See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
| 1. | Nature of Operations and Basis of Presentation |
Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2021, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.
The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim quarterly or year-to-date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year’s financial statement presentation.
The outbreak of the novel coronavirus (COVID-19) has adversely impacted and continues to impact certain industries in which the Corporation's clients operate and may have impaired their ability to fulfill their outstanding obligations due to continued financial distress. The spread of COVID-19 has caused unprecedented uncertainty, volatility and disruption in the U.S. and global economy at large. The Corporation's business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. With the easing of restrictions during the latter part of 2020 and into 2021, and the availability and distribution of vaccines, the U.S. economy has slowly begun to improve as consumer and business spending has rebounded in recent months. However, the lasting effects are uncertain as government aid programs and stimulus packages taper, and the ultimate long-term impact of the business shutdowns that occurred as a result of COVID-19 remains uncertain in many sectors of the economy, such as the travel, hospitality and entertainment industries. This may cause business sectors that have had better recoveries not to be able to maintain those recoveries in the long term. Although the Corporation has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will continue to be effective.
To help address the impact of the COVID-19 pandemic on the economy and financial markets, the Board of Governors of the Federal Reserve System lowered the federal funds target rate to a range of between zero and 0.25% during the first quarter of 2020. Throughout 2021, the Federal Reserve continued to maintain the targeted federal funds rate at these levels because of the pandemic-related risks to the economy. The Corporation's earnings and related cash flows are largely dependent upon net interest income, representing the difference between interest income received on interest-earning assets, primarily loans and securities, and the interest paid on interest-bearing liabilities, primarily customer deposits and borrowed funds. As a result of the significant decline in interest rates and prepayments on higher yielding existing loans, the yield on the total loan portfolio has decreased. Additionally, with significant cash inflows realized from a growth in deposits and the forgiveness of Paycheck Protection Program (PPP) loans, the current yields on funds reinvested into the purchase of securities are lower than existing portfolio yields. However, the fees arising from the PPP loan program have mitigated some of this decline during 2020 and 2021. As economic conditions have started to improve, the Federal Reserve has begun to shift its focus to limiting the inflationary and other potentially adverse effects of the expiration of government aid programs and stimulus packages and has begun raising interest rates. Since the Corporation's balance sheet is asset sensitive and rate sensitive assets reprice more quickly than rate sensitive liabilities, margin compression may be somewhat mitigated during 2022 as the Federal Reserve raises rates.
The U.S. government also enacted certain fiscal stimulus measures in several phases to assist in counteracting the economic disruptions caused by the pandemic. On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was enacted to authorize funding for research and development of vaccines and to allocate money to state and local governments for response and containment measures. On March 18, 2020, the Families First Coronavirus Response Act was put in place to provide for paid sick/medical leave, no-cost coverage for testing, expanded unemployment benefits and additional funding to states for the ongoing economic consequences of the pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Among other measures, the CARES Act provided $349 billion for the PPP loans administered by the Small Business Administration (SBA) to assist qualified small businesses with certain operational expenses, certain credits for individuals and their dependents against their 2020 personal income tax and expanded eligibility for unemployment benefits. This legislation was later amended on April 24, 2020, by the Paycheck Protection Program and Healthcare Enhancement Act (PPPHE Act) which provided an additional $310 billion of funding for PPP loans. In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal was enacted to provide additional economic stimulus to individuals and businesses in response to the extended economic distress caused by the pandemic. This included additional stimulus payments to individuals and their dependents, an extension of enhanced unemployment benefits, $284 billion of additional funds for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.
| 1. | Nature of Operations and Basis of Presentation (continued) |
Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by the pandemic. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of the termination of the COVID-19 national emergency or December 31, 2020. This provision was extended, and expired on January 1, 2022 under the Consolidated Appropriations Act. The banking regulators issued similar guidance, which also clarified that a COVID-19 related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. The Corporation implemented a short-term modification program to provide relief to consumer and commercial customers following the guidelines of these provisions. Most modifications fall into the 90 to 180-day range with deferred principal and interest due and payable on the maturity date of the existing loans. Specific detail describing these modifications made in relation to the CARES Act can be found in the TDR discussion in "Note 4 - Loans Receivable and Related Allowance for Loan Losses" to the Consolidated Financial Statements.
The Corporation responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by holding meetings virtually, restricting travel and attendance at external gatherings, expending remote-access availability and limiting banking office lobby hours. Remote-access employees have since transitioned back to the office and banking offices resumed normal business hours. The Corporation continues to monitor events related to the pandemic and will take necessary precautions to ensure the safety of its customers and employees.
| 2. | Earnings per Common Share |
Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares for assumed issuance of restricted stock.
The factors used in the Corporation’s earnings per common share computation follow:
| (Dollar amounts in thousands, except for per share amounts) | | For the three months ended June 30, | | For the six months ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | | $ | 2,237 | | | $ | 1,934 | | | $ | 4,673 | | | $ | 4,108 | |
| Less: Preferred stock dividends | | | 102 | | | | 95 | | | | 102 | | | | 95 | |
| Net income available to common stockholders | | $ | 2,135 | | | $ | 1,839 | | | $ | 4,571 | | | $ | 4,013 | |
| Average common shares outstanding | | | 2,735,212 | | | | 2,721,212 | | | | 2,735,212 | | | | 2,721,212 | |
| Add: Dilutive effects of restricted stock awards | | | 30,701 | | | | 23,132 | | | | 27,124 | | | | 21,057 | |
| Average shares and dilutive potential common shares | | | 2,765,913 | | | | 2,744,344 | | | | 2,762,336 | | | | 2,742,269 | |
| Basic earnings per common share | | $ | 0.78 | | | $ | 0.68 | | | $ | 1.67 | | | $ | 1.47 | |
| Diluted earnings per common share | | $ | 0.77 | | | $ | 0.67 | | | $ | 1.65 | | | $ | 1.46 | |
Equity Securities
The Corporation held equity securities with fair values of $3,000 and $5,000 at June 30, 2022 and December 31, 2021, respectively. Changes in the fair value of these securities are included in other income on the consolidated statements of net income. During the three and six months ended June 30, 2022, the Corporation recognized a loss of $2,000 and $3,000, respectively, on equity securities held at June 30, 2022, compared to a loss of $3,000 and $5,000, respectively, for the same periods in 2021. During the three and six months ended June 30, 2022 and 2021, the Corporation did not sell any equity securities.
Debt Securities - Available-for-Sale
The following table summarizes the Corporation’s debt securities as of June 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| June 30, 2022: | | | | | | | | | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 6,106 | | | $ | — | | | $ | (914 | ) | | $ | 5,192 | |
| U.S. agency mortgage-backed securities: residential | | | 10,594 | | | | 12 | | | | (753 | ) | | | 9,853 | |
| U.S. agency collateralized mortgage obligations: residential | | | 44,978 | | | | — | | | | (5,328 | ) | | | 39,650 | |
| State and political subdivisions | | | 89,295 | | | | 5 | | | | (17,459 | ) | | | 71,841 | |
| Corporate debt securities | | | 25,431 | | | | 41 | | | | (869 | ) | | | 24,603 | |
| Total securities available-for-sale | | $ | 176,404 | | | $ | 58 | | | $ | (25,323 | ) | | $ | 151,139 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 8,142 | | | $ | 52 | | | $ | (35 | ) | | $ | 8,159 | |
| U.S. agency mortgage-backed securities: residential | | | 12,049 | | | | 116 | | | | (130 | ) | | | 12,035 | |
| U.S. agency collateralized mortgage obligations: residential | | | 50,202 | | | | 92 | | | | (804 | ) | | | 49,490 | |
| State and political subdivisions | | | 92,307 | | | | 1,099 | | | | (844 | ) | | | 92,562 | |
| Corporate debt securities | | | 23,705 | | | | 424 | | | | (105 | ) | | | 24,024 | |
| Total securities available-for-sale | | $ | 186,405 | | | $ | 1,783 | | | $ | (1,918 | ) | | $ | 186,270 | |
| 3. | Securities (continued) |
The following table summarizes scheduled maturities of the Corporation’s debt securities as of June 30, 2022. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.
| (Dollar amounts in thousands) | | Available-for-sale |
| | | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | — | | | $ | — | |
| Due after one year through five years | | | 5,108 | | | | 5,108 | |
| Due after five years through ten years | | | 33,425 | | | | 31,525 | |
| Due after ten years | | | 82,299 | | | | 65,003 | |
| Mortgage-backed securities: residential | | | 10,594 | | | | 9,853 | |
| Collateralized mortgage obligations: residential | | | 44,978 | | | | 39,650 | |
| Total securities available-for-sale | | $ | 176,404 | | | $ | 151,139 | |
Information pertaining to debt securities with gross unrealized losses at June 30, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:
| (Dollar amounts in thousands) | | Less than 12 Months | | 12 Months or More | | Total |
| | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 5,192 | | | $ | (914 | ) | | $ | — | | | $ | — | | | $ | 5,192 | | | $ | (914 | ) |
| U.S. agency mortgage-backed securities: residential | | | 3,241 | | | | (134 | ) | | | 5,664 | | | | (619 | ) | | | 8,905 | | | | (753 | ) |
| U.S. agency collateralized mortgage obligations: residential | | | 22,792 | | | | (2,546 | ) | | | 16,858 | | | | (2,782 | ) | | | 39,650 | | | | (5,328 | ) |
| State and political subdivisions | | | 56,655 | | | | (12,825 | ) | | | 13,959 | | | | (4,634 | ) | | | 70,614 | | | | (17,459 | ) |
| Corporate debt securities | | | 14,850 | | | | (773 | ) | | | 2,153 | | | | (96 | ) | | | 17,003 | | | | (869 | ) |
| Total | | $ | 102,730 | | | $ | (17,192 | ) | | $ | 38,634 | | | $ | (8,131 | ) | | $ | 141,364 | | | $ | (25,323 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 4,568 | | | $ | (35 | ) | | $ | — | | | $ | — | | | $ | 4,568 | | | $ | (35 | ) |
| U.S. agency mortgage-backed securities: residential | | | 7,254 | | | | (130 | ) | | | — | | | | — | | | | 7,254 | | | | (130 | ) |
| U.S. agency collateralized mortgage obligations: residential | | | 39,964 | | | | (801 | ) | | | 1,584 | | | | (3 | ) | | | 41,548 | | | | (804 | ) |
| State and political subdivisions | | | 39,872 | | | | (814 | ) | | | 1,442 | | | | (30 | ) | | | 41,314 | | | | (844 | ) |
| Corporate debt securities | | | 6,104 | | | | (105 | ) | | | — | | | | — | | | | 6,104 | | | | (105 | ) |
| Total | | $ | 97,762 | | | $ | (1,885 | ) | | $ | 3,026 | | | $ | (33 | ) | | $ | 100,788 | | | $ | (1,918 | ) |
Gains and losses on sales of securities for the three and six months ended June 30, 2022 and 2021 were as follows:
| (Dollar amounts in thousands) | | For the three months ended June 30, | | For the six months ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Proceeds | | $ | 1,919 | | | $ | 248 | | | $ | 6,858 | | | $ | 248 | |
| Gains | | | — | | | | 4 | | | | 16 | | | | 29 | |
| Losses | | | (103 | ) | | | — | | | | (109 | ) | | | — | |
| Tax provision related to gains (losses) | | | (22 | ) | | | 1 | | | | (20 | ) | | | 6 | |
Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
There were 238 debt securities in an unrealized loss position as of June 30, 2022, 66 of which were in an unrealized loss position for more than 12 months. Of these 238 securities, 143 were state and political subdivision securities, 42 were corporate securities, 37 were collateralized mortgage obligations (issued by U.S. government sponsored entities), 12 were mortgage-backed securities and four were agency securities. Management believes the unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of their amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of June 30, 2022 to be other-than-temporarily impaired.
| 4. | Loans Receivable and Related Allowance for Loan Losses |
The Corporation’s loans receivable as of the respective dates are summarized as follows:
| (Dollar amounts in thousands) | | June 30, 2022 | | December 31, 2021 |
| Mortgage loans on real estate: | | | | | | | | |
| Residential first mortgages | | $ | 291,779 | | | $ | 273,823 | |
| Home equity loans and lines of credit | | | 73,625 | | | | 75,810 | |
| Commercial real estate | | | 342,041 | | | | 326,341 | |
| Total real estate loans | | | 707,445 | | | | 675,974 | |
| Other loans: | | | | | | | | |
| Commercial business | | | 57,819 | | | | 65,877 | |
| Consumer | | | 45,412 | | | | 48,552 | |
| Total other loans | | | 103,231 | | | | 114,429 | |
| Total loans, gross | | | 810,676 | | | | 790,403 | |
| Less allowance for loan losses | | | 10,525 | | | | 10,393 | |
| Total loans, net | | $ | 800,151 | | | $ | 780,010 | |
Included in total loans above are net deferred costs of $3.3 million and $3.3 million at June 30, 2022 and December 31, 2021, respectively. In addition, included in commercial loans at June 30, 2022 and December 31, 2021 were $171,000 and $1.2 million, respectively, of PPP loans that are guaranteed by the SBA. The Corporation received $3.7 million of fees related to the origination of these loans, of which $1.3 million was recognized in 2020, $2.4 million was recognized during 2021, $37,000 was recognized in the six months ended June 30, 2022 and $4,000 is expected be recognized in future periods upon forgiveness by the SBA.
An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans. While the Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-19 pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
At June 30, 2022, there was no allowance for loan losses allocated to loans acquired from United American Savings Bank (2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc. (2018) because the unaccreted purchase discount still exceeded the calculated allowance.
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:
| (Dollar amounts in thousands) | | Residential Mortgages | | Home Equity & Lines of Credit | | Commercial Real Estate | | Commercial Business | | Consumer | | Total |
| Three months ended June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning Balance | | $ | 2,310 | | | $ | 485 | | | $ | 6,444 | | | $ | 651 | | | $ | 378 | | | $ | 10,268 | |
| Charge-offs | | | (17 | ) | | | — | | | | — | | | | — | | | | (160 | ) | | | (177 | ) |
| Recoveries | | | — | | | | 40 | | | | 11 | | | | — | | | | 8 | | | | 59 | |
| Provision | | | 212 | | | | (32 | ) | | | 87 | | | | (29 | ) | | | 137 | | | | 375 | |
| Ending Balance | | $ | 2,505 | | | $ | 493 | | | $ | 6,542 | | | $ | 622 | | | $ | 363 | | | $ | 10,525 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning Balance | | $ | 2,335 | | | $ | 525 | | | $ | 6,253 | | | $ | 904 | | | $ | 376 | | | $ | 10,393 | |
| Charge-offs | | | (17 | ) | | | (15 | ) | | | — | | | | — | | | | (243 | ) | | | (275 | ) |
| Recoveries | | | — | | | | 40 | | | | 58 | | | | — | | | | 14 | | | | 112 | |
| Provision | | | 187 | | | | (57 | ) | | | 231 | | | | (282 | ) | | | 216 | | | | 295 | |
| Ending Balance | | $ | 2,505 | | | $ | 493 | | | $ | 6,542 | | | $ | 622 | | | $ | 363 | | | $ | 10,525 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| At June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending ALL balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 15 | | | $ | — | | | $ | 177 | | | $ | 2 | | | $ | — | | | $ | 194 | |
| Acquired loans collectively evaluated for impairment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Originated loans collectively evaluated for impairment | | | 2,490 | | | | 493 | | | | 6,365 | | | | 620 | | | | 363 | | | | 10,331 | |
| Total | | $ | 2,505 | | | $ | 493 | | | $ | 6,542 | | | $ | 622 | | | $ | 363 | | | $ | 10,525 | |
| Total loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 279 | | | $ | 4 | | | $ | 2,277 | | | $ | 84 | | | $ | — | | | $ | 2,644 | |
| Acquired loans collectively evaluated for impairment | | | 24,865 | | | | 5,666 | | | | 18,501 | | | | 1,748 | | | | 395 | | | | 51,175 | |
| Originated loans collectively evaluated for impairment | | | 266,635 | | | | 67,955 | | | | 321,263 | | | | 55,987 | | | | 45,017 | | | | 756,857 | |
| Total | | $ | 291,779 | | | $ | 73,625 | | | $ | 342,041 | | | $ | 57,819 | | | $ | 45,412 | | | $ | 810,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending ALL balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 1 | | | $ | — | | | $ | 88 | | | $ | 196 | | | $ | — | | | $ | 285 | |
| Acquired loans collectively evaluated for impairment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Originated loans collectively evaluated for impairment | | | 2,334 | | | | 525 | | | | 6,165 | | | | 708 | | | | 376 | | | | 10,108 | |
| Total | | $ | 2,335 | | | $ | 525 | | | $ | 6,253 | | | $ | 904 | | | $ | 376 | | | $ | 10,393 | |
| Total loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 294 | | | $ | 4 | | | $ | 1,225 | | | $ | 363 | | | $ | — | | | $ | 1,886 | |
| Acquired loans collectively evaluated for impairment | | | 29,573 | | | | 6,370 | | | | 21,471 | | | | 2,055 | | | | 538 | | | | 60,007 | |
| Originated loans collectively evaluated for impairment | | | 243,956 | | | | 69,436 | | | | 303,645 | | | | 63,459 | | | | 48,014 | | | | 728,510 | |
| Total | | $ | 273,823 | | | $ | 75,810 | | | $ | 326,341 | | | $ | 65,877 | | | $ | 48,552 | | | $ | 790,403 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning Balance | | $ | 2,660 | | | $ | 585 | | | $ | 5,472 | | | $ | 612 | | | $ | 356 | | | $ | 9,685 | |
| Charge-offs | | | — | | | | — | | | | (56 | ) | | | — | | | | (38 | ) | | | (94 | ) |
| Recoveries | | | — | | | | 1 | | | | 1 | | | | — | | | | 5 | | | | 7 | |
| Provision | | | (211 | ) | | | (49 | ) | | | 409 | | | | 63 | | | | 38 | | | | 250 | |
| Ending Balance | | $ | 2,449 | | | $ | 537 | | | $ | 5,826 | | | $ | 675 | | | $ | 361 | | | $ | 9,848 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning Balance | | $ | 2,774 | | | $ | 620 | | | $ | 5,180 | | | $ | 677 | | | $ | 329 | | | $ | 9,580 | |
| Charge-offs | | | — | | | | — | | | | (151 | ) | | | — | | | | (128 | ) | | | (279 | ) |
| Recoveries | | | — | | | | 8 | | | | 1 | | | | 1 | | | | 12 | | | | 22 | |
| Provision | | | (325 | ) | | | (91 | ) | | | 796 | | | | (3 | ) | | | 148 | | | | 525 | |
| Ending Balance | | $ | 2,449 | | | $ | 537 | | | $ | 5,826 | | | $ | 675 | | | $ | 361 | | | $ | 9,848 | |
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2022:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Impaired Loans with Specific Allowance |
| | | As of June 30, 2022 | | For the three months ended June 30, 2022 |
| | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 68 | | | $ | 68 | | | $ | 15 | | | $ | 68 | | | $ | 1 | | | $ | 1 | |
| Home equity and lines of credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial real estate | | | 2,060 | | | | 2,060 | | | | 177 | | | | 501 | | | | 24 | | | | 24 | |
| Commercial business | | | 2 | | | | 2 | | | | 2 | | | | 126 | | | | — | | | | — | |
| Consumer | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 2,130 | | | $ | 2,130 | | | $ | 194 | | | $ | 695 | | | $ | 25 | | | $ | 25 | |
| | | For the six months ended June 30, 2022 |
| | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 68 | | | $ | 1 | | | $ | 1 | |
| Home equity and lines of credit | | | — | | | | — | | | | — | |
| Commercial real estate | | | 1,020 | | | | 52 | | | | 29 | |
| Commercial business | | | 85 | | | | — | | | | — | |
| Consumer | | | — | | | | — | | | | — | |
| Total | | $ | 1,173 | | | $ | 53 | | | $ | 30 | |
| | | Impaired Loans with No Specific Allowance |
| | | As of June 30, 2022 | | For the three months ended June 30, 2022 |
| | | Unpaid Principal Balance | | Recorded Investment | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 323 | | | $ | 211 | | | $ | 215 | | | $ | 1 | | | $ | 1 | |
| Home equity and lines of credit | | | 4 | | | | 4 | | | | 4 | | | | — | | | | — | |
| Commercial real estate | | | 217 | | | | 217 | | | | 1,188 | | | | 11 | | | | 11 | |
| Commercial business | | | 82 | | | | 82 | | | | 84 | | | | 1 | | | | 1 | |
| Consumer | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 626 | | | $ | 514 | | | $ | 1,491 | | | $ | 13 | | | $ | 13 | |
| | | For the six months ended June 30, 2022 |
| | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 219 | | | $ | 2 | | | $ | 2 | |
| Home equity and lines of credit | | | 4 | | | | — | | | | — | |
| Commercial real estate | | | 1,014 | | | | 20 | | | | 20 | |
| Commercial business | | | 94 | | | | 5 | | | | 5 | |
| Consumer | | | — | | | | — | | | | — | |
| Total | | $ | 1,331 | | | $ | 27 | | | $ | 27 | |
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was
not necessary as of
December 31, 2021:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Impaired Loans with Specific Allowance |
| | | As of December 31, 2021 | | For the year ended December 31, 2021 |
| | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 68 | | | $ | 68 | | | $ | 1 | | | $ | 28 | | | $ | 3 | | | $ | 3 | |
| Home equity and lines of credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial real estate | | | 559 | | | | 559 | | | | 88 | | | | 387 | | | | 30 | | | | 30 | |
| Commercial business | | | 250 | | | | 250 | | | | 196 | | | | 79 | | | | 8 | | | | 8 | |
| Consumer | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 877 | | | $ | 877 | | | $ | 285 | | | $ | 494 | | | $ | 41 | | | $ | 41 | |
| | | Impaired Loans with No Specific Allowance |
| | | As of December 31, 2021 | | For the year ended December 31, 2021 |
| | | Unpaid Principal Balance | | Recorded Investment | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 338 | | | $ | 226 | | | $ | 284 | | | $ | 3 | | | $ | 3 | |
| Home equity and lines of credit | | | 4 | | | | 4 | | | | 4 | | | | — | | | | — | |
| Commercial real estate | | | 666 | | | | 666 | | | | 990 | | | | 71 | | | | 71 | |
| Commercial business | | | 113 | | | | 113 | | | | 96 | | | | 5 | | | | 5 | |
| Consumer | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 1,121 | | | $ | 1,009 | | | $ | 1,374 | | | $ | 79 | | | $ | 79 | |
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2021:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Impaired Loans with Specific Allowance |
| | | As of June 30, 2021 | | For the three months ended June 30, 2021 |
| | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | — | | | $ | — | | | $ | — | | | $ | 35 | | | $ | — | | | $ | — | |
| Home equity and lines of credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial real estate | | | 315 | | | | 315 | | | | 27 | | | | 344 | | | | 5 | | | | 5 | |
| Commercial business | | | 4 | | | | 4 | | | | 4 | | | | 33 | | | | — | | | | — | |
| Consumer | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 319 | | | $ | 319 | | | $ | 31 | | | $ | 412 | | | $ | 5 | | | $ | 5 | |
| | | For the six months ended June 30, 2021 |
| | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 23 | | | $ | — | | | $ | — | |
| Home equity and lines of credit | | | — | | | | — | | | | — | |
| Commercial real estate | | | 356 | | | | 8 | | | | 8 | |
| Commercial business | | | 48 | | | | — | | | | — | |
| Consumer | | | — | | | | — | | | | — | |
| Total | | $ | 427 | | | $ | 8 | | | $ | 8 | |
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
| | | Impaired Loans with No Specific Allowance |
| | | As of June 30, 2021 | | For the three months ended June 30, 2021 |
| | | Unpaid Principal Balance | | Recorded Investment | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 424 | | | $ | 312 | | | $ | 282 | | | $ | 1 | | | $ | 1 | |
| Home equity and lines of credit | | | 4 | | | | 4 | | | | 4 | | | | — | | | | — | |
| Commercial real estate | | | 1,013 | | | | 1,013 | | | | 1,053 | | | | 10 | | | | 10 | |
| Commercial business | | | 120 | | | | 120 | | | | 93 | | | | 2 | | | | 2 | |
| Consumer | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 1,561 | | | $ | 1,449 | | | $ | 1,432 | | | $ | 13 | | | $ | 13 | |
| | | For the six months ended June 30, 2021 |
| | | Average Recorded Investment | | Interest Income Recognized in Period | | Cash Basis Interest Recognized in Period |
| Residential first mortgages | | $ | 297 | | | $ | 2 | | | $ | 2 | |
| Home equity and lines of credit | | | 4 | | | | — | | | | — | |
| Commercial real estate | | | 1,122 | | | | 24 | | | | 24 | |
| Commercial business | | | 84 | | | | 3 | | | | 3 | |
| Consumer | | | — | | | | — | | | | — | |
| Total | | $ | 1,507 | | | $ | 29 | | | $ | 29 | |
Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material.
Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would
not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do
not include forgiveness of principal balances. The Corporation generally does
not extend additional credit to borrowers with loans classified as TDRs.
At June 30, 2022 and December 31, 2021, the Corporation had $2.1 million and $346,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $128,000 and $6,000 of specific allowance for these loans at June 30, 2022 and December 31, 2021, respectively.
During the three and six months ended June 30, 2022 the Corporation modified one commercial mortgage loan with a recorded investment of $1.8 million. Modifications to this loan included an interest rate reduction and re-amortization of the principal balance. At June 30, 2022, there was $114,000 of allowance for loan losses allocated to this loan. During the three and six months ended June 30, 2021, the Corporation did not modify any loans as TDRs.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three and six months ended June 30, 2022 and 2021, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.
COVID-19 related deferrals. Under the provisions of the CARES Act, at the peak, the Corporation had granted modifications on 410 loans with an aggregate balance of $110.4 million, representing 13.6% of gross outstanding loan balances. As of June 30, 2022, one loan with a balance of $3.9 million remained on deferral while the remaining loans have resumed normal repayment or have been repaid in full. The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status.
Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.
Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.
Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
The reserve allocation for risk rated loan pools is developed by applying the following factors:
Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.
Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.
Management uses the following definitions for risk ratings:
Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.
Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.
Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.
Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.
The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of June 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Not Rated | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
| June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgages | | $ | 290,833 | | | $ | — | | | $ | — | | | $ | 946 | | | $ | — | | | $ | 291,779 | |
| Home equity and lines of credit | | | 73,341 | | | | — | | | | — | | | | 284 | | | | — | | | | 73,625 | |
| Commercial real estate | | | — | | | | 307,780 | | | | 10,264 | | | | 23,997 | | | | — | | | | 342,041 | |
| Commercial business | | | — | | | | 52,353 | | | | 1,260 | | | | 4,206 | | | | — | | | | 57,819 | |
| Consumer | | | 45,403 | | | | — | | | | — | | | | 9 | | | | — | | | | 45,412 | |
| Total loans | | $ | 409,577 | | | $ | 360,133 | | | $ | 11,524 | | | $ | 29,442 | | | $ | — | | | $ | 810,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgages | | $ | 272,722 | | | $ | — | | | $ | — | | | $ | 1,101 | | | $ | — | | | $ | 273,823 | |
| Home equity and lines of credit | | | 75,408 | | | | — | | | | — | | | | 402 | | | | — | | | | 75,810 | |
| Commercial real estate | | | — | | | | 295,891 | | | | 7,494 | | | | 22,956 | | | | — | | | | 326,341 | |
| Commercial business | | | — | | | | 59,628 | | | | 1,356 | | | | 4,893 | | | | — | | | | 65,877 | |
| Consumer | | | 48,538 | | | | — | | | | — | | | | 14 | | | | — | | | | 48,552 | |
| Total loans | | $ | 396,668 | | | $ | 355,519 | | | $ | 8,850 | | | $ | 29,366 | | | $ | — | | | $ | 790,403 | |
| 4. | Loans Receivable and Related Allowance for Loan Losses (continued) |
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of June 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Performing | | Nonperforming | | | | |
| | | Accruing Loans Not Past Due | | Accruing 30-59 Days Past Due | | Accruing 60-89 Days Past Due | | Accruing 90+ Days Past Due | | Nonaccrual | | Total |
| June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgages | | $ | 288,478 | | | $ | 1,964 | | | $ | 391 | | | $ | 249 | | | $ | 697 | | | $ | 291,779 | |
| Home equity and lines of credit | | | 72,543 | | | | 661 | | | | 137 | | | | 43 | | | | 241 | | | | 73,625 | |
| Commercial real estate | | | 337,842 | | | | 1,815 | | | | 107 | | | | — | | | | 2,277 | | | | 342,041 | |
| Commercial business | | | 57,472 | | | | 56 | | | | — | | | | 206 | | | | 85 | | | | 57,819 | |
| Consumer | | | 45,029 | | | | 174 | | | | 199 | | | | — | | | | 10 | | | | 45,412 | |
| Total loans | | $ | 801,364 | | | $ | 4,670 | | | $ | 834 | | | $ | 498 | | | $ | 3,310 | | | $ | 810,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgages | | $ | 270,221 | | | $ | 1,913 | | | $ | 588 | | | $ | 291 | | | $ | 810 | | | $ | 273,823 | |
| Home equity and lines of credit | | | 74,853 | | | | 230 | | | | 325 | | | | 160 | | | | 242 | | | | 75,810 | |
| Commercial real estate | | | 325,018 | | | | 73 | | | | — | | | | — | | | | 1,250 | | | | 326,341 | |
| Commercial business | | | 65,305 | | | | — | | | | — | | | | 234 | | | | 338 | | | | 65,877 | |
| Consumer | | | 48,344 | | | | 117 | | | | 77 | | | | — | | | | 14 | | | | 48,552 | |
| Total loans | | $ | 783,741 | | | $ | 2,333 | | | $ | 990 | | | $ | 685 | | | $ | 2,654 | | | $ | 790,403 | |
The following table presents the Corporation’s nonaccrual loans by aging category as of June 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Not Past Due | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days + Past Due | | Total |
| June 30, 2022: | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgages | | $ | 184 | | | $ | — | | | $ | 68 | | | $ | 445 | | | $ | 697 | |
| Home equity and lines of credit | | | 4 | | | | — | | | | — | | | | 237 | | | | 241 | |
| Commercial real estate | | | 2,209 | | | | 8 | | | | — | | | | 60 | | | | 2,277 | |
| Commercial business | | | 85 | | | | — | | | | — | | | | — | | | | 85 | |
| Consumer | | | — | | | | — | | | | — | | | | 10 | | | | 10 | |
| Total loans | | $ | 2,482 | | | $ | 8 | | | $ | 68 | | | $ | 752 | | | $ | 3,310 | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgages | | $ | 196 | | | $ | — | | | $ | 69 | | | $ | 545 | | | $ | 810 | |
| Home equity and lines of credit | | | 4 | | | | — | | | | — | | | | 238 | | | | 242 | |
| Commercial real estate | | | 1,052 | | | | 10 | | | | — | | | | 188 | | | | 1,250 | |
| Commercial business | | | 338 | | | | — | | | | — | | | | — | | | | 338 | |
| Consumer | | | — | | | | — | | | | — | | | | 14 | | | | 14 | |
| Total loans | | $ | 1,590 | | | $ | 10 | | | $ | 69 | | | $ | 985 | | | $ | 2,654 | |
| 5. | Goodwill and Intangible Assets |
The following table summarizes the Corporation’s acquired goodwill and intangible assets as of June 30, 2022 and December 31, 2021:
| (Dollar amounts in thousands) | | June 30, 2022 | | December 31, 2021 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Goodwill | | $ | 19,460 | | | $ | — | | | $ | 19,460 | | | $ | — | |
| Core deposit intangibles | | | 5,634 | | | | 4,811 | | | | 5,634 | | | | 4,735 | |
| Total | | $ | 25,094 | | | $ | 4,811 | | | $ | 25,094 | | | $ | 4,735 | |
Goodwill resulted from five acquisitions. Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test. No goodwill impairment charges were recorded during 2021 or in the first six months of 2022. Although the annual review of goodwill revealed no impairment consideration, management will continue to monitor the status of current economic conditions related to the COVID-19 pandemic in the event that subsequent deterioration would warrant an interim assessment of goodwill. While it is impossible to know the future impact of the evolving economic conditions, the impact could be material.
The core deposit intangible asset, resulting from three acquisitions, is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three and six months ended June 30, 2022, the Corporation recorded intangible amortization expense totaling $38,000 and $76,000, respectively, compared to $39,000 and $78,000, respectively, for the same periods in 2021.
| 6. | Stock Compensation Plan |
In February 2021, the Corporation adopted the 2021 Stock Incentive Plan (the 2021 Plan), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 204,091 shares of common stock. As of June 30, 2022, 192,591 shares remain available for issuance under the 2021 Plan.
In addition, in February 2014, the Corporation adopted the 2014 Stock Incentive Plan (the 2014 Plan, and together with the 2021 Plan, the Plans), which is shareholder approved and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock. As of June 30, 2022, 783 shares of restricted stock and 88,433 stock options remain available for issuance under the 2014 Plan.
Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plans. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of ten years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Compensation cost related to share-based payment transactions must be recognized in the financial statements with measurement based upon the fair value of the equity instruments issued.
At June 30, 2022, there were no options that were granted or outstanding under the Plans.
A summary of the status of the Corporation’s nonvested restricted stock awards as of June 30, 2022, and changes during the period then ended is presented below:
| | | Shares | | Weighted-Average Grant-date Fair Value |
| Nonvested at January 1, 2022 | | | 52,200 | | | $ | 28.32 | |
| Granted | | | — | | | | — | |
| Vested | | | — | | | | — | |
| Forfeited | | | (1,250 | ) | | | 28.92 | |
| Nonvested as of June 30, 2022 | | | 50,950 | | | $ | 28.31 | |
For the three and six month periods ended June 30, 2022, the Corporation recognized stock compensation expense of $101,000 and $221,000, respectively, compared to $112,000 and $224,000, respectively, for the same periods in 2021. As of June 30, 2022, there was $692,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over the next three years. It is the Corporation’s policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation.
Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.
Assets measured at fair value on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:
Debt securities available-for-sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt and equity securities held by the Corporation.
For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
| (Dollar amounts in thousands) | | | | | | (Level 1) | | (Level 2) | | (Level 3) |
| Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| June 30, 2022: | | | | | | | | | | | | | | | | |
| Securities available-for-sale | | | | | | | | | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 5,192 | | | $ | — | | | $ | 5,192 | | | $ | — | |
| U.S. agency mortgage-backed securities: residential | | | 9,853 | | | | — | | | | 9,853 | | | | — | |
| U.S. agency collateralized mortgage obligations: residential | | | 39,650 | | | | — | | | | 39,650 | | | | — | |
| State and political subdivision | | | 71,841 | | | | — | | | | 71,841 | | | | — | |
| Corporate debt securities | | | 24,603 | | | | — | | | | 20,018 | | | | 4,585 | |
| Total available-for-sale securities | | $ | 151,139 | | | $ | — | | | $ | 146,554 | | | $ | 4,585 | |
| | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 3 | | | $ | 3 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | |
| Securities available-for-sale | | | | | | | | | | | | | | | | |
| U.S. government sponsored entities and agencies | | $ | 8,159 | | | $ | — | | | $ | 8,159 | | | $ | — | |
| U.S. agency mortgage-backed securities: residential | | | 12,035 | | | | — | | | | 12,035 | | | | — | |
| U.S. agency collateralized mortgage obligations: residential | | | 49,490 | | | | — | | | | 49,490 | | | | — | |
| State and political subdivisions | | | 92,562 | | | | — | | | | 92,562 | | | | — | |
| Corporate debt securities | | | 24,024 | | | | — | | | | 20,439 | | | | 3,585 | |
| Total available-for-sale securities | | $ | 186,270 | | | $ | — | | | $ | 182,685 | | | $ | 3,585 | |
| | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | |
The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the three and six month periods ended June 30, 2022, the Corporation had no transfers between levels. During the three and six month periods ended June 30, 2021, the Corporation reclassified one security from Level 3 to Level 2.
| 7. | Fair Value (continued) |
The following table presents changes in Level 3 assets measured on a recurring basis for the three and six month periods ended June 30, 2022 and 2021:
| (Dollar amounts in thousands) | | Three months ended June 30, | | Six months ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Balance at the beginning of the period | | $ | 4,585 | | | $ | 2,006 | | | $ | 3,585 | | | $ | 2,006 | |
| Total gains or losses (realized/unrealized): | | | | | | | | | | | | | | | | |
| Included in earnings | | | — | | | | — | | | | — | | | | — | |
| Included in other comprehensive income | | | — | | | | — | | | | — | | | | — | |
| Purchased into Level 3 | | | — | | | | — | | | | 1,000 | | | | — | |
| Transfers in and/or out of Level 3 | | | — | | | | — | | | | — | | | | — | |
| Balance at the end of the period | | $ | 4,585 | | | $ | 2,006 | | | $ | 4,585 | | | $ | 2,006 | |
Assets measured at fair value on a non-recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of the following assets:
Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of June 30, 2022, the Corporation had two impaired commercial real estate loans carried at a fair value of $1.9 million, which consisted of the outstanding balance of $2.1 million less a specific reserve of $177,000. As of December 31, 2021, the Corporation had five impaired commercial real estate loans carried at a fair value of $470,000, which consisted of the outstanding balance of $558,000 less a specific reserve of $88,000 and one impaired commercial business loan carried at a fair value of $54,000, which consisted of the outstanding balance of $247,000, less a specific reserve of $193,000. During the three and six month periods ended June 30, 2022 there was additional provision for loan losses recorded for impaired loans of $114,000, compared to $1,000 for the three and six month periods ended June 30, 2021
Other real estate owned(OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of June 30, 2022 and December 31, 2021, the Corporation did not have any OREO measured at fair value less costs to sell. During the three and six month periods ended June 30, 2022 and 2021, there was no expense recorded associated with the write-down of OREO.
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied.
For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
| (Dollar amounts in thousands) | | | | | | (Level 1) | | (Level 2) | | (Level 3) |
| Description | | Total | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| June 30, 2022: | | | | | | | | | | | | | | | | |
| Impaired commercial real estate loans | | $ | 1,883 | | | $ | — | | | $ | — | | | $ | 1,883 | |
| Total | | $ | 1,883 | | | $ | — | | | $ | — | | | $ | 1,883 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021: | | | | | | | | | | | | | | | | |
| Impaired commercial business loan | | $ | 54 | | | $ | — | | | $ | — | | | $ | 54 | |
| Impaired commercial real estate loans | | | 470 | | | | — | | | | — | | | | 470 | |
| Total | | $ | 524 | | | $ | — | | | $ | — | | | $ | 524 | |
| 7. | Fair Value (continued) |
The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis:
| (Dollar amounts in thousands) | | | | | Valuation | Unobservable | Weighted |
| | | | | | Techniques(s) | Input(s) | Average |
| June 30, 2022: | | | | | | | | | |
| Impaired commercial real estate loans | | $ | 1,883 | | Sales comparison approach | Adjustment for differences between comparable sales | | 10 | % |
| | | | | | | | | | |
| December 31, 2021: | | | | | | | | | |
| Impaired commercial business loan | | $ | 54 | | Sales comparison approach | Adjustment for differences between comparable sales | | 10 | % |
| Impaired commercial real estate loans | | | 470 | | Sales comparison approach | Adjustment for differences between comparable sales | | 10 | % |
Excluded from the tables above at June 30, 2022 was one unsecured commercial business loan totaling $2,000 and an impaired residential mortgage loan totaling $68,000 which was classified as a TDR and measured using a discounted cash flow methodology. As of December 31, 2021, there was one unsecured commercial business loan totaling $3,000 and an impaired residential mortgage loan totaling $69,000 which was classified as a TDR and measured using a discounted cash flow methodology excluded from the tables.
The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet:
| (Dollar amounts in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Carrying | | Fair Value Measurements using: |
| Description | | Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| June 30, 2022: | | | | | | | | | | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 11,654 | | | $ | 11,654 | | | $ | 11,654 | | | $ | — | | | $ | — | |
| Interest earning time deposits | | | 1,490 | | | | 1,490 | | | | — | | | | 1,490 | | | | — | |
| Securities - available-for-sale | | | 151,139 | | | | 151,139 | | | | — | | | | 146,554 | | | | 4,585 | |
| Securities - equities | | | 3 | | | | 3 | | | | 3 | | | | — | | | | — | |
| Loans held for sale | | | — | | | | — | | | | — | | | | — | | | | — | |
| Loans, net | | | 800,151 | | | | 765,615 | | | | — | | | | — | | | | 765,615 | |
| Federal bank stock | | | 5,527 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Accrued interest receivable | | | 3,563 | | | | 3,563 | | | | 33 | | | | 783 | | | | 2,747 | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 937,581 | | | | 939,494 | | | | 798,263 | | | | 141,231 | | | | — | |
| Borrowed funds | | | 18,000 | | | | 18,000 | | | | — | | | | 18,000 | | | | — | |
| Accrued interest payable | | | 313 | | | | 313 | | | | 4 | | | | 309 | | | | — | |
| December 31, 2021: | | | | | | | | | | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 9,080 | | | $ | 9,080 | | | $ | 9,080 | | | $ | — | | | $ | — | |
| Interest earning time deposits | | | 2,484 | | | | 2,484 | | | | — | | | | 2,484 | | | | — | |
| Securities - available-for-sale | | | 186,270 | | | | 186,270 | | | | — | | | | 182,685 | | | | 3,585 | |
| Securities - equities | | | 5 | | | | 5 | | | | 5 | | | | — | | | | — | |
| Loans held for sale | | | 469 | | | | 469 | | | | — | | | | 469 | | | | — | |
| Loans, net | | | 780,010 | | | | 780,086 | | | | — | | | | — | | | | 780,086 | |
| Federal bank stock | | | 5,715 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Accrued interest receivable | | | 3,731 | | | | 3,731 | | | | 35 | | | | 817 | | | | 2,879 | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 918,496 | | | | 921,811 | | | | 767,840 | | | | 153,971 | | | | — | |
| Borrowed funds | | | 22,050 | | | | 22,121 | | | | — | | | | 22,121 | | | | — | |
| Accrued interest payable | | | 338 | | | | 338 | | | | 5 | | | | 333 | | | | — | |
This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful.
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
To qualify as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less. The primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, becoming fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019 and subsequent periods. Amounts recorded to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of June 30, 2022, the Bank met all capital adequacy requirements to which it was subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.
The following table sets forth certain information concerning the Bank’s regulatory capital as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer.
| (Dollar amounts in thousands) | | June 30, 2022 | | December 31, 2021 |
| | | Amount | | Ratio | | Amount | | Ratio |
| Total capital to risk-weighted assets: | | | | | | | | | | | | | | | | |
| Actual | | $ | 93,672 | | | | 12.99 | % | | $ | 92,495 | | | | 13.11 | % |
| For capital adequacy purposes | | | 57,684 | | | | 8.00 | % | | | 56,448 | | | | 8.00 | % |
| To be well capitalized | | | 72,105 | | | | 10.00 | % | | | 70,559 | | | | 10.00 | % |
| Tier 1 capital to risk-weighted assets: | | | | | | | | | | | | | | | | |
| Actual | | $ | 84,640 | | | | 11.74 | % | | $ | 83,656 | | | | 11.86 | % |
| For capital adequacy purposes | | | 43,263 | | | | 6.00 | % | | | 42,336 | | | | 6.00 | % |
| To be well capitalized | | | 57,684 | | | | 8.00 | % | | | 56,448 | | | | 8.00 | % |
| Common Equity Tier 1 capital to risk-weighted assets: | | | | | | | | | | | | | | | | |
| Actual | | $ | 84,640 | | | | 11.74 | % | | $ | 83,656 | | | | 11.86 | % |
| For capital adequacy purposes | | | 32,447 | | | | 4.50 | % | | | 31,752 | | | | 4.50 | % |
| To be well capitalized | | | 46,868 | | | | 6.50 | % | | | 45,864 | | | | 6.50 | % |
| Tier 1 capital to average assets: | | | | | | | | | | | | | | | | |
| Actual | | $ | 84,640 | | | | 8.06 | % | | $ | 83,656 | | | | 7.98 | % |
| For capital adequacy purposes | | | 41,998 | | | | 4.00 | % | | | 41,926 | | | | 4.00 | % |
| To be well capitalized | | | 52,497 | | | | 5.00 | % | | | 52,407 | | | | 5.00 | % |
| 9. | Accumulated Other Comprehensive Income (Loss) |
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three month periods ended June 30, 2022 and 2021 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):
| (Dollar amounts in thousands) | | Unrealized Gains and Losses on Available-for-Sale Securities | | Defined Benefit Pension Items | | Totals |
| Accumulated Other Comprehensive Income (Loss) at April 1, 2022 | | $ | (12,111 | ) | | $ | (5,071 | ) | | $ | (17,182 | ) |
| Other comprehensive income before reclassification | | | (7,929 | ) | | | — | | | | (7,929 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | 81 | | | | — | | | | 81 | |
| Net current period other comprehensive income (loss) | | | (7,848 | ) | | | — | | | | (7,848 | ) |
| Accumulated Other Comprehensive Income (Loss) at June 30, 2022 | | $ | (19,959 | ) | | $ | (5,071 | ) | | $ | (25,030 | ) |
| (Dollar amounts in thousands) | | Amount Reclassified | |
| | | from Accumulated Other Comprehensive Income | |
| Details about Accumulated Other Comprehensive (Income) Loss Components | | For the three months ended June 30, 2022 | Affected Line Item in the Statement Where Net Income is Presented |
| Unrealized gains and losses on available-for-sale securities | | $ | 103 | | Net gain on sale of available-for-sale securities |
| Tax effect | | | (22 | ) | Provision for income taxes |
| Total reclassifications for the period | | $ | 81 | | Net of tax |
| (Dollar amounts in thousands) | | Unrealized Gains and Losses on Available-for-Sale Securities | | Defined Benefit Pension Items | | Totals |
| Accumulated Other Comprehensive Income (Loss) at April 1, 2021 | | $ | 140 | | | $ | (5,704 | ) | | $ | (5,564 | ) |
| Other comprehensive income before reclassification | | | 1,231 | | | | — | | | | 1,231 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (3 | ) | | | — | | | | (3 | ) |
| Net current period other comprehensive income (loss) | | | 1,228 | | | | — | | | | 1,228 | |
| Accumulated Other Comprehensive Income (Loss) at June 30, 2021 | | $ | 1,368 | | | $ | (5,704 | ) | | $ | (4,336 | ) |
| (Dollar amounts in thousands) | | Amount Reclassified | |
| | | from Accumulated Other Comprehensive Income | |
| Details about Accumulated Other Comprehensive (Income) Loss Components | | For the three months ended June 30, 2021 | Affected Line Item in the Statement Where Net Income is Presented |
| Unrealized gains and losses on available-for-sale securities | | $ | (4 | ) | Net gain on sale of available-for-sale securities |
| Tax effect | | | 1 | | Provision for income taxes |
| Total reclassifications for the period | | $ | (3 | ) | Net of tax |
| 9. | Accumulated Other Comprehensive Income (Loss) |
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the six months ended June 30, 2022 and 2021 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income (loss):
| (Dollar amounts in thousands) | | Unrealized Gains and Losses on Available-for-Sale Securities | | Defined Benefit Pension Items | | Totals |
| Accumulated Other Comprehensive Income (Loss) at January 1, 2022 | | $ | (106 | ) | | $ | (5,071 | ) | | $ | (5,177 | ) |
| Other comprehensive income (loss) before reclassification | | | (19,927 | ) | | | — | | | | (19,927 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | 74 | | | | — | | | | 74 | |
| Net current period other comprehensive income (loss) | | | (19,853 | ) | | | — | | | | (19,853 | ) |
| Accumulated Other Comprehensive Income (Loss) at June 30, 2022 | | $ | (19,959 | ) | | $ | (5,071 | ) | | $ | (25,030 | ) |
| (Dollar amount in thousands) | | Amount Reclassified | |
| | | from Accumulated Other Comprehensive Income | |
| Details about Accumulated Other | | For the six months ended | Affected Line Item in the Statement |
| Comprehensive (Income) Loss Components | | June 30, 2022 | Where Net Income is Presented |
| Unrealized gains and losses on available-for-sale securities | | $ | 93 | | Net gain on sale of available-for-sale securities |
| Tax effect | | | (19 | ) | Provision for income taxes |
| Total security reclassifications for the period | | | 74 | | |
| (Dollar amounts in thousands) | | Unrealized Gains and Losses on Available-for-Sale Securities | | Defined Benefit Pension Items | | Totals |
| Accumulated Other Comprehensive Income (Loss) at January 1, 2021 | | $ | 2,220 | | | $ | (5,704 | ) | | $ | (3,484 | ) |
| Other comprehensive income (loss) before reclassification | | | (829 | ) | | | — | | | | (829 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (23 | ) | | | — | | | | (23 | ) |
| Net current period other comprehensive income (loss) | | | (852 | ) | | | — | | | | (852 | ) |
| Accumulated Other Comprehensive Income (Loss) at June 30, 2021 | | $ | 1,368 | | | $ | (5,704 | ) | | $ | (4,336 | ) |
| (Dollar amount in thousands) | | Amount Reclassified | |
| | | from Accumulated Other Comprehensive Income | |
| Details about Accumulated Other | | For the six months ended | Affected Line Item in the Statement |
| Comprehensive (Income) Loss Components | | June 30, 2021 | Where Net Income is Presented |
| Unrealized gains and losses on available-for-sale securities | | $ | (29 | ) | Net gain on sale of available-for-sale securities |
| Tax effect | | | 6 | | Provision for income taxes |
| Total security reclassifications for the period | | | (23 | ) | |
As of June 30, 2022, the Corporation leases real estate for seven branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from June 2024 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before expiration. The weighted average remaining life of the lease term for these leases was 10.92 years as of June 30, 2022 compared to 12.23 years as of June 30, 2021.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was 3.25% as of June 30, 2022 compared to 3.52% as of June 30, 2021.
The total operating lease costs were $67,000 and $134,000, respectively, for the three and six months ended June 30, 2022 and $48,000 and $96,000, respectively, for the three and six months ended June 30, 2021. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $1.4 million and $1.5 million, respectively, as of June 30, 2022, and $1.3 million and $1.5 million, respectively, as of June 30, 2021.
Total estimated rental commitments for the operating leases were as follows as of June 30, 2022:
| (Dollar amounts in thousands) | | | | |
| Year ending December 31: | | | | |
| 2022 (excluding six months) | | $ | 148 | |
| 2023 | | | 296 | |
| 2024 | | | 271 | |
| 2025 | | | 227 | |
| 2026 | | | 144 | |
| Thereafter | | | 793 | |
| Total minimum lease payments | | | 1,879 | |
| Discount effect of cash flows | | | (339 | ) |
| Present value of lease liabilities | | $ | 1,540 | |
| 11. | Recent Accounting Pronouncements |
Newly Issued Not Yet Effective Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU was originally effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. However, on October 16, 2019, FASB announced a delay for the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. As the Corporation is a smaller reporting company, the delay would be applicable. Management has selected a software vendor and is currently working through the implementation process. The Corporation is reviewing available historical information in order to assess the expected credit losses and determine the impact the adoption of ASU 2016-13 will have on the financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform". ASU 2020-04 contains optional guidance to ease the potential burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the London Interbank Offered Rate (LIBOR) likely being discontinued as a benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate that may be discontinued. This ASU became effective upon issuance and generally can be applied through December 31, 2022. As of September 30, 2021, the Corporation has identified 13 purchased participation loans totaling $50.0 million in outstanding balances, two purchased National Syndicated Credits totaling $7.4 million in outstanding balances and one tax-exempt commercial business loan with an outstanding balance of $615,000 tied to the LIBOR reference rate. The Corporation has not yet made any contract modifications related to the outstanding loans, however, does not expect any changes to have a material impact on financial statements or disclosures.
On March 23, 2022, the Corporation, Farmers National Banc Corp., an Ohio corporation (“Farmers”) and FMNB Merger Subsidiary V, LLC, a wholly-owned subsidiary of Farmers (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Farmers will acquire the Corporation pursuant to the merger of the Corporation with and into the Merger Sub (the “Merger”). Promptly following the consummation of the Merger, the Bank will merge with and into The Farmers National Bank of Canfield, the national banking subsidiary of Farmers (the “Bank Merger”). Upon completion of the Merger, each share of common stock of the Corporation will be converted into the right receive right to receive, at the election of the holder, either $40.00 in cash or 2.15 shares of common stock of Farmers, subject to allocation and proration procedures to ensure that 70% of the outstanding shares of the Corporation common stock are converted into the right to receive Farmers common stock and 30% are converted into the right to receive cash. On July 20, 2022, the shareholders of the Corporation approved the Merger Agreement. Consummation of the Merger is subject to a number of customary conditions, including, but not limited to, the receipt of required regulatory approvals. The transaction is expected to be completed in the second half of 2022.