Note 1 – Summary of Significant Accounting Policies
Business and Organization
The Company is a financial holding company and was organized as a West Virginia corporation in 2003. MVB operates principally through its wholly-owned subsidiary, the Bank. The Bank’s subsidiaries include MVB Insurance, MVB CDC, Chartwell, Paladin Fraud and MVB Technology.
MVB conducts a wide range of business activities, primarily CoRe banking. The Company also continues to be involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech. MVB considers Fintech companies as those entities that use technology to electronically move funds.
Since the formation of the Bank, the Company has acquired a number of financial institutions and other financial services businesses. Future acquisitions and divestitures will be consistent with the Company’s strategic direction. The Company's most recent acquisition and divestiture activity includes the following:
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In September 2019, the Company acquired Chartwell, based from Bethesda, MD. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and banks, in coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert compliance resources with respect to new client due diligence.
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In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc. (“Summit”), a subsidiary of Summit Financial Group, Inc., pursuant to which Summit purchased certain assets and assumed certain liabilities of three Bank branch locations in Berkeley County, WV, and one Bank branch location in Jefferson County, WV. The Company closed this transaction in April 2020.
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In March 2020, the Bank entered into an Agreement with Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the Bank's mortgage origination services and Intercoastal. The transaction closed in July 2020. On the closing date, Intercoastal converted into a Virginia limited liability company and the Bank contributed certain of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of a new entity, ICM, representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company recognizes its ownership interest in ICM as an equity method investment.
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In April 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver for The First State Bank, Barboursville, WV, providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book value. The Bank also acquired three branch locations in Barboursville, Teays Valley and Huntington, WV.
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In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC, a Washington limited liability company.
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In August 2020, MVB Technology entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as Grand. Pursuant to the Asset Purchase Agreement, MVB Technology acquired substantially all the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward.
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Business Overview
Commercial and Retail Banking
The Company’s primary business activities, which are conducted through the Bank and its subsidiaries, are primarily CoRe banking. The Bank offers its customers a full range of products and services including:
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Various demand deposit accounts, savings accounts, money market accounts and certificates of deposit;
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Commercial, consumer and real estate mortgage loans and lines of credit;
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Debit cards;
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Cashier’s checks;
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Safe deposit rental facilities; and
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Non-deposit investment services offered through an association with a broker-dealer.
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Fintech Banking
In addition to its CoRe banking activities, the Company is also involved in innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech. The dedicated Fintech sales team specializes in providing banking services to corporate Fintech clients, with an overarching focus on operational risk and compliance. Managing banking relationships with clients in the payments, digital savings, cryptocurrency, crowd funding, lottery and gaming industries is complex from both an operational and regulatory perspective.
COVID-19 Pandemic
During 2020, economies throughout the world have been severely disrupted as a result of the outbreak of COVID-19. The outbreak and any preventative or protective actions that the Company or its clients may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations generally and could potentially impact the Company’s clients, providers and third parties. The extent to which the COVID-19 pandemic impacts the Company’s future operating results will depend on future developments, which are highly uncertain and cannot be predicted.
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company, its subsidiary, MVB Bank and the Bank’s wholly-owned subsidiaries. These statements have been prepared in accordance with U.S. GAAP and practices in the banking industry. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.
In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period. Estimates are based on known facts and circumstances and actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, purchased credit impaired loans, derivative instruments, goodwill and deferred tax assets and liabilities.
Unconsolidated investments where the Company has the ability to exercise significant influence over the operating and financial policies of the respective investee are accounted for using the equity method of accounting; those that are not consolidated or accounted for using the equity method of accounting are accounted for under cost or fair value accounting. For these investments accounted for under the equity method, the Company records its investment in non-consolidated affiliates and the portion of income or loss in equity in earnings of non-consolidated affiliates. The Company periodically evaluates these investments for impairment. As of December 31, 2020, the Company holds one equity method investment.
Certain amounts in the 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 financial statement presentation and there was no change to net income.
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.
Cash and Cash Equivalents
Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original maturities of 90 days or less are considered cash equivalents. Net cash flows are reported for loans, deposits and short-term borrowing transactions.
Investment Securities
Investment securities at the time of purchase are classified as one of the following:
Available-for-Sale Securities - Includes debt that will be held for indefinite periods of time. These securities may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated income tax effect.
Equity Securities - Includes equity securities that are adjusted to fair value on a monthly basis, with the change in value recorded directly on the income statement. The Company has elected to measure the equity securities without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for underlying transactions for identical or similar investments of new issues.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.
Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statement of income.
The Bank is a member of the FHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of December 31, 2020 and 2019, the Bank holds $2.8 million and $15.0 million, respectively, which is included in accrued interest receivable and other assets. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) a significant decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.
Management considered that the FHLB’s regulatory capital ratios have improved in the most recent quarters, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members during 2020 and 2019.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal reduced by an allowance for loan losses. Loans are considered non-accrual when scheduled principal or interest payments are 90 days past due. Interest income on loans is recognized on an accrual basis. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio. The Company consistently applies a quarterly loan review process to continually evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses, and is based upon periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are impaired. The
general component covers all loans that are not impaired, and is based upon historical loss experience adjusted for qualitative factors.
The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification policy. In reviewing risk within the loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial and commercial real estate secured loans; (iii) home equity loans; and (iv) consumer and other loans. Factors considered in this process include general loan terms, collateral and availability of historical data to support the analysis. Historical loss percentages for each loan category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentages to get the adjusted factor to be applied to non-classified loans on a weighted basis, by risk grade. The following qualitative factors are analyzed:
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Lending policies and procedures
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Nature and volume of the portfolio
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Experience and ability of lending management and staff
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Volume and severity of problem credits
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Quality of the loan review system
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Conclusions of loan reviews, audits and exams
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National, state, regional and local economic trends and business conditions
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General economic conditions
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Unemployment rates
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Inflation / Consumer Price Index
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Value of underlying collateral
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Existence and effect of any credit concentrations
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Consumer sentiment
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Other external factors
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The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and/or the Special Assets Review Committee (“SARC”), as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless Management believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires a six-month recent history of payments due. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.
Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. The Company also separately evaluates individual consumer loans for impairment. Loans are identified individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow evaluation of the significance of the payment delays and the circumstances surrounding the loan and the borrower.
Once the determination has been made that a loan is impaired, the amount of the impairment is measured using one of three valuation methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan
basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
The Company defers loan origination and commitment fees and direct loan origination costs and the net amount is amortized as an adjustment of the related loan’s yield.
Purchased Credit Impaired Loans
The Company may purchase individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These PCI loans are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses.
After acquisition, losses are recognized by an increase in the allowance for loan losses. Such PCI loans are accounted for individually or aggregated into pools of loans based on common risk characteristics, such as credit score, loan type and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (non-accretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Troubled Debt Restructurings
A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The determination of whether a concession has been granted includes an evaluation of the debtor’s ability to access funds at a market rate for debt with similar risk characteristics and among other things, the significance of the modification relative to unpaid principal or collateral value of the debt and/or the significance of a delay in the timing of payments relative to the frequency of payments, original maturity date or the expected duration of the loan. The most common concessions granted generally include one or more modifications to the terms of the debt such as a reduction in the interest rate for the remaining life of the debt, an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reduction of the unpaid principal or interest. All TDRs are considered impaired loans.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation, while land is carried at cost. Depreciation expense is computed for financial reporting by the straight-line-method based on the estimated useful lives of assets, which range from seven to 40 years on buildings, three to ten years on furniture, fixtures and equipment, and lesser of useful life or lease term for leasehold improvements.
Bank-Owned Life Insurance
Bank-owned life insurance represents life insurance on the lives of certain Company employees who have provided positive consent allowing the Company to be the beneficiary of such policies. These policies are recorded at their cash surrender value or the amount that can be realized upon surrender of the policy. Income from these policies is not subject to income taxes and is recorded as noninterest income.
Equity Method Investment
Investments in companies in which the Company has significant influence over the operating and financing decisions are accounted for using the equity method of accounting. These investments are included in the equity method investment line item on the consolidated balance sheets. The Company recognizes its proportionate share of the investee's profits and losses in the equity method investment income line item with corresponding adjustments to the equity method investment line item.
Intangible Assets and Goodwill
Goodwill is reviewed for potential impairment at least annually at the reporting unit level. In addition to the annual impairment evaluation, the Company evaluates for impairment when events or circumstances indicate that it is more likely than not an impairment loss has occurred. The Company performs its annual impairment test during the fourth quarter. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test discussed below. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Examples of qualitative factors include: economic conditions; industry and market considerations; increases in labor or other costs; overall financial performance such as negative or declining cash flows; relevant entity-specific events such as changes in management, key personnel, strategy or customers; and regulatory or political developments.
The Company early adopted ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350) and did so for the period ended December 31, 2020. This guidance simplified the accounting for goodwill impairment for all entities by requiring impairment charges to be based on Step 1 of the previous accounting guidance’s two-step impairment test under ASC Topic 350. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, the entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The new standard eliminates the requirement to calculate a goodwill impairment charge using Step 2, which involved calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. Entities are still be able to perform optional qualitative goodwill impairment assessment before determining whether to proceed to the quantitative step of determining whether the reporting unit’s carrying amount exceeds it fair value.
For intangible assets subject to amortization, the recoverability test is performed when a triggering event occurs and an impairment loss is recognized if the carrying value of the intangible asset exceeds fair value and is not recoverable. The carrying value of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. Intangible assets deemed to have indefinite useful lives are not subject to amortization. An impairment loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value.
Derivative Instruments
Interest Rate Lock Commitments and Hedges
The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 days to 120 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and hedges is very high due to their similarity. As a result of these strategies, the Company limits the exposure of losses with these arrangements and will not realize significant gains related to its rate lock commitments due to changes in interest rates. For loans not originated on a best effort basis, the Company also uses mortgage-backed security hedges and pair-offs to mitigate interest rate risk by entering into securities and mortgage-backed securities trades with brokers.
The fair value of rate lock commitments and hedges is not readily ascertainable with precision because rate lock commitments and hedges are not actively traded in stand-alone-markets. The Company determines the fair value of rate lock commitments and hedges by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Fair value changes are recorded in noninterest income in the Company’s consolidated statement of income. At December 31, 2020 and 2019, the balance of interest rate lock commitments was $0 and $1.7 million, respectively. There were no forward sales commitments as of December 31, 2020 and 2019.
Interest Rate Swaps
Beginning in 2015, the Company entered into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking clients. The Company mitigates this risk by entering into equal and offsetting interest rate swap agreements with highly rated third-party financial institutions. The interest rate swap agreements are free-standing derivatives and
are recorded at fair value on the Company’s consolidated balance sheet. Fair value changes are recorded in noninterest income in the Company’s consolidated net income statement. At December 31, 2020 and 2019, the fair value of interest rate swap agreements was $13.8 million and $5.7 million, respectively.
Fair Value Hedge
The Company entered into an interest rate swap designated as a fair value hedge to mitigate the effect of changing interest rates on the fair values of certain designated fixed-rate loans and available for sale securities. This involves the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount. The gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company entered into a pay-fixed/receive-variable interest rate swap in January 2019 with a notional amount of $23.0 million and $30.0 million at December 31, 2020 and 2019, respectively, which was designated as a fair value hedge associated with the Company’s fixed-rate loan program and certain available for sale securities. At December 31, 2020 and 2019, the fair value of interest rate swap hedge was $0.1 million and $0.4 million, respectively.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”) are recorded when the Bank sells mortgage loans and retains the servicing on those loans. On a monthly basis, MVB tracks the amount of mortgage loans that are sold with servicing retained. A valuation is done to determine the MSRs value, which is then recorded as an asset and amortized over the period of estimated net servicing revenues. The balance of MSRs is evaluated for impairment quarterly, and was determined not to be impaired at December 31, 2020 or 2019. Servicing loans for others generally consists of collecting mortgage payments from borrowers, maintaining escrow accounts, remitting payments to third party investors and, when necessary, foreclosure processing. Serviced loans are not included in the Consolidated Balance Sheets. At December 31, 2020 and 2019, the value of MSRs was $2.9 million and $0.3 million, respectively.
Foreclosed Assets Held for Resale
Foreclosed assets held for resale acquired in satisfaction of mortgage obligations and in foreclosure proceedings are recorded at fair value less estimated selling costs at the time of foreclosure, establishing a new cost basis, with any valuation adjustments charged to the allowance for loan losses. In subsequent periods, foreclosed assets are recorded at the lower of cost or fair value less any costs to sell. Costs relating to improvement of the property are capitalized, while holding costs of the property are charged to other loan origination and maintenance expense in the period incurred. Subsequent declines in fair value and gains or losses on sale are recorded in other noninterest expense. At December 31, 2020 and 2019, the Company held other real estate of $5.7 million and $1.4 million, respectively. These amounts include the foreclosed assets that were acquired from our acquisition of First State.
Fair Value Measurements
Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.
The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.
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Level I:
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Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
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Level II:
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Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available, but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
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Level III:
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Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
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Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs.
Revenue Recognition
The Company records revenue from contracts with customers in accordance with ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income is not currently necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Payment Card and Service Charge Income
Payment card and service charge income are comprised of service charges on accounts and interchange and debit card transaction fees. Service charges on accounts consist of account analysis fees, monthly service fees, check orders and other account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied and the related revenue recognized, over the period in which the service is provided. Check orders and other account related fees are largely transactional based and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Interchange and debit card transaction fees are primarily comprised of interchange fees earned whenever the Bank’s debit and credit cards are processed through card payment networks, such as Visa. The Bank’s performance obligation for debit card and interchange income is generally satisfied, and the related revenue recognized, on a transactional basis. Payment is typically received immediately or in the following month. The Company also enters into interchange arrangements with minimum commitment fees. Minimum commitment fees are recognized ratably, until such time that minimum commitment fees are exceeded or expected to be exceeded.
Compliance Consulting Income
Compliance consulting income is comprised of consulting revenue generated by Chartwell and Paladin Fraud. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Paladin Fraud provides an extensive and customizable suite of fraud prevention services for merchants, credit agencies, Fintech companies and other vendors to help clients and partners defend against threats. Chartwell and Paladin Fraud account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The services promised are then evaluated in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. Both Chartwell and Paladin Fraud's services included in its contracts are distinct from one another. The transaction price for each contract is determined based upon the consideration expected to be received for the distinct services being provided under the contract. Revenue is recognized as performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance obligations are satisfied, factors considered include contract terms, payment terms and whether there is an alternative future use of the product or service. Consulting engagements may vary in length and scope but will generally include the review and/or preparation of regulatory filings, business plans, financial models and other risk management services to customers within financial industries. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement.
Other Operating Income
Other operating income is primarily comprised of ATM fees, wire transfer fees, travelers check fees, revenue streams such as safe deposit box rental fees and other miscellaneous service charges. ATM fees, wire transfer fees and travelers check fees are primarily generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks and other services. The Bank’s performance obligations for fees and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. The Bank’s performance obligation for the gains and losses on sales of other real estate owned is satisfied, and the related revenue recognized, after each sale of other real estate owned is closed.
Marketing Costs
Marketing costs are expensed as incurred. Marketing expense was $1.1 million, $1.3 million and $1.1 million for 2020, 2019 and 2018, respectively.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock units (“RSUs”) issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Earnings Per Share
The Company determines basic earnings per share by dividing net income less preferred stock dividends by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income less dividends on convertible preferred stock plus interest on convertible subordinated debt by the weighted-average number of shares outstanding, increased by both the number of shares that would be issued assuming the exercise of stock options under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt, if dilutive.
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For the years ended
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December 31,
|
(Dollars in thousands except shares and per share data)
|
|
2020
|
|
2019
|
|
2018
|
Numerator for basic earnings per share:
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
37,411
|
|
|
$
|
26,564
|
|
|
$
|
12,003
|
|
Less: Dividends on preferred stock
|
|
461
|
|
|
479
|
|
|
489
|
|
Net income from continuing operations available to common shareholders - basic
|
|
36,950
|
|
|
26,085
|
|
|
11,514
|
|
Net income from discontinued operations available to common shareholders - basic and diluted
|
|
—
|
|
|
427
|
|
|
—
|
|
Net income available to common shareholders
|
|
$
|
36,950
|
|
|
$
|
26,512
|
|
|
$
|
11,514
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share:
|
|
|
|
|
|
|
Net income from continuing operations available to common shareholders - basic
|
|
$
|
36,950
|
|
|
$
|
26,085
|
|
|
$
|
11,514
|
|
Add: Dividends on preferred stock
|
|
—
|
|
|
—
|
|
|
489
|
|
Add: Interest on subordinated debt (tax effected)
|
|
—
|
|
|
—
|
|
|
753
|
|
Net income available to common shareholders from continuing operations - diluted
|
|
$
|
36,950
|
|
|
$
|
26,085
|
|
|
$
|
12,756
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Total average shares outstanding
|
|
11,821,574
|
|
|
11,713,885
|
|
|
11,030,984
|
|
Effect of dilutive convertible preferred stock
|
|
—
|
|
|
—
|
|
|
489,625
|
|
Effect of dilutive convertible subordinated debt
|
|
—
|
|
|
—
|
|
|
837,500
|
|
Effect of dilutive stock options and restricted stock units
|
|
266,532
|
|
|
330,782
|
|
|
363,894
|
|
Total diluted average shares outstanding
|
|
12,088,106
|
|
|
12,044,667
|
|
|
12,722,003
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations - basic
|
|
$
|
3.13
|
|
|
$
|
2.22
|
|
|
$
|
1.04
|
|
Earnings per share from discontinued operations - basic
|
|
$
|
—
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
Earnings per common share - basic
|
|
$
|
3.13
|
|
|
$
|
2.26
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations - diluted
|
|
$
|
3.06
|
|
|
$
|
2.16
|
|
|
$
|
1.00
|
|
Earnings per share from discontinued operations - diluted
|
|
$
|
—
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
Earnings per common share - diluted
|
|
$
|
3.06
|
|
|
$
|
2.20
|
|
|
$
|
1.00
|
|
For the years ended December 31, 2020, 2019, and 2018, approximately 0.5 million, 0.4 million and 0.3 million options to purchase shares of common stock, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and minimum pension liability, are reported as a separate component of the equity section of the Consolidated Balance Sheet, such items, along with net income, are components of comprehensive income.
In 2018, the Company was required to perform a reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act. The Tax Reform Act included a reduction to the corporate income tax rate from 34 percent to 21 percent effective January 1, 2018. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which resulted in a decrease of $0.6 million.
Income Taxes
The amount reflected as income taxes represents federal and state income taxes on financial statement income. Certain items of income and expense, primarily the provision for possible loan losses, allowance for losses on foreclosed assets held for resale, depreciation and accretion of discounts on investment securities are reported in different accounting periods for income tax purposes. The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax bases of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. Deferred tax assets and liabilities are the result of timing differences in recognition of revenue and expense for income tax and financial statement purposes. No deferred income tax valuation allowance is provided since it is more likely than not that realization of the deferred income tax asset will occur in future years.
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be reversed in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. With limited exception, the Company’s federal and state income tax returns for taxable years through 2016 have been closed for purposes of examination by the federal and state taxing jurisdictions.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. While the Company’s chief decision makers monitor the revenue streams of the various Company’s products and services, operations are managed and financial performance is evaluated on a Company-wide basis. The Company has identified three reportable segments: CoRe banking; mortgage banking; and financial holding company.
Business Combinations
U.S. GAAP requires that the acquisition method of accounting, formerly referred to as the purchase method, be used for all business combinations that an acquirer is identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquired entity at the acquisition date.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Recent Accounting Pronouncements and Developments
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-20 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; 2) the amount and timing of plan assets expected to be returned to the employer; 3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; 4) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; 5) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets and 6) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement
health care benefits. The ASU added the following disclosures: 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 is effective for public business entities for fiscal years ending after December 15, 2020. As ASU 2018-14 only revises disclosure requirements, it did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include additions, modification and removal of disclosure requirements. The ASU removed the following disclosure requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, 3) the valuation process for Level 3 fair value measurements and 4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: 1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and 2) the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted-average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: 1) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and 3) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. Adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326 and in November 2019, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, all of which clarifies codification and corrects unintended application of the guidance. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. PCI loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance was initially effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. On November 15, 2019, the FASB issued ASU 2019-10, Financial Investments – Credit Issues (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay in the effective date of the standard for smaller reporting companies until January 2023. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In that regard, the Company has formed a cross-functional implementation team. The team is working to develop an implementation plan which will include assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. The Company is also in the process of implementing a third-party vendor solution to assist it in the application of this standard. The adoption of this standard could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption will be significantly influenced by the composition, characteristics and quality of its loan portfolio, as well as the prevailing economic conditions and forecasts as of the adoption date.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments and certain derivatives, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments will be effective for the Company on January 1, 2021. The Company does not expect this standard to have a material effect on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for certain contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform. The guidance is effective from the date of issuance until December 31, 2022. The guidance permits entities to not apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. In January 2021, ASU 2021-01 was issued by the FASB and clarifies that certain exceptions in reference rate reform apply to derivatives that are affected by the discounting transition. The Company will continue to assess the impact as the reference rate transition occurs over the next two years.
In August 2020, the SEC issued a final rule that modernizes the disclosure requirements in Regulation S-K relating to the description of the business, legal proceedings, and risk factors, which are required in many SEC filings, including Form 10-K and registration statements. The final rule was effective in November 2020, 30 days after its date of publication in the Federal Register. The Company adopted the amendments in preparing this report.
Note 2 – Investment Securities
Amortized cost and fair values of investment securities available-for-sale at December 31, 2020 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
United States government agency securities
|
|
$
|
56,207
|
|
|
$
|
995
|
|
|
$
|
(210)
|
|
|
$
|
56,992
|
|
United States sponsored mortgage-backed securities
|
|
94,968
|
|
|
972
|
|
|
(171)
|
|
|
95,769
|
|
Municipal securities
|
|
223,642
|
|
|
8,327
|
|
|
(82)
|
|
|
231,887
|
|
Other debt securities
|
|
7,500
|
|
|
—
|
|
|
—
|
|
|
7,500
|
|
Total debt securities
|
|
382,317
|
|
|
10,294
|
|
|
(463)
|
|
|
392,148
|
|
Other securities
|
|
18,401
|
|
|
146
|
|
|
(71)
|
|
|
18,476
|
|
Total investment securities available-for-sale
|
|
$
|
400,718
|
|
|
$
|
10,440
|
|
|
$
|
(534)
|
|
|
$
|
410,624
|
|
Amortized cost and fair values of investment securities available-for-sale at December 31, 2019 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
United States government agency securities
|
|
$
|
52,046
|
|
|
$
|
199
|
|
|
$
|
(249)
|
|
|
$
|
51,996
|
|
United States sponsored mortgage-backed securities
|
|
58,748
|
|
|
188
|
|
|
(624)
|
|
|
58,312
|
|
Municipal securities
|
|
108,750
|
|
|
4,399
|
|
|
(57)
|
|
|
113,092
|
|
Total debt securities
|
|
219,544
|
|
|
4,786
|
|
|
(930)
|
|
|
223,400
|
|
Other securities
|
|
12,247
|
|
|
181
|
|
|
(7)
|
|
|
12,421
|
|
Total investment securities available-for-sale
|
|
$
|
231,791
|
|
|
$
|
4,967
|
|
|
$
|
(937)
|
|
|
$
|
235,821
|
|
The following table summarizes amortized cost and fair values of debt securities by maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Available for sale
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Within one year
|
|
$
|
—
|
|
|
$
|
—
|
|
After one year, but within five years
|
|
9,254
|
|
|
9,629
|
|
After five years, but within ten years
|
|
36,097
|
|
|
36,863
|
|
After ten years
|
|
336,966
|
|
|
345,656
|
|
Total
|
|
$
|
382,317
|
|
|
$
|
392,148
|
|
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled.
Investment securities with a carrying value of $229.4 million and $68.0 million at December 31, 2020 and 2019, respectively, were pledged to secure public funds, repurchase agreements and potential borrowings at the Federal Reserve discount window.
The Company’s investment portfolio includes securities that are in an unrealized loss position as of December 31, 2020, the details of which are included in the following table. Although these securities, if sold at December 31, 2020 would result in a pretax loss of $0.5 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. It is more likely than not that the Company will not, for liquidity purposes, sell any securities at a loss. Declines in the fair values of these securities can be traced to general market conditions, which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency and whether or not the financial condition of the security issuer has severely deteriorated. As of December 31, 2020, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain material realized losses as a result of the current temporary decline in fair value.
The following table discloses the length of time that investments have remained in an unrealized loss position at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Less than 12 months
|
|
12 months or more
|
Description and number of positions
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
United States government agency securities (27)
|
|
$
|
19,021
|
|
|
$
|
(68)
|
|
|
$
|
12,574
|
|
|
$
|
(142)
|
|
United States sponsored mortgage-backed securities (9)
|
|
15,331
|
|
|
(155)
|
|
|
3,349
|
|
|
(16)
|
|
Municipal securities (14)
|
|
11,856
|
|
|
(82)
|
|
|
—
|
|
|
—
|
|
Other securities (5)
|
|
3,947
|
|
|
(71)
|
|
|
—
|
|
|
—
|
|
|
|
$
|
50,155
|
|
|
$
|
(376)
|
|
|
$
|
15,923
|
|
|
$
|
(158)
|
|
The following table discloses the length of time that investments have remained in an unrealized loss position at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Less than 12 months
|
|
12 months or more
|
Description and number of positions
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
United States government agency securities (26)
|
|
$
|
8,160
|
|
|
$
|
(59)
|
|
|
$
|
15,399
|
|
|
$
|
(190)
|
|
United States sponsored mortgage-backed securities (40)
|
|
16,660
|
|
|
(170)
|
|
|
27,498
|
|
|
(454)
|
|
Municipal securities (13)
|
|
6,018
|
|
|
(40)
|
|
|
828
|
|
|
(17)
|
|
Other securities (2)
|
|
1,093
|
|
|
(7)
|
|
|
—
|
|
|
—
|
|
|
|
$
|
31,931
|
|
|
$
|
(276)
|
|
|
$
|
43,725
|
|
|
$
|
(661)
|
|
The following table summarizes the investment sales and related gains and losses in 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Sales of available-for-sale investments
|
|
$
|
54,023
|
|
|
$
|
31,220
|
|
|
$
|
2,743
|
|
Gross gains
|
|
948
|
|
|
105
|
|
|
352
|
|
|
|
|
|
|
|
|
Gross losses
|
|
34
|
|
|
271
|
|
|
25
|
|
|
|
|
|
|
|
|
Sales of equity investments
|
|
$
|
4,622
|
|
|
$
|
5,968
|
|
|
$
|
—
|
|
Gross gains
|
|
3,501
|
|
|
—
|
|
|
—
|
|
Gross losses
|
|
—
|
|
|
7
|
|
|
—
|
|
The Company recognized unrealized holding gains on equity securities of $0.4 million, $13.8 million and $0.6 million in 2020, 2019 and 2018, respectively, and these were recorded in noninterest income. A majority of the 2019 unrealized holding gains on equity securities was the result of the Company recognizing a $13.5 million pre-tax gain after a valuation on its Fintech investment portfolio in the second quarter of 2019.
There were no held-to-maturity securities at December 31, 2020 or December 31, 2019 and the Company sold no held-to-maturity investments during the years of 2020, 2019 or 2018.
Note 3 – Loans and Allowance for Loan Losses
Prior to the ICM transaction, the Company routinely generated one to four family mortgages for sale into the secondary market. During 2020, 2019 and 2018, the Company recognized sales proceeds of $1.48 billion, $1.61 billion and $1.24 billion, resulting in mortgage fee income of $33.4 million, $41.0 million and $32.3 million, respectively.
The components of loans in the Consolidated Balance Sheet at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Commercial and non-residential real estate
|
|
$
|
1,141,114
|
|
|
$
|
1,063,828
|
|
Residential
|
|
240,264
|
|
|
271,604
|
|
Home equity
|
|
30,828
|
|
|
35,106
|
|
Consumer
|
|
3,156
|
|
|
3,697
|
|
PCI loans:
|
|
|
|
|
Commercial and non-residential real estate
|
|
21,008
|
|
|
—
|
|
Residential
|
|
16,943
|
|
|
—
|
|
|
|
|
|
|
Consumer
|
|
1,488
|
|
|
—
|
|
Total loans
|
|
1,454,801
|
|
|
1,374,235
|
|
Deferred loan origination costs and (fees), net
|
|
(1,057)
|
|
|
306
|
|
Loans receivable
|
|
$
|
1,453,744
|
|
|
$
|
1,374,541
|
|
The following table summarizes the primary segments of the loan portfolio, excluding PCI loans, as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
13,334
|
|
|
$
|
1,960
|
|
|
$
|
95
|
|
|
$
|
5
|
|
|
$
|
15,394
|
|
Collectively evaluated for impairment
|
|
1,127,780
|
|
|
238,304
|
|
|
30,733
|
|
|
3,151
|
|
|
1,399,968
|
|
Total Loans
|
|
$
|
1,141,114
|
|
|
$
|
240,264
|
|
|
$
|
30,828
|
|
|
$
|
3,156
|
|
|
$
|
1,415,362
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
7,401
|
|
|
$
|
1,953
|
|
|
$
|
95
|
|
|
$
|
34
|
|
|
$
|
9,483
|
|
Collectively evaluated for impairment
|
|
1,056,427
|
|
|
269,651
|
|
|
35,011
|
|
|
3,663
|
|
|
1,364,752
|
|
Total Loans
|
|
$
|
1,063,828
|
|
|
$
|
271,604
|
|
|
$
|
35,106
|
|
|
$
|
3,697
|
|
|
$
|
1,374,235
|
|
The Company currently manages its loan portfolios and the respective exposure to credit losses (credit risk) by the following specific portfolio segments which are levels at which the Company develops and documents its systematic methodology to
determine the allowance for credit losses attributable to each respective portfolio segment. These segments are as follows:
Commercial business loans – Commercial loans are made to provide funds for equipment and general corporate needs, as well as to finance owner occupied real estate, and to finance future cash flows of Federal Government lease contracts. Repayment of these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. This segment includes both company originated and purchased participation loans. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.
Commercial real estate loans – Commercial real estate loans consist of non-owner occupied properties, such as investment properties for retail, office and multifamily with a history of occupancy and cash flow. This segment includes both company originated and purchased participation loans. These loans carry the risk of adverse changes in the local economy and a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.
Commercial acquisition, development and construction loans – Commercial acquisition, development and construction loans are intended to finance the construction of commercial and residential properties, including the construction of single-family dwellings, and also includes loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.
Commercial SBA PPP loans –This segment includes the loan originated through the recently created SBA PPP loans. Credit risk is heightened as this SBA program mandates that these loans require no collateral and no guarantors of the loans. However, the loans are backed by a full guaranty of the SBA, so long as the loans were originated in accordance with the program guidelines. Additionally, these loans are eligible for full forgiveness by the SBA so long as the borrowers comply with the program guidelines as it pertains to their eligibility to borrow these funds, as well as their use of the funds.
Residential mortgage loans – This residential real estate subsegment contains permanent and construction mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Credit risk arises from the borrower’s, and where applicable the builder's, continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.
Home equity lines of credit – This segment includes subsegment for senior lien and subordinate lien lines of credit. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.
Consumer loans – This segment of loans includes primarily installment loans and personal lines of credit. Consumer loans include installment loans used by clients to purchase automobiles, boats and recreational vehicles. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.
The following table presents impaired loans by class, excluding PCI loans, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans with Specific Allowance
|
|
Impaired Loans with No Specific Allowance
|
|
Total Impaired Loans
|
(Dollars in thousands)
|
|
Recorded Investment
|
|
Related Allowance
|
|
Recorded Investment
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
3,431
|
|
|
$
|
1,032
|
|
|
$
|
5,653
|
|
|
$
|
9,084
|
|
|
$
|
10,440
|
|
Commercial real estate
|
|
772
|
|
|
264
|
|
|
944
|
|
|
1,716
|
|
|
1,864
|
|
Acquisition and development
|
|
—
|
|
|
—
|
|
|
2,534
|
|
|
2,534
|
|
|
3,939
|
|
Total commercial
|
|
4,203
|
|
|
1,296
|
|
|
9,131
|
|
|
13,334
|
|
|
16,243
|
|
Residential
|
|
—
|
|
|
—
|
|
|
1,960
|
|
|
1,960
|
|
|
2,232
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
95
|
|
|
95
|
|
|
95
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Total impaired loans
|
|
$
|
4,203
|
|
|
$
|
1,296
|
|
|
$
|
11,191
|
|
|
$
|
15,394
|
|
|
$
|
18,575
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
2,606
|
|
|
$
|
249
|
|
|
$
|
644
|
|
|
$
|
3,250
|
|
|
$
|
4,308
|
|
Commercial real estate
|
|
1,786
|
|
|
325
|
|
|
295
|
|
|
2,081
|
|
|
2,171
|
|
Acquisition and development
|
|
—
|
|
|
—
|
|
|
2,070
|
|
|
2,070
|
|
|
3,467
|
|
Total commercial
|
|
4,392
|
|
|
574
|
|
|
3,009
|
|
|
7,401
|
|
|
9,946
|
|
Residential
|
|
—
|
|
|
—
|
|
|
1,953
|
|
|
1,953
|
|
|
2,045
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
95
|
|
|
95
|
|
|
100
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
34
|
|
|
34
|
|
|
35
|
|
Total impaired loans
|
|
$
|
4,392
|
|
|
$
|
574
|
|
|
$
|
5,091
|
|
|
$
|
9,483
|
|
|
$
|
12,126
|
|
The following table presents the average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
(Dollars in thousands)
|
|
Average Investment in Impaired Loans
|
|
Interest Income Recognized on Accrual Basis
|
|
Interest Income Recognized on Cash Basis
|
|
Average Investment in Impaired Loans
|
|
Interest Income Recognized on Accrual Basis
|
|
Interest Income Recognized on Cash Basis
|
|
Average Investment in Impaired Loans
|
|
Interest Income Recognized on Accrual Basis
|
|
Interest Income Recognized on Cash Basis
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
6,066
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,052
|
|
|
$
|
51
|
|
|
$
|
106
|
|
Commercial real estate
|
|
3,057
|
|
|
97
|
|
|
104
|
|
|
3,220
|
|
|
162
|
|
|
140
|
|
|
6,416
|
|
|
159
|
|
|
94
|
|
Acquisition and development
|
|
1,207
|
|
|
67
|
|
|
73
|
|
|
2,151
|
|
|
123
|
|
|
131
|
|
|
1,367
|
|
|
106
|
|
|
8
|
|
Total commercial
|
|
10,330
|
|
|
164
|
|
|
177
|
|
|
8,573
|
|
|
285
|
|
|
271
|
|
|
11,835
|
|
|
316
|
|
|
208
|
|
Residential
|
|
2,541
|
|
|
19
|
|
|
19
|
|
|
2,719
|
|
|
16
|
|
|
16
|
|
|
2,569
|
|
|
20
|
|
|
14
|
|
Home equity
|
|
87
|
|
|
—
|
|
|
—
|
|
|
154
|
|
|
2
|
|
|
2
|
|
|
100
|
|
|
2
|
|
|
1
|
|
Consumer
|
|
7
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
149
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
12,965
|
|
|
$
|
183
|
|
|
$
|
196
|
|
|
$
|
11,491
|
|
|
$
|
303
|
|
|
$
|
289
|
|
|
$
|
14,653
|
|
|
$
|
338
|
|
|
$
|
223
|
|
As of December 31, 2020, there are five loans collateralized by residential real estate property in the process of foreclosure. The total recorded investment in these loans was $0.2 million as of December 31, 2020. These loans are included in the table above and have no specific allowance allocated to them.
As of December 31, 2020, the loans acquired through the acquisition of First State held 32 foreclosed residential real estate properties, representing $2.6 million, or 56.6%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of various commercial loans to different borrowers. There are eleven additional loans collateralized by
residential real estate property in the process of foreclosure. The total recorded investment in these loans was $1.1 million as of December 31, 2020. These loans are included in the table above and have no specific allowance allocated to them.
As of December 31, 2019, the Bank held eleven foreclosed residential real estate properties representing $0.6 million, or 40.9%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two commercial loan relationships, one of which included two properties for a total of $0.3 million, while the other included seven properties for a total of $0.2 million. The three remaining properties, totaling $0.1 million, were the result of the foreclosure of two unrelated borrowers. There are seven additional consumer mortgage loans collateralized by residential real estate property in the process of foreclosure. The total recorded investment in these loans was $0.6 million as of December 31, 2019. These loans are included in the table above and have no specific allowance allocated to them.
Bank management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions.
Loans categorized as “Pass” rated have adequate sources of repayment, with little identifiable risk of collection and general conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.
Loans categorized as “Special Mention” rated have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.
Loans categorized as “Substandard” rated are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that bank will sustain some loss if the deficiencies are not corrected.
Loans categorized as “Doubtful” rated have all the weakness inherent in those classified substandard with the added characteristic that the weakness make collections or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.
The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Any portion of a loan that has been or is expected to be charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy, repossession or death occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures that a review of all commercial relationships of $1.0 million or greater is performed annually.
Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis. The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The following table represents the classes of the loan portfolio, excluding PCI loans, summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
496,222
|
|
|
$
|
9,529
|
|
|
$
|
17,045
|
|
|
$
|
1,095
|
|
|
$
|
523,891
|
|
Commercial real estate
|
|
356,544
|
|
|
32,044
|
|
|
34,001
|
|
|
533
|
|
|
423,122
|
|
Acquisition and development
|
|
80,771
|
|
|
25,001
|
|
|
4,184
|
|
|
2,170
|
|
|
112,126
|
|
SBA PPP
|
|
81,975
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81,975
|
|
Total commercial
|
|
1,015,512
|
|
|
66,574
|
|
|
55,230
|
|
|
3,798
|
|
|
1,141,114
|
|
Residential
|
|
236,250
|
|
|
948
|
|
|
2,896
|
|
|
170
|
|
|
240,264
|
|
Home equity
|
|
30,277
|
|
|
381
|
|
|
144
|
|
|
26
|
|
|
30,828
|
|
Consumer
|
|
3,124
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
3,156
|
|
Total Loans
|
|
$
|
1,285,163
|
|
|
$
|
67,935
|
|
|
$
|
58,270
|
|
|
$
|
3,994
|
|
|
$
|
1,415,362
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
511,590
|
|
|
$
|
17,398
|
|
|
$
|
11,894
|
|
|
$
|
—
|
|
|
$
|
540,882
|
|
Commercial real estate
|
|
406,712
|
|
|
3,564
|
|
|
1,494
|
|
|
—
|
|
|
411,770
|
|
Acquisition and development
|
|
106,428
|
|
|
1,869
|
|
|
2,879
|
|
|
—
|
|
|
111,176
|
|
Total commercial
|
|
1,024,730
|
|
|
22,831
|
|
|
16,267
|
|
|
—
|
|
|
1,063,828
|
|
Residential
|
|
267,367
|
|
|
1,946
|
|
|
2,177
|
|
|
114
|
|
|
271,604
|
|
Home equity
|
|
34,641
|
|
|
383
|
|
|
82
|
|
|
—
|
|
|
35,106
|
|
Consumer
|
|
3,613
|
|
|
56
|
|
|
28
|
|
|
—
|
|
|
3,697
|
|
Total Loans
|
|
$
|
1,330,351
|
|
|
$
|
25,216
|
|
|
$
|
18,554
|
|
|
$
|
114
|
|
|
$
|
1,374,235
|
|
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.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and/or the SARC, as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless the Company believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires the receipt of six consecutive months of regular, on-time payments. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.
The following table presents the classes of the loan portfolio, excluding PCI loans, summarized by aging categories of performing loans and nonaccrual loans as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Current
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90+ Days Past Due
|
|
Total Past Due
|
|
Total Loans
|
|
Non-Accrual
|
|
90+ Days Still Accruing
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
521,799
|
|
|
$
|
1,040
|
|
|
$
|
33
|
|
|
$
|
1,019
|
|
|
$
|
2,092
|
|
|
$
|
523,891
|
|
|
$
|
8,601
|
|
|
$
|
—
|
|
Commercial real estate
|
|
422,343
|
|
|
34
|
|
|
212
|
|
|
533
|
|
|
779
|
|
|
423,122
|
|
|
944
|
|
|
—
|
|
Acquisition and development
|
|
109,686
|
|
|
—
|
|
|
—
|
|
|
2,440
|
|
|
2,440
|
|
|
112,126
|
|
|
2,534
|
|
|
—
|
|
SBA PPP
|
|
81,975
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81,975
|
|
|
—
|
|
|
—
|
|
Total commercial
|
|
1,135,803
|
|
|
1,074
|
|
|
245
|
|
|
3,992
|
|
|
5,311
|
|
|
1,141,114
|
|
|
12,079
|
|
|
—
|
|
Residential
|
|
235,420
|
|
|
2,058
|
|
|
1,969
|
|
|
817
|
|
|
4,844
|
|
|
240,264
|
|
|
1,534
|
|
|
—
|
|
Home equity
|
|
30,369
|
|
|
289
|
|
|
75
|
|
|
95
|
|
|
459
|
|
|
30,828
|
|
|
95
|
|
|
—
|
|
Consumer
|
|
3,156
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,156
|
|
|
5
|
|
|
—
|
|
Total Loans
|
|
$
|
1,404,748
|
|
|
$
|
3,421
|
|
|
$
|
2,289
|
|
|
$
|
4,904
|
|
|
$
|
10,614
|
|
|
$
|
1,415,362
|
|
|
$
|
13,713
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
537,602
|
|
|
$
|
3,189
|
|
|
$
|
47
|
|
|
$
|
44
|
|
|
$
|
3,280
|
|
|
$
|
540,882
|
|
|
$
|
2,848
|
|
|
$
|
—
|
|
Commercial real estate
|
|
411,070
|
|
|
522
|
|
|
178
|
|
|
—
|
|
|
700
|
|
|
411,770
|
|
|
295
|
|
|
—
|
|
Acquisition and development
|
|
110,717
|
|
|
180
|
|
|
—
|
|
|
279
|
|
|
459
|
|
|
111,176
|
|
|
390
|
|
|
—
|
|
Total commercial
|
|
1,059,389
|
|
|
3,891
|
|
|
225
|
|
|
323
|
|
|
4,439
|
|
|
1,063,828
|
|
|
3,533
|
|
|
—
|
|
Residential
|
|
267,515
|
|
|
3,003
|
|
|
549
|
|
|
537
|
|
|
4,089
|
|
|
271,604
|
|
|
1,461
|
|
|
—
|
|
Home equity
|
|
34,382
|
|
|
545
|
|
|
84
|
|
|
95
|
|
|
724
|
|
|
35,106
|
|
|
95
|
|
|
—
|
|
Consumer
|
|
3,610
|
|
|
1
|
|
|
58
|
|
|
28
|
|
|
87
|
|
|
3,697
|
|
|
34
|
|
|
—
|
|
Total Loans
|
|
$
|
1,364,896
|
|
|
$
|
7,440
|
|
|
$
|
916
|
|
|
$
|
983
|
|
|
$
|
9,339
|
|
|
$
|
1,374,235
|
|
|
$
|
5,123
|
|
|
$
|
—
|
|
The ALL is maintained to absorb losses from the loan portfolio and is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-performing loans.
Interest income on loans would have increased by approximately $0.6 million, $0.6 million and $0.8 million for 2020, 2019 and 2018, respectively, if loans had performed in accordance with their terms.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL. The Bank analyzes certain impaired loans in homogeneous pools, rather than on an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically, residential mortgage loans, home equity lines of credit and consumer loans, when considered impaired, are evaluated collectively for impairment by applying allocation rates derived from the Bank’s historical losses specific to impaired loans and the reserve totaled $0.1 million and $0.1 million, and $0.2 million as of December 31, 2020, 2019 and 2018, respectively.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by qualified factors.
The segments described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Company and Bank management track the historical net charge-off activity at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. All pools currently utilize a rolling 12 quarters.
“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor as these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory and governmental sources are: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, conclusion of loan reviews, audits and exams, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions, consumer sentiment and other external factors. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.
To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of letters of credit, non-revolving lines of credit and revolving lines of credit and based its calculation on the expectation of future advances of each loan category. Letters of credit were determined to be highly unlikely to advance since they are generally in place only to ensure various forms of performance of the borrowers. In the Bank’s history, there have been no letters of credit drawn upon. In addition, many of the letters of credit are cash secured and do not warrant an allocation. Non-revolving lines of credit were determined to be highly likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.
Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which Management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. The liability for unfunded commitments was $0.6 million and $0.3 million as of December 31, 2020 and 2019, respectively.
Bank 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 following tables summarize the activity of primary segments of the ALL, excluding the ALL related to PCI loans, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment for the years ending December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
ALL balance at December 31, 2019
|
|
$
|
10,098
|
|
|
$
|
1,272
|
|
|
$
|
327
|
|
|
$
|
78
|
|
|
$
|
11,775
|
|
Charge-offs
|
|
(1,932)
|
|
|
(224)
|
|
|
(23)
|
|
|
—
|
|
|
(2,179)
|
|
Recoveries
|
|
22
|
|
|
—
|
|
|
9
|
|
|
3
|
|
|
34
|
|
Provision
|
|
15,845
|
|
|
684
|
|
|
(15)
|
|
|
(30)
|
|
|
16,484
|
|
Allowance contributed with mortgage combination transaction
|
|
—
|
|
|
(354)
|
|
|
—
|
|
|
—
|
|
|
(354)
|
|
ALL balance at December 31, 2020
|
|
$
|
24,033
|
|
|
$
|
1,378
|
|
|
$
|
298
|
|
|
$
|
51
|
|
|
$
|
25,760
|
|
Individually evaluated for impairment
|
|
$
|
1,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,296
|
|
Collectively evaluated for impairment
|
|
$
|
22,737
|
|
|
$
|
1,378
|
|
|
$
|
298
|
|
|
$
|
51
|
|
|
$
|
24,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
ALL balance at December 31, 2018
|
|
$
|
8,605
|
|
|
$
|
1,405
|
|
|
$
|
684
|
|
|
$
|
245
|
|
|
$
|
10,939
|
|
Charge-offs
|
|
(998)
|
|
|
—
|
|
|
—
|
|
|
(10)
|
|
|
(1,008)
|
|
Recoveries
|
|
1
|
|
|
1
|
|
|
4
|
|
|
49
|
|
|
55
|
|
Provision
|
|
2,490
|
|
|
(134)
|
|
|
(361)
|
|
|
(206)
|
|
|
1,789
|
|
ALL balance at December 31, 2019
|
|
$
|
10,098
|
|
|
$
|
1,272
|
|
|
$
|
327
|
|
|
$
|
78
|
|
|
$
|
11,775
|
|
Individually evaluated for impairment
|
|
$
|
574
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
574
|
|
Collectively evaluated for impairment
|
|
$
|
9,524
|
|
|
$
|
1,272
|
|
|
$
|
327
|
|
|
$
|
78
|
|
|
$
|
11,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
ALL balance at December 31, 2017
|
|
$
|
7,804
|
|
|
$
|
1,119
|
|
|
$
|
705
|
|
|
$
|
250
|
|
|
$
|
9,878
|
|
Charge-offs
|
|
(1,024)
|
|
|
(166)
|
|
|
—
|
|
|
(290)
|
|
|
(1,480)
|
|
Recoveries
|
|
15
|
|
|
22
|
|
|
59
|
|
|
5
|
|
|
101
|
|
Provision
|
|
1,810
|
|
|
430
|
|
|
(80)
|
|
|
280
|
|
|
2,440
|
|
ALL balance at December 31, 2018
|
|
$
|
8,605
|
|
|
$
|
1,405
|
|
|
$
|
684
|
|
|
$
|
245
|
|
|
$
|
10,939
|
|
Individually evaluated for impairment
|
|
$
|
1,043
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,043
|
|
Collectively evaluated for impairment
|
|
$
|
7,562
|
|
|
$
|
1,405
|
|
|
$
|
684
|
|
|
$
|
245
|
|
|
$
|
9,896
|
|
The allowance for loan losses is based on estimates, and actual losses will 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.
Troubled Debt Restructurings
At December 31, 2020 and 2019, the Bank had specific reserve allocations for TDRs of $0.6 million and $0.5 million, respectively. Loans considered to be troubled debt restructured loans totaled $10.2 million and $7.7 million as of December 31, 2020 and December 31, 2019, respectively. Of these totals, $1.6 million and $4.4 million, respectively, represent accruing troubled debt restructured loans and represent 12% and 46%, respectively, of total impaired loans. Meanwhile, as of December 31, 2020, $8.0 million represents seven loans to three borrowers that have defaulted under the restructured terms. The largest of these loans, at $2.2 million, is a restructured commercial loan to a company previously dependent on the coal industry, which is now structured as an unsecured loan. Three of these loans to an unrelated borrower, totaling $5.2 million, are restructured equipment loans to a borrower in the coal industry, which was provided extended interest-only terms to allow time for the collateral equipment to be sold. The last of these loans are commercial acquisition and development loans totaling $0.6 million that were considered TDRs due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to principal and interest payments. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of December 31, 2020. The unsecured loan and the three development loans were also considered non-performing loans as of December 31, 2019.
During the year ended December 31, 2020, no restructured loans defaulted under their modified terms that were not already classified as non-performing for having previously defaulted under their modified terms.
There were no commitments to advance funds to any TDRs as of December 31, 2020.
The following table presents details related to loans identified as TDRs during the years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New TDRs 1
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
6
|
|
|
$
|
6,294
|
|
|
$
|
5,326
|
|
|
2
|
|
|
$
|
336
|
|
|
$
|
333
|
|
Commercial real estate
|
|
2
|
|
|
159
|
|
|
150
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition and development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial
|
|
8
|
|
|
6,453
|
|
|
5,476
|
|
|
2
|
|
|
336
|
|
|
333
|
|
Residential
|
|
1
|
|
|
87
|
|
|
86
|
|
|
3
|
|
|
246
|
|
|
323
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
9
|
|
|
$
|
6,540
|
|
|
$
|
5,562
|
|
|
5
|
|
|
$
|
582
|
|
|
$
|
656
|
|
1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.
Purchased Credit Impaired Loans
As a result of the acquisition of First State, the Company has PCI loans. The Company did not hold any PCI loans as of December 31, 2019. See Note 24 – Acquisitions and Divestitures for further details of the acquisition of First State.
The carrying amount of the PCI loan portfolio is as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2020
|
|
|
Commercial
|
|
$
|
21,008
|
|
|
|
Residential
|
|
16,943
|
|
|
|
|
|
|
|
|
Consumer
|
|
1,488
|
|
|
|
Outstanding balance
|
|
$
|
39,439
|
|
|
|
Carrying amount, net of allowance
|
|
$
|
39,355
|
|
|
|
Accretable yield, or income expected to be collected, is as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2020
|
|
|
Beginning balance
|
|
$
|
—
|
|
|
|
New loans purchased
|
|
11,746
|
|
|
|
Accretion of income
|
|
(2,945)
|
|
|
|
Reclassification from non-accretable difference
|
|
(488)
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,313
|
|
|
|
For the PCI loan portfolio disclosed above, the Company increased the allowance for loan losses by $0.1 million during 2020.
PCI loans purchased during 2020, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Contractually required payments receivable of loans purchased during the period:
|
|
|
Commercial
|
|
$
|
36,046
|
|
|
|
Residential
|
|
47,787
|
|
|
|
|
|
|
|
|
Consumer
|
|
2,990
|
|
|
|
Cash flows expected to be collected at acquisition
|
|
$
|
86,823
|
|
|
|
Fair value of loans acquired at acquisition
|
|
$
|
50,235
|
|
|
|
Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected and, as of
December 31, 2020, the Company held no such loans.
The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2020 for the PCI loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Residential
|
|
|
|
|
|
Total
|
ALL balance as of December 31, 2019
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
Charge-offs
|
|
|
|
(11)
|
|
|
|
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
|
95
|
|
|
|
|
|
|
95
|
|
ALL balance at December 31, 2020
|
|
|
|
$
|
84
|
|
|
|
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
|
|
$
|
84
|
|
|
|
|
|
|
84
|
|
As of December 31, 2020, the loans in the Company's PCI loan portfolio are all collectively evaluated for impairment and are segmented into three categories: commercial loans totaling $17.1 million, residential loans totaling $16.9 million and consumer loans totaling $1.3 million, for portfolio total of $35.4 million.
The following table represents the classes of the PCI loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
12,263
|
|
|
$
|
136
|
|
|
$
|
345
|
|
|
$
|
4,860
|
|
|
$
|
17,604
|
|
Commercial Real Estate
|
|
982
|
|
|
3
|
|
|
263
|
|
|
21
|
|
|
1,269
|
|
Acquisition & Development
|
|
1,900
|
|
|
—
|
|
|
—
|
|
|
235
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
|
|
15,145
|
|
|
139
|
|
|
608
|
|
|
5,116
|
|
|
21,008
|
|
Residential
|
|
15,157
|
|
|
—
|
|
|
1,665
|
|
|
121
|
|
|
16,943
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
1,256
|
|
|
—
|
|
|
—
|
|
|
232
|
|
|
1,488
|
|
Total Loans
|
|
$
|
31,558
|
|
|
$
|
139
|
|
|
$
|
2,273
|
|
|
$
|
5,469
|
|
|
$
|
39,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the classes of the PCI loan portfolio summarized by aging categories of performing loans and non-accrual loans as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Current
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90+ Days Past Due
|
|
Total Past Due
|
|
Total Loans
|
|
Non-Accrual
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
16,264
|
|
|
$
|
71
|
|
|
$
|
65
|
|
|
$
|
1,204
|
|
|
$
|
1,340
|
|
|
$
|
17,604
|
|
|
$
|
—
|
|
|
|
Commercial Real Estate
|
|
1,157
|
|
|
—
|
|
|
—
|
|
|
112
|
|
|
112
|
|
|
1,269
|
|
|
—
|
|
|
|
Acquisition & Development
|
|
2,135
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,135
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
|
|
19,556
|
|
|
71
|
|
|
65
|
|
|
1,316
|
|
|
1,452
|
|
|
21,008
|
|
|
—
|
|
|
|
Residential
|
|
13,714
|
|
|
710
|
|
|
145
|
|
|
2,374
|
|
|
3,229
|
|
|
16,943
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
1,245
|
|
|
3
|
|
|
1
|
|
|
239
|
|
|
243
|
|
|
1,488
|
|
|
—
|
|
|
|
Total Loans
|
|
$
|
34,515
|
|
|
$
|
784
|
|
|
$
|
211
|
|
|
$
|
3,929
|
|
|
$
|
4,924
|
|
|
$
|
39,439
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the PCI loans are considered non-accrual as they are all currently accreting interest income under PCI accounting.
As the Company's PCI loan portfolio is accounted for in pools with similar risk characteristics in accordance with ASC 310-30, this portfolio is not subject to the impaired loan and TDR guidance. Rather, the revised estimated future cash flows of the individually modified loans are included in the estimated future cash flows of the pool.
PPP Loans and CARES Act Deferrals
The Company is actively participating in the PPP as a lender, evaluating other programs available to assist its clients and providing deferrals consistent with GSE guidelines. The Company originated 455 PPP loans with original balances of $92.8 million and outstanding balances of $82.0 million as of December 31, 2020.
As of December 31, 2020, commercial loans totaling $34.7 million and mortgage loans totaling $13.5 million were approved for modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”
Note 4 – Premises and Equipment
The following table presents the components of premises and equipment at December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Land
|
|
$
|
3,936
|
|
|
$
|
3,105
|
|
Buildings and improvements
|
|
14,350
|
|
|
13,352
|
|
Furniture, fixtures and equipment
|
|
18,701
|
|
|
15,553
|
|
Construction in progress
|
|
326
|
|
|
1,019
|
|
Leasehold improvements
|
|
3,079
|
|
|
1,985
|
|
|
|
40,392
|
|
|
35,014
|
|
Accumulated depreciation
|
|
(14,189)
|
|
|
(13,040)
|
|
Premises and equipment, net
|
|
$
|
26,203
|
|
|
$
|
21,974
|
|
Depreciation expense totaled $3.0 million, $3.0 million and $2.8 million for 2020, 2019 and 2018, respectively.
The Company leases certain premises, for the operation of banking offices and certain equipment under operating and finance leases. At December 31, 2020, the Company had lease liabilities totaling $18.4 million, of which $18.3 million was related to operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $17.7 million, of which $17.5 million was related to operating leases and $0.2 million was related to finance leases, related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the year ended December 31, 2020, the weighted-average remaining lease term for finance leases was 2.3 years and the weighted-average discount rate used in the measurement of finance lease liabilities was 2.4%. At December 31, 2020, the weighted-average remaining lease term for operating leases was 12.9 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 2.9%.
The Company leases certain premises, for the operation of some banking offices and equipment under operating and finance leases.At December 31, 2019, the Company had lease liabilities totaling $14.8 million, of which $14.6 million was related to operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $13.5 million, of which $13.2 million was related to operating leases and $0.3 million was related to finance leases, related to these leases. For the year ended December 31, 2019, the weighted-average remaining lease term for finance leases was 2.7 years and the weighted-average discount rate used in the measurement of finance lease liabilities was 2.8%. For the year ended December 31, 2019, the weighted-average remaining lease term for operating leases was 11.8 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.5%.
Lease costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Amortization of right-of-use assets, finance leases
|
|
$
|
65
|
|
|
$
|
77
|
|
Interest on lease liabilities, finance leases
|
|
4
|
|
|
6
|
|
Operating lease cost
|
|
2,072
|
|
|
2,120
|
|
Short-term lease cost
|
|
27
|
|
|
72
|
|
Variable lease cost
|
|
38
|
|
|
38
|
|
Total lease cost
|
|
$
|
2,206
|
|
|
$
|
2,313
|
|
Rent expense for the year ended December 31, 2018, prior to the adoption of ASU 2016-02, was $2.0 million.
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the year ended December 31, 2020.
Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in thousands)
|
|
Finance Leases
|
|
Operating Leases
|
2021
|
|
$
|
68
|
|
|
$
|
1,779
|
|
2022
|
|
59
|
|
|
1,623
|
|
2023
|
|
41
|
|
|
1,825
|
|
2024
|
|
5
|
|
|
1,779
|
|
2025
|
|
5
|
|
|
1,709
|
|
2026 and thereafter
|
|
4
|
|
|
14,280
|
|
Total future minimum lease payments
|
|
$
|
182
|
|
|
$
|
22,995
|
|
Less: Amounts representing interest
|
|
(6)
|
|
|
(4,723)
|
|
Present value of net future minimum lease payments
|
|
$
|
176
|
|
|
$
|
18,272
|
|
Note 5 – Equity Method Investment
In the third quarter of 2020, the Company acquired a portion of ICM and recognizes its ownership as an equity method investment initially recorded at fair value. In accordance with Rule 8-03(b)(3) of Regulation S-X, the Company must assess whether its equity method investment is a significant equity method investment. In evaluating the significance of this investment, the Company performed the income, asset, and investment tests described in S-X 3-05 and S-X 1-02(w). Rule 8-03(b)(3) of Regulation S-X requires summarized financial information in a quarterly report if any of the three tests exceeds 20%. Under the income test, the Company’s proportionate share of its equity method investee's aggregated net income exceeded the applicable threshold of 20%, and accordingly it is required to provide summarized income statement information for this investee for all periods presented. The Company's share of net income from its equity method investment totaled $24.2 million for the year ended December 31, 2020.
The following table provides summarized income statement information for the Company's equity method investment. As ICM did not exist prior to July 1, 2020, no historical financial information is presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
|
|
Total revenues
|
|
$
|
120,323
|
|
|
|
|
|
Gross profit
|
|
59,659
|
|
|
|
|
|
Net income
|
|
59,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of loans
|
|
100,402
|
|
|
|
|
|
Volume of loans sold
|
|
2,948,724
|
|
|
|
|
|
As of December 31, 2020, the locked mortgage pipeline was $1.54 billion. For more information, please see Note 24 – Acquisitions and Divestitures.
Note 6 – Deposits
Deposits at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Demand deposits of individuals, partnerships and corporations
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
715,791
|
|
|
$
|
278,547
|
|
Interest-bearing demand
|
|
496,502
|
|
|
351,435
|
|
Savings and money markets
|
|
545,501
|
|
|
363,026
|
|
Time deposits, including CDs and IRAs
|
|
224,595
|
|
|
272,034
|
|
Total deposits
|
|
$
|
1,982,389
|
|
|
$
|
1,265,042
|
|
|
|
|
|
|
Time deposits that meet or exceed the FDIC insurance limit
|
|
$
|
16,955
|
|
|
$
|
8,955
|
|
Maturities of time deposits at December 31, 2020 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
126,863
|
|
2022
|
|
62,833
|
|
2023
|
|
20,864
|
|
2024
|
|
12,705
|
|
2025
|
|
1,330
|
|
Total
|
|
$
|
224,595
|
|
As of December 31, 2020, overdrawn deposit accounts totaling $0.2 million were reclassified as loan balances.
Note 7 – Borrowed Funds
The Bank is a member of the FHLB of Pittsburgh, Pennsylvania. At December 31, 2019 the Bank had borrowed $222.9 million. No amounts were outstanding as of December 31, 2020. As of December 31, 2020, the Bank's maximum borrowing capacity with the FHLB was $452.2 million and the remaining borrowing capacity was $440.9 million, with the difference being deposit letters of credit.
Short-term borrowings
Along with traditional deposits, the Bank has access to short-term borrowings from FHLB to fund its operations and investments.
Information related to short-term borrowings is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
|
Balance at end of year
|
|
$
|
—
|
|
|
$
|
192,063
|
|
|
|
Average balance during the year
|
|
68,407
|
|
|
187,226
|
|
|
|
Maximum month-end balance
|
|
154,248
|
|
|
240,811
|
|
|
|
Weighted-average rate during the year
|
|
0.58
|
%
|
|
2.24
|
%
|
|
|
Weighted-average rate at December 31
|
|
—
|
%
|
|
1.81
|
%
|
|
|
Long-term borrowings
As of December 31, 2020, the Bank had no long-term borrowings with the FHLB. As of December 31, 2019, the Bank had long-term borrowings totaling $30.8 million. Of this total, $30.0 million was fixed interest rate notes, originated in November 2019, due between November 2022 and November 2024, with interest of between 1.7% and 1.8% payable monthly and $0.8 million was fixed interest rate notes, originated between October 2006 and April 2007, due between October 2021 and April 2022, with interest of between 5.18% and 5.20% payable monthly.
Repurchase agreements
Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase. Repurchase agreements with customers represent funds deposited by customers, on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with customers are presented as an individual line item on the consolidated
balance sheets. All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Company and the client and are accounted for as secured borrowings. The Company’s repurchase agreements reflected in liabilities consist of customer accounts and securities which are pledged on an individual security basis.
The Company monitors the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected at the amount of cash received in connection with the transaction and included in securities sold under agreements to repurchase on the consolidated balance sheets. The primary risk with the Company's repurchase agreements is market risk associated with the investments securing the transactions, as it may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents.
All of the Company’s repurchase agreements were overnight agreements at December 31, 2020 and December 31, 2019. These borrowings were collateralized with investment securities with a carrying value of $10.7 million and $10.5 million at December 31, 2020 and December 31, 2019, respectively, and were comprised of United States Government Agencies and Mortgage backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.
Information related to repurchase agreements is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
|
Balance at end of year
|
|
$
|
10,266
|
|
|
$
|
10,172
|
|
|
|
Average balance during the year
|
|
9,856
|
|
|
11,252
|
|
|
|
Maximum month-end balance
|
|
10,505
|
|
|
14,655
|
|
|
|
Weighted-average rate during the year
|
|
0.23
|
%
|
|
0.43
|
%
|
|
|
Weighted-average rate at December 31
|
|
0.14
|
%
|
|
0.44
|
%
|
|
|
Subordinated Debt
Information related to subordinated debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
|
Balance at end of year
|
|
$
|
43,407
|
|
|
$
|
4,124
|
|
|
|
Average balance during the year
|
|
7,568
|
|
|
12,125
|
|
|
|
Maximum month-end balance
|
|
43,524
|
|
|
17,524
|
|
|
|
Weighted-average rate during the year
|
|
3.45
|
%
|
|
6.35
|
%
|
|
|
Weighted-average rate at December 31
|
|
4.02
|
%
|
|
3.51
|
%
|
|
|
In November 2020, the Company completed the private placement of $40 million fixed-to-floating rate subordinated notes to certain qualified institutional investors. These notes are unsecured and have a ten-year term, maturing December 1, 2030, and will bear interest at a fixed rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR, plus 401 basis points, payable quarterly in arrears. These notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.
In March 2007, the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its MVB Financial Statutory Trust I subsidiary (the “Trust”). The Company established the Trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Company since 2012. Interest payments are due in March, June, September and December and are adjusted at the interest due dates at a rate of 1.62% over the three-month LIBOR Rate. The obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees. The securities issued by the Trust are includable for regulatory purposes as a component of the Company’s Tier 1 capital.
In June 2014, the Company issued its Convertible Subordinated Promissory Notes to various investors in the aggregate principal amount of $29.4 million. The notes were issued in $0.1 million increments per note, subject to a minimum investment of $1 million. The Notes were to expire 10 years after the initial issuance date of the Notes. In July 2019, the Federal Reserve Board provided the Company with its approval for the Company to redeem all of the outstanding Notes. On or about August 1, 2019, the
Company provided notice to the holders of the outstanding notes that it would redeem the outstanding notes on September 30, 2019.
In 2019, $1.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 62,500 new shares and $12.4 million of subordinated debt was redeemed. These transactions provided an annual interest expense savings of $1.0 million.
In 2018, $16.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 1,000,000 new shares and providing an annual interest expense savings of $1.1 million.
The Company recognized interest expense on its subordinated debt of $0.3 million, $0.8 million and $1.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Note 8 – Commitments and Contingent Liabilities
Commitments
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit 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 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. Since 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 credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.
Total contractual amounts of the commitments as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Available on lines of credit
|
|
$
|
393,814
|
|
|
$
|
385,871
|
|
Stand-by letters of credit
|
|
19,806
|
|
|
18,145
|
|
Other loan commitments
|
|
22,418
|
|
|
24,821
|
|
|
|
$
|
436,038
|
|
|
$
|
428,837
|
|
Concentration of Credit Risk
The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers throughout the North Central West Virginia Northern Virginia markets. Collateral for loans is primarily residential and commercial real estate, personal property and business equipment. The Company evaluates the credit worthiness of each of its customers on a case-by-case basis and the amount of collateral it obtains is based upon management’s credit evaluation.
Regulatory
The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. In accordance with these requirements, the Company implemented a deposit reclassification program that allowed the Company to maintain no such reserve balances as of December 31, 2020 and 2019.
Contingent Liabilities
The subsidiary Bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.
Note 9 – Income Taxes
The provisions for income taxes for the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
10,899
|
|
|
$
|
10,450
|
|
|
$
|
2,203
|
|
State
|
|
2,019
|
|
|
2,101
|
|
|
1,031
|
|
|
|
$
|
12,918
|
|
|
$
|
12,551
|
|
|
$
|
3,234
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,183)
|
|
|
$
|
(3,716)
|
|
|
$
|
117
|
|
State
|
|
(203)
|
|
|
(237)
|
|
|
22
|
|
|
|
(3,386)
|
|
|
(3,953)
|
|
|
139
|
|
Income tax expense
|
|
$
|
9,532
|
|
|
$
|
8,598
|
|
|
$
|
3,373
|
|
Following is a reconciliation of income taxes at federal statutory rates to recorded income taxes for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Income tax at federal statutory rate
|
|
$
|
9,858
|
|
|
21.0
|
%
|
|
$
|
7,353
|
|
|
21.0
|
%
|
|
$
|
3,229
|
|
|
21.0
|
%
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income taxes
|
|
1,435
|
|
|
3.1
|
%
|
|
2,101
|
|
|
6.0
|
%
|
|
738
|
|
|
4.8
|
%
|
Tax exempt earnings
|
|
(1,381)
|
|
|
(3.0)
|
%
|
|
(856)
|
|
|
(2.8)
|
%
|
|
(594)
|
|
|
(3.9)
|
%
|
Other
|
|
(380)
|
|
|
(0.8)
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
|
$
|
9,532
|
|
|
20.3
|
%
|
|
$
|
8,598
|
|
|
24.2
|
%
|
|
$
|
3,373
|
|
|
21.9
|
%
|
Deferred income tax assets and liabilities were comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Gross deferred tax assets:
|
|
|
|
|
Allowance for loan losses
|
|
$
|
7,141
|
|
|
$
|
3,310
|
|
Minimum pension liability
|
|
1,544
|
|
|
1,589
|
|
|
|
|
|
|
SERP/RSU
|
|
1,039
|
|
|
652
|
|
Other
|
|
1,209
|
|
|
10
|
|
Total gross deferred tax assets
|
|
10,933
|
|
|
5,561
|
|
|
|
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
Depreciation
|
|
(1,733)
|
|
|
(1,505)
|
|
Pension
|
|
(262)
|
|
|
(164)
|
|
Unrealized gain on securities available-for-sale
|
|
(2,320)
|
|
|
(1,088)
|
|
Holding gain on equity securities
|
|
(3,893)
|
|
|
(3,838)
|
|
Goodwill
|
|
(2,498)
|
|
|
(2,134)
|
|
Total gross deferred tax liabilities
|
|
(10,706)
|
|
|
(8,729)
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
227
|
|
|
$
|
(3,168)
|
|
Deferred income tax assets and deferred income tax liabilities were included in other assets and other liabilities, respectively.
The Company has invested, as a limited partner, in three Section 42 affordable housing investment funds. In exchange for these investments, the Company receives its pro rata share of income, expense, gains and losses, including tax credits, that are received by the projects. As of December 31, 2020 and December 31, 2019, the Company recognized, as an investment, $2.8 million and $3.0 million in the aggregate between the three affordable housing investment funds. In addition, the Company has recognized no gains or losses from the funds.
Note 10 – Related Party Transactions
The Company has granted loans to officers and directors of the Company and to their immediate family members as well as loans to related companies. These related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk of collectability. Set forth below is a summary of the related loan activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Balance at Beginning of Year
|
|
Borrowings
|
|
Executive Officer and Director Retirements
|
|
Repayments
|
|
Balance at End of Year
|
December 31, 2020
|
|
$
|
12,284
|
|
|
$
|
24,453
|
|
|
$
|
(8,187)
|
|
|
$
|
(1,127)
|
|
|
$
|
27,423
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
27,971
|
|
|
$
|
13,897
|
|
|
$
|
—
|
|
|
$
|
(29,584)
|
|
|
$
|
12,284
|
|
The Company held related party deposits of $73.8 million and $35.5 million at December 31, 2020 and December 31, 2019, respectively.
The Company held no related party repurchase agreements at December 31, 2020 and December 31, 2019.
Note 11 – Pension Plan
The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time employees. Benefits are based on years of service and the employee’s compensation. Accruals under this plan were frozen as of May 31, 2014. Freezing the plan resulted in a re-measurement of the pension obligations and plan assets as of the freeze date. The pension obligation was re-measured using the discount rate based on the Citigroup Above Median Pension Discount Curve in effect on May 31, 2014 of 4.46%.
On June 19, 2017, the Company approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to which the Chief
Executive Officer of PMG is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on December 31, 2017. If the executive completes three years of continuous employment prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8 million payable in 180 equal consecutive installments of $10 thousand. The liability is calculated by discounting the anticipated future cash flows at 4.0%. The liability accrued for this obligation was $1.2 million and $0.8 million as of December 31, 2020 and 2019, respectively. Service cost was $0.2 million and $0.4 million in 2020 and 2019, respectively.
Pension expense was $0.3 million, $0.3 million and $0.3 million in 2020, 2019 and 2018, respectively.
Information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a measurement date of December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Change in benefit obligation
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
11,435
|
|
|
$
|
9,416
|
|
|
|
|
|
|
Interest cost
|
|
365
|
|
|
392
|
|
Actuarial loss
|
|
(54)
|
|
|
99
|
|
Assumption changes
|
|
1,255
|
|
|
1,769
|
|
|
|
|
|
|
Benefits paid
|
|
(286)
|
|
|
(241)
|
|
Benefit obligation at end of year
|
|
$
|
12,715
|
|
|
$
|
11,435
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
6,165
|
|
|
$
|
5,238
|
|
Actual return on plan assets
|
|
511
|
|
|
808
|
|
Employer contribution
|
|
706
|
|
|
360
|
|
Benefits paid
|
|
(286)
|
|
|
(241)
|
|
Fair value of plan assets at end of year
|
|
$
|
7,096
|
|
|
$
|
6,165
|
|
|
|
|
|
|
Funded status
|
|
$
|
(5,619)
|
|
|
$
|
(5,270)
|
|
Unrecognized net actuarial loss
|
|
6,591
|
|
|
5,883
|
|
|
|
|
|
|
Prepaid pension cost recognized
|
|
$
|
972
|
|
|
$
|
613
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
12,715
|
|
|
$
|
11,435
|
|
At December 31, 2020, 2019 and 2018, the weighted-average assumptions used to determine the benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
|
2.50
|
%
|
|
3.24
|
%
|
|
4.23
|
%
|
Rate of compensation increase
|
|
N/A
|
|
N/A
|
|
N/A
|
The components of net periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
365
|
|
|
$
|
392
|
|
|
$
|
352
|
|
Expected return on plan assets
|
|
(438)
|
|
|
(407)
|
|
|
(372)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
420
|
|
|
271
|
|
|
306
|
|
Net periodic pension cost
|
|
$
|
347
|
|
|
$
|
256
|
|
|
$
|
286
|
|
For the years December 31, 2020, 2019 and 2018, the weighted-average assumptions used to determine net periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
|
2.50
|
%
|
|
3.24
|
%
|
|
3.55
|
%
|
Expected long-term rate of return on plan assets
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
Rate of compensation increase
|
|
N/A
|
|
N/A
|
|
N/A
|
The Company’s pension plan asset allocations at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Plan Assets
|
|
|
|
|
Cash
|
|
9
|
%
|
|
4
|
%
|
Fixed income
|
|
20
|
%
|
|
23
|
%
|
Alternative investments
|
|
19
|
%
|
|
15
|
%
|
Domestic equities
|
|
27
|
%
|
|
33
|
%
|
Foreign equities
|
|
24
|
%
|
|
24
|
%
|
Real estate investment trusts
|
|
1
|
%
|
|
1
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
The estimated net loss for the plan that is expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $0.5 million.
The following table sets forth by level within the fair value hierarchy, as defined in Note 18 – Fair Value Measurements, the Pension Plan’s assets at fair value as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
639
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
639
|
|
Fixed income
|
|
1,419
|
|
|
—
|
|
|
—
|
|
|
1,419
|
|
Alternative investments
|
|
—
|
|
|
—
|
|
|
1,348
|
|
|
1,348
|
|
Domestic equities
|
|
1,916
|
|
|
—
|
|
|
—
|
|
|
1,916
|
|
Foreign equities
|
|
1,703
|
|
|
—
|
|
|
—
|
|
|
1,703
|
|
Real estate investment trusts
|
|
—
|
|
|
—
|
|
|
71
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
5,677
|
|
|
$
|
—
|
|
|
$
|
1,419
|
|
|
$
|
7,096
|
|
The following table sets forth by level, within the fair value hierarchy, as defined in Note 18 – Fair Value Measurements, the Pension Plan’s assets at fair value as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
247
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
247
|
|
Fixed income
|
|
1,418
|
|
|
—
|
|
|
—
|
|
|
1,418
|
|
Alternative investments
|
|
—
|
|
|
—
|
|
|
925
|
|
|
925
|
|
Domestic equities
|
|
2,034
|
|
|
—
|
|
|
—
|
|
|
2,034
|
|
Foreign equities
|
|
1,480
|
|
|
—
|
|
|
—
|
|
|
1,480
|
|
Real estate investment trusts
|
|
—
|
|
|
—
|
|
|
61
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
5,179
|
|
|
$
|
—
|
|
|
$
|
986
|
|
|
$
|
6,165
|
|
Investment in government securities and short-term investments are valued at the closing price reported on the active market on which the individual securities are traded. Alternative investments and investment in debt securities are valued at quoted prices which are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while this plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table includes the Company's best estimate of the plan contribution for next fiscal year and the benefits expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter.
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Cash Flow
|
Contributions for the period of January 1, 2021 through December 31, 2021
|
|
$
|
199
|
|
|
|
|
Estimated future benefit payments reflecting expected future service
|
|
|
2021
|
|
$
|
344
|
|
2022
|
|
$
|
407
|
|
2023
|
|
$
|
423
|
|
2024
|
|
$
|
445
|
|
2025
|
|
$
|
508
|
|
2026 through 2030
|
|
$
|
2,652
|
|
Note 12 – Goodwill and Other Intangible Assets
The table below summarizes the changes in carrying amounts of goodwill and other intangibles, including core deposit intangibles, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
(Dollars in thousands)
|
|
Goodwill
|
|
Gross
|
|
Accumulated Depreciation
|
|
Net
|
Balance at January 1, 2020
|
|
$
|
19,630
|
|
|
$
|
4,226
|
|
|
$
|
(753)
|
|
|
$
|
3,473
|
|
|
|
|
|
|
|
|
|
|
Reduction of goodwill and intangibles from sale of branches to Summit
|
|
(1,598)
|
|
|
(845)
|
|
|
441
|
|
|
(404)
|
|
Intangibles resulting from First State acquisition
|
|
—
|
|
|
560
|
|
|
—
|
|
|
560
|
|
Reduction of goodwill from ICM transaction
|
|
(16,882)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill resulting from Paladin acquisition
|
|
1,200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization expense
|
|
—
|
|
|
—
|
|
|
(1,229)
|
|
|
(1,229)
|
|
Balance at December 31, 2020
|
|
$
|
2,350
|
|
|
$
|
3,941
|
|
|
$
|
(1,541)
|
|
|
$
|
2,400
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
18,480
|
|
|
$
|
1,006
|
|
|
$
|
(456)
|
|
|
$
|
550
|
|
Goodwill and intangibles resulting from Chartwell acquisition
|
|
1,150
|
|
|
3,220
|
|
|
—
|
|
|
3,220
|
|
Amortization expense
|
|
—
|
|
|
—
|
|
|
(297)
|
|
|
(297)
|
|
Balance at December 31, 2019
|
|
$
|
19,630
|
|
|
$
|
4,226
|
|
|
$
|
(753)
|
|
|
$
|
3,473
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
$
|
18,480
|
|
|
$
|
1,006
|
|
|
$
|
(360)
|
|
|
$
|
646
|
|
Amortization expense
|
|
—
|
|
|
—
|
|
|
(96)
|
|
|
(96)
|
|
Balance at December 31, 2018
|
|
$
|
18,480
|
|
|
$
|
1,006
|
|
|
$
|
(456)
|
|
|
$
|
550
|
|
Goodwill represents the excess of the purchase price over the fair value of acquired net assets under the acquisition method of accounting. Intangibles represent the core deposit intangibles from the acquisition of First State in 2020 and the intangibles resulting from the Chartwell and Paladin acquisitions. The value of the acquired core deposit relationships was determined using the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The core deposit intangibles were being amortized over a ten-year period using an accelerated method. The intangibles resulting from the Chartwell acquisition are related to their customer relationships, backlog, a trademark and a non-competition agreement. These items are amortized over five years, 5.3 years, 15 years and four years, respectively.
The table below presents estimated amortization expense for the Company’s other intangible assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
616
|
|
2022
|
|
616
|
|
2023
|
|
507
|
|
2024
|
|
235
|
|
2025
|
|
47
|
|
Thereafter
|
|
379
|
|
|
|
$
|
2,400
|
|
The Company’s assessment of qualitative factors determined that it is not more likely than not that the fair value of each reporting unit is less than its carrying amount and therefore, goodwill is not impaired as of December 31, 2020 and 2019. The Company has not identified any triggering events since the impairment evaluation that would indicate potential impairment.
Intangibles, including core deposit intangibles are evaluated for impairment if events and circumstances indicate a potential for impairment. Such an evaluation of other intangible assets is based on undiscounted cash flow projections. No impairment charges were recorded for other intangible assets in any of the periods presented.
Note 13 – Stock Offerings
In August 2019, the Board of Directors of the Company announced the approval of a stock repurchase program, of which 49,100 shares were repurchased for $0.7 million at an average price of $14.52 per share, between March 2020 and July 2020. In August 2020, the Board of Directors of the Company announced the approval of an extension of the existing stock repurchase program. Under the extended program, the Company is authorized to repurchase up to $5.0 million of its outstanding shares of common stock over the next 12 months or until the aggregate share repurchases are completed, whichever date comes first, on the open market or in privately negotiated transactions. The stock repurchase program does not require the Company to repurchase any specified number of shares of its common stock, and it may be discontinued, suspended or restarted at any time at the Company's discretion. From August 2020 through November 2020, the Company purchased an additional 210,824 shares for $3.5 million at an average price of $15.93 per share.
In December 2020, the Company repurchased 536,490 shares of its common stock at a price of $20.25 per share via a modified “Dutch auction” tender offer. Additionally, the Company’s Board of Directors authorized the repurchase from time to time, on or before December 31, 2021, of up to $31.9 million of shares of the Company’s common stock as part of the Company’s stock repurchase program, which repurchases may occur from time to time, on the open market or otherwise, at such prices and upon such terms as the Company may determine and otherwise in accordance with applicable law.
Note 14 – Stock Options and Other Equity Awards
The MVB Financial Corp. Incentive Stock Plan (the “Plan”) provides for the issuance of stock options, restricted stock awards and RSUs to selected employees and directors. As of December 31, 2020, the Plan had 3.2 million shares authorized and 569,997 shares remaining available for issuance. To date, the Company has awarded both stock options and RSUs to selected employees and directors.
Stock-Based Compensation Expense
Stock-based compensation expense is recognized as salary and employee benefit cost the fair value of the instruments on the date of the grant. The amount that the Company recognized in stock-based compensation expense related to the issuance of stock options and RSUs is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Stock Options
|
|
$
|
950
|
|
|
$
|
873
|
|
|
$
|
936
|
|
RSUs
|
|
1,403
|
|
|
886
|
|
|
331
|
|
Total Stock-based compensation expense
|
|
$
|
2,353
|
|
|
$
|
1,759
|
|
|
$
|
1,267
|
|
Proceeds from stock options exercised were $4.5 million, $2.2 million and $2.1 million during 2020, 2019 and 2018, respectively. During 2020, 2019 and 2018, certain options were exercised in cashless transactions. Shares were forfeited related to exercise price and related tax obligations and the Company paid tax authorities amounts due resulting in a net cash outflow.
Stock Options
Under the provisions of the Plan, the option price per share shall not be less than the fair market value of the common stock on the date of the grant. Stock options expire ten years from the date of the grant. With the exception of 125,000 shares granted in 2017 that vest in four years and expire in ten years, all options granted vest in five years and expire ten years from the date of the grant.
The following summarizes stock options as of and for the year ended December 31, 2020 and 2019 and the changes for the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
|
|
|
|
Outstanding at beginning of year
|
|
1,593,241
|
|
|
$
|
14.96
|
|
|
|
|
|
Granted
|
|
126,250
|
|
|
18.11
|
|
|
|
|
|
Exercised
|
|
(305,697)
|
|
|
14.36
|
|
|
|
|
|
Forfeited
|
|
(9,750)
|
|
|
16.85
|
|
|
|
|
|
Expired
|
|
(7,250)
|
|
|
14.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
1,396,794
|
|
|
$
|
15.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
947,988
|
|
|
$
|
14.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during 2020
|
|
|
|
$
|
4.48
|
|
|
|
|
|
Weighted-average fair value of options granted during 2019
|
|
|
|
$
|
4.22
|
|
|
|
|
|
Weighted-average fair value of options granted during 2018
|
|
|
|
$
|
5.97
|
|
|
|
|
|
The intrinsic value of options exercised during 2020, 2019 and 2018 was $1.9 million, $1.9 million and $0.9 million, respectively.
The fair value for the options was estimated at the date of grant using a Black-Scholes option-pricing model with the following inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Average risk-free interest rates
|
|
0.66
|
%
|
|
2.02
|
%
|
|
2.81
|
%
|
Weighted-average life
|
|
seven years
|
|
seven years
|
|
seven years
|
Expected volatility
|
|
30.9
|
%
|
|
21.8
|
%
|
|
18.6
|
%
|
Expected dividend yield
|
|
2.20
|
%
|
|
0.84
|
%
|
|
0.54
|
%
|
The following summarizes information related to the total outstanding and exercisable stock options at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Total Options
|
|
Weighted-Average Exercise Price
|
|
Intrinsic Value (in millions)
|
|
Weighted-Average Remaining Life
|
|
Total Options
|
|
Weighted-Average Exercise Price
|
|
Intrinsic Value (in millions)
|
|
Weighted-Average Remaining Life
|
1,396,794
|
|
$15.36
|
|
$10.2
|
|
5.64
|
|
947,988
|
|
$14.66
|
|
$7.6
|
|
4.80
|
At December 31, 2020, based on stock options outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested stock options was $1.3 million. This cost is expected to be recognized over a weighted-average period of 2.9 years. At December 31, 2020, the fair value of stock options vested during the year was $0.9 million.
Restricted Stock Units
Under the provisions of the Plan, RSUs are similar to restricted stock awards, except the recipient does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the Company for a particular length of time. Each RSU that vests entitles the recipient to receive one share of the Company’s common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting, dividend or liquidation rights, with respect to the shares underlying awarded RSUs until the recipient becomes the record holder of those shares.
The Company granted 153,642 RSUs in 2020, 97,911 of which were time-based awards and 55,731 of which were performance-based awards. Time-based RSUs granted in 2020 vest in five equal installments per year over a five-year period, with the exception of time-based grants to members of the board of directors, which vest over a one-year period. Performance-based RSUs vest in one installment at the end of three years, based on set criteria.
A summary of the activity for the Company’s RSUs for the period indicated is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
Balance at beginning of year
|
|
160,758
|
|
|
$
|
16.67
|
|
|
|
|
|
Granted
|
|
153,642
|
|
|
13.08
|
|
|
|
|
|
Vested
|
|
(53,981)
|
|
|
15.36
|
|
|
|
|
|
Forfeited
|
|
(7,383)
|
|
|
16.55
|
|
|
|
|
|
Balance at end of year
|
|
253,036
|
|
|
$
|
14.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of RSUs granted during 2020
|
|
|
|
$
|
13.08
|
|
|
|
|
|
Weighted-average fair value of RSUs granted during 2019
|
|
|
|
$
|
15.50
|
|
|
|
|
|
Weighted-average fair value of RSUs granted during 2018
|
|
|
|
$
|
19.33
|
|
|
|
|
|
At December 31, 2020, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested RSU awards was $2.3 million. This cost is expected to be recognized over a weighted-average period of 2.8 years. At December 31, 2020, the fair value of RSU awards vested during the year was $0.8 million.
Note 15 – Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The Bank is required to comply with applicable capital adequacy standards established by the FDIC. The Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement. West Virginia state chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total capital, Tier 1 capital and Tier 1 common equity to risk-weighted assets, and of Tier 1 capital to average assets, as defined. As of December 31, 2020 and 2019, the Company and the Bank meet all capital adequacy requirements to which they are subject.
The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 common equity risk-based and Tier 1 leverage ratios as set forth in the table below. Both the Company’s and the Bank’s actual capital amounts and ratios are presented in the table below.
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Actual
|
|
Minimum Capital Requirement
|
|
|
|
Minimum to be Well Capitalized
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
Amount
|
|
Ratio
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
273,318
|
|
|
15.8%
|
|
$
|
138,277
|
|
|
8.0%
|
|
|
|
|
|
$
|
172,846
|
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
251,565
|
|
|
14.6%
|
|
$
|
103,708
|
|
|
6.0%
|
|
|
|
|
|
$
|
138,277
|
|
|
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
251,565
|
|
|
14.6%
|
|
$
|
77,781
|
|
|
4.5%
|
|
|
|
|
|
$
|
112,350
|
|
|
6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
251,565
|
|
|
11.0%
|
|
$
|
91,269
|
|
|
4.0%
|
|
|
|
|
|
$
|
114,086
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
201,672
|
|
|
12.8%
|
|
$
|
125,686
|
|
|
8.0%
|
|
|
|
|
|
$
|
157,107
|
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
189,365
|
|
|
12.1%
|
|
$
|
94,264
|
|
|
6.0%
|
|
|
|
|
|
$
|
125,686
|
|
|
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
189,365
|
|
|
12.1%
|
|
$
|
70,698
|
|
|
4.5%
|
|
|
|
|
|
$
|
102,120
|
|
|
6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Bank
|
|
$
|
189,365
|
|
|
9.9%
|
|
$
|
76,182
|
|
|
4.0%
|
|
|
|
|
|
$
|
95,227
|
|
|
5.0%
|
Note 16 – Regulatory Restriction on Dividends
The approval of the regulatory agencies is required if the total of all dividends declared by the Bank in any calendar year exceeds the Bank’s net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years.
Note 17 – Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments are summarized as follows:
Fair Value Measurements at:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level I)
|
|
Significant Other Observable Inputs (Level II)
|
|
Significant Unobservable Inputs (Level III)
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
263,893
|
|
|
$
|
263,893
|
|
|
$
|
263,893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposit with banks
|
|
11,803
|
|
|
11,986
|
|
|
—
|
|
|
11,986
|
|
|
—
|
|
Securities available-for-sale
|
|
410,624
|
|
|
410,624
|
|
|
—
|
|
|
366,945
|
|
|
43,679
|
|
Equity securities
|
|
27,585
|
|
|
27,585
|
|
|
472
|
|
|
—
|
|
|
27,113
|
|
Loans held-for-sale
|
|
1,062
|
|
|
1,062
|
|
|
—
|
|
|
1,062
|
|
|
—
|
|
Loans
|
|
1,427,900
|
|
|
1,434,275
|
|
|
—
|
|
|
—
|
|
|
1,434,275
|
|
Mortgage servicing rights
|
|
2,942
|
|
|
2,942
|
|
|
—
|
|
|
—
|
|
|
2,942
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
13,822
|
|
|
13,822
|
|
|
—
|
|
|
13,822
|
|
|
—
|
|
Accrued interest receivable
|
|
7,793
|
|
|
7,793
|
|
|
—
|
|
|
2,770
|
|
|
5,023
|
|
Fair value hedge
|
|
2,215
|
|
|
2,215
|
|
|
—
|
|
|
2,215
|
|
|
—
|
|
Bank-owned life insurance
|
|
41,262
|
|
|
41,262
|
|
|
—
|
|
|
41,262
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,982,389
|
|
|
$
|
1,964,860
|
|
|
$
|
—
|
|
|
$
|
1,964,860
|
|
|
$
|
—
|
|
Repurchase agreements
|
|
10,266
|
|
|
10,266
|
|
|
—
|
|
|
10,266
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedge
|
|
2,141
|
|
|
2,141
|
|
|
—
|
|
|
2,141
|
|
|
—
|
|
Interest rate swap
|
|
13,822
|
|
|
13,822
|
|
|
—
|
|
|
13,822
|
|
|
—
|
|
Accrued interest payable
|
|
572
|
|
|
572
|
|
|
—
|
|
|
572
|
|
|
—
|
|
Subordinated debt
|
|
43,407
|
|
|
45,536
|
|
|
—
|
|
|
45,536
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,002
|
|
|
$
|
28,002
|
|
|
$
|
28,002
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposits with banks
|
|
12,549
|
|
|
12,586
|
|
|
—
|
|
|
12,586
|
|
|
—
|
|
Securities available-for-sale
|
|
235,821
|
|
|
235,821
|
|
|
—
|
|
|
198,562
|
|
|
37,259
|
|
Equity securities
|
|
18,514
|
|
|
18,514
|
|
|
—
|
|
|
—
|
|
|
18,514
|
|
Loans held-for-sale
|
|
109,788
|
|
|
109,788
|
|
|
—
|
|
|
109,788
|
|
|
—
|
|
Loans
|
|
1,362,766
|
|
|
1,364,706
|
|
|
—
|
|
|
—
|
|
|
1,364,706
|
|
Mortgage servicing rights
|
|
348
|
|
|
348
|
|
|
—
|
|
|
—
|
|
|
348
|
|
Interest rate lock commitment
|
|
1,660
|
|
|
1,660
|
|
|
—
|
|
|
—
|
|
|
1,660
|
|
Interest rate swap
|
|
5,722
|
|
|
5,722
|
|
|
—
|
|
|
5,722
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedge
|
|
1,770
|
|
|
1,770
|
|
|
—
|
|
|
1,770
|
|
|
—
|
|
Accrued interest receivable
|
|
7,909
|
|
|
7,909
|
|
|
—
|
|
|
1,592
|
|
|
6,317
|
|
Bank-owned life insurance
|
|
35,374
|
|
|
35,374
|
|
|
—
|
|
|
35,374
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,265,042
|
|
|
$
|
1,249,135
|
|
|
$
|
—
|
|
|
$
|
1,249,135
|
|
|
$
|
—
|
|
Repurchase agreements
|
|
10,172
|
|
|
10,172
|
|
|
—
|
|
|
10,172
|
|
|
—
|
|
FHLB and other borrowings
|
|
222,885
|
|
|
222,891
|
|
|
—
|
|
|
222,891
|
|
|
—
|
|
Mortgage-backed security hedges
|
|
186
|
|
|
186
|
|
|
—
|
|
|
186
|
|
|
—
|
|
Fair value hedge
|
|
1,418
|
|
|
1,418
|
|
|
—
|
|
|
1,418
|
|
|
|
Interest rate swap
|
|
5,722
|
|
|
5,722
|
|
|
—
|
|
|
5,722
|
|
|
—
|
|
Accrued interest payable
|
|
1,060
|
|
|
1,060
|
|
|
—
|
|
|
1,060
|
|
|
—
|
|
Subordinated debt
|
|
4,124
|
|
|
4,124
|
|
|
—
|
|
|
4,124
|
|
|
—
|
|
Note 18 – Fair Value Measurements
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Assets Measured on a Recurring Basis
As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company classified investments in government securities as Level II instruments and valued them using the market approach. The following measurements are made on a recurring basis.
Available-for-sale investment securities — Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I securities include those traded on an active exchange, such as the New York Stock Exchange, United States Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate debt securities. There have been no changes in valuation techniques for the year ended December 31, 2020. Valuation techniques are consistent with techniques used in prior periods. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments.
Equity securities — Certain equity securities are recorded at fair value on a nonrecurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The valuation methodologies utilized may include significant unobservable inputs.
Loans held-for-sale — The fair value of mortgage loans held-for-sale is determined, when possible, using quoted secondary-market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.
Interest rate lock commitment — The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices and estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.
Mortgage-backed security hedges — Mortgage-backed security hedges are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed security.
Interest rate swap — Interest rate swaps are recorded at fair value based on third-party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.
Fair value hedge — Treated like an interest rate swap, fair value hedges are recorded at fair value based on third-party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.
The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of December 31, 2020 and 2019 by level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
United States government agency securities
|
|
$
|
—
|
|
|
$
|
56,992
|
|
|
$
|
—
|
|
|
$
|
56,992
|
|
United States sponsored mortgage-backed securities
|
|
—
|
|
|
95,769
|
|
|
—
|
|
|
95,769
|
|
Municipal securities
|
|
—
|
|
|
188,208
|
|
|
43,679
|
|
|
231,887
|
|
|
|
|
|
|
|
|
|
|
Other securities
|
|
—
|
|
|
18,476
|
|
|
—
|
|
|
18,476
|
|
Equity securities
|
|
472
|
|
|
—
|
|
|
—
|
|
|
472
|
|
Loans held-for-sale
|
|
—
|
|
|
1,062
|
|
|
—
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
—
|
|
|
13,822
|
|
|
—
|
|
|
13,822
|
|
Fair value hedge
|
|
—
|
|
|
2,215
|
|
|
—
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
—
|
|
|
13,822
|
|
|
—
|
|
|
13,822
|
|
Fair value hedge
|
|
—
|
|
|
2,141
|
|
|
—
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
United States government agency securities
|
|
$
|
—
|
|
|
$
|
51,996
|
|
|
$
|
—
|
|
|
$
|
51,996
|
|
United States sponsored mortgage-backed securities
|
|
—
|
|
|
58,312
|
|
|
—
|
|
|
58,312
|
|
Municipal securities
|
|
—
|
|
|
75,833
|
|
|
37,259
|
|
|
113,092
|
|
Other securities
|
|
—
|
|
|
12,421
|
|
|
—
|
|
|
12,421
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale
|
|
—
|
|
|
109,788
|
|
|
—
|
|
|
109,788
|
|
Interest rate lock commitment
|
|
—
|
|
|
—
|
|
|
1,660
|
|
|
1,660
|
|
Interest rate swap
|
|
—
|
|
|
5,722
|
|
|
—
|
|
|
5,722
|
|
|
|
|
|
|
|
|
|
|
Fair value hedge
|
|
—
|
|
|
1,770
|
|
|
—
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
—
|
|
|
5,722
|
|
|
—
|
|
|
5,722
|
|
Fair value hedge
|
|
—
|
|
|
1,418
|
|
|
—
|
|
|
1,418
|
|
Mortgage-backed security hedges
|
|
—
|
|
|
186
|
|
|
—
|
|
|
186
|
|
The following table represents recurring Level III assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate Lock Commitments
|
|
Municipal Securities
|
|
Equity Securities
|
|
Total
|
Balance at December 31, 2019
|
|
$
|
1,660
|
|
|
$
|
37,259
|
|
|
$
|
—
|
|
|
$
|
38,919
|
|
Realized and unrealized gains (losses) included in earnings
|
|
(1,660)
|
|
|
3
|
|
|
—
|
|
|
(1,657)
|
|
Purchase of securities
|
|
—
|
|
|
22,228
|
|
|
—
|
|
|
22,228
|
|
Maturities/calls
|
|
—
|
|
|
(15,778)
|
|
|
—
|
|
|
(15,778)
|
|
Unrealized gain included in other comprehensive income (loss)
|
|
—
|
|
|
7,119
|
|
|
—
|
|
|
7,119
|
|
Unrealized loss included in other comprehensive income (loss)
|
|
—
|
|
|
(7,152)
|
|
|
—
|
|
|
(7,152)
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
|
$
|
43,679
|
|
|
$
|
—
|
|
|
$
|
43,679
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
1,750
|
|
|
$
|
33,122
|
|
|
$
|
300
|
|
|
$
|
35,172
|
|
Realized and unrealized losses included in earnings
|
|
(90)
|
|
|
—
|
|
|
—
|
|
|
(90)
|
|
Purchase of securities
|
|
—
|
|
|
842
|
|
|
—
|
|
|
842
|
|
Reclassification to nonrecurring assets
|
|
—
|
|
|
—
|
|
|
(300)
|
|
|
(300)
|
|
Maturities/calls
|
|
—
|
|
|
(15,716)
|
|
|
—
|
|
|
(15,716)
|
|
Unrealized gain included in other comprehensive income (loss)
|
|
—
|
|
|
34,702
|
|
|
—
|
|
|
34,702
|
|
Unrealized loss included in other comprehensive income (loss)
|
|
—
|
|
|
(15,691)
|
|
|
—
|
|
|
(15,691)
|
|
Balance at December 31, 2019
|
|
$
|
1,660
|
|
|
$
|
37,259
|
|
|
$
|
—
|
|
|
$
|
38,919
|
|
Assets Measured on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a nonrecurring basis during 2020 and 2019 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.
Impaired loans — Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.
Other real estate owned — Other real estate owned, which is obtained through the Bank’s foreclosure process, is valued utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. At the time the foreclosure is completed, the Company obtains a current external appraisal.
Other debt securities — Certain debt securities are recorded at fair value on a nonrecurring basis. These other debt securities, which include preferred member interest in an equity method investment, are securities without a readily determinable fair value and are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer.
Equity securities — Certain equity securities are recorded at fair value on a nonrecurring basis. Equity securities without a readily
determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer.
Assets measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019 are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,098
|
|
|
$
|
14,098
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
5,730
|
|
|
5,730
|
|
Other debt securities
|
|
—
|
|
|
—
|
|
|
7,500
|
|
|
7,500
|
|
Equity securities
|
|
—
|
|
|
—
|
|
|
27,113
|
|
|
27,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,909
|
|
|
$
|
8,909
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,397
|
|
|
1,397
|
|
Equity securities
|
|
—
|
|
|
—
|
|
|
18,514
|
|
|
18,514
|
|
The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level III Fair Value Measurements
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Nonrecurring measurements:
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
14,098
|
|
|
Appraisal of collateral 1
|
|
Appraisal adjustments 2
|
|
20% - 62%
|
|
|
|
|
|
|
Liquidation expense 2
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
5,730
|
|
|
Appraisal of collateral 1
|
|
Appraisal adjustments 2
|
|
20% - 30%
|
|
|
|
|
|
|
Liquidation expense 2
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
$
|
7,500
|
|
|
Net asset value
|
|
Cost minus impairment
|
|
—%
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
27,113
|
|
|
Net asset value
|
|
Cost minus impairment
|
|
—%
|
|
|
|
|
|
|
|
|
|
Recurring measurements:
|
|
|
|
|
|
|
|
|
Municipal securities (Local TIF bonds)
|
|
$
|
43,679
|
|
|
Appraisal of bond 3
|
|
Bond appraisal adjustment 4
|
|
5% - 15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level III Fair Value Measurements
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Nonrecurring measurements:
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
8,909
|
|
|
Appraisal of collateral 1
|
|
Appraisal adjustments 2
|
|
20% - 62%
|
|
|
|
|
|
|
Liquidation expense 2
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
1,397
|
|
|
Appraisal of collateral 1
|
|
Appraisal adjustments 2
|
|
20% - 30%
|
|
|
|
|
|
|
Liquidation expense 2
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
18,514
|
|
|
Net asset value
|
|
Cost minus impairment
|
|
—%
|
|
|
|
|
|
|
|
|
|
Recurring measurements:
|
|
|
|
|
|
|
|
|
Municipal securities (Local TIF bonds)
|
|
$
|
37,259
|
|
|
Appraisal of bond 3
|
|
Bond appraisal adjustment 4
|
|
5% - 15%
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
$
|
1,660
|
|
|
Pricing model
|
|
Pull through rates
|
|
77% - 82%
|
1 Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level III 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 liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
3 Fair value determined through independent analysis of liquidity, rating, yield and duration.
4 Appraisals may be adjusted for qualitative factors, such as local economic conditions.
Note 19 – Comprehensive Income
The following tables present the components of accumulated other comprehensive income (“AOCI”) for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
Details about AOCI Components
|
|
Amount Reclassified from AOCI
|
|
Amount Reclassified from AOCI
|
|
Amount Reclassified from AOCI
|
|
Consolidated Statement of Income Line Item
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss)
|
|
$
|
914
|
|
|
$
|
(166)
|
|
|
$
|
327
|
|
|
Gain (loss) on sale of available-for-sale securities
|
|
|
914
|
|
|
(166)
|
|
|
327
|
|
|
Total before tax
|
|
|
(214)
|
|
|
44
|
|
|
(88)
|
|
|
Income tax expense
|
|
|
700
|
|
|
(122)
|
|
|
239
|
|
|
Net of tax
|
Defined benefit pension plan items
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
(420)
|
|
|
(271)
|
|
|
(306)
|
|
|
Salaries and employee benefits
|
|
|
(420)
|
|
|
(271)
|
|
|
(306)
|
|
|
Total before tax
|
|
|
98
|
|
|
73
|
|
|
83
|
|
|
Income tax expense
|
|
|
(322)
|
|
|
(198)
|
|
|
(223)
|
|
|
Net of tax
|
Investment hedge
|
|
|
|
|
|
|
|
|
Carrying value adjustment
|
|
473
|
|
|
(44)
|
|
|
—
|
|
|
Interest on investment securities
|
|
|
473
|
|
|
(44)
|
|
|
—
|
|
|
Total before tax
|
|
|
(128)
|
|
|
12
|
|
|
—
|
|
|
Income tax expense
|
|
|
345
|
|
|
(32)
|
|
|
—
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
723
|
|
|
$
|
(352)
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Unrealized gains (losses) on available for-sale securities
|
|
Defined benefit pension plan items
|
|
Investment Hedge
|
|
Total
|
Balance at January 1, 2020
|
|
$
|
2,942
|
|
|
$
|
(4,295)
|
|
|
$
|
32
|
|
|
$
|
(1,321)
|
|
Other comprehensive income (loss) before reclassification
|
|
5,344
|
|
|
(1,074)
|
|
|
—
|
|
|
4,270
|
|
Amounts reclassified from AOCI
|
|
(700)
|
|
|
322
|
|
|
(345)
|
|
|
(723)
|
|
Net current period OCI
|
|
4,644
|
|
|
(752)
|
|
|
(345)
|
|
|
3,547
|
|
Balance at December 31, 2020
|
|
$
|
7,586
|
|
|
$
|
(5,047)
|
|
|
$
|
(313)
|
|
|
$
|
2,226
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
(3,384)
|
|
|
$
|
(3,422)
|
|
|
$
|
—
|
|
|
$
|
(6,806)
|
|
Other comprehensive income (loss) before reclassification
|
|
6,204
|
|
|
(1,071)
|
|
|
—
|
|
|
5,133
|
|
Amounts reclassified from AOCI
|
|
122
|
|
|
198
|
|
|
32
|
|
|
352
|
|
Net current period OCI
|
|
6,326
|
|
|
(873)
|
|
|
32
|
|
|
5,485
|
|
Balance at December 31, 2019
|
|
$
|
2,942
|
|
|
$
|
(4,295)
|
|
|
$
|
32
|
|
|
$
|
(1,321)
|
|
Note 20 – Condensed Financial Statements of Parent Company
Information relative to the parent company’s condensed balance sheets at December 31, 2020 and 2019 and the related condensed statements of income and cash flows for the years ended December 31, 2020, 2019 and 2018 are presented below:
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Assets
|
|
|
|
|
Cash
|
|
$
|
15,566
|
|
|
$
|
1,058
|
|
Investment in subsidiaries
|
|
265,679
|
|
|
211,271
|
|
Other assets
|
|
6,077
|
|
|
6,397
|
|
Total assets
|
|
$
|
287,322
|
|
|
$
|
218,726
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
Other liabilities
|
|
$
|
4,432
|
|
|
$
|
2,666
|
|
Subordinated debt
|
|
43,407
|
|
|
4,124
|
|
Total liabilities
|
|
47,839
|
|
|
6,790
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
239,483
|
|
|
211,936
|
|
Total liabilities and stockholders’ equity
|
|
$
|
287,322
|
|
|
$
|
218,726
|
|
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Income, dividends from Bank subsidiary
|
|
$
|
6,688
|
|
|
$
|
6,280
|
|
|
$
|
8,906
|
|
Operating expenses
|
|
16,804
|
|
|
14,296
|
|
|
13,439
|
|
Loss from continuing operations, before income taxes
|
|
(10,116)
|
|
|
(8,016)
|
|
|
(4,533)
|
|
Income tax benefit - continuing operations
|
|
(2,082)
|
|
|
(1,880)
|
|
|
(1,569)
|
|
Net loss from continuing operations
|
|
(8,034)
|
|
|
(6,136)
|
|
|
(2,964)
|
|
Income from discontinued operations, before income taxes
|
|
—
|
|
|
575
|
|
|
—
|
|
Income tax expense - discontinued operations
|
|
—
|
|
|
148
|
|
|
—
|
|
Net income from discontinued operations
|
|
—
|
|
|
427
|
|
|
—
|
|
Equity in undistributed income earnings of subsidiaries
|
|
45,445
|
|
|
32,700
|
|
|
14,967
|
|
Net income
|
|
$
|
37,411
|
|
|
$
|
26,991
|
|
|
$
|
12,003
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
$
|
461
|
|
|
$
|
479
|
|
|
$
|
489
|
|
Net income available to common shareholders
|
|
$
|
36,950
|
|
|
$
|
26,512
|
|
|
$
|
11,514
|
|
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
37,411
|
|
|
$
|
26,991
|
|
|
$
|
12,003
|
|
Equity in undistributed earnings of subsidiaries
|
|
(45,445)
|
|
|
(32,700)
|
|
|
(14,967)
|
|
Stock-based compensation
|
|
2,353
|
|
|
1,759
|
|
|
1,267
|
|
Other assets
|
|
(2,101)
|
|
|
(4,104)
|
|
|
1,997
|
|
Other liabilities
|
|
1,767
|
|
|
344
|
|
|
1,311
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
(6,015)
|
|
|
(7,710)
|
|
|
1,611
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
(2,982)
|
|
|
16,791
|
|
|
(2,194)
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
(2,982)
|
|
|
16,791
|
|
|
(2,194)
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from stock issuance
|
|
240
|
|
|
1,033
|
|
|
—
|
|
AOCI reclassification of pension and available-for-sale investments
|
|
—
|
|
|
—
|
|
|
743
|
|
Subordinated debt issuance (redemption)
|
|
40,000
|
|
|
(12,400)
|
|
|
(35)
|
|
Common stock repurchased
|
|
(15,746)
|
|
|
—
|
|
|
—
|
|
Preferred stock redemption
|
|
—
|
|
|
(500)
|
|
|
—
|
|
Common stock options exercised
|
|
4,464
|
|
|
2,164
|
|
|
2,129
|
|
Cash dividends paid on common stock
|
|
(4,275)
|
|
|
(2,290)
|
|
|
(1,220)
|
|
Cash dividends paid on preferred stock
|
|
(461)
|
|
|
(479)
|
|
|
(489)
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
24,222
|
|
|
(12,472)
|
|
|
1,128
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
15,225
|
|
|
(3,391)
|
|
|
545
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
1,058
|
|
|
4,449
|
|
|
3,904
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
16,283
|
|
|
$
|
1,058
|
|
|
$
|
4,449
|
|
|
|
|
|
|
|
|
Noncash common stock converted from subordinated debt
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
15,965
|
|
Note 21 – Segment Reporting
The Company has identified three reportable segments: CoRe banking; mortgage banking; and financial holding company. Revenue from CoRe banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. The Fintech division, Chartwell and Paladin Fraud reside in the CoRe banking segment. Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage loan origination process. Prior to July 1, 2020, the mortgage banking services were conducted by PMG. In July 2020, the Company announced the completion of PMG’s combination with Intercoastal to form ICM. The Company has recognized its ownership as an equity method investment, initially recorded at fair value. Income related to this equity method investment is included in the Mortgage Banking segment. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.
Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
(Dollars in thousands)
|
|
CoRe Banking
|
|
Mortgage Banking
|
|
Financial Holding Company
|
|
Intercompany Eliminations
|
|
Consolidated
|
Interest income
|
|
$
|
75,812
|
|
|
$
|
6,269
|
|
|
$
|
3
|
|
|
$
|
(1,631)
|
|
|
$
|
80,453
|
|
Interest expense
|
|
10,400
|
|
|
3,139
|
|
|
261
|
|
|
(2,173)
|
|
|
11,627
|
|
Net interest income (loss)
|
|
65,412
|
|
|
3,130
|
|
|
(258)
|
|
|
542
|
|
|
68,826
|
|
Provision for (recovery of) loan losses
|
|
16,649
|
|
|
(70)
|
|
|
—
|
|
|
—
|
|
|
16,579
|
|
Net interest income after provision for loan losses
|
|
48,763
|
|
|
3,200
|
|
|
(258)
|
|
|
542
|
|
|
52,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
|
|
Mortgage fee income
|
|
247
|
|
|
33,722
|
|
|
—
|
|
|
(542)
|
|
|
33,427
|
|
Other income
|
|
30,082
|
|
|
29,768
|
|
|
6,685
|
|
|
(8,125)
|
|
|
58,410
|
|
Total noninterest income
|
|
30,329
|
|
|
63,490
|
|
|
6,685
|
|
|
(8,667)
|
|
|
91,837
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
28,801
|
|
|
21,550
|
|
|
11,278
|
|
|
—
|
|
|
61,629
|
|
Other expenses
|
|
33,298
|
|
|
5,074
|
|
|
5,265
|
|
|
(8,125)
|
|
|
35,512
|
|
Total noninterest expenses
|
|
62,099
|
|
|
26,624
|
|
|
16,543
|
|
|
(8,125)
|
|
|
97,141
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
16,993
|
|
|
40,066
|
|
|
(10,116)
|
|
|
—
|
|
|
46,943
|
|
Income tax expense (benefit)
|
|
1,752
|
|
|
9,862
|
|
|
(2,082)
|
|
|
—
|
|
|
9,532
|
|
Net income (loss)
|
|
$
|
15,241
|
|
|
$
|
30,204
|
|
|
$
|
(8,034)
|
|
|
$
|
—
|
|
|
$
|
37,411
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
461
|
|
|
—
|
|
|
461
|
|
Net income (loss) available to common shareholders
|
|
$
|
15,241
|
|
|
$
|
30,204
|
|
|
$
|
(8,495)
|
|
|
$
|
—
|
|
|
$
|
36,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures for the year ended December 31, 2020
|
|
$
|
6,439
|
|
|
$
|
99
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
6,615
|
|
Total Assets as of December 31, 2020
|
|
2,343,556
|
|
|
58,140
|
|
|
284,943
|
|
|
(355,163)
|
|
|
2,331,476
|
|
Goodwill as of December 31, 2020
|
|
2,350
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
(Dollars in thousands)
|
|
CoRe Banking
|
|
Mortgage Banking
|
|
Financial Holding Company
|
|
Intercompany Eliminations
|
|
Consolidated
|
Interest income
|
|
$
|
75,874
|
|
|
$
|
8,342
|
|
|
$
|
13
|
|
|
$
|
(1,868)
|
|
|
$
|
82,361
|
|
Interest expense
|
|
18,698
|
|
|
6,014
|
|
|
769
|
|
|
(2,520)
|
|
|
22,961
|
|
Net interest income
|
|
57,176
|
|
|
2,328
|
|
|
(756)
|
|
|
652
|
|
|
59,400
|
|
Provision for loan losses
|
|
1,622
|
|
|
167
|
|
|
—
|
|
|
—
|
|
|
1,789
|
|
Net interest income after provision for loan losses
|
|
55,554
|
|
|
2,161
|
|
|
(756)
|
|
|
652
|
|
|
57,611
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
|
|
Mortgage fee income
|
|
657
|
|
|
41,040
|
|
|
—
|
|
|
(652)
|
|
|
41,045
|
|
Other income
|
|
23,033
|
|
|
1,289
|
|
|
6,268
|
|
|
(7,031)
|
|
|
23,559
|
|
Total noninterest income
|
|
23,690
|
|
|
42,329
|
|
|
6,268
|
|
|
(7,683)
|
|
|
64,604
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
19,067
|
|
|
28,432
|
|
|
8,676
|
|
|
—
|
|
|
56,175
|
|
Other expenses
|
|
25,070
|
|
|
8,136
|
|
|
4,851
|
|
|
(7,031)
|
|
|
31,026
|
|
Total noninterest expenses
|
|
44,137
|
|
|
36,568
|
|
|
13,527
|
|
|
(7,031)
|
|
|
87,201
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before income taxes
|
|
35,107
|
|
|
7,922
|
|
|
(8,015)
|
|
|
—
|
|
|
35,014
|
|
Income tax expense (benefit) - continuing operations
|
|
8,175
|
|
|
2,155
|
|
|
(1,880)
|
|
|
—
|
|
|
8,450
|
|
Net income (loss) from continuing operations
|
|
26,932
|
|
|
5,767
|
|
|
(6,135)
|
|
|
—
|
|
|
26,564
|
|
Income from discontinued operations, before income taxes
|
|
—
|
|
|
—
|
|
|
575
|
|
|
—
|
|
|
575
|
|
Income tax expense - discontinued operations
|
|
—
|
|
|
—
|
|
|
148
|
|
|
—
|
|
|
148
|
|
Net income from discontinued operations
|
|
—
|
|
|
—
|
|
|
427
|
|
|
—
|
|
|
427
|
|
Net income (loss)
|
|
26,932
|
|
|
5,767
|
|
|
(5,708)
|
|
|
—
|
|
|
26,991
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
479
|
|
|
—
|
|
|
479
|
|
Net income (loss) available to common shareholders
|
|
$
|
26,932
|
|
|
$
|
5,767
|
|
|
$
|
(6,187)
|
|
|
$
|
—
|
|
|
$
|
26,512
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures for the year ended December 31, 2019
|
|
$
|
1,438
|
|
|
$
|
112
|
|
|
$
|
492
|
|
|
$
|
—
|
|
|
$
|
2,042
|
|
Total Assets as of December 31, 2019
|
|
1,953,975
|
|
|
248,382
|
|
|
216,411
|
|
|
(474,564)
|
|
|
1,944,114
|
|
Goodwill as of December 31, 2019
|
|
2,748
|
|
|
16,882
|
|
|
—
|
|
|
—
|
|
|
19,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
(Dollars in thousands)
|
|
CoRe Banking
|
|
Mortgage Banking
|
|
Financial Holding Company
|
|
Intercompany Eliminations
|
|
Consolidated
|
Interest income
|
|
$
|
63,762
|
|
|
$
|
6,667
|
|
|
$
|
5
|
|
|
$
|
(674)
|
|
|
$
|
69,760
|
|
Interest expense
|
|
13,667
|
|
|
4,085
|
|
|
1,756
|
|
|
(1,802)
|
|
|
17,706
|
|
Net interest income
|
|
50,095
|
|
|
2,582
|
|
|
(1,751)
|
|
|
1,128
|
|
|
52,054
|
|
Provision for loan losses
|
|
2,386
|
|
|
54
|
|
|
—
|
|
|
—
|
|
|
2,440
|
|
Net interest income after provision for loan losses
|
|
47,709
|
|
|
2,528
|
|
|
(1,751)
|
|
|
1,128
|
|
|
49,614
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
|
|
Mortgage fee income
|
|
585
|
|
|
32,880
|
|
|
—
|
|
|
(1,128)
|
|
|
32,337
|
|
Other income
|
|
6,479
|
|
|
(243)
|
|
|
6,411
|
|
|
(6,344)
|
|
|
6,303
|
|
Total noninterest income
|
|
7,064
|
|
|
32,637
|
|
|
6,411
|
|
|
(7,472)
|
|
|
38,640
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
14,924
|
|
|
23,927
|
|
|
7,373
|
|
|
—
|
|
|
46,224
|
|
Other expenses
|
|
20,081
|
|
|
8,608
|
|
|
4,309
|
|
|
(6,344)
|
|
|
26,654
|
|
Total noninterest expenses
|
|
35,005
|
|
|
32,535
|
|
|
11,682
|
|
|
(6,344)
|
|
|
72,878
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
19,768
|
|
|
2,630
|
|
|
(7,022)
|
|
|
—
|
|
|
15,376
|
|
Income tax expense (benefit)
|
|
4,265
|
|
|
677
|
|
|
(1,569)
|
|
|
—
|
|
|
3,373
|
|
Net income (loss)
|
|
$
|
15,503
|
|
|
$
|
1,953
|
|
|
$
|
(5,453)
|
|
|
$
|
—
|
|
|
$
|
12,003
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
489
|
|
|
—
|
|
|
489
|
|
Net income (loss) available to common shareholders
|
|
$
|
15,503
|
|
|
$
|
1,953
|
|
|
$
|
(5,942)
|
|
|
$
|
—
|
|
|
$
|
11,514
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures for the year ended December 31, 2018
|
|
$
|
2,284
|
|
|
$
|
272
|
|
|
$
|
137
|
|
|
$
|
—
|
|
|
$
|
2,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 22 – Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
(Dollars in thousands)
|
|
Interest Income
|
|
Net Interest Income
|
|
Income Before Taxes
|
|
Net Income
|
|
Basic
|
|
Diluted
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
20,699
|
|
|
$
|
16,171
|
|
|
$
|
1,227
|
|
|
$
|
1,048
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Second quarter
|
|
21,774
|
|
|
18,458
|
|
|
24,042
|
|
|
18,034
|
|
|
1.50
|
|
|
1.49
|
|
Third quarter
|
|
18,627
|
|
|
16,510
|
|
|
8,512
|
|
|
6,491
|
|
|
0.53
|
|
|
0.53
|
|
Fourth quarter
|
|
19,353
|
|
|
17,687
|
|
|
13,162
|
|
|
11,838
|
|
|
1.00
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
(Dollars in thousands)
|
|
Interest Income
|
|
Net Interest Income
|
|
Income Before Taxes
|
|
Net Income
|
|
Basic
|
|
Diluted
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
19,623
|
|
|
$
|
13,972
|
|
|
$
|
3,989
|
|
|
$
|
3,192
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
Second quarter
|
|
20,470
|
|
|
14,529
|
|
|
20,526
|
|
|
15,377
|
|
|
1.31
|
|
|
1.18
|
|
Third quarter
|
|
21,038
|
|
|
15,034
|
|
|
5,668
|
|
|
4,327
|
|
|
0.36
|
|
|
0.35
|
|
Fourth quarter
|
|
21,230
|
|
|
15,865
|
|
|
5,406
|
|
|
4,095
|
|
|
0.34
|
|
|
0.32
|
|
Note 24 – Acquisitions and Divestitures
The First State Bank Acquisition
In April 2020, the Bank entered into a Purchase and Assumption Agreement with the FDIC, as receiver for First State, providing
for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. This was deemed to be a strategic opportunity to acquire deposits and certain assets of an institution that operated in counties contiguous to the Company's Southern WV market and further solidified the strategy for growth within core commercial markets. The Company has accounted for this acquisition under the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations, whereby the assets acquired and liabilities assumed were recorded by the Company at their estimated fair values as of their acquisition date. Fair value estimates were based on management's acceptance of a fair market valuation analysis performed by an independent third-party firm.
In first quarter 2020, the Bank submitted a bid to the FDIC which included a bid based upon acquiring loans at a discounted amount, and also assuming the deposits of First State with no deposit premium. The Bank was notified that it was the winning bidder in the process, and the net asset discount accepted by the FDIC was $33.2 million. Immediately after the closing of this transaction, the FDIC remitted these funds to the Bank. As part of this transaction, the Bank acquired three branch locations for aggregate consideration of approximately $1.5 million. Also included was other real estate owned (“OREO”) at 46.5% of the book value, along with deposits with an aggregate value of approximately $140.0 million, cash and investment securities of $37.0 million and loans with a book value of $83.5 million. Net proceeds received from the FDIC for the transaction were $39.6 million.
Management made significant estimates and exercised significant judgement in accounting for the acquisition of First State. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair values for the acquired loans. Premises and equipment was valued based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment securities. These values are subject to change based on continued evaluations of appraisals and other loan-related assumptions.
The statement of net assets acquired and the resulting bargain purchase gain recorded is presented in the following tables. As explained in the notes that accompany the following table, the assets acquired and liabilities assumed were recorded at the acquisition date fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
As recorded by The First State Bank
|
|
Fair Value Adjustments
|
|
|
|
As recorded by MVB
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,053
|
|
|
$
|
—
|
|
|
|
|
$
|
26,053
|
|
Investment securities - available-for-sale, at fair value
|
|
10,964
|
|
|
—
|
|
|
|
|
10,964
|
|
Loans
|
|
83,514
|
|
|
(22,861)
|
|
|
(a)
|
|
60,653
|
|
OREO
|
|
22,610
|
|
|
(10,520)
|
|
|
(b)
|
|
12,090
|
|
Premises and equipment, net
|
|
1,582
|
|
|
(12)
|
|
|
(c)
|
|
1,570
|
|
Accrued interest receivable and other assets
|
|
2,234
|
|
|
211
|
|
|
(d)
|
|
2,445
|
|
Total Assets
|
|
$
|
146,957
|
|
|
$
|
(33,182)
|
|
|
|
|
$
|
113,775
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits - transaction accounts
|
|
$
|
70,931
|
|
|
$
|
—
|
|
|
|
|
$
|
70,931
|
|
Deposits - certificates of deposit
|
|
69,029
|
|
|
2,560
|
|
|
(e)
|
|
71,589
|
|
Total deposits
|
|
139,960
|
|
|
2,560
|
|
|
|
|
142,520
|
|
FHLB and other borrowings
|
|
5,800
|
|
|
—
|
|
|
|
|
5,800
|
|
Accrued interest payable and other liabilities
|
|
411
|
|
|
—
|
|
|
|
|
411
|
|
Total Liabilities
|
|
$
|
146,171
|
|
|
$
|
2,560
|
|
|
|
|
$
|
148,731
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired over/(under) liabilities assumed
|
|
$
|
786
|
|
|
$
|
(35,742)
|
|
|
|
|
$
|
(34,956)
|
|
(a) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by First State.
(b) Adjustment reflects the fair value of OREO acquired.
(c) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.
(d) Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts and the fair value adjustment to other assets.
(e) Adjustment arises since the interest rates paid on interest-bearing deposits where higher than rates available in the market on similar deposits as of the acquisition date.
The following table summarizes the assets acquired and liabilities assumed in the First State acquisition as of the acquisition date, and the pre-tax bargain purchase gain of $4.7 million recognized on the transaction, which is included in gains on acquisition and divestiture activity in the consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Assets acquired at fair value:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,053
|
|
|
|
Investment securities - available-for-sale, at fair value
|
|
10,964
|
|
|
|
Loans
|
|
60,653
|
|
|
|
OREO
|
|
12,090
|
|
|
|
Premises and equipment, net
|
|
1,570
|
|
|
|
Accrued interest receivable and other assets
|
|
2,445
|
|
|
|
Total fair value of assets acquired
|
|
$
|
113,775
|
|
|
|
|
|
|
|
|
Liabilities assumed at fair value:
|
|
|
|
|
Deposits
|
|
$
|
142,520
|
|
|
|
FHLB and other borrowings
|
|
5,800
|
|
|
|
Accrued interest payable and other liabilities
|
|
411
|
|
|
|
Total fair value of liabilities acquired
|
|
$
|
148,731
|
|
|
|
|
|
|
|
|
Net assets assumed at fair value
|
|
|
|
$
|
(34,956)
|
|
Transaction cash consideration received from the FDIC
|
|
|
|
39,627
|
|
Bargain purchase gain, before tax
|
|
|
|
$
|
4,671
|
|
Acquired Loans
The following table outlines the contractually required payments receivable, cash flows the Company expects to receive, non-accretable credit adjustments and the accretable yield for all First State loans as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Contractually Required Payments Receivable
|
|
Non-Accretable Credit Adjustments
|
|
Cash Flows Expected to be Collected
|
|
Accretable FMV Adjustments
|
|
Carrying Value of Loans Receivable
|
PCI loans
|
|
$
|
86,823
|
|
|
$
|
24,842
|
|
|
$
|
61,981
|
|
|
$
|
11,746
|
|
|
$
|
50,235
|
|
Purchased performing loans
|
|
12,818
|
|
|
2,561
|
|
|
10,257
|
|
|
1,817
|
|
|
8,440
|
|
Other purchased loans
|
|
1,978
|
|
|
—
|
|
|
1,978
|
|
|
—
|
|
|
1,978
|
|
Total
|
|
$
|
101,619
|
|
|
$
|
27,403
|
|
|
$
|
74,216
|
|
|
$
|
13,563
|
|
|
$
|
60,653
|
|
The Company recorded all loans acquired at the estimated fair value on the purchase date, with no carryover of the related allowance for loan losses. On the acquisition date, the Company segmented the loan portfolio into six loan pools: performing commercial, performing commercial real estate, performing consumer and residential real estate, classified commercial, classified commercial real estate and classified consumer and residential real estate. Of the 934 loans acquired, 663 were determined to be of deteriorated credit and were accounted for under ASC 310-30 as PCI loans. The 271 remaining loans acquired were accounted for under ASC 310-20 as purchased performing loans. Other purchased loans include premium finance loans, credit cards and overdrawn escrow accounts.
The Company had an independent third-party determine the net discounted value of cash flows on approximately 718 performing loans totaling $39.5 million. The valuation took into consideration the loans' underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures and remaining balances. These performing loans were segmented into pools based on loan and payment type and in some cases, risk grade.
The Company established a credit risk-related non-accretable difference of $24.8 million relating to these acquired, credit-impaired loans, reflected in the recorded net fair value. It further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount adjustment of $11.7 million at acquisition relating to
these impaired loans.
The following table discloses the impact of the acquisition of First State from the acquisition date through December 31, 2020. This table also presents certain pro forma information (net interest income and noninterest income and net income) as of the First State acquisition had occurred on January 1, 2019. The pro forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.
Deal-related costs from the First State acquisition of $1.2 million have been excluded from the 12 month period of 2020 pro forma information presented below and included in the 12 month period of 2019 pro forma information below. The actual results and pro forma information were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
|
Revenue
|
|
Net Income
|
2020:
|
|
|
|
|
Actual First State results included in consolidated statement of income since acquisition date
|
|
$
|
8,793
|
|
|
$
|
3,351
|
|
Supplemental consolidated pro forma as if First State had been acquired January 1, 2019
|
|
$
|
157,180
|
|
|
$
|
34,522
|
|
|
|
|
|
|
2019:
|
|
|
|
|
Supplemental consolidated pro forma as if First State had been acquired January 1, 2019
|
|
$
|
133,429
|
|
|
$
|
29,290
|
|
Paladin, LLC Acquisition
In April 2020, Paladin Fraud, LLC, a newly-formed West Virginia limited liability company and wholly-owned subsidiary of MVB Bank, entered into an Asset Purchase Agreement by and among Paladin Fraud, Paladin, LLC, a Washington limited liability company, James Houlihan and Jamon Whitehead. Pursuant to the Purchase Agreement, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin and the purchase price of the transaction consisted of 19,278 unregistered shares of MVB common stock and an undisclosed amount of cash. Paladin is a respected leader in the fraud prevention industry and has formed a specialty niche that aligns well with the MVB as a preferred bank for Fintech companies.
Divestiture of Four Eastern Panhandle, WV Branches
In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit, pursuant to which Summit purchased certain assets and assumed certain liabilities of three Bank branch locations in Berkeley County, WV and one Bank branch location in Jefferson County, WV. Upon closing, Summit assumed $188.1 million in deposits and acquired $36.8 million in loans, as well as cash, real property, personal property and other fixed assets. The Company recognized a gain of $9.6 million related to this transaction and was recorded in noninterest income for the in 2020. The completion of this sale resulted in the Company exiting the Eastern Panhandle, WV market. The Company closed this transaction in April 2020, and as such, no assets or liabilities of branches are classified as held-for-sale as of December 31, 2020. The Company recognized a gain on sale of banking centers of $9.6 million, which is included in gains on acquisition and divestiture activity.
Assets to be acquired and liabilities to be assumed that were classified as held-for-sale as of December 31, 2019 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
As of December 31, 2019,
|
Loans
|
|
|
|
$
|
42,916
|
|
Premises and equipment, net
|
|
|
|
3,638
|
|
Assets of branches held-for-sale
|
|
|
|
$
|
46,554
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
|
$
|
19,251
|
|
Interest-bearing deposits
|
|
|
|
169,019
|
|
Deposits of branches held-for-sale
|
|
|
|
$
|
188,270
|
|
Combination with Intercoastal
In July 2020, the Company completed the combination with Intercoastal to form ICM. The Bank contributed certain of its assets and in exchange received common units representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company has recognized its ownership as an equity method investment, initially recorded at fair value. The Company recognized a gain on this transaction of $3.3 million, which is included in gains on acquisition and divestiture activity.
Acquisition of Grand Software
In August 2020, MVB Technology, LLC, a newly formed West Virginia limited liability company and wholly-owned subsidiary of the Bank, entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as Grand. Pursuant to the Purchase Agreement, MVB Technology acquired the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward. As of December 31, 2020, the assets acquired were recorded in premises and equipment with a balance of $1.3 million.
Note 25 – Subsequent Event
In January 2021, the Company redeemed all of its outstanding shares of series B convertible noncumulative perpetual preferred stock, par value $1.00 per share, with a liquidation preference of $1,000 per share and all of its outstanding shares of series C convertible noncumulative perpetual preferred stock, par value $1.00 per share, with a liquidation preference of $1,000 per share, at a redemption price per share equal to $10,000, plus declared and unpaid dividends of $46.03 per share of series B preferred stock, and $49.86 per share of series C preferred stock. Upon redemption, the Preferred Stock was no longer outstanding and all rights with respect to such stock ceased and terminated, except the right to payment of the redemption price.