UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2021March 31, 2022
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from____________to______________
Commission file number: 0-15536
CODORUS VALLEY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania | 23-2428543 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405-2887
(Address of principal executive offices)(Zip code)
717-747-1519
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since the last report.)
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $2.50 par value | CVLY | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
|
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On October 26, 2021, 9,534,606April 22, 2022, 9,528,122 shares of common stock, par value $2.50, were outstanding.
Codorus Valley Bancorp, Inc.
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Management’s discussion and analysis of financial condition and results of operations |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Codorus Valley Bancorp, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, | December 31, | March 31, | December 31, | |||||||
(dollars in thousands, except per share data) | 2021 | 2020 | 2022 | 2021 | ||||||
Assets | ||||||||||
Interest bearing deposits with banks | $ | 471,385 | $ | 313,469 | $ | 417,741 | $ | 525,644 | ||
Cash and due from banks | 20,032 | 22,324 | 21,474 | 19,850 | ||||||
Total cash and cash equivalents | 491,417 | 335,793 | 439,215 | 545,494 | ||||||
Securities, available-for-sale | 224,576 | 185,002 | 302,383 | 254,285 | ||||||
Restricted investment in bank stocks, at cost | 1,311 | 2,593 | 1,311 | 1,311 | ||||||
Loans held for sale | 9,379 | 15,981 | 2,016 | 7,876 | ||||||
Loans (net of deferred fees of $5,002- 2021 and $6,134 - 2020) | 1,524,377 | 1,544,589 | ||||||||
Loans (net of deferred fees of $3,865- 2022 and $4,368 - 2021) | 1,528,496 | 1,529,751 | ||||||||
Less-allowance for loan losses | (22,336) | (21,264) | (22,027) | (22,782) | ||||||
Net loans | 1,502,041 | 1,523,325 | 1,506,469 | 1,506,969 | ||||||
Premises and equipment, net | 21,993 | 25,206 | 21,779 | 21,955 | ||||||
Operating leases right-of-use assets | 1,915 | 2,386 | 3,584 | 1,697 | ||||||
Goodwill | 2,301 | 2,301 | 2,301 | 2,301 | ||||||
Other assets | 75,223 | 69,612 | 80,624 | 76,684 | ||||||
Total assets | $ | 2,330,156 | $ | 2,162,199 | $ | 2,359,682 | $ | 2,418,572 | ||
Liabilities | ||||||||||
Deposits | ||||||||||
Noninterest bearing | $ | 460,876 | $ | 396,947 | $ | 508,396 | $ | 524,609 | ||
Interest bearing | 1,588,484 | 1,466,592 | 1,587,476 | 1,619,156 | ||||||
Total deposits | 2,049,360 | 1,863,539 | 2,095,872 | 2,143,765 | ||||||
Short-term borrowings | 12,300 | 8,540 | 10,778 | 10,761 | ||||||
Long-term debt | 21,586 | 46,606 | 21,571 | 21,579 | ||||||
Subordinated debentures - face amount $31,000 (less unamortized discount and debt | ||||||||||
issuance cost of $337 at September 30, 2021 and $398 at December 31, 2020) | 30,663 | 30,602 | ||||||||
Subordinate debentures - face amount $31,000 (less discount and debt | ||||||||||
issuance cost of $297 at March 31, 2022 and $317 at December 31, 2021) | 30,703 | 30,683 | ||||||||
Operating leases liabilities | 2,031 | 2,515 | 3,738 | 1,803 | ||||||
Other liabilities | 15,504 | 12,437 | 13,301 | 14,476 | ||||||
Total liabilities | 2,131,444 | 1,964,239 | 2,175,963 | 2,223,067 | ||||||
Shareholders' equity | ||||||||||
Preferred stock, par value $2.50 per share; | ||||||||||
1,000,000 shares authorized; shares issued and outstanding: | ||||||||||
0 at September 30, 2021 and 0 at December 31, 2020 | 0 | 0 | ||||||||
0 at March 31, 2022 and 0 at December 31, 2021 | 0 | 0 | ||||||||
Common stock, par value $2.50 per share; 30,000,000 shares authorized; | ||||||||||
shares issued: 9,883,187 at September 30, 2021 and 9,820,882 at December 31, 2020; and | ||||||||||
shares outstanding: 9,592,199 at September 30, 2021 and 9,820,882 at December 31, 2020 | 24,708 | 24,552 | ||||||||
shares issued: 9,883,187 at March 31, 2022 and December 31, 2021; and shares | ||||||||||
outstanding: 9,528,122 at March 31, 2022 and 9,472,404 at December 31, 2021 | 24,708 | 24,708 | ||||||||
Additional paid-in capital | 142,110 | 141,461 | 141,409 | 142,067 | ||||||
Retained earnings | 36,515 | 28,380 | 39,401 | 37,769 | ||||||
Accumulated other comprehensive income | 1,431 | 3,567 | ||||||||
Treasury stock, at cost; 290,988 shares at September 30, 2021 | (6,052) | 0 | ||||||||
Accumulated other comprehensive loss | (13,957) | (164) | ||||||||
Treasury stock shares outstanding, at cost: 355,065 shares at March 31, 2022 | ||||||||||
and 410,783 at December 31, 2021 | (7,842) | (8,875) | ||||||||
Total shareholders' equity | 198,712 | 197,960 | 183,719 | 195,505 | ||||||
Total liabilities and shareholders' equity | $ | 2,330,156 | $ | 2,162,199 | $ | 2,359,682 | $ | 2,418,572 | ||
See accompanying notes.
Codorus Valley Bancorp, Inc.
Consolidated Statements of Income
(Unaudited)
Three months ended | Nine months ended | Three months ended | ||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||
(dollars in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | ||||||||||
Interest income | ||||||||||||||||
Loans, including fees | $ | 17,106 | $ | 17,589 | $ | 51,190 | $ | 54,233 | $ | 15,681 | $ | 17,592 | ||||
Investment securities: | ||||||||||||||||
Taxable | 927 | 616 | 2,299 | 2,197 | 1,280 | 582 | ||||||||||
Tax-exempt | 88 | 113 | 268 | 380 | 99 | 94 | ||||||||||
Dividends | 6 | 36 | 55 | 131 | 9 | 26 | ||||||||||
Other | 174 | 57 | 360 | 497 | 228 | 81 | ||||||||||
Total interest income | 18,301 | 18,411 | 54,172 | 57,438 | 17,297 | 18,375 | ||||||||||
Interest expense | ||||||||||||||||
Deposits | 1,724 | 3,111 | 5,893 | 10,888 | 1,062 | 2,220 | ||||||||||
Federal funds purchased and other short-term borrowings | 12 | 9 | 30 | 29 | 10 | 8 | ||||||||||
Long-term debt | 100 | 310 | 557 | 1,273 | 105 | 252 | ||||||||||
Subordinated debentures | 417 | 0 | 1,253 | 0 | 419 | 418 | ||||||||||
Total interest expense | 2,253 | 3,430 | 7,733 | 12,190 | 1,596 | 2,898 | ||||||||||
Net interest income | 16,048 | 14,981 | 46,439 | 45,248 | 15,701 | 15,477 | ||||||||||
Provision for loan losses | 349 | 1,930 | 1,932 | 13,915 | 1,027 | 1,231 | ||||||||||
Net interest income after provision for loan losses | 15,699 | 13,051 | 44,507 | 31,333 | 14,674 | 14,246 | ||||||||||
Noninterest income | ||||||||||||||||
Trust and investment services fees | 1,151 | 992 | 3,346 | 2,932 | 1,162 | 1,052 | ||||||||||
Income from mutual fund, annuity and insurance sales | 349 | 287 | 993 | 797 | 330 | 300 | ||||||||||
Service charges on deposit accounts | 1,304 | 1,182 | 3,844 | 3,287 | 1,282 | 1,221 | ||||||||||
Income from bank owned life insurance | 326 | 286 | 1,023 | 851 | 311 | 270 | ||||||||||
Other income | 518 | 215 | 1,440 | 1,136 | 419 | 563 | ||||||||||
Gain on sales of loans held for sale | 490 | 1,282 | 2,473 | 2,134 | 358 | 1,050 | ||||||||||
Loss on write down of assets held for sale | (30) | 0 | (1,204) | 0 | ||||||||||||
(Loss) gain on sales of securities | 0 | 0 | (23) | 65 | ||||||||||||
Loss on sales of securities | 0 | (23) | ||||||||||||||
Total noninterest income | 4,108 | 4,244 | 11,892 | 11,202 | 3,862 | 4,433 | ||||||||||
Noninterest expense | ||||||||||||||||
Personnel | 8,047 | 7,470 | 24,743 | 22,471 | 8,390 | 8,428 | ||||||||||
Occupancy of premises, net | 869 | 805 | 2,698 | 2,596 | 979 | 973 | ||||||||||
Furniture and equipment | 836 | 856 | 2,467 | 2,550 | 887 | 838 | ||||||||||
Professional and legal | 449 | 298 | 1,053 | 748 | 859 | 351 | ||||||||||
Marketing | 462 | 352 | 1,165 | 988 | 400 | 265 | ||||||||||
FDIC insurance | 242 | 325 | 660 | 664 | 239 | 226 | ||||||||||
Debit card processing | 404 | 344 | 1,081 | 1,017 | 382 | 280 | ||||||||||
Charitable donations | 121 | 65 | 1,059 | 1,030 | 30 | 188 | ||||||||||
External data processing | 809 | 631 | 2,487 | 2,039 | 821 | 820 | ||||||||||
Loss (gain) on foreclosed real estate, including provision for | ||||||||||||||||
(recovery of) losses | 0 | 3 | 0 | (170) | ||||||||||||
PA shares tax | 355 | 150 | ||||||||||||||
Impaired loan carrying costs | 94 | 128 | 281 | 604 | 138 | 100 | ||||||||||
Other | 1,326 | 1,352 | 3,451 | 3,541 | 1,196 | 1,087 | ||||||||||
Total noninterest expense | 13,659 | 12,629 | 41,145 | 38,078 | 14,676 | 13,706 | ||||||||||
Income before income taxes | 6,148 | 4,666 | 15,254 | 4,457 | 3,860 | 4,973 | ||||||||||
Provision for income taxes | 1,365 | 1,042 | 3,289 | 772 | 807 | 1,073 | ||||||||||
Net income | $ | 4,783 | $ | 3,624 | $ | 11,965 | $ | 3,685 | $ | 3,053 | $ | 3,900 | ||||
Net income per share, basic | $ | 0.49 | $ | 0.37 | $ | 1.22 | $ | 0.38 | $ | 0.32 | $ | 0.40 | ||||
Net income per share, diluted | $ | 0.49 | $ | 0.37 | $ | 1.22 | $ | 0.38 | $ | 0.32 | $ | 0.40 | ||||
See accompanying notes.
Codorus Valley Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended | |||||
September 30, | |||||
(dollars in thousands) | 2021 | 2020 | |||
Net income | $ | 4,783 | $ | 3,624 | |
Other comprehensive income: | |||||
Securities available for sale: | |||||
Net unrealized holding (losses) arising during the period | |||||
(net of tax (benefit) of ($182) and ($120), respectively) | (683) | (452) | |||
Reclassification adjustment for gains included in net income | |||||
(net of tax expense of $0 and $0, respectively) (a) (b) | 0 | 0 | |||
Net unrealized (losses) | (683) | (452) | |||
Comprehensive income | $ | 4,100 | $ | 3,172 | |
Nine months ended | |||||
September 30, | |||||
(dollars in thousands) | 2021 | 2020 | |||
Net income | $ | 11,965 | $ | 3,685 | |
Other comprehensive income: | |||||
Securities available for sale: | |||||
Net unrealized holding (losses) gains arising during the period | |||||
(net of tax (benefit) expense of ($573) and $726, respectively) | (2,154) | 2,731 | |||
Reclassification adjustment for losses (gains) included in net income | |||||
(net of tax (benefit) expense of ($5) and $14, respectively) (a) (b) | 18 | (51) | |||
Net unrealized (losses) gains | (2,136) | 2,680 | |||
Comprehensive income | $ | 9,829 | $ | 6,365 | |
Three months ended | |||||
March 31, | |||||
(dollars in thousands) | 2022 | 2021 | |||
Net income | $ | 3,053 | $ | 3,900 | |
Other comprehensive income: | |||||
Securities available for sale: | |||||
Net unrealized holding losses arising during the period | |||||
(net of tax benefit of $3,666 and $561, respectively) | (13,793) | (2,111) | |||
Reclassification adjustment for losses included in net income | |||||
(net of tax benefit of $0 and $5, respectively) (a) (b) | 0 | 18 | |||
Net unrealized losses | (13,793) | (2,093) | |||
Comprehensive (loss) income | $ | (10,740) | $ | 1,807 | |
(a)Amounts are included in net gain (loss) on sales of securities on the Consolidated Statements of Income within noninterest income.
(b)Income tax amounts are included in the provision (benefit) for income taxes on the Consolidated Statements of Income.
See accompanying notes.
Codorus Valley Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended | Three months ended | |||||||||
September 30, | March 31, | |||||||||
(dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||
Cash flows from operating activities | ||||||||||
Net income | $ | 11,965 | $ | 3,685 | $ | 3,053 | $ | 3,900 | ||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||||
Depreciation/amortization | 1,956 | 2,072 | 630 | 664 | ||||||
Net amortization of premiums on securities | 749 | 686 | 230 | 295 | ||||||
Amortization of deferred loan origination fees and costs | (5,968) | (2,255) | (742) | (2,200) | ||||||
Net amortization of operating lease right of use assets | 448 | 484 | 173 | 147 | ||||||
Net amortization of finance lease right of use assets | 35 | 36 | 12 | 12 | ||||||
Amortization of subordinated debentures issuance fees | 61 | 0 | 20 | 20 | ||||||
Net change in operating lease liabilities | (462) | (500) | (126) | (150) | ||||||
Provision for loan losses | 1,932 | 13,915 | 1,027 | 1,231 | ||||||
Writedown of assets held for sale | 1,204 | 0 | ||||||||
Provision for losses on foreclosed real estate | 0 | 18 | ||||||||
Increase in bank owned life insurance | (1,023) | (851) | (311) | (270) | ||||||
Originations of mortgage loans held for sale | (67,628) | (80,926) | (7,916) | (27,175) | ||||||
Originations of SBA loans held for sale | (8,242) | (841) | (1) | (349) | ||||||
Proceeds from sales of mortgage loans held for sale | 74,722 | 81,649 | 8,743 | 31,216 | ||||||
Proceeds from sales of SBA loans held for sale | 10,187 | 140 | 5,386 | 0 | ||||||
Gain on sales of mortgage loans held for sale | (2,248) | (2,125) | (210) | (1,050) | ||||||
Gain on sales of SBA loans held for sale | (225) | (9) | (148) | 0 | ||||||
(Gain) loss on disposal of premises and equipment | (25) | 79 | ||||||||
Loss (gain) on sales of securities, available-for-sale | 23 | (65) | ||||||||
Gain on sales of foreclosed real estate | 0 | (216) | ||||||||
Loss on lease write-off | 0 | 8 | ||||||||
Gain on disposal of premises and equipment | 0 | (6) | ||||||||
Loss on sales of securities, available-for-sale | 0 | 23 | ||||||||
Stock-based compensation | 568 | 390 | 289 | 101 | ||||||
Decrease (increase) in interest receivable | 3,906 | (3,108) | ||||||||
(Increase) decrease in interest receivable | (56) | 262 | ||||||||
Decrease (increase) in other assets | 178 | (2,446) | 100 | (205) | ||||||
Increase (decrease) in interest payable | 104 | (274) | ||||||||
Increase (decrease) in other liabilities | 2,799 | (1,554) | ||||||||
Increase in interest payable | 330 | 349 | ||||||||
(Decrease) increase in other liabilities | (1,506) | 7,957 | ||||||||
Net cash provided by operating activities | 25,016 | 7,992 | 8,977 | 14,772 | ||||||
Cash flows from investing activities | ||||||||||
Purchases of securities, available-for-sale | (235,564) | (107,828) | (77,952) | (123,921) | ||||||
Maturities, repayments and calls of securities, available-for-sale | 188,710 | 50,801 | 12,165 | 130,260 | ||||||
Sales of securities, available-for-sale | 3,803 | 21,679 | 0 | 3,803 | ||||||
Net decrease in restricted investment in bank stock | 1,282 | 1,958 | 0 | 315 | ||||||
Net decrease (increase) in loans made to customers | 25,321 | (81,802) | 215 | (32,445) | ||||||
Purchases of premises and equipment | (1,467) | (2,004) | (466) | (276) | ||||||
Investment in bank owned life insurance | (7,007) | (7) | ||||||||
Proceeds from bank owned life insurance | 450 | 0 | ||||||||
Proceeds from sales of foreclosed real estate | 0 | 1,116 | ||||||||
Net cash used in investing activities | (24,472) | (116,087) | (66,038) | (22,264) | ||||||
Cash flows from financing activities | ||||||||||
Net increase in demand and savings deposits | 228,882 | 248,060 | ||||||||
Net (decrease) increase in time deposits | (43,061) | 7,249 | ||||||||
Net increase in short-term borrowings | 3,760 | 1,384 | ||||||||
Repayment of long-term debt | (25,000) | (35,000) | ||||||||
Net (decrease) increase in demand and savings deposits | (20,353) | 106,330 | ||||||||
Net decrease in time deposits | (27,540) | (5,806) | ||||||||
Net increase (decrease) in short-term borrowings | 17 | (797) | ||||||||
Net change in finance lease liabilities | (20) | (19) | (7) | (7) | ||||||
Cash dividends paid to shareholders | (3,830) | (4,103) | (1,421) | (1,278) | ||||||
Treasury stock reissuance | (947) | 5 | ||||||||
Payment of taxes related to stock withheld | (12) | (4) | (70) | (5) | ||||||
Treasury stock reissued | 313 | 89 | ||||||||
Treasury stock repurchased | (6,189) | (87) | (34) | 0 | ||||||
Proceeds from issuance of stock | 237 | 444 | 1,137 | 161 | ||||||
Net cash provided by financing activities | 155,080 | 218,013 | ||||||||
Net increase in cash and cash equivalents | 155,624 | 109,918 | ||||||||
Net cash (used in) provided by financing activities | (49,218) | 98,603 | ||||||||
Net (decrease) increase in cash and cash equivalents | (106,279) | 91,111 | ||||||||
Cash and cash equivalents at beginning of year | 335,793 | 131,591 | 545,494 | 335,793 | ||||||
Cash and cash equivalents at end of period | $ | 491,417 | $ | 241,509 | $ | 439,215 | $ | 426,904 | ||
See accompanying notes.
Codorus Valley Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||
(dollars in thousands, except per share data) | Stock | Capital | Earnings | Income (Loss) | Stock | Total | ||||||||||||
Balance, January 1, 2021 | $ | 24,552 | $ | 141,461 | $ | 28,380 | $ | 3,567 | $ | 0 | $ | 197,960 | ||||||
Net income | 3,900 | 3,900 | ||||||||||||||||
Other comprehensive loss, net of tax | (2,093) | (2,093) | ||||||||||||||||
Cash dividends ($0.130 per share) | (1,278) | (1,278) | ||||||||||||||||
Stock-based compensation | 101 | 101 | ||||||||||||||||
Withheld stock - 279 shares | (5) | (5) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
7,175 shares under the dividend reinvestment and stock purchase plan | 18 | 98 | 116 | |||||||||||||||
5,702 shares under the employee stock option plan | 14 | 31 | 5 | 50 | ||||||||||||||
43,212 shares of stock-based compensation awards | 108 | (108) | 0 | |||||||||||||||
Balance, March 31, 2021 | $ | 24,692 | $ | 141,583 | $ | 31,002 | $ | 1,474 | $ | 0 | $ | 198,751 | ||||||
Balance, April 1, 2021 | $ | 24,692 | $ | 141,583 | $ | 31,002 | $ | 1,474 | $ | 0 | $ | 198,751 | ||||||
Net income | 3,282 | 3,282 | ||||||||||||||||
Other comprehensive income, net of tax | 640 | 640 | ||||||||||||||||
Cash dividends ($0.130 per share) | (1,284) | (1,284) | ||||||||||||||||
Stock-based compensation | 294 | 294 | ||||||||||||||||
Repurchased stock - 142,541 shares | (2,672) | (2,672) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
6,495 shares under the dividend reinvestment and stock purchase plan | 16 | 104 | 120 | |||||||||||||||
9,909 shares under employee stock purchase plan | (41) | 183 | 142 | |||||||||||||||
Balance, June 30, 2021 | $ | 24,708 | $ | 141,940 | $ | 33,000 | $ | 2,114 | $ | (2,489) | $ | 199,273 | ||||||
Balance, July 1, 2021 | $ | 24,708 | $ | 141,940 | $ | 33,000 | $ | 2,114 | $ | (2,489) | $ | 199,273 | ||||||
Net income | 4,783 | 4,783 | ||||||||||||||||
Other comprehensive loss, net of tax | (683) | (683) | ||||||||||||||||
Cash dividends ($0.130 per share) | (1,268) | (1,268) | ||||||||||||||||
Stock-based compensation | 173 | 173 | ||||||||||||||||
Withheld stock - 274 shares | (6) | (6) | ||||||||||||||||
Repurchased stock - 164,820 shares | (3,682) | (3,682) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
5,370 shares under the dividend reinvestment and stock purchase plan | 22 | 100 | 122 | |||||||||||||||
1,368 shares of stock-based compensation awards | (25) | 25 | 0 | |||||||||||||||
Balance, September 30, 2021 | $ | 24,708 | $ | 142,110 | $ | 36,515 | $ | 1,431 | $ | (6,052) | $ | 198,712 | ||||||
Balance, January 1, 2020 | $ | 24,390 | $ | 140,450 | $ | 25,019 | $ | 1,309 | $ | 0 | $ | 191,168 | ||||||
Net loss | (2,989) | (2,989) | ||||||||||||||||
Other comprehensive income, net of tax | 2,798 | 2,798 | ||||||||||||||||
Cash dividends ($0.160 per share) | (1,561) | (1,561) | ||||||||||||||||
Stock-based compensation | 120 | 120 | ||||||||||||||||
Repurchased stock - 5,335 shares | (87) | (87) | ||||||||||||||||
Withheld stock - 102 shares | (2) | (2) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
6,706 shares under the dividend reinvestment and stock purchase plan | 17 | 132 | 149 | |||||||||||||||
6,468 shares of stock-based compensation awards | 16 | (16) | 0 | |||||||||||||||
Balance, March 31, 2020 | $ | 24,423 | $ | 140,686 | $ | 20,469 | $ | 4,107 | $ | (89) | $ | 189,596 | ||||||
Balance, April 1, 2020 | $ | 24,423 | $ | 140,686 | $ | 20,469 | $ | 4,107 | $ | (89) | $ | 189,596 | ||||||
Net income | 3,050 | 3,050 | ||||||||||||||||
Other comprehensive income, net of tax | 334 | 334 | ||||||||||||||||
Cash dividends ($0.160 per share) | (1,562) | (1,562) | ||||||||||||||||
Stock-based compensation | 130 | 130 | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
12,536 shares under the dividend reinvestment and stock purchase plan | 18 | 44 | 89 | 151 | ||||||||||||||
1,000 shares under the stock option plan | 2 | 3 | 5 | |||||||||||||||
(767) shares of stock-based compensation awards | (2) | 2 | 0 | |||||||||||||||
11,116 shares under employee stock purchase plan | 28 | 103 | 131 | |||||||||||||||
Balance, June 30, 2020 | $ | 24,469 | $ | 140,968 | $ | 21,957 | $ | 4,441 | $ | 0 | $ | 191,835 | ||||||
Balance, July 1, 2020 | $ | 24,469 | $ | 140,968 | $ | 21,957 | $ | 4,441 | $ | 0 | $ | 191,835 | ||||||
Net income | 3,624 | 3,624 | ||||||||||||||||
Other comprehensive loss, net of tax | (452) | (452) | ||||||||||||||||
Cash dividends ($0.100 per share) | (980) | (980) | ||||||||||||||||
Stock-based compensation | 139 | 139 | ||||||||||||||||
Withheld stock - 180 shares | (2) | (2) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
7,173 shares under the dividend reinvestment and stock purchase plan | 18 | 79 | 97 | |||||||||||||||
771 shares of stock-based compensation awards | 2 | (2) | 0 | |||||||||||||||
Balance, September 30, 2020 | $ | 24,489 | $ | 141,184 | $ | 24,601 | $ | 3,989 | $ | (2) | $ | 194,261 | ||||||
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||
(dollars in thousands, except per share data) | Stock | Capital | Earnings | (Loss) Income | Stock | Total | ||||||||||||
Balance, January 1, 2022 | $ | 24,708 | $ | 142,067 | $ | 37,769 | $ | (164) | $ | (8,875) | $ | 195,505 | ||||||
Net income | 3,053 | 3,053 | ||||||||||||||||
Other comprehensive loss, net of tax | (13,793) | (13,793) | ||||||||||||||||
Cash dividends ($0.15 per share) | (1,421) | (1,421) | ||||||||||||||||
Stock-based compensation | 289 | 289 | ||||||||||||||||
Repurchased stock - 1,535 shares | (34) | (34) | ||||||||||||||||
Withheld stock - 3,177 shares | (70) | (70) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
6,734 shares under the dividend reinvestment and stock purchase plan | 20 | 126 | 146 | |||||||||||||||
3,137 shares under the employee stock option plan | (15) | 59 | 44 | |||||||||||||||
50,559 shares of stock-based compensation awards | (952) | 952 | 0 | |||||||||||||||
Balance, March 31, 2022 | $ | 24,708 | $ | 141,409 | $ | 39,401 | $ | (13,957) | $ | (7,842) | $ | 183,719 | ||||||
Balance, January 1, 2021 | $ | 24,552 | $ | 141,461 | $ | 28,380 | $ | 3,567 | $ | 0 | $ | 197,960 | ||||||
Net income | 3,900 | 3,900 | ||||||||||||||||
Other comprehensive loss, net of tax | (2,093) | (2,093) | ||||||||||||||||
Cash dividends ($0.13 per share) | (1,278) | (1,278) | ||||||||||||||||
Stock-based compensation | 101 | 101 | ||||||||||||||||
Withheld stock - 279 shares | (5) | (5) | ||||||||||||||||
Issuance and reissuance of stock: | ||||||||||||||||||
7,175 shares under the dividend reinvestment and stock purchase plan | 18 | 98 | 116 | |||||||||||||||
5,702 shares under the employee stock option plan | 14 | 31 | 5 | 50 | ||||||||||||||
43,212 shares of stock-based compensation awards | 108 | (108) | 0 | |||||||||||||||
Balance, March 31, 2021 | $ | 24,692 | $ | 141,583 | $ | 31,002 | $ | 1,474 | $ | 0 | $ | 198,751 | ||||||
See accompanying notes.
Note 1—Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
The accompanying consolidated balance sheet at December 31, 20202021 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.
Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). As of September 30, 2021,March 31, 2022, PeoplesBank operates 1 wholly-owned subsidiary, Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.
The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended September 30, 2021.March 31, 2022. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.
These consolidated statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.
The results of operations for the three and nine months ended September 30, 2021March 31, 2022 are not necessarily indicative of the results to be expected for the full year.
In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of September 30, 2021March 31, 2022 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in Section 4013 of the CARES Act to January 1, 2022.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP”) was signed into law. Chief among the $1.9 trillion stimulus act is additional support for individuals, including $1,400 checks to many Americans, extended unemployment benefits, and expanded tax credits. In addition, ARP provides funding for state and local governments and support for businesses continuing to struggle as a result of the pandemic, including a modest increase to PPP, expanded eligibility to more non-profits, a grant program for restaurants that have suffered pandemic-related losses, and extended payroll support for the airline industry.
While the Corporation continues to evaluate the disruption caused by the pandemic, and impact of the CARES Act, these events may have a material adverse impact on the Corporation’s results of future operations, financial position, capital, and liquidity in fiscal year 2021.2022. Further, a decrease in results of future operations may place a strain on the Corporation’s capital reserve ratios.
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances less amounts charged off, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Generally, loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) over the contractual life of the loan. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following industry classes: builder & developer, commercial real estate investor, residential real estate investor, hotel/motel, wholesale & retail, agriculture, manufacturing, service and all other. Consumer loans consist of the following classes: residential mortgage, home equity and all other.
Generally, for all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A past due loan may remain on accrual status if it is in the process of collection and well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed in the current year. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to the Corporation’s judgment as to the collectability of principal. Generally, nonaccrual loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for loan losses represents the Corporation’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. While the Corporation attributes a portion of the allowance to individual loans and groups of loans that it evaluates and determines to be impaired, the allowance is available to cover all charge-offs that arise from the loan portfolio.
The allowance for loan losses is maintained at a level considered by management to be adequate to provide for probable incurred losses. The Corporation performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be 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 classified as impaired, generally nonaccrual loans and troubled debt restructurings. For loans that are classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative (environmental) risk factors. Historical loss rates are based on a two year rolling average of net charge-offs. Qualitative risk factors that supplement historical losses in the evaluation of loan pools are shown below. Each factor is assigned a value to reflect improving, stable or declining conditions based on the Corporation’s best judgment using relevant information available at the time of the evaluation.
Changes in international, US and local economies and business conditions
Changes in the value of collateral for collateral dependent loans
Changes in the level of concentrations of credit
Changes in the volume and severity of classified and past due loans
Changes in the nature and volume of the portfolio
Changes in collection, charge-off, and recovery procedures
Changes in underwriting standards and loan terms
Changes in the quality of the loan review system
Changes in the experience/ability of lending management and key lending staff
Regulatory and legal regulations that could affect the level of credit losses
Other pertinent environmental factors
As disclosed in Note 4—Loans, the Corporation engages in commercial and consumer lending. Loans are made within the Corporation’s primary market area and surrounding areas, and include the purchase of whole loan or participation interests in loans from other financial institutions. Commercial loans, which pose the greatest risk of loss to the Corporation, whether originated or purchased, are generally secured by real estate. Within the broad commercial loan segment, the builder & developer and commercial real estate investor loan classes generally present a higher level of risk than other commercial loan classifications. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, unstable real estate prices and the dependency upon successful construction and sale or operation of the real estate project. As a result of the COVID-19 pandemic, the commercial loan segments of hotel/motel and the restaurant and recreation segments included under other commercial loans currently present a higher level of risk than other
commercial loan classifications. Within the consumer loan segment, junior (i.e., second) liens present a higher risk to the Corporation because economic and housing market conditions can adversely affect the underlying value of the collateral, which could render the Corporation under-secured or unsecured. In addition, economic and housing market conditions can adversely affect the ability of some borrowers to service their debt.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation 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 in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Corporation 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. Loans that are deemed impaired are evaluated for impairment loss based on the net realizable value of the collateral, as applicable. Loans that are not collateral dependent will rely on the present value of expected future cash flows discounted at the loan’s effective interest rate to determine impairment loss. Large groups of smaller balance homogeneous loans such as residential mortgage loans, home equity loans and other consumer loans are collectively evaluated for impairment, unless they are classified as impaired.
An allowance for loan losses is established for an impaired commercial loan if its carrying value exceeds its estimated fair value. For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals of the underlying collateral. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the most recent appraisal and the condition of the property. Appraisals are generally discounted to provide for selling costs and other factors to determine an estimate of the net realizable value of the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. InGenerally in instances when specific consumer related loans become impaired, they may be partially or fully charged off, which eliminates the need for a specific allowance.
Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted under a troubled debt restructuring may involve an interest rate that is below the market rate given the associated credit risk of the loan or an extension of a loan’s stated maturity date. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a reasonable period of time, generally six consecutive months after modification and future payments are reasonably assured.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act provides the option to not apply ASC 310-40 (TDRs) to a loan modification, related specifically to COVID-19 hardships, when the loan was not past due greater than 30 days as of December 31, 2019. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of September 30, 2021, the Corporation has remaining loan modifications totaling approximately $41,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program (PPP), with outstanding PPP loans as of September 30, 2021 of approximately $55,000,000, which includes $47,000,000 of new PPP loans originated in 2021.
Loan-Level Interest Rate Swaps
Beginning duringDuring the second quarter of 2021, PeoplesBank entered into loan-level interest rate swaps (“swaps”) to facilitate certain client transactions and to meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. A loan-level interest rate swap is a contract in which the series of interest rate flows (fixed and variable) are exchanged over the term of a loan with certain qualifying commercial loan clients, and PeoplesBank simultaneously enters into an interest rate swap with a dealer counterparty with identical notional amounts and terms. The net result of these swaps is that the client pays a fixed interest rate and PeoplesBank receives a floating interest rate. The swap positions with clients are equally offset with the dealer counterparties to minimize the potential impact on PeoplesBank’s financial statements.
Pursuant to agreements with the dealer counterparties, PeoplesBank may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon the current positions and related future collateral requirements relating to them, PeoplesBank believes any effect on its cash flow or liquidity position to be immaterial.
Derivatives contain an element of credit risk, including the possibility that PeoplesBank will incur a loss because a party to the agreements, which may be a dealer counterparty or a client, fails to meet its contractual obligations. Derivative contracts may only be executed with dealer counterparties as approved by the Board of Directors. Similarly, derivatives with clients may only be executed with clients within credit exposure limits as approved by the Board of Directors. Loan-level interest rate swaps are considered derivatives but are not accounted for using hedge accounting.
Interest rate swaps, recorded at fair value, are included in other assets on the Consolidated Balance Sheets. Additional information is provided in Note 15 – Interest Rate Swaps.
Bank Premises and Equipment Held for Sale
Bank premises and equipment designated as held for sale are carried at the lower of cost or fair value, and, at September 30,March 31, 2022 and December 31, 2021 consisted of one retail banking property scheduled to be closed in the fourthsecond quarter 2021 and one retail banking property scheduled to be closed in earlyof 2022, totaling $2,715,000$567,000 and is included in other assets on the Consolidated Balance Sheets. An impairment charge of approximately $30,000 and $1,174,000 was recorded during the three and nine months ended September 30, 2021, respectively. There were 0 bank premises and equipment designated as held for sale as of December 31, 2020.
Foreclosed Real Estate
Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a write-down. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At September 30,March 31, 2022 and December 31, 2021 there was 0 foreclosed real estate. Included within loans receivable asAs of September 30, 2021 was a recorded investment of $105,000 ofMarch 31, 2022, there were no consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction, compared to $206,000$102,000 as of December 31, 2020.2021.
Mortgage Servicing Rights
The mortgage servicing rights (MSRs) associated with the sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an estimate of future net servicing income of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At September 30, 2021,March 31, 2022, the balance of residential mortgage loans serviced for third parties was $70,326,000$62,207,000 compared to $87,142,000$66,885,000 at December 31, 2020.2021.
Three months ended | Nine months ended | Three months ended | |||||||||||||||
September 30, | September 30, | March 31, | |||||||||||||||
(dollars in thousands) | 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | |||||||||||
Amortized cost: | |||||||||||||||||
Balance at beginning of period | $ | 458 | $ | 649 | $ | 511 | $ | 965 | $ | 380 | $ | 511 | |||||
Originations of mortgage servicing rights | 5 | 29 | 36 | 84 | 5 | 16 | |||||||||||
Amortization expense | (45) | (161) | (219) | (349) | (40) | (91) | |||||||||||
Valuation allowance | 2 | (31) | 92 | (214) | 0 | 88 | |||||||||||
Balance at end of period | $ | 420 | $ | 486 | $ | 420 | $ | 486 | $ | 345 | $ | 524 | |||||
Goodwill and Core Deposit Intangible Assets
Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test. This test consists of a qualitative analysis. If the Corporation determines events or circumstances indicate that it is more likely than not that goodwill is impaired, a quantitative analysis must be completed. Analyses may also be performed between annual tests. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The Corporation completes its annual goodwill impairment test on October 1st of each year. Based upon a qualitative analysis of goodwill, the Corporation concluded that the amount of recorded goodwill was not impaired as of October 1, 2021.
Core deposit intangibles represent the value assigned to demand, interest checking, money market, and savings accounts acquired as part of an acquisition. The core deposit intangible value represents the future economic benefit of potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources and the alternative cost to grow a similar core deposit base. The core deposit intangible asset resulting from the merger with Madison Bancorp, Inc. was determined to have a definite life and is being amortized using the sum of the years’ digits method over ten years. All intangible assets must be evaluated for impairment if certain events or changes in circumstances occur. Any impairment write-downs would be recognized as expense on the consolidated statements of income.
Revenue from Contracts with Customers
Revenue from contracts with customers that are required to be recognized under FASB ASC Topic 606 - Revenue from Contracts with Customers (ASC 606) is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Corporation recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
The majority of the Corporation’s revenue-generating transactions are not within the scope of ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other U.S. Generally Accepted Accounting Principles (GAAP) discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of income as components of non-interest income are as follows:
Trust and investment service fees – The Corporation provides trust, investment management custody and irrevocable life insurance trust services to clients. Such services are rendered in accordance with the underlying contracts for which fees are earned. The Corporation’s performance obligations are generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for services rendered is primarily received in the following month.
Income from mutual fund, annuity and insurance sales – The Corporation sells mutual funds, annuity and insurance products to its clients. The Corporation’s performance obligation is met upon the signing of the product agreement and, in certain cases, a time component may exist when the client has the right to rescind the agreement with or without penalty. The Corporation recognizes revenues upon delivery of the product or service unless there is a time component in which case revenues are recognized utilizing the expected value method. Payment for services rendered is primarily received in the following month.
Service charges on deposits accounts – These represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Other service charges include revenue from processing wire transfers, cashier’s checks and other services. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to the clients’ accounts.
Other noninterest income – The Corporation evaluated individual components of other noninterest income, such as credit card merchant fees, credit and gift card fees and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through payment networks, such as Visa. Credit and gift card income is realized through a third party provider who issues cards as private label in the Corporation’s name. ATM fees are primarily generated when a non-Corporation cardholder uses a Corporation ATM. The income is primarily comprised as a percentage of interchange fees earned whenever the issuer’s card is processed through card payment networks, such as Visa or Pulse. Merchant services income is realized through a third party service provider who is contracted by the Corporation under a referral arrangement. Such fees represent fees charged to merchants to process their debit card transactions. The Corporation’s performance obligation for these fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received within a one to three day lag or in the following month.
Per Share Data
The computation of net income per share is provided in the table below.
Three months ended | Nine months ended | Three months ended | ||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||
(in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | ||||||||||
Net income | $ | 4,783 | $ | 3,624 | $ | 11,965 | $ | 3,685 | $ | 3,053 | $ | 3,900 | ||||
Weighted average shares outstanding (basic) | 9,699 | 9,792 | 9,785 | 9,774 | 9,486 | 9,842 | ||||||||||
Effect of dilutive stock options | 48 | 22 | 36 | 29 | 31 | 25 | ||||||||||
Weighted average shares outstanding (diluted) | 9,747 | 9,814 | 9,821 | 9,803 | 9,517 | 9,867 | ||||||||||
Basic earnings per share | $ | 0.49 | $ | 0.37 | $ | 1.22 | $ | 0.38 | ||||||||
Diluted earnings per share | $ | 0.49 | $ | 0.37 | $ | 1.22 | $ | 0.38 | ||||||||
Basic earnings per share | $ | 0.32 | $ | 0.40 | |
Diluted earnings per share | $ | 0.32 | $ | 0.40 |
Comprehensive Income
Accounting principles generally accepted in the United States 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, are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Cash Flow Information
For purposes of the consolidated statements of cash flows, the Corporation considers interest bearing deposits with banks, cash and due from banks, and federal funds sold to be cash and cash equivalents.
Supplemental cash flow information is provided in the table below.
Nine months ended | Three months ended | |||||||||
September 30, | March 31, | |||||||||
(dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||
Cash paid during the period for: | ||||||||||
Income taxes | $ | 3,135 | $ | 3,557 | $ | 260 | $ | 0 | ||
Interest | $ | 7,629 | $ | 12,464 | $ | 1,265 | $ | 2,549 | ||
Noncash investing and financing activities: | ||||||||||
Transfer of loans to foreclosed real estate | $ | 0 | $ | 121 | ||||||
Transfer of premises and equipment to assets held for sale | $ | 2,715 | $ | 0 | ||||||
Initial recognition of operating lease right-of-use assets | $ | 18 | $ | 186 | $ | 2,061 | $ | 0 | ||
Initial recognition of operating lease liabilities | $ | 18 | $ | 186 | $ | 2,061 | $ | 0 | ||
Recent Accounting Pronouncements
Pronouncements Adopted in 2021
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The update is effective for fiscal years ending after December 15, 2020. The adoption of this standard did not have a material impact on its consolidated financial statements.
Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This standard adds a new Topic 326 which requires companies to measure and record impairment on financial instruments at the time of origination using the expected credit loss (CECL) model. The CECL model calculates impairment based on historical experience, current conditions, and reasonable and supportable forecasts, and reflects the organization’s current estimate of all expected credit losses over the contractual term of its financial assets. The new standard was delayed and is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation is working with a selected third-party vendor solution to assist with the application of ASU 2016-013 and finalizing the loss estimation models to be used. As the loss estimation models and data goverance documentation is finalized, a third party will be contracted to perform a model validation prior to adoption. While the Corporation anticipates the allowance for loan losses will increase under its current assumptions, it expects the provisionsimpact of adopting ASU No. 2016-132016-013 will be influenced by the composition, characteristics and quality of its loan and investment securities portfolios, as well as general economic conditions and forecasts at the adoption date.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (TDRs), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. ASU 2022-02 is not expected to have a material impact itson the Corporation’s consolidated financial statements, in particular, the level of the reserve for credit losses. The Corporation is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.statements.
Note 2 – Securities
A summary of securities available-for-sale at September 30, 2021March 31, 2022 and December 31, 20202021 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. Corporates include subordinated debt issued by domestic community banks. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At September 30, 2021, 82.9March 31, 2022, 80.5 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania. The portfolio was intentionally distributed to limit exposure with the largest issuer at $2.6$2.2 million. At September 30, 2021March 31, 2022 and December 31, 2020,2021, there were no holdings of securities of any one issuer, other than the US Government and its agencies, in an amount greater than 10% of shareholders’ equity.
Amortized | Gross Unrealized | Fair | Amortized | Gross Unrealized | Fair | |||||||||||||||||
(dollars in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||
September 30, 2021 | ||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||
U.S. agency | $ | 3,500 | $ | 0 | $ | (54) | $ | 3,446 | $ | 10,500 | $ | 0 | $ | (548) | $ | 9,952 | ||||||
U.S. agency mortgage-backed, residential | 162,010 | 2,873 | (901) | 163,982 | 235,672 | 314 | (12,803) | 223,183 | ||||||||||||||
State and municipal | 31,689 | 251 | (477) | 31,463 | 37,003 | 73 | (3,425) | 33,651 | ||||||||||||||
Corporates | 25,565 | 197 | (77) | 25,685 | 36,875 | 25 | (1,303) | 35,597 | ||||||||||||||
Total debt securities | $ | 222,764 | $ | 3,321 | $ | (1,509) | $ | 224,576 | $ | 320,050 | $ | 412 | $ | (18,079) | $ | 302,383 | ||||||
December 31, 2020 | ||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||
U.S. agency | $ | 40,000 | $ | 0 | $ | 0 | $ | 40,000 | $ | 3,500 | $ | 0 | $ | (104) | $ | 3,396 | ||||||
U.S. agency mortgage-backed, residential | 106,792 | 4,133 | (29) | 110,896 | 181,783 | 2,148 | (1,996) | 181,935 | ||||||||||||||
State and municipal | 24,014 | 311 | (25) | 24,300 | 36,319 | 250 | (413) | 36,156 | ||||||||||||||
Corporates | 9,681 | 139 | (14) | 9,806 | 32,891 | 166 | (259) | 32,798 | ||||||||||||||
Total debt securities | $ | 180,487 | $ | 4,583 | $ | (68) | $ | 185,002 | $ | 254,493 | $ | 2,564 | $ | (2,772) | $ | 254,285 | ||||||
The proceeds from sales of securities and the associated gains and losses are listed below. Realized gains and losses are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the income statement.
Three months ended | Nine months ended | Three months ended | ||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||
(dollars in thousands) | 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | ||||||||||
Proceeds | $ | 0 | $ | 0 | $ | 3,803 | $ | 21,679 | $ | 0 | $ | 3,803 | ||||
Gross gains | 0 | 0 | 24 | 124 | 0 | 24 | ||||||||||
Gross losses | 0 | 0 | (47) | (59) | 0 | (47) | ||||||||||
Tax benefit (provision) | 0 | 0 | 5 | (14) | ||||||||||||
Tax benefit | 0 | 5 | ||||||||||||||
The amortized cost and estimated fair value of debt securities at September 30, 2021March 31, 2022 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.
Available-for-sale | Available-for-sale | |||||||||
Amortized | Fair | Amortized | Fair | |||||||
(dollars in thousands) | Cost | Value | Cost | Value | ||||||
Due in one year or less | $ | 2,738 | $ | 2,761 | $ | 1,261 | $ | 1,263 | ||
Due after one year through five years | 100,016 | 101,986 | 96,982 | 93,512 | ||||||
Due after five years through ten years | 92,849 | 92,745 | 164,272 | 153,923 | ||||||
Due after ten years | 27,161 | 27,084 | 57,535 | 53,685 | ||||||
Total debt securities | $ | 222,764 | $ | 224,576 | $ | 320,050 | $ | 302,383 | ||
Investment securities having a carrying value of $179,426,000$198,338,000 and $170,313,000$184,938,000 on September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.
The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, at September 30, 2021March 31, 2022 and December 31, 2020.2021.
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | |||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. agency | 2 | $ | 3,446 | $ | (54) | 0 | $ | 0 | $ | 0 | 2 | $ | 3,446 | $ | (54) | 7 | $ | 8,178 | $ | (322) | 1 | $ | 1,774 | $ | (226) | 8 | $ | 9,952 | $ | (548) | |||||||||||||||||||||
U.S. agency mortgage-backed, residential | 44 | 81,872 | (901) | 0 | 0 | 0 | 44 | 81,872 | (901) | 131 | 181,519 | (10,694) | 10 | 19,417 | (2,109) | 141 | 200,936 | (12,803) | |||||||||||||||||||||||||||||||||
State and municipal | 24 | 22,479 | (477) | 0 | 0 | 0 | 24 | 22,479 | (477) | 27 | 17,694 | (1,829) | 10 | 11,383 | (1,596) | 37 | 29,077 | (3,425) | |||||||||||||||||||||||||||||||||
Corporates | 9 | 10,173 | (77) | 0 | 0 | 0 | 9 | 10,173 | (77) | 26 | 30,808 | (1,273) | 1 | 470 | (30) | 27 | 31,278 | (1,303) | |||||||||||||||||||||||||||||||||
Total temporarily impaired debt | |||||||||||||||||||||||||||||||||||||||||||||||||||
securities, available-for-sale | 79 | $ | 117,970 | $ | (1,509) | 0 | $ | 0 | $ | 0 | 79 | $ | 117,970 | $ | (1,509) | 191 | $ | 238,199 | $ | (14,118) | 22 | $ | 33,044 | $ | (3,961) | 213 | $ | 271,243 | $ | (18,079) | |||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. agency | 2 | $ | 40,000 | $ | 0 | 0 | $ | 0 | $ | 0 | 2 | $ | 40,000 | $ | 0 | 2 | $ | 3,396 | $ | (104) | 0 | $ | 0 | $ | 0 | 2 | $ | 3,396 | $ | (104) | |||||||||||||||||||||
U.S. agency mortgage-backed, residential | 8 | 8,706 | (29) | 0 | 0 | 0 | 8 | 8,706 | (29) | 62 | 112,395 | (1,665) | 5 | 12,373 | (331) | 67 | 124,768 | (1,996) | |||||||||||||||||||||||||||||||||
State and municipal | 4 | 3,808 | (25) | 0 | 0 | 0 | 4 | 3,808 | (25) | 22 | 20,481 | (355) | 2 | 2,749 | (58) | 24 | 23,230 | (413) | |||||||||||||||||||||||||||||||||
Corporates | 3 | 4,075 | (14) | 0 | 0 | 0 | 3 | 4,075 | (14) | 13 | 15,737 | (244) | 1 | 485 | (15) | 14 | 16,222 | (259) | |||||||||||||||||||||||||||||||||
Total temporarily impaired debt | |||||||||||||||||||||||||||||||||||||||||||||||||||
securities, available-for-sale | 17 | $ | 56,589 | $ | (68) | 0 | $ | 0 | $ | 0 | 17 | $ | 56,589 | $ | (68) | 99 | $ | 152,009 | $ | (2,368) | 8 | $ | 15,607 | $ | (404) | 107 | $ | 167,616 | $ | (2,772) | |||||||||||||||||||||
Securities available-for-sale are analyzed quarterly for possible other-than-temporary impairment. The analysis considers, among other factors: 1) whether the Corporation has the intent to sell its securities prior to market recovery or maturity; 2) whether it is more likely than not that the Corporation will be required to sell its securities prior to market recovery or maturity; 3) default rates/history by security type; 4) third-party securities ratings; 5) third-party guarantees; 6) subordination; 7) payment delinquencies; 8) nature of the issuer; and 9) current financial news.
The Corporation believes that unrealized losses at September 30, 2021March 31, 2022 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through September 30, 2021March 31, 2022 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.
Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of September 30, 2021March 31, 2022 and December 31, 2020,2021, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLBP”) and, to a lesser degree, Atlantic Community Bancshares, Inc. (“ACBI”), the parent company of Atlantic Community Bankers Bank (“ACBB”). Under the FHLBP’s Capital Plan member banks, including PeoplesBank, are required to maintain a minimum stock investment. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.
The FHLBP paid dividends during the periods ended September 30, 2021March 31, 2022 and 2020.2021. The FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of 5 percent of the member’s total capital stock outstanding or its excess capital stock outstanding.
Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to
the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes 0 impairment charge was necessary related to the restricted stock during the periods ended September 30, 2021March 31, 2022 and 2020.2021.
Note 4—Loans
Loan Portfolio Composition
The table below provides the composition of the loan portfolio at September 30, 2021March 31, 2022 and December 31, 2020.2021. The portfolio is comprised of 2 segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance.
Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations.
September 30, | % Total | December 31, | % Total | March 31, | % Total | December 31, | % Total | |||||||||||||||
(dollars in thousands) | 2021 | Loans | 2020 | Loans | 2022 | Loans | 2021 | Loans | ||||||||||||||
Builder & developer | $ | 147,940 | 9.7 | $ | 147,609 | 9.6 | $ | 155,832 | 10.2 | $ | 156,462 | 10.2 | ||||||||||
Commercial real estate investor | 297,020 | 19.5 | 236,924 | 15.3 | 330,601 | 21.6 | 322,887 | 21.1 | ||||||||||||||
Residential real estate investor | 229,374 | 15.0 | 238,458 | 15.4 | 229,760 | 15.0 | 227,017 | 14.8 | ||||||||||||||
Hotel/Motel | 81,222 | 5.3 | 79,421 | 5.2 | 70,010 | 4.6 | 70,254 | 4.6 | ||||||||||||||
Wholesale & retail | 80,535 | 5.3 | 108,425 | 7.0 | 76,122 | 5.0 | 76,340 | 5.0 | ||||||||||||||
Manufacturing | 76,442 | 5.0 | 79,142 | 5.1 | 84,424 | 5.5 | 72,720 | 4.8 | ||||||||||||||
Agriculture | 93,883 | 6.2 | 80,450 | 5.2 | 96,365 | 6.3 | 95,317 | 6.2 | ||||||||||||||
Service | 68,864 | 4.5 | 76,838 | 5.0 | 70,384 | 4.6 | 65,163 | 4.3 | ||||||||||||||
Other | 232,038 | 15.3 | 280,616 | 18.2 | 192,428 | 12.6 | 222,179 | 14.5 | ||||||||||||||
Total commercial related loans | 1,307,318 | 85.8 | 1,327,883 | 86.0 | 1,305,926 | 85.4 | 1,308,339 | 85.5 | ||||||||||||||
Residential mortgages | 101,406 | 6.7 | 95,751 | 6.2 | 106,302 | 7.0 | 103,741 | 6.8 | ||||||||||||||
Home equity | 92,909 | 6.1 | 96,711 | 6.3 | 93,859 | 6.1 | 94,842 | 6.2 | ||||||||||||||
Other | 22,744 | 1.4 | 24,244 | 1.5 | 22,409 | 1.5 | 22,829 | 1.5 | ||||||||||||||
Total consumer related loans | 217,059 | 14.2 | 216,706 | 14.0 | 222,570 | 14.6 | 221,412 | 14.5 | ||||||||||||||
Total loans | $ | 1,524,377 | 100.0 | $ | 1,544,589 | 100.0 | $ | 1,528,496 | 100.0 | $ | 1,529,751 | 100.0 | ||||||||||
Loan Risk Ratings
The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $500,000 may be scored using a third-party credit scoring software model for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior
management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Watch and Special Asset Committee,Committees, which includes senior management. The Committee,Committees, which typically meetsmeet at least quarterly, makesmake changes, as appropriate, to these risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value.ratings. In addition to review by the Committee,Committees, existing loans are monitored by the primary loan officer and loan review officer to determine if any changes, upward or downward, in risk ratings are appropriate. Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing loans, except to non-accrual status. Only the Committee, Executive ChairmanPresident/CEO or President/CEOCFO may approve a downgrade of a loan to non-accrual statusstatus. The Special Asset Committee or President/CEO may upgrade a loan that is criticized or classified.
The Corporation uses teneleven risk ratings to grade commercial loans. The first sevensix ratings are considered “pass” ratings. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current sound worth or paying capacity of the obligor, or of the collateral pledged. A “substandard” loan has a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to potential loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk-rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. The table below does not include
the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses.
The table below presents a summary of loan risk ratings by loan class at September 30, 2021March 31, 2022 and December 31, 2020.2021.
Special | Special | ||||||||||||||||||||||||||||
(dollars in thousands) | Pass | Mention | Substandard | Nonaccrual | Total | Pass | Mention | Substandard | Nonaccrual | Total | |||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||
Builder & developer | $ | 133,897 | $ | 6,129 | $ | 7,101 | $ | 813 | $ | 147,940 | $ | 143,088 | $ | 5,716 | $ | 6,222 | $ | 806 | $ | 155,832 | |||||||||
Commercial real estate investor | 290,225 | 5,569 | 1,050 | 176 | 297,020 | 325,943 | 920 | 1,029 | 2,709 | 330,601 | |||||||||||||||||||
Residential real estate investor | 222,577 | 3,321 | 682 | 2,794 | 229,374 | 228,262 | 941 | 394 | 163 | 229,760 | |||||||||||||||||||
Hotel/Motel | 50,838 | 522 | 17,551 | 12,311 | 81,222 | 53,058 | 0 | 4,877 | 12,075 | 70,010 | |||||||||||||||||||
Wholesale & retail | 77,971 | 1,390 | 1,174 | 0 | 80,535 | 73,691 | 335 | 2,096 | 0 | 76,122 | |||||||||||||||||||
Manufacturing | 69,452 | 0 | 53 | 6,937 | 76,442 | 75,112 | 0 | 4,573 | 4,739 | 84,424 | |||||||||||||||||||
Agriculture | 86,281 | 404 | 392 | 6,806 | 93,883 | 78,018 | 15,225 | 712 | 2,410 | 96,365 | |||||||||||||||||||
Service | 62,446 | 657 | 4,790 | 971 | 68,864 | 62,991 | 400 | 6,022 | 971 | 70,384 | |||||||||||||||||||
Other | 209,233 | 1,430 | 14,604 | 6,771 | 232,038 | 172,909 | 1,346 | 13,537 | 4,636 | 192,428 | |||||||||||||||||||
Total commercial related loans | 1,202,920 | 19,422 | 47,397 | 37,579 | 1,307,318 | 1,213,072 | 24,883 | 39,462 | 28,509 | 1,305,926 | |||||||||||||||||||
Residential mortgage | 101,331 | 0 | 10 | 65 | 101,406 | 104,350 | 0 | 772 | 1,180 | 106,302 | |||||||||||||||||||
Home equity | 92,324 | 48 | 0 | 537 | 92,909 | 93,400 | 0 | 0 | 459 | 93,859 | |||||||||||||||||||
Other | 22,576 | 0 | 0 | 168 | 22,744 | 22,318 | 0 | 0 | 91 | 22,409 | |||||||||||||||||||
Total consumer related loans | 216,231 | 48 | 10 | 770 | 217,059 | 220,068 | 0 | 772 | 1,730 | 222,570 | |||||||||||||||||||
Total loans | $ | 1,419,151 | $ | 19,470 | $ | 47,407 | $ | 38,349 | $ | 1,524,377 | $ | 1,433,140 | $ | 24,883 | $ | 40,234 | $ | 30,239 | $ | 1,528,496 | |||||||||
December 31, 2020 | |||||||||||||||||||||||||||||
December 31, 2021 | |||||||||||||||||||||||||||||
Builder & developer | $ | 133,804 | $ | 11,305 | $ | 2,121 | $ | 379 | $ | 147,609 | $ | 142,983 | $ | 6,016 | $ | 6,656 | $ | 807 | $ | 156,462 | |||||||||
Commercial real estate investor | 230,113 | 6,379 | 231 | 201 | 236,924 | 316,976 | 929 | 1,039 | 3,943 | 322,887 | |||||||||||||||||||
Residential real estate investor | 234,316 | 1,215 | 130 | 2,797 | 238,458 | 226,126 | 0 | 611 | 280 | 227,017 | |||||||||||||||||||
Hotel/Motel | 48,264 | 542 | 18,143 | 12,472 | 79,421 | 40,789 | 0 | 17,273 | 12,192 | 70,254 | |||||||||||||||||||
Wholesale & retail | 99,821 | 8,591 | 13 | 0 | 108,425 | 73,821 | 1,346 | 1,173 | 0 | 76,340 | |||||||||||||||||||
Manufacturing | 67,968 | 0 | 3,610 | 7,564 | 79,142 | 67,544 | 0 | 51 | 5,125 | 72,720 | |||||||||||||||||||
Agriculture | 72,829 | 416 | 3,776 | 3,429 | 80,450 | 90,226 | 80 | 714 | 4,297 | 95,317 | |||||||||||||||||||
Service | 75,618 | 249 | 0 | 971 | 76,838 | 57,667 | 404 | 6,121 | 971 | 65,163 | |||||||||||||||||||
Other | 256,040 | 1,481 | 13,804 | 9,291 | 280,616 | 201,226 | 1,384 | 14,197 | 5,372 | 222,179 | |||||||||||||||||||
Total commercial related loans | 1,218,773 | 30,178 | 41,828 | 37,104 | 1,327,883 | 1,217,358 | 10,159 | 47,835 | 32,987 | 1,308,339 | |||||||||||||||||||
Residential mortgage | 95,466 | 123 | 11 | 151 | 95,751 | 103,669 | 0 | 10 | 62 | 103,741 | |||||||||||||||||||
Home equity | 96,026 | 55 | 0 | 630 | 96,711 | 94,358 | 47 | 0 | 437 | 94,842 | |||||||||||||||||||
Other | 23,954 | 0 | 0 | 290 | 24,244 | 22,733 | 0 | 0 | 96 | 22,829 | |||||||||||||||||||
Total consumer related loans | 215,446 | 178 | 11 | 1,071 | 216,706 | 220,760 | 47 | 10 | 595 | 221,412 | |||||||||||||||||||
Total loans | $ | 1,434,219 | $ | 30,356 | $ | 41,839 | $ | 38,175 | $ | 1,544,589 | $ | 1,438,118 | $ | 10,206 | $ | 47,845 | $ | 33,582 | $ | 1,529,751 | |||||||||
Impaired Loans
The table below presents a summary of impaired loans at September 30, 2021March 31, 2022 and December 31, 2020,2021. Generally, impaired loans are all loans risk rated nonaccrual or classified troubled debt restructuring. An allowance is established for those individual loans that are commercial related where the Corporation has doubt as to the full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs.
With No Allowance | With A Related Allowance | Total | With No Allowance | With A Related Allowance | Total | |||||||||||||||||||||||||||||||||||
Recorded | Unpaid | Recorded | Unpaid | Related | Recorded | Unpaid | Recorded | Unpaid | Recorded | Unpaid | Related | Recorded | Unpaid | |||||||||||||||||||||||||||
(dollars in thousands) | Investment | Principal | Investment | Principal | Allowance | Investment | Principal | Investment | Principal | Investment | Principal | Allowance | Investment | Principal | ||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Builder & developer | $ | 1,000 | $ | 1,082 | $ | 0 | $ | 0 | $ | 0 | $ | 1,000 | $ | 1,082 | $ | 988 | $ | 1,075 | $ | 0 | $ | 0 | $ | 0 | $ | 988 | $ | 1,075 | ||||||||||||
Commercial real estate investor | 995 | 1,012 | 0 | 0 | 0 | 995 | 1,012 | 3,428 | 4,678 | 0 | 0 | 0 | 3,428 | 4,678 | ||||||||||||||||||||||||||
Residential real estate investor | 2,402 | 2,593 | 392 | 392 | 204 | 2,794 | 2,985 | 163 | 321 | 0 | 0 | 0 | 163 | 321 | ||||||||||||||||||||||||||
Hotel/Motel | 12,311 | 12,773 | 0 | 0 | 0 | 12,311 | 12,773 | 12,075 | 12,734 | 0 | 0 | 0 | 12,075 | 12,734 | ||||||||||||||||||||||||||
Wholesale & retail | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||
Manufacturing | 6,937 | 7,113 | 0 | 0 | 0 | 6,937 | 7,113 | 4,739 | 5,159 | 0 | 0 | 0 | 4,739 | 5,159 | ||||||||||||||||||||||||||
Agriculture | 5,746 | 5,966 | 1,060 | 1,174 | 502 | 6,806 | 7,140 | 2,410 | 2,834 | 0 | 0 | 0 | 2,410 | 2,834 | ||||||||||||||||||||||||||
Service | 0 | 0 | 971 | 976 | 377 | 971 | 976 | 0 | 0 | 971 | 1,061 | 377 | 971 | 1,061 | ||||||||||||||||||||||||||
Other commercial | 2,947 | 3,120 | 3,824 | 4,291 | 3,079 | 6,771 | 7,411 | 361 | 413 | 4,275 | 5,095 | 2,618 | 4,636 | 5,508 | ||||||||||||||||||||||||||
Total impaired commercial related loans | 32,338 | 33,659 | 6,247 | 6,833 | 4,162 | 38,585 | 40,492 | 24,164 | 27,214 | 5,246 | 6,156 | 2,995 | 29,410 | 33,370 | ||||||||||||||||||||||||||
Residential mortgage | 65 | 65 | 0 | 0 | 0 | 65 | 65 | 62 | 63 | 1,118 | 1,118 | 166 | 1,180 | 1,181 | ||||||||||||||||||||||||||
Home equity | 537 | 576 | 0 | 0 | 0 | 537 | 576 | 459 | 520 | 0 | 0 | 0 | 459 | 520 | ||||||||||||||||||||||||||
Other consumer | 168 | 188 | 0 | 0 | 0 | 168 | 188 | 91 | 101 | 0 | 0 | 0 | 91 | 101 | ||||||||||||||||||||||||||
Total impaired consumer related loans | 770 | 829 | 0 | 0 | 0 | 770 | 829 | 612 | 684 | 1,118 | 1,118 | 166 | 1,730 | 1,802 | ||||||||||||||||||||||||||
Total impaired loans | $ | 33,108 | $ | 34,488 | $ | 6,247 | $ | 6,833 | $ | 4,162 | $ | 39,355 | $ | 41,321 | $ | 24,776 | $ | 27,898 | $ | 6,364 | $ | 7,274 | $ | 3,161 | $ | 31,140 | $ | 35,172 | ||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Builder & developer | $ | 575 | $ | 790 | $ | 0 | $ | 0 | $ | 0 | $ | 575 | $ | 790 | $ | 991 | $ | 1,078 | $ | 0 | $ | 0 | $ | 0 | $ | 991 | $ | 1,078 | ||||||||||||
Commercial real estate investor | 1,163 | 1,170 | 0 | 0 | 0 | 1,163 | 1,170 | 2,834 | 2,854 | 1,878 | 1,878 | 1,464 | 4,712 | 4,732 | ||||||||||||||||||||||||||
Residential real estate investor | 581 | 862 | 2,216 | 2,216 | 216 | 2,797 | 3,078 | 280 | 438 | 0 | 0 | 0 | 280 | 438 | ||||||||||||||||||||||||||
Hotel/Motel | 12,472 | 12,472 | 0 | 0 | 0 | 12,472 | 12,472 | 12,192 | 12,754 | 0 | 0 | 0 | 12,192 | 12,754 | ||||||||||||||||||||||||||
Wholesale & retail | 237 | 237 | 0 | 0 | 0 | 237 | 237 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||
Manufacturing | 7,564 | 7,564 | 0 | 0 | 0 | 7,564 | 7,564 | 5,125 | 5,501 | 0 | 0 | 0 | 5,125 | 5,501 | ||||||||||||||||||||||||||
Agriculture | 2,270 | 2,382 | 1,159 | 1,217 | 615 | 3,429 | 3,599 | 2,709 | 2,893 | 1,588 | 1,784 | 467 | 4,297 | 4,677 | ||||||||||||||||||||||||||
Service | 971 | 1,061 | 0 | 0 | 0 | 971 | 1,061 | 0 | 0 | 971 | 1,061 | 377 | 971 | 1,061 | ||||||||||||||||||||||||||
Other commercial | 5,739 | 5,954 | 3,552 | 3,888 | 2,481 | 9,291 | 9,842 | 3,622 | 4,376 | 1,750 | 2,389 | 1,750 | 5,372 | 6,765 | ||||||||||||||||||||||||||
Total impaired commercial related loans | 31,572 | 32,492 | 6,927 | 7,321 | 3,312 | 38,499 | 39,813 | 27,753 | 29,894 | 6,187 | 7,112 | 4,058 | 33,940 | 37,006 | ||||||||||||||||||||||||||
Residential mortgage | 151 | 151 | 0 | 0 | 0 | 151 | 151 | 62 | 64 | 0 | 0 | 0 | 62 | 64 | ||||||||||||||||||||||||||
Home equity | 630 | 653 | 0 | 0 | 0 | 630 | 653 | 437 | 474 | 0 | 0 | 0 | 437 | 474 | ||||||||||||||||||||||||||
Other consumer | 290 | 301 | 0 | 0 | 0 | 290 | 301 | 96 | 104 | 0 | 0 | 0 | 96 | 104 | ||||||||||||||||||||||||||
Total impaired consumer related loans | 1,071 | 1,105 | 0 | 0 | 0 | 1,071 | 1,105 | 595 | 642 | 0 | 0 | 0 | 595 | 642 | ||||||||||||||||||||||||||
Total impaired loans | $ | 32,643 | $ | 33,597 | $ | 6,927 | $ | 7,321 | $ | 3,312 | $ | 39,570 | $ | 40,918 | $ | 28,348 | $ | 30,536 | $ | 6,187 | $ | 7,112 | $ | 4,058 | $ | 34,535 | $ | 37,648 | ||||||||||||
The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021. Interest income on loans with no related allowance is the result of interest collected on a cash basis, except accruing TDRs.
With No Related Allowance | With A Related Allowance | Total | With No Related Allowance | With A Related Allowance | Total | |||||||||||||||||||||||||||||||
Average | Total | Average | Total | Average | Total | Average | Total | Average | Total | Average | Total | |||||||||||||||||||||||||
Recorded | Interest | Recorded | Interest | Recorded | Interest | Recorded | Interest | Recorded | Interest | Recorded | Interest | |||||||||||||||||||||||||
(dollars in thousands) | Investment | Income | Investment | Income | Investment | Income | Investment | Income | Investment | Income | Investment | Income | ||||||||||||||||||||||||
Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||
Builder & developer | $ | 1,006 | $ | 0 | $ | 0 | $ | 0 | $ | 1,006 | $ | 0 | $ | 990 | $ | 0 | $ | 0 | $ | 0 | $ | 990 | $ | 0 | ||||||||||||
Commercial real estate investor | 1,024 | 11 | 0 | 0 | 1,024 | 11 | 3,131 | 0 | 939 | 0 | 4,070 | 0 | ||||||||||||||||||||||||
Residential real estate investor | 2,496 | 8 | 395 | 0 | 2,891 | 8 | 221 | 23 | 0 | 0 | 221 | 23 | ||||||||||||||||||||||||
Hotel/Motel | 12,550 | 0 | 0 | 0 | 12,550 | 0 | 12,134 | 0 | 0 | 0 | 12,134 | 0 | ||||||||||||||||||||||||
Wholesale & retail | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Manufacturing | 7,348 | 19 | 0 | 0 | 7,348 | 19 | 4,932 | 21 | 0 | 0 | 4,932 | 21 | ||||||||||||||||||||||||
Agriculture | 4,835 | 0 | 1,092 | 0 | 5,927 | 0 | 2,559 | 186 | 794 | 0 | 3,353 | 186 | ||||||||||||||||||||||||
Service | 486 | 0 | 485 | 0 | 971 | 0 | 0 | 0 | 971 | 0 | 971 | 0 | ||||||||||||||||||||||||
Other commercial | 3,612 | 0 | 4,128 | 61 | 7,740 | 61 | 1,992 | 115 | 3,012 | 0 | 5,004 | 115 | ||||||||||||||||||||||||
Total impaired commercial related loans | 33,357 | 38 | 6,100 | 61 | 39,457 | 99 | 25,959 | 345 | 5,716 | 0 | 31,675 | 345 | ||||||||||||||||||||||||
Residential mortgage | 33 | 0 | 0 | 0 | 33 | 0 | 63 | 0 | 559 | 0 | 622 | 0 | ||||||||||||||||||||||||
Home equity | 541 | 0 | 0 | 0 | 541 | 0 | 448 | 0 | 0 | 0 | 448 | 0 | ||||||||||||||||||||||||
Other consumer | 171 | 0 | 0 | 0 | 171 | 0 | 93 | 0 | 0 | 0 | 93 | 0 | ||||||||||||||||||||||||
Total impaired consumer related loans | 745 | 0 | 0 | 0 | 745 | 0 | 604 | 0 | 559 | 0 | 1,163 | 0 | ||||||||||||||||||||||||
Total impaired loans | $ | 34,102 | $ | 38 | $ | 6,100 | $ | 61 | $ | 40,202 | $ | 99 | $ | 26,563 | $ | 345 | $ | 6,275 | $ | 0 | $ | 32,838 | $ | 345 | ||||||||||||
Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||
Builder & developer | $ | 585 | $ | 9 | $ | 70 | $ | 0 | $ | 655 | $ | 9 | $ | 796 | $ | 0 | $ | 0 | $ | 0 | $ | 796 | $ | 0 | ||||||||||||
Commercial real estate investor | 1,244 | 16 | 0 | 0 | 1,244 | 16 | 1,136 | 11 | 0 | 0 | 1,136 | 11 | ||||||||||||||||||||||||
Residential real estate investor | 1,779 | 3 | 2,710 | 0 | 4,489 | 3 | 618 | 0 | 2,216 | 0 | 2,834 | 0 | ||||||||||||||||||||||||
Hotel/Motel | 0 | 0 | 0 | 0 | 0 | 0 | 12,461 | 0 | 0 | 0 | 12,461 | 0 | ||||||||||||||||||||||||
Wholesale & retail | 239 | 2 | 0 | 0 | 239 | 2 | 236 | 1 | 0 | 0 | 236 | 1 | ||||||||||||||||||||||||
Manufacturing | 0 | 0 | 0 | 0 | 0 | 0 | 7,651 | 0 | 0 | 0 | 7,651 | 0 | ||||||||||||||||||||||||
Agriculture | 2,337 | 37 | 1,200 | 0 | 3,537 | 37 | 2,147 | 37 | 1,119 | 0 | 3,266 | 37 | ||||||||||||||||||||||||
Service | 485 | 0 | 0 | 0 | 485 | 0 | 971 | 0 | 0 | 0 | 971 | 0 | ||||||||||||||||||||||||
Other commercial | 5,211 | 33 | 3,805 | 0 | 9,016 | 33 | 6,130 | 0 | 3,851 | 0 | 9,981 | 0 | ||||||||||||||||||||||||
Total impaired commercial related loans | 11,880 | 100 | 7,785 | 0 | 19,665 | 100 | 32,146 | 49 | 7,186 | 0 | 39,332 | 49 | ||||||||||||||||||||||||
Residential mortgage | 152 | 2 | 0 | 0 | 152 | 2 | 76 | 0 | 0 | 0 | 76 | 0 | ||||||||||||||||||||||||
Home equity | 614 | 5 | 0 | 0 | 614 | 5 | 643 | 0 | 0 | 0 | 643 | 0 | ||||||||||||||||||||||||
Other consumer | 206 | 2 | 0 | 0 | 206 | 2 | 274 | 3 | 0 | 0 | 274 | 3 | ||||||||||||||||||||||||
Total impaired consumer related loans | 972 | 9 | 0 | 0 | 972 | 9 | 993 | 3 | 0 | 0 | 993 | 3 | ||||||||||||||||||||||||
Total impaired loans | $ | 12,852 | $ | 109 | $ | 7,785 | $ | 0 | $ | 20,637 | $ | 109 | $ | 33,139 | $ | 52 | $ | 7,186 | $ | 0 | $ | 40,325 | $ | 52 | ||||||||||||
With No Related Allowance | With A Related Allowance | Total | ||||||||||||||||
Average | Total | Average | Total | Average | Total | |||||||||||||
Recorded | Interest | Recorded | Interest | Recorded | Interest | |||||||||||||
(dollars in thousands) | Investment | Income | Investment | Income | Investment | Income | ||||||||||||
Nine months ended September 30, 2021 | ||||||||||||||||||
Builder & developer | $ | 901 | $ | 0 | 0 | $ | 0 | $ | 901 | $ | 0 | |||||||
Commercial real estate investor | 1,080 | 34 | 0 | 0 | 1,080 | 34 | ||||||||||||
Residential real estate investor | 1,557 | 66 | 1,305 | 0 | 2,862 | 66 | ||||||||||||
Hotel/Motel | 12,506 | 0 | 0 | 0 | 12,506 | 0 | ||||||||||||
Wholesale & retail | 118 | 14 | 0 | 0 | 118 | 14 | ||||||||||||
Manufacturing | 7,500 | 19 | 0 | 0 | 7,500 | 19 | ||||||||||||
Agriculture | 3,491 | 37 | 1,105 | 0 | 4,596 | 37 | ||||||||||||
Service | 728 | 0 | 243 | 0 | 971 | 0 | ||||||||||||
Other commercial | 4,871 | 26 | 3,990 | 61 | 8,861 | 87 | ||||||||||||
Total impaired commercial related loans | 32,752 | 196 | 6,643 | 61 | 39,395 | 257 | ||||||||||||
Residential mortgage | 54 | 0 | 0 | 0 | 54 | 0 | ||||||||||||
Home equity | 592 | 0 | 0 | 0 | 592 | 0 | ||||||||||||
Other consumer | 222 | 7 | 0 | 0 | 222 | 7 | ||||||||||||
Total impaired consumer related loans | 868 | 7 | 0 | 0 | 868 | 7 | ||||||||||||
Total impaired loans | $ | 33,620 | $ | 203 | 6,643 | $ | 61 | $ | 40,263 | $ | 264 | |||||||
Nine months ended September 30, 2020 | ||||||||||||||||||
Builder & developer | $ | 771 | $ | 31 | $ | 189 | $ | 0 | $ | 960 | $ | 31 | ||||||
Commercial real estate investor | 1,296 | 56 | 0 | 0 | 1,296 | 56 | ||||||||||||
Residential real estate investor | 1,311 | 22 | 3,865 | 0 | 5,176 | 22 | ||||||||||||
Hotel/Motel | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||
Wholesale & retail | 255 | 5 | 3,564 | 0 | 3,819 | 5 | ||||||||||||
Manufacturing | 6 | 3 | 537 | 0 | 543 | 3 | ||||||||||||
Agriculture | 2,217 | 95 | 1,106 | 0 | 3,323 | 95 | ||||||||||||
Service | 900 | 1 | 0 | 0 | 900 | 1 | ||||||||||||
Other commercial | 3,357 | 70 | 3,719 | 0 | 7,076 | 70 | ||||||||||||
Total impaired commercial related loans | 10,113 | 283 | 12,980 | 0 | 23,093 | 283 | ||||||||||||
Residential mortgage | 183 | 5 | 0 | 0 | 183 | 5 | ||||||||||||
Home equity | 643 | 42 | 0 | 0 | 643 | 42 | ||||||||||||
Other consumer | 215 | 9 | 0 | 0 | 215 | 9 | ||||||||||||
Total impaired consumer related loans | 1,041 | 56 | 0 | 0 | 1,041 | 56 | ||||||||||||
Total impaired loans | $ | 11,154 | $ | 339 | $ | 12,980 | $ | 0 | $ | 24,134 | $ | 339 | ||||||
Past Due and Nonaccrual
The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at September 30, 2021March 31, 2022 and December 31, 2020.2021.
≥ 90 Days | ≥ 90 Days | |||||||||||||||||||||||||||||||||||||||
30-59 | 60-89 | Past Due | Total Past | 30-59 | 60-89 | Past Due | Total Past | |||||||||||||||||||||||||||||||||
Days | Days | and | Due and | Total | Days | Days | and | Due and | Total | |||||||||||||||||||||||||||||||
(dollars in thousands) | Past Due | Past Due | Accruing | Nonaccrual | Nonaccrual | Current | Loans | Past Due | Past Due | Accruing | Nonaccrual | Nonaccrual | Current | Loans | ||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Builder & developer | $ | 575 | $ | 0 | $ | 0 | $ | 813 | $ | 1,388 | $ | 146,552 | $ | 147,940 | $ | 0 | $ | 0 | $ | 0 | $ | 806 | $ | 806 | $ | 155,026 | $ | 155,832 | ||||||||||||
Commercial real estate investor | 2,130 | 818 | 0 | 176 | 3,124 | 293,896 | 297,020 | 0 | 0 | 0 | 2,709 | 2,709 | 327,892 | 330,601 | ||||||||||||||||||||||||||
Residential real estate investor | 0 | 0 | 3,599 | 2,794 | 6,393 | 222,981 | 229,374 | 157 | 0 | 0 | 163 | 320 | 229,440 | 229,760 | ||||||||||||||||||||||||||
Hotel/Motel | 0 | 0 | 0 | 12,311 | 12,311 | 68,911 | 81,222 | 0 | 0 | 0 | 12,075 | 12,075 | 57,935 | 70,010 | ||||||||||||||||||||||||||
Wholesale & retail | 76 | 0 | 0 | 0 | 76 | 80,459 | 80,535 | 0 | 0 | 0 | 0 | 0 | 76,122 | 76,122 | ||||||||||||||||||||||||||
Manufacturing | 0 | 0 | 0 | 6,937 | 6,937 | 69,505 | 76,442 | 0 | 0 | 0 | 4,739 | 4,739 | 79,685 | 84,424 | ||||||||||||||||||||||||||
Agriculture | 0 | 0 | 0 | 6,806 | 6,806 | 87,077 | 93,883 | 0 | 0 | 324 | 2,410 | 2,734 | 93,631 | 96,365 | ||||||||||||||||||||||||||
Service | 249 | 0 | 0 | 971 | 1,220 | 67,644 | 68,864 | 0 | 1,185 | 0 | 971 | 2,156 | 68,228 | 70,384 | ||||||||||||||||||||||||||
Other | 1,098 | 0 | 0 | 6,771 | 7,869 | 224,169 | 232,038 | 1,479 | 0 | 0 | 4,636 | 6,115 | 186,313 | 192,428 | ||||||||||||||||||||||||||
Total commercial related loans | 4,128 | 818 | 3,599 | 37,579 | 46,124 | 1,261,194 | 1,307,318 | 1,636 | 1,185 | 324 | 28,509 | 31,654 | 1,274,272 | 1,305,926 | ||||||||||||||||||||||||||
Residential mortgage | 0 | 0 | 0 | 65 | 65 | 101,341 | 101,406 | 683 | 228 | 0 | 1,180 | 2,091 | 104,211 | 106,302 | ||||||||||||||||||||||||||
Home equity | 76 | 0 | 0 | 537 | 613 | 92,296 | 92,909 | 190 | 0 | 0 | 459 | 649 | 93,210 | 93,859 | ||||||||||||||||||||||||||
Other | 892 | 2,570 | 19 | 168 | 3,649 | 19,095 | 22,744 | 3,213 | 0 | 0 | 91 | 3,304 | 19,105 | 22,409 | ||||||||||||||||||||||||||
Total consumer related loans | 968 | 2,570 | 19 | 770 | 4,327 | 212,732 | 217,059 | 4,086 | 228 | 0 | 1,730 | 6,044 | 216,526 | 222,570 | ||||||||||||||||||||||||||
Total loans | $ | 5,096 | $ | 3,388 | $ | 3,618 | $ | 38,349 | $ | 50,451 | $ | 1,473,926 | $ | 1,524,377 | $ | 5,722 | $ | 1,413 | $ | 324 | $ | 30,239 | $ | 37,698 | $ | 1,490,798 | $ | 1,528,496 | ||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Builder & developer | $ | 427 | $ | 489 | $ | 322 | $ | 379 | $ | 1,617 | $ | 145,992 | $ | 147,609 | $ | 0 | $ | 0 | $ | 0 | $ | 807 | $ | 807 | $ | 155,655 | $ | 156,462 | ||||||||||||
Commercial real estate investor | 0 | 0 | 0 | 201 | 201 | 236,723 | 236,924 | 0 | 812 | 0 | 3,943 | 4,755 | 318,132 | 322,887 | ||||||||||||||||||||||||||
Residential real estate investor | 136 | 0 | 0 | 2,797 | 2,933 | 235,525 | 238,458 | 0 | 0 | 0 | 280 | 280 | 226,737 | 227,017 | ||||||||||||||||||||||||||
Hotel/Motel | 0 | 0 | 0 | 12,472 | 12,472 | 66,949 | 79,421 | 0 | 0 | 0 | 12,192 | 12,192 | 58,062 | 70,254 | ||||||||||||||||||||||||||
Wholesale & retail | 29 | 0 | 0 | 0 | 29 | 108,396 | 108,425 | 0 | 183 | 0 | 0 | 183 | 76,157 | 76,340 | ||||||||||||||||||||||||||
Manufacturing | 0 | 0 | 0 | 7,564 | 7,564 | 71,578 | 79,142 | 0 | 0 | 0 | 5,125 | 5,125 | 67,595 | 72,720 | ||||||||||||||||||||||||||
Agriculture | 0 | 0 | 0 | 3,429 | 3,429 | 77,021 | 80,450 | 0 | 0 | 324 | 4,297 | 4,621 | 90,696 | 95,317 | ||||||||||||||||||||||||||
Service | 0 | 709 | 0 | 971 | 1,680 | 75,158 | 76,838 | 0 | 0 | 0 | 971 | 971 | 64,192 | 65,163 | ||||||||||||||||||||||||||
Other | 679 | 887 | 0 | 9,291 | 10,857 | 269,759 | 280,616 | 9 | 34 | 0 | 5,372 | 5,415 | 216,764 | 222,179 | ||||||||||||||||||||||||||
Total commercial related loans | 1,271 | 2,085 | 322 | 37,104 | 40,782 | 1,287,101 | 1,327,883 | 9 | 1,029 | 324 | 32,987 | 34,349 | 1,273,990 | 1,308,339 | ||||||||||||||||||||||||||
Residential mortgage | 0 | 0 | 937 | 151 | 1,088 | 94,663 | 95,751 | 0 | 308 | 0 | 62 | 370 | 103,371 | 103,741 | ||||||||||||||||||||||||||
Home equity | 206 | 177 | 36 | 630 | 1,049 | 95,662 | 96,711 | 193 | 0 | 0 | 437 | 630 | 94,212 | 94,842 | ||||||||||||||||||||||||||
Other | 717 | 321 | 0 | 290 | 1,328 | 22,916 | 24,244 | 5,869 | 132 | 0 | 96 | 6,097 | 16,732 | 22,829 | ||||||||||||||||||||||||||
Total consumer related loans | 923 | 498 | 973 | 1,071 | 3,465 | 213,241 | 216,706 | 6,062 | 440 | 0 | 595 | 7,097 | 214,315 | 221,412 | ||||||||||||||||||||||||||
Total loans | $ | 2,194 | $ | 2,583 | $ | 1,295 | $ | 38,175 | $ | 44,247 | $ | 1,500,342 | $ | 1,544,589 | $ | 6,071 | $ | 1,469 | $ | 324 | $ | 33,582 | $ | 41,446 | $ | 1,488,305 | $ | 1,529,751 | ||||||||||||
Troubled Debt Restructurings
Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. The principal balance of outstanding TDRs was $1,006,000$15,954,000 at September 30, 2021March 31, 2022 and $1,395,000$954,000 at December 31, 2020.2021. There were 0 allowanceswas a $1,901,000 allowance allocated to any TDRs at September 30, 2021 orMarch 31, 2022 and none at December 31, 2020.2021. There are no commitments to lend to existing TDRs. A TDR is considered to be in payment default once it is contractually past due pursuant to the terms of the loan documents. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR
represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if
principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and with respect to which management believes that future loan payments are reasonably assured under the modified terms.
As of September 30, 2021,March 31, 2022, there are 0 modifications for consumer loans, 21 mortgage loansloan totaling approximately $1,163,000$641,000 and 5 commercial loans totaling approximately $40,000,000$33,527,000 under the CARES Act, which are not considered TDRs. As of March 31, 2021, there were 0 modifications for consumer loans, 5 mortage loans totaling approximately $2,060,000 and 38 commercial loans totaling approximately $86,091,000 under the CARES Act, which are not considered TDRs.
There were 0The below table shows loans whose terms have been modified under TDRs during the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021. TDR concessions include maturity extensions, below market interest rates relative to new debt with similar risk and interest or principal forgiveness. NaN commercial relationship included principal forgiveness of $1,329,000, which was recognized in the prior period, in accordance with a bankruptcy court order. NaN of the loans modified in March 2022 is not performing under their modified terms. There were 0 defaults for the three and nine months ended September 30,March 31, 2022 and March 31, 2021 and September 30, 2020 for TDRs entered into during the previous 12 month period.
TDR Modifications | ||||||||||
Pre-Modification | Post-Modification | |||||||||
Number | Outstanding | Outstanding | Recorded | |||||||
of | Recorded | Recorded | Investment | |||||||
(dollars in thousands) | Contracts | Investments | Investments | at Period End | ||||||
Three months ended: | ||||||||||
March 31, 2022 | ||||||||||
Commercial related loans nonaccrual | 2 | $ | 15,093 | $ | 13,764 | $ | 12,014 | |||
Consumer related loans accruing | 1 | $ | 134 | $ | 134 | $ | 133 | |||
Consumer related loans nonaccrual | 1 | $ | 1,053 | $ | 1,118 | $ | 952 | |||
March 31, 2021 | ||||||||||
NaN | ||||||||||
NOTE 5 – Allowance for Loan Losses
The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021.
Allowance for Loan Losses | Allowance for Loan Losses | |||||||||||||||||||||||||||
July 1, 2021 | September 30, 2021 | January 1, 2022 | March 31, 2022 | |||||||||||||||||||||||||
(dollars in thousands) | Balance | Charge-offs | Recoveries | Provision | Balance | Balance | Charge-offs | Recoveries | Provision | Balance | ||||||||||||||||||
Builder & developer | $ | 2,218 | $ | 0 | $ | 0 | $ | (85) | $ | 2,133 | $ | 2,408 | $ | 0 | $ | 0 | $ | (133) | $ | 2,275 | ||||||||
Commercial real estate investor | 3,492 | 0 | 0 | 246 | 3,738 | 5,647 | (1,227) | 0 | 662 | 5,082 | ||||||||||||||||||
Residential real estate investor | 3,828 | (17) | 4 | (36) | 3,779 | 3,493 | 0 | 6 | (297) | 3,202 | ||||||||||||||||||
Hotel/Motel | 1,309 | 0 | 0 | (67) | 1,242 | 968 | 0 | 0 | (403) | 565 | ||||||||||||||||||
Wholesale & retail | 2,015 | 0 | 0 | 35 | 2,050 | 1,989 | 0 | 0 | (6) | 1,983 | ||||||||||||||||||
Manufacturing | 790 | 0 | 0 | 96 | 886 | 883 | 0 | 0 | 116 | 999 | ||||||||||||||||||
Agriculture | 1,440 | 0 | 0 | (135) | 1,305 | 1,307 | (535) | 0 | 433 | 1,205 | ||||||||||||||||||
Service | 750 | 0 | 0 | 378 | 1,128 | 981 | 0 | 0 | (5) | 976 | ||||||||||||||||||
Other commercial | 5,544 | (19) | 3 | (131) | 5,397 | 4,656 | (3) | 19 | 440 | 5,112 | ||||||||||||||||||
Total commercial related loans | 21,386 | (36) | 7 | 301 | 21,658 | 22,332 | (1,765) | 25 | 807 | 21,399 | ||||||||||||||||||
Residential mortgage | 265 | 0 | 0 | 16 | 281 | 186 | 0 | 0 | 177 | 363 | ||||||||||||||||||
Home equity | 273 | 0 | 0 | 5 | 278 | 191 | (45) | 1 | 43 | 190 | ||||||||||||||||||
Other consumer | 87 | (2) | 7 | 3 | 95 | 74 | (2) | 4 | (3) | 73 | ||||||||||||||||||
Total consumer related loans | 625 | (2) | 7 | 24 | 654 | 451 | (47) | 5 | 217 | 626 | ||||||||||||||||||
Unallocated | 0 | 0 | 0 | 24 | 24 | (1) | 0 | 0 | 3 | 2 | ||||||||||||||||||
Total | $ | 22,011 | $ | (38) | $ | 14 | $ | 349 | $ | 22,336 | $ | 22,782 | $ | (1,812) | $ | 30 | $ | 1,027 | $ | 22,027 | ||||||||
Allowance for Loan Losses | ||||||||||||||
January 1, 2021 | March 31, 2021 | |||||||||||||
(dollars in thousands) | Balance | Charge-offs | Recoveries | Provision | Balance | |||||||||
Builder & developer | $ | 2,034 | $ | 0 | $ | 0 | $ | 32 | $ | 2,066 | ||||
Commercial real estate investor | 3,177 | 0 | 0 | 233 | 3,410 | |||||||||
Residential real estate investor | 3,944 | (50) | 4 | 111 | 4,009 | |||||||||
Hotel/Motel | 1,440 | 0 | 0 | 208 | 1,648 | |||||||||
Wholesale & retail | 2,416 | 0 | 0 | (305) | 2,111 | |||||||||
Manufacturing | 840 | 0 | 0 | (65) | 775 | |||||||||
Agriculture | 1,288 | 0 | 0 | 163 | 1,451 | |||||||||
Service | 457 | 0 | 0 | 281 | 738 | |||||||||
Other commercial | 5,002 | (42) | 1 | 603 | 5,564 | |||||||||
Total commercial related loans | 20,598 | (92) | 5 | 1,261 | 21,772 | |||||||||
Residential mortgage | 256 | 0 | 0 | 0 | 256 | |||||||||
Home equity | 287 | (5) | 2 | (2) | 282 | |||||||||
Other consumer | 101 | (7) | 13 | (9) | 98 | |||||||||
Total consumer related loans | 644 | (12) | 15 | (11) | 636 | |||||||||
Unallocated | 22 | 0 | 0 | (19) | 3 | |||||||||
Total | $ | 21,264 | $ | (104) | $ | 20 | $ | 1,231 | $ | 22,411 | ||||
Allowance for Loan Losses | ||||||||||||||
July 1, 2020 | September 30, 2020 | |||||||||||||
(dollars in thousands) | Balance | Charge-offs | Recoveries | Provision | Balance | |||||||||
Builder & developer | $ | 2,376 | $ | 0 | $ | 0 | $ | (254) | $ | 2,122 | ||||
Commercial real estate investor | 2,732 | 0 | 0 | (56) | 2,676 | |||||||||
Residential real estate investor | 4,767 | (1,641) | 3 | 807 | 3,936 | |||||||||
Hotel/Motel | 1,530 | 0 | 0 | 6 | 1,536 | |||||||||
Wholesale & retail | 2,398 | 0 | 0 | 21 | 2,419 | |||||||||
Manufacturing | 901 | 0 | 0 | 29 | 930 | |||||||||
Agriculture | 1,112 | 0 | 0 | 38 | 1,150 | |||||||||
Service | 403 | 0 | 0 | 23 | 426 | |||||||||
Other commercial | 4,207 | (367) | 0 | 1,270 | 5,110 | |||||||||
Total commercial related loans | 20,426 | (2,008) | 3 | 1,884 | 20,305 | |||||||||
Residential mortgage | 229 | 0 | 0 | 19 | 248 | |||||||||
Home equity | 297 | (59) | 0 | 56 | 294 | |||||||||
Other consumer | 94 | (2) | 7 | (3) | 96 | |||||||||
Total consumer related loans | 620 | (61) | 7 | 72 | 638 | |||||||||
Unallocated | (8) | 0 | 0 | (26) | (34) | |||||||||
Total | $ | 21,038 | $ | (2,069) | $ | 10 | $ | 1,930 | $ | 20,909 | ||||
Allowance for Loan Losses | ||||||||||||||
January 1, 2021 | September 30, 2021 | |||||||||||||
(dollars in thousands) | Balance | Charge-offs | Recoveries | Provision | Balance | |||||||||
Builder & developer | $ | 2,034 | $ | 0 | $ | 0 | $ | 99 | $ | 2,133 | ||||
Commercial real estate investor | 3,177 | 0 | 0 | 561 | 3,738 | |||||||||
Residential real estate investor | 3,944 | (233) | 51 | 17 | 3,779 | |||||||||
Hotel/Motel | 1,440 | 0 | 0 | (198) | 1,242 | |||||||||
Wholesale & retail | 2,416 | 0 | 0 | (366) | 2,050 | |||||||||
Manufacturing | 840 | 0 | 0 | 46 | 886 | |||||||||
Agriculture | 1,288 | 0 | 0 | 17 | 1,305 | |||||||||
Service | 457 | 0 | 0 | 671 | 1,128 | |||||||||
Other commercial | 5,002 | (709) | 26 | 1,078 | 5,397 | |||||||||
Total commercial related loans | 20,598 | (942) | 77 | 1,925 | 21,658 | |||||||||
Residential mortgage | 256 | 0 | 0 | 25 | 281 | |||||||||
Home equity | 287 | (5) | 2 | (6) | 278 | |||||||||
Other consumer | 101 | (16) | 24 | (14) | 95 | |||||||||
Total consumer related loans | 644 | (21) | 26 | 5 | 654 | |||||||||
Unallocated | 22 | 0 | 0 | 2 | 24 | |||||||||
Total | $ | 21,264 | $ | (963) | $ | 103 | $ | 1,932 | $ | 22,336 | ||||
Allowance for Loan Losses | ||||||||||||||
January 1, 2020 | September 30, 2020 | |||||||||||||
(dollars in thousands) | Balance | Charge-offs | Recoveries | Provision | Balance | |||||||||
Builder & developer | $ | 2,263 | $ | (844) | $ | 0 | $ | 703 | $ | 2,122 | ||||
Commercial real estate investor | 2,565 | 0 | 0 | 111 | 2,676 | |||||||||
Residential real estate investor | 4,632 | (1,641) | 9 | 936 | 3,936 | |||||||||
Hotel/Motel | 742 | 0 | 0 | 794 | 1,536 | |||||||||
Wholesale & retail | 3,575 | (3,116) | 7 | 1,953 | 2,419 | |||||||||
Manufacturing | 1,252 | (392) | 0 | 70 | 930 | |||||||||
Agriculture | 1,304 | 0 | 0 | (154) | 1,150 | |||||||||
Service | 367 | (73) | 0 | 132 | 426 | |||||||||
Other commercial | 3,837 | (7,984) | 0 | 9,257 | 5,110 | |||||||||
Total commercial related loans | 20,537 | (14,050) | 16 | 13,802 | 20,305 | |||||||||
Residential mortgage | 158 | 0 | 0 | 90 | 248 | |||||||||
Home equity | 203 | (59) | 0 | 150 | 294 | |||||||||
Other consumer | 167 | (13) | 34 | (92) | 96 | |||||||||
Total consumer related loans | 528 | (72) | 34 | 148 | 638 | |||||||||
Unallocated | 1 | 0 | 0 | (35) | (34) | |||||||||
Total | $ | 21,066 | $ | (14,122) | $ | 50 | $ | 13,915 | $ | 20,909 | ||||
The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for September 30, 2021March 31, 2022 and December 31, 2020.2021.
Allowance for Loan Losses | Loans | Allowance for Loan Losses | Loans | |||||||||||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||
Evaluated For | Evaluated For | Evaluated For | Evaluated For | Evaluated For | Evaluated For | Evaluated For | Evaluated For | |||||||||||||||||||||||||||
(dollars in thousands) | Impairment | Impairment | Balance | Impairment | Impairment | Balance | Impairment | Impairment | Balance | Impairment | Impairment | Balance | ||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||
Builder & developer | $ | 0 | $ | 2,133 | $ | 2,133 | $ | 1,000 | $ | 146,940 | $ | 147,940 | $ | 0 | $ | 2,275 | $ | 2,275 | $ | 988 | $ | 154,844 | $ | 155,832 | ||||||||||
Commercial real estate investor | 0 | 3,738 | 3,738 | 995 | 296,025 | 297,020 | 0 | 5,082 | 5,082 | 3,428 | 327,173 | 330,601 | ||||||||||||||||||||||
Residential real estate investor | 204 | 3,575 | 3,779 | 2,794 | 226,580 | 229,374 | 0 | 3,202 | 3,202 | 163 | 229,597 | 229,760 | ||||||||||||||||||||||
Hotel/Motel | 0 | 1,242 | 1,242 | 12,311 | 68,911 | 81,222 | 0 | 565 | 565 | 12,075 | 57,935 | 70,010 | ||||||||||||||||||||||
Wholesale & retail | 0 | 2,050 | 2,050 | 0 | 80,535 | 80,535 | 0 | 1,983 | 1,983 | 0 | 76,122 | 76,122 | ||||||||||||||||||||||
Manufacturing | 0 | 886 | 886 | 6,937 | 69,505 | 76,442 | 0 | 999 | 999 | 4,739 | 79,685 | 84,424 | ||||||||||||||||||||||
Agriculture | 502 | 803 | 1,305 | 6,806 | 87,077 | 93,883 | 0 | 1,205 | 1,205 | 2,410 | 93,955 | 96,365 | ||||||||||||||||||||||
Service | 377 | 751 | 1,128 | 971 | 67,893 | 68,864 | 377 | 599 | 976 | 971 | 69,413 | 70,384 | ||||||||||||||||||||||
Other commercial | 3,079 | 2,318 | 5,397 | 6,771 | 225,267 | 232,038 | 2,618 | 2,494 | 5,112 | 4,636 | 187,792 | 192,428 | ||||||||||||||||||||||
Total commercial related | 4,162 | 17,496 | 21,658 | 38,585 | 1,268,733 | 1,307,318 | 2,995 | 18,404 | 21,399 | 29,410 | 1,276,516 | 1,305,926 | ||||||||||||||||||||||
Residential mortgage | 0 | 281 | 281 | 65 | 101,341 | 101,406 | 166 | 197 | 363 | 1,180 | 105,122 | 106,302 | ||||||||||||||||||||||
Home equity | 0 | 278 | 278 | 537 | 92,372 | 92,909 | 0 | 190 | 190 | 459 | 93,400 | 93,859 | ||||||||||||||||||||||
Other consumer | 0 | 95 | 95 | 168 | 22,576 | 22,744 | 0 | 73 | 73 | 91 | 22,318 | 22,409 | ||||||||||||||||||||||
Total consumer related | 0 | 654 | 654 | 770 | 216,289 | 217,059 | 166 | 460 | 626 | 1,730 | 220,840 | 222,570 | ||||||||||||||||||||||
Unallocated | 0 | 24 | 24 | 0 | 0 | 0 | 0 | 2 | 2 | 0 | 0 | 0 | ||||||||||||||||||||||
Total | $ | 4,162 | $ | 18,174 | $ | 22,336 | $ | 39,355 | $ | 1,485,022 | $ | 1,524,377 | $ | 3,161 | $ | 18,866 | $ | 22,027 | $ | 31,140 | $ | 1,497,356 | $ | 1,528,496 | ||||||||||
December 31, 2021 | |||||||||||||||||
Builder & developer | $ | 0 | $ | 2,408 | $ | 2,408 | $ | 991 | $ | 155,471 | $ | 156,462 | |||||
Commercial real estate investor | 1,464 | 4,183 | 5,647 | 4,712 | 318,175 | 322,887 | |||||||||||
Residential real estate investor | 0 | 3,493 | 3,493 | 280 | 226,737 | 227,017 | |||||||||||
Hotel/Motel | 0 | 968 | 968 | 12,192 | 58,062 | 70,254 | |||||||||||
Wholesale & retail | 0 | 1,989 | 1,989 | 0 | 76,340 | 76,340 | |||||||||||
Manufacturing | 0 | 883 | 883 | 5,125 | 67,595 | 72,720 | |||||||||||
Agriculture | 467 | 840 | 1,307 | 4,297 | 91,020 | 95,317 | |||||||||||
Service | 377 | 604 | 981 | 971 | 64,192 | 65,163 | |||||||||||
Other commercial | 1,750 | 2,906 | 4,656 | 5,372 | 216,807 | 222,179 | |||||||||||
Total commercial related | 4,058 | 18,274 | 22,332 | 33,940 | 1,274,399 | 1,308,339 | |||||||||||
Residential mortgage | 0 | 186 | 186 | 62 | 103,679 | 103,741 | |||||||||||
Home equity | 0 | 191 | 191 | 437 | 94,405 | 94,842 | |||||||||||
Other consumer | 0 | 74 | 74 | 96 | 22,733 | 22,829 | |||||||||||
Total consumer related | 0 | 451 | 451 | 595 | 220,817 | 221,412 | |||||||||||
Unallocated | 0 | (1) | (1) | 0 | 0 | 0 | |||||||||||
Total | $ | 4,058 | $ | 18,724 | $ | 22,782 | $ | 34,535 | $ | 1,495,216 | $ | 1,529,751 |
December 31, 2020 | |||||||||||||||||
Builder & developer | $ | 0 | $ | 2,034 | $ | 2,034 | $ | 575 | $ | 147,034 | $ | 147,609 | |||||
Commercial real estate investor | 0 | 3,177 | 3,177 | 1,163 | 235,761 | 236,924 | |||||||||||
Residential real estate investor | 216 | 3,728 | 3,944 | 2,797 | 235,661 | 238,458 | |||||||||||
Hotel/Motel | 0 | 1,440 | 1,440 | 12,472 | 66,949 | 79,421 | |||||||||||
Wholesale & retail | 0 | 2,416 | 2,416 | 237 | 108,188 | 108,425 | |||||||||||
Manufacturing | 0 | 840 | 840 | 7,564 | 71,578 | 79,142 | |||||||||||
Agriculture | 615 | 673 | 1,288 | 3,429 | 77,021 | 80,450 | |||||||||||
Service | 0 | 457 | 457 | 971 | 75,867 | 76,838 | |||||||||||
Other commercial | 2,481 | 2,521 | 5,002 | 9,291 | 271,325 | 280,616 | |||||||||||
Total commercial related | 3,312 | 17,286 | 20,598 | 38,499 | 1,289,384 | 1,327,883 | |||||||||||
Residential mortgage | 0 | 256 | 256 | 151 | 95,600 | 95,751 | |||||||||||
Home equity | 0 | 287 | 287 | 630 | 96,081 | 96,711 | |||||||||||
Other consumer | 0 | 101 | 101 | 290 | 23,954 | 24,244 | |||||||||||
Total consumer related | 0 | 644 | 644 | 1,071 | 215,635 | 216,706 | |||||||||||
Unallocated | 0 | 22 | 22 | 0 | 0 | 0 | |||||||||||
Total | $ | 3,312 | $ | 17,952 | $ | 21,264 | $ | 39,570 | $ | 1,505,019 | $ | 1,544,589 |
The composition of deposits as of September 30, 2021March 31, 2022 and December 31, 20202021 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $46,000$59,000 at September 30, 2021,March 31, 2022, compared to $55,000 at December 31, 2020.2021.
September 30, | December 31, | March 31, | December 31, | |||||||
(dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||
Noninterest bearing demand | $ | 460,876 | $ | 396,947 | $ | 508,396 | $ | 524,609 | ||
Interest bearing demand | 254,054 | 224,764 | 264,049 | 261,945 | ||||||
Money market | 701,769 | 598,398 | 726,245 | 744,224 | ||||||
Savings | 143,435 | 111,143 | 163,005 | 151,272 | ||||||
Time deposits less than $100 | 262,536 | 283,910 | 235,593 | 247,398 | ||||||
Time deposits $100 to $250 | 160,391 | 180,674 | 138,794 | 151,377 | ||||||
Time deposits $250 or more | 66,299 | 67,703 | 59,790 | 62,940 | ||||||
Total deposits | $ | 2,049,360 | $ | 1,863,539 | $ | 2,095,872 | $ | 2,143,765 | ||
Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At September 30, 2021,March 31, 2022, the balance of securities sold under agreements to repurchase was $12,300,000$10,778,000 compared to $8,540,000$10,761,000 at December 31, 2020.2021. At September 30, 2021March 31, 2022 and December 31, 2020,2021, there were 0 other short-term borrowings.
The following table presents a summary of long-term debt as of September 30, 2021March 31, 2022 and December 31, 2020.2021. PeoplesBank’s long-term debt obligations to the FHLBP are fixed rate instruments. Under terms of a blanket collateral agreement with the FHLBP, the obligations are secured by FHLBP stock and PeoplesBank qualifying loan receivables, principally real estate secured loans.
September 30, | December 31, | March 31, | December 31, | |||||||
(dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||
PeoplesBank’s obligations: | ||||||||||
Federal Home Loan Bank of Pittsburgh (FHLBP) | ||||||||||
Due June 2021, 2.81% | $ | 0 | $ | 10,000 | ||||||
Due June 2021, 2.14% | 0 | 15,000 | ||||||||
Due May 2022, 2.93% | 10,000 | 10,000 | 10,000 | 10,000 | ||||||
Total FHLBP | $ | 10,000 | $ | 35,000 | $ | 10,000 | $ | 10,000 | ||
Codorus Valley Bancorp, Inc. obligations: | ||||||||||
Junior subordinated debt | ||||||||||
Due 2034, 2.14%, floating rate based on 3 month | ||||||||||
Due 2034, 2.85%, floating rate based on 3 month | ||||||||||
LIBOR plus 2.02%, callable quarterly | 3,093 | 3,093 | 3,093 | 3,093 | ||||||
Due 2036, 1.67% floating rate based on 3 month | ||||||||||
Due 2036, 1.78% floating rate based on 3 month | ||||||||||
LIBOR plus 1.54%, callable quarterly | 7,217 | 7,217 | 7,217 | 7,217 | ||||||
Due 2030, 4.50% fixed rate, callable on or after December 2025 | 30,663 | 30,602 | 30,703 | 30,683 | ||||||
Total junior subordinated debt | $ | 40,973 | $ | 40,912 | $ | 41,013 | $ | 40,993 | ||
Lease obligations included in long-term debt: | ||||||||||
Finance lease liabilities | 1,276 | 1,296 | 1,261 | 1,269 | ||||||
Total long-term debt | $ | 52,249 | $ | 77,208 | $ | 52,274 | $ | 52,262 | ||
At September 30, 2021 there were 0 municipal deposit letters of credit compared to $42,000,000 at December 31, 2020. These letters of credit are issued by the FHLBP on behalf of PeoplesBank naming applicable municipalities as beneficiaries. The letters of credit took the place of securities pledged to the municipalities for their deposits maintained at PeoplesBank.
In June 2006, Codorus Valley formed CVB Statutory Trust No. 2, a wholly-owned special purpose subsidiary whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7,217,000. In November 2004, Codorus Valley formed CVB Statutory Trust No. 1 to facilitate a pooled trust preferred debt issuance of $3,093,000. The Corporation owns all of the common stock of these nonbank subsidiaries, and the debentures are the sole assets of the Trusts. The accounts of both Trusts are not consolidated for financial reporting purposes in accordance with FASB ASC 810. For regulatory capital purposes, all of the Corporation’s trust preferred securities qualified as Tier 1 capital for all reported periods. Trust preferred securities are subject to capital limitations under the FDIC’s risk-based capital guidelines. The Corporation used the net proceeds from these offerings to fund its operations.
In December 2020, Codorus Valley issued subordinated notes in the amount of $31,000,000. The Corporation may redeem the subordinated notes, in whole or in part, in a principal amount with integral multiples of $10,000, on or after December 9, 2025 and prior to the maturity date at 100% of the principal amount, plus accrued and unpaid interest. The subordinated notes mature on December 9, 2030. The subordinated notes are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the Note Purchase Agreements. The subordinated notes may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated notes have a fixed rate of interest equal to 4.50% until December 30, 2025. After that term, the variable rate of interest is equal to the then current 90-Day Average SOFR (Secured Oversight Financing Rate) plus 404 basis points.
Note 8—Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Corporation adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 affected the accounting treatment for operating lease agreements in which the Corporation is the lessee.
Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property, ATM locations, and office space. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Corporation has 1 finance lease for 1 financial center.
Leases with an initial term of 12 months or less are not recorded on the consolidated statement of condition. All other leases have remaining lease terms of 1 year to 25 years, some of which include options to extend. Upon opening a new financial center, we typically install brand-specific leasehold improvements which are depreciated over the shorter of the useful life or length of the lease. To the extent that the initial lease term of the related lease is less than the useful life of the leasehold improvements and, taking into consideration the dollar amount of the improvements, we conclude that it is reasonably certain that a renewal option will be exercised, the renewal period is included in the lease term, and the related payments are reflected in the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on an amortizing and collateralized basis, over a similar term.
All of our leases include fixed rental payments. We commonly enter into leases under which the lease payments increase at pre-determined dates based on the change in the consumer price index. While the majority of our leases are gross leases, we also have a number of leases in which we make separate payments to the lessor based on the lessor’s property and casualty insurance cost and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and nonlease components for all of our building leases.
The components of lease expense were as follows:
Three months ended | Three months ended | |||||||||
September 30, | March 31, | |||||||||
(dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||
Operating lease cost | $ | 165 | $ | 169 | $ | 196 | $ | 169 | ||
Finance lease cost: | ||||||||||
Amortization of right-of-use assets | $ | 12 | $ | 12 | $ | 12 | $ | 12 | ||
Interest on lease liability | 12 | 12 | 12 | 12 | ||||||
Total finance lease cost | $ | 24 | $ | 24 | $ | 24 | $ | 24 | ||
Total lease cost | $ | 189 | $ | 193 | $ | 220 | $ | 193 | ||
Nine months ended | |||||
September 30, | |||||
(dollars in thousands) | 2021 | 2020 | |||
Operating lease cost | $ | 503 | $ | 564 | |
Finance lease cost: | |||||
Amortization of right-of-use assets | $ | 36 | $ | 36 | |
Interest on lease liability | 36 | 36 | |||
Total finance lease cost | $ | 72 | $ | 72 | |
Total lease cost | $ | 575 | $ | 636 | |
Supplemental cash flow information related to leases was as follows:
Nine months ended | Three months ended | |||||||||
September 30, | March 31, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
Operating cash flows from operating leases | $ | 519 | $ | 578 | $ | 148 | $ | 173 | ||
Operating cash flows from financing leases | 36 | 36 | 12 | 12 | ||||||
Financing cash flows from financing leases | 20 | 19 | 7 | 7 | ||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||
Operating leases | 0 | 186 | 2,061 | 0 | ||||||
Finance leases | 0 | 0 | 0 | 0 | ||||||
Amounts recognized as right-of-use assets related to finance leases are included in fixed assets in the accompanying statement of financial position, while related lease liabilities are included in long-term debt. Supplemental balance sheet information related to leases was as follows:
September 30, | December 31, | March 31, | December 31, | |||||||
2021 | 2020 | 2022 | 2021 | |||||||
Assets: | ||||||||||
Operating leases right-of-use assets | $ | 1,915 | $ | 2,386 | $ | 3,584 | $ | 1,697 | ||
Finance leases assets | 1,052 | 1,087 | 1,029 | 1,041 | ||||||
Total lease assets | $ | 2,967 | $ | 3,473 | $ | 4,613 | $ | 2,738 | ||
Liabilities: | ||||||||||
Operating | $ | 2,031 | $ | 2,515 | $ | 3,738 | $ | 1,803 | ||
Financing | 1,276 | 1,296 | 1,261 | 1,269 | ||||||
Total lease liabilities | $ | 3,307 | $ | 3,811 | $ | 4,999 | $ | 3,072 | ||
Weighted Average Remaining Lease Term (years) | ||||||||||
Operating leases | 4.3 | 5.2 | 7.3 | 4.3 | ||||||
Finance leases | 22.4 | 23.2 | 21.9 | 22.2 | ||||||
Weighted Average Discount Rate | ||||||||||
Operating leases | 2.60% | 2.68% | 2.19% | 2.58% | ||||||
Finance leases | 3.69% | 3.69% | 3.69% | 3.69% | ||||||
Future minimum payments for financing leases and operating leases as of September 30, 2021March 31, 2022 and December 31, 20202021 were as follows:
(dollars in thousands:) | September 30, 2021 | March 31, 2022 | ||||||||
Year Ending December 31, | Operating Leases | Finance Leases | Operating Leases | Finance Leases | ||||||
2021 | $ | 162 | $ | 19 | ||||||
2022 | 615 | 75 | $ | 591 | $ | 56 | ||||
2023 | 487 | 75 | 701 | 75 | ||||||
2024 | 400 | 75 | 638 | 75 | ||||||
2025 | 179 | 79 | 417 | 79 | ||||||
2026 | 324 | 80 | ||||||||
Thereafter | 307 | 1,589 | 1,350 | 1,508 | ||||||
Total lease payments | 2,150 | 1,912 | 4,021 | 1,873 | ||||||
Less imputed interest | (119) | (636) | (283) | (612) | ||||||
Total | $ | 2,031 | $ | 1,276 | $ | 3,738 | $ | 1,261 | ||
(dollars in thousands:) | December 31, 2020 | December 31, 2021 | ||||||||
Year Ending December 31, | Operating Leases | Finance Leases | Operating Leases | Finance Leases | ||||||
2021 | $ | 667 | $ | 75 | ||||||
2022 | 604 | 75 | $ | 558 | $ | 75 | ||||
2023 | 489 | 75 | 463 | 75 | ||||||
2024 | 413 | 75 | 400 | 75 | ||||||
2025 | 192 | 79 | 179 | 79 | ||||||
2026 | 86 | 80 | ||||||||
Thereafter | 317 | 1,588 | 221 | 1,509 | ||||||
Total lease payments | 2,682 | 1,967 | 1,907 | 1,893 | ||||||
Less imputed interest | (167) | (671) | (104) | (624) | ||||||
Total | $ | 2,515 | $ | 1,296 | $ | 1,803 | $ | 1,269 | ||
The Corporation is subject to restrictions on the payment of dividends to its shareholders pursuant to the Pennsylvania Business Corporation Law of 1988, as amended (“BCL”). The BCL prohibits dividend payments if such payment would render the Corporation insolvent or result in negative net worth. Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by PeoplesBank to the Corporation. The amount of total dividends, which may be paid at any date, is generally limited to the retained earnings of PeoplesBank. Furthermore, dividend payments would be prohibited if the effect thereof would cause PeoplesBank’s capital to be reduced below applicable minimum capital requirements as discussed below. Loans and advances by PeoplesBank to affiliates, including the Corporation, are limited to 10 percent of PeoplesBank’s capital stock and contributed capital on a secured basis.
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2021,March 31, 2022, the Corporation and Bank meetmet all capital adequacy requirements to which they areit is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2021March 31, 2022 and December 31, 2020,2021, the most recent regulatory notifications categorized PeoplesBank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
Actual and required capital amounts (in thousands) and ratios are presented below.
Minimum for Basel III | Well Capitalized | Minimum for Basel III | Well Capitalized | |||||||||||||||||||||||||||||||
Actual (1) | Capital Adequacy | Minimum (2) | Actual (1) | Capital Adequacy | Minimum (2) | |||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||
Codorus Valley Bancorp, Inc. (consolidated) | ||||||||||||||||||||||||||||||||||
at September 30, 2021 | ||||||||||||||||||||||||||||||||||
at March 31, 2022 | ||||||||||||||||||||||||||||||||||
Capital ratios: | ||||||||||||||||||||||||||||||||||
Common equity Tier 1 | $ | 194,753 | 12.38 | % | $ | 110,129 | 7.00 | % | n/a | n/a | $ | 195,149 | 11.93 | % | $ | 114,529 | 7.00 | % | $ | n/a | n/a | % | ||||||||||||
Tier 1 risk based | 204,753 | 13.01 | 133,729 | 8.50 | n/a | n/a | 205,149 | 12.54 | 139,071 | 8.50 | n/a | n/a | ||||||||||||||||||||||
Total risk based | 255,094 | 16.21 | 165,194 | 10.50 | n/a | n/a | 256,323 | 15.67 | 171,794 | 10.50 | n/a | n/a | ||||||||||||||||||||||
Leverage | 204,753 | 8.92 | 91,861 | 4.00 | n/a | n/a | 205,149 | 8.60 | 95,458 | 4.00 | n/a | n/a | ||||||||||||||||||||||
at December 31, 2020 | ||||||||||||||||||||||||||||||||||
at December 31, 2021 | ||||||||||||||||||||||||||||||||||
Capital ratios: | ||||||||||||||||||||||||||||||||||
Common equity Tier 1 | $ | 191,863 | 13.10 | % | $ | 102,504 | 7.00 | % | n/a | n/a | $ | 193,142 | 12.11 | % | $ | 111,612 | 7.00 | % | $ | n/a | n/a | % | ||||||||||||
Tier 1 risk based | 201,863 | 13.79 | 124,469 | 8.50 | n/a | n/a | 203,142 | 12.74 | 135,529 | 8.50 | n/a | n/a | ||||||||||||||||||||||
Total risk based | 250,806 | 17.13 | 153,756 | 10.50 | n/a | n/a | 253,791 | 15.92 | 167,418 | 10.50 | n/a | n/a | ||||||||||||||||||||||
Leverage | 201,863 | 9.58 | 84,250 | 4.00 | n/a | n/a | 203,142 | 8.59 | 94,596 | 4.00 | n/a | n/a | ||||||||||||||||||||||
PeoplesBank, A Codorus Valley Company | ||||||||||||||||||||||||||||||||||
at September 30, 2021 | ||||||||||||||||||||||||||||||||||
at March 31, 2022 | ||||||||||||||||||||||||||||||||||
Capital ratios: | ||||||||||||||||||||||||||||||||||
Common equity Tier 1 | $ | 228,117 | 14.53 | % | $ | 109,903 | 7.00 | % | $ | 102,053 | 6.50 | % | $ | 232,928 | 14.27 | % | $ | 114,295 | 7.00 | % | $ | 106,131 | 6.50 | % | ||||||||||
Tier 1 risk based | 228,117 | 14.53 | 133,453 | 8.50 | 125,603 | 8.00 | 232,928 | 14.27 | 138,787 | 8.50 | 130,623 | 8.00 | ||||||||||||||||||||||
Total risk based | 247,776 | 15.78 | 164,854 | 10.50 | 157,004 | 10.00 | 253,358 | 15.52 | 163,279 | 10.00 | 163,279 | 10.00 | ||||||||||||||||||||||
Leverage | 228,117 | 9.95 | 91,719 | 4.00 | 114,649 | 5.00 | 232,928 | 9.77 | 95,330 | 4.00 | 119,162 | 5.00 | ||||||||||||||||||||||
at December 31, 2020 | ||||||||||||||||||||||||||||||||||
at December 31, 2021 | ||||||||||||||||||||||||||||||||||
Capital ratios: | ||||||||||||||||||||||||||||||||||
Common equity Tier 1 | $ | 198,184 | 13.56 | % | $ | 102,274 | 7.00 | % | $ | 94,968 | 6.50 | % | $ | 230,162 | 14.47 | % | $ | 111,348 | 7.00 | % | $ | 103,395 | 6.50 | % | ||||||||||
Tier 1 risk based | 198,184 | 13.56 | 124,190 | 8.50 | 116,884 | 8.00 | 230,162 | 14.47 | 135,208 | 8.50 | 127,255 | 8.00 | ||||||||||||||||||||||
Total risk based | 216,484 | 14.82 | 153,411 | 10.50 | 146,105 | 10.00 | 250,081 | 15.72 | 167,022 | 10.50 | 159,069 | 10.00 | ||||||||||||||||||||||
Leverage | 198,184 | 9.43 | 84,109 | 4.00 | 105,137 | 5.00 | 230,162 | 9.75 | 94,457 | 4.00 | 118,071 | 5.00 | ||||||||||||||||||||||
(1) Net unrealized gains and losses on securities available-for-sale, net of taxes, are disregarded for capital ratio computation purposes in accordance with federal regulatory banking guidelines.
(2) To be “well capitalized” under the prompt corrective action provisions in the Basel III framework. “Well capitalized” applies to PeoplesBank only.
Share Repurchase
The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in March 2020. Under the Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. During the first quarter of 2020 the Corporation repurchased 5,335 shares at an average price of $16.37. Shortly after the Program began, and in response to COVID-19, the Corporation suspended the Program. That program expired by its own terms in October 2020.
The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in January 2021. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation progam. The program was successfully completed in August after the purchase of $4,900,000 of common stock. During the three months ended September 30, 2021, the Corporation
purchased 99,607 shares at an average price of $22.49 for a total of $2,200,000. During the nine months ended September 30, 2021,after the Corporation purchased 242,148 shares at an average price of $20.29 for a total of $4,900,000.$4,912,000.
The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in August 2021. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outsanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be avaiblable for use and reissuance for the purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. During the three months ended September 30, 2021,The program was successfully completed in January 2022, after the Corporation purchased 65,213224,821 shares at an average price of $22.10$22.24 for a total of $1,400,000.$5,000,000.
The Corporation’s Board of Directors approved a new Repurchase Program (“Program”) in January 2022. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of the common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for the purpose as and when determined by the Board of Directors including, without limitation to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation plan. There was no activity under the Program during the quarter ended March 31, 2022.
There are 0 legal proceedings pending against Codorus Valley Bancorp, Inc. or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation, other than routine litigation incidental to the business. Management is not aware of any proceedings known or contemplated by government authorities.
Note 12—Guarantees
Codorus Valley does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by PeoplesBank to guarantee the performance of a client to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to clients. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $15,458,000$15,531,000 of standby letters of credit outstanding on September 30, 2021,March 31, 2022, compared to $15,206,000$14,688,000 on December 31, 2020.2021. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The amount of the liability as of September 30, 2021March 31, 2022 and December 31, 2020,2021, for guarantees under standby letters of credit issued, was not material. Many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.
Note 13—Fair Value of Assets and Liabilities
The Corporation uses its best judgment in estimating the fair value of the Corporation’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values subsequent to the respective reporting dates may be different than the amounts reported at each period end.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.
Since management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications on a quarterly basis.
Assets Measured at Fair Value on a Recurring Basis
Securities available-for-sale
The fair values of investment securities were measured using information from a third-party pricing service. The pricing service uses quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, by relying on the securities’ relationship to other benchmark quoted prices.
Interest rate swap agreements
Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.
Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||
(dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
September 30, 2021 | ||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||
U.S. agency | $ | 3,446 | $ | 0 | $ | 3,446 | $ | 0 | $ | 9,952 | $ | 0 | $ | 9,952 | $ | 0 | ||||||
U.S. agency mortgage-backed, residential | 163,982 | 0 | 163,982 | 0 | 223,183 | 0 | 223,183 | 0 | ||||||||||||||
State and municipal | 31,463 | 0 | 31,463 | 0 | 33,651 | 0 | 33,651 | 0 | ||||||||||||||
Corporates | 25,685 | 0 | 25,685 | 0 | 35,597 | 0 | 35,597 | 0 | ||||||||||||||
Other assets: | ||||||||||||||||||||||
Loan-level interest rate swaps | 29 | 0 | 29 | 0 | (3) | 0 | (3) | 0 | ||||||||||||||
December 31, 2020 | ||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||
U.S. agency | $ | 40,000 | $ | 0 | $ | 40,000 | $ | 0 | $ | 3,396 | $ | 0 | $ | 3,396 | $ | 0 | ||||||
U.S. agency mortgage-backed, residential | 110,896 | 0 | 110,896 | 0 | 181,935 | 0 | 181,935 | 0 | ||||||||||||||
State and municipal | 24,300 | 0 | 24,300 | 0 | 36,156 | 0 | 36,156 | 0 | ||||||||||||||
Corporates | 9,806 | 0 | 9,806 | 0 | 32,798 | 0 | 32,798 | 0 | ||||||||||||||
Other assets: | ||||||||||||||||||||||
Loan-level interest rate swaps | (51) | 0 | (51) | 0 | ||||||||||||||||||
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans
Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are generally included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At September 30, 2021,March 31, 2022, the fair value of impaired loans with a valuation allowance or partial charge-off was $2,398,000,$5,159,000, net of valuation allowances of $4,162,000$3,161,000 and partial charge-offs of $266,000.$1,589,000. At December 31, 20202021 the fair value of impaired loans with a valuation allowance or charge-off was $4,009,000,$3,142,000, net of valuation allowances of $3,312,000$4,058,000 and charge-offs of $373,000.$957,000.
Foreclosed Real Estate
Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based on an independent third-party appraisal of the property or occasionally on a recent sales offer. At September 30, 2021March 31, 2022 and December 31, 2020,2021, there were 0 foreclosed real estate assets with a valuation allowance or write-down.
Mortgage Servicing Rights
Mortgage servicing rights are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and original time to maturity. Mortgage servicing rights are subsequently evaluated for impairment on a quarterly basis. Significant inputs to the valuation include expected cash flow, expected net servicing income, a cash flow discount rate and the expected life of the underlying loans. At September 30, 2021, the fair value of the mortgage servicing rights asset was $496,000. At December 31, 2020, the fair value of the mortgage servicing rights asset was $511,000.
Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||
(dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
September 30, 2021 | ||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||
Impaired builder & developer loans | $ | 224 | $ | 0 | $ | 0 | $ | 224 | $ | 181 | $ | 0 | $ | 0 | $ | 181 | ||||||
Impaired residential real estate investor loans | 277 | 0 | 0 | 277 | 52 | 0 | 0 | 52 | ||||||||||||||
Impaired commercial real estate loans | 651 | 0 | 0 | 651 | ||||||||||||||||||
Impaired agriculture loans | 1,042 | 0 | 0 | 1,042 | ||||||||||||||||||
Impaired service loans | 594 | 0 | 0 | 594 | ||||||||||||||||||
Impaired other commercial loans | 1,657 | 0 | 0 | 1,657 | ||||||||||||||||||
Impaired home equity loans | 29 | 29 | 0 | 0 | ||||||||||||||||||
Impaired residential mortgage loans | 952 | 0 | 0 | 952 | ||||||||||||||||||
Mortgage servicing rights | 345 | 0 | 0 | 345 | ||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||
Impaired builder & developer loans | $ | 224 | $ | 0 | $ | 0 | $ | 224 | ||||||||||||||
Impaired residential real estate investor loans | 89 | 0 | 0 | 89 | ||||||||||||||||||
Impaired commercial real estate loans | 414 | 0 | 0 | 414 | ||||||||||||||||||
Impaired agriculture loans | 558 | 0 | 0 | 558 | 1,121 | 0 | 0 | 1,121 | ||||||||||||||
Impaired service loans | 594 | 0 | 0 | 594 | 594 | 0 | 0 | 594 | ||||||||||||||
Impaired other loans | 745 | 0 | 0 | 745 | 700 | 0 | 0 | 700 | ||||||||||||||
Mortgage servicing rights | 496 | 0 | 0 | 496 | 380 | 0 | 0 | 380 | ||||||||||||||
December 31, 2020 | ||||||||||||||||||||||
Impaired builder & developer loans | $ | 196 | $ | 0 | $ | 0 | $ | 196 | ||||||||||||||
Impaired residential real estate investor loans | 2,209 | 2,000 | 0 | 209 | ||||||||||||||||||
Impaired agriculture loans | 544 | 0 | 0 | 544 | ||||||||||||||||||
Impaired other loans | 1,071 | 0 | 0 | 1,071 | ||||||||||||||||||
Mortgage servicing rights | 511 | 0 | 0 | 511 | ||||||||||||||||||
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements | Quantitative Information about Level 3 Fair Value Measurements | |||||||||||||||||
Fair Value | Valuation | Unobservable | Weighted | Weighted | Fair Value | Valuation | Unobservable | Weighted | ||||||||||
(dollars in thousands) | Estimate | Techniques | Input | Average | Range | Average | Estimate | Techniques | Input | Range | Average | |||||||
September 30, 2021 | ||||||||||||||||||
March 31, 2022 | ||||||||||||||||||
Impaired builder & developer loans | $ | 224 | Appraisal (1) | Appraisal adjustments (2) | 15% -15% | 15% | $ | 181 | Appraisal (1) | Appraisal adjustments (2) | 15% -15% | 15% | ||||||
Impaired residential real estate investor loans | 277 | Appraisal (1) | Appraisal adjustments (2) | 15%-15% | 15% | 52 | Appraisal (1) | Appraisal adjustments (2) | 15%-15% | 15% | ||||||||
Impaired commercial real estate loans | 651 | Appraisal (1) | Appraisal adjustments (2) | 15%-15% | 15% | |||||||||||||
Impaired agriculture loans | 1,042 | Appraisal (1) | Appraisal adjustments (2) | 15% -20% | 18% | |||||||||||||
Impaired service loans | 594 | Appraisal (1) | Appraisal adjustments (2) | 15% -15% | 15% | |||||||||||||
Impaired other commercial loans | 1,657 | Appraisal (1) | Appraisal adjustments (2) | 15% -50% | 20% | |||||||||||||
Impaired residential mortgage loans | 952 | Appraisal (1) | Appraisal adjustments (2) | 15% -15% | 15% | |||||||||||||
Mortgage Servicing Rights | 345 | Multiple of annual service fee | Estimated prepayment speed based on rate and term | 9.8% - 9.8% | 9.8% | |||||||||||||
December 31, 2021 | ||||||||||||||||||
Impaired builder & developer loans | $ | 224 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | ||||||||||||
Impaired residential real estate investor loans | 89 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | |||||||||||||
Impaired commercial real estate | 414 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | |||||||||||||
Impaired agriculture loans | 558 | Appraisal (1) | Appraisal adjustments (2) | 21% -25% | 23% | 1,121 | Appraisal (1) | Appraisal adjustments (2) | 15% - 20% | 18% | ||||||||
Impaired service loans | 594 | Appraisal (1) | Appraisal adjustments (2) | 15% -15% | 15% | 594 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | ||||||||
Impaired other loans | 745 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | 700 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | ||||||||
Mortgage Servicing Rights | 496 | Multiple of annual service fee | Estimated prepayment speed based on rate and term | 14.9% - 14.9% | 14.9% | |||||||||||||
December 31, 2020 | ||||||||||||||||||
Impaired builder & developer loans | $ | 196 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | ||||||||||||
Impaired residential real estate investor loans | 209 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | |||||||||||||
Impaired agriculture loans | 544 | Appraisal (1) | Appraisal adjustments (2) | 25% - 25% | 25% | |||||||||||||
Impaired other loans | 89 | Appraisal (1) | Appraisal adjustments (2) | 15% - 15% | 15% | |||||||||||||
Impaired other loans | 982 | Business asset valuation (3) | Business asset valuation adjustments (4) | 40% - 50% | 44% | |||||||||||||
Mortgage servicing rights | 511 | Multiple of annual service fee | Estimated prepayment speed based on rate and term | 18.5% - 18.5% | 18.5% | 380 | Multiple of annual service fee | Estimated prepayment speed based on rate and term | 14.9% - 14.9% | 14.9% | ||||||||
(1)Fair value is generally determined through independent appraisals, which generally include various level 3 inputs that are not identifiable.
(2)Appraisal amounts may be adjusted downward by the Corporation's management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expense adjustments are presented as a percent of the appraisal.
(3)Fair value is generally determined through client-provided financial statements and bankruptcy court documents.
(4)Business asset valuation may be adjusted downward by the corporation's management qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses adjustments are presented as a percent of the financial statement book value.
The following presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of September 30, 2021March 31, 2022 and December 31, 2020.2021.
Fair Value Estimates | Fair Value Estimates | |||||||||||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
Quoted Prices | Significant | Significant | Quoted Prices | Significant | Significant | |||||||||||||||||||||||
in Active | Other | Other | in Active | Other | Other | |||||||||||||||||||||||
Carrying | Estimated | Markets for | Observable | Unobservable | Carrying | Estimated | Markets for | Observable | Unobservable | |||||||||||||||||||
(dollars in thousands) | Amount | Fair Value | Identical Assets | Inputs | Inputs | Amount | Fair Value | Identical Assets | Inputs | Inputs | ||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 491,417 | $ | 491,417 | $ | 491,417 | $ | 0 | $ | 0 | $ | 439,215 | $ | 439,215 | $ | 439,215 | $ | 0 | $ | 0 | ||||||||
Securities available-for-sale | 224,576 | 224,576 | 0 | 224,576 | 0 | 302,383 | 302,383 | 0 | 302,383 | 0 | ||||||||||||||||||
Restricted investment in bank stocks | 1,311 | N/A | N/A | N/A | N/A | 1,311 | N/A | N/A | N/A | N/A | ||||||||||||||||||
Loans held for sale | 9,379 | 9,947 | 0 | 9,947 | 0 | 2,016 | 2,173 | 0 | 2,173 | 0 | ||||||||||||||||||
Loans, net | 1,502,041 | 1,495,953 | 0 | 0 | 1,495,953 | 1,506,469 | 1,472,936 | 0 | 0 | 1,472,936 | ||||||||||||||||||
Interest receivable | 4,446 | 4,446 | 0 | 4,446 | 0 | 4,618 | 4,618 | 0 | 1,006 | 3,612 | ||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||
Deposits | $ | 2,049,360 | $ | 2,050,805 | $ | 0 | $ | 2,050,805 | $ | 0 | $ | 2,095,872 | $ | 2,090,309 | $ | 0 | $ | 2,090,309 | $ | 0 | ||||||||
Short-term borrowings | 12,300 | 12,300 | 0 | 12,300 | 0 | 10,778 | 10,778 | 0 | 10,778 | 0 | ||||||||||||||||||
Long-term debt (1) | 20,310 | 18,967 | 0 | 10,181 | 8,786 | 20,310 | 18,921 | 0 | 10,039 | 8,882 | ||||||||||||||||||
Subordinated debentures | 30,663 | 32,720 | 0 | 32,720 | 0 | 30,708 | 31,660 | 0 | 31,660 | 0 | ||||||||||||||||||
Interest payable | 636 | 636 | 0 | 636 | 0 | 545 | 545 | 0 | 545 | 0 | ||||||||||||||||||
Off-balance sheet instruments | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 335,793 | $ | 335,793 | $ | 335,793 | $ | 0 | $ | 0 | $ | 545,494 | $ | 545,494 | $ | 545,494 | $ | 0 | $ | 0 | ||||||||
Securities available-for-sale | 185,002 | 185,002 | 0 | 185,002 | 0 | 254,285 | 254,285 | 0 | 254,285 | 0 | ||||||||||||||||||
Restricted investment in bank stocks | 2,593 | N/A | N/A | N/A | N/A | 1,311 | N/A | N/A | N/A | N/A | ||||||||||||||||||
Loans held for sale | 15,981 | 17,228 | 0 | 17,228 | 0 | 7,876 | 8,271 | 0 | 8,271 | 0 | ||||||||||||||||||
Loans, net | 1,523,325 | 1,527,295 | 0 | 0 | 1,527,295 | 1,506,969 | 1,498,388 | 0 | 0 | 1,498,388 | ||||||||||||||||||
Interest receivable | 8,352 | 8,352 | 0 | 8,352 | 0 | 4,562 | 4,562 | 0 | 752 | 3,810 | ||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||
Deposits | $ | 1,863,539 | $ | 1,868,203 | $ | 0 | $ | 1,868,203 | $ | 0 | $ | 2,143,765 | $ | 2,143,187 | $ | 0 | $ | 2,143,187 | $ | 0 | ||||||||
Short-term borrowings | 8,540 | 8,540 | 0 | 8,540 | 0 | 10,761 | 10,761 | 0 | 10,761 | 0 | ||||||||||||||||||
Long-term debt (1) | 45,310 | 43,005 | 0 | 35,571 | 7,434 | 20,310 | 18,999 | 0 | 10,109 | 8,890 | ||||||||||||||||||
Subordinated debentures | 30,602 | 31,159 | 0 | 31,159 | 0 | 30,683 | 32,578 | 0 | 32,578 | 0 | ||||||||||||||||||
Interest payable | 532 | 532 | 0 | 532 | 0 | 216 | 216 | 0 | 216 | 0 | ||||||||||||||||||
Off-balance sheet instruments | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
(1) Exclude leases included in Long-term debt | (1) Exclude leases included in Long-term debt | (1) Exclude leases included in Long-term debt | ||||||||||||||||||||||||||
Note 14—Assets and Liabilities Subject to Offsetting
Securities Sold Under Agreements to Repurchase
PeoplesBank enters into agreements with clients in which it sells securities subject to an obligation to repurchase the same securities (“repurchase agreements”). The contractual maturity of the repurchase agreement is overnight and continues until either party terminates the agreement. These repurchase agreements are accounted for as a collateralized financing arrangement (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability (short-term borrowings) in the Corporation’s consolidated financial statements of condition, while the securities underlying the repurchase agreements are appropriately segregated for safekeeping purposes and remain in the respective securities asset accounts. Thus, there is no offsetting or netting of the securities with the repurchase agreement liabilities.
Gross amounts Not Offset in | Gross amounts Not Offset in | |||||||||||||||||||||||||||||||||||||||
the Statements of Condition | the Statements of Condition | |||||||||||||||||||||||||||||||||||||||
Financial Instruments | Financial Instruments | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Gross | Gross | Net Amounts | U.S. agency | U.S. agency | Cash | Net | Gross | Gross | Net Amounts | U.S. agency | U.S. agency | Cash | Net | ||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Repurchase Agreements | $ | 12,300 | $ | 0 | $ | 12,300 | $ | (13,193) | $ | 0 | $ | 0 | $ | (893) | $ | 10,778 | $ | 0 | $ | 10,778 | $ | (10,988) | $ | 0 | $ | 0 | $ | (210) | ||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Repurchase Agreements | $ | 8,540 | $ | 0 | $ | 8,540 | $ | (10,255) | $ | 0 | $ | 0 | $ | (1,715) | $ | 10,761 | $ | 0 | $ | 10,761 | $ | (12,268) | $ | 0 | $ | 0 | $ | (1,507) | ||||||||||||
Note 15 – Interest Rate Swaps
Loan Level Interest Rate Swaps
PeoplesBank enters into loan-level interest rate swaps with certain qualifying, creditworthy commercial loan clients to provide a loan pricing structure that meets the interest rate risk management needs of both PeoplesBank as well as the client. PeoplesBank simultaneously enters into parallel interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net results of the offsetting client and deal counterparty swap agreements is that the client pays a fixed rate of interest and PeoplesBank receives a floating rate. PeoplesBank’s loan-level interest rate swaps are considered derivatives but are not accounted for using hedge accounting.
The fair value, notational amount, and collateral posted related to loan-level interest rate swaps are presented below:
(dollars in thousands) | September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | ||||||||
Interest Rate Swap Contracts - Commercial Loans: | ||||||||||||
Fair Value (a) | $ | 29 | $ | 0 | $ | (3) | $ | (51) | ||||
Notional Amount | 3,642 | 0 | 6,955 | 7,266 | ||||||||
Cash Collateral Posted (b) | 0 | 0 | 0 | 0 | ||||||||
(a)Included in other assets and other non-interest income as of September 30,March 31, 2022 and December 31, 2021 on the Consolidated Balance Sheets and Consolidated Statements of Income, respective. There were no interest rate swaps as of December 31, 2020.respectively.
(b)No cash collateral was posted as of September 30, 2021. There were no interest rate swaps as ofMarch 31, 2022 and December 31, 2020.2021.
The gross amounts of loan-level interest rate swaps, the amounts offset and the carrying values in the Consolidated Balance Sheets, and the collateral pledged to support such agreements are presented below.
(dollars in thousands) | September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | ||||||
Interest Rate Swap Contracts - Commercial Loans: | ||||||||||
Gross amounts recognized | $ | 29 | $ | 0 | $ | (3) | $ | (51) | ||
Gross amounts offset | 29 | 0 | (3) | (51) | ||||||
Net amounts preseneted in the Consolidated Balance Sheets | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||
Gross amounts not offset: | ||||||||||
Financial instruments | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||
Cash Collateral | 0 | 0 | 0 | 0 | ||||||
Net amounts | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for Codorus Valley Bancorp, Inc. (“Codorus Valley” or “the Corporation”), a bank holding company, and its wholly-owned subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank”), are provided below. Codorus Valley’s consolidated financial condition and results of operations consist almost entirely of PeoplesBank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future.
Forward-looking Statements
Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When words such as “believes,” “expects,” “anticipates” or similar expressions occur in the Form 10-Q, management is making forward-looking statements.
Note that many factors, some of which are discussed elsewhere in this report and in the documents that are incorporated by reference, could affect the future financial results of the Corporation and its subsidiaries, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q. These factors include, but are not limited to, the following:
Operating, legal and regulatory risks;
Credit risk, including an increase in nonperforming assets requiring loss provisions and the incurrence of carrying costs related to nonperforming assets;
Interest rate fluctuations which could increase our cost of funds or decrease our yield on earning assets and therefore reduce our net interest income;
Declines in the market value of investment securities considered to be other-than-temporary;
Unavailability of capital when needed, or availability at less than favorable terms;
Unauthorized disclosure of sensitive or confidential client or client information, whether through a breach of our computer systems or otherwise, which may adversely affect the Corporation’s operations, net income or reputation;
Inability to achieve merger-related synergies, and difficulties in integrating the business and operations of acquired institutions;
A prolonged economic downturn or excessive inflation;
Political and competitive forces affecting banking, securities, asset management and credit services businesses;
Occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, or pandemics;
The effects of and changes in the rate of FDIC premiums, including special assessments;
Future legislative or administrative changes to U.S. governmental capital programs;
Future changes in federal or state tax laws or tax rates;
Enacted financial reform legislation, e.g., Dodd-Frank Wall Street Reform and Consumer Protection Act, may have a significant impact on the Corporation’s business and results of operations;
The risk that management’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful; and
Impact of COVID-19 pandemic.
COVID-19
The third quarter brought an escalation of COVID-19 cases to our Pennsylvania and Maryland markets. The Delta variant attributed to some of the rise in local cases. Mask requirements were re-instated for associates interacting with the public along with social distancing and limiting large gatherings to address the changing conditions.
The process of associates returning to the office in a phased and hybrid approach was completed in August. The long-term remote work policy that was adopted earlier this year allows a portion of positions to work remotely on an ad hoc, part-time or full-time basis. The
COVID-19 Task Force continues to prepare for the possible requirement set forth by the Biden Administration to require all associates to be vaccinated or require weekly COVID testing.
At the time of this release, all Financial Centers are operating with regular lobby and drive thru hours. All Retirement Community Office lobbies are open. Three Loan Production Offices (Hanover, Centerville, and Bel Air) remain closed.
PeoplesBank continues to responsibly and prudently extend credit to qualified borrowers. To date, the Bank has processed approximately 822 second round Paycheck Protection Program (PPP) loans totaling $77 million. PeoplesBank has successfully worked with borrowers and SBA to process forgiveness on 1,684 of 2,080, or 81 percent, of total PPP loans processed. Currently, seven 2020 Round One PPP loans remain outstanding. The other remaining outstanding loans are 2021 Round Two PPP loans that have several months left to process forgiveness. Approximately 48 percent of the 2021 Round Two PPP loans generated by PeoplesBank have already qualified for full forgiveness.
The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.
Critical Accounting Policies
The Corporation’s critical accounting policies, as summarized in Note 1—Summary of Significant Accounting Policies, include those related to the allowance for loan losses and the fair value of its available-for-sale securities portfolio, which requirerequires management to make significant judgments, estimates and assumptions that have a material impact on the carrying value of the respectivecertain assets and liabilities. For this Form 10-Q, there were no material changes made to the Corporation’s critical accounting policies, which are more fully disclosed in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2020.
Three Months Ended September 30, 2021March 31, 2022 vs. Three Months Ended September 30, 2020March 31, 2021
The schedule below presents selected performance metrics for the thirdfirst quarter of both 20212022 and 2020.2021.
Three months ended | Three months ended | |||||||||||||
September 30, | March 31, | |||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||
Basic earnings per share | $ | 0.49 | $ | 0.37 | $ | 0.32 | $ | 0.40 | ||||||
Diluted earnings per share | $ | 0.49 | $ | 0.37 | $ | 0.32 | $ | 0.40 | ||||||
Cash dividend payout ratio | 26.50 | % | 27.01 | % | 46.54 | % | 32.75 | % | ||||||
Return on average assets | 0.83 | % | 0.70 | % | 0.51 | % | 0.71 | % | ||||||
Return on average equity | 9.56 | % | 7.47 | % | 6.33 | % | 7.96 | % | ||||||
Net interest margin (tax equivalent basis) | 2.90 | % | 3.01 | % | 2.79 | % | 3.04 | % | ||||||
Net overhead ratio | 1.66 | % | 1.61 | % | 1.81 | % | 1.69 | % | ||||||
Efficiency ratio | 67.33 | % | 65.27 | % | 74.51 | % | 68.36 | % | ||||||
Average equity to average assets | 8.70 | % | 9.31 | % | 8.09 | % | 8.97 | % | ||||||
The Corporation’s net income (earnings) was $4,783,000$3,053,000 for the quarter ended September 30, 2021,March 31, 2022, as compared to $3,624,000$3,900,000 for the quarter ended September 30, 2020, an increaseMarch 31, 2021, a decrease of $1,159,000$847,000 or 3222 percent.
INCOME STATEMENT ANALYSIS
Net Interest Income
Unless otherwise noted, this section discusses interest income and interest expense amounts as reported in the Consolidated Statements of Income, which are not presented on a tax equivalent basis.
Net interest income for the quarter ended September 30, 2021March 31, 2022 was $16,048,000,$15,701,000, an increase of $1,067,000$224,000 or 71 percent compared to net interest income of $14,981,000$15,477,000 for the thirdfirst quarter 2020.2021.
The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 2.902.79 percent for the thirdfirst quarter 20212022 compared to the 3.013.04 percent for the thirdfirst quarter 2020.2021. The net interest margin contraction was a result of higher levels of interest bearing deposits with bank,banks and lower volume and lower interest rates on loans, and higherpartially offset by lower volume and rate onof long-term debt partially offset byand lower rates on interest bearing demand and time deposits.
Total interest income for the thirdfirst quarter 20212022 totaled $18,301,000,$17,297,000, a decrease of $110,000$1,078,000 or 16 percent below the amount of total interest income for the thirdfirst quarter 2020.2021. The change was primarily a result of lower rates onvolume of commercial loans.
Interest and dividend income on investments increased $373,000$686,000 or 4598 percent in the thirdfirst quarter 20212022 compared to the same period in 2020.2021. The average balance of the investment securities portfolio increased $52,365,000$111,777,000 or 3265 percent when comparing the thirdfirst quarter 20212022 to the same period in 2020.2021. The tax-equivalent yield on investments for the thirdfirst quarter 20212022 was 1.922.03 percent or 131 basis point lowerpoints higher than the 1.931.72 percent realized in the thirdfirst quarter 2020.2021.
Interest income on loans decreased $483,000$1,911,000 or 311 percent in the thirdfirst quarter 20212022 compared to the same period in 2020.2021. The average balance of outstanding loans, primarily commercial loans, decreased approximately $69,134,000$50,680,000 or 43 percent comparing the thirdfirst quarter 20212022 to the same period in 2020.2021. Lower average balances on the loan portfolio and lower fees recognized due to PPP loan forgiveness were the primary driverdrivers of the decrease in interest income on loans. The tax-equivalent yield on loans for the thirdfirst quarter 20212022 was 4.444.17 percent or 636 basis points higherlower than the 4.384.53 percent experienced in the thirdfirst quarter 2020.2021.
Total interest expense for the thirdfirst quarter 20212022 was $2,253,000,$1,596,000, a decrease of $1,177,000$1,302,000 or 3445 percent as compared to total interest expense of $3,430,000$2,898,000 for the thirdfirst quarter 2020.2021. The change was primarily the result of a decrease in the cost of interest bearing demand and time deposits.
Interest expense on deposits decreased $1,387,000$1,158,000 or 4552 percent in the thirdfirst quarter 20212022 compared to the same period in 2020.2021. The average rate paid on interest bearing deposits was 0.440.27 percent in the thirdfirst quarter 20212022 or 4335 basis points lower than the average rate paid of 0.870.62 percent in the thirdfirst quarter 2020.2021. The average balance of interest bearing deposits for the thirdfirst quarter 20212022 increased by $126,582,000$143,345,000 or 910 percent compared to the thirdfirst quarter 2020.2021. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the thirdfirst quarter 20212022 increasing 1821 percent to $474,796,000$511,170,000 as compared to $402,648,000$423,830,000 for the thirdfirst quarter 2020.2021. The increase was partiallyprimarily related to deposits associated with the origination of Paycheck Protection Program (PPP) loans and consumer stimulus payments.new commercial client relationships.
For the first quarter 2022 interest expense on borrowings (long-term debt and subordinated debentures) decreased $144,000 or 21 percent compared to the first quarter 2021. Short-term borrowings consisting of repurchase agreements and other short-term
For the third quarter 2021 interest expense on borrowings (long-term debt and subordinated debentures) increased $207,000 or 67 percent compared to the third quarter 2020. Short-term borrowings consisting of repurchase agreements and other short-term borrowings averaged $11,890,000$9,967,000 for the thirdfirst quarter 2021,2022, compared to an average balance of $9,276,000$7,735,000 for the thirdfirst quarter 2020.2021. The rate on average short-term borrowings for the thirdfirst quarter 20212022 was 0.400.41 percent, an increasea decrease as compared to a rate of 0.390.42 percent for the thirdfirst quarter 2020.2021. Long-term debt, which includes borrowings from the Federal Home Loan Bank of Pittsburgh (FHLBP) and subordinated debentures issued in December 2020 by the Corporation, averaged $54,363,000$54,059,000 for the thirdfirst quarter 20212022 and $49,379,000$79,659,000 for the thirdfirst quarter 2020.2021. The decrease was attributable to FHLBP advances totaling $25,000,000 which matured and were repaid in the second quarter of 2021. For the thirdfirst quarter 2021,2022, the rate on average long-term borrowings was 3.773.93 percent, an increase of 12752 basis points as compared to a rate of 2.503.41 percent for the thirdfirst quarter 20202021. The increase was related to the rate on subordinated debentures issued in December 2020.
Table 1-Average Balances and Interest Rates (tax equivalent basis) | Table 1-Average Balances and Interest Rates (tax equivalent basis) | Table 1-Average Balances and Interest Rates (tax equivalent basis) | ||||||||||||||||||||||||||||||||
Three months ended September 30, | Three months ended March 31, | |||||||||||||||||||||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||
(dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||
Interest bearing deposits with banks | $ | 454,474 | $ | 174 | 0.15 | % | $ | 221,701 | $ | 57 | 0.10 | % | $ | 483,553 | $ | 228 | 0.19 | % | $ | 325,193 | $ | 81 | 0.10 | % | ||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||||
Taxable | 193,854 | 933 | 1.91 | 143,448 | 652 | 1.81 | 258,112 | 1,289 | 2.03 | 151,517 | 608 | 1.63 | ||||||||||||||||||||||
Tax-exempt | 21,594 | 109 | 2.00 | 19,635 | 141 | 2.86 | 24,583 | 124 | 2.05 | 19,401 | 118 | 2.47 | ||||||||||||||||||||||
Total investment securities | 215,448 | 1,042 | 1.92 | 163,083 | 793 | 1.93 | 282,695 | 1,413 | 2.03 | 170,918 | 726 | 1.72 | ||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||
Taxable (1) | 1,519,946 | 17,028 | 4.44 | 1,591,152 | 17,528 | 4.38 | 1,516,145 | 15,594 | 4.17 | 1,567,817 | 17,515 | 4.53 | ||||||||||||||||||||||
Tax-exempt | 9,430 | 99 | 4.17 | 7,358 | 77 | 4.16 | 10,891 | 111 | 4.13 | 9,899 | 97 | 3.97 | ||||||||||||||||||||||
Total loans | 1,529,376 | 17,127 | 4.44 | 1,598,510 | 17,605 | 4.38 | 1,527,036 | 15,705 | 4.17 | 1,577,716 | 17,612 | 4.53 | ||||||||||||||||||||||
Total earning assets | 2,199,298 | 18,343 | 3.31 | 1,983,294 | 18,455 | 3.70 | 2,293,284 | 17,346 | 3.07 | 2,073,827 | 18,419 | 3.60 | ||||||||||||||||||||||
Other assets (2) | 102,294 | 101,859 | 92,129 | 111,868 | ||||||||||||||||||||||||||||||
Total assets | $ | 2,301,592 | $ | 2,085,153 | $ | 2,385,413 | $ | 2,185,695 | ||||||||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||
Interest bearing demand | $ | 906,383 | $ | 451 | 0.20 | % | $ | 767,579 | $ | 525 | 0.27 | % | $ | 997,383 | $ | 331 | 0.13 | % | $ | 814,058 | $ | 430 | 0.21 | % | ||||||||||
Savings | 139,940 | 18 | 0.05 | 104,015 | 15 | 0.06 | 155,982 | 12 | 0.03 | 117,627 | 15 | 0.05 | ||||||||||||||||||||||
Time | 500,718 | 1,255 | 0.99 | 548,865 | 2,571 | 1.86 | 451,131 | 719 | 0.65 | 529,466 | 1,775 | 1.36 | ||||||||||||||||||||||
Total interest bearing deposits | 1,547,041 | 1,724 | 0.44 | 1,420,459 | 3,111 | 0.87 | 1,604,496 | 1,062 | 0.27 | 1,461,151 | 2,220 | 0.62 | ||||||||||||||||||||||
Short-term borrowings | 11,890 | 12 | 0.40 | 9,276 | 9 | 0.39 | 9,967 | 10 | 0.41 | 7,735 | 8 | 0.42 | ||||||||||||||||||||||
Long-term debt | 54,363 | 517 | 3.77 | 49,379 | 310 | 2.50 | 54,059 | 524 | 3.93 | 79,659 | 670 | 3.41 | ||||||||||||||||||||||
Total interest bearing liabilities | 1,613,294 | 2,253 | 0.55 | 1,479,114 | 3,430 | 0.92 | 1,668,522 | 1,596 | 0.39 | 1,548,545 | 2,898 | 0.76 | ||||||||||||||||||||||
Noninterest bearing deposits | 474,796 | 402,648 | 511,170 | 423,830 | ||||||||||||||||||||||||||||||
Other liabilities | 13,289 | 9,311 | 12,755 | 17,340 | ||||||||||||||||||||||||||||||
Shareholders' equity | 200,213 | 194,080 | 192,966 | 195,980 | ||||||||||||||||||||||||||||||
Total liabilities and | ||||||||||||||||||||||||||||||||||
shareholders' equity | $ | 2,301,592 | $ | 2,085,153 | $ | 2,385,413 | $ | 2,185,695 | ||||||||||||||||||||||||||
Net interest income (tax equivalent basis) | $ | 16,090 | $ | 15,025 | $ | 15,750 | $ | 15,521 | ||||||||||||||||||||||||||
Net interest margin (3) | 2.90 | % | 3.01 | % | 2.79 | % | 3.04 | % | ||||||||||||||||||||||||||
Tax equivalent adjustment | (42) | (44) | (49) | (44) | ||||||||||||||||||||||||||||||
Net interest income | $ | 16,048 | $ | 14,981 | $ | 15,701 | $ | 15,477 | ||||||||||||||||||||||||||
(1)Average balance includes average nonaccrual loans of $39,444,000$32,036,000 for 20212022 and $18,939,000$37,711,000 for 2020.2021.
Interest includes net loan fees of $2,725,000$1,429,000 for 20212022 and $1,462,000$2,705,000 for 2020.2021.
(2)Average balance includes average bank owned life insurance and foreclosed real estate.
(3)Net interest income (tax equivalent basis) annualized as a percentage of average earning assets.
Table 2-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis) | Table 2-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis) | Table 2-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis) | ||||||||||||||
Three months ended | Three months ended | |||||||||||||||
September 30, | March 31, | |||||||||||||||
2021 vs. 2020 | 2022 vs. 2021 | |||||||||||||||
Increase (decrease) due to change in* | Increase (decrease) due to change in* | |||||||||||||||
(dollars in thousands) | Volume | Rate | Net | Volume | Rate | Net | ||||||||||
Interest Income | ||||||||||||||||
Interest bearing deposits with banks | $ | 61 | $ | 56 | $ | 117 | $ | 40 | $ | 107 | $ | 147 | ||||
Investment securities: | ||||||||||||||||
Taxable | 373 | (92) | 281 | 531 | 150 | 681 | ||||||||||
Tax-exempt | 14 | (46) | (32) | 32 | (26) | 6 | ||||||||||
Loans: | ||||||||||||||||
Taxable | 329 | (829) | (500) | (1,833) | (88) | (1,921) | ||||||||||
Tax-exempt | 21 | 1 | 22 | 10 | 4 | 14 | ||||||||||
Total interest income | 798 | (910) | (112) | (1,220) | 147 | (1,073) | ||||||||||
Interest Expense | ||||||||||||||||
Deposits: | ||||||||||||||||
Interest bearing demand | 101 | (175) | (74) | 99 | (198) | (99) | ||||||||||
Savings | 5 | (2) | 3 | 5 | (8) | (3) | ||||||||||
Time | (221) | (1,095) | (1,316) | (262) | (794) | (1,056) | ||||||||||
Short-term borrowings | 3 | 0 | 3 | 2 | 0 | 2 | ||||||||||
Long-term debt | (169) | 376 | 207 | (166) | 20 | (146) | ||||||||||
Total interest expense | (281) | (896) | (1,177) | (322) | (980) | (1,302) | ||||||||||
Net interest income (tax equivalent basis) | $ | 1,079 | $ | (14) | $ | 1,065 | $ | (898) | $ | 1,127 | $ | 229 | ||||
*Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate.
Provision for Loan Losses
The provision for loan losses is an expense charged to earnings to cover the estimated losses attributable to uncollected loans. The provision reflects management’s judgment of an appropriate level for the allowance for loan losses. Provision for loan losses for the thirdfirst quarter 20212022 was $349,000,$1,027,000, a $1,581,000$204,000 decrease as compared to $1,930,000$1,231,000 provision for the thirdfirst quarter 2020.2021. The decreased provision expense in the thirdfirst quarter 20212022 was attributed primarily to the impactsresult of a reduction of qualitative factors influenced by COVID-19 in the prior period. Changes in the external environment created by COVID-19 continue to impact the qualitative factors for certain loan segments in the allowance for loan loss analysis. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.471.44 percent at September 30, 2021,March 31, 2022, as compared to 1.381.49 percent at December 31, 20202021 and 1.331.42 percent at September 30, 2020.March 31, 2021.
More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 54.44.
Noninterest Income
The following table presents the components of total noninterest income for the thirdfirst quarter 2021,2022, compared to the thirdfirst quarter 2020.2021.
Table 3 - Noninterest income | ||||||||||||||||||||
Three months ended | Change | Three months ended | Change | |||||||||||||||||
September 30, | Increase (Decrease) | March 31, | Increase (Decrease) | |||||||||||||||||
(dollars in thousands) | 2021 | 2020 | $ | % | 2022 | 2021 | $ | % | ||||||||||||
Trust and investment services fees | $ | 1,151 | $ | 992 | $ | 159 | 16 | % | $ | 1,162 | $ | 1,052 | $ | 110 | 10 | % | ||||
Income from mutual fund, annuity and insurance sales | 349 | 287 | 62 | 22 | 330 | 300 | 30 | 10 | ||||||||||||
Service charges on deposit accounts | 1,304 | 1,182 | 122 | 10 | 1,282 | 1,221 | 61 | 5 | ||||||||||||
Income from bank owned life insurance | 326 | 286 | 40 | 14 | 311 | 270 | 41 | 15 | ||||||||||||
Other income | 518 | 215 | 303 | 141 | 419 | 563 | (144) | (26) | ||||||||||||
Gain on sales of loans held for sale | 490 | 1,282 | (792) | (62) | 358 | 1,050 | (692) | (66) | ||||||||||||
Loss on write down of assets held for sale | (30) | 0 | (30) | *nm | ||||||||||||||||
Loss on sales of securities | 0 | (23) | 23 | 100 | ||||||||||||||||
Total noninterest income | $ | 4,108 | $ | 4,244 | $ | (136) | (3) | % | $ | 3,862 | $ | 4,433 | $ | (571) | (13) | % | ||||
*nm – not meaningful
The discussion that follows addresses changes in selected categories of noninterest income.
Trust and investment services feesIncome from bank owned life insurance—The $159,000$41,000 or 16 percent increase in trust and investment services fees is due to an increase in the client base during the third quarter 2021 compared to the third quarter 2020.
Income from mutual fund, annuity and insurance sales—The $62,000 or 2215 percent increase in income from mutual fund, annuity andbank owned life insurance sales is due to an increase in the client base during the third quarter 2021 compared to the third quarter 2020.
Service charges on deposit accounts—The $122,000 or 10 percent increase in service charges on deposit accounts is due to the waiverpurchase of overdraft and foreign ATM fees associated with the COVID-19 pandemicadditional bank owned life insurance in the prior period.second quarter 2021.
Other income—The $303,000$144,000 or 14126 percent increasedecrease in other income is primarily due to higherlower swap referral fees during the thirdfirst quarter 20212022 compared to the thirdfirst quarter 2020.2021.
Gain on sales of loans held for sale—The $792,000$692,000 or 6266 percent decrease in gain on sales of loans was due to the sale of a smaller volume of the mortgage loans to the secondary market during the thirdfirst quarter 20212022 compared to the third quarter 2020.
Loss on write down of assets held for sale—The $30,000 loss on write down of assets held for sale was recognized to write down to fair value, less costs to sell. The sale of the financial center is expected to occur in the first quarter 2022.2021.
Noninterest Expense
The following table presents the components of total noninterest expense for the thirdfirst quarter 2021,2022, compared to the thirdfirst quarter 2020.2021.
Table 4 - Noninterest expense | ||||||||||||||||||||||||||
Three months ended | Change | Three months ended | Change | |||||||||||||||||||||||
September 30, | Increase (Decrease) | March 31, | Increase (Decrease) | |||||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||
Personnel | $ | 8,047 | $ | 7,470 | $ | 577 | 8 | % | $ | 8,390 | $ | 8,428 | $ | (38) | (0) | % | ||||||||||
Occupancy of premises, net | 869 | 805 | 64 | 8 | 979 | 973 | 6 | 1 | ||||||||||||||||||
Furniture and equipment | 836 | 856 | (20) | (2) | 887 | 838 | 49 | 6 | ||||||||||||||||||
Professional and legal | 449 | 298 | 151 | 51 | 859 | 351 | 508 | 145 | ||||||||||||||||||
Marketing | 462 | 352 | 110 | 31 | 400 | 265 | 135 | 51 | ||||||||||||||||||
FDIC insurance | 242 | 325 | (83) | (26) | 239 | 226 | 13 | 6 | ||||||||||||||||||
Debit card processing | 404 | 344 | 60 | 17 | 382 | 280 | 102 | 36 | ||||||||||||||||||
Charitable donations | 121 | 65 | 56 | 86 | 30 | 188 | (158) | (84) | ||||||||||||||||||
External data processing | 809 | 631 | 178 | 28 | 821 | 820 | 1 | 0 | ||||||||||||||||||
Loss on foreclosed real estate, including recovery of losses | 0 | 3 | (3) | (100) | ||||||||||||||||||||||
PA shares tax | 355 | 150 | 205 | 137 | ||||||||||||||||||||||
Impaired loan carrying costs | 94 | 128 | (34) | (27) | 138 | 100 | 38 | |||||||||||||||||||
Other | 1,326 | 1,352 | (26) | (2) | 1,196 | 1,087 | 109 | 10 | ||||||||||||||||||
Total noninterest expense | $ | 13,659 | $ | 12,629 | $ | 1,030 | 8 | % | $ | 14,676 | $ | 13,706 | $ | 970 | 7 | % | ||||||||||
The discussion that follows addresses changes in selected categories of noninterest expense.
Professional and legal—The $151,000$508,000 or 51145 percent increase in professional and legal expense is attributed to corporate matters in the current period.
Marketing—The $110,000$135,000 or 3151 percent increase in marketing expense is attributed primarily to marketing campaigns previously delayed duerelated to the COVID-19 pandemic occurringnew Hunt Valley Connections Center in the third quarter 2021.
FDIC insurance—The $83,000 or 26 percent decrease in FDIC insurance expense is attributed to adjustment to the assessment calculation to offset the impact of PPP loans originated, which positively impacted third quarter 2021 expense.current period.
Debit card processing—The $60,000$102,000 or 1736 percent increase in debit card processing expense is attributed to the growth of retail clients and increased usage of electronic methods to access deposits.
Charitable donations—The $56,000$158,000 or 8684 percent increasedecrease in charitable donations expense is attributed to timing of charitable donations in 20212022 compared to the prior period.period. Charitable donations that occurred in the first quarter 2021 are expected to occur during the second quarter 2022.
External data processingPA shares tax—The $178,000$205,000 or 28137 percent increase in external data processingPA shares tax expense is attributed to increased reliance on technologytiming of charitable donations and the related tax credits in 2022 compared to the prior period. Tax credits that occurred in the first quarter 2021 are expected to occur during the second quarter 2022.
Impaired loan carrying costs—The $34,000$38,000 or 2738 percent decreaseincrease in impaired loan carrying costs expense is primarily attributed to a decreaseincrease in expenses associated with impaired loans compared to the prior period.
Provision for Income Taxes
The provision for income taxes for the thirdfirst quarter 20212022 was $1,365,000 an increase$807,000 a decrease of $323,000$266,000 or 3125 percent as compared to the thirdfirst quarter 2020.2021. The increasedecrease was attributed to higherlower pre-tax net income for the thirdfirst quarter 20212022 compared to the thirdfirst quarter 2020.2021. The effective tax rate for the three months ended September 30,March 31, 2022 and March 31, 2021 and September 30, 2020 was 22.220.9 percent and 22.321.6 percent, respectively. The effective tax rate differs from the statutory tax rate primarily due to the impact of certain elements with specific tax benefits, including tax-exempt income, such as income from tax-exempt investments, tax-exempt loans, and bank-owned life insurance.
Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
The Corporation’s net income (earnings) was $11,965,000 for the first nine months of 2021 compared to $3,685,000 for the first nine months of 2020, an increase of $8,280,000.
The schedule below presents selected performance metrics for the first nine months of both 2021 and 2020.
Nine months ended | |||||||
September 30, | |||||||
2021 | 2020 | ||||||
Basic earnings per share | $ | 1.22 | $ | 0.38 | |||
Diluted earnings per share | $ | 1.22 | $ | 0.38 | |||
Cash dividend payout ratio | 32.00 | % | 111.32 | % | |||
Return on average assets | 0.71 | % | 0.24 | % | |||
Return on average equity | 8.02 | % | 2.54 | % | |||
Net interest margin (tax equivalent basis) | 2.91 | % | 3.17 | % | |||
Net overhead ratio | 1.73 | % | 1.78 | % | |||
Efficiency ratio | 70.02 | % | 67.07 | % | |||
Average equity to average assets | 8.85 | % | 9.59 | % | |||
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income for the nine months ended September 30, 2021 was $46,439,000, an increase of $1,191,000 or 3 percent compared to net interest income of $45,248,000 for the first nine months of 2020. The main driver of the increase was lower rates on time deposits and interest bearing demand deposits. The growth of lower cost core deposits and resulting near term growth in short-term investments served to dilute the reported net interest margin while having minimal impact on net interest income.
The Corporation’s net interest margin, computed as interest income (tax-equivalent basis) annualized as a percentage of average interest earning assets, was 2.91 percent for the first nine months of 2021, representing a decrease compared to the 3.17 percent net interest margin for the first nine months of 2020. The net interest margin contraction was a result of higher levels of interest bearing deposits with banks, lower interest rates on loans and higher rate on long-term debt, partially offset by lower rates on interest bearing demand and time deposits and volume of commercial loans.
Total interest income for the first nine months of 2021 totaled $54,172,000, a decrease of $3,266,000 or 6 percent below the amount of total interest income for the first nine months of 2020. The change was primarily a result of a decrease in loan interest income due to lower rates on commercial loans, partially offset by a higher volume of commercial loans.
Interest income on loans decreased $3,043,000 or 6 percent in the first nine months of 2021 compared to the same period in 2020. The average balance of outstanding loans decreased $8,071,000 or 1 percent in the first nine months of 2021 compared to the first nine months of 2020, reflecting the impact related to SBA PPP loan forgiveness, between the two periods.
Investment income for the first nine months of 2021 decreased $223,000 or 7 percent compared to the first nine months of 2020. The tax-equivalent yield on investments for the first nine months of 2021 was 1.87 percent or 41 basis points lower than the 2.28 percent experienced during the first nine months of 2020.
Total interest expense for the first nine months of 2021 was $7,733,000, a decrease of $4,457,000 or 37 percent as compared to total interest expense of $12,190,000 for the first nine months of 2020. The change in interest expense was primarily a result of a decrease in the interest rates paid on interest bearing demand and time deposits.
Interest expense on deposits decreased $4,995,000 or 46 percent in the first nine months of 2021 compared to the same period in 2020. The change was due primarily to a decrease in the cost of interest bearing demand and time deposits. The average balance of interest-bearing deposits for the first nine months of 2021, primarily in lower cost core deposits, increased by $113,645,000 or 8 percent compared to the average for the first nine months of 2020. The average rate paid on interest-bearing deposits in the first nine months of 2021 was 0.53 percent, a decrease from the average rate of 1.05 percent paid on interest-bearing deposits during the first nine months of 2020. Also, the Corporation experienced favorable growth in noninterest-bearing deposits, with the average volume for the first nine months of 2021 increasing to $456,497,000, as compared to $349,717,000 for the first nine months of 2020. The increase
was primarily related to deposits associated with the origination of Paycheck Protection Program (PPP) loans and new commercial client activity.
Interest expense on borrowings for the first nine months of 2021 increased 41 percent compared to the first nine months of 2020, due to the issuance of subordinated debt in December 2020, offset by a lower volume of existing long-term debt. Outstanding long-term debt, consisting primarily of subordinated debentures and Federal Home Loan Bank of Pittsburgh (FHLBP) advances, averaged $68,331,000 for the first nine months of 2021, compared to an average balance of approximately $66,754,000 for the same period of 2020. The rate on average long-term debt for the first nine months of 2021 was 3.54 percent, an increase as compared to the rate of 2.55 percent for the same period of 2020.
Table 5-Average Balances and Interest Rates (tax equivalent basis) | |||||||||||||||||
Nine months ended September 30, | |||||||||||||||||
2021 | 2020 | ||||||||||||||||
Average | Yield/ | Average | Yield/ | ||||||||||||||
(dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||
Assets | |||||||||||||||||
Interest bearing deposits with banks | $ | 388,176 | $ | 360 | 0.12 | % | $ | 183,152 | $ | 497 | 0.36 | % | |||||
Investment securities: | |||||||||||||||||
Taxable | 171,402 | 2,354 | 1.84 | 142,406 | 2,328 | 2.18 | |||||||||||
Tax-exempt | 20,585 | 335 | 2.18 | 21,499 | 474 | 2.95 | |||||||||||
Total investment securities | 191,987 | 2,689 | 1.87 | 163,905 | 2,802 | 2.28 | |||||||||||
Loans: | |||||||||||||||||
Taxable (1) | 1,550,637 | 50,962 | 4.39 | 1,558,421 | 53,996 | 4.63 | |||||||||||
Tax-exempt | 9,467 | 287 | 4.05 | 9,754 | 297 | 4.07 | |||||||||||
Total loans | 1,560,104 | 51,249 | 4.39 | 1,568,175 | 54,293 | 4.62 | |||||||||||
Total earning assets | 2,140,267 | 54,298 | 3.39 | 1,915,232 | 57,592 | 4.02 | |||||||||||
Other assets (2) | 106,513 | 99,283 | |||||||||||||||
Total assets | $ | 2,246,780 | $ | 2,014,515 | |||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||
Deposits: | |||||||||||||||||
Interest bearing demand | $ | 852,489 | $ | 1,306 | 0.20 | % | $ | 736,686 | $ | 2,476 | 0.45 | % | |||||
Savings | 129,780 | 49 | 0.05 | 96,385 | 50 | 0.07 | |||||||||||
Time | 516,064 | 4,538 | 1.18 | 551,617 | 8,362 | 2.02 | |||||||||||
Total interest bearing deposits | 1,498,333 | 5,893 | 0.53 | 1,384,688 | 10,888 | 1.05 | |||||||||||
Short-term borrowings | 10,096 | 30 | 0.40 | 8,188 | 29 | 0.47 | |||||||||||
Long-term debt | 68,331 | 1,810 | 3.54 | 66,754 | 1,273 | 2.55 | |||||||||||
Total interest bearing liabilities | 1,576,760 | 7,733 | 0.66 | 1,459,630 | 12,190 | 1.12 | |||||||||||
Noninterest bearing deposits | 456,497 | 349,717 | |||||||||||||||
Other liabilities | 14,717 | 11,876 | |||||||||||||||
Shareholders' equity | 198,806 | 193,292 | |||||||||||||||
Total liabilities and | |||||||||||||||||
shareholders' equity | $ | 2,246,780 | $ | 2,014,515 | |||||||||||||
Net interest income (tax equivalent basis) | $ | 46,565 | $ | 45,402 | |||||||||||||
Net interest margin (3) | 2.91 | % | 3.17 | % | |||||||||||||
Tax equivalent adjustment | (126) | (154) | |||||||||||||||
Net interest income | $ | 46,439 | $ | 45,248 | |||||||||||||
(1)Average balance includes average nonaccrual loans of $38,658,000 for 2021 and $23,728,000 for 2020. Interest includes net loan fees of $7,385,000 for 2021 and $3,471,000 for 2020.
(2)Average balance includes average bank owned life insurance and foreclosed real estate.
(3)Net interest income (tax equivalent basis) annualized as a percentage of average interest earning assets.
Table 6-Rate/Volume Analysis of Changes in Net Interest Income (tax equivalent basis) | ||||||||
Nine months ended | ||||||||
September 30, | ||||||||
2021 vs. 2020 | ||||||||
Increase (decrease) due to change in* | ||||||||
(dollars in thousands) | Volume | Rate | Net | |||||
Interest Income | ||||||||
Interest bearing deposits with banks | $ | 558 | $ | (695) | $ | (137) | ||
Investment securities: | ||||||||
Taxable | 756 | (730) | 26 | |||||
Tax-exempt | (20) | (119) | (139) | |||||
Loans: | ||||||||
Taxable | 3,178 | (6,212) | (3,034) | |||||
Tax-exempt | (8) | (2) | (10) | |||||
Total interest income | 4,464 | (7,758) | (3,294) | |||||
Interest Expense | ||||||||
Deposits: | ||||||||
Interest bearing demand | 357 | (1,527) | (1,170) | |||||
Savings | 17 | (18) | (1) | |||||
Time | (539) | (3,285) | (3,824) | |||||
Short-term borrowings | 7 | (6) | 1 | |||||
Long-term debt | (544) | 1,081 | 537 | |||||
Total interest expense | (702) | (3,755) | (4,457) | |||||
Net interest income (tax equivalent basis) | $ | 5,166 | $ | (4,003) | $ | 1,163 | ||
*Changes which are due to both volume and rate are allocated in proportion to their relationship to the amount of change attributed directly to volume or rate.
Provision for Loan Losses
For the first nine months of 2021, the provision for loan losses was $1,932,000, as compared to a provision of $13,915,000 for the first nine months of 2020, a decrease of $11,983,000. The decreased provision expense in the first nine months of 2021 was attributed primarily to a partial charge off arising from several large commercial lending relationships in the prior period and the impacts of COVID-19 in the prior period. Changes in the external environment created by COVID-19 continue to impact the qualitative factors for certain loan segments in the allowance for loan loss analysis. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments. The allowance as a percentage of total loans was 1.47 percent at September 30, 2021, as compared to 1.38 percent at December 31, 2020 and 1.33 percent at September 30, 2020.
More information about the allowance for loan losses can be found in this report under the caption Allowance for Loan Losses on page 54.
Noninterest Income
The following table presents the components of total noninterest income for the first nine months of 2021, compared to the first nine months of 2020.
Table 7 - Noninterest income | ||||||||||||
Nine months ended | Change | |||||||||||
September 30, | Increase (Decrease) | |||||||||||
(dollars in thousands) | 2021 | 2020 | $ | % | ||||||||
Trust and investment services fees | $ | 3,346 | $ | 2,932 | $ | 414 | 14 | % | ||||
Income from mutual fund, annuity and insurance sales | 993 | 797 | 196 | 25 | ||||||||
Service charges on deposit accounts | 3,844 | 3,287 | 557 | 17 | ||||||||
Income from bank owned life insurance | 1,023 | 851 | 172 | 20 | ||||||||
Other income | 1,440 | 1,136 | 304 | 27 | ||||||||
Gain on sales of loans held for sale | 2,473 | 2,134 | 339 | 16 | ||||||||
Loss on write down of assets held for sale | (1,204) | 0 | (1,204) | *nm | ||||||||
(Loss) gain on sales of securities | (23) | 65 | (88) | (135) | ||||||||
Total noninterest income | $ | 11,892 | $ | 11,202 | $ | 690 | 6 | % | ||||
*nm – not meaningful
The discussion that follows addresses changes in selected categories of noninterest income.
Income from mutual fund, annuity and insurance sales—The $196,000 or 25 percent increase in income from mutual fund, annuity and insurance sales is due to an increase in the client base during the first nine months of 2021 compared to the first nine months of 2020.
Service charges on deposit accounts—The $557,000 or 17 percent increase in service charges on deposit accounts is due to the waiver of overdraft and foreign ATM fees associated with the COVID-19 pandemic in the prior period.
Income from bank owned life insurance—The $172,000 or 20 percent increase in income from bank owned life insurance is due to the purchase of new insurance policies during the second quarter 2021.
Other income—The $304,000 or 27 percent increase in other income is due to improved mortgage loan servicing fees in the current period compared to the prior period.
Gain on sales of loans held for sale—The $339,000 or 16 percent increase in gain on sales of loans is due to the sale of a larger volume of mortgage and SBA loans to the secondary market in the current period compared to the prior period.
Loss on write down of assets held for sale—The $1,204,000 increase in loss on write down of assets held for sale was primarily due to the recognition of impairment expected on the sale of the Dover Financial Center. The financial center was closed in the third quarter 2021 and the actual sale is expected to occur in the fourth quarter 2021.
Noninterest Expense
The following table presents the components of total noninterest expense for the first nine months of 2021, compared to the first nine months of 2020.
Table 8 - Noninterest expense | ||||||||||||
Nine months ended | Change | |||||||||||
September 30, | Increase (Decrease) | |||||||||||
(dollars in thousands) | 2021 | 2020 | $ | % | ||||||||
Personnel | $ | 24,743 | $ | 22,471 | $ | 2,272 | 10 | % | ||||
Occupancy of premises, net | 2,698 | 2,596 | 102 | 4 | ||||||||
Furniture and equipment | 2,467 | 2,550 | (83) | (3) | ||||||||
Professional and legal | 1,053 | 748 | 305 | 41 | ||||||||
Marketing | 1,165 | 988 | 177 | 18 | ||||||||
FDIC insurance | 660 | 664 | (4) | (1) | ||||||||
Debit card processing | 1,081 | 1,017 | 64 | 6 | ||||||||
Charitable donations | 1,059 | 1,030 | 29 | 3 | ||||||||
External data processing | 2,487 | 2,039 | 448 | 22 | ||||||||
Gain on foreclosed real estate, including recovery of losses | 0 | (170) | 170 | 100 | ||||||||
Impaired loan carrying costs | 281 | 604 | (323) | (53) | ||||||||
Other | 3,451 | 3,541 | (90) | (3) | ||||||||
Total noninterest expense | $ | 41,145 | $ | 38,078 | $ | 3,067 | 8 | % | ||||
The discussion that follows addresses changes in selected categories of noninterest expense.
Personnel—The $2,272,000 or 10 percent increase in personnel includes higher actual medical claims expense in 2021 compared to the prior period.
Professional and legal—The $305,000 or 41 percent increase in professional and legal is primarily due to an increase in CPA fees and legal fees associated with corporate matters.
Marketing—The $177,000 or 18 percent increase in marketing is attributed to marketing campaigns previously delayed due to the COVID-19 pandemic resuming in 2021.
External data processing—The $448,000 or 22 percent increase in external data processing is attributed to increased reliance on technology.
Gain on foreclosed real estate, including recovery of losses—The $170,000 change in foreclosed real estate including recovery for losses is attributed to the recovery for losses on foreclosed real estate that was sold during the second quarter 2020.
Impaired loan carrying costs—The $323,000 or 53 percent decrease in impaired loan carrying costs is attributed to fewer costs associated with impaired loans incurred during the current period.
Provision for Income Taxes
The income tax expense for the first nine months of 2021 was $3,289,000, an increase of $2,517,000 or 326 percent as compared to the first nine months of 2020. The effective tax rate for the nine months ended September 30, 2021 and September 30, 2020 was 21.6 percent and 17.3 percent, respectively. In the first half of the prior year the Company realized a tax benefit.
BALANCE SHEET REVIEW
Interest Bearing Deposits with Banks
On September 30, 2021,March 31, 2022, interest bearing deposits with banks totaled $471,385,000, an increase$417,741,000, a decrease of $157,916,000$107,903,000 or 5021 percent, compared to the level at year-end 2020.2021. The increasedecrease is primarily the result of the growthpurchase of investment securities and a decrease in client deposits related to PPP loan proceeds deposited, receipt of stimulus payments and organic growth, offset by purchases of investment securities.deposits.
Investment Securities (Available-for-Sale)
The Corporation’s entire investment securities portfolio is classified available-for-sale, and is comprised of interest-earning debt securities. The overall composition of the Corporation’s investment securities portfolio is provided in Note 2—Securities. On September 30, 2021,March 31, 2022, the fair value of investment securities available-for-sale totaled $224,576,000,$302,383,000, which represented an increase of $39,574,000$48,098,000 as compared to the fair value of investment securities at year-end 2020.2021. Purchases of securities exceeded the cash flows from principal reductions, sales and maturities during the first ninethree months of 2022.
Loans Held For Sale
On March 31, 2022, loans held for sale were $2,016,000, which was $5,860,000 or 74 percent lower than the level at year-end 2021. This was attributable to lower secondary market mortgage volume in the first quarter 2022 and SBA loans sold during the quarter.
Loans
On September 30, 2021,March 31, 2022, total loans, net of deferred fees, were $1.50$1.53 billion, which was $21,284,000$1,255,000 or less than one percent lower than the level at year-end 2020. The change in2021. Despite the decrease, core loan volume increased $12,653,000, which was due primarily tooffset by a decrease in PPP loans, which totaled approximately $55,000,000$13,810,000 at September 30, 2021,March 31, 2022, compared to $143,000,000$27,662,000 at December 31, 2020.2021. Commercial loans within the builder and developer, commercial real estate investor and residential real estate investor sectors each represented more than 10 percent of the total portfolio. The composition of the Corporation’s loan portfolio is provided in Note 4—Loans.
Operating Leases Right-of-Use Assets
On March 31, 2022, operating leases right-of-use assets totaled $3,584,000, which was $1,887,000 or 111 percent higher than the level at year-end 2021. The increase was primarily the result of the new Hunt Valley Connections Center, which opened in the first quarter 2022.
Deposits
Deposits are the Corporation’s principal source of funding for earning assets. On September 30, 2021,March 31, 2022, deposits totaled $2.05$2.10 billion, which reflected a $185,821,000$47,893,000 or 102 percent increasedecrease compared to the level at year-end 2020.2021. Of the increasedecrease in total deposits, $63,929,000$16,213,000 is attributable to noninterest bearing deposits and $121,892,000$31,680,000 is related to growth in interest bearing deposits, primarily time deposits. The composition of the Corporation’s total deposit portfolio is provided in Note 6—Deposits.
Short-term Borrowings
Short-term borrowings, which consist of securities sold under agreements to repurchase (repurchase agreements), federal funds purchased, and other short-term borrowings, totaled $12,300,000$10,778,000 at September 30, 2021,March 31, 2022, which reflected a $3,760,000$17,000 or 44less than 1 percent increase compared to the level at year-end 2020.2021.
Long-term Debt
The Corporation uses long-term borrowings as a secondary funding source for asset growth and to manage interest rate risk. On September 30, 2021,March 31, 2022, long-term debt, including subordinated debentures totaled $52,249,000$52,274,000 compared to $77,208,000$52,262,000 at year-end 2020. The $24,959,000 or 32 percent decrease in long-term debt resulted from the maturity of two FHLB advances totaling $25,000,000.2021. A listing of outstanding long-term debt obligations is provided in Note 7—Short-Term Borrowings and Long-Term Debt. The composition of the Corporation’s leases is provided in Note 8—Leases.
OtherOperating Leases Liabilities
OtherOn March 31, 2022, operating leases liabilities totaled $15,504,000 at September 30, 2021,$3,738,000, which reflected a $3,067,000was $1,935,000 or 25107 percent increase compared tohigher than the level at year-end 2020,2021. The increase was primarily due to increased liabilities related to loan clearing items at September 30, 2021.the result of the new Hunt Valley Connections Center, which opened in the first quarter 2022.
Shareholders’ Equity and Capital Adequacy
Shareholders’ equity, or capital, enables Codorus Valley to maintain asset growth and absorb losses. Capital adequacy can be affected by a multitude of factors, including profitability, new stock issuances, corporate expansion and acquisitions, dividend policy and distributions, and regulatory mandates. The Corporation’s total shareholders’ equity was approximately $198,712,000$183,719,000 on September 30, 2021, an increaseMarch 31, 2022, a decrease of approximately $752,000$11,786,000 or less than 16 percent compared to the level at year-end 2020.2021. The decrease was primarily related to the increase in accumulated other comprehensive loss caused by changing market rate conditions impacting the investment securities portfolio.
Cash Dividends on Stock
The Corporation has historically paid cash dividends on its stock on a quarterly basis. The Board of Directors determines the dividend rate after considering the Corporation's capital requirements, current and projected net income, and other relevant factors. As recently announced, the Board of Directors declared a quarterly cash dividend of $0.15 per share on OctoberApril 12, 2021,2022, payable on November
9, 2021,May 10, 2022, to shareholders of record at the close of business on OctoberApril 26, 2021.2022. The cash dividend follows a quarterly cash dividend of $0.11 per share and a special cash dividend of $0.02$0.15 per share distributed in February 2021, May 2021 and August 2021.2022.
Capital Adequacy
The Corporation and PeoplesBank are subject to various regulatory capital requirements administered by banking regulators that involve quantitative guidelines and qualitative judgments. The regulatory capital measures for the Corporation and PeoplesBank as of September 30, 2021March 31, 2022 and the minimum capital ratios established by regulators are set forth in Note 9—Regulatory Matters to the financial statements. We believe that PeoplesBank is well capitalized on September 30, 2021March 31, 2022 and had no regulatory dividend restrictions (see Note 9—Regulatory Matters to the financial statements).
RISK MANAGEMENT
Credit Risk Management
Credit risk represents the possibility that a loan client, counterparty or issuer may not perform in accordance with contractual terms, posing one of the most significant risks of loss to the Corporation. Accordingly, the Corporation emphasizes the management of credit risk, and has established a lending policy which management believes is sound given the nature and scope of our operations.
The Credit Risk Management section included in Item 7 of the Corporation’s previously filed Annual Report on Form 10-K for the year ended December 31, 2020,2021, provides a more detailed overview of the Corporation’s credit risk management process.
Nonperforming Assets
Nonperforming assets, as shown in the table below, are asset categories that pose the greatest risk of loss. The level of nonperforming assets at September 30, 2021March 31, 2022 has increased by $2,497,000decreased $3,343,000 or 610 percent when compared to year-end 2020, primarlily the result of an increase in accruing loans 90 days or more past due of $2,323,000.2021.
The Corporation regularly monitors large and criticized assets in its commercial loan portfolio recognizing that prolonged low economic growth, or a weakening economy, could have negative effects on these commercial borrowers. Nonperforming assets are monitored and managed for collection of these accounts. Collection efforts, including modification of contractual terms for individual accounts based on prevailing market conditions and liquidation of collateral assets, are employed to maximize recovery. A special assets committee meets regularly, at a minimum quarterly, to review nonperforming assets. We generally rely on appraisals performed by independent licensed appraisers to determine the value of real estate collateral for impaired collateral-dependent loans. Generally, an appraisal is performed when: an account reaches 90 days past due, unless a certified appraisal was completed within the past twelve months; market values have changed significantly; the condition of the property has changed significantly; or the existing appraisal is outdated based upon regulatory or policy requirements. In instances where the value of the collateral, net of costs to sell, is less than the net carrying amount for impaired commercial related loans, a specific loss allowance is established for the difference. Further provisions for loan losses may be required for nonaccrual loans as additional information becomes available or conditions change. When it is probable that some portion or an entire loan balance will not be collected, that amount is charged off as loss against the allowance.
The paragraphs and table below address significant changes in the nonperforming asset categories as of September 30, 2021March 31, 2022 compared to December 31, 2020.2021.
Table 5 – Nonperforming assets
Table 9 - Nonperforming Assets | |||||||
September 30, | December 31, | ||||||
(dollars in thousands) | 2021 | 2020 | |||||
Nonaccrual loans | $ | 38,349 | $ | 38,175 | |||
Accruing loans 90 days or more past due | 3,618 | 1,295 | |||||
Total nonperforming loans | 41,967 | 39,470 | |||||
Total nonperforming assets | $ | 41,967 | $ | 39,470 | |||
Accruing troubled debt restructurings | $ | 1,006 | $ | 1,395 | |||
Total period-end loans, net of deferred fees | $ | 1,524,377 | $ | 1,544,589 | |||
Allowance for loan losses (ALL) | $ | 22,336 | $ | 21,264 | |||
ALL as a % of total period-end loans | 1.47 | % | 1.38 | % | |||
Net charge-offs year-to-date, annualized as a % of average total loans | 0.07 | % | 0.93 | % | |||
ALL as a % of nonperforming loans | 53.22 | % | 53.87 | % | |||
Nonperforming loans as a % of total period-end loans | 2.75 | % | 2.56 | % | |||
Nonperforming assets as a % of total period-end | |||||||
loans and net foreclosed real estate | 2.75 | % | 2.56 | % | |||
Nonperforming assets as a % of total period-end assets | 1.80 | % | 1.83 | % | |||
Nonperforming assets as a % of total period-end | |||||||
shareholders' equity | 21.12 | % | 19.94 | % | |||
March 31, | December 31, | |||||||
(dollars in thousands) | 2022 | 2021 | ||||||
Nonaccrual loans: | ||||||||
Builder & developer | $ | 806 | $ | 807 | ||||
Commercial real estate investor | 2,709 | 3,943 | ||||||
Residential real estate investor | 163 | 280 | ||||||
Hotel/Motel | 12,075 | 12,192 | ||||||
Manufacturing | 4,739 | 5,125 | ||||||
Agriculture | 2,410 | 4,297 | ||||||
Service | 971 | 971 | ||||||
Commercial other | 4,636 | 5,372 | ||||||
Residential mortgages | 1,180 | 62 | ||||||
Home equity | 459 | 437 | ||||||
Consumer other | 91 | 96 | ||||||
Total nonaccrual loans | $ | 30,239 | $ | 33,582 | ||||
Accruing loans that are contractually past due 90 days or more as to principal and interest: | ||||||||
Agriculture | 324 | 324 | ||||||
Total accruing loans past due 90 days or more | $ | 324 | $ | 324 | ||||
Other Real Estate Owned: | $ | 0 | $ | 0 | ||||
Total Nonperforming assets | $ | 30,563 | $ | 33,906 | ||||
Troubled debt restructurings (TDRs): | ||||||||
Accruing TDRs | $ | 1,087 | $ | 954 | ||||
TDRs included with nonaccrual loans above | 12,966 | 0 | ||||||
Total TDRs | $ | 14,053 | $ | 954 | ||||
Impaired loans without a valuation allowance | $ | 24,776 | $ | 28,348 | ||||
Impaired loans with a valuation allowance | 6,364 | 6,187 | ||||||
Total impaired loans | $ | 31,140 | $ | 34,535 | ||||
Valuation allowance related to impaired loans | $ | 3,161 | $ | 4,058 | ||||
Nonaccrual loans as a % of total loans | 1.98 | % | 2.20 | % | ||||
Nonperforming loans as a % of total loans | 2.00 | % | 2.22 | % | ||||
Nonperforming assets as a % of total period-end assets | 1.30 | % | 1.40 | % | ||||
ALL as a % of nonaccrual loans | 72.84 | % | 67.84 | % | ||||
ALL as a % of nonperforming assets | 72.07 | % | 67.19 | % | ||||
ALL as a % of total loans | 1.44 | % | 1.49 | % | ||||
Nonaccrual loans as a % of applicable portfolio: | ||||||||
Builder & developer | 0.52 | % | 0.52 | % | ||||
Commercial real estate investor | 0.82 | % | 1.22 | % | ||||
Residential real estate investor | 0.07 | % | 0.12 | % | ||||
Hotel/Motel | 17.25 | % | 17.35 | % | ||||
Manufacturing | 5.61 | % | 7.05 | % | ||||
Agriculture | 2.50 | % | 4.51 | % | ||||
Service | 1.38 | % | 1.49 | % | ||||
Commercial other | 2.41 | % | 2.42 | % | ||||
Residential mortgages | 1.11 | % | 0.06 | % | ||||
Home equity | 0.49 | % | 0.46 | % | ||||
Consumer other | 0.41 | % | 0.42 | % | ||||
Nonperforming loans
Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more past due. We generally place a loan on nonaccrual status and cease accruing interest income (i.e., recognize interest income on a cash basis, as long as the loan is sufficiently collateralized) when loan payment performance is unsatisfactory and the loan is past due 90 days or more. A loan is returned to interest accruing status when we determine that circumstances have improved to the extent that all of the principal and interest amounts contractually due are current for at least six consecutive payments and future payments are reasonably assured. Loans past due 90 days or more and still accruing interest represent loans that are contractually past due, but are well collateralized and in the process of collection. As of September 30, 2021,March 31, 2022, the nonperforming loan portfolio balance totaled $41,967,000,$30,563,000, compared to $39,470,000$33,906,000 at year-end 2020.2021. During the first ninethree months of 2021,2022, loans totaling $9,079,000$1,147,000 were transferred to nonaccrual status, offset by the transfer of loans out of nonaccrual status and payments to loans in nonaccrual status totaling approximately $8,905,000.$4,490,000, representing a net decrease in nonaccrual loans of $3,343,000. In addition, accruing loans 90 days or more past due increased $2,323,000remained the same at $324,000 in the first nine months of 2021.both periods. For both periods, the nonperforming portfolio balance was comprised primarily of collateralized commercial loans.
Foreclosed Real Estate
Foreclosed real estate represents real estate acquired to satisfy debts owed to PeoplesBank and is included in the Other Assets category on the Corporation’s balance sheet. As of September 30, 2021March 31, 2022 and December 31, 20202021 there was no foreclosed real estate.
Troubled Debt Restructurings
Troubled debt restructurings pertain to loans whose terms have been modified to include a concession that we would not ordinarily consider due to the debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a reduction of interest rate lower than the current market rate for new debt with similar risk, the deferral of payments or extension of the stated maturity date. Troubled debt restructurings are evaluated for impairment if they have been restructured during the most recent calendar year, or if they cease to perform in accordance with the modified terms. As
The principal balance of September 30, 2021,all outstanding TDRs was $15,954,000 at March 31, 2022 and $954,000 at December 31, 2021. There was a $1,901,000 allowance allocated to TDRs at March 31, 2022 and none at December 31, 2021. Included in the total TDRs at March 31, 2022, the accruing troubled debt restructuringTDR portfolio balance totaled $1,006,000,$1,087,000, compared to $1,395,000$954,000 at year-end 2020.2021. The $389,000 decrease$14,640,000 increase in total TDRs was the result of principal repaymentsthe addition of two commercial and the payoff of one relationship.two consumer loan relationships.
As of September 30, 2021,March 31, 2022, there are no modifications remaining for consumer loans, twoone mortgage loansloan totaling approximately $1,163,000$641,000 and five commercial loans totaling approximately $40,000,000$33,527,000 under the CARES Act, which are not considered TDRs. As of March 31, 2021, there were no modifications for consumer loans, five mortage loans totaling approximately $2,060,000 and 38 commercial loans totaling approximately $86,091,000 under the CARES Act, which are not considered TDRs.
Allowance for Loan Losses
Although the Corporation believes that it maintains sound credit policies, certain loans deteriorate and must be charged off as losses. The allowance for loan losses is maintained to absorb losses inherent in the portfolio. The allowance is increased by provisions charged to expense and is reduced by loan charge-offs, net of recoveries. The allowance is based upon management’s continuous
evaluation of the loan portfolio coupled with a formal review of adequacy on a quarterly basis, which is subject to review and approval by the Board.
The allowance for loan losses consists primarily of two components: specific allowances for individually impaired commercial loans and allowances calculated for pools of loans. The Corporation uses an internal risk rating system to evaluate individual loans. Loans are segmented into industry groups or pools with similar characteristics, and an allowance for loan losses is allocated to each segment based on quantitative factors such as recent loss history (two-year rolling average of net charge-offs) and qualitative factors, such as the results of internal and external credit reviews, changes in the size and composition of the loan portfolio, adequacy of collateral, and general economic conditions. Determining the level of the allowance for probable loan losses at any given period is subjective, particularly during deteriorating or uncertain economic periods, and requires that we make estimates using assumptions. There is also the potential for adjustment to the allowance as a result of regulatory examinations.
The following tables presents an analysis of the activity in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020:
Table 10 - Analysis of Allowance for Loan Losses | |||||||
(dollars in thousands) | 2021 | 2020 | |||||
Balance-July 1, | $ | 22,011 | $ | 21,038 | |||
Provision charged to operating expense | 349 | 1,930 | |||||
Loans charged off: | |||||||
Commercial, financial and agricultural | 36 | 2,008 | |||||
Consumer and home equity | 2 | 61 | |||||
Total loans charged off | 38 | 2,069 | |||||
Recoveries: | |||||||
Commercial, financial and agricultural | 7 | 3 | |||||
Consumer and home equity | 7 | 7 | |||||
Total recoveries | 14 | 10 | |||||
Net charge-offs | 24 | 2,059 | |||||
Balance-September 30, | $ | 22,336 | $ | 20,909 | |||
Ratios: | |||||||
Annualized net charge-offs as a % of average total loans | 0.01 | % | 0.52 | % | |||
Allowance for loan losses as a % of total period-end loans | 1.47 | % | 1.33 | % | |||
Allowance for loan losses as a % of nonperforming loans | 53.22 | % | 103.06 | % | |||
Table 11 - Analysis of Allowance for Loan Losses | |||||||
(dollars in thousands) | 2021 | 2020 | |||||
Balance-January 1, | $ | 21,264 | $ | 21,066 | |||
Provision charged to operating expense | 1,932 | 13,915 | |||||
Loans charged off: | |||||||
Commercial, financial and agricultural | 942 | 13,952 | |||||
Real estate - construction and land development | 0 | 97 | |||||
Consumer and home equity | 21 | 73 | |||||
Total loans charged off | 963 | 14,122 | |||||
Recoveries: | |||||||
Commercial, financial and agricultural | 77 | 17 | |||||
Consumer and home equity | 26 | 33 | |||||
Total recoveries | 103 | 50 | |||||
Net charge-offs | 860 | 14,072 | |||||
Balance-September 30, | $ | 22,336 | $ | 20,909 | |||
Ratios: | |||||||
Annualized net charge-offs as a % of average total loans | 0.07 | % | 1.20 | % | |||
Allowance for loan losses as a % of total period-end loans | 1.47 | % | 1.33 | % | |||
Allowance for loan losses as a % of nonperforming loans | 53.22 | % | 103.06 | % | |||
The provision for loan losses decreased $11,983,000$204,000 from September 30, 2020March 31, 2021 to September 30, 2021.March 31, 2022. The decreased provision expense in the first ninethree months of 20212022 was attributed primarily to a partial charge off arising from several large commercial lending relationshipslarger impact related to COVID-19 in the prior period. Changes in the external environment created by COVID-19 continue to impact the qualitative factors for certain loan segments in the allowance for loan loss analysis, but to a lesser extent than the prior period. Both periods supported adequate allowance for loan loss coverage, however, changing economic conditions associated with the COVID-19 pandemic may require future adjustments.
Net charge-offs for the first nine months of 2021 were $860,000 compared to $14,072,000 for the same period in 2020. During the first nine months of 2021, there were $963,000 of charge-offs as compared to $14,122,000 during the same period in 2020. The risks and uncertainties associated with the COVID-19 pandemic, weak economic and business conditions, or the erosion of real estate values may adversely affect our borrowers’ ability to service their loans, causing significant fluctuations in the level of charge-offs and provision expense from one period to another. The allowance as a percentage of total loans was 1.47 percent at September 30, 2021, as compared to 1.38 percent at December 31, 2020 and 1.33 percent at September 30, 2020.
Liquidity Risk Management
Maintaining adequate liquidity provides the Corporation with the ability to meet financial obligations to depositors, loan clients, employees, and shareholders on a timely and cost effective basis in the normal course of business. Additionally, adequate liquidity provides funds for growth and business opportunities as they arise. Liquidity is generated from transactions relating to both the Corporation's assets and liabilities. The primary sources of asset liquidity are funds received from client loan payments, investment maturities and cash inflows from mortgage-backed securities, and the net proceeds of asset sales. The primary sources of liability liquidity are deposit growth, and funds obtained from short-term borrowings and long-term debt. The Consolidated Statements of Cash Flows, included in this report, present the changes in cash from operating, investing and financing activities. At September 30, 2021,March 31, 2022, we believe that liquidity was adequate based upon the potential liquidation of unpledged available-for-sale securities with a fair value totaling approximately $45,150,000$104,045,000 and available credit from the Federal Home Loan Bank of Pittsburgh totaling approximately $554,733,000.$574,073,000. The Corporation’s loan-to-deposit ratio was 74.472.9 percent as of September 30, 2021, 82.9March 31, 2022, 71.4 percent as of December 31, 20202021 and 85.380.4 percent as of September 30, 2020.March 31, 2021.
Off-Balance Sheet Arrangements
The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist primarily of commitments to grant new loans, unfunded commitments under existing loan facilities, and letters of credit issued under the same standards as on-balance sheet instruments. Unused commitments on September 30, 2021,March 31, 2022, totaled $684,373,000$665,654,000 and consisted of $499,053,000$529,563,000 in unfunded commitments under existing loan facilities, $169,862,000$120,560,000 to grant new loans and $15,458,000$15,531,000 in letters of credit. Generally these commitments have fixed expiration dates or termination clauses and are for specific purposes. Accordingly, many of the commitments are expected to expire without being drawn upon and, therefore, generally do not present significant liquidity risk to the Corporation or PeoplesBank.
Recent Legislative Developments
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. Since that time banking regulators, the SEC and FASB have all issued additional guidance and clarification on various sections of the CARES Act. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19, provided the loan was not past due as of December 31, 2019. Section 541 of the Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020, extending the provisions in Section 4013 of the CARES Act to January 1, 2022. Regulators have encouraged financial institutions to work constructively with borrowers in communities and industries affected by COVID-19 using prudent and proactive actions which are in the best interests of the financial institution, the borrower and the economy. The Corporation’s Board of Directors approved a number of options for loan modifications, including interest deferral, full payment deferral, additional extensions of credit, and SBA loan programs (i.e., Economic Injury Disaster Loans, Paycheck Protection Program). As of September 30, 2021, the Corporation has remaining loan modifications totaling approximately $41,000,000. The Corporation has been an active participant in the SBA Paycheck Protection Program, with outstanding PPP loans as of September 30, 2021 of approximately $55,000,000.
At its October 16, 2019 meeting, the FASB approved a deferral of the effective date for several of its recent standards. The proposal creates two new “buckets”: (1) SEC filers other than smaller reporting companies (SRCs, as defined by the SEC) and (2) all other entities. For the Corporation, this would apply to ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”), which has not yet been adopted by the Corporation. The effective date of the CECL standard would be for fiscal years beginning after December 15, 2022. The Corporation will continuecontinues to move forward with the project.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The most significant market risk to which the Corporation is exposed is interest rate risk. The primary business of the Corporation and the composition of its balance sheet consist of investments in interest earning assets (primarily loans and securities), which are funded by interest bearing liabilities (deposits and borrowings), all of which have varying levels of sensitivity to changes in market interest rates. Changes in rates also have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset Liability Management Committee, consisting of key financial and senior management personnel, meets on a regular basis. The Committee is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, reviewing projected sources and uses of funds, approving asset and liability management policies, monitoring economic conditions, and overseeing the formulation and implementation of strategies regarding balance sheet positions.
Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in client behavior that could result in changes to mix and/or volumes in the balance sheet, nor do they account for competitive pricing over the forward 12-month period. The Corporation applies these interest rate “shocks” to its financial instruments up and down 100, 200, 300, and 400 basis points. A 300 and 400 basis point decrease in interest rates cannot be simulated at this time due to the historically low interest rate environment.
The following table summarizes the expected impact of interest rate shocks on net interest income as well as the Corporation’s policy limits at each level. All scenarios with the exception of a decrease of 100 basis points were within policy limits at September 30, 2021.March 31, 2022.
Change in Interest Rates | Annual Change in Net | % Change in Net | % Change | |||||
(basis points) | Interest Income (in thousands) | Interest Income | Policy Limit | |||||
+100 | $ | 7,142 | 10.49 | % | (5.00) | % | ||
(100) | $ | (4,922) | (7.23) | % | (5.00) | % | ||
+200 | $ | 14,431 | 21.19 | % | (15.00) | % | ||
(200) | $ | (7,976) | (11.71) | % | (15.00) | % | ||
+300 | $ | 21,807 | 32.02 | % | (25.00) | % | ||
+400 | $ | 29,253 | 42.95 | % | (35.00) | % | ||
Change in Interest Rates | Annual Change in Net | % Change in Net | % Change | |||||
(basis points) | Interest Income (in thousands) | Interest Income | Policy Limit | |||||
+100 | $ | 6,628 | 10.56 | % | (5.00) | % | ||
-100 | $ | (3,323) | (5.30) | % | (5.00) | % | ||
+200 | $ | 14,344 | 22.86 | % | (15.00) | % | ||
-200 | $ | (6,318) | (9.78) | % | (15.00) | % | ||
+300 | $ | 21,960 | 34.99 | % | (25.00) | % | ||
+400 | $ | 29,446 | 46.92 | % | (35.00) | % | ||
Item 4. Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Treasurer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive and Chief Financial Officers concluded that, as of September 30, 2021,March 31, 2022, the Corporation’s disclosure controls and procedures were effective. The Corporation’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that information required
to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. A control system, no matter how well conceived and operated, must reflect the fact that there are resource constraints and that the benefits of controls must be considered relative to their costs, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
There has been no change in the Corporation’s internal control over financial reporting that occurred during the three and nine months ended September 30, 2021,March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Part II—OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and PeoplesBank are involved in routine litigation incidental to their business. In the opinion of management, there are no legal proceedings pending against the Corporation or any of its subsidiaries which are expected to have a material impact upon the consolidated financial position and/or operating results of the Corporation. Management is not aware of any adverse proceedings known or contemplated by government authorities.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in Item 1A – Risk Factors – in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
On April 12, 2022, Codorus Valley Bancorp, Inc. (the "Company") entered into a Cooperation Agreement (the "Agreement") with Driver Opportunity Partners I LP, Driver Management Company LLC and J. Abbott R. Cooper (collectively, "Driver"). Pursuant to the Agreement, and concurrently with the execution of the Agreement, the Company appointed John E. Kiernan to the Company's board of directors (the "Board") and the Corporate Governance and Nominating Committee (the "Nominating Committee"), the Compensation Committee ("Compensation Committee") and the Audit Committee ("Audit Committee") of the Board. Additionally, the Company agreed to nominate Mr. Kiernan for election at the Company's 2022 annual meeting of stockholders (the "2022 Annual Meeting"). The Company has further agreed to begin a process to identify and appoint two additional new independent directors to the Board, one of whom shall be identified and selected by the Board in its sole discretion, and the other of whom shall be mutually agreed upon by Driver and the Board. Each of these two new directors shall be appointed to the Board no later than June 30,
2022. Additionally, the Audit Committee has agreed to engage Chain Bridge Partners, LLC ("Chain Bridge") to undertake a comprehensive review of the Company's credit risk policies and practices (the "Credit Risk Study"). The review will include (i) an evaluation of the adequacy of the Board's level governance of the Company's lending program, (ii) an assessment of managerial compliance with the Board's approved policies and procedures, including loan underwriting documentation and support, and (iii) a credit review. At the conclusion of the Credit Risk Study, Chain Bridge will issue recommendations for strengthening the Company's credit and underwriting risk management policies and practices.
Furthermore, the Company will hire independent third-party advisors to perform a comprehensive study of the Company’s executive compensation (the “Compensation Study”), including the executive compensation initiatives previously proposed by Driver, and any recommendations contained in the Credit Risk Study. The Compensation Study will also solicit feedback from the Company’s shareholders, and evaluate stock ownership guidelines for the Company’s directors.
Driver has agreed to withdraw its notice of intent to nominate director candidates for election at the 2022 Annual Meeting. With respect to each annual or special meeting of the Company's stockholders during the term of the Agreement, Driver has agreed to vote the shares of the Company's common stock then held by it in accordance with the Board's recommendations on director election proposals and any other proposals submitted by the Company or a stockholder, except that Driver may vote in its discretion on extraordinary transactions and, other than with respect to certain proposals relating to Board composition, in accordance with the recommendations of Institutional Shareholder Services, Inc. or Glass Lewis & Co. if either of them recommends differently from the
Board. Further, Driver has agreed to a general release of claims with respect to the Company and its affiliates and to voluntarily dismiss with prejudice any and all claims asserted in any actions against the Company or its affiliates in their entirety. During the term of the Agreement, the Company and Driver have agreed that they will not disparage each other.
Driver has also agreed to certain customary standstill provisions prohibiting it from, among other things, (i) making certain announcements regarding the Company's transactions, (ii) soliciting proxies, (iii) purchasing or otherwise acquiring ownership of any securities of the Company, (iv) advising, encouraging or intentionally influencing any person with respect to disposition of any securities of the Company, (v) taking actions to change or influence the Board, Company management or the direction of certain Company matters, and (vi) exercising certain stockholder rights.
The Agreement will terminate upon five business days' written notice by either party, except that the Agreement shall not terminate until the date that is 30 days prior to the opening of the window for submission of stockholder nominations for the Company's 2024 annual meeting of stockholders pursuant to the Company's Amended and Restated By-Laws. Each of the Company and Driver has the right to terminate the Agreement earlier if the other party commits a material breach of the Agreement and such breach is not cured within 15 days after notice or, if such breach is not curable within 15 days, the breaching party has not taken any substantive action to cure within such 15-day period.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Corporation relies on its subsidiary PeoplesBank, A Codorus Valley Company, for dividend distributions, which are subject to restrictions as reported in Note 9—Regulatory Matters of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Total Number of | Approximate Dollar | |||||||||
Shares Purchased as | Value of Shares that | |||||||||
Total Number | Part of Publicly | May Yet Be Purchased | ||||||||
of Shares | Average Price | Announced Plans | Under the Plans or | |||||||
Period | Purchased | Paid per Share | or Programs | Programs | ||||||
January 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
February 1 - 28, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
March 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
April 1 - 30, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
May 1 - 31, 2021 | 142,541 | $ | 18.75 | 142,541 | $ | 2,327,900 | ||||
June 1 - 30, 2021 | 0 | $ | 0 | 0 | $ | 2,327,900 | ||||
July 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 2,327,900 | ||||
August 1 - 31, 2021 | 99,607 | $ | 22.49 | 99,607 | $ | 87,900 | ||||
September 1 - 30, 2021 | 0 | $ | 0 | 0 | $ | 0 | ||||
Total Number of | Approximate Dollar | |||||||||
Shares Purchased as | Value of Shares that | |||||||||
Total Number | Part of Publicly | May Yet Be Purchased | ||||||||
of Shares | Average Price | Announced Plans | Under the Plans or | |||||||
Period | Purchased | Paid per Share | or Programs | Programs | ||||||
January 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
February 1 - 28, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
March 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
April 1 - 30, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
May 1 - 31, 2021 | 142,541 | $ | 18.75 | 142,541 | $ | 2,327,356 | ||||
June 1 - 30, 2021 | 0 | $ | 0 | 0 | $ | 2,327,356 | ||||
July 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 2,327,356 | ||||
August 1 - 31, 2021 | 99,607 | $ | 22.49 | 99,607 | $ | 0 | ||||
September 1 - 30, 2021 | 65,213 | $ | 22.10 | 65,213 | $ | 3,558,793 | ||||
October 1 - 31, 2021 | 59,585 | $ | 22.63 | 59,585 | $ | 2,210,384 | ||||
November 1 - 30, 2021 | 66,113 | $ | 22.28 | 66,113 | $ | 737,387 | ||||
December 1 - 31, 2021 | 32,375 | $ | 21.72 | 32,375 | $ | 34,202 |
Total Number of | Approximate Dollar | |||||||||
Shares Purchased as | Value of Shares that | |||||||||
Total Number | Part of Publicly | May Yet Be Purchased | ||||||||
of Shares | Average Price | Announced Plans | Under the Plans or | |||||||
Period | Purchased | Paid per Share | or Programs | Programs | ||||||
January 1 - 31, 2022 | 1,535 | $ | 22.00 | 1,535 | $ | 5,000,000 | ||||
February 1 - 28, 2022 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
March 1 - 31, 2022 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
The Corporation’s Board of Directors approved a Share Repurchase Program (“Program”) in January 2021. Under the Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. The program was completed in August 2021.
Total Number of | Approximate Dollar | |||||||||
Shares Purchased as | Value of Shares that | |||||||||
Total Number | Part of Publicly | May Yet Be Purchased | ||||||||
of Shares | Average Price | Announced Plans | Under the Plans or | |||||||
Period | Purchased | Paid per Share | or Programs | Programs | ||||||
August 1 - 31, 2021 | 0 | $ | 0 | 0 | $ | 5,000,000 | ||||
September 1 - 30, 2021 | 65,213 | $ | 22.10 | 65,213 | $ | 3,558,700 | ||||
The Corporation’s Board of Directors approved a new Share Repurchase Program (“Program”) in August 2021.January 2022. Under the newly approved Program, the Corporation is authorized to repurchase up to $5 million of the Corporation’s issued and outstanding common stock. All shares of common stock repurchased pursuant to the Program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. There was no activity under the new Program during the quarter ended March 31, 2022.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
This Item 4 is not applicable to the Corporation.
Item 5. Other Information
None
Item 6. Exhibits
Exhibit Number | Description of Exhibit | |
101 | Financial statements from the Quarterly Report on Form 10-Q of Codorus Valley Bancorp, Inc. for the quarter ended | |
104 | Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101) |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Codorus Valley Bancorp, Inc. (Registrant) | ||
| /s/ Craig L. Kauffman | |
Date | Craig L. Kauffman, | |
President | ||
and Chief Executive Officer (Principal Executive Officer) | ||
| /s/ Larry D. Pickett | |
Date | Larry D. Pickett | |
Treasurer | ||
(Principal Financial and Accounting Officer) |