FIDELITY D & D BANCORP, INC. The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as ofSeptember 30, 2022 compared toDecember 31, 2021 and a comparison of the results of operations for the three and nine months endedSeptember 30, 2022 and 2021. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company's 2021 Annual Report filed on Form 10-K. Forward-looking statements Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words "expect," "anticipate," "intend," "plan," "believe," "estimate," and similar expressions are intended to identify such forward-looking statements.
The Company's actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:
? local, regional and national economic conditions and changes thereto;
? the short-term and long-term effects of inflation, and rising costs to the
Company, its customers and on the economy;
? the effects of economic conditions particularly with regard to the negative
impact of severe, wide-ranging and continuing disruptions caused by the spread
of Coronavirus Disease 2019 (COVID-19) and any other pandemic, epidemic or
other health-related crisis and responses thereto on current customers and the
operations of the Company, specifically the effect of the economy on loan
customers' ability to repay loans;
? securities markets and monetary fluctuations and volatility;
? the costs and effects of litigation and of unexpected or adverse outcomes in
such litigation;
? the impact of new or changes in existing laws and regulations, including laws
and regulations concerning taxes, banking, securities and insurance and their
application with which the Company and its subsidiaries must comply;
? impacts of the capital and liquidity requirements of the Basel III standards
and other regulatory pronouncements, regulations and rules;
? governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
? effects of short- and long-term federal budget and tax negotiations and their
effect on economic and business conditions;
? the effect of changes in accounting policies and practices, as may be adopted
by the regulatory agencies, as well as the Financial Accounting Standards
Board and other accounting standard setters;
? the risks of changes and volatility of interest rates on the level and
composition of deposits, loan demand, and the values of loan collateral,
securities and interest rate protection agreements, as well as interest rate
risks;
? the effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities brokerage
firms, insurance companies, money market and other mutual funds and other
financial institutions operating in our market area and elsewhere, including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the internet;
? technological changes;
? the interruption or breach in security of our information systems, continually
evolving cybersecurity and other technological risks and attacks resulting in
failures or disruptions in customer account management, general ledger
processing and loan or deposit updates and potential impacts resulting
therefrom including additional costs, reputational damage, regulatory
penalties, and financial losses;
? acquisitions and integration of acquired businesses;? the failure of assumptions underlying the establishment of reserves for loan
losses and estimations of values of collateral and various financial assets
and liabilities;
? acts of war or terrorism;
? disruption of credit and equity markets; and
? the risk that our analyses of these risks and forces could be incorrect and/or
that the strategies developed to address them could be unsuccessful.
The Company cautions readers not to place undue reliance on forward-looking
statements, which reflect analyses only as of the date of this document. The
Company has no obligation to update any forward-looking statements to reflect
events or circumstances after the date of this document.
Readers should review the risk factors described in other documents that we file
or furnish, from time to time, with the Securities and Exchange Commission ,
including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and
other current reports filed or furnished on Form 8-K.
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Table of Contents Executive Summary The Company is aPennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust company is TheFidelity Deposit and Discount Bank . The Company is headquartered inDunmore, Pennsylvania . We considerLackawanna ,Northampton ,Lehigh andLuzerne Counties our primary marketplace. As a leading Northeastern andEastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see "Funds Deployed" section of this management's discussion and analysis) and to increase the amount of low-cost core deposits (see "Funds Provided" section of this management's discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers' needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand and optimize our franchise footprint, consisting presently of our 21-branch network. We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated inNortheastern Pennsylvania , primarily inLackawanna andLuzerne counties, andEastern Pennsylvania , primarilyNorthampton andLehigh counties. TheFederal Open Market Committee (FOMC) increased interest rates by 25 basis points inMarch 2022 in the first "tightening" move sinceDecember 2018 followed by increases of 50 basis points and 75 basis points inMay 2022 andJune 2022 , respectively. TheFOMC increased interest rates another 75 basis points each inJuly 2022 ,September 2022 andNovember 2022 , totaling 375 basis points increase thus far during 2022, and communicated inflation fighting expectations of further increases during the remainder of this year. According to theU.S. Bureau of Labor Statistics , the national unemployment rate forSeptember 2022 was 3.5%, down 0.4 percentage points fromDecember 2021 . The unemployment rates in theScranton -Wilkes-Barre -Hazleton (market area north) and theAllentown -Bethlehem -Easton (market area south) Metropolitan Statistical Areas (local) also decreased but the market area north remained at a higher level than the national unemployment rate. The local unemployment rates atSeptember 30, 2022 were 4.2% in market area north and 3.3% in market area south, respectively, a decrease of 1.1 percentage points and 1.0 percentage point from the 5.3% and 4.3%, respectively, atDecember 31, 2021 . The median home values in theScranton -Wilkes-Barre -Hazleton metro andAllentown -Bethlehem -Easton metro increased 15.8% and 13.3%, respectively, from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets. Values in the markets are expected to grow at a slower pace in the next year. In light of these expectations, we are uncertain if real estate values could continue to increase at these levels with the rising rate environment, however we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.
On
For the nine months endedSeptember 30, 2022 , net income was$22.9 million , or$4.03 diluted earnings per share, compared to$16.2 million , or$3.09 diluted earnings per share, for the nine months endedSeptember 30, 2021 . Non-recurring merger-related costs andFederal Home Loan Bank (FHLB) prepayment penalties incurred are not a part of the Company's normal operations. If these expenses had not occurred, adjusted net income (non-GAAP) for the nine months endedSeptember 30, 2022 and 2021 would have been$22.9 million and$19.1 million , respectively. Adjusted diluted EPS (non-GAAP) would have been$4.03 and$3.64 for the nine months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , tangible common book value per share (non-GAAP) was$22.24 and$32.57 , respectively. The decrease in tangible book value was due to the decline in tangible common equity resulting within AOCI from the after tax net unrealized losses on available-for-sale securities. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See "Non-GAAP Financial Measures" located below within this management's discussion and analysis.Branch managers, relationship bankers, mortgage originators and our business service partners are all focused on developing a mutually profitable full banking relationship. We understand our markets, offer products and services along with financial advice that is appropriate for our community, clients and prospects. The Company continues to focus on the trusted financial advisor model by utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships. In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, "Risk Factors" below, as well as Part I, Item 1A, "Risk Factors," and in the "Supervisory and Regulation" section of management's discussion and analysis of financial condition and results of operations in our 2021 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us. 39
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Table of Contents Non-GAAP Financial Measures The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare the Company's financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company's non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company's tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% atSeptember 30, 2022 and 2021. The following table reconciles the non-GAAP financial measures of FTE net interest income: Three months ended Nine months endedSeptember 30 ,September 30 ,
(dollars in thousands) September 30, 2022 2021 September 30, 2022 2021 Interest income (GAAP) $ 20,135$ 18,173 $ 57,378$ 46,680 Adjustment to FTE 687 577 2,038 1,480 Interest income adjusted to FTE (non-GAAP) 20,822 18,750 59,416 48,160 Interest expense (GAAP) 1,625 999 3,431 2,730 Net interest income adjusted to FTE (non-GAAP) $ 19,197$ 17,751 $ 55,985$ 45,430
The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:
Three months ended Nine months ended
September 30 , September 30 ,(dollars in thousands) September 30, 2022 2021 September 30, 2022 2021 Efficiency Ratio (non-GAAP) Non-interest expenses (GAAP) $ 13,028$ 15,185 $ 38,484$ 37,492 Net interest income (GAAP) 18,510 17,174 53,947 43,950 Plus: taxable equivalent adjustment 687 577 2,038 1,480 Non-interest income (GAAP) 3,911 4,009 12,722 14,102 Net interest income (FTE) plus non-interest income (non-GAAP) $ 23,108$ 21,760 $ 68,707$ 59,532 Efficiency ratio (non-GAAP) 56.38 % 69.79 % 56.01 % 62.98 %
The following table provides a reconciliation of the tangible common equity (non-GAAP) and the calculation of tangible book value per share:
September September
(dollars in thousands) 30, 2022 30, 2021
Tangible Book Value per Share (non-GAAP)
Total assets (GAAP) $ 2,435,768 $ 2,411,799
Less: Intangible assets, primarily goodwill (21,264 ) (21,678 )
Tangible assets 2,414,504 2,390,121
Total shareholders' equity (GAAP) 146,487
205,569
Less: Intangible assets, primarily goodwill (21,264 ) (21,678 ) Tangible common equity$ 125,223
Common shares outstanding, end of period 5,630,332
5,645,687
Tangible Common Book Value per Share$ 22.24 $ 32.57 40
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The following table provides a reconciliation of the Company's earnings results
under GAAP to comparative non-GAAP results excluding merger-related expenses:
Nine months ended
September 30, 2022 September 30, 2021
Income Income
(dollars in before Diluted before Diluted
thousands except income Provision for earnings per income Provision for earnings per
per share data) taxes income taxes Net income share taxes income taxes Net income share
Results of
operations (GAAP) $ 26,610 $ 3,735 $ 22,875 $ 4.03 $ 19,010 $ 2,788 $ 16,222 $ 3.09
Add: Merger-related
expenses - - - - 3,143 514 2,629 0.50
Add: FHLB
prepayment penalty - - - - 369 78 291 0.05
Adjusted earnings
(non-GAAP) $ 26,610 $ 3,735 $ 22,875 $ 4.03 $ 22,522 $ 3,380 $ 19,142 $ 3.64
Three months ended
September 30, 2022 September 30, 2021
(dollars in Income Diluted Income Diluted
thousands except before Provision for earnings per before Provision for earnings per
per share data) income taxes income taxes Net income share income taxes income taxes Net income share
Results of
operations (GAAP) $ 8,868 $ 1,179 $ 7,689 $ 1.36 $ 5,548 $ 689 $ 4,859 $ 0.85
Add:
Merger-related
expenses - - - - 2,201 462 1,739 0.31
Adjusted earnings
(non-GAAP) $ 8,868 $ 1,179 $ 7,689 $ 1.36 $ 7,749 $ 1,151 $ 6,598 $ 1.16
General
The Company's earnings depend primarily on net interest income. Net interest
income is the difference between interest income and interest expense. Interest
income is generated from yields earned on interest-earning assets, which consist
principally of loans and investment securities. Interest expense is incurred
from rates paid on interest-bearing liabilities, which consist of deposits and
borrowings. Net interest income is determined by the Company's interest rate
spread (the difference between the yields earned on its interest-earning assets
and the rates paid on its interest-bearing liabilities) and the relative amounts
of interest-earning assets and interest-bearing liabilities. Interest rate
spread is significantly impacted by: changes in interest rates and market yield
curves and their related impact on cash flows; the composition and
characteristics of interest-earning assets and interest-bearing liabilities;
differences in the maturity and re-pricing characteristics of assets compared to
the maturity and re-pricing characteristics of the liabilities that fund them
and by the competition in the marketplace.
The Company's earnings are also affected by the level of its non-interest income
and expenses and by the provisions for loan losses and income taxes.
Non-interest income mainly consists of: service charges on the Company's loan
and deposit products; interchange fees; trust and asset management service fees;
increases in the cash surrender value of the bank owned life insurance and from
net gains or losses from sales of loans and securities. Non-interest expense
consists of: compensation and related employee benefit costs; occupancy;
equipment; data processing; advertising and marketing; FDIC insurance premiums;
professional fees; loan collection; net other real estate owned (ORE) expenses;
supplies and other operating overhead.
Net interest income, net interest rate margin, net interest rate spread and the
efficiency ratio are presented in the MD&A on a fully-taxable equivalent (FTE)
basis. The Company believes this presentation to be the preferred industry
measurement of net interest income as it provides a relevant comparison between
taxable and non-taxable amounts.
Comparison of the results of operations
three and nine months ended September 30, 2022 and 2021
Overview
For the third quarter of 2022, the Company generated net income of $7.7 million ,
or $1.36 per diluted share, compared to $4.9 million , or $0.85 per diluted
share, for the third quarter of 2021. The $2.8 million increase in net income
was primarily the result of $2.2 million lower non-interest expenses and
$1.3 million higher net interest income. Non-interest expenses decreased quarter
over-quarter due to merger-related expenses incurred during the third quarter of
2021 following the Landmark merger when compared to those incurred in the third
quarter of 2022. In the year-to-date comparison, net income increased by
$6.7 million to $22.9 million , or $4.03 per diluted share, from $16.2 million ,
or $3.09 per diluted share. The $10.0 million growth in net interest income was
enough to offset $1.4 million lower non-interest income and $1.0 million higher
non-interest expenses year-over-year.
Return on average assets (ROA) was 1.27% and 0.82% for the third quarters of
2022 and 2021, respectively, and 1.27% and 1.08% for the nine months ended
September 30, 2022 and 2021, respectively. During the same time periods, return
on average shareholders' equity (ROE) was 18.23% and 9.07%, respectively, and
17.01% and 11.88%, respectively. ROA increased due to the growth in net income
relative to the increase in average assets for the quarter and year-to-date
comparisons. ROE increased due to net income growth as well as average equity
decreases for the quarter and year-to-date comparisons.
Net interest income and interest sensitive assets / liabilities
For the third quarter of 2022, net interest income increased$1.3 million , or 8%, to$18.5 million from$17.2 million for the third quarter of 2021 due to increased interest income. The$2.0 million growth in interest income was produced by the addition of$108.1 million in average interest-earning assets supplemented by the effect of a 20 basis point increase in FTE yields earned on those assets. The loan portfolio contributed the most to this growth by providing$1.0 million more in interest income, which absorbed$1.3 million lower fees earned under the Paycheck Protection Program (PPP), due to$81.1 million more in average loans and a three basis point increase in the yields earned thereon. In the investment portfolio, the average balance of total securities grew$90.9 million earning 17 basis points higher FTE yields which produced$0.8 million in additional FTE interest income. Interest income on interest-bearing cash also increased$0.3 million due to an increase in yields. On the liability side, total interest-bearing liabilities grew$79.9 million , on average, with a 14 basis point increase in rates paid thereon. A$92.4 million higher average balance of interest-bearing deposits and 15 basis point increase in rates paid on deposits resulted in$0.7 million more interest expense on deposits for the third quarter of 2022 compared to the 2021 like period. Net interest income increased$10.0 million , or 23%, from$43.9 million for the nine months endedSeptember 30, 2021 to$53.9 million for the nine months endedSeptember 30, 2022 , due to$10.7 million higher interest income partially offset by a$0.7 million increase in interest expense. Total average interest-earning assets increased$401.9 million with six basis point higher yields resulting in$11.3 million of growth in FTE interest income. In the loan portfolio, the Company experienced average balance growth of$238.8 million which had the effect of producing$6.9 million more FTE interest income, despite$3.0 million less in fees earned under the PPP and a 7 basis point reduction in FTE yields during the first nine months of 2022. Interest income on loans also included$0.9 million in additional fair value purchase accounting accretion during the first nine months of 2022. The average balance of the investment portfolio grew$227.1 million supplemented by a 10 basis point increase in yields which resulted in$4.0 million in additional FTE interest income. On the liability side, total interest-bearing liabilities grew$287.6 million , on average, with a one basis point increase in rates paid on these interest-bearing liabilities. Growth in average interest-bearing deposits of$286.2 million supplemented by a two basis point increase in the rates paid on deposits caused this increase in interest expense. 41
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The FTE net interest rate spread increased by 6 and 5 basis points and margin increased by 10 and 5 basis points, respectively, for the three and nine months endedSeptember 30, 2022 compared to the same 2021 periods. In the quarter-over-quarter and year-to-date comparisons, the spread and margin increased due to the yields earned on interest-earning assets increasing faster than the rise in rates paid on interest-bearing liabilities. The overall 29 and 21 basis point cost of funds for the three and nine months endedSeptember 30, 2022 , which includes the impact of non-interest bearing deposits, increased 10 and 1 basis points compared to the same 2021 periods. The primary reason for the increase was the higher rates paid on deposits compared to the same 2021 periods. For the remainder of 2022, the Company expects to operate in a rising interest rate environment. A rate environment with rising interest rates positions the Company to improve its interest income performance from new and repricing earning assets. For the remainder of 2022, the Company anticipates net interest income to grow at a slower pace as growth in interest income would likely help mitigate an adverse impact of rate movements on the cost of funds. The risk to continuing net interest income improvement is rapid acceleration of deposit rates in the Company's marketplace. TheFOMC began increasing the federal funds rate during 2022, the first moves since they cut rates during the first quarter of 2020, which began to have an effect on rates paid on interest-bearing liabilities. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans was also increased 300 basis points during the first nine months of 2022 and another 75 basis points inNovember 2022 . Consensus economic forecasts are predicting increases in short-term rates throughout the rest of 2022. The 2022 focus is to manage net interest income and control deposit costs through a rising forecasted short-term rate cycle for primarily overnight to 12 month rates. Continued growth in the loan portfolios complemented with the achieved investment security growth is expected to boost interest income, and when coupled with a proactive relationship approach to deposit cost setting strategies should help stop spread compression and contain the interest rate margin, preventing further reductions below acceptable levels. The Company's cost of interest-bearing liabilities was 0.40% and 0.29% for the three and nine months endedSeptember 30, 2022 , or 14 and 1 basis points higher than the cost for the same 2021 periods. The increase in interest paid on deposits contributed to the higher cost of interest-bearing liabilities. Management currently believes theFOMC is expected to continue to raise the federal funds rate in the immediate future, so the Company may experience pressure to increase rates paid on deposits. To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances. Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin. The Company's Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM is actively addressing the Company's sensitivity to a changing rate environment to ensure interest rate risks are contained within acceptable levels. ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company's marketing department, together with ALM, and relationship managers, continue to develop prudent strategies that will grow the loan portfolio and accumulate low-cost deposits to improve net interest income performance. 42
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The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% forSeptember 30, 2022 and 2021 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See "Non-GAAP Financial Measures" within this management's discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for loan losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan (cost amortization)/fee accretion of ($0.2 million ) and$1.0 million during the third quarters of 2022 and 2021 , respectively, and$0.4 million and$3.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively, are included in interest income from loans. MNB and Landmark loan fair value purchase accounting adjustments of$0.9 million and$0.9 million are included in interest income from loans and$13 thousand and$43 thousand reduced interest expense on deposits and borrowings for the three months endedSeptember 30, 2022 and 2021. MNB and Landmark loan fair value purchase accounting adjustments of$2.8 million and$1.8 million are included in interest income from loans and$149 thousand and$79 thousand reduced interest expense on deposits and borrowings for the nine months endedSeptember 30, 2022 and 2021. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing net interest income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source: Three months ended (dollars in thousands) September 30, 2022 September 30, 2021 Average Yield / Average Yield / Assets balance Interest rate balance Interest rate Interest-earning assets Interest-bearing deposits$ 59,409 $ 351 2.34 %$ 123,561 $ 54 0.17 % Restricted investments in bank stock 3,645 56 6.06 3,430 28 3.25 Investments: Agency - GSE 116,914 445 1.51 110,131 382 1.37 MBS - GSE residential 264,249 1,157 1.74 219,391 795 1.44 State and municipal (nontaxable) 255,736 1,916 2.97 223,571 1,651 2.93 State and municipal (taxable) 86,262 449 2.06 79,084 377 1.89 Other - - - 108 - 0.40 Total investments 723,161 3,967 2.18 632,285 3,205 2.01 Loans and leases: C&I and CRE (taxable) 749,154 9,428 4.99 795,821 9,692 4.83 C&I and CRE (nontaxable) 70,700 620 3.48 53,632 513 3.79 Consumer 224,753 2,184 3.85 199,540 2,004 3.98 Residential real estate 466,661 4,216 3.58 381,149 3,254 3.39 Total loans and leases 1,511,268 16,448 4.32 1,430,142 15,463 4.29
Total
interest-earning
assets 2,297,483 20,822 3.60 % 2,189,418 18,750 3.40 % Non-interest earning assets 110,404 168,838 Total assets$ 2,407,887 $ 2,358,256 Liabilities and shareholders' equity Interest-bearing liabilities Deposits: Interest-bearing checking$ 703,101 $ 577 0.33 %$ 674,146 $ 464 0.27 % Savings and clubs 245,589 59 0.10 222,077 25 0.04 MMDA 541,799 801 0.59 467,269 221 0.19 Certificates of deposit 124,083 113 0.36 158,657 168 0.42 Total interest-bearing deposits 1,614,572 1,550 0.38 1,522,149 878 0.23 Secured borrowings 7,708 75 3.85 20,140 121 2.37 Short-term borrowings 10 - 0.43 68 - 0.14 FHLB advances - - - 49 - 0.06 Total interest-bearing liabilities 1,622,290 1,625 0.40 % 1,542,406 999 0.26 % Non-interest bearing deposits 589,228 579,629 Non-interest bearing liabilities 29,030 23,798 Total liabilities 2,240,548 2,145,833 Shareholders' equity 167,339 212,423 Total liabilities and shareholders' equity$ 2,407,887 $ 2,358,256 Net interest income - FTE$ 19,197 $ 17,751 Net interest spread 3.20 % 3.14 % Net interest margin 3.32 % 3.22 % Cost of funds 0.29 % 0.19 % 43
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Nine months ended
(dollars in
thousands) September 30, 2022 September 30, 2021
Average Yield / Average Yield /
Assets balance Interest rate balance Interest rate
Interest-earning
assets
Interest-bearing
deposits $ 55,571 $ 464 1.12 % $ 119,827 $ 114 0.13 %
Restricted
investments in bank
stock 3,472 120 4.62 3,160 96 4.08
Investments:
Agency - GSE 118,052 1,309 1.48 80,147 820 1.37
MBS - GSE residential 268,494 3,416 1.70 178,355 1,911 1.43
State and municipal
(nontaxable) 260,855 5,811 2.98 188,955 4,271 3.02
State and municipal
(taxable) 88,513 1,348 2.04 61,371 857 1.87
Other - - - 36 - 0.40
Total investments 735,914 11,884 2.16 508,864 7,859 2.06
Loans and leases:
C&I and CRE (taxable) 754,781 27,387 4.85 694,274 24,873 4.79
C&I and CRE
(nontaxable) 69,555 1,711 3.29 46,185 1,331 3.85
Consumer 211,031 6,070 3.85 174,869 5,126 3.92
Residential real
estate 451,880 11,780 3.49 333,167 8,761 3.52
Total loans and
leases 1,487,247 46,948 4.22 1,248,495 40,091 4.29
Total
interest-earning
assets 2,282,204 59,416 3.48 % 1,880,346 48,160 3.42 % Non-interest earning assets 119,718 134,633 Total assets$ 2,401,922 $ 2,014,979 Liabilities and shareholders' equity Interest-bearing liabilities Deposits: Interest-bearing checking$ 713,743 $ 1,529 0.29 %$ 569,947 $ 1,258 0.30 % Savings and clubs 245,052 112 0.06 203,109 88 0.06 MMDA 507,693 1,346 0.35 407,106 738 0.24 Certificates of deposit 128,893 334 0.35 128,978 499 0.52 Total interest-bearing deposits 1,595,381 3,321 0.28 1,309,140 2,583 0.26 Secured borrowings 9,301 109 1.56 6,787 121 2.37 Short-term borrowings 72 1 1.06 129 - 0.33 FHLB advances - - - 1,134 26 3.07 Total interest-bearing liabilities 1,604,754 3,431 0.29 % 1,317,190 2,730 0.28 % Non-interest bearing deposits 589,581 494,582 Non-interest bearing liabilities 27,741 20,607 Total liabilities 2,222,076 1,832,379 Shareholders' equity 179,846 182,600 Total liabilities and shareholders' equity$ 2,401,922 $ 2,014,979 Net interest income - FTE$ 55,985 $ 45,430 Net interest spread 3.19 % 3.14 % Net interest margin 3.28 % 3.23 % Cost of funds 0.21 % 0.20 % 44
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Changes in net interest income are a function of both changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities. The following table presents the extent to which changes in
interest rates and changes in volumes of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (1) the changes attributable to changes in volume
(changes in volume multiplied by the prior period rate), (2) the changes
attributable to changes in interest rates (changes in rates multiplied by prior
period volume) and (3) the net change. The combined effect of changes in both
volume and rate has been allocated proportionately to the change due to volume
and the change due to rate. Tax-exempt income was not converted to a
tax-equivalent basis on the rate/volume analysis:
Nine months ended September 30,
(dollars in
thousands) 2022 compared to 2021 2021 compared to 2020
Increase (decrease) due to
Volume Rate Total Volume Rate Total
Interest income:
Interest-bearing
deposits $ (92 ) $ 442 $ 350 $ 54 $ (36 ) $ 18
Restricted
investments in bank
stock 10 14 24 1 (29 ) (28 )
Investments:
Agency - GSE 415 74 489 665 (53 ) 612
MBS - GSE residential 1,098 407 1,505 466 (890 ) (424 )
State and municipal 1,552 - 1,552 2,705 (551 ) 2,154
Other - - - (1 ) (2 ) (3 )
Total investments 3,065 481 3,546 3,835 (1,496 ) 2,339
Loans and leases:
Residential real
estate 3,096 (77 ) 3,019 1,547 (840 ) 707
C&I and CRE 2,925 (110 ) 2,815 7,251 609 7,860
Consumer 1,042 (98 ) 944 237 (113 ) 124
Total loans and
leases 7,063 (285 ) 6,778 9,035 (344 ) 8,691
Total interest income 10,046 652 10,698 12,925 (1,905 ) 11,020
Interest expense:
Deposits:
Interest-bearing
checking 309 (38 ) 271 563 (337 ) 226
Savings and clubs 19 5 24 32 (28 ) 4
Money market 212 396 608 510 (1,062 ) (552 )
Certificates of
deposit - (165 ) (165 ) (65 ) (811 ) (876 )
Total deposits 540 198 738 1,040 (2,238 ) (1,198 )
Secured borrowings 36 (48 ) (12 ) 121 - 121
Overnight borrowings - 1 1 (185 ) (63 ) (248 )
FHLB advances (26 ) - (26 ) (260 ) 18 (242 )
Total interest
expense 550 151 701 716 (2,283 ) (1,567 )
Net interest income $ 9,496 $ 501 $ 9,997 $ 12,209 $ 378 $ 12,587
Provision for loan losses
The provision for loan losses represents the necessary amount to charge against
current earnings, the purpose of which is to increase the allowance for loan
losses (the allowance) to a level that represents management's best estimate of
known and inherent losses in the Company's loan portfolio. Loans determined to
be uncollectible are charged off against the allowance. The required amount of
the provision for loan losses, based upon the adequate level of the allowance,
is subject to the ongoing analysis of the loan portfolio. The Company's Special
Assets Committee meets periodically to review problem loans. The committee is
comprised of management, including credit administration officers, loan
officers, loan workout officers and collection personnel. The committee reports
quarterly to the Credit Administration Committee of the board of directors.
Management continuously reviews the risks inherent in the loan portfolio. Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include:
• specific loans that could have loss potential;
• levels of and trends in delinquencies and non-accrual loans;
• levels of and trends in charge-offs and recoveries;
• trends in volume and terms of loans;
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• changes in risk selection and underwriting standards; • changes in lending policies and legal and regulatory requirements; • experience, ability and depth of lending management; • national and local economic trends and conditions; and • changes in credit concentrations. For the three months endedSeptember 30, 2022 , the provision for loan losses was$0.5 million , a$0.1 million increase compared to$0.4 million for the same period in 2021. The increase in the provision compared to the three months endedSeptember 30, 2021 , was due to the higher provisioning required for loan growth in the third quarter of 2022 compared to the year earlier period. For the nine months endedSeptember 30, 2022 , the provision for loan losses was$1.6 million relatively unchanged from the same period in 2021, despite loan growth in 2022 as the increased provisioning needed for higher organic loan growth was offset by a$0.4 million specific reserve incurred during the prior year that was not required in the current year. This amount of provisioning was respective to the loan growth achieved during 2022 and reflected what management deemed necessary to maintain the allowance for loan and lease losses at an adequate level.
The provision for loan losses derives from the reserve required from the
allowance for loan losses calculation. The Company continued provisioning for
the three and nine months ended
For a discussion on the allowance for loan losses, see "Allowance for loan losses," located in the comparison of financial condition section of management's discussion and analysis contained herein.
Other income For the third quarter of 2022, non-interest income amounted to$3.9 million , a decrease of$0.1 million , or 2%, compared to$4.0 million recorded for the same 2021 period. The decrease was due to$0.2 million less service charges on loans from less mortgage activity and less commercial loan late fees during the third quarter of 2022 compared to the third quarter of 2021. There was also a$0.1 million decrease in gains/losses on the write-down, sale or disposal of premises and equipment from various equipment that was disposed of during the third quarter of 2022. Partially offsetting these decreases was$0.2 million in additional deposit service charges from higher overdraft charges as the number of items presented increased. Non-interest income totaled$12.7 million for the nine months endedSeptember 30, 2022 , a decrease of$1.4 million , or 10%, from the$14.1 million recorded for the nine months endedSeptember 30, 2021 . The decrease was primarily due to$2.3 million lower gains on loan sales and$0.5 million less loan service charges due to scaled back demand for mortgages. There was also a$0.2 million decrease in gains/losses on the write-down, sale or disposal of premises and equipment from premises and equipment that was disposed of during 2022. Partially offsetting these decreases was$0.7 million in additional deposit service charges,$0.2 million higher fees from trust fiduciary activities and a$0.2 million increase in debit card interchange fees. Operating expenses For the quarter endedSeptember 30, 2022 , total non-interest expenses were$13.0 million , a decrease of$2.2 million , or 14%, compared to$15.2 million for the same 2021 quarter. Non-interest expenses would have remained flat if the Company had not incurred$2.2 million in merger-related expenses during the third quarter of 2021. Salary and employee benefits declined$0.1 million , or 2%, to$6.8 million for the third quarter of 2022 from$6.9 million for the third quarter of 2021. The decrease was primarily due to less salaries expense from fewer full-time equivalent employees. Data processing and communications expenses decreased$0.1 million , or 11%, primarily due to the integration of systems after the merger with Landmark. These decreases were offset by increases in advertising and marketing expenses of$0.1 million from an increase in donations and$0.1 million in loan collection expenses during the third quarter of 2022. For the nine months endedSeptember 30, 2022 , non-interest expenses increased$1.0 million , or 3%, compared to the nine months endedSeptember 30, 2021 , from$37.5 million to$38.5 million . Non-interest expenses would have increased$3.5 million more if not for$3.1 million in merger-related expenses and a$0.4 million FHLB prepayment penalty incurred by the Company during the nine months endedSeptember 30, 2021 . Salaries and employee benefit expenses grew$2.9 million , or 17%. The increase was primarily due to less deferred loan origination costs reducing salaries and employee benefits expense from a lower volume of originations from mortgages and PPP loans. Additionally, salaries and employee benefits were higher from new positions added and merit increases and higher group insurance from a larger amount of claims. Premises and equipment expenses increased$0.5 million , or 10%, due to higher expenses for lease payments, real estate taxes and other expenses related to premises and equipment acquired from the merger with Landmark. PA shares tax expense was$0.3 million higher from growth in equity. Advertising and marketing expenses rose$0.2 million from additional advertising costs. Partially offsetting these increases, professional services were$0.2 million lower for the first nine months of 2022 compared to the same 2021 period due to less legal expenses and other non-recurring professional fees incurred during the first nine months of 2021. The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.43% and 1.55% for the nine months endedSeptember 30, 2022 and 2021. The expense ratio decreased because of decreased non-interest expenses. The efficiency ratio (non-GAAP) decreased from 62.98% atSeptember 30, 2021 to 56.01% atSeptember 30, 2022 due to revenue increasing faster than expenses. For more information on the calculation of the efficiency ratio, see "Non-GAAP Financial Measures" located within this management's discussion and analysis. Provision for income taxes The provision for income taxes increased$0.9 million for the nine months endedSeptember 30, 2022 compared to the same 2021 period due to higher pre-tax income. The Company's effective tax rate was 14.0% atSeptember 30, 2022 compared to 14.7% atSeptember 30, 2021 . The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to higher tax-exempt interest income. Due to challenges relating to current market conditions, the Company may not have the ability to make a reliable estimate of all or part of its ordinary income which could cause volatility in the effective tax rate. If the federal corporate tax rate is increased, the Company's net deferred tax liabilities and deferred tax assets will be re-valued upon adoption of the new tax rate. A federal tax rate increase will decrease net deferred tax assets with a corresponding decrease to provision for income taxes. 46
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Comparison of financial condition at
September 30, 2022 and December 31, 2021
Overview
Consolidated assets increased $16.7 million to $2.4 billion as of September 30,
2022 relatively unchanged from December 31, 2021 . The increase in assets
occurred primarily in the loan portfolio partially offset by a decline in
the investment portfolio. The reduction in the investment portfolio was
primarily caused by net unrealized losses which were partially offset by the
related deferred tax asset which is a component of other assets on the
consolidated balance sheets. Loan portfolio increases were funded by growth in
deposits.
Funds Deployed:
Investment securities
At the time of purchase, management classifies investment securities into one of
three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM).
To date, management has not purchased any securities for trading purposes. Some
of the securities the Company purchases are classified as AFS even though there
is no immediate intent to sell them. The AFS designation affords management the
flexibility to sell securities and position the balance sheet in response to
capital levels, liquidity needs or changes in market conditions. Debt securities
AFS are carried at fair value on the consolidated balance sheets with unrealized
gains and losses, net of deferred income taxes, reported separately within
shareholders' equity as a component of accumulated other comprehensive income
(AOCI). Securities designated as HTM are carried at amortized cost and represent
debt securities that the Company has the ability and intent to hold until
maturity. For the nine months ended September 30, 2022 , AOCI was reduced by
$82.5 million due to the change in fair value of the Company's investment
securities.
Effective April 1, 2022 , the Company transferred agency and municipal bonds with
a book value of $245.5 million from AFS to HTM in order to apply the accounting
for securities HTM to mitigate the effect AFS accounting has on the balance
sheet. The bonds that were transferred had the highest price volatility and
consisted of fixed-rate securities representing 70% of the agency portfolio, 70%
of the taxable municipal portfolio each laddered out on the short to
intermediate part of the curve and 35% of the tax-exempt municipal portfolio on
the long end of the curve were identified as the best candidates given the
Company's ability to hold those bonds to maturity. The market value of the
securities on the date of the transfer was $221.7 million , after netting
unrealized losses totaling $18.9 million . The $18.9 million , net of deferred
taxes, will be accreted against other comprehensive income over the life of the
bonds.
As of September 30, 2022 , the carrying value of investment securities amounted
to $635.8 million , or 26% of total assets, compared to $739.0 million , or 31% of
total assets, as of December 31, 2021 . On September 30, 2022 , 34% of the
carrying value of the investment portfolio was comprised of U.S. Government
Sponsored Enterprise residential mortgage-backed securities (MBS - GSE
residential or mortgage-backed securities) that amortize and provide monthly
cash flow that the Company can use for reinvestment, loan demand, unexpected
deposit outflow, facility expansion or operations. The mortgage-backed
securities portfolio includes only pass-through bonds issued by Fannie Mae,
Freddie Mac and the Government National Mortgage Association (GNMA).
The Company's municipal (obligations of states and political subdivisions)
portfolio is comprised of tax-free municipal bonds with a book value of
$254.6 million and taxable municipal bonds with a book value of $86.3 million .
The overall credit ratings of these municipal bonds was as follows: 37% AAA , 62%
AA, and 1% A.
During the first nine months of 2022, the carrying value of total investments
decreased $103.2 million , or 14%. Purchases for the first nine months of
2022 totaled $39.2 million , while principal reductions totaled $32.7 million ,
the decline in unrealized gain/loss was $81.6 million in the AFS portfolio and
$23.9 million in unrealized losses were transferred to the HTM portfolio. The
purchases were funded principally by cash flow generated from the portfolio and
excess overnight liquidity. The Company attempts to maintain a well-diversified
and proportionate investment portfolio that is structured to complement the
strategic direction of the Company. Its growth typically supplements the lending
activities but also considers the current and forecasted economic conditions,
the Company's liquidity needs and interest rate risk profile.
A comparison of investment securities at September 30, 2022 and December 31,
2021 is as follows:
September 30, 2022 December 31, 2021
(dollars in
thousands) Amount % Book yield Reprice term Amount % Book yield Reprice term
MBS - GSE
residential $ 217,475 34.2 % 1.8 % 6.5 $ 257,267 34.8 % 1.6 % 5.1
Obligations of
states &
political
subdivisions 305,937 48.1 2.9 15.2 364,710 49.4 2.3 7.5
Agency - GSE 112,375 17.7 2.3 6.7 117,003 15.8 1.4 5.2
Total $ 635,787 100.0 % 2.4 % 10.7 $ 738,980 100.0 % 1.9 % 6.3
The investment securities portfolio contained no private label mortgage-backed
securities, collateralized mortgage obligations, collateralized debt
obligations, or trust preferred securities, and no off-balance sheet derivatives
were in use. The portfolio had no adjustable-rate instruments as of September
30, 2022 and December 31, 2021 .
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Investment securities were comprised of AFS and HTM securities as ofSeptember 30, 2022 and AFS securities as ofDecember 31, 2021 . The AFS securities were recorded with a net unrealized loss of$81.4 million and a net unrealized gain of$0.2 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Of the net declineof$81.6 million in the unrealized gain position;$39.0 million was attributable to municipal securities;$40.3 million was attributable to mortgage-backed securities and$2.3 million was attributable to agency securities. During the second quarter of 2022, securities with net unrealized losses totaling$23.9 million were transferred to HTM of which subsequently$1.1 million was accreted against other comprehensive income. The direction and magnitude of the change in value of the Company's investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company's investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company's investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company's debt securities portfolio could be subject to market value increases. As ofSeptember 30, 2022 , the Company had$426.8 million in public deposits, or 19% of total deposits.Pennsylvania state law requires the Company to maintain pledged securities on these public deposits or otherwise obtain a FHLB letter of credit orFDIC insurance for these customers. As ofSeptember 30, 2022 , the balance of pledged securities required for public and trust deposits was$468.4 million , or 74% of total securities. Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary. Considerations such as the Company's intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired. If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized. During the quarter endedSeptember 30, 2022 , the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.
Restricted investments in bank stock
Investment inFederal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB ofPittsburgh . Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. AtlanticCommunity Bankers Bank (ACBB) stock totaled$82 thousand as ofSeptember 30, 2022 andDecember 31, 2021 . The balance in FHLB stock was$3.6 million and$3.1 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The dividends received from the FHLB totaled$109 thousand and$104 thousand for the nine months endedSeptember 30, 2022 and 2021, respectively. Loans held-for-sale (HFS) Upon origination, most residential mortgages and certainSmall Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans. Consideration is given to the Company's current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or business loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is based on the lower of cost or estimated fair value. If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs. As ofSeptember 30, 2022 andDecember 31, 2021 , loans HFS consisted of residential mortgages with carrying amounts of$1.4 million and$31.7 million , respectively, which approximated their fair values. During the nine months endedSeptember 30, 2022 , residential mortgage loans with principal balances of$68.0 million were sold into the secondary market and the Company recognized net gains of$1.4 million , compared to$140.7 million and$3.6 million , respectively, during the nine months endedSeptember 30, 2021 .
Management completed
The Company retains mortgage servicing rights (MSRs) on loans sold into the
secondary market. MSRs are retained so that the Company can foster personal
relationships. At
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As of
Growth in the portfolio was primarily attributed to the$61.1 million increase in the residential portfolio, including$13 million in mortgage loans originated during 2021 as available-for-sale but reclassified to the held-for-investment portfolio during the first quarter 2022. The Company elected to reclassify the mortgage loans, which meetFNMA underwriting guidelines and are considered high quality, to realize the better yields than those alternately available during the first quarter of 2022. This growth was supplemented by a$28.8 million increase in the consumer portfolio during the first nine months of 2022.
The composition of the loan portfolio at
September 30, 2022 December 31, 2021
(dollars in thousands) Amount % Amount %
Commercial and industrial $ 221,911 14.6 % $ 236,304 16.5 %
Commercial real estate:
Non-owner occupied 315,323 20.7 312,848 21.8
Owner occupied 256,053 16.8 248,755 17.3
Construction 26,015 1.7 21,147 1.5
Consumer:
Home equity installment 56,814 3.7 47,571 3.3
Home equity line of credit 53,632 3.5 54,878 3.8
Auto 132,802 8.7 118,029 8.2
Direct finance leases 32,526 2.1 26,232 1.8
Other 7,733 0.5 8,013 0.6
Residential:
Real estate 384,493 25.2 325,861 22.8
Construction 37,433 2.5 34,919 2.4
Gross loans 1,524,735 100.0 % 1,434,557 100.0 %
Less:
Allowance for loan losses (16,779 ) (15,624 )
Unearned lease revenue (1,793 ) (1,429 )
Net loans $ 1,506,163 $ 1,417,504
Loans held-for-sale $ 1,386 $ 31,727 Commercial & industrial (C&I) and commercial real estate (CRE)
As ofSeptember 30, 2022 , the commercial loan portfolio increased by$0.2 million to$819.3 million compared to theDecember 31, 2021 balance of$819.1 million due to the$14.6 million increase in the commercial real estate portfolio partially offset by the$14.4 million decrease in the commercial and industrial portfolio, which was attributed to a$38.1 million reduction in PPP loans (net of deferred fees). Excluding the reduction in PPP loans during the nine months endedSeptember 30, 2022 , the commercial portfolio grew$38.3 million with the growth stemming from the both the C&I and CRE portfolios. Excluding PPP loans, C&I loans grew$23.7 million primarily due to four loans originated during the first nine months of 2022 to four unrelated borrowers consisting of one commercial fixed term note and three tax-free municipal loans. Other C&I loan originations in various industries were offset by scheduled and unscheduled paydowns in the portfolio. CRE loans increased$14.6 million with growth of$7.3 million in owner occupied CRE primarily due to one fixed commercial loan,$4.8 million in commercial construction and$2.5 million in non-owner occupied CRE loan balances. During the first nine months of 2022, the Company experienced growth in fixed commercial real estate loans and reductions in floating commercial real estate loans due to the current interest rate environment.
Paycheck Protection Program Loans
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law onMarch 27, 2020 , and provided over$2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized theSmall Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP).
As a qualified SBA lender, the Company was automatically authorized to originate
PPP loans, and during the second and third quarter of 2020, the Company
originated 1,551 loans totaling
Under the PPP, the entire principal amount of the borrower's loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount, so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. As part of the Economic Relief Act, which became law onDecember 27, 2020 , an additional$284 billion of federal resources was allocated to a reauthorized and revised PPP. OnJanuary 19, 2021 , the Company began processing and originating PPP loans for this second round, which subsequently ended onMay 31, 2021 , and during this round, the Company originated 1,022 loans totaling$77 million . 49
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Beginning in the fourth quarter of 2020 and continuing during 2022, the Company submitted PPP forgiveness applications to the SBA, and throughSeptember 30, 2022 , the Company received forgiveness or paydowns of$234.7 million , or 99%, of the original PPP loan balances of$236.3 million with$31.6 million occurring during the nine months endedSeptember 30, 2022 . As a PPP lender, the Company received fee income of approximately$9.9 million with$9.8 million recognized to date, including$0.7 million recognized during the first quarter of 2022,$0.5 million during the second quarter of 2022, and$26 thousand recognized during the third quarter of 2022. Unearned fees attributed to PPP loans, net of fees paid to referral sources as prescribed by the SBA under the PPP, were$53 thousand as ofSeptember 30, 2022 .
The PPP loans originated by size were as follows as of
Balance Current SBA fee
(dollars in thousands) originated balance Total SBA fee recognized
$150,000 or less $ 76,594 $ 358 $ 4,866 $ 4,846
Greater than $150,000 but less than
$2,000,000 128,082 1,225 4,765 4,733
$2,000,000 or higher 31,656 - 316 316
Total PPP loans originated $ 236,332 $ 1,583 $ 9,947 $ 9,895
The table above does not include the $20.3 million in PPP loans acquired because
of the merger with Landmark during the third quarter of 2021. As of September
30, 2022 , the balance of outstanding acquired PPP loans was $0.3 million .
Consumer
The consumer loan portfolio consisted of home equity installment, home equity line of credit, automobile, direct finance leases and other consumer loans.
As ofSeptember 30, 2022 , the consumer loan portfolio increased by$28.8 million , or 11%, to$283.5 million compared to theDecember 31, 2021 balance of$254.7 million , primarily due to growth in the home equity installment, auto and direct finance lease portfolios. Auto loans grew$14.8 million from continued demand for higher priced automobiles and new dealer relationships. Direct finance leases increased$6.3 million primarily due to higher residual values and more automobile leases added than expired. Home equity installment loans also grew$9.2 million from the spring and fall home equity campaigns. Residential As ofSeptember 30, 2022 , the residential loan portfolio increased by$61.1 million , or 17%, to$421.9 million compared to theDecember 31, 2021 balance of$360.8 million . The increase was due in part to a strategic reclassification of$13 million in available-for-sale mortgages booked during 2021 to held-for-investment loans during the first quarter of 2022. The remainder of the increase was due to a shift from mortgage loans sold to loans held-for-investment due to increased jumbo loans and the pricing of loans in the secondary market and more adjustable rate mortgages which are not being sold in the secondary market.
The residential loan portfolio consisted primarily of held-for-investment residential loans for primary residences. Management expects the sudden historic rise in interest rates to impact demand for residential mortgages for the remainder of 2022.
Allowance for loan losses Management evaluates the credit quality of the Company's loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (allowance) on a quarterly basis. The allowance reflects management's best estimate of the amount of credit losses in the loan portfolio. Management's judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The provision for loan losses represents the amount necessary to maintain an appropriate allowance. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received. Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows: ? identification of specific impaired loans by loan category;
? calculation of specific allowances where required for the impaired loans based
on collateral and other objective and quantifiable evidence;
? determination of loans with similar credit characteristics within each class
of the loan portfolio segment and eliminating the impaired loans;
? application of historical loss percentages (trailing twelve-quarter average)
to pools to determine the allowance allocation; and
? application of qualitative factor adjustment percentages to historical losses
for trends or changes in the loan portfolio, regulations, and/or current
economic conditions.
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A key element of the methodology to determine the allowance is the Company's credit risk evaluation process, which includes credit risk grading of individual commercial loans. Commercial loans are assigned credit risk grades based on the Company's assessment of conditions that affect the borrower's ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers' current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management determines an upgrade or downgrade may be warranted. The credit risk grades for the commercial loan portfolio are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company's historical experience as well as what management believes to be best practices and within common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. Acquired loans are initially recorded at their acquisition date fair values with no carryover of the existing related allowance for loan losses. Fair values are based on a discounted cash flow methodology that involves assumptions and judgements as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Upon acquisition, in accordance with GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30. These loans are deemed purchased credit impaired loans and the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. Acquired ASC 310-20 loans, which are loans that did not meet the criteria of ASC 310-30, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. These loans are initially recorded at fair value and include credit and interest rate marks associated with purchase accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans after acquisition. Each quarter, management performs an assessment of the allowance for loan losses. The Company's Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee's focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due. The assessment process also includes the review of all loans on non-accrual status as well as a review of certain loans to which the lenders or theCredit Administration function have assigned a criticized or classified risk rating. 51
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The following tables set forth the activity in the allowance for loan losses and certain key ratios for the period indicated:
As of and As of and for As of and
for the the for the
nine months twelve months nine months
ended ended ended
September December 31, September
(dollars in thousands) 30, 2022 2021 30, 2021
Balance at beginning of period $ 15,624 $ 14,202 $ 14,202
Charge-offs:
Commercial and industrial (323 ) (130 ) (120 )
Commercial real estate (1 ) (491 ) (209 )
Consumer (226 ) (206 ) (110 )
Residential - (162 ) (43 )
Total (550 ) (989 ) (482 )
Recoveries:
Commercial and industrial 8 23 20
Commercial real estate 61 250 241
Consumer 59 138 70
Residential 2 - -
Total 130 411 331
Net charge-offs (420 ) (578 ) (151 )
Provision for loan losses 1,575 2,000 1,550
Balance at end of period $ 16,779 $ 15,624 $ 15,601
Allowance for loan losses to total loans 1.10 % 1.09 % 1.12 %
Net charge-offs to average total loans
outstanding 0.04 % 0.04 % 0.02 %
Average total loans $ 1,487,247 $ 1,299,960 $ 1,248,495
Loans 30 - 89 days past due and accruing $ 852 $ 1,982 $ 1,086
Loans 90 days or more past due and accruing $ 50 $ 64 $ 112
Non-accrual loans $ 3,020 $ 2,949 $ 2,747
Allowance for loan losses to non-accrual
loans 5.56 x 5.30 x 5.68 x
Allowance for loan losses to non-performing
loans 5.47 x 5.19 x 5.46 x
The allowance increased $1.2 million , or 7%, to $16.8 million at September 30,
2022 from $15.6 million at December 31, 2021 due to provisioning of $1.6 million
partially offset by $0.4 million in net charge-offs. The allowance for loan and
lease losses increased as a percentage of total loans at 1.10% as of September
30, 2022 compared to 1.09% as of December 31, 2021 because the growth in the
allowance (7%) outpaced the growth in the total loans (6%) through September 30,
2022 .
Loans acquired from the Merchants and Landmark mergers (performing and
non-performing) were initially recorded at their acquisition-date fair values.
Since there is no initial credit valuation allowance recorded under this method,
the Company established a post-acquisition allowance for loan losses to record
losses which may subsequently arise on the acquired loans.
PPP loans made to eligible borrowers have a 100% SBA guarantee. Given this guarantee, no allowance for loan and lease losses was recorded for these loans.
Management believes that the current balance in the allowance for loan losses is
sufficient to meet the identified potential credit quality issues that may arise
and other issues unidentified but inherent to the portfolio. Potential problem
loans are those where there is known information that leads management to
believe repayment of principal and/or interest is in jeopardy and the loans are
currently neither on non-accrual status nor past due 90 days or more.
During the first quarter of 2022, management increased the qualitative factors
associated with its commercial, consumer, and residential portfolios related to
the rise in rates that occurred during the quarter, and the adverse impact that
these increased rates are anticipated to have on estimated credit losses.
During the second quarter of 2022, management increased the qualitative factors
associated with its commercial, consumer, and residential portfolios related to
the rise in rates that occurred during the quarter, and the adverse impact that
these increased rates are anticipated to have on estimated credit losses. These
increases were partially offset by a reduction in the qualitative factors for
the owner occupied CRE and residential RE portfolios related to the historically
low delinquency observed in these portfolios.
During the third quarter of 2022, management decreases the qualitative factors
associated with its commercial, consumer, and residential portfolios related to
changes in the Company's loan policy that were expected to reduce credit losses.
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The allocation of net charge-offs among major categories of loans are as follows
for the periods indicated:
For the For the
nine months nine months
ended ended
September % of Total Net September % of Total Net
(dollars in thousands) 30, 2022 Charge-offs 30, 2021 Charge-offs
Net charge-offs
Commercial and industrial $ (315 ) 75 % $ (100 ) 66 %
Commercial real estate 60 (14 ) 33 (22 )
Consumer (167 ) 40 (40 ) 27
Residential 2 (1 ) (43 ) 29
Total net charge-offs $ (420 ) 100 % $ (150 ) 100 %
For the nine months ended September 30, 2022 , net charge-offs against the
allowance totaled $420 thousand compared with net charge-offs of $150 thousand
for the nine months ended September 30, 2021 , representing a $270 thousand
increase, which was attributed to a $193 thousand charge off in the C&I
portfolio to a single borrower and increased losses in the consumer portfolio.
Net charge offs increased as a percentage of the total loan portfolio at 0.04%
for the nine months ended September 30, 2022 compared with the nine months ended
September 30, 2021 .
For a discussion on the provision for loan losses, see the "Provision for loan
losses," located in the results of operations section of management's discussion
and analysis contained herein.
The allowance for loan losses can generally absorb losses throughout the loan
portfolio. However, in some instances an allocation is made for specific loans
or groups of loans. Allocation of the allowance for loan losses for different
categories of loans is based on the methodology used by the Company, as
previously explained. The changes in the allocations from period-to-period are
based upon quarter-end reviews of the loan portfolio.
Allocation of the allowance among major categories of loans for the periods
indicated, as well as the percentage of loans in each category to total loans,
is summarized in the following table. This table should not be interpreted as an
indication that charge-offs in future periods will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends. When
present, the portion of the allowance designated as unallocated is within the
Company's guidelines:
September 30, 2022 December 31, 2021 September 30, 2021
Category Category Category
% of % of % of
(dollars in thousands) Allowance Loans Allowance Loans Allowance Loans
Category
Commercial real estate $ 7,162 39 % $ 7,422 41 % $ 7,285 41 %
Commercial and industrial 2,674 15 2,204 16 2,441 19
Consumer 2,841 18 2,404 18 2,446 18
Residential real estate 4,022 28 3,508 25 3,013 22
Unallocated 80 - 86 - 416 -
Total $ 16,779 100 % $ 15,624 100 % $ 15,601 100 %
As of September 30, 2022 , the commercial loan portfolio, consisting of CRE and
C&I loans, comprised 59% of the total allowance for loan losses compared with
62% on December 31, 2021 . The commercial loan allowance allocation declined due
to the payoff of a commercial real estate loan to a single borrower with a large
specific impairment during the first quarter of 2022 and the relative decrease
in this loan category, which decreased to 54% as of September 30, 2022 from 57%
at December 31, 2021 .
As of September 30, 2022 , the consumer loan portfolio comprised 17% of the total
allowance for loan losses compared with 15% on December 31, 2021 . The two
percentage point increase in the consumer loan allowance allocation was the
result of relative growth in the consumer portfolio, which increased to 19% as
of September 30, 2022 from 18% at December 31, 2021 .
As of September 30, 2022 , the residential loan portfolio comprised 24% of the
total allowance for loan losses compared with 22% on December 31, 2021 . The two
percentage point increase was the result of the relative increase in this loan
category, which increased to 28% as of September 30, 2022 from 25% at December
31, 2021 .
As of September 30, 2022 , the unallocated reserve, representing the portion of
the allowance not specifically identified with a loan or groups of loans, was
less than 1% of the total allowance for loan losses unchanged from December 31,
2021 .
Non-performing assets
The Company defines non-performing assets as accruing loans past due 90 days or
more, non-accrual loans, troubled debt restructurings (TDRs), other real estate
owned (ORE) and repossessed assets.
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The following table sets forth non-performing assets data as of the period
indicated:
September December 31, September
(dollars in thousands) 30, 2022 2021 30, 2021
Loans past due 90 days or more and accruing $ 50 $ 64 $ 112
Non-accrual loans * 3,020 2,949 2,747
Total non-performing loans 3,070 3,013 2,859
Troubled debt restructurings 1,347 2,987 2,479
Other real estate owned and repossessed assets 103 434 803
Total non-performing assets $ 4,520 $
6,434
Total loans, including loans held-for-sale
$ 2,435,768 $ 2,419,104 $ 2,411,799 Non-accrual loans to total loans 0.20 % 0.20 % 0.19 % Non-performing loans to total loans 0.20 % 0.21 % 0.20 % Non-performing assets to total assets 0.19 % 0.27 % 0.25 % * In the table above, the amount includes non-accrual TDRs of$0.4 million as ofSeptember 30, 2022 ,$0.6 million as ofDecember 31, 2021 and$0.7 million as ofSeptember 30, 2021 . Management routinely reviews the loan portfolio to identify loans that are either delinquent or are otherwise deemed by management unable to repay in accordance with contractual terms. Generally, loans of all types are placed on non-accrual status if a loan of any type is past due 90 or more days or if collection of principal and interest is in doubt. Further, unsecured consumer loans are charged-off when the principal and/or interest is 90 days or more past due. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income. Non-performing assets represented 0.19% of total assets atSeptember 30, 2022 compared with 0.27% atDecember 31, 2021 . The improvement resulted from a$1.9 million , or 30%, decrease in non-performing assets. Non-performing assets decreased due to a$1.6 million reduction in accruing troubled debt restructurings and a$0.3 million reduction in other real estate owned and repossessed assets. FromDecember 31, 2021 toSeptember 30, 2022 , non-accrual loans increased$0.1 million , or 2%, from$2.9 million to$3.0 million . The$0.1 million increase in non-accrual loans was primarily the result of$1.7 million in additions and$0.1 million in advances partially offset by$0.9 million in payments,$0.4 million in moves to ORE,$0.3 million in charge offs, and$0.1 million in moves to accrual. AtSeptember 30, 2022 , there were a total of 39 loans to 29 unrelated borrowers with balances that ranged from less than$1 thousand to$0.6 million . AtDecember 31, 2021 , there were a total of 31 loans to 28 unrelated borrowers with balances that ranged from less than$1 thousand to$0.7 million . There were two full recourse auto loans totaling$50 thousand that were over 90 days past due as ofSeptember 30, 2022 compared to two direct finance leases totaling$64 thousand that were over 90 days past due as ofDecember 31, 2021 . The delinquent auto loans are fully guaranteed under a formal recourse agreement with the originating auto dealer and we are in process of orderly collection. The Company seeks payments from all past due customers through an aggressive customer communication process. Unless well-secured and in the process of collection, past due loans will be placed on non-accrual at the 90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts. 54
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The composition of non-performing loans as ofSeptember 30, 2022 is as follows: Past due Gross 90 days or Non- Total non- % of loan more and accrual performing gross (dollars in thousands) balances still accruing loans loans loans Commercial and industrial$ 221,911 $ -$ 628 $ 628 0.28 % Commercial real estate: Non-owner occupied 315,323 - 732 732 0.23 % Owner occupied 256,053 - 1,303 1,303 0.51 % Construction 26,015 - - - - Consumer: Home equity installment 56,814 - - - - Home equity line of credit 53,632 - 119 119 0.22 % Auto loans 132,802 50 201 251 0.19 % Direct finance leases * 30,733 - - - - Other 7,733 - - - - Residential: Real estate 384,493 - 37 37 0.01 % Construction 37,433 - - - - Loans held-for-sale 1,386 - - - - Total$ 1,524,328 $ 50$ 3,020 $ 3,070 0.20 %
*Net of unearned lease revenue of
Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as ofSeptember 30, 2022 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of$126 thousand .
The following tables set forth the activity in TDRs for the periods indicated:
As of and for the nine months ended
Accruing Non-accruing
Commercial Commercial Commercial
(dollars in thousands) real estate real estate & industrial Total
Troubled Debt Restructures:
Beginning balance $ 2,987 $ 419 $ 135 $ 3,541
Additions - - - -
Pay downs / payoffs (1,640 ) (65 ) (135 ) (1,840 )
Charge offs - - - -
Ending balance $ 1,347 $ 354 $ - $ 1,701
Number of loans 6 1 - 7
As of and for the year ended
Accruing Non-accruing
Commercial Commercial Commercial
(dollars in thousands) real estate real estate & industrial Total
Troubled Debt Restructures:
Beginning balance $ 2,571 $ 456 $ 206 $ 3,233
Additions 519 - - 519
Pay downs / payoffs (103 ) (37 ) (6 ) (146 )
Charge offs - - (65 ) (65 )
Ending balance $ 2,987 $ 419 $ 135 $ 3,541
Number of loans 8 1 2 11
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The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards to maximize the Company's recovery. FromDecember 31, 2021 toSeptember 30, 2022 , TDRs declined$1.8 million , or 52%, primarily due to the payoff of two commercial real estate TDRs to a single borrower totaling$1.6 million and the payoff of two C&I TDRs to a single borrower totaling$0.1 million . AtDecember 31, 2021 , there were a total of 11 TDRs by 8 unrelated borrowers with balances that ranged from$50 thousand to$1.3 million , and atSeptember 30, 2022 , there were a total of 7 TDRs by 6 unrelated borrowers with balances that ranged from$89 thousand to$0.5 million .
Loans modified in a TDR may or may not be placed on non-accrual status.
At
Foreclosedassets held-for-sale
FromDecember 31, 2021 toSeptember 30, 2022 , foreclosed assets held-for-sale (ORE) declined from$434 thousand to$103 thousand , a$331 thousand decrease, which was primarily attributed to two ORE properties totaling$283 thousand that were sold during the first quarter. One property totaling$437 thousand was also added to ORE and sold during 2022. The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale: September 30, 2022 December 31, 2021 (dollars in thousands) Amount # Amount # Balance at beginning of period$ 434 5$ 256 6 Additions 437 1 969 7 Pay downs (6 ) - Write downs (17 ) (16 ) Sold (745 ) (4 ) (775 ) (8 ) Balance at end of period$ 103 2$ 434 5 As ofSeptember 30, 2022 , ORE consisted of two properties securing loans to two unrelated borrowers totaling$103 thousand . One property ($102 thousand ) was added in 2021 and one property ($1 thousand ) was added in 2017. Of the two properties, one property is under agreement of sale and one property is listed for sale.
As of
Cash surrender value of bank owned life insurance
The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. As a result of the Landmark acquisition, the Company acquired$7.2 million in BOLI during the third quarter of 2021. The BOLI cash surrender value build-up can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company's capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value. The Company was notified of a pending death benefit claim on two owned policies and, upon completion of proper administration, expects to receive over$0.9 million in the upcoming months. Premises and equipment Net of depreciation, premises and equipment increased$1.7 million during the first nine months of 2022. The Company purchased$0.6 million in fixed assets and added$4.0 million in construction in process during the first nine months of 2022. The increase in construction in process was primarily due to the purchase of theScranton Electric Building for a new headquarters inScranton, PA . These increases were partially offset by$1.7 million in depreciation expense and$1.2 million in transfers to other assets held-for-sale. The Company is planning to open a new branch and administrative office forLuzerne County inWilkes-Barre in December. The Company has recently begun remodeling theMain Branch located inDunmore, PA and estimated costs for the project are currently$3.9 million . The Company began corporate headquarters planning which may continue to increase construction in process and is evaluating its branch network looking for consolidation that makes sense for more efficient operations. OnDecember 23, 2020 , theCommonwealth of Pennsylvania authorized the release of$2.0 million in Redevelopment Assistance Capital Program (RACP) funding for the Company's headquarters project inLackawanna County . OnDecember 2, 2021 , the Company announced it would be receiving an additional$2.0 million in RACP funding in support of the project. The$4.0 million in total RACP grant funds will be allocated to the renovation and rehabilitation of the historic building located in downtownScranton which will be used for the new corporate headquarters. The Company currently expects net remaining costs for the corporate headquarters to be$15.8 million over approximately two years beginning during the fourth quarter of 2022. In addition, the Company intends to pursue a federal historic preservation tax credit which, if it qualifies, would provide a 20% tax credit on qualified improvements on the historic property. 56
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Table of Contents Other assets During the first nine months of 2022, the$22.1 million increase in other assets was due mostly to a$21.0 million increase in deferred tax assets primarily from net unrealized losses in the investment portfolio and$0.7 million increase in prepaid dealer reserve. Funds Provided: Deposits The Company is a community based commercial depository financial institution, memberFDIC , which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company's 21 branch offices and all deposits are insured by theFDIC up to the full extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances. The following table represents the components of deposits as of the date indicated: September 30, 2022 December 31, 2021 (dollars in thousands) Amount % Amount % Interest-bearing checking$ 731,701 32.4 %$ 730,595 33.7 % Savings and clubs 245,202 10.9 234,747 10.8 Money market 538,480 23.9 475,447 21.9 Certificates of deposit 121,006 5.4 138,793 6.4 Total interest-bearing 1,636,389 72.6 1,579,582 72.8 Non-interest bearing 616,844 27.4 590,283 27.2 Total deposits$ 2,253,233 100.0 %$ 2,169,865 100.0 % Total deposits increased$83.4 million , or 4%, to$2.3 billion atSeptember 30, 2022 from$2.2 billion atDecember 31, 2021 . During 2022, the Company accepted various wealth managed trust accounts into a bank pledged money market account which increased total deposits by$42.4 million atSeptember 30, 2022 . Money market accounts grew$63.0 million primarily due to the$42.4 million from trust accounts along with a$24.0 million transfer from an interest-bearing checking account. Non-interest bearing checking accounts increased$26.6 million primarily due to increases in business checking accounts. Savings and clubs also increased$10.5 million due to personal savings growth. Interest-bearing checking accounts increased$1.1 million during the first nine months of 2022 as seasonal activity in public accounts offset the aforementioned$24.0 million transfer to a money market account. During the fourth quarter of 2022, one public customer started transitioning interest-bearing deposits totaling$38.4 million atSeptember 30, 2022 out of the bank and the Company expects most of these deposits to be gone at the end of the year. The Company focuses on obtaining a full-banking relationship with existing checking account customers as well as forming new customer relationships. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop creative programs for its customers to maintain and grow core deposits. For the remainder of 2022, the Company expects deposit balances to wane as clients transfer their deposits to investments to earn higher interest and pay down debts. Seasonal public deposit fluctuations are expected to remain volatile and at times may partially offset future deposit growth. Partially offsetting these non-maturing deposit increases, CDs decreased$17.8 million during the first nine months of 2022. CD balances continue to decline as rates lagged capital market rate increases and CDs with promotional rates reached maturity. The majority of maturing CDs were closed as customers could earn higher yields by investing the money elsewhere. The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships. The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtainFDIC insurance protection for customers who have large deposits that at times may exceed theFDIC maximum insured amount of$250,000 . The Company did not have any CDARs as ofSeptember 30, 2022 andDecember 31, 2021 . As ofSeptember 30, 2022 andDecember 31, 2021 , ICS reciprocal deposits represented$26.7 million and$27.6 million , or 1% each, of total deposits which are included in interest-bearing checking accounts in the table above. The$0.9 million decrease in ICS deposits is primarily due to business deposit transfers from ICS accounts to other interest-bearing checking accounts. 57
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As ofSeptember 30, 2022 , total uninsured deposits were estimated to be$1.1 billion . The estimate of uninsured deposits is based on the same methodologies and assumptions used for regulatory reporting requirements. The Company aggregates deposit products by taxpayer identification number and classifies into ownership categories to estimate amounts over theFDIC insurance limit.
The maturity distribution of certificates of deposit that meet or exceed the
(dollars in thousands) Three months or less$ 10,042 More than three months to six months 1,400 More than six months to twelve months 5,386 More than twelve months 4,416 Total$ 21,244 Approximately 27% of the CDs, with a weighted-average interest rate of 0.34%, are scheduled to mature in 2022 and an additional 52%, with a weighted-average interest rate of 0.36%, are scheduled to mature in 2023. Renewing CDs are currently expected to re-price to lower market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company plans to address repricing CDs in the ordinary course of business on a relationship basis and is prepared to match rates when prudent to maintain relationships. Growth in CD accounts is challenged by the current and expected rate environment and clients' preference for short-term rates. The Company will develop CD promotional programs when the Company deems that it is economically feasible to do so or when demand exists. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company. Short-term borrowings
Borrowings are used as a complement to deposit generation as an alternative
funding source whereby the Company will borrow under advances from the FHLB of
Short-term borrowings may include overnight balances with FHLB line of credit and/or correspondent bank's federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. If deposit balances decline, the Company may need to use short-term borrowings to fund loan growth for the fourth quarter of 2022. As ofSeptember 30, 2022 , the Company had the ability to borrow$113.6 million from theFederal Reserve borrower-in-custody program,$145.9 million in overnight borrowings with the FHLB and$31.0 million from lines of credit with correspondent banks. Secured borrowings As ofSeptember 30, 2022 andDecember 31, 2021 , the Company had 9 secured borrowing agreements with third parties with a fair value of$7.6 million related to certain sold loan participations that did not qualify for sales treatment acquired from Landmark. Secured borrowings are expected to decrease for the remainder of 2022 from scheduled amortization and, when possible, early pay-offs. FHLB advances The Company had no FHLB advances as ofSeptember 30, 2022 andDecember 31, 2021 . During the first quarter of 2021, the Company paid off$5 million in FHLB advances with a weighted average interest rate of 3.07%. During the third quarter of 2021, the Company acquired$4.5 million in FHLB advances from the Landmark merger that was subsequently paid off. As ofSeptember 30, 2022 , the Company had the ability to borrow an additional$607.4 million from the FHLB, including any overnight borrowings. The Company does not expect to have any FHLB advances in 2022.
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