STANDARD AVB FINANCIAL CORP. This section is intended to help potential investors understand the Company's financial performance through a discussion of the factors affecting its financial condition atDecember 31, 2020 andDecember 31, 2019 , and the Company's consolidated results of operations for the year endedDecember 31, 2020 . This section should be read in conjunction with the audited consolidated financial statements and notes that appear elsewhere in this Annual Report.
Overview
The Company provides a wide array of consumer and commercial financial products and services to individuals, families and small to medium-sized businesses through 17 banking offices located in thePennsylvania counties ofAllegheny ,Westmoreland andBedford andAllegany County, Maryland through its wholly-owned subsidiaryStandard Bank . In addition to providing traditional banking services, the Bank offers enhanced investment advisory, brokerage, and insurance services. The COVID-19 pandemic has caused significant volatility and disruption in the financial markets worldwide. The Company has continued to provide assistance to residential and commercial borrowers to help them meet the unexpected financial challenges stemming from the COVID-19 pandemic.
Despite the challenging current market and economic conditions, the Company continues to maintain capital in excess of regulatory requirements.
The primary sources of funds consist of deposit inflows, loan repayments and sales, advances and short-term borrowings from the FHLB and repurchase agreements and maturities, principal repayments and sales of available for sale securities. Building shareholder value through consistent earnings remains the Company's primary focus. The Company's key performance metrics are net income, return on average assets, return on average equity, the efficiency ratio and non-performing assets to total assets. The primary source of earnings is net interest income. Operational results can be affected by a wide range of factors including general and local economic and competitive conditions, changes in market interest rates and actions of regulatory authorities. The Company continues to focus on managing the interest rate margin and maximizing earnings from sources other than interest income, controlling non-interest expenses and maintaining strong asset quality.
Business Strategy
The Bank's primary objective is to operate as a profitable, community-oriented financial institution serving customers in its market areas. The Bank is seeking to accomplish this objective by pursuing a business strategy that is designed to maintain core profitability, strong capital and high asset quality. This business strategy includes the following elements:
Remaining a community-oriented financial institution while continuing to
increase the customer base of small and medium-size businesses in the market
area. The Bank was established in 1913 and has operated continuously in
southwestern
?
Pursuant to the terms of the merger agreement entered into with Dollar in
Dollar after the transaction. Both the Company and Dollar have a long history
of providing community banking services in their market areas. The Bank is
committed to meeting the financial needs of the communities in which it
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operates, and is dedicated to providing quality personal service to customers.
The Bank provides a broad range of business and consumer financial services from
seventeen community banking offices. Relationship banking is the core focus with
a strong emphasis to increase small and medium-sized businesses in the market
area. Increasing commercial real estate and business lending while maintaining
conservative loan underwriting standards. The largest increase in the Bank's
loan portfolio balance in recent years has been to the growth in the commercial
loan portfolio. Commercial real estate and business loans outstanding totaled
? approximately
31, 2020, including
portfolio, the Bank has emphasized maintaining strong asset quality by
following conservative loan underwriting guidelines. All commercial loans are
underwritten in a central location in theLawrenceville office to ensure uniformity and consistency in underwriting decisions. Expanding the product mix and capacity to sell residential loans in the
secondary mortgage market. The Bank has expanded offerings of residential
lending products to include more saleable government sponsored loans (e.g.
? fixed rates, can be originated and sold to avoid increasing the Bank's interest
rate risk exposure while establishing customer deposit and other relationships.
Notwithstanding the emphasis on sales of residential mortgages, the Bank continues to originate fixed and adjustable rate mortgage loans for its portfolio.
Emphasizing core deposits by attracting new customers and enhancing existing
customer relationships. In an effort to grow the banking franchise, the Bank
has enhanced direct marketing efforts to local businesses and consumers and
established a stronger culture of cross-selling products to existing customers.
In addition, the Bank has worked to enhance treasury management products and
? services. This line of business provides higher balance, lower cost accounts
which use more sophisticated electronic cash management services than the
consumer or average small business. A comprehensive strategy has been developed
to attract and retain deposits by offering enhanced technology, such as mobile
and online banking, remote check deposit, positive pay, People Pay and remote
deposit capture, with a consistent emphasis on quality customer service. Rationalizing delivery channels as customer preferences evolve. The Bank
currently operates seventeen community banking offices. The banking industry is
? experiencing rapid changes in technology. The Bank is focused on improving
customer services and addressing our customer's needs by using technology. The
objective is to ensure an efficient service delivery system that balances the
use of technology and personal customer service.
Critical Accounting Policies
The Company considers accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. The Company considers the following to be its critical accounting policies. Allowance for Loan Losses. The Bank maintains an allowance for loan losses in an amount it believes is appropriate to absorb probable losses inherent in the portfolio at the balance sheet date. Management's periodic determination of the adequacy of the allowance is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in relevant industries and other pertinent factors such as regulatory guidance and general economic conditions. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an appraisal or other estimate of the value of collateral on impaired loans and estimated losses on pools of homogenous loans based on the balance of loans in each loan category, changes in the inherent credit risk due to portfolio growth, historical loss experience and consideration of current economic trends. Based on management's estimate of the level of allowance for loan losses required, the Bank records a provision for loan losses to maintain the allowance for loan losses at an appropriate level.
The determination of the allowance for loan losses is based on management's current judgments about the loan portfolio credit quality and management's consideration of all known relevant internal and external factors that affect
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loan collectability, as of the reporting date. Management cannot predict with
certainty the amount of loan charge-offs that will be incurred. Management does
not currently determine a range of loss with respect to the allowance for loan
losses. In addition, various banking regulatory agencies, as an integral part of
their examination processes, periodically review the Bank's allowance for loan
losses. Such agencies may require that the Bank recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination. Accordingly, actual results could
differ from those estimates.
Other-Than-Temporary Impairment. In estimating other-than-temporary impairment
of investment securities, securities are evaluated periodically, and at least
quarterly, to determine whether a decline in their value is other than
temporary. The Company considers numerous factors when determining whether
potential other-than-temporary impairment exists and the period over which a
debt security is expected to recover. The principal factors considered are (1)
the length of time and the extent to which the fair value has been less than the
amortized cost basis, (2) the financial condition of the issuer (and guarantor,
if any) and adverse conditions specifically related to the security, industry or
geographic area, (3) failure of the issuer of the security to make scheduled
interest or principal payments, (4) any changes to the rating of a security by a
rating agency, and (5) the presence of credit enhancements, if any, including
the guarantee of the federal government or any of its agencies.
For debt securities, other-than-temporary impairment is considered to have
occurred if (1) the Company intends to sell the security, (2) it is more likely
than not the Company will be required to sell the security before recovery of
its amortized cost basis, or (3) if the present value of expected cash flows is
not sufficient to recover the entire amortized cost basis. In determining the
present value of expected cash flows, the Company discounts the expected cash
flows at the effective interest rate implicit in the security at the date of
acquisition or, for debt securities that are beneficial interests in securitized
financial assets, at the current rate used to accrete the beneficial interest.
In estimating cash flows expected to be collected, the Company uses available
information with respect to security prepayment speeds, expected deferral rates
and severity, whether subordinated interests, if any, are capable of absorbing
estimated losses and the value of any underlying collateral.
Deferred Tax Assets. The Company uses an estimate of future earnings to support
the position that the benefit of its deferred tax assets will be realized. If
future income should prove non-existent or less than the amount of the deferred
tax assets within the tax years to which they may be applied, the asset may not
be realized and the Company's net income will be reduced.
Goodwill and Other Intangible Assets. The Company must assess goodwill and other
intangible assets for impairment. This assessment involves estimating the fair
value of its reporting units. If the fair value of the reporting unit is less
than the carrying value including goodwill, the Company would be required to
take a charge against earnings to write down the assets to the lower value.
Pension Plan. The Bank maintains a noncontributory defined benefit pension plan
covering employees whose benefits were frozen effective August 1, 2005 . No
future benefits are accrued, however the plan calls for benefits to be paid to
eligible employees at retirement based primarily upon years of service with the
Bank.
Non-GAAP Financial Measures. In addition to the results of operations presented
in accordance with generally accepted accounting principles (GAAP), Management
uses, and this exhibit contains, certain non-GAAP financial measures. Management
believes these non-GAAP financial measures provide information useful to
investors in understanding the Company's underlying operational performance,
business and performance trends, and facilitate comparisons with the performance
of others in the financial service industry. Although Management believes these
non-GAAP financial measures enhance investors' understanding of the Company's
business and performance, they should not be considered an alternative to GAAP.
Net income, basic earnings per share, diluted earnings per share, return on
average assets and return on average equity excluding merger-related expenses
are all non-GAAP measures. The following table reconciles net income to net
income excluding merger-related expenses and presents basic earnings per share,
diluted earnings per share, return on average assets and return on average
equity utilizing both net income and net income excluding merger-related
expenses for the years ended December 31, 2020 and December 31, 2019 (dollars in
thousands, except per share data):
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Year Ended December 31,
2020 2019
Noninterest Expense (GAAP) $ 22,604 $ 21,625 Merger-related expenses (GAAP) (1,075)
-
Noninterest expense, excluding merger-related expenses
21,625
Net Income (GAAP) $ 6,932 $
8,806
After tax merger-related expenses (GAAP) 1,005
-
Net income, excluding merger-related expenses $ 7,937 $
8,806 Earnings Per Share - Basic GAAP $ 1.52$ 1.91
Excluding merger-related expenses $ 1.74
n/a
Earnings Per Share - Diluted
GAAP $ 1.50 $ 1.90 Excluding merger-related expenses $ 1.71
n/a
Average Assets (GAAP) $ 1,031,734 $ 983,042
Return on Average Assets
GAAP 0.67 % 0.90 %Excluding merger-related expenses 0.77 %
n/a
Average Equity (GAAP) $ 142,984 $ 140,189
Return on Average Equity
GAAP 4.85 % 6.28 %Excluding merger-related expenses 5.55 %
n/a
Balance Sheet Analysis:
General. The Company's total assets as ofDecember 31, 2020 increased$67.2 million , or 6.8%, to$1.1 billion from$984.4 million atDecember 31, 2019 . The increase in total assets included an increase in cash and cash equivalents of$18.1 million , or 55.8%, an increase in investment and mortgage-backed securities of$24.1 million , or 15.0%, and an increase in loans receivable of$21.8 million , or 3.1%, for the year endedDecember 31, 2020 . Cash and Cash Equivalents. Cash and cash equivalents increased$18.1 million , or 55.8%, to$50.5 million atDecember 31, 2020 from$32.4 million atDecember 31, 2019 . The increase was primarily the result of a$74.8 million , or 10.2%, increase in deposits, partially offset by an increase in loans receivable of$21.8 million , or 3.1%, and an increase in investment and mortgage-backed securities of$24.1 million , or 15.0%, during the period.Investment Securities . Investment securities available for sale increased$20.1 million , or 28.7%, to$90.0 million atDecember 31, 2020 from$69.9 million atDecember 31, 2019 . Purchases of investment securities totaled$39.3 million , partially offset by calls and maturities of$19.0 million and sales of$874,000 during the year endedDecember 31, 2020 .Equity Securities . Equity securities were$2.6 million and$3.0 million atDecember 31, 2020 andDecember 31, 2019 , respectively. The decrease of$403,000 was a result of changes in the market prices of the community bank stocks held in the investment portfolio due to the current economic environment. There were no purchases or sales of equity securities during the year endedDecember 31, 2020 . 32 Table of ContentsMortgage-Backed Securities . The Company's mortgage-backed securities available for sale increased$4.0 million , or 4.4%, to$95.5 atDecember 31, 2020 from$91.5 million atDecember 31, 2019 . Purchases of mortgage-backed securities totaled$40.5 million , partially offset by repayments of$33.0 million and sales of$3.5 million during the year endedDecember 31, 2020 . Investment, Equity and Mortgage-Backed Securities Composition. The composition of the investment, equity, and mortgage-backed securities portfolio is summarized in the following table (dollars in thousands). AtDecember 31, 2020 andDecember 31, 2019 , all of the Company's investment, equity, and mortgage-backed securities were classified as available for sale and recorded at current fair value. At December 31, 2020 2019 Amortized Fair Amortized Fair Cost Value Cost Value Municipal obligations$ 78,877 $ 80,716 $ 57,506 $ 58,816
U.S. government and agency obligations 4,000 4,007 8,404
8,489
Corporate bonds 4,975 5,230 2,477
2,579
Mortgage-backed securities: Ginnie Mae pass-through certificates 20,079 20,495 21,386
21,504
Fannie Mae pass-through certificates 24,051 24,553 20,537
20,795
Freddie Mac pass-through certificates 21,317 21,624 13,986
14,086
Private pass-through certificates 17,528 17,371 21,904
21,603
Collateralized mortgage obligations 11,287 11,482 13,406
13,490
Equity securities 2,686 2,552 2,686 2,955
Total securities $ 184,800 $ 188,030 $ 162,292 $ 164,317
During the year ended December 31, 2020 , $79.9 million of securities purchased
were partially offset by $4.4 million of securities sales and $52.0 million of
securities calls and repayments. For the year ended December 31, 2020 , there was
a net realized gain of $23,000 on the sale of securities. During the year ended
December 31, 2019 , $44.2 million of securities purchased were partially offset
by $7.6 million of securities sales and $25.6 million of securities calls and
repayments. For the year ended December 31, 2019 , there was a net realized loss
of $1,000 on the sale of securities.
At December 31, 2020 and December 31, 2019 , the Company held 39 securities and
42 securities in unrealized loss positions of $414,000 and $471,000 ,
respectively. The decline in the fair value of these securities resulted
primarily from interest rate fluctuations. The Company does not intend to sell
these securities nor is it more likely than not that the Company would be
required to sell these securities before their anticipated recovery and the
Company believes the collection of the investment and related interest is
probable. Based on this analysis, the Company considers all of the unrealized
losses to be temporary impairment losses.
Investment, Equity and Mortgage-Backed Securities Maturities and Yields. The
maturities and weighted average yields of the investment, equity and
mortgage-backed securities portfolio at December 31, 2020 are summarized in the
following table (dollars in thousands). Maturities are based on the final
contractual payment dates, and do not reflect the
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impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax- equivalent basis.
Due 1 Year or Less Due 1 - 5 Years Due 5 - 10 Years Due Over 10 Years Total Securities
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
Municipal
obligations $ 4,657 5.14 % $ 1,640 2.74 % $ 18,571 2.66 % $ 54,009 2.38 % $ 78,877 2.62 %
U.S. government
and agency
obligations - - 1,000 0.75 % 3,000 1.08 % - - 4,000 1.00 %
Corporate bonds 1,000 3.00 % 3,975 2.84 % - - - - 4,975 2.87 % Mortgage-backed securities: Ginnie Mae pass through certificates - - - - - - 20,079 1.31 % 20,079 1.31 % Fannie Mae pass through certificates - - - - 827 3.11 % 23,224 1.50 % 24,051 1.56 % Freddie Mac pass through certificates - - - - - - 21,317 1.58 % 21,317 1.58 % Collateralized mortgage obligations - - - - - - 11,287 0.76 % 11,287 0.76 % Private pass through certificates - - 718 1.70 %
3,727 1.68 % 13,083 1.15 % 17,528 1.29 % Equity securities 2,686 3.60 %
- - - - - - 2,686 3.60 %
Total $ 8,343 4.39 % $ 7,333 2.42 % $ 26,125 2.35 % $ 142,999 1.73 % $ 184,800 1.97 %
Loans. At December 31, 2020 , net loans were $734.8 million , or 69.9% of total
assets, compared to $713.0 million , or 72.4% of total assets at December 31,
2019 . The $21.8 million , or 3.1%, increase in total loans was due in large part
to a $51.8 million , or 16.0%, increase in commercial real estate and
construction loans and a $30.4 million , or 64.1%, increase in commercial
business loans. The increase in commercial business loans was primarily the
result of funded SBA PPP loans totaling $42.4 million partially offset by loan
repayments. These increases were partially offset by decreases in the
one-to-four family residential and construction, home equity loans and lines of
credit, and other loan segments of $42.0 million or 17.9%, $15.4 million or
13.8%, and $66,000 or 11.6%, respectively. The decrease in residential and
construction loans and home equity loans and lines of credit were the result of
residential loan sales and loan repayments during the period.
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Loan Portfolio Composition. The following table summarizes the composition of
the loan portfolio at the dates indicated, excluding loans held for sale
(dollars in thousands):
December 31,
2020 2019 2018 2017 2016
One-to-four family
residential and
construction $ 192,402 $ 234,421 $ 253,913 $ 261,715 $ 174,740
Commercial real estate and
construction 375,621 323,843 308,775 300,997 116,691
Home equity loans and
lines of credit 96,116 111,499 123,373 130,915 77,913
Commercial business 77,950 47,514 46,196 56,122 15,505
Other 504 570 1,139 1,413 520
Total loans $ 742,593 $ 717,847 $ 733,396 $ 751,162 $ 385,369
Loan Portfolio Maturities. The following table summarizes the maturity of the
loan portfolio at December 31, 2020 (dollars in thousands). Demand loans, loans
having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
Due Under Due 1 - 5 Due Over
1 Year Years 5 YearsOne-to-four family residential and construction$ 1,100 $ 5,745 $ 186,841 Commercial real estate and construction 19,534 43,495
312,040
Home equity loans and lines of credit 3,472 12,833
79,935 Commercial business 11,461 47,903 17,729 Other 177 328 - Total loans$ 35,744 $ 110,304 $ 596,545 Fixed and Adjustable Rate Loans. The following table summarizes the maturity of the Bank's fixed- and adjustable-rate loans atDecember 31, 2020 (dollars in thousands): Due Under Due 1 - 5 Due Over 1 Year Years 5 Years Fixed$ 6,755 $ 87,020 $ 211,010 Adjustable 28,989 23,284 385,535 Total loans$ 35,744 $ 110,304 $ 596,545
Bank Owned Life Insurance. The Company invests in bank owned life insurance to provide a funding source for benefit plan obligations. Bank owned life insurance also generally provides noninterest income that is non-taxable. Bank owned life insurance increased$1.6 million , or 6.7%, to$24.9 million atDecember 31, 2020 , from$23.4 million atDecember 31, 2019 .
Deposits. The Company accepts deposits primarily from the areas in which the
Bank's offices are located. The Company has consistently focused on building
broader customer relationships and targeting small business customers to
increase core deposits. The Company also relies on customer service to attract
and retain deposits. The Company offers a variety of deposit accounts with a
range of interest rates and terms. Deposit accounts consist of savings accounts,
certificates of deposit, money market accounts, commercial and consumer checking
accounts and individual retirement accounts. Interest rates, maturity terms,
service fees and withdrawal penalties are established on a periodic basis.
Deposit rates and terms are based primarily on current operating strategies and
market interest rates, liquidity requirements and deposit growth goals.
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Deposits increased$74.7 million , or 10.2%, to$809.2 million atDecember 31, 2020 from$734.5 million atDecember 31, 2019 . The increase resulted from a$113.7 million , or 23.2%, increase in demand and savings accounts partially offset by a$39.0 million , or 15.9%, decrease in time deposits during the year endedDecember 31, 2020 . The increase in demand and savings accounts resulted from increases in both business and consumer products. The increases were primarily the result of inflows from several sources including PPP loan proceeds, government stimulus and maturing time deposits as well as reductions in business and consumer spending during the period. Non-interest-bearing checking accounts, savings accounts, interest-bearing checking accounts and money market accounts increased$49.2 million or 38.7%,$29.1 million or 20.2%,$18.4 million or 16.6%, and$17.0 million or 16.0%, respectively. The following table summarizes the average balance and weighted average rates of total deposits, by account type, at the dates indicated (dollars in thousands): Year Ended Year Ended December 31, 2020 December 31, 2019 Average Yield / Average Yield/ Balance Rate Balance Rate Savings accounts$ 154,184 0.12 %$ 142,116 0.16 % Time Deposits 228,065 1.94 % 246,553 2.13 %
Money market accounts 117,497 0.38 % 106,001 1.16 %
Demand and NOW accounts 123,663 0.18 % 105,545 0.29 %
Total deposits
At
Three months or less$ 17,442 Over three to six months 8,576 Over six to twelve months 19,044 Over twelve months 54,081 Total$ 99,143 Borrowings. Borrowed funds, which includes short and long-term borrowings and securities sold under agreements to repurchase, decreased by$9.9 million , or 9.6%, to$93.0 million atDecember 31, 2020 from$102.8 million atDecember 31, 2019 . The decrease was primarily due to a$9.6 million , or 10.0%, decrease in long-term borrowings resulting from$22.2 million in maturities and an additional$12.4 million in principal repayments partially offset by new FHLB advances entered into the period totaling$25.0 million . Financing lease liabilities, which are also included in long-term borrowings, were$3.0 million atDecember 31, 2020 and$3.1 million atDecember 31, 2019 . There were no short-term borrowings atDecember 31, 2020 orDecember 31, 2019 . Total Stockholders' Equity. Stockholders' equity increased$4.1 million , or 2.9%, to$146.0 million atDecember 31, 2020 from$141.8 million atDecember 31, 2019 . The increase was the result of net income of$6.9 million earned during the year endedDecember 31, 2020 as well as a$1.1 million increase in accumulated other comprehensive income resulting from fair value adjustments on available for sale debt securities during the period. These increases were partially offset by$4.0 million in dividends paid during the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , 43,700 shares of the Company's outstanding stock were repurchased in accordance with the Company's stock repurchase program. OnMarch 19, 2020 , the Company temporarily suspended its stock repurchase plan. Additionally, 215,910 shares were exercised and 93,922 shares were repurchased in conjunction with stock options exercised.
Average Balance and Yields
The following table sets forth average balance sheets, average yields and costs,
and certain other information for the years and the periods indicated (dollars
in thousands). No tax-equivalent yield adjustments were made, as the effect
thereof was not material. All average balances are daily average balances.
Non-accrual loans were included in the
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computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.
For the Year Ended December 31,
2020 2019
Average Average
Outstanding Outstanding
Balance Interest Yield/ Rate Balance Interest Yield/ Rate
Interest-earning assets:
Loans $ 737,939 $ 30,964 4.15 % $ 731,098 $ 32,487 4.41 %
Investment and mortgage-backed
securities 166,090 3,710 2.23 % 160,445 4,227 2.63 %
FHLB and other restricted
stock 8,443 506 5.98 % 7,680 618 8.05 %
Interest-earning deposits 50,852 135 0.26 % 17,906 372 2.08 %Total interest-earning assets 963,324 35,315 3.63 %
917,129 37,704 4.08 %
Noninterest-earning assets 68,410 65,913
Total assets $ 1,031,734 $ 983,042
Interest-bearing liabilities:
Savings accounts $ 154,184 181 0.12 % 142,116 221 0.16 %
Time Deposits 228,065 4,437 1.94 % 246,553 5,242 2.13 %
Money market accounts 117,497 443 0.38 % 106,001 1,227 1.16 %
Demand and NOW accounts 123,663 222 0.18 % 105,545 301 0.29 %
Total interest-bearing
deposits 623,409 5,283 0.85 % 600,215 6,991 1.17 %
Borrowings 101,085 2,091 2.07 % 103,414 2,254 2.18 %
Securities sold under
agreements to repurchase 6,123 13 0.21 % 3,488 17 0.48 %
Total interest-bearing
liabilities 730,617 7,387 1.01 % 707,117 9,262 1.31 %Noninterest-bearing deposits 154,245
132,510
Noninterest-bearing
liabilities 3,888 3,226
Total liabilities 888,750 842,853
Stockholders' equity 142,984 140,189
Total liabilities and
stockholders' equity $ 1,031,734 $ 983,042
Net interest income $ 27,928 $ 28,442 Net interest rate spread (1) 2.62 % 2.77 % Net interest-earning assets (2)$ 232,707 $ 210,012 Net interest margin (3) 2.89 % 3.10 % Average interest-earning assets to interest-bearing liabilities 131.85 %
129.77 %
Net interest rate spread represents the difference between the yield on (1) average interest-earning assets and the cost of average interest-bearing
liabilities.
(2) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the
Company's net interest income for the years ended December 31, 2020 and December
31, 2019 (dollars in thousands). The rate column shows the effects attributable
to changes in rate (changes in rate multiplied by prior volume). The volume
column shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). For purposes of this table, changes
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attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately, based on the changes due to rate and the changes due
to volume.
Year Ended December 31, 2020
vs.
Year Ended December 31, 2019
Increase (decrease) due to
Volume Rate Total
Interest-earning assets:
Loans receivable $ 302 $ (1,825) $ (1,523) Investment and mortgage-backed securities 145 (662)
(517)
FHLB and other restricted stock 57 (169)
(112) Interest-earning deposits 279 (516) (237) Total interest-earning assets 783 (3,172) (2,389) Interest-bearing liabilities: Savings accounts 18 (58) (40) Time Deposits (408) (397) (805) Money market accounts 121 (905) (784) Demand and NOW accounts 46 (125) (79) Borrowings (50) (113) (163)
Securities sold under agreements to repurchase 9 (13)
(4)
Total interest-bearing liabilities (264) (1,611)
(1,875) Change in net interest income$ 1,047 $ (1,561) $ (514)
Comparison of Operating Results for the Years Ended
General. Net income for the year endedDecember 31, 2020 was$6.9 million compared to$8.8 million for the year endedDecember 31, 2019 , a decrease of$1.9 million , or 21.3%. Merger-related expenses during the period were$1.1 million ($1.0 million after tax) related to the pending merger with Dollar. Excluding the after tax impact of the merger-related expenses, net income would have been$7.9 million . Earnings per share for the current period was$1.52 for basic and$1.50 for fully diluted ($1.74 and$1.71 , respectively, excluding the merger-related expenses) compared to$1.91 for basic and$1.90 for fully diluted for the prior year. The Company's annualized return on average assets (ROA) and return on average equity (ROE) for the year endedDecember 31, 2020 were 0.67% and 4.85%, respectively, (0.77% and 5.55%, respectively, excluding the merger-related expenses) compared to 0.90% and 6.28%, respectively, for the year endedDecember 31, 2019 . Net Interest Income. Net interest income for the year endedDecember 31, 2020 was$27.9 million , a decrease of 514,000, or 1.8%, compared to$28.4 million for the year endedDecember 31, 2019 . The decrease was primarily the result of an decrease in the yield on interest-earning assets partially offset by a decrease in the cost of interest-bearing liabilities and an increase in the balance of interest-earning assets. The net interest rate spread and net interest margin were 2.62% and 2.89%, respectively, for the year endedDecember 31, 2020 , compared to 2.77% and 3.10%, respectively, for the year endedDecember 31, 2019 . Interest and Dividend Income. Total interest and dividend income decreased by$2.4 million , or 6.3%, to$35.3 million for the year endedDecember 31, 2020 compared to$37.7 million for the year endedDecember 31, 2019 . The decrease was primarily the result of a 45 basis point decrease in the average yield on interest-earning assets to 3.63% due to lower short-term interest rates for much of the year endedDecember 31, 2020 from 4.08% for the year endedDecember 31, 2019 . The decrease in total interest and dividend income resulting from the decrease in the average yield was partially offset by an increase in the average balance of interest-earning assets of$46.2 million , or 5.0%, to$963.3 million for the year endedDecember 31, 2020 compared to the prior year. 38
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Interest income on loans decreased$1.5 million , or 4.7%, to$31.0 million for the year endedDecember 31, 2020 compared to$32.5 million for the year endedDecember 31, 2019 . The decrease was primarily the result of a 26 basis point decrease in the average yield on loans receivable to 4.15% for the year endedDecember 31, 2020 from 4.41% for the year endedDecember 31, 2019 . The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of loans receivable of$6.8 million , or 0.9%, to$737.9 million for the year endedDecember 31, 2020 compared to the prior year. Interest income on investment and mortgage-backed securities decreased by$517,000 , or 12.2%, to$3.7 million for the year endedDecember 31, 2020 from$4.2 million for the year endedDecember 31, 2019 . The decrease was primarily the result of a 40 basis point decrease in the average yield earned on investment and mortgage-backed securities to 2.23% for the year endedDecember 31, 2020 from 2.63% for the year endedDecember 31, 2019 . The decrease in the average yield was the result of purchases made during the year at a lower rate than those being called and sold due to the declining rate environment. The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of investment and mortgage-backed securities of$5.6 million , or 3.5%, to$166.1 million for the year endedDecember 31, 2020 compared to the prior year. Interest income on FHLB stock and other restricted stock decreased$112,000 or 18.1% to$506,000 for the year endedDecember 31, 2020 compared to$618,000 for the year endedDecember 31, 2019 . The decrease was primarily the result of a 207 basis point decrease in the average yield to 5.98% for the year endedDecember 31, 2020 from 8.05% for the year endedDecember 31, 2019 . The FHLB decreased the dividend yield on both activity and membership stock as of the first quarter of 2020. The true up that was required for the dividend received was booked in the second quarter of 2020. The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of FHLB stock and other restricted stock of$763,000 , or 9.9%, to$8.4 million for the year endedDecember 31, 2020 compared to the prior year. The overall increase in the average balance of FHLB stock required was due to an increase in the outstanding balance of MPF loans during the year. Interest income on interest-earning deposits decreased$237,000 or 63.7% to$135,000 for the year endedDecember 31, 2020 compared to$372,000 for the year endedDecember 31, 2019 . The decrease was primarily the result of a 182 basis point decrease in the average yield on interest-earning deposits to 0.26% due to lower short-term interest rates for much of the year endedDecember 31, 2020 from 2.08% for the year endedDecember 31, 2019 . The decrease in interest income resulting from the decrease in the average yield was partially offset by an increase in the average balance of interest-earning deposits of$32.9 million , or 184.0%, to$50.9 million for the year endedDecember 31, 2020 compared to the prior year. Interest Expense. Total interest expense decreased by$1.9 million , or 20.2%, to$7.4 million for the year endedDecember 31, 2020 from$9.3 million for the year endedDecember 31, 2019 . The decrease was primarily the result of a 30 basis point decrease in the average cost of interest-bearing liabilities to 1.01% due to lower short-term interest rates for much of the year endedDecember 31, 2020 from 1.31% for the prior year. Interest expense on deposits decreased by$1.7 million , or 24.4%, to$5.3 million for the year endedDecember 31, 2020 from$7.0 million for the year endedDecember 31, 2019 . The decrease was primarily the result of a 32 basis point decrease in the cost of interest-bearing deposits to 0.85% due to lower short-term interest rates for much of the year endedDecember 31, 2020 from 1.17% for the year endedDecember 31, 2019 . Additionally, the average balance of time deposits decreased$18.5 million , or 7.5%, for the year endedDecember 31, 2020 compared to the prior year. Partially offsetting those decreases was an increase in the average balance of demand and NOW deposit accounts, savings accounts, and money market accounts of$18.2 million or 17.2%,$12.1 million or 8.5%, and$11.5 million or 10.9%, respectively, for the year endedDecember 31, 2020 compared to the prior year. Interest expense on borrowed funds decreased$167,000 , or 7.4%, to$2.1 million for the year endedDecember 31, 2020 from$2.3 million for the year endedDecember 31, 2019 . The decrease was primarily the result of an 11 basis point decrease in the average cost of borrowings to 2.07% for the year endedDecember 31, 2020 from 2.18% for year endedDecember 31, 2019 . The decrease in the average cost of borrowed funds was primarily the result of new FHLB advances being entered into at rates lower than the average rate on existing borrowings as well as maturities during the period. 39
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Additionally, there was a decrease in the average balance of borrowings of
Provision for Loan Losses. Provision for loan losses increased$2.3 million , or 321.8%, to$3.1 million for the year endedDecember 31, 2020 , compared to$725,000 for the year endedDecember 31, 2019 . In management's judgement, the allowance for loan losses is at a sufficient level that reflects the losses inherent in the Bank's loan portfolio relative to loan mix, economic conditions and historical loss experience. The increased provision for loan losses for the year endedDecember 31, 2020 was impacted by the increasing concern over the pandemic's impact on the local, regional and national economy as well as the hotel sector where it was determined necessary to build reserves. See "Non-Performing and Problem Assets" for additional information. Noninterest Income. Noninterest income increased$559,000 , or 11.1%, to$5.6 million for the year endedDecember 31, 2020 compared to$5.1 million for the year endedDecember 31, 2019 . The increase was primarily the result of a$1.5 million , or 533.0%, increase in loan sales gains and referral fees for the year endedDecember 31, 2020 . The increase in loan sale gains and referral fees was primarily the result of a historically low interest rate environment which caused a significant refinance market. The increase in noninterest income resulting from the increase in loan sale gains and referral fees was partially offset by a change in net equity securities fair value adjustments from a gain of$230,000 for the year endedDecember 31, 2020 to a loss of$403,000 for the year endedDecember 31, 2020 related to fluctuations in the market prices of the community bank stocks held in the investment portfolio due to the current economic environment. Additionally, there was a$195,000 , or 71.7%, decrease in other income. Noninterest Expense. Noninterest expenses totaled$22.6 million for the year endedDecember 31, 2020 , compared to$21.6 million for the year endedDecember 31, 2019 . Excluding merger-related expenses of$1.1 million , noninterest expenses were$21.6 million for both twelve month periods. Compensation expenses increased$174,000 , or 1.4%, which were partially offset by a decrease in core deposit intangible amortization of$157,000 , or 25.0%, during the year endedDecember 31, 2020 compared to the prior year. Income Tax Expense. The Company recorded a provision for income tax of$945,000 for the year endedDecember 31, 2020 compared to$2.3 million for the year endedDecember 31, 2019 . The effective tax rate was 12.0% for the year endedDecember 31, 2020 and 21.0% for the year endedDecember 31, 2019 . The decrease in the effective tax rate was primarily the result of permanent deductions related to both non-taxable interest income and the exercise of a number of stock options during the year.
Non-Performing and Problem Assets
When a residential mortgage loan, home equity loan or line of credit or consumer
loan is past due, the Company sends a late notice and contacts the borrower to
inquire as to why the loan is past due. When a loan is 30 days or more past due,
a second late notice is mailed and additional personal, direct contact with the
borrower is attempted to determine the reason for the delinquency and establish
the procedures by which the borrower will bring the loan current. When the loan
is 45 days past due, the Company explores the customer's situation and repayment
options and inspects the collateral. In addition, when a loan reaches 90 days
past due, management determines and recommends to the Loan Committee whether to
initiate foreclosure proceedings, which will be initiated by counsel if the loan
is not brought current. Procedures for avoiding foreclosure can include
restructuring the loan in a manner that provides concessions to the borrower to
facilitate payment.
Commercial business loans and commercial real estate loans are generally handled
in the same manner as the loans discussed above. Additionally, when a loan is 30
days past due, the borrower is contacted, the property is visually inspected and
inquiries are made with the principals as to the status of the loan and what
actions are being implemented to bring the loan current. Depending on the type
of loan, the borrower's cash flow statements, internal financial statements, tax
returns, rent rolls, new or updated independent appraisals, online databases and
other relevant information in Bank and third-party loan reviews are analyzed to
help determine a course of action. In addition, legal counsel is consulted and
an approach for resolution is determined and aggressively pursued.
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Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and interest is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. The loan may be returned to accrual status once it is brought current, six months of on-time payments have been received and full payment of principal and interest is expected. Management evaluates individual loans in all of the commercial segments for possible impairment if the relationship is greater than$200,000 and the loan is in nonaccrual status, risk-rated Substandard or Doubtful, 90 days or more past due or represents a troubled debt restructuring. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial business or commercial real estate loan. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loan is part of a larger relationship that is impaired, has a classified risk rating, or is a trouble debt restructuring ("TDR"). The table below sets forth the amounts and categories of non-performing assets at the dates indicated (dollars in thousands). As ofDecember 31, 2020 andDecember 31, 2019 , there were two loans modified as TDRs. AtDecember 31, 2018 , 2017, and 2016, there were no TDRs.December 31, 2020 2019
Non-accrual loans:
One-to-four family residential and construction
2,196 311
Home equity loans and lines of credit 173 272
Commercial business 683 60
Other 2 6
Total nonaccrual loans 4,965 2,716
Loans past due 90 days and still accruing - -
Total non-performing loans 4,965 2,716
Foreclosed real estate 488 404
Total non-performing assets $ 5,453 $ 3,120
Ratios:
Non-accrual loans to total loans 0.67 % 0.38 %
Non-performing loans to total loans 0.67 % 0.38 %
Non-performing assets to total assets 0.52 % 0.32 %
Allowance for loan losses to non-performing loans 157.93 % 179.75 %
Loans in process of foreclosure totaled$1.7 million atDecember 31, 2020 .Foreclosed Real Estate . Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate on the Consolidated Statements of Financial Condition. When property is acquired, it is recorded at estimated fair value at the date of foreclosure less the cost to sell, establishing a new cost basis. Estimated fair value generally represents the sales price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs and declines in estimated fair market value result 41
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in charges to expense after acquisition. AtDecember 31, 2020 , 2019, 2018, 2017, and 2016, foreclosed real estate totaled$488,000 ,$404,000 ,$486,000 ,$419,000 , and$251,000 , respectively. Foreclosed real estate atDecember 31, 2020 consisted of three residential properties. Classification of Assets. Management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized, and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently performing but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the collection of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans 90 days or more past due are considered Substandard. Any loan that has a specific allocation of the allowance for loan losses and is in the process of liquidation of the collateral is placed in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category. The following table sets forth the amounts of classified and criticized assets (classified assets plus loans designated as special mention) atDecember 31, 2020 (dollars in thousands): Classified assets: Substandard$ 6,409 Doubtful - Loss - Total classified assets 6,409 Special mention 10,490
Total criticized assets
Allowance for Loan Losses
An allowance for loan losses ("ALL") is maintained to absorb losses from the
loan portfolio. The ALL is based on management's continuing evaluation of the
risk characteristics and credit quality of the loan portfolio, assessment of
current economic conditions, diversification and size of the portfolio, adequacy
of collateral, past and anticipated loss experience, and the amount of
non-performing loans.
The Bank's methodology for determining the ALL is based on the requirements of
ASC Section 310-10-35 for loans individually evaluated for impairment (discussed
above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment,
as well as the Interagency Policy Statements on the Allowance for Loan and Lease
Losses and other bank regulatory guidance. The total of the two components
represents the Bank's ALL.
Loans that are collectively evaluated for impairment are analyzed with general
allowances being made as appropriate. For general allowances, historical loss
trends are used in the estimation of losses in the current portfolio. These
historical loss amounts are modified by other qualitative factors. Management
tracks the historical net charge-off activity for the loan segments which may be
adjusted for qualitative factors. Pass rated credits are segregated from
criticized credits for the application of qualitative factors. Loans in the
criticized pools, which possess certain qualities or characteristics that may
lead to collection and loss issues, are closely monitored by management and
subject to additional qualitative factors.
Management has identified a number of additional qualitative factors which it
uses to supplement the historical charge-off factor because these factors are
likely to cause estimated credit losses associated with the existing loan pools
to differ from historical loss experience. The additional factors are evaluated
using information obtained from internal, regulatory, and governmental sources
and include national and local economic trends and conditions; levels of and
trends in delinquency rates and non-accrual loans; trends in volumes and terms
of loans; effects of changes in lending policies; experience, depth and ability
of management; effects of the COVID-19 pandemic; and concentrations of credit
from a loan type, industry and/or geographic standpoint.
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Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Any future recoveries are credited back to the ALL. Management utilizes an internally developed spreadsheet to track and apply the various components of the allowance. The ALL is based on estimates and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the loan portfolio at any given date. In addition, federal regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and may require the Bank to make changes to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to Management. Based on Management's comprehensive analysis of the loan portfolio, they believe the current level of the allowance for loan losses is adequate.
The table below presents information regarding the activity in the allowance for loan losses for each of the periods presented (dollars in thousands):
For the Year Ended December 31,
2020 2019 2018 2017 2016
Balance at beginning of year $ 4,882 $ 4,414 $ 4,127 $ 3,837 $ 3,800
Provision charged to operating
expenses 3,058 725 572 517 40
Recoveries of loans previously
charged-off:
One-to-four family residential
and construction 5 4 69 28 -
Commercial real estate and
construction 8 3 2 1 1
Home equity loans and lines of
credit - 1 11 - -
Commercial business 1 - 5 3 -
Other 1 2 - 7 -
Total recoveries 15 10 87 39 1
Loans charged-off:
One-to-four family residential
and construction (24) - - (185) -
Commercial real estate and
construction - (187) (80) - -
Home equity loans and lines of
credit (16) (2) - (51) -
Commercial business (70) (37) (244) (1) -
Other (4) (41) (48) (29) (4)
Total charge-offs (114) (267) (372) (266) (4)
Net charge-offs (99) (257) (285) (227) (3)
Balance at end of year $ 7,841 $ 4,882 $ 4,414 $ 4,127 $ 3,837
Net charge-offs to average
loans outstanding 0.01 % 0.04 % 0.04 % 0.03 % - %
Allowance for loan losses to
total loans at year-end 1.06 % 0.68 % 0.60 % 0.55 % 1.00 %
The allowance for loan losses at
During the year endedDecember 31, 2020 , there was (1) a decrease in the provision for both the one-to four family residential and construction and the home equity loans and lines of credit loan classes primarily due to decreases in the loan balances in these categories as well as decreases in the qualitative factors related to changes in loan balances, lending policies and the experience, depth and ability of management partially offset by increases in the economic qualitative factor as a result of the COVID-19 pandemic and charge-offs incurred during the year; (2) an increase in the 43
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provision for the commercial real estate and construction loan class primarily
due to increases in the loan balances in this category as well as the addition
of a new qualitative factor for the COVID-19 pandemic, additional reserves
required for the hotel sector and increases in the qualitative factors related
to changes in volume and severity of past due, nonaccrual and classified loans,
loan concentrations and internal loan review partially offset by decreases in
the qualitative factors related to changes in lending policies, the experience,
depth and ability of management and other external factors; and (3) a decrease
in the allowance for the commercial business loan class primarily due to
decreases in the qualitative factors related to changes in loan balances,
lending policies and the experience, depth and ability of management as well as
charge-offs incurred during the year partially offset by the addition of a new
qualitative factor due to the COVID-19 pandemic and increases in the qualitative
factors related to balance changes in loan concentrations and internal loan
review. The allowance for other loan segment remained consistent with the prior
year.
Allocation of Allowance for Loan Losses. The following table sets forth the
allowance for loan losses allocated by loan category and the percent of loans in
each category to total loans at the dates indicated (dollars in thousands). The
allowance for loan losses allocated to each category is not necessarily
indicative of future losses in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
December 31, 2020 December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Amount Total Amount Total Amount Total Amount Total
One-to-four
family
residential and
construction $ 206 2.6 % $ 721 32.7 % $ 1,051 34.6 % $ 1,384 34.8 % $ 1,280 45.4 %
Commercial real
estate and
construction 6,990 89.1 % 3,313 45.1 % 2,761 42.1 % 2,003 40.1 % 1,787 30.3 %
Home equity loans
and lines of
credit 191 2.4 % 310 15.5 % 312 16.8 % 400 17.4 % 547 20.2 %
Commercial
business 451 5.8 % 534 6.6 % 286 6.3 % 333 7.5 % 211 4.0 %
Other 3 0.0 % 4 0.1 % 4 0.2 % 7 0.2 % 12 0.1 %
Total $ 7,841 100.0 % $ 4,882 100.0 % $ 4,414 100.0 % $ 4,127 100.0 % $ 3,837 100.0 %
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. The Company's primary sources of funds consist of deposit inflows, loan repayments and sales, advances and short-term borrowings from the FHLB, repurchase agreements and maturities, principal repayments and sales of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Asset/Liability Management Committee, under the direction of the Chief Financial Officer, is responsible for establishing and monitoring liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of its customers as well as unanticipated contingencies. Management believes there are sufficient sources of liquidity to satisfy short- and long-term liquidity needs as ofDecember 31, 2020 .
Management regularly monitors and adjusts the investments in liquid assets based upon an assessment of:
? expected loan demand;
? expected deposit flows and borrowing maturities;
? yields available on interest-earning deposits and securities; and
? the objectives of the asset/liability management program.
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The most liquid assets are cash and cash equivalents. The level of these assets
is dependent on the operating, financing, lending and investing activities
during any given period. At December 31, 2020 , cash and cash equivalents totaled
$50.5 million . Cash flows are derived from operating activities, investing
activities and financing activities as reported in the Company's Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements.
At December 31, 2020 , there were $126.6 million in loan commitments outstanding
of which $57.1 million were for commercial loans and lines, $43.8 million were
for one-to-four-family and construction loans and $25.7 million were for standby
letters of credit and other commitments including consumer overdraft lines.
Certificates of deposit due within one year of December 31, 2020 totaled $84.9
million , or 10.5% of total deposits. If these deposits do not remain with the
Bank, it may be required to seek other sources of funds, including loan and
securities sales, repurchase agreements and FHLB advances and short-term
borrowings. The Company believes, however, based on historical experience and
current market interest rates, it will retain upon maturity a large portion of
certificates of deposit with maturities of one year or less.
The Company's primary investing activities include originating loans and
purchasing investment securities. During the year ended December 31, 2020 , the
Bank had a net increase in loans of $21.8 million due in large part to a $51.8
million increase in commercial real estate loans and $42.4 million SBA PPP loans
that were funded during the period partially offset by prepayments and
residential loan sales. During the year ended December 31, 2019 , the Bank had a
net decrease in loans of $16.0 million . Purchases of investment securities
totaled $79.9 million and $44.2 million for the years ended December 31, 2020
and 2019, respectively.
Financing activities generally consist of activity in deposit accounts and FHLB
advances and short-term borrowings. The Company experienced net increases in
deposits of $74.8 million and $16.5 million during the years ended December 31,
2020 and December 31, 2019 , respectively. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by the
Bank and local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB, which provides an
additional source of funds. There were net decreases in FHLB advances of $9.6
million and $9.0 million for the years ended December 31, 2020 and December 31,
2019 , respectively. There were no FHLB short term borrowings for the year ended
December 31, 2020 and a net decrease of $4.5 million for the year ended
December 31, 2019 . At December 31, 2020 , the Bank had the ability to borrow up
to an additional $315.2 million from the FHLB.
The Company is committed to serving both its individual and commercial customers
through these difficult and unprecedented times. In light of the COVID-19
pandemic, the Company has increased the monitoring of its current liquidity and
anticipated funding needs. Additionally, the Company has been proactive in
positioning itself with additional liquidity in anticipation of the need to
assist customers. Finally, the Company has successfully tested all of its
contingency funding sources.
The Bank is subject to various regulatory capital requirements, including a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At December 31, 2019 , the Bank exceeded all regulatory capital
requirements. The Bank is considered "well capitalized" under regulatory
guidelines. See "Item 1 Business-Supervision and Regulation - Banking
Regulation - Capital Requirements" and Note 12 of the Notes to the Consolidated
Financial Statements.
Off-Balance Sheet Arrangements
In the normal course of business, the Company extends credit in the form of
various financial instruments with off-balance-sheet risks. These off-balance
sheet instruments involve, to various degrees, elements of credit and interest
rate risk not reported in the statement of financial condition. The Company uses
the same credit policies in making commitments for off-balance sheet financial
instruments as it does for on-balance sheet instruments. Collateral is generally
required to support financial instruments with credit risk and it typically
includes real estate property. The Company grants loan commitments at prevailing
market rates of interest. Commitments to extend credit are agreements
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to lend to a customer as long as there is no violation of any conditions established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The Company's exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contract amount of the financial instrument and is limited by subjecting them to credit approval and monitoring procedures. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Sometimes commitments expire without being drawn upon. Therefore, the total contractual amounts presented do not necessarily represent future funding requirements. AtDecember 31, 2020 , the Company had unused commitments totaling$126.6 million . The Company does not currently participate in any derivative activity for the purpose of managing interest rate sensitivity or risks associated with lending, deposit taking or borrowing activities.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements and related notes have been prepared in accordance withU.S. generally accepted accounting principles which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, the Company's assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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