UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to______________________

Commission file number: 001-38229

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION:	IRS EMPLOYER IDENTIFICATION NO:
Pennsylvania	23-3017653

Address of principal executive offices:

Blakely & Drinker St.

Dunmore, Pennsylvania 18512

TELEPHONE: 570-342-8281

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common stock, without par value	FDBC	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Non-accelerated filer ☒ Accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on April 30, 2023, the latest practicable date, was 5,665,255 shares.

FIDELITY D & D BANCORP, INC.

Form 10-Q March 31, 2023

Index

Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	3
	Consolidated Statements of Income for the three months ended March 31, 2023 and 2022	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	52
Item 4.	Controls and Procedures	58
Part II. Other Information
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		62

2

PART I – Financial Information

Item 1: Financial Statements

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets                

(Unaudited) 

(Unaudited)
(dollars in thousands)	March 31, 2023			December 31, 2022
Assets:
Cash and due from banks	$	29,668		$	3,542
Interest-bearing deposits with financial institutions		33,370			25,549
Total cash and cash equivalents		63,038			29,091
Available-for-sale securities		391,414			420,862
Held-to-maturity securities (fair value of $194,251 in 2023; $187,280 in 2022)		223,112			222,744
Restricted investments in bank stock		5,968			5,268
Loans and leases, net (allowance for credit losses of $17,910 in 2023; $17,149 in 2022)		1,609,089			1,547,025
Loans held-for-sale (fair value $160 in 2023; $1,660 in 2022)		156			1,637
Foreclosed assets held-for-sale		87			168
Bank premises and equipment, net		31,408			31,307
Leased property under finance leases, net		1,029			1,089
Right-of-use assets		8,527			8,642
Cash surrender value of bank owned life insurance		53,567			54,035
Accrued interest receivable		8,666			8,487
Goodwill		19,628			19,628
Core deposit intangible, net		1,443			1,540
Other assets		25,889			26,849
Total assets	$	2,443,021		$	2,378,372
Liabilities:
Deposits:
Interest-bearing	$	1,552,036		$	1,564,305
Non-interest-bearing		591,055			602,608
Total deposits		2,143,091			2,166,913
Accrued interest payable and other liabilities		15,846			17,434
Allowance for credit losses on off-balance sheet credit exposures		1,334			49
Finance lease obligation		1,051			1,110
Operating lease liabilities		9,263			9,357
Short-term borrowings		88,989			12,940
Secured borrowings		7,560			7,619
Total liabilities		2,267,134			2,215,422
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par value; none issued		-			-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,665,255 at March 31, 2023; and 5,630,794 at December 31, 2022)		116,437			115,611
Retained earnings		123,416			119,754
Accumulated other comprehensive loss		(62,938	)		(71,152	)
Treasury stock, at cost (25,945 shares at March 31, 2023 and 32,663 shares at December 31, 2022)		(1,028	)		(1,263	)
Total shareholders' equity		175,887			162,950
Total liabilities and shareholders' equity	$	2,443,021		$	2,378,372

See notes to unaudited consolidated financial statements

3

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

(Unaudited)	Three months ended
(dollars in thousands except per share data)	March 31, 2023			March 31, 2022
Interest income:
Loans and leases:
Taxable	$	18,119		$	14,367
Nontaxable		899			409
Interest-bearing deposits with financial institutions		31			33
Restricted investments in bank stock		106			31
Investment securities:
U.S. government agency and corporations		1,520			1,508
States and political subdivisions (nontaxable)		1,217			1,381
States and political subdivisions (taxable)		446			449
Total interest income		22,338			18,178
Interest expense:
Deposits		4,618			822
Secured borrowings		111			65
Other short-term borrowings		584			-
Total interest expense		5,313			887
Net interest income		17,025			17,291
Provision for credit losses on loans		180			525
Provision (credit) for credit losses on unfunded loan commitments		225			(11	)
Net interest income after provision for credit losses		16,620			16,777
Other income:
Service charges on deposit accounts		922			799
Interchange fees		1,251			1,176
Service charges on loans		298			441
Fees from trust fiduciary activities		695			617
Fees from financial services		222			267
Fees and other revenue		619			380
Earnings on bank-owned life insurance		321			319
Gain (loss) on write-down, sale or disposal of:
Loans		164			712
Available-for-sale debt securities		(1	)		-
Premises and equipment		(2	)		(157	)
Total other income		4,489			4,554
Other expenses:
Salaries and employee benefits		6,515			6,714
Premises and equipment		2,127			1,925
Data processing and communication		677			712
Advertising and marketing		893			781
Professional services		925			719
Automated transaction processing		429			369
Office supplies and postage		181			179
PA shares tax		(32	)		160
Loan collection		13			35
Other real estate owned		1			(25	)
FDIC assessment		168			237
Other		960			859
Total other expenses		12,857			12,665
Income before income taxes		8,252			8,666
Provision for income taxes		1,212			1,144
Net income	$	7,040		$	7,522
Per share data:
Net income - basic	$	1.25		$	1.33
Net income - diluted	$	1.24		$	1.32
Dividends	$	0.36		$	0.33

See notes to unaudited consolidated financial statements

4

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income
(Unaudited)	Three months ended March 31,
(dollars in thousands)	2023			2022
Net income	$	7,040		$	7,522
Other comprehensive gain (loss), before tax:
Unrealized holding gain (loss) on available-for-sale debt securities		9,824			(54,020	)
Reclassification adjustment for net losses realized in income		1			-
Amortization of unrealized loss on held-to-maturity securities		572			-
Net unrealized gain (loss)		10,397			(54,020	)
Tax effect		(2,183	)		11,344
Unrealized gain (loss), net of tax		8,214			(42,676	)
Other comprehensive income (loss), net of tax		8,214			(42,676	)
Total comprehensive income (loss), net of tax	$	15,254		$	(35,154	)

See notes to unaudited consolidated financial statements

5

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

For the Three Months Ended March 31, 2023 and 2022
(Unaudited)									Accumulated
									other
	Capital stock					Retained			comprehensive			Treasury
(dollars in thousands)	Shares			Amount		earnings			income (loss)			Stock			Total
Balance, December 31, 2021		5,645,687		$	114,108	$	97,442		$	179		$	-		$	211,729
Net income							7,522									7,522
Other comprehensive loss										(42,676	)					(42,676	)
Issuance of common stock through Employee Stock Purchase Plan		4,891			252											252
Issuance of common stock from vested restricted share grants through stock compensation plans		8,490			-											-
Stock-based compensation expense					306											306
Cash dividends declared							(1,890	)								(1,890	)
Balance, March 31, 2022		5,659,068		$	114,666	$	103,074		$	(42,497	)	$	-		$	175,243
Balance, December 31, 2022		5,630,794		$	115,611	$	119,754		$	(71,152	)	$	(1,263	)	$	162,950
Cumulative-effect adjustment for adoption of ASU 2016-13 (Footnote 1)							(1,326	)								(1,326	)
Net income							7,040									7,040
Other comprehensive income										8,214						8,214
Issuance of common stock through Employee Stock Purchase Plan		7,294			302											302
Re-issuance of common stock through Dividend Reinvestment Plan		8,104			79								303			382
Issuance of common stock from vested restricted share grants through stock compensation plans		20,449			-											-
Stock-based compensation expense					445											445
Repurchase of shares to cover withholdings		(1,386	)										(68	)		(68	)
Cash dividends declared							(2,052	)								(2,052	)
Balance, March 31, 2023		5,665,255		$	116,437	$	123,416		$	(62,938	)	$	(1,028	)	$	175,887

See notes to unaudited consolidated financial statements

6

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)	Three months ended March 31,
(dollars in thousands)	2023			2022
Cash flows from operating activities:
Net income	$	7,040		$	7,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		1,188			1,402
Provision for credit losses on loans		180			525
Provision (credit) for credit losses on unfunded loan commitments		225			(11	)
Deferred income tax expense (benefit)		(71	)		439
Stock-based compensation expense		445			306
Proceeds from sale of loans held-for-sale		11,105			30,239
Originations of loans held-for-sale		(9,795	)		(18,048	)
Earnings from bank-owned life insurance		(321	)		(319	)
Gain from bank-owned life insurance claim		(142	)		-
Net gain from sales of loans		(164	)		(712	)
Net loss from sales of investment securities		1			-
Net gain from sale and write-down of foreclosed assets held-for-sale		-			(44	)
Net loss from write-down and disposal of bank premises and equipment		2			157
Operating lease payments		22			31
Change in:
Accrued interest receivable		(179	)		101
Other assets		(895	)		(1,501	)
Accrued interest payable and other liabilities		(1,589	)		(1,842	)
Net cash provided by operating activities		7,052			18,245
Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		31,208			-
Proceeds from maturities, calls and principal pay-downs		7,142			10,057
Purchases		-			(37,930	)
Increase in restricted investments in bank stock		(700	)		(24	)
Net increase in loans and leases		(63,082	)		(27,254	)
Principal portion of lease payments received under direct finance leases		1,407			1,494
Purchases of bank premises and equipment		(718	)		(3,242	)
Proceeds from death benefits received on bank-owned life insurance		931			-
Proceeds from sale of bank premises and equipment		22			-
Proceeds from sale of foreclosed assets held-for-sale		-			764
Net cash used in investing activities		(23,790	)		(56,135	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(23,812	)		40,149
Net increase (decrease) in other borrowings		75,991			(36	)
Repayment of finance lease obligation		(59	)		(59	)
Proceeds from employee stock purchase plan participants		302			252
Repurchase of shares to cover withholdings		(68	)		-
Dividends paid		(1,669	)		(1,890	)
Net cash provided by financing activities		50,685			38,416
Net increase in cash and cash equivalents		33,947			526
Cash and cash equivalents, beginning		29,091			96,877
Cash and cash equivalents, ending	$	63,038		$	97,403

See notes to unaudited consolidated financial statements

7

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)	Three months ended March 31,
(dollars in thousands)	2023			2022
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	5,075		$	928
Income tax		-			-
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains (losses) on available-for-sale securities		9,825			(54,020	)
Cumulative-effect adjustment for adoption of ASU 2016-13		(1,326	)		-
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity		572			-
Transfers from/(to) loans to/(from) foreclosed assets held-for-sale		(82	)		437
Transfers from/(to) loans to/(from) loans held-for-sale, net		(205	)		(12,798	)
Transfers from premises and equipment to other assets held-for-sale		-			633
Right-of-use asset		-			50
Lease liability		-			50

See notes to unaudited consolidated financial statements

8

FIDELITY D & D BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of operations and critical accounting policies

Nature of operations

Fidelity D & D Bancorp, Inc. (the Company) is a bank holding company and the parent of The Fidelity Deposit and Discount Bank (the Bank). The Bank is a commercial bank and trust company chartered under the laws of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company. Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna, Northampton and Luzerne Counties and Wealth Management offices in Schuylkill and Lebanon Counties.

Principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in consolidation.

For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with U.S. GAAP. In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls. These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.

In the opinion of management, the consolidated balance sheets as of March 31, 2023 and December 31, 2022 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2023 and 2022 and consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the 2022 financial statements to conform to the 2023 presentation.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2023 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

9

 

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for credit losses. Management believes that the allowance for credit losses at  March 31, 2023 is adequate and reasonable to cover incurred and expected losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

Another material estimate is the calculation of fair values of the Company’s investment securities. Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, price quotes may be obtained from more than one source. All of the Company’s debt securities are classified as available-for-sale (AFS) or held-to-maturity (HTM). AFS debt securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI).  Debt securities, for which the Company has the positive intent and ability to hold to maturity, are reported at cost. On occasion, the Company may transfer securities from AFS to HTM at fair value on the date of transfer.

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained. On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of  March 31, 2023 and December 31, 2022, loans classified as HFS consisted of residential mortgage loans.

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease. The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet.

Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles. ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for credit losses. Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income.

The Company accounts for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that management believes to be reasonable.

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. Goodwill is tested for impairment on at least an annual basis. There was no goodwill impairment as of  March 31, 2023 and December 31, 2022. Other acquired intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Company accounts for certain participation interests in commercial loans receivable (loan participation agreements) sold as a sale of financial assets pursuant to ASC 860, Transfers and Servicing. Loan participation agreements that meet the sale criteria under ASC 860 are derecognized from the Consolidated Balance Sheets at the time of transfer. If the transfer of loans does not meet the sale criteria or participating interest criteria under ASC 860, the transfer is accounted for as a secured borrowing and the loan is not de-recognized and a participating liability is recorded in the Consolidated Balance Sheets.

The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income.

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.

10

 

2. New accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.

On January 1, 2023, the Company adopted ASU 2016-13 and all of the subsequent amendments using the modified-retrospective approach and recorded a cumulative-effect adjustment to retained earnings. The change in this accounting guidance could require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard. Starting in the 3rd quarter of 2022, the Company ran its CECL model parallel to the current allowance for loan losses calculation to gain a better understanding of the effects of the change. During the fourth quarter of 2022, a third-party service provider ran a model validation with no substantial findings. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $1.3 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment includes a $0.5 million decrease for the allowance for credit losses on loans (ACL) and a $0.8 million decrease for the reserve for unfunded commitments, net of deferred tax. The Company has also run a CECL analysis on its held-to-maturity investment securities as of March 31, 2023 and the estimated CECL reserve is immaterial. While the CECL model does not apply to available-for-sale securities, the ASU does require companies to record an allowance when recognizing credit losses for available-for-sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than in interest income over time.

The Company adopted the provisions of ASC 326 related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30 using the prospective transition approach. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.1 million of the ACL.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The amendments in this update were effective for the Company upon adoption of ASU 2016-13. The amendments in this update should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, the Company has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted ASU 2022-02 on January 1, 2023 and the adoption required additional quantitative and qualitative disclosures. There was not any significant effect on the Company's financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in this update are elective and apply to all entities that have contracts that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. An optional expedient simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848. The amendments in this update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2022-06. As of  March 31, 2023, the Company had approximately $35 million in loans with rates tied to LIBOR. The Company is working on modifying each of these existing contracts.

11

 

3. Accumulated other comprehensive income

The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:

As of and for the three months ended March 31, 2023
	Unrealized gains
	(losses) on			Securities
	available-for-sale			transferred to
(dollars in thousands)	debt securities			held-to-maturity			Total
Beginning balance	$	(53,624	)	$	(17,528	)	$	(71,152	)
Other comprehensive gain before reclassifications, net of tax		7,761			452			8,213
Amounts reclassified from accumulated other comprehensive income, net of tax		1			-			1
Net current-period other comprehensive gain		7,762			452			8,214
Ending balance	$	(45,862	)	$	(17,076	)	$	(62,938	)

As of and for the three months ended March 31, 2022
	Unrealized gains
	(losses) on			Securities
	available-for-sale			transferred to
(dollars in thousands)	debt securities			held-to-maturity		Total
Beginning balance	$	179		$	-	$	179
Other comprehensive loss before reclassifications, net of tax		(42,676	)		-		(42,676	)
Amounts reclassified from accumulated other comprehensive income, net of tax		-			-		-
Net current-period other comprehensive loss		(42,676	)		-		(42,676	)
Ending balance	$	(42,497	)	$	-	$	(42,497	)

Details about accumulated other
comprehensive income components	Amount reclassified from accumulated					Affected line item in the statement
(dollars in thousands)	other comprehensive income					where net income is presented
	For the three months
	ended March 31,
	2023			2022
Unrealized gains (losses) on AFS debt securities	$	(1	)	$	-	Gain (loss) on sale of investment securities
Income tax effect		-			-	Provision for income taxes
Total reclassifications for the period	$	(1	)	$	-	Net income

12

 

4. Investment securities

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions (municipal)

The municipal securities are general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The Company did not record any allowance for credit losses on its available-for-sale or held-to-maturity securities. The amortized cost and fair value of investment securities at  March 31, 2023 and December 31, 2022 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
March 31, 2023
Held-to-maturity securities:
Agency - GSE	$	80,572	$	-	$	(7,726	)	$	72,846
Obligations of states and political subdivisions		142,540		-		(21,135	)		121,405
Total held-to-maturity securities	$	223,112	$	-	$	(28,861	)	$	194,251