UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016March 31, 2017
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-49731
SEVERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | | 52-1726127 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
200 Westgate Circle, Suite 200 Annapolis, Maryland | | 21401 |
(Address of principal executive offices) | | (Zip Code) |
410-260-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,”filer”, “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
| |
Non- accelerated filer ☐ (Do not check if a smaller reporting company) | 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 ☐ No ☑
NumberIndicate the number of shares outstanding of each of the registrant’s issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value – 12,128,204 shares outstanding as of the close of business on November 10, 2016: 12,104,379 shares.May 15, 2017
SEVERN BANCORP, INC. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION | Page |
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Item 1. | Financial Statements(Unaudited) | |
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Item 2. | | 4527 |
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Item 3. | | 5643 |
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Item 4. | | 5643 |
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PART II – OTHER INFORMATION | |
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Item 1. | | 5644 |
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Item 1A. | | 5744 |
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Item 2. | | 5744 |
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Item 3. | | 5744 |
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Item 4. | | 5744 |
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Item 5. | | 5744 |
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Item 6. | | 5744 |
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| 5845 |
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| 46 |
Caution Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, as well as other periodic reports filed with the Securities and Exchange Commission (“SEC”), and written or oral communications made from time to time by or on behalf of Severn Bancorp and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.
Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2016 Annual Report on Form 10-K, Item 1A of Part II of this report on Form 10-Q, and the following:
| · | general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults; |
| · | changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits, and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity; |
| · | our liquidity requirements could be adversely affected by changes in our assets and liabilities; |
| · | our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio; |
| · | the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance, and other aspects of the financial services industry; |
| · | competitive factors among financial services companies, including product and pricing pressures, and our ability to attract, develop, and retain qualified banking professionals; |
| · | the effect of fiscal and governmental policies of the United States (“U.S.”) federal government; |
| · | the effect of any mergers, acquisitions, or other transactions to which we or our subsidiary may from time to time be a party; |
| · | costs and potential disruption or interruption of operations due to cyber-security incidents; |
| · | the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and other regulatory agencies; and |
| · | geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad. |
Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.
PART I– FINANCIAL INFORMATION
SEVERN BANCORP, INC. AND SUBSIDIARIESSevern Bancorp, Inc. and Subsidiaries
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (dollars in thousands, except per share amounts)data)
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ASSETS | | | |
Cash and due from banks | | $ | 31,451 | | | $ | 28,366 | |
Interest earning deposits in other banks | | | 13,042 | | | | 15,225 | |
Cash and cash equivalents | | | 44,493 | | | | 43,591 | |
Investment securities held to maturity (fair value: $68,975 at September 30, 2016; $76,310 at December 31, 2015) | | | 67,677 | | | | 76,133 | |
Loans held for sale | | | 12,961 | | | | 13,203 | |
Loans receivable, net of allowance for loan losses of $8,985 and $8,758, respectively | | | 603,473 | | | | 589,656 | |
Premises and equipment, net | | | 24,167 | | | | 24,290 | |
Foreclosed real estate | | | 1,343 | | | | 1,744 | |
Federal Home Loan Bank stock, at cost | | | 5,230 | | | | 5,626 | |
Deferred tax asset | | | 10,916 | | | | - | |
Accrued interest receivable and other assets | | | 7,496 | | | | 7,836 | |
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Total assets | | $ | 777,756 | | | $ | 762,079 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Liabilities | | | | | | | | |
Deposits | | $ | 556,610 | | | $ | 523,771 | |
Short-term borrowings | | | 7,000 | | | | - | |
Long-term borrowings | | | 103,500 | | | | 115,000 | |
Subordinated debentures | | | 20,619 | | | | 24,119 | |
Accrued interest payable and other liabilities | | | 3,244 | | | | 12,733 | |
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Total liabilities | | | 690,973 | | | | 675,623 | |
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Stockholders’ Equity | | | | | | | | |
Preferred stock, $0.01 par value, 1,000,000 shares authorized: | | | | | | | | |
Preferred stock series “A”, 437,500 shares issued and outstanding; $3,500 liquidation preference | | | 4 | | | | 4 | |
Preferred stock series “B”, 0 and 23,393 shares issued and outstanding; and $0 and $23,393 liquidation preference, respectively | | | - | | | | - | |
Common stock, $0.01 par value, 20,000,000 shares authorized;12,104,379 and 10,088,879 shares issued and outstanding, respectively | | | 121 | | | | 101 | |
Additional paid-in capital | | | 63,778 | | | | 76,335 | |
Retained earnings | | | 22,880 | | | | 10,016 | |
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Total stockholders' equity | | | 86,783 | | | | 86,456 | |
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Total liabilities and stockholders' equity | | $ | 777,756 | | | $ | 762,079 | |
| | March 31, 2017 | | | December 31, 2016 | |
ASSETS | | (unaudited) | | | | |
Cash and due from banks | | $ | 19,782 | | | $ | 39,396 | |
Federal funds sold and interest-earning deposits in other banks | | | 63,775 | | | | 27,718 | |
Cash and cash equivalents | | | 83,557 | | | | 67,114 | |
Securities available for sale, at fair value | | | 7,151 | | | | - | |
Securities held to maturity (fair value of $59,389 at March 31, 2017 and $62,827 at December 31, 2016) | | | 59,283 | | | | 62,757 | |
Loans held for sale, at fair value | | | 2,755 | | | | 10,307 | |
Loans receivable | | | 609,741 | | | | 610,278 | |
Allowance for loan losses | | | (8,332 | ) | | | (8,969 | ) |
Loans, net | | | 601,409 | | | | 601,309 | |
Real estate acquired through foreclosure | | | 1,243 | | | | 973 | |
Restricted stock investments | | | 4,701 | | | | 5,103 | |
Premises and equipment, net | | | 23,792 | | | | 24,030 | |
Accrued interest receivable | | | 2,262 | | | | 2,249 | |
Deferred income taxes | | | 9,473 | | | | 10,081 | |
Other assets | | | 3,114 | | | | 3,562 | |
Total assets | | $ | 798,740 | | | $ | 787,485 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest bearing | | $ | 77,982 | | | $ | 58,145 | |
Interest-bearing | | | 515,780 | | | | 513,801 | |
Total deposits | | | 593,762 | | | | 571,946 | |
Long-term borrowings | | | 93,500 | | | | 103,500 | |
Subordinated debentures | | | 20,619 | | | | 20,619 | |
Accrued expenses and other liabilities | | | 2,019 | | | | 3,490 | |
Total liabilities | | | 709,900 | | | | 699,555 | |
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Stockholders’ Equity: | | | | | | | | |
Preferred stock, $0.01 par value, 1,000,000 shares authorized: | | | | | | | | |
Preferred stock series “A,” 437,500 shares issued and outstanding and $3,500 liquidation preference at both March 31, 2017 and December 31, 2016 | | | 4 | | | | 4 | |
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,128,204 and 12,123,179 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively | | | 121 | | | | 121 | |
Additional paid-in capital | | | 64,098 | | | | 63,960 | |
Retained earnings | | | 24,632 | | | | 23,845 | |
Accumulated other comprehensive loss | | | (15 | ) | | | - | |
Total stockholders’ equity | | | 88,840 | | | | 87,930 | |
Total liabilities and stockholders’ equity | | $ | 798,740 | | | $ | 787,485 | |
TheSee accompanying notes to consolidated financial statements are an integral part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIESSevern Bancorp, Inc. and Subsidiaries
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)OPERATIONS (dollars in thousands, except per share data)
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Interest Income | | | | | | | | | | | | | |
Loans, including fees | | $ | 7,479 | | | $ | 7,549 | | | $ | 21,847 | | | $ | 22,541 | | |
Interest income: | | | (unaudited) | |
Loans | | | $ | 7,131 | | | $ | 7,107 | |
Securities | | | 280 | | | | 314 | | | | 890 | | | | 788 | | | | 269 | | | | 311 | |
Other | | | 83 | | | | 69 | | | | 251 | | | | 242 | | |
Other earning assets | | | | 157 | | | | 86 | |
Total interest income | | | 7,842 | | | | 7,932 | | | | 22,988 | | | | 23,571 | | | | 7,557 | | | | 7,504 | |
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Interest Expense | | | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | |
Deposits | | | 1,019 | | | | 1,032 | | | | 3,002 | | | | 3,055 | | | | 975 | | | | 979 | |
Borrowings and subordinated debentures | | | 1,106 | | | | 1,252 | | | | 3,493 | | | | 3,673 | | |
Long-term borrowings and subordinated debentures | | | | 996 | | | | 1,290 | |
Total interest expense | | | 2,125 | | | | 2,284 | | | | 6,495 | | | | 6,728 | | | | 1,971 | | | | 2,269 | |
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Net interest income | | | 5,717 | | | | 5,648 | | | | 16,493 | | | | 16,843 | | | | 5,586 | | | | 5,235 | |
Provision for loan losses | | | 50 | | | | - | | | | 150 | | | | 200 | | |
Net interest income after provision for loan losses | | | 5,667 | | | | 5,648 | | | | 16,343 | | | | 16,643 | | |
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Non-interest Income | | | | | | | | | | | | | | | | | |
Mortgage banking activities | | | 861 | | | | 859 | | | | 1,893 | | | | 2,278 | | |
Reversal of provision for loan losses | | | | (275 | ) | | | - | |
Net interest income after reversal of provision for loan losses | | | | 5,861 | | | | 5,235 | |
Noninterest income: | | | | | | | | | |
Mortgage-banking revenue | | | | 535 | | | | 721 | |
Real estate commissions | | | 455 | | | | 298 | | | | 1,246 | | | | 896 | | | | 380 | | | | 118 | |
Real estate management fees | | | 214 | | | | 166 | | | | 564 | | | | 491 | | | | 194 | | | | 165 | |
Other | | | 185 | | | | 146 | | | | 1,076 | | | | 1,036 | | |
Total non-interest income | | | 1,715 | | | | 1,469 | | | | 4,779 | | | | 4,701 | | |
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Non-Interest Expenses | | | | | | | | | | | | | | | | | |
Other noninterest income | | | | 249 | | | | 246 | |
Total noninterest income | | | | 1,358 | | | | 1,250 | |
Noninterest expense: | | | | | | | | | |
Compensation and related expenses | | | 4,028 | | | | 3,758 | | | | 11,478 | | | | 11,659 | | | | 3,757 | | | | 3,636 | |
Occupancy | | | 486 | | | | 377 | | | | 1,387 | | | | 1,255 | | | | 336 | | | | 452 | |
Legal | | | 81 | | | | 70 | | | | 217 | | | | 199 | | |
Foreclosed real estate, net | | | 41 | | | | 132 | | | | 184 | | | | 119 | | |
FDIC assessments and regulatory expense | | | 175 | | | | 307 | | | | 469 | | | | 917 | | |
Legal fees | | | | 28 | | | | 130 | |
Write-downs, losses, and costs of real estate acquired through foreclsoure, net | | | | 33 | | | | 45 | |
Federal Deposit Insurance Corpation insurance premiums | | | | (2 | ) | | | 130 | |
Professional fees | | | 252 | | | | 179 | | | | 659 | | | | 680 | | | | 135 | | | | 172 | |
Advertising | | | 134 | | | | 88 | | | | 475 | | | | 221 | | | | 206 | | | | 133 | |
Online charges | | | 117 | | | | 233 | | | | 617 | | | | 640 | | | | 196 | | | | 257 | |
Credit report and appraisal fees | | | 148 | | | | 170 | | | | 480 | | | | 646 | | | | 103 | | | | 103 | |
Other | | | 487 | | | | 524 | | | | 1,535 | | | | 1,463 | | | | 883 | | | | 520 | |
Total non-interest expenses | | | 5,949 | | | | 5,838 | | | | 17,501 | | | | 17,799 | | |
Income before income tax provision/(benefit) | | | 1,433 | | | | 1,279 | | | | 3,621 | | | | 3,545 | | |
Income tax provision/(benefit) | | | 378 | | | | 52 | | | | (10,816 | ) | | | 88 | | |
Total noninterest expense | | | | 5,675 | | | | 5,578 | |
Net income before income tax provision | | | | 1,544 | | | | 907 | |
Income tax provision | | | | 619 | | | | - | |
Net income | | | 1,055 | | | | 1,227 | | | | 14,437 | | | | 3,457 | | | | 925 | | | | 907 | |
Amortization of discount on preferred stock | | | (68 | ) | | | (68 | ) | | | (203 | ) | | | (203 | ) | | | (68 | ) | | | (68 | ) |
Dividends on preferred stock | | | (448 | ) | | | (526 | ) | | | (1,370 | ) | | | (1,579 | ) | | | (70 | ) | | | (526 | ) |
Net income available to common stockholders | | $ | 539 | | | $ | 633 | | | $ | 12,864 | | | $ | 1,675 | | | $ | 787 | | | $ | 313 | |
Basic income per share | | $ | 0.04 | | | $ | 0.06 | | | $ | 1.14 | | | $ | 0.17 | | |
Diluted income per share | | $ | 0.04 | | | $ | 0.06 | | | $ | 1.13 | | | $ | 0.17 | | |
Net income per common share - basic | | | $ | 0.06 | | | $ | 0.03 | |
Net income per common share - diluted | | | $ | 0.06 | | | $ | 0.03 | |
TheSee accompanying notes to consolidated financial statements are an integral part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIESSevern Bancorp, Inc. and Subsidiaries
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)COMPREHENSIVE INCOME (dollars(dollars in thousands)
Nine Months Ended September 30, 2016
| | Preferred Stock | | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Total Stockholders’ Equity | |
Balance - December 31, 2015 | | $ | 4 | | | $ | 101 | | | $ | 76,335 | | | $ | 10,016 | | | $ | 86,456 | |
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Net Income | | | - | | | | - | | | | - | | | | 14,437 | | | | 14,437 | |
Stock issuance (2,015,500 shares) net of expenses of $575 | | | | | | | 20 | | | | 10,490 | | | | | | | | 10,510 | |
Stock-based compensation | | | - | | | | - | | | | 143 | | | | - | | | | 143 | |
Dividend declared on Series A preferred stock | | | - | | | | - | | | | - | | | | (140 | ) | | | (140 | ) |
Stock redemption on Series B preferred stock (23,393 shares) | | | - | | | | - | | | | (23,393 | ) | | | - | | | | (23,393 | ) |
Dividend declared on Series B preferred stock | | | - | | | | - | | | | - | | | | (1,230 | ) | | | (1,230 | ) |
Amortization of discount on | | | | | | | | | | | | | | | | | | | | |
Series B preferred stock warrants | | | | | | | | | | | 203 | | | | (203 | ) | | | - | |
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Balance – September 30, 2016 | | $ | 4 | | | $ | 121 | | | $ | 63,778 | | | $ | 22,880 | | | $ | 86,783 | |
| | Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
| | (unaudited) | |
Net income | | $ | 925 | | | $ | 907 | |
Other comprehensive loss item - unrealized holding losses on available-for-sale securities arising during the period (net of tax benefit of $10 in 2017) | | | (15 | ) | | | - | |
Total other comprehensive loss | | | (15 | ) | | | - | |
Total comprehensive income | | $ | 910 | | | $ | 907 | |
Nine Months Ended September 30, 2015
| | Preferred Stock | | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Total Stockholders’ Equity | |
Balance - December 31, 2014 | | $ | 4 | | | $ | 101 | | | $ | 75,848 | | | $ | 7,857 | | | $ | 83,810 | |
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Net Income | | | - | | | | - | | | | - | | | | 3,457 | | | | 3,457 | |
Stock-based compensation | | | - | | | | - | | | | 92 | | | | - | | | | 92 | |
Dividend declared on Series B preferred stock | | | - | | | | - | | | | - | | | | (1,579 | ) | | | (1,579 | ) |
Amortization of discount on | | | | | | | | | | | | | | | | | | | | |
Series B preferred stock warrants | | | | | | | | | | | 203 | | | | (203 | ) | | | - | |
Exercised Options (21,500 shares) | | | - | | | | - | | | | 96 | | | | | | | | 96 | |
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Balance – September 30, 2015 | | $ | 4 | | | $ | 101 | | | $ | 76,239 | | | $ | 9,532 | | | $ | 85,876 | |
TheSee accompanying notes to consolidated financial statements are an integral part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIESSevern Bancorp, Inc. and Subsidiaries
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)CHANGES IN STOCKHOLDERS’ EQUITY (dollars in thousands)thousands, except per share data)
| | For the Nine Months Ended September 30, | |
| | 2016 | | | 2015 | |
| | | | | | |
Cash Flows from Operating Activities | | | | | | |
| | | | | | |
Net income | | $ | 14,437 | | | $ | 3,457 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Amortization of deferred loan fees | | | (889 | ) | | | (1,013 | ) |
Net amortization of premiums and discounts | | | 318 | | | | 299 | |
Provision for loan losses | | | 150 | | | | 200 | |
Provision for depreciation | | | 863 | | | | 851 | |
Provision for losses on foreclosed real estate | | | 196 | | | | - | |
Gain on sale of loans | | | (1,893 | ) | | | (2,278 | ) |
Gain on sale of foreclosed real estate | | | (46 | ) | | | (79 | ) |
Proceeds from loans sold to others | | | 106,668 | | | | 125,385 | |
Loans originated for sale | | | (104,533 | ) | | | (128,925 | ) |
Stock-based compensation expense | | | 143 | | | | 92 | |
Deferred income tax benefit | | | (10,916 | ) | | | - | |
Decrease in accrued interest receivable and other assets | | | 340 | | | | 1,132 | |
(Decrease) increase in accrued interest payable and other liabilities | | | (2,938 | ) | | | 1,172 | |
| | | | | | | | |
Net cash provided by operating activities | | | 1,900 | | | | 294 | |
| | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | |
| | | | | | | | |
Purchase of investment securities held to maturity | | | (3,562 | ) | | | (24,199 | ) |
Proceeds from maturing investment securities held to maturity | | | 7,000 | | | | 4,000 | |
Principal collected on mortgage-backed securities held to maturity | | | 4,700 | | | | 2,565 | |
Net (increase) decrease in loans | | | (14,448 | ) | | | 44,416 | |
Proceeds from sale of foreclosed real estate | | | 1,621 | | | | 2,014 | |
Investment in premises and equipment | | | (740 | ) | | | (242 | ) |
Redemption of FHLB stock | | | 396 | | | | 310 | |
| | | | | | | | |
Net cash (used in) provided by investing activities | | | (5,033 | ) | | | 28,864 | |
| | Three Months Ended March 31, 2017 (unaudited) | |
| | Number of Shares of Preferred Stock | | | Number of Shares of Common Stock | | | Preferred Stock | | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Accumulated Comprehensive Loss | | | Total Stockholders’ Equity | |
Balance at January 1, 2017 | | | 437,500 | | | | 12,123,179 | | | $ | 4 | | | $ | 121 | | | $ | 63,960 | | | $ | 23,845 | | | $ | - | | | $ | 87,930 | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 925 | | | | - | | | | 925 | |
Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 53 | | | | - | | | | - | | | | 53 | |
Dividend declared on Series A preferred stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (70 | ) | | | - | | | | (70 | ) |
Amortization of discount on Series B preferred stock | | | - | | | | - | | | | - | | | | - | | | | 68 | | | | (68 | ) | | | - | | | | - | |
Options exercised | | | - | | | | 5,025 | | | | - | | | | - | | | | 17 | | | | - | | | | - | | | | 17 | |
Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (15 | ) | | | (15 | ) |
Balance at March 31, 2017 | | | 437,500 | | | | 12,128,204 | | | $ | 4 | | | $ | 121 | | | $ | 64,098 | | | $ | 24,632 | | | $ | (15 | ) | | $ | 88,840 | |
| | Three Months Ended March 31, 2016 (unaudited) | |
| | Number of Shares of Preferred Stock | | | Number of Shares of Common Stock | | | Preferred Stock | | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Accumulated Comprehensive Income | | | Total Stockholders’ Equity | |
Balance at January 1, 2016 | | | 460,893 | | | | 10,088,879 | | | $ | 4 | | | $ | 101 | | | $ | 76,335 | | | $ | 10,016 | | | $ | - | | | $ | 86,456 | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 907 | | | | - | | | | 907 | |
Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 48 | | | | - | | | | - | | | | 48 | |
Dividend declared on Series B preferred stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (526 | ) | | | - | | | | (526 | ) |
Amortization of discount on Series B preferred stock | | | - | | | | - | | | | - | | | | - | | | | 68 | | | | (68 | ) | | | - | | | | - | |
Balance at March 31, 2016 | | | 460,893 | | | | 10,088,879 | | | $ | 4 | | | $ | 101 | | | $ | 76,451 | | | $ | 10,329 | | | $ | - | | | $ | 86,885 | |
See accompanying notes to consolidated financial statements
SEVERN BANCORP, INC. AND SUBSIDIARIESSevern Bancorp, Inc. and Subsidiaries
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED (dollars in thousands)thousands, except per share data)
| | For the Nine Months Ended September 30, | |
| | 2016 | | | 2015 | |
| | | | | | |
Cash Flows from Financing Activities | | | | | | |
| | | | | | |
Net increase (decrease) in deposits | | | 32,839 | | | | (7,168 | ) |
Net increase in short-term borrowings | | | 7,000 | | | | - | |
Additional borrowed funds, long term | | | 3,500 | | | | - | |
Repayment of borrowed funds, long term | | | (18,500 | ) | | | - | |
Series A preferred stock dividends | | | (140 | ) | | | - | |
Series B preferred stock dividends | | | (7,781 | ) | | | - | |
Stock redemption of Series B preferred stock | | | (23,393 | ) | | | - | |
Net proceeds from common stock issuance | | | 10,510 | | | | - | |
Proceeds from exercise of options | | | - | | | | 96 | |
Net cash provided by (used in) financing activities | | | 4,035 | | | | (7,072 | ) |
Increase in cash and cash equivalents | | | 902 | | | | 22,086 | |
Cash and cash equivalents at beginning of year | | | 43,591 | | | | 33,335 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 44,493 | | | $ | 55,421 | |
| | | | | | | | |
Supplemental disclosure of cash flows information: | | | | | | | | |
| | | | | | | | |
Cash paid (received) during period for: | | | | | | | | |
| | | | | | | | |
Interest | | $ | 9,104 | | | $ | 6,003 | |
| | | | | | | | |
Income taxes | | $ | (852 | ) | | $ | (298 | ) |
| | | | | | | | |
Transfer of loans to foreclosed real estate | | $ | 1,370 | | | $ | 1,907 | |
| | Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
Cash flows from operating activities: | | (unaudited) | |
Net income | | $ | 925 | | | $ | 907 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
Depreciation and amortization | | | 298 | | | | 286 | |
Amortization of deferred loan fees | | | (264 | ) | | | (297 | ) |
Net amortization of premiums and discounts | | | (76 | ) | | | 104 | |
Reversal of provision for loan losses | | | (275 | ) | | | - | |
Write-downs and losses on real estate acquired through foreclosure, net of gains | | | 40 | | | | 13 | |
Gain on sale of mortgage loans held for sale | | | (535 | ) | | | (721 | ) |
Proceeds from sale of mortgage loans held for sale | | | 10,757 | | | | 36,609 | |
Originations of mortgage loans held for sale | | | (2,670 | ) | | | (28,409 | ) |
Stock-based compensation | | | 53 | | | | 48 | |
Deferred income taxes | | | 619 | | | | - | |
(Increase) decrease in accrued interest receivable | | | (13 | ) | | | 20 | |
Decrease in other assets | | | 447 | | | | 30 | |
(Decrease) increase in accrued expenses and other liabilities | | | (1,541 | ) | | | 1,438 | |
Net cash provided by operating activities | | | 7,765 | | | | 10,028 | |
Cash flows from investing activities: | | | | | | | | |
Loan principal (disbursements), net of repayments | | | (76 | ) | | | (3,286 | ) |
Redemption of restricted stock investments | | | 402 | | | | 13 | |
Purchases of premises and equipment, net | | | (60 | ) | | | (60 | ) |
Activity in securities held to maturity: | | | | | | | | |
Purchases | | | - | | | | (1,021 | ) |
Maturities/calls/repayments | | | 3,542 | | | | 2,293 | |
Activity in available-for-sale securities: | | | | | | | | |
Purchases | | | (7,176 | ) | | | - | |
Maturities/calls/repayments | | | 8 | | | | - | |
Proceeds from sales of real estate acquired through foreclosure | | | 205 | | | | 578 | |
Net cash used in investing activities | | | (3,155 | ) | | | (1,483 | ) |
Cash flows from financing activities: | | | | | | | | |
Net increase in deposits | | | 21,816 | | | | 962 | |
Repayment of long-term borrowings | | | (10,000 | ) | | | - | |
Proceeds from exercise of stock options | | | 17 | | | | - | |
Net cash provided by financing activities | | | 11,833 | | | | 962 | |
Increase in cash and cash equivalents | | | 16,443 | | | | 9,507 | |
Cash and cash equivalents at beginning of period | | | 67,114 | | | | 43,591 | |
Cash and cash equivalents at end of period | | $ | 83,557 | | | $ | 53,098 | |
Supplemental Information: | | | | | | | | |
Interest paid on deposits and borrowed funds | | $ | 2,002 | | | $ | 1,962 | |
Income taxes paid | | | 52 | | | | - | |
Real estate acquired in satisfaction of loans | | | 515 | | | | 584 | |
TheSee accompanying notes to consolidated financial statements are an integral part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIESSevern Bancorp, Inc. and Subsidiaries
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Information as of and for the three months ended March 31, 2017 and 2016 is unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accounting and reporting policies of Severn Bancorp, Inc. and subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 8-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. In the opinion of management, all adjustments (comprising only of those of a normal recurring nature) necessary for a fair presentation of the results of operations for the interim periods presented have been made. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017 or any other interim or future period. Events occurring after the date of the financial statements up to May 15, 2017, the date the financial statements were available to be issued, were considered in the preparation of the consolidated financial statements.
These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2016 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of Severn Bancorp, Inc. (“Bancorp”), and its wholly-owned subsidiaries, SBI Mortgage Company and SBI Mortgage Company’s subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC, and Severn Savings Bank, FSB (the “Bank”), and the Bank’s subsidiaries, Louis Hyatt, Inc., Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West, LLC. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.
Note 2 - BasisUse of Presentation
Bancorp follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB”. The FASB sets generally accepted accounting principles in the United States (“GAAP”) that Bancorp follows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.Estimates
The accompanying unaudited consolidatedpreparation of financial statements have been prepared in accordance with GAAP for interim financial informationrequires management to make estimates and in accordance withassumptions that affect the instructions to Form 10-Q. Accordingly, they do not include allreported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentationdate of the results of operations for the interim periods presented have been made. Such adjustments were of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016 or any other interim period. The unaudited consolidated financial statements for the three and nine months ended September 30, 2016 should be read in conjunction with the audited consolidated financial statements, and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for loan losses and the related notes, which were included in Bancorp’s Annual Report on Form 10-Kallowance for loan losses (“Allowance”), determination of impaired loans and the fiscal year ended December 31, 2015. These consolidated financial statements consider eventsrelated measurement of impairment, valuation of investment securities, valuation of real estate acquired through foreclosure, valuation of share-based compensation, the assessment that occurred througha liability should be recognized with respect to any matters under litigation, and the datecalculation of current and deferred income taxes and the consolidated financial statements were issued.realizability of deferred tax assets.
Note 3 - Cash Flow PresentationFlows
In the statementsFor purposes of reporting cash flows, cash and cash equivalents include cash on hand, amountsand due from banks, Federal Home Loan Bank of Atlanta (“FHLB Atlanta”) overnight deposits, and federal funds sold. Generally, federal funds are sold, for one-day periods.and interest-earning deposits with banks (items with stated original maturity of three months or less).
Note 4 – Reclassifications
Amounts in the prior year’s consolidated financial statementsCertain reclassifications have been reclassified whenever necessarymade to amounts previously reported to conform to current period presentation.
Recent Accounting Pronouncements
Pronouncements Adopted
In March 2016, the current year’s presentation. Such reclassifications had no impactFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting, the purpose of which is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on net income.the statement of cash flows. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operation, or cash flows. We have elected to account for stock option forfeitures when they occur.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDPronouncements Issued
Note 5 -In May 2014, FASB issued ASU No. 2014-09, Earnings Per ShareRevenue from Contracts with Customersthat provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This standard may affect an entity’s financial statements, business processes and internal control over financial reporting. The standard is effective for interim and annual periods beginning after December 15, 2017. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. We are currently evaluating the impact of this standard on the Company’s financial position, results of operations, and cash flows.
Basic earnings per shareIn January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires entities to measure equity investments at fair value and recognize changes on fair value in net income. The guidance also provides a new measurement alternative for equity investments that do not have readily determinable fair values and don’t qualify for the net asset value practical expedient. Entities will have to record changes in instrument–specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, except for certain financial liabilities of consolidated collateralized financing entities. Entities will also have to reassess the realizability of a deferred tax asset related to an available-for-sale (“AFS”) debt security in combination with their other deferred tax assets. For public entities, the guidance in this ASU is computedeffective for the first interim or annual period beginning after December 15, 2017. Early adoption by dividing net income availablepublic entities is permitted as of the beginning of the year of adoption for selected amendments by a cumulative effect adjustment to common stockholdersthe balance sheet. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
In February 2016, FASB issued ASU 2016-02, Leases, which requires a lessee to recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a “right-of-use” asset. The accounting applied by the weighted average numberlessor is relatively unchanged. The ASU also requires expanded qualitative and quantitative disclosures. For public business entities, the guidance is effective for interim and annual reporting periods beginning after December 15, 2018 and mandates a modified retrospective transition for all entities. Early application is permitted. We have determined that the provisions of sharesASU No. 2016-02 may result in an increase in assets to recognize the present value of common stock outstandingthe lease obligations, with a corresponding increase in liabilities, however, we do not expect this to have a material impact on our financial position, results of operations, or cashflows.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, which sets forth a current expected credit loss (“CECL”) model which requires the Company to measure all expected credit losses for each period. Diluted earnings per share reflect additional common sharesfinancial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. While the Company is currently in the process of evaluating the impact of the amended guidance on its Consolidated Financial Statements, it currently expects the ALLL to increase upon adoption given that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that maythe Allowance will be issued by Bancorp relaterequired to outstanding stock options, warrants,cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and convertible preferred stock,will depend on economic conditions and are determined using the treasury stock method.composition of the Company’s loan and lease portfolio at the time of adoption.
Not includedIn August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which provides guidance regarding the presentation of certain cash receipts and cash payments in the diluted earnings per share calculationstatement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASC No. 2016-15 to have a material impact on its financial position, results of operations, or cash flows.
In March 2017, FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other costs, which provides guidance that calls for the three monthshortening of the amortization period ended September 30, 2016 because they were anti-dilutive were 437,500 shares of common stock issuable upon conversion of Bancorp’s Series A Preferred Stock. Not included in the diluted earnings per share calculation for the nine month period ended September 30, 2016 because they were anti-dilutive, were 126,600 shares of common stock issuable upon exercise of outstanding stock options, 556,976 shares of common stock issuable upon the exercise ofcertain callable debt securities held at a warrantpremium. The standard is effective for interim and 437,500 shares of common stock issuable upon conversion of Bancorp’s Series A Preferred Stock. Not included in the diluted earnings per share calculation for the three and nine monthannual reporting periods ended September 30, 2015, because they were anti-dilutive, were 40,000 and 121,500 shares, respectively, of common stock issuable upon exercise of outstanding stock options, 556,976 shares of common stock issuable upon the exercise of a warrant and 437,500 shares of common stock issuable upon conversion of Bancorp’s Series A Preferred Stock.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Common shares – weighted average (basic) | | | 12,104,379 | | | | 10,088,879 | | | | 11,324,660 | | | | 10,082,278 | |
Common share equivalents – weighted average | | | 79,360 | | | | 27,181 | | | | 51,193 | | | | 24,688 | |
Common shares – weighted average (diluted) | | | 12,183,739 | | | | 10,116,060 | | | | 11,375,853 | | | | 10,106,966 | |
Note 6 - Guarantees
Bancorpbeginning after December 15, 2018. Early adoption is permitted. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby lettersexpect the adoption of credit. See Note 10.
Note 7 - Regulatory Matters
The Bank is subjectASC No. 2017-08 to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by the regulators that, if undertaken, could have a direct material effectimpact on Bancorp’s consolidatedits financial statements.
Asposition, results of September 30, 2016, Bancorp’s reservable liability was below the threshold established by the Federal Reserve Bank and therefore, Bancorp was not required to maintain reserves (in the form of deposits with the Federal Reserve Bankoperations, or a correspondent bank on behalf of the Federal Reserve Bank.)
Federal banking agencies have adopted proposals that have substantially amended the regulatory capital rules applicable to Bancorp and the Bank. The amendments implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The amended rules establish new higher capital ratio requirements, narrow the definitions of capital, impose new operating restrictions on banking organizations with insufficient capital buffers and increase the risk weighting of certain assets. The amended rules were effective with respect to Bancorp and the Bank in January 2015, with certain requirements to be phased in beginning in 2016.cash flows.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDNote 2 - Securities
Note 7 - Regulatory Matters–ContinuedThe amortized cost and estimated fair values of our AFS securities portfolio was as follows as of March 31, 2017:
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
| | (dollars in thousands) | |
U.S. government agency notes | | $ | 7,176 | | | $ | - | | | $ | 25 | | | $ | 7,151 | |
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measuresWe did not hold any AFS securities as of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.December 31, 2016.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amountsThe amortized cost and ratios (set forth in the table below)estimated fair values of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).our held-to-maturity (“HTM”) securities portfolio were as follows:
| | March 31, 2017 | |
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
| | (dollars in thousands) | |
U.S. Treasury securities | | $ | 10,996 | | | $ | 143 | | | $ | - | | | $ | 11,139 | |
U.S. government agency notes | | | 20,021 | | | | 131 | | | | 53 | | | | 20,099 | |
Government sponsored mortgage-backed securities | | | 28,266 | | | | 62 | | | | 177 | | | | 28,151 | |
| | $ | 59,283 | | | $ | 336 | | | $ | 230 | | | $ | 59,389 | |
As
| | December 31, 2016 | |
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
| | (dollars in thousands) | |
U.S. Treasury securities | | $ | 12,998 | | | $ | 167 | | | $ | - | | | $ | 13,165 | |
U.S. government agency notes | | | 20,027 | | | | 133 | | | | 54 | | | | 20,106 | |
Government sponsored mortgage-backed securities | | | 29,732 | | | | 52 | | | | 228 | | | | 29,556 | |
| | $ | 62,757 | | | $ | 352 | | | $ | 282 | | | $ | 62,827 | |
Gross unrealized losses and fair value by length of September 30, 2016,time that the most recent notification fromindividual HTM securities have been in an unrealized loss position at the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 and Tier 1 leverage ratios as set forth in the table below. Theredates indicated are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios are also presented in the table below.following tables:
| | March 31, 2017 | |
| | Less than 12 months | | | 12 months or more | | | Total | |
| | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | |
| | (dollars in thousands) | |
U.S. government agency notes | | $ | 15,154 | | | $ | 53 | | | $ | - | | | $ | - | | | $ | 15,154 | | | $ | 53 | |
Mortgage-backed securities | | | 22,399 | | | | 177 | | | | | | | | | | | | 22,399 | | | | 177 | |
| | $ | 37,553 | | | $ | 230 | | | $ | - | | | $ | - | | | $ | 37,553 | | | $ | 230 | |
Under the final capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards
| | December 31, 2016 | |
| | Less than 12 months | | | 12 months or more | | | Total | |
| | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | |
| | (dollars in thousands) | |
U.S. government agency notes | | $ | 5,002 | | | $ | 54 | | | $ | - | | | $ | - | | | $ | 5,002 | | | $ | 54 | |
Mortgage-backed securities | | | 23,457 | | | | 228 | | | | - | | | | - | | | | 23,457 | | | | 228 | |
| | $ | 28,459 | | | $ | 282 | | | $ | - | | | $ | - | | | $ | 28,459 | | | $ | 282 | |
The gross unrealized loss in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitationsAFS securities portfolio is on the percentage$2.0 million fair value of earnings that can be paid out in dividends or usedAFS securities and has existed for stock repurchases or for the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. Management believes that, as of September 30, 2016, the Bank meets all capital adequacy requirements under the Basel III Capital Rules, including the capital conservation buffer, on a fully phased-in basis as if all such requirements were currently in effect.less than twelve months.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 7 - Regulatory Matters–Continued
| | Actual | | | For Capital Adequacy Purposes | | | Minimum Capital Adequacy with Capital Buffer | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | % | | | Amount | | | % | | | Amount | | % | | | Amount | | % | |
| | (dollars in thousands) | | | |
September 30, 2016 | | | | | | | | | | | | | | | | | | | | | |
Tangible (1) | | $ | 97,733 | | | 12.7 | % | | $ | 11,548 | | | | 1.5 | % | | | N/A | | | N/A | | | | N/A | | | N/A | |
Tier 1 capital (2) | | | 97,733 | | | 16.3 | % | | | 36,056 | | | | 6.0 | % | | $ | 39,811 | | | 6.6 | % | | $ | 48,074 | | | 8.0 | % |
Common Equity Tier 1 (2) | | | 97,733 | | | 16.3 | % | | | 27,042 | | | | 4.5 | % | | | 30,797 | | | 5.1 | % | | | 39,060 | | | 6.5 | % |
Leverage (1) | | | 97,733 | | | 12.7 | % | | | 30,795 | | | | 4.0 | % | | | 35,606 | | | 4.6 | % | | | 38,494 | | | 5.0 | % |
Total (2) | | | 105,299 | | | 17.5 | % | | | 48,074 | | | | 8.0 | % | | | 51,830 | | | 8.6 | % | | | 60,093 | | | 10.0 | % |
| (1) | To adjusted total assets. |
| (2) | To risk-weighted assets. |
Note 8 - Stock-Based Compensation
Bancorp has a stock-based compensation plan for directors, officers, and other key employees of Bancorp. The aggregate number of shares of common stock that may be issued with respect to the awards granted under the plan is 500,000 plus any shares forfeited under Bancorp’s old stock-based compensation plan. Under the termsAll of the stock-based compensation plan, Bancorp has the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan, stock options generally have a maximum term of ten years, andsecurities that are granted with an exercise price at least equal to the fair market value of the common stock on the date the options are granted. Generally, options granted to directors, officers and employees vest over a five-year period, although the Compensation Committee has the authority to provide for different vesting schedules.
Bancorp follows FASB ASC 718, “Compensation – Stock Compensation”, to account for stock-based compensation. FASB ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations at fair value. FASB ASC 718 requires an entity to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award.
There were no options granted during the nine months ended September 30, 2016 and September 30, 2015.
Stock-based compensation expense for the three and nine months ended September 30, 2016 totaled $48,000 and $143,000, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2015 totaled $30,000 and $92,000, respectively. There were no options exercised during the nine months ended September 30, 2016 and 21,500 options were exercised during the nine months ended September 30, 2015.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 8 - Stock-Based Compensation–Continued
Information regarding Bancorp’s stock-based compensation plan as of and for the nine months ended September 30, 2016 is as follows:
| | 2016 | |
| | Shares | | | | |
Options outstanding, December 31, 2015 | | | 339,800 | | | $ | 4.83 | |
Options granted | | | - | | | | - | |
Options exercised | | | - | | | | - | |
Options forfeited | | | (54,500 | ) | | | 5.07 | |
Options outstanding, September 30, 2016 | | | 285,300 | | | $ | 4.79 | |
Options exercisable, September 30, 2016 | | | 136,125 | | | $ | 4.37 | |
The aggregate intrinsic value of the options outstanding as of September 30, 2016 and December 31, 2015 was $491,000 and $323,000, respectively. The aggregate intrinsic value of the options exercisable as of September 30, 2016 and December 31, 2015 was $292,000 and $165,000, respectively.
The following table summarizes the nonvested options in Bancorp’s stock option plan as of September 30, 2016.
| | Shares | | | Weighted Average Grant Date Exercise Price | |
Nonvested options outstanding, December 31, 2015 | | | 235,570 | | | $ | 5.13 | |
Nonvested options granted | | | - | | | | - | |
Nonvested options vested | | | (31,895 | ) | | $ | 5.01 | |
Nonvested options forfeited | | | (54,500 | ) | | $ | 5.07 | |
Nonvested options outstanding, September 30, 2016 | | | 149,175 | | | $ | 5.18 | |
As of September 30, 2016, there was $407,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over a period of fifty-one months.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 9 - Investment Securities
The amortized cost and fair value of investment securities held to maturity are as follows (dollars in thousands):
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
September 30, 2016: | | | | | | | | | | | | |
| | | | | | | | | | | | |
US Treasury securities | | $ | 15,006 | | | $ | 282 | | | $ | - | | | $ | 15,288 | |
US Agency securities | | | 21,034 | | | | 392 | | | | 6 | | | | 21,420 | |
US Government sponsored mortgage-backed securities | | | 31,637 | | | | 630 | | | | - | | | | 32,267 | |
Total | | $ | 67,677 | | | $ | 1,304 | | | $ | 6 | | | $ | 68,975 | |
| | | | | | | | | | | | | | | | |
December 31, 2015: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
US Treasury securities | | $ | 21,057 | | | $ | 276 | | | $ | 8 | | | $ | 21,325 | |
US Agency securities | | | 20,011 | | | | 139 | | | | 76 | | | | 20,074 | |
US Government sponsored mortgage-backed securities | | | 35,065 | | | | 41 | | | | 195 | | | | 34,911 | |
Total | | $ | 76,133 | | | $ | 456 | | | $ | 279 | | | $ | 76,310 | |
The following table shows fair value and unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of September 30, 2016 and December 31, 2015. There was one Agency securitycurrently in a gross unrealized loss position at September 30, 2016. Four US Treasury securities, thirteen Agency securities and twelve Mortgage-backed securities wereare so due to declines in a gross unrealized loss position at December 31, 2015. Management believes that the unrealized lossesfair values resulting from changes in 2016 and 2015 were the result of interest rate levels differing from those existing atrates or increased liquidity spreads since the time of purchase ofthey were purchased. We have the securitiesintent and actual and estimated prepayment speeds. The Bank does not consider any ofability to hold these debt securities to be other than temporarily impaired at September 30, 2016 maturity (including the AFS securities) and December 31, 2015, because the unrealized losses were related primarily to changes in market interest rates and widening of sector spreads and were not necessarily related to the credit quality of the issuers of the securities.
In addition, the Bank doesdo not intend to sell, nor does itdo we believe it will be more likely than not that itwe will be required to sell, any impaired securities prior to a recovery of amortized cost.
We expect these securities11 will be repaid in full, with no losses realized. As such, management considers any impairment to be temporary.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 9 - Investment Securities-Continued
| | Less than 12 months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
September 30, 2016: | | (dollars in thousands) | |
| | | | | | | | | | | | | | | | | | |
US Treasury securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
US Agency securities | | | 1,021 | | | | 6 | | | | - | | | | - | | | | 1,021 | | | | 6 | |
US Government sponsored mortgage-backed securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 1,021 | | | $ | 6 | | | $ | - | | | $ | - | | | $ | 1,021 | | | $ | 6 | |
| | Less than 12 months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
December 31, 2015: | | (dollars in thousands) | |
| | | | | | | | | | | | | | | | | | |
US Treasury securities | | $ | 3,992 | | | $ | 8 | | | $ | - | | | $ | - | | | $ | 3,992 | | | $ | 8 | |
US Agency securities | | | 12,958 | | | | 76 | | | | - | | | | - | | | | 12,958 | | | | 76 | |
US Government sponsored mortgage-backed securities | | | 31,091 | | | | 195 | | | | - | | | | - | | | | 31,091 | | | | 195 | |
Total | | $ | 48,041 | | | $ | 279 | | | $ | - | | | $ | - | | | $ | 48,041 | | | $ | 279 | |
The amortized cost and estimated fair valueContractual maturities of debt securities at September 30, 2016, by contractual maturityMarch 31, 2017 are shown in the following table.below. Actual maturities may differ from contractual maturities because issuers mayborrowers have the right to call or prepay obligations with or without call or prepayment penalties.
| | Held to Maturity (dollars in thousands) | |
| | Amortized Cost | | | Estimated Fair Value | |
| | | | | | |
Due in one year or less | | $ | 9,008 | | | $ | 9,035 | |
Due from greater than one year to five years | | | 25,072 | | | | 25,511 | |
Due from greater than five years to ten years | | | 1,960 | | | | 2,162 | |
US Government sponsored mortgage-backed securities | | | 31,637 | | | | 32,267 | |
| | $ | 67,677 | | | $ | 68,975 | |
| | AFS Securities | | | HTM Securities | |
| | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | |
| | (dollars in thousands) | |
Due in one year or less | | $ | - | | | $ | - | | | $ | 10,003 | | | $ | 10,018 | |
Due after one through five years | | | 7,176 | | | | 7,151 | | | | 19,052 | | | | 19,166 | |
Due after five years through ten years | | | - | | | | - | | | | 1,962 | | | | 2,054 | |
Mortgage-backed securities | | | - | | | | - | | | | 28,266 | | | | 28,151 | |
| | $ | 7,176 | | | $ | 7,151 | | | $ | 59,283 | | | $ | 59,389 | |
There were no securities pledged as collateral as of March 31, 2017 or December 31, 2016.
Note 3 - Loans Receivable and Allowance for Loan Losses
Loans receivable are summarized as follows:
| | March 31, 2017 | | | December 31, 2016 | |
| | (dollars in thousands) | |
Residential mortgage | | $ | 253,309 | | | $ | 260,603 | |
Commercial | | | 16,695 | | | | 16,811 | |
Commercial real estate | | | 190,961 | | | | 195,710 | |
Construction, land acquisition, and development | | | 50,556 | | | | 41,438 | |
Land | | | 49,159 | | | | 48,664 | |
Lines of credit | | | 31,859 | | | | 29,657 | |
Home equity | | | 18,022 | | | | 19,129 | |
Consumer | | | 1,590 | | | | 1,210 | |
Total loans receivable | | | 612,151 | | | | 613,222 | |
Unearned loan fees | | | (2,410 | ) | | | (2,944 | ) |
Net loans receivable | | $ | 609,741 | | | $ | 610,278 | |
Certain loans in the amount of $322.6 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”) as collateral against advances.
Credit Quality
An Allowance is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. The methodology takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates. Management believes the Allowance is adequate as of March 31, 2017 and December 31, 2016. While management uses available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Allowance as an integral part of their examination process. Such agencies may require us to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDFor purposes of determining the Allowance, we have segmented our loan portfolio by product type. Our portfolio loan segments are residential mortgage, commercial, commercial real estate, construction, land acquisition, and development, land, lines of credit, home equity, and consumer. We have looked at all segments and have determined that no additional subcategorization is warranted based upon our credit review methodology and our portfolio classes are the same as our portfolio segments.
Note 10 - Loans ReceivableInherent Credit Risks
Loans receivable, including unfunded commitments consist of the following:
| | September 30, | | | December 31, | |
| | 2016 | | | 2015 | |
| | (dollars in thousands) | |
Residential mortgage, total | | $ | 271,924 | | | $ | 285,930 | |
Individually evaluated for impairment | | | 22,521 | | | | 26,087 | |
Collectively evaluated for impairment | | | 249,403 | | | | 259,843 | |
Construction, land acquisition and development, total | | | 63,879 | | | | 77,478 | |
Individually evaluated for impairment | | | 71 | | | | 309 | |
Collectively evaluated for impairment | | | 63,808 | | | | 77,169 | |
Land, total | | | 34,861 | | | | 28,677 | |
Individually evaluated for impairment | | | 1,375 | | | | 1,608 | |
Collectively evaluated for impairment | | | 33,486 | | | | 27,069 | |
Lines of credit, total | | | 26,254 | | | | 20,188 | |
Individually evaluated for impairment | | | 495 | | | | 299 | |
Collectively evaluated for impairment | | | 25,759 | | | | 19,889 | |
Commercial real estate, total | | | 198,915 | | | | 174,912 | |
Individually evaluated for impairment | | | 5,696 | | | | 6,321 | |
Collectively evaluated for impairment | | | 193,219 | | | | 168,591 | |
Commercial non-real estate, total | | | 16,105 | | | | 9,296 | |
Individually evaluated for impairment | | | - | | | | 122 | |
Collectively evaluated for impairment | | | 16,105 | | | | 9,174 | |
Home equity, total | | | 19,739 | | | | 24,529 | |
Individually evaluated for impairment | | | 3,519 | | | | 2,285 | |
Collectively evaluated for impairment | | | 16,220 | | | | 22,244 | |
Consumer, total | | | 1,209 | | | | 1,224 | |
Individually evaluated for impairment | | | 100 | | | | 10 | |
Collectively evaluated for impairment | | | 1,109 | | | | 1,214 | |
Total Loans | | | 632,886 | | | | 622,234 | |
Less | | | | | | | | |
Unfunded commitments included above | | | (17,400 | ) | | | (21,101 | ) |
| | $ | 615,486 | | | | 601,133 | |
Individually evaluated for impairment | | | 33,777 | | | | 37,041 | |
Collectively evaluated for impairment | | | 581,709 | | | | 564,092 | |
| | | 615,486 | | | | 601,133 | |
Allowance for loan losses | | | (8,985 | ) | | | (8,758 | ) |
Deferred loan origination fees and costs, net | | | (3,028 | ) | | | (2,719 | ) |
Net Loans | | $ | 603,473 | | | $ | 589,656 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 – Loans Receivable - Continued
The inherent credit risks within the loan portfolio vary depending upon the loan class as follows:
Residential mortgage loans are- secured by one to four family dwelling units. The loans have lowerlimited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, at a loan to valueloan-to-value ratio (“LTV”) of 80% or less.
Construction, land acquisitionCommercial - underwritten in accordance with our policies and developmentinclude evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial and industrial loans are underwrittenmade primarily based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the abilityidentified cash flow of the borrower or guarantor to repay principal and interest. Ifsecondarily on the Bank is forced to forecloseunderlying collateral supporting the loan. Accordingly, the repayment of a commercial and industrial loan depends primarily on a project prior to or at completion, due to a default, there can be no assurance that the Bank will be able to recover allcreditworthiness of the unpaid balanceborrower (and any guarantors), while liquidation of the loan as well as related foreclosurecollateral is a secondary and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified periodoften insufficient source of time. Sources of repayment of these loans typically are permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Land loansrepayment. are underwritten based upon the independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Line of credit loans are subject to the underwriting standards and processes similar to commercial non-real estate loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.
Commercial real estate loans are - subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real-estatereal estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate loans based on collateral and risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. The nature of commercial real estate loans makes them more difficult to monitor and evaluate.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 – Loans Receivable - Continued
Commercial non-real estateConstruction, land acquisition, and development (“ADC”) - underwritten in accordance with our underwriting policies which include a financial analysis of the developers, property owners, construction cost estimates, and independent appraisal valuations. These loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower's ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based will rely on the identified cash flowvalue associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and secondarilyinterest.
Sources of repayment of these loans typically are permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the underlying collateral supportingBank will be able to recover all of the unpaid balance of the loan facility. Accordingly,as well as related foreclosure and holding costs. In addition, the repaymentBank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.time.
Land - underwritten according to our policies which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Lines of credit - subject to the underwriting standards and processes similar to commercial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and, secondarily, as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.
Home equity loans are - subject to the underwriting standards and processes similar to residential mortgages and are secured by one to four family dwelling units. Home equity loans have greater risk than residential mortgages as a result of the Bank being in a second lien position in the event collateral is liquidated.position.
Consumer loans- consist of loans to individuals through the Bank'sBank’s retail network and are typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the difference inlower value of the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
The loan portfolio segments and loan classes disclosed above are the same because this is the level of detail management uses when the original loan is recorded and is the level of detail used by management to assess and monitor the risk and performance of the portfolio. Management has determined that this level of detail is adequate to understand and manage the inherent risks within each portfolio segment and loan class.
Allowance for Loan Losses- An allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Determining the amount of the allowance for loan losses requires the use of estimates and assumptions, which is permitted under GAAP. Actual results could differ significantly from those estimates. Management believes the allowance for losses on loans is adequate. While management uses available information to estimate losses on loans, future additions to the allowances may be necessary based on changes in economic conditions, particularly in the state of Maryland. In addition, various regulatory agencies periodically review the Bank's allowance for losses on loans as an integral part of their examination process. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 – Loans Receivable - Continued
For loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
For such loans that are classified as impaired, an allowance is established when the current market value of the underlying collateral less its estimated disposal costs is lower than the carrying value of that loan. For loans that are not solely collateral dependent, an allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. The general component relates to loans that are classified as doubtful, substandard or special mention that are not considered impaired, as well as non-classified loans. The general reserve is based on historical loss experience adjusted for qualitative factors. These qualitative factors include:
| ● | Levels and trends in delinquencies and nonaccruals; |
| ● | Inherent risk in the loan portfolio; |
| ● | Trends in volume and terms of the loan; |
| ● | Effects of any change in lending policies and procedures; |
| ● | Experience, ability and depth of management; |
| ● | National and local economic trends and conditions; and |
| ● | Effect of any changes in concentration of credit. |
A loan is considered impaired if it meets either of the following two criteria:
| ● | Loans that are 90 days or more in arrears (nonaccrual loans); or |
| ● | Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. |
Risk Ratings
Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.Allowance. Loans not classified are rated pass.
AThe accrual of interest on loans is discontinued at the time the loan is 90 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered a troubled debt restructuring when for economic or legal reasons relating to the borrowers financial difficulties Bancorp grants a concession to the borrower that it would not otherwise consider. Loan modifications made with terms consistent with current market conditions that the borrower could obtain in the open market are not considered troubled debt restructurings.doubtful.
All interest accrued but not collected for loans that are placed in nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, generally after six months of consecutive current payments and an updated analysis of the borrower’s ability to service the loan.
Loans that experience insignificant payment delays and payment shortfalls generally are not placed in nonaccrual status or classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of 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.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDAllowance Methodology
Note 10 – Loans Receivable - ContinuedThe Allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as loans that are not classified.
A loan is considered impaired if it meets any of the following three criteria:
| · | Loans that are 90 days or more in arrears (nonaccrual loans); or |
| · | Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. |
| · | Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”) |
If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent for purposes of Allowance determination.
With respect to all loan segments, management doeswe do not charge off a loan, or a portion of a loan, until one of the following conditions have been met:
| ●· | The loan has been foreclosed on. Onceforeclosed. At the loan has been transferred from the Loans Receivable to Foreclosed Real Estate,time of foreclosure, a charge off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral. |
| ●· | An agreement to accept less than the recorded balance of the loan has been made with the borrower. Once an agreement has been finalized and any proceeds from the borrower are received, a charge offcharge-off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral.proceeds received. |
| ●· | The loan is considered to be impaireda collateral dependent andimpaired loan when its collateral valuation is less than the recorded balance. The loan is written down for accounting purposes by the amount of the difference between the recorded balance and collateral value. |
Prior to the above conditions, a loan is assessed for impairment when: (i) a loan becomes 90 days or more in arrears or (ii) based on current information and events, it is probable that the borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent. For a cash flow dependent loan, if based on management’s calculation of discounted cash flows, a reserve is needed, a specific reserve is recorded. That reserve is included in the Allowance for Loan Losses in the Consolidated Statement of Financial Condition.
At times, the Bancorp receives extension requests for commercial real estate and construction loans, some of which have related repayment guarantees. An extension may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing, and is based on a re-underwriting of the loan and management's assessment of the borrower's ability to perform according to the agreed-upon terms. Typically, at the time of an extension, borrowers are performing in accordance with contractual loan terms. Extension terms generally do not exceed 12 to 18 months and typically require that the borrower provide additional economic support in the form of partial repayment, additional collateral or guarantees. In cases where the fair value of the collateral or the financial resources of the borrower are deemed insufficient to repay the loan, reliance may be placed on the support of a guarantee, if applicable. However, such guarantees are not relied on when evaluating a loan for impairment and never considered the sole source of repayment.
Bancorp evaluates the financial condition of guarantors based on the most current financial information available. Most often, such information takes the form of (i) personal financial statements of net worth, cash flow statements and tax returns (for individual guarantors) and (ii) financial and operating statements, tax returns and financial projections (for legal entity guarantors). Bancorp’s evaluation is primarily focused on various key financial metrics, including net worth, global cash flow, leverage ratios, and liquidity. It is Bancorp's policy to update such information annually, or more frequently as warranted, over the life of the loan.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDSpecific Allowance Component
Note 10 – Loans Receivable – Continued
While Bancorp does not specifically track the frequency with which it has pursued guarantor performance underImpaired loans secured by real estate - when a guarantee, its underwriting process, both at origination and upon extension, as applicable, includes an assessment of the guarantor's reputation, creditworthiness and willingness to perform. Historically, when Bancorp has found it necessary to seek performance under a guarantee, it has been able to effectively mitigate its losses. As stated above, Bancorp’s ability to seek performance under a guarantee is directly related to the guarantor's reputation, creditworthiness and willingness to perform. When asecured real estate loan becomes impaired, repaymenta decision is sought from both the underlying collateral and the guarantor (as applicable). In the event that the guarantor is unwilling or unablemade as to perform, a legal remedy is pursued.
Construction loans are funded, at the requestwhether an updated certified appraisal of the borrower, typically not more than once per month,real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the LTV ratio based on the extent of work completed,original appraisal, and are monitored throughout the lifecondition of the projectproperty. Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
Impaired loans secured by independent professional construction inspectors and Bancorp's commercialcollateral other than real estate lending department. Interest is advanced to the borrower, upon request, based upon the progress of the project toward completion. The amount of interest advanced is added to the total outstanding principal under the loan commitment. Should the project not progress- for loans secured by nonreal estate collateral, such as scheduled, the adequacy of the interest reserve necessary to carry the project through to completion is subject to close monitoring by management. Should the interest reserve be deemed to be inadequate, the borrower is required to fund the deficiency. Similarly, once a loan is fully funded, the borrower is required to fund all interest payments.
Construction loans are reviewed for extensions upon expiration of the loan term, if necessary. Provided the loan is performing in accordance with contractual terms, extensions may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing. Extension terms generally do not exceed 12 to 18 months.
In general, Bancorp's construction loans are used to finance improvements to commercial, industrial or residential property. Repayment is typically derived from the sale of the property as a whole, the sale of smaller individual units, or by a take-out from a permanent mortgage. The term of the construction period generally does not exceed two years. Loan commitments are based on established construction budgets which represent an estimate of total costs to complete the proposed project including both hard (direct) costs (building materials, labor, etc.)accounts receivable, inventory, and soft (indirect) costs (legal and architectural fees, etc.). In addition, project costs may include an appropriate level of interest reserve to carry the project through to completion. If established, such interest reservesequipment, estimated fair values are determined based on (i) a percentagethe borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the committed loan amount, (ii)financial information or the loan term, and (iii)quality of the applicable interest rate. Regardless of whether a loan contains an interest reserve, the total project cost statement serves as the basis for underwriting and determining which items will be funded by the loan and which items will be funded through borrower equity. Bancorp has not advanced additional interest reserves to keep a loan from becoming nonperforming.assets.
Bancorp recognized $202,000For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs is lower than the carrying value of the loan. For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of the loan.
General Allowance Component
The general component of the Allowance is based on historical loss experience adjusted for qualitative factors. Loans are pooled by portfolio class and $312,000an historical loss percentage, based upon a four-year net charge-off history, is applied to each class. The result of interest income from itsthat calculation for each loan class is then applied to the current loan portfolio from interest reserves duringbalances to determine the nine months ended September 30, 2016 and 2015, respectively. Nonerequired general component of the Allowance per loan class. We then apply additional loss multipliers to the different classes of loans where interest reserves were recorded as capitalized interest were non-performing.to reflect various qualitative factors. These qualitative factors include, but are not limited to:
| · | Levels and trends in delinquencies and nonaccruals; |
| · | Inherent risk in the loan portfolio; |
| · | Trends in volume and terms of the loan; |
| · | Effects of any change in lending policies and procedures; |
| · | Experience, ability and depth of management; |
| · | National and local economic trends and conditions; and |
| · | Effect of any changes in concentration of credit. |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDThe following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:
Note 10 - Loans Receivable - Continued
The following is a summary of the allowance for loan losses for the nine and three month periods ended September 30, 2016 (dollars in thousands):
| | Total | | | Residential Mortgage | | | Construction Acquisition Development | | | Land | | | Lines of Credit | | | Commercial Real Estate | | | Commercial Non-Real Estate | | | Home Equity | | | Consumer | | | Three Months Ended March 31, 2017 | |
Nine months ended September 30, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Residental Mortgage | | | Commercial | | | Commercial Real Estate | | | ADC | | | Land | | | Lines of Credit | | | Home Equity | | | Consumer | | | Total | |
| | | (dollars in thousands) | |
Beginning Balance | | $ | 8,758 | | | $ | 4,188 | | | $ | 446 | | | $ | 510 | | | $ | 57 | | | $ | 2,792 | | | $ | 234 | | | $ | 528 | | | $ | 3 | | | $ | 3,833 | | | $ | 421 | | | $ | 2,535 | | | $ | 527 | | | $ | 863 | | | $ | 57 | | | $ | 728 | | | $ | 5 | | | $ | 8,969 | |
Provision | | | 150 | | | | (491 | ) | | | (133 | ) | | | 349 | | | | (27 | ) | | | (226 | ) | | | 409 | | | | 317 | | | | (48 | ) | |
Charge-offs | | | (446 | ) | | | (151 | ) | | | (13 | ) | | | (59 | ) | | | - | | | | (178 | ) | | | (17 | ) | | | (28 | ) | | | - | | | | (499 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (499 | ) |
Recoveries | | | 523 | | | | 322 | | | | 97 | | | | 3 | | | | 10 | | | | 4 | | | | 33 | | | | 4 | | | | 50 | | | | 107 | | | | 27 | | | | - | | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | 137 | |
Net (charge-offs) recoveries | | | | (392 | ) | | | 27 | | | | - | | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | (362 | ) |
Provision for (reversal of) loan losses | | | | 348 | | | | (22 | ) | | | (20 | ) | | | (140 | ) | | | (153 | ) | | | (10 | ) | | | (278 | ) | | | - | | | | (275 | ) |
Ending Balance | | $ | 8,985 | | | $ | 3,868 | | | $ | 397 | | | $ | 803 | | | $ | 40 | | | $ | 2,392 | | | $ | 659 | | | $ | 821 | | | $ | 5 | | | $ | 3,789 | | | $ | 426 | | | $ | 2,515 | | | $ | 387 | | | $ | 710 | | | $ | 47 | | | $ | 453 | | | $ | 5 | | | $ | 8,332 | |
Ending balance related to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 2,259 | | | $ | 1,583 | | | $ | - | | | $ | 55 | | | $ | 15 | | | $ | 200 | | | $ | - | | | $ | 402 | | | $ | 4 | | |
Loans collectively evaluated for impairment | | $ | 6,726 | | | $ | 2,285 | | | $ | 397 | | | $ | 748 | | | $ | 25 | | | $ | 2,192 | | | $ | 659 | | | $ | 419 | | | $ | 1 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
individually evaluated for impairment | | | $ | 1,757 | | | $ | - | | | $ | 191 | | | $ | - | | | $ | 52 | | | $ | - | | | $ | 81 | | | $ | 3 | | | $ | 2,084 | |
Ending balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
collectively evaluated for impairment | | | | 2,032 | | | | 426 | | | | 2,324 | | | | 387 | | | | 658 | | | | 47 | | | | 372 | | | | 2 | | | | 6,248 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,789 | | | $ | 426 | | | $ | 2,515 | | | $ | 387 | | | $ | 710 | | | $ | 47 | | | $ | 453 | | | $ | 5 | | | $ | 8,332 | |
Beginning Balance | | $ | 8,804 | | | $ | 3,892 | | | $ | 297 | | | $ | 686 | | | $ | 49 | | | $ | 2,577 | | | $ | 703 | | | $ | 593 | | | $ | 7 | | |
Provision | | | 50 | | | | (161 | ) | | | 113 | | | | 176 | | | | (9 | ) | | | (189 | ) | | | (54 | ) | | | 226 | | | | (52 | ) | |
Charge-offs | | | (72 | ) | | | - | | | | (13 | ) | | | (59 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | |
Recoveries | | | 203 | | | | 137 | | | | - | | | | - | | | | - | | | | 4 | | | | 10 | | | | 2 | | | | 50 | | |
Ending Balance | | $ | 8,985 | | | $ | 3,868 | | | $ | 397 | | | $ | 803 | | | $ | 40 | | | $ | 2,392 | | | $ | 659 | | | $ | 821 | | | $ | 5 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending loan balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
individually evaluated for impairment | | | $ | 19,008 | | | $ | - | | | $ | 3,130 | | | $ | - | | | $ | 818 | | | $ | - | | | $ | 2,438 | | | $ | 92 | | | $ | 25,486 | |
Ending loan balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
collectively evaluated for impairment | | | | 234,301 | | | | 16,695 | | | | 187,831 | | | | 50,556 | | | | 48,341 | | | | 31,859 | | | | 15,584 | | | | 1,498 | | | | 586,665 | |
| | | $ | 253,309 | | | $ | 16,695 | | | $ | 190,961 | | | $ | 50,556 | | | $ | 49,159 | | | $ | 31,859 | | | $ | 18,022 | | | $ | 1,590 | | | $ | 612,151 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
| | Three Months Ended March 31, 2016 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residental Mortgage | | | Commercial | | | Commercial Real Estate | | | ADC | | | Land | | | Lines of Credit | | | Home Equity | | | Consumer | | | Total | |
| | (dollars in thousands) | |
Beginning Balance | | $ | 4,188 | | | $ | 234 | | | $ | 2,792 | | | $ | 446 | | | $ | 510 | | | $ | 57 | | | $ | 528 | | | $ | 3 | | | $ | 8,758 | |
Charge-offs | | | (140 | ) | | | (17 | ) | | | (47 | ) | | | - | | | | - | | | | - | | | | (28 | ) | | | - | | | | (232 | ) |
Recoveries | | | 82 | | | | 19 | | | | - | | | | - | | | | - | | | | 5 | | | | 1 | | | | - | | | | 107 | |
Net (charge-offs) recoveries | | | (58 | ) | | | 2 | | | | (47 | ) | | | - | | | | - | | | | 5 | | | | (27 | ) | | | - | | | | (125 | ) |
Provision for (reversal of) loan losses | | | 93 | | | | 112 | | | | (397 | ) | | | (111 | ) | | | 174 | | | | (20 | ) | | | 149 | | | | - | | | | - | |
Ending Balance | | $ | 4,223 | | | $ | 348 | | | $ | 2,348 | | | $ | 335 | | | $ | 684 | | | $ | 42 | | | $ | 650 | | | $ | 3 | | | $ | 8,633 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
individually evaluated for impairment | | $ | 1,760 | | | $ | 4 | | | $ | 221 | | | $ | - | | | $ | 81 | | | $ | 15 | | | $ | 2 | | | $ | 1 | | | $ | 2,084 | |
Ending balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
collectively evaluated for impairment | | | 2,463 | | | | 344 | | | | 2,127 | | | | 335 | | | | 603 | | | | 27 | | | | 648 | | | | 2 | | | | 6,549 | |
| | $ | 4,223 | | | $ | 348 | | | $ | 2,348 | | | $ | 335 | | | $ | 684 | | | $ | 42 | | | $ | 650 | | | $ | 3 | | | $ | 8,633 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending loan balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
individually evaluated for impairment | | $ | 26,477 | | | $ | 99 | | | $ | 3,800 | | | $ | 351 | | | $ | 1,444 | | | $ | 150 | | | $ | 1,929 | | | $ | 215 | | | $ | 34,465 | |
Ending loan balance - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
collectively evaluated for impairment | | | 258,224 | | | | 13,057 | | | | 182,470 | | | | 41,482 | | | | 30,166 | | | | 21,708 | | | | 21,513 | | | | 926 | | | | 569,546 | |
| | $ | 284,701 | | | $ | 13,156 | | | $ | 186,270 | | | $ | 41,833 | | | $ | 31,610 | | | $ | 21,858 | | | $ | 23,442 | | | $ | 1,141 | | | $ | 604,011 | |
The following is a summarytables present the credit quality breakdown of the allowance forour loan losses for the year ended December 31, 2015 (dollars in thousands):portfolio by class:
2015 | | Total | | | Residential Mortgage | | | Construction Acquisition Development | | | Land | | | Lines of Credit | | | Commercial Real Estate | | | Commercial Non-Real Estate | | | Home Equity | | | Consumer | |
Beginning Balance | | $ | 9,435 | | | $ | 4,664 | | | $ | 362 | | | $ | 646 | | | $ | 12 | | | $ | 2,504 | | | $ | 280 | | | $ | 963 | | | $ | 4 | |
Provision | | | (280 | ) | | | (651 | ) | | | 84 | | | | (185 | ) | | | (190 | ) | | | 368 | | | | 59 | | | | 236 | | | | (1 | ) |
Charge-offs | | | (1,522 | ) | | | (454 | ) | | | - | | | | - | | | | - | | | | (80 | ) | | | (154 | ) | | | (834 | ) | | | - | |
Recoveries | | | 1,125 | | | | 629 | | | | - | | | | 49 | | | | 235 | | | | - | | | | 49 | | | | 163 | | | | - | |
Ending Balance | | $ | 8,758 | | | $ | 4,188 | | | $ | 446 | | | $ | 510 | | | $ | 57 | | | $ | 2,792 | | | $ | 234 | | | $ | 528 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance on loans individually evaluated for impairment | | $ | 2,282 | | | $ | 1,838 | | | $ | - | | | $ | 78 | | | $ | 30 | | | $ | 328 | | | $ | 5 | | | $ | 2 | | | $ | 1 | |
Allowance on loans collectively evaluated for impairment | | $ | 6,476 | | | $ | 2,350 | | | $ | 446 | | | $ | 432 | | | $ | 27 | | | $ | 2,464 | | | $ | 229 | | | $ | 526 | | | $ | 2 | |
| | March 31, 2017 | |
| | Pass | | | Special Mention | | | Substandard | | | Total | |
| | (dollars in thousands) | |
Residential mortgage | | $ | 245,391 | | | $ | 4,008 | | | $ | 3,910 | | | $ | 253,309 | |
Commercial | | | 16,565 | | | | 130 | | | | - | | | | 16,695 | |
Commercial real estate | | | 182,158 | | | | 6,950 | | | | 1,853 | | | | 190,961 | |
ADC | | | 50,556 | | | | - | | | | - | | | | 50,556 | |
Land | | | 48,420 | | | | - | | | | 739 | | | | 49,159 | |
Lines of credit | | | 31,521 | | | | 114 | | | | 224 | | | | 31,859 | |
Home equity | | | 15,211 | | | | 471 | | | | 2,340 | | | | 18,022 | |
Consumer | | | 1,590 | | | | - | | | | - | | | | 1,590 | |
| | $ | 591,412 | | | $ | 11,673 | | | $ | 9,066 | | | $ | 612,151 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable – Continued
The following is a summary of the allowance for loan losses for the nine and three month periods ended September 30, 2015 (dollars in thousands):
| | Total | | | Residential Mortgage | | | Construction Acquisition Development | | | Land | | | Lines of Credit | | | Commercial Real Estate | | | Commercial Non-Real Estate | | | Home Equity | | | Consumer | |
Nine months ended September 30, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 9,435 | | | $ | 4,664 | | | $ | 362 | | | $ | 646 | | | $ | 12 | | | $ | 2,504 | | | $ | 280 | | | $ | 963 | | | $ | 4 | |
Provision | | | 200 | | | | (311 | ) | | | (60 | ) | | | (216 | ) | | | (30 | ) | | | 362 | | | | 223 | | | | 233 | | | | (1 | ) |
Charge-offs | | | (1,357 | ) | | | (383 | ) | | | - | | | | - | | | | - | | | | (50 | ) | | | (155 | ) | | | (769 | ) | | | - | |
Recoveries | | | 411 | | | | 208 | | | | - | | | | - | | | | 40 | | | | - | | | | 29 | | | | 134 | | | | - | |
Ending Balance | | $ | 8,689 | | | $ | 4,178 | | | $ | 302 | | | $ | 430 | | | $ | 22 | | | $ | 2,816 | | | $ | 377 | | | $ | 561 | | | $ | 3 | |
Ending balance related to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 2,290 | | | $ | 1,883 | | | $ | 1 | | | $ | 42 | | | $ | - | | | $ | 322 | | | $ | 6 | | | $ | 34 | | | $ | 2 | |
Loans collectively evaluated for impairment | | $ | 6,399 | | | $ | 2,295 | | | $ | 301 | | | $ | 388 | | | $ | 22 | | | $ | 2,494 | | | $ | 371 | | | $ | 527 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 8,944 | | | $ | 4,396 | | | $ | 422 | | | $ | 458 | | | $ | 21 | | | $ | 2,732 | | | $ | 394 | | | $ | 518 | | | $ | 3 | |
Provision | | | - | | | | (267 | ) | | | (120 | ) | | | (28 | ) | | | (14 | ) | | | 84 | | | | 135 | | | | 210 | | | | - | |
Charge-offs | | | (484 | ) | | | (32 | ) | | | - | | | | - | | | | - | | | | - | | | | (154 | ) | | | (298 | ) | | | - | |
Recoveries | | | 229 | | | | 81 | | | | - | | | | - | | | | 15 | | | | - | | | | 2 | | | | 131 | | | | - | |
Ending Balance | | $ | 8,689 | | | $ | 4,178 | | | $ | 302 | | | $ | 430 | | | $ | 22 | | | $ | 2,816 | | | $ | 377 | | | $ | 561 | | | $ | 3 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
The accrual of interest on loans is discontinued at the time the loan is 90 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest collected on these loans is applied to principal unless the loan meets the criteria for recognizing interest income on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
The following tables summarize impaired loans at September 30, 2016 and December 31, 2015 (dollars in thousands):
| | Impaired Loans with Specific Allowance | | | Impaired Loans with No Specific Allowance | | | Total Impaired Loans | |
| | Recorded Investment | | | Related Allowance | | | Recorded Investment | | | Recorded Investment | | | Unpaid Principal Balance | |
September 30, 2016 | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 9,812 | | | $ | 1,583 | | | $ | 12,709 | | | $ | 22,521 | | | $ | 23,138 | |
Construction, acquisition and development | | | - | | | | - | | | | 71 | | | | 71 | | | | 71 | |
Land | | | 424 | | | | 55 | | | | 951 | | | | 1,375 | | | | 1,488 | |
Lines of credit | | | 149 | | | | 15 | | | | 346 | | | | 495 | | | | 495 | |
Commercial real estate | | | 1,973 | | | | 200 | | | | 3,723 | | | | 5,696 | | | | 5,898 | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | 1,609 | | | | 402 | | | | 1,910 | | | | 3,519 | | | | 4,105 | |
Consumer | | | 100 | | | | 4 | | | | - | | | | 100 | | | | 100 | |
Total impaired loans | | $ | 14,067 | | | $ | 2,259 | | | $ | 19,710 | | | $ | 33,777 | | | $ | 35,295 | |
| | Impaired Loans with Specific Allowance | | | Impaired Loans with No Specific Allowance | | | Total Impaired Loans | |
| | Recorded Investment | | | Related Allowance | | | Recorded Investment | | | Recorded Investment | | | Unpaid Principal Balance | |
December 31, 2015 | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 11,885 | | | $ | 1,838 | | | $ | 14,202 | | | $ | 26,087 | | | $ | 26,656 | |
Construction, acquisition and development | | | - | | | | - | | | | 309 | | | | 309 | | | | 309 | |
Land | | | 639 | | | | 78 | | | | 969 | | | | 1,608 | | | | 1,723 | |
Lines of credit | | | 299 | | | | 30 | | | | - | | | | 299 | | | | 299 | |
Commercial real estate | | | 3,214 | | | | 328 | | | | 3,107 | | | | 6,321 | | | | 6,469 | |
Commercial non-real estate | | | 103 | | | | 5 | | | | 19 | | | | 122 | | | | 123 | |
Home equity | | | 16 | | | | 2 | | | | 2,269 | | | | 2,285 | | | | 3,251 | |
Consumer | | | 10 | | | | 1 | | | | - | | | | 10 | | | | 10 | |
Total impaired loans | | $ | 16,166 | | | $ | 2,282 | | | $ | 20,875 | | | $ | 37,041 | | | $ | 38,840 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
The following tables summarize average impaired loans for the nine month and three month periods ended September 30, 2016 (dollars in thousands):
| | Impaired Loans with Specific Allowance | | | Impaired Loans with No Specific Allowance | | | Total Impaired Loans | |
| | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
Nine months ended September 30, 2016 | | | | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 10,684 | | | $ | 356 | | | $ | 13,774 | | | $ | 417 | | | $ | 24,458 | | | $ | 773 | |
Construction, acquisition and development | | | - | | | | - | | | | 269 | | | | 9 | | | | 269 | | | | 9 | |
Land | | | 513 | | | | 20 | | | | 1,162 | | | | 27 | | | | 1,675 | | | | 47 | |
Lines of credit | | | 149 | | | | 6 | | | | 144 | | | | 3 | | | | 293 | | | | 9 | |
Commercial real estate | | | 2,040 | | | | 77 | | | | 4,655 | | | | 134 | | | | 6,695 | | | | 211 | |
Commercial non-real estate | | | 33 | | | | 1 | | | | 6 | | | | - | | | | 39 | | | | 1 | |
Home equity | | | 370 | | | | 7 | | | | 1,991 | | | | 59 | | | | 2,361 | | | | 66 | |
Consumer | | | 73 | | | | 2 | | | | 23 | | | | - | | | | 96 | | | | 2 | |
Total impaired loans | | $ | 13,862 | | | $ | 469 | | | $ | 22,024 | | | $ | 649 | | | $ | 35,886 | | | $ | 1,118 | |
| | Impaired Loans with Specific Allowance | | | Impaired Loans with No Specific Allowance | | | Total Impaired Loans | |
| | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
| | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2016 | | | | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 9,831 | | | $ | 106 | | | $ | 12,734 | | | $ | 132 | | | $ | 22,565 | | | $ | 238 | |
Construction, acquisition and development | | | - | | | | - | | | | 71 | | | | 1 | | | | 71 | | | | 1 | |
Land | | | 426 | | | | 6 | | | | 960 | | | | 8 | | | | 1,386 | | | | 14 | |
Lines of credit | | | 149 | | | | 2 | | | | 274 | | | | 2 | | | | 423 | | | | 4 | |
Commercial real estate | | | 1,977 | | | | 25 | | | | 3,730 | | | | 57 | | | | 5,707 | | | | 82 | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | 1,078 | | | | 6 | | | | 1,911 | | | | 18 | | | | 2,989 | | | | 24 | |
Consumer | | | 102 | | | | 1 | | | | - | | | | - | | | | 102 | | | | 1 | |
Total impaired loans | | $ | 13,563 | | | $ | 146 | | | $ | 19,680 | | | $ | 218 | | | $ | 33,243 | | | $ | 364 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
The following tables summarize average impaired loans for the nine and three month periods ended September 30, 2015 (dollars in thousands):
| | Impaired Loans with Specific Allowance | | | Impaired Loans with No Specific Allowance | | | Total Impaired Loans | |
| | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
Nine months ended September 30, 2015 | | | | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 12,438 | | | $ | 402 | | | $ | 14,101 | | | $ | 422 | | | $ | 26,539 | | | $ | 824 | |
Construction, acquisition and development | | | 125 | | | | 1 | | | | 623 | | | | 23 | | | | 748 | | | | 24 | |
Land | | | 843 | | | | 14 | | | | 1,118 | | | | 60 | | | | 1,961 | | | | 74 | |
Lines of credit | | | - | | | | - | | | | 395 | | | | 17 | | | | 395 | | | | 17 | |
Commercial real estate | | | 2,754 | | | | 94 | | | | 1,942 | | | | 121 | | | | 4,696 | | | | 215 | |
Commercial non-real estate | | | 249 | | | | 4 | | | | 7 | | | | 13 | | | | 256 | | | | 17 | |
Home equity | | | 448 | | | | - | | | | 2,627 | | | | 90 | | | | 3,075 | | | | 90 | |
Consumer | | | 11 | | | | - | | | | 551 | | | | 3 | | | | 562 | | | | 3 | |
Total impaired loans | | $ | 16,868 | | | $ | 515 | | | $ | 21,364 | | | $ | 749 | | | $ | 38,232 | | | $ | 1,264 | |
| | Impaired Loans with Specific Allowance | | | Impaired Loans with No Specific Allowance | | | Total Impaired Loans | |
| | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
| | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2015 | | | | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 12,848 | | | $ | 137 | | | $ | 12,512 | | | $ | 125 | | | $ | 25,360 | | | $ | 262 | |
Construction, acquisition and development | | | 125 | | | | 1 | | | | 413 | | | | 6 | | | | 538 | | | | 7 | |
Land | | | 821 | | | | 8 | | | | 1,075 | | | | 16 | | | | 1,896 | | | | 24 | |
Lines of credit | | | - | | | | - | | | | 278 | | | | 2 | | | | 278 | | | | 2 | |
Commercial real estate | | | 3,241 | | | | 37 | | | | 1,866 | | | | 39 | | | | 5,107 | | | | 76 | |
Commercial non-real estate | | | 210 | | | | 1 | | | | 20 | | | | - | | | | 230 | | | | 1 | |
Home equity | | | 12 | | | | - | | | | 2,663 | | | | 25 | | | | 2,675 | | | | 25 | |
Consumer | | | 11 | | | | - | | | | 2 | | | | - | | | | 13 | | | | - | |
Total impaired loans | | $ | 17,268 | | | $ | 184 | | | $ | 18,829 | | | $ | 213 | | | $ | 36,097 | | | $ | 397 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
Bancorp recognized $364,000 and $1,118,000 of interest income on impaired loans using a cash-basis method of accounting for the three months and nine months ended September 30, 2016, respectively, and $397,000 and $1,264,000 for the three months and nine months ended September 30, 2015, respectively. Bancorp did not record any interest income attributable to the change in present value attributable to the passage of time. Bancorp evaluates its impaired loans and assesses them based on either discounted cash flows or if it deems its loans to be collateral dependent, assesses impairment based on the value of the underlying collateral, less disposal costs.
Included in the above impaired loans amount at September 30, 2016 was $25,571,000 of loans that are not in non-accrual status. In addition, there was a total of $22,521,000 of residential real estate loans included in impaired loans at September 30, 2016, of which $17,631,000 were to consumers and $4,890,000 to builders. The collateral supporting impaired collateral dependent loans is individually reviewed by management to determine its estimated fair market value, less estimated disposal cost and a charge off is taken, if necessary, for the difference between the carrying amount of any loan and the estimated fair value of the collateral less estimated disposal cost.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of September 30, 2016 and December 31, 2015. Included in the Pass column were $17,400,000 and $21,101,000 in unfunded commitments at September 30, 2016 and December 31, 2015, respectively (dollars in thousands):
| | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| | | | | | | | | | | | | | | |
September 30, 2016 | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 261,922 | | | $ | 6,868 | | | $ | 3,134 | | | $ | - | | | $ | 271,924 | |
Construction, acquisition and development | | | 63,533 | | | | 346 | | | | - | | | | - | | | | 63,879 | |
Land | | | 33,683 | | | | 372 | | | | 806 | | | | - | | | | 34,861 | |
Lines of credit | | | 25,813 | | | | 189 | | | | 252 | | | | - | | | | 26,254 | |
Commercial real estate | | | 187,060 | | | | 8,534 | | | | 3,321 | | | | - | | | | 198,915 | |
Commercial non-real estate | | | 15,782 | | | | 98 | | | | 225 | | | | - | | | | 16,105 | |
Home equity | | | 16,289 | | | | 586 | | | | 2,864 | | | | - | | | | 19,739 | |
Consumer | | | 1,209 | | | | - | | | | - | | | | - | | | | 1,209 | |
Total loans | | $ | 605,291 | | | $ | 16,993 | | | $ | 10,602 | | | $ | - | | | $ | 632,886 | |
| | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 268,583 | | | $ | 12,457 | | | $ | 4,890 | | | $ | - | | | $ | 285,930 | |
Construction, acquisition and development | | | 77,168 | | | | 71 | | | | 239 | | | | - | | | | 77,478 | |
Land | | | 26,845 | | | | 1,268 | | | | 564 | | | | - | | | | 28,677 | |
Lines of credit | | | 19,521 | | | | 368 | | | | 299 | | | | - | | | | 20,188 | |
Commercial real estate | | | 155,766 | | | | 13,208 | | | | 5,938 | | | | - | | | | 174,912 | |
Commercial non-real estate | | | 9,151 | | | | 125 | | | | 20 | | | | - | | | | 9,296 | |
Home equity | | | 22,018 | | | | 588 | | | | 1,923 | | | | - | | | | 24,529 | |
Consumer | | | 1,224 | | | | - | | | | - | | | | - | | | | 1,224 | |
Total loans | | $ | 580,276 | | | $ | 28,085 | | | $ | 13,873 | | | $ | - | | | $ | 622,234 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
| | December 31, 2016 | |
| | Pass | | | Special Mention | | | Substandard | | | Total | |
| | (dollars in thousands) | |
Residential mortgage | | $ | 251,763 | | | $ | 4,316 | | | $ | 4,524 | | | $ | 260,603 | |
Commercial | | | 16,722 | | | | 88 | | | | 1 | | | | 16,811 | |
Commercial real estate | | | 184,820 | | | | 7,420 | | | | 3,470 | | | | 195,710 | |
ADC | | | 41,438 | | | | - | | | | - | | | | 41,438 | |
Land | | | 47,886 | | | | - | | | | 778 | | | | 48,664 | |
Lines of credit | | | 29,289 | | | | 116 | | | | 252 | | | | 29,657 | |
Home equity | | | 16,056 | | | | 472 | | | | 2,601 | | | | 19,129 | |
Consumer | | | 1,210 | | | | - | | | | - | | | | 1,210 | |
| | $ | 589,184 | | | $ | 12,412 | | | $ | 11,626 | | | $ | 613,222 | |
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. Included in the Current column were $17,400,000 and $21,101,000 in unfunded commitments at September 30, 2016 and December 31, 2015, respectively. The following table presentstables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans:
| | March 31, 2017 | |
| | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total | | | Non- Accrual | |
| | (dollars in thousands) | |
Residential mortgage | | $ | 1,670 | | | $ | - | | | $ | 3,304 | | | $ | 4,974 | | | $ | 248,335 | | | $ | 253,309 | | | $ | 3,938 | |
Commercial | | | 64 | | | | - | | | | - | | | | 64 | | | | 16,631 | | | | 16,695 | | | | - | |
Commercial real estate | | | 488 | | | | - | | | | - | | | | 488 | | | | 190,473 | | | | 190,961 | | | | 262 | |
ADC | | | - | | | | - | | | | - | | | | - | | | | 50,556 | | | | 50,556 | | | | - | |
Land | | | - | | | | - | | | | 6 | | | | 6 | | | | 49,153 | | | | 49,159 | | | | 93 | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | 31,859 | | | | 31,859 | | | | - | |
Home equity | | | 141 | | | | - | | | | 673 | | | | 814 | | | | 17,208 | | | | 18,022 | | | | 2,355 | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | 1,590 | | | | 1,590 | | | | - | |
| | $ | 2,363 | | | $ | - | | | $ | 3,983 | | | $ | 6,346 | | | $ | 605,805 | | | $ | 612,151 | | | $ | 6,648 | |
| | December 31, 2016 | |
| | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total | | | Non- Accrual | |
| | (dollars in thousands) | |
Residential mortgage | | $ | 1,472 | | | $ | 2,074 | | | $ | 964 | | | $ | 4,510 | | | $ | 256,093 | | | $ | 260,603 | | | $ | 3,580 | |
Commercial | | | - | | | | - | | | | | | | | - | | | | 16,811 | | | | 16,811 | | | | 1 | |
Commercial real estate | | | - | | | | 171 | | | | 515 | | | | 686 | | | | 195,024 | | | | 195,710 | | | | 2,938 | |
ADC | | | - | | | | - | | | | - | | | | - | | | | 41,438 | | | | 41,438 | | | | - | |
Land | | | 106 | | | | - | | | | 6 | | | | 112 | | | | 48,552 | | | | 48,664 | | | | 269 | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | 29,657 | | | | 29,657 | | | | 150 | |
Home equity | | | 34 | | | | - | | | | 2,174 | | | | 2,208 | | | | 16,921 | | | | 19,129 | | | | 2,914 | |
Consumer | | | 4 | | | | - | | | | - | | | | 4 | | | | 1,206 | | | | 1,210 | | | | - | |
| | $ | 1,616 | | | $ | 2,245 | | | $ | 3,659 | | | $ | 7,520 | | | $ | 605,702 | | | $ | 613,222 | | | $ | 9,852 | |
We do not have any greater than 90 days and still accruing loans as of September 30, 2016 andMarch 31, 2017 or December 31, 2015 (dollars in thousands):
| | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | Non- Accrual | |
September 30, 2016 | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 1,158 | | | $ | - | | | $ | 1,100 | | | $ | 2,258 | | | $ | 269,666 | | | $ | 271,924 | | | $ | 1,615 | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | 63,879 | | | | 63,879 | | | | - | |
Land | | | 45 | | | | - | | | | 6 | | | | 51 | | | | 34,810 | | | | 34,861 | | | | 149 | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | 26,254 | | | | 26,254 | | | | 149 | |
Commercial real estate | | | - | | | | - | | | | 515 | | | | 515 | | | | 198,400 | | | | 198,915 | | | | 2,908 | |
Commercial non-real estate | | | - | | | | 240 | | | | - | | | | 240 | | | | 15,865 | | | | 16,105 | | | | - | |
Home equity | | | - | | | | 1,593 | | | | 603 | | | | 2,196 | | | | 17,543 | | | | 19,739 | | | | 3,179 | |
Consumer | | | - | | | | - | | | | 205 | | | | 205 | | | | 1,004 | | | | 1,209 | | | | 206 | |
Total loans | | $ | 1,203 | | | $ | 1,833 | | | $ | 2,429 | | | $ | 5,465 | | | $ | 627,421 | | | $ | 632,886 | | | $ | 8,206 | |
| | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | Non- Accrual | |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | $ | 1,593 | | | $ | 65 | | | $ | 2,461 | | | $ | 4,119 | | | $ | 281,811 | | | $ | 285,930 | | | $ | 3,191 | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | 77,478 | | | | 77,478 | | | | 244 | |
Land | | | 137 | | | | - | | | | 156 | | | | 293 | | | | 28,384 | | | | 28,677 | | | | 277 | |
Lines of credit | | | 149 | | | | - | | | | - | | | | 149 | | | | 20,039 | | | | 20,188 | | | | 483 | |
Commercial real estate | | | 253 | | | | - | | | | 292 | | | | 545 | | | | 174,367 | | | | 174,912 | | | | 2,681 | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | 9,296 | | | | 9,296 | | | | - | |
Home equity | | | - | | | | - | | | | 625 | | | | 625 | | | | 23,904 | | | | 24,529 | | | | 2,098 | |
Consumer | | | 3 | | | | - | | | | - | | | | 3 | | | | 1,221 | | | | 1,224 | | | | - | |
Total loans | | $ | 2,135 | | | $ | 65 | | | $ | 3,534 | | | $ | 5,734 | | | $ | 616,500 | | | $ | 622,234 | | | $ | 8,974 | |
Bancorp did not have any loans that were 90 or more past due and still accruing interest as of September 30, 2016 and December 31, 2015.2016.
SEVERN BANCORP, INC. AND SUBSIDIARIESThe following tables summarize impaired loans:
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED | | | | | | | | | | | Three Months Ended March 31, | |
| | March 31, 2017 | | | 2017 | | | 2016 | |
| | Unpaid Principal Balance | | | Recorded Investment | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related Allowance: | | (dollars in thousands) | |
Residential mortgage | | $ | 11,294 | | | $ | 10,187 | | | $ | - | | | $ | 10,592 | | | $ | 117 | | | $ | 15,217 | | | $ | 168 | |
Commercial | | | - | | | | - | | | | - | | | | 1 | | | | 7 | | | | 18 | | | | - | |
Commercial real estate | | | 1,244 | | | | 1,209 | | | | - | | | | 2,494 | | | | 39 | | | | 2,381 | | | | 16 | |
ADC | | | - | | | | - | | | | - | | | | - | | | | - | | | | 331 | | | | 4 | |
Land | | | 437 | | | | 437 | | | | - | | | | 438 | | | | 6 | | | | 878 | | | | 10 | |
Lines of credit | | | - | | | | - | | | | - | | | | 86 | | | | 1 | | | | 99 | | | | - | |
Home equity | | | 1,727 | | | | 1,187 | | | | | | | | 1,615 | | | | 15 | | | | 2,148 | | | | 20 | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | 68 | | | | - | |
With a related Allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 8,932 | | | | 8,821 | | | | 1,757 | | | | 8,839 | | | | 97 | | | | 11,433 | | | | 123 | |
Commercial | | | - | | | | - | | | | - | | | | - | | | | - | | | | 100 | | | | 1 | |
Commercial real estate | | | 1,921 | | | | 1,921 | | | | 191 | | | | 1,925 | | | | 24 | | | | 2,148 | | | | 27 | |
ADC | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | 412 | | | | 381 | | | | 52 | | | | 383 | | | | 5 | | | | 649 | | | | 8 | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | 150 | | | | 2 | |
Home equity | | | 1,299 | | | | 1,251 | | | | 81 | | | | 1,338 | | | | 48 | | | | 16 | | | | 1 | |
Consumer | | | 92 | | | | 92 | | | | 3 | | | | 93 | | | | 1 | | | | 10 | | | | - | |
Totals: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 20,226 | | | | 19,008 | | | | 1,757 | | | | 19,431 | | | | 214 | | | | 26,650 | | | | 291 | |
Commercial | | | - | | | | - | | | | - | | | | 1 | | | | 7 | | | | 118 | | | | 1 | |
Commercial real estate | | | 3,165 | | | | 3,130 | | | | 191 | | | | 4,419 | | | | 63 | | | | 4,529 | | | | 43 | |
ADC | | | - | | | | - | | | | - | | | | - | | | | - | | | | 331 | | | | 4 | |
Land | | | 849 | | | | 818 | | | | 52 | | | | 821 | | | | 11 | | | | 1,527 | | | | 18 | |
Lines of credit | | | - | | | | - | | | | - | | | | 86 | | | | 1 | | | | 249 | | | | 2 | |
Home equity | | | 3,026 | | | | 2,438 | | | | 81 | | | | 2,953 | | | | 63 | | | | 2,164 | | | | 21 | |
Consumer | | | 92 | | | | 92 | | | | 3 | | | | 93 | | | | 1 | | | | 78 | | | | - | |
| | December 31, 2016 | |
| | Unpaid Principal Balance | | | Recorded Investment | | | Related Allowance | |
With no related Allowance: | | (dollars in thousands) | |
Residential mortgage | | $ | 9,854 | | | $ | 9,338 | | | $ | - | |
Commercial | | | - | | | | - | | | | - | |
Commercial real estate | | | 3,900 | | | | 3,698 | | | | - | |
ADC | | | - | | | | - | | | | - | |
Land | | | 441 | | | | 441 | | | | - | |
Lines of credit | | | - | | | | - | | | | - | |
Home equity | | | 2,139 | | | | 1,529 | | | | - | |
Consumer | | | - | | | | - | | | | - | |
With a related Allowance: | | | | | | | | | | | | |
Residential mortgage | | | 11,176 | | | | 11,065 | | | | 1,703 | |
Commercial | | | - | | | | - | | | | - | |
Commercial real estate | | | 1,958 | | | | 1,958 | | | | 196 | |
ADC | | | - | | | | - | | | | - | |
Land | | | 417 | | | | 417 | | | | 53 | |
Lines of credit | | | 148 | | | | 148 | | | | 15 | |
Home equity | | | 1,608 | | | | 1,608 | | | | 402 | |
Consumer | | | 96 | | | | 96 | | | | 4 | |
Totals: | | | | | | | | | | | | |
Residential mortgage | | | 21,030 | | | | 20,403 | | | | 1,703 | |
Commercial | | | - | | | | - | | | | - | |
Commercial real estate | | | 5,858 | | | | 5,656 | | | | 196 | |
ADC | | | - | | | | - | | | | - | |
Land | | | 858 | | | | 858 | | | | 53 | |
Lines of credit | | | 148 | | | | 148 | | | | 15 | |
Home equity | | | 3,747 | | | | 3,137 | | | | 402 | |
Consumer | | | 96 | | | | 96 | | | | 4 | |
Note 10 -We recognized Loans Receivable$360,000 and - Continued$380,000 of interest income on impaired loans using a cash-basis method of accounting for the three months ended March 31, 2017 and 2016, respectively. We did not record any interest income attributable to the change in present value due to the passage of time. We evaluate impaired loans and assess them based on either discounted cash flows or, if collateral based, on the net value of the underlying collateral.
Bancorp offers a varietyConsumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of modificationsthe applicable jurisdiction totaled $4.1 million as of March 31, 2017. Consumer mortgage loans in real estate acquired through foreclosure amounted to borrowers. The modification categories offered can generally be described in the following categories:
| ● | Rate Modification – A modification in which the interest rate is changed. |
| ● | Term Modification – A modification in which the maturity date, timing of payments or frequency of payments is changed. |
| ● | Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time. |
| ● | Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification above. |
| ● | Loan Balance Modification – A modification in which a portion of the outstanding loan balance is forgiven. |
| ● | Combination Modification – Any other type of modification, including the use of multiple categories above. |
Bancorp has not purchased, sold or reclassified any loans to held for sale during the periods discussed. Only loans originated specifically for sale are recorded as held for sale$188,000 and $393,000 at the period ended September 30, 2016March 31, 2017 and December 31, 2015.2016, respectively.
Bancorp considers a modification of a loan term a troubled debt restructuring or “TDR” if BancorpTDRs
In situations where, for economic or legal reasons related to thea borrower’s financial difficulties, grantsmanagement may grant a concession for other than an insignificant period of time to the debtorborrower that it would not otherwise consider. Prior to entering intobe considered, the related loan is classified as a TDR. Such concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. At the time that a loan modification, Bancorp assessesis modified, management evaluates any possible impairment based on the borrower’s financial condition to determine ifpresent value of expected future cash flows, discounted at the borrower has the means to meet the termscontractual interest rate of the modification. This includes obtainingoriginal loan agreement, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. Any impairment amount is then set up as a credit report onspecific reserve in the borrower as well asAllowance.
The following table presents loans that were modified during the borrower’s tax returns and financial statements.three months ended March 31 by type of concession:
| | 2017 | | | 2016 | |
| | Number of Modifications | | | Recorded Investment Prior to Modification | | | Recorded Investment After Modification | | | Number of Modifications | | | Recorded Investment Prior to Modification | | | Recorded Investment After Modification | |
Residential Mortgage: | | (dollars in thousands) | |
Combination | | | - | | | $ | - | | | $ | - | | | | 3 | | | $ | 624 | | | $ | 624 | |
| | | - | | | $ | - | | | $ | - | | | | 3 | | | $ | 624 | | | $ | 624 | |
There were 71 restructured loans at September 30, 2016 totaling $22,795,000,
Interest on our portfolio of which 67 loans totaling $22,431,000 were performing as agreed. Of those performing loans, 53 loans totaling $18,422,000 have not been late on a payment duringTDRs was accounted for under the last 2 years.following methods:
| | March 31, 2017 | |
| | Number of Modifications | | | Accrual Status | | | Number of Modifications | | | Nonaccrual Status | | | Total Number of Modifications | | | Total Balance of Modifications | |
| (dollars in thousands) | |
Residential mortgage | | | 45 | | | $ | 14,143 | | | | 5 | | | $ | 2,566 | | | | 50 | | | $ | 16,709 | |
Commercial real estate | | | 3 | | | | 1,901 | | | | 2 | | | | 210 | | | | 5 | | | | 2,111 | |
Land | | | 1 | | | | 28 | | | | 2 | | | | 146 | | | | 3 | | | | 174 | |
Consumer | | | 4 | | | | 92 | | | | - | | | | - | | | | 4 | | | | 92 | |
| | | 53 | | | $ | 16,164 | | | | 9 | | | $ | 2,922 | | | | 62 | | | $ | 19,086 | |
There were 77 restructured loans at December 31, 2015 totaling $25,715,000, of which 71 loans totaling $24,386,000 were performing as agreed.
| | December 31, 2016 | |
| | Number of Modifications | | | Accrual Status | | | Number of Modifications | | | Nonaccrual Status | | | Total Number of Modifications | | | Total Balance of Modifications | |
| (dollars in thousands) | |
Residential mortgage | | | 48 | | | $ | 15,886 | | | | 4 | | | $ | 2,137 | | | | 52 | | | $ | 18,023 | |
Commercial real estate | | | 3 | | | | 1,914 | | | | 2 | | | | 249 | | | | 5 | | | | 2,163 | |
Land | | | 2 | | | | 170 | | | | 1 | | | | 6 | | | | 3 | | | | 176 | |
Consumer | | | 5 | | | | 96 | | | | - | | | | - | | | | 5 | | | | 96 | |
| | | 58 | | | $ | 18,066 | | | | 7 | | | $ | 2,392 | | | | 65 | | | $ | 20,458 | |
In the nine months ended September 30,first quarter of 2017 and 2016 and 2015, there were no TDRs that subsequently defaulted during the 12 month period ended September 30, 2016March 31, 2017 and 2015.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED2016.
Note 10 - Loans Receivable – Continued
The following tables present newly restructured loans that occurred during the nine and three months ended September 30, 2016 (dollars in thousands):
| | Nine months ended September 30, 2016 | |
| | Rate Modification | | | Contracts | | | Combination Modifications | | | Contracts | | | Total | | | Total Contracts | |
Pre-Modification Outstanding Recorded Investment: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | 624 | | | | 3 | | | $ | 624 | | | | 3 | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | 624 | | | | 3 | | | $ | 624 | | | | 3 | |
| | | | | | | | | | | | | | | | | |
Post-Modification Outstanding Recorded Investment: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | 624 | | | | 3 | | | $ | 624 | | | | 3 | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | 624 | | | | 3 | | | $ | 624 | | | | 3 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable – Continued
| | Three months ended September 30, 2016 | |
| | Rate
Modification
| | | Contracts
| | | Combination
Modifications
| | | Contracts
| | | Total
| | | Total
Contracts
| |
Pre-Modification Outstanding Recorded Investment:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
| | | | | | | | | | | | | | | | | |
Post-Modification Outstanding Recorded Investment: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
In addition, the TDR is evaluated for impairment loss. A determination is made as to whether an impaired TDR is cash flow or collateral dependent. If the TDR is cash flow dependent, an allowance for loan losses specific reserve is calculated based on the difference in net present value of future cash flows between the original and modified loan terms. If the TDR is collateral dependent, the collateral securing the TDR, which is always real estate, is evaluated for impairment based on either an appraisal or broker price opinion. If a TDR’s collateral valuation is less than its current loan balance, the TDR is written down for accounting purposes by the amount of the difference between the current loan balance and the collateral value. If the borrower performs under the terms of the modification, generally six consecutive months, and the ultimate collectability of all amounts contractually due under the modified terms is not in doubt, the loan is returned to accrual status. There are no loans that have been modified due to the financial difficulties of the borrower that are not considered a TDR. There were no TDR defaults during the nine months ended September 30, 2016 and 2015.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - ContinuedOff-Balance Sheet Instruments
The following tables present newly restructured loans that occurred duringBank is a party to financial instruments with off-balance sheet risk in the ninenormal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and three months ended September 30, 2015 (dollarsstandby letters of credit, which involve, to varying degrees, elements of credit risk in thousands):
| | Nine months ended September 30, 2015 | |
| | Rate Modification | | | Contracts | | | Combination Modifications | | | Contracts | | | Total | | | Total Contracts | |
Pre-Modification Outstanding Recorded Investment: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | 91 | | | | 2 | | | $ | 91 | | | | 2 | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | 91 | | | | 2 | | | $ | 91 | | | | 2 | |
| | | | | | | | | | | | | | | | | |
Post-Modification Outstanding Recorded Investment: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | 200 | | | | 2 | | | $ | 200 | | | | 2 | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | 200 | | | | 2 | | | $ | 200 | | | | 2 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDthe amount recognized in the consolidated statements of financial condition. The contract amounts of these instruments express the extent of involvement we have in each class of financial instruments.
Note 10 - Loans ReceivableOur exposure to credit loss from nonperformance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. - Continued
| | Three months ended September 30, 2015 | |
| | Rate
Modification
| | | Contracts
| | | Combination
Modifications
| | | Contracts
| | | Total
| | | Total
Contracts
| |
Pre-Modification Outstanding Recorded Investment:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
| | | | | | | | | | | | | | | | | |
Post-Modification Outstanding Recorded Investment: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
Construction, acquisition and development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial non-real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total loans | | | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 10 - Loans Receivable - Continued
Interest on TDRs was accountedthe same credit policies in making commitments and conditional obligations as we do for under the following methods as of September 30, 2016 and December 31, 2015 (dollars in thousands):
| | Number of Contracts | | | Accrual Status | | | Number of Contracts | | | Non- Accrual Status | | | Total Number of Contracts | | | Total Modifications | |
September 30, 2016 | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 52 | | | $ | 19,185 | | | | 1 | | | $ | 109 | | | | 53 | | | $ | 19,294 | |
Construction, acquisition and Development | | | 1 | | | | 70 | | | | - | | | | - | | | | 1 | | | | 70 | |
Land | | | 5 | | | | 661 | | | | 1 | | | | 6 | | | | 6 | | | | 667 | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | 4 | | | | 2,414 | | | | 2 | | | | 249 | | | | 6 | | | | 2,663 | |
Commercial non-real estate | | | 4 | | | | 92 | | | | - | | | | - | | | | 4 | | | | 92 | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | 1 | | | | 9 | | | | - | | | | - | | | | 1 | | | | 9 | |
Total loans | | | 67 | | | $ | 22,431 | | | | 4 | | | $ | 364 | | | | 71 | | | $ | 22,795 | |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 55 | | | $ | 20,831 | | | | 3 | | | $ | 1,071 | | | | 58 | | | $ | 21,902 | |
Construction, acquisition and development | | | 1 | | | | 71 | | | | - | | | | - | | | | 1 | | | | 71 | |
Land | | | 6 | | | | 907 | | | | 1 | | | | 6 | | | | 7 | | | | 913 | |
Lines of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | 4 | | | | 2,464 | | | | 2 | | | | 252 | | | | 6 | | | | 2,716 | |
Commercial non-real estate | | | 4 | | | | 103 | | | | - | | | | - | | | | 4 | | | | 103 | |
Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer | | | 1 | | | | 10 | | | | - | | | | - | | | | 1 | | | | 10 | |
Total loans | | | 71 | | | $ | 24,386 | | | | 6 | | | $ | 1,329 | | | | 77 | | | $ | 25,715 | |
on-balance-sheet instruments. Unless otherwise noted, the Bank requireswe require collateral or other security to support financial instruments with off-balance-sheet credit risk (dollars in thousands).risk.
Financial Instruments Whose Contract Amounts Represent Credit Risk | | Contract Amount At | |
September 30, 2016 | | | December 31, 2015 |
Standby letters of credit | | $ | 4,316 | | | $ | 5,937 | |
Home equity lines of credit | | | 7,804 | | | | 7,467 | |
Unadvanced construction commitments | | | 17,400 | | | | 21,101 | |
Mortgage loan commitments | | | 7,665 | | | | 3,233 | |
Lines of credit | | | 34,716 | | | | 27,189 | |
Loans sold with limited repurchase provisions | | | 55,017 | | | | 65,107 | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDThe following table shows the contract amounts for our off-balance sheet instruments:
Note 10 - Loans Receivable - Continued
| | | | | | |
| | (dollars in thousands) | |
Standby letters of credit | | $ | 3,713 | | | $ | 4,022 | |
Home equity lines of credit | | | 7,069 | | | | 7,736 | |
Unadvanced construction commitments | | | 12,960 | | | | 15,728 | |
Mortgage loan commitments | | | 1,158 | | | | 574 | |
Lines of credit | | | 57,289 | | | | 34,125 | |
Loans sold and serviced with limited repurchase provisions | | | 51,228 | | | | 70,773 | |
Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements and are limited to real estate transactions. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes, except for certain standby letters of credit, that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2016March 31, 2017 and December 31, 20152016 for guarantees under standby letters of credit issued was $98,000$93,000 and $115,000,$94,000, respectively.
Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. The Bank evaluatesWe evaluate each customer'scustomer’s credit worthiness on a case-by-case basis.
Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.
Mortgage loan commitments not reflected in the accompanying statements of financial condition at September 30,March 31, 2017 included two loans at fixed interest rates of 3.75% and 4.75%, respectively, totaling $1.2 million. At December 31, 2016 such commitments included seventeen loan commitments totaling $7,665,000two loans at a fixed interest rate range of 3.25% to 4.63% and none at floating interest rates, and at December 31, 2015 included seven loan commitments4.25% totaling $3,233,000 at a fixed interest rate range of 3.75% to 8.00% and none at floating interest rates.$574,000.
Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer'scustomer’s credit worthiness on a case-by-case basis.
The Bank has entered into several agreements to sell mortgage loans to third parties. The loans sold under these agreements for the nine month period ended September 30, 2016 and year ended December 31, 2015 were $43,960,000 and $157,309,000, respectively. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging generally from 120 to 180 days after the terms specified bysale date depending on the investor’s agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.
Only We established a reserve for potential repurchases for these loans, originated specifically for sale are recorded as held for salewhich amounted to $52,000 at September 30, 2016March 31, 2017 and December 31, 2015.
No amount was recognized in the consolidated statement of financial condition at September 30, 2016 and December 31, 2015 as a liability for credit loss related to these loans.
Except for the liability recorded for standby letters of credit of $98,000 at September 30, 2016 and $115,000$48,000 at December 31, 2016. We did not repurchase any loans during the first quarter of 2017 or 2016.
Note 4 - Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2015, liabilitiesfederal bank regulatory agencies issued final results to revise their risk-based capital requirements and the method for credit losses associatedcalculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019. Under the final rules, the effects of certain accumulated other comprehensive items are not excluded, however, banking organizations like us that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these commitments were not material.items. With the submission of the Call Report for the first quarter of 2015, we made this election in order to avoid significant variations in the level of capital that can be caused by interest rate fluctuations on the fair value of the Bank’s AFS securities portfolio.
SEVERN BANCORP, INC. AND SUBSIDIARIESThe Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The new capital conservation buffer requirements began phase in effective January 2016 at 0.625% of risk-weighted assets and increase by that amount each year until fully implemented in January 2019 (1.25 % at March 31, 2017). An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDAs of the date of the last regulatory exam, the Bank was considered “well capitalized” and as of March 31, 2017, the Bank continued to meet the requirements to be considered “well capitalized” based on applicable U.S. regulatory capital ratio requirements.
Our regulatory capital amounts and ratios were as follows:
| | Actual | | | | | | Minimum Requirements for Capital Adequacy Purposes | | | Minimum Requirements with Capital Conservation Buffer | | | To be Well Capitalized Under Prompt Corrective Action Provision | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
March 31, 2017 | | (dollars in thousands) | |
Common Equity Tier 1 Capital (to risk-weighted assets) | | $ | 100,246 | | | | 16.9 | % | | $ | 26,668 | | | | 4.5 | % | | $ | 33,779 | | | | 5.8 | % | | $ | 38,520 | | | | 6.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | | 107,682 | | | | 18.2 | % | | | 47,409 | | | | 8.0 | % | | | 54,520 | | | | 9.3 | % | | | 59,261 | | | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to risk-weighted assets) | | | 100,246 | | | | 16.9 | % | | | 35,557 | | | | 6.0 | % | | | 42,668 | | | | 7.3 | % | | | 47,409 | | | | 8.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to average quarterly assets) | | | 100,246 | | | | 12.9 | % | | | 31,169 | | | | 4.0 | % | | | 40,520 | | | | 5.3 | % | | | 38,962 | | | | 5.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | |
Common Equity Tier 1 Capital (to risk-weighted assets) | | $ | 98,970 | | | | 16.5 | % | | $ | 26,983 | | | | 4.5 | % | | $ | 30,730 | | | | 5.1 | % | | $ | 38,975 | | | | 6.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | | 106,517 | | | | 17.8 | % | | | 47,969 | | | | 8.0 | % | | | 51,717 | | | | 8.6 | % | | | 59,962 | | | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to risk-weighted assets) | | | 98,970 | | | | 16.5 | % | | | 35,977 | | | | 6.0 | % | | | 39,725 | | | | 6.6 | % | | | 47,969 | | | | 8.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to average quarterly assets) | | | 98,970 | | | | 12.9 | % | | | 30,634 | | | | 4.0 | % | | | 35,420 | | | | 4.6 | % | | | 38,292 | | | | 5.0 | % |
Note 5 - Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for each period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options, warrants, and convertible preferred stock, and are determined using the treasury stock method.
Not included in the diluted earnings per share calculation for the three month periods ended March 31, 2017 and March 31, 2016, because they were anti-dilutive, were 20,000 and 136,500 shares, respectively, of common stock issuable upon exercise of outstanding stock options, 556,976 shares of common stock issuable upon the exercise of a warrant, and 437,500 shares of common stock issuable upon conversion of the Company’s Series A Preferred Stock.
Information relating to the calculations of our income per common share is summarized as follows for the three months ended March 31:
| | 2017 | | | 2016 | |
| | (dollars in thousands, except for per share data) | |
Weighted-average shares outstanding - basic | | | 12,125,553 | | | | 10,088,879 | |
Dilution | | | 85,027 | | | | 39,372 | |
Weighted-average share outstanding - diluted | | | 12,210,580 | | | | 10,128,251 | |
| | | | | | | | |
Net income available to common stockholders | | $ | 787 | | | $ | 313 | |
| | | | | | | | |
Net income per share - basic | | $ | 0.06 | | | $ | 0.03 | |
Net income per share - diluted | | $ | 0.06 | | | $ | 0.03 | |
Note 6 - Stock-Based Compensation
We maintain a stock-based compensation plan for directors, officers, and other key employees of the Company. The aggregate number of shares of common stock that may be issued with respect to the awards granted under the plan is 500,000 plus any shares forfeited under the Company’s old stock-based compensation plan. Under the terms of the stock-based compensation plan, the Company has the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan, stock options generally have a maximum term of ten years, and are granted with an exercise price at least equal to the fair market value of the common stock on the date the options are granted. Generally, options granted to directors, officers, and employees of the Company vest over a five-year period, although the Compensation Committee has the authority to provide for different vesting schedules.
We account for stock-based compensation in accordance with FASB Accounting Standards Codification Topic 718, Compensation – Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations at fair value. Additionally, we are required to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award. Stock-based compensation expense included in the consolidated statements of operations for the three months ended March 31, 2017 and 2016 totaled $53,000 and $48,000, respectively.
There were no options granted during the three months ended March 31, 2017 or 2016.
Information regarding our stock-based compensation plan is as follows as of and for the three months ended March 31:
| | 2017 | | | 2016 | |
| | Number of Shares | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | | | Number of Shares | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | |
Outstanding at beginning of period | | | 339,500 | | | $ | 5.31 | | | | | | | | | | 339,800 | | | $ | 4.83 | | | | | | | |
Granted | | | - | | | | - | | | | | | | | | | - | | | | - | | | | | | | |
Exercised | | | (5,025 | ) | | | 3.37 | | | | | | | | | | - | | | | - | | | | | | | |
Outstanding at end of period | | | 334,475 | | | $ | 5.34 | | | | 7.7 | | | $ | 627 | | | | 339,800 | | | $ | 4.83 | | | | 8.0 | | | $ | 131 | |
Exercisable at end of period | | | 151,249 | | | $ | 4.61 | | | | 6.8 | | | $ | 397 | | | | 138,771 | | | $ | 4.27 | | | | 6.9 | | | $ | 131 | |
As of March 31, 2017, there was $590,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over a period of sixty months.
Note 7 - Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive loss, for the three months ended March 31, 2017(dollars in thousands):
Balance at beginning of period | | $ | - | |
Other comprehensive loss before reclassification | | | (15 | ) |
Amounts reclassified from accumulated other comprehensive loss | | | - | |
Net other comprehensive loss during period | | $ | (15 | ) |
Balance at end of period | | $ | (15 | ) |
We did not have any accumulated other comprehensive income or loss for the three months ended March 31, 2016.
Note 118 - Fair ValuesValue of Financial Instruments
A fair value hierarchy that prioritizes the inputs to valuation methods is used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair market hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets, or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
We record transfers between levels at the end of the reporting period in which the change in significant inputs occurs.
Assets and Liabilities Measured on a Recurring Basis
The following information should not be interpreted as an estimate of thetables present fair value of Bancorp since ameasurements for assets and liabilities that are measured at fair value calculation is only providedon a recurring basis as of and for a limited portion of Bancorp’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Bancorp’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of Bancorp’s financial instruments at September 30, 2016 and Decemberthree months ended March 31, 2015.2017:
Impaired Loans:
Impaired loans are carried at the lower of cost or the present value of expected future cash flows of the loan. If it is determined that the repayment of the loan will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment, the loan is considered collateral dependent. Impaired loans that are considered collateral dependent are carried at the lower of cost or the fair value of the underlying collateral. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.
For such loans that are classified as impaired, an allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. For such loans that are classified as collateral dependent impaired loans, an allowance is established when the current market value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the net collateral value has been determined, a charge-off is taken for the difference between the net collateral value and the carrying value of the loan.
Impaired loans are those for which Bancorp has measured impairment based on the present value of expected future cash flows or on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consisted of the loan balances of $14,067,000 and $16,166,000 at September 30, 2016 and December 31, 2015, respectively, less their valuation allowances of $2,259,000 and $2,282,000 at September 30, 2016 and December 31, 2015, respectively. The fair value of three impaired collateral-dependent loans that were partially charged off during the nine months ended September 30, 2016 totaled $1,990,000 net of charge-offs of $67,000 that were recorded in the nine months ended September 30, 2016. The fair value of seven impaired collateral-dependent loans that were partially charged off during the year ended December 31, 2015 totaled $3,219,000 net of charge-offs of $622,000 that were recorded in the twelve months ended December 31, 2016.
| | Carrying Value | | | Quoted Prices (Level 1) | | | Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Changes In Fair Values Included In Period Income | |
Assets: | | (dollars in thousands) | |
AFS Securities - U.S. government agency notes | | $ | 7,151 | | | $ | - | | | $ | 7,151 | | | $ | - | | | $ | - | |
Loans held for sale (“LHFS”) | | | 2,755 | | | | - | | | | 2,755 | | | | - | | | | 85 | |
Mortgage servicing rights (“MSRs”) | | | 546 | | | | - | | | | - | | | | 546 | | | | 43 | |
Interest-rate lock commitments (“IRLCs”) | | | 169 | | | | - | | | | 169 | | | | - | | | | 7 | |
Mandatory forward contracts | | | 2 | | | | - | | | | 2 | | | | - | | | | (151 | ) |
| | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Best efforts forward contracts | | | 26 | | | | - | | | | 26 | | | | - | | | | (26 | ) |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 11 - Fair Values of Financial Instruments - Continued
Foreclosed Real Estate:
Real estate acquired through foreclosure is recordedThe following tables present fair value measurements for assets and liabilities that are measured at fair value less estimated disposal costs. Management periodically evaluateson a recurring basis as of and for the recoverability of the carrying value of the real estate acquired through foreclosure using current estimates of fair value. In the event of a subsequent decline, management provides a specific allowance to reduce real estate acquired through foreclosure to fair value less estimated disposal cost. Expenses incurred on foreclosed real estate prior to disposition are charged to expense. Gains or losses on the sale of foreclosed real estate are recognized upon disposition of the property.year ended December 31, 2016:
Foreclosed real estate totaled $1,343,000 and $1,744,000 as of September 30, 2016 and December 31, 2015, respectively. The carrying value of foreclosed residential real estate included within foreclosed real estate totaled $552,000 and $543,000 as of September 30, 2016 and December 31, 2015, respectively.
Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction totaled $3,252,000 and $1,487,000 as of September 30, 2016 and December 31, 2015, respectively.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 11 - Fair Values of Financial Instruments – Continued
| | Carrying Value | | | Quoted Prices (Level 1) | | | Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Changes In Fair Values Included In Period Income | |
Assets: | | (dollars in thousands) | |
MSRs | | $ | 557 | | | $ | - | | | $ | - | | | $ | 557 | | | $ | 181 | |
IRLCs | | | 162 | | | | - | | | | 162 | | | | - | | | | (21 | ) |
Mandatory forward contracts | | | 153 | | | | - | | | | 153 | | | | - | | | | 42 | |
The following table sets forth financial assets that were accounted for at fair value on a nonrecurring and recurring basis by level within the fair value hierarchy as of September 30, 2016 and December 31, 2015:
| | | | | September 30, 2016 Fair Value Measurement Using: | |
| | September 30, 2016 | | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | (dollars in thousands) | |
Nonrecurring fair value measurements | | | | | | | | | | | | |
Impaired loans | | $ | 13,798 | | | $ | - | | | $ | - | | | $ | 13,798 | |
Foreclosed real estate | | | 1,343 | | | | - | | | | - | | | | 1,343 | |
Total nonrecurring fair value measurements | | $ | 15,141 | | | $ | - | | | $ | - | | | $ | 15,141 | |
Recurring fair value measurements | | | | | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 484 | | | $ | - | | | $ | - | | | $ | 484 | |
Rate lock commitments | | | 480 | | | | - | | | | 480 | | | | - | |
Mandatory forward contracts | | | 14 | | | | - | | | | 14 | | | | - | |
Total recurring fair value measurements | | $ | 978 | | | $ | - | | | $ | 494 | | | $ | 484 | |
| | | | | | December 31, 2015 Fair Value Measurement Using: | |
| | December 31, 2015 | | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | (dollars in thousands) | |
Nonrecurring fair value measurements | | | | | | | | | | | | | | | | |
Impaired loans | | $ | 17,103 | | | $ | - | | | $ | - | | | $ | 17,103 | |
Foreclosed real estate | | | 543 | | | | - | | | | - | | | | 543 | |
Total nonrecurring fair value measurements | | $ | 17,646 | | | $ | - | | | $ | - | | | $ | 17,646 | |
Recurring fair value measurements | | | | | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 623 | | | $ | - | | | $ | - | | | $ | 623 | |
Rate lock commitments | | | 141 | | | | - | | | | 141 | | | | - | |
Mandatory forward contracts | | | 111 | | | | - | | | | 111 | | | | - | |
Total recurring fair value measurements | | $ | 875 | | | $ | - | | | $ | 252 | | | $ | 623 | |
There were no liabilities that were required to be re-measured on a nonrecurring basis at September 30, 2016 or December 31, 2015.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 11 - Fair Values of Financial Instruments - Continued
The following table presentsprovides additional quantitative information about assets measured at fair value on a recurring basis and for which Bancorp has utilized Level 3 inputs to determine fair value:
| | Quantitative Information about Level 3 Fair Value Measurements | |
| | Fair Value Estimate | | Valuation Techniques | | Unobservable Input | | Range (Weighted Average) | |
September 30, 2016 | | | | | | | | | |
Mortgage servicing rights | | $ | 484 | | Market approach | | Weighted average prepayment speed | | | 7.83 | % |
| | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | |
Mortgage servicing rights | | $ | 623 | | Market approach | | Weighted average prepayment speed | | | 9.91 | % |
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Bancorp haswe have utilized Level 3 inputs to determine fair value:
| | Quantitative Information about Level 3 Fair Value Measurements | |
| | Fair Value Estimate | | Valuation Techniques | | Unobservable Input | | Range (Weighted Average) | |
September 30, 2016 | | | | | | | | | |
Impaired loans | | $ | 11,808 | | PV of future cash flows (1) | | Discount rate | | | -10.00% | |
| | | 1,990 | | Appraisal of collateral (2) | | Liquidation expenses (3) | | | -10.00% | |
Foreclosed real estate | | $ | 1,343 | | Appraisal of collateral (2),(4) | | Appraisal adjustments (3) | | -10.00% to -15.11% (-12.76%) | |
| | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | |
Impaired loans | | $ | 13,884 | | PV of future cash flows (1) | | Discount rate | | | -6.00 % | |
| | $ | 3,219 | | Appraisal of collateral (2) | | Liquidation expenses (3) | | | -6.00% | |
| | | | | | | | | | | |
Foreclosed real estate | | $ | 543 | | Appraisal of collateral (2),(4) | | Appraisal adjustments (3) | | -6.12% to -7.31% (-6.24%) | |
| (1) | Cash flow which generally includes various level 3 inputs which are not identifiable. |
| (2) | Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable. |
| (3) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. |
| (4) | Includes qualitative adjustments by management and estimated liquidation expenses. |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
| | Fair Value Estimate | | Valuation Technique | | Unobservable Input | | | |
| | (dollars in thousands) | | | | | |
March 31, 2017: | | | | | | | | | |
MSRs | | $ | 546 | | Market Approach | | Weighted average prepayment speed | | | 3.96 % | |
| | | | | | | | | | | |
December 31, 2016: | | | | | | | | |
MSRs | | $ | 557 | | Market Approach | | Weighted average prepayment speed | | | 3.95 % | |
Note 11 - Fair Values of Financial Instruments – Continued
| | | | | Fair Value Measurement at September 30, 2016 | |
| | Carrying Amount | | | Fair Value | | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Financial Assets | | (dollars in thousands) | |
Cash and cash equivalents | | $ | 44,493 | | | $ | 44,493 | | | $ | 44,493 | | | $ | - | | | $ | - | |
Investment securities (HTM) | | | 67,677 | | | | 68,975 | | | | - | | | | 68,975 | | | | | |
Loans held for sale | | | 12,961 | | | | 13,348 | | | | - | | | | 13,124 | | | | - | |
Loans receivable, net | | | 603,473 | | | | 611,051 | | | | - | | | | - | | | | 611,051 | |
FHLB stock | | | 5,230 | | | | 5,230 | | | | - | | | | 5,230 | | | | - | |
Accrued interest receivable | | | 2,262 | | | | 2,262 | | | | - | | | | 2,262 | | | | - | |
Mortgage servicing rights | | | 484 | | | | 484 | | | | - | | | | - | | | | 484 | |
Rate lock commitments | | | 480 | | | | 480 | | | | - | | | | 480 | | | | - | |
Mandatory forward contracts | | | 14 | | | | 14 | | | | - | | | | 14 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 556,610 | | | $ | 557,547 | | | | - | | | $ | 557,547 | | | | - | |
FHLB advances/Other Borrowings | | | 110,500 | | | | 107,626 | | | | - | | | | 107,626 | | | | - | |
Subordinated debentures | | | 20,619 | | | | 20,619 | | | | - | | | | - | | | | 20,619 | |
Accrued interest payable | | | 528 | | | | 528 | | | | - | | | | 528 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Off Balance Sheet Commitments | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | Fair Value Measurement at December 31, 2015 | |
| | Carrying Amount | | | Fair Value | | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Financial Assets | | (dollars in thousands) | |
Cash and cash equivalents | | $ | 43,591 | | | $ | 43,591 | | | $ | 43,591 | | | $ | - | | | $ | - | |
Investment securities (HTM) | | | 76,133 | | | | 76,310 | | | | - | | | | 76,310 | | | | - | |
Loans held for sale | | | 13,203 | | | | 13,295 | | | | - | | | | 13,295 | | | | - | |
Loans receivable, net | | | 589,656 | | | | 593,742 | | | | - | | | | - | | | | 593,742 | |
FHLB stock | | | 5,626 | | | | 5,626 | | | | - | | | | 5,626 | | | | - | |
Accrued interest receivable | | | 2,218 | | | | 2,218 | | | | - | | | | 2,218 | | | | - | |
Mortgage servicing rights | | | 623 | | | | 623 | | | | - | | | | - | | | | 623 | |
Rate lock commitments | | | 141 | | | | 141 | | | | - | | | | 141 | | | | - | |
Mandatory forward contracts | | | 111 | | | | 111 | | | | - | | | | 111 | | | | - | |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 523,771 | | | $ | 524,458 | | | | - | | | | 524,458 | | | | - | |
FHLB advances | | | 115,000 | | | | 110,759 | | | | - | | | | 110,759 | | | | - | |
Subordinated debentures | | | 24,119 | | | | 24,119 | | | | - | | | | - | | | | 24,119 | |
Accrued interest payable | | | 3,137 | | | | 3,137 | | | | - | | | | 3,137 | | | | - | |
Off Balance Sheet Commitments | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 11 - Fair Values of Financial Instruments – ContinuedAFS Securities
The following methodsestimated fair values of AFS debt securities are obtained from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and assumptions wereapplying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to measurevalue debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value of financial instruments recorded at costmeasurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things, and are based on Bancorp’s consolidated balance sheet:market data obtained from sources independent from the Bank. The Level 2 investments in the Bank’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. The Bank has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in the Bank’s portfolio are not exchange-traded, and such nonexchange-traded fixed income securities are typically priced by correlation to observed market data.
Cash and cash equivalents:LHFS
The carrying amount reported
At March 31,2017, LHFS were carried at fair value, which is determined based on outstanding investor commitments or, in the consolidated statementsabsence of financial condition for cash and cash equivalents approximate those assets’ fair values.such commitments, on current investor yield requirements or third party pricing models. At December 31, 2017, LHFS were carried at the lower-of-cost or market value (“LCM”) utilizing the same method.
Investment Securities:
Bancorp utilizes a third party source to determine the fair value of its securities. The methodology consists of pricing models based on asset class and includes available trade, bid, other market information, broker quotes, proprietary models, various databases and trading desk quotes. All Bancorp’s investments are considered Level 2.MSRs
Loans held for sale:
The fair value of loans held for sale is based primarily on investor quotes.
Loans receivable:
The fair values of loans receivable were estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. These rates were used for each aggregated category of loans as reported on the Office of the Comptroller of the Currency Quarterly Report.
FHLB stock:
The carrying amount of FHLB stock approximates fair value based on the redemption provisions of the FHLB. There have been no identified events or changes in circumstances that may have a significant adverse effect on the FHLB stock. Based on our evaluation, we have concluded that our FHLB stock was not impaired at September 30, 2016 and December 31, 2015.
Accrued interest receivable and payable:
The carrying amounts of accrued interest receivable and accrued interest payable approximates their fair values.
Derivative Instruments:
Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contract”) and rate lock commitments. The fair value of Bancorp’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by Bancorp. Forward contracts and rate lock loan commitments are classified as Level 2 in the fair value hierarchy
Mortgage servicing rights:
The fair value of mortgage servicing rightsMSRs is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a monthly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUEDIRLCs
Note 11 - We utilize a third party specialist model to estimate the fair value of our IRLCs, which are valued based upon mandatory pricing quotes from correspondent lenders less estimated costs to process and settle the loan. Fair Valuesvalue is adjusted for the estimated probability of Financial Instruments – Continuedthe loan closing with the borrower.
Deposit liabilities:Forward Contracts
To avoid interest rate risk, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and the bank measures and reports them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value using a valuation methodology similar to that used for our mandatory commitments.
Assets Measured on a Nonrecurring Basis
We may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of LCM accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of assets:
| | March 31, 2017 | |
| | Carrying Value | | | Quoted Prices (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Range of Discount | | | Weighted Average | |
| | (dollars in thousands) | | | | | | | |
Impaired loans | | $ | 1,989 | | | $ | - | | | $ | - | | | $ | 1,989 | | | | 0% - 32 | % | | | 18.4 | % |
Real estate acquired through foreclosure | | | 735 | | | | - | | | | - | | | | 735 | | | | 0% - 26 | % | | | 4.9 | % |
| | December 31, 2016 | |
| | Carrying Value | | | Quoted Prices (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Range of Discount | | | Weighted Average | |
| | (dollars in thousands) | | | | | | | |
Impaired loans | | $ | 2,136 | | | $ | - | | | $ | - | | | $ | 2,136 | | | | 0% - 2 | % | | | 2.0 | % |
Real estate acquired through foreclosure | | | 767 | | | | - | | | | - | | | | 767 | | | | 0% - 10 | % | | | 10.0 | % |
Impaired Loans
Impaired loans are those for which we have measured impairment based on the present value of expected future cash flows or on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. If it is determined that the repayment of the loan will be provided solely by the underlying collateral, and there are no other available and reliable sources of repayment, the loan is considered collateral dependent. Impaired loans that are considered collateral dependent are carried at the LCM. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.
For such loans that are classified as impaired, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. For such impaired loans that are classified as collateral dependent, an Allowance is established when the current market value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the net collateral value has been determined, a charge-off is taken for the difference between the net collateral value and the carrying value of the loan.
Real Estate Acquired Through Foreclosure
We record foreclosed real estate assets at the fair value less estimated selling costs on their acquisition dates and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. We generally obtain certified external appraisals of real estate acquired through foreclosure and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent, and executed sale agreements.
Fair Value of All Financial Instruments
The carrying value and estimated fair value of all financial instruments are summarized in the following tables. The descriptions of the fair value calculations for AFS securities, LHFS, MSRs, IRLCs, best efforts forward contracts, mandatory forward contracts, impaired loans, and real estate acquired through foreclosure are included in the discussions above.
| | March 31, 2017 | |
| | Carrying | | | Fair Value | |
| | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | (dollars in thousands) | |
Cash and cash equivalents | | $ | 83,557 | | | $ | 83,557 | | | $ | - | | | $ | - | | | $ | 83,557 | |
AFS securities | | | 7,151 | | | | - | | | | 7,151 | | | | - | | | | 7,151 | |
HTM securities | | | 59,283 | | | | 11,139 | | | | 48,250 | | | | - | | | | 59,389 | |
LHFS | | | 2,755 | | | | - | | | | 2,755 | | | | - | | | | 2,755 | |
Loans receivable | | | 601,409 | | | | - | | | | - | | | | 598,174 | | | | 598,174 | |
Restricted stock investments | | | 4,701 | | | | - | | | | 4,701 | | | | - | | | | 4,701 | |
MSRs | | | 546 | | | | - | | | | - | | | | 546 | | | | 546 | |
IRLCs | | | 169 | | | | - | | | | 169 | | | | - | | | | 169 | |
Mandatory forward contracts | | | 2 | | | | - | | | | 2 | | | | - | | | | 2 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 593,762 | | | | - | | | | 594,288 | | | | - | | | | 594,288 | |
Borrowings | | | 93,500 | | | | - | | | | 90,000 | | | | - | | | | 90,000 | |
Subordinated debentures | | | 20,619 | | | | - | | | | - | | | | 20,619 | | | | 20,619 | |
Best effort forward contracts | | | 26 | | | | - | | | | 26 | | | | - | | | | 26 | |
| | December 31, 2016 | |
| | Carrying | | | Fair Value | |
| | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | (dollars in thousands) | |
Cash and cash equivalents | | $ | 67,114 | | | $ | 67,114 | | | $ | - | | | $ | - | | | $ | 67,114 | |
HTM securities | | | 62,757 | | | | 13,165 | | | | 49,662 | | | | - | | | | 62,827 | |
LHFS | | | 10,307 | | | | - | | | | 10,313 | | | | - | | | | 10,313 | |
Loans receivable | | | 601,309 | | | | - | | | | - | | | | 602,953 | | | | 602,953 | |
Restricted stock investments | | | 5,103 | | | | - | | | | 5,103 | | | | - | | | | 5,103 | |
MSRs | | | 557 | | | | - | | | | - | | | | 557 | | | | 557 | |
IRLCs | | | 162 | | | | - | | | | 162 | | | | - | | | | 162 | |
Mandatory forward contracts | | | 153 | | | | - | | | | 153 | | | | - | | | | 153 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 571,946 | | | | - | | | | 572,556 | | | | - | | | | 572,556 | |
Borrowings | | | 103,500 | | | | - | | | | 97,961 | | | | - | | | | 97,961 | |
Subordinated debentures | | | 20,619 | | | | - | | | | - | | | | 20,619 | | | | 20,619 | |
At March 31, 2017 and December 31, 2016, the Bank had loan funding commitments of $78.5 million and $58.2 million, respectively, and standby letters of credit outstanding of $3.7 million and $4.0 million, respectively. The fair value of these commitments is nominal.
Cash and Cash Equivalents
The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents approximate those assets’ fair values.
HTM securities
The Company utilizes a third party source to determine the fair value of its securities. The methodology consists of pricing models based on asset class and includes available trade, bid, other market information, broker quotes, proprietary models, various databases, and trading desk quotes. U.S Treasuary Securities are considered Level 1 and all of our other securities are considered Level 2.
Loans Receivable
The fair values of loans receivable were estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. These rates were used for each aggregated category of loans as reported on the Office of the Comptroller of the Currency Quarterly Report.
Restricted Stock Investments
The carrying value of restricted stock investments is a reasonable estimate of fair value as these investments do not have a readily available market.
Deposits
The fair values disclosed for demand deposit accounts, savings accounts, and money market depositsaccounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
FHLB advancesBorrowings
Long-term and Other Borrowings:
Fairshort-term borrowings were segmented into categories with similar financial characteristics. Carrying values of long-term debt are estimatedwere discounted using discounteda cash flow analysis, based on rates currently available for advances from the FHLB with similar terms and remaining maturities. Fair values of long-term debt are estimated using discounted cash flow analysis,approach based on market rates currently available for notes with similar terms.rates.
Subordinated debentures:debentures
Current economic conditions have rendered the market for this liability inactive. As such, Bancorpthe Company is unable to determine a good estimate of fair value. Since the rate paid on the debentures held is lower than what would be required to secure an interest in the same debt at year end and we are unable to obtain a current fair value, Bancorpthe Company has disclosed that the carrying value approximates the fair value.
Off-balance sheet financial instruments:Limitations
Fair valuesvalue estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from a one-time sale of our total holdings of a particular financial instrument. Because no market exists for Bancorp’s off-balance sheeta significant portion of our financial instruments, (lending commitments and letters of credit) are not significant andfair value estimates are based on fees currently charged to enter into similar agreements, taking into account the remaining termsjudgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates. The above information should not be interpreted as an estimate of the agreementsfair value of the Company since a fair value calculation is only provided for a limited portion of our assets and liabilities. Due to a wide range of valuation techniques and the counterparties’ credit standing.degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.
Note 12 - Income Taxes
Tax expense was $378,000There were no transfers between any of Levels 1, 2, and 3 for the third quarter ofthree months ended March 31, 2017 or 2016 compared to a $52,000or for the third quarter of 2015. For the nine monthsyear ended September 30, 2016 the Bancorp recorded an income tax benefit of $10,816,000 compared to income tax expense of $88,000 for the same period of 2015. The income tax benefit in 2016 was primarily due to the reversal of an $11,837,000 valuation allowance during the second quarter ofDecember 31, 2016. The valuation allowance was first recorded in the third quarter of 2013 due to the uncertainty of whether or not the Bancorp would be able to realize the asset.
In assessing Bancorp’s ability to realize its net deferred tax asset, Management considers whether it is more likely than not that some portion or all of the net deferred tax asset will or will not be realized. Bancorp’s ultimate realization of the net deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of net deferred taxes recognized could be impacted by changes to any of these variables.
Each quarter, Bancorp weighs both the positive and negative information and analyzes its position of whether or not a valuation allowance is required. Over the past several quarters, the positive information has been increasing while the negative information has been decreasing. Over the last eight quarters, the Bancorp has demonstrated consistent earnings while its level of non-performing assets has steadily decreased. Additionally, the Federal Reserve Bank and The Office of the Comptroller of the Currency have terminated their formal agreements with Bancorp, reducing regulatory risk.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12 - Income Taxes - Continued
Given the consistent earnings and improving asset quality, Bancorp’s analysis has now concluded that, as of September 30, 2016, it is more likely than not that it will generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred tax asset. As such, the full valuation allowance of $11,837,000 was reversed to income tax expense at June 30, 2016. Bancorp’s net deferred tax asset was $10,916,000 as of September 30, 2016.
Note 13 - Recent Accounting Pronouncements
Under ASU 2014-09, Revenue from Contracts with Customers, establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance. The revenue standard’s core principal is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The new standard applies to all public entities for annual periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year. Bancorp is currently evaluating the impact this update will have on its consolidated financial position and results of operations.
Under ASU 2016-08, Revenue from Contracts with Customers, the new revenue standard clarifies the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance:
require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer;
illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer;
clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances; and
revise existing examples and add two new ones to more clearly depict how the guidance should be applied.
Bancorp is currently evaluating the impact this update will have on its consolidated financial position and results of operations.
Under ASU 2016-01, Amendment to the Recognition and Measurement Guidance for Financial Instruments, an entity is required to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in Other Comprehensive Income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of Available For Sale debt securities in combination with other deferred tax assets. The Amendment provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 13 - Recent Accounting Pronouncements – Continued
The Amendment also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The new standard takes effect in 2018 for public companies. Early adoption is only permitted for the provision related to instrument-specific credit risk and the fair value disclosure exemption provided to nonpublic entities. Bancorp has evaluated the effect of ASU 2016-01 and believes adoption will not have a material effect on the Consolidated Financial Statements.
Under ASU 2016-09 Stock Compensation, introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows.
In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.
The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.
Bancorp is currently evaluating the impact this update will have on its consolidated financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Bancorp is currently evaluating the impact this update will have on its consolidated financial position and results of operations.
Under ASU 2016-13, Financial Instruments – Credit Losses the ASU sets forth a “current expected credit loss” (CECL) model which requires Bancorp to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Bancorp is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.
Under ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments clarifications of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice.
| · | Cash payments for debt prepayment or extinguishment costs will be classified in financing activities. |
| · | Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity. |
| · | Cash paid by an acquirer that isn’t soon after a business combination for the settlement of a contingent consideration liability will be separated between financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess will be classified in operating activities. Cash paid soon after the business combination will be classified in investing activities. |
| · | Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature of each loss included in the settlement. |
| · | Cash proceeds received from the settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies will be classified as cash inflows from investing activities. Cash payments for premiums on COLI and BOLI may be classified as cash outflows for investing, operating, or a combination of both. |
| · | A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a noncash activity, and cash received from beneficial interests will be classified in investing activities. |
| · | Distributions received from equity method investees will be classified using either a cumulative earnings approach or a look-through approach as an accounting policy election. |
The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance. Bancorp is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
When used in this report, the terms “the Company,” “we,” “us,” and “our” refer to Severn Bancorp and, unless the context requires otherwise, its consolidated subsidiaries. The following discussion should be read and reviewed in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Severn Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016.
The Company
BancorpThe Company is a savings and loan holding company chartered as a corporation in the state of Maryland in 1990. It conducts business primarily through two subsidiaries, Severn Savings Bank, FSB (“Bank”(the “Bank”) and SBI Mortgage Company (“SBI”). The Bank’s principal subsidiary Louis Hyatt, Inc. (“Hyatt Commercial”), conducts business as Hyatt Commercial, a commercial real estate brokerage and property management company. SBI holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company of Crownsville Development Corporation (“Crownsville”), which is doing business as Annapolis Equity Group, which acquires real estate for syndication and investment purposes. The Bank has five branches in Anne Arundel County, Maryland, which offer a full range of deposit products, and originate mortgages in its primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware, and Virginia.
Bank CompetitionOverview
The Annapolis, Maryland area hasCompany provides a high densitywide range of financial institutions, manypersonal and commercial banking services. Personal services include mortgage lending and various other lending services as well as deposit products such as personal Internet banking and online bill pay, checking accounts, individual retirement accounts, money market accounts, and savings and time deposit accounts. Commercial services include commercial secured and unsecured lending services as well as business Internet banking, corporate cash management services, and deposit services. The Company also provides ATMs, credit cards, debit cards, safe deposit boxes, and telephone banking, among other products and services.
We have experienced a slightly improved level of which are significantly largerprofitability for the three months ended March 31, 2017, primarily due to the payoff of $10.0 million in Federal Home Loan Bank of Atlanta (“FHLB”) advances and have greater financial resources than the Bank, and all of which are competitorsa reversal of the Bankprovision for loan losses. Management believes that, while conditions continue to varying degrees.improve and real estate values in the Company’s market area continue to stabilize, certain detrimental factors, including job losses, still exist for some customers. The Bank’sinterest rate spread between our cost of funds and what we earn on loans has shrunk somewhat from 2016 levels due to slightly rising interest rates and competition for new loans comes primarily from savings and loan associations, savings banks, mortgage banking companies, insurance companiesdeposits. We recorded no income tax provision during the first quarter of 2016 as we maintained a valuation allowance against the full amount of our deferred tax assests at that time. During the latter part of 2016, we reversed the valuation allowance and commercial banks. Its most direct competitionrecorded a tax provision for deposits has historically come from savings and loan associations, savings banks, commercial banks and credit unions. The Bank faces additional competition for deposits from money market mutual funds and corporate and government securities funds and investments. The Bank also faces increased competition for deposits from other financial institutions such as brokerage firms and insurance companies. The Bank is a community-oriented financial institution serving its market area with a wide selectionthe first quarter of mortgage loan products. Management considers the Bank’s reputation and customer service to be a major competitive advantage in attracting and retaining customers in its market area. The Bank also believes it benefits from its community orientation.
Forward Looking Statements
In additionThe Company expects to experience similar market conditions during the historical information contained herein,remainder of 2017, as the discussionnational and local economies continue to improve and as the employment environment in this report contains forward-looking statements that involveour market improves. If interest rates increase, demand for borrowing may decrease and our interest rate spread could decrease. We will continue to manage loan and deposit pricing against the risks of rising costs of our deposits and uncertaintiesborrowings. Interest rates are outside of our control, so we must attempt to balance the pricing and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. The forward-looking statements contained herein include, but are not limited to, those with respect to the Bank’s strategy; management’s determination of the amountduration of the loan loss allowance;portfolio against the effectrisks of changes in interest rates; changes in deposit insurance premiums;rising costs of our deposits and borrowings.
The continued success and attraction of Anne Arundel County, Maryland, and vicinity, will also be important to our ability to meet obligations;originate and legal proceedings. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “could,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,”grow mortgage loans and similar expressions are typically used to identify forward-looking statements. Bancorp’s operations and actual results could differ significantly from those discussed indeposits, as will our continued focus on maintaining a low overhead.
If the forward-looking statements. Some of the factors that could cause or contribute to such differences include, but are not limited to: changes in general economic conditions and political conditions and by governmental monetary and fiscal policies; changes in the economic conditions of the geographic areas in which Bancorp conducts business; changes in interest rates; a downturn in the real estate markets in which Bancorp conducts business; the high degree of risk exhibited by Bancorp’s loan portfolio; environmental liabilities with respect to properties Bancorp has title; changes in federal and state regulation; Bancorp’s ability to estimate loan losses; competition; breaches in security or interruptions in Bancorp’s information systems; Bancorp’s ability to timely develop and implement technology; Bancorp’s ability to retain its management team; perception of Bancorpvolatility in the market place; Bancorp’s abilityand the economy continues or worsens, our business, financial condition, results of operations, access to maintain effective internal controls over financial reportingfunds, and disclosure controlsthe price of our stock could be materially and procedures; and terrorist attacks and threat of actual war; and other factors detailed from time to time in Bancorp’s filings with the Securities and Exchange Commission (the “SEC”), including “Item 1A. Risk Factors” contained in Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.adversely impacted.
Critical Accounting Policies
Bancorp’sOur significant accounting policies are set forth in Note 1 of the audited consolidated financial statements as offor the year ended December 31, 20152016 which were included in Bancorp’sour Annual Report on Form 10-K. Of these significant accounting policies, Bancorp considers itswe consider our policies regarding the allowanceAllowance for loan losses (“Allowance”), the valuation of foreclosed real estate acquired through foreclosure, the evaluation of other than temporary impairmentvaluation of investment securities, and the valuation of the deferred tax asset to be itsour most critical accounting policies, givendue to the uncertainty in evaluatingfact that these policies inherently have a greater reliance on the leveluse of the allowanceestimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to cover credit losses inherentbe recorded at fair value, when a decline in the loan portfolio and the material effect that such judgments can havevalue of an asset not carried on the results of operations and future taxable income. In addition, changes in economic conditions can have a significant impact on real estate values of underlying collateral affecting the allowance for loan losses and therefore the provision for loan losses and results of operations as well as the valuation of foreclosed real estate. Bancorp has developed policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. Bancorp’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. When applying accounting policies in such areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets and liabilities. Below is a discussion of our critical accounting policies.
OverviewSecurities
We designate securities into one of three categories at the time of purchase. Debt securities that we have the intent and ability to hold to maturity are classified as held to maturity (“HTM”) and recorded at amortized cost. Debt and equity securities are classified as trading if bought and held principally for the purpose of sale in the near term. Trading securities are reported at estimated fair value, with unrealized gains and losses included in earnings. Debt securities not classified as HTM and debt and equity securities not classified as trading securities are considered available for sale (“AFS”) and are reported at estimated fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax effects, in accumulated other comprehensive loss.
Bancorp providesAFS and HTM securities are evaluated periodically to determine whether a wide rangedecline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near-term recovery of personalvalue are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security.
The initial indications of other-than-temporary impairment (“OTTI”) for both debt and commercial banking services. Personal servicesequity securities are a decline in the market value below the amount recorded for a security and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, our intent to sell the security, and if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action. Once a decline in value is determined to be other than temporary, the security is segmented into credit- and noncredit-related components. Any impairment adjustment due to identified credit-related components is recorded as an adjustment to current period earnings, while noncredit-related fair value adjustments are recorded through accumulated other comprehensive loss. In situations where we intend to sell or it is more likely than not that we will be required to sell the security, the entire OTTI loss is recognized in earnings.
Allowance for Loan Losses
The Allowance is maintained at an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Determining the amount of the Allowance requires the use of estimates and assumptions. Actual results could differ significantly from those estimates.
Future additions or reduction in the Allowance may be necessary based on changes in economic conditions, particularly in the State of Maryland. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s Allowance. Such agencies may require the Bank to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination.
The Allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value (“LTV”) ratio based on the original appraisal and the condition of the property. Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include various lending servicesestimated costs to sell the property. For loans secured by collateral other than real estate, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the net collateral value has been determined, a charge off is taken for the difference between the net collateral value and the carrying value of the loan. For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as checking, individual retirement accounts, money market, savingsnonclassified loans. The general reserve is based on historical loss experience adjusted for qualitative factors. These qualitative factors include, but are not limited to:
| · | Levels and trends in delinquencies and nonaccruals; |
| · | Inherent risk in the loan portfolio; |
| · | Trends in volume and terms of the loan; |
| · | Effects of any change in lending policies and procedures; |
| · | Experience, ability and depth of management; |
| · | National and local economic trends and conditions; and |
| · | Effect of any changes in concentration of credit. |
A loan is considered impaired if it meets any of the following three criteria:
| · | Loans that are 90 days or more in arrears (nonaccrual loans); or |
| · | Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. |
| · | Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”) |
We assign risk ratings to the loans in our portfolio. These credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and time deposit accounts. Commercial servicesloss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include commercial securedloans that are inadequately protected by the current sound net worth and unsecured lending servicespaying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as well as business internet banking, corporate cash management servicesa loss are considered uncollectible and deposit services. Bancorp also provides ATMs, debit cards, internet banking including on-line bill pay, mortgage lending, safe deposit boxes, and telephone banking, among other products and services.are charged to the Allowance. Loans not classified are rated pass.
Bancorp had net incomeLoans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of $14,437,000payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the nine months ended September 30, 2016, compareddelay, the borrower’s prior payment record, and the amount of the shortfall in relation to $3,457,000the principal and interest owed.
Real Estate Acquired Through Foreclosure
Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs. Management periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using estimates as described under “Allowance for Loan Losses” above. In the nine months ended September 30, 2015.event of a subsequent change in fair value, the carrying amount is adjusted to the lesser of the new fair value, less disposal costs, or the carrying value recorded at acquisition. The increaseamount of the change is primarily duecharged or credited to an $11,194,000other expense. Expenses on real estate acquired through foreclosure incurred prior to the disposition of the property, such as maintenance, insurance and taxes, and physical security, are charged to expense. Material expenses that improve the property to its best use are capitalized to the property. If a foreclosed property is sold for more or less than the carrying value, a gain or losses is recognized upon the sale of the property.
Deferred Income Taxes
Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax benefit recordedbasis of assets and liabilities based on enacted tax rates expected to be in the second quarter of 2016 dueeffect when such amounts are realized or settled. Deferred tax assets are recognized only to the reversal of the valuation allowance recorded against the deferred tax asset. The reversal resulted in the recognition of a one-time tax benefit in the second quarter of 2016 of approximately $11,837,000. Bancorp has now concludedextent that it is more likely than not that itsuch amount will generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred tax assets.
Our resultsbe realized based on consideration of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings and subordinated debentures. We also generate non-interest income, including, among other sources, mortgage banking activities, real estate commissions and management fees, and service charges on deposit accounts. Our non-interest expense consists primarily of employee compensation and benefits, net occupancy expense and other operating expenses.
If interest rates increase, demand for borrowing may decrease and Bancorp’s interest rate spread could decrease. Bancorp will continue to manage loan and deposit pricing against the risks of rising costs of its deposits and borrowings. Interest rates are outside the control of Bancorp, so it must attempt to balance its pricing and duration of its loan portfolio against the risks of rising costs of its deposits and borrowings.available evidence.
The continued successeffect on deferred tax assets and attractionliabilities of Anne Arundel County, Maryland, and vicinity, will also be important to Bancorp’s ability to originate and grow mortgage loans and deposits, as will Bancorp’s continued focus on maintaining a low overhead.
If the volatilitychange in tax rates is recognized in income in the marketperiod that includes the enactment date. To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. We recognizes a tax position as a benefit only if it “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The judgment about the level of future taxable income is inherently subjective and the economy worsens, ouris reviewed on a continual basis as regulatory and business financial condition, results of operations, access to funds and the price of our stock could be materially and adversely impacted.factors change.
Results of Operations
Net income decreased by $172,000 to net income of $1,055,000 for the third quarter of 2016, compared to net income of $1,227,000 for the third quarter of 2015. This was primarily due to increases in non-interest expenses and income taxes. Basic and diluted earnings per share were $0.04 for the third quarter of 2016 compared to $0.06 for the third quarter of 2015. Income
Net income increased by $10,980,000$18,000, or 2.0%, to net income of $14,437,000$925,000 for the nine months ended September 30, 2016,first quarter of 2017, compared to net income of $3,457,000$907,000 for the nine months ended September 30, 2015. The increase was due to the reversal of the valuation allowance recorded against the deferred tax asset in the secondfirst quarter of 2016. Basic and diluted earningsincome per share were $1.14 and $1.13, respectively,increased to $0.06 for the nine months ended September 30, 2016first quarter of 2017 compared to $0.17$0.03 for the nine months ended September 30, 2015.first quarter of 2016. The primary contributors to the increase in net income were improved net interest income and a reduced loan loss provision, partially offset by an increased income tax provision.
Net Interest Income
Net interest income, which is interest earned net of interest expense, increased by $69,000,$351,000, or 1.2%6.7%, to $5,717,000$5.6 million for the thirdfirst quarter of 2016,2017, compared to $5,648,000$5.2 million for the thirdfirst quarter of 2015.2016. The increase in net interest income was primarily due to lower cost of borrowings. Net interest income decreased $350,000, or 2.1%, to $16,493,000 for the nine months ended September 30, 2016, compared to $16,843,000 for the nine months ended September 30, 2015. The primary reason for this decrease was a decrease in the average yield onbalance of interest-bearing liabilities and an increase in the average balance of interest-earning assets. Our net interest margin increased slightly from 3.08% in the loan portfolio.first quarter of 2016 to 3.09% in the first quarter of 2017.
Interest Income
Interest income increased by $53,000, or 0.7% to $7.6 million for the first quarter of 2017, compared to $7.5 million for the first quarter of 2016. Average interest-earning assets increased from $682.6 million in the first quarter of 2016 to $732.3 million in the first quarter of 2017. Average loans outstanding increased by $20.0 million due to increased originations. Average HTM securities decreased by $14.5 million due to security maturities and repayments from mortgage-backed securities. The proceeds were used to fund the purchase of AFS securities and, along with other available funds, the purchase of certificates of deposit, which contributed to the increase in average other interest-earning assets.
Interest Expense
Interest expense decreased by $298,000, or 13.1%, to $2.0 million for the first quarter of 2017, compared to $2.3 million for the first quarter of 2016. The decrease was primarily due to both the decreased average balance and decreased average rate in our borrowings. Average borrowings decreased $18.6 million from the first quarter of 2016 and the rate paid on borrowings decreased from 3.73% for the first quarter of 2016 to 3.35% for the first quarter of 2017. We paid off $3.5 million of 8.0% subordinated debentures in the later part of 2016 as well as $10.0 million FHLB advances in 2017.
Bancorp’sThe following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
| | Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
| | Average Balance (1) | | | Interest (2) | | | Yield/ Rate (4) | | | Average Balance (1) | | | Interest (2) | | | Yield/ Rate (4) | |
ASSETS | | (dollars in thousands) | |
Loans | | $ | 608,417 | | | $ | 7,081 | | | | 4.72 | % | | $ | 588,443 | | | $ | 7,020 | | | | 4.80 | % |
Loans held for sale (“LHFS”) | | | 4,416 | | | | 50 | | | | 4.59 | % | | | 8,196 | | | | 87 | | | | 4.27 | % |
AFS securities | | | 3,671 | | | | 15 | | | | 1.66 | % | | | - | | | | - | | | | - | |
HTM securities | | | 60,762 | | | | 254 | | | | 1.70 | % | | | 75,218 | | | | 311 | | | | 1.66 | % |
Other interest-earning assets (3) | | | 50,297 | | | | 97 | | | | 0.78 | % | | | 4,984 | | | | 20 | | | | 1.61 | % |
Restricted stock investments,at cost | | | 4,784 | | | | 60 | | | | 5.09 | % | | | 5,795 | | | | 66 | | | | 4.58 | % |
Total interest-earning assets | | | 732,347 | | | | 7,557 | | | | 4.18 | % | | | 682,636 | | | | 7,504 | | | | 4.42 | % |
Allowance for loan losses | | | (9,000 | ) | | | | | | | | | | | (8,717 | ) | | | | | | | | |
Cash and other noninterest-earning assets | | | 65,926 | | | | | | | | | | | | 87,713 | | | | | | | | | |
Total assets | | $ | 789,273 | | | | 7,557 | | | | | | | $ | 761,632 | | | | 7,504 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Checking and savings | | $ | 278,499 | | | | 215 | | | | 0.31 | % | | $ | 213,195 | | | | 155 | | | | 0.29 | % |
Certificates of deposit | | | 217,455 | | | | 760 | | | | 1.42 | % | | | 278,290 | | | | 824 | | | | 1.19 | % |
Total interest-bearing deposits | | | 495,954 | | | | 975 | | | | 0.80 | % | | | 491,485 | | | | 979 | | | | 0.80 | % |
Borrowings | | | 120,563 | | | | 996 | | | | 3.35 | % | | | 139,119 | | | | 1,290 | | | | 3.73 | % |
Total interest-bearing liabilities | | | 616,517 | | | | 1,971 | | | | 1.30 | % | | | 630,604 | | | | 2,269 | | | | 1.45 | % |
Noninterest-bearing deposit accounts | | | 81,569 | | | | | | | | | | | | 32,159 | | | | | | | | | |
Other noninterest-bearing liabilities | | | 2,716 | | | | | | | | | | | | 13,931 | | | | | | | | | |
Stockholders’ equity | | | 88,471 | | | | | | | | | | | | 84,938 | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 789,273 | | | | 1,971 | | | | | | | $ | 761,632 | | | | 2,269 | | | | | |
Net interest income/net interest spread | | | $ | 5,586 | | | | 2.88 | % | | | | | | $ | 5,235 | | | | 2.97 | % |
Net interest margin | | | | | | | | | | | 3.09 | % | | | | | | | | | | | 3.08 | % |
(1) | Nonaccrual loans are included in average loans. |
(2) | There are no tax equivalency adjustments. |
(3) | Other interest-earning assets include interest-earning deposits and federal funds sold |
The “Rate/Volume Analysis” below indicates the changes in our net interest income as a result of changes in volume and rates. We maintain an asset and liability management policy designed to provide a proper balance between rate-sensitive assets and rate-sensitive liabilities to attempt to optimize interest margins while providing adequate liquidity for our anticipated needs. Changes in interest income and interest expense that result from variances in both volume and rates have been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.
| | Three Months Ended March 31, 2017 vs. 2016 | |
| | Due to Variances in | |
| | Rate | | | Volume | | | Total | |
Interest earned on: | | (dollars in thousands) | |
Loans | | $ | (611 | ) | | $ | 672 | | | $ | 61 | |
LHFS | | | 40 | | | | (77 | ) | | | (37 | ) |
AFS securities | | | - | | | | 15 | | | | 15 | |
HTM Securities | | | 51 | | | | (108 | ) | | | (57 | ) |
Other interest-earning assets | | | (74 | ) | | | 151 | | | | 77 | |
Restricted stock investments, at cost | | | 34 | | | | (40 | ) | | | (6 | ) |
Total interest income | | | (560 | ) | | | 613 | | | | 53 | |
| | | | | | | | | | | | |
Interest paid on: | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | |
Checking and savings | | | 12 | | | | 48 | | | | 60 | |
Certificates of deposit | | | 657 | | | | (721 | ) | | | (64 | ) |
Total interest-bearing deposits | | | 669 | | | | (673 | ) | | | (4 | ) |
Borrowings | | | (748 | ) | | | 454 | | | | (294 | ) |
Total interest expense | | | (79 | ) | | | (219 | ) | | | (298 | ) |
Net interest income | | $ | (481 | ) | | $ | 832 | | | $ | 351 | |
Provision for Loan Losses
The Company’s loan portfolio is subject to varying degrees of credit risk and an allowance for loan losses is maintained to absorb losses inherent in its loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what Bancorpthe Company determined it was worth at the time of the granting of the loan. Bancorp monitors itsWe monitor loan delinquencies at least monthly. All loans that are delinquent and all loans within the various categories of Bancorp’sour portfolio as a group are evaluated. Bancorp’s Board,Management, with the advice and recommendation of Bancorp’s management,the Company’s Board of Directors, estimates an allowanceAllowance to be set aside for loan losses. Included in determining the calculation are such factors as historical losses for each loan portfolio, current market value of the loan’s underlying collateral, inherent risk contained within the portfolio after considering the state of the general economy, economic trends, consideration of particular risks inherent in different kinds of lending and consideration of known information that may affect loan collectability. During the first quarter of 2017, as a result of our Allowance analysis, we determined that a provision reversal of $275,000 was appropriate.
TheSee additional information about the provision for loan losses under “Credit Risk Management and the Allowance” later in this Item.
Noninterest Income
Total noninterest income increased by $108,000, or 8.6%, to $50,000$1.4 million for the thirdfirst quarter of 2017, compared to $1.3 million for the first quarter of 2016, compared to $0 for the third quarter of 2015. The provision for loan losses decreased by $50,000, or 25.0%, to $150,000 for the nine months ended September 30, 2016, compared to $200,000 for the same period in 2015. This decrease was primarily due to an improvement in the loan portfolio quality, a lower level of net charge-offs and lower loan delinquencies in 2016 compared to 2015. Additionally, Bancorp experienced a higher amount of recoveries in 2016 compared to 2015. Additionally, Bancorp experienced a higher amount of recoveries in 2016 compared to 2015. Recoveries were $203,000 and $523,000 for the three and nine months ended September 30, 2016, respectively. Comparatively, the recoveries were $229,000 and $411,000 for the three and nine months ended September 30, 2015. The higher recoveries in 2016 increased the allowance for loan losses and thus lowered the need for additional provisions.
Total non-interest income increased by $246,000, or 16.7%, to $1,715,000 for the third quarter of 2016, compared to $1,469,000 for the third quarter of 2015. Total non-interest income increased by $78,000, or 1.7%, to $4,779,000 for the nine months ended September 30, 2016, compared to $4,701,000 for the same period in 2015. The primary reasons for these increases in non-interest income were an increase in real estate commissions and management fees, partially offset by a decrease in mortgage banking activities , and decreases in the fair values of interest rate lock commitments and mandatory forward contracts entered into by the Bank. Mortgage banking activities increased $2,000, or 0.2%, to $861,000 for the third quarter of 2016, compared to $859,000 for the third quarter of 2015. Mortgage banking activities decreased $385,000, or 16.9%, to $1,893,000 for the nine months ended September 30, 2016, compared to $2,278,000 for the same period in 2015. This decrease was the result of lower mortgage origination production and a decrease in the fair value of mortgage servicing rights.mortgage-banking revenue. Real estate commissions by Hyatt Commercial increased by $157,000,$262,000, or 52.7%222.0%, to $455,000$380,000 for the thirdfirst quarter of 2016,2017, compared to $298,000$118,000 for the thirdfirst quarter of 2015. Real estate commissions increased $350,000, or 39.1%, to $1,246,000 for the nine months ended September 30, 2016, compared to $896,000 for the same period in 2015.2016. The increase in real estate commissions was due to increasedan increase in commercial sales and leasing activity in 2016 compared to 2015.the first quarter of 2017. Real estate management fees increased by $48,000,$29,000, or 29.0%17.6%, to $214,000$194,000 for the thirdfirst quarter of 2017, compared to $165,000 for the first quarter of 2016, due primarily to a management fee rate increase in 2017. Mortgage banking revenue decreased $186,000, or 25.8%, to $535,000 for the first quarter of 2017, compared to $166,000$721,000 for the thirdfirst quarter of 2015. Real estate management fees increased $73,000, or 14.9%, to $564,000 for2016. This decrease in activity was the nine months ended September 30, 2016,result of a decrease in loans booked through our Internet mortgage platform (“E-Home Finance”) in the first quarter of 2017 compared to $491,000 for the same period in 2015. These increases were due to a higher level of commercial property under management in 2016 compared to 2015. Other non-interest income increased $39,000, or 26.7%, to $185,000 for the thirdfirst quarter of 2016, compared to $146,000 for the third quarter of 2015. Other non-interest income increased $40,000, or 3.9%, to $1,076,000 for the nine months ended September 30, 2016, compared to $1,036,000 for the same period in 2015. The primary reason for the third quarter increase was due to the initial reception of income from the investment in the Bancorp’s real estate subsidiary.2016.
Noninterest Expense
Total non-interestnoninterest expenses increased $111,000,$97,000, or 1.9%1.7%, to $5,949,000$5.7 million for the thirdfirst quarter of 2017, compared to $5.6 million for the first quarter of 2016, comparedprimarily due to $5,838,000 for the third quarter of 2015. Total non-interestincreases in compensation and related expenses decreased $298,000, or 1.7%, to $17,501,000 for the nine months ended September 30, 2016, compared to $17,799,000 for the same periodand advertising expenses, partially offset by decreases in 2015.Federal Deposit Insurance Corporation (“FDIC”) assessments, occupancy, professional fees, online charges, and legal fees. Compensation and related expenses increased by $270,000,$121,000, or 7.2%3.3%, to $4,028,000$3.8 million for the thirdfirst quarter of 2016,2017, compared to $3,758,000$3.6 million for the thirdfirst quarter of 2015. The third quarter increase was primarily due to an increase in commissions and also, compensation and accrued time off payouts to executive officers who retired or resigned. Compensation and related expenses decreased by $181,000, or 1.6%, to $11,478,000 for the nine months ended September 30, 2016, compared to $11,659,000 for the same period in 2015. This was primarily due to lower commissions paid on lower mortgage banking activities in 2016 compared to 2015. Net occupancy costs increased by $109,000, or 28.9%, to $486,000 for the third quarter of 2016, compared to $377,000 for the third quarter of 2015. Net occupancy costs increased by $132,000, or 10.5%, to $1,387,000 for the nine months ended September 30, 2016, compared to $1,255,000 for the same period in 2015. These increases were the result of the timing of maintenance costs in 2016 compared to 2015, partially offset by an increase in rents collected from tenants and the beginning of rent payments for the Severna Park branch. Legal fees increased by $11,000, or 15.7%, to $81,000 for the third quarter of 2016, compared to $70,000 for the third quarter of 2015. Legal fees increased $18,000, or 9.0%, to $217,000 for the nine months ended September 30, 2016, compared to $199,000 for the same period in 2015. These variances were primarily due to the timing of services needed from outside legal firms in 2016 compared to 2015. Expenses on foreclosed real estate decreased by $91,000, or 68.9%, to $41,000 for the third quarter of 2016 compared to $132,000 for the third quarter of 2015. This decrease was due to a recovery of expenses from a former REO property. Expenses on foreclosed real estate increased by $65,000 to $184,000 for the nine months ended September 30, 2016, compared to $119,000 for the same period in 2015. These increases were primarily due to higher losses and expenses on properties in 2016, compared to 2015. FDIC assessments and regulatory expense decreased by $132,000, or 43.0% to $175,000 for the third quarter of 2016, compared to $307,000 for the third quarter of 2015. FDIC assessments and regulatory expense decreased by $448,000, or 48.9% to $469,000 for the nine months ended September 30, 2016, compared to $917,000 for the same period in 2015. These decreases were primarily due to a decrease in the risk-based assessment percentage charged by the FDIC due to Bancorp’s release from its regulatory agreements. Professional fees increased by $73,000, or 40.8% to $252,000 for the third quarter of 2016 compared to $179,000 for the third quarter of 2015.2016. This increase was primarily due to higher feesseverance expenses paid in accounting and consulting expenses in 2016the first quarter of 2017. Net occupancy costs decreased by $116,000, or 25.7%, to $336,000 for the first quarter of 2017, compared to 2015. Professional$452,000 for the first quarter of 2016, primarily due to lower maintenance and utility expenses. Legal fees decreased by $21,000,$102,000, or 3.1%78.5%, to $659,000$28,000 for the nine months ended September 30, 2016,first quarter of 2017, compared to $680,000$130,000 for the same period in 2015. This decrease was primarily due to a decrease in consulting related fees during the first quarter of 2016. Advertising increased $46,000, to $134,000 for the third quarter of 2016, compared to $88,000 for the third quarter of 2015. Advertising increased by $254,000, or 114.9% to $475,000 for the nine months ended September 30, 2016, compared to $221,000 for the same period in 2015. These increases were primarily due to the advertising campaign associated with the opening of the new branch in Severna Park. Online charges decreased $116,000, or 49.8%, to $117,000 for the third quarter of 2016, compared to $233,000 for the third quarter of 2015. Online charges decreased by $23,000, or 3.6% to $617,000 for the nine months ended September 30, 2016, compared to $640,000 for the same period in 2015. These decreases were primarily due to aThis decrease in the yearly charges from the Bank’s computer processor in 2016 compared to 2015. Credit report and appraisal fees decreased $22,000, or 12.9%, to $148,000 for the third quarter of 2016, compared to $170,000 for the third quarter of 2015. Credit report and appraisal fees decreased $166,000, or 25.7% to $480,000 for the nine months ended September 30, 2016, compared to $646,000 for the same period in 2015. These decreases were primarily due to a lower volume of mortgage banking activity in 2016 versus 2015. Other non-interest expenses decreased by $37,000, or 7.1%, to $487,000 for the third quarter of 2016 compared to $524,000 for the third quarter of 2015. Other non-interest expenses increased by $72,000, or 4.9% to $1,535,000 for the nine months ended September 30, 2016, compared to $1,463,000 for the same period in 2015. The decrease was primarily due to a decrease in the provision for contingent liabilities and the fair value of mandatory contracts for the quarter. The increase was primarily due to an overall increase in the provision for contingent liabilities and the fair value of mandatory contracts for the nine months ended September 30, 2016.
Income Taxes
There was a $378,000 income tax expense recorded for the third quarter of 2016 compared to a $52,000 tax expense for the third quarter of 2015. For the nine months ended September 30, 2016, the income tax benefit was $10,816,000 compared to income tax expense of $88,000 for the same period in 2015. The income tax benefit in 2016 was primarily due to the reversal of an $11,837,000 valuation allowance during the second quarter of 2016. The valuation allowance was first recorded against the deferred tax asset in the third quarter of 2013.
In assessing the Bancorp’s ability to realize its net deferred tax asset, Management considers whether it is more likely than not that some portion or all of the net deferred tax asset will or will not be realized. Bancorp’s ultimate realization of the net deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of net deferred taxes recognized could be impacted by changes to any of these variables.
Bancorp has now concluded that, as of September 30, 2016, it is more likely than not that it will generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred tax asset. The Bancorp’s net deferred tax asset was $10,916,000 as of September 30, 2016 and is included in the other assets category within the financial statements.
Analysis of Financial Condition
Total assets increased $15,677,000, or 2.1%, to $777,756,000 at September 30, 2016, compared to $762,079,000 at December 31, 2015. Cash and cash equivalents increased by $902,000, or 2.1%, to $44,493,000 at September 30, 2016, compared to $43,591,000 at December 31, 2015. This increase was primarily due to a higher level of legal activity during the first quarter of 2016 on certain foreclosures compared to the first quarter of 2017. During the first quarter of 2017, we reversed an over accrual of FDIC assessment expense due to a lower first quarter 2017 rate assessment that arose from the termination of the formal agreements with the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board (“FRB”) in 2016. Professional fees decreased by $37,000, or 21.5%, to $135,000 for the first quarter of 2017, compared to $172,000 for the first quarter of 2016, primarily due to a decrease in fees incurred for consulting. Advertising increased $73,000, or 54.9%, to $206,000 for the first quarter of 2017, compared to $133,000 for the first quarter of 2016, primarily due to timing of marketing campaigns. During the first quarter of 2017, we received a refund of certain fees that were overbilled in late 2016. This refund caused online charges to decrease by $61,000, or 23.7%.
Income Tax Provision
We incurred $619,000 in income tax expense during the first quarter of 2017 compared to none in 2016 as we fully released our deferred tax asset valuation allowance in the latter part of 2016.
Financial Condition
Total assets increased $11.2 million to $798.7 million at March 31, 2017, compared to $787.5 million at December 31, 2016. Cash and cash andequivalents increased by $16.4 million, or 24.5%, to $83.6 million at March 31, 2017, compared to $67.1 million at December 31, 2016. This increase was primarily due from banks as a result of ato management’s decision to increase in depositsliquid assets to preserve liquidity at September 30, 2016March 31, 2017, compared to December 31, 2015. Investment securities2016. LHFS decreased 11.1%$7.5 million, or 73.3%, or $8,456.000 to $67,677,000 as of September 30, 2016$2.8 million at March 31, 2017, compared to $76,133,000 as of December 31, 2015. The decrease was due to matured securities not being reinvested and allowed to convert to cash. Loans receivable, net increased $13,817,000, or 2.3%, to $603,473,000 at September 30, 2016, compared to $589,656,000$10.3 million at December 31, 2015. This increase was due to a continued higher demand for commercial loans during 2016 compared to 2015. Loans held for sale decreased $242,000, or 1.8%, to $12,961,000 at September 30, 2016, compared to $13,203,000 at December 31, 2015.2016. This decrease was primarily due to the timing of loans soldpending sale. Real estate acquired through September 30, 2016foreclosure increased $270,000, or 27.7%, to $1.2 million at March 31, 2017 compared to December 31, 2015. Foreclosed real estate decreased $401,000, or 23.0%, to $1,343,000 at September 30, 2016 compared to $1,744,000$973,000 at December 31, 2015.2016. This decrease was the result of additional properties sold and less properties foreclosed on during 2016 compared to 2015.
Total liabilities increased $15,350,000 or 2.3%, to $690,973,000 at September 30, 2016 from $675,623,000 at December 31, 2015. Total deposits increased $32,839,000, or 6.3%, to $556,610,000 at September 30, 2016 compared to $523,771,000 at December 31, 2015. This increase was primarily due to an increase in deposits from commercial relationships. Long-term and short-term borrowings decreased by $4,500,000, or 3.9%, to $110,500,000 at September 30, 2016 compared to $115,000,000 at December 31, 2015. The decrease was due to the payoffaddition of a $15,000,000 advance net of a $3,500,000 loan and an additional $7,000,000 in short-term borrowings. Accrued interest payable and other liabilities decreased $9,489,000,one property. Total deposits increased $21.8 million, or 74.5%3.8%, to $3,244,000$593.8 million at September 30, 2016March 31, 2017 compared to $12,733,000$571.9 million at December 31, 2015. This decrease was due2016. Long-term borrowings decreased by $10.0 million, or 9.7 %, to the payment of the TARP and Trust Preferred accruals for dividends and interest.
Stockholders’ Equity
Total stockholders’ equity increased $327,000 to $86,783,000$93.5 million at September 30, 2016March 31, 2017 compared to $86,456,000 as of$103.5 million at December 31, 2015. This increase was primarily a result of Bancorp raising $10,510,000 of new common equity by entering into subscription agreements with various purchasers under which it issued a total of 2,015,500 shares of its common stock at a price of $5.50 per share, and net income for the nine months ended September 30, 2016, which was offset by the redemption of $23,400,000 of Series B Preferred Stock.
Liquidity and Capital Resources
Bancorp’s liquidity is determined by its ability to raise funds through several sources including borrowed funds, capital, deposits, loan repayments, maturing investments and the sale of loans.
In assessing its liquidity, the management of Bancorp considers operating requirements, anticipated deposit flows, expected funding of loans, deposit maturities and borrowing availability, so that sufficient funds may be available on short notice to meet obligations as they arise or to permit Bancorp to take advantage of business opportunities.
Management believes Bancorp has sufficient cash flow and liquidity to meet its current commitments through the next 12 months. Certificates of deposit, which are scheduled2016. These borrowings began to mature in less than one year, totaled $177,473,000 at September 30,February, 2017.
Securities
We utilize the securities portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals. We continually monitor the credit risk associated with investments and diversify the risk in the securities portfolios. We held $7.2 million in securities classified as AFS as of March 31, 2017. We held $59.3 million and $62.8 million, respectively, in securities classified as HTM as of March 31, 2017 and December 31, 2016. Based on past experience, management believes that a significant portion of such deposits will remain with Bancorp. At September 30, 2016, Bancorp had commitments to originate mortgage loans of $7,665,000, unadvanced home equity lines of credit of $7,804,000, unadvanced construction commitments of $17,400,000, unused lines of credit of $34,716,000 and commitments under standby letters of credit of $4,316,000. Bancorp has the ability to reduce its commitments for new loan originations, adjust other cash outflows, and borrow from FHLB Atlanta should the need arise. As of September 30, 2016, outstanding FHLB Atlanta borrowings totaled $107,000,000, and Bancorp had available to it an additional $130,043,000 in borrowing availability from FHLB Atlanta.
Net cash providedChanges in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing, and banking industries impact the securities market. Quarterly, we review each security in our AFS portfolio to determine the nature of any decline in value and evaluate if any impairment should be classified as OTTI. For the three months ended March 31, 2017, we determined that no OTTI charges were required during 2017.
All of the AFS and HTM securities that are impaired as of March 31, 2017 are so due to declines in fair values resulting from changes in interest rates or increased credit/liquidity spreads compared to the time they were purchased. We have the intent to hold these securities to maturity and it is more likely than not that we will not be required to sell the securities before recovery of value. As such, management considers the impairments to be temporary.
Our AFS securities portfolio consists of United States of America (“U.S.”) government agency notes in the amount of $7.2 million at March 31, 2017.
Our HTM securities portfolio composition is as follows:
| | March 31, 2017 | | | December 31, 2016 | |
| | (dollars in thousands) | |
U.S. Treasury securities | | $ | 10,996 | | | $ | 12,998 | |
U.S. government agency notes | | | 20,021 | | | | 20,027 | |
Mortgage-backed securities | | | 28,266 | | | | 29,732 | |
| | $ | 59,283 | | | $ | 62,757 | |
LHFS
We originate residential mortgage loans for sale on the secondary market. At March 31, 2017, such LHFS, which are carried at fair value, amounted to $2.8 million, the majority of which are subject to purchase commitments from investors. The LHFS balance at December 31, 2016 was $10.3 million and was recorded at lower-of-cost on market value (“LCM”). LHFS decreased by operating activities$7.5 million, or 73.3%, to $2.8 million at March 31, 2017, compared to $10.3 at December 31, 2016. This decrease was $1,900,000primarily due to the timing of loans pending sale on the secondary market.
Loans
Our loan portfolio is expected to produce higher yields than investment securities and other interest-earning assets; the absolute volume and mix of loans and the volume and mix of loans as a percentage of total earning assets is an important determinant of our net interest margin.
The following table sets forth the composition of our loan portfolio before unearned loan fees:
| | March 31, 2017 | | | December 31, 2016 | |
| | Amount | | | Percent of Total | | | Amount | | | Percent of Total | |
| | (dollars in thousands) | |
Residential Mortgage | | $ | 253,309 | | | | 41.4 | % | | $ | 260,603 | | | | 42.5 | % |
Commercial | | | 16,695 | | | | 2.7 | % | | | 16,811 | | | | 2.7 | % |
Commercial real estate | | | 190,961 | | | | 31.2 | % | | | 195,710 | | | | 31.9 | % |
Construction, land acquisition, and development | | | 50,556 | | | | 8.3 | % | | | 41,438 | | | | 6.8 | % |
Land | | | 49,159 | | | | 8.0 | % | | | 48,664 | | | | 7.9 | % |
Lines of credit | | | 31,859 | | | | 5.2 | % | | | 29,657 | | | | 4.8 | % |
Home equity | | | 18,022 | | | | 2.9 | % | | | 19,129 | | | | 3.1 | % |
Consumer | | | 1,590 | | | | 0.3 | % | | | 1,210 | | | | 0.3 | % |
| | $ | 612,151 | | | | 100.0 | % | | $ | 613,222 | | | | 100.0 | % |
Loans (before unearned income) decreased by $1.1 million, or 0.2%, to $612.2 million at March 31, 2017, compared to $613.2 million at December 31, 2016. This decrease was primarily due to decreased residential and commercial real estate loan demand.
Construction Loans
Construction loans are funded, at the request of the borrower, typically not more than once per month, based on the extent of work completed, and are monitored, throughout the life of the project, by independent professional construction inspectors and the Company’s commercial real estate lending department. Interest is advanced to the borrower, upon request, based upon the progress of the project toward completion. The amount of interest advanced is added to the total outstanding principal under the loan commitment. Should the project not progress as scheduled, the adequacy of the interest reserve necessary to carry the project through to completion is subject to close monitoring by management. Should the interest reserve be deemed to be inadequate, the borrower is required to fund the deficiency. Similarly, once a loan is fully funded, the borrower is required to fund all interest payments.
Construction loans are reviewed for extensions upon expiration of the loan term. Provided the loan is performing in accordance with contractual terms, extensions may be granted to allow for the ninecompletion of the project, marketing or sales of completed units, or to provide for permanent financing. Extension terms generally do not exceed 12 to 18 months.
In general, our construction loans are used to finance improvements to commercial, industrial, or residential property. Repayment is typically derived from the sale of the property as a whole, the sale of smaller individual units, or by a take-out from a permanent mortgage. The term of the construction period generally does not exceed two years. Loan commitments are based on established construction budgets which represent an estimate of total costs to complete the proposed project including both hard (direct) costs (building materials, labor, etc.) and soft (indirect) costs (legal and architectural fees, etc.). In addition, project costs may include an appropriate level of interest reserves to carry the project through to completion. If established, such interest reserves are determined based on (i) a percentage of the committed loan amount, (ii) the loan term, and (iii) the applicable interest rate. Regardless of whether a loan contains an interest reserve, the total project cost statement serves as the basis for underwriting and determining which items will be funded by the loan and which items will be funded through borrower equity. The Company has not advanced additional interest reserves to keep a loan from becoming nonperforming.
We recognized $73,000 and $61,000 of interest income and capitalized interest from interest reserves during the three months ended September 30,March 31, 2017 and 2016, respectively. None of the loans where interest reserves were recorded as capitalized interest were nonperforming.
Extensions and Guarantees
We have experienced extension requests for commercial real estate and construction loans, some of which have related repayment guarantees. An extension may be granted to allow for the completion of the project, marketing, or sales of completed units, or to provide for permanent financing, and is based on a re-underwriting of the loan and management’s assessment of the borrower’s ability to perform according to the agreed-upon terms. Typically, at the time of an extension, borrowers are performing in accordance with contractual loan terms. Extension terms generally do not exceed 12 to 18 months and typically require the borrower to provide additional economic support in the form of partial repayment, additional collateral, or guarantees. In cases where the fair value of the collateral or the financial resources of the borrower are deemed insufficient to repay the loan, reliance may be placed on the support of a guarantee, if applicable. However, such guarantees are not relied on when evaluating a loan for impairment and never considered the sole source of repayment.
We evaluate the financial condition of guarantors based on the most current financial information available. Most often, such information takes the form of (i) personal financial statements of net worth, cash flow statements, and tax returns (for individual guarantors) and (ii) financial and operating statements, tax returns, and financial projections (for legal entity guarantors). Our evaluation is primarily focused on various key financial metrics, including net worth, leverage ratios, and liquidity. It is our policy to update such information annually, or more frequently as warranted, over the life of the loan.
While we do not specifically track the frequency with which we have pursued guarantor performance under a guarantee, our underwriting process, both at origination and upon extension, as applicable, includes an assessment of the guarantor’s reputation, creditworthiness, and willingness to perform. Historically, when we have found it necessary to seek performance under a guarantee, we have been able to effectively mitigate our losses. When a loan becomes impaired, repayment is sought from both the underlying collateral and the guarantor (as applicable). In the event that the guarantor is unwilling or unable to perform, a legal remedy is pursued.
Credit Risk Management and the Allowance
Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Our credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.
We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.
Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. Our Allowance methodology employs management’s assessment as to the level of future losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers’ current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and/or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. In addition, we evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors. Our risk management practices are designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may inherently exist within the loan portfolio. The assessment aspects involved in analyzing the quality of individual loans and assessing collateral values can also contribute to undetected, but probable, losses. For more detailed information about our Allowance methodology and risk rating system, see Note 3 to the Consolidated Financial Statements.
The following table summarizes the activity in our Allowance by portfolio segment for the three months ended March 31:
| | 2017 | | | 2016 | |
| | (dollars in thousands) | |
Allowance, beginning of period | | $ | 8,969 | | | $ | 8,758 | |
Charge-offs: | | | | | | | | |
Residential mortgage | | | (499 | ) | | | (140 | ) |
Commercial | | | - | | | | (17 | ) |
Commercial real estate | | | - | | | | (47 | ) |
Construction, land acquisition, and development | | | - | | | | - | |
Land | | | - | | | | - | |
Lines of credit | | | - | | | | - | |
Home equity | | | - | | | | (28 | ) |
Consumer | | | | | | | - | |
Total charge-offs | | | (499 | ) | | | (232 | ) |
Recoveries: | | | | | | | | |
Residential mortgage | | | 107 | | | | 82 | |
Commercial | | | 27 | | | | 19 | |
Commercial real estate | | | - | | | | - | |
Construction, land acquisition, and development | | | - | | | | - | |
Land | | | - | | | | - | |
Lines of credit | | | - | | | | 5 | |
Home equity | | | 3 | | | | 1 | |
Consumer | | | - | | | | - | |
Total recoveries | | | 137 | | | | 107 | |
Net charge offs | | | (362 | ) | | | (125 | ) |
Reversal of provision for loan losses | | | (275 | ) | | | - | |
Allowance, end of period | | $ | 8,332 | | | $ | 8,633 | |
Loans (before unearned loan fees): | | | | | | | | |
Period-end balance | | $ | 612,151 | | | $ | 604,011 | |
Average balance during period | | | 608,417 | | | | 588,443 | |
Allowance as a percentage of period-end loan balance | | | 1.36 | % | | | 1.43 | % |
Percent of average loans (annualized): | | | | | | | | |
Reversal of provision for loan losses | | | (0.18 | )% | | | - | |
Net charge-offs | | | 0.24 | % | | | 0.09 | % |
The following table summarizes our allocation of the Allowance by loan segment:
| | March 31, 2017 | | | December 31, 2016 | |
| | Amount | | | Percent of Total | | | Percent of Loans to Total Loans | | | Amount | | | Percent of Total | | | Percent of Loans to Total Loans | |
| | (dollars in thousands) | |
Residential mortgage | | $ | 3,789 | | | | 45.5 | % | | | 41.4 | % | | $ | 3,833 | | | | 42.7 | % | | | 42.5 | % |
Commercial | | | 426 | | | | 5.1 | % | | | 2.7 | % | | | 421 | | | | 4.7 | % | | | 2.7 | % |
Commercial real estate | | | 2,515 | | | | 30.2 | % | | | 31.2 | % | | | 2,535 | | | | 28.3 | % | | | 31.9 | % |
Construction, land acquisition, and development | | | 387 | | | | 4.6 | % | | | 8.3 | % | | | 527 | | | | 5.9 | % | | | 6.8 | % |
Land | | | 710 | | | | 8.5 | % | | | 8.0 | % | | | 863 | | | | 9.6 | % | | | 7.9 | % |
Lines of credit | | | 47 | | | | 0.6 | % | | | 5.2 | % | | | 57 | | | | 0.6 | % | | | 4.8 | % |
Home equity | | | 453 | | | | 5.4 | % | | | 2.9 | % | | | 728 | | | | 8.1 | % | | | 3.1 | % |
Consumer | | | 5 | | | | 0.1 | % | | | 0.3 | % | | | 5 | | | | 0.1 | % | | | 0.3 | % |
Total | | $ | 8,332 | | | | 100.0 | % | | | 100.0 | % | | $ | 8,969 | | | | 100.0 | % | | | 100.0 | % |
Based upon management’s evaluation, provisions are made to maintain the Allowance as a best estimate of inherent losses within the portfolio. The Allowance totaled $8.3 million at March 31, 2017 and $9.0 million at December 31, 2016. Any changes in the Allowance from period to period reflect management’s ongoing application of its methodologies to establish the Allowance, which, for the three months ended March 31, 2017, resulted in decreased allocated Allowances for all loan segments except for commercial and consumer. The changes in the Allowances for the respective loan segments were a function of the changes in the corresponding loan balances and asset quality.
During 2017, as a result of our Allowance analysis, and overall improved asset quality, we released $275,000 from the Allowance. We recorded net charge-offs of $362,000 and $125,000 during the three months ended March 31, 2017 and 2016, respectively. During 2017, annualized net charge-offs as compared to net cash provided byaverage loans outstanding increased to 0.24%, compared to 0.09% during 2016. The Allowance as a percentage of outstanding loans decreased from 1.43% as of December 31, 2016 to 1.36% as of March 31, 2017, reflecting the improvement in our overall asset quality.
Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of March 31, 2017 and is sufficient to address the credit losses inherent in the current loan portfolio.
Nonperforming Assets (“NPAs”)
Given the volatility of the real estate market, it is very important for us to have current appraisals on our NPAs. Generally, we annually obtain appraisals on NPAs. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets once a month. During these Loss Mitigation Committee meetings, all NPAs and loan delinquencies are reviewed. We also produce an NPA report which is distributed monthly to senior management and is also discussed and reviewed at the Loss Mitigation Committee meetings. This report contains all relevant data on the NPAs, including the latest appraised value and valuation date. Accordingly, these reports identify which assets will require an updated appraisal. As a result, we have not experienced any internal delays in identifying which loans/credits require appraisals. With respect to the ordering process of the appraisals, we have not experienced any delays in turnaround time nor has this been an issue over the past three years. Furthermore, we have not had any delays in turnaround time or variances thereof in our specific loan operating markets.
NPAs, expressed as a percentage of total assets, totaled 1.0% at March 31, 2017 and 1.4% at December 31, 2016. The ratio of the Allowance to nonperforming loans was 125.3% at March 31, 2017 and 91.0% at December 31, 2016. The increase in this ratio from December 31, 2016 to March 31, 2017 was a reflection of the decrease in nonperforming loans.
The distribution of our NPAs is illustrated in the following table. We did not have any loans greater than 90 days past due and still accruing at March 31, 2017 and December 31, 2016.
| | March 31, 2017 | | | December 31, 2016 | |
Nonaccrual Loans: | | (dollars in thousands) | |
Residential mortgage | | $ | 3,938 | | | $ | 3,580 | |
Commercial | | | - | | | | 1 | |
Commercial real estate | | | 262 | | | | 2,938 | |
Construction, land acquisition, and development | | | - | | | | - | |
Land | | | 93 | | | | 269 | |
Lines of credit | | | - | | | | 150 | |
Home equity | | | 2,355 | | | | 2,914 | |
Consumer | | | - | | | | - | |
| | | 6,648 | | | | 9,852 | |
| | | | | | | | |
Real Estate Acquired Through Foreclosure: | | | | | | | | |
Residential mortgage | | | 188 | | | | 393 | |
Commercial | | | - | | | | - | |
Commercial real estate | | | 827 | | | | 341 | |
Construction, land acquisition, and development | | | - | | | | - | |
Land | | | 228 | | | | 239 | |
Lines of credit | | | - | | | | - | |
Home equity | | | - | | | | - | |
Consumer | | | - | | | | - | |
| | | 1,243 | | | | 973 | |
Total Nonperforming Assets | | $ | 7,891 | | | $ | 10,825 | |
Nonaccrual loans amounted to $6.6 million at March 31, 2017 and $9.9 million at December 31, 2016. We added three loans in the amount of $294,000 for$921,000 to nonaccrual status during 2017. Of the same periodbalance of nonaccrual loans at December 31, 2016, $3.3 million were either returned to accrual status, charged off, or paid off.
Real estate acquired through foreclosure increased $270,000 compared to December 31, 2016, with decreases in 2015, anall loan segments, with the exception of commercial real estate, due to resolution of the properties through foreclosure sales or buyouts. The increase in cash provided by operating activities of $1,606,000. This changecommercial real estate was primarily the result of an increase in net income and lower origination volume of loans held for sale into the secondary market. Net cash used in investing activities was $5,033,000 for the nine months ended September 30, 2016, compared to $28,864,000 of net cash provided by investing activities for the same period in 2015, a decrease in cash provided by investing of $33,897,000. This change was primarily due to a net increase in loans receivable of $58,864,000 offset by a decrease in the purchase of investment securities that totaled $20,637,000. Net cash provided by financing activities increased $11,107,000 to $4,035,000 for the nine months ended September 30, 2016, compared to $7,072,000 net cash used in financing activities for the same period in 2015. This increase was primarily due to net proceeds received from the issuance of common stock in 2016 and an increase in customer deposits, partially offset by the redemption of $23,393,000 of Series B Preferred Stock and dividends paid on Preferred Stockone foreclosure in the amount of $7,472,000.
Federal Home Loan Bank of Atlanta Line of Credit$515,000.
The Bank hasactivity in our real estate acquired through foreclosure was as follows:
| | Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
| | (dollars in thousands) | |
Balance at beginning of period | | $ | 973 | | | $ | 1,744 | |
Real estate acquired in satisfaction of loans | | | 515 | | | | 584 | |
Write-downs and losses on real estate acquired through foreclosure | | | (40 | ) | | | (13 | ) |
Proceeds from sales of real estate acquired through foreclosure | | | (205 | ) | | | (578 | ) |
Balance at end of period | | $ | 1,243 | | | $ | 1,737 | |
TDRs
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an available lineinsignificant period of credit, secured by various loans in its portfolio,time to the borrower that would not otherwise be considered, the related loan is classified as a TDR.
The composition of our TDRs is illustrated in the amountfollowing table:
| | March 31, 2017 | | | December 31, 2016 | |
Residential mortgage: | | (dollars in thousands) | |
Nonaccrual | | $ | 2,566 | | | $ | 2,137 | |
>= 90 days past due | | | - | | | | - | |
<90 days past due/current | | | 14,143 | | | | 15,886 | |
Commercial real estate: | | | | | | | | |
Nonaccrual | | | 210 | | | | 249 | |
>= 90 days past due | | | - | | | | - | |
<90 days past due/current | | | 1,901 | | | | 1,914 | |
Land: | | | | | | | | |
Nonaccrual | | | 146 | | | | 6 | |
>= 90 days past due | | | - | | | | - | |
<90 days past due/current | | | 28 | | | | 170 | |
Consumer | | | | | | | | |
Nonaccrual | | | - | | | | - | |
>= 90 days past due | | | - | | | | - | |
<90 days past due/current | | | 92 | | | | 96 | |
Totals | | | | | | | | |
Nonaccrual | | | 2,922 | | | | 2,392 | |
>= 90 days past due | | | - | | | | - | |
<90 days past due/current | | | 16,164 | | | | 18,066 | |
| | $ | 19,086 | | | $ | 20,458 | |
See additional information on TDRs in Note 3 to the Consolidated Financial Statements.
Deposits
Deposits were $593.8 million at March 31, 2017 and $571.9 million at December 31, 2016. During the three months ended March 31, 2017, we experienced increases in checking accounts and savings accounts due to new account openings and higher account balances. We obtained significant new noninterest-bearing deposits in the first quarter of twenty five percent2017 through a campaign designed to attract deposits in certain local emerging markets. The decrease in certificates of its total assets, withdeposit was due to the payoff of regularly maturing CDs.
The deposit breakdown is as follows:
| | March 31, 2017 | | | December 31, 2016 | |
| | Balance | | | Percent of Total | | | Balance | | | Percent of Total | |
| | (dollars in thousands) | |
Checking and savings | | $ | 247,546 | | | | 41.69 | % | | $ | 239,985 | | | | 41.96 | % |
Certificates of deposit | | | 268,234 | | | | 45.18 | % | | | 273,816 | | | | 47.87 | % |
Total interest-bearing deposits | | | 515,780 | | | | 86.87 | % | | | 513,801 | | | | 89.83 | % |
Noninterest-bearing deposits | | | 77,982 | | | | 13.13 | % | | | 58,145 | | | | 10.17 | % |
Total deposits | | $ | 593,762 | | | | 100.00 | % | | $ | 571,946 | | | | 100.00 | % |
Borrowings
Our borrowings consist of advances from the FHLB Atlanta. Asand a term loan from a commercial bank.
The FHLB advances are available under a specific collateral pledge and security agreement, which requires that we maintain collateral for all of September 30, 2016, theour borrowings equal to 30% of total available line of credit withassets. Our advances from the FHLB Atlanta was approximately $237,043,000, of which $107,000,000 was outstandingmay be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and short-term borrowings.may contain prepayment penalties. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties.
At March 31, 2017, our total available credit line with the FHLB was $145.3 million. The Bank, from time to time, utilizes the line of credit when interest rates are more favorable than obtaining deposits from the public.public. Our outstanding FHLB advance balance at March 31, 2017 and December 31, 2016 was $90.0 million and $100.0 million, respectively. During the latter part of 2016, we paid off $10.0 million in higher cost advances.
The following table sets forth information concerning the interest rates and maturity dates of the advances from the FHLB Atlanta as of September 30, 2016 (dollars in thousands):
Principal Amount | | | Rate | | | Maturity | |
$ | 7,000 | | | | 0.36% | | | | 2016 | |
| 70,000 | | | 2.43% to 4.05% | | | | 2017 | |
| 15,000 | | | 2.58% to 3.43% | | | | 2018 | |
| 15,000 | | | | 4.00% | | | | 2019 | |
$ | 107,000 | | | | | | | | | |
Notes Payable
On September 30, 2016, the Bancorpwe entered into a loan agreement with a commercial bank whereby the Bancorpwe borrowed $3,500,000 for a term of 8 years. The unsecured note bears interest at a fixed rate of 4.25% for the first 36 months then, at the option of the Bancorp,Company, converts to either (1) floating rate of the Wall Street Journal Prime plus .50%50 basis points or (2) fixed rate at two hundred seventy five (275) basis points over the five year amortizing Federal Home Loan BankFHLB rate for the remaining five years. Repayment terms are monthly interest only payments for the first 36 months, then quarterly principal payments of $175,000 plus interest. The loan is subject to a prepayment penalty of 1% of the principal amount prepaid during the first 36 months. If the Bancorp electswe elect the 5 year fixed rate of 275 basis points over the Federal Home Loan BankFHLB rate (“FHLB Rate Period”), the loan will be subject to a prepayment penalty of 2% during the first and second years of the FHLB Rate Period and 1% of the principal repaid during the third, fourth, and fifth years of the FHLB Rate Period. The BancorpWe may make additional principal payments from internally generated funds of up to $875,000 per year during any fixed rate period without penalty. There is no prepayment penalty during any floating rate period.
The following table sets forth information concerning the interest rates and maturity dates of the advances from the FHLB as of March 31, 2017:
Principal Amount (in thousands) | | | Rate | | | Maturity | |
$ | 60,000 | | | 2.85% to 4.05% | | | | 2017 | |
| 15,000 | | | 2.58% to 3.43% | | | | 2018 | |
| 15,000 | | | | 4.00% | | | | 2019 | |
$ | 90,000 | | | | | | | | | |
Subordinated Debentures
As of September 30, 2016, BancorpMarch 31, 2017, the Company had outstanding $20,619,000$20.6 million in principal amount of Junior Subordinated Debt Securities, Duedue in 2035 (the “2035 Debentures”). The 2035 Debentures were issued pursuant to an Indenture dated as of December 17, 2004 (the “2035 Indenture”) between Bancorpthe Company and Wells Fargo Bank, National Association as Trustee. The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month LIBOR (0.63% as of September 30, 2016) plus 200 basis points, and mature on January 7, 2035. Payments of principal, interest, premium and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of Bancorp,the Company, as defined in the 2035 Indenture. The 2035 Debentures became redeemable, in whole or in part, by Bancorpthe Company on January 7, 2010.
The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by Bancorp.the Company. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures. Bancorp hasWe have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.
The Warrant has a 10-year term and is immediately exercisable at an exercise price of $6.30 per share of Common Stock. The exercise price and number of shares subject to the Warrant are both subject to anti-dilution adjustments. Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant. The warrant expires November 11, 2018.
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of AmericaU.S. and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike industrial companies,As a financial institution, virtually all of theour assets and liabilities of a financial institution are monetary in nature. As a result,nature and interest rates have a more significant impact on a financial institution’sour performance than the effects of general levels of inflation.