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 June 30, 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 | 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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-212b‑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 ☐ |
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act).Yes☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value – 12,137,341 –12,688,626 shares outstanding as of August May 14, 201811, 2017
SEVERN BANCORP, INC. AND SUBSIDIARIES
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49 |
i
Caution Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q,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”“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 20162017 Annual Report on Form 10-K, Item 1A of Part II of the Company’s March 31, 2017 quarterly report on Form 10-Q,10‑K, Item 1A of Part II of this quarterly report on Form 10-Q,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 |
· | costs and potential disruption or interruption of operations due to cyber-security incidents; |
· | the effect of any change in federal government enforcement of federal laws affecting the medical-use cannabis industry; |
· | 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.
ii
PART I–I – FINANCIAL INFORMATION
(dollars in thousands, except per share data)
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| March 31, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
ASSETS |
| (unaudited) |
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|
| |
Cash and due from banks |
| $ | 2,291 |
| $ | 2,382 |
Federal funds sold and interest-bearing deposits in other banks |
|
| 16,016 |
|
| 19,471 |
Cash and cash equivalents |
|
| 18,307 |
|
| 21,853 |
Certificates of deposit held for investment |
|
| 8,780 |
|
| 8,780 |
Securities available for sale, at fair value |
|
| 12,011 |
|
| 10,119 |
Securities held to maturity (fair value of $49,026 and $54,004 at March 31, 2018 and December 31, 2017, respectively) |
|
| 49,911 |
|
| 54,303 |
Loans held for sale, at fair value |
|
| 5,803 |
|
| 4,530 |
Loans receivable |
|
| 669,912 |
|
| 668,151 |
Allowance for loan losses |
|
| (8,169) |
|
| (8,055) |
Loans, net |
|
| 661,743 |
|
| 660,096 |
Real estate acquired through foreclosure |
|
| 237 |
|
| 403 |
Restricted stock investments |
|
| 4,844 |
|
| 4,489 |
Premises and equipment, net |
|
| 23,121 |
|
| 23,139 |
Accrued interest receivable |
|
| 2,454 |
|
| 2,640 |
Deferred income taxes |
|
| 4,565 |
|
| 5,302 |
Bank owned life insurance |
|
| 5,104 |
|
| 5,064 |
Goodwill |
|
| 1,104 |
|
| 1,099 |
Other assets |
|
| 3,101 |
|
| 2,970 |
Total assets |
| $ | 801,085 |
| $ | 804,787 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Liabilities: |
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Deposits: |
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Noninterest bearing |
| $ | 73,670 |
| $ | 72,833 |
Interest-bearing |
|
| 516,246 |
|
| 529,395 |
Total deposits |
|
| 589,916 |
|
| 602,228 |
Short-term borrowings |
|
| 8,000 |
|
| — |
Long-term borrowings |
|
| 88,500 |
|
| 88,500 |
Subordinated debentures |
|
| 20,619 |
|
| 20,619 |
Accrued expenses and other liabilities |
|
| 1,633 |
|
| 2,340 |
Total liabilities |
|
| 708,668 |
|
| 713,687 |
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Stockholders' Equity: |
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Preferred stock, $0.01 par value, 1,000,000 shares authorized: |
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Preferred stock series ''A,'' 437,500 shares issued and outstanding and $3,500 liquidation preference at both March 31, 2018 and December 31, 2017 |
|
| 4 |
|
| 4 |
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,247,626 and 12,233,424 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively |
|
| 122 |
|
| 122 |
Additional paid-in capital |
|
| 65,060 |
|
| 65,137 |
Retained earnings |
|
| 27,320 |
|
| 25,872 |
Accumulated other comprehensive loss |
|
| (89) |
|
| (35) |
Total stockholders' equity |
|
| 92,417 |
|
| 91,100 |
Total liabilities and stockholders' equity |
| $ | 801,085 |
| $ | 804,787 |
June 30, 2017 | December 31, 2016 | |||||||
ASSETS | (unaudited) | |||||||
Cash and due from banks | $ | 19,759 | $ | 39,396 | ||||
Federal funds sold and interest-bearing deposits in other banks | 14,242 | 27,718 | ||||||
Cash and cash equivalents | 34,001 | 67,114 | ||||||
Securities available for sale, at fair value | 7,171 | - | ||||||
Securities held to maturity (fair value of $64,747 at June 30, 2017 and $62,827 at December 31, 2016) | 64,442 | 62,757 | ||||||
Loans held for sale, at fair value at June 30, 2017 | 3,489 | 10,307 | ||||||
Loans receivable | 631,444 | 610,278 | ||||||
Allowance for loan losses | (7,718 | ) | (8,969 | ) | ||||
Loans, net | 623,726 | 601,309 | ||||||
Real estate acquired through foreclosure | 1,015 | 973 | ||||||
Restricted stock investments | 4,276 | 5,103 | ||||||
Premises and equipment, net | 23,644 | 24,030 | ||||||
Accrued interest receivable | 2,285 | 2,249 | ||||||
Deferred income taxes | 8,769 | 10,081 | ||||||
Other assets | 2,626 | 3,562 | ||||||
Total assets | $ | 775,444 | $ | 787,485 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 92,605 | $ | 58,145 | ||||
Interest-bearing | 487,021 | 513,801 | ||||||
Total deposits | 579,626 | 571,946 | ||||||
Long-term borrowings | 83,500 | 103,500 | ||||||
Subordinated debentures | 20,619 | 20,619 | ||||||
Accrued expenses and other liabilities | 1,877 | 3,490 | ||||||
Total liabilities | 685,622 | 699,555 | ||||||
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 June 30, 2017 and December 31, 2016 | 4 | 4 | ||||||
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,125,340 and 12,123,179 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively | 121 | 121 | ||||||
Additional paid-in capital | 64,214 | 63,960 | ||||||
Retained earnings | 25,477 | 23,845 | ||||||
Accumulated other comprehensive income | 6 | - | ||||||
Total stockholders' equity | 89,822 | 87,930 | ||||||
Total liabilities and stockholders' equity | $ | 775,444 | $ | 787,485 |
See accompanying notes to consolidated financial statements
1
Severn Bancorp, Inc. and Subsidiaries
(dollars in thousands, except per share data)
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| Three Months Ended March 31, |
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| 2018 |
| 2017 |
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Interest income: |
| (unaudited) | |||||
Loans |
| $ | 8,371 |
| $ | 7,131 |
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Securities |
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| 320 |
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| 269 |
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Other earning assets |
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| 186 |
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| 157 |
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Total interest income |
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| 8,877 |
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| 7,557 |
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Interest expense: |
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Deposits |
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| 1,133 |
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| 975 |
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Long-term borrowings and subordinated debentures |
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| 760 |
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| 996 |
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Total interest expense |
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| 1,893 |
|
| 1,971 |
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Net interest income |
|
| 6,984 |
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| 5,586 |
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Reversal of provision for loan losses |
|
| — |
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| (275) |
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Net interest income after reversal of provision for loan losses |
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| 6,984 |
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| 5,861 |
|
Noninterest income: |
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Mortgage-banking revenue |
|
| 595 |
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| 535 |
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Real estate commissions |
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| 385 |
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| 380 |
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Real estate management fees |
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| 183 |
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| 194 |
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Credit report and appraisal fees |
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| 76 |
|
| 70 |
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Deposit service charges |
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| 295 |
|
| 34 |
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Title company revenue |
|
| 142 |
|
| — |
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Other noninterest income |
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| 193 |
|
| 145 |
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Total noninterest income |
|
| 1,869 |
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| 1,358 |
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Noninterest expense: |
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Compensation and related expenses |
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| 4,278 |
|
| 3,757 |
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Occupancy |
|
| 344 |
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| 336 |
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Legal fees |
|
| 11 |
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| 28 |
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Write-downs, losses, and costs of real estate acquired through foreclosure, net |
|
| 32 |
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| 33 |
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Federal Deposit Insurance Corporation insurance premiums |
|
| 55 |
|
| (2) |
|
Professional fees |
|
| 109 |
|
| 135 |
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Advertising |
|
| 233 |
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| 206 |
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Data processing |
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| 264 |
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| 196 |
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Credit report and appraisal fees |
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| 70 |
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| 103 |
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Licensing and software |
|
| 121 |
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| 75 |
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Mortgage leads purchased |
|
| — |
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| 95 |
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Other noninterest expense |
|
| 706 |
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| 713 |
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Total noninterest expense |
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| 6,223 |
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| 5,675 |
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Net income before income tax provision |
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| 2,630 |
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| 1,544 |
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Income tax provision |
|
| 745 |
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| 619 |
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Net income |
|
| 1,885 |
|
| 925 |
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Dividends on preferred stock |
|
| (70) |
|
| (70) |
|
Net income available to common stockholders |
| $ | 1,815 |
| $ | 855 |
|
Net income per common share - basic |
| $ | 0.15 |
| $ | 0.07 |
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Net income per common share - diluted |
| $ | 0.15 |
| $ | 0.07 |
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest income: | (unaudited) | |||||||||||||||
Loans | $ | 7,394 | $ | 7,261 | $ | 14,525 | $ | 14,368 | ||||||||
Securities | 328 | 299 | 597 | 610 | ||||||||||||
Other earning assets | 174 | 82 | 331 | 168 | ||||||||||||
Total interest income | 7,896 | 7,642 | 15,453 | 15,146 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 938 | 1,004 | 1,913 | 1,983 | ||||||||||||
Borrowings and subordinated debentures | 951 | 1,097 | 1,947 | 2,387 | ||||||||||||
Total interest expense | 1,889 | 2,101 | 3,860 | 4,370 | ||||||||||||
Net interest income | 6,007 | 5,541 | 11,593 | 10,776 | ||||||||||||
(Reversal of) provision for loan losses | (375 | ) | 100 | (650 | ) | 100 | ||||||||||
Net interest income after (reversal of) provision for loan losses | 6,382 | 5,441 | 12,243 | 10,676 | ||||||||||||
Noninterest income: | ||||||||||||||||
Mortgage-banking revenue | 281 | 930 | 816 | 1,651 | ||||||||||||
Real estate commissions | 268 | 673 | 648 | 791 | ||||||||||||
Real estate management fees | 122 | 185 | 316 | 350 | ||||||||||||
Other noninterest income | 334 | 303 | 583 | 549 | ||||||||||||
Total noninterest income | 1,005 | 2,091 | 2,363 | 3,341 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Compensation and related expenses | 3,674 | 3,814 | 7,431 | 7,450 | ||||||||||||
Occupancy | 325 | 449 | 661 | 901 | ||||||||||||
Legal fees | 35 | 6 | 63 | 136 | ||||||||||||
Write-downs, losses, and costs of real estate acquired through foreclsoure, net | 7 | 98 | 40 | 143 | ||||||||||||
Federal Deposit Insurance Corpation insurance premiums | 66 | 164 | 64 | 294 | ||||||||||||
Professional fees | 118 | 235 | 253 | 407 | ||||||||||||
Advertising | 245 | 208 | 451 | 341 | ||||||||||||
Online charges | 228 | 243 | 424 | 500 | ||||||||||||
Credit report and appraisal fees | 172 | 229 | 275 | 332 | ||||||||||||
Other | 954 | 805 | 1,837 | 1,325 | ||||||||||||
Total noninterest expense | 5,824 | 6,251 | 11,499 | 11,829 | ||||||||||||
Net income before income tax provision | 1,563 | 1,281 | 3,107 | 2,188 | ||||||||||||
Income tax provision (benefit) | 581 | (11,194 | ) | 1,200 | (11,194 | ) | ||||||||||
Net income | 982 | 12,475 | 1,907 | 13,382 | ||||||||||||
Amortization of discount on preferred stock | (67 | ) | (67 | ) | (135 | ) | (135 | ) | ||||||||
Dividends on preferred stock | (70 | ) | (396 | ) | (140 | ) | (922 | ) | ||||||||
Net income available to common stockholders | $ | 845 | $ | 12,012 | $ | 1,632 | $ | 12,325 | ||||||||
Net income per common share - basic | $ | 0.07 | $ | 1.02 | $ | 0.13 | $ | 1.13 | ||||||||
Net income per common share - diluted | $ | 0.07 | $ | 1.02 | $ | 0.13 | $ | 1.12 |
See accompanying notes to consolidated financial statements
2
Severn Bancorp, Inc. and Subsidiaries
(dollars in thousands)
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| Three Months Ended March 31, |
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| 2018 |
| 2017 |
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|
| (unaudited) | |||||
Net income |
| $ | 1,885 |
| $ | 925 |
|
Other comprehensive loss items: |
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Unrealized holding losses on available-for-sale securities arising during the period (net of tax benefit of $19 and $9 in 2018 and 2017) |
|
| (54) |
|
| (15) |
|
Total other comprehensive loss |
|
| (54) |
|
| (15) |
|
Total comprehensive income |
| $ | 1,831 |
| $ | 910 |
|
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(unaudited) | ||||||||||||||||
Net income | $ | 982 | $ | 12,475 | $ | 1,907 | $ | 13,382 | ||||||||
Other comprehensive income item - unrealized holding gains on available-for-sale securities arising during the period (net of income taxes of $14 and $4, respectively, in 2017) | 21 | - | 6 | - | ||||||||||||
Total other comprehensive income | 21 | - | 6 | - | ||||||||||||
Total comprehensive income | $ | 1,003 | $ | 12,475 | $ | 1,913 | $ | 13,382 |
See accompanying notes to consolidated financial statements
3
Severn Bancorp, Inc. and Subsidiaries
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| Three Months Ended March 31, 2018 | ||||||||||||||||||||
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| Number of |
| Number of |
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| Accumulated |
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| ||||||
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| Shares of |
| Shares of |
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| Additional |
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| Other |
| Total | ||||||
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| Preferred |
| Common |
| Preferred |
| Common |
| Paid-In |
| Retained |
| Comprehensive |
| Stockholders' | ||||||
|
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| Loss |
| Equity | ||||||
|
| (unaudited) | ||||||||||||||||||||
Balance at January 1, 2018 |
| 437,500 |
| 12,233,424 |
| $ | 4 |
| $ | 122 |
| $ | 65,137 |
| $ | 25,872 |
| $ | (35) |
| $ | 91,100 |
Net income |
| — |
| — |
|
| — |
|
| — |
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| — |
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| 1,885 |
|
| — |
|
| 1,885 |
Stock-based compensation |
| — |
| — |
|
| — |
|
| — |
|
| 56 |
|
| — |
|
| — |
|
| 56 |
Dividend declared on Series A preferred stock |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (70) |
|
| — |
|
| (70) |
Dividends paid on common stock at $0.03 per share |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (367) |
|
| — |
|
| (367) |
Exercise of stock options |
| — |
| 14,202 |
|
| — |
|
| — |
|
| 56 |
|
| — |
|
| — |
|
| 56 |
Other |
| — |
| — |
|
| — |
|
| — |
|
| (189) |
|
| — |
|
| — |
|
| (189) |
Other comprehensive loss |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (54) |
|
| (54) |
Balance at March 31, 2018 |
| 437,500 |
| 12,247,626 |
| $ | 4 |
| $ | 122 |
| $ | 65,060 |
| $ | 27,320 |
| $ | (89) |
| $ | 92,417 |
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| Three Months Ended March 31, 2017 | ||||||||||||||||||||
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| Number of |
| Number of |
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| Accumulated |
|
| ||||||
|
| Shares of |
| Shares of |
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|
|
| Additional |
|
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| Other |
| Total | ||||||
|
| Preferred |
| Common |
| Preferred |
| Common |
| Paid-In |
| Retained |
| Comprehensive |
| Stockholders' | ||||||
|
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| Loss |
| Equity | ||||||
|
| (unaudited) | ||||||||||||||||||||
Balance at January 1, 2017 |
| 437,500 |
| 12,123,179 |
| $ | 4 |
| $ | 121 |
| $ | 64,471 |
| $ | 23,334 |
| $ | — |
| $ | 87,930 |
Net income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 925 |
|
| — |
|
| 925 |
Stock-based compensation |
| — |
| — |
|
| — |
|
| — |
|
| 53 |
|
| — |
|
| — |
|
| 53 |
Dividend declared on Series A preferred stock |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (70) |
|
| — |
|
| (70) |
Exercise of stock options |
| — |
| 5,025 |
|
| — |
|
| — |
|
| 17 |
|
| — |
|
| — |
|
| 17 |
Other comprehensive loss |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (15) |
|
| (15) |
Balance at March 31, 2017 |
| 437,500 |
| 12,128,204 |
| $ | 4 |
| $ | 121 |
| $ | 64,541 |
| $ | 24,189 |
| $ | (15) |
| $ | 88,840 |
Six Months Ended June 30, 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 Income | Total Stockholders' Equity | |||||||||||||||||||||||||
Balance at January 1, 2017 | 437,500 | 12,123,179 | $ | 4 | $ | 121 | $ | 63,960 | $ | 23,845 | $ | - | $ | 87,930 | ||||||||||||||||||
Net income | - | - | - | - | - | 1,907 | - | 1,907 | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 102 | - | - | 102 | ||||||||||||||||||||||||
Stock issued, net of expense | - | 2,161 | - | - | 17 | - | - | 17 | ||||||||||||||||||||||||
Dividend declared on Series A preferred stock | - | - | - | - | - | (140 | ) | - | (140 | ) | ||||||||||||||||||||||
Amortization of discount on Series B preferred stock | - | - | - | - | 135 | (135 | ) | - | - | |||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 6 | 6 | ||||||||||||||||||||||||
Balance at June 30, 2017 | 437,500 | 12,125,340 | $ | 4 | $ | 121 | $ | 64,214 | $ | 25,477 | $ | 6 | $ | 89,822 |
Six Months Ended June 30, 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 | - | - | - | - | - | 13,382 | - | 13,382 | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 95 | - | - | 95 | ||||||||||||||||||||||||
Stock issued, net of expense | - | 2,015,500 | - | 20 | 10,490 | - | - | 10,510 | ||||||||||||||||||||||||
Stock redemption on Series B preferred stock | (10,000 | ) | - | - | - | (10,000 | ) | - | - | (10,000 | ) | |||||||||||||||||||||
Dividend declared on Series A preferred stock | - | - | - | - | - | (70 | ) | - | (70 | ) | ||||||||||||||||||||||
Dividend declared on Series B preferred stock | - | - | - | - | - | (852 | ) | - | (852 | ) | ||||||||||||||||||||||
Amortization of discount on Series B preferred stock | - | - | - | - | 135 | (135 | ) | - | - | |||||||||||||||||||||||
Balance at June 30, 2016 | 450,893 | 12,104,379 | $ | 4 | $ | 121 | $ | 77,055 | $ | 22,341 | $ | - | $ | 99,521 |
See accompanying notes to consolidated financial statements
4
Severn Bancorp, Inc. and Subsidiaries
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2018 |
| 2017 | ||
Cash flows from operating activities: |
| (unaudited) | ||||
Net income |
| $ | 1,885 |
| $ | 925 |
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 307 |
|
| 298 |
Amortization of deferred loan fees |
|
| (409) |
|
| (264) |
Net amortization of premiums and discounts |
|
| 57 |
|
| (76) |
Reversal of provision for loan losses |
|
| — |
|
| (275) |
Write-downs and losses on real estate acquired through foreclosure, net of gains |
|
| 44 |
|
| 40 |
Gain on sale of mortgage loans |
|
| (595) |
|
| (535) |
Proceeds from sale of mortgage loans held for sale |
|
| 15,195 |
|
| 10,757 |
Originations of loans held for sale |
|
| (15,873) |
|
| (2,670) |
Stock-based compensation |
|
| 56 |
|
| 53 |
Increase in cash surrender value of bank-owned life insurance |
|
| (40) |
|
| — |
Deferred income taxes |
|
| 757 |
|
| 619 |
Decrease (increase) in accrued interest receivable |
|
| 186 |
|
| (13) |
(Increase) decrease in other assets |
|
| (328) |
|
| 447 |
Decrease in accrued expenses and other liabilities |
|
| (707) |
|
| (1,541) |
Net cash provided by operating activities |
|
| 535 |
|
| 7,765 |
Cash flows from investing activities: |
|
|
|
|
|
|
Loan principal (disbursements), net of repayments |
|
| (1,238) |
|
| (76) |
Redemption of restricted stock investments |
|
| (355) |
|
| 402 |
Purchases of premises and equipment, net |
|
| (288) |
|
| (60) |
Activity in securities held to maturity: |
|
|
|
|
|
|
Maturities/calls/repayments |
|
| 4,356 |
|
| 3,542 |
Activity in available-for-sale securities: |
|
|
|
|
|
|
Purchases |
|
| (2,000) |
|
| (7,176) |
Maturities/calls/repayments |
|
| 15 |
|
| 8 |
Proceeds from sales of real estate acquired through foreclosure |
|
| 122 |
|
| 205 |
Net cash provided by (used in) investing activities |
|
| 612 |
|
| (3,155) |
Cash flows from financing activities: |
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
| (12,312) |
|
| 21,816 |
Net increase in short-term borrowings |
|
| 8,000 |
|
| — |
Additional long-term borrowings |
|
| 5,000 |
|
| — |
Repayments of long-term borrowings |
|
| (5,000) |
|
| (10,000) |
Common stock dividends |
|
| (367) |
|
| — |
Preferred stock dividends |
|
| (70) |
|
| — |
Proceeds from common stock issuance |
|
| 56 |
|
| 17 |
Net cash (used in) provided by financing activities |
|
| (4,693) |
|
| 11,833 |
(Decrease) increase in cash and cash equivalents |
|
| (3,546) |
|
| 16,443 |
Cash and cash equivalents at beginning of period |
|
| 21,853 |
|
| 67,014 |
Cash and cash equivalents at end of period |
| $ | 18,307 |
| $ | 83,457 |
Supplemental Information: |
|
|
|
|
|
|
Interest paid on deposits and borrowed funds |
| $ | 1,872 |
| $ | 2,002 |
Income taxes paid |
|
| 12 |
|
| 52 |
Real estate acquired in satisfaction of loans |
|
| — |
|
| 515 |
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | (unaudited) | |||||||
Net income | $ | 1,907 | $ | 13,382 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Depreciation and amortization | 602 | 571 | ||||||
Amortization of deferred loan fees | (521 | ) | (592 | ) | ||||
Net amortization of premiums and discounts | (262 | ) | 214 | |||||
(Reversal of) provision for loan losses | (650 | ) | 100 | |||||
Write-downs and losses on real estate acquired through foreclosure, net of gains | 40 | 87 | ||||||
Gain on sale of mortgage loans | (816 | ) | (1,651 | ) | ||||
Proceeds from sale of mortgage loans held for sale | 24,065 | 62,046 | ||||||
Originations of loans held for sale | (16,849 | ) | (60,572 | ) | ||||
Stock-based compensation | 102 | 95 | ||||||
Deferred income taxes | 1,308 | (11,239 | ) | |||||
Increase in accrued interest receivable | (36 | ) | (44 | ) | ||||
Decrease (increase) in other assets | 936 | (178 | ) | |||||
Decrease in accrued expenses and other liabilities | (1,614 | ) | (358 | ) | ||||
Net cash provided by operating activities | 8,212 | 1,861 | ||||||
Cash flows from investing activities: | ||||||||
Loan principal (disbursements), net of repayments | (21,343 | ) | (20,025 | ) | ||||
Redemption (purchase) of restricted stock investments | 827 | (369 | ) | |||||
Purchases of premises and equipment, net | (216 | ) | (288 | ) | ||||
Activity in securities held to maturity: | ||||||||
Purchases | (6,679 | ) | (4,562 | ) | ||||
Maturities/calls/repayments | 5,096 | 7,901 | ||||||
Activity in available-for-sale securities: | ||||||||
Purchases | (7,184 | ) | - | |||||
Maturities/calls/repayments | 184 | - | ||||||
Proceeds from sales of real estate acquired through foreclosure | 433 | 1,622 | ||||||
Net cash used in investing activities | (28,882 | ) | (15,721 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 7,680 | 15,906 | ||||||
Additional borrowings | - | 10,000 | ||||||
Repayment of borrowings | (20,000 | ) | - | |||||
Series A preferred stock dividends | (140 | ) | (70 | ) | ||||
Series B preferred stock dividends | - | (7,402 | ) | |||||
Stock redemption of Series B preferred stock | - | (10,000 | ) | |||||
Proceeds from common stock issuance | 17 | 10,510 | ||||||
Net cash (used in) provided by financing activities | (12,443 | ) | 18,944 | |||||
(Decrease) increase in cash and cash equivalents | (33,113 | ) | 5,084 | |||||
Cash and cash equivalents at beginning of period | 67,114 | 43,591 | ||||||
Cash and cash equivalents at end of period | $ | 34,001 | $ | 48,675 | ||||
Supplemental Information: | ||||||||
Interest paid on deposits and borrowed funds | $ | 3,902 | $ | 7,099 | ||||
Real estate acquired in satisfaction of loans | 515 | 1,077 | ||||||
Transfers of loans held for sale to portfolio | 419 | - |
See accompanying notes to consolidated financial statements
5
Severn Bancorp, Inc. and Subsidiaries
(Information as of and for the three and six months ended June 30,March 31, 2018 and 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 8-018‑01 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 and six months ended June 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20172018 or any other interim or future period. Events occurring after the date of the financial statements up to August 14, 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 20162017 Annual Report on Form 10-K10‑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., and its wholly-owned subsidiaries, Mid-Maryland Title Company, Inc., 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.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the 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 allowance for loan losses (“Allowance”), determination of impaired loans and the related measurement of impairment, valuation of investment securities, valuation of real estate acquired through foreclosure, valuation of share-basedstock-based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, and the calculation of current and deferred income taxes and the realizability of net deferred tax assets.
Cash Flows
We consider all highly liquid securities with original maturities of three months or less to be cash equivalents. For reporting purposes, assets grouped in the Consolidated Statements of reporting cash flows, cash and cash equivalents include cashFinancial Condition under the captions “Cash and due from banks, federalbanks” and “Federal funds sold and interest-earninginterest-bearing deposits with banks.
Reclassifications
Certain reclassifications have been made to amounts previously reported to conform to current period presentation.
6
Revenue Recognition
Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage-banking and mortgage servicing activities. Our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income, are service charges on deposit accounts, real estate commissions, and real estate management fees.
Service Charges on Deposit Accounts
Service charges on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
Real Estate Commissions
Real Estate Commissions represent commissions received on properties sold. Revenue is recognized when our performance obligation is completed, which is generally the time the property is sold and payment has been received.
Real Estate Management Fees
Real Estate Management Fees represent monthly fees received on property maintenance and management. We perform daily services for these fees and bill for those services on a monthly basis. We have determined that each day of the performance of the services represents a distinct service. The overall service of property management each day is substantially the same and has the same pattern of transfer (daily) over the term of the contract. Further, each distinct day of service represents a performance obligation that would be satisfied over time (over the length of the contract, not at a point in time) and has the same measure of progress (elapsed time). Management has therefore determined that property management services are a single performance obligation composed of a series of distinct services. In performing the daily management activities, the customer is simultaneously receiving and consuming the benefits provided by our performance of the contract. Revenue is earned evenly and daily over the life of the contract. For purposes of expedience, we record the fees when monthly invoices are processed. Each month contains 1/12 of the contract revenue.
Recent Accounting Pronouncements
Pronouncements Adopted
In March 2016,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting2014‑09, , 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 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.
7
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 processesWe adopted the pronouncement on January 1, 2018. Our accounting policies 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 inrevenue recognition principles did not change materially as the periodprinciples of adoption or a modified retrospective approach. WeASC 606 are currently evaluatinglargely consistent with the impact of this standardprevious revenue recognition practices. See additional information on the Company’s financial position, results of operations, and cash flows.
In January 2016, FASB issued ASU No. 2016-01, 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 haveThe standard requires entities 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 effective for the first interim or annual period beginning after December 15, 2017. Early adoption by public entities is permitted as of the beginning of the year of adoption for selected amendments by a cumulative effect adjustment to the balance sheet. The adoption of this standard isdid not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
In 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 statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. The adoption of ASC No. 2016‑15 did not have a material impact on our financial position, results of operations, or cash flows.
Pronouncements Issued
In February 2016, FASB issued ASU 2016-02, 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 lessor 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 ASU No. 2016-022016‑02 may result in an increase in assets to recognize the present value of the 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 cash flows.
In June 2016, FASB issued ASU No. 2016-13, 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 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. While the Company iswe are currently in the process of evaluating the impact of the amended guidance on itsour Consolidated Financial Statements, itwe currently expectsexpect the Allowance to increase upon adoption given that the Allowance will be required to 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 will depend on economic conditions and the composition of the Company’sour loan and lease portfolio at the time of adoption.
Classification of Certain Cash Receipts and Cash Payments, which provides guidance regarding the presentation of certain cash receipts and cash payments in the statement 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 February 2018, FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The
8
Company does not expect the adoption of ASCASU No. 2017-082018-02 to have a material impact on its financial position, results of operations, or cash flows.
Note 2 – Correction of an Immaterial Prior Year Error
In 2016, we redeemed the Series B preferred stock sold in 2008 to the U.S. Department of the Treasury (the “TARP Shares”). At the time of the redemption, the remaining unamortized discount of $511,000 should have been fully amortized into additional paid-in capital and retained earnings and reflected as a reduction to net income available to common stockholders. This treatment was not reflected in the consolidated financial statements included in the March 31, 2017 Quarterly Report on Form 10‑Q. We determined that this amount was not material to the 2017 consolidated financial statements. Our March 31, 2017 consolidated financial statements within these consolidated financial statements have been adjusted to reflect the proper recognition of the remaining discount at the time of the redemption as a $68,000 adjustment to net income available to common stockholders, revising the originally reported amount from $787,000 to $855,000. The adjustment had no impact on total assets at March 31, 2017 or December 31, 2017 and no impact on net income for the three months ended March 31, 2017.
Note 3 - Securities
The amortized cost and estimated fair values of our AFS securities portfolio were as follows as of June 30, 2017:
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
U.S. government agency notes | $ | 7,160 | $ | 13 | $ | 2 | $ | 7,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
|
| (dollars in thousands) | ||||||||||
U.S. Treasury securities |
| $ | 1,985 |
| $ | — |
| $ | 10 |
| $ | 1,975 |
U.S. government agency notes |
|
| 10,149 |
|
| — |
|
| 113 |
|
| 10,036 |
|
| $ | 12,134 |
| $ | — |
| $ | 123 |
| $ | 12,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
|
| (dollars in thousands) | ||||||||||
U.S. government agency notes |
| $ | 10,169 |
| $ | — |
| $ | 50 |
| $ | 10,119 |
|
| $ | 10,169 |
| $ | — |
| $ | 50 |
| $ | 10,119 |
The amortized cost and estimated fair values of our held-to-maturity (“HTM”) securities portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
|
| (dollars in thousands) | ||||||||||
U.S. Treasury securities |
| $ | 4,993 |
| $ | 40 |
| $ | 8 |
| $ | 5,025 |
U.S. government agency notes |
|
| 15,999 |
|
| 40 |
|
| 143 |
|
| 15,896 |
Mortgage-backed securities |
|
| 28,919 |
|
| 11 |
|
| 825 |
|
| 28,105 |
|
| $ | 49,911 |
| $ | 91 |
| $ | 976 |
| $ | 49,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
|
| (dollars in thousands) | ||||||||||
U.S. Treasury securities |
| $ | 4,994 |
| $ | 68 |
| $ | 6 |
| $ | 5,056 |
U.S. government agency notes |
|
| 19,004 |
|
| 81 |
|
| 99 |
|
| 18,986 |
Mortgage-backed securities |
|
| 30,305 |
|
| 27 |
|
| 370 |
|
| 29,962 |
|
| $ | 54,303 |
| $ | 176 |
| $ | 475 |
| $ | 54,004 |
9
June 30, 2017 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
U.S. Treasury securities | $ | 10,996 | $ | 127 | $ | 1 | $ | 11,122 | ||||||||
U.S. government agency notes | 20,015 | 158 | 37 | 20,136 | ||||||||||||
Mortgage-backed securities | 33,431 | 123 | 65 | 33,489 | ||||||||||||
$ | 64,442 | $ | 408 | $ | 103 | $ | 64,747 |
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 | ||||||||||||
Mortgage-backed securities | 29,732 | 52 | 228 | 29,556 | ||||||||||||
$ | 62,757 | $ | 352 | $ | 282 | $ | 62,827 |
Gross unrealized losses and fair value by length of time that the individual AFS securities have been in an unrealized loss position at the dates indicated are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | ||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
|
| (dollars in thousands) | ||||||||||||||||
U.S. Treasury securities |
| $ | 1,975 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 1,975 |
| $ | 10 |
U.S. government agency notes |
|
| 9,021 |
|
| 103 |
|
| 1,015 |
|
| 10 |
|
| 10,036 |
|
| 113 |
|
| $ | 10,996 |
| $ | 113 |
| $ | 1,015 |
| $ | 10 |
| $ | 12,011 |
| $ | 123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
|
| (dollars in thousands) | ||||||||||||||||
U.S. government agency notes |
| $ | 10,119 |
| $ | 50 |
| $ | — |
| $ | — |
| $ | 10,119 |
| $ | 50 |
|
| $ | 10,119 |
| $ | 50 |
| $ | — |
| $ | — |
| $ | 10,119 |
| $ | 50 |
Gross unrealized losses and fair value by length of time that the individual HTM securities have been in an unrealized loss position at the dates indicated are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | ||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
|
| (dollars in thousands) | ||||||||||||||||
U.S. Treasury securities |
| $ | 1,992 |
| $ | 8 |
| $ | — |
| $ | — |
| $ | 1,992 |
| $ | 8 |
U.S. government agency notes |
|
| 8,953 |
|
| 41 |
|
| 4,935 |
|
| 102 |
|
| 13,888 |
|
| 143 |
Mortgage-backed securities |
|
| 21,284 |
|
| 568 |
|
| 6,557 |
|
| 257 |
|
| 27,841 |
|
| 825 |
|
| $ | 32,229 |
| $ | 617 |
| $ | 11,492 |
| $ | 359 |
| $ | 43,721 |
| $ | 976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
|
| (dollars in thousands) | ||||||||||||||||
U.S. Treasury securities |
| $ | 1,993 |
| $ | 6 |
| $ | — |
| $ | — |
| $ | 1,993 |
| $ | 6 |
U.S. government agency notes |
|
| 6,977 |
|
| 23 |
|
| 6,964 |
|
| 76 |
|
| 13,941 |
|
| 99 |
Mortgage-backed securities |
|
| 20,993 |
|
| 217 |
|
| 7,046 |
|
| 153 |
|
| 28,039 |
|
| 370 |
|
| $ | 29,963 |
| $ | 246 |
| $ | 14,010 |
| $ | 229 |
| $ | 43,973 |
| $ | 475 |
June 30, 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. Treasury securities | $ | 2,000 | $ | - | $ | 2,998 | $ | 1 | $ | 4,998 | $ | 1 | ||||||||||||
U.S. government agency notes | 1,000 | - | 8,014 | 37 | 9,014 | 37 | ||||||||||||||||||
Mortgage-backed securities | 9,265 | 15 | 7,938 | 50 | 17,203 | 65 | ||||||||||||||||||
$ | 12,265 | $ | 15 | $ | 18,950 | $ | 88 | $ | 31,215 | $ | 103 |
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 In the AFS securities portfolio is on $2.0 million fair value of AFS securities and has existed for less than twelve months.
All of the securities that are currently in a gross unrealized loss position are so due to declines in fair values resulting from changes in interest rates or increased liquidity spreads since the time they were purchased. We have the intent and ability to hold these debt securities to maturity (including the AFS securities) and do not intend to sell, nor do we believe it will be more likely than not that we will be required to sell, any impaired securities prior to a recovery of amortized cost. We expect these securities will be repaid in full, with no losses realized. As such, management considers any impairment to be temporary.
10
Contractual maturities of debt securities at June 30, 2017March 31, 2018 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AFS Securities |
| HTM Securities | ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair | ||||
|
| Cost |
| Value |
| Cost |
| Value | ||||
|
| (dollars in thousands) | ||||||||||
Due in one year or less |
| $ | 1,025 |
| $ | 1,015 |
| $ | 9,006 |
| $ | 8,980 |
Due after one through five years |
|
| 11,109 |
|
| 10,996 |
|
| 10,978 |
|
| 10,909 |
Due after five years through ten years |
|
| — |
|
| — |
|
| 1,008 |
|
| 1,032 |
Mortgage-backed securities |
|
| — |
|
| — |
|
| 28,919 |
|
| 28,105 |
|
| $ | 12,134 |
| $ | 12,011 |
| $ | 49,911 |
| $ | 49,026 |
AFS Securities | HTM Securities | |||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Due in one year or less | $ | - | $ | - | $ | 13,013 | $ | 13,021 | ||||||||
Due after one through five years | 7,160 | 7,171 | 16,034 | 16,149 | ||||||||||||
Due after five years through ten years | - | - | 1,964 | 2,088 | ||||||||||||
Mortgage-backed securities | - | - | 33,431 | 33,489 | ||||||||||||
$ | 7,160 | $ | 7,171 | $ | 64,442 | $ | 64,747 |
We did not sell any securities during the three months ended March 31, 2018 or 2017.
There were no securities pledged as collateral as of June 30, 2017March 31, 2018 or December 31, 2016.
Note 34 - Loans Receivable and Allowance for Loan Losses
Loans receivable are summarized as follows:
|
|
|
|
|
|
|
|
| March 31, 2018 |
| December 31, 2017 | ||
|
| (dollars in thousands) | ||||
Residential mortgage |
| $ | 288,061 |
| $ | 287,656 |
Commercial |
|
| 39,015 |
|
| 37,356 |
Commercial real estate |
|
| 230,336 |
|
| 236,302 |
Construction, land acquisition, and development |
|
| 100,635 |
|
| 93,060 |
Home equity/2nds |
|
| 13,853 |
|
| 15,703 |
Consumer |
|
| 1,050 |
|
| 1,084 |
Total loans receivable |
|
| 672,950 |
|
| 671,161 |
Unearned loan fees |
|
| (3,038) |
|
| (3,010) |
Loans receivable |
| $ | 669,912 |
| $ | 668,151 |
June 30, 2017 | December 31, 2016 | |||||||
(dollars in thousands) | ||||||||
Residential mortgage | $ | 288,747 | $ | 260,603 | ||||
Commercial | 25,811 | 46,468 | ||||||
Commercial real estate | 216,388 | 195,710 | ||||||
Construction, land acquisition, and development | 85,898 | 90,102 | ||||||
Home equity | 16,336 | 19,129 | ||||||
Consumer | 1,104 | 1,210 | ||||||
Total loans receivable | 634,284 | 613,222 | ||||||
Unearned loan fees | (2,840 | ) | (2,944 | ) | ||||
Net loans receivable | $ | 631,444 | $ | 610,278 |
Certain loans in the amount of $201.4$190.8 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”) as collateral against advances.
At March 31, 2018, the Bank was servicing $32.7 million in loans for the Federal National Mortgage Association and $15.6 million in loans for the Federal Home Loan Mortgage Corporation.
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. While management uses all available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions.conditions and our actual loss experience. 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. Management believes the Allowance is adequate as of June 30, 2017March 31, 2018 and December 31, 2016.2017.
11
For 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 (“ADC”), Home equity/2nds, 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.
Inherent Credit Risks
The inherent credit risks within the loan portfolio vary depending upon the loan class as follows:
Residential mortgage- secured by one to four family dwelling units. The loans have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, at a loan-to-value ratio (“LTV”) of 80% or less.
Commercial- underwritten in accordance with our policies and include evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial 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. Additionally, lines of credit are 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.
Commercial real estate- subject to the underwriting standards and processes similar to commercial, and industrial 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.estate and secondarily as cash flow dependent. 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.
Construction, land acquisition, and development (“ADC”) 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 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 ability of the borrower or guarantor to repay principal and interest. Additionally, land is 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.
The sources of repayment of these loans is 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 Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure 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 period of time.
12
Home equity/2nds - subject to the underwriting standards and processes similar to residential mortgages and are secured by one to four family dwelling units. Home equity/2nds loans have greater risk than residential mortgages as a result of the Bank generally being in a second lien position.
Consumer- consist of loans to individuals through the Bank’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 lower value of the underlying collateral, if any.
The following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2018 | |||||||||||||||||||
|
| Residential |
|
|
| Commercial |
|
|
| Home Equity/ |
|
|
|
| |||||||
|
| Mortgage |
| Commercial |
| Real Estate |
| ADC |
| 2nds |
| Consumer |
| Total | |||||||
|
| (dollars in thousands) | |||||||||||||||||||
Beginning Balance |
| $ | 3,099 |
| $ | 527 |
| $ | 2,805 |
| $ | 1,236 |
| $ | 386 |
| $ | 2 |
| $ | 8,055 |
Charge-offs |
|
| (323) |
|
| — |
|
| — |
|
| (13) |
|
| — |
|
| — |
|
| (336) |
Recoveries |
|
| 221 |
|
| — |
|
| 211 |
|
| — |
|
| 18 |
|
| — |
|
| 450 |
Net (charge-offs) recoveries |
|
| (102) |
|
| — |
|
| 211 |
|
| (13) |
|
| 18 |
|
| — |
|
| 114 |
Provision for (reversal of) loan losses |
|
| 304 |
|
| (13) |
|
| (21) |
|
| (163) |
|
| (107) |
|
| — |
|
| — |
Ending Balance |
| $ | 3,301 |
| $ | 514 |
| $ | 2,995 |
| $ | 1,060 |
| $ | 297 |
| $ | 2 |
| $ | 8,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - individually evaluated for impairment |
| $ | 1,285 |
| $ | — |
| $ | 318 |
| $ | 47 |
| $ | 2 |
| $ | 1 |
| $ | 1,653 |
Ending balance - collectively evaluated for impairment |
|
| 2,016 |
|
| 514 |
|
| 2,677 |
|
| 1,013 |
|
| 295 |
|
| 1 |
|
| 6,516 |
|
| $ | 3,301 |
| $ | 514 |
| $ | 2,995 |
| $ | 1,060 |
| $ | 297 |
| $ | 2 |
| $ | 8,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending loan balance -individually evaluated for impairment |
| $ | 17,439 |
| $ | 296 |
| $ | 2,820 |
| $ | 981 |
| $ | 1,260 |
| $ | 82 |
| $ | 22,878 |
Ending loan balance -collectively evaluated for impairment |
|
| 267,584 |
|
| 38,719 |
|
| 227,516 |
|
| 99,654 |
|
| 12,593 |
|
| 968 |
|
| 647,034 |
|
| $ | 285,023 |
| $ | 39,015 |
| $ | 230,336 |
| $ | 100,635 |
| $ | 13,853 |
| $ | 1,050 |
| $ | 669,912 |
13
Three Months Ended June 30, 2017 | ||||||||||||||||||||||||||||
Residential Mortgage | Commercial | Commercial Real Estate | Construction, Acquisition, and Development | Home Equity/ 2nds | Consumer | Total | ||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Beginning Balance | $ | 3,789 | $ | 473 | $ | 2,515 | $ | 1,097 | $ | 453 | $ | 5 | $ | 8,332 | ||||||||||||||
Charge-offs | (208 | ) | (27 | ) | - | - | (98 | ) | - | (333 | ) | |||||||||||||||||
Recoveries | 32 | - | 60 | - | 2 | - | 94 | |||||||||||||||||||||
Net (charge-offs) recoveries | (176 | ) | (27 | ) | 60 | - | (96 | ) | - | (239 | ) | |||||||||||||||||
(Reversal of) provision for loan losses | (210 | ) | (57 | ) | (4 | ) | (113 | ) | 10 | (1 | ) | (375 | ) | |||||||||||||||
Ending Balance | $ | 3,403 | $ | 389 | $ | 2,571 | $ | 984 | $ | 367 | $ | 4 | $ | 7,718 | ||||||||||||||
Six Months Ended June 30, 2017 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Beginning Balance | $ | 3,833 | $ | 478 | $ | 2,535 | $ | 1,390 | $ | 728 | $ | 5 | $ | 8,969 | ||||||||||||||
Charge-offs | (707 | ) | - | - | - | (98 | ) | - | (805 | ) | ||||||||||||||||||
Recoveries | 139 | - | 60 | - | 5 | - | 204 | |||||||||||||||||||||
Net (charge-offs) recoveries | (568 | ) | - | 60 | - | (93 | ) | - | (601 | ) | ||||||||||||||||||
Provision for (reversal of) loan losses | 138 | (89 | ) | (24 | ) | (406 | ) | (268 | ) | (1 | ) | (650 | ) | |||||||||||||||
Ending Balance | $ | 3,403 | $ | 389 | $ | 2,571 | $ | 984 | $ | 367 | $ | 4 | $ | 7,718 | ||||||||||||||
Ending balance -individually evaluated for impairment | $ | 1,524 | $ | - | $ | 189 | $ | 51 | $ | - | $ | 3 | $ | 1,767 | ||||||||||||||
Ending balance - collectively evaluated for impairment | 1,879 | 389 | 2,382 | 933 | 367 | 1 | 5,951 | |||||||||||||||||||||
$ | 3,403 | $ | 389 | $ | 2,571 | $ | 984 | $ | 367 | $ | 4 | $ | 7,718 | |||||||||||||||
Ending loan balance - individually evaluated for impairment | $ | 15,919 | $ | - | $ | 6,078 | $ | 807 | $ | - | $ | 90 | $ | 22,894 | ||||||||||||||
Ending loan balance - collectively evaluated for impairment | 269,988 | 25,811 | 210,310 | 85,091 | 16,336 | 1,014 | 608,550 | |||||||||||||||||||||
$ | 285,907 | $ | 25,811 | $ | 216,388 | $ | 85,898 | $ | 16,336 | $ | 1,104 | $ | 631,444 |
December 31, 2016 | ||||||||||||||||||||||||||||
Residential Mortgage | Commercial | Commercial Real Estate | Construction, Acquisition, and Development | Home Equity/ 2nds | Consumer | Total | ||||||||||||||||||||||
Ending Allowance balance - individually evaluated for impairment | $ | 1,703 | $ | 15 | $ | 196 | $ | 53 | $ | 402 | $ | 4 | $ | 2,373 | ||||||||||||||
Ending Allowance balance - collectively evaluated for impairment | 2,130 | 463 | 2,339 | 1,337 | 326 | 1 | 6,596 | |||||||||||||||||||||
$ | 3,833 | $ | 478 | $ | 2,535 | $ | 1,390 | $ | 728 | $ | 5 | $ | 8,969 | |||||||||||||||
Ending loan balance - individually evaluated for impairment | $ | 20,403 | $ | 148 | $ | 5,656 | $ | 858 | $ | 3,137 | $ | 96 | $ | 30,298 | ||||||||||||||
Ending loan balance - collectively evaluated for impairment | 237,256 | 46,320 | 190,054 | 89,244 | 15,992 | 1,114 | 579,980 | |||||||||||||||||||||
$ | 257,659 | $ | 46,468 | $ | 195,710 | $ | 90,102 | $ | 19,129 | $ | 1,210 | $ | 610,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||||||||||||||
|
| Residential |
|
|
| Commercial |
|
|
|
| Home Equity/ |
|
|
|
| ||||||
|
| Mortgage |
| Commercial |
| Real Estate |
| ADC |
| 2nds |
| Consumer |
| Total | |||||||
|
| (dollars in thousands) | |||||||||||||||||||
Ending balance - individually evaluated for impairment |
| $ | 1,181 |
| $ | — |
| $ | 182 |
| $ | 48 |
| $ | — |
| $ | 2 |
| $ | 1,413 |
Ending balance - collectively evaluated for impairment |
|
| 1,918 |
|
| 527 |
|
| 2,623 |
|
| 1,188 |
|
| 386 |
|
| — |
|
| 6,642 |
|
| $ | 3,099 |
| $ | 527 |
| $ | 2,805 |
| $ | 1,236 |
| $ | 386 |
| $ | 2 |
| $ | 8,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending loan balance - individually evaluated for impairment |
| $ | 18,219 |
| $ | — |
| $ | 2,917 |
| $ | 991 |
| $ | — |
| $ | 84 |
| $ | 22,211 |
Ending loan balance - collectively evaluated for impairment |
|
| 266,427 |
|
| 37,356 |
|
| 233,385 |
|
| 92,069 |
|
| 15,703 |
|
| 1,000 |
|
| 645,940 |
|
| $ | 284,646 |
| $ | 37,356 |
| $ | 236,302 |
| $ | 93,060 |
| $ | 15,703 |
| $ | 1,084 |
| $ | 668,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2017 | ||||||||||||||||||||
|
| Residential |
|
|
| Commercial |
|
|
| Home Equity/ |
|
|
|
|
|
|
| |||||
|
| Mortgage |
| Commercial |
| Real Estate |
| ADC |
| 2nds |
| Consumer |
| Total |
| |||||||
|
| (dollars in thousands) | ||||||||||||||||||||
Beginning Balance |
| $ | 3,833 |
| $ | 478 |
| $ | 2,535 |
| $ | 1,390 |
| $ | 728 |
| $ | 5 |
| $ | 8,969 |
|
Charge-offs |
|
| (499) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (499) |
|
Recoveries |
|
| 107 |
|
| 27 |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| 137 |
|
Net (charge-offs) recoveries |
|
| (392) |
|
| 27 |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| (362) |
|
Provision for (reversal of) loan losses |
|
| 348 |
|
| (32) |
|
| (20) |
|
| (293) |
|
| (278) |
|
| — |
|
| (275) |
|
Ending Balance |
| $ | 3,789 |
| $ | 473 |
| $ | 2,515 |
| $ | 1,097 |
| $ | 453 |
| $ | 5 |
| $ | 8,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - individually evaluated for impairment |
| $ | 1,757 |
| $ | — |
| $ | 191 |
| $ | 52 |
| $ | 81 |
| $ | 3 |
| $ | 2,084 |
|
Ending balance - collectively evaluated for impairment |
|
| 2,032 |
|
| 473 |
|
| 2,324 |
|
| 1,045 |
|
| 372 |
|
| 2 |
|
| 6,248 |
|
|
| $ | 3,789 |
| $ | 473 |
| $ | 2,515 |
| $ | 1,097 |
| $ | 453 |
| $ | 5 |
| $ | 8,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending loan balance - individually evaluated for impairment |
| $ | 19,008 |
| $ | — |
| $ | 3,130 |
| $ | 818 |
| $ | 2,438 |
| $ | 92 |
| $ | 25,486 |
|
Ending loan balance - collectively evaluated for impairment |
|
| 231,891 |
|
| 48,554 |
|
| 187,831 |
|
| 98,897 |
|
| 15,584 |
|
| 1,498 |
|
| 584,255 |
|
|
| $ | 250,899 |
| $ | 48,554 |
| $ | 190,961 |
| $ | 99,715 |
| $ | 18,022 |
| $ | 1,590 |
| $ | 609,741 |
|
14
The following tables present the credit quality breakdown of our loan portfolio by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | ||||||||||
|
|
|
| Special |
|
|
|
| ||||
|
| Pass |
| Mention |
| Substandard |
| Total | ||||
|
| (dollars in thousands) | ||||||||||
Residential mortgage |
| $ | 278,721 |
| $ | 1,367 |
| $ | 4,935 |
| $ | 285,023 |
Commercial |
|
| 38,981 |
|
| 34 |
|
| — |
|
| 39,015 |
Commercial real estate |
|
| 224,274 |
|
| 4,185 |
|
| 1,877 |
|
| 230,336 |
ADC |
|
| 99,455 |
|
| — |
|
| 1,180 |
|
| 100,635 |
Home equity/2nds |
|
| 12,542 |
|
| 457 |
|
| 854 |
|
| 13,853 |
Consumer |
|
| 1,050 |
|
| — |
|
| — |
|
| 1,050 |
|
| $ | 655,023 |
| $ | 6,043 |
| $ | 8,846 |
| $ | 669,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||
|
|
|
| Special |
|
|
|
| ||||
|
| Pass |
| Mention |
| Substandard |
| Total | ||||
|
| (dollars in thousands) | ||||||||||
Residential mortgage |
| $ | 277,867 |
| $ | 1,563 |
| $ | 5,216 |
| $ | 284,646 |
Commercial |
|
| 37,312 |
|
| 44 |
|
| — |
|
| 37,356 |
Commercial real estate |
|
| 228,746 |
|
| 4,615 |
|
| 2,941 |
|
| 236,302 |
ADC |
|
| 91,868 |
|
| — |
|
| 1,192 |
|
| 93,060 |
Home equity/2nds |
|
| 14,384 |
|
| 465 |
|
| 854 |
|
| 15,703 |
Consumer |
|
| 1,084 |
|
| — |
|
| — |
|
| 1,084 |
|
| $ | 651,261 |
| $ | 6,687 |
| $ | 10,203 |
| $ | 668,151 |
Three Months Ended June 30, 2016 | ||||||||||||||||||||||||||||
Residential Mortgage | Commercial | Commercial Real Estate | Construction, Acquisition, and Development | Home Equity/ 2nds | Consumer | Total | ||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Beginning Balance | $ | 4,223 | $ | 390 | $ | 2,348 | $ | 1,019 | $ | 650 | $ | 3 | $ | 8,633 | ||||||||||||||
Charge-offs | (11 | ) | - | (131 | ) | - | - | - | (142 | ) | ||||||||||||||||||
Recoveries | 103 | 9 | - | 100 | 1 | - | 213 | |||||||||||||||||||||
Net recoveries (charge-offs) | 92 | 9 | (131 | ) | 100 | 1 | - | 71 | ||||||||||||||||||||
(Reversal of) provision for loan losses | (423 | ) | 353 | 360 | (136 | ) | (58 | ) | 4 | 100 | ||||||||||||||||||
Ending Balance | $ | 3,892 | $ | 752 | $ | 2,577 | $ | 983 | $ | 593 | $ | 7 | $ | 8,804 | ||||||||||||||
Six Months Ended June 30, 2016 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Beginning Balance | $ | 4,188 | $ | 291 | $ | 2,792 | $ | 956 | $ | 528 | $ | 3 | $ | 8,758 | ||||||||||||||
Charge-offs | (151 | ) | (17 | ) | (178 | ) | - | (28 | ) | - | (374 | ) | ||||||||||||||||
Recoveries | 185 | 33 | - | 100 | 2 | - | 320 | |||||||||||||||||||||
Net recoveries (charge-offs) | 34 | 16 | (178 | ) | 100 | (26 | ) | - | (54 | ) | ||||||||||||||||||
(Reversal of) provision for loan losses | (330 | ) | 445 | (37 | ) | (73 | ) | 91 | 4 | 100 | ||||||||||||||||||
Ending Balance | $ | 3,892 | $ | 752 | $ | 2,577 | $ | 983 | $ | 593 | $ | 7 | $ | 8,804 | ||||||||||||||
Ending balance - individually evaluated for impairment | $ | 1,663 | $ | 15 | $ | 203 | $ | 60 | $ | 2 | $ | 5 | $ | 1,948 | ||||||||||||||
Ending balance - collectively evaluated for impairment | 2,229 | 737 | 2,374 | 923 | 591 | 2 | 6,856 | |||||||||||||||||||||
$ | 3,892 | $ | 752 | $ | 2,577 | $ | 983 | $ | 593 | $ | 7 | $ | 8,804 | |||||||||||||||
Ending loan balance - individually evaluated for impairment | $ | 23,078 | $ | 279 | $ | 5,949 | $ | 1,676 | $ | 1,928 | $ | 105 | $ | 33,015 | ||||||||||||||
Ending loan balance - collectively evaluated for impairment | 251,250 | 42,168 | 196,535 | 72,922 | 20,469 | 1,541 | 584,885 | |||||||||||||||||||||
$ | 274,328 | $ | 42,447 | $ | 202,484 | $ | 74,598 | $ | 22,397 | $ | 1,646 | $ | 617,900 |
June 30, 2017 | ||||||||||||||||
Pass | Special Mention | Substandard | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Residential mortgage | $ | 278,100 | $ | 2,970 | $ | 4,837 | $ | 285,907 | ||||||||
Commercial | 25,571 | 103 | 137 | 25,811 | ||||||||||||
Commercial real estate | 209,246 | 4,994 | 2,148 | 216,388 | ||||||||||||
ADC | 84,886 | - | 1,012 | 85,898 | ||||||||||||
Home equity/2nds | 14,988 | 471 | 877 | 16,336 | ||||||||||||
Consumer | 1,104 | - | - | 1,104 | ||||||||||||
$ | 613,895 | $ | 8,538 | $ | 9,011 | $ | 631,444 |
December 31, 2016 | ||||||||||||||||
Pass | Special Mention | Substandard | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Residential mortgage | $ | 248,819 | $ | 4,316 | $ | 4,524 | $ | 257,659 | ||||||||
Commercial | 46,011 | 204 | 253 | 46,468 | ||||||||||||
Commercial real estate | 184,820 | 7,420 | 3,470 | 195,710 | ||||||||||||
ADC | 89,324 | - | 778 | 90,102 | ||||||||||||
Home equity/2nds | 16,056 | 472 | 2,601 | 19,129 | ||||||||||||
Consumer | 1,210 | - | - | 1,210 | ||||||||||||
$ | 586,240 | $ | 12,412 | $ | 11,626 | $ | 610,278 |
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. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | |||||||||||||||||||
|
| 30-59 |
| 60-89 |
| 90+ |
|
|
|
|
|
|
|
| |||||||
|
| Days |
| Days |
| Days |
| Total |
|
|
|
|
| Non- | |||||||
|
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current |
| Total |
| Accrual | |||||||
|
| (dollars in thousands) | |||||||||||||||||||
Residential mortgage |
| $ | 99 |
| $ | 95 |
| $ | 2,652 |
| $ | 2,846 |
| $ | 282,177 |
| $ | 285,023 |
| $ | 3,619 |
Commercial |
|
| — |
|
| 16 |
|
| 225 |
|
| 241 |
|
| 38,774 |
|
| 39,015 |
|
| 296 |
Commercial real estate |
|
| — |
|
| — |
|
| 216 |
|
| 216 |
|
| 230,120 |
|
| 230,336 |
|
| 216 |
ADC |
|
| — |
|
| — |
|
| 239 |
|
| 239 |
|
| 100,396 |
|
| 100,635 |
|
| 310 |
Home equity/2nds |
|
| 76 |
|
| — |
|
| 1,136 |
|
| 1,212 |
|
| 12,641 |
|
| 13,853 |
|
| 1,260 |
Consumer |
|
| 36 |
|
| — |
|
| — |
|
| 36 |
|
| 1,014 |
|
| 1,050 |
|
| — |
|
| $ | 211 |
| $ | 111 |
| $ | 4,468 |
| $ | 4,790 |
| $ | 665,122 |
| $ | 669,912 |
| $ | 5,701 |
15
June 30, 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 | $ | - | $ | 842 | $ | 2,427 | $ | 3,269 | $ | 282,638 | $ | 285,907 | $ | 3,388 | ||||||||||||||
Commercial | - | - | - | - | 25,811 | 25,811 | 90 | |||||||||||||||||||||
Commercial real estate | - | 164 | - | 164 | 216,224 | 216,388 | 164 | |||||||||||||||||||||
ADC | 84 | - | 6 | 90 | 85,808 | 85,898 | 90 | |||||||||||||||||||||
Home equity/2nds | 15 | - | 463 | 478 | 15,858 | 16,336 | 1,310 | |||||||||||||||||||||
Consumer | - | - | - | - | 1,104 | 1,104 | - | |||||||||||||||||||||
$ | 99 | $ | 1,006 | $ | 2,896 | $ | 4,001 | $ | 627,443 | $ | 631,444 | $ | 5,042 |
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 | $ | 253,149 | $ | 257,659 | $ | 3,580 | ||||||||||||||
Commercial | - | - | - | - | 46,468 | 46,468 | 151 | |||||||||||||||||||||
Commercial real estate | - | 171 | 515 | 686 | 195,024 | 195,710 | 2,938 | |||||||||||||||||||||
ADC | 106 | - | 6 | 112 | 89,990 | 90,102 | 269 | |||||||||||||||||||||
Home equity/2nds | 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 | $ | 602,758 | $ | 610,278 | $ | 9,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||||||||||||||
|
| 30-59 |
| 60-89 |
| 90+ |
|
|
|
|
|
|
|
| |||||||
|
| Days |
| Days |
| Days |
| Total |
|
|
|
|
| Non- | |||||||
|
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current |
| Total |
| Accrual | |||||||
|
| (dollars in thousands) | |||||||||||||||||||
Residential mortgage |
| $ | 1,006 |
| $ | — |
| $ | — |
| $ | 1,006 |
| $ | 283,640 |
| $ | 284,646 |
| $ | 3,891 |
Commercial |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,356 |
|
| 37,356 |
|
| 78 |
Commercial real estate |
|
| 948 |
|
| — |
|
| — |
|
| 948 |
|
| 235,354 |
|
| 236,302 |
|
| 159 |
ADC |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 93,060 |
|
| 93,060 |
|
| 314 |
Home equity/2nds |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 15,703 |
|
| 15,703 |
|
| 1,268 |
Consumer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,084 |
|
| 1,084 |
|
| — |
|
| $ | 1,954 |
| $ | — |
| $ | — |
| $ | 1,954 |
| $ | 666,197 |
| $ | 668,151 |
| $ | 5,710 |
We dodid not have any loans greater than 90 days past due and still accruing loans as of June 30, 2017March 31, 2018 or December 31, 2016.
The interest which would have been recorded on the above nonaccrual loans if those loans had been performing in accordance with their contractual terms was approximately $311,000$462,000 and $226,000$172,000 for the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, respectively. The actual interest income recorded on those loans was approximately $61,000$34,000 and $87,000$71,000 for the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, respectively.
The following tables summarize impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 |
| December 31, 2017 | ||||||||||||||
|
| Unpaid |
|
|
|
|
| Unpaid |
|
|
|
| ||||||
|
| Principal |
| Recorded |
| Related |
| Principal |
| Recorded |
| Related | ||||||
|
| Balance |
| Investment |
| Allowance |
| Balance |
| Investment |
| Allowance | ||||||
With no related Allowance: |
| (dollars in thousands) | ||||||||||||||||
Residential mortgage |
| $ | 11,610 |
| $ | 9,958 |
| $ | — |
| $ | 12,929 |
| $ | 11,572 |
| $ | — |
Commercial |
|
| 349 |
|
| 296 |
|
| — |
|
| — |
|
| — |
|
| — |
Commercial real estate |
|
| 1,262 |
|
| 1,148 |
|
| — |
|
| 1,562 |
|
| 1,507 |
|
| — |
ADC |
|
| 633 |
|
| 633 |
|
| — |
|
| 636 |
|
| 636 |
|
| — |
Home equity/2nds |
|
| 1,684 |
|
| 1,247 |
|
| — |
|
| — |
|
| — |
|
| — |
Consumer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
With a related Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
| 7,596 |
|
| 7,481 |
|
| 1,285 |
|
| 6,761 |
|
| 6,647 |
|
| 1,181 |
Commercial |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Commercial real estate |
|
| 1,566 |
|
| 1,672 |
|
| 318 |
|
| 1,410 |
|
| 1,410 |
|
| 182 |
ADC |
|
| 387 |
|
| 348 |
|
| 47 |
|
| 392 |
|
| 355 |
|
| 48 |
Home equity/2nds |
|
| 14 |
|
| 13 |
|
| 2 |
|
| — |
|
| — |
|
| — |
Consumer |
|
| 82 |
|
| 82 |
|
| 1 |
|
| 84 |
|
| 84 |
|
| 2 |
Totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
| 19,206 |
|
| 17,439 |
|
| 1,285 |
|
| 19,690 |
|
| 18,219 |
|
| 1,181 |
Commercial |
|
| 349 |
|
| 296 |
|
| — |
|
| — |
|
| — |
|
| — |
Commercial real estate |
|
| 2,828 |
|
| 2,820 |
|
| 318 |
|
| 2,972 |
|
| 2,917 |
|
| 182 |
ADC |
|
| 1,020 |
|
| 981 |
|
| 47 |
|
| 1,028 |
|
| 991 |
|
| 48 |
Home equity/2nds |
|
| 1,698 |
|
| 1,260 |
|
| 2 |
|
| — |
|
| — |
|
| — |
Consumer |
|
| 82 |
|
| 82 |
|
| 1 |
|
| 84 |
|
| 84 |
|
| 2 |
16
Six Months Ended June 30, | ||||||||||||||||||||||||||||
June 30, 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 | $ | 9,546 | $ | 7,954 | $ | - | $ | 9,160 | $ | 215 | $ | 13,669 | $ | 285 | ||||||||||||||
Commercial | - | - | - | - | - | 88 | 1 | |||||||||||||||||||||
Commercial real estate | 4,618 | 4,174 | - | 3,027 | 47 | 4,090 | 77 | |||||||||||||||||||||
ADC | 432 | 432 | - | 437 | 12 | 1,227 | 27 | |||||||||||||||||||||
Home equity/2nds | - | - | - | 905 | 25 | 2,030 | 41 | |||||||||||||||||||||
Consumer | 617 | - | - | - | - | 34 | - | |||||||||||||||||||||
With a related Allowance: | ||||||||||||||||||||||||||||
Residential mortgage | 7,699 | 7,965 | 1,524 | 9,284 | 170 | 11,381 | 250 | |||||||||||||||||||||
Commercial | - | - | - | 49 | - | 200 | 5 | |||||||||||||||||||||
Commercial real estate | 1,904 | 1,904 | 189 | 1,928 | 50 | 2,071 | 52 | |||||||||||||||||||||
ADC | 407 | 375 | 51 | 391 | 10 | 556 | 14 | |||||||||||||||||||||
Home equity/2nds | - | - | - | 953 | - | 16 | 1 | |||||||||||||||||||||
Consumer | 90 | 90 | 3 | 93 | 1 | 58 | 1 | |||||||||||||||||||||
Totals: | ||||||||||||||||||||||||||||
Residential mortgage | 17,245 | 15,919 | 1,524 | 18,444 | 385 | 25,050 | 535 | |||||||||||||||||||||
Commercial | - | - | - | 49 | - | 288 | 6 | |||||||||||||||||||||
Commercial real estate | 6,522 | 6,078 | 189 | 4,955 | 97 | 6,161 | 129 | |||||||||||||||||||||
ADC | 839 | 807 | 51 | 828 | 22 | 1,783 | 41 | |||||||||||||||||||||
Home equity/2nds | - | - | - | 1,858 | 25 | 2,046 | 42 | |||||||||||||||||||||
Consumer | 707 | 90 | 3 | 93 | 1 | 92 | 1 |
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 | 441 | 441 | - | |||||||||
Home equity/2nds | 2,139 | 1,529 | - | |||||||||
Consumer | - | - | - | |||||||||
With a related Allowance: | ||||||||||||
Residential mortgage | 11,176 | 11,065 | 1,703 | |||||||||
Commercial | 148 | 148 | 15 | |||||||||
Commercial real estate | 1,958 | 1,958 | 196 | |||||||||
ADC | 417 | 417 | 53 | |||||||||
Home equity/2nds | 1,608 | 1,608 | 402 | |||||||||
Consumer | 96 | 96 | 4 | |||||||||
Totals: | ||||||||||||
Residential mortgage | 21,030 | 20,403 | 1,703 | |||||||||
Commercial | 148 | 148 | 15 | |||||||||
Commercial real estate | 5,858 | 5,656 | 196 | |||||||||
ADC | 858 | 858 | 53 | |||||||||
Home equity/2nds | 3,747 | 3,137 | 402 | |||||||||
Consumer | 96 | 96 | 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||||||||
|
| 2018 |
| 2017 | ||||||||
|
| Average |
| Interest |
| Average |
| Interest | ||||
|
| Recorded |
| Income |
| Recorded |
| Income | ||||
|
| Investment |
| Recognized |
| Investment |
| Recognized | ||||
With no related Allowance: |
| (dollars in thousands) | ||||||||||
Residential mortgage |
| $ | 10,765 |
| $ | 110 |
| $ | 10,592 |
| $ | 117 |
Commercial |
|
| 148 |
|
| 13 |
|
| 87 |
|
| 8 |
Commercial real estate |
|
| 1,328 |
|
| 10 |
|
| 2,494 |
|
| 39 |
ADC |
|
| 634 |
|
| 8 |
|
| 438 |
|
| 6 |
Home equity/2nds |
|
| 623 |
|
| 4 |
|
| 1,615 |
|
| 15 |
Consumer |
|
| — |
|
| — |
|
| — |
|
| — |
With a related Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
| 7,064 |
|
| 58 |
|
| 8,839 |
|
| 97 |
Commercial |
|
| — |
|
| — |
|
| — |
|
| — |
Commercial real estate |
|
| 1,541 |
|
| 19 |
|
| 1,925 |
|
| 24 |
ADC |
|
| 351 |
|
| 4 |
|
| 383 |
|
| 5 |
Home equity/2nds |
|
| 7 |
|
| — |
|
| 1,338 |
|
| 48 |
Consumer |
|
| 83 |
|
| 1 |
|
| 93 |
|
| 1 |
Totals: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
| 17,829 |
|
| 168 |
|
| 19,431 |
|
| 214 |
Commercial |
|
| 148 |
|
| 13 |
|
| 87 |
|
| 8 |
Commercial real estate |
|
| 2,869 |
|
| 29 |
|
| 4,419 |
|
| 63 |
ADC |
|
| 985 |
|
| 12 |
|
| 821 |
|
| 11 |
Home equity/2nds |
|
| 630 |
|
| 4 |
|
| 2,953 |
|
| 63 |
Consumer |
|
| 83 |
|
| 1 |
|
| 93 |
|
| 1 |
Residential 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 $3.5$4.0 million as of June 30, 2017. Residential mortgage loans in real estate acquired through foreclosure amounted to $99,000 and $393,000 at June 30, 2017 and DecemberMarch 31, 2016, respectively.2018.
Troubled Debt Restructure Loans (“TDR” or “TDRs”)
Our portfolio of TDRs was accounted for under the following methods:
|
|
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|
|
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|
|
|
|
|
|
|
|
|
| March 31, 2018 | |||||||||||||
|
|
|
|
|
|
|
|
|
| Total |
| Total | |||
|
| Number of |
| Accrual |
| Number of |
| Nonaccrual |
| Number of |
| Balance of | |||
|
| Modifications |
| Status |
| Modifications |
| Status |
| Modifications |
| Modifications | |||
|
| (dollars in thousands) | |||||||||||||
Residential mortgage |
| 40 |
| $ | 10,692 |
| 4 |
| $ | 811 |
| 44 |
| $ | 11,503 |
Commercial real estate |
| 3 |
|
| 1,848 |
| — |
|
| — |
| 3 |
|
| 1,848 |
ADC |
| 1 |
|
| 136 |
| — |
|
| — |
| 1 |
|
| 136 |
Consumer |
| 3 |
|
| 82 |
| — |
|
| — |
| 3 |
|
| 82 |
|
| 47 |
| $ | 12,758 |
| 4 |
| $ | 811 |
| 51 |
| $ | 13,569 |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||||||||
|
|
|
|
|
|
|
|
|
| Total |
| Total | |||
|
| Number of |
| Accrual |
| Number of |
| Nonaccrual |
| Number of |
| Balance of | |||
|
| Modifications |
| Status |
| Modifications |
| Status |
| Modifications |
| Modifications | |||
|
| (dollars in thousands) | |||||||||||||
Residential mortgage |
| 42 |
| $ | 11,631 |
| 2 |
| $ | 736 |
| 44 |
| $ | 12,367 |
Commercial real estate |
| 3 |
|
| 1,862 |
| 1 |
|
| 78 |
| 4 |
|
| 1,940 |
ADC |
| 1 |
|
| 137 |
| 1 |
|
| 6 |
| 2 |
|
| 143 |
Consumer |
| 4 |
|
| 84 |
| — |
|
| — |
| 4 |
|
| 84 |
|
| 50 |
| $ | 13,714 |
| 4 |
| $ | 820 |
| 54 |
| $ | 14,534 |
There were no TDRs
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 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Residential Mortgage | - | $ | - | $ | - | 3 | $ | 624 | $ | 624 | ||||||||||||||
- | $ | - | $ | - | 3 | $ | 624 | $ | 624 |
We did not modify any loans during the three months ended June 30, 2017March 31, 2018 or 2016.
June 30, 2017 | ||||||||||||||||||||||||
Number of Modifications | Accrual Status | Number of Modifications | Nonaccrual Status | Total Number of Modifications | Total Balance of Modifications | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Residential mortgage | 43 | $ | 13,490 | 4 | $ | 2,287 | 47 | $ | 15,777 | |||||||||||||||
Commercial real estate | 3 | 1,886 | 1 | 90 | 4 | 1,976 | ||||||||||||||||||
ADC | 2 | 166 | 1 | 6 | 3 | 172 | ||||||||||||||||||
Home equity/2nds | 1 | 232 | - | - | 1 | 232 | ||||||||||||||||||
Consumer | 4 | 90 | - | - | 4 | 90 | ||||||||||||||||||
53 | $ | 15,864 | 6 | $ | 2,383 | 59 | $ | 18,247 |
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 | ||||||||||||||||||
ADC | 2 | 170 | 1 | 6 | 3 | 176 | ||||||||||||||||||
Consumer | 5 | 96 | - | - | 5 | 96 | ||||||||||||||||||
58 | $ | 18,066 | 7 | $ | 2,392 | 65 | $ | 20,458 |
June 30, 2017 | December 31, 2016 | |||||||
(dollars in thousands) | ||||||||
Standby letters of credit | $ | 4,314 | $ | 4,022 | ||||
Home equity lines of credit | 12,369 | 7,736 | ||||||
Unadvanced construction commitments | 70,131 | 15,728 | ||||||
Mortgage loan commitments | 1,060 | 574 | ||||||
Lines of credit | 12,996 | 34,125 | ||||||
Loans sold and serviced with limited repurchase provisions | 24,446 | 70,773 |
Note 45 - 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 2015,2013, federal bank regulatory agencies issued final results to revise their risk-based capital requirements and the method for calculating 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 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.
As of the date of the last regulatory exam, the Bank was considered “well capitalized” and as of June 30, 2017,March 31, 2018, the Bank continued to meet the requirements to be considered “well capitalized” based on applicable U.S. regulatory capital ratio requirements.
18
The Bank’s regulatory capital amounts and ratios were as follows:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Minimum |
| Minimum |
| To be Well |
| ||||||||||
|
|
|
|
|
| Requirements |
| Requirements |
| Capitalized Under |
| ||||||||||
|
|
|
|
|
| for Capital Adequacy |
| with Capital |
| Prompt Corrective |
| ||||||||||
|
| Actual |
|
|
| Purposes |
| Conservation Buffer |
| Action Provision |
| ||||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||||
|
| (dollars in thousands) |
| ||||||||||||||||||
March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital (to risk-weighted assets) |
| $ | 107,618 |
| 16.8 | % | $ | 28,750 |
| 4.5 | % | $ | 40,729 |
| 6.4 | % | $ | 41,527 |
| 6.5 | % |
Total capital (to risk-weighted assets) |
|
| 115,614 |
| 18.1 | % |
| 51,111 |
| 8.0 | % |
| 63,090 |
| 9.9 | % |
| 63,888 |
| 10.0 | % |
Tier 1 capital (to risk-weighted assets) |
|
| 107,618 |
| 16.8 | % |
| 38,333 |
| 6.0 | % |
| 50,312 |
| 7.9 | % |
| 51,111 |
| 8.0 | % |
Tier 1 capital (to average quarterly assets) |
|
| 107,618 |
| 13.5 | % |
| 31,835 |
| 4.0 | % |
| 46,757 |
| 5.9 | % |
| 39,793 |
| 5.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital (to risk-weighted assets) |
| $ | 105,721 |
| 16.5 | % | $ | 28,904 |
| 4.5 | % | $ | 36,933 |
| 5.8 | % | $ | 41,750 |
| 6.5 | % |
Total capital (to risk-weighted assets) |
|
| 113,758 |
| 17.7 | % |
| 51,385 |
| 8.0 | % |
| 59,414 |
| 9.3 | % |
| 64,231 |
| 10.0 | % |
Tier 1 capital (to risk-weighted assets) |
|
| 105,721 |
| 16.5 | % |
| 38,539 |
| 6.0 | % |
| 46,567 |
| 7.3 | % |
| 51,385 |
| 8.0 | % |
Tier 1 capital (to average quarterly assets) |
|
| 105,721 |
| 13.5 | % |
| 31,440 |
| 4.0 | % |
| 41,264 |
| 5.3 | % |
| 39,300 |
| 5.0 | % |
Actual Amount | Ratio | 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 | |||||||||||||||||||||||||||
June 30, 2017 | (dollars in thousands) | |||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets) | $ | 101,643 | 16.9 | % | $ | 27,117 | 4.5 | % | $ | 34,650 | 5.8 | % | $ | 39,170 | 6.5 | % | ||||||||||||||||
Total capital (to risk-weighted assets) | 109,192 | 18.1 | % | 48,209 | 8.0 | % | 55,742 | 9.3 | % | 60,261 | 10.0 | % | ||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 101,643 | 16.9 | % | 36,157 | 6.0 | % | 43,689 | 7.3 | % | 48,209 | 8.0 | % | ||||||||||||||||||||
Tier 1 capital (to average quarterly assets) | 101,643 | 13.3 | % | 30,654 | 4.0 | % | 40,233 | 5.3 | % | 38,318 | 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 56 - 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 three2018 and six month periods ended June 30, 2017 and June 30, 2016, because they were anti-dilutive, were 24,00022,000 and 111,50020,000 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:
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
| (dollars in thousands, except for per share data) |
| ||||
Weighted-average shares outstanding - basic |
|
| 12,241,554 |
|
| 12,125,553 |
|
Dilution |
|
| 93,083 |
|
| 85,027 |
|
Weighted-average share outstanding - diluted |
|
| 12,334,637 |
|
| 12,210,580 |
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
| $ | 1,815 |
| $ | 855 |
|
Net income per share - basic |
| $ | 0.15 |
| $ | 0.07 |
|
Net income per share - diluted |
| $ | 0.15 |
| $ | 0.07 |
|
19
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in thousands, except for per share data) | ||||||||||||||||
Weighted-average shares outstanding - basic | 12,125,324 | 11,772,195 | 12,124,566 | 10,930,537 | ||||||||||||
Dilution | 83,926 | 55,447 | 85,345 | 47,788 | ||||||||||||
Weighted-average share outstanding - diluted | 12,209,250 | 11,827,642 | 12,209,911 | 10,978,325 | ||||||||||||
Net income available to common stockholders | $ | 845 | $ | 12,012 | $ | 1,632 | $ | 12,325 | ||||||||
Net income per share - basic | $ | 0.07 | $ | 1.02 | $ | 0.13 | $ | 1.13 | ||||||||
Net income per share - diluted | $ | 0.07 | $ | 1.02 | $ | 0.13 | $ | 1.12 |
Note 67 - 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 CodificationASC Topic 718, Compensation – Stock Compensation, whichrequires 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 June 30,March 31, 2018 and 2017 totaled $56,000 and 2016 totaled $49,000 and $47,000,$53,000, respectively. Stock-based compensation expense included in the consolidated statements of operations for the six months ended June 30, 2017 and 2016 totaled $102,000 and $95,000, respectively.
Information regarding our stock-based compensation plan is as follows as of and for the sixthree months ended June 30:March 31:
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|
|
|
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|
|
|
|
| 2018 |
| 2017 | ||||||||||||||||
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Weighted- |
|
| ||||
|
|
|
| Weighted- |
| Average |
| Aggregate |
|
|
| Weighted- |
| Average |
| Aggregate | ||||
|
|
|
| Average |
| Remaining |
| Intrinsic |
|
|
| Average |
| Remaining |
| Intrinsic | ||||
|
| Number |
| Exercise |
| Contractual |
| Value |
| Number |
| Exercise |
| Contractual |
| Value | ||||
|
| of Shares |
| Price |
| Term (in years) |
| (in thousands) |
| of Shares |
| Price |
| Term (in years) |
| (in thousands) | ||||
Outstanding at beginning of period |
| 434,275 |
| $ | 5.87 |
|
|
|
|
|
| 339,500 |
| $ | 5.31 |
|
|
|
|
|
Granted |
| 6,500 |
|
| 7.41 |
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
Exercised |
| (14,202) |
|
| 3.95 |
|
|
|
|
|
| (5,025) |
|
| 3.37 |
|
|
|
|
|
Forfeited |
| (250) |
|
| 7.10 |
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
Outstanding at end of period |
| 426,323 |
| $ | 5.96 |
| 6.2 |
| $ | 549 |
| 334,475 |
| $ | 5.34 |
| 7.7 |
| $ | 627 |
Exercisable at end of period |
| 200,028 |
| $ | 5.03 |
| 6.1 |
| $ | 453 |
| 151,249 |
| $ | 4.61 |
| 6.8 |
| $ | 397 |
The fair values of options at the time of the grants were derived using the Black-Scholes option-pricing model. The followings weighted average assumptions were used to value options granted for the three months ended March 31, 2018:
|
|
|
|
|
|
| 2018 |
| |
Expected life |
|
| 5.5 years |
|
Risk-free interest rate |
|
| 2.67 | % |
Expected volatility |
|
| 32.20 | % |
Expected dividend yield |
|
| — |
|
Weighted average per share fair value of options granted |
| $ | 2.57 |
|
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 | ||||||||||||||||||||||||||
Exercised | (5,025 | ) | 3.37 | - | - | |||||||||||||||||||||||||||
Forfeited | (15,000 | ) | 4.67 | - | - | |||||||||||||||||||||||||||
Outstanding at end of period | 319,475 | 5.37 | 7.5 | $ | 604 | 339,800 | 4.83 | 7.8 | $ | 403 | ||||||||||||||||||||||
Exercisable at end of period | 158,129 | 4.70 | 6.7 | $ | 407 | 137,210 | 4.34 | 6.7 | $ | 229 |
As of June 30, 2017,March 31,2018, there was $523,000$662,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over the next 5460 months.
20
Note 78 - Other Comprehensive Income
Off-Balance Sheet Instruments
The following table presents the changesBank is a party to financial instruments with off-balance sheet risk in the componentsnormal course of accumulatedbusiness to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk in excess of the 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.
Our exposure to credit loss from nonperformance by the other comprehensiveparty to the above mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with off-balance sheet credit risk.
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
|
| (dollars in thousands) | ||||
Standby letters of credit |
| $ | 3,434 |
| $ | 3,480 |
Home equity lines of credit |
|
| 14,221 |
|
| 13,321 |
Unadvanced construction commitments |
|
| 50,021 |
|
| 74,720 |
Mortgage loan commitments |
|
| 3,148 |
|
| 595 |
Lines of credit |
|
| 16,796 |
|
| 16,612 |
Loans sold and serviced with limited repurchase provisions |
|
| 24,592 |
|
| 21,409 |
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 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 March 31, 2018 and December 31, 2017 for guarantees under standby letters of credit issued was $44,000 and $42,000, 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. We evaluate each customer’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 March 31, 2018 included three loans totaling $3.1 million.Such commitments at December 31, 2017 consisted of two loans totaling $595,000.
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’s credit worthiness on a case-by-case basis.
The Bank has entered into several agreements to sell mortgage loans to third parties. 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 sale 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. We established a reserve for
21
potential repurchases for these loans, which amounted to $67,000 at March 31, 2018 and $63,000 at December 31, 2017. We did not repurchase any loans during the three months ended March 31, 2018 or 2017.
Other Contingencies
The Company provides banking services to customers who do business in the medical-use cannabis industry. While the growing, processing, and sales of medical-use cannabis is legal in the state of Maryland, the business currently violates Federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. The strict enforcement of Federal laws regarding medical-use cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s consolidated financial statements if the Federal government takes actions against the Company. As of March 31, 2018, the Company has not accrued an amount for the potential impact of any such actions.
Following is a summary of the level of business activities with our medical-use cannabis customers:
• Deposit and loan balances at March 31, 2018 were approximately $16.5 million, 2.8% of total deposits, and $12.7 million, 1.9% of total loans, respectively. Deposit and loan balances at December 31, 2017 were approximately $19.2 million, 3.2% of total deposits, and $11.9 million, 1.8% of total loans, respectively.
•Interest and noninterest income for the three and six months ended June 30, 2017:
Three Months | Six Months | |||||||
(dollars in thousands) | ||||||||
Balance at beginning of period | $ | (15 | ) | $ | - | |||
Other comprehensive income before reclassification | 21 | 6 | ||||||
Amounts reclassified from accumulated other comprehensive income (loss) | - | - | ||||||
Net other comprehensive income during period | 21 | 6 | ||||||
Balance at end of period | $ | 6 | $ | 6 |
•Volume of deposits in the accounts of medical-use cannabis customers for the three months ended March 31, 2018 was approximately $17.9 million. No deposits were made in medical-use cannabis accounts during the three months ended March 31, 2017.
Note 89 - Fair Value 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.
22
Assets and Liabilities Measured on a Recurring Basis
The following tables present fair value measurements for assets that are measured at fair value on a recurring basis as of and for the three months ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Significant |
|
|
|
| ||||
|
|
|
|
|
|
| Other |
| Significant |
| Total Changes | ||||
|
|
|
|
| Quoted |
| Observable |
| Unobservable |
| In Fair Values | ||||
|
| Carrying |
| Prices |
| Inputs |
| Inputs |
| Included In | |||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Period Income | |||||
Assets: |
| (dollars in thousands) | |||||||||||||
AFS Securities - U.S. Treasury and government agency notes |
| $ | 12,011 |
| $ | 1,975 |
| $ | 10,036 |
| $ | — |
| $ | — |
Loans held for sale ("LHFS") |
|
| 5,803 |
|
| — |
|
| 5,803 |
|
| — |
|
| 38 |
Mortgage servicing rights ("MSRs") |
|
| 499 |
|
| — |
|
| — |
|
| 499 |
|
| 22 |
Interest-rate lock commitments ("IRLCs") |
|
| 184 |
|
| — |
|
| — |
|
| 184 |
|
| 162 |
Mandatory forward contracts |
|
| 41 |
|
| — |
|
| 41 |
|
| — |
|
| 28 |
Best efforts forward contracts |
|
| 15 |
|
| — |
|
| 15 |
|
| — |
|
| 12 |
The following tables present fair value measurements for assets and liabilities that are measured at fair value on a recurring basis as of and for the six months ended June 30, 2017:
Carrying Value | Quoted Prices (Level 1) | Significant Other 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 | $ | 7,171 | $ | - | $ | 7,171 | $ | - | $ | - | ||||||||||
Loans held for sale ("LHFS") | 3,489 | - | 3,489 | - | 104 | |||||||||||||||
Mortgage servicing rights ("MSRs") | 511 | - | - | 511 | (46 | ) | ||||||||||||||
Interest-rate lock commitments ("IRLCs") | 23 | - | 23 | - | (139 | ) | ||||||||||||||
Mandatory forward contracts | 8 | - | 8 | - | (145 | ) | ||||||||||||||
Best efforts forward contracts | 4 | - | 4 | - | 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Significant |
|
|
|
| |||||
|
|
|
|
|
| Other |
| Significant |
| Total Changes | |||||
|
|
|
| Quoted |
| Observable |
| Unobservable |
| In Fair Values | |||||
|
| Carrying |
| Prices |
| Inputs |
| Inputs |
| Included In | |||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Period Income | |||||
Assets: |
| (dollars in thousands) | |||||||||||||
AFS Securities - U.S. Treasury and government agency notes |
| $ | 10,119 |
| $ | — |
| $ | 10,119 |
| $ | — |
| $ | — |
LHFS |
|
| 4,530 |
|
| — |
|
| 4,530 |
|
| — |
|
| 131 |
MSRs |
|
| 477 |
|
| — |
|
| — |
|
| 477 |
|
| (80) |
IRLCs |
|
| 22 |
|
| — |
|
| — |
|
| 22 |
|
| (140) |
Mandatory forward contracts |
|
| 13 |
|
| — |
|
| 13 |
|
| — |
|
| (140) |
Best efforts forward contracts |
|
| 3 |
|
| — |
|
| 3 |
|
| — |
|
| 3 |
Carrying Value | Quoted Prices (Level 1) | Significant Other 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 | $ | 66 | ||||||||||
IRLCs | 162 | - | 162 | - | (21 | ) | ||||||||||||||
Mandatory forward contracts | 153 | - | 153 | - | 42 |
The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value |
| Valuation |
| Unobservable |
| Range |
| |
|
| Estimate |
| Technique |
| Input |
| (Weighted-Average) |
| |
|
| (dollars in thousands) |
|
|
|
|
| |||
March 31, 2018: |
|
|
|
|
|
|
|
|
|
|
MSRs |
| $ | 499 |
| Market Approach |
| Weighted average prepayment speed |
| 3.97 | % |
IRLCs |
|
| 184 |
| Market Approach |
| Average pull through rate |
| 90.00 | % |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017: |
|
|
|
|
|
|
|
|
|
|
MSRs |
| $ | 477 |
| Market Approach |
| Weighted average prepayment speed |
| 3.94 | % |
IRLCs |
|
| 22 |
| Market Approach |
| Average pull through rate |
| 90.00 | % |
Fair Value Estimate | Valuation Technique | Unobservable Input | Range (Weighted-Average) | ||||||||||
(dollars in thousands) | |||||||||||||
June 30, 2017: | |||||||||||||
MSRs | $ | 511 | Market Approach | Weighted average prepayment speed | 3.96% | ||||||||
December 31, 2016: | |||||||||||||
MSRs | $ | 557 | Market Approach | Weighted average prepayment speed | 3.95% |
AFS Securities
The estimated 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 applying 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 value debt securities without relying
23
exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements 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 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.
LHFS
LHFS wereare carried at fair value, which is determined based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements or third party pricing models. At December 31, 2016, LHFS were carried at the lower-of-cost or market value (“LCM”) utilizing the same method.
MSRs
The fair value of MSRs 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.
IRLCs
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 value is adjusted for the estimated probability of the loan closing with the borrower.
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.
24
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 LCMlower-of-cost-or-market value (“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, 2018 |
| ||||||||||||||
|
|
|
|
|
|
|
| Significant |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Other |
| Significant |
|
|
|
|
| ||
|
|
|
|
| Quoted |
| Observable |
| Unobservable |
|
|
|
|
| |||
|
| Carrying |
| Prices |
| Inputs |
| Inputs |
| Range of |
| Weighted |
| ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Discount (1) |
| Average |
| ||||
|
| (dollars in thousands) |
|
|
|
|
| ||||||||||
Impaired loans |
| $ | 8,697 |
| $ | — |
| $ | — |
| $ | 8,697 |
| 0% - 19% |
| 8.2 | % |
Real estate acquired through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreclosure |
|
| 23 |
|
| — |
|
| — |
|
| 23 |
| 0% - 36% |
| 36.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| ||||||||||||||
|
|
|
|
|
|
|
| Significant |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Other |
| Significant |
|
|
|
|
| ||
|
|
|
|
| Quoted |
| Observable |
| Unobservable |
|
|
|
|
| |||
|
| Carrying |
| Prices |
| Inputs |
| Inputs |
| Range of |
| Weighted |
| ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Discount (1) |
| Average |
| ||||
|
| (dollars in thousands) |
|
|
|
|
| ||||||||||
Impaired loans |
| $ | 2,793 |
| $ | — |
| $ | — |
| $ | 2,793 |
| 0% - 33% |
| 14.5 | % |
Real estate acquired through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreclosure |
|
| 178 |
|
| — |
|
| — |
|
| 178 |
| 0% - 22% |
| 11.5 | % |
June 30, 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 | $ | 1,597 | $ | - | $ | - | $ | 1,597 | 0% - 36 | % | 26.4 | % | ||||||||||||
Real estate acquired through foreclosure | 789 | - | - | 789 | 0% - 26 | % | 6.0 | % |
(1) | Discount based on current market conditions and estimated selling costs |
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, andand/or 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.
25
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, and impaired loans and real estate acquired through foreclosure are included in the discussions above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 | |||||||||||||
|
| Carrying |
| Fair Value | |||||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Assets: |
| (dollars in thousands) | |||||||||||||
Cash and cash equivalents |
| $ | 18,307 |
| $ | 18,307 |
| $ | — |
| $ | — |
| $ | 18,307 |
Certificates of deposit held for investment |
|
| 8,780 |
|
| 8,780 |
|
| — |
|
| — |
|
| 8,780 |
AFS securities |
|
| 12,011 |
|
| 1,975 |
|
| 10,036 |
|
| — |
|
| 12,011 |
HTM securities |
|
| 49,911 |
|
| 5,025 |
|
| 44,001 |
|
| — |
|
| 49,026 |
LHFS |
|
| 5,803 |
|
| — |
|
| 5,803 |
|
| — |
|
| 5,803 |
Loans receivable, net |
|
| 661,743 |
|
| — |
|
| — |
|
| 668,451 |
|
| 668,451 |
Restricted stock investments |
|
| 4,844 |
|
| — |
|
| 4,844 |
|
| — |
|
| 4,844 |
Accrued interest receivable |
|
| 2,454 |
|
| — |
|
| 2,454 |
|
| — |
|
| 2,454 |
MSRs |
|
| 499 |
|
| — |
|
| — |
|
| 499 |
|
| 499 |
IRLCs |
|
| 184 |
|
| — |
|
| — |
|
| 184 |
|
| 184 |
Mandatory forward contracts |
|
| 41 |
|
| — |
|
| 41 |
|
| — |
|
| 41 |
Best effort forward contracts |
|
| 15 |
|
| — |
|
| 15 |
|
| — |
|
| 15 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 589,916 |
|
| — |
|
| 578,257 |
|
| — |
|
| 578,257 |
Accrued interest payable |
|
| 416 |
|
| — |
|
| 416 |
|
| — |
|
| 416 |
Borrowings |
|
| 96,500 |
|
| — |
|
| 89,198 |
|
| — |
|
| 89,198 |
Subordinated debentures |
|
| 20,619 |
|
| — |
|
| — |
|
| 20,619 |
|
| 20,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||||||||
|
| Carrying |
| Fair Value | |||||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Assets: |
| (dollars in thousands) | |||||||||||||
Cash and cash equivalents |
| $ | 21,853 |
| $ | 21,853 |
| $ | — |
| $ | — |
| $ | 21,853 |
Certificates of deposit held for investment |
|
| 8,780 |
|
| 8,780 |
|
| — |
|
| — |
|
| 8,780 |
AFS securities |
|
| 10,119 |
|
| — |
|
| 10,119 |
|
| — |
|
| 10,119 |
HTM securities |
|
| 54,303 |
|
| 5,056 |
|
| 48,948 |
|
| — |
|
| 54,004 |
LHFS |
|
| 4,530 |
|
| — |
|
| 4,530 |
|
| — |
|
| 4,530 |
Loans receivable, net |
|
| 660,096 |
|
| — |
|
| — |
|
| 672,349 |
|
| 672,349 |
Restricted stock investments |
|
| 4,489 |
|
| — |
|
| 4,489 |
|
| — |
|
| 4,489 |
Accrued interest receivable |
|
| 2,640 |
|
| — |
|
| 2,640 |
|
| — |
|
| 2,640 |
MSRs |
|
| 477 |
|
| — |
|
| — |
|
| 477 |
|
| 477 |
IRLCs |
|
| 22 |
|
| — |
|
| — |
|
| 22 |
|
| 22 |
Mandatory forward contracts |
|
| 13 |
|
| — |
|
| 13 |
|
| — |
|
| 13 |
Best effort forward contracts |
|
| 3 |
|
| — |
|
| 3 |
|
| — |
|
| 3 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 602,228 |
|
| — |
|
| 594,659 |
|
| — |
|
| 594,659 |
Accrued interest payable |
|
| 395 |
|
| — |
|
| 395 |
|
| — |
|
| 395 |
Borrowings |
|
| 88,500 |
|
| — |
|
| 81,303 |
|
| — |
|
| 81,303 |
Subordinated debentures |
|
| 20,169 |
|
| — |
|
| — |
|
| 20,619 |
|
| 20,619 |
June 30, 2017 | ||||||||||||||||||||
Carrying | Fair Value | |||||||||||||||||||
Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets: | (dollars in thousands) | |||||||||||||||||||
Cash and cash equivalents | $ | 34,001 | $ | 34,001 | $ | - | $ | - | $ | 34,001 | ||||||||||
AFS securities | 7,171 | - | 7,171 | - | 7,171 | |||||||||||||||
HTM securities | 64,442 | 11,122 | 53,625 | - | 64,747 | |||||||||||||||
LHFS | 3,489 | - | 3,489 | - | 3,489 | |||||||||||||||
Loans receivable | 623,726 | - | - | 640,282 | 640,282 | |||||||||||||||
Restricted stock investments | 4,276 | - | 4,276 | - | 4,276 | |||||||||||||||
Accrued interest receivable | 2,285 | - | 2,285 | - | 2,285 | |||||||||||||||
MSRs | 511 | - | - | 511 | 511 | |||||||||||||||
IRLCs | 23 | - | 23 | - | 23 | |||||||||||||||
Mandatory forward contracts | 8 | - | 8 | - | 8 | |||||||||||||||
Best effort forward contracts | 4 | - | 4 | - | 4 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits | 579,626 | - | 574,109 | - | 574,109 | |||||||||||||||
Borrowings | 83,500 | - | 83,436 | - | 83,436 | |||||||||||||||
Subordinated debentures | 20,619 | - | - | 20,619 | 20,619 | |||||||||||||||
Accrued interest payable | 496 | - | 496 | - | 496 |
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 | |||||||||||||||
Accrued interest receivable | 2,249 | - | 2,249 | - | 2,249 | |||||||||||||||
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 | |||||||||||||||
Accrued interest payable | 538 | - | 538 | - | 538 |
At June 30, 2017March 31,2018 and December 31, 2016,2017, the Bank had loan funding commitments of $96.6$84.2 million and $58.2$105.2 million, respectively, and standby letters of credit outstanding of $4.3$3.4 million and $4.0$3.5 million, respectively. The fair value of these commitments is nominal.
26
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.
Certificates Held for Investment
The carrying amount reported in the consolidated statements of financial condition for Certificates of Deposit Held for Investment 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 Treasury Securities are considered Level 1 and all of our other securities are considered Level 2.
Loans Receivable
As of March 31, 2018, the fair valuesvalue of loans receivable werewas estimated using an exit price analysis, in accordance with current FASB guidance, contracted through a third party service provider. As of December 31, 2017, the fair value of loans receivable was estimated using discounted cash flow analyses, using market interest rates currently beingthen offered for loans with similar terms to borrowers of similar credit quality. These rates were used for each aggregated category of loans.
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.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
Deposits
The fair values disclosed for demand deposit accounts, savings accounts, and money market accounts 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.
Borrowings
Long-term and short-term borrowings were segmented into categories with similar financial characteristics. Carrying values were discounted using a cash flow approach based on market rates.
Subordinated debentures
Current economic conditions have rendered the market for this liability inactive. As such, the 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, the Company has disclosed thatwe consider the carrying value approximatesof these instruments to approximate the fair value.
27
Limitations
Fair value 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 a significant portion of our financial instruments, fair value estimates are based on judgments 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 fair 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 degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.
There were no transfers between any of Levels 1, 2, and 3 for the sixthree months ended June 30,March 31, 2018 or 2017 or 2016 or for the year ended December 31, 2016.2017.
28
Note 9 – 10 - Subsequent Event
On July 7, 2017, we enteredApril 2, 2018, the Company exercised its option to convert all 437,500 outstanding shares of Preferred Stock into a definitive agreement to purchase Mid Maryland Title Company (the “Title Company”), a real estate settlement company that handles commercial and residential real estate settlements in Maryland. The purchase is subject to the completion of due diligence and is anticipated to close in September 2017. The acquisitionshares of the Title Company is not anticipatedCompany’s common stock. The conversion ratio was one share of Preferred Stock for one share of common stock. As of April 2, 2018, the Preferred Stock was no longer deemed outstanding and all rights with respect to have a material effect on the Company’s financial condition or results of operations.
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-K10‑K for the year ended December 31, 2016.
The Company
The Company is a savings and loan holding company chartered as a corporation in the state of Maryland in 1990. It conducts business primarily through twothree subsidiaries, Severn Savings Bank, FSB (the “Bank”), Mid-Maryland Title Company, Inc. (the “Title Company”), 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, and acquires real estate for syndication and investment purposes. The Title Company is a real estate settlement company that handles commercial and residential real estate settlements in Maryland. The Bank’s principal subsidiary Louis Hyatt, Inc. (“Hyatt Commercial”), conducts business as Hyatt Commercial, a commercial real estate brokerage and property management company. 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. As of June 30, 2017,March 31, 2018, we had 131143 full-time equivalent employees.
Overview
The Company provides a wide range of personal 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 slightlyan improved level of profitability for the three and six months ended June 30, 2017,March 31, 2018, primarily due to the payoffimproved profitability of Federal Home Loan Bankour mortgage-banking operations as well as an improvement in our net interest margin. We recognized increased deposit service charges as a result of Atlanta (“FHLB”) advancesfees from medical-use cannabis deposit accounts and reversals of the provision for loan losses. Management believes that, while conditions continuerealized lower income taxes due to improve and real estate valuesa lower federal tax rate in the Company’s market area continue to stabilize, certain detrimental factors still exist for some customers. The interest rate spread between our cost of funds and what we earn on loans and investments has grown somewhat from 2016 levels due primarily to the aforementioned payoff of high costing FHLB advances. During the second quarter of 2016, we reversed the valuation allowance maintained on the deferred tax assets, which resulted in an $11.2 million deferred tax benefit. With the reversal of the valuation allowance, we are now recording a provision for income taxes.
The Company expects to experience similar market conditions during the remainder of 2017, as the national and local economies continue to improve and as the employment environment in our market improves.2018, provided interest rates do not increase rapidly. If interest rates increase rapidly, demand for loans 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 borrowings. Interest rates are outside of our control, so we must attempt to balance the pricing and duration of the loan portfolio against the risks of rising costs of our deposits and borrowings.
29
Critical Accounting Policies
Our significant accounting policies are set forth in Note 1 of the audited consolidated financial statements for the year ended December 31, 20162017 which were included in our Annual Report on Form 10-K.10‑K. Of these significant accounting policies, we consider our policies regarding the valuation of investment securities, the Allowance for loan losses (“Allowance”), the valuation of real estate acquired through foreclosure, and the valuation of the net deferred tax asset to be our most critical accounting policies, due to the fact that these policies inherently have a greater reliance on the use of estimates, 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 be recorded at fair value, when a decline in the value of an asset not carried in the consolidated financial 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.
Securities
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 income.
AFS and HTM securities are evaluated periodically to determine whether a decline 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 value 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 equity 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 income.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.
30
Future additions or reductionreductions in the Allowance may be necessary based on changes in economic conditions, particularly in Anne Arundel County and the State of Maryland.Maryland and our actual loss experience. 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 estimated 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 netfair collateral value has been determined, a charge off is taken for the difference between the net collateralfair 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.
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); |
· | 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; or |
· | Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”). |
Loans that experience insignificant payment delays and payment shortfalls may not be 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.
The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as nonclassified 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; |
· | Effect of any changes in concentration of credit; and |
· | Industry conditions. |
We assign risk ratings to the loans in our portfolio. These credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. 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
31
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. Loans not classified are rated pass.
With respect to all loan segments, we do not classified as impaired. Management determines the significancecharge off a loan, or a portion 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 lengthuntil one 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.following conditions have been met:
· | The property collateralizing the loan has been foreclosed upon. At the 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-off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral; or |
· | The collateral valuation on a collateral dependent impaired loan is less than the recorded balance. The loan is charged off for accounting purposes by the amount of the difference between the recorded balance and collateral value. |
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
Deferred Income Taxes
Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amount will be realized based on consideration of available evidence.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period 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 is reviewed on a continual basis as regulatory and business factors change.
Results of Operations
Net Income
Net income decreasedincreased by $11.5 million,$960,000, or 92.1%103.8%, to $982,000 for the three months ended June 30, 2017, compared to $12.5$1.9 million for the three months ended June 30, 2016.March 31, 2018, compared to $925,000 for the three months ended March 31, 2017. Basic and diluted income per share were $0.15 for the three months
32
ended March 31, 2018 compared to $0.07 for the three months ended June 30, 2017 compared to $1.02 for the three months ended June 30, 2016. During the second quarter of 2016, we recorded a one-time reversal of the valuation allowance held against net deferred tax assets. Income before taxes amounted to $1.6 million for the three months ended June 30, 2017, compared to $1.3 million for the three months ended June 30, 2016.March 31, 2017. The increase in pre-taxnet income reflected improved net interest income decreasedand noninterest expenses, and a reduced loan loss provision,income, partially offset by decreased noninterest income.
Net Interest Income
Net interest income, which is interest earned net of interest expense, increased by $466,000,$1.4 million, or 8.4%25.0%, to $6.0$7.0 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.5$5.6 million for the three months ended June 30, 2016.March 31, 2017. Our net interest margin increased from 3.15%3.09% for the secondfirst quarter of 20162017 to 3.26%3.66% for the secondfirst quarter of 2017.2018. Our net interest spread increased from 3.01%2.88% for the secondfirst quarter of 20162017 to 3.05%3.46% for the secondfirst quarter of 2017.
Interest Income
Interest income increased by $254,000,$1.3 million, or 3.3%17.5%, to $7.9$8.9 million for the three months ended June 30, 2017,March 31, 2018, compared to $7.6 million for the three months ended June 30, 2016.March 31, 2017. Average interest-earning assets increased from $708.1$732.3 million for the secondfirst quarter of 20162017 to $738.7$773.9 million for the secondfirst quarter of 2017. 2018, due primarily to growth in average loans outstanding.Average loans outstanding increased by $8.1 million due$60.2 milliondue to increased originations.originations in all loan categories. The average yield on loans held for investment increased from 4.72% for the three months ended March 31, 2017 to 5.06% for the three months ended March 31, 2018 as a result of the increased interest rate environment. Average HTM securities decreased by $15.1 million due$8.2 milliondue to security in the second quarter of maturities and repayments from mortgage-backed securities. The proceeds were used to fund the purchase of AFS securities, the average balance of which increased $7.9 million during the three months ended March 31, 2018, 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 $212,000,$78,000, or 10.1%4.0%, to $1.9 million for the three months ended June 30, 2017,March 31, 2018, compared to $2.1$2.0 million for the three months ended June 30, 2016.March 31, 2017. The decrease was primarily due to a decrease in the average rate paid on certificates of depositborrowings from 1.51%3.35% for the second quarter of 2016 to 1.16% for the secondfirst quarter of 2017 due to 2.63% for the maturitiesfirst quarter of higher rate certificates of deposit.2018. Additionally, average borrowings decreased $26.2by $3.2 million from the second quarter of 2016 to the second quarter of 2017. We paid off $3.5 million of 8.0% subordinated debentures in the later part of 2016 as well as $20.0 million in FHLB advances in 2017.
33
The 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 average rates paid on average interest-bearing liabilities. Average balances are also provided for noninterest-earning assets and noninterest-bearing liabilities.
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| ||||||||||||||||||||||||
|
| Three Months Ended March 31, |
| ||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, |
| 2018 |
| 2017 |
| ||||||||||||||||||||||||||||||||||||
2017 | 2016 |
| Average |
|
|
| Yield/ |
| Average |
|
|
| Yield/ |
| |||||||||||||||||||||||||||
Average Balance (1) | Interest (2) | Yield/ Rate (4) | Average Balance (1) | Interest (2) | Yield/ Rate (4) |
| Balance (1) |
| Interest (2) |
| Rate (4) |
| Balance (1) |
| Interest (2) |
| Rate (4) |
| |||||||||||||||||||||||
ASSETS | (dollars in thousands) |
| (dollars in thousands) |
| |||||||||||||||||||||||||||||||||||||
Loans | $ | 611,906 | $ | 7,352 | 4.82 | % | $ | 603,827 | $ | 7,195 | 4.79 | % |
| $ | 668,615 |
| $ | 8,335 |
| 5.06 | % | $ | 608,417 |
| $ | 7,081 |
| 4.72 | % | ||||||||||||
Loans held for sale ("LHFS") | 3,535 | 42 | 4.76 | % | 7,910 | 66 | 3.36 | % |
|
| 3,421 |
|
| 36 |
| 4.27 | % |
| 4,416 |
|
| 50 |
| 4.59 | % | ||||||||||||||||
AFS securities | 7,161 | 30 | 1.68 | % | - | - | - |
|
| 11,597 |
|
| 51 |
| 1.78 | % |
| 3,671 |
|
| 15 |
| 1.66 | % | |||||||||||||||||
HTM securities | 60,371 | 298 | 1.98 | % | 75,453 | 299 | 1.59 | % |
|
| 52,586 |
|
| 269 |
| 2.07 | % |
| 60,762 |
|
| 254 |
| 1.70 | % | ||||||||||||||||
Other interest-earning assets (3) | 50,938 | 114 | 0.90 | % | 15,006 | 14 | 0.38 | % |
|
| 32,852 |
|
| 126 |
| 1.56 | % |
| 50,297 |
|
| 97 |
| 0.78 | % | ||||||||||||||||
Restricted stock investments, at cost | 4,742 | 60 | 5.07 | % | 5,881 | 68 | 4.65 | % |
|
| 4,847 |
|
| 60 |
| 5.02 | % |
| 4,784 |
|
| 60 |
| 5.09 | % | ||||||||||||||||
Total interest-earning assets | 738,653 | 7,896 | 4.29 | % | 708,077 | 7,642 | 4.34 | % |
|
| 773,918 |
|
| 8,877 |
| 4.65 | % |
| 732,347 |
|
| 7,557 |
| 4.18 | % | ||||||||||||||||
Allowance for loan losses | (8,678 | ) | (8,763 | ) | |||||||||||||||||||||||||||||||||||||
Allowance |
|
| (8,141) |
|
|
|
|
|
|
| (9,000) |
|
|
|
|
|
| ||||||||||||||||||||||||
Cash and other noninterest-earning assets | 62,929 | 69,376 |
|
| 43,233 |
|
|
|
|
|
|
| 65,926 |
|
|
|
|
|
| ||||||||||||||||||||||
Total assets | $ | 792,904 | 7,896 | $ | 768,690 | 7,642 |
| $ | 809,010 |
|
| 8,877 |
|
|
| $ | 789,273 |
|
| 7,557 |
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Checking and savings | $ | 282,149 | 314 | 0.45 | % | $ | 271,883 | 172 | 0.25 | % |
| $ | 304,037 |
|
| 332 |
| 0.44 | % | $ | 278,499 |
|
| 215 |
| 0.31 | % | ||||||||||||||
Certificates of deposit | 214,760 | 624 | 1.16 | % | 221,778 | 832 | 1.51 | % |
|
| 222,508 |
|
| 801 |
| 1.46 | % |
| 217,455 |
|
| 760 |
| 1.42 | % | ||||||||||||||||
Total interest-bearing deposits | 496,909 | 938 | 0.76 | % | 493,661 | 1,004 | 0.82 | % |
|
| 526,545 |
|
| 1,133 |
| 0.87 | % |
| 495,954 |
|
| 975 |
| 0.80 | % | ||||||||||||||||
Borrowings | 115,334 | 951 | 3.31 | % | 141,537 | 1,097 | 3.12 | % |
|
| 117,352 |
|
| 760 |
| 2.63 | % |
| 120,563 |
|
| 996 |
| 3.35 | % | ||||||||||||||||
Total interest-bearing liabilities | 612,243 | 1,889 | 1.24 | % | 635,198 | 2,101 | 1.33 | % |
|
| 643,897 |
|
| 1,893 |
| 1.19 | % |
| 616,517 |
|
| 1,971 |
| 1.30 | % | ||||||||||||||||
Noninterest-bearing deposits | 89,777 | 38,019 |
|
| 88,160 |
|
|
|
|
|
|
| 81,569 |
|
|
|
|
|
| ||||||||||||||||||||||
Other noninterest-bearing liabilities | 2,493 | 6,434 |
|
| 2,103 |
|
|
|
|
|
|
| 2,716 |
|
|
|
|
|
| ||||||||||||||||||||||
Stockholders' equity | 88,391 | 89,039 |
|
| 74,850 |
|
|
|
|
|
|
| 88,471 |
|
|
|
|
|
| ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 792,904 | 1,889 | $ | 768,690 | 2,101 |
| $ | 809,010 |
|
| 1,893 |
|
|
| $ | 789,273 |
|
| 1,971 |
|
|
| ||||||||||||||||||
Net interest income/net interest spread | Net interest income/net interest spread | $ | 6,007 | 3.05 | % | $ | 5,541 | 3.01 | % |
|
|
|
| $ | 6,984 |
| 3.46 | % |
|
|
| $ | 5,586 |
| 2.88 | % | |||||||||||||||
Net interest margin | 3.26 | % | 3.15 | % |
|
|
|
|
|
|
| 3.66 | % |
|
|
|
|
|
| 3.09 | % |
(1)Nonaccrual loans are included in average loans.
(2)There are no tax equivalency adjustments.
(3)Other interest-earning assets include interest-earning deposits, federal funds sold, and certificates of deposit held for investment
(4)Annualized
34
Six Months Ended June 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average Balance (1) | Interest (2) | Yield/ Rate (4) | Average Balance (1) | Interest (2) | Yield/ Rate (4) | |||||||||||||||||||
ASSETS | (dollars in thousands) | |||||||||||||||||||||||
Loans | $ | 610,162 | $ | 14,433 | 4.77 | % | $ | 606,122 | $ | 14,215 | 4.72 | % | ||||||||||||
LHFS | 3,976 | 92 | 4.67 | % | 6,163 | 153 | 4.99 | % | ||||||||||||||||
AFS securities | 4,549 | 45 | 1.99 | % | - | - | - | |||||||||||||||||
HTM securities | 61,433 | 552 | 1.81 | % | 69,942 | 610 | 1.75 | % | ||||||||||||||||
Other interest-earning assets (3) | 50,618 | 211 | 0.84 | % | 32,652 | 34 | 0.21 | % | ||||||||||||||||
Restricted stock investments, at cost | 4,848 | 120 | 4.99 | % | 5,418 | 134 | 4.97 | % | ||||||||||||||||
Total interest-earning assets | 735,586 | 15,453 | 4.24 | % | 720,297 | 15,146 | 4.23 | % | ||||||||||||||||
Allowance for loan losses | (8,839 | ) | (8,881 | ) | ||||||||||||||||||||
Cash and other noninterest-earning assets | 64,343 | 67,566 | ||||||||||||||||||||||
Total assets | $ | 791,090 | 15,453 | $ | 778,982 | 15,146 | ||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Checking and savings | $ | 280,324 | 529 | 0.38 | % | $ | 299,896 | 327 | 0.22 | % | ||||||||||||||
Certificates of deposit | 216,108 | 1,384 | 1.29 | % | 219,617 | 1,656 | 1.52 | % | ||||||||||||||||
Total interest-bearing deposits | 496,432 | 1,913 | 0.78 | % | 519,513 | 1,983 | 0.77 | % | ||||||||||||||||
Borrowings | 117,949 | 1,947 | 3.33 | % | 131,050 | 2,387 | 3.66 | % | ||||||||||||||||
Total interest-bearing liabilities | 614,381 | 3,860 | 1.27 | % | 650,563 | 4,370 | 1.35 | % | ||||||||||||||||
Noninterest-bearing deposits | 85,673 | 35,089 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 2,605 | 4,575 | ||||||||||||||||||||||
Stockholders' equity | 88,431 | 88,755 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 791,090 | 3,860 | $ | 778,982 | 4,370 | ||||||||||||||||||
Net interest income/net interest spread | $ | 11,593 | 2.97 | % | $ | 10,776 | 2.88 | % | ||||||||||||||||
Net interest margin | 3.18 | % | 3.01 | % |
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, 2018 vs. 2017 | |||||||
|
|
| Due to Variances in | |||||||
|
|
| Rate |
| Volume |
| Total | |||
Interest earned on: |
|
| (dollars in thousands) | |||||||
Loans |
|
| $ | 524 |
| $ | 730 |
| $ | 1,254 |
LHFS |
|
|
| (3) |
|
| (11) |
|
| (14) |
AFS securities |
|
|
| 1 |
|
| 35 |
|
| 36 |
HTM Securities |
|
|
| 183 |
|
| (168) |
|
| 15 |
Other interest-earning assets |
|
|
| 224 |
|
| (195) |
|
| 29 |
Restricted stock investments, at cost |
|
|
| (3) |
|
| 3 |
|
| — |
Total interest income |
|
|
| 926 |
|
| 394 |
|
| 1,320 |
|
|
|
|
|
|
|
|
|
|
|
Interest paid on: |
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
Checking and savings |
|
|
| 96 |
|
| 21 |
|
| 117 |
Certificates of deposit |
|
|
| 23 |
|
| 18 |
|
| 41 |
Total interest-bearing deposits |
|
|
| 119 |
|
| 39 |
|
| 158 |
Borrowings |
|
|
| (210) |
|
| (26) |
|
| (236) |
Total interest expense |
|
|
| (91) |
|
| 13 |
|
| (78) |
Net interest income |
|
| $ | 1,017 |
| $ | 381 |
| $ | 1,398 |
Three Months Ended June 30, 2017 vs. 2016 | Six Months Ended June 30, 2017 vs. 2016 | |||||||||||||||||||||||
Due to Variances in | Due to Variances in | |||||||||||||||||||||||
Rate | Volume | Total | Rate | Volume | Total | |||||||||||||||||||
Interest earned on: | (dollars in thousands) | |||||||||||||||||||||||
Loans | $ | 47 | $ | 110 | $ | 157 | $ | 138 | $ | 80 | $ | 218 | ||||||||||||
LHFS | 116 | (140 | ) | (24 | ) | (9 | ) | (52 | ) | (61 | ) | |||||||||||||
AFS securities | - | 30 | 30 | - | 45 | 45 | ||||||||||||||||||
HTM Securities | 232 | (233 | ) | (1 | ) | 14 | (72 | ) | (58 | ) | ||||||||||||||
Other interest-earning assets | 35 | 65 | 100 | 148 | 29 | 177 | ||||||||||||||||||
Restricted stock investments, at cost | 31 | (39 | ) | (8 | ) | 1 | (15 | ) | (14 | ) | ||||||||||||||
Total interest income | 461 | (207 | ) | 254 | 292 | 15 | 307 | |||||||||||||||||
Interest paid on: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Checking and savings | 138 | 4 | 142 | 265 | (63 | ) | 202 | |||||||||||||||||
Certificates of deposit | (181 | ) | (27 | ) | (208 | ) | (246 | ) | (26 | ) | (272 | ) | ||||||||||||
Total interest-bearing deposits | (43 | ) | (23 | ) | (66 | ) | 19 | (89 | ) | (70 | ) | |||||||||||||
Borrowings | 365 | (511 | ) | (146 | ) | (210 | ) | (230 | ) | (440 | ) | |||||||||||||
Total interest expense | 322 | (534 | ) | (212 | ) | (191 | ) | (319 | ) | (510 | ) | |||||||||||||
Net interest income | $ | 139 | $ | 327 | $ | 466 | $ | 483 | $ | 334 | $ | 817 |
Provision for Loan Losses
Our loan portfolio is subject to varying degrees of credit risk and an allowance for loan lossesAllowance is maintained to absorb losses inherent in itsour loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what the Companywe determined it was worth at the time of the granting of the loan. We monitor loan delinquencies at least monthly. All loans that are delinquent and all loans within the various categories of our portfolio as a group are evaluated. Management, with the advice and recommendation of the Company’s Board of Directors, estimates an Allowance 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. As
We did not record a result of our Allowance analysis,provision for loan losses during the three and six months ended June 30, 2017, we determined thatMarch 31, 2018. We recorded a reversal of the provision reversalsfor loan losses of $375,000 and $650,000, respectively, were appropriate.
Noninterest Income
Total noninterest income decreasedincreased by $1.1 million,$511,000, or 51.9%37.6%, to $1.0$1.9 million for the three months ended June 30, 2017,March 31, 2018, compared to $2.1$1.4 million for the three months ended June 30, 2016,March 31, 2017, primarily due to decreased real estate commissionsincreased mortgage-banking revenue, deposit service charges, and mortgage-bankingtitle company revenue. Real estate commissions by Hyatt Commercial decreased by $405,000, or 60.2%, to $268,000 for the three months ended June 30, 2017, compared to $673,000 for the three months ended June 30, 2016. The decrease was due to a decrease in commercial sales activity during the three months ended June 30, 2017, compared to the same period in 2016. Mortgage-banking revenue decreased $649,000,increased $60,000, or 69.8%11.2%, due to a decreasedan increased volume of loans originated through our Internet mortgage platform (“E-Home Finance”) in the second quarter of 2017 compared to the second quarter of 2016.
35
Noninterest Expense
Total noninterest expenses decreased $427,000,increased $548,000, or 6.8%9.7%, to $5.8$6.2 million for the three months ended June 30, 2017,March 31, 2018, compared to $6.3$5.7 million for the first quarter of 2017, primarily due to increases in compensation and related expenses. Compensation and related expenses increased by $521,000, or 13.9%, to $4.3 million for the three months ended June 30, 2016, primarily due to decreases in compensation and related expenses, Federal Deposit Insurance Corporation (“FDIC”) assessments, occupancy, professional fees, and write-downs and costs related to real estate acquired through foreclosure. Compensation and related expenses decreased by $140,000, or 3.7%, to $3.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $3.8 million for the three months ended June 30, 2016.March 31, 2017. This increase was primarily due to annual salary increases, as well as increased commission expense that corresponds with our increased loan origination and mortgage-banking volume. Partially offsetting the increase in compensation and related expenses, mortgage leads purchased decreased $95,000 due to the transition away from the purchased lead model.
Income Tax Provision
We recorded745,000 income tax provision on net income before income taxes of $2.6 million for the three months ended March 31, 2018, compared to a tax provision of $619,000 on net income before income taxes of $1.5 million for the three months ended March 31, 2017. The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, which lowered the corporate federal tax rate from 35% to 21% effective January 1, 2018. Among other things, the new law has significantly lowered our effective tax rate.
Financial Condition
Total assets decreased $3.7 million to $801.1 million at March 31, 2018, compared to $804.8 million at December 31, 2017. This decrease was primarily due to staff reductions. Net occupancy costs decreased by $124,000,decreases in interest-bearing deposits in other banks and in total securities. Loans increased $1.8 million, or 27.6%0.3%, to $325,000 for the three months ended June 30, 2017, compared to $449,000 for the three months ended June 30, 2016, primarily due to lower maintenance and utility expenses. Our FDIC insurance premiums decreased during the second quarter of 2017 as a result of 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 $117,000, or 49.8%, to $118,000 for the three months ended June 30, 2017, compared to $235,000 for the three months ended June 30, 2016, primarily due to decreased fees incurred for consulting. We incurred less costs as well as fewer write downs related to our real estate acquired through foreclosure in the second quarter of 2017 compared to the second quarter of 2016.
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$12.0 million and $10.1 million in securities classified as AFS as of June 30, 2017.March 31, 2018 and December 31, 2017, respectively. We held $64.4$49.9 million and $62.8$54.3 million, respectively, in securities classified as HTM as of June 30, 2017March 31, 2018 and December 31, 2016.
Changes 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 portfolio to determine the nature of any decline in value and evaluate if any impairment should be classified as OTTI. For the three and six months ended June 30, 2017,March 31, 2018, we determined that no OTTI charges were required.
All of the AFS and HTM securities that are temporarily impaired as of June 30, 2017March 31, 2018 are so due to declines in fair values resulting from changes in interest rates or decreased credit/liquidity spreads compared to the time they were purchased. We have the intent to hold these securities to maturity (including those designated as AFS) 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.
36
Our HTM securities portfolio composition is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AFS |
| HTM | ||||||||
|
| March 31, 2018 |
| December 31, 2017 |
| March 31, 2018 |
| December 31, 2017 | ||||
|
| (dollars in thousands) | ||||||||||
U.S. Treasury securities |
| $ | 1,975 |
| $ | — |
| $ | 4,993 |
| $ | 4,994 |
U.S. government agency notes |
|
| 10,036 |
|
| 10,119 |
|
| 15,999 |
|
| 19,004 |
Mortgage-backed securities |
|
| — |
|
| — |
|
| 28,919 |
|
| 30,305 |
|
| $ | 12,011 |
| $ | 10,119 |
| $ | 49,911 |
| $ | 54,303 |
June 30, 2017 | December 31, 2016 | |||||||
(dollars in thousands) | ||||||||
U.S. Treasury securities | $ | 10,996 | $ | 12,998 | ||||
U.S. government agency notes | 20,015 | 20,027 | ||||||
Mortgage-backed securities | 33,431 | 29,732 | ||||||
$ | 64,442 | $ | 62,757 |
LHFS
We originate residential mortgage loans for sale on the secondary market. At June 30, 2017,March 31, 2018, such LHFS, which are carried at fair value, amounted to $3.5$5.8 million at March 31, 2018 and $4.5 million at December 31, 2017, 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 or market value (“LCM”). LHFS decreasedincreased by $6.8$1.3 million, or 66.1%28.1%, compared to December 31, 2016. This decrease was2017, primarily due to a lowerhigher origination volume and 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 earninginterest-earning assets is an important determinant of our net interest margin.
The following table sets forth the composition of our loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 |
| December 31, 2017 |
|
| ||||||
|
|
|
| Percent |
|
|
| Percent |
|
| ||
|
| Amount |
| of Total |
| Amount |
| of Total |
|
| ||
|
| (dollars in thousands) |
|
| ||||||||
Residential Mortgage |
| $ | 285,023 |
| 42.5 | % | $ | 284,646 |
| 42.6 | % |
|
Commercial |
|
| 39,015 |
| 5.8 | % |
| 37,356 |
| 5.5 | % |
|
Commercial real estate |
|
| 230,336 |
| 34.4 | % |
| 236,302 |
| 35.4 | % |
|
Land acquisition, development, and construction ("ADC") |
|
| 100,635 |
| 15.0 | % |
| 93,060 |
| 13.9 | % |
|
Home equity/2nds |
|
| 13,853 |
| 2.1 | % |
| 15,703 |
| 2.4 | % |
|
Consumer |
|
| 1,050 |
| 0.2 | % |
| 1,084 |
| 0.2 | % |
|
|
| $ | 669,912 |
| 100.0 | % | $ | 668,151 |
| 100.0 | % |
|
June 30, 2017 | December 31, 2016 | |||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Residential Mortgage | $ | 285,907 | 45.3 | % | $ | 257,659 | 42.2 | % | ||||||||
Commercial | 25,811 | 4.1 | % | 46,468 | 7.6 | % | ||||||||||
Commercial real estate | 216,388 | 34.2 | % | 195,710 | 32.1 | % | ||||||||||
Construction, land acquisition, and development ("ADC") | 85,898 | 13.6 | % | 90,102 | 14.8 | % | ||||||||||
Home equity/2nds | 16,336 | 2.6 | % | 19,129 | 3.1 | % | ||||||||||
Consumer | 1,104 | 0.2 | % | 1,210 | 0.2 | % | ||||||||||
$ | 631,444 | 100.0 | % | $ | 610,278 | 100.0 | % |
Loans increased by $21.2$1.8 million, or 3.5%0.3%, to $631.4$669.9 million at June 30, 2017,March 31, 2018, compared to $610.3$668.2 million at December 31, 2016.2017. This increase was primarily due to increased demand and originations of residential mortgagemortgages, commercial, and commercial real estate loan demand.
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.
37
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 34 to the Consolidated Financial Statements.
The following table summarizes the activity in our Allowance by portfolio segment:
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | |||||
|
| 2018 |
| 2017 | |||
|
| (dollars in thousands) | |||||
Allowance, beginning of year |
| $ | 8,055 |
| $ | 8,969 |
|
Charge-offs: |
|
|
|
|
|
|
|
Residential mortgage |
|
| (323) |
|
| (499) |
|
Commercial |
|
| — |
|
| — |
|
Commercial real estate |
|
| — |
|
| — |
|
ADC |
|
| (13) |
|
| — |
|
Home equity/2nds |
|
| — |
|
| — |
|
Consumer |
|
| — |
|
| — |
|
Total charge-offs |
|
| (336) |
|
| (499) |
|
Recoveries: |
|
|
|
|
|
|
|
Residential mortgage |
|
| 221 |
|
| 107 |
|
Commercial |
|
| — |
|
| 27 |
|
Commercial real estate |
|
| 211 |
|
| — |
|
ADC |
|
| — |
|
| — |
|
Home equity/2nds |
|
| 18 |
|
| 3 |
|
Consumer |
|
| — |
|
| — |
|
Total recoveries |
|
| 450 |
|
| 137 |
|
Net recoveries (charge offs) |
|
| 114 |
|
| (362) |
|
Reversal of provision for loan losses |
|
| — |
|
| (275) |
|
Allowance, end of period |
| $ | 8,169 |
| $ | 8,332 |
|
Loans: |
|
|
|
|
|
|
|
Period-end balance |
| $ | 669,912 |
| $ | 609,741 |
|
Average balance during period |
|
| 668,615 |
|
| 608,417 |
|
Allowance as a percentage of |
|
|
|
|
|
|
|
period-end loan balance |
|
| 1.22 | % |
| 1.37 | % |
Percent of average loans: |
|
|
|
|
|
|
|
Reversal of provision for loan losses |
|
| — | % |
| (0.18) | % |
Net recoveries (charge offs ) |
|
| 0.07 | % |
| (0.24) | % |
38
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Allowance, beginning of period | $ | 8,332 | $ | 8,633 | $ | 8,969 | $ | 8,758 | ||||||||
Charge-offs: | ||||||||||||||||
Residential mortgage | (208 | ) | (11 | ) | (707 | ) | (151 | ) | ||||||||
Commercial | (27 | ) | - | - | (17 | ) | ||||||||||
Commercial real estate | - | (131 | ) | - | (178 | ) | ||||||||||
ADC | - | - | - | - | ||||||||||||
Home equity/2nds | (98 | ) | - | (98 | ) | (28 | ) | |||||||||
Consumer | - | - | - | - | ||||||||||||
Total charge-offs | (333 | ) | (142 | ) | (805 | ) | (374 | ) | ||||||||
Recoveries: | ||||||||||||||||
Residential mortgage | 32 | 103 | 139 | 185 | ||||||||||||
Commercial | - | 9 | - | 33 | ||||||||||||
Commercial real estate | 60 | - | 60 | - | ||||||||||||
ADC | - | 100 | - | 100 | ||||||||||||
Home equity/2nds | 2 | 1 | 5 | 2 | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
Total recoveries | 94 | 213 | 204 | 320 | ||||||||||||
Net (charge offs) recoveries | (239 | ) | 71 | (601 | ) | (54 | ) | |||||||||
(Reversal of) provision for loan losses | (375 | ) | 100 | (650 | ) | 100 | ||||||||||
Allowance, end of period | $ | 7,718 | $ | 8,804 | $ | 7,718 | $ | 8,804 | ||||||||
Loans: | ||||||||||||||||
Period-end balance | $ | 631,444 | $ | 617,900 | $ | 631,444 | $ | 617,900 | ||||||||
Average balance during period | 611,906 | 603,827 | 610,162 | 606,122 | ||||||||||||
Allowance as a percentage of period-end loan balance | 1.22 | % | 1.42 | % | 1.22 | % | 1.42 | % | ||||||||
Percent of average loans (annualized) : | ||||||||||||||||
(Reversal of) provision for loan losses | (0.25 | )% | 0.07 | % | (0.21 | )% | 0.03 | % | ||||||||
Net (charge offs) recoveries | (0.16 | )% | 0.05 | % | (0.20 | )% | (0.02 | )% |
The following table summarizes our allocation of the Allowance by loan segment:
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| March 31, 2018 |
| December 31, 2017 |
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|
| Percent |
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| Percent |
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| ||
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|
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|
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| of Loans |
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| of Loans |
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| ||
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|
| Percent |
| to Total |
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|
| Percent |
| to Total |
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| ||
|
| Amount |
| of Total |
| Loans |
| Amount |
| of Total |
| Loans |
|
| ||
|
| (dollars in thousands) |
|
| ||||||||||||
Residential mortgage |
| $ | 3,301 |
| 40.4 | % | 42.5 | % | $ | 3,099 |
| 38.5 | % | 42.6 | % |
|
Commercial |
|
| 514 |
| 6.3 | % | 5.8 | % |
| 527 |
| 6.6 | % | 5.5 | % |
|
Commercial real estate |
|
| 2,995 |
| 36.7 | % | 34.4 | % |
| 2,805 |
| 34.8 | % | 35.4 | % |
|
ADC |
|
| 1,060 |
| 13.0 | % | 15.0 | % |
| 1,236 |
| 15.3 | % | 13.9 | % |
|
Home equity/2nds |
|
| 297 |
| 3.6 | % | 2.1 | % |
| 386 |
| 4.8 | % | 2.4 | % |
|
Consumer |
|
| 2 |
| 0.0 | % | 0.2 | % |
| 2 |
| 0.0 | % | 0.2 | % |
|
Total |
| $ | 8,169 |
| 100.0 | % | 100.0 | % | $ | 8,055 |
| 100.0 | % | 100.0 | % |
|
June 30, 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 | $ | 3,403 | 44.1 | % | 45.3 | % | $ | 3,833 | 42.7 | % | 42.2 | % | ||||||||||||
Commercial | 389 | 5.0 | % | 4.1 | % | 478 | 5.3 | % | 7.6 | % | ||||||||||||||
Commercial real estate | 2,571 | 33.3 | % | 34.2 | % | 2,535 | 28.3 | % | 32.1 | % | ||||||||||||||
ADC | 984 | 12.7 | % | 13.6 | % | 1,390 | 15.5 | % | 14.8 | % | ||||||||||||||
Home equity/2nds | 367 | 4.8 | % | 2.6 | % | 728 | 8.1 | % | 3.1 | % | ||||||||||||||
Consumer | 4 | 0.1 | % | 0.2 | % | 5 | 0.1 | % | 0.2 | % | ||||||||||||||
Total | $ | 7,718 | 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 $7.7$8.2 million at June 30, 2017March 31, 2018 and $9.0$8.1 million at December 31, 2016.2017. Any changes in the Allowance from period to period reflect management’s ongoing application of its methodologies to establish the Allowance, which, for the sixthree months ended June 30, 2017,March 31, 2018, resulted in increased allocated Allowances for residential mortgage and commercial real estate loans, with the other categories resulting in decreased allocated Allowances for all loan segments except for commercial real estate loans.Allowances. The changes in the Allowances for the respective loan segments were a function of the changes in the corresponding loan balances and asset quality.
As a result of our Allowance analysis, and overall improved asset quality, we released $375,000 and $650,000, respectively, from thedid not record a provision, nor did we release any Allowance during the three and six months ended June 30, 2017. We recorded $100,000 in provision for losses for both the three and six months ended June 30, 2016. We recorded net charge-offs of $239,000 and $601,000, respectively, during the three and six months ended June 30, 2017 compared to net recoveries of $71,000 during the three months ended June 30, 2016March 31, 2018. We recorded a $275,000 reversal of provision for losses for the three months ended March 31, 2017. We recorded net recoveries of $114,000 during the three months ended March 31, 2018 and net charge-offs of $54,000$362,000 during the sixthree months ended June 30, 2016.March 31, 2017. During the first sixthree months of 2017,ended March 31, 2018, annualized net recoveries as compared to average loans outstanding amounted to 0.07%, compared to annualized net charge-offs as compared to average loans outstanding amounted to 0.20%, compared to 0.02%of 0.24% during the first sixthree months of 2016.2017. The Allowance as a percentage of outstanding loans decreased from 1.47%remained fairly stable at 1.22% as of March 31, 2018 and 1.21% as of December 31, 2016 to 1.22% as of June 30, 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 June 30, 2017March 31, 2018 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 obtain appraisals on NPAs annually. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets once a month.monthly. 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.
39
NPAs, expressed as a percentage of total assets, totaled 0.78%0.74% at June 30, 2017March 31, 2018 and 1.37%0.76% at December 31, 2016.2017. The ratio of the Allowance to nonperforming loans was 153.1%143.3% at June 30, 2017March 31, 2018 and 91.0%141.1% at December 31, 2016. The increase in this ratio from December 31, 2016 to June 30, 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 June 30, 2017March 31, 2018 and December 31, 2016.2017.
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|
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|
|
|
|
| March 31, 2018 |
| December 31, 2017 |
| ||
Nonaccrual Loans: |
| (dollars in thousands) |
| ||||
Residential mortgage |
| $ | 3,619 |
| $ | 3,891 |
|
Commercial |
|
| 296 |
|
| 78 |
|
Commercial real estate |
|
| 216 |
|
| 159 |
|
ADC |
|
| 310 |
|
| 314 |
|
Home equity/2nds |
|
| 1,260 |
|
| 1,268 |
|
Consumer |
|
| — |
|
| — |
|
|
|
| 5,701 |
|
| 5,710 |
|
Real Estate Acquired Through Foreclosure: |
|
|
|
|
|
|
|
Residential mortgage |
|
| — |
|
| — |
|
Commercial |
|
| — |
|
| — |
|
Commercial real estate |
|
| 90 |
|
| 187 |
|
ADC |
|
| 147 |
|
| 216 |
|
Home equity/2nds |
|
| — |
|
| — |
|
Consumer |
|
| — |
|
| — |
|
|
|
| 237 |
|
| 403 |
|
Total Nonperforming Assets |
| $ | 5,938 |
| $ | 6,113 |
|
June 30, 2017 | December 31, 2016 | |||||||
Nonaccrual Loans: | (dollars in thousands) | |||||||
Residential mortgage | $ | 3,388 | $ | 3,580 | ||||
Commercial | 90 | 151 | ||||||
Commercial real estate | 164 | 2,938 | ||||||
ADC | 90 | 269 | ||||||
Home equity/2nds | 1,310 | 2,914 | ||||||
Consumer | - | - | ||||||
5,042 | 9,852 | |||||||
Real Estate Acquired Through Foreclosure: | ||||||||
Residential mortgage | 99 | 393 | ||||||
Commercial | - | - | ||||||
Commercial real estate | 700 | 341 | ||||||
ADC | 216 | 239 | ||||||
Home equity/2nds | - | - | ||||||
Consumer | - | - | ||||||
1,015 | 973 | |||||||
Total Nonperforming Assets | $ | 6,057 | $ | 10,825 |
Nonaccrual loans amounted to $5.0$5.7 million, or .80%0.85% of total loans, at June 30, 2017both March 31, 2018 and $9.9 million, or 1.61% of total loans, at December 31, 2016.2017. We added three$377,000 in loans in the amount of $418,000 to nonaccrual status during 2017. Of the balance of nonaccrual loans at Decemberthree months ended March 31, 2016, $2.6 million were returned to accrual status, $422,000 were charged off, $515,000 were transferred to real estate acquired through foreclosure, and $1.7 million were paid off.
Real estate acquired through foreclosure increased $42,000decreased $166,000 compared to December 31. The increase in commercial real estate was primarily from one foreclosure in31, 2017 due to the amountsale of $515,000.
The activity in our real estate acquired through foreclosure was as follows:
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|
|
| Three Months Ended March 31, | ||||
|
| 2018 |
| 2017 | ||
|
| (dollars in thousands) | ||||
Balance at beginning of year |
| $ | 403 |
| $ | 973 |
Real estate acquired in satisfaction of loans |
|
| — |
|
| 515 |
Write-downs and losses on real estate acquired through foreclosure |
|
| (44) |
|
| (40) |
Proceeds from sales of real estate acquired through foreclosure |
|
| (122) |
|
| (205) |
Balance at end of year |
| $ | 237 |
| $ | 1,243 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Balance at beginning of period | $ | 1,243 | $ | 1,737 | $ | 973 | $ | 1,744 | ||||||||
Real estate acquired in satisfaction of loans | - | 493 | 515 | 1,077 | ||||||||||||
Write-downs and losses | - | (74 | ) | (40 | ) | (87 | ) | |||||||||
Proceeds from sales | (228 | ) | (1,044 | ) | (433 | ) | (1,622 | ) | ||||||||
Balance at end of period | $ | 1,015 | $ | 1,112 | $ | 1,015 | $ | 1,112 |
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 insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR.
40
The composition of our TDRs is illustrated in the following table:
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|
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|
|
| March 31, 2018 |
| December 31, 2017 |
| ||
Residential mortgage: |
| (dollars in thousands) |
| ||||
Nonaccrual |
| $ | 811 |
| $ | 736 |
|
<90 days past due/current |
|
| 10,692 |
|
| 11,631 |
|
Commercial real estate: |
|
|
|
|
|
|
|
Nonaccrual |
|
| — |
|
| 78 |
|
<90 days past due/current |
|
| 1,848 |
|
| 1,862 |
|
ADC: |
|
|
|
|
|
|
|
Nonaccrual |
|
| — |
|
| 6 |
|
<90 days past due/current |
|
| 136 |
|
| 137 |
|
Consumer: |
|
|
|
|
|
|
|
Nonaccrual |
|
| — |
|
| — |
|
<90 days past due/current |
|
| 82 |
|
| 84 |
|
Totals: |
|
|
|
|
|
|
|
Nonaccrual |
|
| 811 |
|
| 820 |
|
<90 days past due/current |
|
| 12,758 |
|
| 13,714 |
|
|
| $ | 13,569 |
| $ | 14,534 |
|
June 30, 2017 | December 31, 2016 | |||||||
Residential mortgage: | (dollars in thousands) | |||||||
Nonaccrual | $ | 2,287 | $ | 2,137 | ||||
<90 days past due/current | 13,490 | 15,886 | ||||||
Commercial real estate: | ||||||||
Nonaccrual | 90 | 249 | ||||||
<90 days past due/current | 1,886 | 1,914 | ||||||
ADC: | ||||||||
Nonaccrual | 6 | 6 | ||||||
<90 days past due/current | 166 | 170 | ||||||
Home equity/2nds: | ||||||||
Nonaccrual | - | - | ||||||
<90 days past due/current | 232 | - | ||||||
Consumer | ||||||||
Nonaccrual | - | - | ||||||
<90 days past due/current | 90 | 96 | ||||||
Totals | ||||||||
Nonaccrual | 2,383 | 2,392 | ||||||
<90 days past due/current | 15,864 | 18,066 | ||||||
$ | 18,247 | $ | 20,458 |
See additional information on TDRs in Note 34 to the Consolidated Financial Statements.
Deposits
Deposits were $579.6amounted to $589.9 million at June 30, 2017March 31, 2018 and $571.9$602.2 million at December 31, 2016. During the six months ended June 30, 2017, we obtained significant new noninterest-bearing deposits through a campaign designed to attract deposits in certain local emerging markets.2017. The decrease in certificates of deposit ("CDs"(“CDs”) was due to the payoff of regularly maturing CDs.
The deposit breakdown is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2018 |
| December 31, 2017 |
|
| ||||||
|
|
|
| Percent |
|
|
| Percent |
|
| ||
|
| Balance |
| of Total |
| Balance |
| of Total |
|
| ||
|
| (dollars in thousands) |
|
| ||||||||
NOW |
| $ | 66,121 |
| 11.2 | % | $ | 63,616 |
| 10.6 | % |
|
Money market |
|
| 103,514 |
| 17.6 | % |
| 103,649 |
| 17.2 | % |
|
Savings |
|
| 95,092 |
| 16.1 | % |
| 98,717 |
| 16.4 | % |
|
Certificates of deposit |
|
| 251,519 |
| 42.6 | % |
| 263,413 |
| 43.7 | % |
|
Total interest-bearing deposits |
|
| 516,246 |
| 87.5 | % |
| 529,395 |
| 87.9 | % |
|
Noninterest-bearing deposits |
|
| 73,670 |
| 12.5 | % |
| 72,833 |
| 12.1 | % |
|
Total deposits |
| $ | 589,916 |
| 100.0 | % | $ | 602,228 |
| 100.0 | % |
|
June 30, 2017 | December 31, 2016 | |||||||||||||||
Balance | Percent of Total | Balance | Percent of Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Checking and savings | $ | 236,969 | 40.88 | % | $ | 239,985 | 41.96 | % | ||||||||
Certificates of deposit | 250,052 | 43.14 | % | 273,816 | 47.87 | % | ||||||||||
Total interest-bearing deposits | 487,021 | 84.02 | % | 513,801 | 89.83 | % | ||||||||||
Noninterest-bearing deposits | 92,605 | 15.98 | % | 58,145 | 10.17 | % | ||||||||||
Total deposits | $ | 579,626 | 100.00 | % | $ | 571,946 | 100.00 | % |
Borrowings
Our borrowings consist of advances from the FHLB and 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 our borrowings equal to 30% of total assets. Our advances from the FHLB may be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and may contain prepayment penalties. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties.
At June 30, 2017,March 31, 2018, our total credit line with the FHLB was $238.9$240.3 million. The Bank, from time to time, utilizes the line of credit when interest rates are more favorable than obtaining deposits from the public. Our outstanding FHLB advance balance at June 30, 2017March 31, 2018 and December 31, 20162017 was $80.0$93.0 million and $100.0$85.0 million, respectively.
41
On September 30, 2016, we entered into a loan agreement with a commercial bank whereby we borrowed $3,500,000$3.5 million out of an available $7.5 million credit line 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 Company, converts to either (1) floating rate of the Wall Street Journal Prime plus 50 basis points or (2) fixed rate at two hundred seventy five (275) basis points over the five year amortizing FHLB 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 we elect the 5 year fixed rate of 275 basis points over the FHLB 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. We 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 June 30, 2017:March 31, 2018:
|
|
|
|
|
|
Principal |
|
|
|
| |
Amount (in thousands) |
| Rate |
| Maturity | |
$ | 15,000 |
| 2.58% to 3.43% |
| 2018 |
| 43,000 |
| 1.55% to 4.00% |
| 2019 |
| 25,000 |
| 1.75% to 1.92% |
| 2020 |
| 10,000 |
| 2.19% |
| 2022 |
$ | 93,000 |
|
|
|
|
Principal | ||||||||
Amount (in thousands) | Rate | Maturity | ||||||
$ | 50,000 | 3.06% to 4.05% | 2017 | |||||
15,000 | 2.58% to 3.43% | 2018 | ||||||
15,000 | 4.00% | 2019 | ||||||
$ | 80,000 |
Subordinated Debentures
As of June 30, 2017both March 31, 2018 and December 31, 2016,2017, the Company had outstanding $20.6 million in principal amount of Junior Subordinated Debt Securities, due in 2035 (the “2035 Debentures”). The 2035 Debentures were issued pursuant to an Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the Company and Wells Fargo Bank, National Association as Trustee. The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month3‑month LIBOR 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 the Company, as defined in the 2035 Indenture. The 2035 Debentures became redeemable, in whole or in part, by the 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 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. We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.
Under the terms of the 2035 Debenture, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing. As of DecemberMarch 31, 2015, we had deferred the payment of fifteen quarters of interest and the cumulative amount of interest in arrears not paid, including interest on unpaid interest, was $1,863,000. During the second quarter of 2016, we paid all of the deferred interest and as of June 30, 2017,2018 we were current on all interest due on the 2035 Debenture.
Capital Resources
Total stockholders’ equity increased $1.9$1.3 million to $89.8$92.4 million at June 30, 2017March 31, 2018 compared to $87.9$91.1 million as of December 31, 2016.2017. The increase was principally the result of 20172018 net income.income, partially offset by dividends paid during the first quarter of 2018.
42
Series A Preferred Stock
On November 15, 2008, the Company completed a private placement offering consisting of a total of 70 units, at an offering price of $100,000 per unit, for gross proceeds of $7,000,000.$7.0 million. Each unit consists of 6,250 shares of the Company’s Series A 8.0% Non-Cumulative Convertible Preferred Stock. Dividends will not be paid on ourOn March 13, 2018, the Company notified holders of its Series A preferred stock that the Company had exercised its option to convert all 437,500 outstanding shares of Series A preferred stock for one share of common stock in any quarter until the dividend onstock. The Company converted the Series A Preferred Stock has been paid for such quarter; however, there is no requirementpreferred stock on April 2, 2018. As of that our Board of Directors declare any dividends ondate, the Series A Preferred Stockpreferred stock was no longer deemed outstanding, and any unpaid dividends are not cumulative.
Capital Adequacy
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 possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures 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. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered “well capitalized.” See details of our capital ratios in Note 45 of the Consolidated Financial Statements.
Liquidity
Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers, to fund the operations of our mortgage-banking business, as well as to meet current and planned expenditures. These cash requirements are met on a daily basis through the inflow of deposit funds, the maintenance of short-term overnight investments, maturities and calls in our securities portfolio, and available lines of credit with the FHLB, which requires pledged collateral. Fluctuations in deposit and short-term borrowing balances may be influenced by the interest rates paid, general consumer confidence, and the overall economic environment. There can be no assurances that deposit withdrawals and loan fundings will not exceed all available sources of liquidity on a short-term basis. Such a situation would have an adverse effect on our ability to originate new loans and maintain reasonable loan and deposit interest rates, which would negatively impact earnings.
Our principal sources of liquidity are loan repayments, maturing investments, deposits, borrowed funds, and proceeds from loans sold on the secondary market. The levels of such sources are dependent on the Bank’s operating, financing, and investing activities at any given time. We consider core deposits stable funding sources and include all deposits, except time deposits of $100,000 or more. The Bank’s experience has been that a substantial portion of certificates of deposit renew at time of maturity and remain on deposit with the Bank. Additionally, loan payments, maturities, deposit growth, and earnings contribute to our flow of funds.
In addition to our ability to generate deposits, we have external sources of funds, which may be drawn upon when desired. The primary source of external liquidity is an available line of credit with the FHLB. The Bank’s total credit availability under the FHLB’s credit availability program was $238.9$240.3 million at June 30, 2017,March 31, 2018, of which $80.0$93.0 million was outstanding.
The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit (collectively “commitments”), which totaled $96.6$84.2 million at June 30, 2017.March 31, 2018. Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. As of June 30, 2017, we had $1.1 million outstanding in mortgage loan commitments and $70.1 million in unadvanced construction commitments, which weWe expect to fund these commitments from the sources of liquidity described above. These amounts do not include undisbursed lines
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Customer withdrawals are also a principal use of liquidity, but are generally mitigated by growth in customer funding sources, such as deposits and short-term borrowings.
In addition to the foregoing, the payment of dividends is a use of cash, but is not expected to have a material effect on liquidity. As of June 30, 2017,March 31, 2018, we had no material commitments for capital expenditures.
Our ability to acquire deposits or borrow could be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. At June 30, 2017,March 31, 2018, management considered the Company’s liquidity level to be sufficient for the purposes of meeting our cash flow requirements. We are not aware of any undisclosed known trends, demands, commitments, or uncertainties that are reasonably likely to result in material changes in our liquidity.
We anticipate that our primary sources of liquidity over the next twelve months will be from loan repayments, maturing investments, deposit growth, and borrowed funds. We believe that these sources of liquidity will be sufficient for us to meet our liquidity needs over the next twelve months.
Off-Balance Sheet Arrangements and Derivatives
We enter into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend credit, lines of credit, and letters of credit. In addition, we have certain operating lease obligations.
Credit Commitments
Credit commitments are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.
Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. We are not aware of any accounting loss we would incur by funding our commitments.
See detailed information on credit commitments above under “Liquidity.”
Derivatives
We maintain and account for derivatives, in the form of interest-rate lock commitments (“IRLCs”) ,and mandatory forward contracts, and best effort forward contracts, in accordance with the Financial Accounting Standards Board guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Operations.
IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of best efforts and mandatory forward contracts.
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Information pertaining to the carrying amounts of our derivative financial instruments follows:
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| March 31, 2018 |
| December 31, 2017 | ||||||||
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| Notional |
| Estimated |
| Notional |
| Estimated | ||||
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| Amount |
| Fair Value |
| Amount |
| Fair Value | ||||
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| (dollars in thousands) | ||||||||||
Asset - IRLCs |
| $ | 9,050 |
| $ | 184 |
| $ | 1,144 |
| $ | 22 |
Asset - Mandatory forward contracts |
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| 5,633 |
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| 41 |
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| 4,399 |
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| 13 |
June 30, 2017 | December 31, 2016 | |||||||||||||||
Notional Amount | Estimated Fair Value | Notional Amount | Estimated Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Asset - IRLCs | $ | 1,304 | $ | 23 | $ | 9,725 | $ | 162 | ||||||||
Asset - Mandatory forward contracts | 3,384 | 8 | 10,302 | 153 | ||||||||||||
Asset - Best effort forward contracts | 1,304 | 4 | - | - |
Inflation
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the U.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. As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation. A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by a corresponding increase in our revenues. However, we believe that the impact of inflation on our operations was not material in 2017the first quarter of 2018 or 2016.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal objective of the Company’s interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risks appropriate given our business strategy, operating environment, capital and liquidity requirements, and performance objectives, and manage the risk consistent with our interest rate risk management policy. Through this management, we seek to reduce the vulnerability of our operations to changes in interest rates. The Board of Directors of the Company is responsible for reviewing our asset/liability policy and interest rate risk position. The Board of Directors reviews the interest rate risk position on a quarterly basis and, in connection with this review, evaluates the Company’s business activities and strategies, the effect of those strategies on the Company’s net interest margin and the effect that changes in interest rates will have on the loan portfolio. While continuous movement of interest rates is certain, the extent and timing of these movements is not always predictable. Any movement in interest rates has an effect on our profitability. We face the risk that rising interest rates could cause the cost ofinterest-bearing liabilities, such as deposits and borrowings, to rise faster than the yield on interest-earning assets, such as loans and investments. Our interest rate spread and interest rate margin also may be negatively impacted in a declining interest rate environment even though we generally borrow at short-term interest rates and lend at longer-term interest rates. This is because loans and other interest-earning assets may be prepaid and replaced with lower yielding assets before the supporting interest-bearing liabilities reprice downward. Our interest rate margin may also be negatively impacted in a flat or inverse-yield curve environment. Mortgage origination activity tends to increase when interest rates trend lower and decrease when interest rates rise.
Our primary strategy to control interest rate risk is to strive to balance our loan origination activities with the interest rate market. We attempt to maintain a substantial portion of our loan portfolio in short-term loans such as construction loans. This has proven to be an effective hedge against rapid increases in interest rates as the construction loan portfolio reprices rapidly.
The matching of maturity or repricing of interest-earning assets and interest-bearing liabilities may be analyzed by examining the extent to which these assets and liabilities are interest rate sensitive and by monitoring the Bank’s interest rate sensitivity gap. An interest-earning asset or interest-bearing liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The difference between rate sensitive assets and rate sensitive liabilities represents the Bank’s interest sensitivity gap. At June 30, 2017,March 31, 2018, we had a one-year cumulative negative gap of approximately $221.9$139.8 million.
Exposure to interest rate risk is actively monitored by management. The objective is to maintain a consistent level of profitability within acceptable risk tolerances across a broad range of potential interest rate environments. We use the
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PROFITstar® model to monitor our exposure to interest rate risk, which calculates changes in the economic value of equity (“EVE”).
The following table represents our EVE as of June 30, 2017:March 31, 2018:
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Change in Rates |
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| % Change |
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+400 | bp | $ | 167,503 |
| $ | (40,124) |
| (0.19) | % |
+300 | bp |
| 179,862 |
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| (27,765) |
| (0.13) | % |
+200 | bp |
| 190,517 |
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| (17,110) |
| (0.08) | % |
+100 | bp |
| 199,717 |
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| (7,910) |
| (0.04) | % |
0 | bp |
| 207,627 |
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-100 | bp |
| 200,706 |
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| (6,921) |
| (0.03) | % |
-200 | bp |
| 184,128 |
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| (23,499) |
| (0.11) | % |
Change in Rates | Amount | $ Change | % Change | |||||||||||
(dollars in thousands) | ||||||||||||||
+400 | bp | $ | 142,159 | $ | (21,685 | ) | -13.24 | % | ||||||
+300 | bp | 148,992 | (14,852 | ) | -9.06 | % | ||||||||
+200 | bp | 154,921 | (8,923 | ) | -5.45 | % | ||||||||
+100 | bp | 159,872 | (3,972 | ) | -2.42 | % | ||||||||
0 | bp | 163,844 | ||||||||||||
-100 | bp | 164,564 | 720 | 0.44 | % | |||||||||
-200 | bp | 159,507 | (4,337 | ) | -2.65 | % |
The preceding income simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.
Item 4. Controls and Procedures
The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-1513a‑15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive OfficerCEO and Chief Financial OfficerCFO concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-1513a‑15 under the Securities Act of 1934) during the three months ended June 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
In the normal course of business, we are party to litigation arising from the banking, financial, and other activities we conduct. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results, or liquidity as of June 30, 2017.
The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Annual Report on Form 10-K10‑K of Severn Bancorp for the year ended December 31, 2016.2017. There has been no material change in our risk factors since the filing of our December 31, 20162017 Annual Report on Form 10-K.10‑K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibit No. | Description | |
31.1 | ||
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form |
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Exhibit No. | Description | |
31.1 | ||
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | ||
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | ||
101 | The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SEVERN BANCORP, INC. | ||
May 15, 2018 | /s/ Alan J. Hyatt | |
Alan J. Hyatt, | ||
(Principal Executive Officer) | ||
May 15, 2018 | /s/ Paul B. Susie | |
Paul B. Susie, | ||
(Principal Financial and Accounting Officer) |
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