Table of Contents

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 2017


2019

or


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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


0‑49731

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)


Maryland

52-1726127

Maryland

52‑1726127

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)


200 Westgate Circle, Suite 200


        Annapolis, Maryland

21401

(Address

  (Address of principal executive offices)

(Zip Code)


410-260-2000

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 


Emerging growth company 


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act).Yes No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

SVBI

The NASDAQ Stock Market, LLC


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 – 12,245,425–12,777,537 shares outstanding as of November 13, 2017August 8, 2019



SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents



Page

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

1

2

3

4

5
6

6
7

Item 2.

26
31

Item 3.

41
48

Item 4.

42
49

PART II – OTHER INFORMATION

Item 1.

42
50

Item 1A.

42
50

Item 2.

42
51

Item 3.

42
51

Item 4.

42
51

Item 5.

43
51

Item 6.

Exhibits

4351

44
51

45
52

i

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,” 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 20162018 Annual Report on Form 10-K,10‑K, Item 1A of Part II of the Company’s March 31, 2017 quarterly report on Form 10-Q, Item 1A of Part II of the Company’s June 30, 2017 quarterly report2019 Quarterly Report on Form 10-Q, Item 1A of Part II of this quarterly reportQuarterly 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 subsidiaries may from time to time be a party;


·

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; andand;


·

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.

ii

Table of Contents

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.

iii

ii

PART I – FINANCIAL INFORMATION


Item 1.Financial Statements

Item 1.Financial Statements

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

    

December 31, 

 

    

2019

    

2018

ASSETS

 

 

 

  

 

Cash and due from banks

 

$

3,644

 

$

2,880

Federal funds sold and interest-bearing deposits in other banks

 

 

73,693

 

 

185,460

Cash and cash equivalents

 

 

77,337

 

 

188,340

Certificates of deposit held for investment

 

 

7,540

 

 

8,780

Securities available for sale, at fair value

 

 

11,031

 

 

11,978

Securities held to maturity (fair value of $33,708 and $38,212 at June 30, 2019 and December 31, 2018, respectively)

 

 

33,562

 

 

38,912

Loans held for sale, at fair value

 

 

17,987

 

 

9,686

Loans receivable

 

 

679,573

 

 

682,349

Allowance for loan losses

 

 

(8,093)

 

 

(8,044)

Loans, net

 

 

671,480

 

 

674,305

Real estate acquired through foreclosure

 

 

1,430

 

 

1,537

Restricted stock investments

 

 

2,857

 

 

3,766

Premises and equipment, net

 

 

22,452

 

 

22,745

Accrued interest receivable

 

 

2,605

 

 

2,848

Deferred income taxes

 

 

2,167

 

 

2,363

Bank owned life insurance

 

 

5,303

 

 

5,225

Goodwill

 

 

1,104

 

 

1,104

Other assets

 

 

5,257

 

 

2,644

Total assets

 

$

862,112

 

$

974,233

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest bearing

 

$

133,357

 

$

146,604

Interest-bearing

 

 

552,059

 

 

632,902

Total deposits

 

 

685,416

 

 

779,506

Long-term borrowings

 

 

48,500

 

 

73,500

Subordinated debentures

 

 

20,619

 

 

20,619

Accrued expenses and other liabilities

 

 

4,886

 

 

2,155

Total liabilities

 

 

759,421

 

 

875,780

Stockholders' Equity:

 

 

  

 

 

  

Common stock, $0.01 par value, 20,000,000 shares authorized; 12,775,137 and 12,759,576 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

128

 

 

128

Additional paid-in capital

 

 

65,696

 

 

65,538

Retained earnings

 

 

36,878

 

 

32,860

Accumulated other comprehensive loss

 

 

(11)

 

 

(73)

Total stockholders' equity

 

 

102,691

 

 

98,453

Total liabilities and stockholders' equity

 

$

862,112

 

$

974,233

  
September 30,
2017
  
December 31,
2016
 
ASSETS (unaudited)    
Cash and due from banks $1,654  $39,396 
Federal funds sold and interest-bearing deposits in other banks  39,981   27,718 
Cash and cash equivalents  41,635   67,114 
Securities available for sale, at fair value  3,129   - 
Securities held to maturity (fair value of $58,959 at September 30, 2017 and $62,827 at December 31, 2016)  58,764   62,757 
Loans held for sale, at fair value at September 30, 2017  4,871   10,307 
Loans receivable  650,964   610,278 
Allowance for loan losses  (7,936)  (8,969)
Loans, net  643,028   601,309 
Real estate acquired through foreclosure  1,104   973 
Restricted stock investments  4,699   5,103 
Premises and equipment, net  23,398   24,030 
Accrued interest receivable  2,503   2,249 
Bank owned life insurance  5,023   - 
Deferred income taxes  8,002   10,081 
Other assets  5,174   3,562 
Total assets $801,330  $787,485 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Liabilities:        
Deposits:        
Noninterest bearing $71,515  $58,145 
Interest-bearing  521,977   513,801 
Total deposits  593,492   571,946 
Short-term borrowings  4,950   - 
Long-term borrowings  88,500   103,500 
Subordinated debentures  20,619   20,619 
Accrued expenses and other liabilities  1,759   3,490 
Total liabilities  709,320   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 September 30, 2017 and December 31, 2016  4   4 
Common stock, $0.01 par value, 20,000,000 shares authorized; 12,245,425 and 12,123,179 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  122   121 
Additional paid-in capital  65,290   63,960 
Retained earnings  26,598   23,845 
Accumulated other comprehensive loss  (4)  - 
Total stockholders’ equity  92,010   87,930 
Total liabilities and stockholders’ equity $801,330  $787,485 

See accompanying notes to consolidated financial statements

1

1

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2019

    

2018

    

2019

    

2018

    

Interest income:

 

 

 

Loans

 

$

9,226

 

$

8,516

 

$

18,393

 

$

16,887

 

Securities

 

 

241

 

 

307

 

 

500

 

 

627

 

Other earning assets

 

 

757

 

 

178

 

 

1,874

 

 

364

 

Total interest income

 

 

10,224

 

 

9,001

 

 

20,767

 

 

17,878

 

Interest expense:

 

 

  

 

 

  

 

 

  

 

 

  

 

Deposits

 

 

1,898

 

 

1,274

 

 

3,767

 

 

2,407

 

Borrowings and subordinated debentures

 

 

481

 

 

800

 

 

1,070

 

 

1,560

 

Total interest expense

 

 

2,379

 

 

2,074

 

 

4,837

 

 

3,967

 

Net interest income

 

 

7,845

 

 

6,927

 

 

15,930

 

 

13,911

 

Provision for loan losses

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net interest income after provision for loan losses

 

 

7,845

 

 

6,927

 

 

15,930

 

 

13,911

 

Noninterest income:

 

 

  

 

 

  

 

 

  

 

 

  

 

Mortgage-banking revenue

 

 

1,087

 

 

635

 

 

1,807

 

 

1,230

 

Real estate commissions

 

 

378

 

 

360

 

 

860

 

 

745

 

Real estate management fees

 

 

162

 

 

187

 

 

326

 

 

370

 

Deposit service charges

 

 

547

 

 

346

 

 

1,056

 

 

641

 

Title company revenue

 

 

262

 

 

293

 

 

479

 

 

435

 

Other noninterest income

 

 

179

 

 

247

 

 

347

 

 

440

 

Total noninterest income

 

 

2,615

 

 

2,068

 

 

4,875

 

 

3,861

 

Noninterest expense:

 

 

  

 

 

  

 

 

  

 

 

  

 

Compensation and related expenses

 

 

4,909

 

 

4,420

 

 

9,434

 

 

8,698

 

Occupancy

 

 

389

 

 

391

 

 

804

 

 

735

 

Legal fees

 

 

26

 

 

31

 

 

75

 

 

42

 

Write-downs, losses, and costs of real estate acquired through foreclosure, net of gains

 

 

24

 

 

(18)

 

 

149

 

 

14

 

Federal Deposit Insurance Corporation insurance premiums

 

 

63

 

 

58

 

 

119

 

 

113

 

Professional fees

 

 

443

 

 

105

 

 

583

 

 

214

 

Advertising

 

 

213

 

 

216

 

 

400

 

 

449

 

Data processing

 

 

354

 

 

255

 

 

696

 

 

519

 

Credit report and appraisal fees

 

 

24

 

 

47

 

 

64

 

 

41

 

Licensing and software

 

 

293

 

 

157

 

 

475

 

 

278

 

Other noninterest expense

 

 

775

 

 

691

 

 

1,464

 

 

1,397

 

Total noninterest expense

 

 

7,513

 

 

6,353

 

 

14,263

 

 

12,500

 

Net income before income tax provision

 

 

2,947

 

 

2,642

 

 

6,542

 

 

5,272

 

Income tax provision

 

 

771

 

 

724

 

 

1,757

 

 

1,469

 

Net income

 

 

2,176

 

 

1,918

 

 

4,785

 

 

3,803

 

Dividends on preferred stock

 

 

 —

 

 

 —

 

 

 —

 

 

(70)

 

Net income available to common stockholders

 

$

2,176

 

$

1,918

 

$

4,785

 

$

3,733

 

Net income per common share - basic

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

 

Net income per common share - diluted

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
Interest income: (unaudited) 
Loans $7,742  $7,479  $22,267  $21,847 
Securities  330   280   927   890 
Other earning assets  167   83   498   251 
Total interest income  8,239   7,842   23,692   22,988 
Interest expense:                
Deposits  1,011   1,019   2,924   3,002 
Borrowings and subordinated debentures  897   1,106   2,844   3,493 
Total interest expense  1,908   2,125   5,768   6,495 
Net interest income  6,331   5,717   17,924   16,493 
Provision for (reversal of) loan losses  -   50   (650)  150 
Net interest income after provision for (reversal of) loan losses  6,331   5,667   18,574   16,343 
Noninterest income:                
Mortgage-banking revenue  334   1,042   1,150   2,693 
Real estate commissions  311   455   959   1,246 
Real estate management fees  197   214   513   564 
Credit report and appraisal fees  137   99   390   304 
Deposit service charges  190   32   265   105 
Other noninterest income  230   54   485   667 
Total noninterest income  1,399   1,896   3,762   5,579 
Noninterest expense:                
Compensation and related expenses  3,288   3,928   10,719   11,218 
Occupancy  354   333   1,015   942 
Legal fees  41   81   104   217 
Write-downs, losses, and costs of real estate acquired through foreclsoure, net  126   41   166   184 
Federal Deposit Insurance Corpation insurance premiums  69   126   133   296 
Professional fees  124   189   377   528 
Advertising  198   158   649   510 
Online charges  237   117   661   617 
Credit report and appraisal fees  203   148   478   480 
Licensing and software  152   115   326   345 
Mortgage leads purchased  48   205   234   559 
Other  681   689   2,158   2,405 
Total noninterest expense  5,521   6,130   17,020   18,301 
Income before income tax provision (benefit)  2,209   1,433   5,316   3,621 
Income tax provision (benefit)  950   378   2,150   (10,816)
Net income  1,259   1,055   3,166   14,437 
Amortization of discount on preferred stock  (68)  (68)  (203)  (203)
Dividends on preferred stock  (70)  (448)  (210)  (1,370)
Net income available to common stockholders $1,121  $539  $2,753  $12,864 
Net income per common share - basic $0.09  $0.04  $0.23  $1.14 
Net income per common share - diluted $0.09  $0.04  $0.22  $1.13 

See accompanying notes to consolidated financial statements

2

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

 

    

2019

    

2018

    

2019

    

2018

    

Net income

 

$

2,176

 

$

1,918

 

$

4,785

 

$

3,803

 

Other comprehensive income (loss) items:

 

 

  

 

 

  

 

 

  

 

 

  

 

Unrealized holding gains (losses) on available-for-sale securities arising during the period (net of tax expense (benefit) of $14, $(5), $21, and $(24)

 

 

38

 

 

(12)

 

 

62

 

 

(66)

 

Total other comprehensive income (loss)

 

 

38

 

 

(12)

 

 

62

 

 

(66)

 

Total comprehensive income

 

$

2,214

 

$

1,906

 

$

4,847

 

$

3,737

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (unaudited) 
Net income $1,259  $1,055  $3,166  $14,437 
Other comprehensive loss items:                
Unrealized holding losses on available-for-sale securities arising during the period (net of income tax benefit of $6 and $2, respectively, in 2017)  (9)  -   (3)  - 
Realized gains, net of income taxes of $1 and $1, respectively, in 2017  (1)  -   (1)  - 
Total other comprehensive loss  (10)  -   (4)  - 
Total comprehensive income $1,249  $1,055  $3,162  $14,437 

See accompanying notes to consolidated financial statements

3

Severn Bancorp, Inc. and Subsidiaries


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

 

Balance at April 1, 2019

 

 —

 

12,775,087

 

$

 —

 

$

128

 

$

65,662

 

$

35,087

 

$

(49)

 

$

100,828

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,176

 

 

 —

 

 

2,176

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

34

 

 

0

 

 

 —

 

 

34

Dividends paid on common stock at $0.03 per share

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(385)

 

 

 —

 

 

(385)

Exercise of stock options

 

 —

 

50

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

38

 

 

38

Balance at June 30, 2019

 

 —

 

12,775,137

 

$

 —

 

$

128

 

$

65,696

 

$

36,878

 

$

(11)

 

$

102,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

 

Balance at April 1, 2018

 

437,500

 

12,247,626

 

$

 4

 

$

122

 

$

65,060

 

$

27,320

 

$

(89)

 

$

92,417

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,918

 

 

 —

 

 

1,918

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

57

 

 

 —

 

 

 —

 

 

57

Dividends paid on common stock at $0.03 per share

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(380)

 

 

 —

 

 

(380)

Redemption of preferred stock

 

(437,500)

 

437,500

 

 

(4)

 

 

 4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of stock options

 

 —

 

9,800

 

 

 —

 

 

 1

 

 

40

 

 

 —

 

 

 —

 

 

41

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

(12)

Balance at June 30, 2018

 

 —

 

12,694,926

 

$

 —

 

$

127

 

$

65,157

 

$

28,858

 

$

(101)

 

$

94,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

 

Balance at January 1, 2019

 

 —

 

12,759,576

 

$

 —

 

$

128

 

$

65,538

 

$

32,860

 

$

(73)

 

$

98,453

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,785

 

 

 —

 

 

4,785

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

77

 

 

 —

 

 

 —

 

 

77

Dividends paid on common stock at $0.06 per share

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(767)

 

 

 —

 

 

(767)

Exercise of stock options

 

 —

 

15,561

 

 

 —

 

 

 —

 

 

81

 

 

 —

 

 

 —

 

 

81

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

62

 

 

62

Balance at June 30, 2019

 

 —

 

12,775,137

 

$

 —

 

$

128

 

$

65,696

 

$

36,878

 

$

(11)

 

$

102,691

4

  
Nine Months Ended September 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
Loss
  
Total
Stockholders’
Equity
 
Balance at January 1, 2017  437,500   12,123,179  $4  $121  $63,960  $23,845  $-  $87,930 
Net income  -   -   -   -   -   3,166   -   3,166 
Stock-based compensation  -   -   -   -   146   -   -   146 
Stock issued in acquisition  -   108,084   -    1    774    -    -    775 
Stock issued, net of expense  -   14,162   -   -   207   -   -   207 
Dividend declared on Series A preferred stock  -   -   -   -   -   (210)  -   (210)
Amortization of discount on Series B preferred stock  -   -   -   -   203   (203)  -   - 
Other comprehensive loss  -   -   -   -   -   -   (4)  (4)
Balance at September 30, 2017  437,500   12,245,425  $4  $122  $65,290  $26,598  $(4) $92,010 

  
Nine Months Ended September 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  -   -   -   -   -   14,437   -   14,437 
Stock-based compensation  -   -   -   -   143   -   -   143 
Stock issued, net of expense  -   2,015,500   -   20   10,490   -   -   10,510 
Stock redemption on Series B preferred stock  (23,393)  -   -   -   (23,393)  -   -   (23,393)
Dividend declared on Series A preferred stock  -   -   -   -   -   (140)  -   (140)
Dividend declared on Series B preferred stock  -   -   -   -   -   (1,230)  -   (1,230)
Amortization of discount on Series B preferred stock  -   -   -   -   203   (203)  -   - 
Balance at September 30, 2016  437,500   12,104,379  $4  $121  $63,778  $22,880  $-  $86,783 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

 

Balance at January 1, 2018

 

437,500

 

12,233,424

 

$

 4

 

$

122

 

$

65,137

 

$

25,872

 

$

(35)

 

$

91,100

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,803

 

 

 —

 

 

3,803

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

113

 

 

 —

 

 

 —

 

 

113

Redemption of preferred stock

 

(437,500)

 

437,500

 

 

(4)

 

 

 4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Dividend declared on Series A preferred stock

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(70)

 

 

 —

 

 

(70)

Dividends paid on common stock at $0.06 per share

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(747)

 

 

 —

 

 

(747)

Exercise of stock options

 

 —

 

24,002

 

 

 —

 

 

 1

 

 

96

 

 

 —

 

 

 —

 

 

97

Other

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(189)

 

 

 —

 

 

 —

 

 

(189)

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(66)

 

 

(66)

Balance at June 30, 2018

 

 —

 

12,694,926

 

$

 —

 

$

127

 

$

65,157

 

$

28,858

 

$

(101)

 

$

94,041

See accompanying notes to consolidated financial statements

5

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, except per share data)thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

Net income

 

$

4,785

 

$

3,803

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

703

 

 

628

Amortization of deferred loan fees

 

 

(949)

 

 

(861)

Net amortization of premiums and discounts

 

 

80

 

 

(125)

Write-downs and losses on real estate acquired through foreclosure, net of gains

 

 

171

 

 

44

Gain on sale of mortgage loans

 

 

(1,807)

 

 

(1,230)

Proceeds from sale of mortgage loans held for sale

 

 

81,725

 

 

37,151

Originations of loans held for sale

 

 

(88,867)

 

 

(40,835)

Stock-based compensation

 

 

77

 

 

113

Increase in cash surrender value of bank-owned life insurance

 

 

(78)

 

 

(82)

Deferred income taxes

 

 

173

 

 

1,334

Decrease in accrued interest receivable

 

 

243

 

 

36

(Increase) decrease in other assets

 

 

(2,610)

 

 

163

Increase in accrued expenses and other liabilities

 

 

2,729

 

 

73

Net cash (used in) provided by operating activities

 

 

(3,625)

 

 

212

Cash flows from investing activities:

 

 

  

 

 

  

Redemption of certificates of deposit held for investment

 

 

1,240

 

 

 —

Loan principal repayments, net of (disbursements)

 

 

4,252

 

 

(17,698)

Redemption of restricted stock investments

 

 

909

 

 

262

Purchases of premises and equipment, net

 

 

(410)

 

 

(548)

Activity in securities held to maturity:

 

 

 

 

 

 

Maturities/calls/repayments

 

 

5,300

 

 

7,745

Activity in available-for-sale securities:

 

 

 

 

 

 

Purchases

 

 

 —

 

 

(2,000)

Maturities/calls/repayments

 

 

1,000

 

 

108

Proceeds from sales of real estate acquired through foreclosure

 

 

107

 

 

64

Net cash provided by (used in) investing activities

 

 

12,398

 

 

(12,067)

Cash flows from financing activities:

 

 

  

 

 

  

Net (decrease) increase in deposits

 

 

(94,090)

 

 

19,387

Net increase in short-term borrowings

 

 

 —

 

 

8,500

Additional long-term borrowings

 

 

 —

 

 

34,000

Repayments of long-term borrowings

 

 

(25,000)

 

 

(49,000)

Common stock dividends

 

 

(767)

 

 

(747)

Preferred stock dividends

 

 

 —

 

 

(70)

Exercise of stock options

 

 

81

 

 

97

Net cash (used in) provided by financing activities

 

 

(119,776)

 

 

12,167

(Decrease) increase in cash and cash equivalents

 

 

(111,003)

 

 

312

Cash and cash equivalents at beginning of period

 

 

188,340

 

 

21,853

Cash and cash equivalents at end of period

 

$

77,337

 

$

22,165

Supplemental Noncash Disclosures:

 

 

 

 

 

  

Interest paid on deposits and borrowed funds

 

$

4,925

 

$

3,937

Income taxes paid

 

 

1,909

 

 

91

Real estate acquired in satisfaction of loans

 

 

171

 

 

 —

Initial recognition of operating lease right-of-use asset

 

 

2,684

 

 

 —

Initial recognition of operating lease liability

 

 

2,684

 

 

 —

Transfers of loans held for sale to loan portfolio

 

 

648

 

 

 —

  Nine Months Ended September 30, 
  2017  2016 
Cash flows from operating activities: (unaudited) 
Net income $3,166  $14,437 
Adjustments to reconcile net income to net cash from operating activities:        
Depreciation and amortization  919   863 
Amortization of deferred loan fees  (847)  (889)
Net amortization of premiums and discounts on securities  (202)  318 
(Reversal of) provision for loan losses  (650)  150 
Write-downs and losses on real estate acquired through foreclosure, net of gains  139   149 
Gain on sale of mortgage loans  (1,150)  (2,693)
Gain on sale of securities  (2)  - 
Proceeds from sale of mortgage loans held for sale  28,482   107,468 
Originations of loans held for sale  (22,556)  (104,533)
Stock-based compensation  146   143 
Increase in cash surrender value of bank owned life insurance  (23)  - 
Deferred income taxes  2,081   (10,916)
Increase in accrued interest receivable  (254)  (44)
(Increase) decrease in other assets  (837)  384 
Decrease in accrued expenses and other liabilities  (1,731)  (2,938)
Net cash provided by operating activities  6,681   1,899 
Cash flows from investing activities:        
Loan principal (disbursements), net of repayments  (40,265)  (14,448)
Redemption of restricted stock investments  404   396 
Purchases of premises and equipment, net  (287)  (740)
Purchase of bank owned life insurance  (5,000)  - 
Activity in securities held to maturity:        
Purchases  (6,679)  (3,562)
Maturities/calls/repayments  10,730   11,700 
Activity in available-for-sale securities:        
Purchases  (7,184)  - 
Sales  4,011   - 
Maturities/calls/repayments  184   - 
Proceeds from sales of real estate acquired through foreclosure  433   1,622 
Net cash used in investing activities  (43,653)  (5,032)
Cash flows from financing activities:        
Net increase in deposits  21,546   32,839 
Additional borrowings  39,950   10,500 
Repayment of borrowings  (50,000)  (18,500)
Series A preferred stock dividends  (210)  (140)
Series B preferred stock dividends  -   (7,781)
Stock redemption of Series B preferred stock  -   (23,393)
Proceeds from common stock issuance  207   10,510 
Net cash provided by financing activities  11,493   4,035 
(Decrease) increase in cash and cash equivalents  (25,479)  902 
Cash and cash equivalents at beginning of period  67,114   43,591 
Cash and cash equivalents at end of period $41,635  $44,493 
Supplemental Information:        
Interest paid on deposits and borrowed funds $5,828  $9,104 
Income taxes paid (recovered)  50   (852)
Real estate acquired in satisfaction of loans  703   1,370 
Transfers of loans held for sale to portfolio  660   - 

See accompanying notes to consolidated financial statements

6

Severn Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of and for the three and nine months ended September 30, 2017 and 2016 is unaudited)

(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 ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20172019 or any other interim or future period. Events occurring after the date of the financial statements up toNovember 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 20162018 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”), andalong with 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. Also included are the accounts of SBI Mortgage Company’s subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

Acquisition
On September 1, 2017, we acquired Mid-Maryland Title Company, Inc. (the “Title Company”) by issuing stock in a business combination. We issued 108,084 shares in the transaction valued at $775,000.  We recorded $759,000 in goodwill in the transaction.  The acquisition continues our growth strategy and focus on being a full-service provider and complements the mortgage services, commercial banking services, and commercial real estate services we provide. The acquisition of the Title Company has not had a material effect on the Company’s financial condition or results of operations.

Use of Estimates

The preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as ofat the date of the financial statements and affect the reported amounts of revenues earnedincome and expenses incurred during the reporting period. Actual results could differ fromperiods presented. The accounting policies we view as critical are those estimates. Estimates that could change significantly relaterelating 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, the valuation of real estate acquired through foreclosure, and the valuation of share-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.

assets and liabilities.

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.

in other banks” are considered cash or cash equivalents.  For financial statement purposes, these assets are carried at cost. Federal funds sold and interest-bearing deposits in other banks generally have overnight maturities and are in excess of amounts that would be recoverable under Federal Deposit Insurance Corporation (“FDIC”) insurance.

Reclassifications

Certain reclassifications have been made to amounts previously reported to conform to current period presentation.

7

Recent Accounting Pronouncements

Pronouncements Adopted

In MarchFebruary 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,  Stock Compensation:  Improvements to Employee Share-Based Payment Accounting2016‑02, , 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.

Pronouncements Issued
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended by ASU 2015-14, Revenue from Contracts with Customers:  Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers:  Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers:  Narrow-Scope Improvements and Practical Expedients, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue form Contracts with Customers, that provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This standard may affect an entity’s financial statements, business processes and internal control over financial reporting. The standard is effective for interim and annual periods beginning after December 15, 2017. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The following revenue streams were identified to be within the scope of ASU No. 2014-09:  real estate commissions, real estate management fees, and deposit service charges.  For all affected revenue streams, we are currently planning to use a modified retrospective approach to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.  We are still evaluating the impact of guidance in this update, including method of implementation, and related changes to disclosures that may be required.
 In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall:  Recognition and Measurement of Financial Assets and Financial Liabilities, which requires entities to measure equity investments at fair value and recognize changes on fair value in net income. The guidance also provides a new measurement alternative for equity investments that do not have readily determinable fair values and don’t qualify for the net asset value practical expedient. Entities will have to record changes in instrument–specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, except for certain financial liabilities of consolidated collateralized financing entities. Entities will also have to reassess the realizability of a deferred tax asset related to an available-for-sale (“AFS”) debt security in combination with their other deferred tax assets. For public entities, the guidance in this ASU is 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 is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
In February 2016, FASB issued ASU 2016-02, Leases, which requires a lessee to recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a “right-of-use”right-of-use (“ROU”) 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 iswas 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 thatadopted this standard using the option to apply the transition provisions of the new standard at the adoption date instead of the earliest period presented as provided in ASU No.2018-11. Additionally, we elected to apply all practical expedients as provided in ASU 2016-02, maywith the exception of the hindsight practical expedient which was not elected. As a result of the adoption of this standard, effective January 1, 2019, we recognized both an ROU asset and a lease liability of $2.7 million to be recorded in an increase inother assets to recognizeand other liabilities, respectively, on the balance sheet.  The lease liability represents the present value of the future payments on five leased properties and six leased pieces of equipment within the Company’s footprint, while the ROU asset reflects the lease obligations, withliability adjusted for deferred rent balances of the respective properties as of the adoption date of January 1, 2019. The Company expects its regulatory capital ratios to remain above the thresholds necessary to be classified as a corresponding increase in liabilities, however, we do“well capitalized” institution.

In March 2017, FASB issued ASU No. 2017‑08, Receivables - Nonrefundable Fees and Other costs, which provides guidance that called for the shortening of the amortization period for certain callable debt securities held at a premium. The standard was effective for interim and annual reporting periods beginning after December 15, 2018. The adoption of ASC No. 2017‑08 did not expect this to have a material impact on our 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 allowed 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. The adoption of ASU No. 2018-02 did not have a material impact on its financial position, results of operations, or cash flows. 

Pronouncements Issued

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. In July 2019, the FASB issued a proposal to delay the implementation for smaller reporting companies such as us until January 2023; however, that proposal is not final as of the filing of this Quarterly Report on Form 10-Q.

We have contracted with a third party vendor to assist in the transition to CECL. The Bank has purchased the third party vendor’s CECL software and has separately contracted with their advisory services group to help with the installation and transition. As the Bank has been using other software of this specific vendor, they have access to the Bank’s historical data. The third party vendor has been analyzing the Bank’s data, and the Bank has been updating the data to provide the information necessary for CECL calculations. The third party vendor has also begun determining which economic factors are most directly responsible for losses. They have started to recommend pools to be used for CECL calculations, and appropriate methods (as proscribed by CECL) to calculate the reserve for the various pools. As the third party vendor has many financial institution clients, they will be able to provide peer group data to the extent the Bank’s data is not sufficient to make the many determinations required under CECL. The current plan is to be running the CECL and the incurred loss model in parallel during the fourth quarter of 2019 and be in position to completely transition to CECL by the required date. 

8

While we are currently in the process of evaluating the impact of the amended guidance on our Consolidated Financial Statements, we currently expectit is quite possible that the Allowance towill 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 our loan and lease portfolio at the time of adoption.

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 standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASC No. 2016-15 to have a material impact on our financial position, results of operations, or cash flows.
In March 2017, FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other costs, which provides guidance that calls for the shortening of the amortization period for certain callable debt securities held at a premium. The standard is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of ASC No. 2017-08 to have a material impact on our financial position, results of operations, or cash flows.

Note 2 - Securities

The amortized cost and estimated fair values of our AFSavailable-for-sale (“AFS”) securities portfolio were as follows as of September 30, 2017:follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2019

 

 

Amortized

 

Unrealized

    

Unrealized

    

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,997

 

$

 —

 

$

 2

 

$

1,995

U.S. government agency notes

 

 

9,051

 

 

 —

 

 

15

 

 

9,036

 

 

$

11,048

 

$

 —

 

$

17

 

$

11,031


 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2018

 

 

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,992

 

$

 —

 

$

11

 

$

1,981

U.S. government agency notes

 

 

10,086

 

 

 —

 

 

89

 

 

9,997

 

 

$

12,078

 

$

 —

 

$

100

 

$

11,978

  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. government agency notes $3,135  $-  $6  $3,129 

We did not hold any AFS securities as of December 31, 2016.

The amortized cost and estimated fair values of our held-to-maturity (“HTM”) securities portfolio were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,992

 

$

23

 

$

 —

 

$

2,015

U.S. government agency notes

 

 

8,989

 

 

103

 

 

24

 

 

9,068

Mortgage-backed securities

 

 

22,581

 

 

83

 

 

39

 

 

22,625

 

 

$

33,562

 

$

209

 

$

63

 

$

33,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,991

 

$

17

 

$

 —

 

$

2,008

U.S. government agency notes

 

 

11,992

 

 

45

 

 

92

 

 

11,945

Mortgage-backed securities

 

 

24,929

 

 

 6

 

 

676

 

 

24,259

 

 

$

38,912

 

$

68

 

$

768

 

$

38,212


9

  September 30, 2017 
  
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
  (dollars in thousands) 
U.S. Treasury securities $7,996  $106  $-  $8,102 
U.S. government agency notes  19,008   137   43   19,102 
Mortgage-backed securities  31,760   97   102   31,755 
  $58,764  $340  $145  $58,959 
  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 

Three

Gross unrealized losses and fair value by length of time that the individual AFS securities werehave been in an unrealized loss position as of September 30, 2017 for less than twelve months, withat the largest single unrealized lossdates indicated are presented in any one security amounting to $3,000.the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

Less than 12 months

 

12 months or more

 

Total

 

   

# of

   

Fair

   

Unrealized

 

# of

 

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

 

Securities

 

Value

 

Losses

   

Securities

   

Value

 

Losses

 

Securities

 

Value

 

Losses

 

 

(dollars in thousands)

U.S. Treasury securities

 

 —

 

$

 —

 

$

 —

 

 2

 

$

1,995

 

$

 2

 

 2

 

$

1,995

 

$

 2

U.S. government agency notes

 

 —

 

 

 —

 

 

 —

 

 7

 

 

9,036

 

 

15

 

 7

 

 

9,036

 

 

15

 

 

 —

 

$

 —

 

$

 —

 

 9

 

$

11,031

 

$

17

 

 9

 

$

11,031

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Less than 12 months

 

12 months or more

 

Total

 

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

 

(dollars in thousands)

U.S. Treasury securities

 

 1

 

$

990

 

$

 5

 

 1

 

$

991

 

$

 6

 

 2

 

$

1,981

 

$

11

U.S. government agency notes

 

 —

 

 

 —

 

 

 —

 

 8

 

 

9,997

 

 

89

 

 8

 

 

9,997

 

 

89

 

 

 1

 

$

990

 

$

 5

 

 9

 

$

10,988

 

$

95

 

10

 

$

11,978

 

$

100

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

Less than 12 months

 

12 months or more

 

Total

 

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

 

(dollars in thousands)

U.S. government agency notes

 

 —

 

$

 —

 

$

 —

 

 7

 

$

6,989

 

$

24

 

 7

 

$

6,989

 

$

24

Mortgage-backed securities

 

 —

 

 

 —

 

 

 —

 

 6

 

 

7,643

 

 

39

 

 6

 

 

7,643

 

 

39

 

 

 —

 

$

 —

 

$

 —

 

13

 

$

14,632

 

$

63

 

13

 

$

14,632

 

$

63


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Less than 12 months

 

12 months or more

 

Total

 

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

 

(dollars in thousands)

U.S. government agency notes

 

 —

 

$

 —

 

$

 —

 

10

 

$

9,927

 

$

92

 

10

 

 

9,927

 

 

92

Mortgage-backed securities

 

 —

 

 

 —

 

 

 —

 

18

 

 

24,011

 

 

676

 

18

 

 

24,011

 

 

676

 

 

 —

 

$

 —

 

$

 —

 

28

 

$

33,938

 

$

768

 

28

 

$

33,938

 

$

768

  September 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. government agency notes $4,000  $2  $7,005  $41  $11,005  $43 
Mortgage-backed securities  11,687   39   7,501   63   19,188   102 
  $15,687  $41  $14,506  $104  $30,193  $145 
  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 

In the HTM securities portfolio, 21 securities were in a loss position as of September 30, 2017, with the largest single unrealized loss in any one security amounting to $29,000.

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 SeptemberJune 30, 20172019 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

 

$

10,033

 

$

10,019

 

$

7,004

 

$

6,993

Due after one through five years

 

 

1,015

 

 

1,012

 

 

3,977

 

 

4,090

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

22,581

 

 

22,625

 

 

$

11,048

 

$

11,031

 

$

33,562

 

$

33,708


  AFS Securities  HTM Securities 
  
Amortized
Cost
  
Estimated
Fair Value
  
Amortized
Cost
  
Estimated
Fair Value
 
  (dollars in thousands) 
Due in one year or less $-  $-  $10,009  $10,014 
Due after one through five years  3,135   3,129   15,030   15,112 
Due after five years through ten years  -   -   1,965   2,078 
Mortgage-backed securities  -   -   31,760   31,755 
  $3,135  $3,129  $58,764  $58,959 

During both the three and nine months ended September 30, 2017, we recognized gross gains and losses on the sale of securities of $4,000 and $2,000, respectively.

We did not sell any securities during 2016.

the three and six months ended June 30, 2019 or 2018.

There were no securities pledged as collateral as of SeptemberJune 30, 20172019 or December 31, 2016.


2018.

Note 3 -  Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:

 

 

 

 

 

 

 

 

    

June 30, 2019

    

December 31, 2018

 

 

(dollars in thousands)

Residential mortgage

 

$

276,013

 

$

276,389

Commercial

 

 

45,347

 

 

35,884

Commercial real estate

 

 

238,699

 

 

244,088

Construction, land acquisition, and development

 

 

108,182

 

 

114,540

Home equity/2nds

 

 

12,581

 

 

13,386

Consumer

 

 

1,621

 

 

1,087

Total loans receivable

 

 

682,443

 

 

685,374

Unearned loan fees

 

 

(2,870)

 

 

(3,025)

Loans receivable

 

$

679,573

 

$

682,349

  September 30, 2017  December 31, 2016 
  (dollars in thousands) 
Residential mortgage $292,068  $260,603 
Commercial  37,485   46,468 
Commercial real estate  223,167   195,710 
Construction, land acquisition, and development  84,164   90,102 
Home equity/2nds  15,861   19,129 
Consumer  1,118   1,210 
Total loans receivable  653,863   613,222 
Unearned loan fees  (2,899)  (2,944)
Net loans receivable $650,964  $610,278 

Certain loans in the amount of $210.4$165.6 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”) as collateral against advances.


advances at June 30, 2019.

At June 30, 2019, the Bank was servicing $27.5 million in loans for the Federal National Mortgage Association (“FNMA”) and $14.0 million in loans for the Federal Home Loan Mortgage Corporation (“FHLMC”). At December 31, 2018, the Bank was servicing $29.4 million in loans for FNMA and $15.1 million in loans for FHLMC.

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 SeptemberJune 30, 20172019 and December 31, 2016.2018.


11

At December 31, 2018, due to a re-evaluation of our qualitative factors, we changed our estimates of the Allowance relative to historical loss experience within specific loan portfolio segments in order to better align our qualitative factors with historical losses experienced over a longer period of time, relative to those specific loan segments. The result of this change in estimate did not result in a material increase in the Allowance compared to the year ended December 31, 2017, however there were material changes to the Allowance between loan segments. Due to the change in accounting estimate, Allowance allocated to commercial loans and ADC loans increased approximately $2.2 million and $1.1 million, respectively, while the Allowance allocated to residential mortgage loans and commercial real estate loans decreased approximately $600,000 and $2.7 million, respectively, as of December 31, 2018. This change in accounting estimate had no impact on earnings or diluted earnings per share.

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 ourconsideration of risk. 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, and are generally 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. Repaymentestate and secondarily as cash flow dependent. As repayment of these loans is generally dependent upon the successful operation of the property securing the loan, orwe look closely at the principal business conducted oncash flows generated by the property securing the loan.loan, although the primary underwriting criteria for these loan types is the sufficient value of the underlying collateral. 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.


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

12


The sources of repayment of these loans is typically 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.


Home equity/2nds - subject to the underwriting standards and processes similar to residential mortgages and 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 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.


Risk Ratings

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss.  Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the Allowance.  Loans not classified are rated pass.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed in nonaccrual status or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, generally after nine months of consecutive current payments and completion of an updated analysis of the borrower’s ability to service the loan.

Loans that experience insignificant payment delays and payment shortfalls may not be placed in nonaccrual status or classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Allowance Methodology

The Allowance consists of specific and general components.  The specific component relates to loans that are classified as impaired.  The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as loans that are not classified.

A loan is considered impaired if it meets any of the following three criteria:

·Loans that are 90 days or more in arrears (nonaccrual loans);
·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”).

If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent for purposes of Allowance determination.

With respect to all loan segments, we do not charge off a loan, or a portion of a loan, until one of the following conditions have been met:

·The loan has been foreclosed. At the time of foreclosure, a charge off is recorded for the difference between the recorded amount of the loan and the fair 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, a charge-off is recorded for the difference between the recorded amount of the loan and the agreed upon proceeds amount.

·The loan is considered to be a collateral dependent impaired loan when its collateral valuation is less than the recorded balance. The loan is written down for accounting purposes by the amount of the difference between the recorded balance and collateral value.

Specific Allowance Component

Impaired loans secured by real estate - when a secured real estate 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 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.

Impaired loans secured by collateral other than real estate - for loans secured by nonreal estate collateral, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging, or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
For such loans that are classified as impaired, an Allowance is established when the current fair value of the underlying collateral less its estimated disposal costs is lower than the carrying value of the loan.  For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of the loan.

General Allowance Component

The general component of the Allowance is based on historical loss experience adjusted for qualitative factors. Loans are pooled by portfolio class and an historical loss percentage, based upon a four-year net charge-off history, is applied to each class.  The result of that calculation for each loan class is then applied to the current loan portfolio balances to determine the required general component of the Allowance per loan class.  We then apply additional loss multipliers to the different classes of loans to reflect various qualitative factors. These qualitative factors include, but are not limited to:

·Levels and trends in delinquencies and nonaccruals;
·Inherent risk in the loan portfolio;
·Trends in volume and terms of the loan;
·Effects of any change in lending policies and procedures;
·Experience, ability, and depth of management;
·National and local economic trends and conditions;
·Effect of any changes in concentration of credit; and
·Industry conditions.

The following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

    

 

    

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

(dollars in thousands)

Beginning Balance

 

$

2,572

 

$

1,740

 

$

712

 

$

2,579

 

$

242

 

$

 1

 

$

239

 

$

8,085

Charge-offs

 

 

(20)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

 

(32)

Recoveries

 

 

 3

 

 

 —

 

 

33

 

 

 —

 

 

 4

 

 

 —

 

 

 —

 

 

40

Net (charge-offs) recoveries

 

 

(17)

 

 

 —

 

 

33

 

 

 —

 

 

 4

 

 

(12)

 

 

 —

 

 

 8

Provision for (reversal of) loan losses

 

 

11

 

 

(174)

 

 

47

 

 

104

 

 

(23)

 

 

11

 

 

24

 

 

 —

Ending Balance

 

$

2,566

 

$

1,566

 

$

792

 

$

2,683

 

$

223

 

$

 —

 

$

263

 

$

8,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

    

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

(dollars in thousands)

Beginning Balance

 

$

3,301

 

$

514

 

$

2,995

 

$

1,060

 

$

297

 

$

 2

 

$

 —

 

$

8,169

Charge-offs

 

 

(37)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(37)

Recoveries

 

 

 1

 

 

 —

 

 

122

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

125

Net (charge-offs) recoveries

 

 

(36)

 

 

 —

 

 

122

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

88

(Reversal of) provision for loan losses

 

 

(303)

 

 

(100)

 

 

(526)

 

 

1,000

 

 

(70)

 

 

(1)

 

 

 —

 

 

 —

Ending Balance

 

$

2,962

 

$

414

 

$

2,591

 

$

2,060

 

$

229

 

$

 1

 

$

 —

 

$

8,257

13

  Three Months Ended September 30, 2017 
  
Residential
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  
Home Equity/
2nds
  Consumer  Total 
  (dollars in thousands) 
Beginning Balance $3,403  $389  $2,571  $984  $367  $4  $7,718 
Charge-offs  -   -   -   -   -   -   - 
Recoveries  156   -   40   -   22   -   218 
Net recoveries  156   -   40   -   22   -   218 
(Reversal of) provision for loan losses  (137)  53   (44)  158   (28)  (2)  - 
Ending Balance $3,422  $442  $2,567  $1,142  $361  $2  $7,936 

  Nine Months Ended September 30, 2017 
  (dollars in thousands) 
Beginning Balance $3,833  $478  $2,535  $1,390  $728  $5  $8,969 
Charge-offs  (707)  -   -   -   (98)  -   (805)
Recoveries  295   -   100   -   27   -   422 
Net (charge-offs) recoveries  (412)  -   100   -   (71)  -   (383)
Provision for (reversal of) loan losses  1   (36)  (68)  (248)  (296)  (3)  (650)
Ending Balance $3,422  $442  $2,567  $1,142  $361  $2  $7,936 
                             
Ending balance - individually evaluated for impairment $1,544  $-  $186  $50  $-  $2  $1,782 
Ending balance - collectively evaluated for impairment  1,878   442   2,381   1,092   361   -   6,154 
  $3,422  $442  $2,567  $1,142  $361  $2  $7,936 
                             
Ending loan balance - individually evaluated for impairment $20,379  $-  $3,419  $1,003  $-  $87  $24,888 
Ending loan balance - collectively evaluated for impairment  268,790   37,485   219,748   83,161   15,861   1,031   626,076 
  $289,169  $37,485  $223,167  $84,164  $15,861  $1,118  $650,964 

  December 31, 2016 
  
Residential
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  
Home Equity/
2nds
  Consumer  Total 
  (dollars in thousands) 
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 
13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

    

 

    

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

(dollars in thousands)

Beginning Balance

 

$

2,224

 

$

2,736

 

$

457

 

$

2,239

 

$

222

 

$

 1

 

$

165

 

$

8,044

Charge-offs

 

 

(20)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

 

(32)

Recoveries

 

 

 8

 

 

 —

 

 

67

 

 

 —

 

 

 6

 

 

 —

 

 

 —

 

 

81

Net (charge-offs) recoveries

 

 

(12)

 

 

 —

 

 

67

 

 

 —

 

 

 6

 

 

(12)

 

 

 —

 

 

49

Provision for (reversal of) loan losses

 

 

354

 

 

(1,170)

 

 

268

 

 

444

 

 

(5)

 

 

11

 

 

98

 

 

 —

Ending Balance

 

$

2,566

 

$

1,566

 

$

792

 

$

2,683

 

$

223

 

$

 —

 

$

263

 

$

8,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - individually evaluated for impairment

 

$

889

 

$

 —

 

$

67

 

$

32

 

$

24

 

$

 —

 

$

 —

 

$

1,012

Ending balance - collectively evaluated for impairment

 

 

1,677

 

 

1,566

 

 

725

 

 

2,651

 

 

199

 

 

 —

 

 

263

 

 

7,081

 

 

$

2,566

 

$

1,566

 

$

792

 

$

2,683

 

$

223

 

$

 —

 

$

263

 

$

8,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance -individually evaluated for impairment

 

$

13,205

 

$

 —

 

$

1,889

 

$

1,119

 

$

859

 

$

72

 

 

 

 

$

17,144

Ending loan balance -collectively evaluated for impairment

 

 

261,269

 

 

45,347

 

 

235,479

 

 

107,063

 

 

11,722

 

 

1,549

 

 

 

 

 

662,429

 

 

$

274,474

 

$

45,347

 

$

237,368

 

$

108,182

 

$

12,581

 

$

1,621

 

 

 

 

$

679,573

  Three Months Ended September 30, 2016 
  
Residential
Mortgage
  Commercial  
Commercial
Real Estate
  ADC  
Home Equity/
2nds
  Consumer  Total 
  (dollars in thousands) 
Beginning Balance $3,892  $752  $2,577  $983  $593  $7  $8,804 
Charge-offs  -   -   -   (72)  -   -   (72)
Recoveries  137   10   4   -   2   50   203 
Net recoveries (charge-offs)  137   10   4   (72)  2   50   131 
(Reversal of) provision for loan losses  (161)  (63)  (189)  289   226   (52)  50 
Ending Balance $3,868  $699  $2,392  $1,200  $821  $5  $8,985 


  Nine Months Ended September 30, 2016 
  (dollars in thousands) 
Beginning Balance $4,188  $291  $2,792  $956  $528  $3  $8,758 
Charge-offs  (151)  (17)  (178)  (72)  (28)  -   (446)
Recoveries  322   43   4   100   4   50   523 
Net recoveries (charge-offs)  171   26   (174)  28   (24)  50   77 
(Reversal of) provision for loan losses  (491)  382   (226)  216   317   (48)  150 
Ending Balance $3,868  $699  $2,392  $1,200  $821  $5  $8,985 
                             
Ending balance - individually evaluated for impairment $1,583  $15  $200  $55  $402  $4  $2,259 
Ending balance - collectively evaluated for impairment  2,285   684   2,192   1,145   419   1   6,726 
  $3,868  $699  $2,392  $1,200  $821  $5  $8,985 
                             
Ending loan balance -  individually evaluated for impairment $22,521  $495  $5,696  $1,446  $3,519  $100  $33,777 
Ending loan balance - collectively evaluated for impairment  246,375   41,864   193,219   79,894   16,220   1,109   578,681 
  $268,896  $42,359  $198,915  $81,340  $19,739  $1,209  $612,458 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Residential

    

 

    

Commercial

    

 

    

 

Home Equity/

    

 

    

 

    

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

(dollars in thousands)

Ending balance - individually evaluated for impairment

 

$

927

 

$

430

 

$

142

 

$

32

 

$

 2

 

$

 —

 

$

 —

 

$

1,533

Ending balance - collectively evaluated for impairment

 

 

1,297

 

 

2,306

 

 

315

 

 

2,207

 

 

220

 

 

 1

 

 

165

 

 

6,511

 

 

$

2,224

 

$

2,736

 

$

457

 

$

2,239

 

$

222

 

$

 1

 

$

165

 

$

8,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance - individually evaluated for impairment

 

$

12,579

 

$

430

 

$

1,992

 

$

1,278

 

$

871

 

$

76

 

 

 

 

$

17,226

Ending loan balance - collectively evaluated for impairment

 

 

262,180

 

 

35,454

 

 

240,701

 

 

113,262

 

 

12,515

 

 

1,011

 

 

 

 

 

665,123

 

 

$

274,759

 

$

35,884

 

$

242,693

 

$

114,540

 

$

13,386

 

$

1,087

 

 

 

 

$

682,349

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

    

 

 

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

 

(dollars in thousands)

Beginning Balance

    

$

3,099

 

$

527

 

$

2,805

 

$

1,236

 

$

386

 

$

 2

 

$

 —

 

$

8,055

 

Charge-offs

 

 

(360)

 

 

 —

 

 

 —

 

 

(13)

 

 

 —

 

 

 —

 

 

 —

 

 

(373)

 

Recoveries

 

 

222

 

 

 —

 

 

333

 

 

 —

 

 

20

 

 

 —

 

 

 —

 

 

575

 

Net (charge-offs) recoveries

 

 

(138)

 

 

 —

 

 

333

 

 

(13)

 

 

20

 

 

 —

 

 

 —

 

 

202

 

Provision for (reversal of) loan losses

 

 

 1

 

 

(113)

 

 

(547)

 

 

837

 

 

(177)

 

 

(1)

 

 

 —

 

 

 —

 

Ending Balance

 

$

2,962

 

$

414

 

$

2,591

 

$

2,060

 

$

229

 

$

 1

 

$

 —

 

$

8,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - individually evaluated for impairment

 

$

1,295

 

$

 —

 

$

153

 

$

1,002

 

$

 2

 

$

 1

 

$

 —

 

$

2,453

 

Ending balance - collectively evaluated for impairment

 

 

1,667

 

 

414

 

 

2,438

 

 

1,058

 

 

227

 

 

 —

 

 

 —

 

 

5,804

 

 

 

$

2,962

 

$

414

 

$

2,591

 

$

2,060

 

$

229

 

$

 1

 

$

 —

 

$

8,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance - individually evaluated for impairment

 

$

15,926

 

$

300

 

$

2,003

 

$

3,046

 

$

1,461

 

$

80

 

 

 

 

$

22,816

 

Ending loan balance - collectively evaluated for impairment

 

 

273,503

 

 

42,318

 

 

230,835

 

 

104,518

 

 

11,976

 

 

946

 

 

 

 

 

664,096

 

 

 

$

289,429

 

$

42,618

 

$

232,838

 

$

107,564

 

$

13,437

 

$

1,026

 

 

 

 

$

686,912

 

The following tables present the credit quality breakdown of our loan portfolio by class:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

 

    

 Special

    

 

    

 

 

 

 Pass 

 

 Mention 

 

Substandard

 

Total

 

 

(dollars in thousands)

Residential mortgage

 

$

270,573

 

$

 —

 

$

3,901

 

$

274,474

Commercial

 

 

44,139

 

 

1,208

 

 

 —

 

 

45,347

Commercial real estate

 

 

232,597

 

 

3,088

 

 

1,683

 

 

237,368

ADC

 

 

107,351

 

 

 —

 

 

831

 

 

108,182

Home equity/2nds

 

 

11,990

 

 

418

 

 

173

 

 

12,581

Consumer

 

 

1,621

 

 

 —

 

 

 —

 

 

1,621

 

 

$

668,271

 

$

4,714

 

$

6,588

 

$

679,573

16

  September 30, 2017 
  Pass  
Special
Mention
  Substandard  Total 
  (dollars in thousands) 
Residential mortgage $281,954  $1,397  $5,818  $289,169 
Commercial  37,299   50   136   37,485 
Commercial real estate  216,373   4,668   2,126   223,167 
ADC  82,958   -   1,206   84,164 
Home equity/2nds  14,531   471   859   15,861 
Consumer  1,118   -   -   1,118 
  $634,233  $6,586  $10,145  $650,964 
14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

 

    

Special

    

 

    

 

 

 

Pass

 

Mention

 

Substandard

 

Total

 

 

(dollars in thousands)

Residential mortgage

 

$

270,727

 

$

827

 

$

3,205

 

$

274,759

Commercial

 

 

35,435

 

 

19

 

 

430

 

 

35,884

Commercial real estate

 

 

237,387

 

 

3,523

 

 

1,783

 

 

242,693

ADC

 

 

113,072

 

 

 —

 

 

1,468

 

 

114,540

Home equity/2nds

 

 

12,536

 

 

434

 

 

416

 

 

13,386

Consumer

 

 

1,087

 

 

 —

 

 

 —

 

 

1,087

 

 

$

670,244

 

$

4,803

 

$

7,302

 

$

682,349

  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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

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

 

$

531

 

$

 —

 

$

2,148

 

$

2,679

 

$

271,795

 

$

274,474

 

$

3,288

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

45,347

 

 

45,347

 

 

 —

Commercial real estate

 

 

 —

 

 

 —

 

 

452

 

 

452

 

 

236,916

 

 

237,368

 

 

779

ADC

 

 

 —

 

 

 —

 

 

388

 

 

388

 

 

107,794

 

 

108,182

 

 

388

Home equity/2nds

 

 

 —

 

 

 —

 

 

173

 

 

173

 

 

12,408

 

 

12,581

 

 

429

Consumer

 

 

16

 

 

 —

 

 

 3

 

 

19

 

 

1,602

 

 

1,621

 

 

 3

 

 

$

547

 

$

 —

 

$

3,164

 

$

3,711

 

$

675,862

 

$

679,573

 

$

4,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

 

$

1,060

 

$

 —

 

$

1,794

 

$

2,854

 

$

271,905

 

$

274,759

 

$

2,580

Commercial

 

 

 —

 

 

 —

 

 

430

 

 

430

 

 

35,454

 

 

35,884

 

 

430

Commercial real estate

 

 

137

 

 

 —

 

 

660

 

 

797

 

 

241,896

 

 

242,693

 

 

660

ADC

 

 

255

 

 

 —

 

 

387

 

 

642

 

 

113,898

 

 

114,540

 

 

558

Home equity/2nds

 

 

96

 

 

 —

 

 

428

 

 

524

 

 

12,862

 

 

13,386

 

 

428

Consumer

 

 

13

 

 

 —

 

 

 —

 

 

13

 

 

1,074

 

 

1,087

 

 

 —

 

 

$

1,561

 

$

 —

 

$

3,699

 

$

5,260

 

$

677,089

 

$

682,349

 

$

4,656

  September 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 $1,173  $1,216  $2,364  $4,753  $284,416  $289,169  $4,531 
Commercial  -   -   -   -   37,485   37,485   84 
Commercial real estate  -   478   -   478   222,689   223,167   160 
ADC  -   -   239   239   83,925   84,164   318 
Home equity/2nds  -   -   458   458   15,403   15,861   1,284 
Consumer  -   -   -   -   1,118   1,118   - 
   $1,173  $1,694  $3,061  $5,928  $645,036  $650,964  $6,377 
  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 

We dodid not have any loans greater than 90 days past due and still accruing loans as of SeptemberJune 30, 20172019 or December 31, 2016.


2018.

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 $1.2$382,000 and $1.1 million and $338,000 for the ninesix months ended SeptemberJune 30,  20172019 and 2016,2018, respectively. The actual interest income recorded on those loans was approximately $403,000$82,000 and $130,000$208,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.

17

The following tables summarize impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

    

Unpaid

    

 

    

 

    

Unpaid

    

 

    

 

 

 

Principal

 

Recorded

 

Related

 

Principal

 

Recorded

 

Related

 

 

Balance

 

Investment

 

Allowance

 

Balance

 

Investment

 

Allowance

With no related Allowance:

 

(dollars in thousands)

Residential mortgage

 

$

7,740

 

$

7,513

 

$

 —

 

$

7,054

 

$

6,808

 

$

 —

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

1,365

 

 

1,325

 

 

 —

 

 

1,244

 

 

1,206

 

 

 —

ADC

 

 

988

 

 

987

 

 

 —

 

 

1,142

 

 

1,143

 

 

 —

Home equity/2nds

 

 

1,308

 

 

825

 

 

 —

 

 

1,290

 

 

859

 

 

 —

Consumer

 

 

69

 

 

68

 

 

 —

 

 

76

 

 

76

 

 

 —

With a related Allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

5,812

 

 

5,692

 

 

889

 

 

5,888

 

 

5,771

 

 

927

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

476

 

 

430

 

 

430

Commercial real estate

 

 

564

 

 

564

 

 

67

 

 

795

 

 

786

 

 

142

ADC

 

 

132

 

 

132

 

 

32

 

 

135

 

 

135

 

 

32

Home equity/2nds

 

 

35

 

 

34

 

 

24

 

 

13

 

 

12

 

 

 2

Consumer

 

 

 4

 

 

 4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Totals:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

13,552

 

 

13,205

 

 

889

 

 

12,942

 

 

12,579

 

 

927

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

476

 

 

430

 

 

430

Commercial real estate

 

 

1,929

 

 

1,889

 

 

67

 

 

2,039

 

 

1,992

 

 

142

ADC

 

 

1,120

 

 

1,119

 

 

32

 

 

1,277

 

 

1,278

 

 

32

Home equity/2nds

 

 

1,343

 

 

859

 

 

24

 

 

1,303

 

 

871

 

 

 2

Consumer

 

 

73

 

 

72

 

 

 —

 

 

76

 

 

76

 

 

 —


18

  September 30, 2017  December 31, 2016 
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Related
Allowance
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Related
Allowance
 
With no related Allowance: (dollars in thousands) 
Residential mortgage $12,856  $11,306  $-  $9,854  $9,338  $- 
Commercial  -   -   -   -   -   - 
Commercial real estate  1,576   1,527   -   3,900   3,698   - 
ADC  636   636   -   441   441   - 
Home equity/2nds  -   -   -   2,139   1,529   - 
Consumer  -   -   -   -   -   - 
With a related Allowance:                        
Residential mortgage  9,306   9,073   1,544   11,176   11,065   1,703 
Commercial  -   -   -   148   148   15 
Commercial real estate  1,892   1,892   186   1,958   1,958   196 
ADC  402   367   50   417   417   53 
Home equity/2nds  -   -   -   1,608   1,608   402 
Consumer  87   87   2   96   96   4 
Totals:                        
Residential mortgage  22,162   20,379   1,544   21,030   20,403   1,703 
Commercial  -   -   -   148   148   15 
Commercial real estate  3,468   3,419   186   5,858   5,656   196 
ADC  1,038   1,003   50   858   858   53 
Home equity/2nds  -   -   -   3,747   3,137   402 
Consumer  87   87   2   96   96   4 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related Allowance: (dollars in thousands) 
Residential mortgage $10,423  $138  $12,734  $132  $9,696  $353  $13,774  $417 
Commercial  -   -   274   2   -   -   150   3 
Commercial real estate  1,531   22   3,730   57   2,652   69   4,655   134 
ADC  637   9   1,031   9   487   21   1,431   36 
Home equity/2nds  918   15   1,911   18   679   40   1,991   59 
Consumer  -   -   -   -   -   -   23   - 
With a related Allowance:                                
Residential mortgage  8,910   116   9,831   106   9,231   286   10,684   356 
Commercial  -   -   149   2   37   -   182   7 
Commercial real estate  1,896   23   1,977   25   1,919   73   2,040   77 
ADC  369   6   426   6   385   16   513   20 
Home equity/2nds  180   -   1,078   6   715   -   370   7 
Consumer  88   1   102   1   91   2   73   2 
Totals:                                
Residential mortgage  19,333   254   22,565   238   18,927   639   24,458   773 
Commercial  -   -   423   4   37   -   332   10 
Commercial real estate  3,427   45   5,707   82   4,571   142   6,695   211 
ADC  1,006   15   1,457   15   872   37   1,944   56 
Home equity/2nds  1,098   15   2,989   24   1,394   40   2,361   66 
Consumer  88   1   102   1   91   2   96   2 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2019

 

2018

 

2019

 

2018

 

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

 

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

With no related Allowance:

 

(dollars in thousands)

Residential mortgage

 

$

7,197

 

$

81

 

$

7,867

 

$

88

 

$

6,950

 

$

160

 

$

9,824

 

$

174

Commercial

 

 

 —

 

 

 —

 

 

457

 

 

13

 

 

 —

 

 

 —

 

 

78

 

 

20

Commercial real estate

 

 

1,327

 

 

17

 

 

1,326

 

 

14

 

 

1,245

 

 

37

 

 

1,350

 

 

30

ADC

 

 

977

 

 

 7

 

 

397

 

 

 4

 

 

1,034

 

 

15

 

 

555

 

 

 9

Home equity/2nds

 

 

834

 

 

17

 

 

1,285

 

 

12

 

 

844

 

 

30

 

 

483

 

 

20

Consumer

 

 

224

 

 

 1

 

 

 —

 

 

 —

 

 

46

 

 

 2

 

 

 —

 

 

 —

With a related Allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

5,706

 

 

80

 

 

7,439

 

 

75

 

 

5,731

 

 

160

 

 

7,184

 

 

152

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

143

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

567

 

 

11

 

 

751

 

 

 8

 

 

694

 

 

20

 

 

1,276

 

 

14

ADC

 

 

132

 

 

 2

 

 

344

 

 

 6

 

 

134

 

 

 4

 

 

1,117

 

 

11

Home equity/2nds

 

 

34

 

 

 —

 

 

13

 

 

 —

 

 

19

 

 

 1

 

 

 4

 

 

 —

Consumer

 

 

 4

 

 

 —

 

 

80

 

 

 1

 

 

28

 

 

 —

 

 

82

 

 

 —

Totals:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

12,903

 

 

161

 

 

15,306

 

 

163

 

 

12,681

 

 

320

 

 

17,008

 

 

326

Commercial

 

 

 —

 

 

 —

 

 

457

 

 

13

 

 

143

 

 

 —

 

 

78

 

 

20

Commercial real estate

 

 

1,894

 

 

28

 

 

2,077

 

 

22

 

 

1,939

 

 

57

 

 

2,626

 

 

44

ADC

 

 

1,109

 

 

 9

 

 

741

 

 

10

 

 

1,168

 

 

19

 

 

1,672

 

 

20

Home equity/2nds

 

 

868

 

 

17

 

 

1,298

 

 

12

 

 

863

 

 

31

 

 

487

 

 

20

Consumer

 

 

228

 

 

 1

 

 

80

 

 

 1

 

 

74

 

 

 2

 

 

82

 

 

 —

There were $1.3 million and $1.4 million in consumer mortgage properties included in real estate acquired through foreclosure at June 30, 2019 and December 31, 2018, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction totaled $3.1$2.3 million as of SeptemberJune 30, 2017. Residential mortgage loans in real estate acquired through foreclosure amounted to $287,0002019 and $393,000 at September 30, 2017 and$1.9 million as of December 31, 2016, respectively.


TDRs

In situations where, for economic2018.

Troubled Debt Restructure Loans (“TDR” 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.  Such concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  At the time that a loan is modified, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole remaining source of repayment for the loan is the liquidation of the collateral.  In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.  Any impairment amount is then set up as a specific reserve in the Allowance.

The following table presents loans that were modified during the nine months ended September 30:
  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 September 30, 2017 or 2016.

Interest on our“TDRs”)

Our portfolio of TDRs was accounted for under the following methods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

 

    

 

    

 

    

 

    

Total

    

Total

 

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

 

(dollars in thousands)

Residential mortgage

 

35

 

$

9,332

 

 3

 

$

422

 

38

 

$

9,754

Commercial real estate

 

 2

 

 

1,000

 

 —

 

 

 —

 

 2

 

 

1,000

ADC

 

 1

 

 

132

 

 —

 

 

 —

 

 1

 

 

132

Consumer

 

 3

 

 

73

 

 —

 

 

 —

 

 3

 

 

73

 

 

41

 

$

10,537

 

 3

 

$

422

 

44

 

$

10,959

19

  September 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  $13,086   4  $2,285   47  $15,371 
Commercial real estate  3   1,875   1   84   4   1,959 
ADC  1   138   1   6   2   144 
Home equity/2nds  1   230   -   -   1   230 
Consumer  4   87   -   -   4   87 
   52  $15,416   6  $2,375   58  $17,791 
  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 

During the three and nine months ended September 30, 2017 and 2016, there

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

 

36

 

$

9,469

 

 3

 

$

446

 

39

 

$

9,915

Commercial real estate

 

 2

 

 

1,019

 

 —

 

 

 —

 

 2

 

 

1,019

ADC

 

 1

 

 

134

 

 —

 

 

 —

 

 1

 

 

134

Consumer

 

 3

 

 

76

 

 —

 

 

 —

 

 3

 

 

76

 

 

42

 

$

10,698

 

 3

 

$

446

 

45

 

$

11,144

There were no TDRs that subsequently defaulted during the three and six months ended June 30, 2019 or 2018 which were modified during the previous 12 month period ended September 30, 2017 and 2016.


Off-Balance Sheet Instruments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business 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 party 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-balancesheet credit risk.
The following table shows the contract amounts for our off-balance sheet instruments:
  
September 30,
2017
  
December 31,
2016
 
  (dollars in thousands) 
Standby letters of credit $3,854  $4,022 
Home equity lines of credit  12,425   7,736 
Unadvanced construction commitments  72,045   15,728 
Mortgage loan commitments  -   574 
Lines of credit  13,092   34,125 
Loans sold and serviced with limited repurchase provisions  19,979   70,773 

Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements and are limited to real estate transactions.  The majority of these standby letters of credit expire within twelve months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Bank requires collateral supporting these letters of credit as deemed necessary.  Management believes, except for certain standby letters of credit, that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of September 30, 2017 and December 31, 2016 for guarantees under standby letters of credit issued was $79,000 and $94,000, respectively.

Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. 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 December 31, 2016 included two loans at a fixed interest rate of 4.25% totaling $574,000. There were no such commitments at September 30, 2017.

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 potential repurchases for these loans, which amounted to $59,000 at September 30, 2017 and $48,000 at December 31, 2016.  period.

We did not repurchasemodify any loans during the ninethree and six months ended SeptemberJune 30, 20172019 or 2016.


2018.

Note 4 -  Regulatory Matters


The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.


In July 2015,2013, 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 includeincluded transition provisions which implement certain portions of the rules through January 1, 2019. Under the final rules, the effects of certain accumulated other comprehensive income 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.

The Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital.  The new capital conservation buffer requirements began to phase in effective January 2016 at 0.625% of risk-weighted assets and increase by that amount each year until fully implemented in January 2019 (1.25% at September 30, 2017). An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition. The federal banking agencies have proposed the Community Bank Leverage Ratio be set at 9%.  However, until the federal banking agencies finalize the proposed rule, the Basel III rules remain in effect.


20

As of the date of the last regulatory exam, the Bank was considered “well capitalized” and as of SeptemberJune 30, 2017,2019, the Bank continued to meet the requirements to be considered “well capitalized” based on applicable U.S. regulatory capital ratio requirements.


The Bank’s regulatory capital amounts and ratios were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

June 30, 2019

 

(dollars in thousands)

 

Common Equity Tier 1 Capital (to risk-weighted assets)

 

$

118,722

 

18.0

%  

$

29,725

 

4.5

%  

$

46,238

 

7.0

%  

$

42,936

 

6.5

%

Total capital (to risk-weighted assets)

 

 

126,919

 

19.2

%

 

52,844

 

8.0

%

 

69,358

 

10.5

%

 

66,055

 

10.0

%

Tier 1 capital (to risk-weighted assets)

 

 

118,722

 

18.0

%  

 

39,633

 

6.0

%  

 

56,147

 

8.5

%  

 

52,844

 

8.0

%

Tier 1 capital (to average quarterly assets)

 

 

118,722

 

13.1

%  

 

36,246

 

4.0

%  

 

58,900

 

6.5

%  

 

45,307

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital (to risk-weighted assets)

 

$

114,749

 

17.4

%  

$

29,651

 

4.5

%  

$

42,006

 

6.4

%  

$

42,830

 

6.5

%

Total capital (to risk-weighted assets)

 

 

122,889

 

18.7

%

 

52,713

 

8.0

%

 

65,068

 

9.9

%

 

65,892

 

10.0

%

Tier 1 capital (to risk-weighted assets)

 

 

114,749

 

17.4

%  

 

39,535

 

6.0

%  

 

51,890

 

7.9

%  

 

52,713

 

8.0

%

Tier 1 capital (to average quarterly assets)

 

 

114,749

 

13.5

%  

 

33,932

 

4.0

%  

 

49,838

 

5.9

%  

 

42,415

 

5.0

%

  Actual     
Minimum
Requirements
for Capital Adequacy
Purposes
  
Minimum
Requirements
with Capital
Conservation Buffer
  
To be Well
Capitalized Under
Prompt Corrective
Action Provision
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
September 30, 2017 (dollars in thousands) 
Common Equity Tier 1 Capital (to risk-weighted assets) $104,318   16.8% $27,907   4.5% $35,658   5.8% $40,309   6.5%
                                 
Total capital (to risk-weighted assets)  112,086   18.1%  49,612   8.0%  57,363   9.3%  62,015   10.0%
                                 
Tier 1 capital (to risk-weighted assets)  104,318   16.8%  37,209   6.0%  44,961   7.3%  49,612   8.0%
                                 
Tier 1 capital (to average quarterly assets)  104,318   13.3%  31,313   4.0%  41,099   5.3%  39,142   5.0%
                                 
December 31, 2016   
Common Equity Tier 1 Capital (to risk-weighted assets) $98,970   16.5% $26,983   4.5% $30,730   5.1% $38,975   6.5%
                                 
Total capital (to risk-weighted assets)  106,517   17.8%  47,969   8.0%  51,717   8.6%  59,962   10.0%
                                 
Tier 1 capital (to risk-weighted assets)  98,970   16.5%  35,977   6.0%  39,725   6.6%  47,969   8.0%
                                 
Tier 1 capital (to average quarterly assets)  98,970   12.9%  30,634   4.0%  35,420   4.6%  38,292   5.0%

Note 5 -  Earnings Per Share


Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for each period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options, warrants, and convertible preferred stock, and are determined using the treasury stock method.


Not included in the diluted earnings per share calculation for 2017 and 2016 because they were anti-dilutive were 20,00022,000 and 126,60024,000 shares respectively, of common stock issuable upon exercise of outstanding stock options for the three and six months ended June 30, 2018, respectively, as well as an additional 437,500 shares of common stock that was issuable upon conversion of the Company’s Series A Preferred Stock, and, in 2016, 556,976Stock. There were no anti-dilutive shares for the three or six months ended June 30, 2019. 

On April 2, 2018, the Company exercised its option to convert all 437,500 outstanding shares of Series A Preferred Stock into shares of the Company’s common stock. The conversion ratio was one share of Series A Preferred Stock for one share of common stock. As of April 2, 2018, the Series A Preferred Stock was no longer deemed outstanding and all rights with respect to such stock issuable upon the exerciseceased and terminated.

21


Information relating to the calculations of our income per common share is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(dollars in thousands, except for per share data)

Weighted-average shares outstanding - basic

 

 

12,775,123

 

 

12,684,711

 

 

12,774,191

 

 

12,463,132

Dilution

 

 

87,168

 

 

96,326

 

 

85,789

 

 

95,937

Weighted-average share outstanding - diluted

 

 

12,862,291

 

 

12,781,037

 

 

12,859,980

 

 

12,559,069

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

2,176

 

$

1,918

 

$

4,785

 

$

3,733

Net income per share - basic

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

Net income per share - diluted

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (dollars in thousands, except for per share data) 
Weighted-average shares outstanding - basic  12,172,586   12,104,379   12,140,689   11,324,660 
Dilution  150,986   79,360   107,525   51,193 
Weighted-average share outstanding - diluted  12,323,572   12,183,739   12,248,214   11,375,853 
                 
Net income available to common stockholders $1,121  $539  $2,753  $12,864 
                 
Net income per share - basic $0.09  $0.04  $0.23  $1.14 
Net income per share - diluted $0.09  $0.04  $0.22  $1.13 

Note 6 - Stock-Based Compensation


We maintainhave maintained a stock-based compensation plan for directors, officers, and other key employees of the Company. The aggregate number of shares of common stock that maycould be issued with respect to the awards granted under the plan iswas 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 hashad the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation iswas granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan, stock options generally havehad a maximum term of ten years, and arewere granted with an exercise price at least equal to the fair market value of the common stock on the date the options arewere granted. Generally, options granted to directors, officers, and employees of the Company vestvested over a five-year period, although the Compensation Committee hashad the authority to provide for different vesting schedules.


The ability to grant new options from this plan expired in March of 2018. A new plan, with the same provisions and number of shares available for grant as the old plan was approved at the stockholders’ meeting in May of 2019.  No shares have been granted from this plan as of June 30, 2019.

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. award.  Stock-based compensation expense included in the consolidated statements of operations for the three months ended SeptemberJune 30, 20172019 and 20162018 totaled $44,000$34,000 and $48,000,$57,000, respectively. Stock-based compensation expense included in the consolidated statements of operations for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 totaled $146,000$77,000 and $143,000,$113,000, respectively.


22

The weighted average fair value
Dividend yield0.00%
Expected volatility36.02%
Risk-free interest rate1.76%
Expected lives5.5 years

Information regarding our stock-based compensation plan is as follows as of and for the ninesix months ended SeptemberJune 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

    

 

    

 

    

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

 

349,023

 

$

6.32

 

  

 

 

  

 

434,025

 

$

5.87

 

  

 

 

  

Granted

 

 —

 

 

 —

 

  

 

 

  

 

6,500

 

 

7.41

 

  

 

 

  

Exercised

 

(15,561)

 

 

5.25

 

  

 

 

  

 

(24,002)

 

 

4.00

 

  

 

 

  

Forfeited

 

(38,500)

 

 

6.41

 

  

 

 

  

 

(1,750)

 

 

5.26

 

  

 

 

  

Outstanding at end of period

 

294,962

 

$

6.37

 

3.0

 

$

684

 

414,773

 

$

6.01

 

6.0

 

$

1,096

Exercisable at end of period

 

179,200

 

$

5.95

 

2.3

 

$

492

 

209,998

 

$

5.18

 

5.9

 

$

730

The cash received from the exercise of stock options amounted to $41,000 for the three months ended June 30, 2018 and $81,000 and $97,000 for the six months ended June 30, 2019 and 2018, respectively.

The stock-based compensation expense amounts and fair values of options at the time of the grants were derived using the Black-Scholes option-pricing model. The following weighted average assumptions were used to value options granted for the six months ended June 30, 2018.  There were no options granted in 2019.

 

 

 

 

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       
Granted  20,000   7.10         -   -       
Exercised  (5,025)  3.37         -   -       
Forfeited  (16,000)  4.59         (54,500)  5.07       
Outstanding at end of period  338,475   5.48   7.2  $526   285,300   4.79   8.2  $491 
Exercisable at end of period  173,702   4.78   6.5  $398   136,125   4.37   7.0  $292 

As of SeptemberJune 30, 2017,2019, there was $520,000$353,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over the next 5951 months.

Note 7 - Commitments and Contingencies

Off-Balance Sheet Instruments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business 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 party 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.

23

Note 7 - Other Comprehensive Income

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

    

2019

    

2018

 

 

(dollars in thousands)

Standby letters of credit

 

$

3,398

 

$

3,321

Home equity lines of credit

 

 

17,364

 

 

17,015

Unadvanced construction commitments

 

 

77,251

 

 

75,326

Mortgage loan commitments

 

 

829

 

 

1,649

Lines of credit

 

 

21,321

 

 

20,990

Loans sold and serviced with limited repurchase provisions

 

 

43,839

 

 

49,623


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 following table presentsmajority of these standby letters of credit expire within twelve months, with automatic one year renewals. The Bank has the changesoption to stop any automatic renewal. 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 June 30, 2019 and December 31, 2018 for guarantees under standby letters of credit issued was $36,000 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 componentscontract. 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.

Residential mortgage loan commitments at June 30, 2019 consisted of accumulated other comprehensive lossthree loans totaling $829,000. Such commitments at December 31, 2018 consisted of three loans totaling $1.6 million.

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 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 potential repurchases for these loans, which amounted to $106,000 at June 30, 2019 and $91,000 at December 31, 2018. We did not repurchase any loans during the six months ended June 30, 2019 or 2018.

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 June 30, 2019, the Company has not accrued an amount for the potential impact of any such actions.

24

Following is a summary of the level of business activities with our medical-use cannabis customers:

•  Deposit and loan balances at June 30, 2019 were approximately $27.1 million, or 4.0% of total deposits, and $15.0 million, or 2.2% of total loans, respectively. Deposit and loan balances at December 31, 2018 were approximately $17.0 million, or 2.2% of total deposits, and $14.1 million, or 2.1% of total loans, respectively.

•Interest and noninterest income for the three months ended June 30, 2019 were approximately $233,000 and $491,000, respectively. Interest and noninterest income for the three months ended June 30, 2018 were approximately $134,000 and $315,000, respectively.

•Interest and noninterest income for the six months ended June 30, 2019 were approximately $428,000 and $941,000, respectively. Interest and noninterest income for the six months ended June 30, 2018 were approximately $310,000 and $545,000, respectively.

•The volume of deposits in the accounts of medical-use cannabis customers for the three and ninesix months ended SeptemberJune 30, 2017:


  Three Months  Nine Months 
  (dollars in thousands) 
Balance at beginning of period $6  $- 
Other comprehensive loss before reclassification  (9)  (3)
Amounts reclassified from accumulated other comprehensive loss  (1)  (1)
Net other comprehensive loss during period  (10)  (4)
Balance at end of period $(4) $(4)
We did not have any accumulated other comprehensive income or loss2019 was approximately $56.6 million and $106.1 million, respectively. The volume of deposits in the accounts of medical-use cannabis customers for the three or nineand six months ended SeptemberJune 30, 2016.

2018 was approximately $11.4 million and $29.3 million, respectively.

Note 8 - 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).

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.


25

Assets Measured on a Recurring Basis


The following tables presenttable presents fair value measurements for assets that are measured at fair value on a recurring basis as of and for the ninesix months ended SeptemberJune 30,  2017:2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

  

 

    

  

    

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 notes

 

$

1,995

 

$

1,995

 

$

 —

 

$

 —

 

$

 —

AFS Securities - U.S. government agency notes

 

 

9,036

 

 

 —

 

 

9,036

 

 

 —

 

 

 —

Loans held for sale ("LHFS")

 

 

17,987

 

 

 —

 

 

17,987

 

 

 —

 

 

278

Mortgage servicing rights ("MSRs")

 

 

343

 

 

 —

 

 

 —

 

 

343

 

 

(94)

Interest-rate lock commitments ("IRLCs")

 

 

345

 

 

 —

 

 

 —

 

 

345

 

 

245

Best efforts forward contracts

 

 

39

 

 

 —

 

 

39

 

 

 —

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

 

36

 

 

 —

 

 

36

 

 

 —

 

 

(20)


  
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
 
  (dollars in thousands) 
AFS Securities - U.S. government agency notes $3,129  $-  $3,129  $-  $- 
Loans held for sale (“LHFS”)  4,871   -   4,871   -   139 
Mortgage servicing rights (“MSRs”)  473   -   -   473   (84)
Interest-rate lock commitments (“IRLCs”)  42   -   42   -   (120)
Mandatory forward contracts  7   -   7   -   (146)
Best efforts forward contracts  6   -   6   -   6 

The following tables presenttable presents fair value measurements for assets and liabilities that are measured at fair value on a recurring basis as of and for the year ended December 31, 2016:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

  

    

  

    

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 notes

 

$

1,981

 

$

1,981

 

$

 —

 

$

 —

 

$

 —

AFS Securities - U.S. government agency notes

 

 

9,997

 

 

 —

 

 

9,997

 

 

 —

 

 

 —

LHFS

 

 

9,686

 

 

 —

 

 

9,686

 

 

 —

 

 

192

MSRs

 

 

437

 

 

 —

 

 

 —

 

 

437

 

 

(40)

IRLCs

 

 

100

 

 

 —

 

 

 —

 

 

100

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

 

16

 

 

 —

 

 

16

 

 

 —

 

 

(30)

Best efforts forward contracts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(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
 
  (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)

 

June 30, 2019:

 

(dollars in thousands)

 

  

 

  

 

MSRs

 

$

343

 

Market Approach

 

Weighted average prepayment speed

 

12.90

%

IRLCs

 

 

345

 

Market Approach

 

Range of pull through rate

 

70% - 95

%

 

 

 

 

 

 

 

Average pull through rate

 

83

%

  

 

 

  

 

  

 

  

 

  

 

December 31, 2018:

 

 

  

 

  

 

  

 

  

 

MSRs

 

$

437

 

Market Approach

 

Weighted average prepayment speed

 

9.80

%

IRLCs

 

 

100

 

Market Approach

 

Range of pull through rate

 

70% - 95

%

 

 

 

 

 

 

 

Average pull through rate

 

84

%

26

  
Fair Value
Estimate
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted-Average)
 
  (dollars in thousands)     
September 30, 2017:         
MSRs $473 Market Approach Weighted average prepayment speed  3.95%
            
December 31, 2016:           
MSRs $557 Market Approach Weighted average prepayment speed  3.95%

The following table shows the activity in the MSRs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2019

 

2018

 

2019

 

2018

 

 

(dollars in thousands)

Beginning balance

 

$

400

 

$

499

 

$

437

 

$

477

Valuation adjustment

 

 

(57)

 

 

 2

 

 

(94)

 

 

24

Ending balance

 

$

343

 

$

501

 

$

343

 

$

501

The following table shows the activity in the IRLCs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2019

 

2018

 

2019

 

2018

 

 

(dollars in thousands)

Beginning balance

 

$

335

 

$

184

 

$

100

 

$

22

Valuation adjustment

 

 

10

 

 

(16)

 

 

245

 

 

146

Ending balance

 

$

345

 

$

168

 

$

345

 

$

168

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 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. U.S Treasury Securities are considered Level 1 and all of our other securities are considered Level 2. 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


At September 30, 2017,

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.

27

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.


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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

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

 

$

5,538

 

$

 —

 

$

 —

 

$

5,538

 

0% - 15%

 

 7

%

Real estate acquired through foreclosure

 

 

625

 

 

 —

 

 

 —

 

 

625

 

0% - 16%

 

16

%

(1)

Discount based on current market conditions and estimated selling costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

 

$

5,678

 

$

 —

 

$

 —

 

$

5,678

 

0% - 16%

 

6.7

%

  September 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% - 33%  25.5%
Real estate acquired through foreclosure  691   -   -   691   0% - 26%  20.9%

(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, and/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.


28

For such loans that are classified as impaired, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. For such impaired loans that are classified as collateral dependent, an Allowance is established when the current market value of the underlying collateral less its estimated disposal costs has not been finalized, but management determines that it is likely that the value is lower than the carrying value of that loan. Once the net collateral value has been determined, a charge-off is taken for the difference between the net collateral value and the carrying value of the loan.

Real Estate Acquired Through Foreclosure


We record foreclosed real estate assets at the fair value less estimated selling costs on their acquisition dates and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. We generally obtain certified external appraisals of real estate acquired through foreclosure and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent, and executed sale agreements.


Fair Value of All Financial Instruments


The carrying value and estimated fair value of all financial instruments are summarized in the following tables.  The descriptions of the fair value calculations for AFS securities, LHFS, MSRs, IRLCs, best efforts forward contracts, mandatory forward contracts, impaired loans, and real estate acquired through foreclosure are included in the discussions above.tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

Carrying

 

Fair Value

 

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

Assets:

 

(dollars in thousands)

Cash and cash equivalents

 

$

77,337

 

$

77,337

 

$

 —

 

$

 —

 

$

77,337

Certificates of deposit held for investment

 

 

7,540

 

 

7,540

 

 

 —

 

 

 —

 

 

7,540

AFS securities

 

 

11,031

 

 

1,995

 

 

9,036

 

 

 —

 

 

11,031

HTM securities

 

 

33,562

 

 

2,015

 

 

31,693

 

 

 —

 

 

33,708

LHFS

 

 

17,987

 

 

 —

 

 

17,987

 

 

 —

 

 

17,987

Loans receivable, net

 

 

671,480

 

 

 —

 

 

 —

 

 

679,488

 

 

679,488

Restricted stock investments

 

 

2,857

 

 

 —

 

 

2,857

 

 

 —

 

 

2,857

Accrued interest receivable

 

 

2,605

 

 

 —

 

 

2,605

 

 

 —

 

 

2,605

ROU asset

 

 

2,494

 

 

 —

 

 

2,494

 

 

 —

 

 

2,494

MSRs

 

 

343

 

 

 —

 

 

 —

 

 

343

 

 

343

IRLCs

 

 

345

 

 

 —

 

 

 —

 

 

345

 

 

345

Best effort forward contracts

 

 

39

 

 

 —

 

 

39

 

 

 —

 

 

39

Liabilities:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

Deposits

 

 

685,416

 

 

 —

 

 

683,846

 

 

 —

 

 

683,846

Accrued interest payable

 

 

350

 

 

 —

 

 

350

 

 

 —

 

 

350

Borrowings

 

 

48,500

 

 

 —

 

 

44,886

 

 

 —

 

 

44,886

Subordinated debentures

 

 

20,619

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619

Lease liability

 

 

2,528

 

 

 —

 

 

2,528

 

 

 —

 

 

2,528

Mandatory forward contracts

 

 

36

 

 

 —

 

 

36

 

 

 —

 

 

36

29

  September 30, 2017 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
Assets: (dollars in thousands) 
Cash and cash equivalents $41,635  $41,635  $-  $-  $41,635 
AFS securities  3,129   -   3,129   -   3,129 
HTM securities  58,764   8,102   50,857   -   58,959 
LHFS  4,871   -   4,871   -   4,871 
Loans receivable  643,028   -   -   653,381   653,381 
Restricted stock investments  4,699   -   4,699   -   4,699 
Accrued interest receivable  2,503   -   2,503   -   2,503 
MSRs  473   -   -   473   473 
IRLCs  42   -   42   -   42 
Mandatory forward contracts  7   -   7   -   7 
Best effort forward contracts  6   -   6   -   6 
Liabilities:                    
Deposits  593,492   -   586,594   -   586,594 
Borrowings  93,450   -   87,909   -   87,909 
Subordinated debentures  20,619   -   -   20,619   20,619 
Accrued interest payable  478   -   478   -   478 

  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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Carrying

 

Fair Value

 

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

Assets:

 

(dollars in thousands) 

Cash and cash equivalents

 

$

188,340

 

$

188,340

 

$

 —

 

$

 —

 

$

188,340

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

 

 

 —

 

 

 —

 

 

8,780

AFS securities

 

 

11,978

 

 

1,981

 

 

9,997

 

 

 —

 

 

11,978

HTM securities

 

 

38,912

 

 

2,008

 

 

36,204

 

 

 —

 

 

38,212

LHFS

 

 

9,686

 

 

 —

 

 

9,686

 

 

 —

 

 

9,686

Loans receivable, net

 

 

674,305

 

 

 —

 

 

 —

 

 

670,512

 

 

670,512

Restricted stock investments

 

 

3,766

 

 

 —

 

 

3,766

 

 

 —

 

 

3,766

Accrued interest receivable

 

 

2,848

 

 

 —

 

 

2,848

 

 

 —

 

 

2,848

MSRs

 

 

437

 

 

 —

 

 

 —

 

 

437

 

 

437

IRLCs

 

 

100

 

 

 —

 

 

 —

 

 

100

 

 

100

Liabilities:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

Deposits

 

 

779,506

 

 

 —

 

 

778,313

 

 

 —

 

 

778,313

Accrued interest payable

 

 

419

 

 

 —

 

 

419

 

 

 —

 

 

419

Borrowings

 

 

73,500

 

 

 —

 

 

69,210

 

 

 —

 

 

69,210

Subordinated debentures

 

 

20,619

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619

Mandatory forward contracts

 

 

16

 

 

 —

 

 

16

 

 

 —

 

 

16

At SeptemberJune 30, 20172019 and December 31, 2016,2018 the Bank had loan funding commitments of $97.6$116.8 million and $58.2$115.0 million, respectively, and standby letters of credit outstanding of $3.9$3.4 million and $4.0$3.3 million, respectively. The fair value of these commitments is nominal.


Cash and Cash Equivalents

The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents approximate those assets’ fair values.

HTM securities

The Company utilizes a third party source to determine the fair value of its securities.  The methodology consists of pricing models based on asset class and includes available trade, bid, other market information, broker quotes, proprietary models, various databases, and trading desk quotes.  U.S Treasury Securities are considered Level 1 and all of our other securities are considered Level 2.

Loans Receivable

The fair values of loans receivable were estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. These rates were used for each aggregated category of loans.

Restricted Stock Investments

The carrying value of restricted stock investments is a reasonable estimate of fair value as these investments do not have a readily available market.

Deposits

The fair values disclosed for demand deposit accounts, savings accounts, and money market 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 that the carrying value approximates the fair value.

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 ninesix months ended SeptemberJune 30, 20172019 or 20162018 or for the year ended December 31, 2016.2018.

Note 9 - Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, we adopted ASU No. 2016-02 “Leases” (“Topic 842”) and all subsequent ASUs that modified Topic 842. For us, Topic 842 primarily affected the accounting treatment for operating lease agreements in which we are the lessee.

Substantially all of the leases in which we are the lessee are comprised of real estate property for branches, ATM locations, office equipment, and office space with terms extending through 2035. All of our leases are classified as operating leases, and therefore, were previously not recognized on the our consolidated statements of financial condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of financial condition as an ROU asset and a corresponding lease liability.

30

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table represents the consolidated statements of financial condition classification of our ROU assets and lease liabilities, included in other assets and other liabilities, respectively. We elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) on the consolidated statements of financial condition.

 

 

 

 

 

 

    

June 30, 2019

    

 

 

(dollars in thousands)

Lease ROU assets

 

$

2,494

 

Lease liabilities

 

 

2,528

 

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Our lease agreements often include one or more options to renew at our discretion. If at lease inception, we consider the exercising of a renewal option to be reasonably certain we will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, we utilize our incremental borrowing rate at lease inception over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The weighted-average remaining lease term was 11.8 years and the weighted-average discount rate was 3.25% as of June 30, 2019.

The following table represents lease costs and other lease information. As we elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Variable lease cost also includes payments for ATM location leases in which payments are based on a percentage of ATM transactions (i.e., ATM surcharge fees), rather than a fixed amount.


 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

    

June 30, 2019

    

June 30, 2019

 

 

(dollars in thousands)

Operating lease costs

 

$

106

 

$

213

Variable lease cost

 

 

 —

 

 

 —

Total lease cost

 

 

106

 

 

213

Cash paid on operating lease liabilities amounted to $79,000 and $159,000 for the three and six months ended June 30, 2019 and 2018, respectively.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more were as follows:

 

 

 

 

 

 

    

June 30, 2019

    

Lease payments due:

 

(dollars in thousands)

June 30, 2020

 

$

351

 

June 30, 2021

 

 

315

 

June 30, 2022

 

 

293

 

June 30, 2023

 

 

269

 

June 30, 2024

 

 

223

 

Thereafter

 

 

1,682

 

Total future minimum lease payments

 

 

3,133

 

Amounts representing interest

 

 

(605)

 

Present value of net future minimum lease payments

 

 

2,528

 

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 as of and for the year ended December 31, 2016.2018.


31

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 three subsidiaries, Severn Savings Bank, FSB (the “Bank”), Mid-Maryland Title Company, Inc. (the “Title Company”), and SBI Mortgage Company (“SBI”). 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 fiveWe maintain six branches in Anne Arundel County, Maryland whichat June 30, 2019 and are opening a seventh branch in Crofton, Maryland in the third quarter of 2019. The branches offer a full range of deposit products and we originate mortgages in itsthe Bank’s primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware, and Virginia. As of SeptemberJune 30, 2017,2019, we had 132167 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 ninesix months ended SeptemberJune 30, 2017,2019, primarily due to an improvement in net interest income as well as improved profitability of our mortgage-banking operations. We recognized increased deposit service charges as a result of fees from medical-use cannabis deposit accounts. Noninterest expenses increased for the payoff of high costing Federal Home Loan Bank of Atlanta (“FHLB”) advancesthree and reversals of the provision for loan losses. Management believes that, while conditions continuesix months ended June 30, 2019 due to improveas severance payments to former employees, increased consulting fees, and real estate valuesinvestments in the Company’s market area continuestaff and systems to stabilize, certain detrimental factors still exist in the market. The interest rate spread between our cost of fundsenhance production and what we earn on loans has grown somewhat from 2016 levels due primarily to the aforementioned payoff of FHLB advances and a change in the mix from higher costing time deposits to lower costing transaction accounts. During the second quarter of 2016, we reversed the valuation allowance maintained on the net deferred tax asset, which resulted in an $11.2 million tax benefit. With the reversal of the valuation allowance, we are now recording a provision for income taxes.


efficiency.

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.2019, provided interest rates do not increase or decrease rapidly. If interest rates increase,change rapidly, demand for loans may decreasefluctuate and our interest rate spread could decrease.change significantly. 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. The continued success and attraction of Anne Arundel County, Maryland, and vicinity, will also be important to our ability to originate and grow mortgage loans and deposits, as will our continued focus on maintaining a low overhead. If the volatility in the market and the economy continues or worsens,occurs, our business, financial condition, results of operations, access to funds, and the price of our stock could be materially and adversely impacted.

Acquisition
On September 1, 2017, we acquired the Title Company by issuing stock in a business combination. We issued 108,084 shares

Critical Accounting Policies

Our accounting and financial reporting policies conform to accounting principles generally accepted in the transaction valued at $775,000.  We recorded $759,000 in goodwill inUnited States of America (“U.S.”) (“GAAP”) and general practice within the transaction.  The acquisition continues our growth strategy and focus on being a full-service provider and complements the mortgage services, commercial banking services, and commercial real estate services we provide. The acquisitionindustry. Accordingly, preparation of the Title Company has not hadfinancial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material effectimpact on the Company’s financial conditioncarrying value of certain assets or resultson income. These estimates and assumptions affect the reported amounts of operations.

Critical Accounting Policies

Our significant accounting policies are set forth in Note 1assets and liabilities at the date of the audited consolidated financial statements forand the year ended December 31, 2016 which were included in our Annual Report on Form 10-K. Of these significantreported amounts of income and expenses during the periods presented. The accounting policies we consider our policies regardingview as critical are those relating to the valuation of  investment securities, the Allowanceallowance for loan losses (“Allowance”), the valuation of securities, 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 loss.

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 loss.  In situations where we intend to sell or it is more likely than not that we will be required to sell the security, the entire OTTI loss is recognized in earnings.

Allowance for Loan Losses

The Allowance is maintained at an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.  Determining the amount of the Allowance requires the use of estimates and assumptions.  Actual results could differ significantly from those estimates.

Future additions or reductions in the Allowance may be necessary based on changes in economic conditions, particularly in Anne Arundel County and the State of Maryland.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s Allowance.  Such agencies may require the Bank to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination.

The Allowance consists of specific and general components. The specific component relates to loans that are classified as impaired.  When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value (“LTV”) ratio based on the original appraisal and the condition of the property.  Appraised values are discounted, if appropriate, to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include 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 fair collateral value has been determined, a charge off is taken for the difference between the fair value and the carrying value of the loan.  For loans that are not solely collateral dependent, an Allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan.
The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as 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.

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.
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 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.
Real Estate Acquired Through Foreclosure

Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs.  Management periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using estimates as described under Allowance for Loan Lossesabove. In the event of a subsequent change in fair value, the carrying amount is adjusted to the lesser of the new fair value, less disposal costs, or the carrying value recorded at acquisition. The amount of the change is charged or credited to noninterest expense.  Expenses on real estate acquired through foreclosure incurred prior to the disposition of the property, such as maintenance, insurance and taxes, and physical security, are charged to expense.  Material expenses that improve the property to its best use are capitalized to the property. If a foreclosed property is sold for more or less than the carrying value, a gain or loss is recognized upon the sale of the property.

Deferred Income Taxes

Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax 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 liabilitiesliabilities. Significant accounting policies are discussed in detail in “Notes to Consolidated Financial Statements - Note 1 - Summary of a changeSignificant Account Policies” in tax rates is recognized in incomeour Annual Report on Form 10-K as of and for the year ended December 31, 2018. There have been no material changes to the significant accounting policies as described in the period that includesAnnual Report other than those mentioned in Note 1 to the enactment date.  Tofinancial statements in this Quarterly Report on Form 10-Q. Disclosures regarding 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.effects

32

of new accounting pronouncements are included in Note 1 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Results of Operations


Net Income


Three months ended SeptemberMonths Ended June 30


Net income increased by $204,000, or 19.3%,amounted to $1.3$2.2 million and $1.9 million for the three months ended SeptemberJune 30, 2017, compared to $1.1 million for the three months ended September 30, 2016.2019 and 2018, respectively. Basic and diluted income per share were $0.09$0.17 for the three months ended SeptemberJune 30, 20172019, compared to $0.04 basic and diluted income per share of $0.15for the three months ended SeptemberJune 30, 2016.2018. The increase in net income reflected improved net interest income decreasedand noninterest expenses, and a reduced loan loss provision,income, partially offset by decreasedincreased noninterest income.


Nine months ended Septemberexpense and income tax provision.

Six Months Ended June 30


Net income decreased by $11.3 million,increased $982,000, or 78.1%25.8%, to $3.2$4.8 million for the ninesix months ended SeptemberJune 30,  2017,2019, compared to $14.4$3.8 million for the ninesix months ended SeptemberJune 30, 2016.2018. Basic and diluted income per share were $0.23 and $0.22, respectively,$0.37, for the ninesix months ended SeptemberJune 30, 2017,2019, compared to $1.14 (basic)basic and $1.13 (diluted)diluted income per share of $0.30 for the ninesix months ended SeptemberJune 30, 2016.  During 2016, we recorded a one-time reversal of the valuation allowance held against the net deferred tax asset in the amount of $11.2 million.  Income before taxes amounted to $5.3 million for the nine months ended September 30, 2017, compared to $3.6 million for the nine months ended September 30, 2016.2018. The increase in pre-taxnet income reflected improved net interest income a reversal of loan loss provision, and decreased noninterest expense,income, partially offset by decreasedincreased noninterest income.


expense and income tax provision.

Net Interest Income


Three months ended SeptemberMonths Ended June 30


Net interest income which is interest earned net of interest expense, increased by $614,000,$918,000, or 10.7%13.3%, to $6.3 million for the three months ended September 30, 2017, compared to $5.7 million for the three months ended September 30, 2016. Our net interest margin increased from 3.19% for the third quarter of 2016 to 3.38% for the third quarter of 2017.  Our net interest spread increased from 3.04% for the third quarter of 2016 to 3.16% for the third quarter of 2017.


Interest Income

Interest income increased by $397,000, or 5.1%, to $8.2 million for the three months ended September 30, 2017, compared to $7.8 million for the three months ended SeptemberJune 30, 2016.2019, compared to $6.9 million for the same period of 2018. Our net interest margin decreased slightly from 3.57% for the three months ended June 30, 2018 to 3.55% for the three months ended June 30, 2019. Our net interest spread decreased from 3.29% for the three months ended June 30, 2018 to 3.20% for the three months ended June 30, 2019.

Six Months Ended June 30

Net interest income increased by $2.0 million, or 14.5%, to $15.9 million for the six months ended June 30, 2019, compared to $13.9 million for the six months ended June 30, 2018. Our net interest margin decreased slightly from 3.62% for the six months ended June 30, 2018 to 3.60% for the six months ended June 30, 2019. Our net interest spread decreased from 3.37% for the six months ended June 30, 2018 to 3.27% for the six months ended June 30, 2019.

Interest Income

Three Months Ended June 30

Interest income increased by $1.2 million, or 13.6%, to $10.2 million for the three months ended June 30, 2019, compared to $9.0 million for the three months ended June 30, 2018, primarily due to increases in interest income on loans due to an increased average yield and an increase in interest income on other interest-earning assets due to increased average volume and yield. Average interest-earning assets increased from $713.4$777.8 millionfor the third quarter of 2016three months ended June 30, 2018 to $743.9$885.5 million for the third quarterthree months ended June 30, 2019, due primarily to growth in average other interest-earning assets of 2017.$113.2 million, most of which consisted of interest-earning deposits in banks, and an increase in the average yield on loans. The increase in interest-bearing deposits in banks was the result of increased deposits from our medical-use cannabis customers. The average yield on other interest-earning assets increased from 1.53% for the three months ended June 30, 2018 to 1.95% for the same period of 2019. Average loans outstanding increased by $12.1$5.6 million duefrom $673.7 million for the three months ended June 30, 2018 to increased originations.$679.3 million for the three months ended June 30, 2019.  The average yield on loans held for investment increased from 4.80%5.03% for the three months ended SeptemberJune 30, 20162018 to 4.92%5.42% for the three months ended September

33

June 30, 20172019 as a result of the increased interest rate environment. Average held-to-maturity (“HTM”) securities decreased by $14.3 million due to securities maturities and repayments from mortgage-backed securities.

Six Months Ended June 30

Interest income increased by $2.9 million, or 16.2%, to $20.8 million for the six months ended June 30, 2019, compared to $17.9 million for the six months ended June 30, 2018, primarily due to increases in interest income on loans and other interest-earning assets. Average interest-earning assets increased from $775.9 million for the six months ended June 30, 2018 to $892.0 million for the six months ended June 30, 2019 due primarily to growth in average other interest-earning assets of $120.5 million, most of which consisted of interest-earning deposits in banks, and an increase in the average yield on loans. The increase in interest-bearing deposits in banks was the result of increased deposits from our medical-use cannabis customers. The average yield on other interest-earning assets increased from 1.54% for the six months ended June 30, 2018 to 2.32% for the same period of 2019. Average loans outstanding increased $7.7 million from $671.2 million for the six months ended June 30, 2018 to $678.8 million for the six months ended June 30, 2019.  The average yield on loans held for investment increased from 5.04% for the six months ended June 30, 2018 to 5.44% for the six months ended June 30, 2019 as a slightlyresult of the increased interest rate environment. Average HTM securities decreased by $11.6$14.6 million due to securitysecurities maturities and repayments from mortgage-backed securities.

Interest Expense

Three Months Ended June 30

Interest expense increased by $305,000, or 14.7%, to $2.4 million for the three months ended June 30, 2019, compared to $2.1 million for the three months ended June 30, 2018 as a result of a $624,000 increase in interest expense on deposits, partially offset by a $319,000 decrease in interest expense on borrowings. The proceeds were usedincrease in deposit interest expense was primarily due to fundan increase in the purchaseaverage rate paid on interest-bearing deposits, driven by the rising interest rate environment as well as increased effects of AFS securities and, alongcompetition with other available funds,financial institutions. These factors increased the purchase ofaverage rate paid on deposits from 1.02% for the three months ended June 30, 2018 to 1.29% for the three months ended June 30, 2019. The average rate paid on certificates of deposit increased from other banks, which contributed1.76% for the three months ended June 30, 2018 to 2.12% for the increase insame period of 2019. Additionally, the average other interest-earning assets.


Interest Expense

Interest expense decreased by $217,000, or 10.2%,rate paid on checking and savings accounts increased from 0.42% for the three months ended June 30, 2018 to $1.90.84% for the three months ended June 30, 2019. The average balance of checking and savings accounts increased significantly from $277.3 million for the three months ended SeptemberJune 30, 2017, compared2018 to $2.1$385.1 million for the three months ended SeptemberJune 30, 2016.2019, primarily due to increases in our medical-use cannabis related accounts. The average balance of certificates of deposit decreased from $223.8 million for the three months ended June 30, 2018 to $206.0 million for the same period of 2019 due to runoff from maturing certificates of deposit. Average borrowings decreased $39.4 million due to payoffs of Federal Home Loan Bank of Atlanta (“FHLB”) advances.

Six Months Ended June 30

Interest expense increased by $870,000, or 21.9%, to $4.8 million for the six months ended June 30, 2019, compared to $4.0 million for the six months ended June 30, 2018 as a result of a $1.4 million increase in interest expense on deposits, partially offset by a $490,000 decrease in interest expense on borrowings. The increase in deposit interest expense was primarily due to a decreasean increase in the average rate paid on transaction accountsinterest-bearing deposits, driven by the rising interest rate environment as well as increased effects of competition with other financial institutions. These factors increased the average rate paid on deposits from 0.23%0.95% for the third quarter of 2016six months ended June 30, 2018 to 0.12%1.25% for the third quartersix months ended June 30, 2019. The average rate paid on certificates of 2017, duedeposit increased from 1.61% for the six months ended June 30, 2018 to a change in2.07% for the mixsame period of 2019. Additionally, the average rate paid on checking and savings accounts increased from higher costing time deposits0.44% for the six months ended June 30, 2018 to lower costing transaction accounts. Additionally,0.82% for the six months ended June 30, 2019. The average interest-bearing liabilities decreased by $19.0 million to $615.3balance of checking and savings accounts increased significantly from $286.3 million for the threesix months ended SeptemberJune 30, 2017 compared2018 to $634.3$398.2 million for the six months ended June 30, 2019, primarily due to increases in our medical-use cannabis related accounts.  The average balance of certificates of deposit decreased from $223.2 million for the six months ended June 30, 2018 to $208.6 million for the same period of 2016.2019 due to runoff from maturing certificates of deposit. Average borrowings decreased $37.0 million due to payoffs of FHLB advances.


34

Nine months ended September 30

Net interest income increased by $1.4 million, or 8.7%, to $17.9 million for the nine months ended September 30, 2017, compared to $16.5 million for the nine months ended September 30, 2016. Our net interest margin increased from 3.07% for the nine months ended September 30, 2016 to 3.25% for the nine months ended September 30, 2017.  Our net interest spread increased from 2.94% for the nine months ended September 30, 2016 to 3.04% for the nine months ended September 30, 2017.
Interest Income

Interest income increased by $704,000, or 3.1%, to $23.7 million for the nine months ended September 30, 2017, compared to $23.0 million for the comparable period of 2016.  Average interest-earning assets increased from $718.0 million for the nine months ended September 30, 2016 to $738.4 million for the nine months ended September 30, 2017.  Average loans outstanding increased by $6.7 million due to increased originations. The average yield on loans increased from 4.74% for the nine months ended September 30, 2016 to 4.81% for the nine months ended September 30, 2017.  Average HTM securities decreased by $9.5 million due to security maturities and repayments from mortgage-backed securities.  As mentioned above, the purchase of AFS securities and certificates of deposit from other banks contributed to the increase in average other interest-earning assets.

Interest Expense

Interest expense decreased by $727,000, or 11.2%, to $5.8 million for the nine months ended September 30, 2017, compared to $6.5 million for the comparable period of 2016.  The decrease was primarily due to the decreased average rate of our borrowings.  Average borrowings decreased $18.0 million and the average rate paid on borrowings decreased from 3.47% for the nine months ended September 30, 2016 to 3.26% for the nine months ended September 30, 2017. Additionally, average interest-bearing liabilities decreased by $30.7 million to $614.7 million for the nine months ended September 30, 2017 compared to $645.4 million for the same period of 2016.

The following table setstables set 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

 Three Months Ended September 30, 

 

2019

 

2018

 

 2017  2016 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

 
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
 

    

Balance

    

Interest (2)

    

Rate (4)

    

Balance 

    

Interest (2)

    

Rate (4)

 

ASSETS (dollars in thousands) 

 

(dollars in thousands)

 

Loans $621,177  $7,702   4.92% $609,096  $7,346   4.80%
Loans held for sale (“LHFS”)  3,117   40   5.09%  10,384   133   5.10%
AFS securities  5,853   26   1.76%  -   -   - 
HTM securities  62,249   304   1.94%  73,872   280   1.51%

Loans (1)

 

$

679,334

 

$

9,176

 

5.42

%  

$

673,700

 

$

8,444

 

5.03

%

Loans held for sale ("LHFS")

 

 

10,184

 

 

50

 

1.97

%  

 

5,172

 

 

72

 

5.58

%

Available-for-sale ("AFS") securities

 

 

11,553

 

 

50

 

1.74

%  

 

11,794

 

 

52

 

1.77

%

Held-to-maturity ("HTM") securities

 

 

36,410

 

 

191

 

2.10

%  

 

50,675

 

 

255

 

2.02

%

Other interest-earning assets (3)  46,825   106   0.90%  14,134   16   0.45%

 

 

144,974

 

 

705

 

1.95

%  

 

31,730

 

 

121

 

1.53

%

Restricted stock investments, at cost  4,676   61   5.18%  5,885   67   4.53%

 

 

3,077

 

 

52

 

6.80

%  

 

4,763

 

 

57

 

4.80

%

Total interest-earning assets  743,897   8,239   4.39%  713,371   7,842   4.37%

 

 

885,532

 

 

10,224

 

4.63

%  

 

777,834

 

 

9,001

 

4.64

%

Allowance  (8,383)          (8,808)        

 

 

(8,082)

 

 

  

 

  

 

 

(8,184)

 

 

  

 

  

 

Cash and other noninterest-earning assets  56,589           71,805         

 

 

42,753

 

 

  

 

  

 

 

43,474

 

 

  

 

  

 

Total assets $792,103   8,239      $776,368   7,842     

 

$

920,203

 

 

10,224

 

  

 

$

813,124

 

 

9,001

 

  

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY                     

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing deposits:                        

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Checking and savings $287,299   89   0.12% $271,003   154   0.23%

 

$

385,084

 

 

807

 

0.84

%  

$

277,269

 

 

292

 

0.42

%

Certificates of deposit  214,282   922   1.71%  221,778   865   1.55%

 

 

206,022

 

 

1,091

 

2.12

%  

 

223,822

 

 

982

 

1.76

%

Total interest-bearing deposits  501,581   1,011   0.80%  492,781   1,019   0.82%

 

 

591,106

 

 

1,898

 

1.29

%  

 

501,091

 

 

1,274

 

1.02

%

Borrowings  113,719   897   3.13%  141,537   1,106   3.11%

 

 

75,887

 

 

481

 

2.54

%  

 

115,279

 

 

800

 

2.78

%

Total interest-bearing liabilities  615,300   1,908   1.23%  634,318   2,125   1.33%

 

 

666,993

 

 

2,379

 

1.43

%  

 

616,370

 

 

2,074

 

1.35

%

Noninterest-bearing deposits  86,437           39,685         

Noninterest-bearing deposit accounts

 

 

146,832

 

 

  

 

  

 

 

99,714

 

 

  

 

  

 

Other noninterest-bearing liabilities  2,665           4,530         

 

 

4,382

 

 

  

 

  

 

 

2,365

 

 

  

 

  

 

Stockholders’ equity  87,701           97,835         
Total liabilities and stockholders’ equity $792,103   1,908      $776,368   2,125     

Stockholders' equity

 

 

101,996

 

 

  

 

  

 

 

94,675

 

 

  

 

  

 

Total liabilities and stockholders' equity

 

$

920,203

 

 

2,379

 

  

 

$

813,124

 

 

2,074

 

  

 

Net interest income/net interest spreadNet interest income/net interest spread  $6,331   3.16%     $5,717   3.04%

 

 

  

 

$

7,845

 

3.20

%  

 

  

 

$

6,927

 

3.29

%

Net interest margin          3.38%          3.19%

 

 

  

 

 

  

 

3.55

%  

 

  

 

 

  

 

3.57

%


(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.

(1)

Nonaccrual loans are included in average loans.

(2)There are no tax equivalency adjustments.
(3)Other interest-earning assets include interest-earning deposits and federal funds sold

35

(4)Annualized
  Nine Months Ended September 30, 
  2017  2016 
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
  
Average
Balance (1)
  
Interest (2)
  
Yield/
Rate (4)
 
ASSETS (dollars in thousands) 
Loans $613,833  $22,105   4.81% $607,113  $21,561   4.74%
LHFS  3,690   162   5.87%  7,570   286   5.05%
AFS securities  4,984   71   1.90%  -   -   - 
HTM securities  61,705   856   1.85%  71,253   890   1.67%
Other interest-earning assets (3)  49,353   317   0.86%  26,479   50   0.25%
Restricted stock investments, at cost  4,791   181   5.05%  5,573   201   4.82%
Total interest-earning assets  738,356   23,692   4.29%  717,988   22,988   4.28%
Allowance  (8,687)          (8,857)        
Cash and other noninterest-earning assets  61,758           69,151         
Total assets $791,427   23,692      $778,282   22,988     
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                     
Interest-bearing deposits:                        
Checking and savings $282,649   618   0.29% $290,518   481   0.22%
Certificates of deposit  215,499   2,306   1.43%  220,337   2,521   1.53%
Total interest-bearing deposits  498,148   2,924   0.78%  510,855   3,002   0.78%
Borrowings  116,539   2,844   3.26%  134,546   3,493   3.47%
Total interest-bearing liabilities  614,687   5,768   1.25%  645,401   6,495   1.34%
Noninterest-bearing deposits  85,928           36,725         
Other noninterest-bearing liabilities  2,624           4,559         
Stockholders’ equity  88,188           91,597         
Total liabilities and stockholders’ equity $791,427   5,768      $778,282   6,495     
Net interest income/net interest spread  $17,924   3.04%     $16,493   2.94%
Net interest margin          3.25%          3.07%

 

 

Six Months Ended June 30, 

 

 

 

2019

 

2018

 

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

 

    

Balance

    

Interest (2)

    

Rate (4)

    

Balance 

    

Interest (2)

    

Rate (4)

  

ASSETS

 

(dollars in thousands)

 

Loans (1)

 

$

678,846

 

$

18,327

 

5.44

%  

$

671,157

 

$

16,779

 

5.04

%

LHFS

 

 

8,378

 

 

66

 

1.59

%  

 

4,297

 

 

108

 

5.07

%

AFS securities

 

 

11,805

 

 

102

 

1.74

%  

 

11,696

 

 

103

 

1.78

%

HTM securities

 

 

37,016

 

 

398

 

2.17

%  

 

51,630

 

 

524

 

2.05

%

Other interest-earning assets (3)

 

 

152,756

 

 

1,758

 

2.32

%  

 

32,291

 

 

247

 

1.54

%

Restricted stock investments, at cost

 

 

3,189

 

 

116

 

7.34

%  

 

4,805

 

 

117

 

4.91

%

Total interest-earning assets

 

 

891,990

 

 

20,767

 

4.69

%  

 

775,876

 

 

17,878

 

4.65

%

Allowance

 

 

(8,075)

 

 

  

 

  

 

 

(8,163)

 

 

  

 

  

 

Cash and other noninterest-earning assets

 

 

42,305

 

 

  

 

  

 

 

43,355

 

 

  

 

  

 

Total assets

 

$

926,220

 

 

20,767

 

  

 

$

811,068

 

 

17,878

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing deposits:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Checking and savings

 

$

398,214

 

 

1,624

 

0.82

%  

$

286,313

 

 

624

 

0.44

%

Certificates of deposit

 

 

208,561

 

 

2,143

 

2.07

%  

 

223,165

 

 

1,783

 

1.61

%

Total interest-bearing deposits

 

 

606,775

 

 

3,767

 

1.25

%  

 

509,478

 

 

2,407

 

0.95

%

Borrowings

 

 

79,309

 

 

1,070

 

2.72

%  

 

116,316

 

 

1,560

 

2.70

%

Total interest-bearing liabilities

 

 

686,084

 

 

4,837

 

1.42

%  

 

625,794

 

 

3,967

 

1.28

%

Noninterest-bearing deposits

 

 

134,845

 

 

  

 

  

 

 

98,277

 

 

  

 

  

 

Other noninterest-bearing liabilities

 

 

3,750

 

 

  

 

  

 

 

2,234

 

 

  

 

  

 

Stockholders' equity

 

 

101,541

 

 

  

 

  

 

 

84,763

 

 

  

 

  

 

Total liabilities and stockholders' equity

 

$

926,220

 

 

4,837

 

  

 

$

811,068

 

 

3,967

 

  

 

Net interest income/net interest spread

 

 

  

 

$

15,930

 

3.27

%  

 

  

 

$

13,911

 

3.37

%

Net interest margin

 

 

  

 

 

  

 

3.60

%  

 

  

 

 

  

 

3.62

%


(1)Nonaccrual loans are included in average loans.
(2)There are no tax equivalency adjustments.
(3)Other interest-earning assets include interest-earning deposits and federal funds sold
(4)Annualized

(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.

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

36

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 June 30, 2019 vs. 2018

 

Six Months Ended June 30, 2019 vs. 2018

 

 

Due to Variances in

 

Due to Variances in

 

    

Rate

    

Volume

    

Total

    

Rate

    

Volume

    

Total

Interest earned on:

 

(dollars in thousands)

Loans

 

$

661

 

$

71

 

$

732

 

$

1,354

 

$

194

 

$

1,548

LHFS

 

 

(233)

 

 

211

 

 

(22)

 

 

(191)

 

 

149

 

 

(42)

AFS securities

 

 

(1)

 

 

(1)

 

 

(2)

 

 

(3)

 

 

 2

 

 

(1)

HTM Securities

 

 

75

 

 

(139)

 

 

(64)

 

 

84

 

 

(210)

 

 

(126)

Other interest-earning assets

 

 

42

 

 

542

 

 

584

 

 

180

 

 

1,331

 

 

1,511

Restricted stock investments, at cost

 

 

85

 

 

(90)

 

 

(5)

 

 

94

 

 

(95)

 

 

(1)

Total interest income

 

 

629

 

 

594

 

 

1,223

 

 

1,518

 

 

1,371

 

 

2,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Interest-bearing deposits:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Checking and savings

 

 

369

 

 

146

 

 

515

 

 

690

 

 

310

 

 

1,000

Certificates of deposit

 

 

531

 

 

(422)

 

 

109

 

 

676

 

 

(316)

 

 

360

Total interest-bearing deposits

 

 

900

 

 

(276)

 

 

624

 

 

1,366

 

 

(6)

 

 

1,360

Borrowings

 

 

(65)

 

 

(254)

 

 

(319)

 

 

30

 

 

(520)

 

 

(490)

Total interest expense

 

 

835

 

 

(530)

 

 

305

 

 

1,396

 

 

(526)

 

 

870

Net interest income

 

$

(206)

 

$

1,124

 

$

918

 

$

122

 

$

1,897

 

$

2,019

  Three Months Ended September 30, 2017 vs. 2016  Nine Months Ended September 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 $169  $187  $356  $312  $232  $544 
LHFS  -   (93)  (93)  65   (189)  (124)
AFS securities  -   26   26   -   71   71 
HTM Securities  240   (216)  24   109   (143)  (34)
Other interest-earning assets  28   62   90   196   71   267 
Restricted stock investments, at cost  39   (45)  (6)  14   (34)  (20)
Total interest income  476   (79)  397   696   8   704 
                         
Interest paid on:                        
Interest-bearing deposits:                        
Checking and savings  (123)  58   (65)  158   (21)  137 
Certificates of deposit  217   (160)  57   (160)  (55)  (215)
Total interest-bearing deposits  94   (102)  (8)  (2)  (76)  (78)
Borrowings  53   (262)  (209)  (199)  (450)  (649)
Total interest expense  147   (364)  (217)  (201)  (526)  (727)
Net interest income $329  $285  $614  $897  $534  $1,431 

Provision for Loan Losses


Our loan portfolio is subject to varying degrees of credit risk and an Allowance is maintained to absorb losses inherent in our loan portfolio. Credit risk includes, but is not limited to, the potential for borrower default and the failure of collateral to be worth what we 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 a result of our Allowance analysis,

We did not record provision for loan losses during the ninethree or six months ended SeptemberJune 30, 2017, we determined that a provision reversal of  $650,000 was appropriate.


2019 or 2018.

See additional information about the provision for loan losses under “Credit Risk Management and the Allowance” later in this Item.


Noninterest Income


Three months ended SeptemberMonths Ended June 30


Total noninterest income decreasedincreased by $497,000,$547,000, or 26.2%26.5%, to $1.4$2.6 million for the three months ended SeptemberJune 30, 2017,2019, compared to $1.9$2.1 million for the three months ended June 30, 2018, with the majority of the increase from mortgage-banking revenue and deposit service charges. Mortgage-banking revenue increased $452,000, or 71.2%, due to the increased volume of loans originated from $25.0 million in the three months ended June 30, 2018 to $69.4 million in the three months ended June 30, 2019. Deposit service charges increased $201,000 due primarily to on-boarding and monthly fees associated with medical-use cannabis customer accounts. The Title Company generated $262,000 in revenue during the three months ended June 30, 2019 compared to $293,000 for the three months ended SeptemberJune 30, 2016, primarily due2018.

Six Months Ended June 30

37

Total noninterest income increased by $1.0 million, or 26.3%, to decreased mortgage-banking revenue.$4.9 million for the six months ended June 30, 2019, compared to $3.9 million for the six months ended June 30, 2018, with increases in most noninterest income categories. Mortgage-banking revenue decreased $708,000,increased $577,000, or 67.9%46.9%, due to a decreasedthe increased volume of loans originated through our Internet mortgage platform (“E-Home Finance”)from $40.8 million in the third quarter of 2017 comparedsix months ended June 30, 2018 to $88.9 million in the third quarter of 2016. In 2017, the decision was made to move away from the E-Home Finance purchased lead model and instead focus on internally generated leads.  We have experienced a temporary reduction in volume during this transition.six months ended June 30, 2019. Deposit service charges increased $158,000$415,000 due primarily to onboardingon-boarding and monthly fees received on a new deposit product during the three months ended September 30, 2017.  Other noninterest income includes $48,000 in revenue generated by the Title Company after the acquisition on September 1, 2017.


Nine months ended September 30

Total noninterest income decreased by $1.8 million, or 32.6%, to $3.8 million for the nine months ended September 30, 2017, compared to $5.6 million for the comparable period in 2016, primarily due to decreased real estate commissions and mortgage-banking revenue.associated with medical-use cannabis customer accounts. Real estate commissions by Hyatt Commercial decreased by $287,000,increased $115,000, or 23.0%,15.4% due to $959,000 foran increase in the ninevolume of properties sold during the six months ended SeptemberJune 30, 2017, compared to $1.2 million for the same period of 2016.  The decrease was due to a decreased volume of commercial sales in the nine months ended September 30, 20172019 compared to the same period of 2018. The Title Company generated $479,000 in 2016.  Mortgage-banking revenue decreased $1.5during the six months ended June 30, 2019 compared to $435,000 for the six months ended June 30, 2018 due to an increase in loan closings and related title work.

Noninterest Expense

Three Months Ended June 30

Total noninterest expense increased $1.2 million, or 57.3%18.3%, to $1.2$7.5 million for the nine months ended September 30, 2017, compared to $2.7 million for the comparable period of 2016.  This decrease in activity was the result of a decrease in the volume of loans originated through E-Home Finance in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to the transition from the E-Home Finance purchased lead model to internally generated leads. Deposit service charges increased $160,000 due primarily to onboarding fees received on a new deposit product during the nine months ended September 30, 2017.  Other noninterest income includes $48,000 in revenue generated by the Title Company after the acquisition on September 1, 2017.


Noninterest Expense

Three months ended September 30

Total noninterest expenses decreased $609,000, or 9.9%, to $5.5 million for the three months ended SeptemberJune 30, 2017,2019, compared to $6.1$6.4 million for the three months ended June 30, 2018, primarily due to increases in compensation and related expenses, professional fees, data processing fees, and licensing and software expenses. Compensation and related expenses increased by $489,000, or 11.1%, to $4.9 million for the three months ended SeptemberJune 30, 2016,2019, compared to $4.4 million for the three months ended June 30, 2018. This increase was primarily due to decreasesannual salary increases, additional hirings, severance payments to former employees, and increased commission expense that corresponds with our increased loan origination and mortgage-banking volumes. Professional fees increased $338,000 due to increased consulting costs. Data processing fees and licensing and software expense increased $99,000 and $136,000, respectively, due to additional efficiency and security enhancements to our core and related systems, as well as the implementation of a new customer relationship management (“CRM”) system.

Six Months Ended June 30

Total noninterest expense increased $1.8 million, or 14.1%, to $14.3 million for the six months ended June 30, 2019, compared to $12.5 million for the six months ended June 30, 2018, primarily due to increases in compensation and related expenses, Federal Deposit Insurance Corporation (“FDIC”) assessments, mortgage leads purchased,professional fees, data processing fees, licensing and professional fees.software expenses, and increased write-downs on real estate acquired through foreclosure. Compensation and related expenses decreasedincreased by $640,000,$736,000, or 16.3%8.5%, to $3.3$9.4 million for the six months ended June 30, 2019, compared to $8.7 million for the six months ended June 30, 2018. This increase was primarily due to the aforementioned annual salary increases, additional hirings, severance payments, and commission expense. Professional fees increased $369,000 due to increased consulting costs. Data processing fees and licensing and software expense increased $177,000 and $197,000, respectively, due to the aforementioned efficiency and security system enhancements and the new CRM system. We experienced write-downs and costs related to real estate acquired through foreclosure of $149,000 during the six months ended June 30, 2019 compared to $14,000 during the same period of 2018. The majority of the increase from 2018 to 2019 was due to the write down of two properties.

Income Tax Provision

Three Months Ended June 30

We recorded a $771,000 tax provision on net income before income taxes of $2.9 million for the three months ended SeptemberJune 30, 2017,2019, compared to $3.9an income tax provision of $724,000 on net income before income taxes of $2.6 million for the three months ended SeptemberJune 30, 2016.2018. The increase in the tax provision was primarily due to the increase in net income before income taxes.

Six Months Ended June 30

We recorded a $1.8 million tax provision on net income before income taxes of $6.5 million for the six months ended June 30, 2019, compared to an income tax provision of $1.5 million on net income before income taxes of $5.3 million for

38

the six months ended June 30, 2018. The increase in the tax provision was primarily due to the increase in net income before income taxes.

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 Tax Act has significantly lowered our effective tax rate.  Our effective tax rate was reduced to 26.2% for the three months ended June 30, 2019 compared to 27.4% for the three months ended June 30, 2018 and 26.9% for the six months ended June 30, 2019 compared to 27.9% for the six months ended June 30, 2018. Our effective tax rate is affected by temporary and permanent book to tax differences arising during the periods.

Financial Condition

Total assets decreased $112.1 million to $862.1 million at June 30, 2019, compared to $974.2 million at December 31, 2018. This decrease was primarily due to staff reductions. Our FDIC insurance premiumsa $111.0 million, or 58.9%, decrease in cash and cash equivalents, to $77.3 million at June 30, 2019 from $188.3 million at December 31, 2018.  Additionally, we experienced a decrease in loans of $2.8 million, or 0.4%, to $679.6 million at June 30, 2019 from $682.3 million at December 31, 2018. Total deposits decreased during the third 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$94.1 million, or 12.1%, to $685.4 million at June 30, 2019 compared to $779.5 million at December 31, 2018. Total borrowings decreased by $65,000,$25.0 million or 34.4%34.0%, to $124,000 for the three months ended September$48.5 million at June 30, 2017,2019 compared to $189,000 for the three months ended September 30, 2016, primarily due to decreased fees incurred for consulting. Mortgage leads purchased decreased $157,000$73.5 million at December 31, 2018 due to the transition away from the E-Home Finance purchased lead model. Partially offsetting the decreases in noninterest expense, on-line charges increased $120,000, credit reports and appraisal fees increased $55,000, and we recorded increased write-downs and incurred increased costs on real estate acquired through foreclosure during the three months ended September 30, 2017 compared to the same period in 2016.


Nine months ended September 30

Total noninterest expenses decreased $1.3 million, or 7.0%, to $17.0 million for the nine months ended September 30, 2017, compared to $18.3 million for the nine months ended September 30, 2016, with decreases in the majoritypaydown of expense categories.  Compensation and related expenses decreased by $499,000, or 4.4%, to $10.7 million for the nine months ended September 30, 2017, compared to $11.2 million for the nine months ended September 30, 2016 due to staff reductions. During the nine months ended September 30, 2017, we reversed an over accrual of FDIC assessment expense due to a lower 2017 rate assessment that arose from the termination of the OCC and FRB agreements in 2016. Professional fees decreased by $151,000, or 28.6%, to $377,000 for the nine months ended September 30, 2017, compared to $528,000 for the same period of 2016, primarily due to a decrease in fees incurred for consulting. Mortgage leads purchased decreased $325,000 due to the transition away from the E-Home Finance purchased lead model.
Income Tax Provision

We recorded $950,000 and $2.2 million in income tax provisions during the three and nine months ended September 30, 2017, respectively, compared to a tax provision of $378,000 for the three months ended September 30, 2016 and a $10.8 million income tax benefit for the nine months ended September 30, 2016.  We fully released our net deferred tax asset valuation allowanceFHLB advances in the first half of 2016.

Financial Condition

Total assets2019. Stockholders’ equity increased $13.8$4.2 million to $801.3$102.7 million at SeptemberJune 30, 2017,2019 compared to $787.5$98.5 million at December 31, 2016.  LHFS decreased $5.4 million, or 52.7%, to $4.9 million at September 30, 2017, compared to $10.3 million at December 31, 2016.  This decrease was2018, primarily due to a lower volume of loan originations, andthe increase in retained earnings, partially offset by dividends to a lesser extent, the timing of loans pending sale.  Loans increased $40.7 million, or 6.7%, to $651.0 million at September 30, 2017 from $610.3 million at December 31, 2016 due to increased residential mortgage and commercial real estate originations during 2017.  Total deposits increased $21.5 million, or 3.8%, to $593.5 million at September 30, 2017 compared to $571.9 million at December 31, 2016.  Total borrowings decreased by $10.1 million, or 9.7%, to $93.5 million at September 30, 2017 compared to $103.5 million at December 31, 2016.  The borrowings held at December 31, 2016 began to mature in February of 2017.  To facilitate the funding of the loan growth and the repayment of FHLB advances, cash and cash equivalents decreased by $25.5 million, or 38.0%, to $41.6 million at September 30, 2017, compared to $67.1 million at December 31, 2016.

stockholders.

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 $3.1$11.0 million and $12.0 million in securities classified as AFS as of SeptemberJune 30, 2017.2019 and December 31, 2018, respectively. We held  $58.8$33.6 million and  $62.8$38.9 million, respectively, in securities classified as HTM as of SeptemberJune 30, 20172019 and December 31, 2016.


2018.

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.other-than-temporary impairment (“OTTI”). For the three and ninesix months ended SeptemberJune 30, 2017,2019, we determined that no OTTI charges were required.


All of the AFS and HTM securities that are temporarily impaired as of SeptemberJune 30, 20172019 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) and it is more likely than not that we will not be required to sell the securities before recovery of value. As such, management considers the impairments to be temporary.


Our AFS securities portfolio consists of United States of America (“U.S.”) government agency notes in the amount of $3.1 million at September 30, 2017, all of which were purchased in 2017.


Our HTM securities portfolio composition is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFS

 

HTM

 

    

June 30, 2019

    

December 31, 2018

    

June 30, 2019

    

December 31, 2018

 

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,995

 

$

1,981

 

$

1,992

 

$

1,991

U.S. government agency notes

 

 

9,036

 

 

9,997

 

 

8,989

 

 

11,992

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

22,581

 

 

24,929

 

 

$

11,031

 

$

11,978

 

$

33,562

 

$

38,912

39

  September 30, 2017  December 31, 2016 
  (dollars in thousands) 
U.S. Treasury securities $7,996  $12,998 
U.S. government agency notes  19,008   20,027 
Mortgage-backed securities  31,760   29,732 
  $58,764  $62,757 
LHFS

LHFS

We originate residential mortgage loans for sale on the secondary market. At September 30, 2017, suchSuch LHFS, which are carried at fair value, amounted to $4.9$18.0 million at June 30, 2019 and $9.7 million at December 31, 2018, 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 $5.4$8.3 million, or 52.7%85.7%, compared to December 31, 2016.  This decrease was2018, primarily due to a lower origination volumeincreased originations and to the timing of loans pending sale on the secondary market.

Loans


Our loan portfolio is expected to produce higher yields than investment securities and other interest-earning assets; the absolute volume and mix of loans and the volume and mix of loans as a percentage of total interest-earning assets is an important determinant of our net interest margin.


The following table sets forth the composition of our loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

 

 

 

Percent

 

 

 

Percent

 

 

 

    

Amount

    

of Total

    

Amount

    

of Total

 

    

 

 

(dollars in thousands)

 

 

Residential Mortgage

 

$

274,474

 

40.4

%  

$

274,759

 

40.3

%

 

Commercial

 

 

45,347

 

6.7

%  

 

35,884

 

5.2

%

 

Commercial real estate

 

 

237,368

 

34.9

%  

 

242,693

 

35.6

%

 

Land acquisition, development, and construction ("ADC")

 

 

108,182

 

15.9

%  

 

114,540

 

16.8

%

 

Home equity/2nds

 

 

12,581

 

1.9

%  

 

13,386

 

2.0

%

 

Consumer

 

 

1,621

 

0.2

%  

 

1,087

 

0.1

%

 

 

 

$

679,573

 

100.0

%  

$

682,349

 

100.0

%

 

  September 30, 2017  December 31, 2016 
  Amount  
Percent
of Total
  Amount  
Percent
of Total
 
  (dollars in thousands) 
Residential Mortgage $289,169   44.4% $257,659   42.2%
Commercial  37,485   5.8%  46,468   7.6%
Commercial real estate  223,167   34.3%  195,710   32.1%
Construction, land acquisition, and development (“ADC”)  84,164   12.9%  90,102   14.8%
Home equity/2nds  15,861   2.4%  19,129   3.1%
Consumer  1,118   0.2%  1,210   0.2%
  $650,964   100.0% $610,278   100.0%

Loans increaseddecreased by $40.7$2.8 million, or 6.7%0.4%, to $651.0$679.6 million at SeptemberJune 30, 2017,2019, compared to $610.3$682.3 million at December 31, 2016.2018. This increasedecrease was due to increaseddecreased demand and originations, as well as increased payoffs of residential mortgages and commercial real estate, ADC and home equity/2nds loans.


We did experience an increase in commercial loan demand during the six months ended June 30, 2019.

Credit Risk Management and the Allowance


Credit risk is the risk of loss arising from the inability of a borrower to meet his or her obligations and entails both general risks, which are inherent in the process of lending, and risks specific to individual borrowers. Our credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type.


We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.


Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. Our Allowance methodology employs management’s assessment as to the level of future losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers’ current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and/or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. In addition, we evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors. Our risk management practices are designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may inherently exist within the loan portfolio. The assessment aspects involved in analyzing the quality of individual

40

loans and assessing collateral values can also contribute to undetected, but probable, losses. For more detailed information about our Allowance methodology and risk rating system, see Note 3 to the Consolidated Financial Statements.

The following table summarizes the activity in our Allowance by portfolio segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(dollars in thousands)

 

Allowance, beginning of year

 

$

8,085

 

$

8,169

 

$

8,044

 

$

8,055

 

Charge-offs:

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential mortgage

 

 

(20)

 

 

(37)

 

 

(20)

 

 

(360)

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial real estate

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

ADC

 

 

 —

 

 

 —

 

 

 —

 

 

(13)

 

Home equity/2nds

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

(12)

 

 

 —

 

 

(12)

 

 

 —

 

Total charge-offs

 

 

(32)

 

 

(37)

 

 

(32)

 

 

(373)

 

Recoveries:

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential mortgage

 

 

 3

 

 

 1

 

 

 8

 

 

222

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial real estate

 

 

33

 

 

122

 

 

67

 

 

333

 

ADC

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity/2nds

 

 

 4

 

 

 2

 

 

 6

 

 

20

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total recoveries

 

 

40

 

 

125

 

 

81

 

 

575

 

Net recoveries

 

 

 8

 

 

88

 

 

49

 

 

202

 

Provision for loan losses

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Allowance, end of period

 

$

8,093

 

$

8,257

 

$

8,093

 

$

8,257

 

Loans:

 

 

  

 

 

  

 

 

  

 

 

  

 

Period-end balance

 

$

679,573

 

$

686,912

 

$

679,573

 

$

686,912

 

Average balance during period

 

 

679,334

 

 

673,700

 

 

678,846

 

 

671,157

 

Allowance as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 

 

   period-end loan balance

 

 

1.19

%  

 

1.20

%  

 

1.19

%  

 

1.20

%  

Percent of average loans (annualized):

 

 

  

 

 

  

 

 

 

 

 

  

 

Provision for loan losses

 

 

 —

%  

 

 —

%  

 

 —

%  

 

 —

%  

Net recoveries

 

 

 —

%  

 

0.05

%  

 

0.01

%  

 

0.06

%  

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (dollars in thousands) 
Allowance, beginning of period $7,718  $8,804  $8,969  $8,758 
Charge-offs:                
Residential mortgage  -   -   (707)  (151)
Commercial  -   -   -   (17)
Commercial real estate  -   -   -   (178)
ADC  -   (72)  -   (72)
Home equity/2nds  -   -   (98)  (28)
Consumer  -   -   -   - 
Total charge-offs  -   (72)  (805)  (446)
Recoveries:                
Residential mortgage  156   137   295   322 
Commercial  -   10   -   43 
Commercial real estate  40   4   100   4 
ADC  -   -   -   100 
Home equity/2nds  22   2   27   4 
Consumer  -   50   -   50 
Total recoveries  218   203   422   523 
Net recoveries (charge offs)  218   131   (383)  77 
Provision for (reversal of) loan losses  -   50   (650)  150 
Allowance, end of period $7,936  $8,985  $7,936  $8,985 
Loans:                
Period-end balance $650,964  $612,458  $650,964  $612,458 
Average balance during period  621,177   609,096   613,833   607,113 
Allowance as a percentage of period-end loan balance  1.22%  1.47%  1.22%  1.47%
Percent of average loans (annualized):                
Provision for (reversal of) loan losses  -   0.03%  (0.14)%  0.03%
Net recoveries (charge offs)  0.14%  0.09%  (0.08)%  0.02%

The following table summarizes our allocation of the Allowance by loan segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

    

 

    

 

    

Percent

    

 

    

 

    

Percent

 

    

 

 

 

 

 

 

of Loans

 

 

 

 

 

of Loans

 

 

 

 

 

 

Percent

 

to Total

 

 

 

Percent

 

to Total

 

 

 

 

Amount

 

of Total

 

Loans

 

Amount

 

of Total

 

Loans

 

 

 

 

(dollars in thousands)

 

 

Residential mortgage

 

$

2,566

 

31.7

%  

40.4

%  

$

2,224

 

27.6

%  

40.3

%

 

Commercial

 

 

1,566

 

19.4

%  

6.7

%  

 

2,736

 

34.0

%  

5.2

%

 

Commercial real estate

 

 

792

 

9.8

%  

34.9

%  

 

457

 

5.7

%  

35.6

%

 

ADC

 

 

2,683

 

33.1

%  

15.9

%  

 

2,239

 

27.8

%  

16.8

%

 

Home equity/2nds

 

 

223

 

2.8

%  

1.9

%  

 

222

 

2.8

%  

2.0

%

 

Consumer

 

 

 —

 

 —

%  

0.2

%  

 

 1

 

 —

%  

0.1

%

 

Unallocated

 

 

263

 

3.2

%  

 —

%  

 

165

 

2.1

%  

 —

%

 

Total

 

$

8,093

 

100.0

%  

100.0

%  

$

8,044

 

100.0

%  

100.0

%

 

  September 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 $3,422   43.1%  44.4% $3,833   42.7%  42.2%
Commercial  442   5.6%  5.8%  478   5.3%  7.6%
Commercial real estate  2,567   32.3%  34.3%  2,535   28.3%  32.1%
ADC  1,142   14.4%  12.9%  1,390   15.5%  14.8%
Home equity/2nds  361   4.6%  2.4%  728   8.1%  3.1%
Consumer  2   -   0.2%  5   0.1%  0.2%
Total $7,936   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  $7.9$8.1 million at  SeptemberJune 30, 20172019 and $9.0$8.0 million at December 31, 2016.2018. Any

41

changes in the Allowance from period to period reflect management’s ongoing application of its methodologies to establish the Allowance, which, for the ninesix months ended SeptemberJune 30, 2017,2019, resulted in decreasedincreased allocated Allowances for mostresidential mortgage, commercial real estate, and ADC loans. The Allowance for commercial loans decreased due to a large favorable resolution to a credit with an allocated reserve in previous periods of $430,000 and due to a high charge-off year rolling out of our lookback period.

At December 31, 2018, due to a re-evaluation of our qualitative factors, we changed our estimates of the Allowance relative to historical loss experience within specific loan portfolio segments in order to better align our qualitative factors with historical losses experienced over a longer period of time, relative to those specific loan segments. The result of this change in estimate did not result in a material increase in the Allowance compared to the year ended December 31, 2017, however there were material changes to the Allowance between loan segments. Due to the change in accounting estimate, the Allowance allocated to commercial loans and ADC loans increased approximately $2.2 million and $1.1 million, respectively, while the Allowance forallocated to residential mortgage loans and commercial real estate increased over theloans decreased approximately $600,000 and $2.7 million, respectively, as of December 31, 2016 level. The changes2018. This change in the Allowances for the respective loan segments were a function of the changes in the corresponding loan balances and asset quality.

accounting estimate had no impact on earnings or diluted earnings per share.

35


As a result of our Allowance analysis, and overall improved asset quality, we released $650,000 from the Allowance during the nine months ended September 30, 2017.  We did not record aany provision nor did we release any Allowance during the three and six months ended SeptemberJune 30, 2017.  We recorded $50,000 and $150,000, respectively, in provision for losses for the three and nine months ended September 30, 2016.2019 or 2018. We recorded net recoveries of $218,000$8,000 and $49,000, respectively, during the three and six months ended June 30, 2019 and net charge-offs $383,000,recoveries of $88,000 and $202,000, respectively, during the three and ninesix months ended SeptemberJune 30, 2017 compared to2018.  During the three and six months ended June 30, 2019, annualized net recoveries of $131,000 and $77,000, respectively, during the three months and nine months ended September 30, 2016.  During the nine months ended September 30, 2017, annualized net (charge-offs) recoveries as compared toa percentage of average loans outstanding amounted to (0.08)%0.00% and 0.01%, respectively, compared to 0.02%0.05% and 0.06%, during the first ninethree and six months of 2016.ended June 30, 2018, respectively. The Allowance as a percentage of outstanding loans decreased from 1.47%was 1.19% as of June 30, 2019 compared to 1.18% as of December 31, 2016 to 1.22% as of September 30, 2017, reflecting the improvement in our overall asset quality.

2018. 

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 SeptemberJune 30, 20172019 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 appraisalsvaluations on our NPAs. Generally, we obtain appraisals or alternative valuations on NPAs annually. In addition, as part of our asset monitoring activities, we maintain a Loss Mitigation Committee that meets 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 (or alternative valuation vehicle) and valuation date. Accordingly, these reports identify which assets will require an updated appraisal.valuation. As a result, we have not experienced any internal delays in identifying which loans/credits require appraisals.updated valuations. With respect to the ordering process of the appraisals, we have not experienced any delays in turnaround time nor has this been an issue over the past three years. Furthermore, we have not had any delays in turnaround time or variances thereof in our specific loan operating markets.


NPAs, expressed as a percentage of total assets, totaled 0.93%0.73% at SeptemberJune 30, 20172019 and 1.37%0.64% at December 31, 2016.2018. The ratio of the Allowance to nonperforming loans was 124.4%165.6% at SeptemberJune 30, 20172019 and 91.0%172.8% at December 31, 2016.  The increase in this ratio from December 31, 2016 to September 30, 2017 was a reflection2018.  

42


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 SeptemberJune 30, 2017 and2019 or December 31, 2016.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

June 30, 2019

    

December 31, 2018

 

Nonaccrual Loans:

 

(dollars in thousands)

 

Residential mortgage

 

$

3,288

 

$

2,580

 

Commercial

 

 

 —

 

 

430

 

Commercial real estate

 

 

779

 

 

660

 

ADC

 

 

388

 

 

558

 

Home equity/2nds

 

 

429

 

 

428

 

Consumer

 

 

 3

 

 

 ���

 

 

 

 

4,887

 

 

4,656

 

Real Estate Acquired Through Foreclosure:

 

 

  

 

 

  

 

Residential mortgage

 

 

1,259

 

 

1,366

 

ADC

 

 

171

 

 

171

 

 

 

 

1,430

 

 

1,537

 

Total Nonperforming Assets

 

$

6,317

 

$

6,193

 

  September 30, 2017  December 31, 2016 
Nonaccrual Loans: (dollars in thousands) 
Residential mortgage $4,531  $3,580 
Commercial  84   151 
Commercial real estate  160   2,938 
ADC  318   269 
Home equity/2nds  1,284   2,914 
Consumer  -   - 
   6,377   9,852 
         
Real Estate Acquired Through Foreclosure:        
Residential mortgage  287   393 
Commercial  -   - 
Commercial real estate  601   341 
ADC  216   239 
Home equity/2nds  -   - 
Consumer  -   - 
   1,104   973 
Total Nonperforming Assets $7,481  $10,825 

Nonaccrual loans amounted to $6.4totaled $4.9 million, or 1.0%0.72% of total loans, at SeptemberJune 30, 20172019 and $9.9$4.7 million, or 1.6%0.68% of total loans at December 31, 2016.  We added2018. Significant activity in nonaccrual loans during the six months ended June 30, 2019 included the addition of seven loans in the amount of $2.6$1.3 million to nonaccrual status during 2017.  Ofloans, the balancetransfer of nonaccrual loans at December 31, 2016, $2.6 million were returned to accrual status, $422,000 were charged off, $515,000 were transferredone loan to real estate acquired through foreclosure of $171,000, and $1.7 million were paid off.

$830,000 in nonaccrual loans that existed at December 31, 2018.

Real estate acquired through foreclosure increased $131,000decreased $107,000 to $1.4 million at June 30, 2019 compared to December 31, 2016. The increase in commercial real estate was primarily from2018 due to one foreclosure in the amount of $515,000.


property addition, partially offset by write downs on properties existing at December 31, 2018.

The activity in our real estate acquired through foreclosure was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(dollars in thousands)

Balance at beginning of period

 

$

1,601

 

$

237

 

$

1,537

 

$

403

Real estate acquired in satisfaction of loans

 

 

 —

 

 

 —

 

 

171

 

 

 —

Write-downs and losses on real estate acquired through foreclosure

 

 

(64)

 

 

 —

 

 

(171)

 

 

(44)

Proceeds from sales of real estate acquired through foreclosure

 

 

(107)

 

 

 —

 

 

(107)

 

 

(64)

Other

 

 

 —

 

 

58

 

 

 —

 

 

 —

Balance at end of period

 

$

1,430

 

$

295

 

$

1,430

 

$

295

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (dollars in thousands) 
Balance at beginning of period $1,015  $1,112  $973  $1,744 
Real estate acquired in satisfaction of loans  188   293   703   1,370 
Write-downs and losses  (99)  (62)  (139)  (149)
Proceeds from sales  -   -   (433)  (1,622)
Balance at end of period $1,104  $1,343  $1,104  $1,343 
TDRs

Troubled Debt Restructures (“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.


43

The composition of our TDRs is illustrated in the following table:

 

 

 

 

 

 

 

 

 

    

June 30, 2019

    

December 31, 2018

    

Residential mortgage:

 

(dollars in thousands)

 

Nonaccrual

 

$

422

 

$

446

 

<90 days past due/current

 

 

9,332

 

 

9,469

 

Commercial real estate:

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

1,000

 

 

1,019

 

ADC:

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

132

 

 

134

 

Consumer:

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

73

 

 

76

 

Totals:

 

 

  

 

 

  

 

Nonaccrual

 

 

422

 

 

446

 

<90 days past due/current

 

 

10,537

 

 

10,698

 

 

 

$

10,959

 

$

11,144

 

  September 30, 2017  December 31, 2016 
Residential mortgage: (dollars in thousands) 
Nonaccrual $2,285  $2,137 
<90 days past due/current  13,086   15,886 
Commercial real estate:        
Nonaccrual  84   249 
<90 days past due/current  1,875   1,914 
ADC:        
Nonaccrual  6   6 
<90 days past due/current  138   170 
Home equity/2nds:        
Nonaccrual  -   - 
<90 days past due/current  230   - 
Consumer        
Nonaccrual  -   - 
<90 days past due/current  87   96 
Totals        
Nonaccrual  2,375   2,392 
<90 days past due/current  15,416   18,066 
  $17,791  $20,458 

See additional information on TDRs in Note 3 to the Consolidated Financial Statements.


Statements herein.

Deposits


Deposits were $593.5totaled $685.4 million at SeptemberJune 30, 20172019  and  $571.9$779.5 million at December 31, 2016.  During2018. The $94.1 million decrease was primarily the nine months ended September 30, 2017, we obtained significant new noninterest-bearingresult of short-term medical-use cannabis related funds that account holders relocated to investment opportunities outside of the Bank. Management was aware of the short-term nature of certain medical-use cannabis related deposits and interest-bearing checking accounts through a campaign designedoffset those funds by maintaining short-term liquidity to attract deposits in certain local emerging markets. The decrease in certificates ofmeet any deposit (“CDs”) was due to the payoff of regularly maturing CDs.

outflows.

The deposit breakdown is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

    

 

    

Percent

    

 

    

Percent

 

    

 

 

Balance

 

of Total

 

Balance

 

of Total

 

 

 

 

(dollars in thousands)

 

 

NOW

 

$

124,035

 

18.1

%  

$

106,508

 

13.7

%

 

Money market

 

 

132,476

 

19.3

%  

 

203,351

 

26.1

%

 

Savings

 

 

69,097

 

10.1

%  

 

75,692

 

9.7

%

 

Certificates of deposit

 

 

226,451

 

33.0

%  

 

247,351

 

31.7

%

 

Total interest-bearing deposits

 

 

552,059

 

80.5

%  

 

632,902

 

81.2

%

 

Noninterest-bearing deposits

 

 

133,357

 

19.5

%  

 

146,604

 

18.8

%

 

Total deposits

 

$

685,416

 

100.0

%  

$

779,506

 

100.0

%

 

  September 30, 2017  December 31, 2016 
  Balance  
Percent
of Total
  Balance  
Percent
of Total
 
  (dollars in thousands) 
Checking and savings $261,581   44.1% $239,985   41.9%
Certificates of deposit  260,396   43.9%  273,816   47.9%
Total interest-bearing deposits  521,977   88.0%  513,801   89.8%
Noninterest-bearing deposits  71,515   12.0%  58,145   10.2%
Total deposits $593,492   100.0% $571,946   100.0%

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.


44

At SeptemberJune 30, 2017,2019, our total credit line with the FHLB was  $231.7$264.4 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 SeptemberJune 30, 20172019 and December 31, 20162018 was $90.0$45.0 million and $100.0$70.0 million, respectively.


On September 30, 2016, we entered into a loan agreement with a commercial bank whereby we borrowed $3,500,000$3.5 million 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 SeptemberJune 30, 2017:2019:

 

 

 

 

 

 

Principal

    

 

    

 

Amount (in thousands)

 

Rate

 

Maturity

$

10,000

 

1.59%

 

2019

 

25,000

 

1.75% to 1.92%

 

2020

 

10,000

 

2.19%

 

2022

$

45,000

 

  

 

  

Principal
Amount (in thousands)
  Rate  Maturity 
$24,950  1.21% to 4.05%  2017 
 15,000  2.58% to 3.43%  2018 
 35,000  1.55% to 4.00%  2019 
 15,000  1.75%  2020 
$89,950        

Subordinated Debentures


As of both SeptemberJune 30, 20172019 and December 31, 2016,2018, 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,Debentures, 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 December 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 third quarter of 2016, we paid all of the deferred interest and as of SeptemberJune 30, 2017,2019, we were current on all interest due on the 2035 Debenture.Debentures.


45

Capital Resources


Total stockholders’ equity increased $4.1$4.2 million to $92.0$102.7 million at SeptemberJune 30, 20172019 compared to $87.9$98.5 million as of December 31, 2016.2018. The increase was principally the result of 20172019 net income and stock issuance related to date, partially offset by dividends paid during the purchase of the Title Company.


six months ended June 30, 2019.

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 consistsconsisted 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 each of the 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.


Series B Preferred Stock

On November 21, 2008, we entered into an agreement with the United States Department of the Treasury (“Treasury”), pursuant to which we issued and sold (i) shares of our Series B Fixed Rate Cumulative Perpetual Preferred Stock (“Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 556,976 shares of the Company’s common stock, par value $0.01 per share.  As of December 31, 2016, the Company had redeemed all outstanding shares of the Preferred Stock. At September 30, 2017 the Treasury continues to hold the Warrant.

The Warrant has a 10-year term and is immediately exercisable at an exercise price of $6.30 per share of Common Stock.  The exercise price and number of shares subject to the Warrant are both subject to anti-dilution adjustments.  Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting powerrights with respect to any shares of Common Stock issued upon exercise of the Warrant. The warrant expires November 11, 2018.

such stock have ceased and terminated. 

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 SeptemberJune 30, 20172019 and December 31, 2016,2018, 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 4 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 $231.7$264.4 million at SeptemberJune 30, 2017,2019, of which $90.0$45.0 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 $101.4$116.8 million at SeptemberJune 30, 2017.2019. Historically, many of the commitments

46

expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. As of September 30, 2017, we had $72.0 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 of credit, home equity lines of credit, and standby letters of credit, in the aggregate amount of $29.2 million at September 30, 2017, which we anticipate we will be able to fund, if required, from these liquidity sources in the regular course of business.


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 SeptemberJune 30, 2017,2019, 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 SeptemberJune 30, 2017,2019, 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.


47

Information pertaining to the carrying amounts of our derivative financial instruments follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

 

    

Notional

    

Estimated

    

Notional

    

Estimated

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

(dollars in thousands)

Asset - IRLCs

 

$

17,811

 

$

345

 

$

3,710

 

$

100

Asset - best effort forward contracts

 

 

17,811

 

 

39

 

 

3,710

 

 

 —

Liability - mandatory forward contracts

 

 

17,536

 

 

36

 

 

9,363

 

 

16

  September 30, 2017  December 31, 2016 
  
Notional
Amount
  
Estimated
Fair Value
  
Notional
Amount
  
Estimated
Fair Value
 
  (dollars in thousands) 
Asset - IRLCs $2,329  $42  $9,725  $162 
Asset - Mandatory forward contracts  4,731   7   10,302   153 
Asset - Best effort forward contracts  2,329   6   -   - 

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.GAAP 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 2017 or 2016.


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

for the three and six months ended June 30, 2019 and 2018.

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 SeptemberJune 30, 2017,2019, we had a one-year cumulative negative gap of approximately $159.2$61.1 million.

48

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 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 SeptemberJune 30, 2017:2019:

 

 

 

 

 

 

 

 

 

 

Change in Rates

    

Amount

    

$ Change

    

% Change

 

 

 

(dollars in thousands)

 

 

 

+400

bp

$

132,344

 

$

(728)

 

(0.55)

%

+300

bp

 

133,692

 

 

620

 

0.47

%

+200

bp

 

136,263

 

 

3,191

 

2.40

%

+100

bp

 

136,817

 

 

3,745

 

2.81

%

0

bp

 

133,072

 

 

  

 

  

 

(100)

bp

 

120,430

 

 

(12,642)

 

(9.50)

%

(200)

bp

 

98,275

 

 

(34,797)

 

(26.15)

%

Change in Rates  Amount  $ Change  % Change 
   (dollars in thousands)    
+400bp $160,130  $(16,836)  -9.51%
+300bp  166,030   (10,936)  -6.18%
+200bp  170,894   (6,072)  -3.43%
+100bp  174,580   (2,386)  -1.35%
0bp  176,966         
-100bp  176,569   (397)  -0.22%
-200bp  169,398   (7,568)  -4.28%

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,

Item 4.     Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the supervisionSecurities and withExchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the participation oftime periods specified in the Company’sSecurities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and the Interim Chief Financial Officer evaluated,(“Interim CFO”), as appropriate, to allow timely decisions regarding required disclosure.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the last daySEC. As of June 30, 2019, the period covered by this report,Company’s management, including the Company’s CEO and Interim CFO, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in RuleRules 13a-15 and 15d-15(e) under the Securities Exchange ActAct. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of 1934.achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgement in evaluating the benefits of possible controls and procedures relative to their costs. Based on thatthis evaluation, the Chief Executive OfficerCompany's CEO and Chief Financial OfficerInterim CFO concluded that, as of the Company’send of the period covered by this quarterly report, the Company's disclosure controls and procedures were effective. There werenot effective because of the material weakness described below.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's quarterly financial statements will not be prevented or detected on a timely basis. The identification of the material weaknesses did not impact any of our consolidated financial statements for any prior annual or interim periods, other than as described in our Annual Report on Form 10-K as of and for the year ended December 31, 2018. Accordingly, management believes that the financial

49

statements included in this Quarterly Report on Form 10-Q present fairly in all material respects the Company's financial condition, results of operations and cash flows for the periods presented.

The Company has identified a material weakness in its internal control over financial reporting, specifically related to both management’s review controls and risk rating controls over the Company’s Allowance. The material weakness in internal control over financial reporting resulted from a lack of sufficient management review controls over the development and monitoring of qualitative factors used in calculating the general component of the Allowance, a lack of sufficient management review controls over the relevant inputs and assumptions used to measure the fair value of impaired loans, lack of controls to identify the completeness of TDRs, and review over the completeness of changes to loans’ risk ratings that are required to be modified within the Company’s loan accounting system.

Management has been actively engaged in developing remediation plans to address the above control deficiencies. The Company has enhanced its management review controls over the development and monitoring of qualitative factors and other relevant assumptions used in calculating the general component of the Allowance. The Company has also enhanced its current review process over impaired loans to ensure a timely review is being performed at an appropriate level of precision as it pertains to the relevant inputs and assumptions to measure the fair value of impaired loans, including appraisal review controls. The Company has also implemented a process to ensure the completeness and accuracy of the population to provide assurance that all required loans are properly evaluated for TDR classification. Finally, the Company has enhanced controls over the review of the completeness of changes to loans’ risk ratings that are required to be modified within the Company’s loan accounting system.

The Company had also previously identified a material weakness in its internal control over financial reporting, specifically related to its reconciliation controls relating to LHFS. The material weakness in internal control over financial reporting resulted from a 2018 material reclassification entry identified during the audit. The impact of this reclassification was corrected on the consolidated statement of financial condition as of December 31, 2018.

Management has since incorporated stronger internal controls over the LHFS, including strengthening the reconciliation process to ensure accuracy of LHFS, including the reflection of all loan sales.

Although the Company’s remediation efforts are well underway and are expected to be fully completed in the near future, the Company’s material weakness will not be considered remediated until new internal controls are operational for a period of time and are tested, and management concludes that these controls are operating effectively.

Other than the remediation described above, there has been no changeschange in the Company’s internal controlscontrol over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three monthsquarter ended SeptemberJune 30, 20172019 that havehas materially affected, or areis reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II – OTHER INFORMATION


Item 1.
Legal Proceedings

Item 1.     Legal Proceedings

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 SeptemberJune 30, 2017.


2019.

Item 1A.Risk Factors

Item 1A.  Risk Factors

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 as of and for the year ended December 31, 2016.2018. There hashave been no material changechanges in our risk factors since the filing of our December 31, 20162018 Annual Report on Form 10-K.10‑K.


50

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

None.


Item 3.Defaults Upon Senior Securities

Item 3.     Defaults Upon Senior Securities

None.


Item 4.Mine Safety Disclosures

Item 4.     Mine Safety Disclosures

Not applicable.

Item 5.Other Information

Item 5.     Other Information

None.


Item 6.     Exhibits

Item 6.Exhibits

Exhibit No.

Description

31.1

31.1

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of Interim Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32

Certification of Chief Executive Officer and Interim 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 10-Q10‑Q as of SeptemberJune 30, 20172019 and for the three and ninesix months ended SeptemberJune 30, 2017,2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.

EXHIBIT INDEX

Exhibit No.

Description

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Certification of Interim Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer and Interim 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 10-Q10‑Q as of SeptemberJune 30, 20172019 and for the three and ninesix months ended SeptemberJune 30, 2017,2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.

51

SIGNATURESSIGNATURES


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.

November 14, 2017

August 9, 2019

/s/ Alan J. Hyatt

Alan J. Hyatt,
Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

November 14, 2017

August 9, 2019

/s/ Paul B. Susie

Marc S. Winkler

Paul B. Susie,
Executive Vice President,

Marc S. Winkler,
Interim
Chief Financial Officer

(Principal Financial and Accounting Officer)

52

45