UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 2017
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ..
Commission File Number 0-49731
SEVERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 52‑1726127 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
200 Westgate Circle, Suite 200 | 21401 | |
(Address of principal executive offices) | (Zip Code) |
410‑260‑2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-212b‑2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer | |
Non- accelerated filer ☐ | Smaller reporting company ☑ | |
Emerging growth company ☐ |
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act).Yes☐ No ☑
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
Page | |||
1 | |||
2 | |||
3 | |||
4 | |||
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; |
· | 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
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
PART I – FINANCIAL INFORMATION
(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
Severn Bancorp, Inc. and Subsidiaries
(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
(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
(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
(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
(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 to
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.
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.
Cash Flows
We consider all highly liquid securities with original maturities of three months or less to be cash equivalents. For reporting purposes, assets grouped in the Consolidated Statements of reporting cash flows, cash and cash equivalents include cashFinancial Condition under the captions “Cash and due from banks, federalbanks” and “Federal funds sold and interest-earninginterest-bearing deposits with banks.
Reclassifications
Certain reclassifications have been made to amounts previously reported to conform to current period presentation.
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.
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.
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 |
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 |
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 |
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 |
We did not sell any securities during 2016.
There were no securities pledged as collateral as of SeptemberJune 30, 20172019 or December 31, 2016.
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.
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.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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.
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.
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 |
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 | Total Balance of | |||||||||||||||||||
(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 | Total Balance of | |||||||||||||||||||
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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.
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 |
We did not repurchasemodify any loans during the ninethree and six months ended SeptemberJune 30, 20172019 or 2016.
Note 4 - Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2015,2013, 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 | Minimum Requirements | To be Well Capitalized Under | |||||||||||||||||||||||||||||
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.
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
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 | Weighted- Average | Aggregate Intrinsic | Number of Shares | Weighted- Average | Weighted- Average | Aggregate Intrinsic | |||||||||||||||||||||||||
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
|
|
|
|
|
|
|
|
| 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 | ) |
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).
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 | Significant Other | Significant Unobservable | Total Changes In Fair Values | ||||||||||||||||
(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 | Significant Other | Significant Unobservable | Total Changes In Fair Values | ||||||||||||||||
(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
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 | Significant Other | Significant Unobservable | 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 | Significant Other | Significant Unobservable | 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.
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
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.
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.
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.
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.
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.
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.
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.
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
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 spread | Net 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.
35
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, 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.
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.
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.
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.
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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
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.
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 | Amount | Percent of Total | Percent of 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.
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.
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.
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 |
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.
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.
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.
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.
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
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) | |||||||||||||
+400 | bp | $ | 160,130 | $ | (16,836 | ) | -9.51 | % | |||||
+300 | bp | 166,030 | (10,936 | ) | -6.18 | % | |||||||
+200 | bp | 170,894 | (6,072 | ) | -3.43 | % | |||||||
+100 | bp | 174,580 | (2,386 | ) | -1.35 | % | |||||||
0 | bp | 176,966 | |||||||||||
-100 | bp | 176,569 | (397 | ) | -0.22 | % | |||||||
-200 | bp | 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
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
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.
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
Exhibit No. | Description | |
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 |
Exhibit No. | Description | |
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | ||
101 | The following financial statements from the Severn Bancorp, Inc. Quarterly Report on Form |
51
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. | |||
August 9, 2019 | /s/ Alan J. Hyatt | ||
Alan J. Hyatt, | |||
(Principal Executive Officer) | |||
August 9, 2019 | /s/ | Marc S. Winkler | |
Marc S. Winkler, | |||
(Principal Financial and Accounting Officer) |
52