Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q10-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, 20182019

or

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

For the transition period from                           to                          .

Commission File Number 0‑49731

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

52‑1726127

(State or other jurisdiction of incorporation or organization)

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

 

 

 

 

200 Westgate Circle, Suite 200
        Annapolis, Maryland

21401

  (Address of principal executive offices)

(Zip Code)

 

410‑260‑2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and formal fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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‑2 of the Exchange Act.

 

 

 

Large accelerated filer

 

Accelerated filer 

 

 

 

Non- accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company 

 

 

 

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

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

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 –12,721,201–12,777,537 shares outstanding as of November 13, 2018August 8, 2019

 

 

 


Table of Contents

SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents

 

 

 

 

Page

PART I – FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Consolidated Statements of Financial Condition as of SeptemberJune 30, 2018 (unaudited)2019 and December 31, 20172018 (unaudited)

1

 

 

 

 

Consolidated Statements of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20182019 and 20172018 (unaudited)

2

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20182019 and 20172018 (unaudited)

3

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the NineThree and Six Months Ended SeptemberJune 30, 20182019 and 20172018 (unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20182019 and 20172018 (unaudited)

56

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

67

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

4748

 

 

 

Item 4. 

Controls and Procedures

4849

 

 

 

 

 

 

PART II – OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

4850

 

 

 

Item 1A. 

Risk Factors

4850

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

4951

 

 

 

Item 3. 

Defaults Upon Senior Securities

4951

 

 

 

Item 4. 

Mine Safety Disclosures

4951

 

 

 

Item 5. 

Other Information

4951

 

 

 

Item 6. 

Exhibits

4951

 

 

 

EXHIBIT INDEX 

5051

 

 

SIGNATURES 

5152

 

 

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Caution Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10‑Q, as well as other periodic reports filed with the Securities and Exchange Commission (“SEC”), and written or oral communications made from time to time by or on behalf of Severn Bancorp and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend,” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.”  Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements reflect our expectation or prediction of future conditions, events, or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 20172018 Annual Report on Form 10‑K, Item 1A of Part II of the Company’s March 31, 20182019 Quarterly Report on Form 10-Q, Item 1A of Part II of the Company’s June 30, 2018 Quarterly Report on Form 10-Q, and Item 1A of Part II of this Quarterly Report on Form 10‑Q, and the following:

·

general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults;

·

changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits, and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

·

our liquidity requirements could be adversely affected by changes in our assets and liabilities;

·

our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;

·

the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance, and other aspects of the financial services industry;

·

competitive factors among financial services companies, including product and pricing pressures, and our ability to attract, develop, and retain qualified banking professionals;

·

the effect of fiscal and governmental policies of the United States (“U.S.”) federal government;

·

the effect of any mergers, acquisitions, or other transactions to which we or our 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; and;

·

geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad.

ii


Table of Contents

Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

 

iii


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

June 30, 

    

December 31, 

    

2018

    

2017

    

2019

    

2018

ASSETS

 

(unaudited)

 

  

 

 

 

 

  

 

Cash and due from banks

 

$

2,160

 

$

2,382

 

$

3,644

 

$

2,880

Federal funds sold and interest-bearing deposits in other banks

 

 

89,156

 

 

19,471

 

 

73,693

 

 

185,460

Cash and cash equivalents

 

 

91,316

 

 

21,853

 

 

77,337

 

 

188,340

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

 

 

7,540

 

 

8,780

Securities available for sale, at fair value

 

 

11,950

 

 

10,119

 

 

11,031

 

 

11,978

Securities held to maturity (fair value of $41,866 and $54,004 at September 30, 2018 and December 31, 2017, respectively)

 

 

43,108

 

 

54,303

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

 

 

9,023

 

 

4,530

 

 

17,987

 

 

9,686

Loans receivable

 

 

689,712

 

 

668,151

 

 

679,573

 

 

682,349

Allowance for loan losses

 

 

(8,056)

 

 

(8,055)

 

 

(8,093)

 

 

(8,044)

Loans, net

 

 

681,656

 

 

660,096

 

 

671,480

 

 

674,305

Real estate acquired through foreclosure

 

 

285

 

 

403

 

 

1,430

 

 

1,537

Restricted stock investments

 

 

3,866

 

 

4,489

 

 

2,857

 

 

3,766

Premises and equipment, net

 

 

22,931

 

 

23,139

 

 

22,452

 

 

22,745

Accrued interest receivable

 

 

2,689

 

 

2,640

 

 

2,605

 

 

2,848

Deferred income taxes

 

 

3,244

 

 

5,302

 

 

2,167

 

 

2,363

Bank owned life insurance

 

 

5,186

 

 

5,064

 

 

5,303

 

 

5,225

Goodwill

 

 

1,104

 

 

1,099

 

 

1,104

 

 

1,104

Other assets

 

 

4,185

 

 

2,970

 

 

5,257

 

 

2,644

Total assets

 

$

889,323

 

$

804,787

 

$

862,112

 

$

974,233

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

 

 

  

 

 

  

Noninterest bearing

 

$

86,252

 

$

72,833

 

$

133,357

 

$

146,604

Interest-bearing

 

 

607,925

 

 

529,395

 

 

552,059

 

 

632,902

Total deposits

 

 

694,177

 

 

602,228

 

 

685,416

 

 

779,506

Long-term borrowings

 

 

73,500

 

 

88,500

 

 

48,500

 

 

73,500

Subordinated debentures

 

 

20,619

 

 

20,619

 

 

20,619

 

 

20,619

Accrued expenses and other liabilities

 

 

5,148

 

 

2,340

 

 

4,886

 

 

2,155

Total liabilities

 

 

793,444

 

 

713,687

 

 

759,421

 

 

875,780

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 December 31, 2017

 

 

 —

 

 

 4

Common stock, $0.01 par value, 20,000,000 shares authorized; 12,695,801 and 12,233,424 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

127

 

 

122

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

 

 

65,216

 

 

65,137

 

 

65,696

 

 

65,538

Retained earnings

 

 

30,642

 

 

25,872

 

 

36,878

 

 

32,860

Accumulated other comprehensive loss

 

 

(106)

 

 

(35)

 

 

(11)

 

 

(73)

Total stockholders' equity

 

 

95,879

 

 

91,100

 

 

102,691

 

 

98,453

Total liabilities and stockholders' equity

 

$

889,323

 

$

804,787

 

$

862,112

 

$

974,233

 

See accompanying notes to consolidated financial statements

1


Table of Contents

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2018

    

2017

    

2018

    

2017

    

    

2019

    

2018

    

2019

    

2018

    

Interest income:

 

(unaudited)

 

 

 

Loans

 

$

8,844

 

$

7,742

 

$

25,731

 

$

22,267

 

 

$

9,226

 

$

8,516

 

$

18,393

 

$

16,887

 

Securities

 

 

293

 

 

330

 

 

920

 

 

927

 

 

 

241

 

 

307

 

 

500

 

 

627

 

Other earning assets

 

 

423

 

 

167

 

 

787

 

 

498

 

 

 

757

 

 

178

 

 

1,874

 

 

364

 

Total interest income

 

 

9,560

 

 

8,239

 

 

27,438

 

 

23,692

 

 

 

10,224

 

 

9,001

 

 

20,767

 

 

17,878

 

Interest expense:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

 

Deposits

 

 

1,531

 

 

1,011

 

 

3,938

 

 

2,924

 

 

 

1,898

 

 

1,274

 

 

3,767

 

 

2,407

 

Borrowings and subordinated debentures

 

 

684

 

 

897

 

 

2,244

 

 

2,844

 

 

 

481

 

 

800

 

 

1,070

 

 

1,560

 

Total interest expense

 

 

2,215

 

 

1,908

 

 

6,182

 

 

5,768

 

 

 

2,379

 

 

2,074

 

 

4,837

 

 

3,967

 

Net interest income

 

 

7,345

 

 

6,331

 

 

21,256

 

 

17,924

 

 

 

7,845

 

 

6,927

 

 

15,930

 

 

13,911

 

Reversal of provision for loan losses

 

 

(300)

 

 

 —

 

 

(300)

 

 

(650)

 

Net interest income after reversal of provision for loan losses

 

 

7,645

 

 

6,331

 

 

21,556

 

 

18,574

 

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

 

 

740

 

 

334

 

 

1,970

 

 

1,150

 

 

 

1,087

 

 

635

 

 

1,807

 

 

1,230

 

Real estate commissions

 

 

408

 

 

311

 

 

1,153

 

 

959

 

 

 

378

 

 

360

 

 

860

 

 

745

 

Real estate management fees

 

 

157

 

 

197

 

 

527

 

 

513

 

 

 

162

 

 

187

 

 

326

 

 

370

 

Credit report and appraisal fees

 

 

83

 

 

137

 

 

283

 

 

390

 

Deposit service charges

 

 

426

 

 

190

 

 

1,067

 

 

265

 

 

 

547

 

 

346

 

 

1,056

 

 

641

 

Title company revenue

 

 

316

 

 

48

 

 

751

 

 

48

 

 

 

262

 

 

293

 

 

479

 

 

435

 

Other noninterest income

 

 

214

 

 

182

 

 

654

 

 

437

 

 

 

179

 

 

247

 

 

347

 

 

440

 

Total noninterest income

 

 

2,344

 

 

1,399

 

 

6,405

 

 

3,762

 

 

 

2,615

 

 

2,068

 

 

4,875

 

 

3,861

 

Noninterest expense:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

 

Compensation and related expenses

 

 

4,661

 

 

3,288

 

 

13,359

 

 

10,719

 

 

 

4,909

 

 

4,420

 

 

9,434

 

 

8,698

 

Occupancy

 

 

416

 

 

354

 

 

1,151

 

 

1,015

 

 

 

389

 

 

391

 

 

804

 

 

735

 

Legal fees

 

 

37

 

 

41

 

 

79

 

 

104

 

 

 

26

 

 

31

 

 

75

 

 

42

 

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

 

 

 7

 

 

126

 

 

21

 

 

166

 

 

 

24

 

 

(18)

 

 

149

 

 

14

 

Federal Deposit Insurance Corporation insurance premiums

 

 

58

 

 

69

 

 

171

 

 

133

 

 

 

63

 

 

58

 

 

119

 

 

113

 

Professional fees

 

 

109

 

 

124

 

 

323

 

 

377

 

 

 

443

 

 

105

 

 

583

 

 

214

 

Advertising

 

 

302

 

 

198

 

 

751

 

 

649

 

 

 

213

 

 

216

 

 

400

 

 

449

 

Data processing

 

 

286

 

 

237

 

 

805

 

 

661

 

 

 

354

 

 

255

 

 

696

 

 

519

 

Credit report and appraisal fees

 

 

182

 

 

203

 

 

423

 

 

478

 

 

 

24

 

 

47

 

 

64

 

 

41

 

Licensing and software

 

 

129

 

 

152

 

 

407

 

 

326

 

 

 

293

 

 

157

 

 

475

 

 

278

 

Mortgage leads purchased

 

 

 —

 

 

48

 

 

 —

 

 

234

 

Other noninterest expense

 

 

853

 

 

681

 

 

2,250

 

 

2,158

 

 

 

775

 

 

691

 

 

1,464

 

 

1,397

 

Total noninterest expense

 

 

7,040

 

 

5,521

 

 

19,740

 

 

17,020

 

 

 

7,513

 

 

6,353

 

 

14,263

 

 

12,500

 

Net income before income tax provision

 

 

2,949

 

 

2,209

 

 

8,221

 

 

5,316

 

 

 

2,947

 

 

2,642

 

 

6,542

 

 

5,272

 

Income tax provision

 

 

784

 

 

950

 

 

2,253

 

 

2,150

 

 

 

771

 

 

724

 

 

1,757

 

 

1,469

 

Net income

 

 

2,165

 

 

1,259

 

 

5,968

 

 

3,166

 

 

 

2,176

 

 

1,918

 

 

4,785

 

 

3,803

 

Dividends on preferred stock

 

 

 —

 

 

(70)

 

 

(70)

 

 

(210)

 

 

 

 —

 

 

 —

 

 

 —

 

 

(70)

 

Net income available to common stockholders

 

$

2,165

 

$

1,189

 

$

5,898

 

$

2,956

 

 

$

2,176

 

$

1,918

 

$

4,785

 

$

3,733

 

Net income per common share - basic

 

$

0.17

 

$

0.10

 

$

0.47

 

$

0.24

 

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

 

Net income per common share - diluted

 

$

0.17

 

$

0.10

 

$

0.47

 

$

0.24

 

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

 

 

See accompanying notes to consolidated financial statements

2


Table of Contents

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

 

    

2018

    

2017

    

2018

    

2017

    

 

 

(unaudited)

Net income

 

$

2,165

 

$

1,259

 

$

5,968

 

$

3,166

 

Other comprehensive loss items:

 

 

  

 

 

  

 

 

  

 

 

  

 

Unrealized holding losses on available-for-sale securities arising during the period (net of tax benefit of $2, $6, $27, and $2)

 

 

(5)

 

 

(9)

 

 

(71)

 

 

(3)

 

Realized gains, net of tax expense of $1 and $1 in 2017

 

 

 —

 

 

(1)

 

 

 —

 

 

(1)

 

Total other comprehensive loss

 

 

(5)

 

 

(10)

 

 

(71)

 

 

(4)

 

Total comprehensive income

 

$

2,160

 

$

1,249

 

$

5,897

 

$

3,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

See accompanying notes to consolidated financial statements

 

 

 

3


Table of Contents

Severn Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 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

 

 

(unaudited)

Balance at January 1, 2018

 

437,500

 

12,233,424

 

$

 4

 

$

122

 

$

65,137

 

$

25,872

 

$

(35)

 

$

91,100

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,968

 

 

 —

 

 

5,968

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

169

 

 

 —

 

 

 —

 

 

169

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 $0.09 per share

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,128)

 

 

 —

 

 

(1,128)

Exercise of stock options

 

 —

 

24,877

 

 

 —

 

 

 1

 

 

99

 

 

 —

 

 

 —

 

 

100

Other

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(189)

 

 

 —

 

 

 —

 

 

(189)

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(71)

 

 

(71)

Balance at September 30, 2018

 

 —

 

12,695,801

 

$

 —

 

$

127

 

$

65,216

 

$

30,642

 

$

(106)

 

$

95,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Nine Months Ended September 30, 2017

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

    

Number of

    

Number of

    

 

    

 

    

 

    

 

    

Accumulated

    

 

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

Shares of

 

Shares of

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

Preferred

 

Common

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders'

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

Stock

 

Stock

 

Stock

 

Stock

 

Capital

 

 Earnings 

 

Loss

 

Equity

 

 

 

(unaudited)

Balance at January 1, 2017

 

437,500

 

12,123,179

 

$

 4

 

$

121

 

$

64,471

 

$

23,334

 

$

 —

 

$

87,930

Balance at April 1, 2018

 

437,500

 

12,247,626

 

$

 4

 

$

122

 

$

65,060

 

$

27,320

 

$

(89)

 

$

92,417

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,166

 

 

 —

 

 

3,166

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,918

 

 

 —

 

 

1,918

Stock-based compensation

 

 —

 

 —

 

 

 —

 

 

 —

 

 

146

 

 

 —

 

 

 —

 

 

146

 

 —

 

 —

 

 

 —

 

 

 —

 

 

57

 

 

 —

 

 

 —

 

 

57

Stock issued in acquisition

 

 —

 

108,084

 

 

 —

 

 

 1

 

 

774

 

 

 —

 

 

 —

 

 

775

Dividend declared on Series A preferred stock

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(210)

 

 

 —

 

 

(210)

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

 

 —

 

14,162

 

 

 —

 

 

 —

 

 

207

 

 

 —

 

 

 —

 

 

207

 

 —

 

9,800

 

 

 —

 

 

 1

 

 

40

 

 

 —

 

 

 —

 

 

41

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

 

(4)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

(12)

Balance at September 30, 2017

 

437,500

 

12,245,425

 

$

 4

 

$

122

 

$

65,598

 

$

26,290

 

$

(4)

 

$

92,010

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

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

45


Table of Contents

Severn Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

Six Months Ended June 30, 

    

2018

    

2017

    

2019

    

2018

Cash flows from operating activities:

 

(unaudited)

 

 

Net income

 

$

5,968

 

$

3,166

 

$

4,785

 

$

3,803

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

966

 

 

919

 

 

703

 

 

628

Amortization of deferred loan fees

 

 

(1,317)

 

 

(847)

 

 

(949)

 

 

(861)

Net amortization of premiums and discounts

 

 

174

 

 

(202)

 

 

80

 

 

(125)

Reversal of provision for loan losses

 

 

(300)

 

 

(650)

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

 

 

54

 

 

139

 

 

171

 

 

44

Gain on sale of mortgage loans

 

 

(1,970)

 

 

(1,150)

 

 

(1,807)

 

 

(1,230)

Gain on sale of securities

 

 

 —

 

 

(2)

Proceeds from sale of mortgage loans held for sale

 

 

64,815

 

 

28,482

 

 

81,725

 

 

37,151

Originations of loans held for sale

 

 

(67,338)

 

 

(22,556)

 

 

(88,867)

 

 

(40,835)

Stock-based compensation

 

 

169

 

 

146

 

 

77

 

 

113

Increase in cash surrender value of bank-owned life insurance

 

 

(122)

 

 

(23)

 

 

(78)

 

 

(82)

Deferred income taxes

 

 

2,083

 

 

2,081

 

 

173

 

 

1,334

Increase in accrued interest receivable

 

 

(49)

 

 

(254)

Increase in other assets

 

 

(1,408)

 

 

(837)

Increase (decrease) in accrued expenses and other liabilities

 

 

2,808

 

 

(1,731)

Net cash provided by operating activities

 

 

4,533

 

 

6,681

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:

 

 

  

 

 

  

 

 

  

 

 

  

Purchase of certificates of deposit held for investment

 

 

 —

 

 

(8,680)

Loan principal (disbursements), net of repayments

 

 

(19,943)

 

 

(40,265)

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

 

 

623

 

 

404

 

 

909

 

 

262

Purchases of premises and equipment, net

 

 

(758)

 

 

(287)

 

 

(410)

 

 

(548)

Purchase of bank-owned life insurance

 

 

 —

 

 

(5,000)

Activity in securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 —

 

 

(6,679)

Maturities/calls/repayments

 

 

11,093

 

 

10,730

 

 

5,300

 

 

7,745

Activity in available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

(2,000)

 

 

(7,184)

 

 

 —

 

 

(2,000)

Maturities/calls/repayments

 

 

 —

 

 

184

 

 

1,000

 

 

108

Sales

 

 

 —

 

 

4,011

Proceeds from sales of real estate acquired through foreclosure

 

 

64

 

 

433

 

 

107

 

 

64

Net cash used in investing activities

 

 

(10,921)

 

 

(52,333)

Net cash provided by (used in) investing activities

 

 

12,398

 

 

(12,067)

Cash flows from financing activities:

 

 

  

 

 

  

 

 

  

 

 

  

Net increase in deposits

 

 

91,949

 

 

21,546

Net (decrease) increase in deposits

 

 

(94,090)

 

 

19,387

Net increase in short-term borrowings

 

 

 —

 

 

8,500

Additional long-term borrowings

 

 

46,500

 

 

39,950

 

 

 —

 

 

34,000

Repayments of long-term borrowings

 

 

(61,500)

 

 

(50,000)

 

 

(25,000)

 

 

(49,000)

Common stock dividends

 

 

(1,128)

 

 

 —

 

 

(767)

 

 

(747)

Preferred stock dividends

 

 

(70)

 

 

(210)

 

 

 —

 

 

(70)

Exercise of stock options

 

 

100

 

 

207

 

 

81

 

 

97

Net cash provided by financing activities

 

 

75,851

 

 

11,493

Increase (decrease) in cash and cash equivalents

 

 

69,463

 

 

(34,159)

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

 

 

21,853

 

 

67,014

 

 

188,340

 

 

21,853

Cash and cash equivalents at end of period

 

$

91,316

 

$

32,855

 

$

77,337

 

$

22,165

Supplemental Information:

 

 

 

 

 

  

Supplemental Noncash Disclosures:

 

 

 

 

 

  

Interest paid on deposits and borrowed funds

 

$

6,144

 

$

5,828

 

$

4,925

 

$

3,937

Income taxes paid

 

 

96

 

 

50

 

 

1,909

 

 

91

Real estate acquired in satisfaction of loans

 

 

 —

 

 

703

 

 

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

 

 

 —

 

 

660

 

 

648

 

 

 —

 

See accompanying notes to consolidated financial statements

 

 

56


Table of Contents

Severn Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of and for the three and nine months ended September 30, 2018 and 2017 is unaudited)(Unaudited)

Note 1 -  Summary of Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of Severn Bancorp, Inc. and subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 8‑01 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, 20182019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20182019 or any other interim or future period. Events occurring after the date of the financial statements up to the date the financial statements were available to be issued were considered in the preparation of the consolidated financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 20172018 Annual Report on Form 10‑K as filed with the Securities and Exchange Commission (“SEC”).

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of Severn Bancorp, Inc., 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 stock-based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, and the calculation of current and deferred income taxes and the realizability of net deferred tax assets.assets and liabilities.

Cash Flows

We consider all highly liquid securities with original maturities of three months or less to be cash equivalents. For reporting purposes, assets grouped in the Consolidated Statements of Financial Condition under the captions “Cash and due from banks” and “Federal funds sold and interest-bearing deposits in other banks” are considered cash or cash equivalents.  For financial statement purposes, these assets are carried at cost. Federal funds sold and interest-bearing deposits in other banks generally have overnight maturities and are in excess of amounts that would be recoverable under Federal Deposit Insurance Corporation (“FDIC”) insurance.

Reclassifications

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

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Revenue Recognition

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage-banking and mortgage servicing activities. Our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income, are service charges on deposit accounts, real estate commissions, real estate management fees, and title company revenue.

Service Charges on Deposit Accounts

Service charges on deposit accounts represent general service fees for monthly account maintenance and activity - or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

Real Estate Commissions

Real Estate Commissions represent commissions received on properties sold. Revenue is recognized when our performance obligation is completed, which is generally the time the property is sold and payment has been received. 

Real Estate Management Fees

Real Estate Management Fees represent monthly fees received on property maintenance and management.  We perform daily services for these fees and bill for those services on a monthly basis.  We have determined that each day of the performance of the services represents a distinct service.  The overall service of property management each day is substantially the same and has the same pattern of transfer (daily) over the term of the contract.  Further, each distinct day of service represents a performance obligation that would be satisfied over time (over the length of the contract, not at a point in time) and has the same measure of progress (elapsed time).  Management has therefore determined that property management services are a single performance obligation composed of a series of distinct services. In performing the daily management activities, the customer is simultaneously receiving and consuming the benefits provided by our performance of the contract.  Revenue is earned evenly and daily over the life of the contract.  For purposes of expedience, we record the fees when monthly invoices are processed.  Each month contains 1/12 of the contract revenue.

Title Company Revenue

Title Company Revenue consists of revenue earned on performing title work for real estate transactions.  The revenue is earned when the title work is performed.  Payment for such performance obligations generally occurs at the time of the settlement of a real estate transaction.  As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement. 

Recent Accounting Pronouncements

Pronouncements Adopted

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

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No. 2014‑09, Revenue from Contracts with Customers, as amended by ASU 2015‑14, Revenue from Contracts with Customers:  Deferral of the Effective Date, ASU 2016‑08, Revenue from Contracts with Customers:  Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU 2016‑10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016‑12, Revenue from Contracts with Customers:  Narrow-Scope Improvements and Practical Expedients, ASU 2016‑20, Technical Corrections and Improvements to Topic 606, Revenue form Contracts with Customers, that provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. We adopted the pronouncement on January 1, 2018 and elected the modified retrospective transition method.  There was no material impact to the financial statements. Our accounting policies and revenue recognition principles did not change materially as the principles of ASC 606 are largely consistent with the previous revenue recognition practices.  See additional information on revenue recognition above.

In January 2016, FASB issued ASU No. 2016‑01, Financial Instruments – Overall:  Recognition and Measurement of Financial Assets and Financial Liabilities, which requires entities to measure equity investments at fair value and recognize changes on fair value in net income. The guidance also provides a new measurement alternative for equity investments that do not have readily determinable fair values and don’t qualify for the net asset value practical expedient. The standard requires entities to record changes in instrument–specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, except for certain financial liabilities of consolidated collateralized financing entities. Entities also have to reassess the realizability of a deferred tax asset related to an available-for-sale (“AFS”) debt security in combination with their other deferred tax assets. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In August 2016, FASB issued ASU No. 2016‑15, Classification of Certain Cash Receipts and Cash Payments, which provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. The adoption of ASC No. 2016‑15 did not have a material impact on our financial position, results of operations, or cash flows.

Pronouncements Issued

In February 2016, FASB issued ASU 2016‑02, Leases, which requires a lessee to recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a “right-of-use”right-of-use (“ROU”) asset. The accounting applied by the lessor is relatively unchanged. The ASU also requires expanded qualitative and quantitative disclosures. For public business entities, the guidance iswas effective for interim and annual reporting periods beginning after December 15, 2018 and mandates a modified retrospective transition for all entities. Early application is permitted. We have determined thatadopted this standard using the option to apply the transition provisions of the new standard at the adoption date instead of the earliest period presented as provided in ASU No. 2016‑02 may2018-11. Additionally, we elected to apply all practical expedients as provided in ASU 2016-02, with the exception of the hindsight practical expedient which was not elected. As a result of the adoption of this standard, effective January 1, 2019, we recognized both an ROU asset and a lease liability of $2.7 million to be recorded in an increase inother assets to recognizeand other liabilities, respectively, on the balance sheet.  The lease liability represents the present value of the future payments on five leased properties and six leased pieces of equipment within the Company’s footprint, while the ROU asset reflects the lease obligations, with a corresponding increase in liabilities.  While we are still evaluating all of our leases to determine the extentliability adjusted for deferred rent balances of the increases, we do not expectrespective properties as of the adoption date of thisJanuary 1, 2019. The Company expects its regulatory capital ratios to remain above the thresholds necessary to be classified as a “well capitalized” institution.

In March 2017, FASB issued ASU No. 2017‑08, Receivables - Nonrefundable Fees and Other costs, which provides guidance that called for the shortening of the amortization period for certain callable debt securities held at a premium. The standard towas effective for interim and annual reporting periods beginning after December 15, 2018. The adoption of ASC No. 2017‑08 did not 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, 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. 

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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 GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of our loan and lease portfolio at the time of adoption.

In March 2017, FASB issued ASU No. 2017‑08, Receivables - Nonrefundable Fees and Other costs, which provides guidance that calls for the shortening of the amortization period for certain callable debt securities held at a premium. The

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standard is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of ASC No. 2017‑08 to have a material impact on our financial position, results of operations, or cash flows.

In February 2018, FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted.  The Company does not expect the adoption of ASU No. 2018-02 to have a material impact on its financial position, results of operations, or cash flows.

 

Note 2 – Correction of an Immaterial Prior Year Error

In 2016, we redeemed the Series B preferred stock sold in 2008 to the U.S. Department of the Treasury (the “TARP Shares”). At the time of the redemption, the remaining unamortized discount of $511,000 should have been fully amortized into additional paid-in capital and retained earnings and reflected as a reduction to net income available to common stockholders. This treatment was not reflected in the consolidated financial statements included in the September 30, 2017 Quarterly Report on Form 10‑Q. We determined that this amount was not material to the 2017 consolidated financial statements. Our September 30, 2017 consolidated financial statements within these consolidated financial statements have been adjusted to reflect the proper recognition of the remaining discount at the time of the redemption as a $68,000 and $203,000 adjustment to net income available to common stockholders for the three and nine months ended September 30, 2017, respectively, revising the originally reported amounts from $1.1 million to $1.2 million for the three months ended September 30, 2017 and from $2.8 million to $3.0 million for the nine months ended September 30, 2017. The adjustment had no impact on total assets at September 30, 2017 or December 31, 2017 and no impact on net income for the three and nine months ended September 30, 2017.

Note 3 - Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

June 30, 2019

 

Amortized

 

Unrealized

    

Unrealized

    

 

 

Amortized

 

Unrealized

    

Unrealized

    

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Cost

 

Gains

 

Losses

 

Fair Value

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,990

 

$

 —

 

$

15

 

$

1,975

 

$

1,997

 

$

 —

 

$

 2

 

$

1,995

U.S. government agency notes

 

 

10,107

 

 

 —

 

 

132

 

 

9,975

 

 

9,051

 

 

 —

 

 

15

 

 

9,036

 

$

12,097

 

$

 —

 

$

147

 

$

11,950

 

$

11,048

 

$

 —

 

$

17

 

$

11,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2017

 

 

Amortized

    

Unrealized

    

Unrealized

    

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(dollars in thousands)

U.S. government agency notes

 

$

10,169

 

$

 —

 

$

50

 

$

10,119

 

 

$

10,169

 

$

 —

 

$

50

 

$

10,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

3,991

 

$

14

 

$

 2

 

$

4,003

 

$

1,992

 

$

23

 

$

 —

 

$

2,015

U.S. government agency notes

 

 

12,993

 

 

10

 

 

133

 

 

12,870

 

 

8,989

 

 

103

 

 

24

 

 

9,068

Mortgage-backed securities

 

 

26,124

 

 

 8

 

 

1,139

 

 

24,993

 

 

22,581

 

 

83

 

 

39

 

 

22,625

 

$

43,108

 

$

32

 

$

1,274

 

$

41,866

 

$

33,562

 

$

209

 

$

63

 

$

33,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2018

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

    

Amortized

    

Unrealized

    

Unrealized

    

Fair

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

4,994

 

$

68

 

$

 6

 

$

5,056

 

$

1,991

 

$

17

 

$

 —

 

$

2,008

U.S. government agency notes

 

 

19,004

 

 

81

 

 

99

 

 

18,986

 

 

11,992

 

 

45

 

 

92

 

 

11,945

Mortgage-backed securities

 

 

30,305

 

 

27

 

 

370

 

 

29,962

 

 

24,929

 

 

 6

 

 

676

 

 

24,259

 

$

54,303

 

$

176

 

$

475

 

$

54,004

 

$

38,912

 

$

68

 

$

768

 

$

38,212

 

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Table of Contents

Gross unrealized losses and fair value by length of time that the individual AFS securities have been in an unrealized loss position at the dates indicated are presented in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

 

Less than 12 months

 

12 months or more

 

Total

 

Less than 12 months

 

12 months or more

 

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

   

# of

   

Fair

   

Unrealized

 

# of

 

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities

 

Value

 

Losses

   

Securities

   

Value

 

Losses

 

Securities

 

Value

 

Losses

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,975

 

$

15

 

$

 —

 

$

 —

 

$

1,975

 

$

15

 

 —

 

$

 —

 

$

 —

 

 2

 

$

1,995

 

$

 2

 

 2

 

$

1,995

 

$

 2

U.S. government agency notes

 

 

6,948

 

 

86

 

 

3,027

 

 

46

 

 

9,975

 

 

132

 

 —

 

 

 —

 

 

 —

 

 7

 

 

9,036

 

 

15

 

 7

 

 

9,036

 

 

15

 

$

8,923

 

$

101

 

$

3,027

 

$

46

 

$

11,950

 

$

147

 

 —

 

$

 —

 

$

 —

 

 9

 

$

11,031

 

$

17

 

 9

 

$

11,031

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Less than 12 months

 

12 months or more

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(dollars in thousands)

U.S. government agency notes

 

$

10,119

 

$

50

 

$

 —

 

$

 —

 

$

10,119

 

$

50

 

 

$

10,119

 

$

50

 

$

 —

 

$

 —

 

$

10,119

 

$

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

 

Less than 12 months

 

12 months or more

 

Total

 

Less than 12 months

 

12 months or more

 

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

 —

 

$

 —

 

$

998

 

$

 2

 

$

998

 

$

 2

U.S. government agency notes

 

 

2,978

 

 

15

 

 

7,911

 

 

118

 

 

10,889

 

 

133

 

 —

 

$

 —

 

$

 —

 

 7

 

$

6,989

 

$

24

 

 7

 

$

6,989

 

$

24

Mortgage-backed securities

 

 

3,649

 

 

106

 

 

21,090

 

 

1,033

 

 

24,739

 

 

1,139

 

 —

 

 

 —

 

 

 —

 

 6

 

 

7,643

 

 

39

 

 6

 

 

7,643

 

 

39

 

$

6,627

 

$

121

 

$

29,999

 

$

1,153

 

$

36,626

 

$

1,274

 

 —

 

$

 —

 

$

 —

 

13

 

$

14,632

 

$

63

 

13

 

$

14,632

 

$

63

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2018

 

Less than 12 months

 

12 months or more

 

Total

 

Less than 12 months

 

12 months or more

 

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

   

# of

   

Fair

   

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,993

 

$

 6

 

$

 —

 

$

 —

 

$

1,993

 

$

 6

U.S. government agency notes

 

 

6,977

 

 

23

 

 

6,964

 

 

76

 

 

13,941

 

 

99

 

 —

 

$

 —

 

$

 —

 

10

 

$

9,927

 

$

92

 

10

 

 

9,927

 

 

92

Mortgage-backed securities

 

 

20,993

 

 

217

 

 

7,046

 

 

153

 

 

28,039

 

 

370

 

 —

 

 

 —

 

 

 —

 

18

 

 

24,011

 

 

676

 

18

 

 

24,011

 

 

676

 

$

29,963

 

$

246

 

$

14,010

 

$

229

 

$

43,973

 

$

475

 

 —

 

$

 —

 

$

 —

 

28

 

$

33,938

 

$

768

 

28

 

$

33,938

 

$

768

 

In the AFS securities portfolio, 8 U.S. government agency notes and 2 U.S. Treasury securities were in a loss position as of September 30, 2018.In the HTM securities portfolio, 11 U.S. government agency notes, one U.S. Treasury security, and 18 mortgage-backed securities were in a loss position as of September 30, 2018.

In the AFS securities portfolio, 8 U.S. government agency notes were in a loss position as of December 31, 2017.In the HTM securities portfolio, 14 U.S. government agency notes, one U.S. Treasury security, and 16 mortgage-backed securities were in a loss position as of December 31, 2017.

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.

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Table of Contents

Contractual maturities of debt securities at SeptemberJune 30, 20182019 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

 

AFS Securities

 

HTM Securities

    

Amortized

    

Fair

    

Amortized

    

Fair

    

Amortized

    

Fair

    

Amortized

    

Fair

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

(dollars in thousands)

 

(dollars in thousands)

Due in one year or less

 

$

3,000

 

$

2,980

 

$

8,004

 

$

7,969

 

$

10,033

 

$

10,019

 

$

7,004

 

$

6,993

Due after one through five years

 

 

9,097

 

 

8,970

 

 

8,980

 

 

8,904

 

 

1,015

 

 

1,012

 

 

3,977

 

 

4,090

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

26,124

 

 

24,993

 

 

 —

 

 

 —

 

 

22,581

 

 

22,625

 

$

12,097

 

$

11,950

 

$

43,108

 

$

41,866

 

$

11,048

 

$

11,031

 

$

33,562

 

$

33,708

 

During both the three and nine months ended September 30, 2017, we recognized gross gains and losses on the sale of securities of $4,000 and $2,000, respectively.  We did not sell any securities induring the three and six months ended June 30, 2019 or 2018.

There were no securities pledged as collateral as of SeptemberJune 30, 20182019 or December 31, 2017.2018.

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Note 43 -  Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

    

June 30, 2019

    

December 31, 2018

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

$

287,258

 

$

287,656

 

$

276,013

 

$

276,389

Commercial

 

 

43,180

 

 

37,356

 

 

45,347

 

 

35,884

Commercial real estate

 

 

236,105

 

 

236,302

 

 

238,699

 

 

244,088

Construction, land acquisition, and development

 

 

112,994

 

 

93,060

 

 

108,182

 

 

114,540

Home equity/2nds

 

 

12,173

 

 

15,703

 

 

12,581

 

 

13,386

Consumer

 

 

1,065

 

 

1,084

 

 

1,621

 

 

1,087

Total loans receivable

 

 

692,775

 

 

671,161

 

 

682,443

 

 

685,374

Unearned loan fees

 

 

(3,063)

 

 

(3,010)

 

 

(2,870)

 

 

(3,025)

Loans receivable

 

$

689,712

 

$

668,151

 

$

679,573

 

$

682,349

 

Certain loans in the amount of $173.0$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 SeptemberJune 30, 2018.2019.

At SeptemberJune 30, 2018,2019, the Bank was servicing $30.1$27.5 million in loans for the Federal National Mortgage Association (“FNMA”) and $15.3$14.0 million in loans for the Federal Home Loan Mortgage Corporation (“FHLMC”). At December 31, 2017,2018, the Bank was servicing $33.5$29.4 million in loans for the FNMA and $16.0$15.1 million in loans for the 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 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, 20182019 and December 31, 2017.2018.

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Table of Contents

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 consideration 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

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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 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, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as loans secured by real estate and secondarily as cash flow dependent. As repayment of these loans is generally dependent upon the successful operation of the property securing the loan, we look closely at the cash flows generated by the property securing the 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.

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Table of Contents

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.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Three Months Ended June 30, 2019

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

    

 

    

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

    

 

    

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

(dollars in thousands)

 

(dollars in thousands)

Beginning Balance

 

$

2,962

 

$

414

 

$

2,591

 

$

2,060

 

$

229

 

$

 1

 

$

 —

 

$

8,257

 

$

2,572

 

$

1,740

 

$

712

 

$

2,579

 

$

242

 

$

 1

 

$

239

 

$

8,085

Charge-offs

 

 

(148)

 

 

 —

 

 

 —

 

 

(6)

 

 

 —

 

 

 —

 

 

 —

 

 

(154)

 

 

(20)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

 

(32)

Recoveries

 

 

 3

 

 

 —

 

 

31

 

 

 —

 

 

219

 

 

 —

 

 

 —

 

 

253

 

 

 3

 

 

 —

 

 

33

 

 

 —

 

 

 4

 

 

 —

 

 

 —

 

 

40

Net (charge-offs) recoveries

 

 

(145)

 

 

 —

 

 

31

 

 

(6)

 

 

219

 

 

 —

 

 

 —

 

 

99

 

 

(17)

 

 

 —

 

 

33

 

 

 —

 

 

 4

 

 

(12)

 

 

 —

 

 

 8

Provision for (reversal of) loan losses

 

 

204

 

 

219

 

 

10

 

 

(494)

 

 

(267)

 

 

 —

 

 

28

 

 

(300)

 

 

11

 

 

(174)

 

 

47

 

 

104

 

 

(23)

 

 

11

 

 

24

 

 

 —

Ending Balance

 

$

3,021

 

$

633

 

$

2,632

 

$

1,560

 

$

181

 

$

 1

 

$

28

 

$

8,056

 

$

2,566

 

$

1,566

 

$

792

 

$

2,683

 

$

223

 

$

 —

 

$

263

 

$

8,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

Three Months Ended June 30, 2018

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

    

 

    

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

    

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

(dollars in thousands)

 

(dollars in thousands)

Beginning Balance

 

$

3,099

 

$

527

 

$

2,805

 

$

1,236

 

$

386

 

$

 2

 

$

 —

 

$

8,055

 

$

3,301

 

$

514

 

$

2,995

 

$

1,060

 

$

297

 

$

 2

 

$

 —

 

$

8,169

Charge-offs

 

 

(508)

 

 

 —

 

 

 —

 

 

(19)

 

 

 —

 

 

 —

 

 

 —

 

 

(527)

 

 

(37)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(37)

Recoveries

 

 

225

 

 

 —

 

 

364

 

 

 —

 

 

239

 

 

 —

 

 

 —

 

 

828

 

 

 1

 

 

 —

 

 

122

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

125

Net (charge-offs) recoveries

 

 

(283)

 

 

 —

 

 

364

 

 

(19)

 

 

239

 

 

 —

 

 

 —

 

 

301

 

 

(36)

 

 

 —

 

 

122

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

88

Provision for (reversal of) loan losses

 

 

205

 

 

106

 

 

(537)

 

 

343

 

 

(444)

 

 

(1)

 

 

28

 

 

(300)

(Reversal of) provision for loan losses

 

 

(303)

 

 

(100)

 

 

(526)

 

 

1,000

 

 

(70)

 

 

(1)

 

 

 —

 

 

 —

Ending Balance

 

$

3,021

 

$

633

 

$

2,632

 

$

1,560

 

$

181

 

$

 1

 

$

28

 

$

8,056

 

$

2,962

 

$

414

 

$

2,591

 

$

2,060

 

$

229

 

$

 1

 

$

 —

 

$

8,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - individually evaluated for impairment

 

$

1,090

 

$

 —

 

$

166

 

$

900

 

$

 2

 

$

 1

 

$

 —

 

$

2,159

Ending balance - collectively evaluated for impairment

 

 

1,931

 

 

633

 

 

2,466

 

 

660

 

 

179

 

 

 —

 

 

28

 

 

5,897

 

$

3,021

 

$

633

 

$

2,632

 

$

1,560

 

$

181

 

$

 1

 

$

28

 

$

8,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance -individually evaluated for impairment

 

$

15,038

 

$

 —

 

$

2,053

 

$

1,582

 

$

772

 

$

78

 

 

 

 

$

19,523

Ending loan balance -collectively evaluated for impairment

 

 

270,432

 

 

43,180

 

 

232,777

 

 

111,412

 

 

11,401

 

 

987

 

 

 

 

 

670,189

 

$

285,470

 

$

43,180

 

$

234,830

 

$

112,994

 

$

12,173

 

$

1,065

 

 

 

 

$

689,712

13

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

14


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2018

    

Residential

    

 

    

Commercial

    

 

    

 

Home Equity/

    

 

    

 

    

 

    

Residential

    

 

    

Commercial

    

 

    

 

Home Equity/

    

 

    

 

    

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

(dollars in thousands)

 

(dollars in thousands)

Ending balance - individually evaluated for impairment

 

$

1,181

 

$

 —

 

$

182

 

$

48

 

$

 —

 

$

 2

 

$

 —

 

$

1,413

 

$

927

 

$

430

 

$

142

 

$

32

 

$

 2

 

$

 —

 

$

 —

 

$

1,533

Ending balance - collectively evaluated for impairment

 

 

1,918

 

 

527

 

 

2,623

 

 

1,188

 

 

386

 

 

 —

 

 

 —

 

 

6,642

 

 

1,297

 

 

2,306

 

 

315

 

 

2,207

 

 

220

 

 

 1

 

 

165

 

 

6,511

 

$

3,099

 

$

527

 

$

2,805

 

$

1,236

 

$

386

 

$

 2

 

$

 —

 

$

8,055

 

$

2,224

 

$

2,736

 

$

457

 

$

2,239

 

$

222

 

$

 1

 

$

165

 

$

8,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending loan balance - individually evaluated for impairment

 

$

18,219

 

$

 —

 

$

2,917

 

$

991

 

$

 —

 

$

84

 

 

 

 

$

22,211

 

$

12,579

 

$

430

 

$

1,992

 

$

1,278

 

$

871

 

$

76

 

 

 

 

$

17,226

Ending loan balance - collectively evaluated for impairment

 

 

267,600

 

 

37,356

 

 

232,212

 

 

92,069

 

 

15,703

 

 

1,000

 

 

 

 

 

645,940

 

 

262,180

 

 

35,454

 

 

240,701

 

 

113,262

 

 

12,515

 

 

1,011

 

 

 

 

 

665,123

 

$

285,819

 

$

37,356

 

$

235,129

 

$

93,060

 

$

15,703

 

$

1,084

 

 

 

 

$

668,151

 

$

274,759

 

$

35,884

 

$

242,693

 

$

114,540

 

$

13,386

 

$

1,087

 

 

 

 

$

682,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

Six Months Ended June 30, 2018

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

    

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

    

 

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

(dollars in thousands)

 

(dollars in thousands)

Beginning Balance

 

$

3,403

 

$

389

 

$

2,571

 

$

984

 

$

367

 

$

 4

 

$

 —

 

$

7,718

    

$

3,099

 

$

527

 

$

2,805

 

$

1,236

 

$

386

 

$

 2

 

$

 —

 

$

8,055

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(360)

 

 

 —

 

 

 —

 

 

(13)

 

 

 —

 

 

 —

 

 

 —

 

 

(373)

 

Recoveries

 

 

156

 

 

 —

 

 

40

 

 

 —

 

 

22

 

 

 —

 

 

 —

 

 

218

 

 

222

 

 

 —

 

 

333

 

 

 —

 

 

20

 

 

 —

 

 

 —

 

 

575

 

Net recoveries

 

 

156

 

 

 —

 

 

40

 

 

 —

 

 

22

 

 

 —

 

 

 —

 

 

218

(Reversal of) provision for loan losses

 

 

(137)

 

 

53

 

 

(44)

 

 

158

 

 

(28)

 

 

(2)

 

 

 —

 

 

 —

Net (charge-offs) recoveries

 

 

(138)

 

 

 —

 

 

333

 

 

(13)

 

 

20

 

 

 —

 

 

 —

 

 

202

 

Provision for (reversal of) loan losses

 

 

 1

 

 

(113)

 

 

(547)

 

 

837

 

 

(177)

 

 

(1)

 

 

 —

 

 

 —

 

Ending Balance

 

$

3,422

 

$

442

 

$

2,567

 

$

1,142

 

$

361

 

$

 2

 

$

 —

 

$

7,936

 

$

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

    

Residential

    

 

    

Commercial

    

 

    

Home Equity/

    

 

 

    

 

 

    

 

 

 

 

 

Mortgage

 

Commercial

 

Real Estate

 

ADC

 

2nds

 

Consumer

 

Unallocated

 

Total

 

 

 

(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

 

16


Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

    

 

    

 Special

    

 

    

 

    

 

    

 Special

    

 

    

 

 

 Pass 

 

 Mention 

 

Substandard

 

Total

 

 Pass 

 

 Mention 

 

Substandard

 

Total

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

$

281,529

 

$

833

 

$

3,108

 

$

285,470

 

$

270,573

 

$

 —

 

$

3,901

 

$

274,474

Commercial

 

 

43,156

 

 

24

 

 

 —

 

 

43,180

 

 

44,139

 

 

1,208

 

 

 —

 

 

45,347

Commercial real estate

 

 

229,305

 

 

3,682

 

 

1,843

 

 

234,830

 

 

232,597

 

 

3,088

 

 

1,683

 

 

237,368

ADC

 

 

111,217

 

 

 —

 

 

1,777

 

 

112,994

 

 

107,351

 

 

 —

 

 

831

 

 

108,182

Home equity/2nds

 

 

11,574

 

 

442

 

 

157

 

 

12,173

 

 

11,990

 

 

418

 

 

173

 

 

12,581

Consumer

 

 

1,065

 

 

 —

 

 

 —

 

 

1,065

 

 

1,621

 

 

 —

 

 

 —

 

 

1,621

 

$

677,846

 

$

4,981

 

$

6,885

 

$

689,712

 

$

668,271

 

$

4,714

 

$

6,588

 

$

679,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

 

    

Special

    

 

    

 

 

 

Pass

 

Mention

 

Substandard

 

Total

 

 

(dollars in thousands)

Residential mortgage

 

$

279,040

 

$

1,563

 

$

5,216

 

$

285,819

Commercial

 

 

37,312

 

 

44

 

 

 —

 

 

37,356

Commercial real estate

 

 

227,573

 

 

4,615

 

 

2,941

 

 

235,129

ADC

 

 

91,868

 

 

 —

 

 

1,192

 

 

93,060

Home equity/2nds

 

 

14,384

 

 

465

 

 

854

 

 

15,703

Consumer

 

 

1,084

 

 

 —

 

 

 —

 

 

1,084

 

 

$

651,261

 

$

6,687

 

$

10,203

 

$

668,151

16

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

    

30-59

    

60-89

    

90+

    

 

    

 

    

 

    

 

    

30-59

    

60-89

    

90+

    

 

    

 

    

 

    

 

 

Days

 

Days

 

Days

 

Total

 

 

 

 

 

Non-

 

Days

 

Days

 

Days

 

Total

 

 

 

 

 

Non-

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total

 

Accrual

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total

 

Accrual

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

$

800

 

$

143

 

$

2,901

 

$

3,844

 

$

281,626

 

$

285,470

 

$

3,784

 

$

531

 

$

 —

 

$

2,148

 

$

2,679

 

$

271,795

 

$

274,474

 

$

3,288

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

43,180

 

 

43,180

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

45,347

 

 

45,347

 

 

 —

Commercial real estate

 

 

452

 

 

113

 

 

159

 

 

724

 

 

234,106

 

 

234,830

 

 

476

 

 

 —

 

 

 —

 

 

452

 

 

452

 

 

236,916

 

 

237,368

 

 

779

ADC

 

 

388

 

 

67

 

 

856

 

 

1,311

 

 

111,683

 

 

112,994

 

 

923

 

 

 —

 

 

 —

 

 

388

 

 

388

 

 

107,794

 

 

108,182

 

 

388

Home equity/2nds

 

 

23

 

 

 —

 

 

429

 

 

452

 

 

11,721

 

 

12,173

 

 

548

 

 

 —

 

 

 —

 

 

173

 

 

173

 

 

12,408

 

 

12,581

 

 

429

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,065

 

 

1,065

 

 

 —

 

 

16

 

 

 —

 

 

 3

 

 

19

 

 

1,602

 

 

1,621

 

 

 3

 

$

1,663

 

$

323

 

$

4,345

 

$

6,331

 

$

683,381

 

$

689,712

 

$

5,731

 

$

547

 

$

 —

 

$

3,164

 

$

3,711

 

$

675,862

 

$

679,573

 

$

4,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2018

    

30-59

    

60-89

    

90+

    

 

    

 

    

 

    

    

    

30-59

    

60-89

    

90+

    

 

    

 

    

 

    

    

 

Days

 

Days

 

Days

 

Total

 

 

 

 

 

Non-

 

Days

 

Days

 

Days

 

Total

 

 

 

 

 

Non-

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total

 

Accrual

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total

 

Accrual

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

$

1,006

 

$

 —

 

$

 —

 

$

1,006

 

$

284,813

 

$

285,819

 

$

3,891

 

$

1,060

 

$

 —

 

$

1,794

 

$

2,854

 

$

271,905

 

$

274,759

 

$

2,580

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

37,356

 

 

37,356

 

 

78

 

 

 —

 

 

 —

 

 

430

 

 

430

 

 

35,454

 

 

35,884

 

 

430

Commercial real estate

 

 

948

 

 

 —

 

 

 —

 

 

948

 

 

234,181

 

 

235,129

 

 

159

 

 

137

 

 

 —

 

 

660

 

 

797

 

 

241,896

 

 

242,693

 

 

660

ADC

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

93,060

 

 

93,060

 

 

314

 

 

255

 

 

 —

 

 

387

 

 

642

 

 

113,898

 

 

114,540

 

 

558

Home equity/2nds

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,703

 

 

15,703

 

 

1,268

 

 

96

 

 

 —

 

 

428

 

 

524

 

 

12,862

 

 

13,386

 

 

428

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,084

 

 

1,084

 

 

 —

 

 

13

 

 

 —

 

 

 —

 

 

13

 

 

1,074

 

 

1,087

 

 

 —

 

$

1,954

 

$

 —

 

$

 —

 

$

1,954

 

$

666,197

 

$

668,151

 

$

5,710

 

$

1,561

 

$

 —

 

$

3,699

 

$

5,260

 

$

677,089

 

$

682,349

 

$

4,656

 

17


Table of Contents

We did not have any loans greater than 90 days past due and still accruing as of SeptemberJune 30, 20182019 or December 31, 2017.2018.

The interest which would have been recorded on the above nonaccrual loans if those loans had been performing in accordance with their contractual terms was approximately $238,000$382,000 and $200,000$1.1 million for the threesix months ended SeptemberJune 30,  20182019 and 2017,2018, respectively. The actual interest income recorded on those loans was approximately $69,000$82,000 and $67,000$208,000 for the threesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively.

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 $713,000 and $1.2 million for the nine months ended September 30,  2018 and 2017, respectively. The actual interest income recorded on those loans was approximately $208,000 and $403,000 for the nine months ended September 30, 2018 and 2017, respectively.

17

Table of Contents

The following tables summarize impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

June 30, 2019

 

December 31, 2018

    

Unpaid

    

 

    

 

    

Unpaid

    

 

    

 

    

Unpaid

    

 

    

 

    

Unpaid

    

 

    

 

 

Principal

 

Recorded

 

Related

 

Principal

 

Recorded

 

Related

 

Principal

 

Recorded

 

Related

 

Principal

 

Recorded

 

Related

 

Balance

 

Investment

 

Allowance

 

Balance

 

Investment

 

Allowance

 

Balance

 

Investment

 

Allowance

 

Balance

 

Investment

 

Allowance

With no related Allowance:

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

$

9,819

 

$

8,995

 

$

 —

 

$

12,929

 

$

11,572

 

$

 —

 

$

7,740

 

$

7,513

 

$

 —

 

$

7,054

 

$

6,808

 

$

 —

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

1,019

 

 

908

 

 

 —

 

 

1,562

 

 

1,507

 

 

 —

 

 

1,365

 

 

1,325

 

 

 —

 

 

1,244

 

 

1,206

 

 

 —

ADC

 

 

522

 

 

522

 

 

 —

 

 

636

 

 

636

 

 

 —

 

 

988

 

 

987

 

 

 —

 

 

1,142

 

 

1,143

 

 

 —

Home equity/2nds

 

 

987

 

 

760

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,308

 

 

825

 

 

 —

 

 

1,290

 

 

859

 

 

 —

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

69

 

 

68

 

 

 —

 

 

76

 

 

76

 

 

 —

With a related Allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

6,159

 

 

6,043

 

 

1,090

 

 

6,761

 

 

6,647

 

 

1,181

 

 

5,812

 

 

5,692

 

 

889

 

 

5,888

 

 

5,771

 

 

927

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

476

 

 

430

 

 

430

Commercial real estate

 

 

1,102

 

 

1,145

 

 

166

 

 

1,410

 

 

1,410

 

 

182

 

 

564

 

 

564

 

 

67

 

 

795

 

 

786

 

 

142

ADC

 

 

1,147

 

 

1,060

 

 

900

 

 

392

 

 

355

 

 

48

 

 

132

 

 

132

 

 

32

 

 

135

 

 

135

 

 

32

Home equity/2nds

 

 

14

 

 

12

 

 

 2

 

 

 —

 

 

 —

 

 

 —

 

 

35

 

 

34

 

 

24

 

 

13

 

 

12

 

 

 2

Consumer

 

 

78

 

 

78

 

 

 1

 

 

84

 

 

84

 

 

 2

 

 

 4

 

 

 4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Totals:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

15,978

 

 

15,038

 

 

1,090

 

 

19,690

 

 

18,219

 

 

1,181

 

 

13,552

 

 

13,205

 

 

889

 

 

12,942

 

 

12,579

 

 

927

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

476

 

 

430

 

 

430

Commercial real estate

 

 

2,121

 

 

2,053

 

 

166

 

 

2,972

 

 

2,917

 

 

182

 

 

1,929

 

 

1,889

 

 

67

 

 

2,039

 

 

1,992

 

 

142

ADC

 

 

1,669

 

 

1,582

 

 

900

 

 

1,028

 

 

991

 

 

48

 

 

1,120

 

 

1,119

 

 

32

 

 

1,277

 

 

1,278

 

 

32

Home equity/2nds

 

 

1,001

 

 

772

 

 

 2

 

 

 —

 

 

 —

 

 

 —

 

 

1,343

 

 

859

 

 

24

 

 

1,303

 

 

871

 

 

 2

Consumer

 

 

78

 

 

78

 

 

 1

 

 

84

 

 

84

 

 

 2

 

 

73

 

 

72

 

 

 —

 

 

76

 

 

76

 

 

 —

 

18


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

    

Average

    

Interest

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

With no related Allowance:

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

$

6,718

 

$

75

 

$

10,423

 

$

138

 

$

9,618

 

$

229

 

$

9,696

 

$

353

 

$

7,197

 

$

81

 

$

7,867

 

$

88

 

$

6,950

 

$

160

 

$

9,824

 

$

174

Commercial

 

 

 6

 

 

 —

 

 

 —

 

 

 —

 

 

59

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

457

 

 

13

 

 

 —

 

 

 —

 

 

78

 

 

20

Commercial real estate

 

 

1,572

 

 

21

 

 

1,531

 

 

22

 

 

1,240

 

 

56

 

 

2,652

 

 

69

 

 

1,327

 

 

17

 

 

1,326

 

 

14

 

 

1,245

 

 

37

 

 

1,350

 

 

30

ADC

 

 

674

 

 

 7

 

 

637

 

 

 9

 

 

547

 

 

20

 

 

487

 

 

21

 

 

977

 

 

 7

 

 

397

 

 

 4

 

 

1,034

 

 

15

 

 

555

 

 

 9

Home equity/2nds

 

 

371

 

 

10

 

 

918

 

 

15

 

 

552

 

 

34

 

 

679

 

 

40

 

 

834

 

 

17

 

 

1,285

 

 

12

 

 

844

 

 

30

 

 

483

 

 

20

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

224

 

 

 1

 

 

 —

 

 

 —

 

 

46

 

 

 2

 

 

 —

 

 

 —

With a related Allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

6,020

 

 

79

 

 

8,910

 

 

116

 

 

6,899

 

 

219

 

 

9,231

 

 

286

 

 

5,706

 

 

80

 

 

7,439

 

 

75

 

 

5,731

 

 

160

 

 

7,184

 

 

152

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

37

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

143

 

 

 —

 

 

 —

 

 

 —

Commercial real estate

 

 

774

 

 

 4

 

 

1,896

 

 

23

 

 

1,243

 

 

19

 

 

1,919

 

 

73

 

 

567

 

 

11

 

 

751

 

 

 8

 

 

694

 

 

20

 

 

1,276

 

 

14

ADC

 

 

176

 

 

 2

 

 

369

 

 

 6

 

 

1,103

 

 

 9

 

 

385

 

 

16

 

 

132

 

 

 2

 

 

344

 

 

 6

 

 

134

 

 

 4

 

 

1,117

 

 

11

Home equity/2nds

 

 

400

 

 

 4

 

 

180

 

 

 —

 

 

 6

 

 

11

 

 

715

 

 

 —

 

 

34

 

 

 —

 

 

13

 

 

 —

 

 

19

 

 

 1

 

 

 4

 

 

 —

Consumer

 

 

79

 

 

 1

 

 

88

 

 

 1

 

 

81

 

 

 2

 

 

91

 

 

 2

 

 

 4

 

 

 —

 

 

80

 

 

 1

 

 

28

 

 

 —

 

 

82

 

 

 —

Totals:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential mortgage

 

 

12,738

 

 

154

 

 

19,333

 

 

254

 

 

16,517

 

 

448

 

 

18,927

 

 

639

 

 

12,903

 

 

161

 

 

15,306

 

 

163

 

 

12,681

 

 

320

 

 

17,008

 

 

326

Commercial

 

 

 6

 

 

 —

 

 

 —

 

 

 —

 

 

59

 

 

 —

 

 

37

 

 

 —

 

 

 —

 

 

 —

 

 

457

 

 

13

 

 

143

 

 

 —

 

 

78

 

 

20

Commercial real estate

 

 

2,346

 

 

25

 

 

3,427

 

 

45

 

 

2,483

 

 

75

 

 

4,571

 

 

142

 

 

1,894

 

 

28

 

 

2,077

 

 

22

 

 

1,939

 

 

57

 

 

2,626

 

 

44

ADC

 

 

850

 

 

 9

 

 

1,006

 

 

15

 

 

1,650

 

 

29

 

 

872

 

 

37

 

 

1,109

 

 

 9

 

 

741

 

 

10

 

 

1,168

 

 

19

 

 

1,672

 

 

20

Home equity/2nds

 

 

771

 

 

14

 

 

1,098

 

 

15

 

 

558

 

 

45

 

 

1,394

 

 

40

 

 

868

 

 

17

 

 

1,298

 

 

12

 

 

863

 

 

31

 

 

487

 

 

20

Consumer

 

 

79

 

 

 1

 

 

88

 

 

 1

 

 

81

 

 

 2

 

 

91

 

 

 2

 

 

228

 

 

 1

 

 

80

 

 

 1

 

 

74

 

 

 2

 

 

82

 

 

 —

 

ResidentialThere 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 $3.7 million and $3.1$2.3 million as of SeptemberJune 30, 20182019 and $1.9 million as of December 31, 2017, respectively.2018.

Troubled Debt Restructure Loans (“TDR” or “TDRs”)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

    

 

    

 

    

 

    

 

    

Total

    

Total

    

 

    

 

    

 

    

 

    

Total

    

Total

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

38

 

$

10,031

 

 4

 

$

997

 

42

 

$

11,028

 

35

 

$

9,332

 

 3

 

$

422

 

38

 

$

9,754

Commercial real estate

 

 2

 

 

1,028

 

 —

 

 

 —

 

 2

 

 

1,028

 

 2

 

 

1,000

 

 —

 

 

 —

 

 2

 

 

1,000

ADC

 

 1

 

 

134

 

 —

 

 

 —

 

 1

 

 

134

 

 1

 

 

132

 

 —

 

 

 —

 

 1

 

 

132

Consumer

 

 3

 

 

78

 

 —

 

 

 —

 

 3

 

 

78

 

 3

 

 

73

 

 —

 

 

 —

 

 3

 

 

73

 

44

 

$

11,271

 

 4

 

$

997

 

48

 

$

12,268

 

41

 

$

10,537

 

 3

 

$

422

 

44

 

$

10,959

 

19


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2018

    

 

    

 

    

 

    

 

    

Total

    

Total

    

 

    

 

    

 

    

 

    

Total

    

Total

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

Number of

 

Accrual

 

Number of

 

Nonaccrual

 

Number of

 

Balance of

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

Modifications

 

Status

 

Modifications

 

Status

 

Modifications

 

Modifications

 

(dollars in thousands)

 

(dollars in thousands)

Residential mortgage

 

42

 

$

11,631

 

 2

 

$

736

 

44

 

$

12,367

 

36

 

$

9,469

 

 3

 

$

446

 

39

 

$

9,915

Commercial real estate

 

 3

 

 

1,862

 

 1

 

 

78

 

 4

 

 

1,940

 

 2

 

 

1,019

 

 —

 

 

 —

 

 2

 

 

1,019

ADC

 

 1

 

 

137

 

 1

 

 

 6

 

 2

 

 

143

 

 1

 

 

134

 

 —

 

 

 —

 

 1

 

 

134

Consumer

 

 4

 

 

84

 

 —

 

 

 —

 

 4

 

 

84

 

 3

 

 

76

 

 —

 

 

 —

 

 3

 

 

76

 

50

 

$

13,714

 

 4

 

$

820

 

54

 

$

14,534

 

42

 

$

10,698

 

 3

 

$

446

 

45

 

$

11,144

 

There were no TDRs that defaulted during the three and ninesix months ended SeptemberJune 30, 20182019 or 20172018 which were modified during the previous 12 month period.

We did not modify any loans during the three and ninesix months ended SeptemberJune 30, 20182019 or 2017.2018.

Note 54 -  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 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 regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The 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. In 2018 the capital conservation buffer is 1.875%. 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 recently enacted 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.

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Table of Contents

As of the date of the last regulatory exam, the Bank was considered “well capitalized” and as of SeptemberJune 30, 20182019, 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

 

 

 

 

 

 

Minimum

 

Minimum

 

To be Well

 

 

 

 

 

 

Requirements

 

Requirements

 

Capitalized Under

 

 

 

 

 

 

Requirements

 

Requirements

 

Capitalized Under

 

 

 

 

 

 

for Capital Adequacy

 

with Capital

 

Prompt Corrective

 

 

 

 

 

 

for Capital Adequacy

 

with Capital

 

Prompt Corrective

 

 

Actual

 

 

 

Purposes

 

Conservation Buffer

 

Action Provision

 

 

Actual

 

 

 

Purposes

 

Conservation Buffer

 

Action Provision

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2018

 

(dollars in thousands)

 

June 30, 2019

 

(dollars in thousands)

 

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

 

$

111,048

 

16.9

%  

$

29,651

 

4.5

%  

$

42,006

 

6.4

%  

$

42,829

 

6.5

%

 

$

118,722

 

18.0

%  

$

29,725

 

4.5

%  

$

46,238

 

7.0

%  

$

42,936

 

6.5

%

Total capital (to risk-weighted assets)

 

 

119,248

 

18.1

%

 

52,713

 

8.0

%

 

65,067

 

9.9

%

 

65,891

 

10.0

%

 

 

126,919

 

19.2

%

 

52,844

 

8.0

%

 

69,358

 

10.5

%

 

66,055

 

10.0

%

Tier 1 capital (to risk-weighted assets)

 

 

111,048

 

16.9

%  

 

39,535

 

6.0

%  

 

51,889

 

7.9

%  

 

52,713

 

8.0

%

 

 

118,722

 

18.0

%  

 

39,633

 

6.0

%  

 

56,147

 

8.5

%  

 

52,844

 

8.0

%

Tier 1 capital (to average quarterly assets)

 

 

111,048

 

13.6

%  

 

32,771

 

4.0

%  

 

48,132

 

5.9

%  

 

40,963

 

5.0

%

 

 

118,722

 

13.1

%  

 

36,246

 

4.0

%  

 

58,900

 

6.5

%  

 

45,307

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

105,721

 

16.5

%  

$

28,904

 

4.5

%  

$

36,933

 

5.8

%  

$

41,750

 

6.5

%

 

$

114,749

 

17.4

%  

$

29,651

 

4.5

%  

$

42,006

 

6.4

%  

$

42,830

 

6.5

%

Total capital (to risk-weighted assets)

 

 

113,758

 

17.7

%

 

51,385

 

8.0

%

 

59,414

 

9.3

%

 

64,231

 

10.0

%

 

 

122,889

 

18.7

%

 

52,713

 

8.0

%

 

65,068

 

9.9

%

 

65,892

 

10.0

%

Tier 1 capital (to risk-weighted assets)

 

 

105,721

 

16.5

%  

 

38,539

 

6.0

%  

 

46,567

 

7.3

%  

 

51,385

 

8.0

%

 

 

114,749

 

17.4

%  

 

39,535

 

6.0

%  

 

51,890

 

7.9

%  

 

52,713

 

8.0

%

Tier 1 capital (to average quarterly assets)

 

 

105,721

 

13.5

%  

 

31,440

 

4.0

%  

 

41,264

 

5.3

%  

 

39,300

 

5.0

%

 

 

114,749

 

13.5

%  

 

33,932

 

4.0

%  

 

49,838

 

5.9

%  

 

42,415

 

5.0

%

 

 

Note 65 -  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 because they were anti-dilutive were 20,00022,000 and 24,000 shares of common stock issuable upon exercise of outstanding stock options for the three and ninesix months ended SeptemberJune 30, 20172018, 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. There were no anti-dilutive shares for the three or ninesix months ended SeptemberJune 30, 2018.2019. 

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 ceased and terminated.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2018

    

2017

    

2018

    

2017

    

    

2019

    

2018

    

2019

    

2018

 

(dollars in thousands, except for per share data)

 

 

(dollars in thousands, except for per share data)

Weighted-average shares outstanding - basic

 

 

12,695,136

 

 

12,172,586

 

 

12,541,032

 

 

12,140,689

 

 

 

12,775,123

 

 

12,684,711

 

 

12,774,191

 

 

12,463,132

Dilution

 

 

137,497

 

 

150,986

 

 

110,228

 

 

107,525

 

 

 

87,168

 

 

96,326

 

 

85,789

 

 

95,937

Weighted-average share outstanding - diluted

 

 

12,832,633

 

 

12,323,572

 

 

12,651,260

 

 

12,248,214

 

 

 

12,862,291

 

 

12,781,037

 

 

12,859,980

 

 

12,559,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

2,165

 

$

1,189

 

$

5,898

 

$

2,956

 

 

$

2,176

 

$

1,918

 

$

4,785

 

$

3,733

Net income per share - basic

 

$

0.17

 

$

0.10

 

$

0.47

 

$

0.24

 

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

Net income per share - diluted

 

$

0.17

 

$

0.10

 

$

0.47

 

$

0.24

 

 

$

0.17

 

$

0.15

 

$

0.37

 

$

0.30

 

 

Note 76 - Stock-Based Compensation

We have 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 could be issued with respect to the awards granted under the plan was 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 had the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation was granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan, stock options generally had a maximum term of ten years, and were granted with an exercise price at least equal to the fair market value of the common stock on the date the options were granted. Generally, options granted to directors, officers, and employees of the Company vested over a five-year period, although the Compensation Committee had the authority to provide for different vesting schedules. The ability to grant new options from this plan described above expired in March of 2018. A new plan, with the same provisions and number of shares available for grant as the old plan was approved at the stockholders’ meeting in May of 2018 and no additional awards may be2019.  No shares have been granted under that plan.from this plan as of June 30, 2019.

We account for stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations at fair value. Additionally, we are required to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award. award.  Stock-based compensation expense included in the consolidated statements of operations for the three months ended SeptemberJune 30, 2019 and 2018 totaled $34,000 and 2017 totaled $56,000 and $44,000,$57,000, respectively. Stock-based compensation expense included in the consolidated statements of operations for the ninesix months ended SeptemberJune 30, 2019 and 2018 totaled $77,000 and 2017 totaled $169,000 and $146,000,$113,000, respectively. 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

2019

 

2018

    

 

    

 

    

Weighted-

    

 

    

 

    

 

    

Weighted-

    

 

    

 

    

 

    

Weighted-

    

 

    

 

    

 

    

Weighted-

    

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Average

 

Remaining

 

Intrinsic

 

Number

 

Exercise

 

Contractual

 

Value

 

Number

 

Exercise

 

Contractual

 

Value

 

Number

 

Exercise

 

Contractual

 

Value

 

Number

 

Exercise

 

Contractual

 

Value

 

of Shares

 

Price

 

Term (in years)

 

(in thousands)

 

of Shares

 

Price

 

Term (in years)

 

(in thousands)

 

of Shares

 

Price

 

Term (in years)

 

(in thousands)

 

of Shares

 

Price

 

Term (in years)

 

(in thousands)

Outstanding at beginning of period

 

434,025

 

$

5.87

 

  

 

 

  

 

339,500

 

$

5.31

 

  

 

 

  

 

349,023

 

$

6.32

 

  

 

 

  

 

434,025

 

$

5.87

 

  

 

 

  

Granted

 

6,500

 

 

7.41

 

  

 

 

  

 

20,000

 

 

7.10

 

  

 

 

  

 

 —

 

 

 —

 

  

 

 

  

 

6,500

 

 

7.41

 

  

 

 

  

Exercised

 

(24,877)

 

 

3.98

 

  

 

 

  

 

(5,025)

 

 

3.37

 

  

 

 

  

 

(15,561)

 

 

5.25

 

  

 

 

  

 

(24,002)

 

 

4.00

 

  

 

 

  

Forfeited

 

(2,600)

 

 

5.78

 

  

 

 

  

 

(16,000)

 

 

4.59

 

  

 

 

  

 

(38,500)

 

 

6.41

 

  

 

 

  

 

(1,750)

 

 

5.26

 

  

 

 

  

Outstanding at end of period

 

413,048

 

$

6.01

 

5.8

 

$

1,565

 

338,475

 

$

5.48

 

7.2

 

$

526

 

294,962

 

$

6.37

 

3.0

 

$

684

 

414,773

 

$

6.01

 

6.0

 

$

1,096

Exercisable at end of period

 

229,687

 

$

5.26

 

5.7

 

$

1,043

 

173,702

 

$

4.78

 

6.5

 

$

398

 

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 followingsfollowing weighted average assumptions were used to value options granted for the ninesix months ended SeptemberJune 30, 2018:2018.  There were no options granted in 2019.

 

 

 

 

 

 

 

2018

    

 

2017

    

 

 

 

Expected life

 

5.5 years

 

 

 

5.5 years

 

 

5.5 years

 

Risk-free interest rate

 

2.67

%  

 

 

1.76

%  

 

2.67

%  

Expected volatility

 

32.20

%  

 

 

36.02

%  

 

32.20

%  

Expected dividend yield

 

 —

 

 

 

 —

 

 

 —

 

Weighted average per share fair value of options granted

$

2.57

 

 

$

2.56

 

$

2.57

 

 

As of SeptemberJune 30, 2018,2019, there was $543,000$353,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over the next 5451 months.

Note 87 - 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.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

June 30, 

    

December 31, 

    

2018

    

2017

    

2019

    

2018

 

(dollars in thousands)

 

(dollars in thousands)

Standby letters of credit

 

$

9,171

 

$

3,480

 

$

3,398

 

$

3,321

Home equity lines of credit

 

 

17,735

 

 

13,321

 

 

17,364

 

 

17,015

Unadvanced construction commitments

 

 

70,408

 

 

74,720

 

 

77,251

 

 

75,326

Mortgage loan commitments

 

 

 —

 

 

595

 

 

829

 

 

1,649

Lines of credit

 

 

21,396

 

 

16,612

 

 

21,321

 

 

20,990

Loans sold and serviced with limited repurchase provisions

 

 

42,449

 

 

21,409

 

 

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 majority of these standby letters of credit expire within twelve months, with automatic one year renewals. The Bank has the option 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 SeptemberJune 30, 20182019 and December 31, 20172018 for guarantees under standby letters of credit issued was $100,000$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 contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. We evaluate each customer’s credit worthiness on a case-by-case basis.

Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.

We did not have anyResidential mortgage loan commitments at SeptemberJune 30, 2018.2019 consisted of three loans totaling $829,000. Such commitments at December 31, 20172018 consisted of twothree loans totaling $595,000.$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’sinvestor 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 $82,000$106,000 at SeptemberJune 30, 20182019 and $63,000$91,000 at December 31, 2017.2018. We did not repurchase any loans during the ninesix months ended SeptemberJune 30, 20182019 or 2017.2018.

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 SeptemberJune 30, 2018,2019, the Company has not accrued an amount for the potential impact of any such actions.

24

Table of Contents

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

24


Table of Contents

•  Deposit and loan balances at SeptemberJune 30, 20182019 were approximately $12.8$27.1 million, 1.8%or 4.0% of total deposits, and $15.3$15.0 million, or 2.2% of total loans, respectively. Deposit and loan balances at December 31, 20172018 were approximately $19.2$17.0 million, 3.2%or 2.2% of total deposits, and $11.9$14.1 million, 1.8%or 2.1% of total loans, respectively.

•Interest and noninterest income for the three months ended SeptemberJune 30, 20182019 were approximately $231,000$233,000 and $376,000,$491,000, respectively. Interest and noninterest income for the ninethree months ended SeptemberJune 30, 2018 were approximately $541,000$134,000 and $921,000,$315,000, respectively. There was no interest or

•Interest and noninterest income recognized on medical-use cannabis accounts for three or ninethe six months ended SeptemberJune 30, 2017.2019 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, 2019 was approximately $56.6 million and $106.1 million, respectively. The volume of deposits in the accounts of medical-use cannabis customers for the three and six months ended June 30, 2018 was approximately $41.5$11.4 million and $70.8$29.3 million, respectively. No deposits were made to medical-use cannabis accounts during the three or nine months ended September 30, 2017.

Note 98 - 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

Table of Contents

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,  2018:2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

  

 

    

  

    

Significant

    

  

    

  

    

  

 

    

  

    

Significant

    

  

    

  

 

  

 

 

  

 

Other

 

Significant

 

Total Changes

 

  

 

 

  

 

Other

 

Significant

 

Total Changes

 

  

 

 

Quoted

 

Observable

 

Unobservable

 

In Fair Values

 

  

 

 

Quoted

 

Observable

 

Unobservable

 

In Fair Values

 

Carrying

 

Prices

 

Inputs

 

Inputs

 

Included In

 

Carrying

 

Prices

 

Inputs

 

Inputs

 

Included In

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period Income

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period Income

Assets:

 

(dollars in thousands)

 

(dollars in thousands)

AFS Securities - U.S. Treasury and government agency notes

 

$

11,950

 

$

1,975

 

$

9,975

 

$

 —

 

$

 —

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")

 

 

9,023

 

 

 —

 

 

9,023

 

 

 —

 

 

126

 

 

17,987

 

 

 —

 

 

17,987

 

 

 —

 

 

278

Mortgage servicing rights ("MSRs")

 

 

482

 

 

 —

 

 

 —

 

 

482

 

 

 5

 

 

343

 

 

 —

 

 

 —

 

 

343

 

 

(94)

Interest-rate lock commitments ("IRLCs")

 

 

187

 

 

 —

 

 

 —

 

 

187

 

 

165

 

 

345

 

 

 —

 

 

 —

 

 

345

 

 

245

Best efforts forward contracts

 

 

39

 

 

 —

 

 

39

 

 

 —

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

 

71

 

 

 —

 

 

71

 

 

 —

 

 

58

 

 

36

 

 

 —

 

 

36

 

 

 —

 

 

(20)

Best efforts forward contracts

 

 

51

 

 

 —

 

 

51

 

 

 —

 

 

48

 

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Table of Contents

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, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

  

    

  

    

Significant

    

  

    

  

    

  

    

  

    

Significant

    

  

    

  

 

  

 

  

 

Other

 

Significant

 

Total Changes

 

  

 

  

 

Other

 

Significant

 

Total Changes

 

  

 

Quoted

 

Observable

 

Unobservable

 

In Fair Values

 

  

 

Quoted

 

Observable

 

Unobservable

 

In Fair Values

 

Carrying

 

Prices

 

Inputs

 

Inputs

 

Included In

 

Carrying

 

Prices

 

Inputs

 

Inputs

 

Included In

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period Income

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period Income

Assets:

 

(dollars in thousands)

 

(dollars in thousands)

AFS Securities - U.S. Treasury notes

 

$

1,981

 

$

1,981

 

$

 —

 

$

 —

 

$

 —

AFS Securities - U.S. government agency notes

 

$

10,119

 

$

 —

 

$

10,119

 

$

 —

 

$

 —

 

 

9,997

 

 

 —

 

 

9,997

 

 

 —

 

 

 —

LHFS

 

 

4,530

 

 

 —

 

 

4,530

 

 

 —

 

 

131

 

 

9,686

 

 

 —

 

 

9,686

 

 

 —

 

 

192

MSRs

 

 

477

 

 

 —

 

 

 —

 

 

477

 

 

(80)

 

 

437

 

 

 —

 

 

 —

 

 

437

 

 

(40)

IRLCs

 

 

22

 

 

 —

 

 

 —

 

 

22

 

 

(140)

 

 

100

 

 

 —

 

 

 —

 

 

100

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

 

13

 

 

 —

 

 

13

 

 

 —

 

 

(140)

 

 

16

 

 

 —

 

 

16

 

 

 —

 

 

(30)

Best efforts forward contracts

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3)

 

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

 

    

Fair Value

    

Valuation

    

Unobservable

    

Range

 

 

Estimate

 

Technique

 

Input

 

(Weighted-Average)

 

 

Estimate

 

Technique

 

Input

 

(Weighted-Average)

 

September 30, 2018:

 

(dollars in thousands)

 

  

 

  

 

June 30, 2019:

 

(dollars in thousands)

 

  

 

  

 

MSRs

 

$

482

 

Market Approach

 

Weighted average prepayment speed

 

8.50

%

 

$

343

 

Market Approach

 

Weighted average prepayment speed

 

12.90

%

IRLCs

 

 

187

 

Market Approach

 

Range of pull through rate

 

70% - 95

%

 

 

345

 

Market Approach

 

Range of pull through rate

 

70% - 95

%

 

 

 

 

 

 

Average pull through rate

 

85

%

 

 

 

 

 

 

Average pull through rate

 

83

%

 

 

  

 

  

 

  

 

  

 

 

 

  

 

  

 

  

 

  

 

December 31, 2017:

 

 

  

 

  

 

  

 

  

 

December 31, 2018:

 

 

  

 

  

 

  

 

  

 

MSRs

 

$

477

 

Market Approach

 

Weighted average prepayment speed

 

3.94

%

 

$

437

 

Market Approach

 

Weighted average prepayment speed

 

9.80

%

IRLCs

 

 

22

 

Market Approach

 

Range of pull through rate

 

80% - 95

%

 

 

100

 

Market Approach

 

Range of pull through rate

 

70% - 95

%

 

 

 

 

 

 

Average pull through rate

 

90

%

 

 

 

 

 

 

Average pull through rate

 

84

%

 

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Table of Contents

The following table shows the activity in the MSRs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

 

(dollars in thousands)

 

(dollars in thousands)

Beginning balance

 

$

501

 

$

511

 

$

477

 

$

557

 

$

400

 

$

499

 

$

437

 

$

477

Valuation adjustment

 

 

(19)

 

 

(38)

 

 

 5

 

 

(84)

 

 

(57)

 

 

 2

 

 

(94)

 

 

24

Ending balance

 

$

482

 

$

473

 

$

482

 

$

473

 

$

343

 

$

501

 

$

343

 

$

501

 

The following table shows the activity in the IRLCs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

 

(dollars in thousands)

 

(dollars in thousands)

Beginning balance

 

$

168

 

$

23

 

$

22

 

$

162

 

$

335

 

$

184

 

$

100

 

$

22

Valuation adjustment

 

 

19

 

 

19

 

 

165

 

 

(120)

 

 

10

 

 

(16)

 

 

245

 

 

146

Ending balance

 

$

187

 

$

42

 

$

187

 

$

42

 

$

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

26


Table of Contents

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 are 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. 

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.

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Table of Contents

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.

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Table of Contents

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 lower-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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

June 30, 2019

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Other 

 

Significant

 

 

 

 

 

 

 

 

 

Quoted 

 

Observable

 

Unobservable

 

 

 

 

 

 

 

 

 

Quoted 

 

Observable

 

Unobservable

 

 

 

 

 

 

Carrying 

 

Prices

 

Inputs

 

Inputs

 

Range of

 

Weighted

 

 

Carrying 

 

Prices

 

Inputs

 

Inputs

 

Range of

 

Weighted

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average

 

 

(dollars in thousands)

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Impaired loans

 

$

5,690

 

$

 —

 

$

 —

 

$

5,690

 

0% - 27%

 

11.0

%

 

$

5,538

 

$

 —

 

$

 —

 

$

5,538

 

0% - 15%

 

 7

%

Real estate acquired through foreclosure

 

 

114

 

 

 —

 

 

 —

 

 

114

 

0% - 8%

 

8.0

%

 

 

625

 

 

 —

 

 

 —

 

 

625

 

0% - 16%

 

16

%

 

(1)

Discount based on current market conditions and estimated selling costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other 

 

Significant

 

 

 

 

 

 

 

 

 

 

Quoted 

 

Observable

 

Unobservable

 

 

 

 

 

 

 

Carrying 

 

Prices

 

Inputs

 

Inputs

 

Range of

 

Weighted

 

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Discount (1)

    

Average

  

 

 

(dollars in thousands)

 

 

 

 

 

Impaired loans

 

$

2,793

 

$

 —

 

$

 —

 

$

2,793

 

0% - 33%

 

14.5

%

Real estate acquired through foreclosure

 

 

178

 

 

 —

 

 

 —

 

 

178

 

0% - 22%

 

11.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

(1)

Discount based on current market conditions and estimated selling costs

 

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 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

Table of Contents

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.

28


Table of Contents

Fair Value of All Financial Instruments

The carrying value and 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 impaired real estate are included in the discussions above.tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2019

 

Carrying

 

Fair Value

 

Carrying

 

Fair Value

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

Assets:

 

(dollars in thousands)

 

(dollars in thousands)

Cash and cash equivalents

 

$

91,316

 

$

91,316

 

$

 —

 

$

 —

 

$

91,316

 

$

77,337

 

$

77,337

 

$

 —

 

$

 —

 

$

77,337

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

 

 

 —

 

 

 —

 

 

8,780

 

 

7,540

 

 

7,540

 

 

 —

 

 

 —

 

 

7,540

AFS securities

 

 

11,950

 

 

1,975

 

 

9,975

 

 

 —

 

 

11,950

 

 

11,031

 

 

1,995

 

 

9,036

 

 

 —

 

 

11,031

HTM securities

 

 

43,108

 

 

4,003

 

 

37,863

 

 

 —

 

 

41,866

 

 

33,562

 

 

2,015

 

 

31,693

 

 

 —

 

 

33,708

LHFS

 

 

9,023

 

 

 —

 

 

9,023

 

 

 —

 

 

9,023

 

 

17,987

 

 

 —

 

 

17,987

 

 

 —

 

 

17,987

Loans receivable, net

 

 

681,656

 

 

 —

 

 

 —

 

 

677,510

 

 

677,510

 

 

671,480

 

 

 —

 

 

 —

 

 

679,488

 

 

679,488

Restricted stock investments

 

 

3,866

 

 

 —

 

 

3,866

 

 

 —

 

 

3,866

 

 

2,857

 

 

 —

 

 

2,857

 

 

 —

 

 

2,857

Accrued interest receivable

 

 

2,689

 

 

 —

 

 

2,689

 

 

 —

 

 

2,689

 

 

2,605

 

 

 —

 

 

2,605

 

 

 —

 

 

2,605

ROU asset

 

 

2,494

 

 

 —

 

 

2,494

 

 

 —

 

 

2,494

MSRs

 

 

482

 

 

 —

 

 

 —

 

 

482

 

 

482

 

 

343

 

 

 —

 

 

 —

 

 

343

 

 

343

IRLCs

 

 

187

 

 

 —

 

 

 —

 

 

187

 

 

187

 

 

345

 

 

 —

 

 

 —

 

 

345

 

 

345

Mandatory forward contracts

 

 

71

 

 

 —

 

 

71

 

 

 —

 

 

71

Best effort forward contracts

 

 

51

 

 

 —

 

 

51

 

 

 —

 

 

51

 

 

39

 

 

 —

 

 

39

 

 

 —

 

 

39

Liabilities:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

Deposits

 

 

694,177

 

 

 —

 

 

687,034

 

 

 —

 

 

687,034

 

 

685,416

 

 

 —

 

 

683,846

 

 

 —

 

 

683,846

Accrued interest payable

 

 

433

 

 

 —

 

 

433

 

 

 —

 

 

433

 

 

350

 

 

 —

 

 

350

 

 

 —

 

 

350

Borrowings

 

 

73,500

 

 

 —

 

 

66,745

 

 

 —

 

 

66,745

 

 

48,500

 

 

 —

 

 

44,886

 

 

 —

 

 

44,886

Subordinated debentures

 

 

20,619

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619

 

 

20,619

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619

Lease liability

 

 

2,528

 

 

 —

 

 

2,528

 

 

 —

 

 

2,528

Mandatory forward contracts

 

 

36

 

 

 —

 

 

36

 

 

 —

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Carrying

 

Fair Value

 

    

Value

    

Level 1

    

Level 2

    

Level 3

    

 Total

Assets:

 

(dollars in thousands) 

Cash and cash equivalents

 

$

21,853

 

$

21,853

 

$

 —

 

$

 —

 

$

21,853

Certificates of deposit held for investment

 

 

8,780

 

 

8,780

 

 

 —

 

 

 —

 

 

8,780

AFS securities

 

 

10,119

 

 

 —

 

 

10,119

 

 

 —

 

 

10,119

HTM securities

 

 

54,303

 

 

5,056

 

 

48,948

 

 

 —

 

 

54,004

LHFS

 

 

4,530

 

 

 —

 

 

4,530

 

 

 —

 

 

4,530

Loans receivable, net

 

 

660,096

 

 

 —

 

 

 —

 

 

672,349

 

 

672,349

Restricted stock investments

 

 

4,489

 

 

 —

 

 

4,489

 

 

 —

 

 

4,489

Accrued interest receivable

 

 

2,640

 

 

 —

 

 

2,640

 

 

 —

 

 

2,640

MSRs

 

 

477

 

 

 —

 

 

 —

 

 

477

 

 

477

IRLCs

 

 

22

 

 

 —

 

 

 —

 

 

22

 

 

22

Mandatory forward contracts

 

 

13

 

 

 —

 

 

13

 

 

 —

 

 

13

Best effort forward contracts

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

602,228

 

 

 —

 

 

594,659

 

 

 —

 

 

594,659

Accrued interest payable

 

 

395

 

 

 —

 

 

395

 

 

 —

 

 

395

Borrowings

 

 

88,500

 

 

 —

 

 

81,303

 

 

 —

 

 

81,303

Subordinated debentures

 

 

20,619

 

 

 —

 

 

 —

 

 

20,619

 

 

20,619

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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, 20182019 and December 31, 2017,2018 the Bank had loan funding commitments of $109.5$116.8 million and $105.2$115.0 million, respectively, and standby letters of credit outstanding of $9.2$3.4 million and $3.5$3.3 million, respectively. The fair value of these commitments is nominal.

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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, 20182019 or 20172018 or for the year ended December 31, 2017.2018.

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.

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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‑K as of and for the year ended December 31, 2017.2018.

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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 opened a new branch in June 2018 in Lothian, Maryland, which brings the total number ofWe maintain six branches to six in Anne Arundel County, Maryland.Maryland at 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 the 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, 2018,2019, we had 166167 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 an improved level of profitability for the three and ninesix months ended SeptemberJune 30, 2018,2019, primarily due to thean improvement in net interest income as well as improved profitability of our mortgage-banking operations as well as an improvement in our net interest margin.operations. We recognized increased deposit service charges as a result of fees from medical-use cannabis deposit accountsaccounts. Noninterest expenses increased for the three and saw improvement in our real estate sales commissions from Hyatt Commercial. Additionally, during the ninesix months ended SeptemberJune 30, 2018, we recognized 2019 due to as severance payments to former employees, increased revenue from the Title Company, which we acquiredconsulting fees, and investments in September 2017.staff and systems to enhance production and efficiency.

The Company expects to experience similar market conditions during the remainder of 2018,2019, provided interest rates do not increase or decrease rapidly. If interest rates increasechange 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 volatility in the market and the economy 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 United States of America (“U.S.”) (“GAAP”) and general practice within the banking industry. Accordingly, 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 affect the reported amounts of assets and liabilities at the date of

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the financial statements and the reported amounts of income and expenses during the periods presented. The accounting policies we view as critical are those relating to the allowance for loan losses (“Allowance”), the valuation of securities, the valuation of real estate acquired through foreclosure, and the valuation of deferred tax assets and liabilities. Significant accounting policies are discussed in detail in “Notes to Consolidated Financial Statements - Note 1 - Summary of Significant Account Policies” in our Annual Report on Form 10-K as of and for the year ended December 31, 2017.2018. There have been no material changes to the significant accounting policies as described in the Annual Report.Report other than those mentioned in Note 1 to the financial statements in this Quarterly Report on Form 10-Q. Disclosures regarding the effects

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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 SeptemberJune 30

Net income increased $906,000, or 72.0%amounted to $2.2$2.2 million for the three months ended September 30, 2018, compared to $1.3and $1.9 million for the three months ended SeptemberJune 30, 2017.2019 and 2018, respectively. Basic and diluted income per share were $0.17 for the three months ended SeptemberJune 30, 20182019, compared to basic and diluted income per share of $0.10 $0.15for the three months ended SeptemberJune 30, 2017. The increase in net income reflected improved net interest income, noninterest income, and reductions in the provisions for loan losses and income taxes, partially offset by increased noninterest expense.

Nine Months Ended September 30

Net income increased $2.8 million, or 88.5%, to $6.0 million for the nine months ended September 30, 2018, compared to $3.2 million for the nine months ended September 30, 2017. Basic and diluted income per share were $0.47 for the nine months ended September 30, 2018, compared to basic and diluted income per share of $0.24 for the nine months ended September 30,  2017.2018. The increase in net income reflected improved net interest income and noninterest income, partially offset by increased noninterest expense and income tax provision,provision.

Six Months Ended June 30

Net income increased $982,000, or 25.8%, to $4.8 million for the six months ended June 30,  2019, compared to $3.8 million for the six months ended June 30, 2018. Basic and a lesser reversaldiluted income per share were $0.37, for the six months ended June 30, 2019, compared to basic and diluted income per share of $0.30 for the provision for loan losses.six months ended June 30, 2018. The increase in net income reflected improved net interest income and noninterest income, partially offset by increased noninterest expense and income tax provision.

Net Interest Income

Three Months Ended SeptemberJune 30

Net interest income which is interest income earned net of interest expense, increased by $1.0 million,$918,000, or 16.0%13.3%, to $7.3$7.8 million for the three months ended SeptemberJune 30, 2018,2019, compared to $6.3$6.9 million for the same period of 2018. Our net interest margin decreased slightly from 3.57% for the three months ended SeptemberJune 30, 2017. Our net interest margin increased from 3.38%2018 to 3.55% for the three months ended SeptemberJune 30, 2017 to 3.65%2019. Our net interest spread decreased from 3.29% for the three months ended SeptemberJune 30, 2018. Our net interest spread increased from 3.16%2018 to 3.20% for the three months ended SeptemberJune 30, 2017 to 3.33% for the three months ended September 30, 2018.2019.

NineSix Months Ended SeptemberJune 30

Net interest income increased by $3.3$2.0 million, or 18.6%14.5%, to $21.3$15.9 million for the ninesix months ended SeptemberJune 30, 2018,2019, compared to $17.9$13.9 million for the ninesix months ended September 30, 2017. Our net interest margin increased from 3.25% for the nine months ended September 30, 2017 to 3.63% for the nine months ended SeptemberJune 30, 2018. Our net interest spread increasedmargin decreased slightly from 3.04%3.62% for the ninesix months ended SeptemberJune 30, 20172018 to 3.34%3.60% for the ninesix months ended SeptemberJune 30, 2018.

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

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Three Months Ended SeptemberJune 30

Interest income increased by $1.3$1.2 million, or 16.0%13.6%, to $9.610.2 million for the three months ended SeptemberJune 30, 2019, compared to $9.0 million for the three months ended June 30, 2018, comparedprimarily due to $8.2increases 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 $777.8 million for the three months ended SeptemberJune 30, 2017, primarily due to a $1.1 million increase in interest income on loans. Average interest-earning assets increased from $743.9 million for the three months ended September 30, 20172018 to $797.7885.5 million for the three months ended SeptemberJune 30, 2018,2019, due primarily to growth in average loans outstanding.other interest-earning assets of $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 $57.6$5.6 million from $673.7 million for the three months ended SeptemberJune 30, 2018 compared to $679.3 million for the same period in 2017 due to increased originations in all loan categories.three months ended June 30, 2019.  The average yield on loans held for investment increased from 4.92%5.03% for the three months ended SeptemberJune 30, 20172018 to 5.11%5.42% for the three months ended September

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June 30, 20182019 as a result of the increased interest rate environment. Other interest income increased by $256,000 during the three months ended September 30, 2018 compared to the same period in 2017 due primarily to an increase in the average yield of our interest-bearing deposits during the three months ended September 30, 2018.Average HTMheld-to-maturity (“HTM”) securities decreased by $13.2$14.3 million due to securities maturities and repayments from mortgage-backed securities. The proceeds were used to fund the purchase of available-for-sale (“AFS”) securities, the average balance of which increased $6.0 million during the three months ended September 30, 2018 as compared to the same period in 2017, and, along with other available funds, the increase in loan originations.

NineSix Months Ended SeptemberJune 30

Interest income increased by $3.7$2.9 million, or 15.8%16.2%, to $27.420.8 million for the ninesix months ended SeptemberJune 30, 2018,2019, compared to $23.717.9 million for the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to a $3.5 million increaseincreases in interest income on loans.loans and other interest-earning assets. Average interest-earning assets increased from $738.4$775.9 million for the ninesix months ended SeptemberJune 30, 20172018 to $783.2892.0 million for the ninesix months ended SeptemberJune 30, 2018,2019 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 of $59.9increased $7.7 million from increased loan originations.$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 4.81%5.04% for the ninesix months ended SeptemberJune 30, 20172018 to 5.06%5.44% for the ninesix months ended SeptemberJune 30, 20182019 as a result of the increased interest rate environment. Other interest income increased by $289,000 during the nine months ended September 30, 2018 compared to the same period in 2017 due primarily to the increase in the average yield of our interest-bearing deposits.Average HTM securities decreased by $10.914.6 million due due to securities maturities and repayments from mortgage-backed securities. The proceeds were used to fund the purchase of AFS securities, the average balance of which increased $6.8 million during the nine months ended September 30, 2018 as compared to the same period in 2017, and, along with other available funds, the increase in loan originations.

Interest Expense

Three Months Ended SeptemberJune 30

Interest expense increased by $307,000,$305,000, or 16.1%14.7%, to $2.2 millionfor the three months ended September 30, 2018, compared to $1.9 millionfor the three months ended September 30, 2017 as a result of a $520,000 increase in interest expense on deposits. The increase in deposit interest expense was due to an increase in the average rate paid on interest-bearing deposits, driven by a rising rate environment which increased the average rate paid on certificates of deposit from 1.71% for the three months ended September 30, 2017 to 1.81% for the three months ended September 30, 2018.  Additionally, the average rate paid on checking and savings accounts increased from 0.12% for the three months ended September 30, 2017 to 0.70% for the three months ended September 30, 2018. The average balance of certificates of deposit increased from $214.3 million for the three months ended September 30, 2017 to $226.4 million for the same period of 2018 due to a successful marketing campaign. Slightly offsetting the effect of interest-bearing deposit rates was a decrease in the average rate paid on borrowings from 3.13% for the three months ended September 30, 2017 to 2.49% for the three months ended September 30, 2018, which resulted from the paydown of higher rate borrowings. Additionally, average borrowings decreased by $4.6 million to $109.22.4 million for the three months ended SeptemberJune 30, 20182019, compared to $113.72.1 million for for the same period of 2017. As a result, interest expense on borrowings decreased $213,000 during the three months ended SeptemberJune 30, 2018 compared to the same period in 2017.

Nine Months Ended September 30

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Interest expense increased by $414,000, or 7.2%, to $6.2 million for the nine months ended September 30, 2018, compared to $5.8 million for the nine months ended September 30, 2017 as a result of a $1.0 million$624,000 increase in interest expense on deposits.deposits, partially offset by a $319,000 decrease in interest expense on borrowings. The increase in deposit interest expense was primarily due to an increase in the average rate paid on interest-bearing deposits, driven by the rising interest rate environment whichas well as increased effects of competition with other financial institutions. These factors increased the average 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 1.43%1.76% for the ninethree months ended SeptemberJune 30, 20172018 to 1.68%2.12% for the nine months ended September 30, 2018.same period of 2019. Additionally, the average rate paid on checking and savings accounts increased from 0.29%0.42% for the ninethree months ended SeptemberJune 30, 20172018 to 0.53%0.84% for the ninethree months ended SeptemberJune 30, 2018.2019. The average balance of checking and savings accounts increased significantly from $277.3 million for the three months ended June 30, 2018 to $385.1 million for the three months ended June 30, 2019, primarily due to increases in our medical-use cannabis related accounts. The average balance of certificates of deposit increaseddecreased from $215.5$223.8 million for the ninethree months ended SeptemberJune 30, 20172018 to $224.2$206.0 million for the same period of 20182019 due to a successful marketing campaign. Slightly offsetting the effectrunoff from maturing certificates of interest-bearing deposit rates was a decrease in the average rate paid on borrowings from 3.26% for the nine months ended September 30, 2017 to 2.63% for the nine months ended September 30, 2018. Additionally, averagedeposit. Average borrowings decreased by $2.6$39.4 million due to $113.9 million for the nine months ended September 30, 2018 compared to $116.5 million for the same periodpayoffs of 2017. During the latter part of 2017, we paid off higher-costing Federal Home Loan Bank of Atlanta (“FHLB”) advances and replaced them with lower-costing advances.  As

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 borrowings decreased $600,000 duringdeposits, partially offset by a $490,000 decrease in interest expense on borrowings. The increase in deposit interest expense was primarily due to an increase in the nineaverage rate paid on interest-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 0.95% for the six months ended SeptemberJune 30, 2018 compared to 1.25% for the six months ended June 30, 2019. The average rate paid on certificates of deposit increased from 1.61% for the six months ended June 30, 2018 to 2.07% for the same period of 2019. Additionally, the average rate paid on checking and savings accounts increased from 0.44% for the six months ended June 30, 2018 to 0.82% for the six months ended June 30, 2019. The average balance of checking and savings accounts increased significantly from $286.3 million for the six months ended June 30, 2018 to $398.2 million for the six months ended June 30, 2019, primarily due to increases in 2017.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 2019 due to runoff from maturing certificates of deposit. Average borrowings decreased $37.0 million due to payoffs of FHLB advances.

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The following tables 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 September 30, 

 

 

Three Months Ended June 30, 

 

 

2018

 

2017

 

 

2019

 

2018

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

    

Balance (1)

    

Interest (2)

    

Rate (4)

    

Balance (1)

    

Interest (2)

    

Rate (4)

 

    

Balance

    

Interest (2)

    

Rate (4)

    

Balance 

    

Interest (2)

    

Rate (4)

 

ASSETS

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Loans(1)

 

$

678,753

 

$

8,744

 

5.11

%  

$

621,177

 

$

7,702

 

4.92

%

 

$

679,334

 

$

9,176

 

5.42

%  

$

673,700

 

$

8,444

 

5.03

%

Loans held for sale ("LHFS")

 

 

6,337

 

 

100

 

6.26

%  

 

3,117

 

 

40

 

5.09

%

 

 

10,184

 

 

50

 

1.97

%  

 

5,172

 

 

72

 

5.58

%

AFS securities

 

 

11,867

 

 

53

 

1.77

%  

 

5,853

 

 

26

 

1.76

%

HTM securities

 

 

49,040

 

 

240

 

1.94

%  

 

62,249

 

 

304

 

1.94

%

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)

 

 

47,201

 

 

360

 

3.03

%  

 

46,825

 

 

106

 

0.90

%

 

 

144,974

 

 

705

 

1.95

%  

 

31,730

 

 

121

 

1.53

%

Restricted stock investments, at cost

 

 

4,504

 

 

63

 

5.55

%  

 

4,676

 

 

61

 

5.18

%

 

 

3,077

 

 

52

 

6.80

%  

 

4,763

 

 

57

 

4.80

%

Total interest-earning assets

 

 

797,702

 

 

9,560

 

4.75

%  

 

743,897

 

 

8,239

 

4.39

%

 

 

885,532

 

 

10,224

 

4.63

%  

 

777,834

 

 

9,001

 

4.64

%

Allowance

 

 

(8,218)

 

 

  

 

  

 

 

(8,383)

 

 

  

 

  

 

 

 

(8,082)

 

 

  

 

  

 

 

(8,184)

 

 

  

 

  

 

Cash and other noninterest-earning assets

 

 

42,969

 

 

  

 

  

 

 

56,589

 

 

  

 

  

 

 

 

42,753

 

 

  

 

  

 

 

43,474

 

 

  

 

  

 

Total assets

 

$

832,453

 

 

9,560

 

  

 

$

792,103

 

 

8,239

 

  

 

 

$

920,203

 

 

10,224

 

  

 

$

813,124

 

 

9,001

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing deposits:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Checking and savings

 

$

283,635

 

 

498

 

0.70

%  

$

287,299

 

 

89

 

0.12

%

 

$

385,084

 

 

807

 

0.84

%  

$

277,269

 

 

292

 

0.42

%

Certificates of deposit

 

 

226,415

 

 

1,033

 

1.81

%  

 

214,282

 

 

922

 

1.71

%

 

 

206,022

 

 

1,091

 

2.12

%  

 

223,822

 

 

982

 

1.76

%

Total interest-bearing deposits

 

 

510,050

 

 

1,531

 

1.19

%  

 

501,581

 

 

1,011

 

0.80

%

 

 

591,106

 

 

1,898

 

1.29

%  

 

501,091

 

 

1,274

 

1.02

%

Borrowings

 

 

109,155

 

 

684

 

2.49

%  

 

113,719

 

 

897

 

3.13

%

 

 

75,887

 

 

481

 

2.54

%  

 

115,279

 

 

800

 

2.78

%

Total interest-bearing liabilities

 

 

619,205

 

 

2,215

 

1.42

%  

 

615,300

 

 

1,908

 

1.23

%

 

 

666,993

 

 

2,379

 

1.43

%  

 

616,370

 

 

2,074

 

1.35

%

Noninterest-bearing deposit accounts

 

 

115,416

 

 

  

 

  

 

 

86,437

 

 

  

 

  

 

 

 

146,832

 

 

  

 

  

 

 

99,714

 

 

  

 

  

 

Other noninterest-bearing liabilities

 

 

2,206

 

 

  

 

  

 

 

2,665

 

 

  

 

  

 

 

 

4,382

 

 

  

 

  

 

 

2,365

 

 

  

 

  

 

Stockholders' equity

 

 

95,626

 

 

  

 

  

 

 

87,701

 

 

  

 

  

 

 

 

101,996

 

 

  

 

  

 

 

94,675

 

 

  

 

  

 

Total liabilities and stockholders' equity

 

$

832,453

 

 

2,215

 

  

 

$

792,103

 

 

1,908

 

  

 

 

$

920,203

 

 

2,379

 

  

 

$

813,124

 

 

2,074

 

  

 

Net interest income/net interest spread

 

 

  

 

$

7,345

 

3.33

%  

 

  

 

$

6,331

 

3.16

%

 

 

  

 

$

7,845

 

3.20

%  

 

  

 

$

6,927

 

3.29

%

Net interest margin

 

 

  

 

 

  

 

3.65

%  

 

  

 

 

  

 

3.38

%

 

 

  

 

 

  

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3435


Table of Contents

 

Nine Months Ended September 30, 

 

 

Six Months Ended June 30, 

 

 

2018

 

2017

 

 

2019

 

2018

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

    

Balance (1)

    

Interest (2)

    

Rate (4)

    

Balance (1)

    

Interest (2)

    

Rate (4)

  

    

Balance

    

Interest (2)

    

Rate (4)

    

Balance 

    

Interest (2)

    

Rate (4)

  

ASSETS

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Loans(1)

 

$

673,689

 

$

25,523

 

5.06

%  

$

613,833

 

$

22,105

 

4.81

%

 

$

678,846

 

$

18,327

 

5.44

%  

$

671,157

 

$

16,779

 

5.04

%

Loans held for sale

 

 

4,977

 

 

208

 

5.59

%  

 

3,690

 

 

162

 

5.87

%

LHFS

 

 

8,378

 

 

66

 

1.59

%  

 

4,297

 

 

108

 

5.07

%

AFS securities

 

 

11,753

 

 

156

 

1.77

%  

 

4,984

 

 

71

 

1.90

%

 

 

11,805

 

 

102

 

1.74

%  

 

11,696

 

 

103

 

1.78

%

HTM securities

 

 

50,767

 

 

764

 

2.01

%  

 

61,705

 

 

856

 

1.85

%

 

 

37,016

 

 

398

 

2.17

%  

 

51,630

 

 

524

 

2.05

%

Other interest-earning assets (3)

 

 

37,261

 

 

607

 

2.18

%  

 

49,353

 

 

317

 

0.86

%

 

 

152,756

 

 

1,758

 

2.32

%  

 

32,291

 

 

247

 

1.54

%

Restricted stock investments, at cost

 

 

4,705

 

 

180

 

5.11

%  

 

4,791

 

 

181

 

5.05

%

 

 

3,189

 

 

116

 

7.34

%  

 

4,805

 

 

117

 

4.91

%

Total interest-earning assets

 

 

783,152

 

 

27,438

 

4.68

%  

 

738,356

 

 

23,692

 

4.29

%

 

 

891,990

 

 

20,767

 

4.69

%  

 

775,876

 

 

17,878

 

4.65

%

Allowance

 

 

(8,181)

 

 

  

 

  

 

 

(8,687)

 

 

  

 

  

 

 

 

(8,075)

 

 

  

 

  

 

 

(8,163)

 

 

  

 

  

 

Cash and other noninterest-earning assets

 

 

43,224

 

 

  

 

  

 

 

61,758

 

 

  

 

  

 

 

 

42,305

 

 

  

 

  

 

 

43,355

 

 

  

 

  

 

Total assets

 

$

818,195

 

 

27,438

 

  

 

$

791,427

 

 

23,692

 

  

 

 

$

926,220

 

 

20,767

 

  

 

$

811,068

 

 

17,878

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing deposits:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Checking and savings

 

$

280,739

 

 

1,122

 

0.53

%  

$

282,649

 

 

618

 

0.29

%

 

$

398,214

 

 

1,624

 

0.82

%  

$

286,313

 

 

624

 

0.44

%

Certificates of deposit

 

 

224,248

 

 

2,816

 

1.68

%  

 

215,499

 

 

2,306

 

1.43

%

 

 

208,561

 

 

2,143

 

2.07

%  

 

223,165

 

 

1,783

 

1.61

%

Total interest-bearing deposits

 

 

504,987

 

 

3,938

 

1.04

%  

 

498,148

 

 

2,924

 

0.78

%

 

 

606,775

 

 

3,767

 

1.25

%  

 

509,478

 

 

2,407

 

0.95

%

Borrowings

 

 

113,929

 

 

2,244

 

2.63

%  

 

116,539

 

 

2,844

 

3.26

%

 

 

79,309

 

 

1,070

 

2.72

%  

 

116,316

 

 

1,560

 

2.70

%

Total interest-bearing liabilities

 

 

618,916

 

 

6,182

 

1.34

%  

 

614,687

 

 

5,768

 

1.25

%

 

 

686,084

 

 

4,837

 

1.42

%  

 

625,794

 

 

3,967

 

1.28

%

Noninterest-bearing deposits

 

 

108,671

 

 

  

 

  

 

 

85,928

 

 

  

 

  

 

 

 

134,845

 

 

  

 

  

 

 

98,277

 

 

  

 

  

 

Other noninterest-bearing liabilities

 

 

2,224

 

 

  

 

  

 

 

2,624

 

 

  

 

  

 

 

 

3,750

 

 

  

 

  

 

 

2,234

 

 

  

 

  

 

Stockholders' equity

 

 

88,384

 

 

  

 

  

 

 

88,188

 

 

  

 

  

 

 

 

101,541

 

 

  

 

  

 

 

84,763

 

 

  

 

  

 

Total liabilities and stockholders' equity

 

$

818,195

 

 

6,182

 

  

 

$

791,427

 

 

5,768

 

  

 

 

$

926,220

 

 

4,837

 

  

 

$

811,068

 

 

3,967

 

  

 

Net interest income/net interest spread

 

 

  

 

$

21,256

 

3.34

%  

 

  

 

$

17,924

 

3.04

%

 

 

  

 

$

15,930

 

3.27

%  

 

  

 

$

13,911

 

3.37

%

Net interest margin

 

 

  

 

 

  

 

3.63

%  

 

  

 

 

  

 

3.25

%

 

 

  

 

 

  

 

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.

35


Table of Contents

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

Table of Contents

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 September 30, 2018 vs. 2017

 

Nine Months Ended September 30, 2018 vs. 2017

 

Three Months Ended June 30, 2019 vs. 2018

 

Six Months Ended June 30, 2019 vs. 2018

 

Due to Variances in

 

Due to Variances in

 

Due to Variances in

 

Due to Variances in

    

Rate

    

Volume

    

Total

    

Rate

    

Volume

    

Total

    

Rate

    

Volume

    

Total

    

Rate

    

Volume

    

Total

Interest earned on:

 

(dollars in thousands)

 

(dollars in thousands)

Loans

 

$

310

 

$

732

 

$

1,042

 

$

1,187

 

$

2,231

 

$

3,418

 

$

661

 

$

71

 

$

732

 

$

1,354

 

$

194

 

$

1,548

LHFS

 

 

11

 

 

49

 

 

60

 

 

(13)

 

 

59

 

 

46

 

 

(233)

 

 

211

 

 

(22)

 

 

(191)

 

 

149

 

 

(42)

AFS securities

 

 

 1

 

 

26

 

 

27

 

 

(9)

 

 

94

 

 

85

 

 

(1)

 

 

(1)

 

 

(2)

 

 

(3)

 

 

 2

 

 

(1)

HTM Securities

 

 

 8

 

 

(72)

 

 

(64)

 

 

101

 

 

(193)

 

 

(92)

 

 

75

 

 

(139)

 

 

(64)

 

 

84

 

 

(210)

 

 

(126)

Other interest-earning assets

 

 

253

 

 

 1

 

 

254

 

 

429

 

 

(139)

 

 

290

 

 

42

 

 

542

 

 

584

 

 

180

 

 

1,331

 

 

1,511

Restricted stock investments, at cost

 

 

14

 

 

(12)

 

 

 2

 

 

 4

 

 

(5)

 

 

(1)

 

 

85

 

 

(90)

 

 

(5)

 

 

94

 

 

(95)

 

 

(1)

Total interest income

 

 

597

 

 

724

 

 

1,321

 

 

1,699

 

 

2,047

 

 

3,746

 

 

629

 

 

594

 

 

1,223

 

 

1,518

 

 

1,371

 

 

2,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Interest-bearing deposits:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Checking and savings

 

 

417

 

 

(8)

 

 

409

 

 

511

 

 

(7)

 

 

504

 

 

369

 

 

146

 

 

515

 

 

690

 

 

310

 

 

1,000

Certificates of deposit

 

 

57

 

 

54

 

 

111

 

 

412

 

 

98

 

 

510

 

 

531

 

 

(422)

 

 

109

 

 

676

 

 

(316)

 

 

360

Total interest-bearing deposits

 

 

474

 

 

46

 

 

520

 

 

923

 

 

91

 

 

1,014

 

 

900

 

 

(276)

 

 

624

 

 

1,366

 

 

(6)

 

 

1,360

Borrowings

 

 

(178)

 

 

(35)

 

 

(213)

 

 

(538)

 

 

(62)

 

 

(600)

 

 

(65)

 

 

(254)

 

 

(319)

 

 

30

 

 

(520)

 

 

(490)

Total interest expense

 

 

296

 

 

11

 

 

307

 

 

385

 

 

29

 

 

414

 

 

835

 

 

(530)

 

 

305

 

 

1,396

 

 

(526)

 

 

870

Net interest income

 

$

301

 

$

713

 

$

1,014

 

$

1,314

 

$

2,018

 

$

3,332

 

$

(206)

 

$

1,124

 

$

918

 

$

122

 

$

1,897

 

$

2,019

 

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.

We recorded a reversal of thedid not record provision for loan losses of $300,000 during the three and nineor six months ended SeptemberJune 30, 2019 or 2018. We recorded a reversal of the provision for loan losses of $650,000 during the nine months ended September 30, 2017, none of which was recorded during the three months ended September 30, 2017.

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 SeptemberJune 30

Total noninterest income increased by $945,000,$547,000, or 67.5%26.5%, to $2.32.6 million for the three months ended SeptemberJune 30, 2019, compared to $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 $1.4 million$293,000 for the three months ended SeptemberJune 30, 2017,2018.

Six Months Ended June 30

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Total noninterest income increased by $1.0 million, or 26.3%, to $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 increased $406,000,$577,000, or 121.6%, due to an increased volume of loans originated for

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sale in the three months ended September 30, 2018 compared to the same period of 2017. In 2017, the decision was made to move away from the purchased lead model previously used and instead focus on internally generated leads. We are seeing increased origination volume from the switch in models. Deposit service charges increased $236,000 due primarily to fees associated with medical-use cannabis customer accounts, which we did not have during the three months ended September 30, 2017. Real estate commissions generated more income for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 due to greater sales volume.  The Title Company, which we purchased during the third quarter of 2017, generated $316,000 in revenue during the three months ended September 30, 2018 compared to $48,000 for the three months ended September 30, 2017.

Nine Months Ended September 30

Total noninterest income increased by $2.6 million, or 70.3%, to $6.4 million for the nine months ended September 30, 2018, compared to $3.8 million for the nine months ended September 30, 2017, with increases in most noninterest income categories. Mortgage-banking revenue increased $820,000, or 71.3%46.9%, due to the increased volume of loans originated as a result offrom $40.8 million in the switchsix months ended June 30, 2018 to $88.9 million in origination models.the six months ended June 30, 2019. Deposit service charges increased $802,000$415,000 due primarily to on-boarding and monthly fees associated with medical-use cannabis customer accounts, which we did not haveaccounts. Real estate commissions increased $115,000, or 15.4% due to an increase in the volume of properties sold during the ninesix months ended SeptemberJune 30, 2017.2019 compared to the same period of 2018. The Title Company generated $751,000$479,000 in revenue during the ninesix months ended SeptemberJune 30, 2019 compared to $435,000 for the six months ended June 30, 2018 compareddue to $48,000 for the nine months ended September 30, 2017.an increase in loan closings and related title work.

Noninterest Expense

Three Months Ended SeptemberJune 30

Total noninterest expense increased $1.5$1.2 million, or 27.5%18.3%, to $7.07.5 million for the three months ended SeptemberJune 30, 2018,2019, compared to $5.56.4 million for the three months ended SeptemberJune 30, 2017,2018, primarily due to increases in compensation and related expenses, advertising,professional fees, data processing fees, and occupancy expense.licensing and software expenses. Compensation and related expenses increased by $1.4 million,$489,000, or 41.8%11.1%, to $4.74.9 million for the three months ended SeptemberJune 30, 2018,2019, compared to $3.34.4 million for the three months ended SeptemberJune 30, 2017. This increase was primarily due to additional hirings, including staff for the new Lothian branch, as well as increased commission expense that corresponds with our increased loan origination and mortgage-banking volumes. Occupancy expenses increased $62,000 due to expenses related to opening the new Lothian branch. Advertising increased $104,000 for the three months ended September 30, 2018 compared to the same period in 2017 due to deposit driven marketing campaigns in 2018.

Nine Months Ended September 30

Total noninterest expense increased $2.7 million, or 16.0%, to $19.7 million for the nine months ended September 30, 2018, compared to $17.0 million for the nine months ended September 30, 2017, primarily due to increases in compensation and related expenses. Compensation and related expenses increased by $2.6 million, or 24.6%, to $13.4 million for the nine months ended September 30, 2018, compared to $10.7 million for the nine months ended September 30, 2017. This increase was primarily due to annual salary increases, additional hirings, severance payments to former employees, and increased commission expense that corresponds with our increased loan origination and mortgage-banking volumes. Partially offsettingProfessional fees increased $338,000 due to increased consulting costs. Data processing fees and licensing and software expense increased $99,000 and $136,000, respectively, due to additional efficiency and security enhancements to our core and related systems, as well as the increaseimplementation of a new customer relationship management (“CRM”) system.

Six Months Ended June 30

Total noninterest expense increased $1.8 million, or 14.1%, to $14.3 million for the six months ended June 30, 2019, compared to $12.5 million for the six months ended June 30, 2018, primarily due to increases in compensation and related expenses, mortgage leads purchased decreased $234,000professional fees, data processing fees, licensing and software expenses, and increased write-downs on real estate acquired through foreclosure. Compensation and related expenses increased by $736,000, or 8.5%, to $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 transition awayaforementioned 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 purchased lead model.write down of two properties.

Income Tax Provision

Three Months Ended September 30

We recorded an income tax provision of $784,000 on net income before income taxes of $2.9 million for the three months ended September 30, 2018, compared to an income tax provision of $950,000 on net income before income taxes of $2.2 million for the three months ended September 30, 2017.

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Nine months Ended SeptemberJune 30

We recorded a $2.3 million income$771,000 tax provision on net income before income taxes of $8.22.9 million for the ninethree months ended SeptemberJune 30, 2018,2019, compared to an income tax provision of $2.2$724,000 on net income before income taxes of $2.6 million for the three months ended June 30, 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

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the ninesix months ended SeptemberJune 30, 2017.2018. 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 26.6% and26.2% for the three months ended June 30, 2019 compared to 27.4% for the three and nine months ended SeptemberJune 30, 2018 respectively,and 26.9% for the six months ended June 30, 2019 compared to 43.0% and 40.4%27.9% for the three and ninesix months ended SeptemberJune 30, 2017, respectively.2018. Our effective tax rate is affected by temporary and permanent book to tax differences arising during the periods.

Financial Condition

Total assets increased $84.5decreased $112.1 million to $889.3$862.1 million at SeptemberJune 30, 2018,2019, compared to $804.8$974.2 million at December 31, 2017.2018. This increasedecrease was primarily due to an increase in loans, which increased $21.6a $111.0 million, or 3.2%58.9%, to $689.7 million at September 30, 2018 from $668.2 million at December 31, 2017, and an increasedecrease in cash and cash equivalents, to $77.3 million at June 30, 2019 from $21.8$188.3 million at December 31, 20172018.  Additionally, we experienced a decrease in loans of $2.8 million, or 0.4%, to $91.3$679.6 million at SeptemberJune 30, 2018. Total deposits increased $91.9 million, or 15.3%, to $694.2 million at September 30, 2018 compared to $602.22019 from $682.3 million at December 31, 2017.2018. Total deposits decreased $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 $15.0$25.0 million or 16.9%34.0%, to $48.5 million at June 30, 2019 compared to $73.5 million at September 30, 2018 compared to $88.5 million at December 31, 20172018 due to the paydown of FHLB advances in 2018.  During the second quarterfirst half of 2018, we converted 437,500 outstanding shares of preferred stock into 437,500 shares of the Company’s common stock.2019. Stockholders’ equity increased $4.8$4.2 million to $95.9$102.7 million at SeptemberJune 30, 20182019 compared to $91.1$98.5 million at December 31, 2017.2018, primarily due to the increase in retained earnings, partially offset by dividends to stockholders.

Securities

We utilize the securities portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals. We continually monitor the credit risk associated with investments and diversify the risk in the securities portfolios. We held $12.0$11.0 million and $10.1$12.0 million in securities classified as AFS as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. We held  $43.1$33.6 million and  $54.3$38.9 million, respectively, in securities classified as HTM as of SeptemberJune 30, 20182019 and December 31, 2017.2018.

Changes in current market conditions, such as interest rates and the economic uncertainties in the mortgage, housing, and banking industries impact the securities market. Quarterly, we review each security in our portfolio to determine the nature of any decline in value and evaluate if any impairment should be classified as other-than-temporary impairment (“OTTI”). For the ninethree and six months ended SeptemberJune 30, 2018,2019, we determined that no OTTI charges were required.

All of the AFS and HTM securities that are temporarily impaired as of SeptemberJune 30, 20182019 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 securities portfolio composition is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFS

 

HTM

 

AFS

 

HTM

    

September 30, 2018

    

December 31, 2017

    

September 30, 2018

    

December 31, 2017

    

June 30, 2019

    

December 31, 2018

    

June 30, 2019

    

December 31, 2018

 

(dollars in thousands)

 

(dollars in thousands)

U.S. Treasury securities

 

$

1,975

 

$

 —

 

$

3,991

 

$

4,994

 

$

1,995

 

$

1,981

 

$

1,992

 

$

1,991

U.S. government agency notes

 

 

9,975

 

 

10,119

 

 

12,993

 

 

19,004

 

 

9,036

 

 

9,997

 

 

8,989

 

 

11,992

Mortgage-backed securities

 

 

 —

 

 

 —

 

 

26,124

 

 

30,305

 

 

 —

 

 

 —

 

 

22,581

 

 

24,929

 

$

11,950

 

$

10,119

 

$

43,108

 

$

54,303

 

$

11,031

 

$

11,978

 

$

33,562

 

$

38,912

 

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LHFS

We originate residential mortgage loans for sale on the secondary market. Such LHFS, which are carried at fair value, amounted to $9.0$18.0 million at SeptemberJune 30, 20182019 and $4.5$9.7 million at December 31, 2017,2018, the majority of which are subject to purchase commitments from investors. LHFS increased by $4.5$8.3 million, or 99.2%85.7%, compared to December 31, 2017,2018, primarily due to a higher 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

June 30, 2019

 

December 31, 2018

 

 

 

 

Percent

 

 

 

Percent

 

 

 

 

Percent

 

 

 

Percent

 

    

Amount

    

of Total

    

Amount

    

of Total

 

    

    

Amount

    

of Total

    

Amount

    

of Total

 

    

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Residential Mortgage

 

$

285,470

 

41.4

%  

$

285,819

 

42.8

%

 

 

$

274,474

 

40.4

%  

$

274,759

 

40.3

%

 

Commercial

 

 

43,180

 

6.3

%  

 

37,356

 

5.6

%

 

 

 

45,347

 

6.7

%  

 

35,884

 

5.2

%

 

Commercial real estate

 

 

234,830

 

34.0

%  

 

235,129

 

35.2

%

 

 

 

237,368

 

34.9

%  

 

242,693

 

35.6

%

 

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

 

 

112,994

 

16.4

%  

 

93,060

 

13.9

%

 

 

 

108,182

 

15.9

%  

 

114,540

 

16.8

%

 

Home equity/2nds

 

 

12,173

 

1.8

%  

 

15,703

 

2.3

%

 

 

 

12,581

 

1.9

%  

 

13,386

 

2.0

%

 

Consumer

 

 

1,065

 

0.1

%  

 

1,084

 

0.2

%

 

 

 

1,621

 

0.2

%  

 

1,087

 

0.1

%

 

 

$

689,712

 

100.0

%  

$

668,151

 

100.0

%

 

 

$

679,573

 

100.0

%  

$

682,349

 

100.0

%

 

 

Loans increaseddecreased by $21.6$2.8 million, or 3.2%0.4%, to $689.7$679.6 million at SeptemberJune 30, 2018,2019, compared to $668.2$682.3 million at December 31, 2017.2018. This increasedecrease was due to increaseddecreased demand and originations, as well as increased payoffs of Commercialcommercial real estate, ADC and ADChome equity/2nds loans. We did experience an increase in commercial loan demand during the six months ended June 30, 2019.

Credit Risk Management and the Allowance

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

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

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

40

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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 43 to the Consolidated Financial Statements.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2018

    

2017

    

2018

    

2017

    

2019

    

2018

    

2019

    

2018

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Allowance, beginning of year

 

$

8,257

 

$

7,718

 

$

8,055

 

$

8,969

 

 

$

8,085

 

$

8,169

 

$

8,044

 

$

8,055

 

Charge-offs:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential mortgage

 

 

(148)

 

 

 —

 

 

(508)

 

 

(707)

 

 

 

(20)

 

 

(37)

 

 

(20)

 

 

(360)

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial real estate

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

ADC

 

 

(6)

 

 

 —

 

 

(19)

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(13)

 

Home equity/2nds

 

 

 —

 

 

 —

 

 

 —

 

 

(98)

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

(12)

 

 

 —

 

 

(12)

 

 

 —

 

Total charge-offs

 

 

(154)

 

 

 —

 

 

(527)

 

 

(805)

 

 

 

(32)

 

 

(37)

 

 

(32)

 

 

(373)

 

Recoveries:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential mortgage

 

 

 3

 

 

156

 

 

225

 

 

295

 

 

 

 3

 

 

 1

 

 

 8

 

 

222

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial real estate

 

 

31

 

 

40

 

 

364

 

 

100

 

 

 

33

 

 

122

 

 

67

 

 

333

 

ADC

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity/2nds

 

 

219

 

 

22

 

 

239

 

 

27

 

 

 

 4

 

 

 2

 

 

 6

 

 

20

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total recoveries

 

 

253

 

 

218

 

 

828

 

 

422

 

 

 

40

 

 

125

 

 

81

 

 

575

 

Net recoveries (charge offs)

 

 

99

 

 

218

 

 

301

 

 

(383)

 

Reversal of provision for loan losses

 

 

(300)

 

 

 —

 

 

(300)

 

 

(650)

 

Net recoveries

 

 

 8

 

 

88

 

 

49

 

 

202

 

Provision for loan losses

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Allowance, end of period

 

$

8,056

 

$

7,936

 

$

8,056

 

$

7,936

 

 

$

8,093

 

$

8,257

 

$

8,093

 

$

8,257

 

Loans:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

 

Period-end balance

 

$

689,712

 

$

650,964

 

$

689,712

 

$

650,964

 

 

$

679,573

 

$

686,912

 

$

679,573

 

$

686,912

 

Average balance during period

 

 

678,753

 

 

621,177

 

 

673,689

 

 

613,833

 

 

 

679,334

 

 

673,700

 

 

678,846

 

 

671,157

 

Allowance as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

period-end loan balance

 

 

1.17

%  

 

1.22

%  

 

1.17

%  

 

1.22

%  

 

 

1.19

%  

 

1.20

%  

 

1.19

%  

 

1.20

%  

Percent of average loans (annualized):

 

 

  

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

  

 

 

 

 

 

  

 

Reversal of provision for loan losses

 

 

0.18

%  

 

 —

%  

 

0.06

%  

 

0.14

%  

Net recoveries (charge offs )

 

 

0.06

%  

 

0.14

%  

 

0.06

%  

 

(0.08)

%  

Provision for loan losses

 

 

 —

%  

 

 —

%  

 

 —

%  

 

 —

%  

Net recoveries

 

 

 —

%  

 

0.05

%  

 

0.01

%  

 

0.06

%  

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

June 30, 2019

 

December 31, 2018

 

 

    

 

    

 

    

Percent

    

 

    

 

    

Percent

 

    

    

 

    

 

    

Percent

    

 

    

 

    

Percent

 

    

 

 

 

 

 

of Loans

 

 

 

 

 

of Loans

 

 

 

 

 

 

 

of Loans

 

 

 

 

 

of Loans

 

 

 

 

 

Percent

 

to Total

 

 

 

Percent

 

to Total

 

 

 

 

 

Percent

 

to Total

 

 

 

Percent

 

to Total

 

 

 

Amount

 

of Total

 

Loans

 

Amount

 

of Total

 

Loans

 

 

 

Amount

 

of Total

 

Loans

 

Amount

 

of Total

 

Loans

 

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

Residential mortgage

 

$

3,021

 

37.5

%  

41.4

%  

$

3,099

 

38.5

%  

42.8

%

 

 

$

2,566

 

31.7

%  

40.4

%  

$

2,224

 

27.6

%  

40.3

%

 

Commercial

 

 

633

 

7.9

%  

6.3

%  

 

527

 

6.5

%  

5.6

%

 

 

 

1,566

 

19.4

%  

6.7

%  

 

2,736

 

34.0

%  

5.2

%

 

Commercial real estate

 

 

2,632

 

32.7

%  

34.0

%  

 

2,805

 

34.8

%  

35.2

%

 

 

 

792

 

9.8

%  

34.9

%  

 

457

 

5.7

%  

35.6

%

 

ADC

 

 

1,560

 

19.4

%  

16.4

%  

 

1,236

 

15.4

%  

13.9

%

 

 

 

2,683

 

33.1

%  

15.9

%  

 

2,239

 

27.8

%  

16.8

%

 

Home equity/2nds

 

 

181

 

2.2

%  

1.8

%  

 

386

 

4.8

%  

2.3

%

 

 

 

223

 

2.8

%  

1.9

%  

 

222

 

2.8

%  

2.0

%

 

Consumer

 

 

 1

 

 —

%  

0.1

%  

 

 2

 

 —

%  

0.2

%

 

 

 

 —

 

 —

%  

0.2

%  

 

 1

 

 —

%  

0.1

%

 

Unallocated

 

 

28

 

0.3

%  

 —

%  

 

 —

 

 —

%  

 —

%

 

 

 

263

 

3.2

%  

 —

%  

 

165

 

2.1

%  

 —

%

 

Total

 

$

8,056

 

100.0

%  

100.0

%  

$

8,055

 

100.0

%  

100.0

%

 

 

$

8,093

 

100.0

%  

100.0

%  

$

8,044

 

100.0

%  

100.0

%

 

 

Based upon management’s evaluation, provisions are made to maintain the Allowance as a best estimate of inherent losses within the portfolio. The Allowance totaled  $8.1 million at  both SeptemberJune 30, 20182019 and $8.0 million at December 31, 2017.2018. Any

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Table of Contents

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, 2018,2019, resulted in increased allocated Allowances for residential 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 withincreased approximately $2.2 million and $1.1 million, respectively, while the other categories resultingAllowance 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 decreasedaccounting estimate had no impact on earnings or relatively stable allocated Allowances. The

40


Table of Contents

changes in the Allowances for the respective loan segments were a function of the changes in the corresponding loan balances and asset quality.diluted earnings per share.

As result of our Allowance analysis, we recorded $300,000 in reversals of thedid not record any provision for loan losses during the three and ninesix months ended SeptemberJune 30, 2019 or 2018. We recorded $650,000 in reversals of provision for loan losses for the nine months ended September 30, 2017, all of which occurred prior to the third quarter of 2017. We recorded net recoveries of $99,000$8,000 and $301,000,$49,000, respectively, during the three and six months ended June 30, 2019 and net recoveries of $88,000 and $202,000, respectively, during the three and ninesix months ended SeptemberJune 30, 2018. We recorded net recoveries of $218,000 during2018.  During the three and six months ended SeptemberJune 30, 2017 and net charge-offs of $383,000 during the nine months ended September 30, 2017. During both the three and nine months ended September 30, 2018,2019, annualized net recoveries as a percentage of average loans outstanding amounted to 0.06%0.00% and 0.01%, respectively, compared to annualized net recoveries as a percentage of average loans outstanding of 0.14%0.05% and 0.06%, during the three and six months ended SeptemberJune 30, 2017 and net charge-offs as a percentage of average loans outstanding of 0.08% during the nine months ended September 30, 2017.2018, respectively. The Allowance as a percentage of outstanding loans was 1.17%1.19% as of SeptemberJune 30, 20182019 compared to 1.21%1.18% as of December 31, 2017.2018. 

Although management uses available information to establish the appropriate level of the Allowance, future additions or reductions to the Allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions, and other factors. As a result, our Allowance may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our Allowance and related methodology. Such agencies may require us to recognize adjustments to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of SeptemberJune 30, 20182019 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 valuations 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 valuation. As a result, we have not experienced any internal delays in identifying which loans/credits require updated valuations. With respect to the ordering process of 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 0.68%0.73% at SeptemberJune 30, 20182019 and 0.76%0.64% at December 31, 2017.2018. The ratio of the Allowance to nonperforming loans was 140.6%165.6% at SeptemberJune 30, 20182019 and 141.1%172.8% at December 31, 2017.2018.  

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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, 2018 and2019 or December 31, 2017.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

September 30, 2018

    

December 31, 2017

    

 

June 30, 2019

    

December 31, 2018

 

Nonaccrual Loans:

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Residential mortgage

 

$

3,784

 

$

3,891

 

 

$

3,288

 

$

2,580

 

Commercial

 

 

 —

 

 

78

 

 

 

 —

 

 

430

 

Commercial real estate

 

 

476

 

 

159

 

 

 

779

 

 

660

 

ADC

 

 

923

 

 

314

 

 

 

388

 

 

558

 

Home equity/2nds

 

 

548

 

 

1,268

 

 

 

429

 

 

428

 

Consumer

 

 

 —

 

 

 —

 

 

 

 3

 

 

 ���

 

 

 

5,731

 

 

5,710

 

 

 

4,887

 

 

4,656

 

Real Estate Acquired Through Foreclosure:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Residential mortgage

 

 

 —

 

 

 —

 

 

 

1,259

 

 

1,366

 

Commercial

 

 

 —

 

 

 —

 

Commercial real estate

 

 

 —

 

 

 —

 

ADC

 

 

171

 

 

187

 

 

 

171

 

 

171

 

Home equity/2nds

 

 

114

 

 

216

 

Consumer

 

 

 —

 

 

 —

 

 

 

285

 

 

403

 

 

 

1,430

 

 

1,537

 

Total Nonperforming Assets

 

$

6,016

 

$

6,113

 

 

$

6,317

 

$

6,193

 

 

Nonaccrual loans totaled $5.7$4.9 million, or 0.83%0.72% of total loans, at SeptemberJune 30, 20182019 and $5.7$4.7 million, or 0.85%0.68% of total loans at December 31, 2017.2018. Significant activity in nonaccrual loans includes additions of $2.6 million in loans to nonaccrual status, primarily due toduring the six months ended June 30, 2019 included the addition of twoseven loans in the amount of $2.2$1.3 million (one residential mortgage andto nonaccrual loans, the transfer of one commercialloan to real estate),estate acquired through foreclosure of $171,000, and payoffs or sold loans of $1.1 million$830,000 in nonaccrual loans that existed at December 31, 2017 during the nine months ended September 30, 2018.

Real estate acquired through foreclosure decreased $118,000$107,000 to $285,000$1.4 million at SeptemberJune 30, 20182019 compared to December 31, 20172018 due to the sale of twoone property addition, partially offset by write downs on properties heldexisting at December 31, 2017.2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2018

    

2017

    

2018

    

2017

    

2019

    

2018

    

2019

    

2018

 

(dollars in thousands)

 

(dollars in thousands)

Balance at beginning of period

 

$

295

 

$

1,015

 

$

403

 

$

973

 

$

1,601

 

$

237

 

$

1,537

 

$

403

Real estate acquired in satisfaction of loans

 

 

 —

 

 

188

 

 

 —

 

 

703

 

 

 —

 

 

 —

 

 

171

 

 

 —

Write-downs and losses on real estate acquired through foreclosure

 

 

(10)

 

 

(99)

 

 

(54)

 

 

(139)

 

 

(64)

 

 

 —

 

 

(171)

 

 

(44)

Proceeds from sales of real estate acquired through foreclosure

 

 

 —

 

 

 —

 

 

(64)

 

 

(433)

 

 

(107)

 

 

 —

 

 

(107)

 

 

(64)

Other

 

 

 —

 

 

58

 

 

 —

 

 

 —

Balance at end of period

 

$

285

 

$

1,104

 

$

285

 

$

1,104

 

$

1,430

 

$

295

 

$

1,430

 

$

295

 

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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

    

    

June 30, 2019

    

December 31, 2018

    

Residential mortgage:

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Nonaccrual

 

$

997

 

$

736

 

 

$

422

 

$

446

 

<90 days past due/current

 

 

10,031

 

 

11,631

 

 

 

9,332

 

 

9,469

 

Commercial real estate:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

78

 

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

1,028

 

 

1,862

 

 

 

1,000

 

 

1,019

 

ADC:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 6

 

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

134

 

 

137

 

 

 

132

 

 

134

 

Consumer:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Nonaccrual

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

<90 days past due/current

 

 

78

 

 

84

 

 

 

73

 

 

76

 

Totals:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Nonaccrual

 

 

997

 

 

820

 

 

 

422

 

 

446

 

<90 days past due/current

 

 

11,271

 

 

13,714

 

 

 

10,537

 

 

10,698

 

 

$

12,268

 

$

14,534

 

 

$

10,959

 

$

11,144

 

 

See additional information on TDRs in Note 43 to the Consolidated Financial Statements.Statements herein.

Deposits

Deposits totaled $694.2$685.4 million at SeptemberJune 30, 20182019  and  $602.2$779.5 million at December 31, 2017.2018. The $91.9$94.1 million increase resulted from a successful marketing campaign during 2018 as well as increased deposit volume related to ourdecrease was primarily the result of short-term medical-use cannabis customers, withrelated funds that account holders relocated to investment opportunities outside of the largest increase in noninterest bearing deposits.Bank. Management was aware of the short-term nature of certain medical-use cannabis related deposits and offset those funds by maintaining short-term liquidity to meet any deposit outflows.

The deposit breakdown is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

June 30, 2019

 

December 31, 2018

 

 

    

 

    

Percent

    

 

    

Percent

 

    

    

 

    

Percent

    

 

    

Percent

 

    

 

Balance

 

of Total

 

Balance

 

of Total

 

 

 

Balance

 

of Total

 

Balance

 

of Total

 

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

NOW

 

$

136,035

 

19.6

%  

$

63,616

 

10.6

%

 

 

$

124,035

 

18.1

%  

$

106,508

 

13.7

%

 

Money market

 

 

134,754

 

19.4

%  

 

103,649

 

17.2

%

 

 

 

132,476

 

19.3

%  

 

203,351

 

26.1

%

 

Savings

 

 

79,936

 

11.5

%  

 

98,717

 

16.4

%

 

 

 

69,097

 

10.1

%  

 

75,692

 

9.7

%

 

Certificates of deposit

 

 

257,200

 

37.1

%  

 

263,413

 

43.7

%

 

 

 

226,451

 

33.0

%  

 

247,351

 

31.7

%

 

Total interest-bearing deposits

 

 

607,925

 

87.6

%  

 

529,395

 

87.9

%

 

 

 

552,059

 

80.5

%  

 

632,902

 

81.2

%

 

Noninterest-bearing deposits

 

 

86,252

 

12.4

%  

 

72,833

 

12.1

%

 

 

 

133,357

 

19.5

%  

 

146,604

 

18.8

%

 

Total deposits

 

$

694,177

 

100.0

%  

$

602,228

 

100.0

%

 

 

$

685,416

 

100.0

%  

$

779,506

 

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.

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At SeptemberJune 30, 2018,2019, our total credit line with the FHLB was  $245.1$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, 20182019 and December 31, 20172018 was $70.0$45.0 million and $85.0$70.0 million, respectively. 

On September 30, 2016, we entered into a loan agreement with a commercial bank whereby we borrowed $3.5 million out of an available $7.5 million credit line for a term of 8 years. The unsecured note bears interest at a fixed rate of 4.25% for the first 36 months then, at the option of the Company, converts to either (1) floating rate of the Wall Street Journal Prime plus 50 basis points or (2) fixed rate at two hundred seventy five (275) basis points over the five year amortizing FHLB rate for the remaining five years. Repayment terms are monthly interest only payments for the first 36 months, then quarterly principal payments of $175,000 plus interest. The loan is subject to a prepayment penalty of 1% of the principal amount prepaid during the first 36 months. If we elect the 5 year fixed rate of 275 basis points over the FHLB rate (“FHLB Rate Period”), the loan will be subject to a prepayment penalty of 2% during the first and second years of the FHLB Rate Period and 1% of the principal repaid during the third, fourth, and fifth years of the FHLB Rate Period. We may make additional principal payments from internally generated funds of up to $875,000 per year during any fixed rate period without penalty. There is no prepayment penalty during any floating rate period.

The following table sets forth information concerning the interest rates and maturity dates of the advances from the FHLB as of SeptemberJune 30, 2018:2019:

 

 

 

 

 

 

 

 

 

 

Principal

Principal

    

 

    

 

Principal

    

 

    

 

Amount (in thousands)

Amount (in thousands)

 

Rate

 

Maturity

Amount (in thousands)

 

Rate

 

Maturity

$

35,000

 

1.55% to 4.00%

 

2019

10,000

 

1.59%

 

2019

25,000

 

1.75% to 1.92%

 

2020

25,000

 

1.75% to 1.92%

 

2020

10,000

 

2.19%

 

2022

10,000

 

2.19%

 

2022

$

70,000

 

  

 

  

45,000

 

  

 

  

 

Subordinated Debentures

As of both SeptemberJune 30, 20182019 and December 31, 2017,2018, 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‑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 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 SeptemberJune 30, 2018,2019, we were current on all interest due on the 2035 Debentures.

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Capital Resources

Total stockholders’ equity increased $4.8$4.2 million to $95.9$102.7 million at SeptemberJune 30, 20182019 compared to $91.1$98.5 million as of December 31, 2017.2018. The increase was principally the result of 20182019 net income to date, partially offset by dividends paid during the ninesix months ended SeptemberJune 30, 2018.2019.

Series A Preferred Stock

On November 15, 2008, the Company completed a private placement offering consisting of a total of 70 units, at an offering price of $100,000 per unit, for gross proceeds of $7.0 million. Each unit consisted of 6,250 shares of the Company’s Series A 8.0% Non-Cumulative Convertible Preferred Stock. On 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. The Company converted the Series A preferred stock on April 2, 2018.  As of that date, the Series A preferred stock was no longer deemed outstanding, and all rights with respect to such stock have ceased and terminated. 

Capital Adequacy

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of SeptemberJune 30, 20182019 and December 31, 2017,2018, 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 54 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 $245.1$264.4 million at SeptemberJune 30, 2018,2019, of which $70.0$45.0 million was outstanding. We also have $7.5 million in credit availability with another financial institution, of which $3.5 million was outstanding at September 30, 2018.

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Table of Contents

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit (collectively “commitments”), which totaled $109.5$116.8 million at SeptemberJune 30, 2018.2019. Historically, many of the commitments

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expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. We expect to fund these commitments from the sources of liquidity described above.

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, 2018,2019, 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, 2018,2019, 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, in accordance with the Financial Accounting Standards Board guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Operations.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan closes until the time the loan is sold. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 60 days. For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of best efforts and mandatory forward contracts.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

    

Notional

    

Estimated

    

Notional

    

Estimated

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

(dollars in thousands)

Asset - IRLCs

 

$

10,400

 

$

187

 

$

1,144

 

$

22

Asset - Mandatory forward contracts

 

 

8,536

 

 

71

 

 

4,399

 

 

13

Asset - Best effort forward contracts

 

 

10,400

 

 

51

 

 

1,144

 

 

 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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 for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

The principal objective of the Company’s interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risks appropriate given our business strategy, operating environment, capital and liquidity requirements, and performance objectives, and manage the risk consistent with our interest rate risk management policy. Through this management, we seek to reduce the vulnerability of our operations to changes in interest rates. The Board of Directors of the Company is responsible for reviewing our asset/liability policy and interest rate risk position. The Board of Directors reviews the interest rate risk position on a quarterly basis and, in connection with this review, evaluates the Company’s business activities and strategies, the effect of those strategies on the Company’s net interest margin and the effect that changes in interest rates will have on the loan portfolio. While continuous movement of interest rates is certain, the extent and timing of these movements is not always predictable. Any movement in interest rates has an effect on our profitability.  We face the risk that rising interest rates could cause the cost of interest-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, 2018,2019, we had a one-year cumulative negative gap of $14.0$61.1 million.

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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, 2018:2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Rates

    

Amount

    

$ Change

    

% Change

 

    

Amount

    

$ Change

    

% Change

 

 

(dollars in thousands)

 

 

 

 

(dollars in thousands)

 

 

 

+400

bp

$

177,408

 

$

(38,465)

 

(0.18)

%

bp

$

132,344

 

$

(728)

 

(0.55)

%

+300

bp

 

189,719

 

 

(26,154)

 

(0.12)

%

bp

 

133,692

 

 

620

 

0.47

%

+200

bp

 

199,668

 

 

(16,205)

 

(0.08)

%

bp

 

136,263

 

 

3,191

 

2.40

%

+100

bp

 

208,200

 

 

(7,673)

 

(0.04)

%

bp

 

136,817

 

 

3,745

 

2.81

%

0

bp

 

215,873

 

 

  

 

  

 

bp

 

133,072

 

 

  

 

  

 

(100)

bp

 

210,926

 

 

(4,947)

 

(0.02)

%

bp

 

120,430

 

 

(12,642)

 

(9.50)

%

(200)

bp

 

197,307

 

 

(18,566)

 

(0.09)

%

bp

 

98,275

 

 

(34,797)

 

(26.15)

%

 

The preceding income simulation analysis does not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.

Item 4.     Controls and Procedures

The Company’s management,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 (“Interim CFO”), evaluated, 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 Rule 13a‑15Rules 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 Company's CEO and Interim 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

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Table of Contents

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, 20182019 that havehas materially affected, or areis reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

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, 2018.2019.

Item 1A.  Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Annual Report on Form 10‑K of Severn Bancorp as of and for the year ended December 31, 2017.2018. There have been no material changechanges in our risk factors since the filing of our December 31, 20172018 Annual Report on Form 10‑K.

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

None.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures

Not applicable.

Item 5.     Other Information

None.

Item 6.     Exhibits

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 10‑Q as of SeptemberJune 30, 20182019 and for the three and ninesix months ended SeptemberJune 30, 2018,2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.

 

 

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Table of Contents

EXHIBIT INDEX

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 10‑Q as of SeptemberJune 30, 20182019 and for the three and ninesix months ended SeptemberJune 30, 2018,2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Accumulated Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

SEVERN BANCORP, INC.

 

 

November 14, 2018August 9, 2019

/s/ Alan J. Hyatt

 

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

 

(Principal Executive Officer)

 

 

November 14, 2018August 9, 2019

/s/ Paul B. SusieMarc S. Winkler

 

Paul B. Susie,Marc S. Winkler,
Executive Vice President,Interim Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

5152