PART I
As used in this Annual Report, the term “the Company” refers to Bay Bancorp, Inc. and, unless the context clearly requires otherwise, the terms “we,” “us,” and “our,” refer to Bay Bancorp, Inc. and its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements. Statements that include the use of terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” and similar expressions also identify forward-looking statements. The statements in this report with respect to, among other things, our plans and strategies; objectives and intentions and the anticipated results thereof; the impact of the Merger and Slavie Acquisition; the impact of regulations on our business; our potential exposure to various types of market risks, such as interest rate risk and credit risk; anticipated funding of commitments to extend credit and unused lines of credit; potential losses from off-balance sheet arrangements, taking advantage of opportunities emerging as the business environment improves and leads to increased loan demand in the future; the recovery of fair value of available for sale securities; the allowance for loan losses; liquidity sources and the impact of the outcome of pending legal proceedings are forward-looking. These forward-looking statements are based on our current intentions, beliefs, and expectations.
These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of, among other things:
| · | | unexpected changes or further deterioration in the housing market or in general economic conditions in our market area, or a slowing economic recovery; |
| · | | unexpected changes in market interest rates or monetary policy; |
| · | | the impact of new governmental regulations that might require changes in our business model; |
| · | | changes in laws, regulations, policies and guidelines impacting our ability to collect on outstanding loans or otherwise negatively impacting its business; |
| · | | higher than anticipated loan losses or the insufficiency of the allowance for credit losses; |
| · | | changes in consumer confidence, spending and savings habits relative to the services we provide; |
| · | | continued relationships with major customers; |
| · | | competition from other financial institutions in originating loans, attracting deposits, and providing various financial services that may affect our profitability; |
| · | | the ability to continue to grow our business internally and through acquisition and successful integration of bank entities while controlling our costs; and |
| · | | changes in competitive, governmental, regulatory, accounting, technological and other factors that may affect us specifically or the banking industry generally, including as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). |
Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to update or revise the information contained in this report whether as a result of new information, future events or circumstances, or otherwise. Past results of operations are not indicative of future results.
ITEM 1. BUSINESS
GENERAL
Bay Bancorp, Inc., a Maryland corporation organized in 1990, is a savings and loan holding company headquartered in Lutherville, Maryland. Until November 1, 2013, the Company operated under the name Carrollton Bancorp. Effective November 1, 2013, the Company’s name was changed to Bay Bancorp, Inc.
On April 19, 2013, the Company completed its merger with Jefferson Bancorp, Inc. (“Jefferson”) with the Company as the surviving corporation (the “Merger”). The Merger was accounted for as a reverse acquisition, which means that for accounting and financial reporting purposes, Jefferson was deemed to have acquired the Company in the Merger even though the Company was the legal successor in the Merger, and the historical financial statements of Jefferson have become the Company’s historical financial statements. Consequently, the assets and liabilities and the operations that are reflected in the historical consolidated financial statements prior to the Merger are those of Jefferson, and the historical consolidated financial statements after the Merger include the assets and liabilities of Jefferson and the Company, historical operations of Jefferson and operations of the combined Company after April l9, 2013.
Prior to the Merger, the Company had one bank subsidiary, Carrollton Bank, and Jefferson had one bank subsidiary, Bay Bank, FSB (the “Bank”). The Bank commenced operations on July 9, 2010 when it bought certain assets and assumed certain liabilities of Bay National Bank (“Bay National”) from the Federal Deposit Insurance Corporation (the “FDIC”). As part of the Merger, Carrollton Bank merged with and into the Bank, with the Bank as the surviving bank subsidiary of the Company. The Bank is a federal savings bank (“FSB”) that provides a full range of financial services to individuals, businesses and organizations through its branch and loan origination offices and its automated teller machines. Deposits in the Bank are insured by the FDIC. The Bank has five subsidiaries: Bay Financial Services, Inc. (“BFS”); Carrollton Community Development Corporation (“CCDC”); and three limited liability company subsidiaries.
On May 15, 2014, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Financial Services Partners Fund I, LLC (“FSPF”), and seven directors and executive officers of the Company (collectively, the “Investors”). Pursuant to the Purchase Agreement, the Company agreed to sell an aggregate of 1,422,764 shares of the Company’s common stock, par value $1.00 per share, to the Investors at a purchase price of $4.92 per share, which was the closing bid price of a share of common stock on May 14, 2014 as reported on The NASDAQ Capital Market. The closing of this transaction occurred on May 15, 2014, and the Company received aggregate gross proceeds of $7,000,000 from the transaction. The Company contributed these proceeds to the Bank, to bolster its regulatory capital and provide funds for future acquisitions and general working capital purposes.
On May 30, 2014, the Bank acquired certain assets and assumed substantially all deposits and certain other liabilities (the “Slavie Acquisition”) of Slavie Federal Savings Bank (“Slavie”), which was closed on May 30, 2014 by the Office of the Comptroller of the Currency (the “OCC”). The Slavie Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement All Deposits, with the FDIC. The Bank did not acquire any of Slavie’s other real estate owned. Additionally, the Bank did not at closing commit to purchase any owned or leased bank premises of Slavie; however, the Bank was granted an option to elect following closing to purchase any or all of the banking premises owned by Slavie except for Slavie’s former headquarters building in Bel Air, Maryland, or in the case of leased banking premises, to assume the lease.
We are focused on providing superior financial and customer service to small and medium-sized commercial and retail businesses, owners of these businesses and their employees, to business professionals and to individual consumers located in the central Maryland region, through our network of 12 branch locations. We attract deposit customers from the general public and use such funds, together with other borrowed funds, to make loans. Our results of operations are primarily determined by the difference between interest income earned on our interest-earning assets, primarily interest and fee income on loans, and interest paid on our interest-bearing liabilities, including deposits and borrowings.
Our mortgage division is in the business of originating residential mortgage loans and then selling them to investors. The mortgage banking business is structured to provide a source of fee income largely from the process of originating residential mortgage loans for sale in the secondary market. Mortgage banking products include Federal Housing Administration and Federal Veterans Administration loans, conventional and nonconforming first and second mortgages, and construction and permanent financing. Loans originated by the mortgage division are generally sold into the secondary market but may be considered for retention by us as part of our balance sheet strategy.
BFS provides brokerage services and a variety of financial planning and investment options to customers. Through December 31, 2013, these services were provided through INVEST Financial Corp. (“INVEST”) pursuant to a service agreement and BFS recognized commission income as these services were provided. The investment options BFS offered through this arrangement included mutual funds, U.S. government bonds, tax-free municipal bonds, individual retirement accounts, long-term care, and health care insurance services. INVEST is a full-service broker/dealer, registered with the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (the “SEC”), a member of Securities Investor Protection Corporation
(“SIPC”), and licensed with state insurance agencies in all 50 states. BFS referred clients to an INVEST representative for investment counseling prior to purchase of securities. Our service agreement with INVEST terminated on December 31, 2013. The Bank now offers, through strategic partners, investment advisory and wealth management services. Through these affiliations, banking clients can receive a full range of financial services, including investment advice, personal and business insurance products and employee benefit products such as pension and 401(k) plan administration. To the extent permitted by applicable regulations, the strategic partners may share fees and commissions with the Bank. In May 2014, the Bank entered into one such fee arrangement. When sufficient volume is developed in any of these lines of business, the Bank may provide these services if permitted by applicable regulations.
The Bank’s three limited liability company subsidiaries manage and dispose of real estate acquired through foreclosure.
CCDC was created to promote, develop, and improve the housing and economic conditions of people in Maryland. CCDC generates revenue through the origination of loans, but did not originate any loans during 2014 and is in the process of being dissolved.
The Merger has strengthened our market position geographically, enhanced our retail delivery channel, allowed us to provide extraordinary customer service while delivering a fuller range of services and products, and lessened our dependence on net interest income by adding fee-based sources of revenue including a mortgage origination division, electronic banking division and a brokerage services subsidiary.
AVAILABILTY OF INFORMATION
We make available through the Investor Relations area of our website, at www.baybankmd.com, annual reports on Form 10-K, quarterly reports on Form 10-Q, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In general, we intend that these reports be available as soon as practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). The SEC maintains a website (www.sec.gov) where these filings are also available through the SEC’s EDGAR system. There is no charge for access to these filings through either our site or the SEC’s site.
MARKET AREA
We consider our core markets to be the communities within the Baltimore Metropolitan Statistical Area, particularly Baltimore City and the Maryland counties of Baltimore, Anne Arundel, Howard, Carroll and Harford, as well as south along the Baltimore-Washington corridor. Lending activities are broader, including the entire State of Maryland, and, to a limited extent, the surrounding states. All of our revenue is generated within the United States.
COMPETITION
Our principal competitors for deposits are other financial institutions, including other savings institutions, commercial banks, credit unions, and local banks and branches or affiliates of other larger banks located in our primary market area. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from mutual funds, U.S. Government securities, insurance companies and private issuers of debt obligations and suppliers of other investment alternatives for depositors such as securities firms. Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.
Current federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. Recent legislation has broadened the extent to which financial services companies, such as investment banks and insurance companies, may control commercial banks. As a consequence of these developments, competition in our principal market may increase, and a further consolidation of financial institutions in Maryland may occur.
STRATEGY
We operate on the premise that the consolidation activities in the banking industry have created an opportunity for a well-capitalized community bank to satisfy banking needs that are no longer being adequately met in the local market. Large national and
regional banks are catering to larger customers and provide an impersonal experience, and typical community banks, because of their limited capacity, are unable to meet the needs of many small-to-medium-sized businesses. Specifically, as a result of bank mergers in the 1990s, many banks in the Baltimore metropolitan area became local branches of large regional and national banks. Although size gave the larger banks some advantages in competing for business from large corporations, including economies of scale and higher
lending limits, we believe that these larger, national banks remain focused on a mass market approach which de-emphasizes personal contact and service. We also believe that the centralization of decision-making power at these large institutions has resulted in a lack of customer service. At many of these institutions, determinations are made at the out-of-state “home office" by individuals who lack personal contact with customers as well as an understanding of the customers' needs and scope of the relationship with the institution. We believe that this trend is ongoing, and continues to be particularly frustrating to owners of small and medium-sized businesses, business professionals and individual consumers who traditionally have been accustomed to dealing directly with a bank executive who had an understanding of their banking needs with the ability to deliver a prompt response.
We attempt to differentiate ourselves from the competition through personalized service, flexibility in meeting the needs of customers, prompt decision making and the availability of senior management to meet with customers and prospective customers.
PRODUCTS AND SERVICES
General
Our primary market focus is on making loans to and gathering deposits from small and medium-sized businesses and their owners, professionals and executives, real estate investors and individual consumers in our primary market area. We lend to customers throughout Maryland, with our core market being the Baltimore MSA and along the Baltimore-Washington corridor. To a limited extent, we lend to customers in neighboring states. Our lending activities consist generally of short to medium term commercial lending, commercial mortgage lending for both owner occupied and investor properties, residential mortgage lending and consumer lending, both secured and unsecured. A substantial portion of our loan portfolio consists of loans to businesses secured by real estate and/or other business assets.
Lending Activities
Credit Policies and Administration
We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. All loan approvals require two signatures; no individual commercial loan authority is given to relationship managers. Loans to $1,000,000 must be signed by the relationship manager and approved by Credit Administration. Loans between $1,000,001 and $2,500,000 must be approved by the Chief Credit Officer and Chief Lending Officer. Loans between $2,500,001 and $5,000,000 must be approved by the Credit and Risk Management Committee. Loans between $5,000,001 and $6,500,000 must be approved by the Directors’ Loan Committee with the prior approval of the Credit and Risk Management Committee. Loans greater than $6,500,000 require full Board approval. Under the leadership of our executive management team, we believe that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial conditions of our borrowers and the concentration of loans in our portfolio.
In addition to the normal repayment risks, all loans in the portfolio are subject to the state of the economy and the related effects on the borrower and/or the real estate market. Generally, longer-term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.
The Bank also retains an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review. We use the results of the firm’s report primarily to validate the risk ratings applied to loans in the portfolio and identify any systemic weaknesses in underwriting, documentation or management of the portfolio. Results of the annual review are presented to executive management, the audit committee of the board and the full board of directors and are available to and used by regulatory examiners when they review the Bank’s asset quality.
The Bank maintains the normal checks and balances on the loan portfolio not only through the underwriting process but through the utilization of an internal credit administration group that both assists in the underwriting and serves as an additional reviewer of underwriting. The separately managed loan administration group also has oversight for documentation, compliance and timeliness of collection activities. Our outsourced internal audit firm also reviews documentation, compliance and file management.
Commercial Lending
Our commercial lending consists of lines of credit, revolving credit facilities, accounts receivable and inventory financing, term loans, equipment loans, small business administration (SBA) loans, stand-by letters of credit and unsecured loans. We originate commercial loans for any business purpose, including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, contract administration and acquisition activities. These loans typically have maturities of seven years or less. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable and inventory, equipment, indemnity deeds of trust and other collateral such as marketable securities, cash value of life insurance, and time deposits at the Bank. Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends on the success of the business. To help manage this risk, we establish parameters/covenants at the inception of the loan to provide early warning signals before payment default. We normally seek to obtain appropriate collateral and personal guarantees from the borrower’s principal owners. We are able, given our business model, to proactively monitor the financial condition of the business.
Commercial Real Estate Lending
We finance commercial real estate for our clients, for both owner-occupied properties and investor properties (including residential properties). We generally will finance owner-occupied and investor commercial real estate at a maximum loan-to-value ratio of 80%. Our underwriting policies and processes focus on the underlying credit of the owner-occupied real estate and on the rental income stream (including rent terms and strength of tenants) for investor commercial real estate as well as an assessment of the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to vacancy rates/absorption rates for surrounding properties, sudden or gradual drops in property values as well as changes in the economic climate. We attempt to mitigate these risks by carefully underwriting loans of this type as well as by following appropriate loan-to-value standards. We are cash flow lenders and never rely solely on property valuations in reaching a lending decision. Personal guarantees are often required for commercial real estate loans as they are for other commercial loans. Most of our real estate loans carry fixed interest rates and amortize over 20 – 25 years with five- to ten-year maturities. Properties securing our commercial real estate loans primarily include office buildings, office condominiums, distribution facilities, retail properties, manufacturing plants and apartment projects. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.
Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Commercial real estate loans, however, entail significant additional risks as compared with residential mortgage lending, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.
Construction Lending
Construction lending can cover funding for land acquisition, land development and/or construction of residential or commercial structures. Our construction loans generally bear a variable rate of interest and have terms of one to two years. Funds are advanced on a percentage-of-completion basis. These loans are generally repaid at the end of the development or construction phase, although loans for commercial construction will often convert into a permanent commercial real estate loans at the end of the term of the loan. Loan to value parameters range from 65% of the value of raw land to 75% for developed land and 80% for commercial or multifamily construction and residential construction. These loan-to-value ratios represent the upper limit of advance rates to remain in compliance with Bank policy. Typically, loan-to-value ratios should be somewhat lower than these upper limits, requiring the borrower to provide significant equity at the inception of the loan. Our underwriting looks not only at the value of the property but the expected cash flows to be generated by sale of the parcels or leasing of the completed construction. The borrower must have solid experience in this type of construction and personal guarantees are required.
Construction lending entails significant risks compared with residential mortgage lending. These risks involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. The value of the project is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. If the estimate of construction or development cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. To mitigate these risks, in addition to the underwriting considerations noted above, we maintain an in-house construction monitoring unit that has oversight for the projects and we require both site visits and frequent reporting before funds are advanced.
Residential Real Estate Lending
We originate a variety of consumer-oriented residential real estate loans. Residential mortgage loans consist primarily of first mortgage loans to individuals, most of which have a loan-to-value not exceeding 89.9%. The remainder of this portion of our portfolio consists of home equity lines of credit and fixed rate home equity loans. Our residential real estate loans are generally for owner-occupied single family homes. These loans are generally for a primary residence although we will occasionally originate loans for a second home where the borrower has strong credit. Our residential real estate loans are generally either fixed rate loans with thirty-year terms for conventional mortgages , ten-year terms for jumbo mortgages or five, seven, and ten-year adjustable rate mortgages with a thirty-year amortization.
Our home equity loans and home equity lines of credit are primarily secured by a second mortgage on owner-occupied one-to four-family residences. Our home equity loans are originated at fixed or adjustable interest rates and with terms of between five and twenty years and are fully amortizing. Our home equity lines allow for the borrower to draw against the line for ten years, after which the outstanding balance is amortized over twenty years. Home equity lines of credit carry a variable rate of interest and are interest only during the draw period. Home equity loans and lines of credit are generally underwritten with a maximum combined loan-to-value ratio of 80% although in some instances the combined loan-to-value ratio may reach 89.9%. We require appraisals or valuations on all real estate loans – both commercial and residential. At the time we close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral. Home equity loans and lines of credit greater than $50,000 also require title insurance, and borrowers must obtain hazard insurance, and flood insurance if applicable.
Home equity loans and lines of credit generally have greater risk than one- to four-family residential mortgage loans. In these cases, we face the risk that collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. In particular, because home equity loans are secured by second mortgages, decreases in real estate values could adversely affect the value of the property serving as collateral for these loans. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans.
Our home equity loan portfolio gives us a diverse client base. Most of these loans are in our primary market area, and the diversity of the individual loans in the portfolio reduces our potential risk.
Consumer Lending
We offer various types of secured and unsecured consumer loans. Generally, our consumer loans are made for personal, family or household purposes as a convenience to our customer base. As a general guideline, a consumer’s total debt service should not exceed 43% of their gross income. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan.
Consumer loans may present greater credit risk than residential real estate loans because many consumer loans are unsecured or are secured by rapidly depreciating assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections also depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the loan may not be repaid. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.
Loan Originations, Purchases, Sales, Participations and Servicing
All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines. We originate both fixed and variable rate loans. Our loan origination activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. We occasionally sell participations in commercial loans to correspondent banks if the amount of the loan exceeds our internal limits. More rarely, we purchase loan participations from correspondent banks in the local market as well. Those loans are underwritten in-house with the same standards as loans directly originated. Our residential real estate loans originated for resale are discussed under “Mortgage Banking Activities” below.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy of the value of the collateral that will secure the loan, if applicable. To assess a business borrower’s ability to repay, we review and analyze, among other factors: current income, credit history including the Bank’s prior experience with the borrower, cash flow, any secondary sources of repayment, other debt obligations in regards to the equity/net worth of the borrower and collateral available to the Bank to secure the loan.
We require appraisals or valuations of all real property securing one- to four-family residential and commercial real estate loans and home equity loans and lines of credit. All appraisers are state-licensed or state-certified appraisers, and a list of approved appraisers is maintained and updated on an annual basis.
Deposit Activities
Deposits are the major source of our funding. We offer a broad array of consumer and business deposit products that include demand, money market, and savings accounts, as well as time deposits. We offer through key technology partnerships a competitive array of commercial cash management products, which allow us to attract demand deposits. We believe that we pay competitive rates on our interest-bearing deposits. As a relationship-oriented organization, we generally seek to obtain deposit relationships with our loan clients.
We offer Certificate of Deposit Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposits to our customers. These programs allow customers to deposit more than would normally be covered by FDIC insurance. CDARS and ICS are nationwide programs that allow participating banks to “swap” customer deposits so that no customer has greater than the insurable maximum in one bank, while allowing the customer the convenience of maintaining a relationship with only one bank.
Mortgage Banking Activities
In addition to originating residential mortgages to hold in our portfolio, we also originate residential mortgage loans for resale in the secondary mortgage market through our mortgage division. These loans are also underwritten pursuant to standard underwriting guidelines. While our intent is to sell all loans originated as loans held for sale, we occasionally are unable to sell a loan due to some underwriting defect. These loans are transferred to the loan portfolio at the lower of their cost or fair value as of the date of transfer. Loans held for sale are sold with servicing rights released; gains or losses are recorded at the date of sale
Brokerage Activities
Through a service agreement with INVEST, BFS provided full service brokerage services for stocks, bonds, mutual funds and annuities. For 2013, commission income totaled $471,810 and net income from brokerage activities was $98,258. Our service agreement with INVEST terminated on December 31, 2013. In mid-2014 the Bank entered into a strategic arrangement with a local firm to provide investment advisory and brokerage services to Bank clients referred by the Bank. The Bank received no fee under the arrangement for 2014 and does not expect any for 2015.
Other Banking Products
We offer our customers wire transfer services, ACH services, ATM and check cards, automated teller machines at most of our full-service branch locations, safe deposit boxes at some full-service locations and credit cards through a third party processor. In addition to traditional deposit services, we offer telephone banking services, mobile banking, internet banking services and internet bill paying services to our customers. We also offer remote deposit capture to our commercial customers and mobile capture to our business and consumer customers.
EMPLOYEES
As of December 31, 2014, the Bank had 157 full-time and 9 part-time employees. None of our employees are represented by a union or covered under a collective bargaining agreement. Management considers its employee relations to be excellent.
SUPERVISION AND REGULATION
General
The Company is a savings and loan holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Home Owners Loan Act of 1933, as amended (the “HOL Act”), and, as such, is subject to the supervision, examination and reporting requirements of the HOL Act and the regulations of the Federal Reserve. As a publicly-traded company whose common stock is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on the NASDAQ Capital Market, the Company is also subject to regulation and supervision by the SEC and The NASDAQ Stock Market, LLC (“NASDAQ”).
The Bank is supervised and examined by the Office of the Comptroller of the Currency (“OCC”) and is also subject to examination by the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors, and not for the protection of stockholders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they
satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta (the “FHLB”), which is one of the 12 regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Federal Reserve, which governs reserves to be maintained against deposits and other matters. The OCC examines the Bank and prepares reports for the consideration of its board of directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents. In addition to the foregoing, there are a myriad of other federal and state laws and regulations that affect, impact or govern the business of banking, including consumer lending, deposit-taking, and trust operations.
All non-bank subsidiaries of the Company are subject to examination by the Federal Reserve, and, as affiliates of the Bank, are subject to examination by the OCC and the FDIC.
Any change in these laws by Congress or in these regulations by the Federal Reserve, the OCC or the FDIC could have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements that are applicable to the Bank and Company are described below. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank, and is qualified in its entirety by reference to the actual statutes and regulations.
Recent Regulatory Reforms
The Dodd-Frank Act, which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions such as banks and bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect all financial institutions, including the Company and the Bank. The Dodd-Frank Act contains a wide variety of provisions (many of which are not yet effective) affecting the regulation of savings and loan holding companies and depository institutions, including restrictions related to mortgage originations, risk retention requirements as to securitized loans, and the establishment of a financial consumer protection agency, known as the Consumer Financial Protection Bureau (the “CFPB”), that is empowered to promulgate and enforce new consumer protection regulations and revise and enforce existing regulations in many areas of consumer compliance.
Moreover, not only are the states’ attorneys general entitled to enforce consumer protection rules issued by the CFPB, but states are permitted to adopt their own consumer protection laws that are more strict than those created under the Dodd-Frank Act. Recently, U.S. financial regulatory agencies have increasingly used general consumer protection statutes to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance as to the parameters for compliance with the federal “unfair or deceptive acts or practices” (“UDAP”) laws. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices”, which has been delegated to the CFPB for supervision.
The legislation also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders the opportunity to approve or disapprove, by non-binding advisory votes, executive compensation and, in certain circumstances, so-called “golden parachute” payments. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
During 2013, significant media attention was given to the Dodd-Frank Act’s amendment of the Bank Holding Company Act of 1956 (the “BHC Act”) to require the U.S. financial regulatory agencies to adopt rules that prohibit banking institutions and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. The U.S. financial regulatory agencies adopted final rules implementing the Volcker Rule on December 10, 2013. The Volcker Rule became effective on July 21, 2012 and the final rules initially had an effective date of April 1, 2014, but the U.S. financial regulatory agencies issued an order extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2015. On December 18, 2014, the Federal Reserve granted an additional one year extension to July 21, 2016, for certain “legacy covered fund” investments and relationships entered into by banking entities prior to December 31, 2013. The Federal Reserve also indicated that it planned to grant an additional one year extension to July 21, 2017, at a later date. We completed our evaluation of the impact of the Volcker Rule and the final rules adopted thereunder and determined that they will not have a material effect on our operations, as we believe that we do not engage in the businesses prohibited by the Volcker Rule. We may incur costs
related to the adoption of additional policies and systems to ensure compliance with the Volcker Rule, but we do not expect that such costs would be material.
Many of the Dodd-Frank Act’s provisions are subject to final rulemaking by the U.S. financial regulatory agencies, and the Dodd-Frank Act’s impact on our business will depend to a large extent on how and when such rules are adopted and implemented by the primary U.S. financial regulatory agencies. We continue to analyze the impact of rules adopted under the Dodd-Frank Act on our business, but the full impact will not be known until the rules and related regulatory initiatives are finalized and their combined impact can be understood. We do anticipate that the Dodd-Frank Act will increase our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future. In particular, the Dodd-Frank Act will require us to invest significant management attention and resources so that we can evaluate the impact of and ensure compliance with this law and its rules.
Federal Banking Regulation
Business Activities
A federal savings bank derives its lending and investment powers from the HOL Act and the regulations of the OCC. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements
Until December 31, 2014, the federal regulatory authorities’ risk-based capital guidelines were based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, most banking organizations, including FSBs, were required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories.
A depository institution’s capital, in turn, was classified in one of two tiers, depending on type:
| · | | Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries (and, under existing standards, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level), less goodwill, most intangible assets and certain other assets. |
| · | | Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations. |
The risk-based capital standards applicable to the Bank required it to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4%, (3% for savings banks receiving the highest rating on the CAMELS rating system) and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OCC, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a federal savings bank that retains credit risk in connection with an asset sale was required to maintain additional regulatory capital because of the purchaser’s recourse against the savings bank. In assessing an institution’s capital adequacy, the OCC would take into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary. In addition, the Bank was required to maintain a tangible capital ratio of at least 1.5%.
On July 2, 2013, the Federal Reserve approved final rules (the “Basel III Capital Rules”) that substantially amend the regulatory risk-based capital rules applicable to the Company. The FDIC and the OCC have subsequently approved these rules, which will apply to the Bank. The Basel III Capital Rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the text of the Basel III Capital Rules released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The Basel III Capital Rules include new risk-based capital and leverage ratios that will apply to both the Company and the Bank, which will be phased in from 2015 to 2019, and which refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company under the Basel III Capital Rules will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (a) a common equity Tier 1 capital ratio of 7.0%, (b) a Tier 1 capital ratio of 8.5%, and (c) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses 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.
The Basel III Capital Rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. Under the final rules, the effects of certain accumulated other comprehensive items are not excluded; however, banking organizations like the Company and the Bank that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these items. The Company and the Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Bank’s available-for-sale securities portfolio.
The Basel III Capital Rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized”: (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The Basel III Capital Rules set forth certain changes for the calculation of risk-weighted assets, which we are required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. On September 3, 2014, the Federal Reserve Board finalized the rule implementing a LCR requirement in a form largely identical to the proposed rule. Neither the Company nor the Bank are subject to the LCR requirement.
Additional information about our capital ratios and requirements is contained in Item 7 of Part II of this annual report under the heading “Capital Resources”.
At December 31, 2014, the Bank’s capital exceeded all applicable requirements.
Loans-to-One Borrower
Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.
Qualified Thrift Lender Test
As a federal savings bank, the Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets”
generally means total assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.
The Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
A federal savings bank that fails the QTL must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test also subject to agency enforcement action for a violation of law.
The Bank was in compliance with the requirements of the QTL test prior to the Merger. Carrollton Bank was not previously subject to the QTL test because it was not chartered as a federal savings bank. Prior to the Merger, management determined that the post-Merger Bank would not pass the QTL test immediately after the Merger. As part of the merger application filed with the OCC, the Bank requested, and the OCC granted, a two-year waiver from the QTL test. The Bank must satisfy the test beginning no later than April 30, 2015.
Capital Distributions
OCC regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application for approval of a capital distribution if:
| · | | the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years; |
| · | | the savings bank would not be at least adequately capitalized following the distribution; |
| · | | the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or |
| · | | the savings bank is not eligible for expedited treatment of its filings. |
Even if an application is not otherwise required, every federal savings bank that is a subsidiary of a holding company must still file a notice with the OCC at least 30 days before the board of directors declares a dividend or approves a capital distribution.
The OCC may disapprove an application or object to a notice of proposed distribution if:
| · | | the savings bank would be undercapitalized following the distribution; |
| · | | the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation or agreement. |
In addition, the Federal Deposit Insurance Act of 1991 (the “FDI Act”) provides that an insured depository institution shall not make any capital distribution if the institution would be undercapitalized after making such distribution.
Liquidity
A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. Historically, the regulation and monitoring of liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III liquidity framework requires banks and their holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. In October 2013, the federal banking agencies proposed rules implementing the LCR for advanced approaches banking organizations and a modified version of the LCR for savings and loan holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to the Company or the Bank. The federal banking agencies have not yet proposed rules to implement the NSFR.
Community Reinvestment Act and Fair Lending Laws
All federal savings banks have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OCC to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the OCC is required to assess the savings bank’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on
the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. As of December 31, 2014, the Bank’s CRA rating was “Satisfactory.” All FDIC-insured institutions are required to make available to the public their most recent CRA performance evaluation.
Transactions with Related Parties
A federal savings bank’s authority to engage in transactions with its affiliates is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Federal Reserve. An affiliate is generally a company that controls or is under common control with an insured depository institution such as the Bank. The Company is an affiliate of the Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, OCC regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are at least as favorable to the institution as comparable transactions with non-affiliates. The OCC requires savings banks to maintain detailed records of all transactions with affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders:
| (i) | | be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and |
| (ii) | | not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. |
In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.
Enforcement
The OCC has primary enforcement responsibility over federal savings banks and has the authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution, and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.
Standards for Safety and Soundness
Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations
The FDI Act requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDI Act includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A
depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio. Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames.
“Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
Under the Basel I framework, a federal savings bank would be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”, (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%, (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%, and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
At December 31, 2014, the Bank met the criteria for being considered “well-capitalized.”
The Basel III Capital Rules revised the former prompt corrective action requirements effective January 1, 2015 by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the former 6%); and (iii) eliminating the former provision that provided that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules did not change the total risk-based capital requirement for any prompt corrective action category.
Insurance of Deposit Accounts
The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.
Effective April 1, 2011, the FDIC implemented a requirement of the Dodd-Frank Act to revise its assessment system to base it on each institution’s total assets less tangible capital instead of deposits. The FDIC also revised its assessment schedule so that it ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
Prohibitions Against Tying Arrangements
Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System
The Bank is a member of the FHLB, which is one of 12 regional banks in the Federal Home Loan Bank System. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. The Bank is required to acquire and hold shares of capital stock of the FHLB as a condition of membership.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
| · | | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
| · | | Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| · | | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
| · | | Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; |
| · | | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; |
| · | | Truth in Savings Act; and |
| · | | Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of the Bank also are subject to the: |
| · | | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| · | | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
| · | | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; |
| · | | The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the "USA Patriot Act", which requires savings banks to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and |
| · | | The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. |
Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions in excess of $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions in excess of $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose. The USA Patriot Act enacted prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for money laundering and terrorist financing activities. The USA Patriot Act requires banks and other depository institutions, brokers, dealers and certain other businesses involved in the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified by the act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The USA Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
Supervision and Regulation of Mortgage Banking Operations
Our mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), the Veterans' Administration (“VA”), and Fannie Mae with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as us are required annually to submit audited financial statements to Fannie Mae, FHA and VA. Each of these regulatory entities has its own financial requirements. Our affairs are also subject to examination by the Federal Reserve, Fannie Mae, FHA and VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate Settlement Procedures Act and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Our mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private mortgage investors.
In January 2013, the CFPB issued eight final regulations governing mainly consumer mortgage lending. These regulations became effective in January 2014.
One of these rules, effective on January 10, 2014, requires mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. This rule also defines “qualified mortgages.” In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years, where the lender determines that the borrower has the ability to repay, and where the borrower’s points and fees do not exceed 3% of the total loan amount. Qualified mortgages that that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability
to repay rules. Qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules.
The CFPB regulations also: (i) require that “higher-priced” mortgages must have escrow accounts for taxes and insurance and similar recurring expenses; (ii) expand the scope of the high-rate, high-cost mortgage provisions by, among other provisions, lowering the rates and fees that lead to coverage and including home equity lines of credit; (iii) revise rules for mortgage loan originator compensation; (iv) add prohibitions against mandatory arbitration provisions and financing single premium credit insurances; and (v) impose a broader requirement for providing borrowers with copies of all appraisals on first-lien dwelling secured loans.
Effective January 10, 2014, the CFPB’s final Truth-in-Lending Act rules relating to mortgage servicing impose new obligations to credit payments and provide payoff statements within certain time periods and provide new notices prior to interest rate and payment adjustments. Effective on that same date, the CFPB’s final Real Estate Settlement Procedures Act rules add new obligations on the servicer when a mortgage loan is in default.
On November 20, 2013, the CFPB issued a final rule on integrated mortgage disclosures under the Truth-in-Lending Act and the Real Estate Settlement Procedures Act, for which compliance is required by August 1, 2015. We are evaluating these integrated mortgage disclosure rules for compliance by that deadline.
Holding Company Regulation
General
The Company is a non-diversified savings and loan holding company within the meaning of the HOL Act. As such, the Company is registered with the Federal Reserve and is subject to Federal Reserve regulations, examinations and reporting requirements. In addition, the Federal Reserve has enforcement authority over the Company and its non-insured subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Permissible Activities
Under present law, the business activities of the Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the BHC Act or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c) (8) of the BHC Act, subject to the prior approval of the Federal Reserve, and certain additional activities authorized by Federal Reserve regulations.
Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
(i)the approval of interstate supervisory acquisitions by savings and loan holding companies; and
(ii)the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital
Prior to the enactment of the Basel III Capital Rules, savings and loan holding companies were not subject to specific regulatory capital requirements. The Basel III Capital Rules radically changed the capital scheme and will generally apply to the Company to the same extent they apply to other depository institution holding companies. See the discussion of the Basel III Capital Rules above under the heading, “Federal Banking Regulation - Capital Requirements”.
Dividends
The Federal Reserve has issued policy guidance regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs asset quality and overall financial condition. Federal Reserve guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
Source of Strength
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established a broad range of corporate governance and accounting measures intended to increase corporate responsibility and protect investors by improving the accuracy and reliability of disclosures under federal securities laws. We are subject to Sarbanes-Oxley because we are required to file periodic reports with the SEC under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley, its implementing regulations and related NASDAQ Stock Market rules have established membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional financial statement certification responsibilities for our chief executive officer and chief financial officer, expanded the disclosure requirements for corporate insiders, and required management to evaluate our disclosure controls and procedures and our internal control over financial reporting.
ITEM 1A. RISK FACTORS
We take on a certain amount of risk in every business decision or activity. The challenge of risk management is not to eliminate risk, but to identify and measure our risks and then to effectively manage those risks in order to optimize stockholder value. As a banking institution, our risks fall into five broad categories of risk: credit risk, market risk, liquidity risk, operational risk, and reputational risk. The following discussion highlights the most significant risk factors of which we are aware that could affect us. Additional risks and uncertainties that we either are not aware of or do not believe to be material could also adversely affect us. If any of the following risk factors were to occur, our business, financial condition, or results of operations could be materially and adversely affected. Before making an investment decision, you should carefully consider the potential risks described below together with all of the other information included or incorporated by reference in this report.
Risks Relating to the Company and its Affiliates
We face intense competition in our target markets.
The financial services industry, including commercial banking, mortgage banking, consumer lending and home equity lending, is highly competitive, and we will continue to encounter strong competition for deposits, loans and other financial services in our target markets in each of our lines of business. Our principal competitors in our target markets are other savings banks, commercial banks and credit unions. However, additional competition is and will continue to be provided by mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions and mortgage companies with respect to some of our products and services. Many of our non-bank competitors are not subject to the same degree of regulation as us and thus have advantages over us in providing certain services. Many of our bank and credit union competitors are significantly larger than us and have greater access to capital and other resources, higher lending limits and larger branch networks. These competitive factors may have a material adverse effect on the profitability of our lending and deposit operations.
We may be adversely affected by conditions in the local market where we operate and by the national economy.
Our business activities are concentrated in the greater Baltimore metropolitan area of Maryland. As a result, our financial condition and results of operations are sensitive to changes in local economic and business conditions. In addition, a significant
decline in general economic conditions nationally caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, declines in the housing market, a tightening credit environment or other factors could impact these local economic conditions and, in turn, have an adverse effect on our financial condition and results of operations.
Although economic conditions have improved since the economic recession ended in June 2009, certain sectors, such as real estate and manufacturing, remain weak and unemployment remains higher than pre-recession levels. Future declines in real estate values, home sales volumes, and financial stress on borrowers as a result of an uncertain economic environment could have an adverse effect on our customers, which could adversely affect our financial condition and results of operations. In addition, local governments and many businesses are still experiencing difficulty due to lower consumer spending. Any deterioration in local economic conditions could drive losses beyond that which is provided for in our allowance for loan losses. We may also face the following risks in connection with these events:
| · | | Economic conditions that negatively affect housing prices and the job market have resulted, and could again result, in deterioration in credit quality of our loan portfolios, and such deterioration in credit quality has had, and could continue to have, a negative impact on our business; |
| · | | Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities; and/or |
| · | | The processes we use to estimate the allowance for loan losses and reserves may no longer be reliable because they rely on complex judgments that may no longer be capable of accurate estimation. |
Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio is made more complex by these deteriorating market and economic conditions. A prolonged national economic recession or deterioration of conditions in our local markets could drive losses beyond that which is provided for in our allowance for credit losses and result in the following consequences:
| · | | Increases in loan delinquencies; |
| · | | Increases in nonperforming assets and foreclosures; |
| · | | Decreases in demand for our products and services, which could adversely affect our liquidity position; and/or |
| · | | Decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power. |
As the above conditions or similar ones occur, they could have an adverse effect on our borrowers or their customers, which could adversely affect our business, financial condition, results of operations and cash flows.
The activities and financial condition of other financial institutions with which we do business could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, including counterparties in the financial industry, such as commercial banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions will expose us to credit risk in the event of default of a counterparty or client. In addition, this credit risk may be exacerbated when the collateral we hold cannot be realized upon liquidation or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
We could experience significant difficulties and complications in connection with our growth and acquisition strategy.
We grew significantly in 2013 and 2014 through acquisitions, and we intend to continue to grow both organically and by acquiring financial institutions and branches. However, the market for acquisitions is highly competitive. We may not be as successful in identifying financial institutions and branch acquisition candidates, integrating acquired institutions or preventing deposit erosion at acquired institutions or branches as we currently anticipate. Even if we are successful with this strategy, we may not be able to manage this growth adequately and profitably due to unforeseen risks including:
| · | | Potential exposure to unknown or contingent liabilities of acquired banks; |
| · | | Potential exposure to asset quality issues of acquired banks; |
| · | | Potential disruption to our existing business; |
| · | | Potential diversion of the time and attention of our management; and |
| · | | Potential loss of key employees and customers of the banks and other businesses that we acquire. |
We may also encounter unforeseen expenses, as well as difficulties and complications in integrating expanded operations and new employees without disruption to our overall operations. Following each acquisition, we must expend substantial resources to integrate the entities. To manage future growth effectively, we will have to maintain and enhance financial and accounting systems and controls, as well as integrate new personnel and manage expanded operations. There can be no assurance that we will be able to effectively manage our expanding operations. If we are unable to manage growth effectively, our business, financial condition, and results of operations could be materially and adversely affected.
Our allowance for loan losses may not be sufficient to cover actual loan losses.
To absorb probable, incurred loan losses that we may realize, we recognize an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience, and delinquency trends. However, we cannot estimate loan losses with certainty, and we cannot assure you that charge-offs in future periods will not exceed the allowance for loan losses. If charge-offs exceed our allowance, our earnings would decrease. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination.
Because our loan portfolio includes a substantial amount of commercial real estate loans, our earnings will be particularly sensitive to the financial and credit risks associated with these types of loans.
The financial and credit risk associated with commercial real estate loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, which is generally larger than consumer-type loans, and the effects of general economic conditions. Any significant failure of our customers to either pay on time or comply with the conditions of their loans would adversely affect our results of operations.
Our commercial real estate loan portfolio represented approximately 40% of the total loan portfolio as of December 31, 2014. Underwriting and portfolio management activities cannot eliminate all risks related to these loans. Commercial real estate loans will typically be larger than consumer-type loans and may pose higher risks than other types of loans. This portfolio is bifurcated into “investor” and “owner-occupied” classes, with investor loans representing approximately 64% of the commercial real estate loan portfolio and 26% of the total loan portfolio. The primary source of repayment for investor commercial real estate loans is through the income stream generated by the property or successful development and sale of their properties. We may incur losses on investor commercial real estate loans due to declines in occupancy rates, rental rates and capitalization rates, which may decrease property values and may potentially decrease the likelihood that a borrower may find permanent financing alternatives.
At December 31, 2014, owner-occupied commercial real estate loans represented approximately 36% of the commercial real estate loan portfolio and 14% of the total loan portfolio. The primary source of repayment for owner-occupied real estate loans is the cash flow produced by the related commercial enterprise, and the value of the real estate is a secondary source of repayment of the loan. If we are required to liquidate the collateral securing a loan to satisfy the debt, our earnings and capital could be adversely affected.
The Bank’s lending activities subject the Bank to the risk of environmental liabilities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
We may not be able to access funding sufficient to support our asset growth.
Our business plan and marketing strategy is based on access to funding from local customer deposits, such as checking and savings accounts and certificates of deposits. Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, FDIC insurance costs, returns available to customers on alternative investments and general economic conditions. If local customer deposits are not sufficient to fund our asset growth, we will look to outside sources such as advances from the FHLB. Since the FHLB provides secured funding, our ability to access advances from the FHLB will be dependent upon whether and to the extent we can provide collateral. We may also look to brokered deposits or branch acquisitions as a source of liquidity. An inability to obtain alternative funding to supplement our local core deposits or FHLB advances, or a substantial,
unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business, financial condition and results of operations.
Fluctuations in interest rates could reduce our profitability as we expect to realize income primarily from the difference between interest earned on loans and investments and interest paid on deposits and borrowings.
Our earnings are significantly dependent on net interest income, as we realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We will experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, negatively affecting our earnings. We are unable to predict fluctuations of market interest rates, which are affected by many factors, including inflation, recession, rise in unemployment, tightening money supply, and disorder and instability in domestic and foreign financial markets. Although our asset-liability management strategy is intended to mitigate risk from changes in market interest rates, we may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.
Our investment securities portfolio is subject to credit risk, market risk, and liquidity risk.
The investment securities portfolio has risk factors beyond our control that may significantly influence its fair value. These risk factors include, but are not limited to, rating agency downgrades, issuer defaults, lack of market pricing, and instability in the credit markets. Any changes in these risk factors could negatively affect our accumulated other comprehensive income and stockholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades, defaults or prepayments, including the liquidation of the underlying collateral in certain securities, could result in future classifications as other-than-temporarily impaired. This could have a material impact on our future earnings, although the impact on stockholders’ equity will be offset by any amount already included in other comprehensive income for securities that were temporarily impaired.
We are subject to operational risk.
Like all businesses, we are subject to operational risk, which represents the risk of loss resulting from inadequate or failed internal processes in our systems, human error, and external events. Operational risk also encompasses technology, compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, rules, regulations, prescribed practices or ethical standards, as well as the risk of our noncompliance with contractual and other obligations. We are also exposed to operational risk through our outsourcing arrangements, and the effect that any changes in circumstances or capabilities of these outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business. Although we seek to mitigate operational risks through a system of internal controls which we regularly review and update, no system of controls, however well designed and maintained, is infallible. Control weaknesses or failures or other operational risks could result in charges, increased operational costs, harm to our reputation or foregone business opportunities.
Failure to maintain effective internal control over financial reporting could impair our ability to prevent fraud or report accurately and timely financial results, resulting in loss of investor confidence and adversely affecting our business and stock price.
We are required by the Sarbanes-Oxley Act to establish and maintain disclosure controls and procedures and internal control over financial reporting. These control systems are intended to provide reasonable assurance that material information relating to us is made known to management and reported as required by the Exchange Act, to provide reasonable assurance regarding the reliability and preparation of our financial statements, and to provide reasonable assurance that fraud and other unauthorized uses of our assets are detected and prevented. Any failure to maintain an effective internal control environment could impact our ability to report financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact our business and stock price.
We are dependent on key personnel, including our executive officers and directors, and the loss of such persons may adversely affect our operations and financial performance.
We are dependent on the continued services of our executive officers, whose skills and years of industry experience are critical to the successful implementation of our business strategy. Should the services of these key executives become unavailable, there can be no assurance that a suitable successor could be found who would be willing to be employed upon the terms and conditions that we would offer. A failure to replace any of these individuals promptly could have an adverse effect on our results of operations and financial performance. Additionally, the community involvement, diverse backgrounds, and extensive local business relationships of our directors is important to our success. If the composition of our board of directors were to change significantly, our banking business could suffer.
We are, and will continue to be, subject to extensive regulation in the conduct of our business operations, which could adversely affect our financial results.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not stockholders. These regulations affect lending practices, capital structure, investment practices, dividend policy and growth, among other things. For example, federal and state consumer protection laws and regulations will limit the manner in which we may offer and extend credit. From time to time, the United States Congress and state legislatures consider changing these laws and may enact new laws or amend existing laws to further regulate the financial services industry. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the laws governing bankruptcy generally favor debtors, making it more expensive or more difficult to collect from customers who have declared bankruptcy.
The full impact of the Dodd-Frank Act is unknown because significant rule making efforts are still required to fully implement all of its requirements, but it will likely materially increase our regulatory expenses.
The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States and affects the lending, investment, trading and operating activities of all financial institutions. Significantly, the Dodd-Frank Act includes the following provisions that affect the Corporation and the Bank:
| · | | It established the CFPB, which has rulemaking authority over many of the statutes governing products and services offered to Bank customers. The creation of the CFPB will directly impact the scope and cost of products and services offered to consumers by the Bank and may have a significant effect on its financial performance. |
| · | | It revised the FDIC’s insurance assessment methodology so that premiums are assessed based upon the average consolidated total assets of the Bank less tangible equity capital. |
| · | | It permanently increased deposit insurance coverage to $250,000. |
| · | | It authorized the Federal Reserve to set debit interchange fees in an amount that is “reasonable and proportional” to the costs incurred by processors and card issuers. Under the final rule issued by the Federal Reserve, there is a cap of $0.21 per transaction (with a maximum of $0.24 per transaction permitted if certain requirements are met). Implementation of these caps went into effect on October 1, 2011. |
| · | | It imposes proprietary trading restrictions on insured depository institutions and their holding companies that prohibit them from engaging in proprietary trading except in limited circumstances, and prevents them from owning equity interests in excess of three percent (3%) of a bank’s Tier 1 capital in private equity and hedge funds. |
Based on the text of the Dodd-Frank Act and the implementing regulations (both effective and yet-to-be-published), it is anticipated that the costs to banks may increase or fee income may decrease significantly, which could adversely affect our results of operations, financial condition and/or liquidity. Moreover, compliance obligations will expose us to additional noncompliance risk and could divert management’s focus from the business of banking.
The Consumer Financial Protection Bureau may reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices. Compliance with any such change may impact our business operations.
The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to adopt rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is new under the law. The full scope of the impact of this authority has not yet been determined as the CFPB has not yet released significant supervisory guidance.
As discussed above, the CFPB issued several rules in 2013 relating to mortgage operations and servicing, including a rule requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and fees. These new rules will likely require the Bank to dedicate significant personnel resources and could have a material adverse effect on our operations.
Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock.
The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing common stock. The issuance of additional shares of common stock could dilute existing stockholders.
Rulemaking efforts by the Federal Reserve may negatively impact our noninterest income.
On November 12, 2009, the Federal Reserve announced the final rules amending Regulation E that prohibit financial institutions from charging fees to consumers for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts-in, to the overdraft service for those types of transactions. Compliance with this regulation is effective July 1, 2010 for new consumer accounts and August 15, 2010 for existing consumer accounts. These new rules negatively impacted the Banks’ noninterest income in 2013 and 2014 and may do the same in future periods.
In addition, the Federal Reserve has issued rules pursuant to the Dodd-Frank Act governing debit card interchange fees that apply to institutions with greater than $10 billion in assets. Although we are not subject to these rules, market forces may effectively require the Bank to adopt a debit card interchange fee structure that complies with these rules, in which case our noninterest income for future periods could be materially and adversely affected.
Our business is, and will continue to be, dependent on technology and an inability to invest in technological improvements or obtain reliable technological support may adversely affect our results of operation and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our ability to grow and compete will depend in part upon the ability to address the needs of customers by using technology to provide products and services that will satisfy their operational needs, while managing the costs of expanding our technology infrastructure. Many competitors have substantially greater resources to invest in technological improvements and third-party support. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. For the foreseeable future, we expect to rely on third-party service providers and on other third parties for services and technical support. If those products and services become unreliable or fail, the adverse impact on customer relationships and operations could be material.
System failure or breaches of our network security could lead to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure that we use could be vulnerable to unforeseen problems. Our operations are dependent in part upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in operations could have an adverse effect on customers. In addition, we must be able to protect the computer systems and network infrastructure utilized by us against physical damage, security breaches and service disruption caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and deter potential customers.
We are dependent upon outside third parties for processing and handling of records and data, which subjects us to additional operational risks.
Like most community banks, we outsource substantially all of our data processing to third-party providers. These third-party providers could also expose us to operational and information security risk resulting from breakdowns or failures of their own systems or capacity constraints. If our third-party providers encounter difficulties, or if we have difficulties in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted and result in a loss of customers and business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
We may be subject to certain risks related to originating and selling mortgage loans.
When mortgage loans are sold, it is customary for the seller to make representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. The whole loan sale agreements require the repurchase or substitution of mortgage loans in the event we breach any of these representations or warranties. In addition, there may be a requirement to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. We receive a limited number of repurchase and indemnity demands from purchasers as a result of borrower fraud and early payment default of the borrower on mortgage loans. While we have enhanced our underwriting policies and procedures, these steps may not be
effective or reduce the risk associated with loans sold in the past. If repurchase and indemnity demands increase materially, the Company’s results of operations could be adversely affected.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of our customers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on business and, in turn, results of operation and financial condition.
Consumers and businesses may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. The possibility of eliminating banks as intermediaries could result in the loss of interest and fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our results of operations and financial condition.
The Company’s largest stockholder is deemed to be a bank holding company, which exposes us to special risks.
H Bancorp LLC (“H Bancorp”), the surviving entity from the liquidation of FSPF, is deemed a bank holding company under the BHC Act with respect to the Bank and beneficially owns approximately 21.5% of the Company’s common stock. Under Federal Reserve guidelines, every bank holding company must serve as a “source of strength” for each of their bank subsidiaries. In addition, the FDI Act requires that an insured depository institution shall be liable for the loss incurred or anticipated by the FDIC arising from the default of a commonly controlled insured depository institution or any assistance provided by the FDIC to any commonly controlled insured depository institution in danger of default. The position of H Bancorp as a source of strength to other depository institutions may limit its ability to serve as a source of strength for us and could adversely affect our ability to access resources of H Bancorp. Federal bank regulatory agencies have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
A bank for which H Bancorp is deemed to be a bank holding company may be required to indemnify, or cross-guarantee, the FDIC against losses the FDIC incurs with respect to any other bank controlled by H Bancorp. Accordingly, we may be obligated to provide financial assistance to any other financial institution to which H Bancorp is deemed to be a bank holding company. Any financial assistance that we would have to provide could reduce our capital and result in a reduction in the value of our stockholders’ equity.
We may not be able to raise additional capital on terms favorable to us or at all.
If we need additional capital to support our business, expand our operations or maintain our minimum capital requirements, we may not be able to raise funds through the issuance of additional shares of our common stock or other securities. Furthermore, the significant amount of common stock that our primary investor owns may discourage other potential investors from offering to acquire newly issued shares. Even if we are able to obtain capital through the issuance of additional shares of our common stock or other securities, the sale of these additional shares could significantly dilute the ownership interest of our existing stockholders.
The Bank may not be able to satisfy the Qualified Thrift Lender test by April 30, 2015.
At December 31, 2014, the Bank did not satisfy the QTL test. However, in connection with the Merger, the OCC granted the Bank a two-year waiver from the QTL test; the Bank must satisfy the test by April 30, 2015. Satisfying the QTL test may limit our ability to change our asset mix and increase the yield on our earning assets by growing our commercial and industrial loan portfolio. In addition, the Bank may need to purchase residential mortgage-backed securities or other qualifying assets at times when the terms might not be attractive. If the Bank is unable to satisfy the QTL test by April 30, 2015, it could be subject to regulatory agency enforcement action for a violation of law. In addition, the Bank could be required to convert to a commercial bank charter.
Risks Relating to the Company’s Common Stock
The shares of common stock are not insured.
The shares of the Company’s common stock are not deposits and are not insured against loss by the FDIC or any other governmental or private agency.
Applicable banking and Maryland laws impose restrictions on the ability of the Company and the Bank to pay dividends and make other distributions on their capital securities, and, in any event, the payment of dividends is at the discretion of the boards of directors of the Company and the Bank.
The Company’s ability to pay cash dividends in the future will be largely dependent upon the receipt of dividends from the Bank, and the Bank’s ability to pay dividends will depend primarily on its future earnings and capital needs. Bank regulatory agencies have the ability to prohibit proposed dividends by a financial institution which would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. Banks that are considered “troubled institutions” are prohibited by federal law from paying dividends altogether. In addition, federal savings banks, like the Bank, must either submit an application or prior notice to the OCC before making a distribution to its stockholders, and the OCC has the authority to deny or object to that distribution. In any event, the declaration and payment of dividends and the amounts thereof are at the discretion of the board of directors. Thus, no assurance can be given that the Company or the Bank will declare or pay dividends in any future period.
The Bank’s ability to pay dividends to the Company is limited by regulatory agreement.
The Bank is a party to an Operating Agreement with the OCC (the “Operating Agreement”) that imposes certain minimal capital requirements on the Bank. In the Operating Agreement, the Bank agreed that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including these capital requirements. Due to these restrictions and the Bank’s desire to preserve capital to fund its growth, the Bank currently does not anticipate paying a dividend to the Company for the foreseeable future. Because the Company’s ability to pay dividends on its common stock is largely dependent on its receipt of dividends from the Bank, the Company likewise does not anticipate paying a dividend on its common stock for the foreseeable future.
The common stock is not heavily traded.
The Company’s common stock is listed on the NASDAQ Capital Market, but shares of the common stock are not heavily traded. Securities that are not heavily traded can be more volatile than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors, and various factors affecting the banking industry generally may have a significant impact on the market price of the shares the common stock. Management cannot predict the extent to which an active public market for any of the Corporation’s securities will develop or be sustained in the future. Accordingly, holders of the Company’s common stock may not be able to sell their shares at the volumes, prices, or times that they desire.
The Company’s Charter and Bylaws and Maryland law may discourage a corporate takeover.
The Company’s Amended and Restated Articles of Incorporation, as amended (the “Charter”), and its Amended and Restated Bylaws (the “Bylaws”) contain certain provisions designed to enhance the ability of the Board of Directors to deal with attempts to acquire control of the Company. First, the Charter gives the Board the authority to classify and reclassify unissued shares of stock of any class or series of stock by setting, fixing, eliminating, or altering in any one or more respects the preferences, rights, voting powers, restrictions and qualifications of, dividends on, and redemption, conversion, exchange, and other rights of, such securities. The Board could use this authority, along with its authority to authorize the issuance of securities of any class or series, to issue shares having terms favorable to management to a person or persons affiliated with or otherwise friendly to management. Second, the Bylaws require any stockholder who desires to nominate a director to abide by strict notice requirements.
Maryland law also contains anti-takeover provisions that apply to the Company. The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested stockholder” for a period of five years following the most recent date on which the interested stockholder became an interested stockholder. An interested stockholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of the corporation after the date on which the corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation at any time within the two-year period immediately prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock. The Maryland Control Share Acquisition Act applies to acquisitions of “control shares”, which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors within any of the following ranges of voting power: one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power. Control shares have limited voting rights.
Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a tender offer or takeover attempt that a stockholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock. These provisions could potentially adversely affect the market prices of the Company’s common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This Item 1B is not applicable because the Company is a “smaller reporting company”.
ITEM 2. PROPERTIES
Our headquarters are located in Lutherville, Maryland. As of December 31, 2014, the Bank operated 10 full-service branches, of which six were owned by the Bank and four were leased. See Note 7 to the Notes to the Consolidated Financial Statements for additional information.
We own the following properties, which had a book value of $2.3 million at December 31, 2014:
| | | |
| | | |
| Location | Description | |
| 1740 East Joppa Road | Full service branch with drive thru and leased | |
| Towson, MD 21234 | leased office space | |
| | | |
| 427 Crain Highway | Full service branch with drive-thru | |
| Glen Burnie, MD 21061 | | |
| | | |
| 531 South Conkling Street | Full service branch with drive-thru | |
| Baltimore, MD 21224 | | |
| | | |
We lease the following facilities at an aggregate annual rental of approximately $1.9 million as of December 31, 2014:
| | | |
| | | |
| Location | Description | Lease Expiration Date (1) |
| 1066-70 Maiden Choice Lane | Full service branch with detached drive-thru | 30-Apr-16 |
| Arbutus, MD 21229 | | |
| | | |
| | | |
| 9515 Deerco Road, Suites 400 and 408 | Mortgage banking offices | 28-Feb-17 |
| Timonium, MD 21093 | | |
| | | |
| 7151 Columbia Gateway Dr., Ste. A | Executive, administrative, and operational offices as well as | 30-Apr-19 |
| Columbia, MD 21046 | electronic banking and limited service branch offices | |
| | | |
| 2328 West Joppa Road, | Executive, Administrative, and operational offices with a | 30-Sep-15 |
| Lutherville, MD 20193 | full service branch | |
| | | |
| 3700 E. Northern Parkway | Full service branch | 31-Aug-17 |
| Baltimore, MD 21200 | | |
| | | |
| 344 N. Charles Street | Full service branch | 31-Mar-23 |
| Baltimore, MD 21201 | | |
| | | |
| 602 Hoagie Drive | Full service branch | 30-Nov-24 |
| Bel Air, MD 21014 (2) | | |
| | | |
| 10301 York Road | Full service branch | 31-May-26 |
| Cockeysville, MD 21030 (2) | | |
| | | |
| 4040 Schroeder Avenue | Full service branch | 31-Jan-28 |
| Perry Hall, MD 21128 (2) | | |
| | | |
| (1) | | Expiration date, assuming the Company does not exercise all extension options. |
| (2) | | Represents Ground leases for these facilities that are otherwise owned by the Bank. |
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal actions arising from normal business activities. In management’s opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact on our results of operation or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR BAY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
STOCK LISTING
The Company’s common stock is listed on the NASDAQ Capital Market under the symbol “BYBK”. At March 26, 2015, there were 331holders of record of the Company’s common stock, which does not include any beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, or by broker-dealers or other participants who hold or clear shares directly or indirectly through the Depository Trust Company, or its nominee, Cede & Co.
TRANSFER AGENT AND REGISTAR
The transfer agent for the Company’s common stock is American Stock Transfer & Trust Co. LLC, 6201 15th Avenue, Brooklyn, NY 11219.
DIVIDENDS
Banking regulations limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agencies. In addition to these regulations, in connection with the Merger, the Bank entered into the Operating Agreement. Under the Operating Agreement, the Bank may not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including its minimum capital requirements. Due to these restrictions and the Bank’s desire to preserve capital to fund its growth, the Company currently does not anticipate paying a dividend for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends is at the discretion of the Company’s Board of Directors and will depend, in part, on the Company’s earnings and future capital needs. Accordingly, there can be no assurance that dividends will be declared in any future period.
QUARTERLY STOCK INFORMATION
The high and low sales prices for the shares of the Company’s common stock for each quarterly period of 2014 and 2013 as reported on the NASDAQ Capital Market are set forth in the following table:
| | | | | | | |
| | | | | | | |
| | High | | Low | |
| 2014 | | | | | | |
| 1st Quarter | $ | 5.25 | | $ | 4.85 | |
| 2nd Quarter | | 5.50 | | | 4.83 | |
| 3rd Quarter | | 5.37 | | | 4.54 | |
| 4th Quarter | | 4.79 | | | 4.33 | |
| | | | | | | |
| 2013 | | | | | | |
| 1st Quarter | $ | 5.79 | | $ | 5.37 | |
| 2nd Quarter | | 5.54 | | | 4.79 | |
| 3rd Quarter | | 6.20 | | | 4.68 | |
| 4th Quarter | | 6.16 | | | 4.77 | |
On March 24, 2015, the closing sales price of the common stock, ticker BYBK, as reported on the NASDAQ Capital Market was $5.03 per share.
ISSUER REPURCHASES
Neither the Company nor any of its affiliates (as defined by Exchange Act Rule 10b-18) repurchased any shares of the Company’s common stock during 2014.
EQUITY COMPENSATION PLAN INFORMATION
Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information regarding Bay’s equity compensation plans required by this Item pursuant to Item 201(d) of Regulation S-K is located in Item 12 of Part III of this Annual Report and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | 2014 | | 2013(2) | | 2012 | | 2011 | | 2010(1) |
Consolidated Income Statement Data: | | | | | | | | | | | | | |
Interest income | | $ | 24,115,000 | | $ | 19,019,543 | | $ | 9,825,529 | | $ | 9,165,793 | | $ | 6,691,567 |
Interest expense | | | 1,257,199 | | | 1,261,969 | | | 572,127 | | | 701,238 | | | 396,997 |
Net interest income | | | 22,857,801 | | | 17,757,574 | | | 9,253,402 | | | 8,464,555 | | | 6,294,570 |
Provision for loan losses | | | 801,688 | | | 842,207 | | | 733,817 | | | 1,256,656 | | | 684,289 |
Net interest income after provision for loan losses | | | 22,056,113 | | | 16,915,367 | | | 8,519,585 | | | 7,207,899 | | | 5,610,281 |
Bargain purchase gain | | | 524,432 | | | 2,860,199 | | | - | | | - | | | 3,054,792 |
Other noninterest income | | | 7,239,795 | | | 6,084,779 | | | 412,682 | | | 1,953,098 | | | 923,568 |
Merger related expense | | | 1,028,239 | | | 2,041,756 | | | 916,174 | | | - | | | - |
Other noninterest expenses | | | 26,486,178 | | | 20,073,365 | | | 7,313,090 | | | 7,529,188 | | | 3,559,383 |
Income before income taxes | | | 2,305,923 | | | 3,745,224 | | | 703,003 | | | 1,631,809 | | | 6,029,258 |
Income taxes (benefit) | | | (726,785) | | | 504,090 | | | 645,450 | | | 828,605 | | | 2,427,552 |
Net income | | $ | 3,032,708 | | $ | 3,241,134 | | $ | 57,553 | | $ | 803,204 | | $ | 3,601,706 |
| | | | | | | | | | | | | | | |
Shares outstanding and per share data: | | | | | | | | | | | | | | | |
Average shares outstanding | | | 10,370,795 | | | 8,322,811 | | | 5,829,140 | | | 5,826,789 | | | 5,807,299 |
Diluted average shares outstanding | | | 10,565,336 | | | 8,342,646 | | | 5,829,140 | | | 5,826,789 | | | 5,807,299 |
Number of shares outstanding, at year-end | | | 11,014,517 | | | 9,379,753 | | | 5,831,963 | | | 5,820,854 | | | 5,837,517 |
Net income - basic per share | | $ | 0.29 | | $ | 0.39 | | $ | 0.01 | | $ | 0.14 | | $ | 0.62 |
Net income - diluted per share | | | 0.29 | | | 0.39 | | | 0.01 | | | 0.14 | | | 0.62 |
Dividends declared per share | | | - | | | - | | | - | | | - | | | - |
Book value per share at period end | | | 6.05 | | | 5.82 | | | 4.65 | | | 4.60 | | | 4.50 |
| | | | | | | | | | | | | | | |
Financial Condition data: | | | | | | | | | | | | | | | |
Assets | | $ | 479,942,985 | | $ | 419,089,303 | | $ | 133,243,868 | | $ | 129,867,364 | | $ | 136,099,103 |
Investment Securities | | | 36,665,607 | | | 36,586,669 | | | 9,716,626 | | | 14,674,092 | | | 16,240,276 |
Loans (net of deferred fees and costs) | | | 393,051,192 | | | 320,680,332 | | | 101,736,172 | | | 97,020,049 | | | 88,414,675 |
Allowance for loan losses | | | 1,294,976 | | | 851,000 | | | 655,942 | | | 824,653 | | | 684,289 |
Deposits | | | 387,830,132 | | | 360,933,471 | | | 100,672,130 | | | 97,959,516 | | | 104,159,484 |
Borrowings | | | 22,150,000 | | | - | | | - | | | - | | | - |
Stockholders’ equity | | | 66,643,286 | | | 54,554,268 | | | 31,824,416 | | | 31,394,875 | | | 29,855,036 |
| | | | | | | | | | | | | | | |
Average Balances: | | | | | | | | | | | | | | | |
Assets | | $ | 459,782,360 | | $ | 358,397,210 | | $ | 127,786,614 | | $ | 129,655,061 | | $ | 86,167,656 |
Investment Securities | | | 36,561,271 | | | 24,427,877 | | | 11,486,249 | | | 16,667,155 | | | 7,144,690 |
Loans | | | 364,511,290 | | | 259,698,504 | | | 97,871,329 | | | 91,976,636 | | | 45,223,264 |
Interest-bearing Deposits | | | 292,056,338 | | | 231,245,789 | | | 73,365,709 | | | 78,770,578 | | | 72,841,087 |
Borrowings | | | 9,269,231 | | | 92,328 | | | 18,306 | | | 19,178 | | | - |
Stockholders' equity | | | 61,530,969 | | | 48,537,003 | | | 30,016,583 | | | 28,329,221 | | | 12,191,603 |
| | | | | | | | | | | | | | | |
Selected performance ratios: | | | | | | | | | | | | | | | |
Return on average assets | | | 0.66% | | | 0.90% | | | 0.05% | | | 0.62% | | | 4.18% |
Return on average equity | | | 4.93% | | | 6.68% | | | 0.19% | | | 2.84% | | | 29.54% |
Yield on average interest-earning assets | | | 5.60% | | | 5.71% | | | 7.89% | | | 7.26% | | | 11.36% |
Rate on average interest-bearing liabilities | | | 0.42% | | | 0.55% | | | 0.78% | | | 0.89% | | | 0.67% |
Net interest spread | | | 5.18% | | | 5.16% | | | 7.11% | | | 6.37% | | | 10.69% |
Net interest margin | | | 5.31% | | | 5.33% | | | 7.43% | | | 6.70% | | | 11.36% |
| | | | | | | | | | | | | | | |
Asset Quality ratios: | | | | | | | | | | | | | | | |
Allowance for loan losses to loans | | | 0.33% | | | 0.27% | | | 0.64% | | | 0.85% | | | 0.77% |
Nonperforming loans to total loans | | | 3.41% | | | 2.59% | | | 5.30% | | | 7.31% | | | 5.62% |
Nonperforming assets to total assets | | | 3.10% | | | 2.29% | | | 4.91% | | | 6.62% | | | 4.99% |
Net charge-offs to average loans | | | 0.10% | | | 0.25% | | | 0.92% | | | 1.21% | | | 0.00% |
| | | | | | | | | | | | | | | |
Capital ratios: | | | | | | | | | | | | | | | |
Leverage ratio (3) | | | 12.94% | | | 11.41% | | | 22.23% | | | 22.36% | | | 20.32% |
Tier 1 risk-based capital ratio (3) | | | 16.31% | | | 14.42% | | | 27.16% | | | 27.85% | | | 26.34% |
Total risk-based capital ratio (3) | | | 16.66% | | | 14.68% | | | 27.76% | | | 28.59% | | | 26.44% |
Average equity to average assets | | | 13.38% | | | 13.54% | | | 23.49% | | | 21.85% | | | 14.15% |
| (1) | | On July 9, 2010, we acquired substantially all assets and assumed all deposit and certain other liabilities related to the two former branch offices of Bay National Bank (“BNB”). The consolidated financial statements cover the period June 30, 2010 (Inception) through December 31, 2010. |
| (2) | | On April 19, 2013, Jefferson completed its acquisition of Carrollton Bancorp. All transactions since the acquisition date are included in our consolidated financial statements. |
| (3) | | Capital ratios reported for Bay Bank, FSB. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Baltimore Washington market provides a strong economy and with a superior group of customers across the region. The Bank’s origination efforts resulted in the growth of new loans in the Bank’s originated portfolio by 40.6% in 2014. The Bank has a balanced business model with an attractive mix of noninterest revenue representing 24% of total revenue in 2014. Profitability of the Bank continues to be driven by low cost core deposits with average cost of deposits of 42 basis points in 2014. The Bank has a very strong capital position and capacity for future growth with regulatory total capital to risk weighted assets of 16.7% as of December 31, 2014.
Over the weekend of October 10, 2014, the Bank completed the integration of the core system platform used by Slavie Federal Savings Bank (“Slavie”) to the Bank’s core system platform. As previously disclosed, the Bank acquired certain assets and assumed substantially all deposits and certain other liabilities of Slavie from the Federal Deposit Insurance Corporation (the “FDIC”) on May 30, 2014 (the “Slavie Acquisition”). Several Slavie employees filled open positions within the Bank and have relocated to their new locations.
The former Slavie branch located in Bel Air, Maryland was closed on October 10, 2014. All deposit account relationships were transferred to the Bank’s nearby Hickory branch location. We anticipate no additional costs related to the closed facility.
Effective December 5, 2014, Kevin B. Cashen resigned as the President and Chief Executive Officer and as a director of Bay and the Bank. Russ McAtee, who served as the Bank’s Senior Vice President and Chief Retail Banking Officer, resigned as of the same date. Joseph J. Thomas, who was then serving as the Executive Chairman of the Company and the Bank was appointed by the respective Boards of Directors as Chairman, President and Chief Executive Officer of both entities. In connection with the resignations, Mr. Cashen and Mr. McAtee entered into separation agreements with the Bank. During the fourth quarter of 2014, the Bank accrued severance and other one-time expenses of $539,000 related to their departures.
Balance Sheet Review
Total assets were $480 million at December 31, 2014, an increase of $61 million, or 15%, when compared to December 31, 2013. The increase was due mainly to a net increase in loans of $72.4 million, or 23%. The Bank acquired net loans of $82.9 million in the Slavie Acquisition, which was offset by a net loan decline of $10.5 million.
Total deposits were $388 million at December 31, 2014, an increase of $27 million, or 7%, when compared to December 31, 2013. The increase was primarily driven by $110.8 million in deposits assumed in the Slavie Acquisition, offset by the $24.0 million decrease from the exit of the individual retirement account (“IRA”) product line, a net $12.1 million decrease resulting from the three Bank branch locations that were closed in the second quarter of 2014, and deposits acquired in the Slavie Acquisition declining by $47.6 million as part of the Bank’s strategy to reposition the deposit composition in connection with those acquired from the FDIC receivership. Excluding these changes, overall net organic deposits were unchanged over 2014 as the Bank managed excess cash, cost of deposits and net interest margin. Stockholders’ equity was $66.6 million at December 31, 2014, an increase of $12.1 million, or 22%, when compared to December 31, 2013. The increase resulted from the $7.0 million received from the Company’s sale of shares of common stock in May 2014, $1.5 million of stock based compensation related to the vesting of stock options and restricted stock awards, and the retention of corporate earnings.
Return on average assets and return on average equity are key measures of our performance. Return on average assets, the quotient of net income divided by average total assets, measures how effectively we utilize our assets to produce income. Our return on average assets for the years ended December 31, 2014 and 2013 was 0.66% and 0.90%, respectively. Return on average equity, the quotient of net income divided by average equity, measures how effectively we invest our capital to produce income. Return on average equity for the years ended December 31, 2014 and 2013 was 4.93% and 6.68%, respectively.
Liquidity remained strong due to the borrowing lines with the FHLB of Atlanta and the Federal Reserve and the size and composition of the investment portfolio.
Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, accruing loans past due 90 days or more, and real estate acquired through foreclosure, increased to $14.90 million at December 31, 2014 from $9.60 million at December 31, 2013. The increase over 2013 was due primarily to the credit impaired loans acquired in the Slavie Acquisition moving to nonaccrual status. Nonperforming assets represented 3.10% of total assets at December 31, 2014 compared to 2.29% at December 31, 2013.
At December 31, 2014, the Bank maintained capital in excess of all “well-capitalized” regulatory requirements. The Bank’s tier 1 risk-based capital ratio was 16.31% at December 31, 2014 as compared to 14.42% at December 31, 2013. Liquidity remained strong due to managed cash and cash equivalents, borrowing lines with the FHLB of Atlanta, the Federal Reserve and correspondent banks, and the size and composition of the investment portfolio.
Review of Financial Results
Net income for the year ended December 31, 2014 was $3.03 million compared to income of $3.24 million for 2013. Although the year-over-year net income levels are not materially different, individual categories reflect considerable variability between years due to the Merger and the Slavie Acquisition.
Net interest income increased by $5.1 million for the year ended December 31, 2014 when compared to 2013. The increase was supported by a $98 million growth in average interest-earning assets added primarily by the Merger and the Slavie Acquisition, and a 13 basis point reduction in the average cost of interest bearing liabilities, offset by an 11 basis point decrease in the average rates earned on interest-earning assets. While the average rates on interest earning assets decreased, interest income was assisted by favorable loan resolutions which resulted in accretion of net purchase discounts on loans of $5.7 million during 2014, compared to $4.1 million, during the same period of 2013.
Noninterest income for the year ended December 31, 2014 was $7.76 million compared to $8.94 million for the same period in 2013. This variance was the result of the 2014 write-off of the remaining interest rate mark-to-market adjustment on IRA deposits of $2.38 million within other noninterest income and a $0.52 million bargain purchase gain compared to the $2.86 million bargain purchase gain associated with the Merger that was recognized during 2013. Electronic banking fees increased by $0.59 million during 2014, as the Merger added this business unit to the Bank. Brokerage commissions declined by $0.47 million for 2014, as the Bank temporarily exited this business line late in 2013. Mortgage banking fees for the year ended December 31, 2014 declined by $1.42 million when compared to 2013, while deposit service charges increased by $0.1 million. Expectations are for increased mortgage fees and gains entering 2015.
Noninterest expense for the year ended December 31, 2014 was $27.51 million compared to $22.12 million for 2013, an increase of $5.40 million. The increase relates to the inclusion during 2014 of a full year of ongoing expenses related to the Merger and $1.0 million of expenses from the Slavie Acquisition. Categories impacted by this full year of expenses were increases in salaries and employee benefits of $2.8 million, occupancy, furniture and equipment expenses of $1.1 million, foreclosed property expenses of $0.3 million, and core deposit intangible amortization of $0.20 million. Salaries and benefits and other expenses included one-time director and officer costs of $1.1 million and fourth quarter severance related expenses of $0.5 million. This was offset by a $1.0 million decline in Merger-related expenses.
In 2014, previously unrecognized tax benefits were recognized and the valuation on certain deferred tax assets was released resulting in an overall reduction in tax expense of $1.77 million.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous year’s financial statements to the current year’s presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates. Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policies applied relate to treatment of the allowance for loan losses, accounting for acquired loans, valuation of the securities portfolio, and accounting for income taxes.
Allowance for Loan Losses
The allowance involves a higher degree of judgment and complexity than other significant accounting policies. The allowance is calculated with the objective of maintaining a reserve level believed by us to be sufficient to absorb estimated probable loan losses. Our determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, expected loan commitment usage, the amounts and timing of expected future cash flows on impaired and
purchased credit impaired (“PCI”) loans, value of collateral, estimated losses on consumer loans and residential mortgages and general amounts for historical loss experience. The process also considers economic conditions and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from our estimates, an additional provision for loan losses may be required that would adversely impact earnings in future periods. See the section of this document titled, “Allowance for Loan Losses and Credit Risk Management.”
Accounting for Acquired Loans
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit impaired loans are initially measured at fair value, which considers estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance related to these loans is not carried over and recorded at the acquisition date. We monitor actual loan cash flows to determine any improvement or deterioration from those forecasted as of the acquisition date. Our acquired loans with specific credit deterioration are accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit related deterioration subsequent to origination is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on purchased credit impaired loans is based on a reasonable expectation about the timing and amount of cash flows to be collected.
Valuation of the Securities Portfolio
Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of an investment. We review other criteria such as magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
Accounting for Income Taxes
We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.
Other significant accounting policies are presented in Note 1 to the consolidated financial statements that appear elsewhere in this Annual Report. We have not substantively changed any aspect of our overall approach in the application of the foregoing policies.
RESULTS OF OPERATIONS
Net Interest Income
The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities. No tax equivalent yield adjustments were made, as the effect thereof was not material.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 |
| | | | | | | | | | | | | | | | | |
| | Average Balance | | Interest (1) | Yield/Rate | | | Average Balance | | Interest (1) | Yield/Rate | | | Average Balance | | Interest | Yield/Rate |
| | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest bearing deposits with banks and federal funds sold | $ | 21,901,452 | $ | 49,811 | 0.23% | | $ | 27,998,706 | $ | 73,294 | 0.26% | | $ | 14,883,366 | $ | 30,966 | 0.21% |
Investment securities available for sale | | 36,050,260 | | 928,974 | 2.58% | | | 24,427,877 | | 615,764 | 2.52% | | | 11,486,249 | | 224,536 | 1.95% |
Investment securities held to maturity | | 511,011 | | 10,792 | 2.11% | | | - | | - | 0.00% | | | - | | - | 0.00% |
Restricted equity securities | | 979,969 | | 30,611 | 3.12% | | | 684,316 | | 22,774 | 3.33% | | | 354,472 | | 5,415 | 1.53% |
Total interest-bearing deposits with | | | | | | | | | | | | | | | | |
banks, fed funds sold, and investments | 59,442,692 | | 1,020,188 | 1.72% | | | 53,110,899 | | 711,832 | 1.34% | | | 26,724,087 | | 260,917 | 0.98% |
| | | | | | | | | | | | | | | | | |
Loans held for sale | | 6,873,298 | | 246,212 | 3.58% | | | 20,390,570 | | 776,325 | 3.81% | | | - | | - | 0.00% |
Loans, net | | | | | | | | | | | | | | | | | |
Commercial & Industrial | | 43,734,768 | | 2,977,357 | 6.81% | | | 30,774,084 | | 2,559,257 | 8.32% | | | 22,798,942 | | 2,399,677 | 10.53% |
Commercial Real Estate | | 158,091,703 | | 9,885,986 | 6.25% | | | 126,062,242 | | 8,183,908 | 6.49% | | | 33,177,558 | | 3,165,790 | 9.54% |
Residential Real Estate | | 107,485,763 | | 6,467,857 | 6.02% | | | 53,593,865 | | 3,635,914 | 6.78% | | | 21,795,785 | | 2,247,787 | 10.31% |
HELOC | | 35,851,459 | | 1,979,302 | 5.52% | | | 29,405,291 | | 1,649,928 | 5.61% | | | 12,486,194 | | 863,921 | 6.92% |
Construction | | 15,652,957 | | 1,251,447 | 7.99% | | | 16,286,846 | | 1,085,322 | 6.66% | | | 2,384,828 | | 132,503 | 5.56% |
Land | | 2,482,128 | | 186,754 | 7.52% | | | 1,887,070 | | 319,018 | 16.91% | | | 4,353,585 | | 653,756 | 15.02% |
Consumer & Other | | 1,212,512 | | 99,897 | 8.24% | | | 1,689,106 | | 98,039 | 5.80% | | | 874,437 | | 101,178 | 11.57% |
Total loans, net (1) | | 364,511,290 | | 22,848,600 | 6.27% | | | 259,698,504 | | 17,531,386 | 6.75% | | | 97,871,329 | | 9,564,612 | 9.77% |
Total earning assets | | 430,827,280 | $ | 24,115,000 | 5.60% | | | 333,199,973 | $ | 19,019,543 | 5.71% | | | 124,595,416 | $ | 9,825,529 | 7.89% |
Cash | | 4,082,953 | | | | | | 4,959,821 | | | | | | 331,550 | | | |
Allowance for loan losses | | (1,132,374) | | | | | | (738,783) | | | | | | (643,067) | | | |
Market valuation | | 231,775 | | | | | | 198,695 | | | | | | 454,113 | | | |
Other assets | | 25,772,726 | | | | | | 20,777,504 | | | �� | | | 3,048,602 | | | |
Total non-earning assets | | 28,955,080 | | | | | | 25,197,237 | | | | | | 3,191,198 | | | |
Total Assets | $ | 459,782,360 | | | | | $ | 358,397,210 | | | | | $ | 127,786,614 | | | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
Interest-bearing checking and savings | $ | 80,030,537 | $ | 90,741 | 0.11% | | $ | 49,428,952 | $ | 65,098 | 0.13% | | $ | 6,471,657 | $ | 14,770 | 0.23% |
Money market | | 83,404,571 | | 305,217 | 0.37% | | | 64,100,619 | | 236,988 | 0.37% | | | 22,230,278 | | 51,502 | 0.23% |
Time deposits | | 128,621,230 | | 835,685 | 0.65% | | | 117,716,218 | | 957,815 | 0.81% | | | 44,663,774 | | 505,767 | 1.13% |
Total interest-bearing deposits | | 292,056,338 | | 1,231,643 | 0.42% | | | 231,245,789 | | 1,259,901 | 0.54% | | | 73,365,709 | | 572,039 | 0.78% |
Borrowed funds: | | | | | | | | | | | | | | | | | |
Federal funds purchased | | - | | - | 0.00% | | | 56,164 | | 486 | 0.87% | | | 18,306 | | 88 | 0.48% |
FHLB advances and other borrowed funds | | 9,269,231 | | 25,556 | 0.28% | | | 36,164 | | 1,582 | 4.37% | | | - | | - | 0.00% |
Total borrowed funds | | 9,269,231 | | 25,556 | 0.28% | | | 92,328 | | 2,068 | 2.24% | | | 18,306 | | 88 | 0.48% |
Total interest-bearing funds | | 301,325,569 | | 1,257,199 | 0.42% | | | 231,338,117 | | 1,261,969 | 0.55% | | | 73,384,015 | | 572,127 | 0.78% |
Noninterest-bearing deposits | | 93,643,953 | | - | | | | 74,794,928 | | - | | | | 24,030,276 | | - | |
Total cost of funds | | 394,969,522 | $ | 1,257,199 | 0.32% | | | 306,133,045 | $ | 1,261,969 | 0.41% | | | 97,414,291 | $ | 572,127 | 0.59% |
Other liabilities and accrued expenses | | 3,281,869 | | | | | | 3,727,162 | | | | | | 355,740 | | | |
Total Liabilities | | 398,251,391 | | | | | | 309,860,207 | | | | | | 97,770,031 | | | |
Stockholders' Equity | | 61,530,969 | | | | | | 48,537,003 | | | | | | 30,016,583 | | | |
Total Liabilities and Stockholders' Equity | $ | 459,782,360 | | | | | $ | 358,397,210 | | | | | $ | 127,786,614 | | | |
Net interest income and spread (2) | | | $ | 22,857,801 | 5.18% | | | | $ | 17,757,574 | 5.16% | | | | $ | 9,253,402 | 7.11% |
Net interest margin | | | | | 5.31% | | | | | | 5.33% | | | | | | 7.43% |
| (1) | | Non-accrual loans are included in average loans. |
| (2) | | Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
| (3) | | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
Net interest income, the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities, is the most significant component of our earnings. Net interest income is a function of several factors, including the volume and mix of interest-earning assets and funding sources, as well as the relative level of market interest rates. While management’s policies influence some of these factors, external forces, including customer needs and demands, competition, the economic policies of the federal government and the monetary policies of the Federal Reserve also affect net interest income.
Net interest income increased by $5.1 million for the year ended December 31, 2014 when compared to 2013. The increase was supported by a $98 million growth in average interest-earning assets added primarily by the Merger and the Slavie Acquisition, and a 13 basis point reduction in the average cost of interest bearing liabilities, offset by an 11 basis point decrease in the average rates earned on interest-earning assets.
Total interest income increased by $5.1 million, or 27%, for the year ended December 31, 2014 when compared to 2013. Interest income on loans increased by $5.3 million, or 30%, for the year ended December 31, 2014 when compared to 2013. Interest income on loans held for sale, investment securities and interest-bearing deposits in banks and federal funds sold decreased by an aggregate of $0.2 million for the year ended December 31, 2014 when compared to 2013. The increase in interest income for 2014 was due primarily to the interest-earning assets acquired in the Slavie Acquisition. In 2014, average interest-earning assets increased by 29% while average interest-bearing liabilities also increased by 30%.
Total interest expense was flat for the year ended December 31, 2014 when compared to 2013 due to lower interest rates. The total cost of interest-bearing liabilities decreased to 0.42% for the year ended December 31, 2014, as compared to 0.55% for 2013. Average noninterest-bearing deposits increased to 25% in 2014 while the percentage of average noninterest-bearing deposits to total deposits decreased to 24% for 2014 compared to 25% for 2013.
Effect of Volume and Rate Changes on Net Interest Income
The following table presents the effect of volume and rate changes on net interest income for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2014 Versus 2013 | | 2013 Versus 2012 |
| Increase (Decrease) Due to Change In | | Increase (Decrease) Due to Change In |
| Average Volume | | Average Rate | | Total | | Average Volume | | Average Rate | | Total |
Interest Income: | | | | | | | | | | | | | | | | | |
Loans | $ | 6,599,110 | | $ | (1,281,895) | | $ | 5,317,214 | | $ | 10,972,938 | | $ | (3,006,164) | | $ | 7,966,774 |
Total interest-bearing deposits with banks, fed funds sold, and investments | 304,651 | | | 3,705 | | | 308,356 | | | 351,648 | | | 99,266 | | | 450,914 |
Loans held for sale | | (486,702) | | | (43,412) | | | (530,114) | | | 776,325 | | | - | | | 776,325 |
Total Interest Income | | 6,417,059 | | | (1,321,602) | | | 5,095,457 | | | 12,100,911 | | | (2,906,898) | | | 9,194,013 |
| | | | | | | | | | | | | | | | | |
Interest Expense: | | | | | | | | | | | | | | | | | |
Time deposits | | 83,100 | | �� | (205,230) | | | (122,130) | | | 628,586 | | | (176,538) | | | 452,048 |
Other interest-bearing deposits | | 106,390 | | | (12,518) | | | 93,872 | | | 199,968 | | | 35,845 | | | 235,813 |
Borrowings | | 26,598 | | | (3,110) | | | 23,488 | | | 1,869 | | | 111 | | | 1,980 |
Total Interest Expense | | 216,088 | | | (220,858) | | | (4,770) | | | 830,423 | | | (140,582) | | | 689,841 |
| | | | | | | | | | | | | | | | | |
(Decrease)/Increase in Net Interest Income | $ | 6,200,971 | | $ | (1,100,744) | | $ | 5,100,227 | | $ | 11,270,488 | | $ | (2,766,316) | | $ | 8,504,172 |
| | | | | | | | | | | | | | | | | |
Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. On a monthly basis, management reviews all loan portfolios to determine trends and monitor asset quality. For consumer loan portfolios, this review generally consists of reviewing delinquency levels on an aggregate basis with timely follow-up on accounts that become delinquent. In commercial loan portfolios, delinquency information is monitored and periodic reviews of business and property leasing operations are performed on an individual loan basis to determine potential collection and repayment problems. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.
We recorded a provision for loan losses of $801,688 and $842,207 for the years ended December 31, 2014 and 2013, respectively. The decrease for 2014 was due primarily to higher charge-offs and specific reserves established in 2013 for loans
acquired in the Merger and a slight decrease in 2014 loan originations offset by increases in the provision due to the Slavie Acquisition. As a result, the allowance for loan losses was $1.29 million at December 31, 2014, representing 0.33% of total loans, compared to $0.85 million, or 0.27% of total loans, at December 31, 2013. Management expects both the allowance for losses and the related provision for loan losses to increase in the future due to the gradual runoff of the acquired loan portfolio and new loan originations.
Noninterest Income
The following table reflects the amounts and changes in noninterest income for the years ended December 31, 2014 and December 31, 2013:
| | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended December 31: | | | 2014 vs 2013 |
| | | 2014 | | 2013 | | | $ Change | | % Change |
| | | | | | | | | | |
| Electronic banking fees | $ | 2,637,079 | $ | 2,050,941 | | $ | 586,138 | | 29% |
| Mortgage banking fees and gains | | 950,299 | | 2,372,956 | | | (1,422,657) | | -60% |
| Net gain on sale of real estate acquired through foreclosure | | 58,046 | | 283,984 | | | (225,938) | | -80% |
| Brokerage commissions | | - | | 471,810 | | | (471,810) | | -100% |
| Service charges on deposit accounts | | 393,128 | | 285,557 | | | 107,571 | | 38% |
| Bargain purchase gain | | 524,432 | | 2,860,199 | | | (2,335,767) | | -82% |
| Other income | | 3,201,243 | | 619,531 | | | 2,581,712 | | 417% |
| Total Noninterest Income | $ | 7,764,227 | $ | 8,944,978 | | $ | (1,180,751) | | -13% |
| | | | | | | | | | |
Noninterest income for the year ended December 31, 2014 was $7.76 million compared to $8.94 million for the same period in 2013. This variance was partially the result of the 2014 write-off of the remaining interest rate mark-to-market adjustment on IRA deposits of $2.40 million within other noninterest income and a $0.52 million bargain purchase gain compared to the $2.86 million bargain purchase gain associated with the Merger that was recognized during 2013. Electronic banking fees increased by $0.59 million during 2014, as the Merger added this business unit to the Bank. Mortgage banking fees for the year ended December 31, 2014 declined by $1.42 million when compared to 2013 due to a lower volume of loan originations, while deposit service charges increased by $0.1 million.
Brokerage commissions declined by $0.47 million for 2014, as the Bank temporarily exited this business line late in 2013. In mid-2014, the Bank entered into a strategic arrangement with a local firm to provide investment advisory and brokerage services to Bank clients referred by the Bank. The Bank will continue to seek ways to expand its sources of non-interest income. In the future, the Bank and/or BFS may enter into fee arrangements with additional strategic partners that offer investment advisory services, risk management and employee benefit services. When sufficient volume is developed in any of these lines of business, the Bank may choose to provide these services if permitted by applicable regulations.
Noninterest Expenses
The following table reflects the amounts and changes in noninterest expense for the years ended December 31, 2014 and 2013
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended December 31: | | 2014 vs 2013 | | |
| | | 2014 | | | 2013 | | $ Change | | % Change | | |
| | | | | | | | | | | | |
| Salary and employee benefits | $ | 13,347,292 | | $ | 10,523,757 | $ | 2,823,535 | | 27% | | |
| Occupancy expenses | | 2,935,880 | | | 2,189,811 | | 746,069 | | 34% | | |
| Furniture and equipment expenses | | 1,174,911 | | | 802,812 | | 372,099 | | 46% | | |
| Legal, accounting and other professional fees | | 1,416,505 | | | 1,362,118 | | 54,387 | | 4% | | |
| Data processing and item processing services | | 1,197,231 | | | 1,054,234 | | 142,997 | | 14% | | |
| FDIC insurance costs | | 383,031 | | | 285,411 | | 97,620 | | 34% | | |
| Advertising and marketing related expenses | | 382,465 | | | 381,810 | | 655 | | 0% | | |
| Foreclosed property expenses | | 690,989 | | | 369,106 | | 321,883 | | 87% | | |
| Loan collection costs | | 332,843 | | | 154,864 | | 177,979 | | 115% | | |
| Core deposit intangible amortization | | 992,960 | | | 791,498 | | 201,462 | | 25% | | |
| Merger related expenses | | 1,028,239 | | | 2,041,756 | | (1,013,517) | | -50% | | |
| Other expenses | | 3,632,071 | | | 2,157,944 | | 1,474,127 | | 68% | | |
| Total Noninterest Expenses | $ | 27,514,417 | | $ | 22,115,121 | $ | 5,399,296 | | 24% | | |
Noninterest expense for the year ended December 31, 2014 was $27.51 million compared to $22.12 million for 2013, an increase of $5.40 million. The increase relates to the inclusion during 2014 of a full year of ongoing expenses related to the Merger and $1.01 million of expenses from the Slavie Acquisition. Categories impacted by this full year of expenses were increases in salaries and employee benefits of $2.82 million, occupancy, furniture and equipment expenses of $1.12 million, foreclosed property expenses of $0.32 million, and core deposit intangible amortization of $0.20 million. Salaries and benefits and other expenses included one-time director and officer costs of $1.1 million related to the grant of equity awards in the third quarter to recognize the grantees’ efforts in building the Bank since being founded in 2010 and fourth quarter severance related expenses of $0.54 million associated with the departure of two Bank officers. This was offset by a $1.01 million decline in Merger-related expenses.
Effective July 1, 2014, the Bank entered into a Shared Services Agreement (“Agreement”) with H Bancorp, the Top Tier BHC for the Company. The Agreement calls for H Bancorp to provide the Bank with certain administrative and support services that have been determined by the Bank to be necessary and appropriate, or may in the future be necessary and appropriate, to the efficient operation of its business. All such transactions will be performed on an arm’s length basis, in order to comply with the provisions of Sections 23A and 23B of the Federal Reserve Act, Federal Reserve Regulation W and applicable banking laws. The Agreement calls for a total annual payment of $250,000 payable over 12 monthly payments to H Bancorp and shall renew automatically on July 1 of each successive year for an additional one-year term until such time as the Agreement is terminated by H Bancorp and/or the Bank in accordance with stated covenants within the Agreement.
Income Taxes
For the year ended December 31, 2014, the benefit for income taxes totaled $0.7 million, or an effective tax rate of (31.5%), compared to a provision for income taxes of $0.5 million, or an effective tax rate of 13.5%, for 2013. The change in the effective tax rate for the year ended December 31, 2014 when compared to 2013 resulted from the following:
| · | | In 2014, previously unrecognized tax benefits were recognized and the valuation allowance on certain deferred tax assets was released resulting in a lower effective tax rate in 2014 relative to 2013; and |
| · | | In 2013, the bargain purchase gain resulting from the Merger was not included in taxable income resulting in a lower effective tax rate for 2013 relative to the statutory rate. |
Except as noted above the variance in the effective rate relates to the change in the mix of tax advantaged income relative to total book income as well as the tax effects of stock-based compensation. Unless there are any significant unusual transactions or changes in tax law, our effective tax rate is likely to return to a rate closer to the combined federal and state statutory rate of approximately 39.5% for the year 2015.
FINANCIAL CONDITION
Our total assets were $480 million at December 31, 2014, an increase of $61 million, or 15%, when compared to the $419 million at December 31, 2013. Interest-earning assets accounted for $61 million of this increase, with $117 million added as a result of the Slavie Acquisition. Loans grew by $72 million, with $83 million added as a result of the Slavie Acquisition. Total deposits were $388 million at December 31, 2014, an increase of $27 million, or 7%, when compared to the $361 million recorded at December 31, 2013. $111 million of deposits were added as a result of the Slavie Acquisition. Stockholders’ equity was $67 million at December 31, 2014, an increase of $12 million, or 22%, when compared to the $55 million recorded at December 31, 2013.
Investment Securities
Our investment policy authorizes management to invest in traditional securities instruments in order to provide ongoing liquidity, income and a ready source of collateral that can be pledged in order to access other sources of funds. The investment portfolio consists mainly of securities available for sale. Securities available for sale are those securities that we intend to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability management strategy, liquidity management, interest rate risk management, regulatory capital management or other similar factors.
The investment portfolio consists primarily of U.S. Government agency securities, residential mortgage-backed securities, and state and municipal obligations. The income from state and municipal obligations is exempt from federal income tax. Certain agency securities are exempt from state income taxes. We use the investment portfolio as a source of both liquidity and earnings. Management continues to evaluate investment options that will produce income without assuming significant credit or interest rate risk and to look for opportunities to use liquidity from maturing investments to reduce our use of high cost time deposits and borrowed funds.
Investments securities increased $0.1 million to $36.7 million at December 31, 2014 from $36.6 at December 31, 2013. New purchases totaled $3.4 million and included $1.3 million in securities designated as held to maturity. This increase was offset by principal pay downs totaling $3.9 million. There was an increase of $0.7 million in market value in 2014 compared to a decrease of $0.7 million in 2013.
The composition of investment securities, at carrying value, at December 31, 2014, 2013 and 2012 are presented in the following table:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | |
| | | Amount | | % | | | Amount | | % | | | Amount | | % | | |
Available for sale securities | | | | | | | | | | | | | | | | | |
U.S. Government agency | | $ | 7,778,271 | | 21.9% | | $ | 7,525,915 | | 20.5% | | $ | - | | - | | |
Residential mortgage-backed securities | | | 20,870,927 | | 59.0% | | | 23,801,003 | | 65.0% | | | 9,716,626 | | 100% | | |
State and municipal bonds | | | 4,654,146 | | 13.2% | | | 5,189,886 | | 14.1% | | | - | | - | | |
Corporate bonds | | | 2,030,000 | | 5.7% | | | - | | 0.0% | | | - | | - | | |
Total debt securities | | | 35,333,344 | | 100.0% | | | 36,516,804 | | 99.7% | | | 9,716,626 | | 100% | | |
Equity securities | | | 16,545 | | 0.0% | | | 69,865 | | 0.1% | | | - | | - | | |
Total available for sale | | $ | 35,349,889 | | 100.0% | | $ | 36,586,669 | | 100.0% | | $ | 9,716,626 | | 100% | | |
| | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | |
| | | Amount | | % | | | Amount | | % | | | Amount | | % | | |
Held to maturity securities | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | | $ | 1,315,718 | | 100% | | $ | - | | - | | $ | - | | - | | |
Maturities and weighted average yields for investment securities at December 31, 2014 are presented in the following table:
| | | | | | | | | |
| | | | | | | | | |
| | 2014 | |
| | Amortized | | Fair | | Yield | |
Maturing - Available for sale | | Cost | | Value | | (1), (2) | |
Within one year | | $ | 237,687 | | $ | 240,942 | | 2.81% | |
Over one to five years | | | 4,794,585 | | | 4,787,945 | | 2.41% | |
Over five to ten years | | | 9,210,672 | | | 9,433,530 | | 2.54% | |
Over ten years | | | - | | | - | | 0.00% | |
Residential mortgage-backed securities | | | 20,679,345 | | | 20,870,927 | | 3.12% | |
Total debt securities | | $ | 34,922,289 | | $ | 35,333,344 | | 2.87% | |
| | | | | | | | | |
| | 2014 | |
| | Amortized | | Fair | | Yield | |
Maturing - Held to maturity | | Cost | | Value | | (1), (2) | |
Residential mortgage-backed securities | | $ | 1,315,718 | | $ | 1,324,797 | | 2.67% | |
| (1) | | Yields are stated as book yields which are adjusted for amortization and accretion of purchase premiums and discounts, respectively. |
| (2) | | Yields on tax-exempt obligations have been computed on a tax-equivalent basis. |
Restricted Equity Securities
Restricted equity securities increased $0.9 million, or 85%, to $1.9 million at December 31, 2014, from $1.0 million at December 31, 2013. This increase was primarily a result of FHLB stock acquired in the Slavie Acquisition.
Loans Held for Sale
Loans held for sale were $7.2 million at December 31, 2014 compared to $12.8 at December 31, 2013. Loans originated for sale to third-party investors generally remain on our balance sheet for an average of 45 days.
Loans
A comparison of the loan portfolio for the years indicated is presented in the following table:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | Amount | % | | | Amount | % | | | Amount | % | | | Amount | % | | | Amount | % |
Commercial & Industrial | $ | 33,454,280 | 9% | | $ | 34,278,539 | 11% | | $ | 20,601,207 | 20% | | $ | 26,351,942 | 27% | | $ | 25,810,468 | 29% |
Commercial Real Estate | | 158,714,554 | 40% | | | 157,450,876 | 49% | | | 39,906,055 | 39% | | | 28,561,983 | 30% | | | 16,959,062 | 19% |
Residential Real Estate | | 140,374,035 | 36% | | | 73,323,554 | 23% | | | 22,229,445 | 22% | | | 20,858,635 | 21% | | | 16,901,963 | 19% |
Home Equity Line of Credit | | 35,717,982 | 9% | | | 33,257,822 | 10% | | | 10,284,221 | 10% | | | 13,612,924 | 14% | | | 14,731,417 | 17% |
Land | | 5,856,875 | 1% | | | 1,716,747 | 1% | | | 3,098,973 | 3% | | | 5,172,942 | 5% | | | 7,558,993 | 9% |
Construction | | 18,052,287 | 5% | | | 19,343,013 | 6% | | | 4,704,581 | 5% | | | 1,959,353 | 2% | | | 5,112,225 | 6% |
Consumer & Other | | 881,179 | 0% | | | 1,309,781 | 0% | | | 911,690 | 1% | | | 502,270 | 1% | | | 1,340,547 | 2% |
Total Loans | | 393,051,192 | 100% | | | 320,680,332 | 100% | | | 101,736,172 | 100% | | | 97,020,049 | 100% | | | 88,414,675 | 100% |
Less: Allowance for Loan Losses | | (1,294,976) | | | | (851,000) | | | | (655,942) | | | | (824,653) | | | | (684,289) | |
Net Loans | $ | 391,756,216 | | | $ | 319,829,332 | | | $ | 101,080,230 | | | $ | 96,195,396 | | | $ | 87,730,386 | |
| | | | | | | | | | | | | | | | | | | |
Loans, net of deferred fees and costs, increased by $72 million to $391.8 million at December 31, 2014 from $319.8 million at December 31, 2013, due primarily to the Slavie purchase. See Note 2 to the consolidated financial statements for breakout of assets and liabilities purchased.
.
The following table summarizes the scheduled repayments of our loan portfolio, both by loan category and by fixed and adjustable rates, at December 31, 2014:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | One Year or Less | | | After One Through Five Years | | | After Five Years | | | Total | |
| By Loan Category: | | | | | | | | | | | | |
| Commercial & Industrial | $ | 10,904,009 | | $ | 18,984,693 | | $ | 3,565,578 | | $ | 33,454,280 | |
| Commercial Real Estate | | 20,255,695 | | | 88,114,633 | | | 50,344,226 | | | 158,714,554 | |
| Residential Real Estate | | 8,731,797 | | | 22,196,779 | | | 109,445,459 | | | 140,374,035 | |
| Land | | 5,137,934 | | | 718,941 | | | - | | | 5,856,875 | |
| Home Equity Line of Credit | | - | | | 1,611,787 | | | 34,106,195 | | | 35,717,982 | |
| Construction | | 8,113,885 | | | 8,150,249 | | | 1,788,153 | | | 18,052,287 | |
| Consumer & Other | | 163,853 | | | 433,218 | | | 284,108 | | | 881,179 | |
| Total | $ | 53,307,173 | | $ | 140,210,300 | | $ | 199,533,719 | | $ | 393,051,192 | |
| | | | | | | | | | | | | |
| By Rate Terms: | | | | | | | | | | | | |
| Fixed rate | | 31,796,538 | | | 112,918,949 | | | 123,424,751 | | | 268,140,238 | |
| Adjustable rate | | 21,510,274 | | | 27,291,351 | | | 76,109,329 | | | 124,910,954 | |
| Total | $ | 53,306,812 | | $ | 140,210,300 | | $ | 199,534,080 | | $ | 393,051,192 | |
Loans are placed on nonaccrual status when they are past-due 90 days as to either principal or interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. Placing a loan on nonaccrual status means that we no longer accrue interest on such loan and reverse any interest previously accrued but not collected. Management may grant a waiver from nonaccrual status for a 90-day past-due loan that is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to make payments in accordance with the terms of the loan and remains current.
A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the fair value of the collateral for collateral dependent loans and at the present value of expected future cash flows using the loans’ effective interest rates for loans that are not collateral dependent.
At December 31, 2014, we had 67 impaired loans totaling $6.4 million. Of this amount, 58 impaired loans totaling $5.2 million were classified as nonaccrual loans. At December 31, 2014, troubled debt restructurings, or TDRs, included in impaired loans totaled $2.4 million, 8 loans of which were included in nonaccrual loans having a total balance of $1.2 million. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms. At December 31, 2014, the total valuation allowance for impaired loans was $0.
At December 31, 2013, we had 48 impaired loans totaling $6.1 million. Of this amount, 37 impaired loans totaling $3.8 million were classified as nonaccrual loans. At December 31, 2013, troubled debt restructurings, or TDRs, included in impaired loans totaled $2.6 million, 8 loans of which were included in nonaccrual loans having a total balance of $0.9 million. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms. At December 31, 2013, the total valuation allowance for impaired loans was $0.
The following table presents details of our nonperforming loans and nonperforming assets, as these asset quality metrics are evaluated by management, for the years indicated:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 |
| | | | | | | | | | | | | | | | |
| Nonaccrual loans excluding PCI loans | | $ | 5,237,356 | | $ | 3,809,000 | | $ | 1,299,252 | | $ | 3,474,989 | | $ | 1,055,197 |
| Nonaccrual PCI loans | | | 1,620,710 | | | 179,114 | | | 656,624 | | | 20,000 | | | - |
| TDR loans excluding those in nonaccrual loans | | | 1,155,508 | | | 1,633,980 | | | 1,794,220 | | | 1,750,000 | | | - |
| Accruing loans past due 90+ days excluding PCI loans | | | - | | | - | | | 460,354 | | | - | | | - |
| Accruing PCI loans past due 90+ days | | | 5,380,847 | | | 2,692,572 | | | 1,186,437 | | | 1,848,482 | | | 3,916,077 |
| | | | | | | | | | | | | | | | |
| Total nonperforming loans | | | 13,394,421 | | | 8,314,666 | | | 5,396,887 | | | 7,093,471 | | | 4,971,274 |
| | | | | | | | | | | | | | | | |
| Real estate acquired through foreclosure | | | 1,480,472 | | | 1,290,120 | | | 1,151,256 | | | 1,504,101 | | | 1,818,460 |
| | | | | | | | | | | | | | | | |
| Total nonperforming assets | | $ | 14,874,893 | | $ | 9,604,786 | | $ | 6,548,143 | | $ | 8,597,572 | | $ | 6,789,734 |
The level of nonperforming assets increased primarily due to the Slavie Acquisition which resulted in the addition of Slavie nonperforming loans and real estate acquired through foreclosure which outpaced pay downs on older acquired loans. Nonperforming assets continue to have a negative impact on earnings as the economy is showing only slight improvement. Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, accruing loans past due 90 days or more, and real estate acquired through foreclosure, increased to $14.90 million at December 31, 2014 from $9.60 million at December 31, 2013. Nonperforming assets represented 3.10% of total assets at December 31, 2014 compared to 2.29% at December 31, 2013. Management has worked diligently to identify borrowers that may be facing difficulties in order to restructure terms where appropriate, secure additional collateral or pursue foreclosure and other secondary sources of repayment. The continued success in reducing nonperforming assets will ultimately be dependent on continued management diligence and improvement in the economy and the real estate market.
Potential problem loans consist of loans that are performing under contract but for which credit problems have caused us to place them on our list of criticized loans. These loans have a risk rating of 6 (Special Mention) or higher, and exclude all nonaccrual loans and accruing loans past due 90+ days. As of December 31, 2014, these loans totaled $33.6 million and consisted primarily of Commercial Real Estate and Residential Real Estate loans which had balances of $19.2 million and $11.1 million, respectively. As of December 31, 2013, these loans totaled $21.6 million and consisted primarily of Commercial Real Estate and Residential Real Estate loans which had balances of $17.5 million and $2.4 million, respectively. Difficulties in the economy and the accompanying impact on these borrowers, as well as future events, such as regulatory examination assessments, may result in these loans and others being classified as nonperforming assets in the future.
Allowance for Loan Losses and Credit Risk Management
The allowance for loan losses is established to estimate losses that may occur on loans by recording a provision for loan losses that is charged to earnings in the current period. The allowance is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historic experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Measured impairment and credit losses are charged against the allowance when management believes the loan or a portion of the loan’s balance is not collectable. Subsequent recoveries, if any, are credited to the allowance.
The allowance consists of specific and general components. The specific component relates to individual loans that are classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement and primarily includes nonaccrual loans, troubled debt restructurings, and purchased credit impaired loans where cash flows have deteriorated from those forecasted as of the acquisition date. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value of the loan. For collateral-dependent impaired loans, any measured impairment is properly charged-off against the loan and allowance in the applicable reporting period. The specific component may fluctuate from period to period if changes occur in the nature and volume of impaired loans.
The general component covers pools of similar loans, including purchased loans that did not have deteriorated credit quality and new loan originations, and is based upon historical loss experience of the bank or peer bank group if the bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the Bank’s loan portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time that the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The general component may fluctuate from period to period if changes occur in the mix of the Bank’s loan portfolio, economic conditions, or specific industry conditions.
A test of the adequacy of the allowance, using the methodology outlined above, is performed by management and reported to the Board of Directors on at least a quarterly basis. The complex evaluations involved in such testing require significant estimates. Management uses available data to establish the allowance at a prudent level, recognizing that the determination is inherently subjective, and that future adjustments may be necessary, depending upon many items including a change in economic conditions affecting specific borrowers, or in general economic conditions, and new information that becomes available. However, there are no assurances that the allowance will be sufficient to absorb losses on nonperforming loans, or that the allowance will be sufficient to cover losses on nonperforming loans in the future.
The allowance was $1,294,976 at December 31, 2014, compared to $851,000 at December 31, 2013. The allowance as a percentage of total portfolio loans was 0.33% at December 31, 2014 and 0.27% at December 31, 2013. Management expects continued gradual increases in our allowance for loan losses due to the gradual runoff of the discount on the acquired loan portfolio and an increase in new loan originations.
For non-impaired loans acquired by the Bank from Bay National on July 10, 2010 without evidence of deteriorated credit quality, there was an unamortized discount of $0.7 million and $1.2 million at December 31, 2014 and December 31, 2013, respectively, which represented 3.3% and 4.2%, respectively, of the related loan balance. For non-impaired acquired legacy Carrollton Bank portfolio loans without evidence of deteriorated credit quality, there was an unamortized discount of $1.3 million and $1.6 million at December 31, 2014 and December 31, 2013 which represented 1.0% and 1.1%, respectively of the related loan balance. For non-impaired acquired legacy Slavie portfolio loans without evidence of deteriorated credit quality, there was an unamortized discount of $2.2 million at December 31, 2014 which represented 3.9% of the related loan balance. As the total combined remaining discount exceeded the indicated total required reserve for these loan pools, no additional reserves were recorded.
During the year ended December 31, 2014, we recorded net charge-offs of $357,712 compared to net charge-offs of $647,149 during 2013.
The following table reflects activity in the allowance for loan losses for the periods indicated:
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 |
| Balance at beginning of year | | $ | 851,000 | | $ | 655,942 | | $ | 824,653 | | $ | 684,289 | | $ | - |
| Chargeoffs: | | | | | | | | | | | | | | | |
| Commercial & Industrial | | | - | | | 82,860 | | | 101,128 | | | 39,778 | | | - |
| Commercial Real Estate | | | 300,214 | | | 187,419 | | | 1,796 | | | - | | | - |
| Residential Real Estate | | | 274,382 | | | 441,421 | | | 183,765 | | | 424,579 | | | - |
| Home Equity Line of Credit | | | 79,492 | | | 10,919 | | | 647,063 | | | 383,187 | | | - |
| Land | | | - | | | - | | | 36,177 | | | 231,362 | | | - |
| Construction | | | - | | | - | | | - | | | 37,386 | | | - |
| Consumer & Other | | | 934 | | | 1,000 | | | - | | | - | | | - |
| Total charge-offs | | | 655,022 | | | 723,619 | | | 969,929 | | | 1,116,292 | | | - |
| | | | | | | | | | | | | | | | |
| Recoveries: | | | | | | | | | | | | | | | |
| Commercial & Industrial | | | 30,000 | | | - | | | 30,000 | | | - | | | - |
| Commercial Real Estate | | | 137,072 | | | - | | | 1,796 | | | - | | | - |
| Residential Real Estate | | | 109,827 | | | 39,135 | | | 7,000 | | | - | | | - |
| Home Equity Line of Credit | | | 9,844 | | | 13,578 | | | 28,605 | | | - | | | - |
| Land | | | - | | | 23,026 | | | - | | | - | | | - |
| Construction | | | - | | | - | | | - | | | - | | | - |
| Consumer & Other | | | 10,567 | | | 731 | | | - | | | - | | | - |
| Total recoveries | | | 297,310 | | | 76,470 | | | 67,401 | | | - | | | - |
| | | | | | | | | | | | | | | | |
| Net charge-offs | | | 357,712 | | | 647,149 | | | 902,528 | | | 1,116,292 | | | - |
| Provision for loan loss | | | 801,688 | | | 842,207 | | | 733,817 | | | 1,256,656 | | | 684,289 |
| | | �� | | | | | | | | | | | | | |
| Balance at end of year | | $ | 1,294,976 | | $ | 851,000 | | $ | 655,942 | | $ | 824,653 | | $ | 684,289 |
| | | | | | | | | | | | | | | | |
| Allowance as a percentage of total loans at the end of the year | | | 0.33% | | | 0.27% | | | 0.64% | | | 0.85% | | | 0.77% |
| Net charge-offs as a percentage of average loans during the year | | | 0.10% | | | 0.25% | | | 0.92% | | | 1.21% | | | 0.00% |
The following table presents the allowance for loan losses by loan category at the dates indicated below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 |
| | | | Amount | | Percent of Loans in Each Category to Total Loans | | | Amount | | Percent of Loans in Each Category to Total Loans | | | Amount | | Percent of Loans in Each Category to Total Loans | | | Amount | | Percent of Loans in Each Category to Total Loans | | | Amount | | Percent of Loans in Each Category to Total Loans |
| Commercial & Industrial | | $ | 200,510 | | 9% | | $ | 167,400 | | 11% | | $ | 121,759 | | 20% | | $ | 151,395 | | 27% | | $ | 232,789 | | 29% |
| Commercial Real Estate | | | 554,585 | | 40% | | | 324,080 | | 49% | | | 131,350 | | 39% | | | 88,361 | | 30% | | | 36,604 | | 19% |
| Residential Real Estate | | | 203,413 | | 36% | | | 80,239 | | 23% | | | 199,306 | | 22% | | | 49,490 | | 21% | | | 69,677 | | 19% |
| Home Equity Line of Credit | | | 166,733 | | 9% | | | 129,203 | | 10% | | | 81,955 | | 10% | | | 446,911 | | 14% | | | 207,227 | | 17% |
| Land | | | 8,687 | | 1% | | | 6,918 | | 1% | | | 6,400 | | 3% | | | 8,256 | | 5% | | | 78,996 | | 9% |
| Construction | | | 153,089 | | 5% | | | 135,416 | | 6% | | | 109,335 | | 5% | | | 75,473 | | 2% | | | 55,233 | | 6% |
| Consumer & Other | | | 7,959 | | 0% | | | 7,744 | | 0% | | | 5,837 | | 1% | | | 4,767 | | 1% | | | 3,763 | | 1% |
| Total Loans | | $ | 1,294,976 | | 100% | | $ | 851,000 | | 100% | | $ | 655,942 | | 100% | | $ | 824,653 | | 100% | | $ | 684,289 | | 100% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits
The following deposit table presents the composition of deposits at December 31, 2014 and 2013:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | 2014 vs 2013 | |
| | | Amount | | % of Total | | | Amount | | % of Total | | | $ Change | | % Change | |
| Noninterest-bearing deposits | $ | 91,676,534 | | 24% | | $ | 90,077,139 | | 25% | | $ | 1,599,395 | | 2% | |
| | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | |
| Checking | | 54,844,855 | | 14% | | | 42,378,939 | | 12% | | | 12,465,916 | | 29% | |
| Savings | | 36,233,369 | | 9% | | | 27,817,849 | | 8% | | | 8,415,520 | | 30% | |
| Money market | | 82,651,992 | | 21% | | | 78,356,997 | | 22% | | | 4,294,995 | | 5% | |
| Total interest-bearing checking, savings and money market deposits | | 173,730,216 | | 45% | | | 148,553,785 | | 42% | | | 25,176,431 | | 17% | |
| | | | | | | | | | | | | | | | |
| Time deposits under $100,000 | | 50,313,096 | | 13% | | | 59,403,534 | | 16% | | | (9,090,438) | | -15% | |
| Time deposits of $100,000 or more | | 72,110,286 | | 19% | | | 62,959,013 | | 17% | | | 9,151,273 | | 15% | |
| Total time deposits | | 122,423,382 | | 31% | | | 122,362,547 | | 33% | | | 60,835 | | 0% | |
| | | | | | | | | | | | | | | | |
| Total interest bearing deposits | | 296,153,598 | | 76% | | | 270,916,332 | | 75% | | | 25,237,266 | | 9% | |
| | | | | | | | | | | | | | | | |
| Total Deposits | $ | 387,830,132 | | 100% | | $ | 360,993,471 | | 100% | | $ | 26,836,661 | | 7% | |
The $26.8 million increase in total deposits was primarily attributable to the Slavie Acquisition, which added total deposits of $111.0 million. Time deposit balances have increased by $0.1 million since the Slavie Acquisition, as our strong liquidity position has allowed for a reduced dependence on large denomination and non-relationship balances.
The ratio of noninterest-bearing deposits to total deposits decreased to 24% at December 31, 2014, from 25% at December 31, 2013. Included in our deposit portfolio are brokered deposits through the Promontory Interfinancial Network. Through this deposit matching network, which includes CDARS and insured cash sweep service (“ICS”), we obtained the ability to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through CDARS and ICS on behalf of a customer, we typically receive matching deposits through the network’s reciprocal deposit program. At December 31, 2014, we had $8.9 million in CDARS and ICS deposits through the reciprocal deposit program compared to $11.6 at December 31, 2013. We can also choose to place deposits through this network without receiving matching deposits. At December 31, 2014, we had placed $0.3 million of deposits through this network for which we received no matching deposits, compared to $3.4 million at December 31, 2013.
Average balances by deposit category and the related average rate paid for the periods indicated are presented in the following table:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2014 | | 2013 | | 2012 | |
| | | Average Balance | | Average Rate Paid | | | Average Balance | | Average Rate Paid | | | Average Balance | | Average Rate Paid | |
| Noninterest-bearing deposits | $ | 93,643,953 | | 0.00% | | $ | 74,794,928 | | 0.00% | | $ | 24,030,276 | | 0.00% | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | |
| Checking | | 45,700,865 | | 0.10% | | | 29,363,622 | | 0.20% | | | 5,959,133 | | 0.23% | |
| Savings | | 34,329,672 | | 0.12% | | | 20,065,330 | | 0.03% | | | 512,524 | | 0.17% | |
| Money market | | 83,404,571 | | 0.37% | | | 64,100,619 | | 0.37% | | | 22,230,278 | | 0.23% | |
| Total interest-bearing checking, savings and money market deposits | | 163,435,108 | | 0.24% | | | 113,529,571 | | 0.27% | | | 28,701,935 | | 0.23% | |
| | | | | | | | | | | | | | | | |
| Total time deposits | | 128,621,230 | | 0.65% | | | 117,716,218 | | 0.81% | | | 44,663,774 | | 1.13% | |
| | | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | 292,056,338 | | 0.42% | | | 231,245,789 | | 0.54% | | | 73,365,709 | | 0.78% | |
| | | | | | | | | | | | | | | | |
| Total Deposits | $ | 385,700,291 | | 0.32% | | $ | 306,040,717 | | 0.41% | | $ | 97,395,985 | | 0.59% | |
The following table presents the maturity distribution for time deposits of $100 thousand or more at December 31, 2014:
| | | | |
| | | | |
| | Amount | |
| Three months or less | $ | 6,510,149 | |
| Over three months through six months | | 4,298,522 | |
| Over six months through twelve months | | 27,620,523 | |
| Over twelve months | | 33,681,092 | |
| Total Time Deposits | $ | 72,110,286 | |
Borrowings
Borrowings at December 31, 2014 consist of FHLB advances of $22 million and Atlantic Community Bankers Bank (“ACBB”) advances of $0.2 million, compared to $0 borrowings as of December 31, 2013.
CAPITAL RESOURCES
Ample capital is necessary to sustain growth, provide a measure of protection against unanticipated declines in asset values and safeguard the funds of depositors. Capital also provides a source of funds to meet loan demand and enables us to manage its assets and liabilities effectively.
At December 31, 2014, our total stockholders’ equity increased to $66.6 million from $54.6 million at December 31, 2013, primarily as a result of the $7.0 million capital raised upon the issuance of additional shares of common stock in May 2014, $3.0 million of retained corporate earnings and $1.5 million of stock-based compensation.
The Bank is subject to various regulatory capital requirements administered by 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 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 its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The minimum levels of Tier 1 and Total capital to risk-weighted assets are 4% and 8%, respectively, under the current regulations.
In addition, the OCC requires that FSBs, like the Bank, maintain a minimum level of Tier 1 capital to average total assets excluding intangibles. This measure is known as the leverage ratio. The current regulatory minimum for the leverage ratio for institutions to be considered adequately capitalized is 4%, but an individual institution could be required to maintain a higher level. In connection with the Merger, the Bank entered into an Operating Agreement with the OCC pursuant to which the Bank agreed, among other things, to maintain a leverage ratio of at least 10% for the term of the Operating Agreement. The Operating Agreement will remain in effect until it is terminated by the OCC or the Bank ceases to be an FSB, either due to a merger or otherwise.
Until the adoption of the Basel III Capital Rules, the Company was not subject to specific capital requirements. The Basel III Capital Rules generally will subject to the Company to the same capital requirements that apply to other depository institution holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio of Tier 1 capital (as defined) to average tangible assets (as defined). At December 31, 2014 and 2013, the Bank had regulatory capital in excess of that required under each requirement and was classified as “well capitalized”.
Actual capital amounts and ratios for the Bank are presented in the following table (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | To Be Well | | |
| | | | | | | | | | Capitalized Under | | |
| | | | | | | To Be Considered | | | Prompt Corrective | | |
| | | | Actual | | | | Adequately Capitalized | | | Action Provisions | | |
| As of December 31, 2014: | | | Amount | | Ratio | | | Amount | | Ratio | | | Amount | | Ratio | |
| | | | | | | | | | | | | | | | | | | | |
| Total Risk-Based Capital Ratio | | $ | 62,743 | | 16.66 | % | | $ | 30,132 | | 8.00 | % | | $ | 37,665 | | 10.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Tier I Risk-Based Capital Ratio | | $ | 61,448 | | 16.31 | % | | $ | 15,066 | | 4.00 | % | | $ | 22,599 | | 6.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Leverage Ratio | | $ | 61,448 | | 12.94 | % | | $ | 18,988 | | 4.00 | % | | $ | 23,735 | | 5.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2013: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Total Risk-Based Capital Ratio | | $ | 47,815 | | 14.68 | % | | $ | 26,049 | | 8.00 | % | | $ | 32,562 | | 10.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Tier I Risk-Based Capital Ratio | | $ | 46,964 | | 14.42 | % | | $ | 13,025 | | 4.00 | % | | $ | 19,537 | | 6.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Leverage Ratio | | $ | 46,964 | | 11.41 | % | | $ | 16,461 | | 4.00 | % | | $ | 20,577 | | 5.00 | % | |
The OCC is required to take certain supervisory actions against an undercapitalized FSB, the severity of which depends upon the FSB’s degree of capitalization. Failure to maintain an appropriate level of capital could cause the OCC to take any one or more of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
Banking regulations also limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agencies. In addition to these regulations, the Bank agreed in the Operating Agreement that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including the minimum capital requirements. Due to the Bank’s desire to preserve capital to fund its growth, we currently do not anticipate paying a dividend for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends is at the discretion of our Board of Directors and will depend, in part, on our earnings and future capital needs.
The current capital regime will significantly change when the Basel III Capital Rules are phased in starting on January 1, 2015. These changes are discussed in Item 1 of Part I of this Annual Report under the heading “Capital Requirements” in the “Supervision and Regulation” section.
Management is in the process of reviewing the new capital rules to determine the impact that they will have on the Company and the Bank.
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 the Company’s customers, as well as to meet current and planned expenditures. Management monitors the liquidity position daily.
Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations and capital. Additionally, liquidity is provided through our portfolios of cash and interest-bearing deposits in other banks, federal funds sold, loans held for sale, and securities available for sale. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by the Bank’s competition.
The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $71.4 million at December 31, 2014. Management notes that, historically, a small percentage of unused lines of credit are actually drawn down by customers within a 12-month period.
Our most liquid assets are cash and assets that can be readily converted into cash, including interest-bearing deposits with banks and federal funds sold, and investment securities. As of December 31, 2014, we had $7.1 million in cash and due from banks, $9.8 million in interest-bearing deposits with banks and federal funds sold, and $35.3 million in investment securities available for sale.
The Bank also has external sources of funds through the Federal Reserve Bank of Richmond (the “Reserve Bank”) and FHLB, which can be drawn upon when required. The Bank has a line of credit totaling approximately $96 million with the FHLB of which $62.8 million was available to be drawn on December 31, 2014 based on qualifying loans pledged as collateral. In addition, the Bank can pledge securities at the Reserve Bank and FHLB and, depending on the type of security, may borrow approximately 50% to 97% of the fair market value of the securities. The Bank had $20.2 million of securities pledged at the FHLB, $0.1 million of securities pledged at the Reserve Bank, and an additional $16.3 million of unpledged securities. Using these securities as collateral, the Bank could borrow approximately $25.8 million as of December 31, 2014.
Additionally, the Bank has unsecured federal funds lines of credit totaling $8.0 million with two institutions and a $4.0 million secured federal funds line of credit with another institution. The secured federal funds line of credit with another institution would require the Bank to transfer securities currently pledged at the FHLB or the Reserve Bank or to pledge unpledged securities to this institution before it could borrow against this line. In November of 2014, the Company obtained a $41.0 million unsecured revolving line of credit with an institution payable in full in November 2015 unless otherwise agreed. The proceeds of the Company’s line of credit may be used for general corporate purposes. At December 31, 2014, there were outstanding balances of $22.0 million under the Bank’s FHLB line and of $0.2 million under the Company’s other line of credit. There were no outstanding balances under these lines or other borrowings at December 31, 2013.
To further aid in managing liquidity, the Bank’s Board of Directors has approved and formed an Asset/Liability Management Committee (“ALCO”) to review and discuss recommendations for the use of available cash and to maintain an investment portfolio. By limiting the maturity of securities and maintaining a conservative investment posture, management can rely on the investment portfolio to help meet any short-term funding needs.
We believe the Bank has adequate cash on hand and available through liquidation of investment securities and available borrowing capacity to meet our liquidity needs. Although we believe sufficient liquidity exists, if economic conditions and consumer confidence deteriorate, this liquidity could be depleted, which would then materially affect our ability to meet operating needs and to raise additional capital.
MARKET RISK AND INTEREST RATE SENSITIVITY
Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on liabilities. Our interest rate risk represents the level of exposure we have to fluctuations in interest rates and is primarily measured as the change in earnings and the theoretical market value of equity that results from changes in interest rates. The ALCO oversees our management of interest rate risk. The objective of the management of interest rate risk is to maximize stockholder value, enhance profitability and increase capital, serve customer and community needs, and protect us from any material financial consequences associated with changes in interest rate risk.
Interest rate risk is that risk to earnings or capital arising from movement of interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships across yield curves that affect bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest rate related options embedded in certain bank products (option risk). Changes in interest rates may also affect a bank’s underlying economic value. The value of a bank’s assets, liabilities, and interest-rate related, off-balance sheet contracts is affected by a change in rates because the present value of future cash flows, and in some cases the cash flows themselves, is changed.
We believe that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management and the Board have chosen an interest rate risk profile that is consistent with our strategic business plan.
The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by our ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology we employ. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.
We prepare a current base case and eight alternative simulations at least once a quarter and report the analysis to the board of directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate.
The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in the current rate environment. It is our goal to structure the balance sheet so that net interest-earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.
At December 31, 2014, we were in an asset sensitive position. Management continuously strives to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will reprice in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining interest rate environment since more liabilities than assets will reprice in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.
| | | | | | | | | | |
| | | | | | | | | | |
| Estimated Changes in Net Interest Income | | | | | | |
| Change in Interest Rates: | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | -300 bp | -400 bp | |
| Policy Limit | -20.0% | -15.0% | -10.0% | -5.0% | -5.0% | -10.0% | -15.0% | -20.0% | |
| December 31, 2014 | 1.8% | 1.4% | 0.9% | 0.4% | -2.4% | N/A | N/A | N/A | |
| December 31, 2013 | 11.7% | 8.7% | 5.6% | 2.7% | -1.3% | N/A | N/A | N/A | |
As shown above, measures of net interest income at risk were less favorable at December 31, 2014 than at December 31, 2013 at all interest rate shock levels. All measures remained well within prescribed policy limits. The primary contributors to the less favorable position was the less asset sensitive balance sheet that resulted from the long-term fixed rate mortgages obtained in the Slavie Acquisition.
The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.
| | | | | | | | | | |
| | | | | | | | | | |
| Estimated Changes in Economic Value of Equity (EVE) | | | | | | | |
| Change in Interest Rates: | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | -300 bp | -400 bp | |
| Policy Limit | -40.0% | -30.0% | -20.0% | -10.0% | -10.0% | -20.0% | -30.0% | -40.0% | |
| December 31, 2014 | 12.1% | 10.2% | 7.7% | 4.9% | -3.2% | N/A | N/A | N/A | |
| December 31, 2013 | 17.7% | 14.3% | 10.1% | 5.9% | -11.0% | N/A | N/A | N/A | |
The EVE at risk declined slightly at December 31, 2014 when compared to December 31, 2013 in all interest rate shock levels. The negative impact on EVE is caused by the significant increase in volume of longer duration loans from the Slavie acquisition which contributes to less benefit as market rates increase in the shock scenarios. We evaluated the slightly below policy decrease in the declining rate scenario shown in the table above. Although we believe the likelihood of this scenario is extremely remote, we will continue to adjust our strategy and monitor the impact of our adjustments to ensure they do not exacerbate or create new out-of-policy limit results.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
We have various contractual obligations that may require future cash payments. The following table presents our significant contractual obligations as of December 31, 2014:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Projected Maturity Date or Payment Period | |
| | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years | |
| Time Deposits (1) | $ | 122,423,382 | | $ | 63,845,975 | | $ | 39,254,818 | | $ | 19,322,589 | | $ | - | |
| Operating lease obligations (2) | | 9,165,723 | | | 1,560,160 | | | 2,081,414 | | | 1,563,489 | | | 3,960,660 | |
| Purchase obligations (3) | | 3,043,000 | | | 883,000 | | | 1,845,000 | | | 315,000 | | | - | |
| Total | $ | 134,632,105 | | $ | 66,289,135 | | $ | 43,181,232 | | $ | 21,201,078 | | $ | 3,960,660 | |
| | | | | | | | | | | | | | | | |
| (1) In the normal course of business, a substantial portion of these balances rollover into new time deposits. |
| (2) The total obligation is estimated based on our normal monthly charges. |
| (3) Represents payments required under a contract with our data processing services provider which expires in April 2018. |
We also 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 issued by the Bank. 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.
The following table presents our outstanding loan commitments and lines and letters of credit as of December 31, 2014:
| | | | |
| | | | |
| | | |
| | | December 31, 2014 | |
| Loan commitments | $ | 5,021,857 | |
| Unused lines of credit | | 64,761,646 | |
| Standby letters of credit | | 1,632,927 | |
| | | | |
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. Management is not aware of any accounting loss that we would incur by funding these commitments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This disclosure is not required, since we are a “smaller reporting company”, but information regarding our market risk is discussed in Item 7 of this Part II under the heading, “Market Risk and Interest Rate Sensitivity”.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Bay Bancorp, Inc.
Lutherville, MD
We have audited the accompanying consolidated balance sheets of Bay Bancorp, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bay Bancorp, Inc. as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/McGladrey LLP
Frederick, Maryland
March 31, 2015
BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| | | | | |
| | | | | |
| | December 31, |
| | 2014 | | | 2013 |
| | | | | |
Cash and due from banks | $ | 7,062,943 | | $ | 7,126,720 |
Interest bearing deposits with banks and federal funds sold | | 9,794,382 | | | 16,146,340 |
Total Cash and Cash Equivalents | | 16,857,325 | | | 23,273,060 |
| | | | | |
Time deposits with banks | | 34,849 | | | - |
Investment securities available for sale, at fair value | | 35,349,889 | | | 36,586,669 |
Investment securities held to maturity, at amortized cost | | 1,315,718 | | | - |
Restricted equity securities, at cost | | 1,862,995 | | | 1,009,695 |
Loans held for sale | | 7,233,306 | | | 12,836,234 |
| | | | | |
Loans, net of deferred fees and costs | | 393,051,192 | | | 320,680,332 |
Less: Allowance for loan losses | | (1,294,976) | | | (851,000) |
Loans, net | | 391,756,216 | | | 319,829,332 |
| | | | | |
Real estate acquired through foreclosure | | 1,480,472 | | | 1,290,120 |
Premises and equipment, net | | 5,553,957 | | | 5,998,532 |
Bank owned life insurance | | 5,485,377 | | | 5,356,575 |
Core deposit intangibles | | 3,478,282 | | | 3,993,679 |
Deferred tax assets, net | | 3,214,100 | | | 6,564,121 |
Accrued interest receivable | | 1,306,111 | | | 1,186,748 |
Accrued taxes receivable | | 3,122,885 | | | - |
Defined benefit pension asset | | 680,668 | | | - |
Other assets | | 1,210,835 | | | 1,164,538 |
Total Assets | $ | 479,942,985 | | $ | 419,089,303 |
| | | | | |
LIABILITIES | | | | | |
| | | | | |
Noninterest-bearing deposits | $ | 91,676,534 | | $ | 90,077,139 |
Interest-bearing deposits | | 296,153,598 | | | 270,916,332 |
Total Deposits | | 387,830,132 | | | 360,993,471 |
| | | | | |
Short-term borrowings | | 22,150,000 | | | - |
Defined benefit pension liability | | - | | | 42,492 |
Accrued expenses and other liabilities | | 3,319,567 | | | 3,499,072 |
Total Liabilities | | 413,299,699 | | | 364,535,035 |
| | | | | |
STOCKHOLDERS’ EQUITY | | | | | |
Common stock - par $1.00 per share, authorized 20,000,000 shares, issued and outstanding 11,014,517 shares as of December 31, 2014; authorized 11,108,500 shares, issued and outstanding 9,379,753 shares as of December 31, 2013. | | 11,014,517 | | | 9,379,753 |
| | | | | |
Additional paid-in capital | | 43,228,950 | | | 36,357,001 |
Retained earnings | | 10,736,305 | | | 7,703,597 |
Accumulated other comprehensive income | | 1,663,514 | | | 1,113,917 |
Total Stockholders' Equity | | 66,643,286 | | | 54,554,268 |
Total Liabilities and Stockholders' Equity | $ | 479,942,985 | | $ | 419,089,303 |
See accompanying notes to audited consolidated financial statements
BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | |
| | | | | | | |
| | Years Ended December 31, |
| | | 2014 | | | 2013 | |
| | | | | | | |
Interest income: | | | | | | | |
Interest and fees on loans | | $ | 22,848,600 | | $ | 17,531,386 | |
Interest on loans held for sale | | | 246,212 | | | 776,325 | |
Interest and dividends on securities | | | 970,377 | | | 638,538 | |
Interest on deposits with banks and federal funds sold | | | 49,811 | | | 73,294 | |
Total Interest Income | | | 24,115,000 | | | 19,019,543 | |
| | | | | | | |
Interest expense: | | | | | | | |
Interest on deposits | | | 1,231,643 | | | 1,259,901 | |
Interest on short-term borrowings | | | 25,556 | | | 2,068 | |
Total Interest Expense | | | 1,257,199 | | | 1,261,969 | |
Net Interest Income | | | 22,857,801 | | | 17,757,574 | |
| | | | | | | |
Provision for loan losses | | | 801,688 | | | 842,207 | |
Net interest income after provision for loan losses | | | 22,056,113 | | | 16,915,367 | |
| | | | | | | |
Noninterest income: | | | | | | | |
Electronic banking fees | | | 2,637,079 | | | 2,050,941 | |
Mortgage banking fees and gains | | | 950,299 | | | 2,372,956 | |
Net gain on sale of real estate acquired through foreclosure | | | 58,046 | | | 283,984 | |
Brokerage commissions | | | - | | | 471,810 | |
Service charges on deposit accounts | | | 393,128 | | | 285,557 | |
Bargain purchase gain | | | 524,432 | | | 2,860,199 | |
Other income | | | 3,201,243 | | | 619,531 | |
Total Noninterest Income | | | 7,764,227 | | | 8,944,978 | |
| | | | | | | |
Noninterest Expenses: | | | | | | | |
Salary and employee benefits | | | 13,347,292 | | | 10,523,757 | |
Occupancy expenses | | | 2,935,880 | | | 2,189,811 | |
Furniture and equipment expenses | | | 1,174,911 | | | 802,812 | |
Legal, accounting and other professional fees | | | 1,416,505 | | | 1,362,118 | |
Data processing and item processing services | | | 1,197,231 | | | 1,054,234 | |
FDIC insurance costs | | | 383,031 | | | 285,411 | |
Advertising and marketing related expenses | | | 382,465 | | | 381,810 | |
Foreclosed property expenses | | | 690,989 | | | 369,106 | |
Loan collection costs | | | 332,843 | | | 154,864 | |
Core deposit intangible amortization | | | 992,960 | | | 791,498 | |
Merger related expenses | | | 1,028,239 | | | 2,041,756 | |
Other expenses | | | 3,632,071 | | | 2,157,944 | |
Total Noninterest Expenses | | | 27,514,417 | | | 22,115,121 | |
Income before income taxes | | | 2,305,923 | | | 3,745,224 | |
| | | | | | | |
Income tax (benefit) expense | | | (726,785) | | | 504,090 | |
Net income | | $ | 3,032,708 | | $ | 3,241,134 | |
| | | | | | | |
Basic net income per common share | | $ | 0.29 | | $ | 0.39 | |
| | | | | | | |
Diluted net income per common share | | $ | 0.29 | | $ | 0.39 | |
See accompanying notes to audited consolidated financial statements
BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | |
| | |
| Years Ended December 31, |
| | 2014 | | | 2013 |
| | | | | |
Net income | $ | 3,032,708 | | $ | 3,241,134 |
| | | | | |
Other Comprehensive Income: | | | | | |
| | - | | | |
Unrealized gain (loss) on investment securities available for sale | | 664,241 | | | (744,943) |
Income tax (expense) benefit relating to item above | | (261,976) | | | 293,880 |
Net effect on other comprehensive income | | 402,265 | | | (451,063) |
| | | | | |
Unrealized gain on defined benefit pension plan | | 243,303 | | | 2,154,881 |
Income tax (expense) benefit relating to item above | | (95,971) | | | (849,993) |
Net effect on other comprehensive income | | 147,332 | | | 1,304,888 |
| | | | | |
Other comprehensive income | | 549,597 | | | 853,825 |
Total Comprehensive Income | $ | 3,582,305 | | $ | 4,094,959 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes to audited consolidated financial statements
BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | Accumulated | | |
| | | | | Additional | | | | Other | | |
| | | Common | | Paid-in | | Retained | | Comprehensive | | |
| | | Stock | | Capital | | Earnings | | Income | | Total |
| Balance December 31, 2012 (1) | $ | 5,831,963 | $ | 21,269,898 | $ | 4,462,463 | $ | 260,092 | $ | 31,824,416 |
| | | | | | | | | | | |
| Net income | | - | | - | | 3,241,134 | | - | | 3,241,134 |
| Other comprehensive income | | - | | - | | - | | 853,825 | | 853,825 |
| Issuance of common stock to FSPF I, LLC | | 2,039,958 | | 8,960,042 | | - | | - | | 11,000,000 |
| Carrollton Bancorp shares retained at the date of Merger | | 1,483,457 | | 5,800,313 | | - | | - | | 7,283,770 |
| Issuance of restricted common stock | | 15,488 | | (15,488) | | - | | - | | - |
| Stock-based compensation | | - | | 311,133 | | - | | - | | 311,133 |
| Issuance of common stock under stock option plan | | 8,887 | | 31,103 | | - | | - | | 39,990 |
| Balance December 31, 2013 | | 9,379,753 | | 36,357,001 | | 7,703,597 | | 1,113,917 | | 54,554,268 |
| | | | | | | | | | | |
| Net income | | - | | - | | 3,032,708 | | - | | 3,032,708 |
| Other comprehensive income | | - | | - | | - | | 549,597 | | 549,597 |
| Stock-based compensation | | 212,000 | | 1,294,713 | | - | | - | | 1,506,713 |
| Issuance of common stock under Securities Purchase Agreement | | 1,422,764 | | 5,577,236 | | - | | - | | 7,000,000 |
| Balance December 31, 2014 | $ | 11,014,517 | $ | 43,228,950 | $ | 10,736,305 | $ | 1,663,514 | $ | 66,643,286 |
| (1) | | As restated for the effect of the Merger (as defined in Note 1), with each share of Jefferson Bancorp, Inc. common stock, $0.01 par, converted into 2.2217 shares of Bay Bancorp, Inc. common stock, $1.00 par. |
See accompanying notes to audited consolidated financial statements
BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | |
| | | | | | |
| Years Ended December 31, |
| | 2014 | | | 2013 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income | $ | 3,032,708 | | $ | 3,241,134 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization of premises and equipment | | 880,644 | | | 644,261 | |
Stock-based compensation | | 1,506,713 | | | 311,133 | |
Amortization of investment premiums and discounts, net | | 239,612 | | | 474,574 | |
Accretion of net discounts on loans | | (5,666,090) | | | (4,127,391) | |
Amortization of core deposit intangibles | | 992,960 | | | 791,498 | |
Reversal of remaining interest rate mark to market adjustment on IRA deposits | | (2,379,662) | | | - | |
Amortization of deposit premiums | | (1,018,176) | | | (989,291) | |
Provision for loan losses | | 801,688 | | | 842,207 | |
Increase in cash surrender value of bank owned life insurance | | (128,802) | | | (93,320) | |
Bargain purchase gain | | (524,432) | | | (2,860,199) | |
Loss on sales of premises and equipment | | 4,431 | | | - | |
Deferred income taxes | | 2,992,074 | | | (486,211) | |
Write down of real estate acquired through foreclosure | | 412,343 | | | 100,611 | |
Gain on sale of real estate acquired through foreclosure | | (58,046) | | | (283,984) | |
Origination of loans held for sale | | (74,709,000) | | | (203,686,063) | |
Proceeds from sales of loans held for sale | | 81,333,823 | | | 220,225,874 | |
Gains on sales of loans held for sale | | (2,123,595) | | | (2,372,956) | |
Net decrease in accrued pension plan | | (479,857) | | | (85,468) | |
Net increase in accrued taxes receivable | | (3,122,885) | | | - | |
Net decrease in accrued interest receivable and other assets | | 182,112 | | | 3,168,586 | |
Net decrease increase in accrued expenses and other liabilities | | (182,773) | | | (357,825) | |
Net cash provided by operating activities | | 1,985,790 | | | 14,457,170 | |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Acquisition, net of cash acquired | | 24,623,173 | | | 27,152,544 | |
Net decrease in time deposits with banks | | 1,511,869 | | | - | |
Purchases of investment securities available for sale | | (2,042,500) | | | (15,744,344) | |
Purchases of investment securities held to maturity | | (1,340,499) | | | - | |
Redemptions and maturities of investment securities | | 3,926,003 | | | 7,438,726 | |
Proceeds from sale of securities available for sale | | - | | | 2,622,388 | |
Redemption of Federal Home Loan Bank stock | | 400,300 | | | 34,800 | |
Net decrease in loans | | 15,646,634 | | | 10,691,422 | |
Proceeds from sale of real estate acquired through foreclosure | | 762,542 | | | 2,185,785 | |
Purchases of premises and equipment | | (479,250) | | | (286,635) | |
Proceeds from sale of premises and equipment | | 38,750 | | | 1,124,849 | |
Net cash provided by investing activities | | 43,047,022 | | | 35,219,535 | |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Net decrease in deposits | | (80,598,547) | | | (56,958,464) | |
Repayment of Federal Home Loan Bank advances | | - | | | (170,000) | |
Net increase in short-term borrowings | | 22,150,000 | | | - | |
Proceeds from issuance of common stock | | 7,000,000 | | | 11,000,000 | |
Issuance of common stock on stock option exercise | | - | | | 39,990 | |
Net cash used in financing activities | | (51,448,547) | | | (46,088,474) | |
| | | | | | |
Net (decrease) increase in cash and cash equivalents | | (6,415,735) | | | 3,588,231 | |
Cash and cash equivalents at beginning of period | | 23,273,060 | | | 19,684,829 | |
Cash and cash equivalents at end of period | $ | 16,857,325 | | $ | 23,273,060 | |
| | | | | | |
See accompanying notes to audited consolidated financial statements
| | | | | | |
| | | | | | |
BAY BANCORP, INC. AND SUBSIDIARY | |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) | |
| | | | | | |
| Years Ended December 31, | |
| | 2014 | | | 2013 | |
Supplemental Disclosures of Cash Flow information: | | | | | | |
Interest paid on deposits and borrowings | $ | 2,289,856 | | $ | 2,401,936 | |
Net income tax (refunds) payments | | (256,007) | | | 319,530 | |
| | | | | | |
Non Cash activities: | | | | | | |
Transfer of loans to real estate acquired through foreclosure | $ | 1,307,191 | | $ | 1,232,558 | |
Transfer of loans held for sale to loan portfolio | | 1,101,700 | | | 2,441,782 | |
Bay Bancorp, Inc. shares retained at the date of the Merger | | - | | | 7,283,770 | |
| | | | | | |
| | | | | | |
| | | | | | |
See accompanying notes to audited consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Bay Bancorp, Inc. is a savings and loan holding company. Through its subsidiary, Bay Bank, FSB, (the “Bank”), a federal savings bank (an “FSB”), Bay Bancorp, Inc. serves the community with a network of 12 branches strategically located throughout the Baltimore Metropolitan Statistical Area, particularly Baltimore City and the Maryland counties of Baltimore, Anne Arundel, Howard, and Harford. The Bank serves local consumers, small and medium size businesses, professionals and other valued customers by offering a broad suite of financial products and services, including on-line and mobile banking, commercial banking, cash management, mortgage lending and retail banking. The Bank funds a variety of loan types including commercial and residential real estate loans, commercial term loans and lines of credit, consumer loans and letters of credit. The Bank’s subsidiary, Bay Financial Services, Inc., provides investment advisory and brokerage services.
As used in these notes, the term “the Company” refers to Bay Bancorp, Inc. and, unless the context clearly requires otherwise, its consolidated subsidiaries.
Basis of Presentation
The consolidated financial statements include the accounts of Bay Bancorp, Inc., the Bank and the Bank’s consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The investment in subsidiary is recorded on Bay’s books on the basis of its equity in the net assets.
On April 19, 2013, Bay Bancorp, Inc. acquired all the outstanding common stock of Jefferson Bancorp, Inc. (“Jefferson”) in a merger (the “Merger”) that was accounted for as a reverse acquisition and recapitalization in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting and financial reporting purposes, Jefferson is deemed to have acquired Bay Bancorp, Inc. in the Merger even though Bay Bancorp, Inc. was the legal successor in the Merger, and the historical financial statements of Jefferson have become the Company’s historical financial statements. Consequently, the assets and liabilities and the operations that are reflected in the historical consolidated financial statements prior to the Merger are those of Jefferson, and the historical consolidated financial statements after the Merger include the assets and liabilities of Jefferson and Bay Bancorp, Inc., historical operations of Jefferson and operations of the combined corporation after April l9, 2013. See Note 2 for further information regarding the Merger. When discussing periods prior to April 19, 2013, the term “the Company” as used in these notes refers to Jefferson and its consolidated subsidiaries.
Reclassifications
Certain prior year amounts have been reclassified to conform to current period classifications. The bargain purchase gain for the three and six months ended June 30, 2014 related to the Slavie Acquisition was retroactively restated downward for measurement period adjustments of $186,682 (pretax) recorded for the three months ended September 30, 2014 and upward for measurement period adjustments of $13,588 (pretax) recorded for the three months ended December 31, 2014. These adjustments decreased the previously reported net income for the three and six months ended June 30, 2014 by $102,299.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses (the “allowance”); the fair value of financial instruments, such as loans, investment securities, and derivatives; measurement and assessment of intangible assets and other purchase accounting related adjustments; benefit plan obligations and expenses; the valuation of deferred tax assets, real estate acquired through foreclosure, and net assets acquired in the Merger and Slavie Acquisition; and the estimate of expected cash flows for loans acquired with deteriorated credit quality.
Segment Information
The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Bank to fund itself with deposits and other borrowings and manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.
Cash and Cash Equivalents
The Company has included cash and due from banks, interest bearing deposits with banks with an original maturity of 90 days or less, and federal funds sold as cash and cash equivalents for the purpose of reporting cash flows.
The Bank is required under regulations promulgated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to maintain reserves against its transaction accounts. These reserves are generally held in the form of cash or noninterest-earning accounts at the Bank. Based on the nature of our transaction account deposits and the amount of vault cash on hand, the Bank is not required to maintain a reserve balance with the Federal Reserve at December 31, 2014 and 2013.
Investment Securities
Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near future. The Company held no trading securities as of December 31, 2014 and December 31, 2013. Available for sale securities, comprised of debt and mortgage-backed securities, are those that may be sold before maturity due to changes in the Company’s interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held to maturity investment securities, comprised of mortgage backed securities, are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost.
Realized gains and losses are recorded in noninterest income and are determined on a trade date basis using the specific identification method. Interest and dividends on investment securities are recognized in interest income on an accrual basis. Premiums and discounts are amortized or accreted into interest income using the interest method over the expected lives of the individual securities.
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Debt securities with a decline in fair value below their cost that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses to the extent impairment is related to credit losses. The amount of the impairment for debt securities related to other factors is recognized in other comprehensive income (loss). In evaluating other-than-temporary impairment losses, management considers: (1) the length of time and the extent to which the fair value has been less than cost, (2) the reasons for the decline in value, (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events, and (4) for fixed maturity securities, whether the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of the cost basis, which may be at maturity.
Restricted Equity Securities, At Cost
The Bank is required to maintain a minimum investment in capital stock of other financial institutions in order to conduct business with these institutions. Since no ready market exists for these stocks and they have no quoted market value, the Bank’s investments in these stocks are carried at cost. Management reviews for impairment based on the ultimate recoverability of the cost basis in these securities. The stocks’ values are determined by the ultimate recoverability of the par values rather than by recognizing temporary declines. Management considers such criteria as the significance of a decline in net assets, if any, the length of time the situation has persisted, commitments by the institutions to make payments required by law or regulation, the impact of legislative or regulatory changes on the customer base and the Bank’s liquidity position.
The Company’s holdings of restricted stock investments consist of the following at December 31, 2014 and 2013:
| | | | | | | | |
| | | | | | | | |
| | | | 2014 | | | 2013 | |
| Federal Home Loan Bank | | $ | 1,544,000 | | $ | 690,700 | |
| Visa Inc., Class B | | | 204,195 | | | 204,195 | |
| Maryland Financial Bank | | | 49,800 | | | 49,800 | |
| Atlantic Central Bankers Bank | | | 65,000 | | | 65,000 | |
| Total restricted equity securities | | $ | 1,862,995 | | $ | 1,009,695 | |
Loans Held for Sale
The Company originates residential mortgage loans for resale in the secondary mortgage loan market. These loans are classified as loans held for sale and are carried at the lower of cost or estimated market value on an aggregate basis. Market value is determined based on the price secondary markets are currently offering for similar loans. Loans held for sale are sold with servicing rights released; gain or loss on the sale is recorded at the date the loan is sold in noninterest income.
Loans
The accounting methods for loans differ depending on whether the loans are originated or purchased, and if purchased, whether or not the purchased loans reflected credit deterioration since the date of origination such that it is probable on the purchase date that the Company will be unable to collect all contractually required payments.
Originated Loans
Loans are generally stated at the principal amount outstanding net of any deferred fees and costs. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. The accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. Generally, loans are placed on nonaccrual status once they are determined to be impaired or when principal or interest payments are 90 or more days past due. Previously accrued but uncollected interest income on these loans is reversed against interest income. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Fees charged and costs capitalized for originating certain loans are amortized or accreted by the interest method over the term of the loan.
Loans are considered impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which management evaluates collectively for impairment. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, management may measure impairment based on a loan’s observable market price or the fair value of the collateral if repayment of the loan is collateral-dependent. For collateral-dependent loans, any measured impairment is charged-off in the applicable reporting period.
Loans Acquired in a Transfer
The loans acquired in the Slavie Acquisition and from the Merger (see Note 2 Business Combinations) were recorded at fair value at the acquisition date and no separate valuation allowance was established. The initial fair values were determined by management, with the assistance of an independent valuation specialist, based on estimated expected cash flows discounted at appropriate rates. The discount rates were based on market rates for new originations of comparable loans and did not include a factor for loan losses as that was included in the estimated cash flows.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. If both conditions exist, the Company determines whether to account for each loan individually or whether such loans will be assembled into pools based on common risk characteristics such as credit score, loan type, and origination date. Based on this evaluation, the Company determined that the loans acquired from Bay National Bank, Slavie and in the Merger subject to ASC Topic 310-30 would be accounted for individually.
The Company considered expected prepayments and estimated the total expected cash flows, which included undiscounted expected principal and interest. The excess of that amount over the fair value of the loan is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the expected life of the loan. The excess of the contractual cash flows over expected cash flows is referred to as nonaccretable difference and is not accreted into income. Over the life of the loan, the Company continues to estimate expected cash flows. Subsequent decreases in expected cash flows are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in cash flows to be collected are first used to reverse any existing valuation allowance and any remaining increase are recognized prospectively through an adjustment of the loan’s yield over its remaining life.
ASC Topic 310-20, Nonrefundable Fees and Other Costs, was applied to loans not considered to have deteriorated credit quality at acquisition. Under ASC Topic 310-20, the difference between the loan’s principal balance at the time of purchase and the fair value is recognized as an adjustment of yield over the life of the loan.
Allowance for Loan Losses
The allowance for loan losses is established to estimate losses that may occur on loans by recording a provision for loan losses that is charged to earnings in the current period. Loans are charged-off when management believes a loan or any portion thereof is not collectable. Subsequent recoveries, if any, are credited to the allowance.
The allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value of that loan. For impaired loans that are collateral dependent, any measured impairment is charged-off against the loan and the allowance in the applicable reporting period. The general component covers loans that are not classified as impaired and primarily include purchased loans not deemed impaired and new loan originations. The general reserve is based on historical loss experience of the bank or peer bank group if the bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the Company’s loan portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data.
While management believes it has established the allowance in accordance with U.S. GAAP and has taken into account both the views of the Company’s regulators and the current economic environment, there can be no assurance that the Company’s regulators and/or the economic environment will not require future increases in the allowance.
Real Estate Acquired Through Foreclosure
The Company records foreclosed real estate assets at fair value less estimated costs to sell at the time of acquisition. Estimated fair value is based upon many subjective factors, including location and condition of the property and current economic conditions. Since the calculation of fair value relies on estimates and judgments relating to inherently uncertain events, actual results may differ materially from the Company’s estimates.
Write-downs at the time of acquisition are made through the allowance. Write-downs for subsequent declines in value and net operating expenses are included in foreclosed property expenses. Gains or losses realized upon disposition are included in noninterest income.
Premises and Equipment
Land is carried at cost. Buildings, land improvements, leasehold improvements, furniture and equipment, and software are stated at cost less accumulated depreciation and amortization. The cost basis of premises and equipment acquired through the Merger and Slavie Acquisition is their respective acquisition date fair values. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or over the estimated useful lives of the assets. Maintenance and normal repairs are charged to operations as incurred, while additions and improvements to buildings, leasehold improvements, and furniture and equipment are capitalized. Gains or losses on disposition of assets are reflected in earnings.
Long-lived assets are evaluated for impairment by management on an on-going basis. Impairment may occur whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Bank Owned Life Insurance
The Company has purchased bank owned life insurance policies on certain current and former employees as a means to generate tax-exempt income which is used to offset a portion of current and future employee benefit costs. Bank owned life insurance is recorded at the cash surrender value of the policies. Changes in the cash surrender value are included in noninterest income.
Core Deposit Intangibles
Core deposit intangibles (the portion of an acquisition purchase price which represents value assigned to the existing deposit base) have finite lives and are amortized by the declining balance method over periods ranging from six to nine years; amortization is recorded in noninterest expenses.
Accumulated Other Comprehensive Income
The Company records unrealized gains and losses on available for sale securities and unrecognized actuarial gains and losses, transition obligations and prior service costs on its pension plan in accumulated other comprehensive income, net of taxes. Unrealized gains and losses on available for sale securities are reclassified into earnings as the gains or losses are realized upon sale of the securities. The credit component of unrealized losses on available for sale securities that are determined to be other-than-temporary impaired are reclassified into earnings at the time the determination is made.
Derivatives
As part of its mortgage banking activities, the Company makes commitments to originate residential mortgage loans that meet the accounting definition of derivatives. As of December 31, 2014, the difference between the market value and the carrying amount of these commitments were immaterial and, therefore, no gain or loss has been recognized in the financial statements.
Advertising Costs
Advertising costs are expensed as incurred and included in noninterest expense.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates in effect when these differences reverse.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.
When tax returns are filed, management is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while there may be other positions that are subject to uncertainty about their merits or the amounts of the positions that ultimately would be sustained if examined. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Management evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements.
It is the Company’s policy to recognize interest and penalties related to unrecognized tax liabilities within income tax expense in the statement of operations.
Stock-Based Compensation
Stock based compensation expense is recognized over the employee or director’s service period, which is generally defined as the vesting period, of the stock based grant based on the estimated grant date fair value. A Black-Scholes option pricing model is used to estimate the fair value of stock options granted.
Earnings per share
Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects 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 solely to outstanding stock options and unvested restricted stock awards, and are determined using the treasury stock method.
Recent Accounting Pronouncements and Developments
In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-04, Receivables-Troubled Debt Restructuring by Creditors (Subtopic 310-40), clarifying that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon
either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the guidance requires interim and annual disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The amended guidance is not expected to have a significant impact on the Company’s financial statement disclosures
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Accounting Standards Codification. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied retrospectively. Early application is not permitted. Management is currently evaluating the impact of adoption.
In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual reporting periods beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual reporting periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. As of December 31, 2014, all of the Company's repurchase agreements were typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 is not expected to have a material impact on the Company's Consolidated Financial Statements
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. However, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for interim or annual reporting periods beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. As of December 31, 2014, the Company did not have any share-based payment awards that included performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The
amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU No. 2014-14 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-14 is not expected to have a material impact on the Company's Consolidated Financial Statements.
NOTE 2 – BUSINESS COMBINATIONS
Slavie Acquisition
On May 30, 2014, the Bank acquired certain assets and assumed substantially all deposits and certain other liabilities of Slavie Federal Savings Bank (“Slavie”), which was closed on May 30, 2014 by the Office of the Comptroller of the Currency (the “Slavie Acquisition”). The Slavie Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement All Deposits, with the Federal Deposit Insurance Corporation (the “FDIC”). The Bank did not acquire any of Slavie’s other real estate owned. Additionally, the Bank did not at closing commit to purchase any owned or leased bank premises of Slavie; however, the Bank was granted an option to elect following closing to purchase any or all of the banking premises owned by Slavie except for their former headquarters facility in Bel Air, or in the case of leased banking premises, to assume the lease. The Bank terminated the lease for Slavie’s Bel Air location in October 2014 and extended its current lease at the Overlea branch.
The Company has accounted for the Slavie Acquisition under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, whereby the acquired net assets and assumed liabilities were recorded by the Company at their estimated fair values as of their acquisition dates. Fair value estimates were based on management’s assessment of the best information available as of the acquisition dates.
Through December 31, 2014, the Bank recorded adjustments to the fair values of certain acquired assets and assumed liabilities as initially reported at June 30, 2014. These adjustments resulted in a $173,094 (pretax) reduction in the bargain purchase gain for the year ended December 31, 2014. The initially recorded bargain purchase gain was based upon a preliminary settlement with the FDIC and initial fair value estimates for loans, intangibles, and deposits developed by management. Subsequently, the Bank and FDIC executed a final settlement and management obtained a third party valuation of loans, intangibles, and deposits. The resulting recorded adjustments are reflected retrospectively to June 30, 2014 and results in the updated pretax bargain purchase gain of $524,432 for the year ended December 31, 2014.
In accordance with the framework established by ASC Topic 820, Fair Value Measurements and Disclosures, the Company used a fair value hierarchy to prioritize the information used to develop assumptions to calculate estimates in determining fair values.
The following table presents the allocation of the consideration received to acquire assets and assume liabilities in the Slavie Acquisition as of the acquisition date. The allocation results in an after-tax bargain purchase gain of $317,544.
| | | | | | | | |
| Assets acquired at fair value: | | | | |
| | | | | | | | |
| | Cash and Cash Equivalents | $ 30,341,150 | | |
| | Time deposits with banks | 1,546,718 | | |
| | Investment securities available for sale, at fair value | 197,311 | | |
| | Restriced equity securities, at cost | 1,253,600 | | |
| | Loans, net of deferred fees and costs | 82,914,607 | | |
| | Accrued interest receivable | 347,772 | | |
| | Core deposit intangible | 477,563 | | |
| | | Total assets acquired | | $ 117,078,721 | | |
| | | | | | | | |
| Liabilities assumed at fair value: | | | | |
| | Deposits | | | | $ 110,833,046 | | |
| | Accrued expenses and other liabilities | 3,266 | | |
| | | Total liabilities assumed | | | $ 110,836,312 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net assets acquired at fair value: | | | $ 6,242,409 | |
| | | | | | | | |
| Transaction cash consideration paid | | 5,717,977 | |
| | | | | | | | |
| Total estimated bargain purchase gain, before tax | | 524,432 | |
| Tax expense | | (206,888) | |
| Total estimated bargain purchase gain, after tax | | $ 317,544 | |
| | | | | | | | |
In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the valuation of acquired loans.
The following is a summary of the loans acquired in the Slavie Acquisition:
| | | | | | | | | |
| | | Purchased Credit Impaired Loans | | | Purchased Non-Impaired Loans | | | Total Purchased Loans |
| | | | | | | | | |
| Contractually required principal and interest at acquisition | $ | 26,970,809 | | $ | 68,701,805 | | $ | 95,672,614 |
| Contractual cash flows not expected to be collected | | (7,018,601) | | | (3,983,263) | | | (11,001,864) |
| Expected cash flows at acquisition | | 19,952,208 | | | 64,718,542 | | | 84,670,750 |
| Interest component of expected cash flows | | (1,114,951) | | | (641,192) | | | (1,756,143) |
| Basis in purchased loans at acquisition - estimated fair value | $ | 18,837,257 | | $ | 64,077,350 | | $ | 82,914,607 |
The fair value of checking, savings and money market deposit accounts acquired was assumed to be the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.
Pro Forma Condensed Combined Financial Information
The following pro forma information combines the historical results of Slavie and pre-Slavie Acquisition Bay Bancorp, Inc. The pro forma financial information does not include the potential impacts of possible business model changes, current market conditions, revenue enhancements, expense efficiencies, or other factors. The pro forma results exclude the impact of the bargain purchase gain of $524,432 and Slavie Acquisition-related expenses of $909,471. While adjustments were made for the estimated impact of certain fair value adjustments, the following results are not indicative of what would have occurred had the Slavie Acquisition taken place on indicated dates.
If the Slavie Acquisition had been completed on January 1, 2014, total revenue would have been approximately $33.0 million for the year ended December 31, 2014. Net income would have been approximately $3.1 million for the same period. Basic and diluted earnings per share would have been $0.30 for the year ended December 31, 2014.
If the Slavie Acquisition had been completed on January 1, 2013, total revenue would have been approximately $31.5 million for the year ended December 31, 2013. Net income would have been approximately $0.2 million for the same period. Basic and diluted earnings per share would have been $0.02 for the year ended December 31, 2013.
The disclosure of Slavie’s post-Slavie Acquisition total revenue, net of interest expense, and net income is not practicable due to the integration of operations shortly after the Slavie Acquisition.
The Merger
On April 19, 2013, Bay Bancorp, Inc. (then known as Carrollton Bancorp) completed its previously announced Merger with Jefferson. Pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of April 8, 2012 (as amended, the “Merger Agreement”), by and among Jefferson, Bay Bancorp, Inc., and FSPF, Jefferson merged with and into Bay Bancorp, Inc., with Bay Bancorp, Inc. continuing as the surviving corporation. In addition, Bay Bancorp’s bank subsidiary, Carrollton Bank, merged with and into the Bank, which was then a subsidiary of Jefferson with the Bank continuing as the surviving bank (the “Bank Merger”). Prior to the Bank Merger, Carrollton Bank had five subsidiaries: Bay Financial Services, Inc. f/k/a Carrollton Financial Services, Inc. (“BFS”); Carrollton Community Development Corporation (“CCDC”); Mulberry Street, LLC (“MSLLC”); 13 Beaver Run LLC (“BRLLC”); and Mulberry Street A LLC (“MSALLC” and, together with BFS, CCDC, MSLLC and BRLLC, the “Carrollton Subsidiaries”). Carrollton Bank’s interests in the Carrollton Subsidiaries were transferred to Bay Bank, FSB as a result of the Bank Merger.
Prior to the completion of the Merger, on April 18, 2013, FSPF invested $11,000,000 into Jefferson in exchange for 2,039,958 shares of common stock of Jefferson at a per share price of $5.39 (as restated for the Merger).
Upon closing of the Merger, each outstanding share of Jefferson's common stock was converted into the right to receive 2.2217 shares of Bay Bancorp's Inc. common stock. As a result of the Merger, Bay Bancorp, Inc. issued approximately 7.9 million shares of its common stock to Jefferson's stockholders in the aggregate. Pursuant to the terms and conditions of the Merger Agreement, the holders of Bay Bancorp, Inc. common stock immediately prior to the Merger elected to tender approximately 42% of the shares outstanding in conjunction with the Merger for cash at a value of $6.20 per share (the “Cash Election”). As a result of the Merger and after giving effect to the cash election, FSPF owned approximately 84% of the outstanding shares of Bay Bancorp, Inc.’s
common stock, and the stockholders of Bay Bancorp, Inc. immediately prior to the Merger owned approximately 16% of the outstanding shares of Bay Bancorp, Inc.’s common stock.
Since the number of shares of Bay Bancorp, Inc.’s common stock issued to Jefferson’s stockholders in connection with the Merger exceeded 50% of the number of issued and outstanding shares of Bay Bancorp, Inc.’s common stock immediately after the Merger, the Merger is treated as a reverse acquisition of assets and a recapitalization for accounting purposes. As a result, Jefferson is deemed to have acquired Bay Bancorp, Inc. for accounting and financial reporting purposes and the historical financial statements of Jefferson have become the Company’s historical financial statements pursuant to U.S. GAAP. Results of operations of the acquired business are included in the consolidated income statement since April 19, 2013, the effective date of the Merger.
The Merger is accounted for using the acquisition method of accounting, and accordingly, the assets acquired and liabilities assumed were recognized at fair value on the date the transaction was completed. There was no goodwill recorded as a result of the Merger; however, a non-taxable bargain purchase gain of $2,860,199 was recognized and included as a separate line item within noninterest income on the consolidated statements of income. The bargain purchase gain represented the excess of the fair value of net assets acquired over consideration paid. The consideration paid represented a substantial discount to the book value of pre-Merger Bay Bancorp, Inc.’s net assets at the acquisition date. The net impact of the fair value adjustments resulted in a $5,282,481 reduction in pre-Merger net assets of Bay Bancorp, Inc. The more significant fair value adjustments were the net discount on loans of $7,927,608 and the core deposit intangible of $4,611,362 which is being amortized over an estimated useful life of approximately nine years.
At December 31, 2013, the Company recorded measurement period adjustments to the fair values of certain acquired assets and assumed liabilities as previously reported at September 30, 2013. These retrospective adjustments resulted in a $2,157,102 reduction to the bargain purchase gain during the year ended December 31, 2013 from the amount previously reported for the nine months ended September 30, 2013. The retrospective adjustments recorded during the fourth quarter of 2013 and their impact on the bargain purchase gain were as follows: deferred income tax assets - $1,874,781 reduction due primarily to excess current and future year recognized built-in losses under Section 382 of the Internal Revenue Service code; facilities operating leases with above market rentals - $413,596 reduction; premises - $91,998 increase; loans - $62,321 reduction; and other liabilities - $101,598 increase. The Company had no additional adjustments to the valuation of acquired assets and assumed liabilities in 2014.
The purchase price and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date were as follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | April 19, 2013 | |
| Purchase price: | | | | | |
| | | | | | | | | | | |
| | Shares of Company common stock outstanding as of stockholder vote | 2,579,388 | | | |
| | Less: Shares tendered for cash | 1,095,931 | | | |
| | Shares of Company common stock retained by current stockholders | | 1,483,457 | | | |
| | | | | | | | | | | |
| | Shares of Company common stock retained by current stockholders | | 1,483,457 | | | |
| | x Market price per share as of April 19, 2013 | $ | 4.91 | | | |
| | Purchase price based on value of shares retained | | | $ | 7,283,770 | |
| | | | | | | | | | | |
| | Shares tendered for cash | | 1,095,931 | | | |
| | x Price per share as agreed to in the Definitive Agreement | $ | 6.20 | | | |
| | Purchase price based on value of shares tendered for cash | | | | 6,794,777 | |
| | | | | | | | | | | |
| | | Total purchase price | | | $ | 14,078,547 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Identifiable assets: | | | | | |
| | Cash and cash equivalents | | | $ | 33,947,321 | |
| | Investment securities available for sale and restricted equity securities | | | 23,191,025 | |
| | Loans held for sale | | | | 29,444,871 | |
| | Loans | | | | 224,946,116 | |
| | Core deposit intangible | | | | 4,611,362 | |
| | Premises and equipment | | | | 7,086,582 | |
| | Bank owned life insurance | | | | 5,263,255 | |
| | Real estate acquired through foreclosure | | | | 908,718 | |
| | Deferred tax asset | | | | | | | 6,394,833 | |
| | Other assets | | | | 4,976,174 | |
| | | Total identifiable assets | | | | 340,770,257 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Identifiable liabilities: | | | | | |
| | Deposits | | | | 318,269,096 | |
| | Short-term borrowings | | | | 170,000 | |
| | Defined benefit pension plan | | | | 2,266,626 | |
| | Lease liability | | | | 683,009 | |
| | Other liabilities | | | | 2,442,780 | |
| | | Total identifiable liabilities | | | | 323,831,511 | |
| | | | | | | | | | | |
| Bargain purchase gain resulting from the Merger | | | | $ | 2,860,199 | |
In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the valuation of acquired loans.
The following is a summary of the loans acquired in the Merger:
| | | | | | | | | | |
| | | Purchased Credit Impaired Loans | | | Purchased Non-Impaired Loans | | | Total Purchased Loans | |
| Contractually required principal and interest at acquisition | $ | 44,734,226 | | $ | 193,685,946 | | $ | 238,420,172 | |
| Contractual cash flows not expected to be collected | | (7,912,505) | | | - | | | (7,912,505) | |
| Expected cash flows at acquisition | | 36,821,721 | | | 193,685,946 | | | 230,507,667 | |
| Interest component of expected cash flows | | (2,788,895) | | | (2,772,656) | | | (5,561,551) | |
| Basis in purchased loans at acquisition - estimated fair value | $ | 34,032,826 | | $ | 190,913,290 | | $ | 224,946,116 | |
The fair value of checking, savings and money market deposit accounts acquired was assumed to be the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued as the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.
Pro Forma Condensed Combined Financial Information
The following pro forma information combines the historical results of Jefferson and pre-Merger Bay Bancorp, Inc. The pro forma financial information does not include the potential impacts of possible business model changes, current market conditions, revenue enhancements, expense efficiencies, or other factors. The pro forma results exclude the impact of the bargain purchase gain of $2,860,199 and Merger-related expenses of $2,041,756. While adjustments were made for the estimated impact of certain fair value adjustments, the following results are not indicative of what would have occurred had the merger taken place on indicated dates.
If the Merger had been completed on January 1, 2013, total revenue would have been approximately $32 million for the year ended December 31, 2013. Net income would have been approximately $2.1 million for the same period. Basic and diluted earnings per share would have been $0.37 for the year ended December 31, 2013.
The disclosure of pre-Merger Bay Bancorp, Inc.’s post-Merger total revenue, net of interest expense, and net income is not practicable due to the integration of operations shortly after the Merger.
In connection with the Slavie Acquisition and the Merger, the Company incurred acquisition and merger related expenses. These expenses were primarily related to professional services, system conversions and integration of operations, termination of existing contractual arrangements to purchase various services, initial marketing and promotion expenses designed to introduce the Bank to the former Carrollton Bank and Slavie customers, and other costs of completing the transaction.
| | | | | | |
| | | | | | |
| | | | |
| Slavie Acquisition: | | | 2014 | | 2013 |
| Professional Fees | | $ | 122,072 | $ | - |
| Data processing | | | 637,199 | | - |
| Advertising and marketing expenses | | | 70,957 | | - |
| Net occupancy and equipment costs | | | 26,226 | | - |
| All other | | | 53,017 | | - |
| Total acquisition related expenses | | | 909,471 | | - |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Carrolton Merger: | | | | | |
| Salaries and employee benefits | | | - | | 132,583 |
| Professional Fees | | | 96,847 | | 448,467 |
| Data processing | | | 21,921 | | 1,183,579 |
| Advertising and marketing expenses | | | - | | 159,374 |
| Net occupancy and equipment costs | | | - | | 63,554 |
| All other | | | - | | 54,199 |
| Total merger related expenses | | | 118,768 | | 2,041,756 |
| | | | | | |
| Total merger and acquisition related expenses | | $ | 1,028,239 | $ | 2,041,756 |
| | | | | | |
summary of the Slavie Acquisition and Merger related expenses included in the consolidated statements of income for the years ended December 31, 2014 and 2013 are as follows
NOTE 3 – INVESTMENT SECURITIES
At December 31, 2014 and December 31, 2013, the amortized cost and estimated fair value of the Company’s investment securities portfolio are summarized as follows:
| | | | | | | | | | | | |
| | | Amortized | | | Gross Unrealized | | | Estimated |
| Available for Sale | | cost | | | Gains | | | Losses | | | Fair Value |
| December 31, 2014 | | | | | | | | | | | |
| | | | | | | | | | | | |
| U.S. government agency | $ | 7,561,238 | | $ | 217,033 | | $ | - | | $ | 7,778,271 |
| Residential mortgage-backed securities | | 20,679,345 | | | 399,198 | | | (207,616) | | | 20,870,927 |
| State and municipal | | 4,639,988 | | | 17,779 | | | (3,621) | | | 4,654,146 |
| Corporate bonds | | 2,041,718 | | | - | | | (11,718) | | | 2,030,000 |
| Total debt securities | | 34,922,289 | | - | 634,010 | | | (222,955) | | | 35,333,344 |
| Equity securities | | 78,754 | | | - | | | (62,209) | | | 16,545 |
| Totals | $ | 35,001,043 | | $ | 634,010 | | $ | (285,164) | | $ | 35,349,889 |
| | | | | | | | | | | | |
| | | Amortized | | | Gross Unrealized | | | Estimated |
| Held-to-Maturity | | cost | | | Gains | | | Losses | | | Fair Value |
| December 31, 2014 | | | | | | | | | | | |
| | | | | | | | | | | | |
| Residential mortgage-backed securities | $ | 1,315,718 | | $ | 9,079 | | $ | - | | $ | 1,324,797 |
| Total debt securities | | 1,315,718 | | | 9,079 | | | - | | | 1,324,797 |
| Totals | $ | 1,315,718 | | $ | 9,079 | | $ | - | | $ | 1,324,797 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Amortized | | | Gross Unrealized | | | Estimated |
| Available for Sale | | cost | | | Gains | | | Losses | | | Fair Value |
| December 31, 2013 | | | | | | | | | | | |
| | | | | | | | | | | | |
| U.S. government agency | $ | 7,592,138 | | $ | 3,694 | | $ | (69,917) | | $ | 7,525,915 |
| Residential mortgage-backed securities | | 23,965,230 | | | 273,885 | | | (438,112) | | | 23,801,003 |
| State and municipal | | 5,265,944 | | | - | | | (76,058) | | | 5,189,886 |
| Total debt securities | | 36,823,312 | | | 277,579 | | | (584,087) | | | 36,516,804 |
| Equity securities | | 78,752 | | | - | | | (8,887) | | | 69,865 |
| Totals | $ | 36,902,064 | | $ | 277,579 | | $ | (592,974) | | $ | 36,586,669 |
| | | | | | | | | | | | |
At December 31, 2013, the Bank had no held-to-maturity securities.
Unrealized losses segregated by length of impairment as of December 31, 2014 and December 31, 2013 were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | 12 months or longer | | | Total |
| Available for Sale | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized |
| December 31, 2014 | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses |
| U.S. government agency | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| Residential mortgage-backed securities | | 791 | | | (3) | | | 6,901,324 | | | (207,613) | | | 6,902,115 | | | (207,616) |
| State and municipals | | 757,939 | | | (3,621) | | | - | | | - | | | 757,939 | | | (3,621) |
| Corporate bonds | | 2,030,000 | | | (11,718) | | | - | | | - | | | 2,030,000 | | | (11,718) |
| Total debt securities | | 2,788,730 | - | | (15,342) | - | | 6,901,324 | - | | (207,613) | - | | 9,690,054 | - | | (222,955) |
| Equity securities | | - | | | - | | | 16,545 | | | (62,209) | | | 16,545 | | | (62,209) |
| Totals | $ | 2,788,730 | | $ | (15,342) | | $ | 6,917,869 | | $ | (269,822) | | $ | 9,706,599 | | $ | (285,164) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | 12 months or longer | | | Total |
| Available for Sale | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized |
| December 31, 2013 | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses |
| U.S. government agency | $ | 7,215,837 | | $ | (69,917) | | $ | - | | $ | - | | $ | 7,215,837 | | $ | (69,917) |
| Residential mortgage-backed securities | | 15,637,539 | | | (438,112) | | | - | | | - | | | 15,637,539 | | | (438,112) |
| State and municipals | | 5,189,886 | | | (76,058) | | | - | | | - | | | 5,189,886 | | | (76,058) |
| Total debt securities | | 28,043,262 | | | (584,087) | | | - | | | - | | | 28,043,262 | | | (584,087) |
| Equity securities | | 69,865 | | | (8,887) | | | - | | | - | | | 69,865 | | | (8,887) |
| Totals | $ | 28,113,127 | | $ | (592,974) | | $ | - | | $ | - | | $ | 28,113,127 | | $ | (592,974) |
At December 31, 2014, unrealized losses in the Company’s portfolio of debt securities of $222,955 in the aggregate were related to 11 securities and caused by increases in market interest rates, spread volatility, or other factors that management deems to be temporary. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.
At December 31, 2014, unrealized losses in the Company’s portfolio of equity securities of $62,209 were related to one security and considered temporary. Since management believes that it is more likely than not the Company will not be required to sell these equity positions for a reasonable period of time sufficient for recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.
At December 31, 2013, unrealized losses in the Company’s portfolio of debt securities of $584,087 in the aggregate were related to 24 securities and caused by increases in market interest rates, spread volatility, or other factors that management deems to be temporary. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.
At December 31, 2013, unrealized losses in the Company’s portfolio of equity securities of $8,887 were related to one security and considered temporary. Since management believes that it is more likely than not the Company will not be required to sell these equity positions for a reasonable period of time sufficient for recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.
The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded 10% of stockholders’ equity at December 31, 2014 or 2013.
No investment securities held by the Company as of December 31, 2014 and December 31, 2013 were subject to a write-down due to credit related other-than-temporary impairment.
Contractual maturities of debt securities at December 31, 2014 and 2013 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.
| | | | | | | | 2014 | | 2013 |
| | | | | | | | | Amortized | | | Fair | | | Amortized | | | Fair |
| Available for sale | | | | | | | | Cost | | | Value | | | Cost | | | Value |
| Within one year | | | | | | | $ | 237,687 | | $ | 240,942 | | $ | - | | $ | - |
| Over one to five years | | | | | | | | 4,794,585 | | | 4,787,945 | | | 3,139,647 | | | 3,120,919 |
| Over five to ten years | | | | | | | | 9,210,672 | | | 9,433,530 | | | 9,186,255 | | | 9,070,492 |
| Over ten years | | | | | | | | - | | | - | | | 532,180 | | | 524,390 |
| Residential mortgage-backed securities | | | | | | 20,679,345 | | | 20,870,927 | | | 23,965,230 | | | 23,801,003 |
| Totals | | | | | | | $ | 34,922,289 | | $ | 35,333,344 | | $ | 36,823,312 | | $ | 36,516,804 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | 2014 | | 2013 |
| | | | | | | | | Amortized | | | Fair | | | Amortized | | | Fair |
| Held to maturity | | | | | | | | Cost | | | Value | | | Cost | | | Value |
| Residential mortgage-backed securities | | | | | $ | 1,315,718 | | $ | 1,324,797 | | $ | - | | $ | - |
The Company’s residential mortgage-backed securities portfolio is presented as a separate line within the maturity table, since borrowers have the right to prepay obligations without prepayment penalties.
During the year ended December 31, 2013, the Company sold its entire portfolio of collateralized debt obligations. These securities, which were acquired as a result of the Merger, were backed by trust preferred securities issued by banks, thrifts, and insurance companies. Sale proceeds of $2,622,388 represented the fair value of these securities at the date of the Merger; therefore, there is neither a gain nor a loss from the sale included in the results of operations for the year ended December 31, 2013.
There were no sales of investment securities available for sale during the year ended December 31, 2014.
At December 31, 2014, securities with an amortized cost of $20,035,812 (fair value of $20,358,237) were pledged as collateral for potential borrowings from the Federal Home Loan Bank of Atlanta (the “FHLB”) and the Federal Reserve Bank of Richmond (the “Reserve Bank”). At December 31, 2013, securities with an amortized cost of $19,721,274 (fair value of $19,535,096) were pledged as collateral for potential borrowings from the FHLB and the Reserve Bank.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. The loan portfolio segment balances are presented in the following table:
| | | | | | |
| | | | | | |
| | | December 31, | |
| | | 2014 | | 2013 | |
| Commercial & Industrial | $ | 33,454,280 | $ | 34,278,539 | |
| Commercial Real Estate | | 158,714,554 | | 157,450,876 | |
| Residential Real Estate | | 140,374,035 | | 73,323,554 | |
| Home Equity Line of Credit | | 35,717,982 | | 33,257,822 | |
| Land | | 5,856,875 | | 1,716,747 | |
| Construction | | 18,052,287 | | 19,343,013 | |
| Consumer & Other | | 881,179 | | 1,309,781 | |
| Total Loans | | 393,051,192 | | 320,680,332 | |
| Less: Allowance for Loan Losses | | (1,294,976) | | (851,000) | |
| Net Loans | $ | 391,756,216 | $ | 319,829,332 | |
| | | | | | |
At December 31, 2014 and December 31, 2013, loans not considered to have deteriorated credit quality at acquisition had a total remaining unamortized discount of $5,281,192 and $3,386,065, respectively.
Portfolio Segments:
The Company currently manages its credit products and the respective exposure to loan losses by the following specific portfolio segments, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan losses. The Company considers each loan type to be a portfolio segment having unique risk characteristics.
Commercial & Industrial
Commercial & Industrial (“C&I”) loans are made to provide funds for equipment and general corporate needs. Repayment of these loans primarily uses the funds obtained from the operation of the borrower's business. C&I loans also include lines of credit that are utilized to finance a borrower's short-term credit needs and/or to finance a percentage of eligible receivables or inventory. Of primary concern in C&I lending is the borrower's creditworthiness and ability to successfully generate sufficient cash flow from their business to service the debt.
Commercial Real Estate
Commercial Real Estate loans are bifurcated into Investor and Owner Occupied types (classes). Commercial Real Estate - Investor loans consist of loans secured by non-owner occupied properties and involve investment properties for warehouse, retail, apartment, and office space with a history of occupancy and cash flow. This commercial real estate class includes mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan. Commercial Real Estate - Owner Occupied loans consist of commercial mortgage loans secured by owner occupied properties and involves a variety of property types to conduct the borrower's operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower's financial health and the ability of the borrower and the business to repay. At December 31, 2014 and December 31, 2013, Commercial Real Estate – Investor loans had a total balance of $101,947,596 and $110,352,299, respectively. At December 31, 2014 and December 31, 2013, Commercial Real Estate – Owner Occupied loans had a total balance of $56,766,958 and $47,098,577, respectively.
Residential Real Estate
Residential Real Estate loans are bifurcated into Investor and Owner Occupied types (classes). Residential Real Estate - Investor loans consist of loans secured by non-owner occupied residential properties and usually carry higher credit risk than Residential Real Estate – Owner Occupied loans due to their reliance on stable rental income and due to lower incentive for the borrower to avoid foreclosure. Payments on loans secured by rental properties often depend on the successful operation and management of the properties and the payment of rent by tenants. At December 31, 2014 and December 31, 2013, Residential Real Estate – Investor loans had a total balance of $50,708,153 and $26,670,715, respectively. At December 31, 2014 and December 31, 2013, Residential Real Estate – Owner Occupied loans had a total balance of $89,665,882 and $46,652,839, respectively.
Home Equity Line of Credit
Home Equity Lines of Credit (“HELOCs”) are a form of revolving credit in which a borrower's primary residence serves as collateral. Borrowers use HELOCs primarily for education, home improvements, and other significant personal expenditures. The borrower will be approved for a specific credit limit set at a percentage of their home's appraised value less the balance owed on the existing first mortgage. Major risks in HELOC lending include the borrower's ability to service the existing first mortgage plus proposed HELOC, the Company's ability to pursue collection in a second lien position upon default, and overall risks in fluctuation in the value of the underlying collateral property.
Land
Land loans are secured by underlying properties that usually consist of tracts of undeveloped land that do not produce income. These loans carry the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, land loans carry the risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found.
Construction
Construction loans, which include land development loans, are generally considered to involve a higher degree of credit risk than long term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction and estimated costs of construction, as well as the property’s ability to attract and retain tenants. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections. If the Company is forced to foreclose on a building before or at completion due to a default, it may be unable to recover all of the unpaid balance of and accrued interest on the loan as well as related foreclosure and holding costs.
Consumer & Other
Consumer & Other loans include installment loans, personal lines of credit, and automobile loans. Payment on these loans often depends on the borrower's creditworthiness and ability to generate sufficient cash flow to service the debt.
Allowance for Loan Losses
To control and monitor credit risk, management has an internal credit process in place to determine whether credit standards are maintained along with in-house loan administration accompanied by oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks that involves the analysis of the borrower's ability to service the debt as well as the assessment of the underlying collateral. Oversight and review procedures include the monitoring of the portfolio credit quality, early identification of potential problem credits and the management of problem credits. As part of the oversight and review process, the Company maintains an allowance for loan losses to absorb estimated and probable losses inherent in the loan portfolio.
For purposes of calculating the allowance, the Company segregates its loan portfolio into portfolio segments based primarily on the type of supporting collateral. The Commercial Real Estate and Residential Real Estate segments, which both exclude any collateral property currently under construction, are further disaggregated into Owner Occupied and Investor classes for each. Further, all segments are also segregated as either purchased credit impaired loans, purchased loans not deemed impaired, troubled debt restructurings, or new originations.
The analysis for determining the allowance is consistent with guidance set forth in U.S. GAAP and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. Pursuant to Bank policy, the allowance is evaluated quarterly by management and is based upon management's review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The allowance consists of specific and general reserves. The specific reserves relate to loans classified as impaired, primarily including nonaccrual loans, troubled debt restructurings, and purchased credit impaired loans where cash flows have deteriorated from those forecasted as of the acquisition date. The reserve for these loans is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value. For impaired loans, any measured impairment is charged-off against the loan and allowance for those loans that are collateral dependent in the applicable reporting period.
The general reserve covers loans that are not classified as impaired and primarily includes purchased loans not deemed impaired and new loan originations. The general reserve requirement is based on historical loss experience and several qualitative factors derived from economic and market conditions that have been determined to have an effect on the probability and magnitude of a loss. Since the Bank does not have its own sufficient loss experience, management also references the historical net charge-off experience of peer groups to determine a reasonable range of reserve values, which is permissible per Bank policy. The peer groups consist of competing Maryland-based financial institutions with established ranges in total asset size. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time that the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The qualitative analysis incorporates global environmental factors in the following trends: national and local economic metrics; portfolio risk ratings and composition; and concentrations in credit.
The following table provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the year ended December 31, 2014:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Commercial | | | Commercial | | Residential | | Home Equity | | | | | | Consumer | | | |
| | | & Industrial | | | Real Estate | | Real Estate | | Line of Credit | | Land | | Construction | | & Other | | Total | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 167,400 | | $ | 324,080 | $ | 80,239 | $ | 129,203 | $ | 6,918 | $ | 135,416 | $ | 7,744 | $ | 851,000 | |
| Charge-offs | | - | | | (300,214) | | (274,382) | | (79,492) | | - | | - | | (934) | | (655,022) | |
| Recoveries(1) | | 30,000 | | | 137,072 | | 109,827 | | 9,844 | | - | | - | | 10,567 | | 297,310 | |
| Provision | | 3,110 | | | 393,647 | | 287,729 | | 107,178 | | 1,769 | | 17,673 | | (9,418) | | 801,688 | |
| Ending balance | $ | 200,510 | | $ | 554,585 | $ | 203,413 | $ | 166,733 | $ | 8,687 | $ | 153,089 | $ | 7,959 | $ | 1,294,976 | |
| | | | | | | | | | | | | | | | | | | |
The following table presents loans and the related allowance for loan losses, by loan portfolio segment, as of December 31, 2014:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Commercial | | | Commercial | | Residential | | Home Equity | | | | | | Consumer | | | |
| | | & Industrial | | | Real Estate | | Real Estate | | Line of Credit | | Land | | Construction | | & Other | | Total | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | $ | - | | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance: collectively evaluated for impairment | | 200,510 | | | 554,585 | | 203,413 | | 166,733 | | 8,687 | | 153,089 | | 7,959 | | 1,294,976 | |
| Totals | $ | 200,510 | | $ | 554,585 | $ | 203,413 | $ | 166,733 | $ | 8,687 | $ | 153,089 | $ | 7,959 | $ | 1,294,976 | |
| | | | | | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | $ | 957,080 | | $ | 828,264 | $ | 4,314,191 | $ | 320,329 | $ | - | $ | - | $ | - | $ | 6,419,864 | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance: collectively evaluated for impairment | | 30,474,533 | | | 137,781,830 | | 124,042,412 | | 34,686,415 | | 2,448,388 | | 17,380,581 | | 881,179 | | 347,695,338 | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance: loans acquired with deteriorated credit quality(2) | | 2,022,667 | | | 20,104,460 | | 12,017,432 | | 711,238 | | 3,408,487 | | 671,706 | | - | | 38,935,990 | |
| Totals | $ | 33,454,280 | | $ | 158,714,554 | $ | 140,374,035 | $ | 35,717,982 | $ | 5,856,875 | $ | 18,052,287 | $ | 881,179 | $ | 393,051,192 | |
| | | | | | | | | | | | | | | | | | | |
| (1) | | Excludes cash payments received on loans acquired with deteriorated credit quality with a carrying value of $0. |
| (2) | | Includes loans acquired with deteriorated credit quality of $104,460 that have current period charge offs. |
The following table provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the year ended December 31, 2013:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Commercial | | | Commercial | | Residential | | Home Equity | | | | | | Consumer | | | |
| | | & Industrial | | | Real Estate | | Real Estate | | Line of Credit | | Land | | Construction | | & Other | | Total | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 121,759 | | $ | 131,350 | $ | 199,306 | $ | 81,955 | $ | 6,400 | $ | 109,335 | $ | 5,837 | $ | 655,942 | |
| Charge-offs | | (82,860) | | | (187,419) | | (441,421) | | (10,919) | | - | | - | | (1,000) | | (723,619) | |
| Recoveries(1) | | - | | | - | | 39,135 | | 13,578 | | 23,026 | | - | | 731 | | 76,470 | |
| Provision | | 128,501 | | | 380,149 | | 283,219 | | 44,589 | | (22,508) | | 26,081 | | 2,176 | | 842,207 | |
| Ending balance | $ | 167,400 | | $ | 324,080 | $ | 80,239 | $ | 129,203 | $ | 6,918 | $ | 135,416 | $ | 7,744 | $ | 851,000 | |
| | | | | | | | | | | | | | | | | | | |
The following table presents loans and the related allowance for loan losses, by loan portfolio segment, as of December 31, 2013:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Commercial | | | Commercial | | Residential | | Home Equity | | | | | | Consumer | | | |
| | | & Industrial | | | Real Estate | | Real Estate | | Line of Credit | | Land | | Construction | | & Other | | Total | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | $ | - | | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance: collectively evaluated for impairment | | 167,400 | | | 324,080 | | 80,239 | | 129,203 | | 6,918 | | 135,416 | | 7,744 | | 851,000 | |
| Totals | $ | 167,400 | | $ | 324,080 | $ | 80,239 | $ | 129,203 | $ | 6,918 | $ | 135,416 | $ | 7,744 | $ | 851,000 | |
| | | | | | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | $ | 730,881 | | $ | 853,819 | $ | 3,544,741 | $ | 325,866 | $ | - | $ | 104,926 | $ | - | $ | 5,560,233 | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance: collectively evaluated for impairment | | 31,315,355 | | | 132,236,685 | | 66,467,228 | | 32,418,288 | | 355,190 | | 17,894,718 | | 1,309,781 | | 281,997,245 | |
| | | | | | | | | | | | | | | | | | | |
| Ending balance: loans acquired with deteriorated credit quality(2) | | 2,232,303 | | | 24,360,372 | | 3,311,585 | | 513,668 | | 1,361,557 | | 1,343,369 | | - | | 33,122,854 | |
| Totals | $ | 34,278,539 | | $ | 157,450,876 | $ | 73,323,554 | $ | 33,257,822 | $ | 1,716,747 | $ | 19,343,013 | $ | 1,309,781 | $ | 320,680,332 | |
| | | | | | | | | | | | | | | | | | | |
| (1) | | Excludes cash payments received on loans acquired with deteriorated credit quality with a carrying value of $0. |
| (2) | | Includes loans acquired with deteriorated credit quality of $501,143 that have current period charge-offs. |
The following table presents information with respect to impaired loans, which includes loans acquired with deteriorated credit quality that have current period charge-offs, as of December 31, 2014:
| | | | | | | | | | | |
| | As of December 31, 2014 | | | For the Year Ended
December 31, 2014 |
| | | | Unpaid | | | | | Average | | Interest |
| | Recorded | | Principal | | Related | | | Recorded | | Income |
| | Investment | | Balance | | Allowance | | | Investment | | Recognized(1) |
With no related allowance recorded: | | | | | | | | | | | |
Commercial & Industrial | $ | 957,080 | $ | 1,155,553 | $ | - | | $ | 1,136,545 | $ | 92,978 |
Commercial Real Estate - Investor | | 662,280 | | 668,287 | | - | | | 731,634 | | 2,371 |
Commercial Real Estate - Owner Occupied | | 165,984 | | 165,984 | | - | | | 170,360 | | - |
Residential Real Estate - Investor | | 1,168,103 | | 1,959,337 | | - | | | 1,728,843 | | 6,508 |
Residential Real Estate - Owner Occupied | | 3,250,548 | | 3,853,959 | | - | | | 3,752,953 | | 201,428 |
Home Equity Line of Credit | | 320,329 | | 404,347 | | - | | | 368,477 | | - |
Land | | - | | - | | - | | | - | | - |
Construction | | - | | - | | - | | | - | | - |
Consumer & Other | | - | | 19,034 | | - | | | 10,245 | | 615 |
| | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | |
Commercial & Industrial | | - | | - | | - | | | - | | - |
Commercial Real Estate - Investor | | - | | - | | - | | | - | | - |
Commercial Real Estate - Owner Occupied | | - | | - | | - | | | - | | - |
Residential Real Estate - Investor | | - | | - | | - | | | - | | - |
Residential Real Estate - Owner Occupied | | - | | - | | - | | | - | | - |
Home Equity Line of Credit | | - | | - | | - | | | - | | - |
Land | | - | | - | | - | | | - | | - |
Construction | | - | | - | | - | | | - | | - |
Consumer & Other | | - | | - | | - | | | - | | - |
Total: | | 6,524,324 | | 8,226,501 | | - | | | 7,899,057 | | 303,900 |
| | | | | | | | | | | |
Commercial & Industrial | $ | 957,080 | $ | 1,155,553 | $ | - | | $ | 1,136,545 | $ | 92,978 |
Commercial Real Estate | | 828,264 | | 834,271 | | - | | | 901,994 | | 2,371 |
Residential Real Estate | | 4,418,651 | | 5,813,296 | | - | | | 5,481,796 | | 207,936 |
Home Equity Line of Credit | | 320,329 | | 404,347 | | - | | | 368,477 | | - |
Land | | - | | - | | - | | | - | | - |
Construction | | - | | - | | - | | | - | | - |
Consumer & Other | | - | | 19,034 | | - | | | 10,245 | | 615 |
| $ | 6,524,324 | $ | 8,226,501 | $ | - | | $ | 7,899,057 | $ | 303,900 |
| (1) | | Consists primarily of accretion income on loans acquired with deteriorated credit quality that were reclassified as troubled debt restructurings subsequent to acquisition. |
The following table presents information with respect to impaired loans, which includes loans acquired with deteriorated credit quality that have current period charge-offs, as of December 31, 2013:
| | | | | | | | | | | |
| | As of December 31, 2013 | | | For the Year Ended
December 31, 2013 |
| | | | Unpaid | | | | | Average | | Interest |
| | Recorded | | Principal | | Related | | | Recorded | | Income |
| | Investment | | Balance | | Allowance | | | Investment | | Recognized(1) |
With no related allowance recorded: | | | | | | | | | | | |
Commercial & Industrial | $ | 730,881 | $ | 875,797 | $ | - | | $ | 766,112 | $ | 100,065 |
Commercial Real Estate - Investor | | 659,002 | | 1,147,133 | | - | | | 466,578 | | 34,185 |
Commercial Real Estate - Owner Occupied | | 695,960 | | 689,644 | | - | | | 707,029 | | - |
Residential Real Estate - Investor | | 680,662 | | 770,812 | | - | | | 681,586 | | 12,985 |
Residential Real Estate - Owner Occupied | | 2,864,079 | | 3,698,438 | | - | | | 3,010,094 | | 178,299 |
Home Equity Line of Credit | | 325,866 | | 370,361 | | - | | | 334,432 | | 2,440 |
Land | | - | | - | | - | | | - | | - |
Construction | | 104,926 | | 845,451 | | - | | | 94,724 | | 115,608 |
Consumer & Other | | - | | 20,491 | | - | | | - | | 1,057 |
| | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | |
Commercial & Industrial | | - | | - | | - | | | - | | - |
Commercial Real Estate - Investor | | - | | - | | - | | | - | | - |
Commercial Real Estate - Owner Occupied | | - | | - | | - | | | - | | - |
Residential Real Estate - Investor | | - | | - | | - | | | - | | - |
Residential Real Estate - Owner Occupied | | - | | - | | - | | | - | | - |
Home Equity Line of Credit | | - | | - | | - | | | - | | - |
Land | | - | | - | | - | | | - | | - |
Construction | | - | | - | | - | | | - | | - |
Consumer & Other | | - | | - | | - | | | - | | - |
Total: | | 6,061,376 | | 8,418,127 | | - | | | 6,060,555 | | 444,639 |
| | | | | | | | | | | |
Commercial & Industrial | $ | 730,881 | $ | 875,797 | $ | - | | $ | 766,112 | $ | 100,065 |
Commercial Real Estate | | 1,354,962 | | 1,836,777 | | - | | | 1,173,607 | | 34,185 |
Residential Real Estate | | 3,544,741 | | 4,469,250 | | - | | | 3,691,680 | | 191,284 |
Home Equity Line of Credit | | 325,866 | | 370,361 | | - | | | 334,432 | | 2,440 |
Land | | - | | - | | - | | | - | | - |
Construction | | 104,926 | | 845,451 | | - | | | 94,724 | | 115,608 |
Consumer & Other | | - | | 20,491 | | - | | | - | | 1,057 |
| $ | 6,061,376 | $ | 8,418,127 | $ | - | | $ | 6,060,555 | $ | 444,639 |
| | | | | | | | | | | |
| (1) | | Consists primarily of accretion income on loans acquired with deteriorated credit quality that were reclassified as troubled debt restructurings subsequent to acquisition. |
In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. Loans rated a 5 (Watch) are pass credits, but are loans that have been identified that warrant additional attention and monitoring. Loans that are risk rated 5 or higher are placed on the Company's monthly watch list. For the pass rated loans, management believes there is a low risk of loss related to these loans and as necessary, credit may be strengthened through improved borrower performance and/or additional collateral. Loans rated a 6 (Special Mention) or higher are considered criticized loans and represent an increased level of credit risk and are placed into these three categories:
6 (Special Mention) - Borrowers exhibit potential credit weaknesses or downward trends that may weaken the credit position if uncorrected. The borrowers are considered marginally acceptable without potential for loss of principal or interest.
7 (Substandard) - Borrowers have well defined weaknesses or characteristics that present the possibility that the Company will sustain some loss if the deficiencies are not corrected.
8 (Doubtful) - Borrowers classified as doubtful have the same weaknesses found in substandard borrowers; however, these weaknesses indicate that the collection of debt in full (principal and interest), based on current conditions, is highly questionable and improbable.
In the normal course of loan portfolio management, relationship managers are responsible for continuous assessment of credit risk arising from the individual borrowers within their portfolio and assigning appropriate risk ratings. Credit Administration is responsible for ensuring the integrity and operation of the risk rating system and maintenance of the watch list. The Officer's Loan
Committee meets monthly to discuss and monitor problem credits and internal risk rating downgrades that result in updates to the watch list.
The following table provides information with respect to the Company's credit quality indicators by class of the loan portfolio as of December 31, 2014:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | Risk Rating |
| | | | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total |
Commercial & Industrial | | | | $ | 30,150,745 | | $ | 1,530,547 | | $ | 1,772,988 | | $ | - | | $ | 33,454,280 |
Commercial Real Estate - Investor | | | | | 93,113,185 | | | 5,837,107 | | | 2,997,304 | | | - | | | 101,947,596 |
Commercial Real Estate - Owner Occupied | | | | | 42,898,246 | | | 6,864,098 | | | 7,004,614 | | | - | | | 56,766,958 |
Residential Real Estate - Investor | | | | | 39,109,937 | | | 2,804,857 | | | 8,793,359 | | | - | | | 50,708,153 |
Residential Real Estate - Owner Occupied | | | | | 84,796,122 | | | - | | | 4,869,760 | | | - | | | 89,665,882 |
Home Equity Line of Credit | | | | | 35,088,028 | | | - | | | 629,954 | | | - | | | 35,717,982 |
Land | | | | | 3,850,748 | | | - | | | 2,006,127 | | | - | | | 5,856,875 |
Construction | | | | | 17,848,675 | | | 81,234 | | | 122,378 | | | - | | | 18,052,287 |
Consumer & Other | | | | | 881,179 | | | - | | | - | | | - | | | 881,179 |
Total | | | | $ | 347,736,865 | | $ | 17,117,843 | | $ | 28,196,484 | | $ | - | | $ | 393,051,192 |
| | | | | | | | | | | | | | | | | |
The following table provides information with respect to the Company's credit quality indicators by class of the loan portfolio as of December 31, 2013:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | Risk Rating |
| | | | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | �� | Total |
Commercial & Industrial | | | | $ | 33,136,370 | | $ | 713,909 | | $ | 428,260 | | $ | - | | $ | 34,278,539 |
Commercial Real Estate - Investor | | | | | 99,120,824 | | | 4,265,276 | | | 6,966,199 | | | - | | | 110,352,299 |
Commercial Real Estate - Owner Occupied | | | | | 37,768,562 | | | 3,883,453 | | | 5,446,562 | | | - | | | 47,098,577 |
Residential Real Estate - Investor | | | | | 25,795,419 | | | 242,381 | | | 632,915 | | | - | | | 26,670,715 |
Residential Real Estate - Owner Occupied | | | | | 42,223,599 | | | 77,473 | | | 4,351,767 | | | - | | | 46,652,839 |
Home Equity Line of Credit | | | | | 32,418,803 | | | 391,993 | | | 447,026 | | | - | | | 33,257,822 |
Land | | | | | 1,716,747 | | | - | | | - | | | - | | | 1,716,747 |
Construction | | | | | 18,847,368 | | | 88,044 | | | 407,601 | | | - | | | 19,343,013 |
Consumer & Other | | | | | 1,309,781 | | | - | | | - | | | - | | | 1,309,781 |
Total | | | | $ | 292,337,473 | | $ | 9,662,529 | | $ | 18,680,330 | | $ | - | | $ | 320,680,332 |
| | | | | | | | | | | | | | | | | |
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 table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2014. Purchased credit impaired loans are excluded from this aging and nonaccrual loans schedule.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Accrual Loans | | | | | | |
| | 30-59 | | | 60-89 | | | 90 or More | | | | | | | | | | | | |
| | Days | | | Days | | | Days | | | Total | | | | | | Nonaccrual | | | Total |
| | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Loans | | | Loans |
Commercial & Industrial | $ | - | | $ | - | | $ | - | | $ | - | | $ | 31,093,412 | | $ | 338,202 | | $ | 31,431,614 |
Commercial Real Estate - Investor | | 159,786 | | | - | | | - | | | 159,786 | | | 88,920,589 | | | 608,084 | | | 89,688,458 |
Commercial Real Estate - Owner Occupied | | - | | | - | | | - | | | - | | | 48,755,651 | | | 165,984 | | | 48,921,635 |
Residential Real Estate - Investor | | 312,422 | | | - | | | - | | | 312,422 | | | 39,508,855 | | | 1,063,643 | | | 40,884,920 |
Residential Real Estate - Owner Occupied | | 924,608 | | | 550,604 | | | - | | | 1,475,213 | | | 83,255,356 | | | 2,741,114 | | | 87,471,683 |
Home Equity Line of Credit | | 456,248 | | | 24,199 | | | - | | | 480,446 | | | 34,205,969 | | | 320,329 | | | 35,006,745 |
Land | | - | | | - | | | - | | | - | | | 2,448,388 | | | - | | | 2,448,388 |
Construction | | - | | | - | | | - | | | - | | | 17,380,581 | | | - | | | 17,380,581 |
Consumer & Other | | - | | | 500 | | | - | | | 500 | | | 880,679 | | | - | | | 881,179 |
Total | $ | 1,853,063 | | $ | 575,303 | | $ | - | | $ | 2,428,367 | | $ | 346,449,479 | | $ | 5,237,356 | | $ | 354,115,202 |
| | | | | | | | | | | | | | | | | | | | |
Purchased credit impaired loans | | | | | | | | | | | | | | | | | | | | 38,935,990 |
Total Loans | | | | | | | | | | | | | | | | | | | $ | 393,051,192 |
The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2013. Purchased credit impaired loans are excluded from this aging and nonaccrual loans schedule.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Accrual Loans | | | | | | |
| | 30-59 | | | 60-89 | | | 90 or More | | | | | | | | | | | | |
| | Days | | | Days | | | Days | | | Total | | | | | | Nonaccrual | | | Total |
| | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Loans | | | Loans |
Commercial & Industrial | $ | 60,653 | | $ | - | | $ | - | | $ | 60,653 | | $ | 31,842,702 | | $ | 142,881 | | $ | 32,046,236 |
Commercial Real Estate - Investor | | - | | | - | | | - | | | - | | | 93,983,453 | | | 100,459 | | | 94,083,912 |
Commercial Real Estate - Owner Occupied | | 175,341 | | | - | | | - | | | 175,341 | | | 38,135,290 | | | 695,960 | | | 39,006,591 |
Residential Real Estate - Investor | | - | | | 226,996 | | | - | | | 226,996 | | | 24,892,038 | | | 472,100 | | | 25,591,134 |
Residential Real Estate - Owner Occupied | | 1,049,769 | | | 117,372 | | | - | | | 1,167,141 | | | 41,151,500 | | | 2,102,194 | | | 44,420,835 |
Home Equity Line of Credit | | 319,767 | | | - | | | - | | | 319,767 | | | 32,128,982 | | | 295,406 | | | 32,744,155 |
Land | | - | | | - | | | - | | | - | | | 355,191 | | | - | | | 355,191 |
Construction | | 104,926 | | | - | | | - | | | 104,926 | | | 17,894,719 | | | - | | | 17,999,645 |
Consumer & Other | | 508 | | | - | | | - | | | 508 | | | 1,309,271 | | | - | | | 1,309,779 |
Total | $ | 1,710,964 | | $ | 344,368 | | $ | - | | $ | 2,055,332 | | $ | 281,693,146 | | $ | 3,809,000 | | $ | 287,557,478 |
| | | | | | | | | | | | | | | | | | | | |
Purchased credit impaired loans | | | | | | | | | | | | | | | | | | | | 33,122,854 |
Total Loans | | | | | | | | | | | | | | | | | | | $ | 320,680,332 |
| | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings
The restructuring of a loan constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction of interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Company will make the necessary disclosures related to the TDR. In certain cases, a modification may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered to be a TDR. Once a loan has been modified and is considered a TDR, it is reported as an impaired loan. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for credit losses calculation. A specific allowance for TDR loans is established when the discounted cash flows, collateral value or observable market price, whichever is appropriate, of the TDR is lower than the carrying value. If a loan deemed a TDR has performed for at least six months at the level prescribed by the
modification, it is not considered to be non-performing; however, it will generally continue to be reported as impaired, but may be returned to accrual status. A TDR is deemed in default on its modified terms once a contractual payment is 30 or more days past due.
The following table presents a breakdown of loans the Company modified during the years ended December 31, 2014 and 2013:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended December 31, 2014 | | Year Ended December 31, 2013 |
| | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| Troubled Debt Restructurings: | | | | | | | | | | | |
| Commercial & Industrial | 1 | $ | 85,397 | $ | 85,397 | | 1 | $ | 160,885 | $ | 160,885 |
| Commercial Real Estate - Investor | - | | - | | - | | - | | - | | - |
| Commercial Real Estate - Owner Occupied | - | | - | | - | | - | | - | | - |
| Residential Real Estate - Investor | - | | - | | - | | - | | - | | - |
| Residential Real Estate - Owner Occupied | 2 | | 612,118 | | 612,118 | | 1 | | 683,763 | | 683,763 |
| Home Equity Line of Credit | - | | - | | - | | 1 | | 68,685 | | 68,685 |
| Land | - | | - | | - | | - | | - | | - |
| Construction | - | | - | | - | | - | | - | | - |
| Consumer & Other | - | | - | | - | | - | | - | | - |
| Totals | 3 | $ | 697,515 | $ | 697,515 | | 3 | $ | 913,333 | $ | 913,333 |
During the year ended December 31, 2014, there were three loans modified as TDRs. The restructuring of a C&I loan included an extension of loan maturity date at an interest rate lower than the current rate for new debt with similar risk. This loan was on nonaccrual as of December 31, 2014. The restructuring of a Residential Real Estate – Owner Occupied loan valued at $376,742 included an extension of the interest only period for an additional 12 months to allow more manageable debt servicing by the borrower. This loan was on nonaccrual as of December 31, 2014. In November 2014, the Bank restructured a Residential Real Estate – Owner Occupied loan valued at $235,376 by extending the loan maturity date at an interest rate lower than the current rate for a new debt with similar risk. As of December 31, 2014, this loan was still accruing.
During the year ended December 31, 2013, the restructuring of a HELOC resulted in interest rate concessions and changes in payment terms and monthly principal and interest payments to interest only, to allow more manageable debt service by the borrower. As of December 31, 2014, this HELOC TDR was on nonaccrual status. The restructuring of the C&I loan included an extension of the loan maturity date at an interest rate lower than the current rate with new debt with similar risk. This loan subsequently paid off in November 2013. The modification of the Residential Real Estate-Owner Occupied loan included an extension of loan maturity date and reduced payments per executed forbearance agreement. This loan subsequently transferred to real estate acquired through foreclosure in April 2014 at its carrying value of $495,000.
None of the loans modified as a TDR during the previous 12 months were in default of their modified terms at December 31, 2014. At December 31, 2014 and 2013, the Bank had $2,347,989 and $2,582,468 in loans identified as TDRs, respectively, of which $1,192,481 and $948,488 were on nonaccrual status, respectively.
NOTE 5 – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are initially measured at fair value, which considers estimated future loan losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses related to these loans was not carried over and recorded at the acquisition date. The Company monitors actual loan cash flows to determine any improvement or deterioration from those forecasted as of the acquisition date.
The following table reflects the carrying amount of purchased credit impaired loans, which are included in the loan categories in Note 4 – Loans and Allowances for Loan Losses:
| | | | | | | | | |
| | | | | | | | | |
| | | | | December 31, 2014 | | December 31, 2013 | | |
| Commercial & Industrial | | $ | 2,022,667 | $ | 2,232,303 | | |
| Commercial Real Estate | | | 20,104,460 | | 24,360,372 | | |
| Residential Real Estate | | | 12,017,432 | | 3,311,585 | | |
| Home Equity Line of Credit | | | 711,238 | | 513,668 | | |
| Land | | | 3,408,487 | | 1,361,557 | | |
| Construction | | | 671,706 | | 1,343,369 | | |
| Total Loans | | $ | 38,935,990 | $ | 33,122,854 | | |
The contractual amount outstanding for these loans totaled $47,678,935 and $41,571,473 as of December 31, 2014 and December 31, 2013, respectively.
The following table reflects activity in the accretable yield for these loans for the years ended December 31, 2014 and 2013:
| | | | | |
| | | | | |
| | | 2014 | | 2013 |
Balance at beginning of period | | $ | 1,991,662 | $ | 1,049,653 |
Acquired through Carrollton Merger | | | - | | 2,788,895 |
Acquired through Slavie Acquisition | | | 1,114,951 | | - |
Reclassification from nonaccretable difference | | | 3,434,246 | | 1,401,853 |
Accretion into interest income | | | (4,441,859) | | (3,173,474) |
Disposals | | | (3,109) | | (75,265) |
Balance at end of period | | $ | 2,095,891 | $ | 1,991,662 |
The following table reflects activity in the allowance for these loans for the years ended December 31, 2014 and 2013:
| | | | | |
| | | | | |
| | | 2014 | | 2013 |
Balance at beginning of period | | $ | - | $ | 213,882 |
Reclassification to TDR | | | - | | (213,882) |
Charge-offs | | | (125,999) | | (131,269) |
Recoveries | | | 30,307 | | 44,580 |
Provision for loan losses | | | 95,692 | | 86,689 |
Balance at end of period | | $ | - | $ | - |
NOTE 6 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The following table reflects activity in real estate acquired through foreclosure for the 12 months ended December 31, 2014 and 2013:
| | | | | | | | |
| | | | | | | | |
| | | | | 2014 | | 2013 | |
| Balance at beginning of period | | | $ | 1,290,120 | $ | 1,151,256 | |
| Acquired through Merger | | | | - | | 908,718 | |
| New transfers from loans | | | | 1,307,191 | | 1,232,558 | |
| Sales | | | | (704,496) | | (1,901,801) | |
| Write-downs | | | | (412,343) | | (100,611) | |
| Balance at end of period | | | $ | 1,480,472 | $ | 1,290,120 | |
NOTE 7 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2014 and 2013 are as follows:
| | | | | | | | |
| | | | | | | | |
| | | 2014 | | 2013 | | Useful Life (in years) | |
| Land | $ | 1,210,000 | $ | 1,210,000 | | | |
| Buildings and improvements | | 1,129,500 | | 1,129,500 | | 10 - 40 | |
| Leasehold improvements | | 2,492,543 | | 2,424,043 | | 10 - 25 | |
| Furniture, fixtures and equipment | | 1,999,929 | | 1,691,036 | | 3 - 10 | |
| Software | | 430,260 | | 385,371 | | 3 - 10 | |
| | | 7,262,232 | | 6,839,950 | | | |
| Accumulated depreciation and amortization | | (1,708,276) | | (841,418) | | | |
| Net premises and equipment | $ | 5,553,957 | $ | 5,998,532 | | | |
| | | | | | | | |
Depreciation and amortization expense for premises and equipment amounted to $880,644 and $644,261 for the years ended December 31, 2014 and 2013, respectively.
The Company leases six branches as well as its administrative, operations, and mortgage banking offices under noncancellable operating leases with initial terms varying from 3 to 10 years and providing for one or more renewal options. Three additional branch sites are subject to noncancellable ground leases with initial terms of 20 years and providing for four 5-year renewal options. The Company also owns three properties with a branch at each location.
Rent expense applicable to operating leases for the years ended December 31, 2014 and 2013 was $1,892,097 and $1,451,936, respectively.
At December 31, 2014, future minimum lease payments under non-cancelable operating leases having an initial term in excess of one year are as follows:
| | | | | | |
| | | | | | |
| Periods ending December 31: | Operating Leases | | | |
| 2015 | $ | 1,560,160 | | | |
| 2016 | | 1,170,524 | | | |
| 2017 | | 910,890 | | | |
| 2018 | | 880,127 | | | |
| 2019 | | 683,362 | | | |
| Thereafter | | 3,960,660 | | | |
| Total minimum lease payments | $ | 9,165,723 | | | |
NOTE 8 – CORE DEPOSIT INTANGIBLE ASSETS
The Company's core deposit intangible assets at December 31, 2014 had a remaining weighted average amortization period of approximately 2.9 years. The following table presents the changes in the net book value of core deposit intangible assets for the years ended December 31, 2014 and 2013:
| | | | | |
| | | 2014 | | 2013 |
Balance at beginning of period | | $ | 3,993,679 | $ | 173,815 |
Additions from the Carrollton Merger | | | - | | 4,611,362 |
Additions from the Slavie Acquisition | | | 477,563 | | - |
Amortization expense | | | (992,960) | | (791,498) |
Balance, December 31 | | $ | 3,478,282 | $ | 3,993,679 |
The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of core deposit intangible assets as of December 31, 2014 and December 31, 2013:
| | | | | |
| | | | | |
| | | 2014 | | 2013 |
Gross carrying amount | | $ | 5,578,211 | $ | 5,100,648 |
Accumulated amortization | | | (2,099,929) | | (1,106,969) |
Net carrying amount | | $ | 3,478,282 | $ | 3,993,679 |
The following table sets forth the future amortization expense for the Company’s core deposit intangible assets at December 31, 2014:
| | | |
Periods ending December 31: | | | Amount |
2015 | | $ | 854,098 |
2016 | | | 649,939 |
2017 | | | 490,847 |
2018 | | | 402,243 |
2019 | | | 368,806 |
Subsequent years | | | 712,349 |
Total | | $ | 3,478,282 |
NOTE 9 – DEPOSITS
The following table presents the composition of deposits at December 31, 2014 and 2013:
| | | | | | | |
| | |
| | | 2014 | | | 2013 | |
| Noninterest-bearing deposits | $ | 91,676,534 | | $ | 90,077,139 | |
| Interest-bearing deposits: | | | | | | |
| Checking | | 54,844,855 | | | 42,378,939 | |
| Savings | | 36,233,369 | | | 27,817,849 | |
| Money market | | 82,651,992 | | | 78,356,997 | |
| Total interest-bearing checking, savings and money market deposits | | 173,730,216 | | | 148,553,785 | |
| | | | | | | |
| Time deposits below $100,000 | | 50,313,096 | | | 59,403,534 | |
| Time deposits $100,000 or above | | 72,110,286 | | | 62,959,013 | |
| Total time deposits | | 122,423,382 | | | 122,362,547 | |
| Total interest-bearing deposits | | 296,153,598 | | | 270,916,332 | |
| | | | | | | |
| Total Deposits | $ | 387,830,132 | | $ | 360,993,471 | |
| | | | | | | |
The following table sets forth the maturity distribution for the Company’s time deposits at December 31, 2014:
| | | | |
| | Amount | |
| Maturing within one year | $ | 63,845,975 | |
| Maturing over one to two years | | 32,165,081 | |
| Maturing over two to three years | | 7,089,737 | |
| Maturing over three to four years | | 2,486,768 | |
| Maturing over four to five years | | 16,835,821 | |
| Maturing over five years | | - | |
| Total Time Deposits | $ | 122,423,382 | |
| | | | |
Interest expense on deposits for the years ended December 31, 2014 and 2013 is as follows:
| | | | | | | |
| | | | | | | |
| | | 2014 | | | 2013 | |
| Interest-bearing checking | | 51,315 | | | 38,042 | |
| Savings | | 80,629 | | | 27,056 | |
| Money market | | 305,217 | | | 236,988 | |
| Total interest-bearing checking, savings and money market deposits | | 437,161 | | | 302,086 | |
| | | | | | | |
| Time deposits below $100,000 | | 251,359 | | | 336,231 | |
| Time deposits $100,000 or above | | 543,123 | | | 621,584 | |
| Total time deposits | | 794,482 | | | 957,815 | |
| | | | | | | |
| Total Interest Expense | $ | 1,231,643 | | $ | 1,259,901 | |
The Company’s deposits include brokered deposits obtained through the Promontory Interfinancial Network, which consist of Certificate of Deposit Registry Service (“CDARS”) balances included in time deposits, and insured cash sweep service (“ICS”) balances included in money market deposits. At December 31, 2014, CDARS and ICS deposits were $4.1 million and $4.8 million, respectively. At December 31, 2013, CDARS and ICS deposits were $5.0 million and $6.6 million, respectively.
In April 2014, the Bank announced its exit from the Individual Retirement Account (“IRA”) product line. At the time, as a result of the announcement, the Bank stopped offering IRAs to new customers and resigned as custodian for its existing IRAs. IRA
deposit balances of $24 million or 6% of total deposits were either transferred to new IRA custodians or disbursed to customers by May 23, 2014. The IRA exit increased second quarter other income $2.4 million, resulting from the recognition of the remaining interest rate mark-to-market adjustment on IRA deposits, that was recorded in connection with the Merger (defined in Note 2).
The aggregate amount of time deposit accounts (including certificates of deposits) in denominations that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2014 totaled $14.8 million dollars.
NOTE 10 – BORROWINGS
Borrowings at December 31, 2014 consisted of the following:
| | | | |
| | | | |
| | | December 31, 2014 | |
| Federal Home Loan Bank Advances | | | |
| Due January, 2015, Fixed Rate 0.24% | $ | 8,000,000 | |
| Due December, 2015, Daily Rate 0.355% | | 14,000,000 | |
| Atlantic Central Bankers Bank Advances | | | |
| Due November, 2015, Fixed Rate 4.50% | | 150,000 | |
| Total | $ | 22,150,000 | |
| | | | |
| As of and for the Year Ended December 31, 2014 | |
| Weighted average interest rate at year end: | | | |
| Federal Home Loan Bank overnight advance | | 0.355% | |
| Federal Home Loan Bank short term advances | | 0.240% | |
| Atlantic Central Bankers Bank advances | | 4.500% | |
| | | | |
| Maximum amount outstanding at month end during the year: | | | |
| Federal Home Loan Bank overnight advance | $ | 20,000,000 | |
| Federal Home Loan Bank short term advances | $ | 8,000,000 | |
| Atlantic Central Bankers Bank advances | $ | 150,000 | |
| | | | |
| Average amount outstanding during the year: | | | |
| Federal Home Loan Bank overnight advance | $ | 6,605,393 | |
| Federal Home Loan Bank short term advances | $ | 2,646,988 | |
| Atlantic Central Bankers Bank advances | $ | 16,849 | |
| | | | |
| Weighted average interest rate during the year: | | | |
| Federal Home Loan Bank overnight advance | | 0.362% | |
| Federal Home Loan Bank short term advances | | 0.194% | |
| Atlantic Central Bankers Bank advances | | 2.893% | |
| | | | |
Interest expense on FHLB advances and other borrowed funds for the years ended December 31, 2014 and 2013 were $25,556 and $1,582, respectively. Fixed-rate advances had a weighted average interest rate of 0.194% for the year ended December 31, 2014.
The Company had no long-term borrowings at December 31, 2013.
NOTE 11 – STOCK-BASED COMPENSATION
The Jefferson Bancorp, Inc. 2010 Stock Option Plan (the “Jefferson Plan”) was approved by the Jefferson Board of Directors in September 2010 and received regulatory approvals in June 2011. The Jefferson Plan provides for the granting of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code and non-qualified stock options (collectively “Awards”). Awards were available for grant to officers, employees and non-employee directors, independent consultants and contractors of Jefferson and its affiliates, including the Bank.
The Jefferson Plan authorized the issuance of up to 577,642 shares of common stock adjusted for the post-merger exchange ratio of 2.2217 and had a term of ten years. In general, options granted under the Jefferson Plan have an exercise price equal to 100% of the fair market value of the common stock at the date of the grant and have a ten year term. Options relating to a total of 539,115 shares of common stock were outstanding as of December 31, 2014. As a result of the Merger, the Jefferson Plan is now administered by Bay Bancorp, Inc.’s Board of Directors.
The Carrollton Bancorp 2007 Equity Plan (the “Equity Plan” and, together with the Jefferson Plan, the “Plans”) was approved at the 2007 annual meeting of stockholders of Bay Bancorp, Inc.. Under the Equity Plan, 500,000 shares of common stock were reserved for issuance. Options relating to a total of 203,900 shares of common stock were outstanding as of December 31, 2014.
Stock Options
The following weighted average assumptions were used for options granted during the years ended December 31, 2014 and 2013:
| | | | | |
| | | | | |
| | | 2014 | | 2013 |
| Dividend yield | | 0.0% | | 0.0% |
| Expected life | | 6.0 years | | 6.0 years |
| Expected volatility | | 27.2% | | 33.9% |
| Risk-free interest rate | | 1.91% | | 1.30% |
| | | | | |
The dividend yield is based on estimated future dividend yields. The expected term of share options granted is generally derived from historical experience. Expected volatilities are generally based on historical volatilities. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following tables summarize changes in the Company's stock options outstanding for the year ended December 31, 2014 and 2013:
| | | | | | | | | |
| | | | | | | | | |
| | Stock Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | |
| Outstanding, January 1, 2014 | 608,905 | $ | 5.23 | | 7.11 years | $ | 175,426 | |
| Granted | 187,000 | | 4.97 | | | | - | |
| Forfeited or expired | (52,890) | | 7.72 | | | | (175,426) | |
| Outstanding, December 31, 2014 | 743,015 | $ | 4.99 | | 6.85 years | $ | - | |
| | | | | | | | | |
| Exercisable at December 31, 2014 | 557,224 | $ | 4.94 | | 6.43 years | $ | - | |
| | | | | | | | | |
| Weighted average fair value of options granted during the year | | $ | 1.60 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | Stock Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (1) | |
| Outstanding, January 1, 2013 | 484,332 | $ | 4.58 | | 7.70 years | $ | (1) | |
| Options retained through Merger | 52,060 | | 15.36 | | | | - | |
| Granted | 208,120 | | 5.30 | | | | 12,000 | |
| Exercised | (8,887) | | 4.50 | | | | 3,082 | |
| Forfeited or expired | (126,720) | | 7.07 | | | | 19,898 | |
| Outstanding, December 31, 2013 | 608,905 | $ | 5.23 | | 7.11 years | $ | 175,426 | |
| | | | | | | | | |
| Exercisable at December 31, 2013 | 377,255 | $ | 5.39 | | 6.31 years | $ | 138,941 | |
| | | | | | | | | |
| Weighted average fair value of options granted during the year | | $ | 1.85 | | | | | |
| (1) | | The intrinsic value of stock options for dates prior to April 19, 2013 was not readily determinable because the legacy Jefferson Bancorp shares were not publicly traded. |
Stock-based compensation expense is recognized on a straight-line basis over the vesting period of the stock options and is recorded in noninterest expense. For the years ended December 31, 2014 and 2013, stock-based compensation expense applicable to the Plans was $415,560 and $268,633, respectively-, and the tax benefits related to stock-based compensation were $0 and $1,418, respectively. Unrecognized stock-based compensation expense attributable to nonvested options was $185,028 at December 31, 2014. This amount is expected to be recognized over a remaining weighted average period of approximately 2.10 years.
The summary of the activity for the Company’s non-vested options for the years ended December 31, 2014 and 2013 is presented in the following table:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2014 | | 2013 | |
| | | Shares | | Weighted-Average Grant-Date Fair Value | | Shares | | Weighted-Average Grant-Date Fair Value | |
| Non-vested options at January 1, | | 231,650 | | $ | 2.30 | | 219,282 | | $ | 2.74 | |
| Granted | | 187,000 | | | 1.47 | | 208,120 | | | 1.85 | |
| Vested | | (232,859) | | | 1.88 | | (102,423) | | | 2.60 | |
| Cancelled, forfeited or expired | | (40,000) | | | 1.85 | | (93,329) | | | 1.98 | |
| Non-vested options at December 31, | | 145,791 | | $ | 2.05 | | 231,650 | | $ | 2.30 | |
| | | | | | | | | | | | |
Restricted Stock Awards
On June 26, 2013, the Company’s Board of Directors revised its director compensation policy to provide for an annual grant to each non-employee director of an award of shares of restricted common stock having a fair market value of $10,000 that will vest one year after the date of the grant. A total of 33,701 shares of restricted common stock have been granted through December 31, 2014, with 16,256 shares granted to the eight eligible directors on May 14, 2014. Total stock based compensation expense attributable to the shares of restricted common stock was $84,153 and $42,500 for the years ended December 31, 2014 and 2013, respectively. The total unrecognized compensation expense attributable to the shares of restricted common stock was $33,323 at December 31, 2014.
A summary of the activity for the Company’s non-vested restricted stock for the period indicated is presented in the following table:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2014 | | 2013 | |
| | | Shares | | Weighted-Average Fair Value | | Shares | | Weighted-Average Fair Value | |
| Non-vested restricted stock at January 1, | | 15,488 | | $ | 5.17 | | - | | $ | - | |
| Granted | | 16,256 | | | 4.92 | | 17,445 | | | 5.16 | |
| Vested | | (15,488) | | | 5.17 | | - | | | - | |
| Cancelled, forfeited or expired | | - | | | - | | (1,957) | | | 5.11 | |
| Non-vested restricted stock at December 31, | | 16,256 | | $ | 4.92 | | 15,488 | | $ | 5.17 | |
| | | | | | | | | | | | |
Other Stock Awards
On July 29, 2014, the Company’s Board of Directors granted a one-time award of common stock to an employee director and certain non-employee directors, totaling 212,000 shares that vested immediately. Total stock based compensation expense attributable to the shares of unrestricted common stock was $1,007,000 for the 12 months ended December 31, 2014.
NOTE 12 – DEFINED BENEFIT PENSION PLAN
The Carrollton Bank Retirement Income Plan (the “Pension Plan”) was acquired through the Merger. The Pension Plan provides defined benefits based on years of service and final average salary. Effective December 31, 2004, all benefit accruals for existing employees were frozen and no new employees were eligible for benefits under the Pension Plan.
Obligations and Funded Status
| | | | | | | | | | |
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | | |
| Change in Benefit Obligation | | | | | | | | | |
| Benefit obligation at beginning of year | $ | 9,897,739 | | $ | - | | | | |
| Benefit obligation acquired in Merger | | - | | | 11,158,118 | | | | |
| Service cost | | 60,738 | | | 41,766 | | | | |
| Interest cost | | 442,705 | | | 293,289 | | | | |
| Actuarial (gain)/loss | | (421,439) | | | (1,256,925) | | | | |
| Disbursements made | | (509,533) | | | (338,509) | | | | |
| Benefit obligation at end of year | | 9,470,210 | | | 9,897,739 | | | | |
| | | | | | | | | | |
| Change in Plan Assets | | | | | | | | | |
| Fair value of plan assets at beginning of year | | 9,855,247 | | | - | | | | |
| Fair value of plan assets acquired in Merger | | - | | | 8,891,492 | | | | |
| Actual return on plan assets | | 499,052 | | | 1,302,264 | | | | |
| Employer contribution | | 306,112 | | | - | | | | |
| Disbursements made | | (509,533) | | | (338,509) | | | | |
| Fair value of plan assets at end of year | | 10,150,878 | | | 9,855,247 | | | | |
| | | | | | | | | | |
| Funded Status at End of Year | $ | 680,668 | | $ | (42,492) | | | | |
| | | | | | | | | | |
The accumulated benefit obligation was $9,470,210 and $9,897,739 at December 31, 2014 and 2013, respectively.
The amount recognized on the consolidated balance sheet as defined benefit pension asset and liability was $680,668 and $42,492 at December 31, 2014 and 2013, respectively.
Amounts recognized in accumulated other comprehensive income (net of taxes at 39.445%) consist of the following:
| | | | | | | | | | |
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | | |
| Net gain | $ | (1,452,220) | | $ | (1,304,888) | | | | |
Components of Net Periodic Pension Benefit and Other Amounts Recognized in Other Comprehensive Income
| | | | | | | | | | |
| Net Periodic Pension Benefit | | 2014 | | | 2013 | | | | |
| Service cost | $ | 60,738 | | $ | 41,766 | | | | |
| Interest cost | | 442,705 | | | 293,289 | | | | |
| Expected return on plan assets | | (598,359) | | | (404,308) | | | | |
| Amortization of net loss/(gain) | | (78,828) | | | - | | | | |
| Net periodic pension benefit | | (173,744) | | | (69,253) | | | | |
| | | | | | | | | | |
| Other Changes in Plan Assets and Benefit Obligations | | | | | | | | | |
| Net (gain) loss for the period | | (243,303) | | | (2,154,881) | | | | |
| Amortization of prior service cost | | - | | | - | | | | |
| Amortization of net transition liability | | - | | | - | | | | |
| Amortization of net gain | | - | | | - | | | | |
| Total recognized in other comprehensive income | | (243,303) | | | (2,154,881) | | | | |
| | | | | | | | | | |
| Total recognized in net periodic pension benefit and other comprehensive income | $ | (417,047) | | $ | (2,224,134) | | | | |
Expected Amortizations
The estimated net gain for the Pension Plan that is expected to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year is as follows:
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | | |
| Expected amortization of net gain | $ | - | | $ | (47,754) | | | | |
| | | | | | | | | | |
Additional Information
The weighted-average assumptions used in the actuarial computation of the Pension Plan’s benefit obligations were as follows:
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | | |
| Discount rates | | 3.77% | | | 4.72% | | | | |
| Rates of compensation increase | | NA | | | NA | | | | |
| | | | | | | | | | |
The weighted-average assumptions used in the actuarial computation of the Pension Plan’s periodic cost were as follows:
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | | |
| Discount rates | | 4.72% | | | 3.81% | | | | |
| Expected rate on plan assets | | 6.60% | | | 6.60% | | | | |
| Rate of compensation increase | | NA | | | NA | | | | |
The target and actual allocations expressed as a percentage of the Pension Plan’s assets as of December 31, 2014 are as follows:
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2014 | | Target | | | Actual | | | | |
| Equity Securities | | 40-65% | | | 59% | | | | |
| Fixed income-guaranteed fund | | 35-60% | | | 41% | | | | |
| Total | | 100% | | | 100% | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2013 | | Target | | | Actual | | | | |
| Equity Securities | | 40-65% | | | 55% | | | | |
| Fixed income-guaranteed fund | | 35-60% | | | 45% | | | | |
| Total | | 100% | | | 100% | | | | |
Estimated future benefit payments are as follows:
| | | | |
| Periods ending December 31: | Amount | |
| 2015 | $ | 475,652 | |
| 2016 | | 487,054 | |
| 2017 | | 460,926 | |
| 2018 | | 468,665 | |
| 2019 | | 472,204 | |
| 2020-2023 | | 2,661,452 | |
| | | | |
There is no required minimum amount of contribution to be made by the Company to the Pension Plan during 2015.
The Pension Plan’s investment strategy is predicated on its investment objectives and the risk and return expectations of asset classes appropriate for the Pension Plan. Investment objectives have been established by considering the Pension Plan’s liquidity needs and time horizon and the fiduciary standards under ERISA. The asset allocation strategy is developed to meet the Pension Plan’s long- term needs in a manner designed to control volatility and to reflect the Company’s risk tolerance.
Fair Value Measurement of Plan Assets
The following table summarizes the fair value of the Pension Plan’s investments at December 31, 2014 and 2013.
| | | | | | | | | | | | | |
| Asset Category | | | Total as of December 31, 2014 | | | Quoted Prices in Active markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Other Unobservable Inputs (Level 3) |
| Equity Securities - Mutual Funds: | | | | | | | | | | | |
| Mixed-cap | | $ | 4,475,708 | | $ | 4,475,708 | | $ | - | | $ | - |
| Small-cap | | | 822,709 | | | 822,709 | | | - | | | - |
| International | | | 665,773 | | | 665,773 | | | - | | | - |
| Guaranteed Deposit | | | 4,186,688 | | | - | | | 4,186,688 | | | - |
| Total | | $ | 10,150,878 | | $ | 5,964,190 | | $ | 4,186,688 | | $ | - |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Asset Category | | | Total as of December 31, 2013 | | | Quoted Prices in Active markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Other Unobservable Inputs (Level 3) |
| Equity Securities - Mutual Funds: | | | | | | | | | | | |
| Mixed-cap | | $ | 4,303,047 | | $ | 4,303,047 | | $ | - | | $ | - |
| Small-cap | | | 825,008 | | | 825,008 | | | - | | | - |
| International | | | 702,016 | | | 702,016 | | | - | | | - |
| Guaranteed Deposit | | | 4,025,176 | | | - | | | 4,025,176 | | | - |
| Total | | $ | 9,855,247 | | $ | 5,830,071 | | $ | 4,025,176 | | $ | - |
401(k) Plan
The Company has a 401(k) profit sharing plan covering substantially all full-time employees. At this time, the Company has elected not to match employee contributions as defined under this plan but will continue to evaluate this decision throughout the year. Therefore, the expense associated with this plan for 2014 and 2013 is $0.
NOTE 13 – INCOME TAXES
The components of income tax expense (benefit) are as follows for the years ended December 31, 2014 and 2013:
| | | | | | |
| | | | | | |
| 2014 | | 2013 | |
Current income tax expense: | | | | | | |
Federal | $ | (3,066,917) | | $ | 749,749 | |
State | | (651,942) | | | 240,552 | |
Total current tax expense | | (3,718,859) | | | 990,301 | |
| | | | | | |
Deferred income tax expense (benefit): | | | | | | |
Federal | | 2,470,018 | | | (377,914) | |
State | | 522,056 | | | (108,297) | |
Total deferred tax expense (benefit) | | 2,992,074 | | | (486,211) | |
| | | | | | |
Total income tax expense | $ | (726,785) | | $ | 504,090 | |
| | | | | | |
The differences between the statutory federal income tax rate of 34% and the effective tax rate for the Company are reconciled as follows:
| | | | | | | | | | |
| | Years Ended December 31, |
| | | 2014 | | | 2013 |
| | | Amount | | Percentage of Pretax Income | | | Amount | | Percentage of Pretax Income |
Income tax expense at federal statutory rate | | $ | 784,014 | | 34.0% | | $ | 1,273,376 | | 34.0% |
Increase (decrease) resulting from: | | | | | | | | | | |
Recognized Built-In Losses/Amended Returns | | | (1,768,601) | | -76.7% | | | - | | - |
Bargain purchase gain | | | - | | - | | | (972,468) | | -26.0% |
Tax exempt income | | | (20,258) | | -0.9% | | | (16,511) | | -0.4% |
Bank owned life insurance | | | (43,793) | | -1.9% | | | (31,729) | | -0.8% |
State income taxes, net of federal income tax benefit | | | 148,099 | | 6.4% | | | 87,288 | | 2.3% |
Incentive stock options | | | 154,010 | | 6.7% | | | 65,725 | | 1.8% |
Acquisition related costs | | | - | | - | | | 90,769 | | 2.4% |
Nondeductible expenses | | | 19,744 | | 0.9% | | | 7,640 | | 0.2% |
Total income tax expense and effective tax rate | | $ | (726,785) | | -31.5% | | $ | 504,090 | | 13.5% |
Deferred tax assets and liabilities resulting from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at December 31, 2014 and 2013 are as follows:
| | | | | | | | | |
| | | | | |
| | 2014 | | 2013 | | |
| Deferred Tax Assets | | | | | | | | |
| Bad Debts | $ | 147,983 | | $ | - | | | |
| Equity security impairment loss | - | 159,890 | | | 159,890 | | | |
| Net unrealized losses on available for sale securities | | - | | | 124,424 | | | |
| Deferred compensation | | 191,317 | | | 215,986 | | | |
| Nonaccrual loan interest income | | 244,180 | | | 155,769 | | | |
| Stock based compensation plans | | 110,632 | | | 123,006 | | | |
| Accrued pension expense | | 801,696 | | | 962,166 | | | |
| Real estate acquired through foreclosure | | 100,503 | | | 179,994 | | | |
| Purchase accounting adjustment - deposits | | - | | | 1,353,909 | | | |
| Purchase accounting adjustment - loans | | 1,858,465 | | | 4,462,191 | | | |
| Purchase accounting adjustment - lease obligations | | 282,022 | | | 276,819 | | | |
| Carryover of excess recognized built-in losses | | - | | | 2,564,279 | | | |
| AMT credit carryforwards | | 277,331 | | | - | | | |
| NOL carryforwards | | 2,029,613 | | | - | | | |
| Other | | 14,552 | | | 35,578 | | | |
| Subtotal | | 6,218,184 | | | 10,614,011 | | | |
| Less: Valuation allowance | | (38,346) | | | (342,442) | | | |
| Total deferred tax assets | | 6,179,838 | | | 10,271,569 | | | |
| | | | | | | | | |
| Deferred Tax Liabilities: | | | | | | | | |
| Bad debts | | - | | | 327,721 | | | |
| Basis difference on securities acquired in merger | | 273,148 | | | 410,205 | | | |
| Core deposit intangible | | 1,372,008 | | | 1,575,307 | | | |
| Purchase accounting adjustment - pension plan | | - | | | 229,003 | | | |
| Purchase accounting adjustment - other | | 36,696 | | | 96,019 | | | |
| Depreciation and amortization | | 164,792 | | | 219,200 | | | |
| Net unrealized gain on pension plan assets | | 945,964 | | | 849,993 | | | |
| Net unrealized gains on available for sale securities | | 137,552 | | | - | | | |
| Other | | 35,578 | | | - | | | |
| Total deferred tax liabilities | | 2,965,738 | | | 3,707,448 | | | |
| Net Deferred Tax Asset | $ | 3,214,100 | | $ | 6,564,121 | | | |
Previously, the Company disclosed that in conjunction with its merger with Jefferson, the Company incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code. As a result, applicable federal and state tax law places an annual limitation of approximately $351,000 on the amount of certain losses that may be used, including built-in losses that existed at the date of the ownership change. Further, the Company disclosed that, during 2013, the Company recognized built-in losses that were also subject to the annual Section 382 limitation and that a portion of these losses would not be realizable due to the limitation. Therefore, no deferred tax assets were recorded for recognized built-in losses in excess of the amount that the Company had the ability to utilize in the future and a valuation allowance was established against a portion of the remaining deferred tax assets with a built-in loss limitation.
Upon completion of the Merger-related income tax returns, it was determined that the Company was subject to the Section 382 limitation for net operating losses, but that the built-in losses were below the de minimis threshold established in Section 382 and therefore were not subject to the annual limitation. Accordingly, the benefit associated with previously unrecorded deferred tax assets has been recognized during the year and the valuation allowance associated with deferred tax assets previously thought to be subject to the built-in loss limitation has been released.
The 2014 effective tax rate of (31.5%) includes a benefit of $1.8 million that resulted from the recognition of the deferred tax assets discussed above.
At December 31, 2014, the Company had federal net operating loss carryforwards of $4.9 million, which begin to expire in 2033. As a result of the Merger, $2.4 million of these net operating losses are subject to an annual limitation of $0.35 million. At December 31, 2014, the Company had state net operating loss carryforwards of $6.9 million, which begin to expire in 2033. A valuation allowance of approximately $38,000 has been established against the corresponding deferred tax assets associated with state net operating losses that are not deemed to be more likely than not to be realized.
The bargain purchase gain recognized in 2014 is the result of the Slavie Acquisition from the FDIC in a taxable transaction. Therefore, there is no impact from the transaction on the effective tax rate.
Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for income tax purposes. Management has determined that the Company is more likely than not to realize existing net deferred tax assets as of December 31, 2013, with the exception of the items noted above.
As of December 31, 2014 and December 31, 2013, the Company did not have any unrecognized tax benefits. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the State of Maryland. The Company is no longer subject to examination by taxing authorities in these jurisdictions for the years before 2011.
NOTE 14 – OTHER COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For financial statements presented by the Company, non-equity changes are comprised of unrealized gains or losses on available for sale debt securities and any minimum pension liability adjustments. These items do not have an impact on the Company’s net income. The following table presents the activity in net accumulated other comprehensive income for the periods indicated:
| | | | | | | | | | |
| | | | | | | | | | |
| | | Unrealized Gains (losses) on Investments Available for Sale | | | Defined Benefit Pension Plan | | | Total | |
| Balance at December 31, 2012 | $ | 260,092 | | $ | - | | $ | 260,092 | |
| Period change, net of tax | | (451,063) | | | 1,304,888 | | | 853,825 | |
| Balance at December 31, 2013 | | (190,971) | | | 1,304,888 | | | 1,113,917 | |
| Period change, net of tax | | 402,265 | | | 147,332 | | | 549,597 | |
| Balance at December 31, 2014 | $ | 211,294 | | $ | 1,452,220 | | $ | 1,663,514 | |
NOTE 15- NET INCOME PER COMMON SHARE
The calculation of net income per common share for the years ended December 31, 2014 and 2013 are as follows:
| | | | | | | | |
| | | |
| | | | 2014 | | | 2013 | |
| Basic earnings per share: | | | | | | | |
| Net income | | $ | 3,032,708 | | $ | 3,241,134 | |
| Weighted average shares outstanding (1) | | | 10,370,795 | | | 8,322,811 | |
| Basic net income per share | | $ | 0.29 | | $ | 0.39 | |
| | | | | | | | |
| Diluted earnings per share: | | | | | | | |
| Net income | | $ | 3,032,708 | | $ | 3,241,134 | |
| Weighted average shares outstanding (1) | | | 10,370,795 | | | 8,322,811 | |
| Dilutive potential shares | | | 194,541 | | | 19,835 | |
| Total diluted average shares outstanding | | | 10,565,336 | | | 8,342,646 | |
| Total diluted net income per share | | $ | 0.29 | | $ | 0.39 | |
| | | | | | | | |
| Anti-dilutive shares | | | 292,939 | | | 264,261 | |
| (1) | | Pre-Merger Jefferson common shares adjusted for the effect of the conversion to Bay Bancorp, Inc. common shares. |
NOTE 16 – RELATED PARTY TRANSACTIONS
The Company’s executive officers and directors, or other entities to which they are related, enter into loan transactions with the Bank in the ordinary course of business. The terms of these transactions are similar to the terms provided to other borrowers
entering into similar loan transactions and do not involve more than normal risk of collectability. Related party loan activity for the years ended December 31 was as follows:
| | | | | | | | |
| | | | | | | | |
| | | | 2014 | | | | 2013 |
| Beginning Balance | | $ | 5,437,593 | | | $ | - |
| Acquired in Merger | | | - | | | | 127,139 |
| Change in status (1) | | | - | | | | 3,975,838 |
| Additions | | | 2,366,328 | | | | 1,500,000 |
| Repayments | | | (159,064) | | | | (165,384) |
| Ending Balance | | $ | 7,644,857 | | | $ | 5,437,593 |
| | | | | | | | |
| (1) | | Outstanding loans of the accounting acquirer that became related party loans at the date of the Merger. |
The Bank routinely enters into deposit relationships with its directors, officers and employees in the normal course of business. These deposits bear the same terms and conditions of those prevailing at the time for comparable transactions with unrelated parties. Deposit balances of executive officers, directors and their related interests as of December 31, 2014 and 2013 were $7,044,100 and $2,526,069, respectively.
A principal for a commercial real estate services company, through which the Bank entered into a third-party lease agreement for the Lutherville headquarters offices and branch in 2010, became a director of the Company and the Bank on April 19, 2013. The Bank paid approximately $340,552 in 2014 and $327,000 in 2013 as lease payments for the office and branch facilities. In addition, the Bank paid approximately $0 and $14,000 to the real estate services company in 2014 and 2013, respectively, for several small leasehold improvement projects.
In August of 2013, the managing member of the ownership group that advises the majority owner of the Company entered into an agreement to sublease office space from the Company in the Bank’s Columbia operations center. The managing member paid $17,382 and $6,750 to the Company during 2014 and 2013, respectively.
Also in August of 2013, the managing member of the ownership group that advises the majority owner of the Company entered into a cost sharing agreement for services to be performed by one of the Bank’s employees. The managing member reimbursed the Bank for $37,380 and $15,830 of the pro-rata share of this employee’s salary and benefits costs in 2014 and 2013, respectively.
In July 2014, the Company entered into an agreement with the majority owner of the Company whereby the majority owner will provide management and advisory services to the Company and the Bank. The Bank paid $125,000 to the majority owner during 2014.
The Company believes these transactions are at terms comparable to those between unrelated parties.
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include loan commitments, unused lines of credit and standby letters of credit. The Company uses these financial instruments to meet the financing needs of its customers. Financial instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. These do not represent unusual risks and management does not anticipate any losses which would have a material effect on the accompanying consolidated financial statements.
Outstanding loan commitments and lines and letters of credit were as follows: |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | December 31, 2014 | | December 31, 2013 | | | |
| Loan commitments | $ | 5,021,857 | $ | 6,224,298 | | | |
| Unused lines of credit | | 64,761,646 | | 58,479,498 | | | |
| Standby letters of credit | | 1,632,927 | | 2,254,568 | | | |
| | | | | | | | |
Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
In the ordinary course of business, the Company has various outstanding contingent liabilities that are not reflected in the accompanying consolidated financial statements. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial condition of the Company.
NOTE 18 – FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
The Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
In accordance with FASB’s guidance, impaired loans where an allowance is established based on the fair value of collateral and real estate acquired through foreclosure requires classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company measures and records the loan or real estate acquired through foreclosure as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company measures and records the loan or real estate acquired through foreclosure as nonrecurring Level 3. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company. Impaired loans and real estate acquired through foreclosure are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
Assets Recorded at Fair Value on a Recurring Basis
The following methods and assumptions were used by the Company to measure certain assets recorded at fair value on a recurring basis in the consolidated financial statements:
Investment Securities Available for Sale
The fair value of investment securities available for sale is the market value based on quoted market prices, when available (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar assets or, due to the limited market activity of the instrument, externally developed models that use significant observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities and market information from third party sources. In the absence of current market activity, securities may be evaluated either by reference to similarly situated bonds or based on the liquidation value or restructuring value of the underlying assets. There was no change in valuation techniques used to measure fair value of securities available for sale for the period ended December 31, 2014.
The tables below present the recorded amount of assets measured at fair value on a recurring basis as of December 31, 2014 and December 31, 2013:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Carrying Value (Fair Value) | | | Quoted Prices (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Other Unobservable Inputs (Level 3) |
December 31, 2014 | | | | | | | | | | | | |
U.S. government agency | | $ | 7,778,271 | | $ | - | | $ | 7,778,271 | | $ | - |
Residential mortgage-backed securities | | | 20,870,927 | | | - | | | 20,870,927 | | | - |
State and municipal | | | 4,654,146 | | | - | | | 4,654,146 | | | - |
Corporate obligations | | | 2,030,000 | | | - | | | 2,030,000 | | | - |
Equity securities | | | 16,545 | | | 16,545 | | | - | | | - |
| | $ | 35,349,889 | | $ | 16,545 | | $ | 35,333,344 | | $ | - |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Carrying Value (Fair Value) | | | Quoted Prices (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Other Unobservable Inputs (Level 3) |
December 31, 2013 | | | | | | | | | | | | |
U.S. government agency | | $ | 7,525,915 | | $ | - | | $ | 7,525,915 | | $ | - |
Residential mortgage-backed securities | | | 23,801,003 | | | - | | | 23,801,003 | | | - |
State and municipal | | | 5,189,886 | | | - | | | 5,189,886 | | | - |
Equity securities | | | 69,865 | | | 69,865 | | | - | | | - |
| | $ | 36,586,669 | | $ | 69,865 | | $ | 36,516,804 | | $ | - |
| | | | | | | | | | | | |
Assets Recorded at Fair Value on a Nonrecurring Basis
On a nonrecurring basis, the Company may be required to measure certain assets at fair value in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment.
The following methods and assumptions were used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:
Loans held for sale
Loans held for sale are recorded at the lower of cost or estimated market value on an aggregate basis. Market value is determined based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale. As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2014 and 2013.
Impaired Loans
Loans for which it is probable that payment of principal and interest will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, using the present value of expected cash flows, the loan’s observable market price, or the fair value of collateral (less selling costs) if the loan is collateral dependent. A specific allowance for loan loss is then established or a charge-
off is recorded if the loan is collateral dependent and the loan is classified at a Level 3 in the fair value hierarchy. Appraised collateral values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those applied in prior periods.
Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure (“REO”) is adjusted to fair value upon transfer of the loan to REO and is classified at a Level 3 in the fair value hierarchy. Subsequently, the REO is carried at the lower of carrying value or fair value. The estimated fair value for REO included in Level 3 is determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of REO deteriorates subsequent to the period of transfer, the REO is also classified at a Level 3 in the fair value hierarchy. Valuation techniques are consistent with those techniques applied in prior periods.
The tables below present the recorded assets measured at fair value on a nonrecurring basis as of December 31, 2014 and December 31, 2013:
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2014: | | Carrying Value (Fair Value) | | | Quoted Prices (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Other Unobservable Inputs (Level 3) |
Impaired loans | $ | 374,459 | | $ | - | | $ | - | | $ | 374,459 |
Real estate acquired through foreclosure | | 983,276 | | | - | | | - | | | 983,276 |
| $ | 1,357,735 | | $ | - | | $ | - | | | 1,357,735 |
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2013: | | Carrying Value (Fair Value) | | | Quoted Prices (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Other Unobservable Inputs (Level 3) |
Impaired loans | $ | 875,357 | | $ | - | | $ | - | | $ | 875,357 |
Real estate acquired through foreclosure | | 960,006 | | | - | | | - | | | 960,006 |
| | 1,835,363 | | $ | - | | $ | - | | | 1,835,363 |
Fair Value of Financial Instruments
The Company discloses fair value information about financial instruments, for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheets. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.
Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant part of the Company's financial instruments, the fair values of such instruments have been derived based on the amount and timing of estimated future cash flows and using market discount rates.
Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities and should not be considered an indication of the fair value of the Company.
The following disclosure of estimated fair values of the Company's financial instruments at December 31, 2014 and December 31, 2013 is made in accordance with the requirements of ASC Topic 820:
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | | | December 31, 2014 | | December 31, 2013 |
| Level in Fair Value Hierarchy | | | Carrying Amount | | Estimated fair value | | Carrying Amount | | Estimated fair value |
| | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 16,857,325 | $ | 16,857,325 | $ | 23,273,060 | | 23,273,060 |
Time deposits with banks | Level 2 | | | 34,849 | | 34,849 | | - | | - |
Investment securities available for sale (debt) | Level 2 | | | 35,333,344 | | 35,333,344 | | 36,516,804 | | 36,516,804 |
Investment securities available for sale (equity) | Level 1 | | | 16,545 | | 16,545 | | 69,865 | | 69,865 |
Investment securities held to maturity (debt) | Level 2 | | | 1,315,718 | | 1,324,797 | | - | | - |
Restricted equity securities | Level 2 | | | 1,862,995 | | 1,862,995 | | 1,009,695 | | 1,009,695 |
Loans held for sale | Level 2 | | | 7,233,306 | | 7,233,306 | | 12,836,234 | | 12,836,234 |
Loans, net of allowance | Level 3 | | | 391,756,216 | | 401,651,659 | | 319,829,332 | | 327,390,640 |
Accrued interest receivable | Level 2 | | | 1,306,111 | | 1,306,111 | | 1,186,748 | | 1,186,748 |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits | Level 3 | | | 387,830,132 | | 388,705,645 | | 360,993,471 | | 361,208,309 |
Accrued interest payable | Level 2 | | | 25,350 | | 25,350 | | 38,642 | | 38,642 |
Borrowings | Level 2 | | | 22,150,000 | | 22,150,000 | | - | | - |
| | | | | | | | | | |
The following methods and assumptions were used to estimate the fair value of each category of financial instruments for which it is practicable to estimate that value:
Cash and due from banks, federal funds sold and overnight investments. The carrying amount approximated the fair value.
Time deposits with banks. The carrying amount of time deposits with banks approximated fair value.
Investment securities (available for sale). See recurring fair value measurements above for methods.
Investment securities (held to maturity). The fair value of debt securities is based upon quoted prices for similar assets or externally developed models that use significant observable inputs.
Restricted equity securities. Since these stocks are restricted as to marketability, the carrying value approximated fair value.
Loans held for sale. The carrying amount approximated the fair value.
Loans. The fair value of loans, except for purchased credit impaired loans that are collateral-dependent, was estimated by computing the discounted value of estimated cash flows, adjusted for probable credit losses, for pools of loans having similar characteristics. The discount rate was based upon the current market rate for a similar loan. The fair value of purchased credit impaired loans that are collateral-dependent was determined based on the estimated fair value of collateral less estimated costs to sell. Nonperforming loans have an assumed interest rate of 0%.
Accrued interest receivable and payable. The carrying amount approximated the fair value of accrued interest, considering the short-term nature of the instrument and its expected collection.
Deposit liabilities. The fair value of demand, money market savings and regular savings deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand. The fair value of time deposits was based upon the discounted value of contractual cash flows at current rates for deposits of similar remaining maturity.
Short-term borrowings. The carrying amount of fixed rate FHLB advances and ACBB borrowings approximated fair value due to the short-term nature of the instrument. The carrying amount of variable rate FHLB advances and ACBB borrowings approximated the fair value.
Off-balance sheet instruments. The Company charges fees for commitments to extend credit. Interest rates on loans, for which these commitments are extended, are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.
NOTE 19 – REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by 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 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 its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The minimum levels of Tier 1 and Total capital to risk-weighted assets are 4% and 8%, respectively, under the current regulations.
In addition, the OCC requires that FSBs, like the Bank, maintain a minimum level of Tier 1 capital to total assets excluding intangibles. This measure is known as the leverage ratio. The current regulatory minimum for the leverage ratio for institutions to be considered adequately capitalized is 4%, but an individual institution could be required to maintain a higher level. In connection with the Merger, the Bank entered into an Operating Agreement with the OCC (the “Operating Agreement”) pursuant to which the Bank agreed, among other things, to maintain a leverage ratio of 10% for the term of the Operating Agreement. The Operating Agreement will remain in effect until it is terminated by the OCC or the Bank ceases to be an FSB, either due to a merger or otherwise.
Until the adoption of the Basel III Capital Rules, the Company was not subject to specific capital requirements. The Basel III Capital Rules generally will subject to the Company to the same capital requirements that apply to other depository institution holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio of Tier 1 capital (as defined) to total tangible assets (as defined). At December 31, 2014 and 2013, the Bank had regulatory capital in excess of that required under each requirement and was classified as “well capitalized”.
Actual capital amounts and ratios for the Bank are presented on the following tables (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | To Be Well | | |
| | | | | | | | | | Capitalized Under | | |
| | | | | | | To Be Considered | | | Prompt Corrective | | |
| | | | Actual | | | | Adequately Capitalized | | | Action Provisions | | |
| As of December 31, 2014: | | | Amount | | Ratio | | | Amount | | Ratio | | | Amount | | Ratio | |
| | | | | | | | | | | | | | | | | | | | |
| Total Risk-Based Capital Ratio | | $ | 62,743 | | 16.66 | % | | $ | 30,132 | | 8.00 | % | | $ | 37,665 | | 10.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Tier I Risk-Based Capital Ratio | | $ | 61,448 | | 16.31 | % | | $ | 15,066 | | 4.00 | % | | $ | 22,599 | | 6.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Leverage Ratio | | $ | 61,448 | | 12.94 | % | | $ | 18,988 | | 4.00 | % | | $ | 23,735 | | 5.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2013: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Total Risk-Based Capital Ratio | | $ | 47,815 | | 14.68 | % | | $ | 26,049 | | 8.00 | % | | $ | 32,562 | | 10.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Tier I Risk-Based Capital Ratio | | $ | 46,964 | | 14.42 | % | | $ | 13,025 | | 4.00 | % | | $ | 19,537 | | 6.00 | % | |
| | | | | | | | | | | | | | | | | | | | |
| Leverage Ratio | | $ | 46,964 | | 11.41 | % | | $ | 16,461 | | 4.00 | % | | $ | 20,577 | | 5.00 | % | |
Banking regulations also limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agencies. In addition to these regulations, the Bank agreed in the Operating Agreement that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including the minimum capital requirements. Due to these restrictions and the Bank’s desire to preserve capital to fund its growth, the Company currently does not anticipate paying a dividend for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends is at the discretion of the Company’s Board of Directors and will depend, in part, on the Company’s earnings and future capital needs. Accordingly, there can be no assurance that dividends will be declared in any future period.
The Bank is required to maintain reserves against certain deposit liabilities which was satisfied with vault cash and balances on deposit with the Federal Reserve Bank of Richmond during the reserve maintenance periods that included December 31, 2014 and 2013.
Under current Federal Reserve regulations, the Bank is limited in the amount it may lend to the parent company and its nonbank subsidiaries. Loans to a single affiliate may not exceed 10%, and loans to all affiliates may not exceed 20% of the Bank’s capital stock, surplus, and undivided profits, plus the allowance for loan and lease losses. Loans from the Bank to nonbank affiliates, including the parent company, are also required to be collateralized according to regulatory guidelines. At December 31, 2014, there were no loans from the Bank to any nonbank affiliate, including the parent company.
NOTE 20 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The condensed financial statements for Bay Bancorp, Inc. (Parent only) are presented below:
| | | | | | |
| | | | | | |
| | December 31, | |
| | 2014 | | | 2013 | |
| | | | | | |
ASSETS | | | | | | |
| | | | | | |
Cash and cash equivalents | $ | 108,712 | | $ | 197,976 | |
Investment securities available for sale, at fair value | | 66,343 | | | 119,665 | |
Investment in subsidiary | | 66,756,548 | | | 54,506,900 | |
Other assets | | 38,954 | | | 33,764 | |
Total Assets | $ | 66,970,557 | | $ | 54,858,305 | |
| | | | | | |
LIABILITIES | | | | | | |
Borrowings | | 150,000 | | | - | |
Accrued expenses and other liabilities | | 177,271 | | | 304,037 | |
Total Liabilities | | 327,271 | | | 304,037 | |
| | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | |
Common stock | | 11,014,517 | | | 9,379,753 | |
Additional paid-in capital | | 43,228,950 | | | 36,357,001 | |
Retained earnings | | 10,736,305 | | | 7,703,597 | |
Accumulated other comprehensive income | | 1,663,514 | | | 1,113,917 | |
Total Stockholders' Equity | | 66,643,286 | | | 54,554,268 | |
Total Liabilities and Stockholders' Equity | $ | 66,970,557 | | $ | 54,858,305 | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | Years Ended December 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | |
Income: | | | | | | | |
Interest and dividends on deposits and investment securities | | $ | 366 | | $ | 3,795 | |
Other income | | | 2,832 | | | - | |
Bargain purchase gain | | | - | | | (110,015) | |
Total Income | | | 3,198 | | | (106,220) | |
| | | | | | | |
Expenses: | | | | | | | |
Interest on short-term borrowings | | | 488 | | | - | |
Merger related expenses | | | - | | | 148,285 | |
Other noninterest expenses | | | 236,818 | | | 318,701 | |
Total Expenses | | | 237,306 | | | 466,986 | |
| | | | | | | |
Loss before income taxes and equity in undistributed net income of subsidiary | | (234,108) | | | (573,206) | |
Income tax benefit | | | (105,769) | | | (123,646) | |
Loss before equity in undistributed net income of subsidiary | | | (128,339) | | | (449,560) | |
Equity in undistributed net income of subsidiary | | | 3,161,047 | | | 3,690,694 | |
Net income | | $ | 3,032,708 | | $ | 3,241,134 | |
| | | | | | | |
| | | | | | |
| Years Ended December 31, |
| | 2014 | | | 2013 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income | $ | 3,032,708 | | $ | 3,241,134 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | |
Equity in undistributed net income of subsidiary | | (3,161,047) | | | (3,690,694) | |
Bargain purchase gain | | - | | | 110,015 | |
Deferred income taxes | | - | | | (51,190) | |
Net decrease in accrued interest receivable and other assets | | 15,841 | | | 90,828 | |
Net increase (decrease) in intercompany accounts payable | | 1,856 | | | (1,048,445) | |
Net decrease in accrued taxes | | (105,770) | | | (50,444) | |
Net decrease in accrued expenses and other liabilities | | (22,852) | | | (183,826) | |
Net cash used in operating activities | | (239,264) | | | (1,582,622) | |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Acquisition, net of cash acquired | | - | | | (6,769,988) | |
Additional equity investment in subsidiary | | (7,000,000) | | | (5,000,000) | |
Net cash used in investing activities | | (7,000,000) | | | (11,769,988) | |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of common stock | | 7,000,000 | | | 11,000,000 | |
Proceeds from Issuance of common stock on stock option exercise | | - | | | 39,990 | |
Proceeds from short term borrowings | | 150,000 | | | - | |
Net cash provided by financing activities | | 7,150,000 | | | 11,039,990 | |
| | | | | | |
Net decrease in cash and cash equivalents | | (89,264) | | | (2,312,620) | |
Cash and cash equivalents at beginning of period | | 197,976 | | | 2,510,596 | |
Cash and cash equivalents at end of period | $ | 108,712 | | $ | 197,976 | |
| | | | | | |
NOTE 21 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Year Ended December 31, 2014 | |
| | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| Interest income | $ | 5,486,904 | | $ | 6,089,803 | | $ | 5,822,604 | | $ | 6,715,689 | |
| Interest expense | | 309,059 | | | 301,169 | | | 299,074 | | | 347,897 | |
| Net interest income | | 5,177,845 | | | 5,788,634 | | | 5,523,530 | | | 6,367,792 | |
| Provision for loan losses | | 219,165 | | | 140,679 | | | 220,373 | | | 221,471 | |
| Net interest income after provision for loan losses | | 4,958,680 | | | 5,647,955 | | | 5,303,157 | | | 6,146,321 | |
| Bargain purchase gain (1) | | - | | | 524,432 | | | - | | | - | |
| Other noninterest income | | 1,253,372 | | | 3,740,534 | | | 1,127,392 | | | 1,118,497 | |
| Total noninterest income | | 1,253,372 | | | 4,264,966 | | | 1,127,392 | | | 1,118,497 | |
| Noninterest expenses | | 6,339,673 | | | 6,255,702 | | | 7,971,649 | | | 6,947,393 | |
| Income (loss) before income taxes | | (127,621) | | | 3,657,219 | | | (1,541,100) | | | 317,425 | |
| Income taxes (benefit) | | (209,356) | | | 1,004,263 | | | (599,585) | | | (922,107) | |
| Net Income (loss) | $ | 81,735 | | $ | 2,652,956 | | $ | (941,515) | | $ | 1,239,532 | |
| | | | | | | | | | | | | |
| Net income (loss) per share - basic | $ | 0.01 | | $ | 0.26 | | $ | (0.09) | | $ | 0.12 | |
| Net income (loss) per share - diluted | $ | 0.01 | | $ | 0.25 | | $ | (0.09) | | $ | 0.12 | |
| | | | | | | | | | | | | |
| (1) | | The bargain purchase gain for the second quarter was retroactively restated downward for measurement period adjustments of $186,682 in the third quarter and adjusted upward for measurement period adjustments of $13,588 in the fourth quarter. Details of the adjustments are presented in NOTE 2 – Business Combinations. |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Year Ended December 31, 2013 | |
| | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| Interest income | $ | 2,230,680 | | $ | 4,947,012 | | $ | 6,203,860 | | $ | 5,637,991 | |
| Interest expense | | 145,697 | | | 357,599 | | | 397,159 | | | 361,514 | |
| Net interest income | | 2,084,983 | | | 4,589,413 | | | 5,806,701 | | | 5,276,477 | |
| Provision for loan losses | | 29,381 | | | 153,875 | | | 350,365 | | | 308,586 | |
| Net interest income after provision for loan losses | | 2,055,602 | | | 4,435,538 | | | 5,456,336 | | | 4,967,891 | |
| Bargain purchase gain | | - | | | 2,860,199 | | | - | | | - | |
| Other noninterest income | | 47,623 | | | 2,100,526 | | | 1,763,047 | | | 2,173,583 | |
| Total noninterest income | | 47,623 | | | 4,960,725 | | | 1,763,047 | | | 2,173,583 | |
| Noninterest expenses | | 1,893,426 | | | 7,547,504 | | | 6,718,869 | | | 5,955,322 | |
| Income (loss) before income taxes | | 209,799 | | | 1,848,759 | | | 500,514 | | | 1,186,152 | |
| Income taxes (benefit) | | 88,519 | | | 569,571 | | | (422,279) | | | 268,279 | |
| Net Income (loss) | $ | 121,280 | | $ | 1,279,188 | | $ | 922,793 | | $ | 917,873 | |
| | | | | | | | | | | | | |
| Net income (loss) per share - basic | $ | 0.02 | | $ | 0.15 | | $ | 0.11 | | $ | 0.11 | |
| Net income (loss) per share - diluted | $ | 0.02 | | $ | 0.15 | | $ | 0.11 | | $ | 0.11 | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bay Bancorp, Inc. reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including Bay’s principal executive officer (“PEO”) and its principal accounting officer (“PAO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
An evaluation of the effectiveness of these disclosure controls as of December 31, 2014 was carried out under the supervision and with the participation of management, including the PEO and the PAO. Based on that evaluation, management, including the PEO and the PAO, has concluded that the Company’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.
During the quarter ended December 31, 2014, there were no changes in the Company’s internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Company’s internal control over financial reporting as of December 31, 2014. Management’s report on the Company’s internal control over financial reporting is included on the following page. The Company is a “smaller reporting company” as defined by Rule 12b-2 under the Exchange Act and, accordingly, its independent registered public accounting firm is not required to attest to the foregoing management report.
Management’s Report on Internal Control Over Financial Reporting
The Board of Directors and Stockholders
Bay Bancorp, Inc.
Bay Bancorp, Inc.’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to management and the Board of Directors as to the reliability of Bay Bancorp, Inc.’s financial reporting and the preparation and presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition.
An internal control system, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements in the financial statements or the unauthorized use or disposition of Bay Bancorp’s assets. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Management assessed the effectiveness of Bay Bancorp’s internal control over financial reporting as of December 31, 2014, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992 Framework). Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2014, Bay Bancorp, Inc.’s internal control over financial reporting is effective.
| | | | |
| | | | |
| Dated: March 31, 2015 | | | |
| | | | |
| /s/ Joseph J. Thomas | | /s/ Larry D. Pickett | |
| Joseph J. Thomas | | Larry D. Pickett | |
| Chairman, President and Chief Executive Officer | | Executive Vice President - Chief Financial Officer |
| (Principal Executive Officer) | | (Principal Accounting Officer) |
| | | | |
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
The Company has adopted a code of ethics that applies to all its directors and officers, and a copy of the code of ethics will be provided to any person, without charge, upon written request to Bay Bancorp, Inc., Attention: Corporate Secretary, 2328 West Joppa Road, Suite 325, Lutherville, Maryland 21093. There have been no material changes in the procedures previously disclosed by which stockholders may recommend nominees to Bay’s Board of Directors.
All other information required by this Item is incorporated herein by reference to the sections of Bay Bancorp Inc.’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A (the “Proxy Statement”) entitled “Information Regarding Directors and Director Nominees”, “Executive Officers and Significant Employees”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Corporate Governance” (under the heading, “Audit Committee”).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the sections of the Proxy Statement entitled ”Director Compensation” and “Executive Compensation”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At the 2007 Annual Meeting of Stockholders, the Company’s stockholders approved the Carrollton Bancorp 2007 Equity Plan (the “Equity Plan”), which authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units. In connection with the Merger, all stock options that were outstanding under Jefferson’s 2010 Stock Option Plan (the “Jefferson Plan”) at the effective time of the Merger were assumed by the Company and converted into options to purchase shares of the Company’s common stock. The converted options have all of the same terms and conditions of such options immediately prior to the Merger (including vesting restrictions), except that (i) the number of shares of the Company’s common stock subject to each option was adjusted so that it is equal to the product of the number of shares of Jefferson’s common stock subject to the original option and the exchange ratio for the Merger (fractional shares resulting from such adjustment were rounded down to the nearest whole share) and (ii) the exercise price per share of each option was adjusted so that it is equal to the exercise price per share of Jefferson’s common stock under the original option divided by the exchange ratio for the Merger (rounded up to the nearest whole cent). No additional grants will be made under the Jefferson Plan. The following table contains information about the Equity Plan as of December 31, 2014:
| | | | | | | | |
| | | | | | | | |
| | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | | Weighted-average exercise price of outstanding options, warrants, and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column) | |
| Plan Category | | (a) | | (b) | | (a) | |
| Equity compensation plans approved by security holders | 282,000 | $ | 4.84 | | 47,356 | |
| Equity compensation plans not approved by security holders | - | | - | | - | |
| | | | | | | | |
| Total | | 282,000 | $ | 4.84 | | 47,356 | |
| | | | | | | | |
| (1) | | In addition to stock options and stock appreciation rights, the Equity Plan permits the grant of stock awards of various types and performance units. As of December 31, 2014, restricted stock awards relating to 16,256 shares were outstanding that are not included in the number shown in column (a). Shares of common stock subject to restricted stock or unrestricted stock awards may not exceed 50% of the total number of shares available under the Equity Plan. Subject to the anti-dilution provisions of the Equity Plan, (i) the maximum number of shares of common stock for which stock options and stock appreciation rights may be granted to any participant in any fiscal year shall not exceed 500,000 shares, and (ii) the maximum aggregate dollar amount of, and the maximum number of shares of common stock subject to, restricted stock and performance unit awards to any employee with respect to a restriction period or performance period may not exceed $500,000 and 500,000 shares, respectively. |
All other information required by this Item is incorporated herein by reference to the sections of the Proxy Statement entitled “Security Ownership of Management and Certain Security Holders” and “Change in Control”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the sections of the Proxy Statement entitled “Certain Relationships and Related Transactions” and “Corporate Governance” (under the heading, “Director Independence”).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the section of the Proxy Statement entitled “Audit Fees and Services”.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements are included in this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2014 and 2013
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
Notes to the Consolidated Financial Statements
All financial statement schedules have been omitted as the required information is either inapplicable or included in the consolidated financial statements or related notes.
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.
| | | | |
| | | | |
| | | Bay Bancorp, Inc. | |
| | | | |
Date: March 31, 2015 | | By: | /s/ Joseph J. Thomas | |
| | | Joseph J. Thomas | |
| | | Chairman, President and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated.
| | | | | | |
| | | | | | |
| Name | | Capacities | | Date | |
| | | | | | |
| /s/ Joseph J. Thomas | | Chairman, President and Chief Executive Officer | | March 31, 2015 | |
| Joseph J. Thomas | | (Principal Executive Officer) | | | |
| | | | | | |
| /s/ Larry D. Pickett | | Executive Vice President - Chief Financial Officer | March 31, 2015 | |
| Larry D. Pickett | | (Principal Accounting Officer) | | | |
| | | | | | |
| /s/ Robert J. Aumiller | | Director | | March 31, 2015 | |
| Robert J. Aumiller | | | | | |
| | | | | | |
| /s/ Steven K. Breeden | | Director | | March 31, 2015 | |
| Steven K. Breeden | | | | | |
| | | | | | |
| /s/ Kevin G. Byrnes | | Director | | March 31, 2015 | |
| Kevin G. Byrnes | | | | | |
| | | | | | |
| /s/ Mark M. Caplan | | Director | | March 31, 2015 | |
| Mark M. Caplan | | | | | |
| | | | | | |
| /s/ Howard I. Hackerman | | Director | | March 31, 2015 | |
| Howard I. Hackerman | | | | | |
| | | | | | |
| /s/ Eric D. Hovde | | Director | | March 31, 2015 | |
| Eric D. Hovde | | | | | |
| | | | | | |
| /s/ Charles L. Maskell | | Director | | March 31, 2015 | |
| Charles L. Maskell | | | | | |
| | | | | | |
EXHIBIT INDEX
| |
Exhibit No. | Description |
| |
2.1 | Purchase and Assumption Agreement, All Deposits, dated as of May 30, 2014, by and between Bay Bank, F.S.B. and the Federal Deposit Insurance Corporation (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed on June 5, 2014) |
| |
3.1 | Articles of Amendment and Restatement filed with SDAT on April 19, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 25, 2013) |
| |
3.2 | Certificate of Correction filed with SDAT on June 5, 2014 (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 filed on June 6, 2014) |
| |
3.3 | Articles of Amendment filed with SDAT on September 3, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on November 1, 2013) |
| |
3.4 | Articles of Amendment filed with SDAT on October 29, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 1, 2013) |
| |
3.5 | Articles Supplementary filed with SDAT on February 11, 2009 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 17, 2009) |
| |
3.6 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed on November 1, 2013) |
| |
10.1 | Preferred Stock Repurchase Agreement, dated April 19, 2013, by and between Carrollton Bancorp and the United States Department of the Treasury (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 25, 2013) |
| |
10.2 | Warrant Repurchase Agreement, dated April 19, 2013, by and between Carrollton Bancorp and the United States Department of the Treasury (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 25, 2013) |
| |
10.3 | Registration Rights Agreement, dated as of April 19, 2013, by and between Carrollton Bancorp and Financial Services Partners Fund I, LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 25, 2013) |
| |
10.4 | Securities Purchase Agreement, dated as of May 15, 2014, by and between Bay Bancorp, Inc. and each of the investors named therein (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2014) |
| |
10.5 | Registration Rights Agreement, dated as of May 15, 2014, by and between Bay Bancorp, Inc. and each of the holders named therein (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2014) |
| |
10.6 | Letter Agreement, dated as of July 29, 2014, by and between Bay Bancorp, Inc. and Joseph J. Thomas (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on August 5, 2014) |
| |
10.7 | Employment Agreement, dated February 26, 2014, by and between Kevin B. Cashen and Bay Bank, F.S.B. (incorporated by reference to Exhibit 10.1 to the Registrant’s Amendment No. 1 on Form 10-Q/A filed on November 26, 2014) |
| |
10.8 | Separation Agreement by and among Kevin B. Cashen, Bay Bank, F.S.B and Bay Bancorp, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 5, 2014) |
| |
10.9 | Form of First Amendment to Stock Option Agreement between Bay Bancorp, Inc. and Kevin B. Cashen (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 5, 2014) |
| |
10.10 | Employment Agreement, dated as of January 2, 2014, by and between Bay Bank, F.S.B. and Larry D. Pickett (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed on May 15, 2014) |
| |
10.11 | Employment Agreement, dated as of April 13, 2014, by and between H. King Corbett and Bay Bank, F.S.B. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2014) |
| |
10.12 | Employment Agreement, dated as of November 23, 2013, by and between Bay Bank, F.S.B. and Gary M. Jewell (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q filed on March 31, 2014) |
| |
10.13 | Employment Agreement, dated as of May 22, 2013, by and between Bay Bank, F.S.B. and Edward J. Schneider (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 24, 2013) |
| |
10.14 | Carrollton Bancorp 1998 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Registrant’s definitive proxy statement on Schedule 14A filed on March 16, 1998) |
| |
10.15 | Carrollton Bancorp 2007 Equity Plan (incorporated by reference to Appendix A to the Registrant’s definitive proxy statement on Schedule 14A filed on April 5, 2007) |
| |
10.16 | Form of Restricted Stock Award Agreement under the Carrollton Bancorp 2007 Equity Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 1, 2013) |
| |
10.17 | Form of Incentive Stock Option Agreement under the Carrollton Bancorp 2007 Equity Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 1, 2013) |
| |
10.18 | Jefferson Bancorp, Inc. 2010 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on April 25, 2013) |
| |
10.19 | Form of Stock Option Agreement under the Jefferson Bancorp, Inc. 2010 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on April 25, 2013) |
| |
21 | Subsidiaries (filed herewith) |
| |
23.1 | Consent of Independent Registered Public Accounting Firm (filed herewith) |
| |
31.1 | Rule 13a-14(a) Certification by the Principal Executive Officer (filed herewith) |
| |
31.2 | Rule 13a-14(a) Certification by the Principal Accounting Officer (filed herewith) |
| |
32.1 | Certification by the Principal Executive Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
| |
32.2 | Certification by the Principal Accounting Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
| |
101 | Interactive Data Files pursuant to Rule 405 of Regulation S-T (filed herewith) |
