UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019March 31, 2020
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-35489
HOWARD BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 20-3735949 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3301 Boston Street, Baltimore, MD | 21224 | |
(Address of principal executive offices) | (Zip Code) |
(410) 750-0020
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each | Trading | Name of each exchange on which | ||
registered: | ||||
Common Stock, par value $0.01 per share | HBMD | The Nasdaq |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filerx | Non-accelerated filer¨ | Smaller reporting companyx | Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of outstanding shares of common stock outstanding as of July 31, 2019.May 8, 2020.
Common Stock, $0.01 par value – 19,081,00818,715,678 shares
HOWARD BANCORP, INC.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This reportQuarterly Report on Form 10-Q (this “report”) contains “forward-looking statements,” as that phrase is defined in the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as “estimate,” “project,” “believe,” “goal,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “should”“should,” “could” and words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. These forward-looking statements include, but are not limited to statements of our goals, intentions and expectations, particularly with respect toincluding the expected impact of exiting our mortgage banking activities, our expectations that many of our unfunded commitments will expire without being drawn, and statements regarding our business plan and strategies, including openingstrategies. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of additional branches, expansion into new markets, potential acquisitions, increasing capital, market share, loan, investmentsthe Company’s control. Actual events and asset growth, revenue and profit growth and expanding client relationships. Actual results couldmay differ materially from those anticipateddescribed in such forward-looking statements. Factors that might cause such differences include, but are not limited to:statements due to numerous factors, including:
· |
· | negative economic conditions |
· | any negative perception of our reputation or |
· | competition among depository and other financial institutions; |
· |
· | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
· | the composition of our management team and our ability to attract and retain key personnel; |
· | our ability to enter new markets successfully and capitalize on growth opportunities, and to otherwise implement our growth strategy; |
· | material weaknesses in our internal control over financial reporting; |
· | our ability to successfully integrate acquired entities, if any; |
· | our |
· | changes in consumer spending, borrowing and savings habits; |
· | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission |
· | changes in our organization, compensation and benefit plans; |
· |
· |
· | our ability to maintain the asset quality of our investment portfolios and the anticipated recovery and collection of unrealized losses on securities available for sale; |
· | impairment of goodwill, other intangible assets or deferred tax assets; |
· | our ability to continue our expected focus on commercial customers as well as |
· | changes in our expected occupancy and equipment expenses; |
· | changes to our allowance for credit losses, and the adequacy thereof; |
· | our ability to maintain adequate liquidity levels and future sources of liquidity; |
· | our ability to retain a large portion of maturing certificates of deposit; |
· | the impact on us of recent changes to accounting standards; |
· | the impact of future cash requirements relating to commitments to extend credit; |
· | risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others; |
· | the risk of changes in technology and customer preferences; |
· | the impact of any material failure or breach in our infrastructure or the infrastructure of third parties on which we rely as a result of cyber-attacks; |
· | the impact of interest rate changes on our net interest income; |
· | the adverse effects of events such as outbreaks of contagious disease, war or terrorist activities, or essential utility outages, including deterioration in the global economy, instability in credit markets and disruptions in our customers’ supply chains and transportation; |
· | other economic, competitive, governmental, regulatory, technological, and geopolitical factors affecting our operations, pricing, and services; and |
· | each of the |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. You should not put undue reliance on any forward-looking statements. These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this report.report, except as required by law.
As used in this report, “Howard Bancorp,” “the Company,” “Bancorp,” “we,” “us,” and “ours” refer to Howard Bancorp, Inc. and its subsidiaries. References to the “Bank” refer to Howard Bank.
Item 1. | Financial Statements |
Unaudited | ||||||||
March 31, | December 31, | |||||||
(in thousands, except share data) | 2020 | 2019 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 15,951 | $ | 12,992 | ||||
Interest-bearing deposits with banks | 179,999 | 96,985 | ||||||
Total cash and cash equivalents | 195,950 | 109,977 | ||||||
Securities available for sale, at fair value | 275,252 | 215,505 | ||||||
Securities held to maturity, at amortized cost | 7,750 | 7,750 | ||||||
Nonmarketable equity securities | 16,757 | 14,152 | ||||||
Loans held for sale, at fair value | 3,795 | 30,710 | ||||||
Loans and leases, net of unearned income | 1,761,419 | 1,745,513 | ||||||
Allowance for credit losses | (13,384 | ) | (10,401 | ) | ||||
Net loans and leases | 1,748,035 | 1,735,112 | ||||||
Bank premises and equipment, net | 42,543 | 42,724 | ||||||
Goodwill | 65,949 | 65,949 | ||||||
Core deposit intangible | 7,770 | 8,469 | ||||||
Bank owned life insurance | 76,275 | 75,830 | ||||||
Other real estate owned | 2,322 | 3,098 | ||||||
Deferred tax assets, net | 33,529 | 36,010 | ||||||
Interest receivable and other assets | 31,967 | 29,333 | ||||||
Total assets | $ | 2,507,894 | $ | 2,374,619 | ||||
LIABILITIES | ||||||||
Noninterest-bearing deposits | $ | 483,499 | $ | 468,975 | ||||
Interest-bearing deposits | 1,305,400 | 1,245,390 | ||||||
Total deposits | 1,788,899 | 1,714,365 | ||||||
Customer repurchase agreements and federal funds purchased | 5,321 | 6,127 | ||||||
FHLB advances | 344,000 | 285,000 | ||||||
Subordinated debt | 28,290 | 28,241 | ||||||
Accrued expenses and other liabilities | 26,026 | 26,738 | ||||||
Total liabilities | 2,192,536 | 2,060,471 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 18,714,844 shares at March 31, 2020 and 19,066,913 at December 31, 2019 | 187 | 191 | ||||||
Capital surplus | 269,918 | 276,156 | ||||||
Retained earnings | 38,501 | 35,158 | ||||||
Accumulated other comprehensive income | 6,752 | 2,643 | ||||||
Total stockholders’ equity | 315,358 | 314,148 | ||||||
Total liabilities and stockholders’ equity | $ | 2,507,894 | $ | 2,374,619 |
The accompanying notes are an integral part of these consolidated financial statements.
2 |
Consolidated Statements of Operations
Unaudited | ||||||||
For the three months ended | ||||||||
March 31, | ||||||||
(in thousands, except per share data) | 2020 | 2019 | ||||||
INTEREST INCOME | ||||||||
Interest and fees on loans and leases | $ | 20,144 | $ | 20,566 | ||||
Interest and dividends on securities | 1,848 | 1,856 | ||||||
Other interest income | 234 | 362 | ||||||
Total interest income | 22,226 | 22,784 | ||||||
INTEREST EXPENSE | ||||||||
Deposits | 3,210 | 3,564 | ||||||
Customer repurchase agreements and federal funds purchased | 4 | 12 | ||||||
FHLB advances | 1,026 | 1,254 | ||||||
Subordinated debt | 461 | 480 | ||||||
Total interest expense | 4,701 | 5,310 | ||||||
NET INTEREST INCOME | 17,525 | 17,474 | ||||||
Provision for credit losses | 3,445 | 1,725 | ||||||
Net interest income after provision for credit losses | 14,080 | 15,749 | ||||||
NONINTEREST INCOME | ||||||||
Service charges on deposit accounts | 642 | 627 | ||||||
Realized and unrealized gains on mortgage banking activity | 1,036 | 1,485 | ||||||
Income from bank owned life insurance | 445 | 447 | ||||||
Loan related fees and service charges | 581 | 1,043 | ||||||
Other operating income | 662 | 933 | ||||||
Total noninterest income | 3,366 | 4,535 | ||||||
NONINTEREST EXPENSE | ||||||||
Compensation and benefits | 8,441 | 8,034 | ||||||
Occupancy and equipment | 1,033 | 1,571 | ||||||
Amortization of core deposit intangible | 699 | 784 | ||||||
Marketing and business development | 450 | 457 | ||||||
Professional fees | 726 | 785 | ||||||
Data processing fees | 927 | 1,378 | ||||||
FDIC assessment | 212 | 287 | ||||||
Other real estate owned | 78 | 27 | ||||||
Loan production expense | 468 | 520 | ||||||
Other operating expense | 1,525 | 1,014 | ||||||
Total noninterest expense | 14,559 | 14,857 | ||||||
INCOME BEFORE INCOME TAXES | 2,887 | 5,427 | ||||||
Income tax (benefit) expense | (456 | ) | 1,171 | |||||
NET INCOME | $ | 3,343 | $ | 4,256 | ||||
NET INCOME PER COMMON SHARE | ||||||||
Basic | $ | 0.18 | $ | 0.22 | ||||
Diluted | $ | 0.18 | $ | 0.22 |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
Consolidated Statements of Comprehensive Income
Unaudited | ||||||||
For the three months ended | ||||||||
March 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Net Income | $ | 3,343 | $ | 4,256 | ||||
Other comprehensive income | ||||||||
Investments available-for-sale: | ||||||||
Unrealized holding gains | 5,669 | 1,800 | ||||||
Related income tax expense | (1,560 | ) | (496 | ) | ||||
Comprehensive income | $ | 7,452 | $ | 5,560 |
Consolidated Balance SheetsStatements of Changes in Stockholders’ Equity
Unaudited | ||||||||
June 30, | December 31, | |||||||
(in thousands, except share data) | 2019 | 2018 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 124,868 | $ | 100,976 | ||||
Federal funds sold | 193 | 522 | ||||||
Total cash and cash equivalents | 125,061 | 101,498 | ||||||
Securities available for sale, at fair value | 151,685 | 223,858 | ||||||
Securities held to maturity, at amortized cost | 9,750 | 9,250 | ||||||
Nonmarketable equity securities | 11,220 | 11,786 | ||||||
Loans held for sale, at fair value | 37,680 | 21,261 | ||||||
Loans and leases, net of unearned income | 1,701,020 | 1,649,751 | ||||||
Allowance for credit losses | (9,120 | ) | (9,873 | ) | ||||
Net loans and leases | 1,691,900 | 1,639,878 | ||||||
Bank premises and equipment, net | 42,876 | 45,137 | ||||||
Goodwill | 65,949 | 70,697 | ||||||
Core deposit intangible | 9,932 | 11,482 | ||||||
Bank owned life insurance | 75,060 | 74,153 | ||||||
Other real estate owned | 4,702 | 4,392 | ||||||
Deferred tax assets, net | 37,803 | 35,285 | ||||||
Interest receivable and other assets | 32,016 | 17,837 | ||||||
Total assets | $ | 2,295,634 | $ | 2,266,514 | ||||
LIABILITIES | ||||||||
Noninterest-bearing deposits | $ | 422,117 | $ | 429,200 | ||||
Interest-bearing deposits | 1,295,099 | 1,256,606 | ||||||
Total deposits | 1,717,216 | 1,685,806 | ||||||
Short-term borrowings | 220,669 | 134,576 | ||||||
Long-term borrowings | 28,142 | 142,077 | ||||||
Accrued expenses and other liabilities | 26,080 | 9,372 | ||||||
Total liabilities | 1,992,107 | 1,971,831 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 19,063,080 shares at June 30, 2019 and 19,039,347 at December 31, 2018 | 191 | 190 | ||||||
Capital surplus | 276,218 | 275,843 | ||||||
Retained earnings | 24,621 | 18,277 | ||||||
Accumulated other comprehensive income | 2,497 | 373 | ||||||
Total stockholders’ equity | 303,527 | 294,683 | ||||||
Total liabilities and stockholders’ equity | $ | 2,295,634 | $ | 2,266,514 |
Accumulated | ||||||||||||||||||||||||
other | ||||||||||||||||||||||||
Unaudited | Number of | Common | Capital | Retained | comprehensive | |||||||||||||||||||
(dollars in thousands, except share data) | shares | stock | surplus | earnings | income | Total | ||||||||||||||||||
Balances at December 31, 2018 | 19,039,347 | $ | 190 | $ | 275,843 | $ | 18,277 | $ | 373 | $ | 294,683 | |||||||||||||
Net income | - | - | - | 4,256 | - | 4,256 | ||||||||||||||||||
Other comprehensive gain | - | - | - | - | 1,304 | 1,304 | ||||||||||||||||||
Director stock awards | 4,802 | - | 62 | - | - | 62 | ||||||||||||||||||
Exercise of options | 8,554 | 1 | 76 | - | - | 77 | ||||||||||||||||||
Employee stock purchase plan | 6,782 | - | 97 | - | - | 97 | ||||||||||||||||||
Stock-based compensation | - | - | 50 | - | - | 50 | ||||||||||||||||||
Balances at March 31, 2019 | 19,059,485 | $ | 191 | $ | 276,128 | $ | 22,533 | $ | 1,677 | $ | 300,529 | |||||||||||||
Balances at December 31, 2019 | 19,066,913 | $ | 191 | $ | 276,156 | $ | 35,158 | $ | 2,643 | $ | 314,148 | |||||||||||||
Net income | - | - | - | 3,343 | - | 3,343 | ||||||||||||||||||
Other comprehensive gain | - | - | - | - | 4,109 | 4,109 | ||||||||||||||||||
Director stock awards | 8,151 | - | 137 | - | - | 137 | ||||||||||||||||||
Employee stock purchase plan | 12,581 | - | 195 | - | - | 195 | ||||||||||||||||||
Repurchased shares | (372,801 | ) | (4 | ) | (6,673 | ) | - | - | (6,677 | ) | ||||||||||||||
Stock-based compensation | - | - | 103 | - | - | 103 | ||||||||||||||||||
Balances at March 31, 2020 | 18,714,844 | $ | 187 | $ | 269,918 | $ | 38,501 | $ | 6,752 | $ | 315,358 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
Consolidated Statements of OperationsCash Flows
Unaudited | ||||||||||||||||
For the six months ended | For the three months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands, except share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans and leases | $ | 41,697 | $ | 33,366 | $ | 21,131 | $ | 19,788 | ||||||||
Interest and dividends on securities | 3,596 | 1,684 | 1,740 | 1,116 | ||||||||||||
Other interest income | 636 | 475 | 274 | 261 | ||||||||||||
Total interest income | 45,929 | 35,525 | 23,145 | 21,165 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 7,568 | 3,079 | 4,004 | 1,729 | ||||||||||||
Short-term borrowings | 1,335 | 1,407 | 754 | 717 | ||||||||||||
Long-term borrowings | 2,198 | 1,011 | 1,033 | 839 | ||||||||||||
Total interest expense | 11,101 | 5,497 | 5,791 | 3,285 | ||||||||||||
NET INTEREST INCOME | 34,828 | 30,028 | �� | 17,354 | 17,880 | |||||||||||
Provision for credit losses | 2,835 | 2,545 | 1,110 | 1,425 | ||||||||||||
Net interest income after provision for credit losses | 31,993 | 27,483 | 16,244 | 16,455 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges on deposit accounts | 1,311 | 916 | 684 | 590 | ||||||||||||
Realized and unrealized gains on mortgage banking activity | 3,793 | 3,439 | 2,308 | 1,623 | ||||||||||||
Gain (loss) on the sale of securities | 658 | (139 | ) | 658 | - | |||||||||||
Loss on the disposal of bank premises & equipment | (83 | ) | - | (83 | ) | - | ||||||||||
Income from bank owned life insurance | 907 | 705 | 460 | 420 | ||||||||||||
Loan fee income | 2,038 | 3,925 | 995 | 2,059 | ||||||||||||
Other operating income | 1,752 | 1,475 | 819 | 925 | ||||||||||||
Total noninterest income | 10,376 | 10,321 | 5,841 | 5,617 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Compensation and benefits | 16,306 | 17,480 | 8,272 | 9,911 | ||||||||||||
Occupancy and equipment | 6,754 | 4,167 | 5,183 | 2,617 | ||||||||||||
Amortization of core deposit intangible | 1,551 | 1,222 | 767 | 863 | ||||||||||||
Marketing and business development | 941 | 2,109 | 484 | 1,104 | ||||||||||||
Professional fees | 1,503 | 1,023 | 718 | 717 | ||||||||||||
Data processing fees | 2,525 | 1,648 | 1,147 | 1,047 | ||||||||||||
Merger and restructuring expense | - | 15,673 | - | 5,698 | ||||||||||||
FDIC assessment | 568 | 414 | 281 | 261 | ||||||||||||
Other real estate owned | 131 | 19 | 104 | (3 | ) | |||||||||||
Loan production expense | 1,220 | 2,252 | 700 | 1,309 | ||||||||||||
Other operating expense | 2,812 | 2,285 | 1,798 | 1,616 | ||||||||||||
Total noninterest expense | 34,311 | 48,292 | 19,454 | 25,140 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | 8,058 | (10,488 | ) | 2,631 | (3,068 | ) | ||||||||||
Income tax expense (benefit) | 1,714 | (2,535 | ) | 543 | (791 | ) | ||||||||||
NET INCOME (LOSS) | $ | 6,344 | $ | (7,953 | ) | $ | 2,088 | $ | (2,277 | ) | ||||||
NET INCOME (LOSS) PER COMMON SHARE | ||||||||||||||||
Basic | $ | 0.33 | $ | (0.50 | ) | $ | 0.11 | $ | (0.12 | ) | ||||||
Diluted | $ | 0.33 | $ | (0.50 | ) | $ | 0.11 | $ | (0.12 | ) |
Unaudited | ||||||||
Three months ended | ||||||||
March 31 | ||||||||
(in thousands) | 2020 | 2019 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 3,343 | $ | 4,256 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Provision for credit losses | 3,445 | 1,725 | ||||||
Deferred income tax | 921 | 1,025 | ||||||
Provision for other real estate owned | 21 | - | ||||||
Depreciation and amortization | 558 | 586 | ||||||
Stock-based compensation | 240 | 209 | ||||||
Net accretion of discount on purchased loans | (204 | ) | (464 | ) | ||||
Net amortization of intangible asset | 699 | 784 | ||||||
Loans originated for sale | (79,847 | ) | (84,354 | ) | ||||
Proceeds from sale of loans originated for sale | 107,798 | 80,285 | ||||||
Realized and unrealized gains on mortgage banking activity | (1,036 | ) | (1,485 | ) | ||||
Loss on sale of other real estate owned, net | 28 | - | ||||||
Cash surrender value of BOLI | (445 | ) | (447 | ) | ||||
Increase in other assets | (3,179 | ) | (243 | ) | ||||
Decrease in other liabilities | (2,723 | ) | (1,166 | ) | ||||
Other, net | 13 | (73 | ) | |||||
Net cash provided by operating activities | 29,632 | 638 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of investment securities | (64,441 | ) | (5,000 | ) | ||||
Proceeds from sales, maturities and calls of investment securities | 10,350 | 38,872 | ||||||
Net (increase) decrease in loans and leases outstanding | (16,164 | ) | 193 | |||||
Proceeds from the sales of other real estate owned | 727 | - | ||||||
Purchase of premises and equipment | (377 | ) | (171 | ) | ||||
Net cash (used in) provided by investing activities | (69,905 | ) | 33,894 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase (decrease) in deposits | 74,534 | (12,338 | ) | |||||
Net decrease in customer repurchase agreements and federal funds purchased | (806 | ) | (6,307 | ) | ||||
Net increase (decrease) in FHLB advances | 59,000 | (20,000 | ) | |||||
Proceeds from issuance of common stock, net of cost | 195 | 77 | ||||||
Repurchase of common stock | (6,677 | ) | - | |||||
Net cash provided by (used in) financing activities | 126,246 | (38,568 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 85,973 | (4,036 | ) | |||||
Cash and cash equivalents at beginning of period | 109,977 | 101,498 | ||||||
Cash and cash equivalents at end of period | $ | 195,950 | $ | 97,462 | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash payments for interest | $ | 4,230 | $ | 5,044 | ||||
Cash payments for income taxes | 15 | - | ||||||
Cash payments for operating leases | 195 | 365 | ||||||
Lease liabilities arising from obtaining right of use assets (see Note 8) | 2,011 | 18,009 | ||||||
Goodwill reduction for adjustments to acquired net deferred tax assets | - | 4,748 |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
Consolidated Statements of Comprehensive (Loss) Income
Unaudited | ||||||||||||||||
Six months ended | Three months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net Income (Loss) | $ | 6,344 | $ | (7,953 | ) | $ | 2,088 | $ | (2,277 | ) | ||||||
Other comprehensive income (loss) | ||||||||||||||||
Investments available-for-sale: | ||||||||||||||||
Reclassification adjustment for (gain) loss | (658 | ) | 139 | (658 | ) | - | ||||||||||
Related income tax | 180 | (38 | ) | 180 | - | |||||||||||
Unrealized holding gains (losses) | 3,590 | (288 | ) | 1,790 | 18 | |||||||||||
Related income tax (expense) benefit | (988 | ) | 71 | (492 | ) | (69 | ) | |||||||||
Comprehensive income (loss) | $ | 8,468 | $ | (8,069 | ) | $ | 2,908 | $ | (2,328 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ EquityUnaudited
Accumulated | ||||||||||||||||||||||||
other | ||||||||||||||||||||||||
Number of | Common | Capital | Retained | comprehensive | ||||||||||||||||||||
(dollars in thousands, except share data) | shares | stock | surplus | earnings | income (loss) | Total | ||||||||||||||||||
Six months ended | ||||||||||||||||||||||||
Balances at January 1, 2018 | 9,820,592 | $ | 98 | $ | 110,387 | $ | 22,105 | $ | (337 | ) | $ | 132,253 | ||||||||||||
Net loss | - | - | - | (7,953 | ) | - | (7,953 | ) | ||||||||||||||||
Net unrealized loss on securities | - | - | - | - | (116 | ) | (116 | ) | ||||||||||||||||
Acquisition of First Mariner Bank | 9,143,222 | 92 | 164,486 | - | - | 164,578 | ||||||||||||||||||
Director stock awards | 4,800 | - | 101 | - | - | 101 | ||||||||||||||||||
Exercise of options | 3,284 | - | 35 | - | - | 35 | ||||||||||||||||||
Stock-based compensation | 37,062 | - | 572 | - | - | 572 | ||||||||||||||||||
Balances at June 30, 2018 | 19,008,960 | $ | 190 | $ | 275,581 | $ | 14,152 | $ | (453 | ) | $ | 289,470 | ||||||||||||
Balances at January 1, 2019 | 19,039,347 | $ | 190 | $ | 275,843 | $ | 18,277 | $ | 373 | $ | 294,683 | |||||||||||||
Net income | - | - | - | 6,344 | - | 6,344 | ||||||||||||||||||
Net unrealized gain on securities | - | - | - | - | 2,124 | 2,124 | ||||||||||||||||||
Director stock awards | 4,802 | - | 62 | - | - | 62 | ||||||||||||||||||
Exercise of options | 12,149 | 1 | 104 | - | - | 105 | ||||||||||||||||||
Employee stock purchase plan | 6,782 | - | 97 | - | - | 97 | ||||||||||||||||||
Stock-based compensation | - | - | 112 | - | - | 112 | ||||||||||||||||||
Balances at June 30, 2019 | 19,063,080 | $ | 191 | $ | 276,218 | $ | 24,621 | $ | 2,497 | $ | 303,527 |
Accumulated | ||||||||||||||||||||||||
other | ||||||||||||||||||||||||
Number of | Common | Capital | Retained | comprehensive | ||||||||||||||||||||
(dollars in thousands, except share data) | shares | stock | surplus | earnings | income (loss) | Total | ||||||||||||||||||
Three months ended | ||||||||||||||||||||||||
Balances at March 31, 2018 | 18,991,026 | $ | 190 | $ | 275,489 | $ | 16,429 | $ | (401 | ) | $ | 291,707 | ||||||||||||
Net loss | - | - | - | (2,277 | ) | - | (2,277 | ) | ||||||||||||||||
Net unrealized loss on securities | - | - | - | - | (52 | ) | (52 | ) | ||||||||||||||||
Acquisition of First Mariner Bank | - | - | - | - | - | - | ||||||||||||||||||
Director stock awards | - | - | - | - | - | - | ||||||||||||||||||
Exercise of options | 1,604 | - | 17 | - | - | 17 | ||||||||||||||||||
Stock-based compensation | 16,330 | - | 75 | - | - | 75 | ||||||||||||||||||
Balances at June 30, 2018 | 19,008,960 | $ | 190 | $ | 275,581 | $ | 14,152 | $ | (453 | ) | $ | 289,470 | ||||||||||||
Balances at March 31, 2019 | 19,059,485 | $ | 191 | $ | 276,128 | $ | 22,533 | $ | 1,677 | $ | 300,529 | |||||||||||||
Net income | - | - | - | 2,088 | - | 2,088 | ||||||||||||||||||
Net unrealized gain on securities | - | - | - | - | 820 | 820 | ||||||||||||||||||
Director stock awards | - | - | - | - | - | - | ||||||||||||||||||
Exercise of options | 3,595 | - | 28 | - | - | 28 | ||||||||||||||||||
Employee stock purchase plan | - | - | - | - | - | - | ||||||||||||||||||
Stock-based compensation | - | - | 62 | - | - | 62 | ||||||||||||||||||
Balances at June 30, 2019 | 19,063,080 | $ | 191 | $ | 276,218 | $ | 24,621 | $ | 2,497 | $ | 303,527 |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
Unaudited | ||||||||
Six months ended | ||||||||
June 30 | ||||||||
(in thousands) | 2019 | 2018 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 6,344 | $ | (7,953 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||
Provision for credit losses | 2,835 | 2,545 | ||||||
Deferred income tax | 1,422 | 1,852 | ||||||
Provision for other real estate owned | 65 | - | ||||||
Depreciation and amortization | 1,209 | 1,200 | ||||||
Stock-based compensation | 112 | 572 | ||||||
Net (accretion) amortization of investment securities | (51 | ) | 25 | |||||
Net accretion of discount on purchased loans | (925 | ) | (628 | ) | ||||
(Gain) loss on sales of securities | (658 | ) | 139 | |||||
Loss on the sale of property | 83 | - | ||||||
Net amortization of intangible asset | 1,551 | 1,222 | ||||||
Loans originated for sale | (259,868 | ) | (337,290 | ) | ||||
Proceeds from sale of loans originated for sale | 247,241 | 355,115 | ||||||
Realized and unrealized gains on mortgage banking activity | (3,793 | ) | (3,439 | ) | ||||
Gain on sales of other real estate owned, net | - | (45 | ) | |||||
Cash surrender value of BOLI | (907 | ) | (705 | ) | ||||
(Increase) decrease in interest receivable | (214 | ) | 431 | |||||
Increase in interest payable | 31 | 340 | ||||||
Decrease in other assets | 3,008 | 2,470 | ||||||
Increase (decrease) in other liabilities | 928 | (355 | ) | |||||
Net cash (used in) provided by operating activities | (1,587 | ) | 15,496 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of investment securities available-for-sale | (6,002 | ) | (44,535 | ) | ||||
Purchases of investment securities held-to-maturity | (500 | ) | - | |||||
Proceeds from sale/maturities of investment securities available-for-sale | 81,159 | 112,039 | ||||||
Net increase in loans and leases outstanding | (54,308 | ) | (10,662 | ) | ||||
Proceeds from the sale of other real estate owned | - | 954 | ||||||
Purchase of premises and equipment | (422 | ) | (1,773 | ) | ||||
Proceeds from the sale of premises and equipment | 1,392 | - | ||||||
Cash acquired in acquisition | - | 29,285 | ||||||
Net cash provided by investing activities | 21,319 | 85,308 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase (decrease) in deposits | 31,410 | (4,699 | ) | |||||
Net increase (decrease) in short-term borrowings | 86,093 | (126,293 | ) | |||||
Net (decrease) increase in long term debt | (113,935 | ) | 109,041 | |||||
Net proceeds from issuance of common stock, net of cost | 263 | 136 | ||||||
Net cash provided by (used in) financing activities | 3,831 | (21,815 | ) | |||||
Net increase in cash and cash equivalents | 23,563 | 78,989 | ||||||
Cash and cash equivalents at beginning of period | 101,498 | 28,972 | ||||||
Cash and cash equivalents at end of period | $ | 125,061 | $ | 107,961 | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash payments for interest | $ | 11,070 | $ | 4,881 | ||||
Cash payments for income taxes | - | - | ||||||
Transferred from loans to other real estate owned | 375 | 174 | ||||||
Cash payments for operating leases | 785 | 1,710 | ||||||
Assets acquired in business combination (net of cash received) | - | 970,709 | ||||||
Liabilities assumed in business combination | - | 897,569 | ||||||
Lease liabilities arising from obtaining right of use assets (see Note 8) | 15,183 | - |
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements(unaudited)
Note 1: Summary of Significant Accounting Policies
Nature of Operations
Howard Bancorp, Inc. (“Bancorp” or the “Company”) was incorporated in April 2005 under the laws of the State of Maryland. On December 15, 2005, Howard Bancorp Inc. (“Bancorp”) acquired all of the stock and became the holding company of Howard Bank (the “Bank”) pursuant to the Plan of Reorganization approved by the stockholders of the Bank and by federal and state regulatory agencies. Each share of the Bank’s common stock was converted into two shares of Bancorp common stock effected by the filing of Articles of Exchange on that date, and the stockholders of the Bank became the stockholders of Bancorp. The Bank has seven subsidiaries, six of which are intended to hold foreclosed real estate (three of which are inactive) and the other owns and manages real estate thatBancorp is used as a branch location and has office and retail space. The accompanying consolidated financial statements of Bancorp and its wholly owned subsidiary, the Bank (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Bancorp was incorporated in April of 2005 under the laws of the State of Maryland and isnow a bank holding company registered under the Bank Holding Company Act of 1956. Bancorp is1956, with a single bank holding company with one subsidiary, theHoward Bank, which operates as a state trust company with commercial banking powers regulated by the Maryland Office of the Commissioner of Financial Regulation (the “Commissioner”).
The Bank has nine subsidiaries—six were formed to hold foreclosed real estate (three of which are currently inactive), two own and manage real estate used for corporate purposes, and one holds historic tax credit investments.
The Company is a diversified financial services company providing commercial banking, mortgage banking and consumer finance through banking branches, the internet and other distribution channels to businesses, business owners, professionals and other consumers located primarily in the Greater Baltimore Metropolitan Area.
On December 6, 2018,These statements should be read in conjunction with the Company entered into Subordinated Note Purchase Agreementsfinancial statements and accompanying notes included in the Company's 2019 Annual Report on Form 10-K as filed with certain institutional accredited investors (the “Purchasers”the Securities and Exchange Commission ("SEC") pursuant to which the Company sold and issued $25,000,000 in aggregate principal amount of 6.00% Fixed-to-Floating Rate Subordinated Notes due December 6, 2028 (the “Notes”). The Notes were issued by the Companyon March 16, 2020. There have been no significant changes to the Purchasers at a price equal to 100% of their face amountCompany's accounting policies as disclosed in a private offering in reliancethe 2019 Annual Report on the exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the provisions of Regulation D thereunder. The Company intends to use the net proceeds from this offering for general corporate purposes, to provide for continued growth and to supplement its regulatory capital ratios.
On March 1, 2018, Bancorp completed its previously announced merger (the “First Mariner merger”) with First Mariner Bank, a Maryland chartered trust company (“First Mariner”), pursuant to the Agreement and Plan of Reorganization dated as August 14, 2017, and as amended by Amendment No. 1 on November 8, 2017, by and among Bancorp, the Bank and First Mariner (as amended, the “First Mariner Merger Agreement”). At the effective time of the First Mariner merger, First Mariner merged with and into the Bank, with the Bank continuing as the surviving bank of the First Mariner merger and a wholly owned subsidiary of the Company. At the effective time of the First Mariner merger, each outstanding share of First Mariner common stock and First Mariner Series A Non-Voting Non-Cumulative Perpetual Preferred Stock issued and outstanding was cancelled and converted into the right to receive 1.6624 shares of Bancorp common stock, provided that cash was paid in lieu of any fractional shares. The aggregate merger consideration of $173.8 million included $9.2 million of cash and 9,143,222 shares of our common stock, which was valued at approximately $164.6 million based on Bancorp’s closing stock price of $18.00 on February 28, 2018.Form 10-K.
The following is a description of the Company’s significant accounting policies.
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the financial services industry for financial information.
Principles of Consolidation
The consolidated financial statements include the accounts of Bancorp, its subsidiary bankthe Bank and the Bank’s subsidiaries. All significant intercompany accounts and transactions have been eliminated. The parent company only financial statements report investments in the subsidiary bankBank under the equity method.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for credit losses, goodwill, deferred tax assets, other-than-temporary impairment of investment securities and the fair value of loans held for sale.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan and lease portfolio and is based on the size and current risk characteristics of the loan and lease portfolio, an assessment of individual problem loans and leases, actual loss experience, current economic events in specific industries and geographic areas including unemployment levels and other pertinent factors including general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogenous loans and leases based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Credit losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.
The allowance for credit losses consists of a specific component and a nonspecific component. The components of the allowance for credit losses represent an estimation done pursuant to either the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 450Contingenciesor ASC Topic 310Receivables. The specific component of the allowance for credit losses reflects expected losses resulting from analysis developed through credit allocations for individual loans.loans and leases. The credit allocations are based on a regular analysis of all loans and leases over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The specific component of the allowance for credit losses also includes management’s determination of the amounts necessary given concentrations and changes in portfolio mix and volume.
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The nonspecific portion of the allowance is determined based on management’s assessment of general economic conditions, as well as economic factors in the individual markets in which the Company operates including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. This determination inherently involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in the Bank’s historical loss factors used to determine the nonspecific component of the allowance, and it recognizes knowledge of the portfolio may be incomplete. The Bank’s historic loss factors are based upon actual losses incurred by portfolio segment over the preceding 24-month period. In portfolio segments where no actual losses have been incurred within the most recent 24-month period, industry loss data for that portfolio segment, as provided by the Federal Deposit Insurance Corporation (“FDIC”), are utilized. In addition to historic loss factors, the Bank’s methodology for the allowance for credit losses also incorporates other risk factors that may be inherent within the portfolio segments. For each portfolio segment, in addition to the historic loss experience, the otherqualitative factors that are measured and monitored in the overall determination of the allowance include:
· | changes in lending policies, procedures, |
· | changes in international, national, state and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; |
· | changes in the |
· | changes in |
· | changes in |
· | changes |
· | changes in the value of underlying collateral for collateral-dependent loans; |
· | the existence of any concentrations of credit, and changes in the level of such concentrations; |
· | the effect of other external factors such as competition and legal and regulatory requirements; and |
· | any other factors that management considers relevant to the quality or performance of the loan portfolio. |
Each of these qualitative risk factors is measured based upon data generated either internally, or in the case of economic conditions utilizing independently provided data on items such as unemployment rates, commercial real estate vacancy rates, or other market data deemed relevant to the business conditions within the markets served.
The Company’s loan and lease policies state that after all collection efforts have been exhausted, and the loan or lease is deemed to be a loss, then the remaining loan or lease balance will be charged to the Company’s established allowance for credit losses. All loans and leases are evaluated for loss potential once it has been determined by the Watch Committee that the likelihood of repayment is in doubt. When a loan is past due for at least 90 days or a deterioration in debt service coverage ratio, guarantor liquidity, or loan-to-value ratio has occurred that would cause concern regarding the likelihood of the full repayment of principal and interest, and the loan or lease is deemed not to be well secured, the loan shouldor lease would be moved to non-accrual status and a specific reserve is established if the net realizable value is less than the principal value of the loan balance(s). Once the actual loss value has been determined, a charge-off against the allowance for credit losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.
Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition, and accordingly, no allowance for loan losses is transferred to the acquiring entity under the acquisition method. The fair values of loans with evidence of credit deterioration (acquired credit impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit-impaired loans. For acquired credit impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the initial investment in the acquired credit impaired loan is recognized as interest income, using a level-yield basis over the life of the loan. This amount is referred to as the accretable yield. The acquired credit impaired loan’s contractually-required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non-accretable difference, and is not reflected as an adjustment to the yield, but in the form of a loss accrual or a valuation allowance.
Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to management’s initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance for credit losses through a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.
Goodwill, Other Intangible Assets and Long-Lived Assets
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in a business combination. The core deposit intangible is amortized over the estimated useful lives of the long-term deposits acquired, and the remaining amounts of the core deposit intangible are periodically reviewed for impairment. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. Long-lived assets are those that provide the companyCompany with a future economic benefit beyond the current year or operating period. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is greater than the fair value of the asset. Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell. An impairment analysis is performed annually.
Management has determined that Bancorpthe Company has one reporting unit, and based upon the annual impairment analysis, it was determined that there was not an impairment of the carrying value of either the goodwill, core deposit intangible or other long-lived assets for 2018. The Company is not aware of any issues that have arisen since our last impairment analysis performed in the fourth quarter of 2018.2019.
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Income Taxes
The Company uses the asset/liability method of accounting for income taxes. Under the asset/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 that will be in effect when these differences reverse.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition, 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 the entire deferred tax asset will not be realized.
The Company does not have uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expenses. The Company remains subject to examination by federal and state taxing authorities for income tax returns for the years ending after December 31, 2015.2014.
Share-Based Compensation
Compensation cost is recognized for stock options and restricted stock issued to directors and employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Company’s common stock at the date of grant is used for restricted stock awards, which include restricted stock units. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards.period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. When an award is granted to an employee who is retirement eligible, the compensation cost of these awards is recognized over the period up to when the director or employee first becomes eligible to retire.
Compensation expense for non-vested common stock awards is based on the fair value of the awards, which is generally the market price of the common stock on the measurement date, which, for the Company, is the date of grant, and is recognized ratably over the service period of the award.
Reclassifications
Certain items inreclassifications to prior financial statements have been reclassifiedpresentation were made to conform to the current2020 presentation. These reclassifications did not affect previously reported net income or total stockholders’ equity.
NewRecent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2018-16,Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.This ASU permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. Alternative Reference Rates Committee has proposed that the SOFR is the rate that represents best practice as the alternative to derivatives currently indexed to London Inter-Bank Offered Rate (“LIBOR”). The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. The Company has non-designated hedge contracts that are indexed to LIBOR and is monitoring this activity and evaluating the related risks as they relate to derivatives.
The FASB has issued ASU 2018-13,2020-04,Fair Value MeasurementReference Rate Reform (Topic 820)848): Disclosure Framework— Changes toFacilitation of the Disclosure Requirements for Fair Value Measurement.Effects of Reference Rate Reform on Financial Reporting.This ASU eliminates, adds and modifies certain disclosure requirementsprovides optional guidance for fair value measurements. Amonga limited period of time to ease the changes, entities will no longer be required to disclosepotential burden in accounting for (or recognizing the amounteffects of) reference rate reform, on financial reporting. The risk of and reason for transfers between Level 1 and Level 2termination of the fair value hierarchy, but willLondon Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation.
The FASB has issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU amends the effective date of the credit loss standard (ASU 2016-13) for smaller reporting companies, as defined by the SEC. The one-time determination of whether an entity is eligible to be required to disclosea smaller reporting company is based on an entity’s most recent determination as of November 15, 2019, in accordance with SEC regulations. The Company met this definition of smaller reporting company based on its most recent determination as of November 15, 2019. As a result, the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments ineffective date of this ASU are effective for the Company has been amended from fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, to fiscal years beginning after December 31, 2022, and interim periods within those fiscal years. In addition, this ASU amended the mandatory effective date for the elimination of Step 2 from the goodwill impairment test (ASU 2017-04 discussed below). As a smaller reporting company, the effective date of the goodwill impairment standard for the Company has been amended from fiscal years beginning after December 15, 2019; early adoption is permitted. Entities are also allowed2019, and interim periods within those fiscal years, to elect early adoption of the eliminated or modified disclosure requirementsfiscal years beginning after December 31, 2022, and delay adoption of the new disclosure requirements until their effective date. Since ASU 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.interim periods within those fiscal years.
The FASB has issued ASU 2017-04,Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this Update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment charges should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments inAs discussed above, this Update areASU, as amended by ASU 2019-10, will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.the Company on January 1, 2023. The Company will evaluate the guidance in this updateUpdate but does not expect it to have a significant impact on the Company’s financial position or resultresults of operations.
8 |
The FASB has issued ASU 2016-13,Financial Instruments—Credit Losses (Topic 326). The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the guidance in this updateUpdate replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The guidance inAs discussed above, this update isASU, as amended by ASU 2019-10, will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.the Company on January 1, 2023. The Company has engaged a third party vendor and is currently gathering historical data and reviewing the methodologies and assumptions utilized to determine the impact of this update on the Company’s Consolidated Financial Statements.
Note 2: Business CombinationsCOVID-19 Risks and Uncertainties
First Mariner AcquisitionIn December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in the Company’s markets. In response to the COVID-19 pandemic, the State of Maryland and most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.
While the Company’s business has been designated an essential business, which allows the Bank to continue to serve its customers, the Company serves many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. And many of the Company’s customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by the COVID-19 pandemic.
The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business and results of operations. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic has had and is expected to continue to have a an adverse effect on the Company’s business and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.
Note 2: Exit of Mortgage Banking Activities
On March 1, 2018, Howard Bancorp completed its previously announced merger with First MarinerDecember 18, 2019, the Company entered into an agreement to release certain management members of the Bank, pursuantmortgage division from their employment contracts and allow those individuals to create a limited liability company (“LLC”) for the purpose of hiring all remaining mortgage employees. The Company also agreed to transfer ownership of the domain name “VAmortgage.com” to the First Mariner Merger Agreement. At the effective timenewly created LLC. In consideration of the First Mariner merger, First Mariner merged with and into the Bank, with the Bank continuing as the surviving bankrelease of the First Mariner merger. Atemployment agreements, the effective timetransfer of the First Mariner merger, pursuant tomortgage employees, and the termssale of the First Mariner Merger Agreement, each outstanding sharedomain name, the LLC paid the Company $750 thousand. Under the agreement, there was a transition period of First Mariner common stockapproximately 45 days, after which the Company agreed to cease originating residential first lien mortgage loans and First Mariner Series A Non-Voting Non-Cumulative Perpetual Preferred Stock issuedwill exit all mortgage banking activities. Accordingly all of the residential first lien mortgage pipeline were processed by the end of the first quarter of 2020. In order to manage loan run-off within the residential mortgage loan portfolio, the Company plans on buying first lien residential mortgage loans, on a servicing released basis, from both the LLC and outstanding was cancelled and converted into the right to receive 1.6624 shares of Howard Bancorp common stock, provided that cash was paid in lieu of any fractional shares. The aggregate merger consideration of $173.8 million included $9.2 million of cash and 9,143,222 shares of our common stock, which was valued at approximately $164.6 million based on Howard Bancorp’s closing stock price of $18.00 on February 28, 2018.other third-party originators.
The Company has accountedfollowing table presents a roll forward of loans held for sale, showing loans originated for sale and loans sold into the secondary market, for the First Mariner merger underperiods March 31, 2020 and, December 31, 2019. In addition, the acquisition methodvolume of accounting in accordance with FASB ASC Topic 805, “Business Combinations,” whereby the acquired assets and assumed liabilities were recorded by Howard Bancorp at their estimated fair values as of their acquisition date.
Management made significant estimates and exercised significant judgment in accountingloans originated for the acquisition of First Mariner. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. Deposits and borrowings were valued based upon interest rates, original and remaining terms and maturities,Company’s loan portfolio as well as current ratesa statement of operations for similar funds inthe mortgage banking activities for the same markets. Premisesperiods. Since the mortgage banking activities were conducted within a division of the Bank, formal financial statements were not prepared. The statement of operations presented below reflects only the direct costs associated with the Company’s mortgage banking activities and equipment was valued based on recent appraised values. Management used quoted or current market prices to determineis thus representative of the fair valueincremental after tax impact of investment securities.exiting this activity.
Quarter Ended | Year Ended | |||||||
(in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Loans held for sale, January 1 | $ | 30,710 | $ | 21,261 | ||||
Loans originated for sale | 79,847 | 573,306 | ||||||
Loans sold into the secondary market | (106,762 | ) | (563,857 | ) | ||||
Loans held for sale, at end of period | $ | 3,795 | $ | 30,710 | ||||
Loans originated for the Bank's portfolio | $ | 11,378 | $ | 114,561 |
The following table provides
For the three months ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Statement of Operations: | ||||||||
Net interest income | $ | 143 | $ | 147 | ||||
Realized and unrealized gains on mortgage banking activity | 1,036 | 1,485 | ||||||
Loan related fees and service charges | 389 | 460 | ||||||
Total noninterest income | 1,425 | 1,945 | ||||||
Salaries and benefits | 928 | 1,607 | ||||||
Occupancy | 20 | 79 | ||||||
All other operating expenses | 490 | 468 | ||||||
Total noninterest expense | 1,438 | 2,154 | ||||||
Pretax contribution | 130 | (62 | ) | |||||
Income tax expense (benefit) | 36 | (17 | ) | |||||
After tax contribution | $ | 94 | $ | (45 | ) |
Since the purchase price asBank’s 91 employees that were engaged in mortgage banking activities were hired by the LLC under the terms of the date of the First Mariner merger (the “acquisition date”), the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $65.3 million recorded from the acquisition:
(in thousands)
Purchase Price Consideration | ||||||||
Cash consideration | $ | 9,245 | ||||||
Purchase price assigned to shares exchanged for stock | 164,578 | |||||||
Total purchase price for First Mariner acquisition | $ | 173,823 | ||||||
Assets acquired at fair value: | ||||||||
Cash and cash equivalents | $ | 38,889 | ||||||
Interest bearing deposits with banks | 3,920 | |||||||
Investment securities available for sale | 130,302 | |||||||
Loans held for sale | 28,189 | |||||||
Loans | 664,338 | |||||||
Accrued interest receivable | 3,023 | |||||||
Other assets | 124,797 | |||||||
Core deposit intangible | 12,588 | |||||||
Total fair value of assets acquired | $ | 1,006,046 | ||||||
Liabilities assumed at fair value: | ||||||||
Deposits | 706,435 | |||||||
Borrowings | 185,020 | |||||||
Accrued expenses and other liabilities | 6,114 | |||||||
Total fair value of liabilities assumed | $ | 897,569 | ||||||
Net assets acquired at fair value: | $ | 108,477 | ||||||
Transaction consideration paid to First Mariner | 173,823 | |||||||
Amount of goodwill recorded from First Mariner Acquisition | $ | 65,346 |
The goodwill resulting from the First Mariner merger at June 30, 2019 of $65.3 million is lower than the $70.1 million reflected at December 31, 2018 due to a changeagreement, no severance costs were recorded. However, in the acquired value of the net deferred tax asset included in other assets above. At the acquisition date, wording of the TCJA appeared to indicate that appreciation in the cash value of acquired BOLI would not be consider exempt from taxation. However, industry groups and congress had urged the IRS to issue regulations to clarify how this section of the TCJA would be applied. In the firstfourth quarter of 2019, the IRS issued new proposed guidance which clarifiedCompany recorded $288 thousand of exit costs associated with change in control and retention agreements. Back office employees remained with the new law and made it more likely than not that the appreciated valuebank for a portion of the BOLI acquiredfirst quarter in order to process the pipeline. The LLC is subleasing the office space that was used by the Company would be tax exempt.
Pro Forma Condensed Combined Financial Information:
The following table presents unaudited pro forma information as if the First Mariner Merger had been completed on January 1, 2018. The pro forma information does not necessarily reflect the results of operations that would have occurred had the First Mariner Merger occurred at the beginning of 2018. Supplemental pro forma earningsthese employees; therefore, no exit costs associated with lease terminations were adjusted to exclude merger related costs. The expected future amortizations of the various fair value adjustments were included beginning of the period. Cost savings are not reflected in the unaudited pro forma amounts for the periods presented. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions on revenues, expense efficiencies, or other factors.required.
Six months ended | Three months ended | |||||||
June 30, 2018 | June 30, 2018 | |||||||
Net interest income after provision | $ | 32,953 | $ | 17,064 | ||||
Noninterest income | 12,351 | 5,617 | ||||||
Noninterest expense | 41,304 | 20,190 | ||||||
Net income | 2,899 | 1,805 | ||||||
Net income per share | $ | 0.15 | $ | 0.10 |
Note 3: Investment Securities
The Bank holds securities classified as available for sale and held to maturity.
As part of the Bank’s overall interest rate position strategies, the Bank sold $35.4 million of held for sale investment securities in the second quarter of 2019 recording a gain on the sale of $658 thousand. In 2018 the Bank sold $33.0 million of pre-acquisition investment securities and recorded a loss on the sale of $139 thousand. Because of the composition and remaining duration of the securities portfolio acquired in the First Mariner merger, management deemed it prudent for interest rate risk management purposes to liquidate the majority of the acquired portfolio. Thus, in the first quarter of 2018, the Bank sold nearly $69.37 million of First Mariner securities, with no gains or losses incurred upon the liquidation, as the sales were executed within days of the merger.
The amortized cost and estimated fair values of investments are as follows:
(in thousands) | June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | Amortized | Unrealized | Unrealized | Estimated | Amortized | Unrealized | Unrealized | Estimated | Amortized | Unrealized | Unrealized | Estimated | |||||||||||||||||||||||||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 60,684 | $ | 1,089 | $ | 4 | $ | 61,769 | $ | 130,088 | $ | 428 | $ | 119 | $ | 130,397 | ||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale U.S. Government | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agencies | $ | 79,916 | $ | 1,978 | $ | - | $ | 81,894 | $ | 66,428 | $ | 963 | $ | 79 | $ | 67,312 | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed | 84,542 | 2,407 | 22 | 86,927 | 90,242 | 364 | 146 | 90,460 | 180,509 | 7,315 | - | 187,824 | 139,918 | 2,848 | 67 | 142,699 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other investments | 3,010 | - | 21 | 2,989 | 3,011 | - | 10 | 3,001 | 5,510 | 43 | 19 | 5,534 | 5,510 | 4 | 20 | 5,494 | ||||||||||||||||||||||||||||||||||||||||||||||||
$ | 148,236 | $ | 3,496 | $ | 47 | $ | 151,685 | $ | 223,341 | $ | 792 | $ | 275 | $ | 223,858 | $ | 265,935 | $ | 9,336 | $ | 19 | $ | 275,252 | $ | 211,856 | $ | 3,815 | $ | 166 | $ | 215,505 | |||||||||||||||||||||||||||||||||
Held to maturity Corporate debentures | $ | 9,750 | $ | 165 | $ | - | $ | 9,915 | $ | 9,250 | $ | 45 | $ | 42 | $ | 9,253 | ||||||||||||||||||||||||||||||||||||||||||||||||
Held to maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debentures | $ | 7,750 | $ | 117 | $ | 17 | $ | 7,850 | $ | 7,750 | $ | 147 | $ | - | $ | 7,897 |
Gross unrealized losses and fair value by investment category and length of time the individual securities have been in a continuous unrealized loss position at June 30, 2019March 31, 2020 and December 31, 20182019 are presented below:
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 1,001 | $ | - | $ | 1,995 | $ | 4 | $ | 2,996 | $ | 4 | ||||||||||||||||||||||||||||||||||||
U.S. Government | ||||||||||||||||||||||||||||||||||||||||||||||||
Agencies | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||
Mortgage-backed | - | - | 2,149 | 22 | 2,149 | 22 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Other investments | 2,989 | 21 | - | - | 2,989 | 21 | - | - | 2,990 | 19 | 2,990 | 19 | ||||||||||||||||||||||||||||||||||||
$ | 3,990 | $ | 21 | $ | 4,144 | $ | 26 | $ | 8,134 | $ | 47 | $ | - | $ | - | $ | 2,990 | $ | 19 | $ | 2,990 | $ | 19 | |||||||||||||||||||||||||
Held to maturity Corporate debentures | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||
Held to maturity | ||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debentures | $ | 2,483 | $ | 17 | $ | - | $ | - | $ | 2,483 | $ | 17 |
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 3,049 | $ | 3 | $ | 13,887 | $ | 116 | $ | 16,936 | $ | 119 | ||||||||||||||||||||||||||||||||||||
U.S. Government | ||||||||||||||||||||||||||||||||||||||||||||||||
Agencies | $ | 10,689 | $ | 79 | $ | - | $ | - | $ | 10,689 | $ | 79 | ||||||||||||||||||||||||||||||||||||
Mortgage-backed | 26,197 | 54 | 2,107 | 92 | 28,304 | 146 | 35,512 | 60 | 975 | 7 | 36,487 | 67 | ||||||||||||||||||||||||||||||||||||
Other investments | 3,001 | 10 | - | - | 3,001 | 10 | - | - | 2,990 | 20 | 2,990 | 20 | ||||||||||||||||||||||||||||||||||||
$ | 32,247 | $ | 67 | $ | 15,994 | $ | 208 | $ | 48,241 | $ | 275 | $ | 46,201 | $ | 139 | $ | 3,965 | $ | 27 | $ | 50,166 | $ | 166 | |||||||||||||||||||||||||
Held to maturity Corporate debentures | $ | 2,458 | $ | 42 | $ | - | $ | - | $ | 2,458 | $ | 42 | ||||||||||||||||||||||||||||||||||||
Held to maturity | ||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debentures | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
The unrealized losses that existed were a result of market changes in interest rates since the original purchase. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include the (1) duration and magnitude of the decline in value, (2) financial condition of the issuer or issuers and (3) structure of the security. The portfolio contained 7Company had four securities with unrealized losses and 31 securitiesin the portfolio with unrealized losses at June 30, 2019 andMarch 31, 2020 compared to 15 at December 31, 2018, respectively.2019.
An impairment loss is recognized in earnings if any of the following are true: (1) the Company intends to sell the debt security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In situations where the Company intends to sell or when it is more likely than not that the Company will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in stockholders’ equity as a component of other comprehensive income, net of deferred tax.
The amortized cost and estimated fair values of investment securities by contractual maturity are shown below:
(in thousands) | June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
Amortized | Estimated Fair | Amortized | Estimated Fair | Amortized | Estimated Fair | Amortized | Estimated Fair | |||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
Amounts maturing: | ||||||||||||||||||||||||||||||||
One year or less | $ | 1,999 | $ | 1,995 | $ | 38,936 | $ | 38,892 | $ | 1,498 | $ | 1,506 | $ | 1,497 | $ | 1,500 | ||||||||||||||||
After one through five years | 53,691 | 54,692 | 88,175 | 88,513 | 49,152 | 50,633 | 49,166 | 50,048 | ||||||||||||||||||||||||
After five through ten years | 22,347 | 22,794 | 19,873 | 19,921 | 38,793 | 39,752 | 33,576 | 33,915 | ||||||||||||||||||||||||
After ten years | 79,949 | 82,119 | 85,607 | 85,785 | 184,242 | 191,211 | 135,367 | 137,939 | ||||||||||||||||||||||||
$ | 157,986 | $ | 161,600 | $ | 232,591 | $ | 233,111 | $ | 273,685 | $ | 283,102 | $ | 219,606 | $ | 223,402 |
At June 30, 2019March 31, 2020 and December 31, 2018, $13.42019, $10.9 million and $42.3$11.6 million in fair value of securities, respectively, were pledged as collateral for both repurchase agreements and deposits of local government entities that require pledged collateral as a condition of maintaining these deposit accounts. No single issuer of securities, except for government agency and mortgage backed securities, had outstanding balances that exceeded ten percent of stockholders’ equity at June 30, 2019.March 31, 2020.
Note 4: Loans and Leases
The Company makes loans and leases to customers primarily in the Greater Baltimore metropolitan areaMetropolitan Area and surrounding communities. A substantial portion of the Company’sCompany’s loan portfolio consists of loans to businesses secured by real estate and/or other business assets.
The loan portfolio segment balances at June 30, 2019March 31, 2020 and December 31, 20182019 are presented in the following table:
March 31, 2020 | December 31, 2019 | |||||||||||||||
(in thousands) | Total | % of Total | Total | % of Total | ||||||||||||
Real estate | ||||||||||||||||
Construction and land | $ | 130,980 | 7.4 | % | $ | 128,285 | 7.3 | % | ||||||||
Residential - first lien | 428,788 | 24.4 | 437,409 | 25.1 | ||||||||||||
Residential - junior lien | 71,045 | 4.0 | 74,164 | 4.2 | ||||||||||||
Total residential real estate | 499,833 | 28.4 | 511,573 | 29.3 | ||||||||||||
Commercial - owner occupied | 248,918 | 14.1 | 241,795 | 13.9 | ||||||||||||
Commercial - non-owner occupied | 447,889 | 25.5 | 444,052 | 25.4 | ||||||||||||
Total commercial real estate | 696,807 | 39.6 | 685,847 | 39.3 | ||||||||||||
Total real estate loans | 1,327,620 | 75.4 | 1,325,705 | 75.9 | ||||||||||||
Commercial loans and leases1 | 389,065 | 22.1 | 372,872 | 21.4 | ||||||||||||
Consumer | 44,734 | 2.5 | 46,936 | 2.7 | ||||||||||||
Total loans and leases | $ | 1,761,419 | 100.0 | % | $ | 1,745,513 | 100.0 | % |
1Includes leases of $5,637 and $6,382 at March 31, 2020 and December 31, 2019, respectively.
June 30, 2019 | December 31, 2018 | |||||||||||||||
(in thousands) | Total | % of Total | Total | % of Total | ||||||||||||
Real estate | ||||||||||||||||
Construction and land | $ | 115,753 | 6.8 | % | $ | 123,671 | 7.5 | % | ||||||||
Residential - first lien | 411,213 | 24.2 | 383,044 | 23.2 | ||||||||||||
Residential - junior lien | 80,303 | 4.7 | 89,645 | 5.4 | ||||||||||||
Total residential real estate | 491,516 | 28.8 | 472,689 | 28.6 | ||||||||||||
Commercial - owner occupied | 232,771 | 13.7 | 234,102 | 14.2 | ||||||||||||
Commercial - non-owner occupied | 442,449 | 26.0 | 427,747 | 25.9 | ||||||||||||
Total commercial real estate | 675,220 | 39.7 | 661,849 | 40.1 | ||||||||||||
Total real estate loans | 1,282,489 | 75.3 | 1,258,209 | 76.2 | ||||||||||||
Commercial loans and leases | 367,856 | 21.6 | 336,876 | 20.5 | ||||||||||||
Consumer | 50,675 | 3.0 | 54,666 | 3.3 | ||||||||||||
Total loans | $ | 1,701,020 | 100.0 | % | $ | 1,649,751 | 100.0 | % |
Net loan origination fees, which are included in the amounts above, totaled $975 thousand and $307 thousand$1.3 million at June 30, 2019both March 31, 2020 and December 31, 2018, respectively.2019.
11 |
Acquired Credit Impaired Loans
The following table documents changes in the accretable discount on acquired credit impaired loans at:at the beginning and end of March 31, 2020 and 2019:
For the six months ended | For the three months ended | |||||||||||||||||||||||
June 30, | June 30, | March 31, | ||||||||||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | ||||||||||||||||||
Balance at beginning of period | $ | 877 | $ | - | $ | 835 | $ | 1,052 | $ | 689 | $ | 877 | ||||||||||||
Impaired loans acquired | - | 1,055 | - | - | - | - | ||||||||||||||||||
Accretion of fair value discounts | (110 | ) | (34 | ) | (68 | ) | (31 | ) | (16 | ) | (42 | ) | ||||||||||||
Balance at end of period | $ | 767 | $ | 1,021 | $ | 767 | $ | 1,021 | $ | 673 | $ | 835 |
The table below presents the outstanding balances and related carrying amounts for all acquired credit impaired loans at the end of the respective periods.periods:
Contractually | ||||||||
Required | ||||||||
Payments | Carrying | |||||||
(in thousands) | Receivable | Amount | ||||||
At June 30, 2019 | $ | 12,246 | $ | 9,816 | ||||
At December 31, 2018 | 15,463 | 11,446 | ||||||
At June 30, 2018 | 17,116 | 12,611 |
Contractually | ||||||||
Required | ||||||||
Payments | Carrying | |||||||
(in thousands) | Receivable | Amount | ||||||
At March 31, 2020 | $ | 10,195 | $ | 8,111 | ||||
At December 31, 2019 | 10,929 | 8,706 |
Note 5: Credit Quality Assessment
Allowance for Credit Losses
Summary information on the allowance for credit loss activity for the period indicated is presented in the following table:
March 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Beginning balance | $ | 10,401 | $ | 9,873 | ||||
Charge-offs | (583 | ) | (2,854 | ) | ||||
Recoveries | 121 | 10 | ||||||
Net charge-offs | (462 | ) | (2,844 | ) | ||||
Provision for credit losses | 3,445 | 1,725 | ||||||
Ending balance | $ | 13,384 | $ | 8,754 |
The March 31, 2020 allowance reflects the Company’s initial assessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Management’s approach to COVID-19 and the evaluation of the allowance considered the following: (1) any change in historical loss rates resulting from COVID-19; (2) any risk rating downgrades related to COVID-19; and (3) any changes to collateral valuations or cash flow assumptions for impaired loans. Based on this review, the Company determined that there were no initial impacts to any of these factors at March 31, 2020.
The Company then reviewed our qualitative factors and identified three factors that warranted further evaluation:
· | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; |
· | The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and |
· | Changes in the value of underlying collateral for collateral-dependent loans. |
The Company’s evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, considered the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Maryland between the March 5 disclosure of the first confirmed cases of COVID-19 in the state and the March 23 executive order closing all non-essential businesses in the state. In addition, management considered the dramatic rise in the unemployment rate in the Company’s market area. Based on U.S. Department of Labor weekly initial unemployment claims by state, management noted that the average weekly initial unemployment claims for the State of Maryland during the two weeks ending March 28, 2020 were 19 times higher than the average weekly claims for the first eleven weeks of 2020. An increase in this qualitative factor was applied to all loan portfolio categories.
12 |
The Company also evaluated the existence and effect of any concentrations of credit, and changes in the level of such concentrations. Management performed an analysis of the loan portfolio to identify the Company’s exposure to industry segments that management believes may potentially be the most highly impacted by COVID-19. Based on this evaluation, the following table identifies those industry segments within the Company’s loan portfolio that management believes may potentially be most highly impacted by COVID-19. Loan balances and total credit exposures are as of March 31, 2020 while the modification and Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan balances are as of April 24, 2020.
(in millions) Loan Category | Loan Balance | As % of Total Loans | Total Exposure (1) | As % of Total Exposure | Loan Balance with Modifications | As % of Loan Category | SBA PPP Loan Balance | As % of Loan Category | ||||||||||||||||||||||||
CRE - retail | $ | 109.8 | 6.2 | % | $ | 112.0 | 5.3 | % | $ | 21.5 | 19.6 | % | $ | - | - | % | ||||||||||||||||
Hotels | 61.5 | 3.5 | 67.0 | 3.2 | 53.5 | 87.0 | 0.9 | 1.5 | ||||||||||||||||||||||||
CRE - residential rental | 50.3 | 2.9 | 51.4 | 2.4 | 10.9 | 21.7 | - | - | ||||||||||||||||||||||||
Nursing and residential care | 39.8 | 2.3 | 46.3 | 2.2 | - | - | 1.8 | 4.5 | ||||||||||||||||||||||||
Retail trade | 26.3 | 1.5 | 37.3 | 1.8 | 1.1 | 4.2 | 6.3 | 24.0 | ||||||||||||||||||||||||
Restaurants and caterers | 26.1 | 1.5 | 29.0 | 1.4 | 19.5 | 74.7 | 8.9 | 34.1 | ||||||||||||||||||||||||
Religious and similar organizations | 27.6 | 1.6 | 28.6 | 1.4 | 2.9 | 10.5 | 2.7 | 9.8 | ||||||||||||||||||||||||
Arts, entertainment, and recreation | 16.2 | 0.9 | 18.5 | 0.9 | 14.5 | 89.5 | 1.3 | 8.0 | ||||||||||||||||||||||||
Total - selected categories | $ | 357.6 | 20.3 | % | $ | 390.1 | 18.6 | % | $ | 123.9 | 34.6 | % | $ | 21.9 | 6.1 | % |
(1) includes unused lines of credit and unfunded commitments
The potentially highly impacted loan exposures noted in the above tables (the “high impacts”) were concentrated in non-owner-occupied commercial real estate (59% of total high impacts), owner-occupied commercial real estate (18% of total high impacts), commercial construction (14% of total high impacts), and commercial loans (9% of total high impacts). An increase in this qualitative factor was applied to these high impact loan portfolio categories.
The Company’s evaluation of potential changes in the value of underlying collateral for collateral-dependent loans considered the potential impact of the economic fallout from COVID-19 on commercial property values due to rent relief and possible business failures resulting in vacancies. In addition, the need for office space may diminish in the future as work from home policies have allowed much office-oriented business activity to continue. Excluding the high impact portfolios, management concluded that 53% of the Company’s non-owner-occupied commercial real estate portfolio was not included in the high impact exposure. An increase in this qualitative factor was applied to the Company’s non-owner-occupied commercial real estate portfolio.
The following tables providetable provides information on the activity in the allowance for credit losses by the respective loan portfolio segment for the periodsthree months ended June 30, 2019March 31, 2020 and June 30, 2018:the year ended December 31, 2019:
March 31, 2020 | ||||||||||||||||||||||||||||||||
Commercial real estate | Commercial | |||||||||||||||||||||||||||||||
Construction | Residential real estate | owner | non-owner | loans | Consumer | |||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,256 | $ | 2,256 | $ | 478 | $ | 788 | $ | 2,968 | $ | 2,103 | $ | 552 | $ | 10,401 | ||||||||||||||||
Charge-offs | - | (33 | ) | - | - | - | (549 | ) | (1 | ) | (583 | ) | ||||||||||||||||||||
Recoveries | - | 3 | 51 | - | - | 66 | 1 | 121 | ||||||||||||||||||||||||
Provision for credit losses | (64 | ) | (22 | ) | 334 | 466 | 1,162 | 1,330 | 239 | 3,445 | ||||||||||||||||||||||
Ending balance | $ | 1,192 | $ | 2,204 | $ | 863 | $ | 1,254 | $ | 4,130 | $ | 2,950 | $ | 791 | $ | 13,384 | ||||||||||||||||
Allowance allocated to: | ||||||||||||||||||||||||||||||||
individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
collectively evaluated for impairment | $ | 1,192 | $ | 2,204 | $ | 863 | $ | 1,254 | $ | 4,130 | $ | 2,950 | $ | 791 | $ | 13,384 | ||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 130,980 | $ | 428,788 | $ | 71,045 | $ | 248,918 | $ | 447,889 | $ | 389,065 | $ | 44,734 | $ | 1,761,419 | ||||||||||||||||
individually evaluated for impairment | $ | 478 | $ | 12,470 | $ | 832 | $ | 477 | $ | 1,777 | $ | 1,092 | $ | 102 | $ | 17,228 | ||||||||||||||||
collectively evaluated for impairment | $ | 130,502 | $ | 416,318 | $ | 70,213 | $ | 248,441 | $ | 446,112 | $ | 387,973 | $ | 44,632 | $ | 1,744,191 |
June 30, 2019 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Six months ended: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 741 | $ | 1,170 | $ | 292 | $ | 735 | $ | 4,057 | $ | 2,644 | $ | 234 | $ | 9,873 | ||||||||||||||||
Charge-offs | (282 | ) | (362 | ) | (471 | ) | (44 | ) | (2,026 | ) | (525 | ) | (18 | ) | (3,728 | ) | ||||||||||||||||
Recoveries | - | - | 104 | - | 3 | 32 | 1 | 140 | ||||||||||||||||||||||||
Provision for credit losses | 669 | 982 | 512 | 202 | 765 | (456 | ) | 161 | 2,835 | |||||||||||||||||||||||
Ending balance | $ | 1,128 | $ | 1,790 | $ | 437 | $ | 893 | $ | 2,799 | $ | 1,695 | $ | 378 | $ | 9,120 | ||||||||||||||||
Three months ended: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,220 | $ | 1,372 | $ | 390 | $ | 817 | $ | 3,188 | $ | 1,543 | $ | 224 | $ | 8,754 | ||||||||||||||||
Charge-offs | (62 | ) | (238 | ) | (221 | ) | (44 | ) | - | (298 | ) | (11 | ) | (874 | ) | |||||||||||||||||
Recoveries | - | - | 99 | - | 1 | 30 | - | 130 | ||||||||||||||||||||||||
Provision for credit losses | (30 | ) | 656 | 169 | 120 | (390 | ) | 420 | 165 | 1,110 | ||||||||||||||||||||||
Ending balance | $ | 1,128 | $ | 1,790 | $ | 437 | $ | 893 | $ | 2,799 | $ | 1,695 | $ | 378 | $ | 9,120 |
June 30, 2018 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Six months ended: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 735 | $ | 668 | $ | 177 | $ | 617 | $ | 1,410 | $ | 2,529 | $ | 23 | $ | 6,159 | ||||||||||||||||
Charge-offs | (202 | ) | (102 | ) | (149 | ) | (1 | ) | (746 | ) | (912 | ) | (49 | ) | (2,161 | ) | ||||||||||||||||
Recoveries | - | 1 | - | - | 2 | 68 | 5 | 76 | ||||||||||||||||||||||||
Provision for credit losses | 128 | 113 | 185 | 110 | 957 | 982 | 70 | 2,545 | ||||||||||||||||||||||||
Ending balance | $ | 661 | $ | 680 | $ | 213 | $ | 726 | $ | 1,623 | $ | 2,667 | $ | 49 | $ | 6,619 | ||||||||||||||||
Three months ended: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 563 | $ | 736 | $ | 186 | $ | 698 | $ | 1,470 | $ | 2,472 | $ | 23 | $ | 6,148 | ||||||||||||||||
Charge-offs | - | (3 | ) | (60 | ) | - | (212 | ) | (644 | ) | (45 | ) | (964 | ) | ||||||||||||||||||
Recoveries | - | 2 | - | - | - | 7 | 1 | 10 | ||||||||||||||||||||||||
Provision for credit losses | 98 | (55 | ) | 87 | 28 | 365 | 832 | 70 | 1,425 | |||||||||||||||||||||||
Ending balance | $ | 661 | $ | 680 | $ | 213 | $ | 726 | $ | 1,623 | $ | 2,667 | $ | 49 | $ | 6,619 |
The following tables provide additional information on the allowance for credit losses at June 30, 2019 and December 31, 2018:
June 30, 2019 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Allowance allocated to: | ||||||||||||||||||||||||||||||||
individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
collectively evaluated for impairment | $ | 1,128 | $ | 1,790 | $ | 437 | $ | 893 | $ | 2,799 | $ | 1,695 | $ | 378 | $ | 9,120 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 115,753 | $ | 411,213 | $ | 80,303 | $ | 232,771 | $ | 442,449 | $ | 367,856 | $ | 50,675 | $ | 1,701,020 | ||||||||||||||||
individually evaluated for impairment | $ | 933 | $ | 12,530 | $ | 914 | $ | 225 | $ | 2,608 | $ | 1,862 | $ | 287 | $ | 19,359 | ||||||||||||||||
collectively evaluated for impairment | $ | 114,820 | $ | 398,683 | $ | 79,389 | $ | 232,546 | $ | 439,841 | $ | 365,994 | $ | 50,388 | $ | 1,681,661 |
December 31, 2018 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Allowance allocated to: | ||||||||||||||||||||||||||||||||
individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | 2,195 | $ | 200 | $ | - | $ | 2,395 | ||||||||||||||||
collectively evaluated for impairment | $ | 741 | $ | 1,170 | $ | 292 | $ | 735 | $ | 1,862 | $ | 2,444 | $ | 234 | 7,478 | |||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 123,671 | $ | 383,044 | $ | 89,645 | $ | 234,102 | $ | 427,747 | $ | 336,876 | $ | 54,666 | $ | 1,649,751 | ||||||||||||||||
individually evaluated for impairment | $ | 1,449 | $ | 13,259 | $ | 1,137 | $ | 1,268 | $ | 5,018 | $ | 2,455 | $ | 174 | 24,760 | |||||||||||||||||
collectively evaluated for impairment | $ | 122,222 | $ | 369,785 | $ | 88,508 | $ | 232,834 | $ | 422,729 | $ | 334,421 | $ | 54,492 | $ | 1,624,991 |
Acquired loans from the First Mariner merger in 2018 were evaluated for impairment subsequent to the merger. No allowance was required on these loans due to the assigned credit marks on these loans.
December 31, 2019 | ||||||||||||||||||||||||||||||||
Commercial real estate | Commercial | |||||||||||||||||||||||||||||||
Construction | Residential real estate | owner | non-owner | loans | Consumer | |||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 741 | $ | 1,170 | $ | 292 | $ | 735 | $ | 4,057 | $ | 2,644 | $ | 234 | $ | 9,873 | ||||||||||||||||
Charge-offs | (282 | ) | (518 | ) | (532 | ) | (46 | ) | (2,026 | ) | (622 | ) | (210 | ) | (4,236 | ) | ||||||||||||||||
Recoveries | 80 | - | 115 | - | 17 | 357 | 2 | 571 | ||||||||||||||||||||||||
Provision for credit losses | 717 | 1,604 | 603 | 99 | 920 | (276 | ) | 526 | 4,193 | |||||||||||||||||||||||
Ending balance | $ | 1,256 | $ | 2,256 | $ | 478 | $ | 788 | $ | 2,968 | $ | 2,103 | $ | 552 | $ | 10,401 | ||||||||||||||||
Allowance allocated to: | ||||||||||||||||||||||||||||||||
individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 500 | $ | - | $ | 500 | ||||||||||||||||
collectively evaluated for impairment | $ | 1,256 | $ | 2,256 | $ | 478 | $ | 788 | $ | 2,968 | $ | 1,603 | $ | 552 | 9,901 | |||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 128,285 | $ | 437,409 | $ | 74,164 | $ | 241,795 | $ | 444,052 | $ | 372,872 | $ | 46,936 | $ | 1,745,513 | ||||||||||||||||
individually evaluated for impairment | $ | 481 | $ | 13,131 | $ | 786 | $ | 566 | $ | 1,725 | $ | 2,360 | $ | 127 | $ | 19,176 | ||||||||||||||||
collectively evaluated for impairment | $ | 127,804 | $ | 424,278 | $ | 73,378 | $ | 241,229 | $ | 442,327 | $ | 370,512 | $ | 46,809 | $ | 1,726,337 |
When potential losses are identified, a specific provision and/or charge-off may be taken, based on the then current likelihood of repayment, that is at least in the amount of the collateral deficiency, and any potential collection costs, as determined by the independent third party appraisal.
All loansLoans that are considered impaired are subject to the completion of an impairment analysis. This analysis highlights any potential collateral deficiencies. A specific amount of impairment is established based on the Bank’s calculation of the probable loss inherent in the individual loan. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.
Credit risk profile by portfolio segment based upon internally assigned risk assignments are presented below:
June 30, 2019 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Credit quality indicators: | ||||||||||||||||||||||||||||||||
Not classified | $ | 114,945 | $ | 399,658 | $ | 79,389 | $ | 232,546 | $ | 439,764 | $ | 366,049 | $ | 50,388 | $ | 1,682,739 | ||||||||||||||||
Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | 808 | 11,555 | 914 | 225 | 2,685 | 1,807 | 287 | 18,281 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total | $ | 115,753 | $ | 411,213 | $ | 80,303 | $ | 232,771 | $ | 442,449 | $ | 367,856 | $ | 50,675 | $ | 1,701,020 |
March 31, 2020 | ||||||||||||||||||||||||||||||||
Commercial real estate | Commercial | |||||||||||||||||||||||||||||||
Construction | Residential real estate | owner | non-owner | loans | Consumer | |||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Credit quality indicators: | ||||||||||||||||||||||||||||||||
Not classified | $ | 130,502 | $ | 416,318 | $ | 70,213 | $ | 248,441 | $ | 446,054 | $ | 387,973 | $ | 44,632 | $ | 1,744,133 | ||||||||||||||||
Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | 478 | 12,470 | 832 | 477 | 1,835 | 1,092 | 102 | 17,286 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total | $ | 130,980 | $ | 428,788 | $ | 71,045 | $ | 248,918 | $ | 447,889 | $ | 389,065 | $ | 44,734 | $ | 1,761,419 |
December 31, 2018 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Credit quality indicators: | ||||||||||||||||||||||||||||||||
Not classified | $ | 122,270 | $ | 370,766 | $ | 88,507 | $ | 228,408 | $ | 422,591 | $ | 334,152 | $ | 54,492 | $ | 1,621,186 | ||||||||||||||||
Special mention | 78 | - | - | 3,877 | - | - | - | 3,955 | ||||||||||||||||||||||||
Substandard | 1,323 | 12,278 | 1,138 | 1,817 | 5,156 | 2,724 | 174 | 24,610 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total | $ | 123,671 | $ | 383,044 | $ | 89,645 | $ | 234,102 | $ | 427,747 | $ | 336,876 | $ | 54,666 | $ | 1,649,751 |
December 31, 2019 | ||||||||||||||||||||||||||||||||
Commercial real estate | Commercial | |||||||||||||||||||||||||||||||
Construction | Residential real estate | owner | non-owner | loans | Consumer | |||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Credit quality indicators: | ||||||||||||||||||||||||||||||||
Not classified | $ | 127,804 | $ | 425,247 | $ | 73,378 | $ | 241,229 | $ | 442,327 | $ | 370,837 | $ | 46,809 | $ | 1,727,631 | ||||||||||||||||
Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | 481 | 12,162 | 786 | 566 | 1,725 | 2,035 | 127 | 17,882 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total | $ | 128,285 | $ | 437,409 | $ | 74,164 | $ | 241,795 | $ | 444,052 | $ | 372,872 | $ | 46,936 | $ | 1,745,513 |
· | Special Mention- A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. |
· | Substandard- Substandard loans and leases are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
· | Doubtful- Loans and leases classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. |
14 |
Loans and leases classified Special Mention, Substandard, Doubtful or Loss are reviewed at least quarterly to determine their appropriate classification. All commercial loan and lease relationships are reviewed annually. Non-classified residential mortgage loans and consumer loans are not evaluated unless a specific event occurs to raise the awareness of a possible credit deterioration.
An aged analysis of past due loans isare as follows:
June 30, 2019 | March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | Commercial real estate | Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | Construction | Residential real estate | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Analysis of past due loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans current | $ | 114,945 | $ | 396,863 | $ | 78,091 | $ | 232,539 | $ | 439,289 | $ | 365,687 | $ | 50,035 | $ | 1,677,449 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis of past due loans and leases: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans and leases current | $ | 130,502 | $ | 409,466 | $ | 68,545 | $ | 248,103 | $ | 445,290 | $ | 387,097 | $ | 44,596 | $ | 1,733,599 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans and leases past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days past due | - | - | 836 | 7 | 204 | 361 | 14 | 1,422 | - | 6,844 | 1,083 | - | 628 | 619 | 28 | 9,202 | ||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days past due | - | 1,355 | 378 | - | - | - | 339 | 2,072 | - | - | 525 | - | - | 649 | 7 | 1,181 | ||||||||||||||||||||||||||||||||||||||||||||||||
Greater than 90 days past due | - | 1,440 | 84 | - | 348 | - | - | 1,872 | - | 973 | 60 | 338 | 194 | - | 1 | 1,566 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total past due | - | 2,795 | 1,298 | 7 | 552 | 361 | 353 | 5,366 | - | 7,817 | 1,668 | 338 | 822 | 1,268 | 36 | 11,949 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-accrual loans1 | 808 | 11,555 | 914 | 225 | 2,608 | 1,808 | 287 | 18,205 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-accrual loans and leases1 | 478 | 11,505 | 832 | 477 | 1,777 | 700 | 102 | 15,871 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 115,753 | $ | 411,213 | $ | 80,303 | $ | 232,771 | $ | 442,449 | $ | 367,856 | $ | 50,675 | $ | 1,701,020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases | $ | 130,980 | $ | 428,788 | $ | 71,045 | $ | 248,918 | $ | 447,889 | $ | 389,065 | $ | 44,734 | $ | 1,761,419 |
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | Commercial real estate | Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | Construction | Residential real estate | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Analysis of past due loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans current | $ | 121,831 | $ | 361,522 | $ | 86,884 | $ | 232,834 | $ | 422,297 | $ | 334,058 | $ | 54,483 | $ | 1,613,909 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis of past due loans and leases: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans and leases current | $ | 127,804 | $ | 418,668 | $ | 71,634 | $ | 241,062 | $ | 442,132 | $ | 370,877 | $ | 46,776 | $ | 1,718,953 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accruing loans and leases past due: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 days past due | - | 6,433 | 937 | - | 432 | 94 | 9 | 7,905 | - | 3,312 | 748 | - | 195 | 35 | 19 | 4,309 | ||||||||||||||||||||||||||||||||||||||||||||||||
60-89 days past due | 166 | 2,241 | 687 | - | - | 307 | - | 3,401 | - | 3,220 | 996 | 167 | - | - | 14 | 4,397 | ||||||||||||||||||||||||||||||||||||||||||||||||
Greater than 90 days past due | 351 | 570 | - | - | - | - | - | 921 | - | 47 | - | - | - | - | - | 47 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total past due | 517 | 9,244 | 1,624 | - | 432 | 401 | 9 | 12,227 | - | 6,579 | 1,744 | 167 | 195 | 35 | 33 | 8,753 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-accrual loans1 | 1,323 | 12,278 | 1,137 | 1,268 | 5,018 | 2,417 | 174 | 23,615 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-accrual loans and leases1 | 481 | 12,162 | 786 | 566 | 1,725 | 1,960 | 127 | 17,807 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 123,671 | $ | 383,044 | $ | 89,645 | $ | 234,102 | $ | 427,747 | $ | 336,876 | $ | 54,666 | $ | 1,649,751 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases | $ | 128,285 | $ | 437,409 | $ | 74,164 | $ | 241,795 | $ | 444,052 | $ | 372,872 | $ | 46,936 | $ | 1,745,513 |
1 Included are acquired credit impaired loans where the Company amortizes the accretable discount into interest income, however these loans do not accrue interest based on the terms of the loan.
Total loans either in non-accrual status or in excess of 90 days delinquent totaled $20.1$17.4 million or 1.2%1.0% of total loans outstanding at June 30, 2019,March 31, 2020, which represents a decrease from $24.5$17.9 million, or 1.5%1.0%, at December 31, 2018.2019.
The Company had no impaired leases at March 31, 2020 and December 31, 2019. The impaired loans at March 31, 2020 and December 31, 2019 are as follows:
March 31, 2020 | ||||||||||||||||||||||||||||||||
Commercial real estate | Commercial | |||||||||||||||||||||||||||||||
Construction | Residential real estate | owner | non-owner | loans | Consumer | |||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Recorded investment1 | $ | 478 | $ | 12,470 | $ | 832 | $ | 477 | $ | 1,777 | $ | 1,092 | $ | 102 | $ | 17,228 | ||||||||||||||||
With an allowance recorded | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
With no related allowance recorded | 478 | 12,470 | 832 | 477 | 1,777 | 1,092 | 102 | 17,228 | ||||||||||||||||||||||||
Related allowance | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Unpaid principal | 663 | 13,723 | 1,030 | 474 | 2,081 | 1,646 | 105 | 19,722 | ||||||||||||||||||||||||
Average balance of impaired loans | 793 | 14,999 | 1,208 | 478 | 2,106 | 2,039 | 105 | 21,728 | ||||||||||||||||||||||||
Interest income recognized | 1 | 138 | 8 | - | 3 | 12 | - | 162 |
December 31, 2019 | ||||||||||||||||||||||||||||||||
Commercial real estate | Commercial | |||||||||||||||||||||||||||||||
Construction | Residential real estate | owner | non-owner | loans | Consumer | |||||||||||||||||||||||||||
(in thousands) | and land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Recorded investment1 | $ | 481 | $ | 13,131 | $ | 786 | $ | 566 | $ | 1,725 | $ | 2,360 | $ | 127 | $ | 19,176 | ||||||||||||||||
With an allowance recorded | - | - | - | - | - | 554 | - | 554 | ||||||||||||||||||||||||
With no related allowance recorded | 481 | 13,131 | 786 | 566 | 1,725 | 1,806 | 127 | 18,622 | ||||||||||||||||||||||||
Related allowance | - | - | - | - | - | 500 | - | 500 | ||||||||||||||||||||||||
Unpaid principal | 667 | 14,371 | 986 | 583 | 2,023 | 3,584 | 130 | 22,344 | ||||||||||||||||||||||||
Average balance of impaired loans | 814 | 15,586 | 1,338 | 594 | 2,105 | 4,392 | 141 | 24,970 | ||||||||||||||||||||||||
Interest income recognized | 5 | 400 | 106 | 30 | 11 | 195 | 1 | 748 |
The following tables reflect1Included are acquired credit impaired loans at June 30, 2019 and December 31, 2018:where the Company amortizes the accretable discount into interest income, however these loans do not accrue interest based on the terms of the loan.
June 30, 2019 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | & land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Recorded investment1 | $ | 933 | $ | 12,530 | $ | 914 | $ | 225 | $ | 2,608 | $ | 1,862 | $ | 287 | $ | 19,359 | ||||||||||||||||
With an allowance recorded | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
With no related allowance recorded | 933 | 12,530 | 914 | 225 | 2,608 | 1,862 | 287 | 19,359 | ||||||||||||||||||||||||
Related allowance | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Unpaid principal | 1,322 | 13,818 | 1,135 | 246 | 4,363 | 3,097 | 302 | 24,283 | ||||||||||||||||||||||||
Six months ended: | ||||||||||||||||||||||||||||||||
Average balance of impaired loans | 1,459 | 15,171 | 1,385 | 247 | 4,480 | 3,536 | 313 | 26,591 | ||||||||||||||||||||||||
Interest income recognized | - | 138 | 33 | 8 | 13 | 14 | 5 | 211 | ||||||||||||||||||||||||
Three months ended: | ||||||||||||||||||||||||||||||||
Average balance of impaired loans | 1,454 | 15,154 | 1,370 | 247 | 4,457 | 3,525 | 313 | 26,520 | ||||||||||||||||||||||||
Interest income recognized | - | 86 | 26 | 8 | 6 | 10 | 4 | 140 |
December 31, 2018 | ||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | ||||||||||||||||||||||||||||||
Construction | Residential | Residential | owner | non-owner | loans | Consumer | ||||||||||||||||||||||||||
(in thousands) | & land | first lien | junior lien | occupied | occupied | and leases | loans | Total | ||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Recorded investment1 | $ | 1,449 | $ | 13,259 | $ | 1,137 | $ | 1,268 | $ | 5,018 | $ | 2,455 | $ | 174 | $ | 24,760 | ||||||||||||||||
With an allowance recorded | - | - | - | - | 2,816 | 200 | - | 3,016 | ||||||||||||||||||||||||
With no related allowance recorded | 1,449 | 13,259 | 1,137 | 1,268 | 2,202 | 2,255 | 174 | 21,744 | ||||||||||||||||||||||||
Related allowance | - | - | - | - | 2,195 | 200 | - | 2,395 | ||||||||||||||||||||||||
Unpaid principal | 1,873 | 14,425 | 1,456 | 1,569 | 5,295 | 4,868 | 185 | 29,671 | ||||||||||||||||||||||||
Average balance of impaired loans | 1,873 | 15,446 | 1,448 | 1,569 | 5,340 | 5,556 | 185 | 31,417 | ||||||||||||||||||||||||
Interest income recognized | - | 474 | 51 | 16 | 5 | 125 | 5 | 676 |
Included in the total impaired loans above were non-accrual loans of $18.2$15.9 million and $23.6$17.8 million at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Interest income that would have been recorded if non-accrual loans had been current and in accordance with their original terms was $534$133 thousand and $1.0 million$388 thousand for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively.
Loans may have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. Such restructured loans are considered trouble debt restructured loans (“TDRs”) that may either be impaired loans that may either be in accruing status or non-accruing status. Non-accruing TDRsrestructured loans may return to accruing status provided there is a sufficient period of payment performance in accordance with the restructure terms. Loans may be removed from the restructured category in the year subsequent to the restructuring if: a) the restructuring agreement specifies an interest rate equal to or greater than the rate that the creditor was willing to accept at the time of restructuring for a new loan with comparable risk; and b) the loan is not impairedif they have performed based on all of the terms specified by the restructuring agreement.restructured loan terms.
The Company had no troubled debt restructured (“TDR”) leases at March 31, 2020 and December 31, 2019. The TDR loans at March 31, 2020 and December 31, 2019 are as follows:
March 31, 2020 | ||||||||||||||||||||
Number | Non-Accrual | Number | Accrual | Total | ||||||||||||||||
(dollars in thousands) | of Loans | Status | of Loans | Status | TDRs | |||||||||||||||
Construction and land | 1 | $ | 124 | - | $ | - | $ | 124 | ||||||||||||
Residential real estate - first lien | 2 | 269 | 2 | 965 | 1,234 | |||||||||||||||
Commercial loans and leases | 1 | 414 | 2 | 367 | 781 | |||||||||||||||
4 | $ | 807 | 4 | $ | 1,332 | $ | 2,139 |
December 31, 2019 | ||||||||||||||||||||
Number | Non-Accrual | Number | Accrual | Total | ||||||||||||||||
(dollars in thousands) | of Loans | Status | of Loans | Status | TDRs | |||||||||||||||
Construction and land | 1 | $ | 125 | - | $ | - | $ | 125 | ||||||||||||
Residential real estate - first lien | 2 | 274 | 2 | 968 | 1,242 | |||||||||||||||
Commercial loans and leases | 1 | 414 | 2 | 367 | 781 | |||||||||||||||
4 | $ | 813 | 4 | $ | 1,335 | $ | 2,148 |
TDRs at June 30, 2019 and December 31, 2018 are as follows:
June 30, 2019 | ||||||||||||||||||||
Number | Non-Accrual | Number | Accrual | Total | ||||||||||||||||
(dollars in thousands) | of Loans | Status | of Loans | Status | TDRs | |||||||||||||||
Construction and land | - | $ | - | 1 | $ | 125 | $ | 125 | ||||||||||||
Residential real estate - first lien | 2 | 285 | 2 | 975 | 1,260 | |||||||||||||||
Commercial - non-owner occupied | 1 | 800 | - | - | 800 | |||||||||||||||
Commercial loans and leases | 1 | 514 | - | - | 514 | |||||||||||||||
4 | $ | 1,599 | 3 | $ | 1,100 | $ | 2,699 |
December 31, 2018 | ||||||||||||||||||||
Number | Non-Accrual | Number | Accrual | Total | ||||||||||||||||
(dollars in thousands) | of Loans | Status | of Loans | Status | TDRs | |||||||||||||||
Construction and land | - | $ | - | 1 | $ | 125 | $ | 125 | ||||||||||||
Residential real estate - first lien | 2 | 291 | 2 | 982 | 1,273 | |||||||||||||||
Commercial - non-owner occupied | 2 | 2,815 | - | - | 2,815 | |||||||||||||||
Commercial loans and leases | 1 | 514 | - | - | 514 | |||||||||||||||
5 | $ | 3,620 | 3 | $ | 1,107 | $ | 4,727 |
A summary of TDR modifications outstanding and performing under modified terms areis as follows:
June 30, 2019 | March 31, 2020 | |||||||||||||||||||||||||||||||
Not Performing | Performing | Not Performing | Performing | |||||||||||||||||||||||||||||
Related | to Modified | to Modified | Total | Related | to Modified | to Modified | Total | |||||||||||||||||||||||||
(in thousands) | Allowance | Terms | Terms | TDRs | Allowance | Terms | Terms | TDRs | ||||||||||||||||||||||||
Construction and land | ||||||||||||||||||||||||||||||||
Extension or other modification | $ | - | $ | - | $ | 125 | $ | 125 | $ | - | $ | 124 | $ | - | $ | 124 | ||||||||||||||||
Residential real estate - first lien | ||||||||||||||||||||||||||||||||
Extension or other modification | - | 285 | 975 | 1,260 | - | 269 | 965 | 1,234 | ||||||||||||||||||||||||
Commercial RE - non-owner occupied | ||||||||||||||||||||||||||||||||
Rate modification | - | 800 | - | 800 | ||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Extension or other modification | - | - | 367 | 367 | ||||||||||||||||||||||||||||
Forbearance | - | 514 | - | 514 | - | 414 | - | 414 | ||||||||||||||||||||||||
Total troubled debt restructured loans | $ | - | $ | 1,599 | $ | 1,100 | $ | 2,699 | $ | - | $ | 807 | $ | 1,332 | $ | 2,139 |
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||||||||||
Not Performing | Performing | Not Performing | Performing | |||||||||||||||||||||||||||||
Related | to Modified | to Modified | Total | Related | to Modified | to Modified | Total | |||||||||||||||||||||||||
(in thousands) | Allowance | Terms | Terms | TDRs | Allowance | Terms | Terms | TDRs | ||||||||||||||||||||||||
Construction and land | ||||||||||||||||||||||||||||||||
Extension or other modification | $ | - | $ | - | $ | 125 | $ | 125 | $ | - | $ | 125 | $ | - | $ | 125 | ||||||||||||||||
Residential real estate - first lien | ||||||||||||||||||||||||||||||||
Extension or other modification | - | 291 | 982 | 1,273 | - | 274 | 968 | 1,242 | ||||||||||||||||||||||||
Commercial RE - non-owner occupied | ||||||||||||||||||||||||||||||||
Rate modification | 2,195 | 2,815 | - | 2,815 | ||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Extension or other modification | - | - | 367 | 367 | ||||||||||||||||||||||||||||
Forbearance | - | 514 | - | 514 | - | 414 | - | 414 | ||||||||||||||||||||||||
Total troubled debt restructured loans | $ | 2,195 | $ | 3,620 | $ | 1,107 | $ | 4,727 | $ | - | $ | 813 | $ | 1,335 | $ | 2,148 |
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
The Company provided COVID-19 related loan modifications to both commercial and retail customers, on a case by case basis, in the form of payment deferrals for periods up to six months. As of March 31, 2020, a total of $101 million of loans (or 5.7% of the loan portfolio) had been modified through payment deferrals.
There were no new loans restructured during the sixthree months ended June 30,March 31, 2020 and March 31, 2019. There was one new loan restructured during the six months ended June 30, 2018. In the second quarter of 2018 the Bank extended the terms of a residential real estate loan that was non-performing.
Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans. During the sixthree months ended June 30,March 31, 2020 and 2019 there were no TDRs that subsequently defaulted within the twelve month period aftermonths of their modification dates.
Management routinely evaluates other real estate owned (“OREO”) based upon periodic appraisals. For the sixthree months ended June 30, 2019 there was one residential first mortgage totaling $375 thousand transferred from loans to OREO and for the same period in 2018 there was one residential first mortgage totaling $174 thousand transferred from loans to OREO. In the second quarter 2019March 31, 2020 the Bank recorded a $65$21 thousand valuation allowance on one propertyunimproved parcel of land because the current appraised value (based on a new appraisal), less estimated cost to sell, was lower than the recorded carrying value of the OREO. InFor the first half of 2018three months ended March 31, 2020 and 2019 there were no such valuation allowances. The Company did not sell any properties held in OREO in the first half of 2019.new loans transferred from loans to OREO. The Company sold one commercial property in Sussex County Delawareseveral properties held as OREO during the second quarterthree months ended March 31, 2020, reducing OREO by $755 thousand and resulting in a loss of 2018 with a carrying value was $593$28 thousand. The Company recorded a $45 thousand gain fromThere were no sales of OREO during the sale of this property.three months ended March 31, 2019. At June 30, 2019March 31, 2020 there were seventwo loans secured by residential first liens totaling $4.5$2.4 million in the process of foreclosure.
Note 6: Derivatives and Hedging Activities
Non-designated Hedges of Interest Rate Risk
The Company maintains interest rate swap contracts with customers that are classified as non-designated hedges and are not speculative in nature. These agreements are designed to convert customer’s variable rate loans with the Company to fixed rate. These interest rate swaps are executed with loan customers to facilitate a respective risk management strategy and allow the customer to pay a fixed rate interest to the Company. These interest rate swaps are simultaneously hedged by executing offsetting interest rate swaps with unrelated market counterparties to minimize the net risk exposure to the Company resulting from the transactions and allow the Company to receive a variable rate interest. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR plus credit spread with payment being calculated on the notional amount. The interest rate swaps are settled with varying maturities.
17 |
As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2019 and December 31, 2018, the interest rate swaps had an aggregate notional amount of approximately $5.9 million and $6.2 million, respectively, theThe fair value of the interest swap derivatives are recorded in other assets and other liabilities. All changes in fair value are recorded through earnings as noninterest income. For the sixthree months ended June 30,March 31, 2020 and March 31, 2019, the Company recorded a net loss of $6$8 thousand and $2 thousand, respectively related to the change in fair value of these interest rate swap derivatives.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of June 30, 2019at March 31, 2020 and December 31, 2018.2019:
June 30, 2019 | March 31, 2020 | |||||||||||||||||||||||||||
Balance Sheet | Notional | Estimated Fair Value | Balance Sheet | Notional | Estimated Fair Value | |||||||||||||||||||||||
(dollars in thousands) | Location | Amount | Gain | Loss | Location | Amount | Gain | Loss | ||||||||||||||||||||
Not designated hedges of interest rate risk: | ||||||||||||||||||||||||||||
Customer related interest rate contracts: | ||||||||||||||||||||||||||||
Matched interest rate swaps with borrowers | Other assets and other liabilities | $ | 2,958 | $ | 222 | $ | - | Other assets and | ||||||||||||||||||||
other liabilities | $ | 2,800 | $ | 415 | $ | - | ||||||||||||||||||||||
Matched interest rate swaps with counterparty | Other assets and other liabilities | $ | 2,958 | $ | - | $ | 234 | Other assets and | ||||||||||||||||||||
other liabilities | $ | 2,800 | $ | - | $ | 419 |
December 31, 2018 | ||||||||||||||
Balance Sheet | Notional | Estimated Fair Value | ||||||||||||
(dollars in thousands) | Location | Amount | Gain | Loss | ||||||||||
Not designated hedges of interest rate risk: | ||||||||||||||
Customer related interest rate contracts: | ||||||||||||||
Matched interest rate swaps with borrowers | Other assets and other liabilities | $ | 3,061 | $ | 100 | $ | - | |||||||
Matched interest rate swaps with counterparty | Other assets and other liabilities | $ | 3,061 | $ | - | $ | 106 |
December 31, 2019 | ||||||||||||||
Balance Sheet | Notional | Estimated Fair Value | ||||||||||||
(dollars in thousands) | Location | Amount | Gain | Loss | ||||||||||
Not designated hedges of interest rate risk: | ||||||||||||||
Customer related interest rate contracts: | ||||||||||||||
Matched interest rate swaps with borrowers | Other assets and | |||||||||||||
other liabilities | $ | 2,853 | $ | 217 | $ | - | ||||||||
Matched interest rate swaps with counterparty | Other assets and | |||||||||||||
other liabilities | $ | 2,853 | $ | - | $ | 228 |
Note 7: Goodwill and Other Intangible Assets
Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset would more-likely-than-not reduce the fair value below the carrying amount. The Bank has one reporting unit, which is the core banking operation.
At December 31, 2018 the Company had $70.7 million in goodwill compared to $65.9 million at June 30, 2019. Based upon updated information the goodwill was adjusted downward in the first quarter of 2019 by $4.7 million to reflect revised valuations as detailed in Note 2.
The table below shows goodwill balances at June 30, 2019 and December 31, 2018.at:
June 30, | December 31, | |||||||||||||||
(in thousands) | 2019 | 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||
Goodwill | ||||||||||||||||
Banking | $ | 65,949 | $ | 70,697 | $ | 65,949 | $ | 65,949 |
Core deposit intangible consistsintangibles represent the estimated value of premiums paid for the acquisitionlong-term deposit relationships acquired in either business combinations or other purchases of core deposits and are amortized based upon the estimated economic benefits received. The gross carrying amount and accumulated amortization of other intangible assets are as follows:
June 30, 2019 | Weighted | March 31, 2020 | Weighted | |||||||||||||||||||||||||||||
Gross | Net | Average | Gross | Net | Average | |||||||||||||||||||||||||||
Carrying | Accumulated | Carrying | Remaining Life | Carrying | Accumulated | Carrying | Remaining Life | |||||||||||||||||||||||||
(in thousands) | Amount | Amortization | Amount | (Years) | Amount | Amortization | Amount | (Years) | ||||||||||||||||||||||||
Amortizing intangible assets: | ||||||||||||||||||||||||||||||||
Core deposit intangible | $ | 16,135 | $ | 6,203 | $ | 9,932 | 4.2 | $ | 16,135 | $ | 8,365 | $ | 7,770 | 3.5 |
December 31, 2018 | Weighted | December 31, 2019 | Weighted | |||||||||||||||||||||||||||||
Gross | Net | Average | Gross | Net | Average | |||||||||||||||||||||||||||
Carrying | Accumulated | Carrying | Remaining Life | Carrying | Accumulated | Carrying | Remaining Life | |||||||||||||||||||||||||
(in thousands) | Amount | Amortization | Amount | (Years) | Amount | Amortization | Amount | (Years) | ||||||||||||||||||||||||
Amortizing intangible assets: | ||||||||||||||||||||||||||||||||
Core deposit intangible | $ | 16,135 | $ | 4,653 | $ | 11,482 | 4.7 | $ | 16,135 | $ | 7,666 | $ | 8,469 | 3.7 |
Estimated future amortization expense for amortizing intangibles for the years ending December 31, are as follows:
(in thousands) | ||||
2019 | $ | 1,463 | ||
2020 | 2,674 | |||
2021 | 2,326 | |||
2022 | 1,915 | |||
2023 | 1,298 | |||
Thereafter | 256 | |||
Total amortizing intangible assets | $ | 9,932 |
Note 8: Leases
On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). The objective of this ASU, along with several related ASUs issued subsequently, is to increase transparency and comparability between organizations that enter into lease agreements. The most significant change is the requirement to recognize right of use (“ROU”) assets and lease liabilities for leases classified as operating leases. The standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. As part of the transition to the new standard, the Company was required to measure and recognize leases that existed at January 1, 2019, and the Company elected a modified retrospective approach. For leases existing at the effective date, the Company elected the package of three transition practical expedients and therefore did not reassess whether an arrangement is or contains a lease, did not reassess lease classification, and did not reassess what qualifies as an initial direct cost.
The adoption of Topic 842 resulted in the initial recognition of operating ROU assets and related lease liabilities of $18.0 million on January 1, 2109, which were recorded in other assets and other liabilities, respectively. As of the adoption date, there were no lease incentives that would have impacted the ROU asset balance.
(in thousands) | ||||
2020 | $ | 1,975 | ||
2021 | 2,326 | |||
2022 | 1,915 | |||
2023 | 1,298 | |||
2024 | 256 | |||
Total amortizing intangible assets | $ | 7,770 |
In the second quarter of 2019, with the execution of our branch optimization initiative, under which we announced the closing of three additional branch locations and the consolidation of two other existing branch locations we incurred $3.6 million in expenses, primarily related to the early termination of existing lease arrangements for the closing locations. All of the costs associated with this initiative were recognized in the second quarter of 2019 and the locations are expected to close in September of 2019. The early termination of these leases reduced the initial $18.0 million in ROU assets recorded on January 1, 2019 to $14.8 million at June 30, 2019.Note 8: Leases
The Company has operating leases on land and buildings with remaining lease terms ranging from 2020 to 2030. Many of the leases include renewal options, with renewal terms generally extending up to 10 years.
In 2019, with the execution of the Company’s branch optimization initiative, under which the closing of three branch locations and the consolidation of two other existing branch locations was announced, a $3.6 million charge to noninterest expenses, primarily related to the early termination of existing lease arrangements for the closing locations, was recorded in the second quarter of 2019. The closing of the three locations occurred in the third quarter of 2019, and the consolidation of the two branch locations into a single new location occurred in the first quarter of 2020. The early termination of these leases reduced the initial $18.0 million in ROU assets recorded on January 1, 2019 to $14.5 million at December 31, 2019. In the first quarter of 2020, the opening of the new location noted above increased ROU assets by $2.0 million.
Operating leases included the following at:
(in thousands) | June 30, 2019 | March 31, 2020 | December 31, 2019 | |||||||||
Operating Leases | ||||||||||||
Operating leases ROU | $ | 14,837 | ||||||||||
Operating leases ROU assets | $ | 15,674 | $ | 14,092 | ||||||||
Operating lease liabilities | $ | 15,183 | $ | 16,134 | $ | 14,507 |
The components of lease expense were as follows:
Six months ended June 30, | Three months ended June 30, | March 31, | ||||||||||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | ||||||||||||||||||
Operating lease cost | $ | 1,080 | $ | 1,960 | $ | 530 | $ | 1,228 | $ | 364 | $ | 550 | ||||||||||||
Sublease income | (293 | ) | (251 | ) | (108 | ) | (113 | ) | (168 | ) | (185 | ) | ||||||||||||
Amortization of ROU assets | 82 | - | 82 | - | 45 | - | ||||||||||||||||||
$ | 869 | $ | 1,709 | $ | 504 | $ | 1,115 | $ | 241 | $ | 365 |
19 |
Lease liability maturities are as follows:
(in thousands) | ||||||||
2019 | $ | 876 | ||||||
2020 | 1,636 | $ | 1,285 | |||||
2021 | 1,546 | 1,662 | ||||||
2022 | 1,404 | 1,520 | ||||||
2023 | 1,257 | 1,372 | ||||||
2024 | 1,170 | |||||||
Thereafter | 12,396 | 13,033 | ||||||
Total future lease payments | $ | 19,115 | $ | 20,042 | ||||
Discount of cash flows | (3,932 | ) | (3,908 | ) | ||||
Present value on net future lease payments | $ | 15,183 | $ | 16,134 | ||||
Weighted average remaining term in years | 7.14 | 6.64 | ||||||
Weighted average discount rate | 3.02 | % | 2.89 | % |
Note 9: Deposits
The following table details the composition of deposits and the related percentage mix of total deposits, respectively, at the dates indicated:
(dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||||||||||
% of | % of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Noninterest-bearing demand | $ | 422,117 | 24 | % | $ | 429,200 | 26 | % | ||||||||
Interest-bearing checking | 184,060 | 11 | 227,322 | 13 | ||||||||||||
Money market accounts | 357,833 | 21 | 356,130 | 21 | ||||||||||||
Savings | 137,346 | 8 | 134,893 | 8 | ||||||||||||
Certificates of deposit $250 and over | 78,619 | 5 | 82,511 | 5 | ||||||||||||
Certificates of deposit under $250 | 537,241 | 31 | 455,750 | 27 | ||||||||||||
Total deposits | $ | 1,717,216 | 100 | % | $ | 1,685,806 | 100 | % |
March 31, 2020 | December 31, 2019 | |||||||||||||||
% of | % of | |||||||||||||||
(dollars in thousands) | Amount | Total | Amount | Total | ||||||||||||
Noninterest-bearing demand | $ | 483,499 | 27 | % | $ | 468,975 | 27 | % | ||||||||
Interest-bearing checking | 173,739 | 10 | 183,447 | 11 | ||||||||||||
Money market accounts | 356,469 | 20 | 360,711 | 21 | ||||||||||||
Savings | 134,060 | 7 | 130,141 | 7 | ||||||||||||
Certificates of deposit $250 and over | 66,713 | 4 | 77,782 | 5 | ||||||||||||
Certificates of deposit under $250 | 574,419 | 32 | 493,309 | 29 | ||||||||||||
Total deposits | $ | 1,788,899 | 100 | % | $ | 1,714,365 | 100 | % |
Note 10: Stock Options and Stock Awards
The Company’s equity incentive plan provides for awards of nonqualified and incentive stock options as well as vested and non-vested common stock awards. As of June 30, 2019, 575,314March 31, 2020, 456,263 shares are reserved for issuance pursuant to future grants under ourthe Company’s stock incentive plan. Employee stock options can be granted with exercise prices at the fair market value (as defined within the plan) of the stock at the date of grant and with terms of up to ten years.years and typically vest over a three to five year period. Except as otherwise permitted in the plan, upon termination of employment for reasons other than retirement, permanent disability or death, the option exercise period is reduced or the options are canceled.
Stock awards may also be granted to non-employee members of the Company’s Boardboard of Directorsdirectors (the “Board of Directors” or “Board”) as compensation for attendance and participation at meetings of the Board of Directors and meetings of the various committees of the Board. For the sixthree months ended June 30,March 31, 2020 and 2019, the Company issued 8,151 and 2018, Bancorp issued 4,802 and 4,800 shares of common stock, respectively, to directors as compensation for their service.
Stock Options
The fair value of the Company’s stock options granted as compensation is estimated on the measurement date, which, for the Company, is the date of grant. The fair value of stock options is calculated using the Black-Scholes option-pricing model under which the Company estimates expected market price volatility and expected term of the options based on historical data and other factors. There were 25,000no stock options granted during the sixthree months ended June 30, 2019,March 31, 2020, while no stockthere were 25,000 options were granted for the year ended December 31, 2018.2019.
20 |
The following table summarizes the Company’s stock option activity and related information for the periods ended:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Exercise | Exercise | Exercise | Exercise | |||||||||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||||||||
Balance at January 1, | 15,268 | $ | 8.76 | 30,991 | $ | 9.69 | 25,000 | $ | 14.54 | 15,268 | $ | 8.76 | ||||||||||||||||||||
Granted | 25,000 | 14.54 | - | - | - | - | 25,000 | 14.54 | ||||||||||||||||||||||||
Exercised | (12,149 | ) | 8.59 | (9,123 | ) | 10.63 | - | - | (13,418 | ) | 8.58 | |||||||||||||||||||||
Forfeited | (1,850 | ) | 10.10 | (6,600 | ) | 10.52 | - | - | (1,850 | ) | 10.10 | |||||||||||||||||||||
Balance at period end | 26,269 | $ | 14.25 | 15,268 | $ | 8.76 | 25,000 | $ | 14.54 | 25,000 | $ | 14.54 | ||||||||||||||||||||
Exercisable at period end | 1,269 | $ | 8.50 | 15,268 | $ | 8.76 | 8,337 | $ | - | - | $ | - | ||||||||||||||||||||
Weighted average fair value of options granted during the year | $ | 5.83 | $ | - | ||||||||||||||||||||||||||||
Weighted average fair value of options | ||||||||||||||||||||||||||||||||
granted during the year | N/A | $ | 5.83 |
No stock options were exercised for the three months ended March 31, 2020. The cash received from the exercise of stock options duringwas $77 thousand for the sixthree months ended June 30, 2019 was $105 thousand, while $35 thousand was received during the six months ended June 30, 2018.March 31, 2019. The intrinsic value of a stock option is the amount that the market value of the underlying stock exceeds the exercise price of the option. Based upon a fair market value of $15.17$10.86 at June 30,March 31, 2020, the options outstanding had no aggregate intrinsic value. At March 31, 2019, based upon a fair market value of $14.81, the options outstanding had an aggregate intrinsic value of $24$77 thousand. At DecemberMarch 31, 2018,2020, based upon fair market value of $14.30, the outstandingon stock options outstanding had an aggregate intrinsic value of $85at the time, the total unrecognized pre-tax compensation expense related to unvested options was $89 thousand.
Restricted Stock Units (“RSU”)
RSUs are similar to restricted stock, exceptequity awards where the recipient does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. Each RSU that vests entitles the recipient to receive one share of the Company’s common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting, dividend or liquidation rights, with respect to the shares underlying awarded RSUs until the recipient becomes the record holder of those shares. The valuation of the Company’s RSURSUs is the closing price per share of the Company’s common stock on the date of grant.
The Company granted 100,000 RSUs during the first quarter of 2020, subject to a five-year vesting schedule. The Company granted 18,500 RSUs during the first halfquarter of 2019, subject to a three-year vesting schedule. The Company granted 20,732 RSUs during 2018, which immediately vested upon grant.
A summary of the activity for the Company’s RSUs for the periods indicated is presented in the following table:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Grant Date | Grant Date | Grant Date | Grant Date | |||||||||||||||||||||||||||||
Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||||||||
Balance at January 1, | 9,731 | $ | 17.29 | 52,155 | $ | 15.09 | 11,032 | $ | 17.48 | 9,731 | $ | 17.29 | ||||||||||||||||||||
Granted | 18,500 | 14.54 | 20,732 | 19.90 | 100,000 | 18.00 | 26,500 | 15.16 | ||||||||||||||||||||||||
Vested | - | - | (54,542 | ) | 16.63 | - | (6,699 | ) | 16.13 | |||||||||||||||||||||||
Forfeited | - | - | (8,614 | ) | 14.41 | - | (18,500 | ) | 14.54 | |||||||||||||||||||||||
Balance at period end | 28,231 | $ | 15.49 | 9,731 | $ | 17.29 | 111,032 | $ | 17.95 | 11,032 | $ | 17.48 |
21 |
At June 30, 2019,March 31, 2020, based on RSUs outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested RSUs was $292 thousand.$1.9 million. Based upon the contractual terms, this expense is expected to be recognized as follows:
(in thousands) | ||||||||
2019 | $ | 75 | ||||||
2020 | 120 | $ | 314 | |||||
2021 | 90 | 404 | ||||||
2022 | 7 | 397 | ||||||
2023 | 360 | |||||||
2024 | 360 | |||||||
2025 | 30 | |||||||
$ | 292 | $ | 1,865 |
Stock-Based Compensation Expense
Stock-based compensation expense attributable to stock options and RSUs is recognized as compensation cost in the statement of operations based on their fair values on the measurement date, which, for the Company, is the date of the grant. This cost is then recognized in noninterest expense on a straight-line basis over the vesting period of the respective stock options and RSUs. The amount that the Company recognized in stock-based compensation expense related to the issuance of restricted stock options and RSUs and foras well as director compensation paid in stock is presented in the following table:
Six months ended | Three months ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Stock-based compensation expense | ||||||||||||||||
Related to the issuance of restricted stock and RSUs | $ | 112 | $ | 572 | $ | 62 | $ | 75 | ||||||||
Director compensation paid in stock | $ | 62 | $ | 101 | $ | - | $ | - |
Three months ended | ||||||||
March 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Stock-based compensation expense | ||||||||
Related to the issuance of restricted stock and RSUs | $ | 91 | $ | 42 | ||||
Related to the issuance of stock options | 12 | 8 | ||||||
Director compensation paid in stock | 137 | 62 | ||||||
Total stock-based compensation expense | $ | 240 | $ | 112 |
Note 11: Benefit Plans
Profit Sharing Plan
The Company sponsors a defined contribution retirement plan through a Section 401(k) profit sharing plan. Employees may contribute up to 15% of their pretax compensation. Participants are eligible for matching Company contributions up to 4% of eligible compensation dependent on the level of voluntary contributions. Company matching contributions totaled $540$301 thousand and $587$277 thousand, respectively, for the sixthree months ended June 30, 2019March 31, 2020 and 2018.2019. The Company’s matching contributions vest immediately.
Supplemental Executive Retirement Plan (“SERP”)
In 2014, the Bank created a SERP for the Chief Executive Officer.Officer (“CEO”). This plan was amended in 2016. Under the defined benefit SERP, Mary Ann Scullythe CEO will receive $150,000 each year for 15 years after attainment of the Normal Retirement Age (as defined in the SERP). Ms. Scully will earnThe CEO earned vesting on a graduated schedule in whichand she will becomebecame fully vested on August 25, 2019, which hashad been established for purposes of the SERP as her retirement date.the commencement date for SERP distributions. Expense related to this SERP totaled $105$19 thousand and $139$53 thousand for the sixthree month periods ending June 30,March 31, 2020 and 2019, and 2018, respectively.
Employee Stock Purchase Plan
The 2017 Employee Stock Purchase Plan (the “Plan”) provides eligible employees of the Company and certain of its subsidiaries with opportunities to purchase shares of the Company’s common stock at a discounted price, with the Company contributing up to a fifteen percent discount per offering period.stock. An aggregate of 250,000 shares of the Company’s common stock was approved for issuance under the Plan. The Plan is intended to qualify as an “employee stock purchase plan” as defined in Section 423 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and shall be interpreted consistent therewith. The first offering period under the Plan commenced on October 1, 2018 and ended on December 31, 2018, and the 2018There was no expense related to the Plan totaled $11 thousand. The current offering period began on January 1, 2019 ending on June 30, 2019, and the expense related to the Company’s contribution to the Plan totaled $19 thousandthis plan for the six monthsthree month periods ended June 30,March 31, 2020 or 2019.
22 |
Note 12: Income (Loss) per Common Share
The table below shows the presentation of basic and diluted income per common share for the periods indicated:
Six months ended | Three months ended | Three months ended | ||||||||||||||||||||||
June 30, | June 30, | March 31, | ||||||||||||||||||||||
(dollars in thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | ||||||||||||||||||
Net income | $ | 6,344 | $ | (7,953 | ) | $ | 2,088 | $ | (2,277 | ) | ||||||||||||||
Preferred stock dividends | - | - | - | - | ||||||||||||||||||||
Net income (loss) available to common stockholders (numerator) | $ | 6,344 | $ | (7,953 | ) | $ | 2,088 | $ | (2,277 | ) | ||||||||||||||
Net income available to common stockholders (numerator) | $ | 3,343 | $ | 4,256 | ||||||||||||||||||||
BASIC | ||||||||||||||||||||||||
Basic average common shares outstanding (denominator) | 19,056,953 | 16,058,092 | 19,061,164 | 19,002,851 | 18,867,087 | 19,052,694 | ||||||||||||||||||
Basic income (loss) per common share | $ | 0.33 | $ | (0.50 | ) | $ | 0.11 | $ | (0.12 | ) | ||||||||||||||
Basic income per common share | $ | 0.18 | $ | 0.22 | ||||||||||||||||||||
DILUTED | ||||||||||||||||||||||||
Average common shares outstanding | 19,056,953 | 16,058,092 | 19,061,164 | 19,002,851 | 18,867,087 | 19,052,694 | ||||||||||||||||||
Dilutive effect of common stock equivalents | 14,367 | - | 6,460 | - | 47,864 | 14,097 | ||||||||||||||||||
Diluted average common shares outstanding (denominator) | 19,071,320 | 16,058,092 | 19,067,624 | 19,002,851 | 18,914,951 | 19,066,791 | ||||||||||||||||||
Diluted income (loss) per common share | $ | 0.33 | $ | (0.50 | ) | $ | 0.11 | $ | (0.12 | ) | ||||||||||||||
Diluted income per common share | $ | 0.18 | $ | 0.22 | ||||||||||||||||||||
Common stock equivalents outstanding that are anti-dilutive and thus excluded from calculation of diluted number of shares presented above | 25,000 | 25,326 | 25,000 | 27,245 | ||||||||||||||||||||
Common stock equivalents outstanding that are | ||||||||||||||||||||||||
anti-dilutive and thus excluded from calculation of | ||||||||||||||||||||||||
diluted number of shares presented above | - | 25,000 |
Note 13: Risk-BasedRegulatory Capital
Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal bank regulatory 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 Bancorp and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.The following table reflects Bancorp’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2013, Federal Deposit Insurance Corporation (the “FDIC”) and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule, which became effective on January 1, 2015, applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $1 billion or more and top-tier savings and loan holding companies. The final rule created a new common equity Tier 1 (“CET1”) minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital ratio (from 4% to 6% of risk-weighted assets), imposed a minimum leverage ratio of 4.0%, and changed the risk-weight of certain assets to better reflect credit risk and other risk exposures. These include, among other things, a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status, and a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless the Company elects to opt-out from this treatment. The Company has elected to permanently opt out of this treatment in the Company’s capital calculations, as permitted by the final rule.
Additionally, subject to a transition schedule, the rule limits Bancorp’s and the Bank’s ability to make capital distributions, engage in share repurchases and pay certain discretionary bonus payments if the they do not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
In addition, under revised prompt corrective action requirements, in order to be considered “well-capitalized,” Bancorp and the Bank must have a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 ratio of 6.5% or greater, a leverage capital ratio of 5.0% or greater, and not be subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.
There are three main categories of capital under the regulatory capital guidelines. Common equity tier 1 capital consists of paid-in common stock, retained earnings and certain common equity Tier 1 minority interests. Various items, including certain amounts of goodwill, intangible assets, deferred tax assets, must be deducted from common equity Tier 1 before capital ratios are calculated. Tier 1 capital (which, together with common equity tier 1 capital, makes up Tier 1 capital) generally consists of perpetual preferred stock and, in certain circumstances and subject to certain limitations, minority investments in certain subsidiaries, less goodwill and other non-qualifying intangible assets, and certain other deductions. Tier 2 capital consists of perpetual preferred stock that is not otherwise eligible to be included as Tier 1 capital, hybrid capital instruments, term subordinated debt and intermediate-term preferred stock and, subject to limitations, general allowances for credit losses. At least half of total capital must consist of Tier 1 capital. Accumulated other comprehensive income (positive or negative) must be reflected in regulatory capital. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Management believes that, as of June 30, 2019March 31, 2020 and December 31, 2018, 2019:
To be well | ||||||||||||||||||||||||
capitalized under | ||||||||||||||||||||||||
the FDICIA | ||||||||||||||||||||||||
For capital | prompt corrective | |||||||||||||||||||||||
Actual | adequacy purposes (1) | action provisions | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
As of March 31, 2020: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 245,246 | 13.06 | % | $ | 150,208 | 8.00 | % | $ | 187,760 | 10.00 | % | ||||||||||||
Howard Bancorp | $ | 247,926 | 13.16 | % | $ | 150,670 | 8.00 | % | N/A | |||||||||||||||
Common equity tier 1 capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 231,862 | 12.35 | % | $ | 84,492 | 4.50 | % | $ | 122,044 | 6.50 | % | ||||||||||||
Howard Bancorp | $ | 206,253 | 10.95 | % | $ | 84,752 | 4.50 | % | N/A | |||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 231,862 | 12.35 | % | $ | 112,656 | 6.00 | % | $ | 150,208 | 8.00 | % | ||||||||||||
Howard Bancorp | $ | 206,253 | 10.95 | % | $ | 113,003 | 6.00 | % | N/A | |||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
(Leverage ratio) | ||||||||||||||||||||||||
Howard Bank | $ | 231,862 | 10.25 | % | $ | 90,473 | 4.00 | % | $ | 113,092 | 5.00 | % | ||||||||||||
Howard Bancorp | $ | 206,253 | 9.10 | % | $ | 90,707 | 4.00 | % | N/A | |||||||||||||||
As of December 31, 2019: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 238,384 | 12.86 | % | $ | 148,314 | 8.00 | % | $ | 185,392 | �� | 10.00 | % | |||||||||||
Howard Bancorp | $ | 247,761 | 13.14 | % | $ | 150,872 | 8.00 | % | N/A | |||||||||||||||
Common equity tier 1 capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 227,983 | 12.30 | % | $ | 83,427 | 4.50 | % | $ | 120,505 | 6.50 | % | ||||||||||||
Howard Bancorp | $ | 209,119 | 11.09 | % | $ | 84,866 | 4.50 | % | N/A | |||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 227,983 | 12.30 | % | $ | 111,235 | 6.00 | % | $ | 148,314 | 8.00 | % | ||||||||||||
Howard Bancorp | $ | 209,119 | 11.09 | % | $ | 113,154 | 6.00 | % | N/A | |||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
(Leverage ratio) | ||||||||||||||||||||||||
Howard Bank | $ | 227,983 | 10.43 | % | $ | 87,434 | 4.00 | % | $ | 109,293 | 5.00 | % | ||||||||||||
Howard Bancorp | $ | 209,119 | 9.55 | % | $ | 87,599 | 4.00 | % | N/A |
(1) Amounts shown exclude the capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, Bancorp is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the FRB (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to Bancorp, the Company calculates these ratios for its own planning and monitoring purposes.
Bancorp and the Bank met all capital adequacy requirements to which they are subject.subject as of March 31, 2020 and December 31, 2019.
The following table reflects Bancorp’s and the Bank’s capital at June 30, 2019 and December 31, 2018:
To be well | ||||||||||||||||||||||||
capitalized under | ||||||||||||||||||||||||
the FDICIA | ||||||||||||||||||||||||
For capital | prompt corrective | |||||||||||||||||||||||
Actual | adequacy purposes | action provisions | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
As of June 30, 2019: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 225,871 | 12.37 | % | $ | 146,133 | 8.00 | % | $ | 182,666 | 10.00 | % | ||||||||||||
Howard Bancorp | $ | 231,176 | 12.55 | % | $ | 147,415 | 8.00 | % | N/A | |||||||||||||||
Common equity tier 1 capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 216,751 | 11.87 | % | $ | 82,200 | 4.50 | % | $ | 118,733 | 6.50 | % | ||||||||||||
Howard Bancorp | $ | 193,914 | 10.52 | % | $ | 82,921 | 4.50 | % | N/A | |||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 216,751 | 11.87 | % | $ | 109,599 | 6.00 | % | $ | 146,133 | 8.00 | % | ||||||||||||
Howard Bancorp | $ | 193,914 | 10.52 | % | $ | 110,561 | 6.00 | % | N/A | |||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
(Leverage ratio) | ||||||||||||||||||||||||
Howard Bank | $ | 216,751 | 10.14 | % | $ | 85,502 | 4.00 | % | $ | 106,878 | 5.00 | % | ||||||||||||
Howard Bancorp | $ | 193,914 | 9.06 | % | $ | 85,586 | 4.00 | % | N/A | |||||||||||||||
As of December 31, 2018: | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 212,099 | 11.80 | % | $ | 143,810 | 8.00 | % | $ | 179,762 | 10.00 | % | ||||||||||||
Howard Bancorp | $ | 218,425 | 12.14 | % | $ | 143,889 | 8.00 | % | N/A | |||||||||||||||
Common equity tier 1 capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 202,226 | 11.25 | % | $ | 80,893 | 4.50 | % | $ | 116,846 | 6.50 | % | ||||||||||||
Howard Bancorp | $ | 179,935 | 10.00 | % | $ | 80,938 | 4.50 | % | N/A | |||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Howard Bank | $ | 202,226 | 11.25 | % | $ | 107,857 | 6.00 | % | $ | 143,810 | 8.00 | % | ||||||||||||
Howard Bancorp | $ | 179,935 | 10.00 | % | $ | 107,917 | 6.00 | % | N/A | |||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
(Leverage ratio) | ||||||||||||||||||||||||
Howard Bank | $ | 202,226 | 9.84 | % | $ | 82,212 | 4.00 | % | $ | 102,765 | 5.00 | % | ||||||||||||
Howard Bancorp | $ | 179,935 | 8.77 | % | $ | 82,046 | 4.00 | % | N/A |
Note 14: Fair Value
FASB ASC Topic 820 “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Under FASB ASC Topic 820, the Company groups assets and liabilities 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 the fair value. These hierarchy levels are:
Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active 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 assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Recurring Fair Value Measurements
All classes of investment securities available for sale are recorded at fair value using an industry-wide valuation service and therefore fall into a Level 2 of the fair value hierarchy. The service uses evaluated pricing models that vary based on asset class and include available trade, bid and other market information. Various methodologies include broker quotes, proprietary models, descriptive terms and conditions databases, and quality control programs.
Fair value of loans held for sale is based upon outstanding investor commitments or, in the absence of such commitments, based on current investor yield requirements or third party pricing models and are considered Level 2. Gains and losses on loan sales are determined using specific identification method. Changes in fair value are recognized in the Consolidated Statement of Operations as part of realized and unrealized gain on mortgage banking activities.
Interest rate lock commitments are recorded at fair value determined as the amount that would be required to settle each of these derivatives at the balance sheet date. In the normal course of business, the Company enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates. The commitment becomes effective when the borrowers lock in a specified interest rate within the time frames established by the mortgage division. All borrowers are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time interest rate is locked by the borrower and the sale date of the loan to an investor. To mitigate this interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into best effort forward sales contracts to sell loans to investors. The forward sales contracts lock in an interest rate price for the sale of loans similar to the specific rate lock commitment. Rate lock commitments to the borrowers through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value in earnings. These valuations fall into a Level 3 of the fair value hierarchy. The rate lock commitments are deemed as Level 3 inputs because the Company applies an estimated pull-through rate, which is deemed an unobservable measure. The pull-through rate utilized is based upon historic pull-through rates that ranged from 70 percent to 80 percent.
For loans held for investment that were originally intended to be sold and previously included as loans held for sale, fair value is determined by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2019March 31, 2020 and December 31, 2018.2019.
June 30, 2019 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
March 31, 2020 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
Active Markets | Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||||||||||
Carrying | for Identical | Observable | Unobservable | Carrying | for Identical | Observable | Unobservable | |||||||||||||||||||||||||
Value | Assets | Inputs | Inputs | Value | Assets | Inputs | Inputs | |||||||||||||||||||||||||
(in thousands) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Available for sale securities: | ||||||||||||||||||||||||||||||||
U.S. Government agencies | $ | 61,769 | $ | - | $ | 61,769 | $ | - | $ | 81,894 | $ | - | $ | 81,894 | $ | - | ||||||||||||||||
Mortgage-backed securities | 86,927 | - | 86,927 | - | 187,824 | - | 187,824 | - | ||||||||||||||||||||||||
Other investments | 2,989 | - | 2,989 | - | 5,534 | - | 5,534 | - | ||||||||||||||||||||||||
Loans held for sale | 37,680 | - | 37,680 | - | 3,795 | - | 3,795 | - | ||||||||||||||||||||||||
Loans held for investment | 1,343 | - | 1,343 | - | 958 | - | 958 | - | ||||||||||||||||||||||||
Rate lock commitments | 466 | - | - | 466 | ||||||||||||||||||||||||||||
Interest rate swap assets | 222 | - | 222 | - | 415 | - | 415 | - | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Interest rate swap liabilities | 234 | - | 234 | - | 419 | - | 419 | - |
December 31, 2018 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
December 31, 2019 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
Active Markets | Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||||||||||
Carrying | for Identical | Observable | Unobservable | Carrying | for Identical | Observable | Unobservable | |||||||||||||||||||||||||
Value | Assets | Inputs | Inputs | Value | Assets | Inputs | Inputs | |||||||||||||||||||||||||
(in thousands) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Available for sale securities: | ||||||||||||||||||||||||||||||||
U.S. Government agencies | $ | 130,397 | $ | - | $ | 130,397 | $ | - | $ | 67,312 | $ | - | $ | 67,312 | $ | - | ||||||||||||||||
Mortgage-backed securities | 90,460 | - | 90,460 | - | 142,699 | - | 142,699 | - | ||||||||||||||||||||||||
Other investments | 3,001 | - | 3,001 | - | 5,494 | - | 5,494 | - | ||||||||||||||||||||||||
Loans held for sale | 21,261 | - | 21,261 | - | 30,710 | - | 30,710 | - | ||||||||||||||||||||||||
Loans held for investment | 1,303 | - | 1,303 | - | 997 | - | 997 | - | ||||||||||||||||||||||||
Rate lock commitments | 126 | - | - | 126 | 60 | - | - | 60 | ||||||||||||||||||||||||
Interest rate swap assets | 100 | - | 100 | - | 217 | - | 217 | - | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Interest rate swap liabilities | 106 | - | 106 | - | 228 | - | 228 | - |
The following table presents a reconciliation of the assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods presented:
June 30, | December 31, | |||||||||||||||
2019 | 2018 | |||||||||||||||
(in thousands) | March 31, 2020 | December 31, 2019 | ||||||||||||||
Balance, beginning of period | $ | 126 | $ | 530 | $ | 60 | $ | 126 | ||||||||
Privately held equity investment | - | (72 | ) | - | - | |||||||||||
Net gains (losses) included in realized and unrealized gains on mortgage banking activity in noninterest income | 340 | (332 | ) | |||||||||||||
Net losses included in realized and unrealized gains on mortgage banking activity in noninterest income | (60 | ) | (66 | ) | ||||||||||||
Balance, end of period | $ | 466 | $ | 126 | $ | - | $ | 60 |
Assets under fair value option:
June 30, 2019 | Carrying | Aggregate | ||||||||||||||||||||||
March 31, 2020 | Carrying | Aggregate | ||||||||||||||||||||||
�� | Fair Value | Unpaid | Fair Value | Unpaid | ||||||||||||||||||||
(in thousands) | Amount | Principal | Difference | Amount | Principal | Difference | ||||||||||||||||||
Loans held for sale | $ | 37,680 | $ | 36,710 | $ | 970 | $ | 3,795 | $ | 3,759 | $ | 36 | ||||||||||||
Loans held for investment | 1,343 | 1,312 | 31 | 958 | 950 | 8 |
December 31, 2018 | Carrying | Aggregate | ||||||||||||||||||||||
December 31, 2019 | Carrying | Aggregate | ||||||||||||||||||||||
Fair Value | Unpaid | Fair Value | Unpaid | |||||||||||||||||||||
(in thousands) | Amount | Principal | Difference | Amount | Principal | Difference | ||||||||||||||||||
Loans held for sale | $ | 21,261 | $ | 20,785 | $ | 476 | $ | 30,710 | $ | 29,969 | $ | 741 | ||||||||||||
Loans held for investment | 1,303 | 1,342 | (39 | ) | 997 | 966 | 31 |
The Company elected to measure the loans held for sale and the loans held for investment that were originally intended for sale, but instead were added to the Bank’s portfolio at fair value, to better align reported results with the underlying economic changes in value of the loans on the Company’s balance sheet.
Non-recurring Fair Value Measurements
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used.
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisal by qualified licensed appraisers hired by the Company. The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business' financial statements and, if necessary, discounted based on management's review and analysis. Appraised and reported 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 client and client's business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
Other real estate owned acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to noninterest expense subsequent to foreclosure.the allowance for credit losses. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. There was a $65 thousandA valuation loss of $21 thousand was recognized duringfor the sixthree months ended June 30, 2019,March 31, 2020 and no valuation losses were recognized duringloss was recorded for the six months ended June 30, 2018.same period on 2019. This charge was for declines in the value of OREO subsequent to foreclosure. OREO is classified within Level 3 of the hierarchy.
Net (loss)/gain included in earnings from the changes in fair value of loans held for sale was $(257) thousand and $72 thousand at March 31, 2020 and 2019, respectively. There was a net gains included in earnings from the changes in fair value of loans held for investment of $8 thousand for the first quarter of 2020 and $56 thousand for the first quarter of 2019.
The following table sets forth the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis at the periods presented. OREO is carried at fair value less anticipated costs to sell. Impaired loans are measured using the fair value of collateral, if applicable.March 31, 2020 and December 31, 2019:
June 30, 2019 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
March 31, 2020 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
Active Markets | Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||||||||||
Carrying | for Identical | Observable | Unobservable | Carrying | for Identical | Observable | Unobservable | |||||||||||||||||||||||||
Value | Assets | Inputs | Inputs | Value | Assets | Inputs | Inputs | |||||||||||||||||||||||||
(in thousands) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Other real estate owned | $ | 4,702 | $ | - | $ | - | $ | 4,702 | $ | 2,322 | $ | - | $ | - | $ | 2,322 | ||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Construction and land | 933 | - | - | 933 | 478 | - | - | 478 | ||||||||||||||||||||||||
Residential - first lien | 12,530 | - | - | 12,530 | 12,470 | - | - | 12,470 | ||||||||||||||||||||||||
Residential - junior lien | 914 | - | - | 914 | 832 | - | - | 832 | ||||||||||||||||||||||||
Commercial - owner occupied | 225 | - | - | 225 | 477 | - | - | 477 | ||||||||||||||||||||||||
Commercial - non-owner occupied | 2,608 | - | - | 2,608 | 1,777 | - | - | 1,777 | ||||||||||||||||||||||||
Commercial loans and leases | 1,862 | - | - | 1,862 | 1,092 | - | - | 1,092 | ||||||||||||||||||||||||
Consumer | 287 | - | - | 287 | 102 | - | - | 102 | ||||||||||||||||||||||||
Total impaired loans | 17,228 | - | - | 17,228 |
December 31, 2018 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
December 31, 2019 | Quoted Price in | Significant | ||||||||||||||||||||||||||||||
Active Markets | Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||||||||||
Carrying | for Identical | Observable | Unobservable | Carrying | for Identical | Observable | Unobservable | |||||||||||||||||||||||||
Value | Assets | Inputs | Inputs | Value | Assets | Inputs | Inputs | |||||||||||||||||||||||||
(in thousands) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | (Fair Value) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Other real estate owned | $ | 4,392 | $ | - | $ | - | $ | 4,392 | $ | 3,098 | $ | - | $ | - | $ | 3,098 | ||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Construction and land | 1,449 | - | - | 1,449 | 481 | - | - | 481 | ||||||||||||||||||||||||
Residential - first lien | 13,259 | - | - | 13,259 | 13,131 | - | - | 13,131 | ||||||||||||||||||||||||
Residential - junior lien | 1,137 | - | - | 1,137 | 786 | - | - | 786 | ||||||||||||||||||||||||
Commercial - owner occupied | 1,268 | - | - | 1,268 | 566 | - | - | 566 | ||||||||||||||||||||||||
Commercial - non-owner occupied | 2,823 | - | - | 2,823 | 1,725 | - | - | 1,725 | ||||||||||||||||||||||||
Commercial loans and leases | 2,255 | - | - | 2,255 | 1,860 | - | - | 1,860 | ||||||||||||||||||||||||
Consumer | 174 | - | - | 174 | 127 | - | - | 127 | ||||||||||||||||||||||||
Total impaired loans | 18,676 | - | - | 18,676 |
At March 31, 2020, OREO consisted of an outstanding balance at June 30, 2019 of $7.0$3.5 million, less a valuation allowance of $2.3 million, and at$1.2 million. At December 31, 20182019, OREO consisted of $6.6an outstanding balance of $4.6 million, less a valuation allowance of $2.2$1.5 million. There was no relatedA specific allocation of the allowance on impaired loans at June 30, 2019; however, there was an allowance of $2.4 million onfor credit losses attributable to impaired loans at December 31, 2018.2019 was $500 thousand.
Various techniques are used to value OREO and impaired loans. All loans for which the underlying collateral is real estate, either construction, land, commercial, or residential, an independent appraisal is used to identify the value of the collateral. The approaches within the appraisal report include sales comparison, income, and replacement cost analysis. The resulting value will be adjusted by a selling cost of 9.5% and the residual value will be used to determine if there is an impairment. Commercial loans and leases and consumer loans utilize a liquidation approach to the impairment analysis.
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are based on quoted market prices where available or calculated using present value techniques. Since quoted market prices are not available on many of our financial instruments, estimates may be based on the present value of estimated future cash flows and estimated discount rates.
Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.
The following table presents the estimated fair value of the Company’s financial instruments at the dates indicated:
June 30, 2019 | March 31, 2020 | |||||||||||||||||||||||||||||||||||||||
Quoted Price in | Significant | Quoted Price in | Significant | |||||||||||||||||||||||||||||||||||||
Active Markets | Other | Significant | Active Markets | Other | Significant | |||||||||||||||||||||||||||||||||||
for Identical | Observable | Unobservable | for Identical | Observable | Unobservable | |||||||||||||||||||||||||||||||||||
Carrying | Fair | Assets | Inputs | Inputs | Carrying | Fair | Assets | Inputs | Inputs | |||||||||||||||||||||||||||||||
(in thousands) | Amount | Value | (Level 1) | (Level 2) | (Level 3) | Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||||||||||
Available for sale securities | $ | 151,685 | $ | 151,685 | $ | - | $ | 151,685 | $ | - | $ | 275,252 | $ | 275,252 | $ | - | $ | 275,252 | $ | - | ||||||||||||||||||||
Held to maturity securities | 9,750 | 9,915 | - | - | 9,915 | 7,750 | 7,850 | - | - | 7,850 | ||||||||||||||||||||||||||||||
Nonmarketable equity securities | 11,220 | 11,220 | - | 11,220 | - | 16,757 | 16,757 | - | 16,757 | - | ||||||||||||||||||||||||||||||
Loans held for sale | 37,680 | 37,680 | - | 37,680 | - | 3,795 | 3,795 | - | 3,795 | - | ||||||||||||||||||||||||||||||
Loans held for investment | 1,343 | 1,343 | - | 1,343 | - | 958 | 958 | - | 958 | - | ||||||||||||||||||||||||||||||
Rate lock commitments | 466 | 466 | - | - | 466 | |||||||||||||||||||||||||||||||||||
Loans and leases1 | 1,690,557 | 1,687,688 | - | - | 1,687,688 | 1,747,077 | 1,755,134 | - | - | 1,755,134 | ||||||||||||||||||||||||||||||
Interest rate swap | 222 | 222 | - | 222 | - | 415 | 415 | - | 415 | - | ||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | 1,717,216 | 1,716,079 | - | 1,716,079 | - | 1,788,899 | 1,787,004 | - | 1,787,004 | - | ||||||||||||||||||||||||||||||
Short-term borrowings | 220,669 | 220,669 | - | 220,669 | - | |||||||||||||||||||||||||||||||||||
Long-term borrowings | 28,142 | 28,043 | - | 28,043 | - | |||||||||||||||||||||||||||||||||||
Customer repos and fed funds purchased | 5,321 | 5,321 | - | 5,321 | - | |||||||||||||||||||||||||||||||||||
FHLB advances | 344,000 | 351,560 | - | 351,560 | - | |||||||||||||||||||||||||||||||||||
Subordinated debt | 28,290 | 28,290 | - | 28,290 | - | |||||||||||||||||||||||||||||||||||
Interest rate swap | 234 | 234 | - | 234 | - | 419 | 419 | - | 419 | - |
December 31, 2018 | ||||||||||||||||||||
Quoted Price in | Significant | |||||||||||||||||||
Active Markets | Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Fair | Assets | Inputs | Inputs | ||||||||||||||||
(in thousands) | Amount | Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Financial Assets | ||||||||||||||||||||
Available for sale securities | $ | 223,858 | $ | 223,858 | $ | - | $ | 223,858 | $ | - | ||||||||||
Held to maturity securities | 9,250 | 9,253 | - | - | 9,253 | |||||||||||||||
Nonmarketable equity securities | 11,786 | 11,786 | - | 11,786 | - | |||||||||||||||
Loans held for sale | 21,261 | 21,261 | - | 21,261 | - | |||||||||||||||
Loans held for investment | 1,303 | 1,303 | - | 1,303 | - | |||||||||||||||
Rate lock commitments | 126 | 126 | - | - | 126 | |||||||||||||||
Loans and leases1 | 1,638,575 | 1,613,506 | - | - | 1,613,506 | |||||||||||||||
Interest rate swap | 100 | 100 | - | 100 | - | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Deposits | 1,685,806 | 1,681,295 | - | 1,681,295 | - | |||||||||||||||
Short-term borrowings | 134,576 | 134,576 | - | 134,576 | - | |||||||||||||||
Long-term borrowings | 142,077 | 142,296 | - | 142,296 | - | |||||||||||||||
Interest rate swap | 106 | 106 | - | 106 | - |
28 |
December 31, 2019 | ||||||||||||||||||||
Quoted Price in | Significant | |||||||||||||||||||
Active Markets | Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Fair | Assets | Inputs | Inputs | ||||||||||||||||
(in thousands) | Amount | Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Financial Assets | ||||||||||||||||||||
Available for sale securities | $ | 215,505 | $ | 215,505 | $ | - | $ | 215,505 | $ | - | ||||||||||
Held to maturity securities | 7,750 | 7,897 | - | - | 7,897 | |||||||||||||||
Nonmarketable equity securities | 14,152 | 14,152 | - | 14,152 | - | |||||||||||||||
Loans held for sale | 30,710 | 30,710 | - | 30,710 | - | |||||||||||||||
Loans held for investment | 997 | 997 | - | 997 | - | |||||||||||||||
Rate lock commitments | 60 | 60 | - | - | 60 | |||||||||||||||
Loans and leases1 | 1,734,115 | 1,735,013 | - | - | 1,735,013 | |||||||||||||||
Interest rate swap | 217 | 217 | - | 217 | - | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Deposits | 1,714,365 | 1,713,081 | - | 1,713,081 | - | |||||||||||||||
Customer repos and fed funds purchased | 6,127 | 6,127 | - | 6,127 | - | |||||||||||||||
FHLB advances | 285,000 | 288,731 | - | 288,731 | - | |||||||||||||||
Subordinated debt | 28,241 | 28,241 | - | 28,241 | - | |||||||||||||||
Interest rate swap | 228 | 228 | - | 228 | - |
(1) | Carrying amount is net of unearned income and allowance for loan and lease losses. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans were measured using an exit price notion at periods presented. |
Note 15: Revenue Recognition
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees, monthly service fees, check orders, and other deposit account related fees. The Banks’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Banks’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Other Operating Income
Other operating income is primarily comprised of debit and credit card income, ATM fees, merchant services income, revenue streams such as safety deposit box rental fees, and other miscellaneous service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Banks’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Bank’s performance obligation for fees, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
The following presents noninterest income, segregated by revenue streams in scope and out of scope of Topic 606, for the six and three months ended June 30, 2019 and 2018.
Unaudited | ||||||||||||||||
Six months ended | Three months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges on deposit accounts | $ | 413 | $ | 247 | $ | 239 | $ | 152 | ||||||||
Fees and other services charges | 1,314 | 1,094 | 685 | 689 | ||||||||||||
Other | 39 | 39 | 15 | 20 | ||||||||||||
Noninterest income in scope of Topic 606 | 1,766 | 1,380 | 939 | 861 | ||||||||||||
Noninterest income out of scope of Topic 606 | 8,610 | 8,941 | 4,902 | 4,756 | ||||||||||||
Total noninterest income | $ | 10,376 | $ | 10,321 | $ | 5,841 | $ | 5,617 |
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Bank’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Bank satisfies its performance obligation and revenue is recognized. The Bank does not typically enter into long term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2019 and December 31, 2018, the Bank did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Bank did not capitalize any contract acquisition cost.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This sectionThe following is intended to help our stockholders and potential investors understand our financial performance through a discussion of the factors affecting our consolidated financial condition at June 30,as of March 31, 2020, as compared to December 31, 2019, and December 31, 2018 and our consolidated results of operations for the three month periods ended June 30, 2019March 31, 2020 and 2018.March 31, 2019. This sectiondiscussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and related notes as well as the consolidated financial and statistical data appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations for any future periods.
We have made, and will continue to make, various forward-looking statements with respect to financial, business and noteseconomic matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the cautionary note regarding “Forward-Looking Statements” at the beginning of this report.
In this report, unless the context suggests otherwise, references to the consolidated financial statements.“Company” refer to Howard Bancorp, Inc. and references to “we,” “us,” and “our” mean the combined business of the Company and the Bank and its wholly-owned subsidiaries.
OverviewGeneral
Howard Bancorp, Inc. is the holding company for Howard Bank. Howard Bank was formed in 2004. Howard Bank’s business has consisted primarily of originating both commercial and real estate loans secured by property in our market area. Typically, commercial real estate and business loans involve a higher degree of risk and carry a higher yield than one-to four-family residential loans. Although we plan to continue to focus on commercial customers, we intend to continue our origination of one- to four-family residential mortgage loans, maintaining our portfolio of mortgage lending and also selling select loans into the secondary markets.
We are headquartered in Baltimore, Maryland. We consider our primary market area to be the Greater Baltimore Metropolitan Area. We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services primarily to small- and medium-sized businesses and their owners, professionals and executives, and high-net-worth individuals. Our loans are primarily funded by core deposits of customers in our market.
Our resultsRecent Business Developments
On December 18, 2019, we entered into an agreement to release certain management members of operations depend mainlyour mortgage division from their employment contracts and allow those individuals to create a limited liability company (“LLC”) for the purpose of hiring our 91 remaining mortgage employees. We also agreed to transfer ownership of the domain name “VAmortgage.com” to the newly created LLC. In consideration of the release of the employment agreements, the transfer of our mortgage employees, and the sale of the domain name, the LLC paid us $750 thousand. Under the agreement, there is a transition period of approximately 45 days, after which we agreed to cease originating residential first lien mortgage loans and exit our mortgage banking activities. Accordingly, we completed processing the residential first lien mortgage pipeline by the end of the first quarter of 2020. In order to manage future loan run-off within our residential mortgage loan portfolio, we plan on buying first lien residential mortgage loans, on a servicing released basis, from both the LLC and other third-party originators.
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While our mortgage banking activities were marginally profitable in two of the last three years and our decision to exit this activity will eliminate that source of income, we believe that the exit of these activities will have a negligible impact on our net interest income whichover the next twelve months and will improve our efficiency ratio. Most importantly, we believe that exiting these activities will allow us to focus resources on growing our more profitable and less volatile commercial banking business that represents our core competency. We expect that this renewed focus will more than replace the marginal levels of net income from our mortgage banking activities within the next twelve months. While we estimate that the after tax income from these activities in 2019 was $1.6 million, the operating expenses we attributed to the mortgage banking activities represented only direct costs and did not include shared services expense for staff and support activities such as loan operations, wire transfer operations, human resources, finance, internal audit, and compliance. If we had allocated these shared services expenses to our mortgage banking activities, the financial returns on our mortgage banking activities would have been even less. The exit of our mortgage banking activities is discussed in Note 2 to the differenceConsolidated Financial Statements.
Recent Events - COVID-19
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, the State of Maryland and most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. Within our local markets, there has been an abrupt slowdown in commercial economic activity resulting from actions announced by the State of Maryland between the interest income we earn on our loan and investment portfoliosMarch 5 disclosure of the first confirmed cases of COVID-19 in the state and the interest expense we pay on deposits and borrowings. Results of operations are also affected by provisions for credit losses, noninterest income and noninterest expense. Our noninterest expense consists primarily of compensation and employee benefits,March 23 executive order closing all non-essential businesses in the state as well as office occupancy, deposit insurance and general administrative and data processing expenses. Our operationsa dramatic rise in the unemployment rate in our market area.
While our business has been designated an essential business, which allows us to continue to serve our customers, we serve many customers that have been deemed, or who are significantlyemployed by businesses that have been deemed, to be non-essential. And many of our customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by generalthe COVID-19 pandemic.
The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and competitive conditions, particularlysignificant volatility and disruption in financial markets, and has had an adverse effect on our business and results of operations. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with respectthe 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to changes1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates government policies and actionsthe other effects of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affectthe COVID-19 pandemic has had and is expected to continue to have an adverse effect on our business and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations.operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.
On December 6, 2018,Our business, financial condition and results of operations generally rely upon the Company entered into Subordinated Note Purchase Agreementsability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary market and in the United States as a whole.
Our COVID-19 Operational Response
Our response has continued to evolve since the first confirmed case of COVID-19 was reported in Maryland on March 5. We have implemented the following measures in an effort to ensure the safety of both our customers and employees while continuing to serve our customers during this challenging period:
· | Twelve of the Bank’s fifteen branches remain accessible to customers – nine through drive thru capabilities and all twelve through pre-scheduled meetings. | |
· | Encouraged utilization of our mobile, online, ATM, and other banking channels to limit personal contact. | |
· | Implemented a work-from-home policy for substantially all employees other than branch personnel. | |
· | Added one week of paid time off to all full-time employees to be used in either 2020 or 2021, to acknowledge long hours devoted to providing extraordinary customer service. | |
· | Implemented deep cleaning procedures at all branch locations and other bank facilities. | |
· | Changed the annual meeting of stockholders to a virtual meeting. |
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Lending Operations and Accommodations to Borrowers
We immediately understood to challenges that our lending customers were facing, and we proactively reached out to commercial customers. In addition, we provided loan modifications to both commercial and retail customers, on a case by case basis, in the form of payment deferrals for periods up to six months. As of March 31, 2020, a total of $101 million of loans (or 5.7% of the loan portfolio) had been modified through payment deferrals. As of May 8, 2020, this number had grown to $347 million (or 19.7% of the loan portfolio). We expect that requests for payment deferrals will continue during the second quarter. In accordance with certain Purchasers pursuantinteragency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings if the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. We have also temporarily ceased making collection calls, are temporarily waiving a higher proportion of late fees assessed for consumer loans, and have paused new foreclosure and repossession actions. We will continue to re-evaluate these temporary actions based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.
We have also actively participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). During the first phase of this program, which commenced on April 3, we processed 856 applications that resulted in 797 PPP loan approvals totaling $185.0 million. As of May 8, 2020, we have funded $179.5million of the Company soldfirst phase approvals. The processing fees we expect to receive from the SBA for originating the first phase PPP loans are estimated at approximately $5.8 million; these fees will be deferred and issued $25,000,000amortized as a yield adjustment in aggregate principal amountinterest income over the life of 6.00% Fixed-to-Floating Rate Subordinated Notes due December 6, 2028. The Notesthe loans. In addition, we are continuing to support our customers through our participation in the second phase of this program, which commenced on April 27. As of May 8, 2020, we have processed 190 applications that have resulted in 185 PPP loan approvals totaling $14.7 million, with $9.1 million of the second phase approvals funded. We expect to receive an estimated additional $555 thousand in processing fees from the SBA for the second phase approvals through May 8. Over 150 members of our team (60% of the workforce) were issuedinvolved in this effort.
Impact on Our Results of Operation and Financial Condition
We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. While we did not yet have a significant impact to our financial condition as of March 31, 2020, in the form of incurred losses or any communications from our borrowers that significant losses were imminent, we nevertheless determined it prudent to increase our allowance for credit losses by $3.0 million in the first quarter of 2020, related to changes in qualitative factors, primarily as a result of the abrupt slowdown in commercial economic activity related to COVID-19, as well as the dramatic rise in the unemployment rate in our market area. Our allowance for credit losses for periods ending after March 31, 2020 may be materially impacted by the CompanyCOVID-19 pandemic.
We will continue to monitor the Purchasers atimpact of COVID-19 on our business, operating results, cash flows, and financial condition, including the valuation of goodwill. If the COVID-19 pandemic extends beyond a price equalfew more months and the economy continues to 100%deteriorate, we will have to reevaluate the impact on our financial condition and possible impairment of their face amountgoodwill.
Capital and Liquidity
As of March 31, 2020, all of our capital ratios were in relianceexcess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.
We believe there could be potential stresses on the exemptions from registration available under Section 4(a)(2)liquidity management as a result of the Securities ActCOVID-19 pandemic and our participation in the provisionsPPP. As customers manage their own liquidity stress, we could experience an increase in the utilization of Regulation D thereunder. The Company intendsexisting lines of credit or decreases in customer deposits. To manage this risk, we increased our interest-bearing deposits with banks by $83.0 million in the first quarter of 2020. Since we believe there is sufficient liquidity in the market at this time, we plan to usereduce these balances during the net proceeds for general corporate purposes, to provide for continued growth and to supplement its regulatory capital ratios.second quarter of 2020.
On March 1, 2018,The Federal Reserve has created the Paycheck Protection Program Lending Facility (“PPPLF”), a lending facility that will allow us to obtain funding specifically for loans that we acquired First Mariner throughmake under the completionPPP, which will allow us to retain existing sources of liquidity for our previously announced merger pursuanttraditional operations. We have been approved by the Federal Reserve Bank of Richmond (“FRB”) to pledge PPP loans as collateral on borrowings from the First Mariner Merger Agreement. AtPPPLF, and we intend to utilize the effective time of the First Mariner merger, First Mariner merged with and into the Bank, with the Bank continuing as the surviving bank of the First Mariner merger and a wholly owned subsidiary of the Company. The aggregate merger consideration of $173.8 million included $9.2 million of cash and 9,143,222 shares of our common stock, which was valued at approximately $164.6 million.PPPLF.
Financial Highlights
Financial highlights during the sixthree months ended June 30, 2019March 31, 2020 are as follows:
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· | Our FHLB advances increased |
· | We completed our $7.0 million stock repurchase program on February 24, 2020; a total of |
· | We remain “well capitalized” by all regulatory measures. |
· | Our book value per common share was $16.85 at March 31, 2020, an increase of $0.27 per share from December 31, 2019. | |
· | We completed the processing of the remaining residential first lien mortgage pipeline during the quarter. This activity resulted from our agreement to exit our mortgage banking activities as discussed in our Form 10-K for the |
Critical Accounting Policies
Our accounting and financial reporting policies conform to GAAP and general practice within the banking industry. Accordingly, preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements.
The accounting policies we view as critical are those relating to the allowance for credit losses, goodwill and other intangible assets, acquisition accounting, income taxes, and share based compensation. Significantcompensation, accounting for business combinations and loans acquired in business combinations. These critical accounting policies and the significant assumptions and estimates made by management related to them are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019. Our significant accounting policies are discussed in detail in “Notes to Consolidated Financial Statements - Note 1: Summary of Significant Account Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. There have been no material changes to the significant accounting policies as described in the Annual Report.Report on Form 10-K for the year ended December 31, 2019. Disclosures regarding the effects of new accounting pronouncements are included in Note 1 of this report.
Balance Sheet Analysis and Comparison of Financial Condition
A comparison between the June 30, 2019March 31, 2020 and December 31, 20182019 balance sheets is presented below.
General
Total assets increased $29.1$133.3 million, or 1.3%0.6%, to $2.296$2.51 billion at June 30, 2019 asMarch 31, 2020 compared to $2.267$2.37 billion at December 31, 2018. This2019. Our asset growth consisted primarily of increases in our loan portfoliointerest-bearing deposits with banks of $51.3$83.0 million, securities available for sale of $59.7 million, and cashloans and cash equivalentsleases of $23.6 million, offset by a $72.2 million decrease$15.9 million. The primary sources of funding asset growth were increases in investment securities. Totaldeposit balances and FHLB borrowings. While total deposits increased $31.4by $74.5 million, or 1.9%, while total borrowingscustomer deposits decreased $27.8by $32.6 million when comparing balances at June 30, 2019 to balances at December 31, 2018.and non-customer deposits increased by $107.1 million. FHLB advances increased by $59.0 million.
Investment
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Securities Available for Sale and Held to Maturity
Available for sale
Available
Our available for sale securities are reported at fair value. We currently holdAt both March 31, 2020 and December 31, 2019, we held U.S. agency securities,debentures, mortgage backed securities, and corporate investments in our securitiesdebentures. This portfolio which are categorized as available for sale. We use our securities portfoliois used primarily to provide the requiredsufficient liquidity to fund our loans and provide funds for withdrawals of deposits. In addition, this portfolio is used as collateral for funding via commercial customer overnight securities sold under agreement to repurchase (“repurchase agreements”) and as wella source of earnings. At March 31, 2020 and December 31, 2019, $10.9 million and $11.6 million in fair value of available for sale securities, respectively, were pledged as to provide sufficient liquidity to fund our loanscollateral for both repurchase agreements and provide funds for withdrawalsdeposits of deposits.local government entities that require pledged collateral as a condition of maintaining these deposit accounts.
Held to maturity
Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are certain corporate debentures. These investments are intended to be held until maturity.
Nonmarketable equity
At June 30, 2019 and December 31, 2018, we held an investment in stock of the Federal Home Loan Bank (“FHLB”) of $11.2 million and $11.8 million, respectively. This investment is required for continued FHLB membership and is based partially upon the amount of borrowings outstanding from the FHLB. This FHLB stock is carried at cost.
The following tables settable sets forth the composition of our investment securities portfolio at the dates indicated.
June 30, 2019 | December 31, 2018 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
(in thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Available for sale | ||||||||||||||||
U.S. Government Agencies | $ | 60,684 | $ | 61,769 | $ | 130,088 | $ | 130,397 | ||||||||
Mortgage-backed | 84,542 | 86,927 | 90,242 | 90,460 | ||||||||||||
Other investments | 3,010 | 2,989 | 3,011 | 3,001 | ||||||||||||
$ | 148,236 | $ | 151,685 | $ | 223,341 | $ | 223,858 | |||||||||
Held to maturity | ||||||||||||||||
Corporate debentures | $ | 9,750 | $ | 9,915 | $ | 9,250 | $ | 9,253 |
March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
Amortized | Estimated | Amortized | Estimated | $ Change in | ||||||||||||||||||||
(in thousands) | Cost | Fair Value | Cost | Fair Value | Fair Value | % Change | ||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Government Agencies | $ | 79,916 | $ | 81,894 | $ | 66,428 | $ | 67,312 | $ | 14,582 | 21.7 | % | ||||||||||||
Mortgage-backed | 180,509 | 187,824 | 139,918 | 142,699 | 45,125 | 31.6 | ||||||||||||||||||
Other investments | 5,510 | 5,534 | 5,510 | 5,494 | 40 | 0.7 | ||||||||||||||||||
$ | 265,935 | $ | 275,252 | $ | 211,856 | $ | 215,505 | $ | 59,747 | 27.7 | % | |||||||||||||
Held to maturity | ||||||||||||||||||||||||
Corporate debentures | $ | 7,750 | $ | 7,850 | $ | 7,750 | $ | 7,897 | $ | (47 | ) | (0.6 | )% |
We had available for sale securities of $151.7 million and $223.9$275.3 million at June 30, 2019 andMarch 31, 2020, an increase of $59.7 million, or 27.7%, since December 31, 2018, respectively, which were recorded at fair value. This represents a decrease2019. Our portfolio growth, consisting of $72.2 million or 32.2% at June 30, 2019 from the prior year end primarily as a resultboth mortgage-backed securities and U.S. Government agency securities, was part of us selling $36.1 million in securities during the second quarter of 2019 recording a gain of $658 thousand on the sale. We intentionally decreased the size of our overall earnings and interest rate risk management strategies.
Our available for sale portfolio given the increased rate of growth in our loan portfolio and also because of the minimal spread given the yields on new investments compared to the incremental cost of funds. In 2018, all acquired First Mariner investment securities were classified as available for sale, and were acquired at their fair values. For interest rate sensitivity reasons, we elected to immediately liquidate a portion of acquired securities portfolio upon the closing of the First Mariner merger and because we sold these securities acquired within days of the closing of the transaction, we did not record any gain or loss on the sale. In 2018, we sold approximately $69.7 million of the acquired securities and retained nearly $51.0 million in our portfolio. Additionally in 2018, the Bank took the opportunity to reposition a portion of its pre-acquisition portfolio through the sale of primarily shorter duration agency debenture bonds with maturities over one year. In the first quarter of 2018, the Bank sold $33.0 million of securities at a loss of $139 thousand.
We had securities held to maturity of $9.7 million and $9.3 million at June 30, 2019 and December 31, 2018, consisting of corporate debentures recorded at amortized cost.
With respect to our portfolio of securities available for sale, the portfolio contained 7four securities with unrealized losses of $47$19 thousand at March 31, 2020, and 3116 securities with unrealized losses of $275$166 thousand at June 30, 2019 and December 31, 2018, respectively.2019. Changes in the fair value of these securities resulted primarily from interest rate fluctuations. We do not intend to sell these securities nor is it more likely than not that we would be required to sell these securities before their anticipated recovery, and we believe the collection of the investment and related interest is probable. Based on this analysis, we do not consider any of the unrealized losses to be other than temporary impairment losses. There were no heldimpairment. Note 3 to maturity securities in a loss position at June 30, 2019, while three securities were in a loss position at December 31, 2018.our Consolidated Financial Statements provides more detail concerning the composition of our portfolio and our process for evaluating the portfolio for other-than-temporary impairment.
Loan and Lease Portfolio
Total loans and leases increased $51.3$15.9 million, or 3.1%0.9%, to $1.7$1.76 billion at June 30, 2019March 31, 2020 from $1.6 million$1.74 billion at December 31, 2018. Organic growth was primarily from increases in commercial loans and leases of $31.0 million, residential first lien loans of $28.2 million and commercial2019. Commercial real estate loans of $13.4increased $11.0 million, from December 31, 2018 as we continue toor 1.6%, and our commercial loan and leases portfolio increased $16.2 million, or 4.3%. The growth in these portfolio categories is consistent with our continued focus on the needs of small to mid-size businesses in our market area. This growthOur residential mortgage portfolio decreased by $11.7 million during the quarter ended March 31, 2020 as a result of a substantially higher level of prepayments due to the lower level of mortgage market rates that led to a strong mortgage refinance quarter. The level of mortgage runoff was offsetpartially mitigated by decreasesnew loan originations, but the wind down of our mortgage banking activities during the quarter resulted in a lower level of new mortgage originations than in prior quarters. In order to manage loan run-off within our residential mortgage loan portfolio, we plan on construction and landbuying first lien residential mortgage loans on a servicing released basis. In that regard, we are currently negotiating investor agreements that may provide a future flow of $7.7 million and consumer loans of $4.0 million from December 31, 2018.new mortgage originations.
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The following table sets forth the composition of our loan portfolio at the dates indicated.
June 30, 2019 | December 31, 2018 | |||||||||||||||
(in thousands) | Total | % of Total | Total | % of Total | ||||||||||||
Real estate | ||||||||||||||||
Construction and land | $ | 115,753 | 6.8 | % | $ | 123,671 | 7.5 | % | ||||||||
Residential - first lien | 411,213 | 24.2 | 383,044 | 23.2 | ||||||||||||
Residential - junior lien | 80,303 | 4.7 | 89,645 | 5.4 | ||||||||||||
Total residential real estate | 491,516 | 28.8 | 472,689 | 28.6 | ||||||||||||
Commercial - owner occupied | 232,771 | 13.7 | 234,102 | 14.2 | ||||||||||||
Commercial - non-owner occupied | 442,449 | 26.0 | 427,747 | 25.9 | ||||||||||||
Total commercial real estate | 675,220 | 39.7 | 661,849 | 40.1 | ||||||||||||
Total real estate loans | 1,282,489 | 75.3 | 1,258,209 | 76.2 | ||||||||||||
Commercial loans and leases | 367,856 | 21.6 | 336,876 | 20.5 | ||||||||||||
Consumer | 50,675 | 3.0 | 54,666 | 3.3 | ||||||||||||
Total loans | $ | 1,701,020 | 100.0 | % | $ | 1,649,751 | 100.0 | % |
March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
(in thousands) | Total | % of Total | Total | % of Total | $ Change | % Change | ||||||||||||||||||
Real estate | ||||||||||||||||||||||||
Construction and land | $ | 130,980 | 7.4 | % | $ | 128,285 | 7.3 | % | $ | 2,695 | 2.1 | % | ||||||||||||
Residential - first lien | 428,788 | 24.4 | 437,409 | 25.1 | (8,621 | ) | (2.0 | ) | ||||||||||||||||
Residential - junior lien | 71,045 | 4.0 | 74,164 | 4.2 | (3,119 | ) | (4.2 | ) | ||||||||||||||||
Total residential real estate | 499,833 | 28.4 | 511,573 | 29.3 | (11,740 | ) | (2.3 | ) | ||||||||||||||||
Commercial - owner occupied | 248,918 | 14.1 | 241,795 | 13.9 | 7,123 | 2.9 | ||||||||||||||||||
Commercial - non-owner occupied | 447,889 | 25.5 | 444,052 | 25.4 | 3,837 | 0.9 | ||||||||||||||||||
Total commercial real estate | 696,807 | 39.6 | 685,847 | 39.3 | 10,960 | 1.6 | ||||||||||||||||||
Total real estate loans | 1,327,620 | 75.4 | 1,325,705 | 75.9 | 1,915 | 0.1 | ||||||||||||||||||
Commercial loans and leases1 | 389,065 | 22.1 | 372,872 | 21.4 | 16,193 | 4.3 | ||||||||||||||||||
Consumer | 44,734 | 2.5 | 46,936 | 2.7 | (2,202 | ) | (4.7 | ) | ||||||||||||||||
Total loans and leases | $ | 1,761,419 | 100.0 | % | $ | 1,745,513 | 100.0 | % | $ | 15,906 | 0.9 | % |
1 Includes leases of $5,637 and $6,382 at March 31, 2020 and December 31, 2019, respectively.
Loan Held for Sale
We sellcompleted the majorityprocessing of the remaining residential first lien mortgage pipeline during the quarter and substantially all of the loans originated for sale were sold by the Bank. LoansMarch 31, 2020. As a result, loans held for sale increased $16.4 million to $37.7were $3.8 million at June 30, 2019March 31, 2020, down from $21.3$30.7 million at December 31, 2018. The2019. Our volume of mortgage loans originatedloan originations for sale intoin the secondary market continues to be strong, with $259.9was $79.8 million during the quarter while our volume of loans sold was $106.7 million, resulting in a $26.9 million decrease in loans originatedheld for sale.
Interest-Bearing Deposits with Banks
Interest-bearing deposits with banks, primarily with the Federal Reserve Bank of Richmond (“FRB”), were $180.0 million at March 31, 2020, an increase of $83.0 million from the December 31, 2019 balance of $97.0 million. As the threat of market disruption in response to the pandemic appeared during the quarter, combined with concerns of potentially higher than normal commercial line utilization and possible reductions in customer deposits, we grew our on-balance sheet liquidity with higher balances held at the FRB. Since we believe there is sufficient liquidity in the first half of 2019 comparedmarket at this time, we plan to $337.3 million for the same period of 2018. The 2018 levels were influenced by our consumer direct unit of our mortgage division that was closed inreduce these balances during the second quarter of 2018,2020.
Nonmarketable Equity Securities
At March 31, 2020 and December 31, 2019, we held an investment in stock of the Federal Home Loan Bank (“FHLB”) of $16.8 million and $14.2 million, respectively. This investment is required for continued FHLB membership and is based partially upon the amount of borrowings outstanding from the FHLB. This FHLB stock is carried at cost.
Deposits
Total deposits were $1.79 billion at March 31, 2020, a $74.5 million, or 4.4%, increase from $1.71 billion at December 31, 2019. Customer deposits, which excludes brokered deposits and other non-customer deposits, were down $32.6 million, or 2.2%, in the first quarter of 2020. Our transaction accounts (noninterest-bearing demand and interest-bearing checking) increased by $4.8 million and represented 45.6% of our customer deposits. Brokered and other non-customer deposits were $347.1 million at March 31, 2020, a $107.1 million increase since year end 2019. The growth in this deposit funding source supported the increase in our on-balance sheet liquidity as the threat of market disruption in response to the pandemic appeared during the quarter. Since we previously announced,believe there is sufficient liquidity in the market at this time, we expected this decline in levelsplan to reduce these balances during the second quarter of mortgage originations.2020.
Leases
As a result of the Company adopting requirements of Accounting Standards Update (“ASU”) 2016-02,Leases(Topic 842), we recognized $14.8 million in right-of-use assets and $15.18 million lease liabilities for operating leases. These amounts are reflected in other assets and other liabilities on our Consolidated Balance Sheet at June 30, 2019, and primarily account for the net changes in both other assets and liabilities from the amounts reported at December 31, 2018.
Deposits
Deposits increased from $1.686 billion at December 31, 2018 to $1.717 billion at June 30, 2019, an increase of $31.4 million or 1.9%. The primary increase in deposits was the $77.6 million increase in certificates of deposit and to a lesser extent an increase in money market accounts of $1.7 million and savings accounts of $2.4 million. This growth was offset by a $43.3 million decrease in interest-bearing checking and $7.1 million decrease in noninterest-bearing checking. The composition of our deposits shifted during the second quarter of 2019 as transaction deposits of $606 million at June 30, 2019 declined by $50.3 million or 7.7% as our largest deposit relationship, reduced their balances by $61.6 million during the second quarter to fund new opportunities and investments. The decline in the transaction deposits necessitated an increase in our higher cost deposit sources, primarily certificates of deposit.
The following tables set forth the distribution of total deposits, by account type, at the dates indicated:
June 30, 2019 | December 31, 2018 | |||||||||||||||
% of | % of | |||||||||||||||
(dollars in thousands) | Amount | Total | Amount | Total | ||||||||||||
Noninterest-bearing demand | $ | 422,117 | 24 | % | $ | 429,200 | 26 | % | ||||||||
Interest-bearing checking | 184,060 | 11 | 227,322 | 13 | ||||||||||||
Money market accounts | 357,833 | 21 | 356,130 | 21 | ||||||||||||
Savings | 137,346 | 8 | 134,893 | 8 | ||||||||||||
Certificates of deposit $250 and over | 78,619 | 5 | 82,511 | 5 | ||||||||||||
Certificates of deposit under $250 | 537,241 | 31 | 455,750 | 27 | ||||||||||||
Total deposits | $ | 1,717,216 | 100 | % | $ | 1,685,806 | 100 | % |
March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
(dollars in thousands) | Amount | Total | Amount | Total | $ Change | % Change | ||||||||||||||||||
Noninterest-bearing demand | $ | 483,499 | 27 | % | $ | 468,975 | 27 | % | $ | 14,524 | 3.1 | % | ||||||||||||
Interest-bearing checking | 173,739 | 10 | 183,447 | 11 | (9,708 | ) | (5.3 | ) | ||||||||||||||||
Money market accounts | 356,469 | 20 | 360,711 | 21 | (4,242 | ) | (1.2 | ) | ||||||||||||||||
Savings | 134,060 | 7 | 130,141 | 7 | 3,919 | 3.0 | ||||||||||||||||||
Certificates of deposit $250 and over | 66,713 | 4 | 77,782 | 5 | (11,069 | ) | (14.2 | ) | ||||||||||||||||
Certificates of deposit under $250 | 574,419 | 32 | 493,309 | 29 | 81,110 | 16.4 | ||||||||||||||||||
Total deposits | $ | 1,788,899 | 100 | % | $ | 1,714,365 | 100 | % | $ | 74,534 | 4.3 | % | ||||||||||||
By deposit source: | ||||||||||||||||||||||||
Customer deposits | $ | 1,441,829 | 81 | % | $ | 1,474,393 | 86 | % | $ | (32,564 | ) | (2.2 | )% | |||||||||||
Brokered and other non-customer deposits | 347,070 | 19 | 239,972 | 14 | 107,098 | 44.6 | ||||||||||||||||||
Total deposits | $ | 1,788,899 | 100 | % | $ | 1,714,365 | 100 | % | $ | 74,534 | 4.3 | % |
Borrowings
Customer deposits remain the primary source we utilize to meet funding needs, but we supplement this with short-term and long-term borrowings. Borrowings consist of overnight unsecured master notes, repurchase agreements, FHLB advances and subordinated debentures. Repurchase agreements consist of overnight electronic sweep products that move customer excess funds from noninterest-bearing deposit accounts to an interest-bearing repurchase agreement, which is classified as a borrowing. Master notes similarly sweep funds from the Bank’s customer accounts to the Company but do not require pledged collateral. Repurchase agreements sweep funds within the Bank and are secured primarily by pledges of U.S. Government Agency securities, based upon their fair value, as collateral for 100% of the principal and accrued interest of its repurchase agreements.Advances
Subordinated Debt
On December 6, 2018, the Company entered into Subordinated Note Purchase Agreements with certain Purchasers pursuantOur primary source of non-deposit funding is FHLB advances. We use a variety a term structures in order to which the Company soldmanage liquidity and issued $25,000,000 in aggregate principal amount of 6.00% Fixed-to-Floating Rate Subordinated Notes due December 6, 2028. The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount in reliance on the exemptions from registration available under Section 4(a)(2) of the Securities Act and the provisions of Regulation D thereunder. The Company used the net proceeds of this offering for general corporate purposes, to provide for continued growth and to supplement its regulatory capital ratios.
The Notes have been structured to qualify initially as Tier 2 capital for regulatory capital purposes. The Notes will initially bear interest at a rate of 6.00% per annum from and including December 6, 2018, to but excluding December 6, 2023, with interest during this period payable semi-annually in arrears. From and including December 6, 2023, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly torisk. FHLB advances were $344.0 million at March 31, 2020, an annual floating rate equal to three-month LIBOR, plus 302 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or afterincrease of $59.0 million from December 6, 2023.
Patapsco Statutory Trust I, a Connecticut statutory business trust and an unconsolidated wholly-owned subsidiary31, 2019. As of Howard Bancorp (the “Trust”), issued $5March 31, 2020, $205.0 million of capital trust pass-through securities to investors. The interest rate currently adjusts on a quarterly basis at the rate of the three month LIBOR plus 1.48%. The Trust purchased $5,155,000 of junior subordinated deferrable interest debentures from Patapsco Bancorp. The debentures are the sole asset of the Trust. Patapsco Bancorp also fully and unconditionally guaranteed the obligations of the Trust under the capital securities, which guarantee became an obligation of Howard Bancorp upon our acquisition of Patapsco Bancorp. The capital securities are redeemable by the Company at par. The capital securities must be redeemed upon final maturity of the subordinated debentures on December 31, 2035.
Our borrowings totaled $248.8 million at June 30, 2019 compared to $276.7 million at December 31, 2018, reflecting a decrease of $27.8 million. Short-term borrowings at June 30, 2019 consisted of repurchase agreements and master notes of $4.7 million, and nine short-term FHLB advances totaling $216.0 million. Long-term borrowings totaled $28.1 million at June 30, 2019, consisting only of subordinated debt, compared to long term borrowings of $142.1 million at December 31, 2018. In the second quarter 2019 we repaid $85 million of long-term FHLB borrowings, recording a pre-payment penalty of $651 thousand in our other operating expenses. The early repayment of these advances was primarily for asset/liability management purposes and a result of the current rate environment.have maturities beyond one year.
Stockholders’ Equity
Total stockholders’ equity increased $8.8was $315.4 million or approximately 3.0%,at March 31, 2020, a $1.2 million increase from $294.7$314.1 million at December 31, 2018 to $303.5 million at June 30, 2019. TheOur increase in stockholders’ equity iswas primarily the result of the retentionour first quarter net income of the earnings for the first half of 2019$3.3 million as well as market interest rate changes which increased the level ofan increase in unrealized gains in our investment portfolio.securities available for sale portfolio (net of taxes) of $4.1 million as a result of lower market interest rates. On February 24, 2020, we completed our stock repurchase program authorized by the Board of Directors on April 24, 2019. A total of 392,565 shares at an average price paid per share of $17.83, for an aggregate amount of $7.0 million, were repurchased under the program. A total of 372,801 shares were repurchased during the first quarter of 2020 for an aggregate amount of $6.7 million.
Total stockholders’ equity at June 30, 2019March 31, 2020 represents a capitalan equity to assetassets ratio of 13.2%12.6%, compared to 13.0%13.2% at December 31, 2018. Book2019. Our book value per share was $15.92$16.85 at June 30, 2019March 31, 2020 and $15.48$16.48 at December 31, 2019.
Results of Operations
A comparison between the three months ended March 31, 2020 and March 31, 2019 is presented below.
Net income for the first quarter of 2020 was $3.3 million, or $0.18 per diluted common share. This compares to net income for the first quarter of 2019 of $4.3 million, or $0.22 per diluted common share. The $913 thousand, or $0.04 per diluted common share, decrease in net income was primarily the result of an increase in the provision for credit losses of $1.7 million, which, net of taxes, reduced EPS by $0.07. Our first quarter 2020 results also included a one-time $1.2 million tax benefit resulting from a net operating loss carryback provision in the CARES Act; this tax benefit increased our EPS by $0.06 per diluted common share. In addition, we recorded $788 thousand of expenses attributable to the departure of our former chief financial officer (“CFO”) during the quarter.
The Federal Reserve’s Federal Open Market Committee’s target for federal funds increased 125 basis points in 2017 and 100 basis points in 2018 to a range of 2.25% to 2.50% for the year ended December 31, 2018. Leverage ratio, Tier 1 risk-based capital ratioDuring 2019, the federal funds target rate remained at the 2.25% to 2.50% range until July 2019 when the Federal Reserve began to drop the federal funds target rate. In the last half of 2019, the Federal Reserve dropped the federal funds target rate 75 basis points to the range of 1.50% to 1.75% at December 31, 2019. In March 2020, in response to the COVID19 pandemic, the Federal Reserve then dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25%.
36 |
Net Interest Income
Net interest income for the first quarter of 2020 was $17.5 million, an increase of $51 thousand from the first quarter of 2019. Our net interest margin was 3.34% for the first quarter of 2020, a decrease of 30 basis points (“bp”) from the net interest margin of 3.64% in the first quarter of 2019. Average earning assets of $2.11 billion increased by $160.9 million, or 8.3%, while net interest income was essentially flat. The yield on our earning assets was down 50 bp and total risk-based capital ratiowas partially offset by a 24 bp decrease in the rate on our interest-bearing liabilities. The net accretion of fair value adjustments on acquired loans added 5 bp to our net interest margin in the first quarter of 2020, an 8 bp decrease from 13 bp in the first quarter of 2019. We expect the impact of this net accretion to continue to decrease in future periods.
Interest Income
Interest income decreased by $558 thousand, or 2.4%, to $22.2 million for the first quarter of 2020 compared to $22.8 million for the first quarter of 2019. Interest income and fees on loans and leases decreased $397 thousand, or 1.9%, while average loans are up 6.9% to $1.75 billion compared to the first quarter of 2019. The average yield on loans of 4.58% is down 46 bp from the first quarter of 2019 yield and was primarily driven by lower interest rates. The net accretion of fair value adjustments on acquired loans added 7 bp to our average yield on loans in the first quarter of 2020, an 8 bp decrease from 15 bp in the first quarter of 2019. The average yield on available for sale securities decreased by 32 bp to 2.76%, as purchases during the quarter were 9.06%at substantially lower market rates. Reflective of the significant decline on market rates of interest, the average yield on our interest-bearing deposits in banks fell 107 bp to 1.11% in the first quarter of 2020 compared to the same period in 2019.
Interest Expense
Interest expense decreased by $609 thousand, or 11.5%, 10.52% and 12.55%, respectively at June 30,to $4.7 million for the first quarter of 2020, compared to $5.3 million for the same period in 2019. The average rate on our interest-bearing liabilities decreased by 24 bp to 1.21% for the first quarter of 2020 compared to the first quarter of 2019. Interest expense on deposits decreased $354 thousand over the first quarter of 2019; we experienced a $37.7 million decrease in average interest-bearing deposits while the average rate on all interest-bearing deposits was down 9 bp. We dropped the interest rates on our interest-bearing deposits in response to the lower prevailing competitive rates in our market starting in late February, with the full impact of those rate actions to be reflected in future periods. In addition, our interest expense on FHLB advances decreased $229 thousand while the average balance increased $125.5 million. The average rate on FHLB advances dropped 131 bp to 1.29% in the first quarter of 2020, compared to the same period in 2019.
Average BalanceBalances, Yields and YieldsRates
The following tables set forth average balance sheets, averagebalances, yields and costs,rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.expense as well as any amortization and accretion of fair value adjustments.
Six months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Income | Yield | Average | Income | Yield | |||||||||||||||||||
(dollars in thousands) | Balance | / Expense | / Rate | Balance | / Expense | / Rate | ||||||||||||||||||
Earning assets | ||||||||||||||||||||||||
Loans and leases:1 | ||||||||||||||||||||||||
Commercial loans and leases | $ | 337,331 | $ | 8,703 | 5.20 | % | $ | 290,828 | $ | 7,094 | 4.92 | % | ||||||||||||
Commercial real estate | 657,035 | 16,517 | 5.07 | 572,846 | 13,448 | 4.73 | ||||||||||||||||||
Construction and land | 121,358 | 3,507 | 5.83 | 97,780 | 2,571 | 5.30 | ||||||||||||||||||
Residential real estate | 486,882 | 11,170 | 4.63 | 395,712 | 8,410 | 4.29 | ||||||||||||||||||
Consumer | 52,424 | 1,288 | 4.95 | 31,442 | 860 | 5.52 | ||||||||||||||||||
Total loans and leases | 1,655,030 | 41,185 | 5.02 | 1,388,608 | 32,383 | 4.70 | ||||||||||||||||||
Loans held for sale | 23,530 | 512 | 4.38 | 50,857 | 983 | 3.90 | ||||||||||||||||||
Other earning assets2 | 65,031 | 636 | 1.97 | 66,322 | 475 | 1.44 | ||||||||||||||||||
Securities:3 | ||||||||||||||||||||||||
U.S. Treasury | - | - | 1,494 | 6 | 0.83 | |||||||||||||||||||
U.S Gov agencies | 104,233 | 1,431 | 2.77 | 58,239 | 487 | 1.69 | ||||||||||||||||||
Mortgage-backed | 88,764 | 1,426 | 3.24 | 37,775 | 555 | 2.96 | ||||||||||||||||||
Corporate debentures | 9,264 | 286 | 6.22 | 9,250 | 285 | 6.22 | ||||||||||||||||||
Other investments | 13,436 | 453 | 6.79 | 16,886 | 351 | 4.19 | ||||||||||||||||||
Total securities | 215,697 | 3,596 | 3.36 | 123,644 | 1,684 | 2.75 | ||||||||||||||||||
Total earning assets | 1,959,288 | 45,929 | 4.73 | 1,629,431 | 35,525 | 4.40 | ||||||||||||||||||
Cash and due from banks | 14,248 | 14,914 | ||||||||||||||||||||||
Bank premises and equipment, net | 44,791 | 41,058 | ||||||||||||||||||||||
Other assets | 223,198 | 149,283 | ||||||||||||||||||||||
Less: allowance for credit losses | (9,470 | ) | (5,093 | ) | ||||||||||||||||||||
Total assets | $ | 2,232,055 | $ | 1,829,593 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 216,305 | 542 | 0.51 | % | $ | 123,915 | $ | 141 | 0.23 | % | |||||||||||||
Money market | 355,429 | 1,282 | 0.73 | 344,685 | 934 | 0.55 | ||||||||||||||||||
Savings | 138,703 | 124 | 0.18 | 117,947 | 86 | 0.15 | ||||||||||||||||||
Time deposits | 547,256 | 5,620 | 2.07 | 378,235 | 1,918 | 1.02 | ||||||||||||||||||
Total interest-bearing deposits | 1,257,693 | 7,568 | 1.21 | 964,782 | 3,079 | 0.65 | ||||||||||||||||||
Short-term borrowings | 112,785 | 1,335 | 2.39 | 181,105 | 1,407 | 1.57 | ||||||||||||||||||
Long-term borrowings | 124,022 | 2,198 | 3.57 | 71,359 | 1,011 | 2.86 | ||||||||||||||||||
Total interest-bearing funds | 1,494,500 | 11,101 | 1.50 | 1,217,246 | 5,497 | 0.91 | ||||||||||||||||||
Noninterest-bearing deposits | 416,647 | 366,958 | ||||||||||||||||||||||
Other liabilities and accrued expenses | 20,336 | 7,106 | ||||||||||||||||||||||
Total liabilities | 1,931,483 | 1,591,310 | ||||||||||||||||||||||
Shareholders' equity | 300,572 | 238,283 | ||||||||||||||||||||||
Total liabilities & shareholders' equity | $ | 2,232,055 | $ | 1,829,593 | ||||||||||||||||||||
Net interest rate spread4 | $ | 34,828 | 3.23 | % | $ | 30,028 | 3.49 | % | ||||||||||||||||
Effect of noninterest-bearing funds | 0.36 | 0.23 | ||||||||||||||||||||||
Net interest margin on earning assets5 | 3.58 | % | 3.72 | % |
Three months ended March 31, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Average | Income / | Yield / | Average | Income / | Yield / | |||||||||||||||||||
(in thousands) | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||
Earning assets | ||||||||||||||||||||||||
Loans and leases: (1) | ||||||||||||||||||||||||
Commercial loans and leases | $ | 377,198 | 4,305 | 4.59 | % | $ | 329,393 | $ | 4,225 | 5.20 | % | |||||||||||||
Commercial real estate | 690,930 | 8,446 | 4.92 | 649,913 | 8,110 | 5.06 | ||||||||||||||||||
Construction and land | 131,489 | 1,463 | 4.47 | 126,719 | 1,822 | 5.83 | ||||||||||||||||||
Residential real estate | 509,034 | 5,244 | 4.14 | 480,694 | 5,571 | 4.70 | ||||||||||||||||||
Consumer | 45,664 | 520 | 4.58 | 53,687 | 647 | 4.89 | ||||||||||||||||||
Total loans and leases | 1,754,315 | 19,978 | 4.58 | 1,640,406 | 20,375 | 5.04 | ||||||||||||||||||
Securities available for sale: (2) | ||||||||||||||||||||||||
U.S Gov agencies | 70,831 | 492 | 2.79 | 111,417 | 762 | 2.77 | ||||||||||||||||||
Mortgage-backed | 151,399 | 978 | 2.60 | 89,583 | 727 | 3.29 | ||||||||||||||||||
Corporate debentures | 5,523 | 92 | 6.73 | 3,001 | 62 | 8.39 | ||||||||||||||||||
Total available for sale securities | 227,752 | 1,562 | 2.76 | 204,001 | 1,551 | 3.08 | ||||||||||||||||||
Securities held to maturity (2) | 7,750 | 112 | 5.83 | 9,250 | 143 | 6.27 | ||||||||||||||||||
FHLB Atlanta stock, at cost | 15,708 | 174 | 4.46 | 10,276 | 162 | 6.39 | ||||||||||||||||||
Loans held for sale | 18,424 | 166 | 3.62 | 16,552 | 191 | 4.68 | ||||||||||||||||||
Interest bearning deposits in banks | 84,860 | 234 | 1.11 | 67,459 | 362 | 2.18 | ||||||||||||||||||
Total earning assets | 2,108,809 | 22,226 | 4.24 | % | 1,947,944 | 22,784 | 4.74 | % | ||||||||||||||||
Cash and due from banks | 13,610 | 14,647 | ||||||||||||||||||||||
Bank premises and equipment, net | 42,689 | 45,016 | ||||||||||||||||||||||
Other assets | 215,459 | 219,480 | ||||||||||||||||||||||
Less: allowance for credit losses | (10,719 | ) | (9,965 | ) | ||||||||||||||||||||
Total assets | $ | 2,369,848 | $ | 2,217,122 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 183,305 | 157 | 0.34 | % | $ | 225,552 | $ | 293 | 0.53 | % | |||||||||||||
Money market | 368,779 | 706 | 0.77 | 356,057 | 613 | 0.70 | ||||||||||||||||||
Savings | 133,577 | 45 | 0.13 | 137,722 | 58 | 0.17 | ||||||||||||||||||
Time deposits | 523,980 | 2,302 | 1.77 | 528,017 | 2,600 | 2.00 | ||||||||||||||||||
Total interest-bearing deposits | 1,209,641 | 3,210 | 1.07 | 1,247,348 | 3,564 | 1.16 | ||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||
FHLB advances | 320,868 | 1,025 | 1.29 | 195,311 | 1,254 | 2.60 | ||||||||||||||||||
Fed funds and repos | 6,665 | 4 | 0.27 | 14,471 | 13 | 0.36 | ||||||||||||||||||
Subordinated debt | 28,258 | 461 | 6.56 | 28,077 | 479 | 6.92 | ||||||||||||||||||
Total borrowings | 355,791 | 1,491 | 1.69 | 237,859 | 1,746 | 2.98 | ||||||||||||||||||
Total interest-bearing funds | 1,565,432 | 4,701 | 1.21 | % | 1,485,207 | 5,310 | 1.45 | % | ||||||||||||||||
Noninterest-bearing deposits | 464,701 | 418,816 | ||||||||||||||||||||||
Other liabilities | 24,909 | 15,586 | ||||||||||||||||||||||
Total liabilities | 2,055,042 | 1,919,609 | ||||||||||||||||||||||
Stockholders' equity | 314,805 | 297,513 | ||||||||||||||||||||||
Total liabilities & equity | $ | 2,369,848 | $ | 2,217,122 | ||||||||||||||||||||
Net interest rate spread (3) | $ | 17,525 | 3.03 | % | $ | 17,474 | 3.29 | % | ||||||||||||||||
Effect of noninterest-bearing funds | 0.31 | 0.34 | ||||||||||||||||||||||
Net interest margin on earning assets (4) | 3.34 | % | 3.64 | % |
Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan |
(2) |
Available for sale securities are presented at fair value, held to maturity securities are presented at amortized cost. |
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
Net interest margin represents net interest income divided by average total interest-earning assets. |
Three months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Income | Yield | Average | Income | Yield | |||||||||||||||||||
(dollars in thousands) | Balance | / Expense | / Rate | Balance | / Expense | / Rate | ||||||||||||||||||
Earning assets | ||||||||||||||||||||||||
Loans and leases:1 | ||||||||||||||||||||||||
Commercial loans and leases | $ | 345,180 | $ | 4,478 | 5.20 | % | $ | 340,677 | $ | 4,295 | 5.06 | % | ||||||||||||
Commercial real estate | 664,079 | 8,407 | 5.08 | 642,032 | 7,685 | 4.80 | ||||||||||||||||||
Construction and land | 116,057 | 1,686 | 5.83 | 109,109 | 1,517 | 5.58 | ||||||||||||||||||
Residential real estate | 493,003 | 5,598 | 4.55 | 469,093 | 5,096 | 4.36 | ||||||||||||||||||
Consumer | 51,174 | 641 | 5.02 | 43,774 | 620 | 5.68 | ||||||||||||||||||
Total loans and leases | 1,669,493 | 20,810 | 5.00 | 1,604,685 | 19,213 | 4.80 | ||||||||||||||||||
Loans held for sale | 30,432 | 321 | 4.23 | 58,011 | 575 | 3.98 | ||||||||||||||||||
Other earning assets2 | 62,629 | 274 | 1.76 | 70,739 | 261 | 1.48 | ||||||||||||||||||
Securities:3 | ||||||||||||||||||||||||
U.S. Treasury | - | - | 1,494 | 3 | 0.83 | |||||||||||||||||||
U.S Gov agencies | 97,128 | 669 | 2.76 | 55,194 | 281 | 2.04 | ||||||||||||||||||
Mortgage-backed | 87,954 | 699 | 3.19 | 49,166 | 386 | 3.15 | ||||||||||||||||||
Corporate debentures | 9,277 | 143 | 6.18 | 9,250 | 142 | 6.18 | ||||||||||||||||||
Other investments | 13,595 | 229 | 6.75 | 19,702 | 304 | 6.18 | ||||||||||||||||||
Total securities | 207,954 | 1,740 | 3.36 | 134,806 | 1,116 | 3.32 | ||||||||||||||||||
Total earning assets | 1,970,508 | 23,145 | 4.71 | 1,868,241 | 21,165 | 4.54 | ||||||||||||||||||
Cash and due from banks | 13,853 | 17,703 | ||||||||||||||||||||||
Bank premises and equipment, net | 44,567 | 51,419 | ||||||||||||||||||||||
Other assets | 226,852 | 200,966 | ||||||||||||||||||||||
Less: allowance for credit losses | (8,980 | ) | (6,179 | ) | ||||||||||||||||||||
Total assets | $ | 2,246,800 | $ | 2,132,150 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 207,159 | 248 | 0.48 | % | $ | 146,549 | $ | 79 | 0.22 | % | |||||||||||||
Money market | 354,808 | 670 | 0.76 | 386,228 | 579 | 0.60 | ||||||||||||||||||
Savings | 139,673 | 66 | 0.19 | 147,525 | 53 | 0.14 | ||||||||||||||||||
Time deposits | 566,284 | 3,020 | 2.14 | 423,841 | 1,018 | 0.96 | ||||||||||||||||||
Total interest-bearing deposits | 1,267,924 | 4,004 | 1.27 | 1,104,143 | 1,729 | 0.63 | ||||||||||||||||||
Short-term borrowings | 125,292 | 754 | 2.41 | 167,245 | 717 | 1.72 | ||||||||||||||||||
Long-term borrowings | 110,474 | 1,033 | 3.75 | 121,299 | 839 | 2.77 | ||||||||||||||||||
Total interest-bearing funds | 1,503,690 | 5,791 | 1.54 | 1,392,687 | 3,285 | 0.95 | ||||||||||||||||||
Noninterest-bearing deposits | 414,502 | 443,222 | ||||||||||||||||||||||
Other liabilities and accrued expenses | 25,009 | 7,030 | ||||||||||||||||||||||
Total liabilities | 1,943,201 | 1,842,939 | ||||||||||||||||||||||
Shareholders' equity | 303,599 | 289,211 | ||||||||||||||||||||||
Total liabilities & shareholders' equity | $ | 2,246,800 | $ | 2,132,150 | ||||||||||||||||||||
Net interest rate spread4 | $ | 17,354 | 3.17 | % | $ | 17,880 | 3.59 | % | ||||||||||||||||
Effect of noninterest-bearing funds | 0.37 | 0.24 | ||||||||||||||||||||||
Net interest margin on earning assets5 | 3.53 | % | 3.83 | % |
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). as well as any impact of number of days and mix. The total of the changes set forth in the rate and volume columns are presented in the total column.
Six months ended June 30, | Three months ended June 30, | |||||||||||||||||||||||
2019 vs. 2018 | 2019 vs. 2018 | |||||||||||||||||||||||
Due to variances in | Due to variances in | |||||||||||||||||||||||
(in thousands) | Total | Rates | Volumes1 | Total | Rates | Volumes1 | ||||||||||||||||||
Interest earned on: | ||||||||||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||
Commercial loans and leases | $ | 1,609 | $ | 408 | $ | 1,201 | $ | 183 | $ | 122 | $ | 61 | ||||||||||||
Commercial real estate | 3,069 | 964 | 2,105 | 722 | 445 | 277 | ||||||||||||||||||
Construction and land | 936 | 256 | 680 | 169 | 67 | 102 | ||||||||||||||||||
Residential real estate | 2,760 | 660 | 2,100 | 502 | 227 | 275 | ||||||||||||||||||
Consumer | 428 | (88 | ) | 516 | 21 | (72 | ) | 93 | ||||||||||||||||
Loans held for sale | (471 | ) | 122 | (593 | ) | (254 | ) | 36 | (290 | ) | ||||||||||||||
Securities | 1,912 | 375 | 1,537 | 624 | 12 | 612 | ||||||||||||||||||
Other earning assets | 161 | 175 | (14 | ) | 13 | 49 | (36 | ) | ||||||||||||||||
Total interest income | 10,404 | 2,872 | 7,532 | 1,980 | 886 | 1,094 | ||||||||||||||||||
Interest paid on: | ||||||||||||||||||||||||
Savings deposits | 38 | 18 | 20 | 13 | 18 | (5 | ) | |||||||||||||||||
Interest bearing checking | 401 | 169 | 232 | 169 | 95 | 74 | ||||||||||||||||||
Money market accounts | 348 | 303 | 45 | 91 | 151 | (60 | ) | |||||||||||||||||
Time deposits | 3,702 | 1,971 | 1,731 | 2,002 | 1,246 | 756 | ||||||||||||||||||
Short-term borrowings | (72 | ) | 734 | (806 | ) | 37 | 289 | (252 | ) | |||||||||||||||
Long-term borrowings | 1,187 | 253 | 934 | 194 | 297 | (103 | ) | |||||||||||||||||
Total interest expense | 5,604 | 3,448 | 2,156 | 2,507 | 2,097 | 410 | ||||||||||||||||||
Net interest earned | $ | 4,800 | $ | (576 | ) | $ | 5,376 | $ | (527 | ) | $ | (1,211 | ) | $ | 684 |
Three months ended March 31, | ||||||||||||
2020 vs. 2019 | ||||||||||||
Due to variances in | ||||||||||||
(in thousands) | Total | Rates | Volumes | |||||||||
Interest income on earning assets: | ||||||||||||
Loans and leases: | ||||||||||||
Commercial loans and leases | $ | 80 | $ | (501 | ) | $ | 581 | |||||
Commercial real estate | 336 | (234 | ) | 569 | ||||||||
Construction and land | (359 | ) | (427 | ) | 68 | |||||||
Residential real estate | (327 | ) | (666 | ) | 338 | |||||||
Consumer | (127 | ) | (41 | ) | (86 | ) | ||||||
Total interest on loans | (397 | ) | (1,868 | ) | 1,471 | |||||||
Securities available for sale: | ||||||||||||
U.S Gov agencies | (270 | ) | 5 | (275 | ) | |||||||
Mortgage-backed | 251 | (155 | ) | 405 | ||||||||
Corporate debentures | 30 | (12 | ) | 43 | ||||||||
Total interest on available for sale securities | 11 | (162 | ) | 173 | ||||||||
Securities held to maturity | (31 | ) | (10 | ) | (21 | ) | ||||||
FHLB Atlanta stock, at cost | 12 | (49 | ) | 62 | ||||||||
Loans held for sale | (25 | ) | (44 | ) | 18 | |||||||
Interest bearning deposits in banks | (128 | ) | (179 | ) | 51 | |||||||
Total interest income | (558 | ) | (2,312 | ) | 1,754 | |||||||
Interest expense on interest-bearing liabilities: | ||||||||||||
Deposits: | ||||||||||||
Interest-bearing demand accounts | (136 | ) | (102 | ) | (34 | ) | ||||||
Money market | 93 | 64 | 29 | |||||||||
Savings | (14 | ) | (13 | ) | (1 | ) | ||||||
Time deposits | (297 | ) | (301 | ) | 4 | |||||||
Total interest on deposits | (354 | ) | (353 | ) | (1 | ) | ||||||
Borrowings: | ||||||||||||
FHLB advances | (228 | ) | (640 | ) | 412 | |||||||
Fed funds and repos | (8 | ) | (3 | ) | (5 | ) | ||||||
Subordinated debt | (18 | ) | (25 | ) | 7 | |||||||
Total interest on borrowings | (255 | ) | (668 | ) | 414 | |||||||
Total interest expense | (609 | ) | (1,021 | ) | 412 | |||||||
Net interest income | $ | 51 | $ | (1,291 | ) | $ | 1,342 |
(1) Change attributed to mix (rate and volume) are included in volume variance.
Comparison of Results of Operations
A comparison between the six months ended June 30, 2019 and June 30, 2018 is presented below.
General
Because of the timing of the First Mariner merger closing on March 1, 2018, the first half operating results of 2018 included only four months’ worth of combined revenues and operating expenses. Additionally the first six months of 2018 results included $15.7 million in expenses relating to the closing of the First Mariner merger while 2019 did not have any merger related expenses.
Net income increased $14.3 million to a net income of $6.3 million for the six months ended June 30, 2019 compared to net loss of $8.0 million for the six months ended June 30, 2018. The net loss of $8.0 million for the first half of 2018 was driven by merger related expenses of $15.7 million, while there were no such merger related expenses during the first six months of 2019. However, the first six month period of 2019 included additional expenses related to our branch optimization initiative under which a total of $3.6 million in expenses were recorded in increased occupancy expense for the closing of branch locations. Earnings per common share for the first six months of 2019 were $0.33 compared to a loss per common share $0.50 for the same period of 2018.
Interest Income
Interest income increased $10.4 million, or 29.3%, to $45.9 million for the six months ended June 30, 2019 compared to $35.5 million for the same period in 2018. Interest income and fees on portfolio loans increased $8.8 million for the first half of 2019 compared to the same period in 2018, as average portfolio loans increased by $266.4 million, while the yield on the portfolio loans increased by 32 basis points when comparing the two periods. The increase in loan yields was market driven and was experienced in nearly every category of loans. Other factors that affected the increase of interest income were increases in interest income from investment securities of $1.9 million on an average balances increase of $92.1 million and an increase in the yields on these securities of 61 basis points when comparing the two periods.
Interest Expense
Interest expense increased $5.6 million to $11.1 million for the six months ended June 30, 2019, compared to $5.5 million for the same period in 2018. Interest expense on deposits increased by $4.5 million as a result of an average balance increase of $292.9 million in our interest-bearing deposits for the first half of 2019 compared to the first half of 2018 as well as an increase in the average rate paid on interest-bearing deposits, which increased 56 basis points. Our interest expense on borrowings increased $1.1 million for the first half of 2019 compared to the first half of 2018. While the average balance of borrowings decreased $15.9 million when comparing the first half of 2019 to the same period in 2018, the average rate paid on such borrowings increased 86 basis points during the same period, due to both the higher market rates as well as the issuance of the subordinated debt in December 2018.
Net Interest Income
Net interest income is our largest source of operating revenue. Net interest income is affected by various factors including changes in interest rates and the composition of interest-earning assets and interest-bearing liabilities and maturities. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. As a result of the changes to interest income and interest expense described above, net interest income increased $4.8 million, or 16.0%, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Provision for Credit Losses
We establish a provision for credit losses, which is a charge to earnings, in order to maintain the allowance for credit losses at a level we consider adequate to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for credit losses, management considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for credit losses is assessed on a quarterly basis and provisions are made for credit losses as required in order to maintain the allowance.
Based on management’s evaluation of the above factors, we hadrecorded a provision for credit losses of $2.8$3.4 million for the six months ended June 30, 2019first quarter of 2020, compared to $2.5a $1.7 million provision for the same period in 2018. The 2019 provision was primarily driven by higher loan growth in the secondfirst quarter of 2019, along with charging off loansan increase of $1.7 million. The first quarter 2020 provision, net of net charge-offs of $462 thousand, resulted in 2019 that previously had specific reserves held against them. The 2019 charge offs increased our cumulative historic loss experience, which increased the levels of allowance needed during 2019.
Management analyzesan increase in the allowance for credit losses as describedof $3.0 million. The first quarter 2019 provision, net of net charge-offs of $2.8 million, resulted in a decrease in the section entitled “Allowance for Credit Losses.”allowance of $1.1 million. The provision that is recorded is sufficient,increase in management’s judgment, to bring theour allowance for credit losses to a level that reflectsis more fully discussed below under the losses inherent in our loan portfolio relative to loan mix, economic conditionssections entitled “Nonperforming and historical loss experience. Management believes, to the bestProblem Assets” and “Allowance for Credit Losses” of its knowledge, that all known losses asthis Management’s Discussion and Analysis of the balance sheet dates have been recorded. However, although management uses the best information available to make determinations with respect to the provisions for credit losses, additional provisions for credit losses may be required to be established in the future should economic or other conditions change substantially. In addition, as an integral partFinancial Condition and Results of their examination process, the Commissioner and the FDIC will periodically review the allowance for credit losses. The Commissioner and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.Operations.
Noninterest Income
Total
The following table presents the major categories of noninterest income remained relatively unchanged, totaling $10.4for the three months ended March 31, 2020 and 2019:
Three months ended | ||||||||||||||||
March 31, | ||||||||||||||||
(in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
Service charges on deposit accounts | $ | 642 | $ | 627 | $ | 15 | 2.4 | % | ||||||||
Realized and unrealized gains on mortgage banking activity | 1,036 | 1,485 | (449 | ) | (30.2 | ) | ||||||||||
Income from bank owned life insurance | 445 | 447 | (2 | ) | (0.4 | ) | ||||||||||
Loan related fees and service charges | 581 | 1,043 | (462 | ) | (44.3 | ) | ||||||||||
Other operating income | 662 | 933 | (271 | ) | (29.0 | ) | ||||||||||
Total noninterest income | $ | 3,366 | $ | 4,535 | $ | (1,169 | ) | (25.8 | )% |
Noninterest income was $3.4 million for the sixthree months ended June 30, 2019March 31, 2020, a decrease of $1.2 million, or 25.8%, compared to $10.3$4.5 million for the same period in 2018. The change in noninterest2019. Noninterest income was driven by reductions inattributable to our mortgage banking revenues, down $2.1activities was $1.4 million in the first halfquarter of 20192020, compared to $1.9 million in the same period 2018. This decline wasfirst quarter of 2019. We completed the processing of the remaining residential first lien mortgage pipeline during the quarter and the exit of our mortgage banking activities has been substantially completed as of March 31, 2020. As a result, of the intended de-emphasis ofnoninterest income from mortgage banking announced atactivities is down $520 thousand from the timefirst quarter of the acquisition2019. Noninterest income from our mortgage banking activities consisted of First Marinerrealized and unrealized gains on mortgage banking activity as well as the discontinuationa portion of the national leads-based Consumer Directline item loan related fees and service charges. Noninterest income from our ongoing banking activities, excluding mortgage unit in April 2018. Partially offsetting this decline,banking, was a gain on the sale of securities of $658$1.9 million, down $649 thousand, which was part of an overall interest rate positioning strategy. Additionally, 2019 benefittedor 25.1%, from the receiptfirst quarter of a $300 thousand prepayment penalty on one large loan that paid off early which occurred in the first quarter. 2019.
Service charges on deposit accounts, for the first half of 2019, which consistconsisted of account activity fees such as nonsufficient funds (”NSF”) and overdraft fees andin addition to other traditional banking fees, increased $395$15 thousand in the first quarter of 2020. While our total service charges were up slightly, NSF and otheroverdraft fees were down $80 thousand from the first quarter of 2019, with a portion of this reduction representing accommodations to COVID-19 impacted customers.
Loan related fees and service charges, after deducting the portion attributable to our mortgage banking activities in both quarters, was $192 thousand in the first quarter of 2020, a reduction of $391 thousand from the first quarter of 2019. The first quarter of 2019 included an early loan payoff fee of $308 thousand.
Other operating income, which consistsconsisted mainly of non-depository account fees such as wire, merchant card and ATM services, increased $277decreased $271 thousand when comparingin the six month periods.first quarter of 2020 compared to the first quarter of 2019. Fee income from merchant card activity declined $110 thousand quarter over quarter, with a portion of the decline in transaction volumes attributable to the COVID-19 related drop in economic activity. Additionally, the first quarter of 2019 included a one-time refund of $100 thousand.
Noninterest Expenses
The following table presents the major categories of noninterest expense for the three months ended March 31, 2020 and 2019:
Three months ended | ||||||||||||||||
March 31, | ||||||||||||||||
(in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
Compensation and benefits | $ | 8,441 | $ | 8,034 | $ | 407 | 5.1 | % | ||||||||
Occupancy and equipment | 1,033 | 1,571 | (538 | ) | (34.2 | ) | ||||||||||
Amortization of core deposit intangible | 699 | 784 | (85 | ) | (10.8 | ) | ||||||||||
Marketing and business development | 450 | 457 | (7 | ) | (1.5 | ) | ||||||||||
Professional fees | 726 | 785 | (59 | ) | (7.5 | ) | ||||||||||
Data processing fees | 927 | 1,378 | (451 | ) | (32.7 | ) | ||||||||||
FDIC assessment | 212 | 287 | (75 | ) | (26.1 | ) | ||||||||||
Other real estate owned | 78 | 27 | 51 | 188.9 | ||||||||||||
Loan production expense | 468 | 520 | (52 | ) | (10.0 | ) | ||||||||||
Other operating expense | 1,525 | 1,014 | 511 | 50.4 | ||||||||||||
Total noninterest expense | $ | 14,559 | $ | 14,857 | $ | (298 | ) | (2.0 | )% |
Noninterest Expenses
Noninterest expenses decreased $14.0 million to $34.3 million for the six months ended June 30, 2019 from $48.3 million for the six months ended June 30, 2018. The greatest impact on the noninterest expense decrease was $15.7 million in merger related expenses associated with the First Mariner merger in the first half of 2018 with no merger related expenses reflected in the same period of 2019. Excluding the merger related expenses for 2018, noninterest expenses would have had an increase of $1.7 million when comparing the 2019 versus 2018 six month operating periods. However the second quarter of 2019 noninterest expense included approximately $3.6 million in occupancy expenses related to the costs of our reduction in branch locations as a part of our branch optimization initiatives and $651 thousand of other operating expense related to the early prepayment of several higher rate FHLB advances. Compensation and benefits decreased $1.2 million, primary as a result of efficiencies recognized from joint merger employee expenses. Occupancy and equipment expenses increased $2.6 million period over period, however excluding the $3.6 million in branch expenses noted above, occupancy expenses decreased by $1were $14.6 million for the first halfquarter of 20192020, a decrease of $298 thousand, or 2.0%, compared to $14.9 million for the first quarter of 2019. Noninterest expenses attributable to our mortgage banking activities were $1.4 million in the first quarter of 2020, down $716 thousand from $2.1 million in the first quarter of 2019. Noninterest expenses from our ongoing banking activities, excluding mortgage banking, were $13.1 million, up $418 thousand, or 3.3%, from the first quarter of 2019. Our first quarter 2020 noninterest expenses included $788 thousand of expenses attributable to the departure of our former CFO.
Compensation and benefits expense are the largest component of our noninterest expenses, and increased by $407 thousand in the first quarter of 2020, compared to the same period in 2018 due2019. Compensation and benefits expense attributable to a reduction in office and branch locations during 2018. In aggregate, all other noninterest expenses categories have remained relatively unchanged when comparing the six month periods.
Income Tax Expense
For the first half of 2019, we had income tax expense of $1.7 million compared to a net tax benefit of $2.5 million at June 30, 2018 because of the pretax loss resulting from the First Mariner merger expenses. The first six months of 2019 benefited from a reduction of $300our mortgage banking activities were $928 thousand in tax expense during the first quarter of 2020, compared to $1.6 million in the first quarter of 2019. Compensation and benefits from our ongoing banking activities, excluding mortgage banking, were $7.5 million in the first quarter of 2020 compared to $6.4 million in the first quarter of 2019, an increase of $1.1 million. Included in this increase was $698 thousand of expenses attributable to the departure of our former CFO. The compensation cost savings resulting from recent IRS regulations concerningour branch optimization initiative in 2019 were offset by increased compensation costs as we continued to build our commercial banking team.
Occupancy and equipment expense decreased $538 thousand in the tax exemptionfirst quarter of BOLI acquired in an acquisition. Prior2020 compared to the first quarter of 2019. The projected cost savings from our 2019 branch optimization initiative have been realized, as we closed three branch locations in 2019 and consolidated two other existing branch locations into a new smaller branch location during the income earned sincequarter.
Data processing expenses decreased $451 thousand as we realize the merger date, March 1, 2018,benefits from acquired BOLI was not treatedour renegotiated core processing contract. Other operating expenses increased by $511 thousand in the first quarter of 2020. Other operating expenses consist mainly of a variety of general expenses such as tax exempt, however withtelephone and data lines, supplies and postage, courier services, general insurance, director fees, and miscellaneous losses. We reevaluated certain expense accruals during the new IRS regulation,first quarter of 2020 and recorded $403 thousand of additional expenses within the income onother operating expense category.
Income Tax Expense
For the acquired BOLI is now exempt fromfirst quarter of 2020, we recorded an income tax benefit of $456 thousand compared to income tax expense of $1.2 million in the first quarter of 2019. The first quarter of 2020 was favorably impacted by certain provisions of the CARES Act that was signed into law on March 27, 2020. The CARES Act permits corporate taxpayers to recover prior period taxes paid by carrying back net operating losses incurred in tax years ending after December 31, 2017, to tax years ending up to five years earlier. As a result, we will be able to carryback the 2018 tax net operating loss of $9.1 million to tax years 2013-2015. The $1.2 million one-time tax benefit represents the difference between the current federal statutory tax rate of 21% and the $30034% statutory federal tax rate applicable during the carryback years. Our effective tax rate for the first quarter of 2020 was (15.8)%; excluding the impact of the $1.2 million one-time benefit, the effective tax rate for the first quarter of 2020 would have been 25.0%.
Income tax expense for the first quarter of 2019 was favorably impacted by a 2019 U.S. Treasury Department change in tax regulations that provided for retroactive application to the taxability of income from BOLI contracts that were acquired in certain tax-free merger transactions. As a result of this change, we recognized a $232 thousand cumulative adjustment reduced ournet reduction in income tax expense in the first quarter of 2019. The2019 pertaining to BOLI income that was earned, and initially treated as subject to income tax, in 2018. Our effective tax rate is influenced by the sources of non-taxable income, such as the income from our BOLI program, and also by certain non-deductible expense items. Certain merger and acquisition costs are deemed not deductible for income tax purposes, which impacts the effective tax rate. As a result of these effects, our effective tax rate decreased to 21.3% for the first six months of 2019 from 24.2% for the first half of 2018.
A comparison between the three months ended June 30, 2019 and June 30, 2018 is presented below.
General
Net income increased $4.4 million to a net income of $2.1 million for the three months ended June 30, 2019 compared to net loss of $2.3 million for the three months ended June 30, 2018. As stated above, the driver of the 2019 increase compared to 2018 was the $5.7 million in merger related expenses recorded in the second quarter of 2018.
Interest Income
Interest income increased $2.0 million to $23.1 million for the three months ended June 30, 2019 compared to $21.2 million for the same period in 2018. Interest income and fees on portfolio loans increased $1.6 million for the second quarter compared to the same period in 2018, as average portfolio loans increased $64.8 million. The remaining quarter over quarter increase in interest income resulted from increases in interest on our securities portfolio of $624 thousand primarily as a result of volume and a 4 basis point increase in yields.
Interest Expense
Interest expense increased $2.5 million to $5.8 million for the three months ended June 30, 2019, compared to $3.3 million for the same period in 2018. Interest expense on deposits increased $2.3 million as a result of an increase in the average balance of $163.8 million for the second quarter of 2019 compared to the same period in 2018. In addition, our interest expense on borrowings increased $231 thousand for the second quarter of 2019 compared to the second quarter of 2018 primarily as a result of 167 basis point increase in interest rates given current market conditions and the afore mentioned subordinated debt issuance.
Net Interest Income
As a result of the changes in our interest income and interest expense as discussed above, our net interest income decreased $526 thousand during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Provision for Credit Losses
Based on management’s evaluation of all of the relevant loan loss methodology factors, we had a provision for credit losses of $1.1 million for the three months ended June 30, 2019 compared to $1.4 million for the same period in 2018, a decrease of $315 thousand. This decrease was primarily a result of charging off loans in the second quarter of 2018 that previously had specific reserves applied against them, and the charge offs increased our cumulative historic loss experience, which increased the necessary levels of the allowance.
Noninterest Income
Noninterest income was $5.8 million for the three months ended June 30, 2019 compared to $5.6 million for the three months ended June 30, 2018, a $224 thousand or 4.0% increase. Noninterest income from realized and unrealized gains on mortgage banking revenues increased approximately $685 thousand. Although 2019 mortgage origination levels were lower for the first half of 2019 compared to 2018, the 2019 monthly origination levels were relatively stable, while immediately after the merger, combined origination levels decreased in 2018, which negatively impacted fair value revenues for the first six months of 2018. With the lower levels of mortgage originations for 2019 compared to 2018, we experienced a decline in loan related fees of nearly $1.1 million for the first half of 2019 compared to the same period in 2018. Also impacting noninterest income for the second quarter of 2019 was a gain on21.6%; excluding the saleimpact of securities of $658 thousand which was part of an overall interestthis item, the effective tax rate positioning.for the first quarter 2019 would have been 25.9%.
Noninterest Expenses
Noninterest expenses decreased $5.7 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The greatest impact on the noninterest expense decrease was $5.7 million in merger related expenses associated with the First Mariner acquisition in the second quarter of 2018 with no merger related expenses reflected in the same period of 2019. Excluding the 2018 merger expenses, the noninterest expenses for 2019 were relatively unchanged from 2018. However when comparing the three month periods for 2019 to 2018, compensation expenses decreased $1.6 million, marketing related expenses decreased by $620 thousand and loan related expenses decreased $609 thousand. These expense reductions were offset by a $2.6 million increase in occupancy expense, which includes $3.6 million recorded in the second quarter of 2019 toward the reduction in branch locations. Excluding this $3.6 million, occupancy expenses would have decreased by $1.0 million for the second quarter of 2019 compared to the same period in 2018. Other operating expenses reflects $651 thousand of expense related to the early prepayment of a few higher rate FHLB advances.
Income Tax Expense
Income tax expense for the three months ended June 30, 2019 was $543 thousand. Because of the pre-tax loss in the second quarter 2018 we had an income tax benefit of $791 thousand, resulting in a change in tax expense of $1.3 million when comparing the two quarters.
Nonperforming and Problem Assets
Management performsWe perform reviews of all delinquent loans and our loan officers contact customers to attempt to resolve potential credit issues in a timely manner. When in the best interests of the Bank and the customer, we will do a troubled debt restructuring with respect to a particular loan. When not possible, we are aggressively moving loans through the legal and foreclosure process within applicable legal constraints.
Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more past due and the value of the collateral securing the loan, if any, is less than the outstanding balance of the loan. Loans are also placed on non-accrual status if management haswe have serious doubt about further collectability of principal or interest on the loan, even though the loan is currently performing. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and furthersubsequent income, if any, is recognized only to the extent received. The loan may be returned to accrual status if the loan is brought current, has performed in accordance with the contractual terms for a reasonable period of time and ultimate collectability of the total contractual principal and interest is no longer in doubt.
Under GAAP we are required to account for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, the modification or restructuring of a debt constitutes a TDR if we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession, such as a reduction in the effective interest rate, to the borrower that we would not otherwise consider. However, all debt restructurings or loan modifications for a borrower do not necessarily constitute troubled debt restructurings. We believe loan modifications will potentially result in a lower level of loan losses and loan collection costs than if we proceeded immediately through the foreclosure process with these borrowers.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
The Company provided COVID-19 related loan modifications to both commercial and retail customers, on a case by case basis, in the form of payment deferrals for periods up to six months. As of March 31, 2020, a total of $101 million of loans (or 5.7% of the loan portfolio) had been modified through payment deferrals.
The table below sets forth the amounts and categories of our nonperforming assets, which consist of non-accrual loans, troubled debt restructurings and OREO (which includes real estate acquired through, or in lieu of, foreclosure), at the dates indicated.
(in thousands) | June 30, 2019 | December 31, 2018 | ||||||
Non-accrual loans: | ||||||||
Real estate loans: | ||||||||
Construction and land | $ | 808 | $ | 1,323 | ||||
Residential - first lien | 11,555 | 12,278 | ||||||
Residential - junior lien | 914 | 1,137 | ||||||
Commercial | 2,833 | 6,286 | ||||||
Commercial and leases | 1,808 | 2,417 | ||||||
Consumer | 287 | 174 | ||||||
Total non-accrual loans | 18,205 | 23,615 | ||||||
Accruing troubled debt restructured loans: | ||||||||
Real estate loans: | ||||||||
Construction and land | 125 | 125 | ||||||
Residential - first lien | 975 | 982 | ||||||
Total accruing troubled debt restructured loans | 1,100 | 1,107 | ||||||
Total non-performing loans | 19,305 | 24,722 | ||||||
Other real estate owned: | ||||||||
Land | 1,707 | 1,772 | ||||||
Residential - first lien | 1,437 | 1,062 | ||||||
Commercial | 1,558 | 1,558 | ||||||
Total other real estate owned | 4,702 | 4,392 | ||||||
Total non-performing assets | $ | 24,007 | $ | 29,114 | ||||
Ratios: | ||||||||
Non-performing loans to total gross loans | 1.13 | % | 1.50 | |||||
Non-performing assets to total assets | 1.05 | % | 1.28 | |||||
Loans past due 90 days still accruing: | ||||||||
Real estate loans: | ||||||||
Construction and land | $ | - | $ | 351 | ||||
Residential - first lien | 1,440 | 570 | ||||||
Residential - junior lien | 84 | - | ||||||
Commercial | 348 | - | ||||||
$ | 1,872 | $ | 921 |
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(in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Non-accrual loans: | ||||||||
Real estate loans: | ||||||||
Construction and land | $ | 478 | $ | 481 | ||||
Residential - first lien | 11,505 | 12,162 | ||||||
Residential - junior lien | 832 | 786 | ||||||
Commercial owner occupied | 477 | 566 | ||||||
Commercial non-owner occupied | 1,777 | 1,725 | ||||||
Commercial and leases | 700 | 1,960 | ||||||
Consumer | 102 | 127 | ||||||
Total non-accrual loans | 15,871 | 17,807 | ||||||
Accruing troubled debt restructured loans: | ||||||||
Real estate loans: | ||||||||
Residential - first lien | 965 | 968 | ||||||
Commercial and leases | 367 | 367 | ||||||
Total accruing troubled debt restructured loans | 1,332 | 1,335 | ||||||
Total non-performing loans | 17,203 | 19,142 | ||||||
Other real estate owned: | ||||||||
Land | 1,327 | 1,559 | ||||||
Residential - first lien | 995 | 1,344 | ||||||
Commercial non-owner occupied | - | 195 | ||||||
Total other real estate owned | 2,322 | 3,098 | ||||||
Total non-performing assets | $ | 19,525 | $ | 22,240 | ||||
Ratios: | ||||||||
Non-performing loans to total gross loans | 0.98 | % | 1.10 | % | ||||
Non-performing assets to total assets | 0.78 | % | 0.94 | % | ||||
Loans past due 90 days still accruing: | ||||||||
Real estate loans: | ||||||||
Residential - first lien | $ | 973 | $ | 47 | ||||
Residential - junior lien | 60 | - | ||||||
Commercial owner occupied | 338 | - | ||||||
Commercial non-owner occupied | 194 | - | ||||||
Consumer | 1 | - | ||||||
Total loans past due 90 days and still accruing | $ | 1,566 | $ | 47 |
Nonperforming Loans
Included in non-accrual loans at June 30, 2019March 31, 2020 are four troubled debt restructured loans (“TDRs”) with a new carrying balance totaling $1.6 million$807 thousand that were not performing in accordance with their modified terms, and the accrual of interest has ceased. Further,In addition, there were threefour TDRs totaling $1.1$1.3 million that were performing subject toin accordance with their modified terms at June 30, 2019.March 31, 2020. There were no additional troubled loans restructured during the first halfthree months of 2019.2020.
Under GAAP, we are required to account for certainNonperforming loans were $17.2 million, or 0.98% of total loans and leases, at March 31, 2020 and were down $1.9 million from $19.1 million, or 1.10% of total loans and leases, at December 31, 2019. The decrease was the result of $1.3 million in payoffs and $583 thousand of charge-offs in the first quarter. $564 thousand of the first quarter 2020 nonperforming loan modifications or restructurings as “troubled debt restructurings.” In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank, for economic or legal reasons relatedcharge-offs were attributable to the borrower’s financial difficulties, grantsfull charge-off of loans to one borrower where we had recorded a concession, such as a reduction inspecific allocation of the effective interest rate, to the borrower that we would not otherwise consider. A debt restructuring or loan modificationallowance for a borrower, however, does not necessarily constitute a troubled debt restructuring.credit losses of $500 thousand at December 31, 2019.
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Nonperforming assets amounted to $24.0 million, or 1.05% of total assets, at June 30, 2019 compared to $29.1 million, or 1.28% of total assets, at December 31, 2018. Total nonperforming assets decreased $5.1 million during the first half of 2019 primarily as a result of charging-off of several of the loans included in nonperforming assets at December 31, 2018.
The composition of our nonperforming assetsloans at June 30, 2019March 31, 2020 is further described below:
Non-Accrual Loans:
· | Two construction and land |
· | 45 residential first lien loans, |
· | 21 residential junior lien loans, one with a fair value of $23 thousand in the process of |
· | Two commercial |
· |
· |
· |
Accruing Troubled Debt Restructured Loans:
· |
· | Two |
Nonperforming Assets
Our nonperforming assets were $19.5 million, or 0.78% of total assets, at March 31, 2020 compared to $22.2 million, or 0.94% of total assets, at December 31, 2019. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming assets decreased $2.7 million during the first quarter of 2020, with $1.9 million of the decrease attributable to nonperforming loans and $776 thousand attributable to a decrease in other real estate owned.
Other Real Estate Owned:Owned
Real estate we acquire as a result of foreclosure is classified as Other Real Estate Owned (“OREO”). When a property is acquired as a result of foreclosure, it is recorded at fair value less the anticipated cost to sell at the date of foreclosure. If there is a subsequent change in the value of OREO, we record a valuation allowance to adjust the carrying value of the real estate to its current fair value less estimated disposal costs. Costs relating to holding such real estate are expensed in the current period while costs relating to improving such real estate are capitalized up to the property’s net realizable value until a saleable condition is reached. Costs in excess of the property’s net realizable value would be expensed in the current period.
Our OREO totaled $2.3 million at March 31, 2020, a $776 thousand decrease from $3.1 million at December 31, 2019. Included in noninterest expenses during the first quarter of 2020 were $21 thousand attributable to net increases in valuation allowances as the current appraised value of OREO properties, less estimated cost to sell, was insufficient to cover the recorded OREO amount. There was no valuation expense for the same period of 2019. In addition, we sold one parcel of land, one commercial real estate property, and one residential real estate property with a combined net carrying balance of $755 thousand; these sales resulted in a $28 thousand net loss on the disposition of OREO during the quarter. There were no additions to OREO during the first quarter of 2020.
OREO at March 31, 2020 consisted of:
· | Several parcels of unimproved land. |
· |
There was one new property transferred into OREO with a carrying value of $375 thousand in the first half of 2019. Costs relating to OREO recorded in noninterest expenses were $66 thousand and $63 thousand for the six months ended June 30, 2019 and 2018, respectively and $39 thousand and $41 thousand for the three months ended June 30, 2019 and 2018, respectively. There was a $65 thousand valuation allowance recorded in the second quarter of 2019 as the current appraised value, less estimated cost to sell, was not sufficient to cover the recorded OREO amount, there was no valuation allowance recorded in the first half of 2018. We did not sell any OREO properties in 2019, and we sold one property in the first half of 2018 with a carrying amount of $593 thousand, recording a net loss on the sale of $45 thousand.
Allowance for Credit Losses
Our allowance for credit losses (the “allowance”) at March 31, 2020 was $13.4 million, up $3.0 million from $10.4 million at December 31, 2019. Net charge-offs for the quarter were $462 thousand while a $3.4 million provision for credit losses was recorded during the quarter. The allowance was 0.76% of total loans and leases at March 31, 2020, an increase of 16 bp from 0.60% of total loans and leases at December 31, 2019.The allowance was also 77.80% of nonperforming loans at March 31, 2020, an increase of 43% from 54.33% of nonperforming loans at December 31, 2019. The $3.0 million increase in our allowance was primarily the result of management’s response to the COVID-19 pandemic and changes in the qualitative factors discussed below.
COVID-19 and Our Evaluation of the Allowance
The March 31, 2020 allowance reflects management’s initial assessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Our approach to COVID-19 and the evaluation of the allowance considered the following: (1) any change in historical loss rates resulting from COVID-19; (2) any risk rating downgrades related to COVID-19; and (3) any changes to collateral valuations or cash flow assumptions for impaired loans. Based on our review, we determined that there were no initial impacts to any of these factors at March 31, 2020.
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We then reviewed our qualitative factors and identified three factors that warranted further evaluation:
· | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; |
· | The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and |
· | Changes in the value of underlying collateral for collateral-dependent loans. |
Our evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, considered the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Maryland between the March 5 disclosure of the first confirmed cases of COVID-19 in the state and the March 23 executive order closing all non-essential businesses in the state. In addition, we considered the dramatic rise in the unemployment rate in our market area. Based on U.S. Department of Labor weekly initial unemployment claims by state, we noted that the average weekly initial unemployment claims for the State of Maryland during the two weeks ending March 28, 2020 were 19 times higher than the average weekly claims for the first eleven weeks of 2020. An increase in this qualitative factor was applied to all loan portfolio categories.
We also evaluated the existence and effect of any concentrations of credit, and changes in the level of such concentrations. We performed an analysis of our loan portfolio to identify our exposure to industry segments that we believe may potentially be the most highly impacted by COVID-19. Based on our evaluation, the following table identifies those industry segments within our loan portfolio that we believe may potentially be most highly impacted by COVID-19. Loan balances and total credit exposures are as of March 31, 2020 while the modification and SBA PPP balances are as of April 24, 2020.
(in millions) Loan Category | Loan Balance | As % of Total Loans | Total Exposure | As % of Total Exposure | Balance with Modifications | As % of Loan Category | SBA PPP Loan Relief | As % of Loan Category | ||||||||||||||||||||||||
CRE - retail | $ | 109.8 | 6.2 | % | $ | 112.0 | 5.3 | % | $ | 21.5 | 19.6 | % | $ | - | - | % | ||||||||||||||||
Hotels | 61.5 | 3.5 | 67.0 | 3.2 | 53.5 | 87.0 | 0.9 | 1.5 | ||||||||||||||||||||||||
CRE - residential rental | 50.3 | 2.9 | 51.4 | 2.4 | 10.9 | 21.7 | - | - | ||||||||||||||||||||||||
Nursing and residential care | 39.8 | 2.3 | 46.3 | 2.2 | - | - | 1.8 | 4.5 | ||||||||||||||||||||||||
Retail trade | 26.3 | 1.5 | 37.3 | 1.8 | 1.1 | 4.2 | 6.3 | 24.0 | ||||||||||||||||||||||||
Restaurants and caterers | 26.1 | 1.5 | 29.0 | 1.4 | 19.5 | 74.7 | 8.9 | 34.1 | ||||||||||||||||||||||||
Religious and similar organizations | 27.6 | 1.6 | 28.6 | 1.4 | 2.9 | 10.5 | 2.7 | 9.8 | ||||||||||||||||||||||||
Arts, entertainment, and recreation | 16.2 | 0.9 | 18.5 | 0.9 | 14.5 | 89.5 | 1.3 | 8.0 | ||||||||||||||||||||||||
Total - selected categories | $ | 357.6 | 20.3 | % | $ | 390.1 | 18.6 | % | $ | 123.9 | 34.6 | % | $ | 21.9 | 6.1 | % |
The potentially highly impacted loan exposures noted in the above table (the “high impacts”) were concentrated in non-owner-occupied commercial real estate (59% of total high impacts), owner-occupied commercial real estate (18% of total high impacts), commercial construction (14% of total high impacts), and commercial loans (9% of total high impacts). An increase in this qualitative factor was applied to these high impact loan portfolio categories.
Our evaluation of potential changes in the value of underlying collateral for collateral-dependent loans considered the potential impact of the economic fallout from COVID-19 on commercial property values due to rent relief and possible business failures resulting in vacancies. In addition, the need for office space may diminish in the future as work from home policies have allowed much office-oriented business activity to continue. Excluding the high impact portfolios, we concluded that 53% of our non-owner-occupied commercial real estate portfolio was not included in the high impact exposure. An increase in this qualitative factor was applied to our non-owner-occupied commercial real estate portfolio.
Credit Risk Management and Allowance Methodology
We provide for credit losses based upon the consistent application of our documented allowance for credit loss methodology. All credit losses are charged to the allowance for credit losses and all recoveries are credited to it. Additions to the allowance for credit losses are provided by charges to income based on various factors which,that, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for credit losses in order to maintain the allowance for credit losses in accordance with GAAP. The
In accordance with accounting guidance for business combinations, there was no allowance for credit losses consists primarilybrought forward on any acquired loans in our acquisitions.For acquired performing loans, credit discounts representing the principal losses expected over the life of two components:the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for credit losses.
We recorded acquired credit impaired loans in our acquisitions net of purchase accounting adjustments. Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to management’s initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance for credit losses through a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.
1) | Specific allowances are established for loans classified as Substandard or Doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the impaired loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for credit losses; and |
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2) | General allowances established for credit losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. |
The allowance for credit losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’sOur periodic evaluation of the adequacy of the allowance is based on past credit loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.
A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan is considered impaired when, based on current information and events, it is probable that Howard Bankwe will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 determinesWe determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. The impairment of a loan may be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided by the collateral. Generally, Howard Bank’sour impairment on such loans is measured by reference to the fair value of the collateral. Interest income on impaired loans is recognized on the cash basis.
Our loan policies state that after all collection efforts have been exhausted, and the loan is deemed to be a loss, then the remaining loan balance will be charged to the established allowance for credit losses. All loans are evaluated for loss potential once it has been determined by theour Watch Committee that the likelihood of repayment is in doubt. When a loan is past due for at least 90 days or a deterioration in debt service coverage ratio, guarantor liquidity, or loan-to-value ratio has occurred that would cause concern regarding the likelihood of the full repayment of principal and interest, and the loan is deemed not to be well secured, the loan should be moved to non-accrual status and a specific reserve is established if the net realizable value is less than the principal value of the loan balance(s). Once the actual loss value has been determined a charge-off against the allowance for credit losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.
The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:
· | changes in lending policies, procedures, |
· | changes in international, national, state and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; |
· | changes in the |
· | changes in |
· | changes in |
· | changes in the quality of our loan review system; |
· | changes in the value of underlying collateral for collateral-dependent loans; |
· | the existence of any concentrations of credit, and |
· | the effect of other external factors such as competition and legal and regulatory requirements; and |
· | any other factors that |
We evaluate the allowance for credit losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for credit loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for credit loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial and commercial real estate loans generally have greater credit risks compared to the one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Actual credit losses may be significantly more than the allowance for credit losses we have established, which could have a material negative effect on our financial results.
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Generally, we underwrite commercial loans based on cash flow and business history and receive personal guarantees from the borrowers where appropriate. We generally underwrite commercial real estate loans and residential real estate loans at a loan-to-value ratio of 85% or less at origination. Accordingly, in the event that a loan becomes past due and, randomly with respect to performing loans, we will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. We will also obtain formal appraisals on a regular basis even if we are not considering liquidation of the property to repay a loan. It is our practice to obtain updated appraisals if there is a material change in market conditions or if we become aware of new or additional facts that indicate a potential material reduction in the value of any individual property collateral.
For impaired loans, we utilize the appraised value or present value of expected cash flows in determining the appropriate specific allowance for credit losses attributable to a loan. In addition, changes in the appraised value of multiple properties securing our loans may result in an increase or decrease in our general allowance for credit losses as an adjustment to our historical loss experience due to qualitative and environmental factors, as described above.
At June 30, 2019 and December 31, 2018, nonperforming loans amounted to $19.3 million and $24.7 million, respectively. There were no loans requiring specific reserves in 2019. The amount of impaired loans requiring specific reserves totaled $3.0 million at December 31, 2018, with the reduction primarily driven by charging off loans that previously had specific reserves held against them, which increased the levels of allowance needed. The amount of impaired loans without a specific valuation allowance totaled $19.3 million and $21.7 million, respectively, at such dates.
Nonperforming loans are evaluated and valued at the time the loan is identified as impaired on a case by case basis, at the lower of cost or market value. Market value is measured based on the value of the collateral securing the loan. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by us. Appraised values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. The difference between the appraised value and the principal balance of the loan will determine the specific allowance valuation required for the loan, if any. Nonperforming loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.
We evaluate the loan portfolio on at least a quarterly basis, more frequently if conditions warrant, and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Maryland Office of the Commissioner of Financial Regulation (the “Commissioner”) and the FDIC will periodically review the allowance for credit losses. The Commissioner and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
The following table sets forth activity in our allowance for credit losses for the periods ended:
(in thousands) | June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||
Balance at beginning of year | $ | 9,873 | $ | 6,159 | $ | 10,401 | $ | 9,873 | ||||||||
Charge-offs: | ||||||||||||||||
Real estate | ||||||||||||||||
Construction and land loans | (282 | ) | (202 | ) | - | (282 | ) | |||||||||
Residential first lien loans | (362 | ) | (142 | ) | (33 | ) | (518 | ) | ||||||||
Residential junior lien loans | (471 | ) | (195 | ) | - | (532 | ) | |||||||||
Commercial owner occupied loans | (44 | ) | (28 | ) | - | (46 | ) | |||||||||
Commercial non-owner occupied loans | (2,026 | ) | (797 | ) | - | (2,026 | ) | |||||||||
Commercial loans and leases | (525 | ) | (1,092 | ) | (549 | ) | (622 | ) | ||||||||
Consumer loans | (18 | ) | (63 | ) | (1 | ) | (210 | ) | ||||||||
(3,728 | ) | (2,519 | ) | |||||||||||||
Total charge-offs | (583 | ) | (4,236 | ) | ||||||||||||
Recoveries: | ||||||||||||||||
Real estate | ||||||||||||||||
Construction and land loans | - | - | - | 80 | ||||||||||||
Residential first lien loans | - | 8 | 3 | - | ||||||||||||
Residential junior lien loans | 104 | 10 | 51 | 115 | ||||||||||||
Commercial owner occupied loans | - | - | ||||||||||||||
Commercial non-owner occupied loans | 3 | 32 | - | 17 | ||||||||||||
Commercial loans and leases | 32 | 88 | 66 | 357 | ||||||||||||
Consumer loans | 1 | 4 | 1 | 2 | ||||||||||||
140 | 142 | |||||||||||||||
Total recoveries | 121 | 571 | ||||||||||||||
Net charge-offs | (3,588 | ) | (2,377 | ) | (462 | ) | (3,665 | ) | ||||||||
Provision for credit losses | 2,835 | 6,091 | 3,445 | 4,193 | ||||||||||||
Balance at end of period | $ | 9,120 | $ | 9,873 | ||||||||||||
Balance at end of year | $ | 13,384 | $ | 10,401 | ||||||||||||
Net charge-offs to average loans and leases | 0.22 | % | 0.16 | % | ||||||||||||
Net charge-offs to average loans and leases(1) | 0.10 | % | 0.22 | % | ||||||||||||
Provision for credit losses to average loans and leases(1) | 0.78 | 0.25 |
(1) Annualized |
Allocation of Allowance for Credit Losses
The following tables set forth the allowance for credit losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
June 30, 2019 | December 31, 2018 | |||||||||||||||
(dollars in thousands) | Amount | Percent1 | Amount | Percent1 | ||||||||||||
Real estate | ||||||||||||||||
Construction and land loans | $ | 1,128 | 6.8 | % | $ | 741 | 7.5 | % | ||||||||
Residential first lien loans | 1,790 | 24.2 | 1,170 | 23.2 | ||||||||||||
Residential junior lien loans | 437 | 4.7 | 292 | 5.4 | ||||||||||||
Commercial owner occupied loans | 893 | 13.7 | 735 | 14.2 | ||||||||||||
Commercial non-owner occupied loans | 2,799 | 26.0 | 4,057 | 25.9 | ||||||||||||
Commercial loans and leases | 1,695 | 21.7 | 2,644 | 20.5 | ||||||||||||
Consumer loans | 378 | 3.0 | 234 | 3.3 | ||||||||||||
Total | $ | 9,120 | 100.0 | % | $ | 9,873 | 100.0 | % |
March 31, 2020 | December 31, 2019 | |||||||||||||||
(in thousands) | Amount | Percent(1) | Amount | Percent(1) | ||||||||||||
Real estate loans: | ||||||||||||||||
Construction and land loans | $ | 1,192 | 7.4 | % | $ | 1,256 | 7.3 | % | ||||||||
Residential first lien loans | 2,204 | 24.4 | 2,256 | 25.1 | ||||||||||||
Residential junior lien loans | 863 | 4.0 | 478 | 4.2 | ||||||||||||
Commercial owner occupied loans | 1,254 | 14.1 | 788 | 13.9 | ||||||||||||
Commercial non-owner occupied loans | 4,130 | 25.5 | 2,968 | 25.4 | ||||||||||||
Total real estate loans | 9,643 | 75.4 | 7,746 | 75.9 | ||||||||||||
Commercial loans and leases | 2,950 | 22.1 | 2,103 | 21.4 | ||||||||||||
Consumer loans | 791 | 2.5 | 552 | 2.7 | ||||||||||||
Total | $ | 13,384 | 100.0 | % | $ | 10,401 | 100.0 | % |
(1) | Represents the percent of loans in each category to total loans |
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB, and the sale of securities available for sale. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee (“ALCO”) is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2019March 31, 2020 and December 31, 2018.2019.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
· | Expected loan demand; |
· | Expected deposit flows and borrowing maturities; |
· | Yields available on interest-earning deposits and securities; and |
· | The objectives of our asset/liability management program. |
Excess liquid assets are invested generally in interest-earning deposits and short-term securities.
Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2019 and December 31, 2018, cash and cash equivalents totaled $125.1 million and $101.5 million, respectively.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our statements of cash flows included in our financial statements.
Excess liquid assets are invested generally in interest-bearing deposits in banks (primarily the FRB) and short-term investment securities.
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The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2019March 31, 2020 and December 31, 2018, we had $297.22019, interest-bearing deposits in banks totaled $180.0 million and $387.3$97.0 million, respectively,respectively. As the threat of market disruption in loanresponse to the COVID-19 pandemic appeared during the quarter, combined with concerns of potentially higher than normal commercial line utilization and possible reductions in customer deposits, we grew our on-balance sheet liquidity with higher balances held at the FRB. Since there is sufficient liquidity in the market at this time, we will be reducing these balances during the second quarter of 2020.
Our total commitments outstanding,to extend credit and available credit lines are discussed in the following section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, including commitments issued to originate loans of $115.0 million and $104.5 milliona table presenting our comparative exposure at June 30, 2019March 31, 2020 and December 31, 2018, respectively,2019.
CDs due within one year totaled $563.4 million, or 31.5% of total deposits, and $282.1$458.9 million, and $282.8 million in unused linesor $26.8% of credit to borrowerstotal deposits, at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. In addition to commitments to originate loans and unused lines of credit we had $15.7 million and $16.7 million in letters of credit at June 30, 2019 and December 31, 2018, respectively. Certificates of deposit of $437.7 million or 71% of our CD’s are scheduled to mature during the remainder of 2019. If we do not retain these deposits, we may be required to seek other sources of funds, including loan and securities sales and FHLB advances. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the certificates of deposit.CDs held in our portfolio. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of depositCDs with maturities of one year or less as of June 30, 2019.March 31, 2020.
Our primary investing activity is originating loans.During the six months ended June 30, 2019 and 2018,first quarter of 2020, cash used to fund net loan growth was $54.3$16.2 million, and $10.7 million, respectively.while for the first quarter of 2019 loan principal payments exceeded new loans, which provided $193 thousand in cash. During the first halfquarter of 20192020 we purchased $6.5$64.4 million of securities while receiving $45.7 million as a result of securities maturing or being calledmaturities, calls, and $35.4 million from the sale of securities.principal repayments totaled $10.4 million. For the same period in 20182019, we purchased $44.5$5.0 million of new securities while receiving $112.0 million as a result of securities salesmaturities, calls, and maturing securities.principal repayments totaled $38.9 million.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experiencedFor the first quarter of 2020, our deposit growth was $74.5 million compared to a net increasedecrease in deposits of $31.4$12.3 million during the six months ended June 30,first quarter of 2019. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB, thatwhich provide an additional source of funds. FHLB advances were $216.0increased to $344.0 million at June 30, 2019March 31, 2020 compared to $232.0$285.0 million at December 31, 2018.2019. At June 30, 2019,March 31, 2020, we had an available line of credit for $593.6 million at the ability to borrow upFHLB, with borrowings limited to a total of $424.9$466.4 million based upon our crediton pledged collateral. This provides us with $122.4 million of borrowing availability at the FHLB, subject to collateral requirements.March 31, 2020.
The Company and the Bank areis subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2019March 31, 2020 and December 31, 2018,2019, we exceeded all regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments are limited to commitments to originate loans and 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 that would have a material effect on us.
Outstanding loan
Total commitments to extend credit and available credit lines of credit at June 30, 2019March 31, 2020 and December 31, 20182019 are as follows:
(in thousands) | June 30, 2019 | December 31, 2018 | ||||||
Unfunded loan commitments | $ | 115,020 | $ | 104,466 | ||||
Unused lines of credit | 282,146 | 282,822 | ||||||
Letters of credit | 15,655 | 16,661 |
(in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Unfunded loan commitments | $ | 78,746 | $ | 77,314 | ||||
Unused lines of credit | 291,675 | 309,519 | ||||||
Letters of credit | 15,395 | 13,853 | ||||||
Total commitments to extend credit and available credit lines | $ | 385,816 | $ | 400,686 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any one time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
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The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in consolidated balance sheets at June 30, 2019March 31, 2020 or December 31, 20182019 as a liability for credit loss related to these commitments.
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Liquidity and Funding
The objective of effective liquidity management is to ensure that the Companywe can meet customer loan requests, customer deposit maturities/withdrawals, and other cash commitments efficiently under both normal operating conditions as well as under unforeseen and unpredictable circumstances of industry or market stress. To achieve this objective, ALCO establishes and monitors liquidity guidelines requiring sufficient asset based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. The Company managesWe manage liquidity at both the parent and subsidiary levels through active management of the balance sheet.
The additional information called for by this item is incorporated herein by reference to the “Liquidity and Capital Resources” section of Item 7,2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Quarterly Report on Form 10-Q.
Interest Rate Risk
Interest rate risk, one of the more prominent risks in terms of potential earnings impact, is an inevitable part of being a financial intermediary. It can occur for any one or more of the following reasons: (a) assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, the Company’sour earnings will initially decline); (b) assets and liabilities may re-price at the same time but by different amounts (when the general level of interest rates is falling, the Companywe may choose for customer management, competitive, or other reasons to reduce the rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates); (c) short-term and long-term market interest rates may change by different amounts (i.e. the shape of the yield curve may impact new loan yields and funding costs differently); or (d) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, mortgage-backed securities held in the securities available for sale portfolio may prepay significantly earlier than anticipated – with an associated reduction in portfolio yield and income – if long-term mortgage rates decline sharply). In addition to the direct impact of interest rate changes on net interest income through these categories, interest rates indirectly impact earnings through their effect on loan demand, credit losses, mortgage origination fees, and other sources of the Company’sour earnings.
In determining the appropriate level of interest rate risk, the Company considerswe consider the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The Company uses a number of tools to measure interest rate risk including a model to simulate the impact of changes in interest rates on our net interest income, monitoring the sensitivity of the net present value of the balance sheet and monitoring the difference or gap between maturing or rate-sensitive assets and liabilities over various time periods.
Management believesWe believe that short term interest rate risk is best measured by simulation modeling. ThisWe prepare a current base case and standard alternative scenarios at least once quarterly and report the analysis calculates expectedboth internally to the Asset / Liability Committee and to the Board of Directors. More frequent or alternative scenarios are often prepared at our discretion.
The balance sheet is subject to quarterly testing for the standard alternative interest rate shock possibilities to indicate the inherent interest rate risk. Current and forward rates are shocked by +/- 100, +/- 200, +300, and +400 bp. Certain scenarios may be impractical under different economic circumstances. We seek to structure the balance sheet so that net interest income based upon historical trends, spreads to market rates, historical market relationships, prepayment behavior and current and expected product offerings using base market rates and usingat risk over a rising and a fallingtwelve month period does not exceed policy guidelines at the various interest rate scenario. For example, if rates were to rise 1.00% or 2.00% overshock levels.
Measures of the next 12 months, net interest income might increase. Conversely, if rates were to decline overat risk produced by the next 12 months, net interest income might decline.
These estimatessimulation analysis are highly assumption-dependent,indicators of an institution’s short-term performance in alternative rate environments. The measures are typically based upon a relatively brief period, usually one year, and may change regularly asdo not provide meaningful insight into the Company’s asset/liability structure and business evolves from one period to the next, results will vary as different interest rate scenarios are used and are measured relative to a base net interest income scenario that may change.
For the rising and falling interest rate scenarios, the base market interest rate forecast are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points. At June 30, 2019, ourinstitution’s long-term performance. Our net interest income exposure related to these hypothetical changesrate shocks at both March 31, 2020 and December 31, 2019 are presented in the following table. Due to relatively low current market interest rates, it was withinnot possible to calculate the current guidelines establisheddown 200 bp scenario because many of the market interest rates would fall below zero in that scenario. In addition, the down 100 bp scenarios assumes no market interest rates fall below zero. All measures were in compliance with our governing policies.policy limits.
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Estimated Change in Net Interest Income | ||||||||||||||||||||||||
Change in interest rates: | + 400 bp | + 300 bp | + 200 bp | + 100 bp | - 100 bp | - 200 bp | ||||||||||||||||||
Policy limits | -15 | % | -12 | % | -10 | % | -10 | % | -10 | % | -12 | % | ||||||||||||
March 31, 2020 | 1.0 | % | 1.4 | % | 1.5 | % | 1.4 | % | -1.4 | % | na | |||||||||||||
December 31, 2019 | -13.1 | % | -9.7 | % | -6.3 | % | -3.0 | % | -0.6 | % | na |
Item 4. | Controls and Procedures |
As required by SEC rules, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2019.March 31, 2020. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no material changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2019,March 31, 2020, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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Item 1. | Legal Proceedings |
From time to time, we may be involved in litigation relating to claims arising out of our normal course of business. As of the date of this report, we are not aware of any material pending litigation matters.
Item 1A. | Risk Factors |
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. Risk Factorsof our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as well as cautionary statements contained in this report, including those under the caption “Forward-Looking Statements,” risks and matters described elsewhere in this report and in our other filings with the SEC.
There have been no material changes inWe are providing these additional risk factors to supplement the risk factors from those disclosedcontained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018,2019.
The COVID-19 pandemic has adversely affected our business and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the State of Maryland and most other states have taken preventative or protective actions, such as filedimposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the markets in which we operate.
The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:
· | employees contracting COVID-19; |
· | reductions in our operating effectiveness as our employees work from home; |
· | a work stoppage, forced quarantine, or other interruption of our business; |
· | unavailability of key personnel necessary to conduct our business activities; |
· | effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls; |
· | sustained closures of our branch lobbies or the offices of our customers; |
· | declines in demand for loans and other banking services and products; |
· | declines in the stability of our deposit base, as well as our capital and liquidity position; |
· | reduced consumer spending due to both job losses and other effects attributable to COVID-19; |
· | unprecedented volatility in United States financial markets; |
· | volatile performance of our investment securities portfolio; |
· | decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets we serve, leading to a need to increase our allowance for credit losses; |
· | declines in value of collateral for loans, including real estate collateral; |
· | declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and |
· | declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets. |
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These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.
In March 2020, we announced programs to support our customers, employees, and communities during the COVID-19 pandemic. A significant number of our borrowers have enrolled in one of our programs to defer all loan payments for periods of up to six months. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time.
The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.
We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.
The extent to which COVID-19 impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’ global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in “Item 1.A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019.
As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Stability Act, or CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the SECPPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $320 billion of PPP loan funding was authorized. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both customers and non-customers that approached us regarding PPP loans, regarding our process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
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We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny our liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
The outbreak of COVID-19, or an outbreak of other highly infectious or contagious diseases, could disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.
Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. We rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the outbreak could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in Maryland where we operate and could create widespread business continuity issues for us. We have already shifted a substantial portion of our workforce to work remotely and have restricted access to our branch lobbies. However, we could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. We also face heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements.
The borrowing needs of our clients may increase, especially during this challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our clients under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of our clients, we typically have a substantial amount of total unfunded credit commitments, which is not reflected on our balance sheet. As of March 15, 2019.31, 2020, we had $386 million in unfunded credit commitments to our clients. Actual borrowing needs of our clients may exceed our expectations, including due to the COVID-19 pandemic, as our clients’ companies may be more dependent on our credit commitments due, among other things, business challenges, a lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from private investment firms. This could adversely affect our credit quality and our liquidity, which could adversely affect our ability to fund operations and meet obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2. Unregistered SalesIssuer Repurchases of Equity Securities and Use of Proceeds
NoneOn April 24, 2019, our Board of Directors authorized a stock repurchase program under which we were permitted to repurchase, from time to time, up to $7.0 million of our outstanding common shares. As of February 24, 2020, we had repurchased all remaining shares under the stock repurchase program, resulting in a total of 392,565 shares repurchased at an average price paid per share of $17.83
The following table reflects information regarding our share repurchases for the three months ended March 31, 2020:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
January 1, 2020 - January 31, 2020 | 101,301 | $ | 17.39 | 101,301 | $ | 4,915,919 | ||||||||||
February 1, 2020 - February 29, 2020 | 271,500 | 18.11 | 271,500 | - | ||||||||||||
March 1, 2020 - March 31, 2020 | - | - | - | - | ||||||||||||
Total | 372,801 | $ | 17.91 | 372,801 |
Item 3. Defaults Upon Senior Securities
Item 3. | Defaults Upon Senior Securities |
None
Item 4. Mine Safety Disclosures
Item 4. | Mine Safety Disclosures |
Not applicable
Item 5. | Other Information |
None
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Item 6. |
101.INS | XBRL Instance File | |
101.SCH | XBRL Schema File | |
101.CAL | XBRL Calculation File | |
101.DEF | XBRL Definition File | |
101.LAB | XBRL Label File | |
101.PRE | XBRL Presentation File |
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.
HOWARD BANCORP, INC. | |||
(Registrant) | |||
Date | |||
Chairman and Chief Executive Officer | |||
Date | |||