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FVCBankcorp, Inc. - Quarter Report: 2019 March (Form 10-Q)

Table of Contents

 

 

 

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 March 31, 2019

 

or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                          to                         

 

Commission File Number:  001-38647

 

FVCBankcorp, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia

 

47-5020283

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

11325 Random Hills Road
Suite 240

 

 

Fairfax, Virginia

 

22030

(Address of principal executive offices)

 

(Zip Code)

 

(703) 436-3800

(Registrant’s telephone number, including area code)

 

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 o

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 o

 

Accelerated filer o

Non-accelerated filer x

 

Smaller reporting company x

 

 

Emerging growth company x

 

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. x

 

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

 

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

 

Title of Each Class:

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered:

Common Stock, $0.01 par value

 

FVCB

 

The Nasdaq Stock Market, LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

13,783,299 shares of common stock, par value $0.01 per share, outstanding as of May 1, 2019

 

 

 


Table of Contents

 

FVCBankcorp, Inc.

 

INDEX TO FORM 10-Q

 

PART I — FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements:

3

 

 

Consolidated Balance Sheets At March 31, 2019 (unaudited) and December 31, 2018

3

 

 

Consolidated Statements of Income For the Three Months Ended March 31, 2019 and 2018 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2019 and 2018 (unaudited)

5

 

 

Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2019 and 2018 (unaudited)

6

 

 

Consolidated Statements of Changes in Stockholders’ Equity For the Three Months Ended March 31, 2019 and 2018 (unaudited)

7

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

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

41

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

61

 

 

Item 4. Controls and Procedures

63

 

 

PART II — OTHER INFORMATION

64

 

 

Item 1. Legal Proceedings

64

 

 

Item 1A. Risk Factors

64

 

 

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

64

 

 

Item 3. Defaults Upon Senior Securities

64

 

 

Item 4. Mine Safety Disclosures

64

 

 

Item 5. Other Information

64

 

 

Item 6. Exhibits

64

 

 

SIGNATURES

66

 

2


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

March 31, 2019 and December 31, 2018

(In thousands, except share data)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018 *

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

13,404

 

$

9,435

 

Interest-bearing deposits at other financial institutions

 

30,359

 

34,060

 

Securities held-to-maturity (fair value of $1.8 million and $1.7 million at March 31, 2019 and December 31, 2018, respectively)

 

1,761

 

1,761

 

Securities available-for-sale, at fair value

 

137,713

 

123,537

 

Restricted stock, at cost

 

5,391

 

5,299

 

Loans, net of allowance for loan losses of $9.5 million and $9.2 million at March 31, 2019 and December 31, 2018, respectively

 

1,169,429

 

1,127,584

 

Premises and equipment, net

 

2,218

 

2,271

 

Accrued interest receivable

 

4,491

 

4,050

 

Prepaid expenses

 

855

 

892

 

Deferred tax assets, net

 

8,224

 

8,591

 

Goodwill and intangibles, net

 

8,342

 

8,443

 

Bank owned life insurance (BOLI)

 

16,511

 

16,406

 

Other real estate owned (OREO)

 

3,866

 

4,224

 

Operating lease right-of-use assets

 

11,885

 

 

Other assets

 

5,314

 

5,023

 

 

 

 

 

 

 

Total assets

 

$

1,419,763

 

$

1,351,576

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing

 

$

253,723

 

$

233,318

 

Interest-bearing checking, savings and money market

 

581,102

 

583,736

 

Time deposits

 

377,870

 

345,386

 

 

 

 

 

 

 

Total deposits

 

$

1,212,695

 

$

1,162,440

 

 

 

 

 

 

 

Subordinated notes, net of issuance costs

 

$

24,427

 

$

24,407

 

Accrued interest payable

 

1,043

 

811

 

Operating lease liabilities

 

12,178

 

 

Accrued expenses and other liabilities

 

5,427

 

5,582

 

 

 

 

 

 

 

Total liabilities

 

$

1,255,770

 

$

1,193,240

 

 

 

 

 

 

 

Commitments and Contingent Liabilities

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

Preferred stock, $0.01 par value

 

 

 

 

 

 

 

 

 

Shares authorized

 

1,000,000

 

1,000,000

 

 

 

 

 

Shares issued and outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value

 

 

 

 

 

 

 

 

 

Shares authorized

 

20,000,000

 

20,000,000

 

 

 

 

 

Shares issued and outstanding

 

13,755,249

 

13,712,615

 

138

 

137

 

Additional paid-in capital

 

 

 

 

 

124,318

 

123,882

 

Retained earnings

 

 

 

 

 

40,568

 

36,728

 

Accumulated other comprehensive (loss), net

 

 

 

 

 

(1,031

)

(2,411

)

Total stockholders’ equity

 

 

 

 

 

$

163,993

 

$

158,336

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

 

 

 

$

1,419,763

 

$

1,351,576

 

 

See Notes to Consolidated Financial Statements.

 


* Derived from audited consolidated financial statements.

 

3


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Income

For the three months ended March 31, 2019 and 2018

(In thousands, except per share data)

(Unaudited)

 

 

 

2019

 

2018

 

Interest and Dividend Income

 

 

 

 

 

Interest and fees on loans

 

$

14,867

 

$

10,573

 

Interest and dividends on securities held-to-maturity

 

13

 

13

 

Interest and dividends on securities available-for-sale

 

891

 

657

 

Dividends on restricted stock

 

68

 

53

 

Interest on deposits at other financial institutions

 

121

 

45

 

Total interest and dividend income

 

$

15,960

 

$

11,341

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

Interest on deposits

 

$

3,740

 

$

2,148

 

Interest on federal funds purchased

 

61

 

1

 

Interest on short-term debt

 

 

34

 

Interest on subordinated notes

 

395

 

395

 

Total interest expense

 

$

4,196

 

$

2,578

 

 

 

 

 

 

 

Net Interest Income

 

$

11,764

 

$

8,763

 

 

 

 

 

 

 

Provision for loan losses

 

515

 

358

 

Net interest income after provision for loan losses

 

$

11,249

 

$

8,405

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

Service charges on deposit accounts

 

181

 

141

 

BOLI income

 

105

 

110

 

Other fee income

 

452

 

134

 

Total noninterest income

 

$

738

 

$

385

 

 

 

 

 

 

 

Noninterest Expenses

 

 

 

 

 

Salaries and employee benefits

 

$

3,938

 

$

3,185

 

Occupancy and equipment expense

 

827

 

571

 

Data processing and network administration

 

439

 

280

 

State franchise taxes

 

422

 

296

 

Audit, legal and consulting fees

 

130

 

156

 

Merger and acquisition expense

 

67

 

 

Loan related expenses

 

68

 

57

 

FDIC insurance

 

111

 

108

 

Marketing, business development and advertising

 

159

 

86

 

Director fees

 

121

 

110

 

Postage, courier and telephone

 

54

 

52

 

Internet banking

 

107

 

67

 

Core deposit intangible amortization

 

100

 

5

 

Other operating expenses

 

361

 

287

 

Total noninterest expenses

 

$

6,904

 

$

5,260

 

 

 

 

 

 

 

Net income before income tax expense

 

$

5,083

 

$

3,530

 

 

 

 

 

 

 

Income tax expense

 

1,157

 

533

 

 

 

 

 

 

 

Net income

 

$

3,926

 

$

2,997

 

 

 

 

 

 

 

Earnings per share, basic

 

$

0.29

 

$

0.27

 

 

 

 

 

 

 

Earnings per share, diluted

 

$

0.27

 

$

0.25

 

 

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2019 and 2018

(In thousands)

(Unaudited)

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Net income

 

$

3,926

 

$

2,997

 

Other comprehensive gain (loss):

 

 

 

 

 

Unrealized gain (loss) on securities available for sale, net of tax expense of $367 in 2019 and net of tax benefit of $372 in 2018.

 

1,380

 

(1,400

)

Total other comprehensive income (loss)

 

$

1,380

 

$

(1,400

)

Total comprehensive income

 

$

5,306

 

$

1,597

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

(In thousands)

(Unaudited)

 

 

 

2019

 

2018

 

Cash Flows From Operating Activities

 

 

 

 

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

Net income

 

$

3,926

 

$

2,997

 

Depreciation

 

164

 

107

 

Provision for loan losses

 

515

 

358

 

Net amortization of premium of securities

 

86

 

141

 

Net amortization of deferred loan costs and purchase premiums

 

129

 

150

 

Net accretion of acquisition accounting adjustments

 

3

 

 

Amortization of subordinated debt issuance costs

 

20

 

20

 

Stock-based compensation expense

 

165

 

172

 

BOLI income

 

(105

)

(110

)

Core deposits intangible amortization

 

100

 

5

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease in accrued interest receivable, prepaid expenses and other assets

 

(334

)

(608

)

(Decrease) increase in accrued interest payable, accrued expenses and other liabilities

 

(76

)

87

 

Net cash provided by operating activities

 

$

4,593

 

$

3,319

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Decrease in interest-bearing deposits at other financial institutions

 

$

3,701

 

$

11,241

 

Purchases of securities available-for-sale

 

(16,535

)

(7,897

)

Proceeds from redemptions of securities available-for-sale

 

4,020

 

4,264

 

Net purchase of restricted stock

 

(92

)

(787

)

Net increase in loans

 

(42,604

)

(32,686

)

Proceeds from sale of OREO

 

358

 

 

Purchases of premises and equipment, net

 

(111

)

(220

)

Net cash used in investing activities

 

$

(51,263

)

$

(26,085

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Net increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits

 

$

17,771

 

$

25,920

 

Net increase (decrease) in time deposits

 

32,596

 

(15,422

)

Increase in federal funds purchased

 

 

2,500

 

Net increase in FHLB advances

 

 

10,000

 

Common stock issuance

 

272

 

599

 

Net cash provided by financing activities

 

$

50,639

 

$

23,597

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

3,969

 

$

831

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

9,435

 

7,427

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

 

$

13,404

 

$

8,258

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2018 and 2019

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

10,869

 

$

109

 

$

74,008

 

$

25,859

 

$

(1,693

)

$

98,283

 

Net income

 

 

 

 

2,997

 

 

2,997

 

Other comprehensive loss

 

 

 

 

 

(1,400

)

(1,400

)

Common stock issuance for options exercised

 

112

 

1

 

598

 

 

 

599

 

Stock-based compensation expense

 

 

 

172

 

 

 

172

 

Balance at March 31, 2018

 

10,981

 

$

110

 

$

74,778

 

$

28,856

 

$

(3,093

)

$

100,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

13,713

 

$

137

 

$

123,882

 

$

36,728

 

$

(2,411

)

$

158,336

 

Net income

 

 

 

 

3,926

 

 

3,926

 

Adoption of lease accounting standard

 

 

 

 

(86

)

 

(86

)

Other comprehensive income

 

 

 

 

 

1,380

 

1,380

 

Common stock issuance for options exercised

 

42

 

1

 

271

 

 

 

272

 

Stock-based compensation expense

 

 

 

165

 

 

 

165

 

Balance at March 31, 2019

 

13,755

 

$

138

 

$

124,318

 

$

40,568

 

$

(1,031

)

$

163,993

 

 

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

 

Note 1.                                 Organization and Summary of Significant Accounting Policies

 

Organization

 

FVCBankcorp, Inc. (the “Company”), a Virginia corporation, was formed in 2015 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Fairfax, Virginia. The Company conducts its business activities through the branch offices of its wholly owned subsidiary bank, FVCbank (the “Bank”). The Company exists primarily for the purposes of holding the stock of its subsidiary, the Bank.

 

The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the Washington, D.C. metropolitan area. The Bank commenced regular operations on November 27, 2007 and is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. It is subject to the regulations of the Federal Reserve System and the State Corporation Commission of Virginia.  Consequently, it undergoes periodic examinations by these regulatory authorities.

 

On October 12, 2018, the Company announced the completion of its acquisition of Colombo Bank (“Colombo”). Colombo, which was headquartered in Rockville, Maryland, merged into FVCbank effective October 12, 2018 adding five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland. Pursuant to the terms of the merger agreement, holders of shares of Colombo common stock received 0.002217 shares of the Company’s common stock and $0.053157 in cash for each share of Colombo common stock held immediately prior to the effective date of the Merger, plus cash in lieu of fractional shares at a rate equal to $19.614 per share of FVCB common stock.  Holders of an aggregate of 35,002 shares of Colombo common stock who individually owned fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, made a timely election to receive only cash in an amount equal to $0.096649 per share of Colombo common stock. As a result of the merger, 763,051 shares of the Company’s common stock were issued in exchange for outstanding shares of Colombo common stock.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2018. Certain prior period amounts have been reclassified to conform to current period presentation.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

 

Significant Accounting Policies

 

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,

 

8


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has identified a third party vendor to assist in the measurement of expected credit losses under this standard and the implementation committee has started the data collection process in order to assess the impact that ASU 2016-13 will have on its consolidated financial statements. The Company expects to be running parallel models by the end of the third quarter of 2019.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”  The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

 

Note 2.                                 Securities

 

Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of March 31, 2019 and December 31, 2018, are as follows:

 

9


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

(Losses)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

Securities of state and local municipalities tax exempt

 

$

264

 

$

2

 

$

 

$

266

 

Securities of U.S. government and federal agencies

 

1,497

 

 

(2

)

1,495

 

Total Held-to-maturity Securities

 

$

1,761

 

$

2

 

$

(2

)

$

1,761

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

1,000

 

$

 

$

(23

)

$

977

 

Securities of state and local municipalities tax exempt

 

3,674

 

32

 

 

3,706

 

Securities of state and local municipalities taxable

 

2,337

 

 

(39

)

2,298

 

Corporate bonds

 

5,000

 

25

 

(94

)

4,931

 

Certificates of deposit

 

245

 

 

 

245

 

SBA pass-through securities

 

179

 

 

(9

)

170

 

Mortgage-backed securities

 

98,738

 

430

 

(1,161

)

98,007

 

Collateralized mortgage obligations

 

27,936

 

58

 

(615

)

27,379

 

Total Available-for-sale Securities

 

$

139,109

 

$

545

 

$

(1,941

)

$

137,713

 

 

10


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

December 31, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

(Losses)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

Securities of state and local municipalities tax exempt

 

$

264

 

$

 

$

(6

)

$

258

 

Securities of U.S. government and federal agencies

 

1,497

 

 

(20

)

1,477

 

Total Held-to-maturity Securities

 

$

1,761

 

$

 

$

(26

)

$

1,735

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

1,000

 

$

 

$

(44

)

$

956

 

Securities of state and local municipalities tax exempt

 

3,678

 

 

(39

)

3,639

 

Securities of state and local municipalities taxable

 

2,378

 

 

(70

)

2,308

 

Corporate bonds

 

5,000

 

92

 

(79

)

5,013

 

Certificates of deposit

 

245

 

 

(1

)

244

 

SBA pass-through securities

 

200

 

 

(5

)

195

 

Mortgage-backed securities

 

90,234

 

94

 

(2,291

)

88,037

 

Collateralized mortgage obligations

 

23,945

 

10

 

(810

)

23,145

 

Total Available-for-sale Securities

 

$

126,680

 

$

196

 

$

(3,339

)

$

123,537

 

 

The Company had no securities pledged with the Federal Reserve Bank at March 31, 2019 and December 31, 2018, respectively.  There were no securities pledged with the Treasury Board of Virginia at the Community Bankers’ Bank at March 31, 2019.  There was $8.1 million in such securities pledged as of December 31, 2018.

 

The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018, respectively. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the

 

11


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

past twelve-month period. Available-for-sale and held-to-maturity securities that have been in a continuous unrealized loss position are as follows:

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

(In thousands)

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

At March 31, 2019

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities of U.S. government and federal agencies

 

$

 

$

 

$

2,472

 

$

(25

)

$

2,472

 

$

(25

)

Securities of state and local municipalities taxable

 

 

 

2,298

 

(39

)

2,298

 

(39

)

Corporate bonds

 

1,499

 

(1

)

907

 

(93

)

2,406

 

(94

)

SBA pass-through securities

 

 

 

170

 

(9

)

170

 

(9

)

Mortgage-backed securities

 

 

 

59,538

 

(1,161

)

59,538

 

(1,161

)

Collateralized mortgage obligations

 

 

 

16,484

 

(615

)

16,484

 

(615

)

Total

 

$

1,499

 

$

(1

)

$

81,869

 

$

(1,942

)

$

83,368

 

$

(1,943

)

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

At December 31, 2018

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities of U.S. government and federal agencies

 

$

 

$

 

$

2,433

 

$

(64

)

$

2,433

 

$

(64

)

Securities of state and local municipalities tax exempt

 

263

 

(1

)

3,634

 

(44

)

3,897

 

(45

)

Securities of state and local municipalities taxable

 

757

 

(1

)

1,551

 

(69

)

2,308

 

(70

)

Corporate bonds

 

988

 

(12

)

933

 

(67

)

1,921

 

(79

)

Certificates of deposit

 

 

 

244

 

(1

)

244

 

(1

)

SBA pass-through securities

 

 

 

195

 

(5

)

195

 

(5

)

Mortgage-backed securities

 

12,743

 

(59

)

60,656

 

(2,232

)

73,399

 

(2,291

)

Collateralized mortgage obligations

 

 

 

16,790

 

(810

)

16,790

 

(810

)

Total

 

$

14,751

 

$

(73

)

$

86,436

 

$

(3,292

)

$

101,187

 

$

(3,365

)

 

12


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Securities of U.S. government and federal agencies: The unrealized losses on one available-for-sale and one held-to-maturity security were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

 

Securities of state and local municipalities: The unrealized losses on the investments in securities of state and local municipalities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Five of the nine investments carry an S&P investment grade rating of AA+ or above, one has a rating of AA-, one has an AA rating, while the remaining two do not carry a rating.

 

Corporate bonds: The unrealized losses on the investments in corporate bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. One of these two investments carries an S&P investment grade rating of A-. The remaining investment does not carry a rating.

 

SBA pass-through securities: The unrealized loss on the Company’s single investment in SBA pass-through securities was caused by interest rate increases. Repayment of the principal on those investments is guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider that investments to be other-than-temporarily impaired at March 31, 2019.

 

Mortgage-backed securities: The unrealized losses on the Company’s investment in forty-eight mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2019.

 

Collateralized mortgage obligations (CMOs): The unrealized loss associated with thirty-one CMOs was caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2019.

 

The amortized cost and fair value of securities as of March 31, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

 

13


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

March 31, 2019

 

 

 

Held-to-maturity

 

Available-for-sale

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

 

 

Less than 1 year

 

$

 

$

 

$

745

 

$

743

 

After 5 years through 10 years

 

1,761

 

1,761

 

20,998

 

20,791

 

After 10 years

 

 

 

117,366

 

116,179

 

Total

 

$

1,761

 

$

1,761

 

$

139,109

 

$

137,713

 

 

For the three months ended March 31, 2019 and March 31, 2018, proceeds from maturities, calls and principal repayments of securities were $4.0 million and $4.3 million, respectively.  During the three months ended March 31, 2019 and March 31, 2018, there were no proceeds from sales of securities available-for-sale, no gross realized gains, and no realized losses.

 

Note 3.   Loans and Allowance for Loan Losses

 

A summary of loan balances by type follows:

 

 

 

March 31, 2019

 

December 31, 2018

 

(In thousands)

 

Originated

 

Acquired

 

Total

 

Originated

 

Acquired

 

Total

 

Commercial real estate

 

$

633,162

 

$

61,792

 

$

694,954

 

$

616,614

 

$

66,988

 

$

683,602

 

Commercial and industrial

 

129,259

 

8,842

 

138,101

 

128,909

 

8,419

 

137,328

 

Commercial construction

 

179,902

 

8,804

 

188,706

 

141,694

 

11,645

 

153,339

 

Consumer residential

 

91,344

 

40,478

 

131,822

 

87,609

 

43,822

 

131,431

 

Consumer nonresidential

 

26,815

 

120

 

26,935

 

32,184

 

124

 

32,308

 

 

 

$

1,060,482

 

$

120,036

 

$

1,180,518

 

$

1,007,010

 

$

130,998

 

$

1,138,008

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

9,512

 

 

9,512

 

9,159

 

 

9,159

 

Unearned income and (unamortized premiums), net

 

1,577

 

 

1,577

 

1,265

 

 

1,265

 

Loans, net

 

$

1,049,393

 

$

120,036

 

$

1,169,429

 

$

996,586

 

$

130,998

 

$

1,127,584

 

 

During 2018, as a result of the Company’s acquisition of Colombo, the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).

 

The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either ASC Topic 310-30 or ASC 310-20.  The outstanding principal balance and related carrying amount of acquired loans included in the consolidated balance sheets as of March 31, 2019 and December 31, 2018 are as follows:

 

14


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

(In thousands)

 

March 31, 2019

 

Purchased credit impaired acquired loans evaluated individually for future credit losses

 

 

 

Outstanding principal balance

 

$

2,395

 

Carrying amount

 

1,658

 

 

 

 

 

Other acquired loans

 

 

 

Outstanding principal balance

 

119,954

 

Carrying amount

 

118,378

 

 

 

 

 

Total acquired loans

 

 

 

Outstanding principal balance

 

122,349

 

Carrying amount

 

120,036

 

 

(In thousands)

 

December 31, 2018

 

Purchased credit impaired acquired loans evaluated individually for future credit losses

 

 

 

Outstanding principal balance

 

$

2,533

 

Carrying amount

 

1,401

 

 

 

 

 

Other acquired loans

 

 

 

Outstanding principal balance

 

131,286

 

Carrying amount

 

129,597

 

 

 

 

 

Total acquired loans

 

 

 

Outstanding principal balance

 

133,819

 

Carrying amount

 

130,998

 

 

The following table presents changes during the three months ended March 31, 2019 and the year ended December 31, 2018, respectively, in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.

 

(In thousands)

 

 

 

Balance at January 1, 2019

 

$

357

 

Accretion

 

(24

)

Balance at March 31, 2019

 

$

333

 

 

(In thousands)

 

 

 

Balance at January 1, 2018

 

$

 

Accretable yield at acquisition date

 

379

 

Accretion

 

(22

)

Balance at December 31, 2018

 

$

357

 

 

15


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

An analysis of the allowance for loan losses for the three months ended March 31, 2019 and 2018, and for the year ended December 31, 2018, follows:

 

Allowance for Loan Losses

For the three months ended March 31, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, January 1

 

$

5,548

 

$

1,474

 

$

1,285

 

$

518

 

$

334

 

$

 

$

9,159

 

Charge-offs

 

 

 

 

 

(162

)

 

(162

)

Recoveries

 

 

 

 

 

 

 

 

Provision

 

264

 

6

 

206

 

(23

)

62

 

 

515

 

Ending Balance

 

$

5,812

 

$

1,480

 

$

1,491

 

$

495

 

$

234

 

$

 

$

9,512

 

 

Allowance for Loan Losses

For the three months ended March 31, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,832

 

$

768

 

$

1,191

 

$

626

 

$

268

 

$

40

 

$

7,725

 

Charge-offs

 

 

 

 

 

 

 

 

Recoveries

 

 

19

 

 

 

 

 

19

 

Provision

 

308

 

34

 

58

 

4

 

(6

)

(40

)

358

 

Ending Balance

 

$

5,140

 

$

821

 

$

1,249

 

$

630

 

$

262

 

$

 

$

8,102

 

 

Allowance for Loan Losses

For the year ended December 31, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,832

 

$

768

 

$

1,191

 

$

626

 

$

268

 

$

40

 

$

7,725

 

Charge-offs

 

 

(86

)

 

(187

)

(292

)

 

(565

)

Recoveries

 

 

26

 

 

1

 

52

 

 

79

 

Provision

 

716

 

766

 

94

 

78

 

306

 

(40

)

1,920

 

Beginning Balance

 

$

5,548

 

$

1,474

 

$

1,285

 

$

518

 

$

334

 

$

 

$

9,159

 

 

The following tables present the recorded investment in loans and impairment method as of March 31, 2019 and December 31, 2018, by portfolio segment:

 

16


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Allowance for Loan Losses

At March 31, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

22

 

$

343

 

$

 

$

 

$

 

$

 

$

365

 

Purchase credit impaired

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

5,790

 

1,137

 

1,491

 

495

 

234

 

 

9,147

 

 

 

$

5,812

 

$

1,480

 

$

1,491

 

$

495

 

$

234

 

$

 

$

9,512

 

 

Loans Receivable

At March 31, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

5,693

 

$

2,934

 

$

 

$

 

$

 

$

 

$

8,627

 

Purchase credit impaired

 

137

 

466

 

687

 

368

 

 

 

1,658

 

Collectively evaluated for impairment

 

689,124

 

134,701

 

188,019

 

131,454

 

26,935

 

 

1,170,233

 

 

 

$

694,954

 

$

138,101

 

$

188,706

 

$

131,822

 

$

26,935

 

$

 

$

1,180,518

 

 

17


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Allowance for Loan Losses

At March 31, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

79

 

$

 

$

 

$

 

$

 

$

79

 

Collectively evaluated for impairment

 

5,140

 

742

 

1,249

 

630

 

262

 

 

8,023

 

 

 

$

5,140

 

$

821

 

$

1,249

 

$

630

 

$

262

 

$

 

$

8,102

 

 

Loans Receivable

At March 31, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,868

 

$

1,046

 

$

 

$

587

 

$

3

 

$

 

$

3,504

 

Collectively evaluated for impairment

 

559,502

 

93,316

 

126,914

 

108,875

 

30,002

 

 

918,609

 

 

 

$

561,370

 

$

94,362

 

$

126,914

 

$

109,462

 

$

30,005

 

$

 

$

922,113

 

 

18


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Allowance for Loan Losses

At December 31, 2018

(In thousands)

 

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

372

 

$

 

$

1

 

$

 

$

 

$

373

 

Purchase credit impaired

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

5,548

 

1,102

 

1,285

 

517

 

334

 

 

8,786

 

 

 

$

5,548

 

$

1,474

 

$

1,285

 

$

518

 

$

334

 

$

 

$

9,159

 

 

Loans Receivable

At December 31, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,306

 

$

2,969

 

$

 

$

182

 

$

 

$

 

$

4,457

 

Purchase credit impaired

 

139

 

467

 

421

 

374

 

 

 

1,401

 

Collectively evaluated for impairment

 

682,157

 

133,892

 

152,918

 

130,875

 

32,308

 

 

1,132,150

 

 

 

$

683,602

 

$

137,328

 

$

153,339

 

$

131,431

 

$

32,308

 

$

 

$

1,138,008

 

 

19


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Impaired loans by class excluding purchased credit impaired, at March 31, 2019 and December 31, 2018, are summarized as follows:

 

Impaired Loans - Originated Loan Portfolio

 

(In thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

 

$

 

$

 

$

 

Commercial and industrial

 

1,792

 

1,792

 

343

 

1,793

 

34

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

1,792

 

$

1,792

 

343

 

$

1,793

 

$

34

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

5,493

 

$

5,507

 

$

 

$

5,521

 

$

63

 

Commercial and industrial

 

1,133

 

1,142

 

 

1,150

 

24

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

6,626

 

$

6,649

 

$

 

$

6,671

 

$

87

 

 

Impaired Loans - Acquired Loan Portfolio

 

(In thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

200

 

$

192

 

22

 

$

192

 

$

4

 

Commercial and industrial

 

 

 

 

 

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

200

 

$

192

 

22

 

$

192

 

$

4

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

 

$

 

$

 

$

 

Commercial and industrial

 

9

 

9

 

 

16

 

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

9

 

$

9

 

$

 

$

16

 

$

 

 

20


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Impaired Loans - Originated Loan Portfolio

 

(In thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

 

$

 

$

 

$

 

Commercial and industrial

 

1,793

 

1,793

 

372

 

1,801

 

100

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

182

 

182

 

1

 

184

 

12

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

1,975

 

$

1,975

 

$

373

 

$

1,985

 

$

112

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,306

 

$

1,319

 

$

 

$

1,321

 

$

68

 

Commercial and industrial

 

1,156

 

1,170

 

 

1,378

 

81

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

2,462

 

$

2,489

 

$

 

$

2,699

 

$

149

 

 

Impaired Loans - Acquired Loan Portfolio

 

(In thousands)

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

 

$

 

$

 

$

 

Commercial and industrial

 

 

 

 

 

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

 

$

 

$

 

$

 

Commercial and industrial

 

20

 

20

 

 

58

 

3

 

Commercial construction

 

 

 

 

 

 

Consumer residential

 

 

 

 

 

 

Consumer nonresidential

 

 

 

 

 

 

 

 

$

20

 

$

20

 

$

 

$

58

 

$

3

 

 

21


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

No additional funds are committed to be advanced in connection with the impaired loans. There were no nonaccrual loans excluded from the impaired loan disclosure.

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans.  This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

 

Pass — Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

 

Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the enhanced possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful — Loans classified as doubtful include those loans which have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, improbable.

 

Loss — Loans classified as loss include those loans which are considered uncollectible and of such little value that their continuance as loans is not warranted. Even though partial recovery may be achieved in the future, it is neither practical nor desirable to defer writing off these loans.

 

Based on the most recent analysis performed, the risk category of loans by class of loans was as follows as of March 31, 2019 and December 31, 2018:

 

22


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

As of March 31, 2019 - Originated Loan Portfolio

 

(In thousands)

 

Commercial Real
Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

626,651

 

$

124,260

 

$

179,902

 

$

90,269

 

$

26,796

 

$

1,047,878

 

Special mention

 

2,315

 

2,236

 

 

750

 

19

 

5,320

 

Substandard

 

4,196

 

2,763

 

 

325

 

 

7,284

 

Doubtful

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

Total

 

$

633,162

 

$

129,259

 

$

179,902

 

$

91,344

 

$

26,815

 

$

1,060,482

 

 

As of March 31, 2019 - Acquired Loan Portfolio

 

(In thousands)

 

Commercial Real
Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

61,279

 

$

8,376

 

$

8,117

 

$

40,467

 

$

120

 

$

118,359

 

Special mention

 

231

 

 

687

 

 

 

918

 

Substandard

 

282

 

466

 

 

11

 

 

759

 

Doubtful

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

Total

 

$

61,792

 

$

8,842

 

$

8,804

 

$

40,478

 

$

120

 

$

120,036

 

 

As of December 31, 2018 - Originated Loan Portfolio

 

(In thousands)

 

Commercial Real
Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

610,580

 

$

124,349

 

$

141,694

 

$

86,848

 

$

32,184

 

$

995,655

 

Special mention

 

6,034

 

1,783

 

 

761

 

 

8,578

 

Substandard

 

 

2,777

 

 

 

 

2,777

 

Doubtful

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

Total

 

$

616,614

 

$

128,909

 

$

141,694

 

$

87,609

 

$

32,184

 

$

1,007,010

 

 

As of December 31, 2018 - Acquired Loan Portfolio

 

(In thousands)

 

Commercial Real
Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

66,849

 

$

7,952

 

$

11,224

 

$

43,811

 

$

124

 

$

129,960

 

Special mention

 

56

 

 

421

 

 

 

477

 

Substandard

 

83

 

467

 

 

11

 

 

561

 

Doubtful

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

Total

 

$

66,988

 

$

8,419

 

$

11,645

 

$

43,822

 

$

124

 

$

130,998

 

 

23


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Past due and nonaccrual loans presented by loan class were as follows at March 31, 2019 and December 31, 2018:

 

As of March 31, 2019 - Originated Loan Portfolio

 

(In thousands)

 

30-59 days past
due

 

60-89 days past
due

 

90 days or more
past due

 

Total past due

 

Current

 

Total loans

 

90 days past due
and still accruing

 

Nonaccruals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

1,020

 

$

80

 

$

1,100

 

$

632,062

 

$

633,162

 

$

80

 

$

293

 

Commercial and industrial

 

1,694

 

70

 

 

1,764

 

127,495

 

129,259

 

 

1,768

 

Commercial construction

 

 

 

812

 

812

 

179,090

 

179,902

 

812

 

 

Consumer residential

 

410

 

811

 

 

1,221

 

90,123

 

91,344

 

 

 

Consumer nonresidential

 

 

 

 

 

26,815

 

26,815

 

 

 

Total

 

$

2,104

 

$

1,901

 

$

892

 

$

4,897

 

$

1,055,585

 

$

1,060,482

 

$

892

 

$

2,061

 

 

As of March 31, 2019 - Acquired Loan Portfolio

 

(In thousands)

 

30-59 days past
due

 

60-89 days past
due

 

90 days or more
past due

 

Total past due

 

Current

 

Total loans

 

90 days past due
and still accruing

 

Nonaccruals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

804

 

$

 

$

 

$

804

 

$

60,988

 

$

61,792

 

$

 

$

281

 

Commercial and industrial

 

150

 

598

 

 

748

 

$

8,094

 

8,842

 

 

290

 

Commercial construction

 

880

 

 

 

880

 

$

7,924

 

8,804

 

 

 

Consumer residential

 

703

 

 

 

703

 

$

39,775

 

40,478

 

 

267

 

Consumer nonresidential

 

 

 

 

 

120

 

120

 

 

 

Total

 

$

2,537

 

$

598

 

$

 

$

3,135

 

$

116,901

 

$

120,036

 

$

 

$

838

 

 

As of December 31, 2018 - Originated Loan Portfolio

 

(In thousands)

 

30-59 days past
due

 

60-89 days past
due

 

90 days or more
past due

 

Total past due

 

Current

 

Total loans

 

90 days past due
and still accruing

 

Nonaccruals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

3,062

 

$

2,148

 

$

 

$

5,210

 

$

611,404

 

$

616,614

 

$

 

$

 

Commercial and industrial

 

68

 

181

 

2,701

 

2,950

 

125,959

 

128,909

 

1,031

 

1,769

 

Commercial construction

 

 

 

 

 

141,694

 

141,694

 

 

 

Consumer residential

 

843

 

345

 

 

1,188

 

86,421

 

87,609

 

 

182

 

Consumer nonresidential

 

111

 

44

 

 

155

 

32,029

 

32,184

 

 

 

Total

 

$

4,084

 

$

2,718

 

$

2,701

 

$

9,503

 

$

997,507

 

$

1,007,010

 

$

1,031

 

$

1,951

 

 

As of December 31, 2018 - Acquired Loan Portfolio

 

(In thousands)

 

30-59 days past
due

 

60-89 days past
due

 

90 days or more
past due

 

Total past due

 

Current

 

Total loans

 

90 days past due
and still accruing

 

Nonaccruals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,001

 

$

83

 

$

56

 

$

1,140

 

$

65,848

 

$

66,988

 

$

 

$

56

 

Commercial and industrial

 

446

 

 

 

446

 

7,973

 

8,419

 

 

 

Commercial construction

 

186

 

 

 

186

 

11,459

 

11,645

 

 

 

Consumer residential

 

2,785

 

612

 

173

 

3,570

 

40,252

 

43,822

 

 

173

 

Consumer nonresidential

 

 

 

 

 

124

 

124

 

 

 

Total

 

$

4,418

 

$

695

 

$

229

 

$

5,342

 

$

125,656

 

$

130,998

 

$

 

$

229

 

 

24


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

There were overdrafts of $45 thousand and $28 thousand at March 31, 2019 and December 31, 2018, which have been reclassified from deposits to loans. At March 31, 2019 and December 31, 2018 loans with a carrying value of $173.9 million and $173.0 million were pledged to the Federal Home Loan Bank of Atlanta.

 

There were no defaults of troubled debt restructurings (TDR’s) where the default occurred within twelve months of the restructuring during the three months ended March 31, 2019 and 2018.

 

The following table presents the TDR’s originated during the three months ending March 31, 2019:

 

For the three months ended March 31, 2019

 

Troubled Debt Restructurings

 

Number of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

 

 

 

 

(In thousands)

 

Commercial real estate

 

1

 

$

3,903

 

$

3,903

 

Total

 

1

 

$

3,903

 

$

3,903

 

 

There were no TDR’s originated in the three months ended March 31, 2018.

 

As of March 31, 2019, and December 31, 2018, the Company has a recorded investment in troubled debt restructurings of $ 4.1 million and $203 thousand, respectively.

 

The concessions made in troubled debt restructurings were extensions of the maturity dates or reductions in the stated interest rate for the remaining life of the debt.

 

Note 4.                                 Derivative Financial Instruments

 

The Company enters into interest rate swap agreements (‘‘swap agreements’’) to facilitate the risk management strategies needed in order to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities) as of March 31, 2019 and December 31, 2018. The Company is party to master netting arrangements with its financial institution counterparty; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments, commonly referred to as variation margin, are recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures, which effectively results in any centrally cleared derivative having a Level 2 fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table in the Fair Value Measurement section. As of March 31, 2019, the Company

 

25


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

entered into thirteen interest rate swap agreements which are collateralized with $3.5 million in cash.  There were eight agreements outstanding as of December 31, 2018 which were collateralized with $1.6 million in cash.

 

The notional amount and fair value of the Company’s derivative financial instruments as of March 31, 2019 and December 31, 2018 were as follows:

 

 

 

March 31, 2019

 

 

 

Notional Amount

 

Fair Value

 

 

 

(In thousands)

 

Interest Rate Swap Agreements

 

 

 

 

 

Receive Fixed/Pay Variable Swaps

 

$

69,387

 

$

(3,258

)

Pay Fixed/Receive Variable Swaps

 

69,387

 

3,258

 

 

 

 

December 31, 2018

 

 

 

Notional Amount

 

Fair Value

 

 

 

(In thousands)

 

Interest Rate Swap Agreements

 

 

 

 

 

Receive Fixed/Pay Variable Swaps

 

$

47,381

 

$

(1,705

)

Pay Fixed/Receive Variable Swaps

 

47,381

 

1,705

 

 

Note 5.                                 Financial Instruments with Off-Balance Sheet Risk

 

The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

 

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

 

At March 31, 2019 and December 31, 2018, the following financial instruments were outstanding which contract amounts represent credit risk:

 

(In thousands)

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

Commitments to grant loans

 

$

36,914

 

$

22,349

 

Unused commitments to fund loans and lines of credit

 

246,483

 

216,043

 

Commercial and standby letters of credit

 

10,066

 

9,383

 

 

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the

 

26


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

 

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

 

Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments, if deemed necessary.

 

The Company maintains its cash accounts with the Federal Reserve and correspondent banks.  The total amount of cash on deposit in correspondent banks exceeding the federally insured limits was $9.4 million and $5.1 million at March 31, 2019 and December 31, 2018, respectively.

 

Note 6.                                 Stock-Based Compensation Plan

 

The Company’s Amended and Restated 2008 Option Plan (the Plan), which is stockholder-approved, was adopted to advance the interests of the Company by providing selected key employees of the Company, their affiliates, and directors with the opportunity to acquire shares of common stock. In June 2018, the stockholders approved an amendment to the Amended and Restated 2008 Plan to extend the term and increase the number of shares authorized for issuance under the Plan by 200,000 shares.

 

The maximum number of shares with respect to which awards may be made is 2,529,296 shares of common stock, subject to adjustment for certain corporate events. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest annually over four years of continuous service and have ten year contractual terms.  At March 31, 2019, 237,315 shares were available to grant under the Plan.

 

No options were granted during the three months ended March 31, 2019 and 2018, respectively.

 

A summary of option activity under the Plan as of March 31, 2019, and changes during the three months ended is presented below:

 

27


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

Number

 

Average

 

Remaining

 

Aggregate

 

 

 

of

 

Exercise

 

Contractual

 

Intrinsic

 

Options

 

Shares

 

Price

 

Term

 

Value (1)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2019

 

1,976,247

 

$

8.00

 

4.98

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(42,634

)

6.37

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

1,933,613

 

$

8.03

 

4.77

 

$

17,160,992

 

Exercisable at March 31, 2019

 

1,766,499

 

$

7.70

 

4.55

 

$

16,261,973

 

 


(1) The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2019. This amount changes based on changes in the market value of the Company’s stock.

 

The compensation cost that has been charged to income for the plan was $165 thousand and $172 thousand for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was unamortized compensation expense of $208 thousand that will be amortized over 13 months. The total income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements was $0 and $192 thousand for the three months ended March 31, 2019 and 2018, respectively.

 

A summary of the Company’s restricted stock grant activity as of March 31, 2019 is shown below.

 

 

 

Number of
Shares

 

Weighted Average
Grant Date
Fair Value

 

Nonvested at January 1, 2019

 

50,629

 

$

17.57

 

Granted

 

1,000

 

17.25

 

Vested

 

 

 

Forfeited

 

 

 

Balance at March 31, 2019

 

51,629

 

$

17.56

 

 

As of March 31, 2019, there was $802 thousand of total unrecognized compensation cost related to nonvested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 32 months.

 

28


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Note 7.                                 Fair Value Measurements

 

Determination of Fair Value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

Fair Value Hierarchy

 

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1 —                Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

Level 2  —             Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

Level 3 —                Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

 

29


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:

 

 

 

 

 

Fair Value Measurements at
March 31, 2019 Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Balance as of

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

Description

 

2019

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

977

 

$

 

$

977

 

$

 

Securities of state and local municipalities tax exempt

 

3,706

 

 

3,706

 

 

Securities of state and local municipalities taxable

 

2,298

 

 

2,298

 

 

Corporate bonds

 

4,931

 

 

4,931

 

 

Certificates of deposit

 

245

 

 

245

 

 

SBA pass-through securities

 

170

 

 

170

 

 

Mortgage-backed securities

 

98,007

 

 

98,007

 

 

Collateralized mortgage obligations

 

27,379

 

 

27,379

 

 

Total Available-for-Sale Securities

 

$

137,713

 

$

 

$

137,713

 

$

 

 

30


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

 

 

Fair Value Measurements at
December 31, 2018 Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Balance as of

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

December 31,

 

Assets

 

Inputs

 

Inputs

 

Description

 

2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

956

 

$

 

$

956

 

$

 

Securities of state and local municipalities tax exempt

 

3,639

 

 

3,639

 

 

Securities of state and local municipalities taxable

 

2,308

 

 

2,308

 

 

Corporate bonds

 

5,013

 

 

5,013

 

 

Certificates of deposit

 

244

 

 

244

 

 

SBA pass-through securities

 

195

 

 

195

 

 

Mortgage-backed securities

 

88,037

 

 

88,037

 

 

Collateralized mortgage obligations

 

23,145

 

 

23,145

 

 

Total Available-for-Sale Securities

 

$

123,537

 

$

 

$

123,537

 

$

 

 

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.

 

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including

 

31


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, has the value derived by discounting comparable sales due to lack of similar properties, or is discounted by the Company due to marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

 

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, which results in a Level 3 classification of the inputs for determining fair value. Other real estate owned properties are evaluated regularly for impairment and adjusted accordingly.

 

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at March 31, 2019 and December 31, 2018:

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

Balance as of

 

Assets

 

Inputs

 

Inputs

 

Description

 

March 31, 2019

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

1,627

 

$

 

$

 

$

1,627

 

Other real estate owned

 

$

3,866

 

$

 

$

 

$

3,866

 

 

32


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

Balance as of

 

Assets

 

Inputs

 

Inputs

 

Description

 

December 31, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

1,602

 

$

 

$

 

$

1,602

 

Other Real Estate Owned

 

$

4,224

 

$

 

$

358

 

$

3,866

 

 

The following table displays quantitative information about Level 3 Fair Value Measurements for March 31, 2019 and December 31, 2018:

 

Quantitative information about Level 3 Fair Value Measurements for March 31, 2019

 

(In thousands)

 

 

 

 

 

 

 

 

Assets 

 

Fair Value

 

Valuation Technique(s)

 

Unobservable input

 

Range (Avg.)

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

1,627

 

Discounted value

 

Marketability/Selling costs

 

5% - 10% (7.96%)

Other real estate owned

 

$

3,866

 

Discounted appraised value

 

Selling costs

 

10.51%

 

Quantitative information about Level 3 Fair Value Measurements for December 31, 2018

 

(In thousands)

 

 

 

 

 

 

 

 

Assets 

 

Fair Value

 

Valuation Technique(s)

 

Unobservable input

 

Range (Avg.)

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

1,602

 

Discounted value

 

Marketability/Selling costs

 

0.60% - 8% (10.89%)

Other real estate owned

 

$

3,866

 

Discounted appraised value

 

Selling costs

 

10.51%

 

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2019 and December 31, 2018.  Fair values for March 31, 2019 and December 31, 2018 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

 

33


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

 

 

Fair Value Measurements as of March 31, 2019, using

 

 

 

Carrying

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant
Unobservable
Inputs

 

Significant
Unobservable
Inputs

 

(In thousands)

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

13,404

 

$

13,404

 

$

 

$

 

Interest-bearing deposits at other institutions

 

30,359

 

30,359

 

 

 

Securities held-to-maturity

 

1,761

 

 

1,761

 

 

Securities available-for-sale

 

137,713

 

 

137,713

 

 

Restricted stock

 

5,391

 

 

5,391

 

 

Loans, net

 

1,169,429

 

 

 

1,158,022

 

Bank owned life insurance

 

16,511

 

 

16,511

 

 

Accrued interest receivable

 

4,491

 

 

4,491

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Checking, savings and money market accounts

 

$

834,825

 

$

 

$

834,825

 

$

 

Time deposits

 

377,870

 

 

375,776

 

 

Subordinated notes

 

24,427

 

 

24,678

 

 

Accrued interest payable

 

1,043

 

 

1,043

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2018, using

 

 

 

Carrying

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant
Unobservable
Inputs

 

Significant
Unobservable
Inputs

 

(In thousands)

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

9,435

 

$

9,435

 

$

 

$

 

Interest-bearing deposits at other institutions

 

34,060

 

34,060

 

 

 

Securities held-to-maturity

 

1,761

 

 

1,735

 

 

 

Securities available-for-sale

 

123,537

 

 

123,537

 

 

Restricted stock

 

5,299

 

 

5,299

 

 

Loans, net

 

1,127,584

 

 

 

1,116,012

 

Bank owned life insurance

 

16,406

 

 

16,406

 

 

Accrued interest receivable

 

4,050

 

 

4,050

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Checking, savings and money market accounts

 

$

817,054

 

$

 

$

817,054

 

$

 

Time deposits

 

345,386

 

 

344,877

 

 

Subordinated notes

 

24,407

 

 

24,515

 

 

Accrued interest payable

 

811

 

 

811

 

 

 

34


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Note 8.                                 Earnings Per Share

 

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of stock which then shared in the earnings of the Company.

 

The following shows the weighted average number of shares used in computing earnings per    share and the effect of weighted average number of shares of dilutive potential common stock.  Dilutive potential common stock has no effect on income available to common stockholders.  There were 0 and 625 shares excluded from the calculation for March 31, 2019 and 2018, respectively, as they were anti-dilutive.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands, except per share data)

 

2019

 

2018

 

 

 

 

 

 

 

Net income

 

$

3,926

 

$

2,997

 

 

 

 

 

 

 

Weighted average number of shares

 

13,724

 

10,934

 

 

 

 

 

 

 

Effect of dilutive securities, restricted stock units and options

 

1,056

 

1,119

 

 

 

 

 

 

 

Weighted average diluted shares

 

14,780

 

12,053

 

 

 

 

 

 

 

Basic EPS

 

$

0.29

 

$

0.27

 

Diluted EPS

 

$

0.27

 

$

0.25

 

 

Note 9.                                 Accumulated Other Comprehensive Income (Loss)

 

Changes in accumulated other comprehensive income (AOCI) for the three months ended March 31, 2019 and 2018 are shown in the following table. The Company has only one component, which is available-for-sale securities, for the periods presented.

 

 

 

Three Months Ended

 

(In thousands)

 

March 31,

 

Available-for-Sale Securities

 

2019

 

2018

 

Balance, beginning of period

 

$

(2,411

)

$

(1,693

)

Net unrealized gains (losses) during the period

 

1,380

 

(1,400

)

Other comprehensive income (loss), net of tax

 

1,380

 

(1,400

)

Balance, end of period

 

$

(1,031

)

$

(3,093

)

 

35


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Note 10.  Subordinated Notes

 

On June 20, 2016, the Company issued $25 million in private placement of fixed-to-floating subordinated notes due June 30, 2026.  Interest is payable at 6.00% per annum, from and including June 20, 2016 to, but excluding June 30, 2021, payable semi-annually in arrears.  From and including June 30, 2021 to the maturity date or early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 487 basis points, payable quarterly in arrears.

 

The Company may, at its option, beginning with the interest payment date of June 30, 2021 and on any scheduled interest payment date thereafter redeem the subordinated notes, in whole or in part, upon not fewer than 30 nor greater than 60 days’ notice to holders, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. Any partial redemption will be made pro rata among all of the holders.

 

The subordinated notes qualify as Tier 2 capital for the Company to the fullest extent permitted under the BASEL III capital rules. When contributed to the capital of the Bank, the proceeds of the subordinated notes may be included in Tier 1 capital for the Bank. At March 31, 2019 and December 31, 2018, $21 million of the proceeds of the Company’s subordinated notes have been included in the Bank’s Tier 1 capital.

 

Note 11.                          Revenue Recognition

 

On January 1, 2018, the Company adopted ASU No. 2014-09 ‘‘Revenue from Contracts with Customers’’ (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, gain on sale of securities, BOLI income, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

 

Service Charges on Deposit Accounts

 

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and personal checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’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 Company’s performance obligation is

 

36


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

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.

 

Fees, Exchange and Other Service Charges

 

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, 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. This income is reflected in other income on the Company’s consolidated statements of income.

 

Other income

 

Other noninterest income consists of loan swap fees, insurance commissions, and other miscellaneous revenue streams not meeting the criteria above. The Company receives monthly recurring commissions based as a percentage of premiums issued and revenue is recognized when received. Any residual miscellaneous fees are recognized as they occur, and therefore, the Company determined this consistent practice satisfies the obligation for performance.

 

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2019

 

2018

 

Noninterest Income

 

 

 

 

 

In-scope of Topic 606

 

 

 

 

 

Service Charges on Deposit Accounts

 

$

181

 

$

141

 

Fees, Exchange, and Other Service Charges

 

76

 

51

 

Other

 

14

 

5

 

Noninterest Income (in-scope of Topic 606)

 

271

 

197

 

Noninterest Income (out-scope of Topic 606)

 

467

 

188

 

Total Noninterest Income

 

$

738

 

$

385

 

 

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 Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

experience significant contract balances. As of March 31, 2019, the Company 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 Company did not capitalize any contract acquisition cost.

 

Note 12.                          Supplemental Cash Flow Information

 

 

 

For the Three Months Ended March 31,

 

(In thousands)

 

2019

 

2018

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowed funds

 

$

3,964

 

$

2,245

 

Income taxes

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

Unrealized gain (loss) on securities available-for-sale

 

1,747

 

(1,772

)

Initial right of use asset - operating leases

 

12,249

 

 

Initial lease liability - operating leases

 

12,656

 

 

 

Note 13.                          Leases

 

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. There was a cumulative effect adjustment of approximately $86 thousand at adoption.  The Company also elected certain practical expedients within the standard and did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases.  Prior to adoption, all of the Company’s leases were classified as operating leases and remain operating leases at adoption. The implementation of the new standard resulted in recognition of a right-of-use asset of approximately $12.2 million and an offsetting lease liability of $12.7 million for leases existing at the date of adoption.

 

Contracts that commence subsequent to adoption are evaluated to determine whether they are or contain a lease in accordance with Topic 842.  The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

non-lease components.  The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less.

 

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.  Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.  Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

 

Lease payments

 

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred.  Payments for leases with terms longer than twelve months are included in the determination of the lease liability.  Payments may be fixed for the term of the lease or variable.  If the lease agreement provides a known escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability.  If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability.  The Company’s leases provide known escalators that are included in the determination of the lease liability, with the exception of three lease agreements.

 

Options to Extend, Residual Value Guarantees, and Restrictions and Covenants

 

The Company’s leases offer the option to extend the lease term.  For each of the leases, the Company is reasonably certain it will exercise the options and has included the additional time and lease payments in the calculation of the lease liability.  None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.

 

The following tables present information about leases:

 

(In thousands)

 

March 31, 2019

 

Lease Liability

 

$12,178

 

Right-of-Use-Asset

 

$11,885

 

Weighted Average Remaining Lease Term

 

11.17 years

 

Weighted Average discount rate

 

3.42%

 

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

For the Three Months Ended

 

(In thousands)

 

March 31, 2019

 

Operating Lease Expense

 

$

470

 

 

 

 

 

Cash paid for amounts included in lease liabilities

 

$

438

 

 

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:

 

(In thousands)

 

March 31, 2019

 

Nine months ending December 31, 2019

 

$

1,129

 

Twelve months ending December 31, 2020

 

1,340

 

Twelve months ending December 31, 2021

 

1,346

 

Twelve months ending December 31, 2022

 

1,380

 

Twelve months ending December 31, 2023

 

1,370

 

Twelve months ending December 31, 2024

 

1,381

 

Thereafter

 

6,823

 

Total

 

$

14,769

 

Less: discount

 

(2,591

)

 

 

$

12,178

 

 

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

 

The following presents management’s discussion and analysis of our consolidated financial condition at March 31, 2019 and December 31, 2018 and the results of our operations for the three months ended March 31, 2019 and 2018. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements.

 

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

 

·                  the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

 

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

 

·                  the occurrence of significant natural disasters;

 

·                  our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;

 

·                  changes in consumer spending and savings habits;

 

·                  technological and social media changes;

 

·                  the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations;

 

·                  changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

 

·                  the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

 

·                  the impact of changes in laws, regulations and policies affecting the real estate industry;

 

·                  the effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the U.S. Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setting bodies;

 

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·                  the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

 

·                  the willingness of users to substitute competitors’ products and services for our products and services;

 

·                  the effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

 

·                  changes in the level of our nonperforming assets and charge-offs;

 

·                  our involvement, from time to time, in legal proceedings and examination and remedial actions by regulators;

 

·                  potential exposure to fraud, negligence, computer theft and cyber-crime;

 

·                  the expected growth opportunities or cost savings from an acquisition may not be fully realized or may take longer to realize than expected;

 

·                  deposit attrition, operating costs, customer losses, and business disruption following a merger, including adverse effects on relationships with employees, may be greater than expected;

 

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in the Company’s Annual Report on Form 10-K, including those discussed in the section entitled “Risk Factors.” If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

 

Overview

 

We are a bank holding company headquartered in Fairfax County, Virginia. Our sole subsidiary, FVCbank, was formed in November 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of the Commonwealth of Virginia. The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals.

 

On October 12, 2018, we completed our acquisition of Colombo Bank (“Colombo”).  Colombo, which was headquartered in Rockville, Maryland, merged into FVCbank effective October 12, 2018 adding five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland. Pursuant to the terms of the merger agreement, holders of shares of Colombo common stock received 0.002217 shares of the Company’s common stock and $0.053157 in cash for each share of Colombo common stock held immediately prior to the effective date of the merger, plus cash in lieu of fractional shares at a rate equal to $19.614 per share of FVCB common stock. Holders of an aggregate of 35,002 shares of Colombo common stock who individually owned fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, made a timely election to receive only cash in an amount equal to $0.096649 per share of Colombo common stock.  As a result of the merger, 763,051 shares of common stock were issued in exchange for outstanding shares of Colombo common stock.

 

Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest income. As discussed further in “Quantitative and Qualitative Disclosures About Market Risk” below, we manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net

 

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interest income, noninterest income is a complementary source of revenue for us and includes, among other things, service charges on deposits and loans, merchant services fee income, loan swap fees, insurance commission income, income from bank owned life insurance, or BOLI, and gains and losses on sales of investment securities available-for-sale.

 

Critical Accounting Policies

 

General

 

The accounting principles we apply under GAAP are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.

 

The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchase credit-impaired loans, fair value measurements, and the valuation of other real estate owned.

 

Allowance for Loan Losses

 

We maintain the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in our loan portfolio. Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers. Unusual and infrequently occurring events, such as weather-related disasters, may impact our assessment of possible credit losses. As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions and concentrations of credit, competition, and loan review results to support estimates.

 

The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments. For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on loan segments, which are largely based on the type of collateral underlying each loan. For purposes of this analysis, we categorize loans into one of five categories: commercial and industrial, commercial real estate, commercial construction, consumer residential, and consumer nonresidential loans. Typically, financial institutions use their historical loss experience and trends in losses for each loan category which are then adjusted for portfolio trends and economic and environmental factors in determining their allowance for loan losses. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio. Because of this, our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular qualitative loan portfolio characteristics and environmental factors. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans.

 

Our peer group is defined by selecting commercial banking institutions of similar size within Virginia, Maryland and the District of Columbia. This is known as our custom peer group. The commercial banking institutions comprising the custom peer group can change based on certain factors including but not limited to the characteristics, size, and geographic footprint of the institution. We have identified 28 banks for our custom peer group which are within $200 million to $3 billion in total assets, the majority of whom are geographically concentrated in the Washington, D.C. metropolitan area in which we operate, as this area has experienced more stable economic conditions than many other areas of the country. These baseline peer group loss rates are then adjusted based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk. Our peer loss rates are updated on a quarterly basis.

 

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. We evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the fair value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan.

 

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Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.

 

Allowance for Loan Losses - Acquired Loans

 

Acquired loans accounted for under ASC 310-30

 

For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

 

Acquired loans accounted for under ASC 310-20

 

Subsequent to the acquisition date, we establish an allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that may warrant recognition in determining our allowance for loan losses.

 

Purchased Credit-Impaired Loans

 

Purchased credit-impaired (PCI) loans, which are the loans acquired in our acquisition of Colombo, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).  At March 31, 2019, we had a specific reserve for impairment of acquired loans within our allowance for loan losses totaling $22 thousand for one credit that had further deteriorated post acquisition.

 

We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform better than originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

 

Fair Value Measurements

 

We determine the fair values of financial instruments based on the 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 standard describes three levels of inputs that may be used to measure fair value. Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

 

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Other Real Estate Owned

 

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any writedowns are charged against current earnings. Accounting policy and treatment is consistent with accounting for impaired loans described above.

 

Financial Overview

 

For the three months ended March 31, 2019, we experienced strong loan growth as we continue to expand our market area through organic growth and continued leveraging of our recent acquisition of Colombo, as well as capitalizing on market disruption as a result of recent merger activity.

 

·                  Total assets increased to $1.42 billion compared to $1.08 million as of March 31, 2019 and 2018, respectively, an increase of $341.1 million, or 31.6%.

 

·                  Total loans, net of deferred fees, increased $257.7 million, or 28.0%, from March 31, 2018 to March 31, 2019. Asset quality remains strong with nonperforming loans and loans past due 90 days or more as a percentage of total assets being 0.27% at March 31, 2019, compared to 0.09% at March 31, 2018.

 

·                  Total deposits increased $274.0 million, or 29.2%, from March 31, 2018 to March 31, 2019.

 

·                  Tangible book value per share at March 31, 2019 was $11.32, an increase from $10.93 at December 31, 2018 and $9.16 at March 31, 2018.

 

·                  Net income was $3.9 million for the three months ended March 31, 2019 compared to $3.0 million for the same period of 2018.

 

Results of Operations—Three Months Ended March 31, 2019 and 2018

 

Overview

 

We recorded net income of $3.9 million, or $0.27 per diluted common share, for the three months ended March 31, 2019, compared to net income of $3.0 million, or $0.25 per diluted common share for the three months ended March 31, 2018. Our results for the three months ended March 31, 2019 were impacted by merger-related expenses totaling $67 thousand relating to our acquisition of Colombo. Excluding these merger-related expenses, we would have recorded net income of $4.0 million, or $0.27 per diluted common share for the quarter ended March 31, 2019. Net interest income increased $3.0 million to $11.8 million for the three months ended March 31, 2019, compared to $8.8 million for the three months ended March 31, 2018, a result of an increase in interest-earning assets through organic growth and acquisition. Provision for loan losses was $515 thousand for the three months ended March 31, 2019, compared to $358 thousand for the same period of 2018. Noninterest income increased $353 thousand to $738 thousand for the three months ended March 31, 2019 as compared to $385 thousand for 2018, primarily a result of an increase in loan swap fees during the first quarter of 2019. Noninterest expense was $6.9 million for the three months ended March 31, 2019 compared to $5.3 million for the same three month period of 2018, primarily due to an increase in salaries and benefits expense for additions to business development and back office staffing as a result of our acquisition of Colombo in addition to increases in occupancy and data processing expenses all a result of our acquisition of Colombo.

 

The annualized return on average assets for the three months ended March 31, 2019 and 2018 was 1.16% and 1.13%, respectively. The annualized return on average equity for the three months ended March 31, 2019 and 2018 was 9.74% and 12.03%, respectively. Excluding merger-related expenses, the annualized return on average assets and annualized return on average equity for the three months ended March 31, 2019 was 1.17% and 9.86%, respectively. For a reconciliation of these performance metrics as adjusted for the merger-related expenses, please refer to “Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)” below.

 

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Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)

For the Three Months Ended March 31, 2019 and 2018

(Dollars in thousands, except per share data)

 

 

 

2019

 

2018

 

Net income (as reported)

 

$

3,926

 

$

2,997

 

Add: merger and acquisition expense

 

67

 

 

Subtract: provision for income taxes associated with merger and acquisition expense

 

(15

)

 

Net income, excluding merger and acquisition expense, net of tax (non-GAAP)

 

$

3,978

 

$

2,997

 

 

 

 

 

 

 

Earnings per share - basic (excluding merger and acquisition expense)

 

$

0.29

 

$

0.27

 

 

 

 

 

 

 

Earnings per share - diluted (excluding merger and acquisition expense)

 

$

0.27

 

0.25

 

 

 

 

 

 

 

Return on average assets (non-GAAP net income)

 

1.17

%

1.13

%

Return on average equity (non-GAAP net income)

 

9.86

%

12.03

%

 

Net Interest Income/Margin

 

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned and rates paid for the three months ended March 31, 2019 and 2018.

 

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

For the Three Months Ended March 31, 2019 and 2018

(Dollars in thousands)

 

 

 

2019

 

2018

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

679,268

 

$

8,009

 

4.72

%

$

538,334

 

$

6,234

 

4.63

%

Commercial and industrial

 

134,803

 

2,234

 

6.63

%

94,596

 

1,222

 

5.17

%

Commercial construction

 

158,880

 

2,275

 

5.73

%

122,182

 

1,482

 

4.85

%

Consumer residential

 

133,939

 

1,760

 

5.26

%

108,815

 

1,172

 

4.31

%

Consumer nonresidential

 

31,058

 

589

 

7.58

%

29,789

 

463

 

6.22

%

Total loans (1)

 

1,137,948

 

14,867

 

5.23

%

893,716

 

10,573

 

4.73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (2)

 

138,947

 

910

 

2.62

%

119,173

 

676

 

2.27

%

Restricted stock

 

5,162

 

68

 

5.23

%

3,687

 

53

 

5.75

%

Deposits at other financial institutions and federal funds sold

 

25,221

 

121

 

1.95

%

16,851

 

45

 

1.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets and interest income

 

1,307,278

 

15,966

 

4.89

%

1,033,427

 

11,347

 

4.39

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

5,807

 

 

 

 

 

2,532

 

 

 

 

 

Premises and equipment, net

 

2,294

 

 

 

 

 

1,229

 

 

 

 

 

Accrued interest and other assets

 

48,489

 

 

 

 

 

27,102

 

 

 

 

 

Allowance for loan losses

 

(9,054

)

 

 

 

 

(7,827

)

 

 

 

 

Total assets

 

$

1,354,814

 

 

 

 

 

$

1,056,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

296,010

 

$

938

 

1.27

%

$

187,251

 

$

404

 

0.87

%

Savings and money markets

 

235,926

 

863

 

1.46

%

188,911

 

447

 

0.96

%

Time deposits

 

307,780

 

1,486

 

1.93

%

263,736

 

909

 

1.40

%

Wholesale deposits

 

74,781

 

453

 

2.42

%

107,265

 

388

 

1.47

%

Total interest - bearing deposits

 

914,497

 

3,740

 

1.66

%

747,163

 

2,148

 

1.17

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowed funds

 

33,716

 

456

 

5.49

%

32,661

 

430

 

5.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities and interest expense

 

948,213

 

4,196

 

1.79

%

779,824

 

2,578

 

1.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

234,149

 

 

 

 

 

174,462

 

 

 

 

 

Other liabilities

 

11,170

 

 

 

 

 

2,519

 

 

 

 

 

Common stockholders’ equity

 

161,282

 

 

 

 

 

99,658

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,354,814

 

 

 

 

 

$

1,056,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and net interest margin (2)

 

 

 

$

11,770

 

3.65

%

 

 

$

8,769

 

3.39

%

 


(1)         Nonaccrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on nonaccruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $212 thousand and $154 thousand for the three months ended March 31, 2019 and 2018, respectively.

(2)         The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 23% for 2019 and 21% for 2018.

 

The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. See “Quantitative and Qualitative Disclosures About Market Risk” below for further information. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities for the three months ended March 31, 2019.

 

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Rate and Volume Analysis

For the Three Months Ended March 31, 2019 and 2018

(Dollars in thousands)

 

 

 

2019 Compared to 2018

 

 

 

Average

 

Average

 

Increase

 

 

 

Volume

 

Rate

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1):

 

 

 

 

 

 

 

Commercial real estate

 

$

1,632

 

$

143

 

$

1,775

 

Commercial and industrial

 

519

 

493

 

1,012

 

Commercial construction

 

445

 

348

 

793

 

Consumer residential

 

271

 

317

 

588

 

Consumer nonresidential

 

21

 

105

 

126

 

Total loans (1)

 

2,888

 

1,406

 

4,294

 

 

 

 

 

 

 

 

 

Investment securities (2)

 

112

 

122

 

234

 

Restricted stock

 

22

 

(7

)

15

 

Deposits at other financial institutions and federal funds sold

 

21

 

55

 

76

 

 

 

 

 

 

 

 

 

Total interest income

 

3,043

 

1,576

 

4,619

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing deposits:

 

 

 

 

 

 

 

Interest checking

 

235

 

299

 

534

 

Savings and money markets

 

117

 

299

 

416

 

Time deposits

 

167

 

410

 

577

 

Wholesale deposits

 

(122

)

187

 

65

 

Total interest - bearing deposits

 

397

 

1,195

 

1,592

 

 

 

 

 

 

 

 

 

Other borrowed funds

 

14

 

12

 

26

 

Total interest expense

 

411

 

1,207

 

1,618

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

$

2,632

 

$

369

 

$

3,001

 

 


(1)         Nonaccrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on nonaccruing loans was not material for the periods presented.

(2)         The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 23% for 2019.

 

Net interest income for the three months ended March 31, 2019 was $16.0 million, compared to $11.3 million for the three months ended March 31, 2018, an increase of $4.6 million, or 40.7%. The increase in net interest income was primarily a result of an increase in the volume of interest-earning assets during 2019 compared to 2018 in addition to the earnings assets acquired from Colombo. The yield on interest-earning assets increased 50 basis points to 4.89% for the three months ended March 31, 2019, compared to 4.39% for the same period of 2018. Offsetting this increase in yield was a 45 basis point increase in the cost of interest-bearing liabilities, primarily reflecting increasing rates of interest-bearing deposits.

 

Our net interest margin, on a tax equivalent basis, for the three months ended March 31, 2019 and 2018 was 3.65% and 3.39%, respectively. The increase in our net interest margin was primarily a result of an increase in volume of our interest-earning assets during 2019 as compared to 2018. Net interest income, on a tax equivalent basis, is a financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis,

 

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net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our federal statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources. The following table provides a reconciliation of our GAAP net interest income to our tax equivalent net interest income.

 

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

For the Three Months Ended March 31, 2019 and 2018

(Dollars in thousands)

 

 

 

2019

 

2018

 

GAAP Financial Measurements:

 

 

 

 

 

Interest income:

 

 

 

 

 

Loans

 

$

14,867

 

$

10,573

 

Deposits at other financial institutions and federal funds sold

 

121

 

45

 

Investment securities available-for-sale

 

891

 

657

 

Investment securities held-to-maturity

 

13

 

13

 

Restricted stock

 

68

 

53

 

Total interest income

 

15,960

 

11,341

 

Interest expense:

 

 

 

 

 

Interest-bearing deposits

 

3,740

 

2,148

 

Other borrowed funds

 

456

 

430

 

Total interest expense

 

4,196

 

2,578

 

Net interest income

 

$

11,764

 

$

8,763

 

Non-GAAP Financial Measurements:

 

 

 

 

 

Add: Tax benefit on tax-exempt interest income - securities

 

6

 

6

 

Total tax benefit on tax-exempt interest income

 

$

6

 

$

6

 

Tax equivalent net interest income

 

$

11,770

 

$

8,769

 

 

Average interest-earning assets increased by 26.5% to $1.31 billion for the three months ended March 31, 2019 compared to $1.03 billion for the three months ended March 31, 2018, which resulted in an increase in total interest income on a tax equivalent basis of $4.6 million, to $16.0 million for the three months ended March 31, 2019, compared to $11.3 million for the three months ended March 31, 2018. The increase in our earning assets was primarily driven by an increase in the average volume of loans receivable of $244.2 million, which contributed to an additional $2.9 million in interest income. This increase in interest income was enhanced by an increase in yields earned on the loan portfolio which increased interest income $1.4 million. Average balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2019 and 2018.

 

Total average interest-bearing deposits increased $167.3 million to $914.5 million for the three months ended March 31, 2019 compared to $747.2 million for the three months ended March 31, 2018. Average noninterest-bearing deposits increased $59.7 million to $234.1 million for the three months ended March 31, 2019 compared to $174.5 million for the same period in 2018. The largest increase in average interest-bearing deposit balances was in our interest checking, which increased $108.8 million compared to 2018. Average wholesale deposits decreased $32.5 million to $74.8 million for the first quarter of 2019 compared to $107.3 million for the first quarter of 2018. This change in the mix of our interest-bearing liabilities, in addition to the increases in the targeted fed funds rate over the past 12 months, have contributed to the increase in our cost of interest-bearing deposits to 1.66% for the three months ended March 31, 2019, from 1.17% for the same period in 2018. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, increased 15 basis points to 5.49% for the three months ended March 31, 2019, from 5.34% for the same period in 2018.

 

Provision Expense and Allowance for Loan Losses

 

Our policy is to maintain the allowance for loan losses at a level that represents our best estimate of inherent losses in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.

 

We recorded a provision for loan losses of $515 thousand for the three months ended March 31, 2019 compared to a provision for loan losses of $358 thousand for the same period of 2018, which reflects our increase in loan origination volume while

 

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maintaining a continued low level of problem loans. The allowance for loan losses at March 31, 2019 was $9.5 million compared to $9.2 million at December 31, 2018. Our allowance for loan loss ratio as a percent of total loans, net of deferred fees and costs, for each of March 31, 2019 and December 31, 2018 was 0.81%, reflecting our continued sound credit quality and stable economic environment.

 

Noninterest Income

 

Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our BOLI policies, and gains on sales of investment securities available-for-sale, and continues to supplement our operating results. During 2018, we have added fee income from loan swap activity which is increasing our level of noninterest income.  Noninterest income for the three months ended March 31, 2019 and 2018 was $738 thousand and $385 thousand, respectively. Fee income from fees on loans, service charges on deposits, and other fee income was $633 thousand for the three months ended March 31, 2019, an increase of 130.2%, as compared to the same quarter of 2018, a result of fee income on loan swaps recorded during the first quarter of 2019 in addition to an increase in customer relationships over the past year.

 

Noninterest Expense

 

Noninterest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Noninterest expense was $6.9 million and $5.3 million for the three months ended March 31, 2019 and 2018, respectively.

 

Salaries and benefits expense increased $753 thousand to $3.9 million for the three months ended March 31, 2019 compared to $3.2 million for the same period in 2018. The increase in salaries and benefits expense is primarily related to increases in our business development and back office personnel to support our growth plans and staffing we retained from our acquisition of Colombo. Occupancy and equipment expense increased $256 thousand for the three months ended March 31, 2019 as compared to the same period of 2018 as a result of the increase in locations following the completion of our acquisition of Colombo.  Merger and acquisition expenses of $67 thousand are included in the three months ended March 31, 2019 compared to no merger related expenses for the comparable 2018 reporting period.  All other increases in noninterest expense for the quarter ended March 31, 2019 as compared to the quarter ended March 31, 2018 are primarily related to the supporting the larger organization post Colombo acquisition and bank growth.

 

Income Taxes

 

We recorded a provision for income tax expense of $1.2 million for the three months ended March 31, 2019, compared to $533 thousand for the three months ended March 31, 2018. Our effective tax rate for the three months ended March 31, 2019 was 22.8%, compared to 15.1% for the same period of 2018. Our effective tax for the three months ended March 31, 2019 is greater than the federal statutory rate as a result of state apportionment taxes for our operations in Maryland and Washington, D.C. Our effective tax rate for the three months ended March 31, 2018 was less than the statutory rate because of discrete tax benefits recorded as a result of certain exercises in nonqualified stock options during 2018.

 

Discussion and Analysis of Financial Condition

 

Overview

 

At March 31, 2019, total assets were $1.42 billion, an increase of 5.0%, or $68.2 million, from $1.35 billion at December 31, 2018. Total loans receivable, net of deferred fees and costs, increased 3.7%, or $42.2 million, to $1.18 billion at March 31, 2019, from $1.14 billion at December 31, 2018. Total investment securities increased $14.2 million, or 11.3%, to $139.5 million at March 31, 2019, from $125.3 million at December 31, 2018. Total deposits increased 4.3%, or $50.3 million, to $1.21 billion at March 31, 2019, from $1.16 billion at December 31, 2018. From time to time, we may utilize other borrowed funds such as federal funds purchased and FHLB advances as an additional funding source for the Bank. At March 31, 2019 and December 31, 2018, we had no federal funds sold or FHLB advances outstanding.

 

Loans Receivable, Net

 

Total loans receivable, net of deferred fees and costs, were $1.18 billion at March 31, 2019, an increase of $42.2 million, or 3.7%, compared to $1.14 billion at December 31, 2018. The increase in the loans receivable portfolio was a result of organic loan growth primarily in our commercial real estate and commercial construction portfolios.

 

The following table presents the composition of our loans receivable portfolio at March 31, 2019 and at December 31, 2018.

 

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Loans Receivable

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Commercial real estate

 

$

694,954

 

$

683,602

 

Commercial and industrial

 

138,101

 

137,328

 

Commercial construction

 

188,706

 

153,339

 

Consumer residential

 

131,822

 

131,431

 

Consumer nonresidential

 

26,935

 

32,308

 

 

 

 

 

 

 

Gross loans

 

1,180,518

 

1,138,008

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Allowance for loan losses

 

9,512

 

9,159

 

Unearned income and (unamortized premiums)

 

1,577

 

1,265

 

 

 

 

 

 

 

Loans receivable, net

 

$

1,169,429

 

$

1,127,584

 

 

Asset Quality

 

Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more and still accruing, and OREO at March 31, 2019 were $7.7 million compared to $7.4 million at December 31, 2018. Our ratio of nonperforming assets to total assets was 0.54% at March 31, 2019 compared to 0.55% at December 31, 2018. Nonperforming loans increased $580 thousand and are primarily commercial real estate loans, one of which is an acquired loan that has a specific reserve of $22 thousand at March 31, 2019, Loans contractually past-due 90 days or more at March 31, 2019 consist of two loans which have matured and are awaiting final payment and are well-collateralized. Troubled debt restructurings, or TDRs, as of March 31, 2019 were $4.1 million and as of December 31, 2018 were $203 thousand. The increase in TDRs was a result of one loan which was restructured during the first quarter of 2019 because of a specific borrower issue for which a specific reserve was not required. We recorded annualized net charge-offs to average loans receivable of 0.06% for the three months ended March 31, 2019 and annualized net recoveries to average loans receivable of (0.01%) for the three months ended March 31, 2018. The following tables provide additional information on our asset quality for the periods presented.

 

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Nonperforming Assets

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Nonperforming assets:

 

 

 

 

 

Nonaccrual loans

 

$

2,899

 

$

2,180

 

 

 

 

 

 

 

Loans contractually past-due 90 days or more

 

892

 

1,031

 

 

 

 

 

 

 

Total nonperforming loans (NPLs)

 

$

3,791

 

$

3,211

 

 

 

 

 

 

 

Other real estate owned (OREO)

 

3,866

 

4,224

 

 

 

 

 

 

 

Total nonperforming assets (NPAs)

 

$

7,657

 

$

7,435

 

Performing troubled debt restructurings (TDRs)

 

$

4,092

 

$

203

 

 

 

 

 

 

 

NPLs/Total Assets

 

0.27

%

0.24

%

NPAs/Total Assets

 

0.54

%

0.55

%

NPAs and TDRs/Total Assets

 

0.83

%

0.57

%

Allowance for loan losses/NPLs

 

250.91

%

285.24

%

 

Nonperforming Loans by Type

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Commercial real estate

 

$

654

 

$

56

 

Commercial and industrial

 

2,058

 

2,800

 

Commercial construction

 

812

 

 

Consumer residential

 

267

 

355

 

Consumer nonresidential

 

 

 

 

 

$

3,791

 

$

3,211

 

 

In addition to the assets reflected in the above tables, at March 31, 2019 and December 31, 2018, we had $7.1 million and $12.2 million, respectively, of loans past due 30-89 days, respectively.

 

At March 31, 2019, there were no performing loans considered potential problem loans. Potential problem loans are defined as loans that are not included in the 90 day past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. At December 31, 2018, we had one potential problem loan with a balance totaling $123 thousand. We have taken a conservative approach with respect to risk rating loans in our portfolio. Based upon the status as a potential problem loan, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, our loan loss allowance methodology incorporates increased reserve factors for certain loans that are adversely rated but not impaired as compared to the general portfolio.

 

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At March 31, 2019, we had one OREO property with a fair value of $3.9 million. We are in the process of selling this property and do not expect a material gain or loss from the current fair value of the property as we recorded a $1.1 million gain on the foreclosure of the property during the year ended December 31, 2017.

 

While our loan growth has continued to be strong, unexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may also be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. At March 31, 2019, our commercial real estate portfolio (including construction lending) portfolio was 74.8% of our total loan portfolio. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.

 

See “Critical Accounting Policies” above for more information on our allowance for loan losses methodology.

 

The following tables present additional information pertaining to the activity in and allocation of the allowance for loan losses by loan type and the percentage of the loan type to the total loan portfolio. The allocation of the allowance for loan losses to a category of loans is not necessarily indicative of future losses or charge-offs, and does not restrict the use of the allowance to any specific category of loans.

 

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Allowance for Loan Losses

For the Three Months Ended March 31, 2019 and 2018

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Beginning balance

 

$

9,159

 

$

7,725

 

 

 

 

 

 

 

Provision for loan losses

 

515

 

358

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

Commercial real estate

 

 

 

Commercial and industrial

 

 

 

Commercial construction

 

 

 

Consumer residential

 

 

 

Consumer nonresidential

 

(162

)

 

Total loans charged off

 

(162

)

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

Commercial real estate

 

 

 

Commercial and industrial

 

 

19

 

Commercial construction

 

 

 

Consumer residential

 

 

 

Consumer nonresidential

 

 

 

Total recoveries

 

 

19

 

 

 

 

 

 

 

Net (charge offs) recoveries

 

(162

)

19

 

 

 

 

 

 

 

Ending balance

 

$

9,512

 

$

8,102

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Loans, net of deferred fees:

 

 

 

 

 

Balance at period end

 

$

1,178,941

 

$

921,231

 

Allowance for loan losses to loans receivable, net of fees

 

0.81

%

0.88

%

Net charge-offs (recoveries) to average loans receivable, annualized

 

0.06

%

(0.01

)%

 

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Allocation of the Allowance for Loan Losses

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

Allocation

 

% of Total*

 

Allocation

 

% of Total*

 

Commercial real estate

 

$

5,812

 

58.87

%

$

5,548

 

60.07

%

Commercial and industrial

 

1,480

 

11.70

%

1,474

 

12.07

%

Commercial construction

 

1,491

 

15.99

%

1,285

 

13.47

%

Consumer residential

 

495

 

11.17

%

518

 

11.55

%

Consumer nonresidential

 

234

 

2.27

%

334

 

2.84

%

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

 

$

9,512

 

100.00

%

$

9,159

 

100.00

%

 


* Percentage of loan type to the total loan portfolio.

 

Investment Securities

 

Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and certificates of deposit. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity at each of March 31, 2019 and December 31, 2018 totaled $1.8 million, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. The fair value of our investment securities available-for-sale was $137.7 million at March 31, 2019, an increase of $14.2 million or 11.5%, from $123.5 million at December 31, 2018. We purchased $16.5 million in available-for-sale investment securities during the three months ended March 31, 2019 to help enhance our net interest margin by investing in higher yielding earning assets and reinvesting $4.0 million in cash flows provided by mortgage-backed securities redemptions.

 

As of March 31, 2019 and December 31, 2018, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. All of our mortgage-backed securities are guaranteed by either the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Investment securities that were pledged to secure public deposits totaled $0 and $8.1 million at March 31, 2019 and December 31, 2018, respectively.

 

We complete reviews for other-than-temporary impairment at least quarterly. At March 31, 2019 and  December 31, 2018, only investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.

 

No other-than-temporary impairment has been recognized for the securities in our investment portfolio as of March 31, 2019 and December 31, 2018.

 

We hold restricted investments in equities of the Federal Reserve Bank of Richmond, or FRB, and FHLB. At March 31, 2019, we owned $1.2 million in FHLB stock and $4.0 million in FRB stock. At December 31, 2018, we owned $1.1 million in FHLB stock and $4.0 million in FRB stock.

 

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The following table reflects the composition of our investment portfolio, at amortized cost, at March 31, 2019 and December 31, 2018.

 

Investment Securities

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

Balance

 

Percent
of Total

 

Balance

 

Percent
of Total

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

Securities of state and local municipalities tax exempt

 

$

264

 

0.19

%

$

264

 

0.21

%

Securities of U.S. government and federal agencies

 

1,497

 

1.06

%

1,497

 

1.16

%

Total held-to-maturity securities

 

$

1,761

 

1.25

%

$

1,761

 

1.37

%

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

1,000

 

0.71

%

$

1,000

 

0.78

%

Securities of state and local municipalities

 

6,011

 

4.27

%

6,056

 

4.72

%

Corporate bonds and securities

 

5,000

 

3.55

%

5,000

 

3.89

%

Mortgage-backed securities

 

126,853

 

90.05

%

114,379

 

89.05

%

Certificates of deposit

 

245

 

0.17

%

245

 

0.19

%

Total available-for-sale securities

 

$

139,109

 

98.75

%

$

126,680

 

98.63

%

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

$

140,870

 

100.00

%

$

128,441

 

100.00

%

 

The following tables present the amortized cost of our investment portfolio by their stated maturities, as well as the weighted average yields for each of the maturity ranges at March 31, 2019 and December 31, 2018.

 

Investment Securities by Stated Maturity

At March 31, 2019

(Dollars in thousands)

 

 

 

At March 31, 2019

 

 

 

Within One Year

 

One to Five Years

 

Five to Ten Years

 

Over Ten Years

 

Total

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Amortized

 

Average

 

Amortized

 

Average

 

Amortized

 

Average

 

Amortized

 

Average

 

Amortized

 

Average

 

 

 

Cost

 

Yield

 

Cost

 

Yield

 

Cost

 

Yield

 

Cost

 

Yield

 

Cost

 

Yield

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of state and local municipalities tax exempt

 

$

 

 

$

 

 

$

264

 

2.32

%

$

 

 

$

264

 

2.32

%

Securities of U.S. government and federal agencies

 

 

 

 

 

1,497

 

3.01

%

 

 

1,497

 

3.01

%

Total held-to-maturity securities

 

$

 

 

$

 

 

$

1,761

 

2.91

%

$

 

 

$

1,761

 

2.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

 

 

$

 

 

$

1,000

 

2.12

%

$

 

 

$

1,000

 

2.12

%

Securities of state and local municipalities

 

500

 

1.95

%

 

 

2,414

 

2.28

%

3,097

 

2.72

%

6,011

 

2.48

%

Corporate bonds

 

 

 

 

 

5,000

 

5.08

%

 

 

5,000

 

5.08

%

Mortgaged-backed securities

 

 

 

 

 

12,584

 

2.16

%

114,269

 

2.62

%

126,853

 

2.56

%

Certificates of deposit

 

245

 

2.10

%

 

 

 

 

 

 

245

 

2.10

%

Total available-for-sale securities

 

$

745

 

2.00

%

$

 

 

$

20,998

 

2.87

%

$

117,366

 

2.62

%

$

139,109

 

2.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

$

745

 

2.00

%

$

 

 

$

22,759

 

2.87

%

$

117,366

 

2.62

%

$

140,870

 

2.65

%

 

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Deposits and Other Borrowed Funds

 

Total deposits were $1.21 billion at March 31, 2019, an increase of $50.3 million, or 4.3%, from $1.16 billion at December 31, 2018. Noninterest-bearing deposits totaled $253.7 million at March 31, 2019, comprising 20.9% of total deposits and increased $20.4 million, or 8.7%, compared to December 31, 2018. At March 31, 2019, deposits from municipalities which are secured by a letter of credit issued by the FHLB, represented 10.8% of our total deposits. Deposits of any individual municipality are generally limited to 5% of total assets and in the aggregate, municipalities are limited to 18% of total assets. Some of these customers utilize our treasury management services, and all maintain deposits of varying types and maturities. As such, we believe that these customers are unlikely to abruptly terminate their relationship with us. However, in the event that we were to lose all or a significant portion of the deposits of one or more of these customers, we believe that we have adequate alternative sources of liquidity to enable us to replace these funds, although the cost of such replacement sources of liquidity could be higher.

 

The following table provides information on our deposit composition at March 31, 2019 and December 31, 2018.

 

Deposit Composition

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

Balance

 

Average
Rate

 

Balance

 

Average
Rate

 

Noninterest bearing demand

 

$

253,723

 

 

$

233,318

 

 

Interest bearing - checking, savings and money market

 

581,102

 

1.32

%

583,736

 

1.21

%

Time deposits $100,000 or more

 

196,132

 

2.06

%

214,832

 

1.92

%

Other time deposits

 

181,738

 

2.02

%

130,554

 

1.64

%

 

 

$

1,212,695

 

 

 

$

1,162,440

 

 

 

 

The remaining maturity of time deposits at March 31, 2019 and December 31, 2018 are as follows:

 

 

 

March 31,

 

 

 

December 31,

 

 

 

 

 

2019

 

 

 

2018

 

 

 

Three months or less

 

$

86,910

 

 

 

$

84,621

 

 

 

Over three months through six months

 

66,980

 

 

 

64,177

 

 

 

Over six months through twelve months

 

131,790

 

 

 

96,778

 

 

 

Over twelve months

 

92,190

 

 

 

99,810

 

 

 

 

 

$

377,870

 

 

 

$

345,386

 

 

 

 

Wholesale deposits increased to $115.4 million at March 31, 2019 from $84.4 million at December 31, 2018. In addition, we are a member of the Promontory Interfinancial Network, or Promontory, which gives us the ability to offer Certificates of Deposit Account Registry Service, or CDARS, and Insured Cash Sweep, or ICS, products to our customers who seek to maximize FDIC insurance protection. When a customer places a large deposit with us for Promontory, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than $250 thousand so that principal and interest are eligible for FDIC insurance protection. These deposits are part of our core deposit base. At March 31, 2019 and December 31, 2018, we had $73.8 million and $88.7 million, respectively, in either CDARS reciprocal or ICS reciprocal products. The following table reports those certificates of deposit that exceed $100,000 by maturity as of March 31, 2019 and December 31, 2018.

 

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Certificates of Deposit Over $100,000 and Greater

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Three months or less

 

$

17,951

 

$

47,326

 

Over three months through six months

 

44,207

 

16,897

 

Over six months through twelve months

 

67,487

 

78,101

 

Over twelve months

 

66,487

 

72,508

 

 

 

$

196,132

 

$

214,832

 

 

Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $24.4 million at each of March 31, 2019 and December 31, 2018 and consisted solely of subordinated notes for each period.

 

The following table reflects the short-term borrowings and other borrowed funds outstanding at March 31, 2019 and December 31, 2018.

 

Short-Term Borrowings and Other Borrowings

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

Amount

 

Weighted

 

Amount

 

Weighted

 

 

 

Outstanding

 

Average Rate

 

Outstanding

 

Average Rate

 

Other borrowed funds:

 

 

 

 

 

 

 

 

 

Subordinated Debt

 

24,427

 

6.00

%

24,407

 

6.00

%

Total other borrowed funds and eighted average rate

 

$

24,427

 

6.00

%

$

24,407

 

6.00

%

 

 

 

 

 

 

 

 

 

 

Total borrowed funds and weighted average rate

 

$

24,427

 

6.00

%

$

24,407

 

6.00

%

 

Capital Resources

 

Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

 

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The minimum capital requirements are: (i) a common equity Tier 1, or CET1, capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total risk based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to our CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we currently consider our minimum capital ratios to be as follows: 7.00% for CET1; 8.50% for Tier 1 capital; and 10.50% for Total capital. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation. Recently enacted legislation directs the federal bank regulatory agencies to develop a “Community Bank Leverage Ratio,” calculated by dividing tangible equity capital by average consolidated total assets, of not less than 8% and not more than 10%. In November 2018, the federal banking agencies proposed a Community Bank Leverage Ratio of 9%. If a “qualified community bank,” generally a depository institution or depository institution holding company with consolidated assets of less than $10 billion, has a leverage ratio which exceeds the Community Bank Leverage Ratio, then such bank will be considered to have met all generally applicable leverage and risk based capital requirements, the capital ratio requirements for “well capitalized” status under Section 38 of the FDIA, and any other leverage or capital requirements to which it is subject. A bank or holding company may be excluded from qualifying community bank status base on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposures and such other facts as the appropriate federal banking agencies determine to be appropriate. Even if the Company and Bank qualify for use of the Community Bank Leverage Ratio, there can be no assurance that satisfaction of the Community Bank Leverage Ratio will provide adequate capital for their operations and growth, or an adequate cushion against increase levels of nonperforming assets or weakened economic conditions.

 

Shareholders’ equity at March 31, 2019 was $164.0 million, an increase of $5.7 million, compared to $158.3 million at December 31, 2018. The increase in shareholders’ equity was primarily attributable the recognition of net income of $3.9 million through March 31, 2019. Common stock issued as a result of option exercises increased shareholders’ equity by $272,000 for the three

 

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months ended March 31, 2019. Accumulated other comprehensive loss decreased $1.4 million during 2019, primarily as a result of an increase in market value of our available-for-sale investment securities portfolio.

 

Total shareholders’ equity to total assets for March 31, 2019 and December 31, 2018 was 11.6% and 11.7%, respectively. Tangible book value per share at March 31, 2019 and December 31, 2018 was $11.32 and $10.93, respectively. Total risk-based capital to risk-weighted assets for the Bank was 13.48% at March 31, 2019 compared to 14.02% at December 31, 2018. Accordingly, we were considered “well capitalized” for regulatory purposes at March 31, 2019 and December 31, 2018.

 

As noted above, regulatory capital levels for the Bank meet those established for “well capitalized” institutions. While we are currently considered “well capitalized,” we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.

 

As the Company is a bank holding company with less than $3 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities, and (iii) have a material amount of securities registered under the Securities Exchange Act of 1934 (the “1934 Act”), is not currently subject to risk-based capital requirements adopted by the Federal Reserve, which are substantially identical to those applicable to the Bank, and which are described below. The Company understands that the Federal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the 1934 Act. There can be no assurance that the Federal Reserve will continue this practice.

 

The following tables shows the minimum capital requirement and our capital position at March 31, 2019 and December 31, 2018 for the Bank.

 

Capital Components

At March 31, 2019 and December 31, 2018

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes (1)

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

177,803

 

13.48

%

$

138,518

> 

10.50

%

$

131,922

> 

10.00

%

Tier I risk-based capital

 

168,279

 

12.76

%

112,134

> 

8.50

%

105,538

> 

8.00

%

Common equity tier I capital

 

168,279

 

12.76

%

92,345

> 

7.00

%

85,749

> 

6.50

%

Leverage capital ratio

 

168,279

 

12.56

%

87,885

> 

6.50

%

67,604

> 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

172,975

 

14.02

%

$

121,861

> 

9.875

%

$

123,404

> 

10.00

%

Tier I risk-based capital

 

163,804

 

13.27

%

97,180

> 

7.875

%

98,723

> 

8.00

%

Common equity tier I capital

 

163,804

 

13.27

%

78,670

> 

6.375

%

80,213

> 

6.50

%

Leverage capital ratio

 

163,804

 

12.41

%

52,771

> 

4.000

%

65,971

> 

5.00

%

 


(1) Except with regard to the Bank’s Tier 1 to average assets ratio, the minimum capital requirement for capital adequacy purposes includes the phased-in portion of the BASEL III Capital Rules conservation buffer.

 

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Liquidity

 

Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service, technology and pricing.

 

In addition to deposits, we have access to the different wholesale funding markets. These markets include the brokered certificate of deposit market and the federal funds market. We are a member of the Promontory Interfinancial Network, which allows banking customers to access FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits. We also have one-way authority with Promontory for both their CDARs and ICS products which provides the Bank the ability to access additional wholesale funding as needed. We also maintain secured lines of credit with the FRB and the FHLB for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.

 

Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.

 

We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.

 

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $181.5 million at March 31, 2019, or 12.8% of total assets. We held investments that are classified as held-to-maturity in the amount of $1.8 million at March 31, 2019. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB at March 31, 2019 was approximately $178.1 million. Borrowing capacity with the FRB was approximately $61.3 million at March 31, 2019. These facilities are subject to the FHLB and the Federal Reserve approving disbursement to us. In addition, we have investment securities of $137.7 million which are available to pledge at FHLB to provide additional borrowing capacity if needed. We also have unsecured federal funds purchased lines of $169.0 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.

 

Liquidity is essential to our business. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events. As discussed under the caption “Deposits and Other Borrowed Funds” above, we have a deposit concentration related to municipalities at March 31, 2019. While we believe we have a healthy liquidity position and do not anticipate the loss of deposits of any of the significant deposit customers, any of the factors discussed above could materially impact our liquidity position in the future.

 

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk

 

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

 

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on management’s evaluation of the counterparty. Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

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. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment

 

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amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business.

 

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which we have committed.

 

Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

With the exception of these off-balance sheet arrangements, we do not have any off-balance sheet arangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, changes in financial condition, revenue, expenses, capital expenditures, or capital resources, that is material to the business of the Company.

 

At March 31, 2019 and December 31, 2018, unused commitments to fund loans and lines of credit totaled $246.5 million and $216.0 million, respectively. Commercial and standby letters of credit totaled $10.1 million and $9.4 million at March 31, 2019 and December 31, 2018, respectively.

 

Quantitative and Qualitative Disclosures About Market Risk

 

As a financial institution, we are exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR. Our goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through an asset and liability committee, or ALCO. ALCO is responsible for managing our interest rate risk in conjunction with liquidity and capital management.

 

We employ an independent consulting firm to model our interest rate sensitivity. We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

 

Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Bank’s interest rate risk position over a historical time frame for comparison purposes.

 

At March 31, 2019, our asset/liability position was asset sensitive based on our interest rate sensitivity model. Our net interest income would increase by 1.8% in an up 100 basis point scenario and would increase by 1.5% in an up 400 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would increase by 4.1% in an up 100 basis point scenario and would increase by 6.8% in an up 400 basis point scenario. At March 31, 2019 and December 31, 2018, all interest rate risk stress tests measures were within our board policy established limits in each of the increased rate scenarios.

 

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Additional information on our interest rate sensitivity for a static balance sheet over a one-year time horizon as of March 31, 2019 and December 31, 2018 can be found below.

 

Interest Rate Risk to Earnings (Net Interest Income)

 

March 31, 2019

 

December 31, 2018

 

Change in interest
rates (basis points)

 

Percentage change in
net interest income

 

Change in interest
rates (basis points)

 

Percentage change in
net interest income

 

+400

 

1.49

%

+400

 

2.74

%

+300

 

1.68

%

+300

 

2.25

%

+200

 

1.90

%

+200

 

1.77

%

+100

 

1.84

%

+100

 

1.03

%

0

 

 

0

 

 

–100

 

0.65

%

–100

 

–1.13

%

–200

 

–2.48

%

–200

 

–4.80

%

 

Economic value of equity, or EVE, measures the period end market value of assets less the market value of liabilities and the change in this value as rates change. It models simultaneous parallel shifts in market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.

 

The interest rate risk to capital at March 31, 2019 and December 31, 2018 is shown below and reflects that our market value of capital is in a liability position in which an increase in short-term interest rates is expected to generate lower market values of capital. At March 31, 2019 and December 31, 2018, all EVE stress tests measures were within our board policy established limits.

 

Interest Rate Risk to Capital

 

March 31, 2019

 

December 31, 2018

 

Change in interest
rates (basis points)

 

Percentage change in
economic value of equity

 

Change in interest
rates (basis points)

 

Percentage change in
economic value of equity

 

+400

 

–18.88

%

+400

 

–16.16

%

+300

 

–13.76

%

+300

 

–11.98

%

+200

 

–8.22

%

+200

 

–7.37

%

+100

 

–3.25

%

+100

 

–3.33

%

0

 

 

0

 

 

–100

 

3.87

%

–100

 

2.39

%

–200

 

4.94

%

–200

 

2.75

%

 

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Item 4.  Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act).  As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on and as of the date of such evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective.

 

The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and are properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to monitor its effectiveness. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In the ordinary course of our operations, we become party to various legal proceedings.  Currently, we are not party to any material legal proceedings, and no such proceedings except as noted above are, to management’s knowledge, threatened against us.

 

Item 1A.  Risk Factors

 

There have been no material changes as of March 31, 2019 in the risk factors from those disclosed in our Annual Report on Form 10-K for the Period Ended December 31, 2018.

 

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

 

(a)  None.

 

(b)  Not applicable.

 

(c)  During the three months ended March 31, 2019, we did not purchase shares of our common stock.

 

Item 3.  Defaults Upon Senior Securities

 

(a)  None.

 

(b)  None.

 

Item 4.  Mine Safety Disclosures

 

None.

 

Item 5.  Other Information

 

(a)  None.

 

(b)  None.

 

Item 6.  Exhibits

 

31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer

32.1

 

Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2

 

Statement of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350

101

 

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer

 

 

 

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer

 

 

 

32.1

 

Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

32.2

 

Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

101

 

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.

 

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SIGNATURES

 

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

 

 

FVCBankcorp, Inc.

 

(Registrant)

 

 

Date: May 14, 2019

/s/ David W. Pijor

 

David W. Pijor

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date: May 14, 2019

/s/ Jennifer L. Deacon

 

Jennifer L. Deacon

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)

 

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