Company Quick10K Filing
Howard Bancorp
Price16.33 EPS1
Shares19 P/E28
MCap312 P/FCF-85
Net Debt28 EBIT36
TEV340 TEV/EBIT9
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-03-16
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-15
10-Q 2017-09-30 Filed 2017-11-07
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-16
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-14
10-K 2014-12-31 Filed 2015-03-27
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-27
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-03-27
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-06-27
8-K 2020-04-29 Earnings, Regulation FD, Exhibits
8-K 2020-04-22 Officers
8-K 2020-03-28 Officers, Exhibits
8-K 2020-02-06 Officers, Regulation FD, Exhibits
8-K 2020-01-21 Earnings, Regulation FD, Exhibits
8-K 2019-10-23 Earnings, Regulation FD, Exhibits
8-K 2019-07-24 Earnings, Regulation FD, Exhibits
8-K 2019-05-22 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-04-23 Earnings, Regulation FD, Exhibits
8-K 2019-01-30 Earnings, Exhibits
8-K 2019-01-30 Regulation FD, Exhibits
8-K 2018-12-06 Enter Agreement, Off-BS Arrangement, Regulation FD, Other Events, Exhibits
8-K 2018-10-24 Regulation FD, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-09-05 Regulation FD, Exhibits
8-K 2018-07-31 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-15 Officers, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-02-26 M&A, Officers, Regulation FD, Exhibits
8-K 2018-01-24 Amend Bylaw, Exhibits
8-K 2018-01-22 Earnings, Exhibits

HBMD 10Q Quarterly Report

Part I
Item 1.Financial Statements
Note 1: Summary of Significant Accounting Policies
Note 2: Exit of Mortgage Banking Activities
Note 3: Investment Securities
Note 4: Loans and Leases
Note 5: Credit Quality Assessment
Note 6: Derivatives and Hedging Activities
Note 7: Goodwill and Other Intangible Assets
Note 8: Leases
Note 9: Deposits
Note 10: Stock Options and Stock Awards
Note 11: Benefit Plans
Note 12: Income per Common Share
Note 13: Regulatory Capital
Note 14: Fair Value
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6.Exhibits
EX-31.1 tm2014553d1_ex31-1.htm
EX-31.2 tm2014553d1_ex31-2.htm
EX-32 tm2014553d1_ex32.htm

Howard Bancorp Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
2.31.81.40.90.50.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12016201720182020
Rev, G Profit, Net Income
0.20.10.10.0-0.0-0.12012201420172020
Ops, Inv, Fin

10-Q 1 tm2014553-1_10q.htm FORM 10-Q

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

Commission File Number: 001-35489

 

HOWARD BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   20-3735949
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

3301 Boston Street, Baltimore, MD   21224
(Address of principal executive offices)   (Zip Code)

 

(410) 750-0020

(Registrant’s telephone number, including area code)

 

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

 

Title of each class:   Trading Symbol   Name of each exchange on which registered:
Common Stock, par value $0.01 per share   HBMD   The Nasdaq Stock Market LLC

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company x Emerging growth company ¨

 

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

 

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

 

The number of shares of common stock outstanding as of May 8, 2020.

 

Common Stock, $0.01 par value – 18,715,678 shares

 

 

 

 

 

HOWARD BANCORP, INC.

TABLE OF CONTENTS

 

    Page
PART I Financial Information 2
Item 1. Financial Statements  
  Consolidated Balance Sheets (Unaudited) 2
  Consolidated Statements of Operations (Unaudited) 3
  Consolidated Statements of Comprehensive Income (Unaudited) 4
  Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 4
  Consolidated Statements of Cash Flows (Unaudited) 5
  Notes to Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosure about Market Risk 50
     
Item 4. Controls and Procedures 51
   
PART II Other Information 52
Item 1. Legal Proceedings 52
     
Item 1A. Risk Factors 52
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
     
Item 3. Defaults Upon Senior Securities 54
     
Item 4. Mine Safety Disclosures 54
     
Item 5. Other Information 54
     
Item 6. Exhibits 55
     
Signatures   56

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “report”) contains “forward-looking statements,” as that phrase is defined in the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as “estimate,” “project,” “believe,” “goal,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “could” and words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. These forward-looking statements include, but are not limited to statements of our goals, intentions and expectations, including the expected impact of exiting our mortgage banking activities, our expectations that many of our unfunded commitments will expire without being drawn, and statements regarding our business plan and strategies. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control. Actual events and results may differ materially from those described in such forward-looking statements due to numerous factors, including:

 

·the impact of the recent outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
·negative economic conditions that adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;
·any negative perception of our reputation or financial strength;
·competition among depository and other financial institutions;
·changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;
·changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
·the composition of our management team and our ability to attract and retain key personnel;
·our ability to enter new markets successfully and capitalize on growth opportunities, and to otherwise implement our growth strategy;
·material weaknesses in our internal control over financial reporting;
·our ability to successfully integrate acquired entities, if any;
·our inability to replace income lost from exiting our mortgage banking activities with new revenues;
·changes in consumer spending, borrowing and savings habits;
·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board;
·changes in our organization, compensation and benefit plans;
·negative reactions to our branch closures by our customers, employees and other counterparties;
·execution risk related to the opening of new branches, including increased expenses;
·our ability to maintain the asset quality of our investment portfolios and the anticipated recovery and collection of unrealized losses on securities available for sale;
·impairment of goodwill, other intangible assets or deferred tax assets;
·our ability to continue our expected focus on commercial customers as well as maintaining our residential mortgage loan portfolio;
·changes in our expected occupancy and equipment expenses;
·changes to our allowance for credit losses, and the adequacy thereof;
·our ability to maintain adequate liquidity levels and future sources of liquidity;
·our ability to retain a large portion of maturing certificates of deposit;
·the impact on us of recent changes to accounting standards;
·the impact of future cash requirements relating to commitments to extend credit;
·risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
·the risk of changes in technology and customer preferences;
·the impact of any material failure or breach in our infrastructure or the infrastructure of third parties on which we rely as a result of cyber-attacks;
·the impact of interest rate changes on our net interest income;
·the adverse effects of events such as outbreaks of contagious disease, war or terrorist activities, or essential utility outages, including deterioration in the global economy, instability in credit markets and disruptions in our customers’ supply chains and transportation;
·other economic, competitive, governmental, regulatory, technological, and geopolitical factors affecting our operations, pricing, and services; and
·each of the factors and risks under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, Part II, Item 1A, Risk Factors, in this Form 10-Q and in subsequent filings we make with the SEC.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. You should not put undue reliance on any forward-looking statements. These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this report, except as required by law.

 

 1 

 

 

PART I

 

Item 1.Financial Statements

 

Howard Bancorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

 

   Unaudited     
   March 31,   December 31, 
(in thousands, except share data)  2020   2019 
ASSETS          
Cash and due from banks  $15,951   $12,992 
Interest-bearing deposits with banks   179,999    96,985 
Total cash and cash equivalents   195,950    109,977 
Securities available for sale, at fair value   275,252    215,505 
Securities held to maturity, at amortized cost   7,750    7,750 
Nonmarketable equity securities   16,757    14,152 
Loans held for sale, at fair value   3,795    30,710 
Loans and leases, net of unearned income   1,761,419    1,745,513 
Allowance for credit losses   (13,384)   (10,401)
Net loans and leases   1,748,035    1,735,112 
Bank premises and equipment, net   42,543    42,724 
Goodwill   65,949    65,949 
Core deposit intangible   7,770    8,469 
Bank owned life insurance   76,275    75,830 
Other real estate owned   2,322    3,098 
Deferred tax assets, net   33,529    36,010 
Interest receivable and other assets   31,967    29,333 
Total assets  $2,507,894   $2,374,619 
LIABILITIES          
Noninterest-bearing deposits  $483,499   $468,975 
Interest-bearing deposits   1,305,400    1,245,390 
Total deposits   1,788,899    1,714,365 
Customer repurchase agreements and federal funds purchased   5,321    6,127 
FHLB advances   344,000    285,000 
Subordinated debt   28,290    28,241 
Accrued expenses and other liabilities   26,026    26,738 
Total liabilities   2,192,536    2,060,471 
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS' EQUITY          
Common stock - par value of $0.01 authorized 20,000,000 shares; issued and outstanding 18,714,844 shares at March 31, 2020 and 19,066,913 at December 31, 2019   187    191 
Capital surplus   269,918    276,156 
Retained earnings   38,501    35,158 
Accumulated other comprehensive income   6,752    2,643 
Total stockholders’ equity   315,358    314,148 
Total liabilities and stockholders’ equity  $2,507,894   $2,374,619 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 2 

 

 

Consolidated Statements of Operations

 

   Unaudited 
   For the three months ended 
   March 31, 
(in thousands, except per share data)  2020   2019 
INTEREST INCOME          
Interest and fees on loans and leases  $20,144   $20,566 
Interest and dividends on securities   1,848    1,856 
Other interest income   234    362 
Total interest income   22,226    22,784 
INTEREST EXPENSE          
Deposits   3,210    3,564 
Customer repurchase agreements and federal funds purchased   4    12 
FHLB advances   1,026    1,254 
Subordinated debt   461    480 
Total interest expense   4,701    5,310 
NET INTEREST INCOME   17,525    17,474 
Provision for credit losses   3,445    1,725 
Net interest income after provision for credit losses   14,080    15,749 
NONINTEREST INCOME          
Service charges on deposit accounts   642    627 
Realized and unrealized gains on mortgage banking activity   1,036    1,485 
Income from bank owned life insurance   445    447 
Loan related fees and service charges   581    1,043 
Other operating income   662    933 
Total noninterest income   3,366    4,535 
NONINTEREST EXPENSE          
Compensation and benefits   8,441    8,034 
Occupancy and equipment   1,033    1,571 
Amortization of core deposit intangible   699    784 
Marketing and business development   450    457 
Professional fees   726    785 
Data processing fees   927    1,378 
FDIC assessment   212    287 
Other real estate owned   78    27 
Loan production expense   468    520 
Other operating expense   1,525    1,014 
Total noninterest expense   14,559    14,857 
INCOME BEFORE INCOME TAXES   2,887    5,427 
Income tax (benefit) expense   (456)   1,171 
NET INCOME  $3,343   $4,256 
NET INCOME PER COMMON SHARE          
Basic  $0.18   $0.22 
Diluted  $0.18   $0.22 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 3 

 

 

Consolidated Statements of Comprehensive Income

 

   Unaudited 
    For the three months ended 
    March 31, 
(in thousands)  2020   2019 
Net Income   $3,343   $4,256 
Other comprehensive income           
Investments available-for-sale:          
Unrealized holding gains    5,669    1,800 
Related income tax expense    (1,560)   (496)
Comprehensive income   $7,452   $5,560 

 

Consolidated Statements of Changes in Stockholders’ Equity

 

                   Accumulated     
                   other     
Unaudited  Number of   Common   Capital   Retained   comprehensive     
(dollars in thousands, except share data)  shares   stock   surplus   earnings   income    Total 
Balances at December 31, 2018   19,039,347   $190   $275,843   $18,277   $373   $294,683 
Net income   -    -    -    4,256    -    4,256 
Other comprehensive gain   -    -    -    -    1,304    1,304 
Director stock awards   4,802    -    62    -    -    62 
Exercise of options   8,554    1    76    -    -    77 
Employee stock purchase plan   6,782    -    97    -    -    97 
Stock-based compensation   -    -    50    -    -    50 
Balances at March 31, 2019   19,059,485   $191   $276,128   $22,533   $1,677   $300,529 
                               
Balances at December 31, 2019   19,066,913   $191   $276,156   $35,158   $2,643   $314,148 
Net income   -    -    -    3,343    -    3,343 
Other comprehensive gain   -    -    -    -    4,109    4,109 
Director stock awards   8,151    -    137    -    -    137 
Employee stock purchase plan   12,581    -    195    -    -    195 
Repurchased shares   (372,801)   (4)   (6,673)   -    -    (6,677)
Stock-based compensation   -    -    103    -    -    103 
Balances at March 31, 2020   18,714,844   $187   $269,918   $38,501   $6,752   $315,358 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 4 

 

 

Consolidated Statements of Cash Flows

 

   Unaudited 
   Three months ended 
   March 31 
(in thousands)  2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $3,343   $4,256 
Adjustments to reconcile net income to net cash from operating activities:          
Provision for credit losses   3,445    1,725 
Deferred income tax   921    1,025 
Provision for other real estate owned   21    - 
Depreciation and amortization   558    586 
Stock-based compensation   240    209 
Net accretion of discount on purchased loans   (204)   (464)
Net amortization of intangible asset   699    784 
Loans originated for sale   (79,847)   (84,354)
Proceeds from sale of loans originated for sale   107,798    80,285 
Realized and unrealized gains on mortgage banking activity   (1,036)   (1,485)
Loss on sale of other real estate owned, net   28    - 
Cash surrender value of BOLI   (445)   (447)
Increase in other assets   (3,179)   (243)
Decrease in other liabilities   (2,723)   (1,166)
Other, net   13    (73)
Net cash provided by operating activities   29,632    638 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of investment securities   (64,441)   (5,000)
Proceeds from sales, maturities and calls of investment securities   10,350    38,872 
Net (increase) decrease in loans and leases outstanding   (16,164)   193 
Proceeds from the sales of other real estate owned   727    - 
Purchase of premises and equipment   (377)   (171)
Net cash (used in) provided by investing activities   (69,905)   33,894 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase (decrease) in deposits   74,534    (12,338)
Net decrease in customer repurchase agreements and federal funds purchased   (806)   (6,307)
Net increase (decrease) in FHLB advances   59,000    (20,000)
Proceeds from issuance of common stock, net of cost   195    77 
Repurchase of common stock   (6,677)   - 
Net cash provided by (used in) financing activities   126,246    (38,568)
           
Net increase (decrease) in cash and cash equivalents   85,973    (4,036)
Cash and cash equivalents at beginning of period   109,977    101,498 
Cash and cash equivalents at end of period  $195,950   $97,462 
SUPPLEMENTAL INFORMATION          
Cash payments for interest  $4,230   $5,044 
Cash payments for income taxes   15    - 
Cash payments for operating leases   195    365 
Lease liabilities arising from obtaining right of use assets (see Note 8)   2,011    18,009 
Goodwill reduction for adjustments to acquired net deferred tax assets   -    4,748 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 5 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 1: Summary of Significant Accounting Policies

 

Nature of Operations

 

Howard Bancorp, Inc. (“Bancorp” or the “Company”) was incorporated in April 2005 under the laws of the State of Maryland. On December 15, 2005, Bancorp acquired all of the stock of Howard Bank (the “Bank”) pursuant to the Plan of Reorganization approved by the stockholders of the Bank and by federal and state regulatory agencies. Each share of the Bank’s common stock was converted into two shares of Bancorp common stock effected by the filing of Articles of Exchange on that date, and the stockholders of the Bank became the stockholders of Bancorp. Bancorp is now a bank holding company registered under the Bank Holding Company Act of 1956, with a single bank subsidiary, Howard Bank, which operates as a state trust company with commercial banking powers regulated by the Maryland Office of the Commissioner of Financial Regulation (the “Commissioner”).

 

The Bank has nine subsidiaries—six were formed to hold foreclosed real estate (three of which are currently inactive), two own and manage real estate used for corporate purposes, and one holds historic tax credit investments.

 

The Company is a diversified financial services company providing commercial banking and consumer finance through banking branches, the internet and other distribution channels to businesses, business owners, professionals and other consumers located primarily in the Greater Baltimore Metropolitan Area.

 

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company's 2019 Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") on March 16, 2020. There have been no significant changes to the Company's accounting policies as disclosed in the 2019 Annual Report on Form 10-K.

 

The following is a description of the Company’s significant accounting policies.

 

Basis of Presentation

 

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the financial services industry for financial information.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Bancorp, the Bank and the Bank’s subsidiaries. All significant intercompany accounts and transactions have been eliminated. The parent company only financial statements report investments in the Bank under the equity method.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for credit losses, goodwill, deferred tax assets, other-than-temporary impairment of investment securities and the fair value of loans held for sale.

 

Allowance for Credit Losses

 

The allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan and lease portfolio and is based on the size and current risk characteristics of the loan and lease portfolio, an assessment of individual problem loans and leases, actual loss experience, current economic events in specific industries and geographic areas including unemployment levels and other pertinent factors including general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogenous loans and leases based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Credit losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.

 

The allowance for credit losses consists of a specific component and a nonspecific component. The components of the allowance for credit losses represent an estimation done pursuant to either the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 450 Contingencies or ASC Topic 310 Receivables. The specific component of the allowance for credit losses reflects expected losses resulting from analysis developed through credit allocations for individual loans and leases. The credit allocations are based on a regular analysis of all loans and leases over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The specific component of the allowance for credit losses also includes management’s determination of the amounts necessary given concentrations and changes in portfolio mix and volume.

 

 6 

 

 

The nonspecific portion of the allowance is determined based on management’s assessment of general economic conditions, as well as economic factors in the individual markets in which the Company operates including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. This determination inherently involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in the Bank’s historical loss factors used to determine the nonspecific component of the allowance, and it recognizes knowledge of the portfolio may be incomplete. The Bank’s historic loss factors are based upon actual losses incurred by portfolio segment over the preceding 24-month period. In portfolio segments where no actual losses have been incurred within the most recent 24-month period, industry loss data for that portfolio segment, as provided by the Federal Deposit Insurance Corporation (“FDIC”), are utilized. In addition to historic loss factors, the Bank’s methodology for the allowance for credit losses incorporates other risk factors that may be inherent within the portfolio segments. For each portfolio segment, in addition to the historic loss experience, the qualitative factors that are measured and monitored in the overall determination of the allowance include:

 

·changes in lending policies, procedures, and practices;
·changes in international, national, state and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;
·changes in the nature and volume of the loan portfolio;
·changes in the experience, ability and depth of the lending staff;
·changes in the volume and severity of past due, nonaccrual, and adversely classified loans;
·changes in the quality of our loan review system;
·changes in the value of underlying collateral for collateral-dependent loans;
·the existence of any concentrations of credit, and changes in the level of such concentrations;
·the effect of other external factors such as competition and legal and regulatory requirements; and
· any other factors that management considers relevant to the quality or performance of the loan portfolio.

 

Each of these qualitative risk factors is measured based upon data generated either internally, or in the case of economic conditions utilizing independently provided data on items such as unemployment rates, commercial real estate vacancy rates, or other market data deemed relevant to the business conditions within the markets served.

 

The Company’s loan and lease policies state that after all collection efforts have been exhausted, and the loan or lease is deemed to be a loss, then the remaining loan or lease balance will be charged to the Company’s established allowance for credit losses. All loans and leases are evaluated for loss potential once it has been determined by the Watch Committee that the likelihood of repayment is in doubt. When a loan is past due for at least 90 days or a deterioration in debt service coverage ratio, guarantor liquidity, or loan-to-value ratio has occurred that would cause concern regarding the likelihood of the full repayment of principal and interest, and the loan or lease is deemed not to be well secured, the loan or lease would be moved to non-accrual status and a specific reserve is established if the net realizable value is less than the principal value of the loan balance(s). Once the actual loss value has been determined, a charge-off against the allowance for credit losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.

  

Acquired Loans

 

Acquired loans are recorded at fair value at the date of acquisition, and accordingly, no allowance for loan losses is transferred to the acquiring entity under the acquisition method. The fair values of loans with evidence of credit deterioration (acquired credit impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit-impaired loans. For acquired credit impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the initial investment in the acquired credit impaired loan is recognized as interest income, using a level-yield basis over the life of the loan. This amount is referred to as the accretable yield. The acquired credit impaired loan’s contractually-required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non-accretable difference, and is not reflected as an adjustment to the yield, but in the form of a loss accrual or a valuation allowance.

 

Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to management’s initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance for credit losses through a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.

 

Goodwill, Other Intangible Assets and Long-Lived Assets

 

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in a business combination. The core deposit intangible is amortized over the estimated useful lives of the long-term deposits acquired, and the remaining amounts of the core deposit intangible are periodically reviewed for impairment. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. Long-lived assets are those that provide the Company with a future economic benefit beyond the current year or operating period. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is greater than the fair value of the asset. Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell. An impairment analysis is performed annually.

 

Management has determined that the Company has one reporting unit, and based upon the annual impairment analysis, it was determined that there was not an impairment of the carrying value of either the goodwill, core deposit intangible or other long-lived assets for 2019.

 

 7 

 

 

Income Taxes

 

The Company uses the asset/liability method of accounting for income taxes. Under the asset/liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. The Company does not have uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expenses. The Company remains subject to examination by federal and state taxing authorities for income tax returns for the years ending after December 31, 2014.

 

Share-Based Compensation

 

Compensation cost is recognized for stock options and restricted stock issued to directors and employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Company’s common stock at the date of grant is used for restricted stock awards, which include restricted stock units. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. When an award is granted to an employee who is retirement eligible, the compensation cost of these awards is recognized over the period up to when the director or employee first becomes eligible to retire.

 

Compensation expense for non-vested common stock awards is based on the fair value of the awards, which is generally the market price of the common stock on the measurement date, which, for the Company, is the date of grant, and is recognized ratably over the service period of the award.

 

Reclassifications

 

Certain reclassifications to prior financial presentation were made to conform to the 2020 presentation. These reclassifications did not affect previously reported net income or total stockholders’ equity.

 

Recent Accounting Pronouncements

 

The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation.

 

The FASB has issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU amends the effective date of the credit loss standard (ASU 2016-13) for smaller reporting companies, as defined by the SEC. The one-time determination of whether an entity is eligible to be a smaller reporting company is based on an entity’s most recent determination as of November 15, 2019, in accordance with SEC regulations. The Company met this definition of smaller reporting company based on its most recent determination as of November 15, 2019. As a result, the effective date of this ASU for the Company has been amended from fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, to fiscal years beginning after December 31, 2022, and interim periods within those fiscal years. In addition, this ASU amended the mandatory effective date for the elimination of Step 2 from the goodwill impairment test (ASU 2017-04 discussed below). As a smaller reporting company, the effective date of the goodwill impairment standard for the Company has been amended from fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, to fiscal years beginning after December 31, 2022, and interim periods within those fiscal years.

 

The FASB has issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  The amendments in this Update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment charges should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. As discussed above, this ASU, as amended by ASU 2019-10, will be effective for the Company on January 1, 2023. The Company will evaluate the guidance in this Update but does not expect it to have a significant impact on the Company’s financial position or results of operations.

 

 8 

 

  

The FASB has issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the guidance in this Update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. As discussed above, this ASU, as amended by ASU 2019-10, will be effective for the Company on January 1, 2023. The Company has engaged a third party vendor and is currently gathering historical data and reviewing the methodologies and assumptions utilized to determine the impact of this update on the Company’s Consolidated Financial Statements.

 

COVID-19 Risks and Uncertainties

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in the Company’s markets. In response to the COVID-19 pandemic, the State of Maryland and most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.

 

While the Company’s business has been designated an essential business, which allows the Bank to continue to serve its customers, the Company serves many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. And many of the Company’s customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by the COVID-19 pandemic.

 

The impact of the COVID-19 pandemic is fluid and continues to evolve. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business and results of operations. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic has had and is expected to continue to have a an adverse effect on the Company’s business and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.

 

Note 2: Exit of Mortgage Banking Activities

 

On December 18, 2019, the Company entered into an agreement to release certain management members of the mortgage division from their employment contracts and allow those individuals to create a limited liability company (“LLC”) for the purpose of hiring all remaining mortgage employees. The Company also agreed to transfer ownership of the domain name “VAmortgage.com” to the newly created LLC. In consideration of the release of the employment agreements, the transfer of the mortgage employees, and the sale of the domain name, the LLC paid the Company $750 thousand. Under the agreement, there was a transition period of approximately 45 days, after which the Company agreed to cease originating residential first lien mortgage loans and will exit all mortgage banking activities. Accordingly all of the residential first lien mortgage pipeline were processed by the end of the first quarter of 2020. In order to manage loan run-off within the residential mortgage loan portfolio, the Company plans on buying first lien residential mortgage loans, on a servicing released basis, from both the LLC and other third-party originators.

 

The following table presents a roll forward of loans held for sale, showing loans originated for sale and loans sold into the secondary market, for the periods March 31, 2020 and, December 31, 2019. In addition, the volume of loans originated for the Company’s loan portfolio as well as a statement of operations for the mortgage banking activities for the same periods. Since the mortgage banking activities were conducted within a division of the Bank, formal financial statements were not prepared. The statement of operations presented below reflects only the direct costs associated with the Company’s mortgage banking activities and is thus representative of the incremental after tax impact of exiting this activity.

 

   Quarter Ended   Year Ended 
(in thousands)  March 31, 2020   December 31, 2019 
Loans held for sale, January 1  $30,710   $21,261 
Loans originated for sale   79,847    573,306 
Loans sold into the secondary market   (106,762)   (563,857)
Loans held for sale, at end of period  $3,795   $30,710 
Loans originated for the Bank's portfolio  $11,378   $114,561 

 

 9 

 

 

   For the three months ended 
   March 31, 
   2020   2019 
Statement of Operations:          
Net interest income  $143   $147 
Realized and unrealized gains on mortgage banking activity   1,036    1,485 
Loan related fees and service charges   389    460 
Total noninterest income   1,425    1,945 
Salaries and benefits   928    1,607 
Occupancy   20    79 
All other operating expenses   490    468 
Total noninterest expense   1,438    2,154 
Pretax contribution    130    (62)
Income tax expense (benefit)   36    (17)
After tax contribution  $94   $(45)

 

Since the Bank’s 91 employees that were engaged in mortgage banking activities were hired by the LLC under the terms of the agreement, no severance costs were recorded. However, in the fourth quarter of 2019, the Company recorded $288 thousand of exit costs associated with change in control and retention agreements. Back office employees remained with the bank for a portion of the first quarter in order to process the pipeline. The LLC is subleasing the office space that was used by these employees; therefore, no exit costs associated with lease terminations were required.

  

Note 3: Investment Securities

 

The Bank holds securities classified as available for sale and held to maturity.

 

The amortized cost and estimated fair values of investments are as follows:

 

(in thousands)

  March 31, 2020     December 31, 2019  
          Gross     Gross                 Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated     Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value     Cost     Gains     Losses     Fair Value  
Available for sale U.S. Government                                                                
Agencies   $ 79,916     $ 1,978     $ -     $ 81,894     $ 66,428     $ 963     $ 79     $ 67,312  
Mortgage-backed     180,509       7,315       -       187,824       139,918       2,848       67       142,699  
Other investments     5,510       43       19       5,534       5,510       4       20       5,494  
    $ 265,935     $ 9,336     $ 19     $ 275,252     $ 211,856     $ 3,815     $ 166     $ 215,505  

Held to maturity

                                                               

Corporate debentures

  $ 7,750     $ 117     $ 17     $ 7,850     $ 7,750     $ 147     $ -     $ 7,897  

 

Gross unrealized losses and fair value by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019 are presented below:

 

March 31, 2020                        
(in thousands)  Less than 12 months   12 months or more   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
Available for sale                              
U.S. Government                              
Agencies  $-   $-   $-   $-   $-   $- 
Mortgage-backed   -    -    -    -    -    - 
Other investments   -    -    2,990    19    2,990    19 
   $-   $-   $2,990   $19   $2,990   $19 
Held to maturity                              
Corporate debentures  $2,483   $17   $-   $-   $2,483   $17 

 

 10 

 

 

December 31, 2019                        
(in thousands)  Less than 12 months   12 months or more   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
Available for sale                              
U.S. Government                              
Agencies  $10,689   $79   $-   $-   $10,689   $79 
Mortgage-backed   35,512    60    975    7    36,487    67 
Other investments   -    -    2,990    20    2,990    20 
   $46,201   $139   $3,965   $27   $50,166   $166 
Held to maturity                              
Corporate debentures  $-   $-   $-   $-   $-   $- 

 

The unrealized losses that existed were a result of market changes in interest rates since the original purchase. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include the (1) duration and magnitude of the decline in value, (2) financial condition of the issuer or issuers and (3) structure of the security. The Company had four securities in the portfolio with unrealized losses at March 31, 2020 compared to 15 at December 31, 2019.

 

An impairment loss is recognized in earnings if any of the following are true: (1) the Company intends to sell the debt security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In situations where the Company intends to sell or when it is more likely than not that the Company will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in stockholders’ equity as a component of other comprehensive income, net of deferred tax.

 

The amortized cost and estimated fair values of investment securities by contractual maturity are shown below:

 

(in thousands)  March 31, 2020   December 31, 2019 
   Amortized   Estimated Fair   Amortized   Estimated Fair 
   Cost   Value   Cost   Value 
Amounts maturing:                    
One year or less  $1,498   $1,506   $1,497   $1,500 
After one through five years   49,152    50,633    49,166    50,048 
After five through ten years   38,793    39,752    33,576    33,915 
After ten years   184,242    191,211    135,367    137,939 
   $273,685   $283,102   $219,606   $223,402 

 

At March 31, 2020 and December 31, 2019, $10.9 million and $11.6 million in fair value of securities, respectively, were pledged as collateral for both repurchase agreements and deposits of local government entities that require pledged collateral as a condition of maintaining these deposit accounts. No single issuer of securities, except for government agency and mortgage backed securities, had outstanding balances that exceeded ten percent of stockholders’ equity at March 31, 2020.

 

Note 4: Loans and Leases

 

The Company makes loans and leases to customers primarily in the Greater Baltimore Metropolitan Area and surrounding communities. A substantial portion of the Company’s loan portfolio consists of loans to businesses secured by real estate and/or other business assets.

 

The loan portfolio segment balances at March 31, 2020 and December 31, 2019 are presented in the following table:

 

   March 31, 2020   December 31, 2019 
(in thousands)  Total   % of
Total
   Total   % of
Total
 
Real estate                    
Construction and land  $130,980    7.4%  $128,285    7.3%
Residential - first lien   428,788    24.4    437,409    25.1 
Residential - junior lien   71,045    4.0    74,164    4.2 
Total residential real estate   499,833    28.4    511,573    29.3 
Commercial - owner occupied   248,918    14.1    241,795    13.9 
Commercial - non-owner occupied   447,889    25.5    444,052    25.4 
Total commercial real estate   696,807    39.6    685,847    39.3 
Total real estate loans   1,327,620    75.4    1,325,705    75.9 
Commercial loans and leases 1   389,065    22.1    372,872    21.4 
Consumer   44,734    2.5    46,936    2.7 
Total loans and leases  $1,761,419    100.0%  $1,745,513    100.0%

 

1 Includes leases of $5,637 and $6,382 at March 31, 2020 and December 31, 2019, respectively.

 

Net loan origination fees, which are included in the amounts above, totaled $1.3 million at both March 31, 2020 and December 31, 2019.

 

 11 

 

 

Acquired Credit Impaired Loans

 

The following table documents changes in the accretable discount on acquired credit impaired loans at the beginning and end of March 31, 2020 and 2019:

 

   March 31, 
(in thousands)  2020   2019 
Balance at beginning of period  $689   $877 
Impaired loans acquired   -    - 
Accretion of fair value discounts   (16)   (42)
Balance at end of period  $673   $835 

 

The table below presents the outstanding balances and related carrying amounts for all acquired credit impaired loans at the end of the respective periods:

 

   Contractually     
   Required     
   Payments   Carrying 
(in thousands)  Receivable   Amount 
At March 31, 2020  $10,195   $8,111 
At December 31, 2019   10,929    8,706 

 

Note 5: Credit Quality Assessment

 

Allowance for Credit Losses

 

Summary information on the allowance for credit loss activity for the period indicated is presented in the following table:

 

   March 31, 
(in thousands)  2020   2019 
Beginning balance  $10,401   $9,873 
Charge-offs   (583)   (2,854)
Recoveries   121    10 
Net charge-offs   (462)   (2,844)
Provision for credit losses   3,445    1,725 
Ending balance  $13,384   $8,754 

 

The March 31, 2020 allowance reflects the Company’s initial assessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Management’s approach to COVID-19 and the evaluation of the allowance considered the following: (1) any change in historical loss rates resulting from COVID-19; (2) any risk rating downgrades related to COVID-19; and (3) any changes to collateral valuations or cash flow assumptions for impaired loans. Based on this review, the Company determined that there were no initial impacts to any of these factors at March 31, 2020.

 

The Company then reviewed our qualitative factors and identified three factors that warranted further evaluation:

 

·Changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;
·The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
·Changes in the value of underlying collateral for collateral-dependent loans.

 

The Company’s evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, considered the abrupt slowdown in commercial economic activity resulting from actions announced by the State of Maryland between the March 5 disclosure of the first confirmed cases of COVID-19 in the state and the March 23 executive order closing all non-essential businesses in the state. In addition, management considered the dramatic rise in the unemployment rate in the Company’s market area. Based on U.S. Department of Labor weekly initial unemployment claims by state, management noted that the average weekly initial unemployment claims for the State of Maryland during the two weeks ending March 28, 2020 were 19 times higher than the average weekly claims for the first eleven weeks of 2020. An increase in this qualitative factor was applied to all loan portfolio categories.

 

 12 

 

 

The Company also evaluated the existence and effect of any concentrations of credit, and changes in the level of such concentrations. Management performed an analysis of the loan portfolio to identify the Company’s exposure to industry segments that management believes may potentially be the most highly impacted by COVID-19. Based on this evaluation, the following table identifies those industry segments within the Company’s loan portfolio that management believes may potentially be most highly impacted by COVID-19. Loan balances and total credit exposures are as of March 31, 2020 while the modification and Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan balances are as of April 24, 2020.

 

(in millions)

Loan Category

  Loan Balance  

As %

of Total Loans

   Total Exposure (1)  

As %

of Total Exposure

  

Loan

Balance with Modifications

  

As %

of Loan Category

   SBA PPP Loan Balance   As % of Loan Category 
CRE - retail  $109.8    6.2%  $112.0    5.3%  $21.5    19.6%  $-    -%
Hotels   61.5    3.5    67.0    3.2    53.5    87.0    0.9    1.5 
CRE - residential rental   50.3    2.9    51.4    2.4    10.9    21.7    -    - 
Nursing and residential care   39.8    2.3    46.3    2.2    -    -    1.8    4.5 
Retail trade   26.3    1.5    37.3    1.8    1.1    4.2    6.3    24.0 
Restaurants and caterers   26.1    1.5    29.0    1.4    19.5    74.7    8.9    34.1 
Religious and similar organizations   27.6    1.6    28.6    1.4    2.9    10.5    2.7    9.8 
Arts, entertainment, and recreation   16.2    0.9    18.5    0.9    14.5    89.5    1.3    8.0 
Total - selected categories  $357.6    20.3%  $390.1    18.6%  $123.9    34.6%  $21.9    6.1%

 

(1) includes unused lines of credit and unfunded commitments

 

The potentially highly impacted loan exposures noted in the above tables (the “high impacts”) were concentrated in non-owner-occupied commercial real estate (59% of total high impacts), owner-occupied commercial real estate (18% of total high impacts), commercial construction (14% of total high impacts), and commercial loans (9% of total high impacts). An increase in this qualitative factor was applied to these high impact loan portfolio categories.

 

The Company’s evaluation of potential changes in the value of underlying collateral for collateral-dependent loans considered the potential impact of the economic fallout from COVID-19 on commercial property values due to rent relief and possible business failures resulting in vacancies. In addition, the need for office space may diminish in the future as work from home policies have allowed much office-oriented business activity to continue. Excluding the high impact portfolios, management concluded that 53% of the Company’s non-owner-occupied commercial real estate portfolio was not included in the high impact exposure. An increase in this qualitative factor was applied to the Company’s non-owner-occupied commercial real estate portfolio.

 

The following table provides information on the activity in the allowance for credit losses by the respective loan portfolio segment for the three months ended March 31, 2020 and the year ended December 31, 2019:

 

   March 31, 2020 
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Allowance for credit losses:                                        
Beginning balance  $1,256   $2,256   $478   $788   $2,968   $2,103   $552   $10,401 
Charge-offs   -    (33)   -    -    -    (549)   (1)   (583)
Recoveries   -    3    51    -    -    66    1    121 
Provision for credit losses   (64)   (22)   334    466    1,162    1,330    239    3,445 
Ending balance  $1,192   $2,204   $863   $1,254   $4,130   $2,950   $791   $13,384 
                                         
Allowance allocated to:                                        
individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $- 
collectively evaluated for impairment  $1,192   $2,204   $863   $1,254   $4,130   $2,950   $791   $13,384 
Loans and leases:                                        
Ending balance  $130,980   $428,788   $71,045   $248,918   $447,889   $389,065   $44,734   $1,761,419 
individually evaluated for impairment  $478   $12,470   $832   $477   $1,777   $1,092   $102   $17,228 
collectively evaluated for impairment  $130,502   $416,318   $70,213   $248,441   $446,112   $387,973   $44,632   $1,744,191 

 

 13 

 

 

   December 31, 2019 
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Allowance for credit losses:                                        
Beginning balance  $741   $1,170   $292   $735   $4,057   $2,644   $234   $9,873 
Charge-offs   (282)   (518)   (532)   (46)   (2,026)   (622)   (210)   (4,236)
Recoveries   80    -    115    -    17    357    2    571 
Provision for credit losses   717    1,604    603    99    920    (276)   526    4,193 
Ending balance  $1,256   $2,256   $478   $788   $2,968   $2,103   $552   $10,401 
Allowance allocated to:                                        
individually evaluated for impairment  $-   $-   $-   $-   $-   $500   $-   $500 
collectively evaluated for impairment  $1,256   $2,256   $478   $788   $2,968   $1,603   $552    9,901 
Loans and leases:                                        
Ending balance  $128,285   $437,409   $74,164   $241,795   $444,052   $372,872   $46,936   $1,745,513 
individually evaluated for impairment  $481   $13,131   $786   $566   $1,725   $2,360   $127   $19,176 
collectively evaluated for impairment  $127,804   $424,278   $73,378   $241,229   $442,327   $370,512   $46,809   $1,726,337 

 

When potential losses are identified, a specific provision and/or charge-off may be taken, based on the then current likelihood of repayment, that is at least in the amount of the collateral deficiency, and any potential collection costs, as determined by the independent third party appraisal.  

 

Loans that are considered impaired are subject to the completion of an impairment analysis.  This analysis highlights any potential collateral deficiencies. A specific amount of impairment is established based on the Bank’s calculation of the probable loss inherent in the individual loan. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.

 

Credit risk profile by portfolio segment based upon internally assigned risk assignments are presented below:

 

   March 31, 2020   
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Credit quality indicators:                                        
Not classified  $130,502   $416,318   $70,213   $248,441   $446,054   $387,973   $44,632   $1,744,133 
Special mention   -    -    -    -    -    -    -    - 
Substandard   478    12,470    832    477    1,835    1,092    102    17,286 
Doubtful   -    -    -    -    -    -    -    - 
Total  $130,980   $428,788   $71,045   $248,918   $447,889   $389,065   $44,734   $1,761,419 

 

   December 31, 2019     
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Credit quality indicators:                                        
Not classified  $127,804   $425,247   $73,378   $241,229   $442,327   $370,837   $46,809   $1,727,631 
Special mention   -    -    -    -    -    -    -    - 
Substandard   481    12,162    786    566    1,725    2,035    127    17,882 
Doubtful   -    -    -    -    -    -    -    - 
Total  $128,285   $437,409   $74,164   $241,795   $444,052   $372,872   $46,936   $1,745,513 

 

·Special Mention - A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
·Substandard - Substandard loans and leases are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
·Doubtful - Loans and leases classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

 

 14 

 

 

Loans and leases classified Special Mention, Substandard, Doubtful or Loss are reviewed at least quarterly to determine their appropriate classification. All commercial loan and lease relationships are reviewed annually. Non-classified residential mortgage loans and consumer loans are not evaluated unless a specific event occurs to raise the awareness of a possible credit deterioration.

 

An aged analysis of past due loans are as follows:

 

   March 31, 2020 
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Analysis of past due loans and leases:                                
Accruing loans and leases current  $130,502   $409,466   $68,545   $248,103   $445,290   $387,097   $44,596   $1,733,599 
Accruing loans and leases past due:                                        
30-59 days past due   -    6,844    1,083    -    628    619    28    9,202 
60-89 days past due   -    -    525    -    -    649    7    1,181 
Greater than 90 days past due   -    973    60    338    194    -    1    1,566 
Total past due   -    7,817    1,668    338    822    1,268    36    11,949 
                                         
Non-accrual loans and leases 1   478    11,505    832    477    1,777    700    102    15,871 
                                         
Total loans and leases  $130,980   $428,788   $71,045   $248,918   $447,889   $389,065   $44,734   $1,761,419 

 

   December 31, 2019 
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Analysis of past due loans and leases:                                
Accruing loans and leases current  $127,804   $418,668   $71,634   $241,062   $442,132   $370,877   $46,776   $1,718,953 
Accruing loans and leases past due:                                        
30-59 days past due   -    3,312    748    -    195    35    19    4,309 
60-89 days past due   -    3,220    996    167    -    -    14    4,397 
Greater than 90 days past due   -    47    -    -    -    -    -    47 
Total past due   -    6,579    1,744    167    195    35    33    8,753 
                                         
Non-accrual loans and leases 1   481    12,162    786    566    1,725    1,960    127    17,807 
                                         
Total loans and leases  $128,285   $437,409   $74,164   $241,795   $444,052   $372,872   $46,936   $1,745,513 

  

1 Included are acquired credit impaired loans where the Company amortizes the accretable discount into interest income, however these loans do not accrue interest based on the terms of the loan.

 

Total loans either in non-accrual status or in excess of 90 days delinquent totaled $17.4 million or 1.0% of total loans outstanding at March 31, 2020, which represents a decrease from $17.9 million, or 1.0%, at December 31, 2019.

 

The Company had no impaired leases at March 31, 2020 and December 31, 2019. The impaired loans at March 31, 2020 and December 31, 2019 are as follows:

 

   March 31, 2020 
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Impaired loans:                                        
Recorded investment 1  $478   $12,470   $832   $477   $1,777   $1,092   $102   $17,228 
With an allowance recorded   -    -    -    -    -    -    -    - 
With no related allowance recorded   478    12,470    832    477    1,777    1,092    102    17,228 
Related allowance   -    -    -    -    -    -    -    - 
Unpaid principal   663    13,723    1,030    474    2,081    1,646    105    19,722 
Average balance of impaired loans   793    14,999    1,208    478    2,106    2,039    105    21,728 
Interest income recognized   1    138    8    -    3    12    -    162 

 

 15 

 

 

   December 31, 2019 
               Commercial real estate   Commercial         
   Construction   Residential real estate   owner   non-owner   loans   Consumer     
(in thousands)  and land   first lien   junior lien   occupied   occupied   and leases   loans   Total 
Impaired loans:                                        
Recorded investment 1  $481   $13,131   $786   $566   $1,725   $2,360   $127   $19,176 
With an allowance recorded   -    -    -    -    -    554    -    554 
With no related allowance recorded   481    13,131    786    566    1,725    1,806    127    18,622 
Related allowance   -    -    -    -    -    500    -    500 
Unpaid principal   667    14,371    986    583    2,023    3,584    130    22,344 
Average balance of impaired loans   814    15,586    1,338    594    2,105    4,392    141    24,970 
Interest income recognized   5    400    106    30    11    195    1    748 

  

1 Included are acquired credit impaired loans where the Company amortizes the accretable discount into interest income, however these loans do not accrue interest based on the terms of the loan.

 

Included in the total impaired loans above were non-accrual loans of $15.9 million and $17.8 million at March 31, 2020 and December 31, 2019, respectively. Interest income that would have been recorded if non-accrual loans had been current and in accordance with their original terms was $133 thousand and $388 thousand for the three months ended March 31, 2020 and 2019, respectively.

 

Loans may have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. Such restructured loans are considered impaired loans that may either be in accruing status or non-accruing status.  Non-accruing restructured loans may return to accruing status provided there is a sufficient period of payment performance in accordance with the restructure terms.  Loans may be removed from the restructured category in the year subsequent to the restructuring if they have performed based on all of the restructured loan terms.  

 

The Company had no troubled debt restructured (“TDR”) leases at March 31, 2020 and December 31, 2019. The TDR loans at March 31, 2020 and December 31, 2019 are as follows:

 

   March 31, 2020 
   Number   Non-Accrual   Number   Accrual   Total 
(dollars in thousands)  of Loans   Status   of Loans   Status   TDRs 
Construction and land   1   $124    -   $-   $124 
Residential real estate - first lien   2    269    2    965    1,234 
Commercial loans and leases   1    414    2    367    781 
    4   $807    4   $1,332   $2,139 

 

 December 31, 2019 
   Number   Non-Accrual   Number   Accrual   Total 
(dollars in thousands)  of Loans   Status   of Loans   Status   TDRs 
Construction and land   1   $125    -   $-   $125 
Residential real estate - first lien   2    274    2    968    1,242 
Commercial loans and leases   1    414    2    367    781 
    4   $813    4   $1,335   $2,148 

 

 16 

 

 

A summary of TDR modifications outstanding and performing under modified terms is as follows:

 

   March 31, 2020 
       Not Performing   Performing     
   Related   to Modified   to Modified   Total 
(in thousands)  Allowance   Terms   Terms   TDRs 
Construction and land                    
Extension or other modification  $-   $124   $-   $124 
Residential real estate - first lien                    
Extension or other modification   -    269    965    1,234 
Commercial loans                    
Extension or other modification   -    -    367    367 
Forbearance   -