QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to ________
Commission File Number 0-29030
SB ONE BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
22-3475473
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
95 State Route 17, Paramus, NJ
07652
(Address of principal executive offices)
(Zip Code)
(844) 256-7328
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
SBBX
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 pursuant to Rule 405 of Regulation S-T 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 or a smaller reporting 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 Act).
Yes ☐ No x
As of November 1, 2019 there were 9,401,694 shares of common stock, no par value, outstanding.
We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “project,” “expect,” “anticipate,” “should,” “may,” “will,” “intend,” “planned,” “estimated,” “potential” or similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:
•
changes in the interest rate environment that reduce margins;
•
changes in the regulatory environment;
•
the highly competitive industry and market area in which we operate;
•
general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;
•
changes in business conditions and inflation;
•
changes in credit market conditions;
•
changes in the securities markets which affect investment management revenues;
•
increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments, which could adversely affect our financial condition;
•
changes in technology used in the banking business;
•
the soundness of other financial services institutions, which may adversely affect our credit risk;
•
our controls and procedures may fail or be circumvented;
•
new lines of business or new products and services, which may subject us to additional risks;
•
changes in key management personnel which may adversely impact our operations;
•
the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the recent financial crisis;
•
severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business;
•
the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Community Bank of Bergen County (“Community”);
•
the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Enterprise Bank, NJ (“Enterprise”); and
•
other factors detailed from time to time in our filings with the SEC.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
i
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
SB ONE BANCORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
September 30, 2019
December 31, 2018
ASSETS
Cash and due from banks
$
11,561
$
11,768
Interest-bearing deposits with other banks
36,380
14,910
Cash and cash equivalents
47,941
26,678
Interest bearing time deposits with other banks
200
200
Securities available for sale, at fair value
207,136
182,139
Securities held to maturity, at amortized cost (fair value of $4,414 and $4,152 at September 30, 2019 and December 31, 2018, respectively)
4,331
4,078
Other Bank Stock, at cost
9,382
11,764
Loans receivable, net of unearned income
1,563,610
1,474,775
Less: allowance for loan losses
9,750
8,775
Net loans receivable
1,553,860
1,466,000
Foreclosed real estate
3,600
4,149
Premises and equipment, net
19,663
19,215
Right-of-use assets, net
4,734
—
Accrued interest receivable
6,253
6,546
Goodwill and intangibles
29,141
29,446
Bank-owned life insurance
36,475
35,778
Other assets
11,543
9,710
Total Assets
$
1,934,259
$
1,795,703
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
$
275,730
$
259,807
Interest bearing
1,251,126
1,094,132
Total deposits
1,526,856
1,353,939
Short-term borrowings
121,000
175,295
Long-term borrowings
42,849
44,611
Lease liability
4,870
—
Accrued interest payable and other liabilities
14,739
8,555
Subordinated debentures
27,866
27,859
Total Liabilities
1,738,180
1,610,259
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued
—
—
Common stock, no par value, 15,000,000 shares authorized; 9,423,931 and 9,532,943 shares issued and 9,258,347 and 9,532,943 shares outstanding at September 30, 2019 and December 31, 2018, respectively
150,875
150,419
Treasury stock, at cost; 165,898 shares at September 30, 2019
(3,638
)
—
Deferred compensation obligation under Rabbi Trust
1,821
1,647
Retained earnings
50,175
35,192
Accumulated other comprehensive (loss)
(1,333
)
(167
)
Stock held by Rabbi Trust
(1,821
)
(1,647
)
Total Stockholders' Equity
196,079
185,444
Total Liabilities and Stockholders' Equity
$
1,934,259
$
1,795,703
See Notes to Consolidated Financial Statements
1
SB ONE BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in thousands except per share data)
2019
2018
2019
2018
INTEREST INCOME
Loans receivable, including fees
$
19,135
$
13,009
$
56,354
$
37,471
Securities:
Taxable
1,490
936
3,942
2,476
Tax-exempt
135
442
920
1,272
Interest bearing deposits
97
23
211
69
Total Interest Income
20,857
14,410
61,427
41,288
INTEREST EXPENSE
Deposits
4,755
2,156
13,078
5,273
Borrowings
1,099
943
3,286
2,323
Subordinated debentures
318
318
949
946
Total Interest Expense
6,172
3,417
17,313
8,542
Net Interest Income
14,685
10,993
44,114
32,746
PROVISION FOR LOAN LOSSES
636
321
1,983
1,227
Net Interest Income after Provision for Loan Losses
14,049
10,672
42,131
31,519
NON-INTERST INCOME
Service fees on deposit accounts
351
320
1,048
959
ATM and debit card fees
289
254
798
717
Bank-owned life insurance
235
190
697
563
Insurance commissions and fees
1,824
1,527
6,482
5,261
Investment brokerage fees
49
29
126
92
Net gain on sales of securities
—
—
1,524
36
Net (loss) gain on disposal of premises and equipment
89
—
(292
)
9
Other
266
198
745
619
Total Non-Interest Income
3,103
2,518
11,128
8,256
NON-INTEREST EXPENSES
Salaries and employee benefits
6,224
5,033
18,688
15,502
Occupancy, net
840
757
2,604
2,086
Data processing
1,000
710
2,939
2,440
Furniture and equipment
343
286
975
893
Advertising and promotion
139
147
394
488
Professional fees
272
383
1,106
1,002
Director fees
146
121
471
410
FDIC assessment
138
183
585
393
Insurance
31
35
94
182
Stationary and supplies
73
59
247
205
Merger-related expenses
—
605
—
4,344
Loan collection costs
96
53
233
203
Net expenses and write-downs related to foreclosed real estate
172
20
333
228
Amortization of intangible assets
102
61
305
182
Other
611
510
1,917
1,579
Total Non-Interest Expenses
10,187
8,963
30,891
30,137
Income before Income Taxes
6,965
4,227
22,368
9,638
EXPENSE FOR INCOME TAXES
1,820
957
5,156
2,068
Net Income
5,145
3,270
17,212
7,570
OTHER COMPREHENSIVE INCOME:
Unrealized gain (loss) on available for sale securities arising during the period
1,241
(1,383
)
6,683
(3,903
)
Fair value adjustments on derivatives
(1,540
)
779
(6,975
)
2,214
Reclassification adjustment for net (gain) on securities transactions included in net income
—
—
(1,524
)
(36
)
Income tax related to items of other comprehensive (loss) income
106
106
650
400
Other comprehensive income (loss), net of income taxes
(193
)
(498
)
(1,166
)
(1,325
)
Comprehensive income
$
4,952
$
2,772
$
16,046
$
6,245
EARNINGS PER SHARE
Basic
$
0.55
$
0.42
$
1.84
$
0.97
Diluted
$
0.55
$
0.41
$
1.83
$
0.96
See Notes to Consolidated Financial Statements
2
SB ONE BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2019 and 2018
(Unaudited)
(Dollars in Thousands)
Number of
Shares
Outstanding
Common
Stock
Deferred Compensation Obligation Under Rabbi Trust
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Stock Held by Rabbi Trust
Treasury
Stock
Total
Stockholders'
Equity
Balance December 31, 2017
6,040,564
$
65,274
1,399
$
27,532
$
1,387
(1,399
)
$
—
$
94,193
Net income
—
—
—
7,570
—
—
—
7,570
Other comprehensive loss
—
—
—
—
(1,325
)
—
—
(1,325
)
Shares issued in merger
1,873,028
51,883
—
—
—
—
—
51,883
Funding of Supplemental Director Retirement Plan
—
—
212
(212
)
—
Common stock issued
—
—
—
—
—
—
—
—
Restricted stock granted
50,045
—
—
—
—
—
—
—
Restricted stock forfeited
(4,148
)
—
—
—
—
—
—
—
Compensation expense related to stock option and restricted stock grants
—
567
—
—
—
—
—
567
Dividends declared on common stock ($0.135 per share)
—
—
—
(1,666
)
—
—
—
(1,666
)
Balance September 30, 2018
7,959,489
$
117,724
$
1,611
$
33,436
$
62
$
(1,611
)
$
—
$
151,222
Balance December 31, 2018
9,532,943
$
150,419
1,647
$
35,192
$
(167
)
(1,647
)
$
—
$
185,444
Net income
—
—
—
17,212
—
—
17,212
Other comprehensive (loss)
—
—
—
—
(1,166
)
—
—
(1,166
)
Treasury shares purchased
(165,898
)
—
—
—
—
(3,952
)
(3,952
)
Funding of Supplemental Director Retirement Plan
—
—
174
—
—
(174
)
—
—
Treasury shares issued
—
—
—
—
—
—
314
314
Common stock issued
—
(314
)
—
—
—
—
—
(314
)
Restricted stock granted
74,470
—
—
—
—
—
—
Restricted stock forfeited
(17,584
)
—
—
—
—
—
—
—
Compensation expense related to stock option and restricted stock grants
—
770
—
—
—
—
770
Dividends declared on common stock ($0.15 per share)
—
—
—
(2,229
)
—
—
(2,229
)
Balance September 30, 2019
9,423,931
$
150,875
$
1,821
$
50,175
$
(1,333
)
$
(1,821
)
$
(3,638
)
$
196,079
See Notes to Consolidated Financial Statements
3
SB ONE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(Dollars in thousands)
2019
2018
Cash Flows from Operating Activities
Net income
$
17,212
$
7,570
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
1,983
1,227
Depreciation and amortization
1,560
1,366
Net amortization of securities premiums and discounts
1,349
1,577
Amortization of subordinated debt issuance costs
7
8
Net realized gain on sale of securities
(1,524
)
(36
)
Net realized loss (gain) on disposal of premises and equipment
292
(9
)
Net realized gain on sale of foreclosed real estate
(25
)
(18
)
Write-downs of and provisions for foreclosed real estate
156
176
Deferred income tax (benefit) expense
(2,066
)
457
Earnings on bank-owned life insurance
(697
)
(563
)
Compensation expense for stock options and restricted stock grants
770
567
Decrease (increase) in assets:
Accrued interest receivable
293
(2,027
)
Other assets
(5,085
)
(1,121
)
Increase in accrued interest payable and other liabilities
5,314
918
Net Cash Provided by Operating Activities
19,539
10,092
Cash Flows from Investing Activities
Net cash acquired in acquisition
—
6,693
Securities available for sale:
Purchases
(85,409
)
(91,170
)
Sales
58,471
80,496
Maturities, calls and principal repayments
7,294
7,205
Securities held to maturity:
Purchases
(890
)
(616
)
Maturities, calls and principal repayments
616
1,000
Net increase in loans
(90,904
)
(114,936
)
Proceeds from the sale of foreclosed real estate
1,479
836
Purchases of bank premises and equipment
(2,201
)
(747
)
Proceeds from the sale of premises and equipment
207
53
Net decrease (increase) in other bank stock
2,382
(2,724
)
Net Cash Used in Investing Activities
(108,955
)
(113,910
)
Cash Flows from Financing Activities
Net increase in deposits
172,917
50,998
Net (decrease) increase in short-term borrowed funds
(54,295
)
72,550
Proceeds from long-term borrowings
15,112
—
Repayment of long-term borrowings
(16,874
)
(15,000
)
Purchase of treasury stock
(3,952
)
—
Dividends paid
(2,229
)
(1,666
)
Net Cash Provided by Financing Activities
110,679
106,882
Net increase in Cash and Cash Equivalents
21,263
3,064
Cash and Cash Equivalents - Beginning
26,678
11,646
Cash and Cash Equivalents - Ending
$
47,941
$
14,710
Supplementary Cash Flows Information
Interest paid
$
17,140
$
8,141
Income taxes paid
$
2,606
$
2,601
Operating Leases
Operating lease right-of-use asset, net
$
4,734
$
—
Operating lease liability
$
4,870
$
—
4
Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans
$
1,061
$
—
Acquisitions of Community:
Non-cash assets acquired:
Other bank stock
—
1,155
Securities available for sale
—
75,909
Loans
—
236,010
Foreclosed real estate
—
1,312
Premises and equipment
—
10,612
Interest receivable
—
824
Bank owned life insurance
—
7,963
Goodwill and intangibles assets
—
23,629
Other assets
—
1,777
Total non-cash assets acquired
—
359,191
Liabilities assumed:
Deposits
—
(301,157
)
Borrowings
—
(12,000
)
Other liabilities
—
(844
)
Total liabilities assumed
—
(314,001
)
Common stock issued for acquisitions
—
(51,883
)
See Notes to Consolidated Financial Statements
5
NOTE 1 – SUMMARY OF SIGNIFICANT ACOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of SB One Bancorp, (“we,” “us,” “our” or the “Company”) and our wholly owned subsidiary SB One Bank (the “Bank”). The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, GFR Maywood, LLC, PPD Holding Company, LLC, Community Investing Company, Inc., 490 Boulevard Realty Corp., and SB One Insurance Agency Inc. ("SB One Insurance Agency"), a full service insurance agency located in Sussex County, New Jersey with a satellite office located in Bergen County, New Jersey. SB One Insurance Agency’s operations are considered a separate segment for financial disclosure purposes. All inter-company transactions and balances have been eliminated in consolidation. The Bank operates eighteen banking offices: seven located in Sussex County, New Jersey, four located in Bergen County, New Jersey, two located in Essex County, New Jersey, one located in Hudson County, New Jersey, one located in Middlesex County, New Jersey, one located in Union County, New Jersey, one located in Warren County, New Jersey, and one located in Queens County, New York.
We are subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”). The Bank’s deposits are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, the FDIC and the New Jersey Department of Banking and Insurance (the “Department”) and the operations of SB One Insurance Agency are subject to supervision and regulation by the Department.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for full year financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
New Accounting Standards
In February 2016, FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases which was issued to clarify and correct untended application of the guidance in ASU 2016-02 (Topic 842). The amendments in this ASU affect aspects of the guidance issued in ASU 2016-02 and provide clarification to related topics, such as 1) Rate implicit in the lease; 2) Reassessment of leases; 3) Transition guidance; and 4) Impairment of net investment in the lease. In July 2018, the FASB also issued ASU 2018-11 Leases (Topic 842) Targeted Improvements, which provides guidance related to comparative reporting requirements for initial adoption and separating lease and non-lease components. Currently, entities are required to adopt the new standard utilizing the modified retrospective approach. This amendment provides entities with an additional transition method which allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Currently, ASU 2016-02 provides a practical expedient to lessees to allow them to not separate non-lease components from lease components; however, it does not provide a similar practical expedient to lessors. This amendment provides a practical expedient to lessors which allows them the option to not separate non-lease components from the associated lease components. However, the lessor practical expedient is limited to circumstances in which the non-lease components would otherwise be account for under the new revenue guidance (Topic 606). In addition, both of the following conditions must be met: 1) the timing and pattern of transfer are the same for non-lease components and associated lease components 2) the lease component, if accounted for separately, would be classified as an operating lease. An entity that elects the lessor practical expedient is also required to provide certain disclosures. For entities that early adopted Topic 842 the amendments in these ASUs are effective upon issuance. The Company adopted both ASU No. 2016-02 and ASU No. 2018-11 effective January 1, 2019 and elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and not restate comparative periods. The
6
Company also elected certain optional practical expedients, which allow the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. Additionally, the Company elected to adopt the practical expedient use of hindsight to determine right of use asset and lease liability for each lease with a renewal option through their first option date. Adoption of the standard did not result in material changes to the Company's consolidated results of operations. The Company's adoption of the ASU resulted in a right of use asset and lease liability of approximately $2.7 million at January 1, 2019. The impact of the adoption on the Company's operating results was not significant.
In March 2019, FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which amends certain aspects of FASB's leasing standard, ASU 2016-02.1 ASU 2019-01 is the result of a proposed ASU issued in December 2018. The ASU addresses the following issues:
•
Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers.
•
Statement of cash flows presentation for sales-type and direct financing leases by lessors within the scope of ASC 942.3
•
Clarification of interim disclosure requirements during transition.
ASU 2019-01 will be effective for public business entities for fiscal years ending after December 15, 2019. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In June, 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. In April, 2019, FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-04 made amendments to the following categories in ASU 2016-13 which include Accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures and extension and renewal options. In May, 2019, FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief, ASU 2019-05 allows the Company to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of Topic 326 if the instruments are eligible for the fair value option under authoritative guidance for fair value. The fair value option election does not apply to held-to-maturity debt securities. We are required to make this election on an instrument-by-instrument basis. This ASU will be effective for public business entities that are SEC filers and considered smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. All other entities will have one additional year. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected not to adopt ASU 2016-13 early. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements. The Company has determined that a third-party vendor will assist with model development, data governance and operational controls to support the adoption of this ASU. Model implementation, including development and validation, began in the second quarter of 2019, as did the establishment of the control activities required to support the models.
In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the accounting for goodwill impairment by requiring impairment charges be based upon the first step in the current two-step impairment test under Accounting Standards Codification (ASC) 350. Currently, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). This ASU’s objective is to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). The update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date. The amendment will apply only to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates, apply to all premiums on callable debt securities, regardless of how they were generated, and require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. The ASU does not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity and does not apply when the investor has already incorporated prepayments into the calculation of its effective yield under other
7
GAAP. The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company's adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.
In August 2017, FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815). The objective of the ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make improvements to simplify the application of hedge accounting guidance in current GAAP. The amendments in the ASU will, among other things, 1) permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risks; 2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; 3) modify disclosures to include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges; and 4) eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. These changes will more closely align the results of cash flow and fair value hedge accounting with risk management activities and the presentation of hedge results in the financial statements. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update with all transition requirements and elections being applied to hedging relationships existing on the date of adoption. The Company's adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.
In June 2018, FASB issued ASU 2018-07 Compensation - Stock Compensation (Topic 718). The main objective of this ASU is to simplify the accounting for share-based payment transactions in current GAAP by expanding the scope to include nonemployee share-based payment transactions. This ASU will apply to all share-based payment transactions in which a grantor acquires goods or services to be used in their own operations by issuing share-based payments. This ASU does not apply to share-based payments used to provide financing to the issuer or awards issued in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in the ASU will require an entity to, among other things, 1) measure nonemployee share-based payment awards at the fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered; 2) measure equity classified nonemployee share-based payment awards at the grant date; and 3) take into consideration the probability of satisfying performance conditions when accounting for nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted; however, an entity’s adoption date shall not be earlier than the entity’s adoption date of Topic 606. Per review of the ASU, the Company determined that it does not pertain to its current operations; therefore, no evaluation regarding adoption is required.
In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include removal and modification of disclosure requirements. The ASU removed the following disclosure requirements: a) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, b) the policy for timing of transfers between levels, c) the valuation process for Level 3 fair value measurements, and d) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: a) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; b) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and c) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 will be effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.
8
In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-201 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: a) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; b) the amount and timing of plan assets expected to be returned to the employer; c) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; d) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; e) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets and f) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: x) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and y) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In October 2018, FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815)-Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU permits the use of the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Early adoption is permitted in any interim period upon issuance of this ASU if an entity already has adopted ASU 2017-12. The amendments in this update should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company's adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.
NOTE 2 – ACQUISITIONS
On January 4, 2018, the Company announced the successful closing of the merger with Community Bank of Bergen County, NJ, a New Jersey-chartered bank (“Community”) in an all-stock transaction (the “Community Merger”). The Community Merger enhanced and expanded SB One Bank’s presence in Bergen County, New Jersey with the addition of 3 full service branch locations in that county, which complements SB One Bank’s existing location in Oradell, New Jersey. Under the terms of the agreement, Community merged with and into SB One Bank, with SB One Bank being the surviving entity and each outstanding share of Community common stock was exchanged for 0.97 shares of the Company's common stock. The Company issued 1,873,028 shares of its common stock, having an aggregate fair value of $51.9 million in the Community Merger and paid approximately $2 thousand in cash for fractional shares. Outstanding Community stock options were paid out in cash by the Company for a total payment of $140 thousand. Expenses related to the Community Merger totaled $4.0 million and $1.2 million for the years ended December 31, 2018 and 2017, respectively.
On December 21, 2018, the Company announced the successful completion of the merger with Enterprise Bank N.J. (“Enterprise”) in an all-stock transaction (the “Enterprise Merger”). The Enterprise Merger is expected to enhance and expand the Company's presence in Union, Middlesex and Essex Counties, New Jersey with the addition of 4 full service branch locations in those counties. Pursuant to the terms of the merger agreement, Enterprise merged with and into SB One Bank and each outstanding share of Enterprise common stock was exchanged for 0.4538 shares of the Company’s common stock. The Company issued 1,573,454 shares of its common stock, having an aggregate fair value of $32.4 million and paid approximately $1 thousand in cash for fractional shares. Outstanding Enterprise stock options were paid out in cash by the Company for a total payment of $1.6 million. Expenses related to the Enterprise Merger totaled $1.8 million for the year ended December 31, 2018.
Community
The Community acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimate using
9
information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarized the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Community.
(Dollars in thousands)
January 4, 2018
Cash and cash equivalents
$
6,693
Interest bearing time deposits with other banks
100
Securities available for sale
75,909
Other bank stock
1,155
Loans
236,010
Foreclosed real estate
1,312
Premises and equipment, net
10,612
Accrued interest receivable
824
Goodwill (banking segment)
22,298
Intangibles assets
1,331
Bank-owned life insurance
7,963
Other assets
1,677
Total Assets
$
365,884
Deposits
$
(301,157
)
Borrowings
(12,000
)
Other liabilities
(844
)
Total Liabilities
$
(314,001
)
Net consideration paid - common shares issued
$
51,883
The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
The Company has finalized the accounting as a result of the merger with Community.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Investment securities available-for-sale
The estimated fair values of the investment securities available for sale, primarily comprised of U.S. government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value discount of $261 thousand was recorded on the investments.
Loans
Loans acquired in the Community acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Community were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $242.5 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan on a level yield amortization over 3.5 years.
(Dollars in thousands)
Gross amortized cost basis at January 4, 2018
$
242,471
Fair value adjustment on general pooled loans
(3,737
)
Credit fair value adjustment on purchased credit impaired loans
(2,724
)
Fair value of acquired loans at January 4, 2018
$
236,010
10
For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into general pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $324 thousand.
Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, Community and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $4.1 million was determined. Both the interest rate and credit fair value adjustments relate to performing loans and loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the weighted average life of the loans of 4 years.
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Community acquisition as of the closing date.
(Dollars in thousands)
Acquired Credit Impaired Loans
Contractually required principal and interest at acquisition
$
6,289
Contractual cash flows not expected to be collected (non-accretable difference)
1,819
Expected cash flows at acquisition
4,470
Interest component of expected cash flows (accretable difference)
846
Fair value of acquired loans
$
3,624
Bank Premises
The Company acquired three branches of Community, all of which were owned by Community, at a premium of $3.5 million. The fair value of Community’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located which will be amortized on a straight line basis over 40 years.
Core Deposit Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.
The core deposit intangible totaled $1.3 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years' digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Community was created based on the consideration paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Community.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $965 thousand is being amortized into income on a level yield amortization method over the contractual life of the deposits of 22.5 months and a weighted average life of 16.5 months.
Bank Owned Life Insurance
Community's bank-owned life insurance book value was $8.0 million with no fair value adjustment.
11
Borrowings
The Company acquired borrowings at Community's carrying value of $12.0 million with no fair value adjustment. The remaining maturity of Community's borrowings was less than thirty days at a weighted average cost of funds equivalent to the current market rate for the similar term borrowing type.
The following table presents certain pro forma information as if Community had been acquired on January 1, 2018. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Community’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
(Dollars in thousands)
Year Ended December 31, 2018
Total revenues (net interest income plus non-interest income)
$
54,941
Net Income
9,935
Basic and diluted earnings per share applicable to common stockholders
$
1.25
Following the closing of the Community Merger on January 4, 2018, the Company reported the results of the combined Company. The Company cannot disaggregate the additional revenue and income before extraordinary items provided by Community since the Company operates as one consolidated entity on its internal systems. The cumulative effect to the Company's net income and net income per share are reported on a consolidated basis for the period ended December 31, 2018.
Enterprise
The Enterprise acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimate using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarized the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Enterprise.
(Dollars in thousands)
December 21, 2018
Cash and cash equivalents, net of stock options paid in cash
$
9,153
Securities available for sale
2,193
Other bank stock
2,380
Loans
257,170
Foreclosed real estate
1,250
Premises and equipment, net
422
Accrued interest receivable
880
Goodwill (banking segment)
2,204
Intangibles assets
1,039
Other assets
3,064
Total Assets
$
279,755
Deposits
$
(197,321
)
Borrowings
(47,106
)
Other liabilities
(2,882
)
Total Liabilities
$
(247,309
)
Net consideration paid - common shares issued
$
32,446
12
The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Investment securities available-for-sale
The estimated fair values of the investment securities available for sale, primarily comprised of U.S. government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value discount of $100 thousand was recorded on the investments.
Loans
Loans acquired in the Enterprise acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Enterprise were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $262.1 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. There was no credit adjustment for purchased credit impaired loans in the Enterprise acquisition.
(Dollars in thousands)
Gross amortized cost basis at December 21, 2018
$
262,126
Fair value adjustment on general pooled loans
(4,956
)
Fair value of acquired loans at December 21, 2018
$
257,170
For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into general pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $1.1 million.
Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, Enterprise and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $3.9 million was determined. Both the interest rate and credit fair value adjustments will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.
Bank Premises
The Company acquired four branches of Enterprise, all of which were leased by Enterprise, at a discount of $282 thousand. The fair value of Enterprise’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located which will be amortized on a straight line basis over 3 years.
Core Deposit Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.
The core deposit intangible totaled $1.0 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years' digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Enterprise was created based on the consideration
13
paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Enterprise.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $1.0 million is being amortized into income on a level yield amortization method over the contractual life of the deposits of 11.4 months and a weighted average life of 11.4 months.
Borrowings
The Company acquired borrowings at Enterprise's carrying value of $47.3 million at a weighted average rate of 2.23% with a fair value adjustment of $149 thousand. The fair value of borrowings represents the present value of the borrowings expected contracted payments discounted by market rates for similar borrowings. Market rates were obtained from the Federal Home Loan Bank (“FHLB”) of New York as of December 21, 2018.
The following table presents certain pro forma information as if Enterprise had been acquired on January 1, 2018. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Enterprise’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
(Dollars in thousands)
Year Ended December 31, 2018
Total revenues (net interest income plus non-interest income)
$
64,827
Net Income
12,496
Basic and diluted earnings per share applicable to common stockholders
$
1.80
The merger transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. Management has not finalized the accounting in connection with the merger and is still in the process of assessing the fair value of loans, other assets and other liabilities which can result in an adjustment to the Company's goodwill and deferred tax asset.
Following the closing of the Enterprise Merger on December 21, 2018, the Company reported the results of the combined Company. The Company cannot disaggregate the additional revenue and income before extraordinary items provided by Enterprise since the Company operates as one consolidated entity on its internal systems. The cumulative effect to the Company's net income and net income per share are reported on a consolidated basis for the period ended December 31, 2018.
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NOTE 3 – SECURITIES
Available for Sale
The amortized cost and approximate fair value of securities available for sale as of September 30, 2019 and December 31, 2018 are summarized as follows:
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
September 30, 2019
U.S. government agencies
$
20,500
$
3
$
(299
)
$
20,204
U.S. government-sponsored enterprises
47,145
4
(455
)
46,694
State and political subdivisions
18,850
1,374
—
20,224
Mortgage-backed securities -
U.S. government-sponsored enterprises
92,824
2,430
(88
)
95,166
Private mortgage-backed securities
17,624
552
—
18,176
Corporate Debt
6,588
100
(16
)
6,672
$
203,531
$
4,463
$
(858
)
$
207,136
December 31, 2018
U.S. government agencies
$
25,161
$
4
$
(371
)
$
24,794
U.S. government-sponsored enterprises
20,404
38
(80
)
20,362
State and political subdivisions
60,457
445
(540
)
60,362
Mortgage-backed securities -
U.S. government-sponsored enterprises
74,670
100
(1,157
)
73,613
Corporate Debt
3,000
8
—
3,008
$
183,692
$
595
$
(2,148
)
$
182,139
Securities with a carrying value of approximately $4.1 million and $2.5 million at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for borrowings at the Federal Reserve Bank as required or permitted by applicable laws and regulations.
The amortized cost and fair value of securities available for sale at September 30, 2019 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments which pay principal on a periodic basis are not included in the maturity categories.
(Dollars in thousands)
Amortized
Cost
Fair
Value
Due in one year or less
$
—
$
—
Due after one year through five years
1,267
1,305
Due after five years through ten years
8,822
9,110
Due after ten years
15,349
16,481
Total bonds and obligations
25,438
26,896
U.S. government agencies
20,500
20,204
U.S. government-sponsored enterprises
47,145
46,694
Mortgage-backed securities:
U.S. government-sponsored enterprises
92,824
95,166
Private mortgage-backed securities
17,624
18,176
Total available for sale securities
$
203,531
$
207,136
There were no gross realized gains on sales of securities available for sale and no gross realized losses for the three months ended September 30, 2019 and 2018, respectively.
15
Gross realized gains on sales of securities available for sale were $1.7 million and $46 thousand and gross realized losses were $199 thousand and $10 thousand for the nine months ended September 30, 2019 and 2018, respectively.
Temporarily Impaired Securities
The following table shows gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual available for sale securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018.
Less Than 12 Months
12 Months or More
Total
(Dollars in thousands)
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
September 30, 2019
U.S. government agencies
$
1,288
$
(3
)
$
15,905
$
(296
)
$
17,193
$
(299
)
U.S. government-sponsored enterprises
38,226
(361
)
4,980
(94
)
43,206
(455
)
Mortgage-backed securities -
U.S. government-sponsored enterprises
5,899
(21
)
5,394
(67
)
11,293
(88
)
Corporate Debt
2,090
(16
)
—
—
2,090
(16
)
Total temporarily impaired securities
$
47,503
$
(401
)
$
26,279
$
(457
)
$
73,782
$
(858
)
December 31, 2018
U.S. government agencies
$
18,998
$
(316
)
$
2,593
$
(55
)
$
21,591
$
(371
)
U.S. government-sponsored enterprises
10,348
(80
)
—
—
10,348
(80
)
State and political subdivisions
17,164
(204
)
18,785
(336
)
35,949
(540
)
Mortgage-backed securities -
U.S. government-sponsored enterprises
30,547
(271
)
28,773
(886
)
59,320
(1,157
)
Total temporarily impaired securities
$
77,057
$
(871
)
$
50,151
$
(1,277
)
$
127,208
$
(2,148
)
For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of September 30, 2019, we reviewed our available for sale securities portfolio for indications of impairment. This review included analyzing the length of time and the extent to which the fair value was lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt and equity securities are evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position.
U.S. Government Agencies
At September 30, 2019 and December 31, 2018, the declines in fair value and the unrealized losses for our U.S. government agencies securities were primarily due to changes in spreads and market conditions and not credit quality. At September 30, 2019, there were sixteen securities with a fair value of $17.2 million that had an unrealized loss that amounted to $299 thousand. As of September 30, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of the U.S. government agencies securities at September 30, 2019 were deemed to be other-than-temporarily impaired (“OTTI”).
At December 31, 2018, there were eighteen securities with a fair value of $21.6 million that had an unrealized loss that amounted to $371 thousand.
U.S. Government Sponsored Enterprises
At September 30, 2019 and December 31, 2018, the change in fair value and unrealized losses for our U.S. government sponsored enterprises securities were primarily due to changes in spreads and market conditions and not credit quality. At September 30, 2019, there were eighteen securities with a fair value of $43.2 million that had an unrealized loss that amounted to $455 thousand. As of June 30, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of the U.S. government sponsored enterprise securities at September 30, 2019, were deemed to be OTTI.
16
At December 31, 2018, there were six securities with a fair value of $10.3 million that had an unrealized loss that amounted to $80 thousand.
State and Political Subdivisions
At September 30, 2019, there were no state and political subdivisions securities that had an unrealized loss.
At December 31, 2018, there were thirty-four securities with a fair value of $35.9 million that had an unrealized loss that amounted to $540 thousand.
Mortgage-Backed Securities - U.S. government-sponsored enterprises
At September 30, 2019 and December 31, 2018, the change in fair value and unrealized losses for our mortgage-backed securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality. At September 30, 2019, there were nine securities with a fair value of $11.3 million that had an unrealized loss that amounted to $88 thousand. As of September 30, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our mortgage-backed securities at September 30, 2019 were deemed to be OTTI.
At December 31, 2018, there were thirty-eight securities with a fair value of $59.3 million that had an unrealized loss that amounted to $1.2 million.
Corporate Debt
At September 30, 2019, there was one security with a fair value of $2.1 million that had an unrealized loss of $16 thousand. These securities typically have maturity dates greater than 5 years and the fair values are more sensitive to changes in market interest rates. As of September 30, 2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our corporate debt securities at September 30, 2019, were deemed to be OTTI.
At December 31, 2018, there were no securities with an unrealized loss.
Held to Maturity Securities
The amortized cost and approximate fair value of securities held to maturity as of September 30, 2019 and December 31, 2018 are summarized as follows:
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
September 30, 2019
State and political subdivisions
$
4,331
$
83
$
—
$
4,414
December 31, 2018
State and political subdivisions
$
4,078
$
74
$
—
$
4,152
The amortized cost and carrying value of securities held to maturity at September 30, 2019 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Amortized
Cost
Fair
Value
Due in one year or less
$
1,553
$
1,553
Due after one year through five years
756
758
Due after five years through ten years
2,022
2,103
Due after ten years
—
—
Total held to maturity securities
$
4,331
$
4,414
17
Temporarily Impaired Securities
For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of September 30, 2019, there were no securities that had an unrealized loss. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. For each security whose fair value is less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred.
At December 31, 2018, there were no held to maturity securities with an unrealized loss.
NOTE 4 – LOANS
The composition of net loans receivable at September 30, 2019 and December 31, 2018 is as follows:
(Dollars in thousands)
September 30, 2019
December 31, 2018
Commercial and industrial
$
105,392
$
81,709
Construction
109,934
142,321
Commercial real estate
967,919
878,449
Residential real estate
379,566
370,955
Consumer and other
1,869
2,393
Total loans receivable
1,564,680
1,475,827
Unearned net loan origination fees
(1,070
)
(1,052
)
Allowance for loan losses
(9,750
)
(8,775
)
Net loans receivable
$
1,553,860
$
1,466,000
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The total amount of loans serviced for the benefit of others was approximately $221 thousand and $229 thousand at September 30, 2019 and December 31, 2018, respectively.
Purchased Credit Impaired Loans
The carrying value of loans acquired in the Community acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $3.0 million at September 30, 2019, which was $600 thousand less than the balance at the time of acquisition on January 4, 2018. Under ASC Subtopic 310-30, these loans, referred to as purchased credit impaired (“PCI”) loans, may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.
Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life, while decreases in expected cash flows are recognized as impairments through a loss provision and an increase in the allowance for loan and lease losses. Valuation allowances (recognized in the allowance for loan and lease losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).
18
The following table presents changes in the accretable yield for PCI loans:
(Dollars in thousands)
Nine months ended September 30, 2019
Nine months ended September 30, 2018
Accretable yield, beginning balance
$
539
$
—
Acquisition of impaired loans
—
846
Accretable yield amortized to interest income
(154
)
(229
)
Reclassification from non-accretable difference
(122
)
—
Accretable yield, ending balance
$
263
$
617
NOTE 5 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES
The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three and nine months ended September 30, 2019 and 2018: