Company Quick10K Filing
Quick10K
Community Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$31.08 6 $174
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-07 Regulation FD, Exhibits
8-K 2019-10-30 Officers, Other Events, Exhibits
8-K 2019-09-25 Officers, Other Events, Exhibits
8-K 2019-09-19 Officers
8-K 2019-07-30 Regulation FD, Exhibits
8-K 2019-07-24 Earnings, Exhibits
8-K 2019-05-15 Shareholder Vote
8-K 2019-04-22 Earnings, Exhibits
8-K 2019-04-01 Officers, Exhibits
8-K 2019-02-04 Earnings, Exhibits
8-K 2018-12-20 Other Events, Exhibits
8-K 2018-11-07 Officers, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-08-01 Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-16 Shareholder Vote
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-04-30 Officers
8-K 2018-03-28 Regulation FD, Exhibits
8-K 2018-01-29 Earnings, Exhibits
8-K 2018-01-01 M&A, Other Events, Exhibits
RF Regions Financial 14,661
HOPE Hope Bancorp 1,685
EFSC Enterprise Financial Services 1,046
BPFH Boston Private Financial Holdings 903
OBNK Origin Bancorp 758
BY Byline Bancorp 644
HTBK Heritage Commerce 504
FISI Financial Institutions 457
BWB Bridgewater Bancshares 390
BKSC Bank of South Carolina 116
TCFC 2019-09-30
Part 1 - Financial Information
Item 1 - Financial Statements
Note 1 - Basis of Presentation and Nature of Operations
Note 2 - Securities
Note 3 - Loans
Note 4 - Goodwill and Other Intangible Assets
Note 5 - Other Real Estate Owned ("Oreo")
Note 6 - Deposits
Note 7 - Commitments & Contingencies
Note 8 - Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures ("Trups")
Note 9 - Subordinated Notes
Note 10 - Regulatory Capital
Note 11 - Fair Value Measurements
Note 12 - Fair Value of Financial Instruments
Note 13 - Accumulated Other Comprehensive Income (Loss)
Note 14 - Earnings per Share ("Eps")
Note 15 - Income Taxes
Note 16 - Stock-Based Compensation
Item 2 - Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure 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 tcfc-20190930xexx31.htm
EX-32 tcfc-20190930xexx32.htm

Community Financial Earnings 2019-09-30

TCFC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tcfc-20190930x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 001‑36094
tcfclogo.jpg
THE COMMUNITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland
52-1652138
(State of Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
3035 Leonardtown Road, Waldorf, Maryland
20601
(Address of Principal Executive Offices)
(Zip Code)
(301) 645‑5601
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
TCFC
 
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       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 (§ 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       No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition 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 
Non-accelerated Filer
 
Smaller Reporting Company
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
As of November 1, 2019, the registrant had 5,584,562 shares of common stock outstanding. 
 



THE COMMUNITY FINANCIAL CORPORATION
FORM 10‑Q
TABLE OF CONTENTS
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART 1 - FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
(dollars in thousands, except per share amounts)
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Cash and due from banks
 
$
37,923

 
$
24,064

Federal funds sold
 
42,205

 
5,700

Interest-bearing deposits with banks
 
36,563

 
3,272

Securities available for sale (AFS), at fair value
 
131,288

 
119,976

Securities held to maturity (HTM), at amortized cost
 
88,654

 
96,271

Equity securities carried at fair value through income
 
4,665

 
4,428

Non-marketable equity securities held in other financial institutions
 
209

 
209

Federal Home Loan Bank (FHLB) stock - at cost
 
4,510

 
3,821

Loans receivable
 
1,417,108

 
1,348,105

Less: allowance for loan losses
 
(11,252
)
 
(10,976
)
Net loans
 
1,405,856

 
1,337,129

Goodwill
 
10,835

 
10,835

Premises and equipment, net
 
22,320

 
22,922

Other real estate owned (OREO)
 
10,195

 
8,111

Accrued interest receivable
 
5,213

 
4,957

Investment in bank owned life insurance
 
36,958

 
36,295

Core deposit intangible
 
2,281

 
2,806

Net deferred tax assets
 
5,979

 
6,693

Right of use assets - operating leases
 
8,521

 

Other assets
 
1,557

 
1,738

Total Assets
 
$
1,855,732

 
$
1,689,227

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
 
 
 
Non-interest-bearing deposits
 
$
243,425

 
$
209,378

Interest-bearing deposits
 
1,316,535

 
1,220,251

Total deposits
 
1,559,960

 
1,429,629

Short-term borrowings
 
15,000

 
35,000

Long-term debt
 
55,387

 
20,436

Guaranteed preferred beneficial interest in junior subordinated debentures (TRUPs)
 
12,000

 
12,000

Subordinated notes - 6.25%
 
23,000

 
23,000

Lease liabilities - operating leases
 
8,607

 

Accrued expenses and other liabilities
 
14,369

 
14,680

Total Liabilities
 
1,688,323

 
1,534,745

 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Common stock - par value $.01; authorized - 15,000,000 shares; issued 5,583,492 and 5,577,559 shares, respectively
 
56

 
56

Additional paid in capital
 
84,713

 
84,397

Retained earnings
 
81,682

 
72,594

Accumulated other comprehensive income (loss)
 
1,715

 
(1,847
)
Unearned ESOP shares
 
(757
)
 
(718
)
Total Stockholders’ Equity
 
167,409

 
154,482

Total Liabilities and Stockholders’ Equity
 
$
1,855,732

 
$
1,689,227

See notes to Consolidated Financial Statements

1


CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
Interest and Dividend Income
 
 
 
 
 
 
 
 
Loans, including fees
 
$
16,542

 
$
15,085

 
$
49,037

 
$
44,294

Interest and dividends on investment securities
 
1,606

 
1,311

 
4,906

 
3,617

Interest on deposits with banks
 
111

 
88

 
231

 
220

Total Interest and Dividend Income
 
18,259

 
16,484

 
54,174

 
48,131

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
3,867

 
2,835

 
11,601

 
7,196

Short-term borrowings
 
140

 
142

 
709

 
642

Long-term debt
 
727

 
746

 
2,043

 
2,231

Total Interest Expense
 
4,734

 
3,723

 
14,353

 
10,069

Net Interest Income
 
13,525

 
12,761

 
39,821

 
38,062

Provision for loan losses
 
450

 
40

 
1,325

 
940

Net Interest Income After Provision For Loan Losses
 
13,075

 
12,721

 
38,496

 
37,122

Noninterest Income
 
 
 
 
 
 
 
 
Loan appraisal, credit, and miscellaneous charges
 
147

 
81

 
343

 
141

Gain on sale of assets
 

 

 

 
1

Unrealized gain (loss) on equity securities
 
35

 
(8
)
 
156

 
(86
)
Income from bank owned life insurance
 
223

 
227

 
662

 
677

Service charges
 
834

 
770

 
2,392

 
2,269

Total Noninterest Income
 
1,239

 
1,070

 
3,553

 
3,002

Noninterest Expense
 
 
 
 
 
 
 
 
Compensation and benefits
 
5,353

 
4,739

 
15,037

 
14,915

Occupancy expense
 
730

 
744

 
2,289

 
2,249

Advertising
 
250

 
165

 
610

 
504

Data processing expense
 
793

 
769

 
2,268

 
2,234

Professional fees
 
523

 
442

 
1,547

 
1,220

Merger and acquisition costs
 

 
11

 

 
3,620

Depreciation of premises and equipment
 
165

 
207

 
520

 
608

Telephone communications
 
46

 
62

 
164

 
230

Office supplies
 
34

 
31

 
104

 
112

FDIC Insurance
 
2

 
185

 
337

 
496

OREO valuation allowance and expenses
 
263

 
165

 
751

 
516

Core deposit intangible amortization
 
169

 
193

 
525

 
597

Other
 
896

 
779

 
2,593

 
2,607

Total Noninterest Expense
 
9,224

 
8,492

 
26,745

 
29,908

Income before income taxes
 
5,090

 
5,299

 
15,304

 
10,216

Income tax expense
 
1,397

 
1,441

 
4,107

 
2,802

Net Income
 
$
3,693

 
$
3,858

 
$
11,197

 
$
7,414

Earnings Per Common Share
 
 
 
 
 
 
 
 
Basic
 
$
0.66

 
$
0.70

 
$
2.01

 
$
1.34

Diluted
 
$
0.66

 
$
0.70

 
$
2.01

 
$
1.34

See notes to Consolidated Financial Statements

2


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Net Income
 
$
3,693

 
$
3,858

 
$
11,197

 
$
7,414

Net unrealized holding gains (losses) arising during period, net of tax expense (benefit) of $255 and $(171), and $1,353 and $(547) respectively.
 
671

 
(451
)
 
3,562

 
(1,442
)
Comprehensive Income
 
$
4,364

 
$
3,407

 
$
14,759

 
$
5,972

See notes to Consolidated Financial Statements

3


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
For the Three Months Ended September 30, 2019 and 2018
(dollars in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings 
 
Accumulated Other Comprehensive Income (Loss)
 
Unearned ESOP Shares
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
 
$
56

 
$
84,613

 
$
78,689

 
$
1,044

 
$
(757
)
 
$
163,645

Net Income
 

 

 
3,693

 

 

 
3,693

Unrealized holding gain on investment securities net of tax expense $255
 

 

 

 
671

 

 
671

Cash dividend at $0.125 per common share
 

 

 
(663
)
 

 

 
(663
)
Dividend reinvestment
 

 
37

 
(37
)
 

 

 

Stock based compensation
 

 
63

 

 

 

 
63

Balance at September 30, 2019
 
$
56

 
$
84,713

 
$
81,682

 
$
1,715

 
$
(757
)
 
$
167,409

(dollars in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings 
 
Accumulated Other Comprehensive Income (Loss)
 
Unearned ESOP Shares
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
 
$
56

 
$
84,106

 
$
66,021

 
$
(2,182
)
 
$
(755
)
 
$
147,246

Net Income
 

 

 
3,858

 

 

 
3,858

Unrealized holding loss on investment securities net of tax benefit $(171)
 

 

 

 
(478
)
 

 
(478
)
Reclassification due to Accounting Standard ASU2016-01
 

 

 
(27
)
 
27

 
 
 

Cash dividend at $0.10 per common share
 

 

 
(537
)
 

 

 
(537
)
Dividend reinvestment
 

 
20

 
(20
)
 

 

 

Net change in fair market value below cost of leveraged ESOP shares released
 

 
7

 

 

 

 
7

Net change in unearned ESOP shares
 

 

 

 

 
(61
)
 
(61
)
Stock based compensation
 

 
113

 

 

 

 
113

Balance at September 30, 2018
 
$
56

 
$
84,246

 
$
69,295

 
$
(2,633
)
 
$
(816
)
 
$
150,148


4


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
(continued)
For the Nine Months Ended September 30, 2019 and 2018
(dollars in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings 
 
Accumulated Other Comprehensive Income (Loss)
 
Unearned ESOP Shares
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
$
56

 
$
84,397

 
$
72,594

 
$
(1,847
)
 
$
(718
)
 
$
154,482

Net Income
 

 

 
11,197

 

 

 
11,197

Unrealized holding gain on investment securities net of tax expense $1,353
 

 

 

 
3,562

 

 
3,562

Cash dividend at $0.25 per common share
 

 

 
(2,004
)
 

 

 
(2,004
)
Dividend reinvestment
 

 
88

 
(88
)
 

 

 

Net change in fair market value below cost of leveraged ESOP shares released
 

 
(4
)
 

 

 

 
(4
)
Net change in unearned ESOP shares
 

 

 

 

 
(39
)
 
(39
)
Repurchase of common stock
 

 

 
(17
)
 

 

 
(17
)
Stock based compensation
 

 
232

 

 

 

 
232

Balance at September 30, 2019
 
$
56

 
$
84,713

 
$
81,682

 
$
1,715

 
$
(757
)
 
$
167,409

(dollars in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Unearned ESOP Shares
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
$
46

 
$
48,209

 
$
63,648

 
$
(1,191
)
 
$
(755
)
 
$
109,957

Net Income
 

 

 
7,414

 

 

 
7,414

Unrealized holding loss on investment securities net of tax benefit of $(547)
 

 

 

 
(1,469
)
 

 
(1,469
)
Reclassification due to Accounting Standard ASU2016-01
 

 

 
(27
)
 
27

 

 

Cash dividend at $0.20 per common share
 

 

 
(1,623
)
 

 

 
(1,623
)
Dividend reinvestment
 

 
50

 
(50
)
 

 

 

Net change in fair market value over cost of leveraged ESOP shares released
 

 
29

 

 

 

 
29

Net change in unearned ESOP shares
 

 

 

 

 
(61
)
 
(61
)
Shares issued for County First Merger
 
10

 
35,609

 

 

 

 
35,619

Repurchase of common stock
 

 

 
(67
)
 

 

 
(67
)
Stock based compensation
 

 
349

 

 

 

 
349

Balance at September 30, 2018
 
$
56

 
$
84,246

 
$
69,295

 
$
(2,633
)
 
$
(816
)
 
$
150,148

See notes to Consolidated Financial Statements

5


CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Nine Months Ended September 30,
(dollars in thousands)
 
2019
 
2018
 
 
 
 
 
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
11,197

 
$
7,414

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Provision for loan losses
 
1,325

 
940

Depreciation and amortization
 
1,215

 
1,256

Net (gains) losses on the sale of OREO
 
(188
)
 
8

Unrealized (gains) losses on equity securities
 
(156
)
 
86

Gain on sale of assets
 

 
(1
)
Net amortization of premium/discount on investment securities
 
(87
)
 
217

Net accretion of merger accounting adjustments
 
(624
)
 
(642
)
Amortization of core deposit intangible
 
525

 
597

Net change in right of use assets and lease liabilities
 
86

 

Increase in OREO valuation allowance
 
766

 
425

Increase in cash surrender value of bank owned life insurance
 
(662
)
 
(673
)
Deferred income tax (benefit) expense
 
(639
)
 
110

Increase in accrued interest receivable
 
(256
)
 
(104
)
Stock based compensation
 
232

 
349

Net change due to (deficit) excess of fair market value over cost of leveraged ESOP shares released
 
(4
)
 
29

(Increase) decrease in net deferred loan costs
 
(508
)
 
169

(Decrease) increase in accrued expenses and other liabilities
 
(311
)
 
117

Decrease in other assets
 
180

 
2,779

Net Cash Provided by Operating Activities
 
12,091

 
13,076

 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
Purchase of AFS investment securities
 
(18,133
)
 
(52,669
)
Proceeds from redemption or principal payments of AFS investment securities
 
11,862

 
6,341

Purchase of HTM investment securities
 
(9,982
)
 
(9,360
)
Proceeds from maturities or principal payments of HTM investment securities
 
17,479

 
14,316

Proceeds from sale of AFS investment securities
 

 
34,919

Net (increase) decrease of FHLB stock
 
(689
)
 
4,933

Loans originated or acquired
 
(346,818
)
 
(238,696
)
Principal collected on loans
 
274,912

 
221,393

Purchase of premises and equipment
 
(613
)
 
(866
)
Proceeds from sale of OREO
 
324

 
982

Net cash acquired in business combination
 

 
32,450

Proceeds from disposal of asset
 

 
1,748

Net Cash (Used in) Provided by Investing Activities
 
(71,658
)
 
15,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(continued)

 
 
Nine Months Ended September 30,
(dollars in thousands)
 
2019
 
2018
Cash Flows from Financing Activities
 
 
 
 
Net increase in deposits
 
$
130,331

 
$
146,910

Proceeds from long-term debt
 
35,000

 
20,000

Payments of long-term debt
 
(49
)
 
(55,048
)
Net decrease in short term borrowings
 
(20,000
)
 
(82,500
)
Dividends paid
 
(2,004
)
 
(1,623
)
Net change in unearned ESOP shares
 
(39
)
 
(61
)
Repurchase of common stock
 
(17
)
 
(67
)
Net Cash Provided by Financing Activities
 
143,222

 
27,611

Increase in Cash and Cash Equivalents
 
83,655

 
56,178

 
 
 
 
 
Cash and Cash Equivalents - January 1
 
33,036

 
15,417

Cash and Cash Equivalents - September 30
 
$
116,691

 
$
71,595

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid during the period for
 
 
 
 
Interest
 
$
14,579

 
$
10,491

Income taxes
 
$
4,913

 
$
2,549

 
 
 
 
 
Supplemental Schedule of Non-Cash Operating Activities
 
 
 
 
Issuance of common stock for payment of compensation
 
$
107

 
$
321

Transfer from loans to OREO
 
$
3,266

 
$
282

Financed amount of sale of OREO
 
$
280

 
$

 
 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
 
 
 
 
Right-of use assets and lease liability recorded upon adoption of ASC 842
 
$
8,933

 
$

 
 
 
 
 
Business Combination Non-Cash Disclosures
 
 
 
 
Assets acquired in business combination (net of cash received)
 
$

 
$
192,259

Liabilities assumed in business combination
 
$

 
$
200,660

See notes to Consolidated Financial Statements

7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation
The consolidated financial statements of The Community Financial Corporation (the “Company”) and its wholly-owned subsidiary, Community Bank of the Chesapeake (the “Bank”), and the Bank’s wholly-owned subsidiary, Community Mortgage Corporation of Tri-County, included herein are unaudited.
The consolidated financial statements reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Management believes that the disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2018 have been derived from audited financial statements. Additions to the Company’s accounting policies are disclosed in the 2018 Annual Report as well as the adoption of new accounting standards included in Note 1. The results of operations for the nine months September 30, 2019 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2018 Annual Report on Form 10‑K.
Reclassification
Certain items in prior financial statements have been reclassified to conform to the current presentation.
Nature of Operations
The Company provides financial services to individuals and businesses through its offices in Southern Maryland, Annapolis, Maryland and Fredericksburg, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.

The Bank is headquartered in Southern Maryland with 12 branches located in Maryland and Virginia including Waldorf (two branches), Bryans Road, Dunkirk, Leonardtown, La Plata (two branches), Charlotte Hall, Prince Frederick, Lusby, California, Maryland; and Fredericksburg, Virginia. The Bank has two operation centers located at the main office in Waldorf, Maryland and in Fredericksburg, Virginia. The Company maintains five loan production offices (“LPOs”) in Annapolis, La Plata, Prince Frederick and Leonardtown, Maryland; and Fredericksburg, Virginia. The Leonardtown LPO is co-located with the branch and the Fredericksburg LPO is co-located with the operation center.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, real estate acquired in the settlement of loans, fair value of financial instruments, fair value of assets acquired, and liabilities assumed in a business combination, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.
New Accounting Policy
See Note 1 – Summary of Significant Accounting Policies included in the Company’s 2018 Annual Report on Form 10‑K for a list of policies in effect as of December 31, 2018. The below summary is intended to provide updates or new policies required as a result of a new accounting standard or a change to the Company’s operations or assets that require a new or amended policy.

8


Commitments and Contingencies
The Company leases certain properties and land under operating leases. For leases in effect upon adoption of Accounting Standards Update 2016-2, “Leases (Topic 842)” at January 1, 2019 and for any leases commencing thereafter, the Company recognizes a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during the lease term, the “right-of-use asset”. The lease liability is measured at the present value of the remaining lease payments, discounted at the Company's incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis.
Certain of the Company's leases contain options to renew the lease. Renewal options are included in the calculation of the lease liabilities when they are reasonably certain to be exercised. The Company's leases do not contain residual value guarantees. The Company's variable lease payments are expensed and classified as operating activities in the statement of cash flows. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.
Recent Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)
ASU 2016‑02 - Leases (Topic 842). In February 2016, the FASB amended existing guidance that requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) 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. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged.
ASU 2016-02 was effective for the Company on January 1, 2019 and initially required transition using a modified retrospective 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 2018-11, “Leases (Topic 842) – Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities not to apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales taxes and similar taxes as well as certain lessor costs.
Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, the Company recognized right-of-use assets and related lease liabilities of $10.2 million and $10.2 million, respectively. Certain practical expedients provided under ASU 2016-02 were applied whereby management did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In addition, the recognition requirements of ASU 2016-02 were not applied to any short-term leases (as defined by related accounting guidance). Lease and non-lease components were accounted for separately because such amounts are readily determinable under our lease contracts. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11.  See Note 7 – Commitments & Contingencies for additional disclosures related to leases.

9


ASU 2016‑13 - Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. ASU No. 2016‑13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to their current method, except that the credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as currently required. The ASU also simplifies the accounting model for purchase credit impaired (“PCI”) debt securities and loans. ASU 2016‑13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses (“ALLL”). In addition, entities will disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).
The Company has formed a CECL committee with representatives from various departments. The committee has selected a third-party vendor solution to assist in the application of the ASU 2016-13. The committee continues to make progress in accordance with the Company's implementation plan for adoption. The Company has developed new expected credit loss estimation models, depending on the nature of each identified pool of financial assets with similar risk characteristics and is currently reviewing and analyzing the different methodologies to estimate expected credit losses. The Company is also working on documenting new processes and controls, challenging estimated credit loss model assumptions and outputs, refining the qualitative framework as well as drafting policies and disclosures. Additionally, parallel runs will be enhanced throughout 2019 as the processes, controls, and policies are finalized. The adoption of the ASU 2016-13 could result in an increase or decrease in the allowance for loan losses as a result of changing from an “incurred loss” model to an “expected loss” model. Furthermore, ASU 2016-13 will necessitate the establishment of an allowance for expected credit losses for certain debt securities and other financial assets. While management is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the impact of adoption will be significantly influenced by the composition, characteristics, and quality of the loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.
On October 16, 2019, the Financial Accounting Standards Board directed the FASB staff to draft a final ASU that will delay the required implementation date for ASU 2016-13 until fiscal years beginning after December 15, 2022 for certain entities. The delay would apply to small reporting companies (as defined by the SEC), non-SEC public companies and private companies. The Company's CECL committee is continuing to evaluate the provisions of ASU 2016-13 and will review the related ASU, once finalized, to determine the new standard's impact on the company’s consolidated financial statements.
Subject to the issuance of the new final ASU mentioned above, ASU 2016-13 will be effective for interim and annual reporting periods beginning after December 15, 2022, early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective.
ASU 2017‑04 - Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. ASU 2017‑04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017‑04, an entity should perform an annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge 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. ASU 2017‑04 will be effective for the Company on January 1, 2023, with earlier adoption permitted and is not expected to have a significant impact on the Company’s financial statements.
ASU 2018‑13 - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018‑13. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018‑13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to early adopt any eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018‑13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.
 

10


ASU 2019-04 - In April 2019, the FASB issued ASU No. 2019-4 which codifies improvements to Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), Financial Instruments (Topic 825). With respect to Topic 326, ASU 2019-04 clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to Topic 825, ASU 2019-04 clarifies the scope of the guidance for recognizing and measuring financial instruments, the requirement for remeasurement under ASC 820 when using the measurement alternative, which equity securities have to be remeasured at historical exchange rates, and certain disclosure requirements. The amendments to Topic 326 have the same effective dates as ASU 2016-13. The Company is currently evaluating the potential impact of Topic 326 amendments on the Company's Consolidated Financial Statements. The amendments to Topic 825 are effective for interim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the Company's Consolidated Financial Statements.

ASU 2019-05 - Financial Instruments-Credit Losses (Topic 326). In May 2019, the FASB issued ASU No. 2019-05. This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. The Company plans to adopt ASU 2019-05 upon adoption of ASU 2016-13 unless an earlier adoption is permitted in an accounting update. The Company is evaluating the impact of electing the fair value option of ASU 2019-05 on the Company's Consolidated Financial Statements.


11


NOTE 2 – SECURITIES
(dollars in thousands)
 
September 30, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Securities available for sale (AFS)
 
 
 
 
 
 
 
 
Asset-backed securities issued by GSEs and U.S. Agencies
 
 
 
 
 
 
 
 
Residential Mortgage Backed Securities ("MBS")
 
$
11,686

 
$
115

 
$
9

 
$
11,792

Residential Collateralized Mortgage Obligations ("CMOs")
 
106,038

 
2,289

 
133

 
108,194

U.S. Agency
 
11,198

 
134

 
30

 
11,302

Total securities available for sale
 
$
128,922

 
$
2,538

 
$
172

 
$
131,288

 
 
 
 
 
 
 
 
 
Securities held to maturity (HTM)
 
 
 
 
 
 
 
 
Asset-backed securities issued by GSEs and U.S. Agencies
 
 
 
 
 
 
 
 
Residential MBS
 
27,707

 
901

 
16

 
28,592

Residential CMOs
 
47,195

 
457

 
139

 
47,513

U.S. Agency
 
9,597

 
197

 
13

 
9,781

Asset-backed securities issued by others:
 
 
 
 
 
 
 
 
Residential CMOs
 
408

 
4

 
13

 
399

Callable GSE agency bonds
 
2,003

 
3

 

 
2,006

Certificates of deposit fixed
 
250

 

 

 
250

U.S. government obligations
 
1,494

 

 

 
1,494

Total securities held to maturity
 
$
88,654

 
$
1,562

 
$
181

 
$
90,035

 
 
 
 
 
 
 
 
 
Equity securities carried at fair value through income
 
 
 
 
 
 
 
 
CRA investment fund
 
$
4,665

 
$

 
$

 
$
4,665

Non-marketable equity securities
 
 
 
 
 
 
 
 
Other equity securities
 
$
209

 
$

 
$

 
$
209

(dollars in thousands)
 
December 31, 2018
 
Amortize Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Securities available for sale (AFS)
 
 
 
 
 
 
 
 
Asset-backed securities issued by GSEs and U.S. Agencies
 
 
 
 
 
 
 
 
Residential MBS
 
$
7,641

 
$
1

 
$
281

 
$
7,361

Residential CMOs
 
102,411

 
199

 
1,870

 
100,740

U.S. Agency
 
12,472

 
9

 
606

 
11,875

Total securities available for sale
 
$
122,524

 
$
209

 
$
2,757

 
$
119,976

 
 
 
 
 
 
 
 
 
Securities held to maturity (HTM)
 
 
 
 
 
 
 
 
Asset-backed securities issued by GSEs and U.S. Agencies
 
 
 
 
 
 
 
 
Residential MBS
 
$
25,948

 
$
75

 
$
756

 
$
25,267

Residential CMOs
 
52,375

 
64

 
1,360

 
51,079

U.S. Agency
 
10,508

 
7

 
404

 
10,111

Asset-backed securities issued by others:
 
 
 
 
 
 
 
 
Residential CMOs
 
482

 

 
41

 
441

Callable GSE agency bonds
 
5,009

 

 
110

 
4,899

Certificates of deposit fixed
 
950

 

 

 
950

U.S. government obligations
 
999

 

 
1

 
998

Total securities held to maturity
 
$
96,271

 
$
146

 
$
2,672

 
$
93,745

 
 
 
 
 
 
 
 
 
Equity securities carried at fair value through income
 
 
 
 
 
 
 
 
CRA investment fund
 
$
4,428

 
$

 
$

 
$
4,428

Non-marketable equity securities
 
 
 
 
 
 
 
 
Other equity securities
 
$
209

 
$

 
$

 
$
209


12


At September 30, 2019 and December 31, 2018 securities with an amortized cost of $47.8 million and $41.3 million were pledged to secure certain customer deposits. At September 30, 2019, no securities were pledged as collateral for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, and at December 31, 2018, securities with an amortized cost of $3.3 million were pledged as collateral for advances from the FHLB of Atlanta.
Management believes that AFS securities with unrealized losses will either recover in market value or be paid off as agreed. The Company intends to, and has the ability to, hold these securities to maturity. Because our intention is not to sell the investments and it is not more likely than not that the Company will be required to sell the investments, management considers the unrealized losses in the AFS portfolio to be temporary.
The Company intends to, and has the ability to, hold the HTM securities with unrealized losses until they mature, at which time the Company will receive full value for the securities. Because our intention is not to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, management considers the unrealized losses in the held-to-maturity portfolio to be temporary.
No charges related to other-than-temporary impairment were made during the three and nine months ended September 30, 2019 and the year ended December 31, 2018.
During the three and nine months ended September 30, 2019 and the year ended December 31, 2018, there were no sales of securities in the ordinary course of operations.
During January of 2018, the Company sold virtually all of the acquired securities from the County First acquisition netting proceeds of $34.9 million which served as the fair value of the acquired securities.
ASC 320 “Investments - Debt Securities,” permits the sale of HTM securities for certain changes in circumstances. The Company may dispose of HTM securities using the safe harbor rule that allows for the sale of HTM securities when principal repayments have reduced the balance to less than 15% of original purchased par. ASC 320 10‑25‑15 indicates that a sale of a debt security after a substantial portion of the principal has been collected is equivalent to holding the security to maturity. In addition, the Company may dispose of HTM securities under ASC 320‑10‑25‑6 due to a significant deterioration in the issues’ creditworthiness.
AFS Securities
Gross unrealized losses and estimated fair value by length of time that individual AFS securities have been in a continuous unrealized loss position at September 30, 2019, and December 31, 2018 were as follows:
September 30, 2019
 
Less Than 12 Months
 
More Than 12 Months
 
Total
(dollars in thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies
 
$
1,005

 
$
4

 
$
23,156

 
$
168

 
$
24,161

 
$
172

 
 
$
1,005

 
$
4

 
$
23,156

 
$
168

 
$
24,161

 
$
172

December 31, 2018
 
Less Than 12 Months
 
More Than 12 Months
 
Total
(dollars in thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies
 
$
30,095

 
$
163

 
$
54,846

 
$
2,594

 
$
84,941

 
$
2,757

 
 
$
30,095

 
$
163

 
$
54,846

 
$
2,594

 
$
84,941

 
$
2,757

At September 30, 2019 and December 31, 2018, the AFS investment portfolio had an estimated fair value of $131.3 million and $120.0 million, of which $24.2 million and $84.9 million, respectively, of the securities had unrealized losses from their amortized cost.

13


AFS asset-backed securities issued by GSEs are guaranteed by the issuer and AFS U.S. government agency securities and bonds are guaranteed by the full faith and credit of the U.S. government. At September 30, 2019 and December 31, 2018, total unrealized losses were $0.2 million and $2.8 million of the portfolio amortized cost of $128.9 million and $122.5 million, respectively. At September 30, 2019 and December 31, 2018, AFS asset-backed securities issued by GSEs and U.S. Agencies with unrealized losses had average lives of 3.65 years and 4.32 years and average durations of 3.36 years and 3.83 years, respectively. Management believes that the securities will either recover in market value or be paid off as agreed.
HTM Securities
Gross unrealized losses and estimated fair value by length of time that the individual HTM securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018 were as follows:
September 30, 2019
 
Less Than 12 Months
 
More Than 12 Months
 
Total
(dollars in thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies
 
$

 
$

 
$
25,414

 
$
168

 
$
25,414

 
$
168

Callable GSE Agency Bonds
 

 

 
2,006

 

 
2,006

 

Asset-backed securities issued by others
 

 

 
399

 
13

 
399

 
13

 
 
$

 
$

 
$
27,819

 
$
181

 
$
27,819

 
$
181

December 31, 2018
 
Less Than 12 Months
 
More Than 12 Months
 
Total
(dollars in thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies
 
$
6,955

 
$
38

 
$
70,752

 
$
2,483

 
$
77,707

 
$
2,521

Callable GSE Agency Bonds
 

 

 
4,899

 
110

 
4,899

 
110

Asset-backed securities issued by others
 

 

 
441

 
41

 
441

 
41

 
 
$
6,955

 
$
38

 
$
76,092

 
$
2,634

 
$
83,047

 
$
2,672

At September 30, 2019 and December 31, 2018, respectively, the HTM investment portfolio had an estimated fair value of $90.0 million and $93.7 million of which $27.8 million and $83.0 million of the securities had unrealized losses from their amortized cost. Of these securities, at September 30, 2019 and December 31, 2018, $27.4 million and $82.6 million were asset-backed securities issued by GSEs and U.S. Agencies and the remaining $399,000 and $441,000 were asset-backed securities issued by others, respectively.
HTM asset-backed securities issued by GSEs and GSE agency bonds are guaranteed by the issuer and HTM U.S. government agency securities and bonds are guaranteed by the full faith and credit of the U.S. government. At September 30, 2019 and December 31, 2018, total unrealized losses on the portfolio were $0.2 million and $2.7 million of the portfolio amortized cost of $28.0 million and $94.8 million, respectively. At September 30, 2019 and December 31, 2018, the securities with unrealized losses had average lives of 4.32 years and 4.88 years and average durations of 3.36 years and 4.26 years, respectively. Management believes that the securities will either recover in market value or be paid off as agreed. The Company intends to, and has the ability to, hold these securities to maturity.
HTM asset-backed securities issued by others are collateralized mortgage obligation securities. The securities have credit support tranches that absorb losses prior to the tranches that the Company owns. The Company reviews credit support positions on its securities regularly. At September 30, 2019 and December 31, 2018, total unrealized losses on the asset-backed securities issued by others were $13,000 and $41,000 of the portfolio amortized cost of $408,000 and $482,000, respectively. At September 30, 2019 and December 31, 2018, HTM asset-backed securities issued by others with unrealized losses had average lives of 3.76 years and 3.01 years and average durations of 3.25 years and 2.33 years, respectively.

14


Credit Quality of Asset-Backed Securities and Agency Bonds
At September 30, 2019 and December 31, 2018, greater than 99% of the asset-backed securities and agency bond portfolio was rated AAA by Standard & Poor’s or the equivalent credit rating from another major rating agency. At September 30, 2019 and December 31, 2018, AFS asset-backed securities issued by GSEs and U.S. Agencies had average lives of 3.61 years and 4.37 years and average durations of 3.30 years and 3.86 years and were guaranteed by their issuer as to credit risk, respectively. HTM asset-backed securities issued by GSEs and U.S. Agencies had average lives of 4.32 years and 4.88 years and average durations of 3.89 years and 4.25 years and were guaranteed by their issuer as to credit risk as of September 30, 2019 and December 31, 2018, respectively.
The tables below present the Standard & Poor’s (“S&P”) or equivalent credit rating from other major rating agencies for AFS and HTM securities at September 30, 2019 and December 31, 2018 by carrying value. The Company considers noninvestment grade securities rated BB+ or lower as classified assets for regulatory and financial reporting. GSE asset-backed securities and GSE agency bonds with S&P AA+ ratings were treated as AAA based on regulatory guidance.
September 30, 2019
 
December 31, 2018
Credit Rating
 
Amount

 
Credit Rating
 
Amount

(dollars in thousands)
 
 
 
(dollars in thousands)
 
 
AAA
 
$
219,534

 
AAA
 
$
215,765

A
 
408

 
A
 

BB
 

 
BB
 
482

Total
 
$
219,942

 
Total
 
$
216,247


15


NOTE 3 – LOANS
Loans consist of the following:
 
 
September 30, 2019
 
December 31, 2018
(dollars in thousands)
 
PCI
 
All other loans**
 
Total
 
% of Gross Loans
 
PCI
 
All other loans**
 
Total
 
% of Gross Loans
Commercial real estate
 
$
1,732

 
$
930,612


$
932,344

 
65.86
 %
 
$
1,785

 
$
876,231

 
$
878,016

 
65.18
 %
Residential first mortgages
 
451

 
163,276

 
163,727

 
11.57
 %
 
466

 
156,243

 
156,709

 
11.63
 %
Residential rentals
 
317

 
120,853

 
121,170

 
8.56
 %
 
897

 
123,401

 
124,298

 
9.23
 %
Construction and land development
 

 
30,774

 
30,774

 
2.17
 %
 

 
29,705

 
29,705

 
2.21
 %
Home equity and second mortgages
 
303

 
35,879

 
36,182

 
2.56
 %
 
72

 
35,489

 
35,561

 
2.64
 %
Commercial loans
 

 
69,179

 
69,179

 
4.89
 %
 

 
71,680

 
71,680

 
5.32
 %
Consumer loans
 

 
937

 
937

 
0.07
 %
 

 
751

 
751

 
0.06
 %
Commercial equipment
 

 
61,104

 
61,104

 
4.32
 %
 

 
50,202

 
50,202

 
3.73
 %
Gross loans
 
2,803

 
1,412,614

 
1,415,417

 
100.00
 %
 
3,220

 
1,343,702

 
1,346,922

 
100.00
 %
Net deferred costs
 

 
1,691

 
1,691

 
0.12
 %
 

 
1,183

 
1,183

 
0.09
 %
Total loans, net of deferred costs
 
$
2,803

 
$
1,414,305

 
$
1,417,108

 
 
 
$
3,220

 
$
1,344,885

 
$
1,348,105

 
 
Less: allowance for loan losses
 

 
(11,252
)
 
(11,252
)
 
(0.79
)%
 

 
(10,976
)
 
(10,976
)
 
(0.81
)%
Net loans
 
$
2,803

 
$
1,403,053

 
$
1,405,856

 
 
 
$
3,220

 
$
1,333,909

 
$
1,337,129

 
 
______________________________________
**   All other loans include acquired Non-PCI pools.
At September 30, 2019 and December 31, 2018, the Bank’s allowance for loan losses totaled $11.3 million and $11.0 million, or 0.79% and 0.81%, respectively, of loan balances. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the portfolio with consideration given to the overall loss experience, current economic conditions, size, growth and composition of the loan portfolio, financial condition of the borrowers and other relevant factors that, in management’s judgment, warrant recognition in providing an adequate allowance.
Net deferred loan costs of $1.7 million at September 30, 2019 included deferred fees paid by customers of $3.2 million offset by deferred costs of $4.9 million, which include premiums paid for the purchase of residential first mortgages and deferred costs recorded in accordance with ASC 310-20 to capture loan origination costs.  Net deferred loan costs of $1.2 million at December 31, 2018 included deferred fees paid by customers of $3.1 million offset by deferred costs of $4.3 million.
Risk Characteristics of Portfolio Segments
Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of Southern Maryland, Annapolis, Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has concentrations in business loans secured by real estate and real estate development loans. At September 30, 2019 and December 31, 2018, the Company had no loans outstanding with foreign entities.
The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:
Commercial Real Estate (“CRE”)
Commercial and other real estate projects include office buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 8.4% and 5.9% of the CRE portfolio at September 30, 2019 and December 31, 2018, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.

16


Loans secured by commercial real estate are larger and involve greater risks than one-to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.
Residential First Mortgages
Residential first mortgage loans are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential loans typically ranges from ten to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages. During the nine months ended September 30, 2019 and the year ended December 31, 2018, the Bank purchased residential first mortgages of $28.1 million and $11.0 million, respectively.
The annual and lifetime limitations on interest rate adjustments may limit the increases in interest rates on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was $53.3 million or 3.8% of total gross loans of $1.4 billion at September 30, 2019 compared to $54.2 million or 4.0% of total gross loans of $1.3 billion at December 31, 2018.
Residential Rentals
Residential rental mortgage loans are amortizing, with principal and interest due each month. The loans are secured by income-producing 1‑4 family units and apartments. As of September 30, 2019 and December 31, 2018, $91.6 million and $96.6 million, respectively, were 1‑4 family units and $29.6 million and $27.7 million, respectively, were apartment buildings or multi-family units. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years<