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, 2016
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 000-54422
_______________
CARROLL BANCORP, INC.
(Exact name of registrant as specified in its charter)
MARYLAND |
|
27-5463184 |
(State or other jurisdiction |
|
(IRS Employer |
1321 Liberty Road, Sykesville, Maryland 21784
(Address of principal executive offices) (Zip Code)
(410) 795-1900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 965,218 shares of common stock outstanding at November 10, 2016.
CARROLL BANCORP, INC.
Form 10-Q
Table of Contents
Page | |
PART I - FINANCIAL INFORMATION | |
Item 1. Financial Statements: | |
Consolidated Statements of Financial Condition as of September 30, 2016 (unaudited) and December 31, 2015 (audited) | 1 |
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited) | 2 |
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited) | 3 |
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (unaudited) | 4 |
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited) | 5 |
Notes to Consolidated Financial Statements (unaudited) | 6 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
40 |
Item 4. Controls and Procedures | 40 |
PART II - OTHER INFORMATION | |
Item 1. Legal Proceedings | 41 |
Item 1A. Risk Factors | 41 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 41 |
Item 3. Defaults Upon Senior Securities | 41 |
Item 4. Mine Safety Disclosures | 41 |
Item 5. Other Information | 41 |
Item 6. Exhibits | 41 |
SIGNATURES | 42 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Carroll Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, |
December 31, |
|||||||
2016 |
2015 |
|||||||
(unaudited) |
(audited) |
|||||||
Assets: |
||||||||
Cash and due from banks |
$ | 1,287,139 | $ | 1,583,914 | ||||
Interest-bearing deposits with depository institutions |
18,347,957 | 6,623,853 | ||||||
Cash and cash equivalents |
19,635,096 | 8,207,767 | ||||||
Certificates of deposit with depository institutions |
2,450,165 | 2,450,248 | ||||||
Securities available for sale, at fair value |
4,127,674 | 4,812,384 | ||||||
Securities held to maturity (fair value September 30, 2016 $3,039,429 and December 31, 2015 $2,011,900) |
2,978,315 | 2,005,775 | ||||||
Loans, net of allowance for loan losses - September 30, 2016 $959,000 and December 31, 2015 $901,000 |
130,489,056 | 128,433,411 | ||||||
Accrued interest receivable |
404,978 | 403,535 | ||||||
Other equity securities, at cost |
816,096 | 869,296 | ||||||
Bank-owned life insurance |
2,149,663 | 2,107,770 | ||||||
Premises and equipment, net |
1,406,198 | 1,303,648 | ||||||
Foreclosed assets |
146,410 | 199,374 | ||||||
Other assets |
548,690 | 544,059 | ||||||
Total assets |
$ | 165,152,341 | $ | 151,337,267 | ||||
Liabilities: |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 8,832,647 | $ | 8,718,993 | ||||
Interest-bearing |
127,061,474 | 113,382,169 | ||||||
Total deposits |
135,894,121 | 122,101,162 | ||||||
Federal Home Loan Bank Advances |
12,500,000 | 12,500,000 | ||||||
Other liabilities |
461,117 | 442,935 | ||||||
Total liabilities |
148,855,238 | 135,044,097 | ||||||
Stockholders' Equity: |
||||||||
Preferred Stock (par value $0.01); authorized 1,000,000 shares; no shares issued and outstanding |
- | - | ||||||
Common Stock (par value $0.01); authorized 9,000,000 shares; issued and outstanding 965,218 shares at September 30, 2016 and 978,279 shares at December 31, 2015 |
9,652 | 9,783 | ||||||
Additional paid-in capital |
12,602,050 | 12,799,995 | ||||||
Unallocated ESOP shares |
(261,088 | ) | (261,088 | ) | ||||
Unearned RSP shares |
(129,032 | ) | (144,599 | ) | ||||
Retained earnings |
4,051,558 | 3,886,581 | ||||||
Accumulated other comprehensive income |
23,963 | 2,498 | ||||||
Total stockholders' equity |
16,297,103 | 16,293,170 | ||||||
Total liabilities and stockholders' equity |
$ | 165,152,341 | $ | 151,337,267 |
The notes to the consolidated financial statements are an integral part of these statements.
Carroll Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2016 |
2015 |
2016 |
2015 |
|||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 1,383,855 | $ | 1,277,344 | $ | 4,165,048 | $ | 3,574,693 | ||||||||
Securities available for sale |
20,162 | 23,751 | 65,437 | 79,427 | ||||||||||||
Securities held to maturity |
28,792 | 13,209 | 80,745 | 39,593 | ||||||||||||
Certificates of deposit |
10,739 | 10,456 | 31,992 | 31,534 | ||||||||||||
Interest-earning deposits |
27,250 | 8,558 | 70,916 | 25,629 | ||||||||||||
Total interest income |
1,470,798 | 1,333,318 | 4,414,138 | 3,750,876 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
221,361 | 126,823 | 591,404 | 376,492 | ||||||||||||
Borrowings |
46,703 | 34,493 | 140,510 | 95,953 | ||||||||||||
Total interest expense |
268,064 | 161,316 | 731,914 | 472,445 | ||||||||||||
Net interest income |
1,202,734 | 1,172,002 | 3,682,224 | 3,278,431 | ||||||||||||
Provision for loan losses |
2,156 | 35,165 | 39,306 | 93,317 | ||||||||||||
Net interest income after provision for loan losses |
1,200,578 | 1,136,837 | 3,642,918 | 3,185,114 | ||||||||||||
Non-interest income: |
||||||||||||||||
Gain (loss) on sale of securities |
- | 1,136 | (1,061 | ) | 1,036 | |||||||||||
Gain on loans held for sale |
12,586 | 3,063 | 58,676 | 5,250 | ||||||||||||
OREO write down |
(55 | ) | - | (30,519 | ) | - | ||||||||||
Increase in cash surrender value - life insurance |
13,863 | 14,204 | 41,893 | 41,975 | ||||||||||||
Customer service fees |
28,637 | 23,240 | 78,422 | 63,652 | ||||||||||||
Loan fee income |
6,772 | 7,182 | 26,971 | 20,001 | ||||||||||||
Other income |
5,170 | 2,663 | 14,214 | 10,917 | ||||||||||||
Total non-interest income |
66,973 | 51,488 | 188,596 | 142,831 | ||||||||||||
Non-interest expense: |
||||||||||||||||
Salaries and employee benefits |
694,102 | 555,580 | 2,004,805 | 1,630,713 | ||||||||||||
Premises and equipment |
138,576 | 111,576 | 404,317 | 292,363 | ||||||||||||
Data processing |
123,562 | 115,224 | 373,759 | 328,608 | ||||||||||||
Professional fees |
66,954 | 91,231 | 256,447 | 249,474 | ||||||||||||
FDIC insurance |
25,993 | 17,094 | 80,639 | 51,260 | ||||||||||||
Directors' fees |
38,025 | 55,000 | 133,150 | 160,700 | ||||||||||||
Corporate insurance |
12,025 | 10,810 | 36,080 | 31,330 | ||||||||||||
Printing and office supplies |
12,749 | 13,369 | 35,018 | 30,804 | ||||||||||||
Other operating expenses |
101,569 | 81,524 | 280,195 | 217,154 | ||||||||||||
Total non-interest expenses |
1,213,555 | 1,051,408 | 3,604,410 | 2,992,406 | ||||||||||||
Income before income tax expense |
53,996 | 136,917 | 227,104 | 335,539 | ||||||||||||
Income tax expense |
11,847 | 55,957 | 62,127 | 124,244 | ||||||||||||
Net income |
$ | 42,149 | $ | 80,960 | $ | 164,977 | $ | 211,295 | ||||||||
Basic earnings per share |
$ | 0.05 | $ | 0.09 | $ | 0.18 | $ | 0.24 | ||||||||
Diluted earnings per share |
$ | 0.04 | $ | 0.08 | $ | 0.17 | $ | 0.23 | ||||||||
Basic weighted average shares outstanding |
931,974 | 938,982 | 935,586 | 894,969 | ||||||||||||
Diluted weighted average shares outstanding |
949,527 | 961,152 | 954,039 | 913,845 |
The notes to the consolidated financial statements are an integral part of these statements.
Carroll Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(unaudited)
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2016 |
2015 |
2016 |
2015 |
|||||||||||||
Net income |
$ | 42,149 | $ | 80,960 | $ | 164,977 | $ | 211,295 | ||||||||
Other comprehensive (loss) income before income tax: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
Net unrealized holding (losses) gains arising during the period |
(22,908 | ) | 25,373 | 34,715 | 9,191 | |||||||||||
Less reclassification adjustment for gain (loss) on the sale of securities available for sale included in net income |
- | 1,136 | (1,061 | ) | 1,036 | |||||||||||
Other comprehensive (loss) income before income tax |
(22,908 | ) | 24,237 | 35,776 | 8,155 | |||||||||||
Income tax effect |
(9,163 | ) | 9,695 | 14,311 | 3,262 | |||||||||||
Other comprehensive (loss) income, net of tax |
(13,745 | ) | 14,542 | 21,465 | 4,893 | |||||||||||
Total comprehensive income |
$ | 28,404 | $ | 95,502 | $ | 186,442 | $ | 216,188 |
The notes to the consolidated financial statements are an integral part of these statements.
Carroll Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2016 and 2015
(unaudited)
Accumulated |
||||||||||||||||||||||||||||
Additional |
Unallocated |
Unallocated |
Other |
|||||||||||||||||||||||||
Common |
Paid-in |
ESOP |
RSP |
Retained |
Comprehensive |
|||||||||||||||||||||||
Stock |
Capital |
Shares |
Shares |
Earnings |
Income |
Total |
||||||||||||||||||||||
Balances at January 1, 2016 |
$ | 9,783 | $ | 12,799,995 | $ | (261,088 | ) | $ | (144,599 | ) | $ | 3,886,581 | $ | 2,498 | $ | 16,293,170 | ||||||||||||
Net income |
164,977 | 164,977 | ||||||||||||||||||||||||||
Other comprehensive income |
21,465 | 21,465 | ||||||||||||||||||||||||||
RSP compensation |
35,844 | 35,844 | ||||||||||||||||||||||||||
Restricted stock vesting |
(15,567 | ) | 15,567 | - | ||||||||||||||||||||||||
Warrants exercised |
19 | 25,828 | 25,847 | |||||||||||||||||||||||||
Stock repurchase |
(150 | ) | (244,050 | ) | (244,200 | ) | ||||||||||||||||||||||
Balances at September 30, 2016 |
$ | 9,652 | $ | 12,602,050 | $ | (261,088 | ) | $ | (129,032 | ) | $ | 4,051,558 | $ | 23,963 | $ | 16,297,103 | ||||||||||||
Balances at January 1, 2015 |
$ | 4,884 | $ | 4,873,447 | $ | (285,447 | ) | $ | (170,217 | ) | $ | 6,317,654 | $ | 10,176 | $ | 10,750,497 | ||||||||||||
Net income |
211,295 | 211,295 | ||||||||||||||||||||||||||
Other comprehensive income |
4,893 | 4,893 | ||||||||||||||||||||||||||
RSP compensation |
34,367 | 34,367 | ||||||||||||||||||||||||||
Private placement offering: |
||||||||||||||||||||||||||||
Issuance of 310,848 shares of common stock net of offering costs |
3,108 | 4,962,721 | 4,965,829 | |||||||||||||||||||||||||
Restricted stock vesting |
(2,993 | ) | 2,993 | - | ||||||||||||||||||||||||
Stock dividend: |
||||||||||||||||||||||||||||
Issuance of 159,898 shares of common stock |
1,599 | 2,700,676 | (2,702,275 | ) | - | |||||||||||||||||||||||
Warrant exercises |
279 | 370,895 | 371,174 | |||||||||||||||||||||||||
Stock Repurchase |
(82 | ) | (133,381 | ) | (133,463 | ) | ||||||||||||||||||||||
Balances at September 30, 2015 |
$ | 9,788 | $ | 12,805,732 | $ | (285,447 | ) | $ | (167,224 | ) | $ | 3,826,674 | $ | 15,069 | $ | 16,204,592 |
The notes to the consolidated financial statements are an integral part of these statements.
Carroll Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
For the Nine Months Ended September 30, |
||||||||
2016 |
2015 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 164,977 | $ | 211,295 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Loss (gain) on sale of securities available for sale |
1,061 | (1,036 | ) | |||||
Gain on sale of loans held for sale |
(58,676 | ) | (5,250 | ) | ||||
Origination of loans held for sale |
(2,422,500 | ) | (525,000 | ) | ||||
Proceeds from sale of loans held for sale |
2,481,176 | 530,250 | ||||||
Amortization and accretion of securities, net |
42,673 | 96,352 | ||||||
Amortization of deferred loan costs, net of origination fees |
180,681 | 21,566 | ||||||
Provision for loan losses |
39,306 | 93,317 | ||||||
Provision for loss on real estate acquired through foreclosure |
30,519 | - | ||||||
Depreciation of premises and equipment |
141,092 | 115,975 | ||||||
Increase in cash surrender value of bank-owned life insurance |
(41,893 | ) | (41,975 | ) | ||||
ESOP compensation expense |
22,500 | 19,400 | ||||||
RSP compensation expense |
35,844 | 34,367 | ||||||
Increase in deferred tax assets |
(12,180 | ) | (37,982 | ) | ||||
Increase in accrued interest receivable |
(1,443 | ) | (36,841 | ) | ||||
(Increase) decrease in other assets |
(6,761 | ) | 13,713 | |||||
(Decrease) increase in other liabilities |
(4,317 | ) | 52,492 | |||||
Net cash provided by operating activities |
592,059 | 540,643 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of securities held to maturity |
(978,214 | ) | - | |||||
Proceeds from sale or redemption of securities available for sale |
15,000 | 3,174,603 | ||||||
Principal collected on securities available for sale |
667,508 | 1,180,409 | ||||||
Maturing of certificate of deposit investments |
- | 200,000 | ||||||
Increase in loans |
(2,275,634 | ) | (21,059,618 | ) | ||||
Purchase of premises and equipment |
(243,642 | ) | (160,267 | ) | ||||
Proceeds from the sale of real estate acquired through foreclosure |
22,446 | - | ||||||
Purchase of other equity securities |
(286,800 | ) | (327,400 | ) | ||||
Redemption of other equity securities |
340,000 | - | ||||||
Net cash used in investing activities |
(2,739,336 | ) | (16,992,273 | ) | ||||
Cash flows from financing activities: |
||||||||
Increase in deposits |
13,792,959 | 8,290,578 | ||||||
Proceeds from FHLB advances |
8,000,000 | 23,500,000 | ||||||
Repayment of FHLB advances |
(8,000,000 | ) | (17,000,000 | ) | ||||
Warrant exercise |
25,847 | 371,174 | ||||||
Stock repurchase |
(244,200 | ) | (133,463 | ) | ||||
Proceeds from private placement offering |
- | 4,965,829 | ||||||
Net cash provided by financing activities |
13,574,606 | 19,994,118 | ||||||
Net increase in cash and cash equivalents |
11,427,329 | 3,542,488 | ||||||
Cash and cash equivalents, beginning balance |
8,207,767 | 6,909,391 | ||||||
Cash and cash equivalents, ending balance |
$ | 19,635,096 | $ | 10,451,879 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Interest paid |
$ | 650,014 | $ | 469,642 | ||||
Income tax paid |
$ | 171,946 | $ | 196,936 |
The notes to the consolidated financial statements are an integral part of these statements.
CARROLL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Summary of Significant Accounting Policies
Organization and Nature of Operations
Carroll Bancorp, Inc. a Maryland corporation (the “Company”) was incorporated on February 18, 2011, to serve as the holding company for Carroll Community Bank (the “Bank”), a state chartered commercial bank. On October 12, 2011, in accordance with a plan of conversion adopted by its Board of Directors and approved by its members, the Bank converted from a Maryland chartered mutual savings bank to a state chartered commercial bank. The conversion was accomplished through formation of the Company to serve as the holding company of the Bank. The Company’s common stock is quoted on the OTC Pink marketplace of the OTC Markets Group under the symbol “CROL”.
In accordance with applicable regulations at the time of the conversion from a mutual holding company to a stock holding company, the Bank substantially restricted its retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who keep their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
The Bank is headquartered in Sykesville, Maryland and is a community-oriented financial institution providing financial services to individuals, families and businesses through three banking offices. The Bank is subject to the regulation, examination and supervision by the State of Maryland Department of Licensing and Regulation and the Federal Deposit Insurance Corporation (“FDIC”), our deposit insurer. Its primary deposits are certificate of deposit, savings and demand accounts and its primary lending products are residential and commercial real estate loans.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany balances and transactions between the Company and the Bank have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.
Accounting Standards Pending Adoption
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This standard may affect an entity’s financial statements, business processes and internal control over financial reporting. The guidance is effective for the first interim or annual period beginning after December 15, 2017. The guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company’s financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance in a deferred tax asset related to available for sale. ASU 2016-1 will be effective for the interim and annual reporting periods beginning after December 15, 2017 and is not expected to have a significant impact on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require organizations that lease assets – or lessees – to recognize assets and liabilities on their balance sheets for leases with lease terms of more than 12 months. Currently, the recognition, measurement, and presentation of expenses and cash flows arising from a lease for lessees primarily depends on its classification as a finance (capital) lease or operating lease. But unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new standard requires companies to include both types of leases on their books. For finance leases, lessees will be required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payment, in the statement of financial position, (ii) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income and (iii) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, lessees will be required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payment, in the statement of financial position, (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (iii) classify all cash payments within operating activities in the statement of cash flows. The ASU also will require disclosures to help investors and other financial statement users better understand the amounts, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Public companies will be required to adopt the new standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For calendar year-end public companies, this means an adoption date of January 1, 2019, and retroactive application to previously issued annual and interim financial statements for 2018 and 2017. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company’s financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. All excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, should be recognized as income tax expense or benefit in the income statement. The tax consequences of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. The amendments in this ASU take effect for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU 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. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i) financial assets subject to credit losses and measured at amortized cost, and (ii) 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 what they do today, except that the 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 they do today. The ASU also simplifies the accounting model for purchased credit-impaired 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. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. 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 is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's financial statements.
Other than the disclosures contained within these statements, the Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.
Note 2. Securities
The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2016 and December 31, 2015 are as follows:
At September 30, 2016 |
||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Securities available for sale: |
||||||||||||||||
Residential mortgage-backed securities |
$ | 1,851,944 | $ | 4,996 | $ | 308 | $ | 1,856,632 | ||||||||
Commercial mortgage-backed securities |
2,014,590 | 33,570 | - | 2,048,160 | ||||||||||||
Municipal bonds |
221,202 | 1,922 | 242 | 222,882 | ||||||||||||
$ | 4,087,736 | $ | 40,488 | $ | 550 | $ | 4,127,674 | |||||||||
Securities held to maturity: |
||||||||||||||||
Municipal bonds |
$ | 1,022,920 | $ | 17,603 | $ | 112 | $ | 1,040,411 | ||||||||
Corporate bonds |
1,955,395 | 43,623 | - | 1,999,018 | ||||||||||||
$ | 2,978,315 | $ | 61,226 | $ | 112 | $ | 3,039,429 |
At December 31, 2015 |
||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Securities available for sale: |
||||||||||||||||
Residential mortgage-backed securities |
$ | 2,549,295 | $ | 12,146 | $ | 8,818 | $ | 2,552,623 | ||||||||
Commercial mortgage-backed securities |
2,017,187 | - | - | 2,017,187 | ||||||||||||
Municipal bonds |
241,739 | 2,503 | 1,668 | 242,574 | ||||||||||||
$ | 4,808,221 | $ | 14,649 | $ | 10,486 | $ | 4,812,384 | |||||||||
Securities held to maturity: |
||||||||||||||||
Municipal bonds |
$ | 500,000 | $ | 9,470 | $ | - | $ | 509,470 | ||||||||
Corporate bonds |
1,505,775 | 250 | 3,595 | 1,502,430 | ||||||||||||
$ | 2,005,775 | $ | 9,720 | $ | 3,595 | $ | 2,011,900 |
The Bank had no private label residential mortgage-backed securities at September 30, 2016 and December 31, 2015 or during the nine months or year then ended, respectively.
At September 30, 2016 and December 31, 2015 the carrying amount of securities pledged as collateral for uninsured public fund deposits was $3.1 million and $2.3 million, respectively.
The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2016 and December 31, 2015, by contractual maturity, are shown below. Expected maturities for residential mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At September 30, 2016 |
||||||||||||||||
Securities available for sale |
Securities held to maturity |
|||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
Under 1 year |
$ | - | $ | - | $ | - | $ | - | ||||||||
Over 1 year through 5 years |
2,337,143 | 2,372,690 | - | - | ||||||||||||
After 5 years through 10 years |
1,750,593 | 1,754,984 | 2,205,394 | 2,258,948 | ||||||||||||
Over 10 years |
- | - | 772,921 | 780,481 | ||||||||||||
$ | 4,087,736 | $ | 4,127,674 | $ | 2,978,315 | $ | 3,039,429 |
At December 31, 2015 |
||||||||||||||||
Securities available for sale |
Securities held to maturity |
|||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
Under 1 year |
$ | - | $ | - | $ | - | $ | - | ||||||||
Over 1 year through 5 years |
378,316 | 379,770 | - | - | ||||||||||||
After 5 years through 10 years |
3,822,110 | 3,816,649 | 1,755,775 | 1,756,777 | ||||||||||||
Over 10 years |
607,795 | 615,965 | 250,000 | 255,123 | ||||||||||||
$ | 4,808,221 | $ | 4,812,384 | $ | 2,005,775 | $ | 2,011,900 |
The Bank sold or had called $15,000 and $3.2 million, respectively, in securities available for sale during the nine months ended September 30, 2016 and 2015. From those sale transactions, the Bank realized a net loss of $1,061 in the 2016 period and a net gain of $1,036 in the 2015 period.
Securities with gross unrealized losses at September 30, 2016 and December 31, 2015, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:
At September 30, 2016 |
||||||||||||||||||||||||
Less than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 636,659 | $ | 308 | $ | - | $ | - | $ | 636,659 | $ | 308 | ||||||||||||
Municipal bonds |
63,210 | 242 | - | - | 63,210 | 242 | ||||||||||||||||||
$ | 699,869 | $ | 550 | $ | - | $ | - | $ | 699,869 | $ | 550 | |||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||
Municipal bonds |
$ | 522,809 | $ | 112 | $ | - | $ | - | $ | 522,809 | $ | 112 |
At December 31, 2015 |
||||||||||||||||||||||||
Less than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 1,801,533 | $ | 8,818 | $ | - | $ | - | $ | 1,801,533 | $ | 8,818 | ||||||||||||
Municipal bonds |
- | - | 78,916 | 1,668 | 78,916 | 1,668 | ||||||||||||||||||
$ | 1,801,533 | $ | 8,818 | $ | 78,916 | $ | 1,668 | $ | 1,880,449 | $ | 10,486 | |||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||
Corporate bonds |
$ | 652,180 | $ | 3,595 | $ | - | $ | - | $ | 652,180 | $ | 3,595 |
Note 3. Loans
Loans at September 30, 2016 and December 31, 2015 are summarized as follows:
At September 30, 2016 |
At December 31, 2015 |
|||||||||||||||
Percent |
Percent |
|||||||||||||||
Balance |
of Total |
Balance |
of Total |
|||||||||||||
Residential owner occupied - first lien |
$ | 36,631,304 | 28.0 | % | $ | 44,890,154 | 34.9 | % | ||||||||
Residential owner occupied - junior lien |
7,380,956 | 5.6 | % | 4,988,405 | 3.9 | % | ||||||||||
Residential non-owner occupied (investor) |
15,250,207 | 11.6 | % | 15,849,835 | 12.3 | % | ||||||||||
Commercial owner occupied |
12,281,567 | 9.4 | % | 14,717,990 | 11.4 | % | ||||||||||
Other commercial loans |
59,155,713 | 45.2 | % | 47,883,818 | 37.2 | % | ||||||||||
Consumer loans |
246,198 | 0.2 | % | 376,070 | 0.3 | % | ||||||||||
Total loans |
130,945,945 | 100.0 | % | 128,706,272 | 100.0 | % | ||||||||||
Net deferred fees, costs and purchase premiums |
502,111 | 628,139 | ||||||||||||||
Allowance for loan losses |
(959,000 | ) | (901,000 | ) | ||||||||||||
Total loans, net |
$ | 130,489,056 | $ | 128,433,411 |
Our residential one- to four-family first lien mortgage loan portfolio is pledged as collateral for our advances with the Federal Home Loan Bank of Atlanta (“FHLB”).
Note 4. Credit Quality of Loans and Allowance for Loan Losses
Company policies, consistent with regulatory guidelines, provide for the classification of loans that are considered to be of lesser quality as substandard, doubtful, or loss. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans (or portions of loans) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.
The Company maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable at the balance sheet date. Our determination as to the classification of our assets is subject to review by the Maryland Commissioner of Financial Regulation and the FDIC. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
The Company provides for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two components:
1) |
specific allowances are established for loans classified as substandard or doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and |
2) |
general allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. |
The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.
The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:
● | changes in the types of loans in the loan portfolio and the size of the overall portfolio; | |
● | changes in the levels of concentration of credit; | |
● |
changes in the number and amount of non-accrual loans, classified loans, past due loans and troubled debt restructurings and other loan modifications; |
|
● | changes in the experience, ability and depth of lending personnel; | |
● | changes in the quality of the loan review system and the degree of Board oversight; | |
● | changes in lending policies and procedures; | |
● | changes in national, state and local economic trends and business conditions; and | |
● | changes in external factors such as competition and legal and regulatory oversight. |
A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all loans secured by real estate by the fair value of the collateral if the loan is collateral dependent.
The Bank’s charge-off policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the loss amount has been determined, the loss amount will be charged to the established allowance for loan losses. Loans secured by real estate, either residential or commercial, are evaluated for loss potential at the 60 day past due threshold. At no later than 90 days past due the loan is placed on nonaccrual status and a specific reserve is established if the net realizable value in less than the principal value of the loan balance(s). Once the actual loss value has been determined, a charge-off to the allowance for loan losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss. Unsecured loans are charged-off to the allowance for loan losses at the 90 day past due threshold or when an actual loss has been determined whichever is earlier.
We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial real estate loans generally have greater credit risks compared to one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Therefore, we expect that the percentage of the allowance for loan losses as a percentage of the loan portfolio will increase going forward as we continue our focus on the origination of commercial real estate loans.
The following tables summarize the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2016 and 2015.
For the Three Months Ended September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Beginning balance |
$ | 145,821 | $ | 21,923 | $ | 109,954 | $ | 95,179 | $ | 581,123 | $ | - | $ | 954,000 | ||||||||||||||
Charge-offs |
- | - | - | - | - | - | - | |||||||||||||||||||||
Recoveries |
2,844 | - | - | - | - | - | 2,844 | |||||||||||||||||||||
Provision |
(9,356 | ) | 7,896 | (1,957 | ) | 3,074 | 2,499 | - | 2,156 | |||||||||||||||||||
Ending Balance |
$ | 139,309 | $ | 29,819 | $ | 107,997 | $ | 98,253 | $ | 583,622 | $ | - | $ | 959,000 |
For the Three Months Ended September 30, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Beginning balance |
$ | 182,964 | $ | 20,944 | $ | 50,142 | $ | 98,661 | $ | 447,289 | $ | - | $ | 800,000 | ||||||||||||||
Charge-offs |
- | - | - | - | - | - | - | |||||||||||||||||||||
Recoveries |
6,835 | - | - | - | - | - | 6,835 | |||||||||||||||||||||
Provision |
(21,544 | ) | (479 | ) | 5,546 | 20,289 | 31,353 | - | 35,165 | |||||||||||||||||||
Ending Balance |
$ | 168,255 | $ | 20,465 | $ | 55,688 | $ | 118,950 | $ | 478,642 | $ | - | $ | 842,000 |
For the Nine Months Ended September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Beginning balance |
$ | 206,169 | $ | 21,450 | $ | 69,898 | $ | 117,744 | $ | 485,739 | $ | - | $ | 901,000 | ||||||||||||||
Charge-offs |
- | - | - | - | - | - | - | |||||||||||||||||||||
Recoveries |
18,694 | - | - | - | - | - | 18,694 | |||||||||||||||||||||
Provision |
(85,554 | ) | 8,369 | 38,099 | (19,491 | ) | 97,883 | - | 39,306 | |||||||||||||||||||
Ending Balance |
$ | 139,309 | $ | 29,819 | $ | 107,997 | $ | 98,253 | $ | 583,622 | $ | - | $ | 959,000 |
For the Nine Months Ended September 30, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Beginning balance |
$ | 228,461 | $ | 25,051 | $ | 46,047 | $ | 89,811 | $ | 332,630 | $ | - | $ | 722,000 | ||||||||||||||
Charge-offs |
- | - | - | - | - | - | - | |||||||||||||||||||||
Recoveries |
24,939 | - | 1,744 | - | - | - | 26,683 | |||||||||||||||||||||
Provision |
(85,145 | ) | (4,586 | ) | 7,897 | 29,139 | 146,012 | - | 93,317 | |||||||||||||||||||
Ending Balance |
$ | 168,255 | $ | 20,465 | $ | 55,688 | $ | 118,950 | $ | 478,642 | $ | - | $ | 842,000 |
The following tables set forth the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||
Ending balance |
$ | 139,309 | $ | 29,819 | $ | 107,997 | $ | 98,253 | $ | 583,622 | $ | - | $ | 959,000 | ||||||||||||||
Ending balance individually evaluated for impairment |
$ | - | $ | - | $ | 48,982 | $ | - | $ | - | $ | - | $ | 48,982 | ||||||||||||||
Ending balance collectively evaluated for impairment |
$ | 139,309 | $ | 29,819 | $ | 59,015 | $ | 98,253 | $ | 583,622 | $ | - | $ | 910,018 | ||||||||||||||
Loans: |
||||||||||||||||||||||||||||
Ending balance |
$ | 36,631,304 | $ | 7,380,956 | $ | 15,250,207 | $ | 12,281,567 | $ | 59,155,713 | $ | 246,198 | $ | 130,945,945 | ||||||||||||||
Ending balance individually evaluated for impairment |
$ | - | $ | - | $ | 211,640 | $ | - | $ | - | $ | - | $ | 211,640 | ||||||||||||||
Ending balance collectively evaluated for impairment |
$ | 36,631,304 | $ | 7,380,956 | $ | 15,038,567 | $ | 12,281,567 | $ | 59,155,713 | $ | 246,198 | $ | 130,734,305 |
At December 31, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||
Ending balance |
$ | 206,169 | $ | 21,450 | $ | 69,898 | $ | 117,744 | $ | 485,739 | $ | - | $ | 901,000 | ||||||||||||||
Ending balance individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Ending balance collectively evaluated for impairment |
$ | 206,169 | $ | 21,450 | $ | 69,898 | $ | 117,744 | $ | 485,739 | $ | - | $ | 901,000 | ||||||||||||||
Loans: |
||||||||||||||||||||||||||||
Ending balance |
$ | 44,890,154 | $ | 4,988,405 | $ | 15,849,835 | $ | 14,717,990 | $ | 47,883,818 | $ | 376,070 | $ | 128,706,272 | ||||||||||||||
Ending balance individually evaluated for impairment |
$ | - | $ | - | $ | 108,188 | $ | - | $ | - | $ | - | $ | 108,188 | ||||||||||||||
Ending balance collectively evaluated for impairment |
$ | 44,890,154 | $ | 4,988,405 | $ | 15,741,647 | $ | 14,717,990 | $ | 47,883,818 | $ | 376,070 | $ | 128,598,084 |
The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
The following tables are a summary of the loan portfolio quality indicators by portfolio segment at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Pass |
$ | 36,631,304 | $ | 7,380,956 | $ | 14,554,977 | $ | 12,281,567 | $ | 56,098,999 | $ | 246,198 | $ | 127,194,001 | ||||||||||||||
Special Mention |
- | - | - | - | 3,056,714 | - | 3,056,714 | |||||||||||||||||||||
Substandard |
- | - | 695,230 | - | - | - | 695,230 | |||||||||||||||||||||
Doubtful |
- | - | - | - | - | - | - | |||||||||||||||||||||
Total |
$ | 36,631,304 | $ | 7,380,956 | $ | 15,250,207 | $ | 12,281,567 | $ | 59,155,713 | $ | 246,198 | $ | 130,945,945 |
At December 31, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Pass |
$ | 44,890,154 | $ | 4,988,405 | $ | 15,252,037 | $ | 14,717,990 | $ | 47,883,818 | $ | 376,070 | $ | 128,108,474 | ||||||||||||||
Special Mention |
- | - | - | - | - | - | - | |||||||||||||||||||||
Substandard |
- | - | 597,798 | - | - | - | 597,798 | |||||||||||||||||||||
Doubtful |
- | - | - | - | - | - | - | |||||||||||||||||||||
Total |
$ | 44,890,154 | $ | 4,988,405 | $ | 15,849,835 | $ | 14,717,990 | $ | 47,883,818 | $ | 376,070 | $ | 128,706,272 |
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as a “Pass” rating.
● Pass (risk ratings 1-6) – risk ratings one to four are deemed “acceptable”. Risk rating five is “acceptable with care” and risk rating six is a “watch credit”.
● Special Mention (risk rating 7) - a special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.
● Substandard (risk rating 8) - substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
● Doubtful (risk rating 9) - loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the loan’s present weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
● Loss (risk rating 10) - loans classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future.
Loans classified special mention, substandard, doubtful or loss are reviewed at least quarterly to determine their appropriate classification. Non-classified commercial loan relationships greater than $50,000 are reviewed annually. Non-classified residential mortgage loans and consumer loans are not evaluated unless a specific event occurs to raise the awareness of possible credit deterioration.
The following tables set forth certain information with respect to our loan delinquencies by portfolio segment at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Current |
$ | 36,180,667 | $ | 7,338,085 | $ | 15,147,849 | $ | 12,281,567 | $ | 56,600,510 | $ | 246,198 | $ | 127,794,876 | ||||||||||||||
30-59 days past due |
284,944 | 42,871 | 102,358 | - | 2,555,203 | - | 2,985,376 | |||||||||||||||||||||
60-89 days past due |
165,693 | - | - | - | - | - | 165,693 | |||||||||||||||||||||
Greater than 90 days past due |
- | - | - | - | - | - | - | |||||||||||||||||||||
Total past due |
450,637 | 42,871 | 102,358 | - | 2,555,203 | - | 3,151,069 | |||||||||||||||||||||
Total |
$ | 36,631,304 | $ | 7,380,956 | $ | 15,250,207 | $ | 12,281,567 | $ | 59,155,713 | $ | 246,198 | $ | 130,945,945 |
At December 31, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
Current |
$ | 44,522,124 | $ | 4,988,405 | $ | 15,731,641 | $ | 14,717,990 | $ | 46,621,559 | $ | 376,070 | $ | 126,957,789 | ||||||||||||||
30-59 days past due |
122,300 | - | 118,194 | - | 1,262,259 | - | 1,502,753 | |||||||||||||||||||||
60-89 days past due |
245,730 | - | - | - | - | - | 245,730 | |||||||||||||||||||||
Greater than 90 days past due |
- | - | - | - | - | - | - | |||||||||||||||||||||
Total past due |
368,030 | - | 118,194 | - | 1,262,259 | - | 1,748,483 | |||||||||||||||||||||
Total |
$ | 44,890,154 | $ | 4,988,405 | $ | 15,849,835 | $ | 14,717,990 | $ | 47,883,818 | $ | 376,070 | $ | 128,706,272 |
The following tables are a summary of impaired loans by portfolio segment at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
||||||||||||||||||||||||||||
Impaired Loans: |
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
|||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Recorded Investment |
$ | - | $ | - | $ | 102,358 | $ | - | $ | - | $ | - | $ | 102,358 | ||||||||||||||
Unpaid Principal Balance |
- | - | 102,358 | - | - | - | 102,358 | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Recorded Investment |
$ | - | $ | - | $ | 109,282 | $ | - | $ | - | $ | - | $ | 109,282 | ||||||||||||||
Unpaid Principal Balance |
- | - | 116,634 | - | - | - | 116,634 | |||||||||||||||||||||
Related Allowance |
- | - | 48,982 | - | - | - | 48,982 | |||||||||||||||||||||
Total impaired loans: |
||||||||||||||||||||||||||||
Recorded Investment |
$ | - | $ | - | $ | 211,640 | $ | - | $ | - | $ | - | $ | 211,640 | ||||||||||||||
Unpaid Principal Balance |
- | - | 218,992 | - | - | - | 218,992 | |||||||||||||||||||||
Related Allowance |
- | - | 48,982 | - | - | - | 48,982 |
At December 31, 2015 |
||||||||||||||||||||||||||||
Impaired Loans: |
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
|||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||
Recorded Investment |
$ | - | $ | - | $ | 108,188 | $ | - | $ | - | $ | - | $ | 108,188 | ||||||||||||||
Unpaid Principal Balance |
- | - | 108,188 | - | - | - | 108,188 | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Recorded Investment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Unpaid Principal Balance |
- | - | - | - | - | - | - | |||||||||||||||||||||
Related Allowance |
- | - | - | - | - | - | - | |||||||||||||||||||||
Total impaired loans: |
||||||||||||||||||||||||||||
Recorded Investment |
$ | - | $ | - | $ | 108,188 | $ | - | $ | - | $ | - | $ | 108,188 | ||||||||||||||
Unpaid Principal Balance |
- | - | 108,188 | - | - | - | 108,188 | |||||||||||||||||||||
Related Allowance |
- | - | - | - | - | - | - |
The following tables present by portfolio segment, information related to the average recorded investment and the interest income foregone and recognized on impaired loans for the three and nine months ended September 30, 2016 and 2015:
For the Three Months Ended September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | - | $ | - | $ | 103,458 | $ | - | $ | - | $ | - | $ | 103,458 | ||||||||||||||
Interest income that would have been recognized |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
- | - | - | - | - | - | - | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | - | $ | - | $ | 110,619 | $ | - | $ | - | $ | - | $ | 110,619 | ||||||||||||||
Interest income that would have been recognized |
- | - | 2,238 | - | - | - | 2,238 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
- | - | 2,238 | - | - | - | 2,238 | |||||||||||||||||||||
Total impaired loans: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | - | $ | - | $ | 214,077 | $ | - | $ | - | $ | - | $ | 214,077 | ||||||||||||||
Interest income that would have been recognized |
- | - | 2,238 | - | - | - | 2,238 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
- | - | 2,238 | - | - | - | 2,238 |
For the Three Months Ended September 30, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 146,410 | $ | - | $ | 110,698 | $ | - | $ | - | $ | - | $ | 257,108 | ||||||||||||||
Interest income that would have been recognized |
1,753 | - | - | - | - | - | 1,753 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
1,753 | - | - | - | - | - | 1,753 | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 55,034 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 55,034 | ||||||||||||||
Interest income that would have been recognized |
457 | - | - | - | - | - | 457 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
457 | - | - | - | - | - | 457 | |||||||||||||||||||||
Total impaired loans: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 201,444 | $ | - | $ | 110,698 | $ | - | $ | - | $ | - | $ | 312,142 | ||||||||||||||
Interest income that would have been recognized |
2,210 | - | - | - | - | - | 2,210 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
2,210 | - | - | - | - | - | 2,210 |
For the Nine Months Ended September 30, 2016 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 6,890 | $ | - | $ | 105,641 | $ | - | $ | - | $ | - | $ | 112,531 | ||||||||||||||
Interest income that would have been recognized |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
- | - | - | - | - | - | - | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | - | $ | - | $ | 84,190 | $ | - | $ | - | $ | - | $ | 84,190 | ||||||||||||||
Interest income that would have been recognized |
- | - | 6,580 | - | - | - | 6,580 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
- | - | 6,580 | - | - | - | 6,580 | |||||||||||||||||||||
Total impaired loans: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 6,890 | $ | - | $ | 189,831 | $ | - | $ | - | $ | - | $ | 196,721 | ||||||||||||||
Interest income that would have been recognized |
- | - | 6,580 | - | - | - | 6,580 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
- | - | 6,580 | - | - | - | 6,580 |
For the Nine Months Ended September 30, 2015 |
||||||||||||||||||||||||||||
Residential owner occupied - first lien |
Residential owner occupied - junior lien |
Residential non-owner occupied (investor) |
Commercial owner occupied |
Other commercial loans |
Consumer loans |
Total |
||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 227,210 | $ | 2,354 | $ | 112,837 | $ | - | $ | - | $ | - | $ | 342,401 | ||||||||||||||
Interest income that would have been recognized |
9,827 | 98 | - | - | - | - | 9,925 | |||||||||||||||||||||
Interest income recognized (cash basis) |
19,626 | 611 | - | - | - | - | 20,237 | |||||||||||||||||||||
Interest income foregone (recovered) |
(9,799 | ) | (513 | ) | - | - | - | - | (10,312 | ) | ||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 27,517 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 27,517 | ||||||||||||||
Interest income that would have been recognized |
579 | - | - | - | - | - | 579 | |||||||||||||||||||||
Interest income recognized (cash basis) |
- | - | - | - | - | - | - | |||||||||||||||||||||
Interest income foregone (recovered) |
579 | - | - | - | - | - | 579 | |||||||||||||||||||||
Total impaired loans: |
||||||||||||||||||||||||||||
Average recorded investment |
$ | 254,727 | $ | 2,354 | $ | 112,837 | $ | - | $ | - | $ | - | $ | 369,918 | ||||||||||||||
Interest income that would have been recognized |
10,406 | 98 | - | - | - | - | 10,504 | |||||||||||||||||||||
Interest income recognized (cash basis) |
19,626 | 611 | - | - | - | - | 20,237 | |||||||||||||||||||||
Interest income foregone (recovered) |
(9,220 | ) | (513 | ) | - | - | - | - | (9,733 | ) |
The following table is a summary of performing and nonperforming impaired loans by portfolio segment at September 30, 2016 and December 31, 2015:
At September 30, |
At December 31, |
|||||||
2016 |
2015 |
|||||||
Performing loans: |
||||||||
Impaired performing loans: |
||||||||
Residential owner occupied - first lien |
$ | - | $ | - | ||||
Residential owner occupied - junior lien |
- | - | ||||||
Residential non-owner occupied (investor) |
- | - | ||||||
Commercial owner occupied |
- | - | ||||||
Other commercial loans |
- | - | ||||||
Consumer loans |
- | - | ||||||
Troubled debt restructurings: |
||||||||
Residential owner occupied - first lien |
- | - | ||||||
Residential owner occupied - junior lien |
- | - | ||||||
Residential non-owner occupied (investor) |
102,358 | 108,188 | ||||||
Commercial owner occupied |
- | - | ||||||
Other commercial loans |
- | - | ||||||
Consumer loans |
- | - | ||||||
Total impaired performing loans |
102,358 | 108,188 | ||||||
Nonperforming loans: |
||||||||
Impaired nonperforming loans (nonaccrual): |
||||||||
Residential owner occupied - first lien |
- | - | ||||||
Residential owner occupied - junior lien |
- | - | ||||||
Residential non-owner occupied (investor) |
109,282 | - | ||||||
Commercial owner occupied |
- | - | ||||||
Other commercial loans |
- | - | ||||||
Consumer loans |
- | - | ||||||
Troubled debt restructurings: |
||||||||
Residential owner occupied - first lien |
- | - | ||||||
Residential owner occupied - junior lien |
- | - | ||||||
Residential non-owner occupied (investor) |
- | - | ||||||
Commercial owner occupied |
- | - | ||||||
Other commercial loans |
- | - | ||||||
Consumer loans |
- | - | ||||||
Total impaired nonperforming loans (nonaccrual): |
109,282 | - | ||||||
Total impaired loans |
$ | 211,640 | $ | 108,188 |
Troubled debt restructurings. Loans may be periodically modified in a troubled debt restructuring (“TDR”) to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. Generally we do not forgive principal or interest on a loan or modify the interest rate to below market rates. When we modify loans in a TDR, we evaluate any possible impairment similar to any other impaired loans. If we determine that the value of the restructured loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance estimate or a charge-off to the allowance.
If a restructured loan was nonperforming prior to the restructuring, the restructured loan will remain a nonperforming loan. After a period of six months and if the restructured loan is in compliance with its modified terms, the loan will become a performing loan. If a restructured loan was performing prior to the restructuring, the restructured loan will remain a performing loan. A performing TDR will no longer be reported as a TDR in calendar years after the year of the restructuring if the effective interest rate is equal or greater than the market rate for credits with comparable risk.
There were no TDRs modified during the nine months ended September 30, 2016 or the year ended December 31, 2015.
Residential Foreclosures and Repossessed Assets — Once all potential alternatives for reinstatement are exhausted, past due loans collateralized by residential real estate are referred for foreclosure proceedings in accordance with the requirements of the applicable jurisdiction. Once the Bank obtains possession of the property collateralizing the loan, the Company records the repossessed property within other assets as other real estate owned. At September 30, 2016, there were no residential loans in the process of foreclosure and residential foreclosures classified as other real estate owned totaled $146,410.
Note 5. Deposits
Deposits were comprised of the following at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
At December 31, 2015 |
|||||||||||||||
Balance |
Percent of Total |
Balance |
Percent of Total |
|||||||||||||
Non-interest bearing checking |
$ | 8,832,647 | 6.5 | % | $ | 8,718,993 | 7.1 | % | ||||||||
Interest-bearing checking |
17,492,025 | 12.9 | % | 8,098,550 | 6.6 | % | ||||||||||
Savings |
3,885,601 | 2.8 | % | 2,512,638 | 2.1 | % | ||||||||||
Premium savings |
19,166,796 | 14.1 | % | 20,619,758 | 16.9 | % | ||||||||||
IRA savings |
5,800,858 | 4.3 | % | 6,325,231 | 5.2 | % | ||||||||||
Money market |
9,751,074 | 7.2 | % | 11,892,738 | 9.7 | % | ||||||||||
Certificates of deposit |
70,965,120 | 52.2 | % | 63,933,254 | 52.4 | % | ||||||||||
Total deposits |
$ | 135,894,121 | 100.0 | % | $ | 122,101,162 | 100.0 | % |
Certificates of deposit scheduled maturities are as follows:
At September 30, 2016 |
At December 31, 2015 |
|||||||
Period to Maturity: |
||||||||
Less than or equal to one year |
$ | 33,474,639 | $ | 36,634,331 | ||||
More than one to two years |
25,328,323 | 13,245,022 | ||||||
More than two to three years |
3,837,249 | 8,965,734 | ||||||
More than three to four years |
2,224,834 | 1,798,769 | ||||||
More than four to five years |
6,100,075 | 3,289,398 | ||||||
Total certificates of deposit |
$ | 70,965,120 | $ | 63,933,254 |
Certificates of deposit included $19.6 million and $27.8 million, respectively, of brokered and listing service deposits at September 30, 2016 and December 31, 2015. Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor.
Note 6. Fair Value Measurements
The FASB issued Accounting Standards Codification (“ASC”) Topic 825 “Financial Instruments,” which provides guidance on the fair value option for financial assets and liabilities. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes must be recorded in earnings.
Simultaneously with the adoption of ASC 825, the Bank adopted ASC 820, Fair Value Measurement. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below.
Level 1 Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. As required by ASC 820, the Bank does not adjust the quoted price for such instruments.
The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid equities, state, municipal and provincial obligations, and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified within Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Bank. The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and are adjusted accordingly, based on the same factors identified above.
Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market prices, the Bank records the foreclosed asset as nonrecurring Level 3.
The following table presents a summary of financial assets measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Residential mortgage-backed securities |
$ | 1,856,632 | $ | - | $ | 1,856,632 | $ | - | ||||||||
Commercial mortgage-backed securities |
2,048,160 | - | 2,048,160 | - | ||||||||||||
Municipal bonds |
222,882 | - | 222,882 | - | ||||||||||||
Total securities available for sale |
$ | 4,127,674 | $ | - | $ | 4,127,674 | $ | - |
At December 31, 2015 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Residential mortgage-backed securities |
$ | 2,552,623 | $ | - | $ | 2,552,623 | $ | - | ||||||||
Commercial mortgage-backed securities |
2,017,187 | - | 2,017,187 | - | ||||||||||||
Municipal bonds |
242,574 | - | 242,574 | - | ||||||||||||
Total securities available for sale |
$ | 4,812,384 | $ | - | $ | 4,812,384 | $ | - |
The following table presents a summary of financial assets measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015:
At September 30, 2016 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Residential non-owner occupied (investor) |
$ | 162,658 | $ | - | $ | - | $ | 162,658 | ||||||||
Total impaired loans |
$ | 162,658 | $ | - | $ | - | $ | 162,658 | ||||||||
Residential owner occupied - first lien |
$ | 146,410 | $ | - | $ | - | $ | 146,410 | ||||||||
Total foreclosed real estate |
$ | 146,410 | $ | - | $ | - | $ | 146,410 |
At December 31, 2015 |
||||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Residential non-owner occupied (investor) |
$ | 108,188 | $ | - | $ | - | $ | 108,188 | ||||||||
Total impaired loans |
$ | 108,188 | $ | - | $ | - | $ | 108,188 | ||||||||
Residential owner occupied - first lien |
$ | 199,374 | $ | - | $ | - | $ | 199,374 | ||||||||
Total foreclosed real estate |
$ | 199,374 | $ | - | $ | - | $ | 199,374 |
The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:
Impaired Loans |
Foreclosed Real Estate |
|||||||
Balance, January 1, 2015 |
$ | 595,070 | $ | 52,964 | ||||
Total realized and unrealized gains (losses): |
||||||||
Included in net income |
- | - | ||||||
Settlements |
(253,803 | ) | - | |||||
Transfers in and/or out of Level 3 |
(233,079 | ) | 146,410 | |||||
Balance, December 31, 2015 |
$ | 108,188 | $ | 199,374 | ||||
Total realized and unrealized gains (losses): |
||||||||
Included in net income |
- | (30,519 | ) | |||||
Settlements |
(5,830 | ) | (22,445 | ) | ||||
Transfers in and/or out of Level 3 |
60,300 | - | ||||||
Balance, September 30, 2016 |
$ | 162,658 | $ | 146,410 |
The methods and assumptions used to estimate the fair values for each class of the Company’s financial instruments are included in the disclosures that follow.
Cash and Cash Equivalents (Carried at Cost). The carrying amounts of cash and cash equivalents approximate fair value.
Certificates of Deposit with Depository Institutions (Carried at Cost). The carrying amounts of the certificates of deposit approximate fair value.
Securities Available for Sale (Carried at Fair Value). Where quoted prices are available in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 would include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, securities available for sale are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities.
Securities Held to Maturity (Carried at Amortized Cost). Where quoted prices are available in an active market, securities held to maturity are classified within Level 1 of the valuation hierarchy. Level 1 would include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, securities held to maturity are classified within Level 2 and fair value values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities.
Loans, Net of Allowance for Loan Losses (Carried at Cost). The fair value of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Impaired loans are measured at an observable market price (if available), or at fair value of the loan’s collateral (if the loan is collateral dependent). When the loan is dependent on collateral, fair value of collateral is determined by an appraisal or independent valuation, which is then adjusted for the estimated cost to sell. Impaired loans allocated to the allowance for loan losses are measured at the lower of cost or fair value on a nonrecurring basis.
Bank-Owned Life Insurance (Carried at Surrender Value). The carrying amount of the life insurance policies is based on the accumulated cash surrender value of each policy.
Other Equity Securities (Carried at Cost). The carrying amount of Federal Home Loan Bank and correspondent bank stock approximates fair value, and considers the limited marketability of such securities.
Deposits (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.
Federal Home Loan Bank Advances (Carried at Cost). Fair values of FHLB advances are estimated using discounted cash flows analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
Off- Balance Sheet Financial Instruments (Disclosures at Cost). Fair values for off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.
The estimated fair values of the Company’s financial instruments were as follows at the dates indicated:
At September 30, 2016 |
||||||||||||||||||||
Carrying |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||||||||||
Amount |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
Financial instruments - assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 19,635,096 | $ | 19,635,096 | $ | - | $ | 19,635,096 | $ | - | ||||||||||
Certificates of deposit with depository institutions |
2,450,165 | 2,450,165 | - | 2,450,165 | - | |||||||||||||||
Securities available for sale |
4,127,674 | 4,127,674 | - | 4,127,674 | - | |||||||||||||||
Securities held to maturity |
2,978,315 | 3,039,429 | - | 3,039,429 | - | |||||||||||||||
Loans, net of allowance for loan losses |
130,489,056 | 131,101,000 | - | - | 131,101,000 | |||||||||||||||
Bank-owned life insurance |
2,149,663 | 2,149,663 | - | 2,149,663 | - | |||||||||||||||
Other equity securities |
816,096 | 816,096 | - | - | 816,096 | |||||||||||||||
Financial instruments - liabilities: |
||||||||||||||||||||
Deposits |
$ | 135,894,121 | $ | 136,021,000 | $ | - | $ | 136,021,000 | $ | - | ||||||||||
Federal Home Loan Bank advances |
12,500,000 | 12,615,000 | - | 12,615,000 | - | |||||||||||||||
Financial instruments - off-balance sheet |
$ | - | $ | - | $ | - | $ | - | $ | - |
At December 31, 2015 |
||||||||||||||||||||
Carrying |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||||||||||
Amount |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
Financial instruments - assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 8,207,767 | $ | 8,207,767 | $ | - | $ | 8,207,767 | $ | - | ||||||||||
Certificates of deposit with depository institutions |
2,450,248 | 2,450,248 | - | 2,450,248 | - | |||||||||||||||
Securities available for sale |
4,812,384 | 4,812,384 | - | 4,812,384 | - | |||||||||||||||
Securities held to maturity |
2,005,775 | 2,011,900 | - | 2,011,900 | - | |||||||||||||||
Loans, net of allowance for loan losses |
128,433,411 | 129,910,000 | - | - | 129,910,000 | |||||||||||||||
Bank-owned life insurance |
2,107,770 | 2,107,770 | - | 2,107,770 | - | |||||||||||||||
Other equity securities |
869,296 | 869,296 | - | - | 869,296 | |||||||||||||||
Financial instruments - liabilities: |
||||||||||||||||||||
Deposits |
$ | 122,101,162 | $ | 121,806,000 | $ | - | $ | 121,806,000 | $ | - | ||||||||||
Federal Home Loan Bank advances |
12,500,000 | 12,616,000 | - | 12,616,000 | - | |||||||||||||||
Financial instruments - off-balance sheet |
$ | - | $ | - | $ | - | $ | - | $ | - |
Note 7. Capital Requirements and Regulatory Matters
Federal and state banking regulations place certain restrictions on dividends paid to the Company by the Bank, and loans or advances made by the Bank to the Company. For a Maryland chartered bank, dividends may be paid out of undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. Loans and advances are limited to 10% of the Bank’s capital and surplus on a secured basis. In addition, the payment of dividends by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below minimum capital requirements.
The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends to the Company.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, tier I and common equity tier 1 capital to risk weighted assets, tier 1 leverage to average assets and tangible capital to tangible assets. Management believes, as of September 30, 2016, the Bank met all capital adequacy requirements to which it is subject.
As of September 2015, the most recent notification from the Bank’s regulators, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios at September 30, 2016 and December 31, 2015 are presented in the table below:
At September 30, 2016 |
||||||||||||||||||||||||
Actual |
For Capital Adequacy Purposes |
To be well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
Total capital to risk-weighted assets |
$ | 16,838,027 | 15.0 | % | $ | 8,953,920 | 8.0 | % | $ | 11,192,400 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets |
15,879,027 | 14.2 | % | 6,715,440 | 6.0 | % | 8,953,920 | 8.0 | % | |||||||||||||||
Common equity tier 1 capital to risk-weighted assets |
15,879,027 | 14.2 | % | 5,036,580 | 4.5 | % | 7,275,060 | 6.5 | % | |||||||||||||||
Tier 1 leverage to average assets |
15,879,027 | 9.9 | % | 6,390,514 | 4.0 | % | 7,988,143 | 5.0 | % | |||||||||||||||
Tangible capital to tangible assets |
15,902,990 | 9.6 | % | N/A | N/A | N/A | N/A |
At December 31, 2015 |
||||||||||||||||||||||||
Actual |
For Capital Adequacy Purposes |
To be well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
Total capital to risk-weighted assets |
$ | 16,584,390 | 16.0 | % | $ | 8,301,696 | 8.0 | % | $ | 10,377,120 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets |
15,683,390 | 15.1 | % | 6,226,272 | 6.0 | % | 8,301,696 | 8.0 | % | |||||||||||||||
Common equity tier 1 capital to risk-weighted assets |
15,683,390 | 15.1 | % | 4,669,704 | 4.5 | % | 6,745,128 | 6.5 | % | |||||||||||||||
Tier 1 leverage to average assets |
15,683,390 | 10.0 | % | 6,304,897 | 4.0 | % | 7,881,122 | 5.0 | % | |||||||||||||||
Tangible capital to tangible assets |
15,685,888 | 10.4 | % | N/A | N/A | N/A | N/A |
The following table presents a reconciliation of the Company’s consolidated equity as determined using GAAP and the Bank’s regulatory capital amounts:
At September 30, |
At December 31, |
|||||||
2016 |
2015 |
|||||||
Consolidated GAAP equity |
$ | 16,297,103 | $ | 16,293,170 | ||||
Consolidated equity in excess of Bank equity |
(394,113 | ) | (607,282 | ) | ||||
Bank GAAP equity - Tangible capital |
15,902,990 | 15,685,888 | ||||||
Less: |
||||||||
Accumulated other comprehensive income, net of tax |
23,963 | 2,498 | ||||||
Disallowed deferred tax assets |
- | - | ||||||
Common equity tier 1 capital |
15,879,027 | 15,683,390 | ||||||
Plus: |
||||||||
Additional tier 1 capital |
- | - | ||||||
Tier 1 capital |
15,879,027 | 15,683,390 | ||||||
Plus: |
||||||||
Allowance for loan losses (1.25% of risk-weighted assets) |
959,000 | 901,000 | ||||||
Total risk-based capital |
$ | 16,838,027 | $ | 16,584,390 |
Note 8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period exclusive of unallocated employee stock ownership plan shares and unvested restricted stock. Diluted earnings per share assumes granted unvested restricted stock as potential common stock and outstanding warrants to purchase common stock are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock as computed by using the Treasury Stock method.
The calculation of net income per common share for the three and nine months ended September 30, 2016 and 2015 are as follows:
For the Three Months Ended September 30, 2016 |
For the Three Months Ended September 30, 2015 |
For the Nine Months Ended September 30, 2016 |
For the Nine Months Ended September 30, 2015 |
|||||||||||||
Net income |
$ | 42,149 | $ | 80,960 | $ | 164,977 | $ | 211,295 | ||||||||
Weighted average number of shares used in: |
||||||||||||||||
Basic number of shares |
931,974 | 938,982 | 935,586 | 894,969 | ||||||||||||
Adjustment for common share equivalents |
17,553 | 22,170 | 18,453 | 18,876 | ||||||||||||
Diluted number of shares |
949,527 | 961,152 | 954,039 | 913,845 | ||||||||||||
Basic net income per common share |
$ | 0.05 | $ | 0.09 | $ | 0.18 | $ | 0.24 | ||||||||
Diluted net income per common share |
$ | 0.04 | $ | 0.08 | $ | 0.17 | $ | 0.23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section is intended to help readers understand our financial performance through a discussion of the factors affecting our financial condition at September 30, 2016 and December 31, 2015. This section should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this Form 10-Q.
Some of the matters discussed below include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements often use words such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be materially different from those anticipated or estimated for the reasons discussed under the heading “Forward-Looking Statements.”
Carroll Bancorp, Inc.
Carroll Bancorp, Inc. is a one-bank holding company for Carroll Community Bank. The Company is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. As such, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System. The Company began operating in 2011.
Our executive offices are located at 1321 Liberty Road, Sykesville, Maryland 21784. Our telephone number at this address is (410) 795-1900. Our website address is www.carrollcobank.com. Information on this website should not be considered a part of this quarterly report.
Carroll Community Bank
Carroll Community Bank is a state-chartered commercial bank headquartered in Sykesville, Maryland. The Bank was organized in 1870 as Sykesville Perpetual Building Association. The Association was chartered in 1887 and re-chartered and reorganized in 1907 when it became Sykesville Building Association of Carroll County. In 1985 the Association was chartered as a federal mutual savings association and in 1988 the business name changed from Sykesville Building Association of Carroll County to Sykesville Federal Savings Association. In 2010, Sykesville Federal Savings Association converted from a federal savings association to a Maryland-chartered mutual savings bank and changed its name to Carroll Community Bank. Lastly, in 2011, the Bank converted from a state-chartered mutual savings bank to a state-chartered commercial bank, a stock form of organization, pursuant to its plan of conversion of which the formation of Carroll Bancorp, Inc. was a part.
Overview
Our business consists primarily of attracting and accepting deposits from the general public in the areas surrounding our offices and investing those deposits, together with funds generated from operations, primarily in commercial real estate and residential mortgage loans. Prior to 2011, as a mutual savings bank we focused on originating residential mortgage loans, but changed our strategic focus to include commercial real estate loans following our conversion to a state-chartered commercial bank. Although we plan to continue to originate one- to four-family residential mortgage loans going forward, we have been and intend to continue our focus on the origination of commercial real estate and business loans and related products. In this regard we offer demand deposit accounts, remote deposit capture and business internet banking to support the business community. We are committed to meeting the credit needs of our community, consistent with safe and sound operations.
We offer a variety of deposit products, including savings accounts, certificates of deposit, money market accounts, business and retail non-interest and interest-bearing checking accounts and individual retirement accounts. We have three full service branches with each providing an automated teller machine, or ATM, and two of which have a drive-through facility for our customers’ convenience.
We have based our strategic plan on the foundation of enhancing stockholder value, growth in market share and operating profitability. Our goals include maintaining credit quality, using technology to expand market share and implementing extensions of core banking services.
Our results of our operation depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on deposits and borrowings. Results of operations are also affected by provisions for loan losses, non-interest income and non-interest expense. Our non-interest expense consists primarily of compensation and employee benefits, as well as data processing costs, office occupancy, deposit insurance and general administrative expenses.
Our operations are significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.
We are operating in a challenging and uncertain economic environment. Economic growth continues to be slow and uncertain, and wage growth is stagnant. A return to recessionary conditions or prolonged stagnant or deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, the demand for our products and services and our ongoing operations, costs and profitability. Declines in sales volumes and increases in unemployment levels in connection with these events may result in higher than expected loan delinquencies, increases in our nonperforming and adversely classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.
The following table summarizes the highlights of our financial performance for the three and nine month periods ended September 30, 2016 compared to the three and nine month periods ended September 30, 2015 (amounts in the table may not match those discussed in the balance of this section due to rounding):
(unaudited) |
For the Three Months Ended September 30, |
|||||||||||||||
(Dollars in thousands, except per share data) |
2016 |
2015 |
$ Change |
% Change |
||||||||||||
Net income |
$ | 42 | $ | 81 | $ | (39 | ) | -48.1 | % | |||||||
Basic earnings per share |
0.05 | 0.09 | (0.04 | ) | -44.4 | % | ||||||||||
Diluted earnings per share |
0.04 | 0.08 | (0.04 | ) | -50.0 | % | ||||||||||
Interest income |
1,471 | 1,333 | 138 | 10.4 | % | |||||||||||
Interest expense |
268 | 161 | 107 | 66.5 | % | |||||||||||
Net interest income |
1,203 | 1,172 | 31 | 2.6 | % | |||||||||||
Noninterest income |
67 | 51 | 16 | 31.4 | % | |||||||||||
Noninterest expense |
1,214 | 1,051 | 163 | 15.5 | % | |||||||||||
Average Loans |
129,703 | 108,526 | 21,177 | 19.5 | % | |||||||||||
Average Earning Assets |
153,875 | 124,592 | 29,283 | 23.5 | % | |||||||||||
Average Interest-Bearing Liabilities |
133,764 | 105,361 | 28,403 | 27.0 | % | |||||||||||
Return on average assets |
0.10 | % | 0.25 | % | ||||||||||||
Return on average equity |
1.02 | % | 1.98 | % | ||||||||||||
Net interest margin |
3.11 | % | 3.73 | % |
(unaudited) |
For the Nine Months Ended September 30, |
|||||||||||||||
(Dollars in thousands, except per share data) |
2016 |
2015 |
$ Change |
% Change |
||||||||||||
Net income |
$ | 165 | $ | 211 | $ | (46 | ) | -21.8 | % | |||||||
Basic earnings per share |
0.18 | 0.24 | (0.06 | ) | -25.0 | % | ||||||||||
Diluted earnings per share |
0.17 | 0.23 | (0.06 | ) | -26.1 | % | ||||||||||
Interest income |
4,414 | 3,751 | 663 | 17.7 | % | |||||||||||
Interest expense |
732 | 473 | 259 | 54.8 | % | |||||||||||
Net interest income |
3,682 | 3,278 | 404 | 12.3 | % | |||||||||||
Noninterest income |
189 | 143 | 46 | 32.2 | % | |||||||||||
Noninterest expense |
3,605 | 2,992 | 613 | 20.5 | % | |||||||||||
Average Loans |
128,752 | 100,276 | 28,476 | 28.4 | % | |||||||||||
Average Earning Assets |
149,816 | 117,164 | 32,652 | 27.9 | % | |||||||||||
Average Interest-Bearing Liabilities |
130,024 | 99,077 | 30,947 | 31.2 | % | |||||||||||
Return on average assets |
0.14 | % | 0.23 | % | ||||||||||||
Return on average equity |
1.34 | % | 1.81 | % | ||||||||||||
Net interest margin |
3.28 | % | 3.74 | % |
Average Balances and Yields
The following tables set forth average balance sheets, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as we held insignificant balances of tax-advantaged interest-earning assets during the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.
For the Three Months Ended September 30, |
||||||||||||||||||||||||
2016 |
2015 |
|||||||||||||||||||||||
(Dollars in thousands) |
Average Outstanding Balance |
Interest |
Yield / Rate |
Average Outstanding Balance |
Interest |
Yield / Rate |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 129,703 | $ | 1,384 | 4.25 | % | $ | 108,526 | $ | 1,277 | 4.67 | % | ||||||||||||
Investment securities |
6,877 | 49 | 2.83 | % | 7,116 | 37 | 2.06 | % | ||||||||||||||||
Certificates of deposit |
2,450 | 11 | 1.79 | % | 2,901 | 10 | 1.37 | % | ||||||||||||||||
Interest-earning deposits |
14,845 | 27 | 0.72 | % | 6,049 | 9 | 0.59 | % | ||||||||||||||||
Total interest-earning assets |
153,875 | 1,471 | 3.80 | % | 124,592 | 1,333 | 4.25 | % | ||||||||||||||||
Noninterest-earning assets |
5,937 | 5,682 | ||||||||||||||||||||||
Total assets |
$ | 159,812 | $ | 130,274 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Savings |
$ | 29,250 | 15 | 0.20 | % | $ | 30,636 | 17 | 0.22 | % | ||||||||||||||
Certificates of deposit |
66,164 | 180 | 1.08 | % | 43,772 | 98 | 0.89 | % | ||||||||||||||||
Money market |
10,635 | 11 | 0.41 | % | 11,082 | 11 | 0.39 | % | ||||||||||||||||
Interest-bearing checking |
15,215 | 15 | 0.39 | % | 5,909 | 1 | 0.07 | % | ||||||||||||||||
Total interest-bearing deposits |
121,264 | 221 | 0.73 | % | 91,399 | 127 | 0.55 | % | ||||||||||||||||
Federal Home Loan Bank advances |
12,500 | 47 | 1.50 | % | 13,962 | 34 | 0.97 | % | ||||||||||||||||
Total interest-bearing liabilities |
133,764 | 268 | 0.80 | % | 105,361 | 161 | 0.61 | % | ||||||||||||||||
Noninterest-bearing deposits |
9,141 | 8,343 | ||||||||||||||||||||||
Noninterest-bearing liabilities |
494 | 332 | ||||||||||||||||||||||
Total liabilities |
143,399 | 114,036 | ||||||||||||||||||||||
Equity |
16,413 | 16,238 | ||||||||||||||||||||||
Total liabilities and capital |
$ | 159,812 | $ | 130,274 | ||||||||||||||||||||
Net interest income |
$ | 1,203 | $ | 1,172 | ||||||||||||||||||||
Net interest rate spread (1) |
3.00 | % | 3.64 | % | ||||||||||||||||||||
Net interest-earning assets (2) |
$ | 20,111 | $ | 19,231 | ||||||||||||||||||||
Net interest margin (3) |
3.11 | % | 3.73 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities |
115.03 | % | 118.25 | % |
(1) |
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(2) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
For the Nine Months Ended September 30, |
||||||||||||||||||||||||
2016 |
2015 |
|||||||||||||||||||||||
(Dollars in thousands) |
Average Outstanding Balance |
Interest |
Yield / Rate |
Average Outstanding Balance |
Interest |
Yield / Rate |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 128,752 | $ | 4,165 | 4.32 | % | $ | 100,276 | $ | 3,575 | 4.77 | % | ||||||||||||
Investment securities |
6,776 | 146 | 2.88 | % | 8,029 | 119 | 1.98 | % | ||||||||||||||||
Certificates of deposit |
2,450 | 32 | 1.74 | % | 3,017 | 31 | 1.37 | % | ||||||||||||||||
Interest-earning deposits |
11,838 | 71 | 0.80 | % | 5,842 | 26 | 0.60 | % | ||||||||||||||||
Total interest-earning assets |
149,816 | 4,414 | 3.94 | % | 117,164 | 3,751 | 4.28 | % | ||||||||||||||||
Noninterest-earning assets |
6,091 | 5,646 | ||||||||||||||||||||||
Total assets |
$ | 155,907 | $ | 122,810 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Savings |
$ | 29,552 | 47 | 0.21 | % | $ | 31,081 | 50 | 0.22 | % | ||||||||||||||
Certificates of deposit |
64,000 | 482 | 1.01 | % | 41,115 | 292 | 0.95 | % | ||||||||||||||||
Money market |
11,267 | 34 | 0.40 | % | 11,063 | 32 | 0.39 | % | ||||||||||||||||
Interest-bearing checking |
12,147 | 28 | 0.31 | % | 5,785 | 3 | 0.07 | % | ||||||||||||||||
Total interest-bearing deposits |
116,966 | 591 | 0.67 | % | 89,044 | 377 | 0.57 | % | ||||||||||||||||
Federal Home Loan Bank advances |
13,058 | 141 | 1.44 | % | 10,033 | 96 | 1.28 | % | ||||||||||||||||
Total interest-bearing liabilities |
130,024 | 732 | 0.75 | % | 99,077 | 473 | 0.64 | % | ||||||||||||||||
Noninterest-bearing deposits |
9,020 | 7,810 | ||||||||||||||||||||||
Noninterest-bearing liabilities |
434 | 291 | ||||||||||||||||||||||
Total liabilities |
139,478 | 107,178 | ||||||||||||||||||||||
Equity |
16,429 | 15,632 | ||||||||||||||||||||||
Total liabilities and capital |
$ | 155,907 | $ | 122,810 | ||||||||||||||||||||
Net interest income |
$ | 3,682 | $ | 3,278 | ||||||||||||||||||||
Net interest rate spread (1) |
3.19 | % | 3.64 | % | ||||||||||||||||||||
Net interest-earning assets (2) |
$ | 19,792 | $ | 18,087 | ||||||||||||||||||||
Net interest margin (3) |
3.28 | % | 3.74 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities |
115.22 | % | 118.26 | % |
(1) |
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(2) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
Rate/Volume Analysis
The following table presents the effects of changing volumes and rates on our net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (change in volume multiplied by old rate), the rate column shows the effects attributable to changes in rate (change in rate multiplied by old volume) and the rate/volume column shows the effects attributable to changes in rate and volume (change in rate multiplied by change in volume).
For the Three Months Ended September 30, |
||||||||||||||||
2016 vs 2015 |
||||||||||||||||
Increase (Decrease) Due to |
||||||||||||||||
Rate/ |
Total Increase |
|||||||||||||||
(in thousands) |
Volume |
Rate |
Volume |
(Decrease) |
||||||||||||
Interest income from: |
||||||||||||||||
Loans |
$ | 249 | $ | (115 | ) | $ | (27 | ) | $ | 107 | ||||||
Investment securities |
(1 | ) | 13 | - | 12 | |||||||||||
Certificates of deposit |
(2 | ) | 3 | - | 1 | |||||||||||
Interest-earning deposits |
13 | 2 | 3 | 18 | ||||||||||||
Total interest income (1) |
314 | (141 | ) | (35 | ) | 138 | ||||||||||
Interest expense on: |
||||||||||||||||
Savings |
(1 | ) | (1 | ) | - | (2 | ) | |||||||||
Certificates of deposit |
50 | 21 | 11 | 82 | ||||||||||||
Money market |
- | - | - | - | ||||||||||||
Interest-bearing checking |
2 | 5 | 7 | 14 | ||||||||||||
Total interest-bearing deposits |
41 | 41 | 12 | 94 | ||||||||||||
Federal Home Loan Bank advances |
(4 | ) | 19 | (2 | ) | 13 | ||||||||||
Total interest expense (1) |
44 | 50 | 13 | 107 | ||||||||||||
Change in net interest income |
$ | 270 | $ | (191 | ) | $ | (48 | ) | $ | 31 |
For the Nine Months Ended September 30, |
||||||||||||||||
2016 vs 2015 |
||||||||||||||||
Increase (Decrease) Due to |
||||||||||||||||
Rate/ |
Total Increase |
|||||||||||||||
(in thousands) |
Volume |
Rate |
Volume |
(Decrease) |
||||||||||||
Interest income from: |
||||||||||||||||
Loans |
$ | 1,016 | $ | (338 | ) | $ | (88 | ) | $ | 590 | ||||||
Investment securities |
(19 | ) | 54 | (8 | ) | 27 | ||||||||||
Certificates of deposit |
(6 | ) | 8 | (1 | ) | 1 | ||||||||||
Interest-earning deposits |
27 | 9 | 9 | 45 | ||||||||||||
Total interest income (1) |
1,045 | (298 | ) | (84 | ) | 663 | ||||||||||
Interest expense on: |
||||||||||||||||
Savings |
(2 | ) | (1 | ) | - | (3 | ) | |||||||||
Certificates of deposit |
163 | 18 | 9 | 190 | ||||||||||||
Money market |
1 | 1 | - | 2 | ||||||||||||
Interest-bearing checking |
3 | 10 | 12 | 25 | ||||||||||||
Total interest-bearing deposits |
119 | 67 | 28 | 214 | ||||||||||||
Federal Home Loan Bank advances |
29 | 12 | 4 | 45 | ||||||||||||
Total interest expense (1) |
148 | 82 | 29 | 259 | ||||||||||||
Change in net interest income |
$ | 897 | $ | (380 | ) | $ | (113 | ) | $ | 404 |
(1) |
The volume, rate and rate/volume variances presented for each component will not add to the variances presented on totals of interest income and interest expense due to shifts from period to period in the relative mix of interest-earning assets and interest-bearing liabilities. |
Comparison of Results of Operations for the Three Months Ended September 30, 2016 and September 30, 2015
General. Net income decreased by $39,000, or 48.1%, to $42,000 for the three months ended September 30, 2016 compared to $81,000 for the same period in 2015. The decrease in net income for the three month period was primarily attributable to the increase in employee and facilities costs as a result of our expansion into the Washington Metropolitan area.
Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased by $31,000, or 2.6%, during the three months ended September 30, 2016 compared to the same period in 2015, primarily as a result of a $29.3 million, or 23.5%, increase in average earning assets, partially offset by an increase in interest expense due to higher deposit balances and higher interest rates on our deposits and borrowings. Our net interest rate spread decreased to 3.00% for the three months ended September 30, 2016 compared to 3.64% for the three months ended September 30, 2015, primarily as a result of new loan originations carrying lower rates than the average weighted rate of the existing loan portfolio and new deposits carrying higher rates than the average weighted rates of the existing deposit portfolio.
Interest Income. Interest income increased by $138,000 to $1.5 million for the three months ended September 30, 2016 compared to $1.3 million for the three months ended September 30, 2015. The increase was primarily attributable to higher loan interest income resulting from the $21.2 million, or 19.5%, increase in average loan balances for the three months ended September 30, 2016 compared to the same period last year, partially offset by a 42 basis point decrease in the average yield on loans over the same period.
Interest Expense. Interest expense increased by $107,000, or 66.5%, to $268,000 for the three months ended September 30, 2016 compared to $161,000 for the three months ended September 30, 2015. This increase was due to the $29.9 million increase in the average balance of interest-bearing deposits, primarily certificates of deposit and interest-bearing checking accounts, and an increase in the average rate paid on interest-bearing liabilities, primarily certificates of deposits, interest-bearing checking accounts and FHLB advances, during the three months ended September 30, 2016 compared to the same period last year.
Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change and as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance.
Based on management’s evaluation of the above factors, the provision for loan losses decreased to $2,000 for the three months ended September 30, 2016 compared to $35,000 for the three months ended September 30, 2015. The provision for loan losses for the quarter ending September 30, 2016 was due to growth in loan balances of $2.4 million. The provision for loan losses for September 30, 2015 was due to an increase in loan balances of $6.9 million.
The allowance for loan losses represented 0.73% of gross loans at September 30, 2016, 0.70% at December 31, 2015 and 0.75% of gross loans at September 30, 2015.
Management believes, to the best of their knowledge, that all known losses as of September 30, 2016 have been recorded and based on our analysis and the historical performance of the loan portfolio, we believe the allowance appropriately reflects the inherit risk of loss in our loan portfolio.
Non-interest Income. Non-interest income was $67,000 for the three months ended September 30, 2016 compared to $51,000 for the same period in 2015. The increase of $16,000 was primarily the result of a $10,000 increase in gains on loans held for sale and a $5,000 increase in customer service fees due to a higher volume of debit card transactions and overdraft fee collections.
Non-interest Expenses. Non-interest expenses increased by $163,000, or 15.5%, to $1.2 million for the three months ended September 30, 2016 compared to $1.1 million during the same period in 2015. The increase was due primarily to a $139,000, or 24.9%, increase in salaries and employee benefits due to higher staffing levels relating to the expansion of our market area, in particular, the opening of our Bethesda, Maryland branch in September 2015, the hiring of experienced personnel for vacant positions and merit salary increases partially offset by a reduction of the management incentive accrual based on the analysis of goal attainment. In addition, we have experienced higher health care insurance costs and an increase in the 401(k) employer match contributions as a result of the increase in the number of employees participating in the plans. Premises and equipment increased by $27,000, or 24.2%, due to the opening of the Bethesda branch, the build-out of our headquarters building to convert the basement into office space, and licensing agreements for software relating to the selling of loans in the secondary market and commercial real estate research and listing service. Data processing expense increased by $8,000, or 7.2%, due to higher transaction volumes and additional technical support for our internal network. FDIC insurance premiums increased by $9,000, or 52.1%, due to the growth in total assets and an increase in our financial ratio factors included in the calculation of the premium primarily as a result of our level of past due loans and brokered deposits compared to last year. Other non-interest expenses increased by $20,000, or 24.6%, due to recruiting fees in connection with filling commercial lending positions as well as costs associated with our employee wellness initiative, advertising, our state assessment expense and customer check order expense. These items were partially offset by a decrease in directors’ fees of $17,000, or 30.9%, due primarily to the reduction in their annual retainer and the total number of directors and professional fees decreased by $24,000, or 26.6%, due to the three months ended September 30, 2015 including costs associated with identifying and pursuing potential acquisition opportunities and implementing the 20% stock dividend.
Income Tax Expense. Income tax expense amounted to $12,000 and $56,000, respectively, for the three months ended September 30, 2016 and 2015, resulting in effective tax rates of 21.9% and 40.9%, respectively. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance, loans and securities relative to pre-tax income. During the three months ended September 30, 2016 our tax exempt income increased significantly compared to the same period in 2015.
Comparison of Results of Operations for the Nine Months Ended September 30, 2016 and September 30, 2015
General. Net income decreased by $46,000, or 21.8%, to $165,000 for the nine months ended September 30, 2016 compared to $211,000 for the same period in 2015. The decrease in net income for the nine month period is attributable to the infrastructure costs to expand our footprint into the Washington Metropolitan area and hire experienced personnel for vacant positions mostly offset by increases in net interest income and non-interest income.
Net Interest Income. Net interest income increased by $404,000, or 12.3%, during the nine months ended September 30, 2016 compared to the same period in 2015, primarily as a result of an increase in average earning assets of $32.7 million, or 27.9%, partially offset by an increase in interest expense due to higher deposit and borrowings balances and interest rates. Our net interest rate spread decreased to 3.19% for the nine months ended September 30, 2016 compared to 3.64% for the nine months ended September 30, 2015 as a result of the lower yields on new loan originations and the higher cost of funds on new deposits during the 2016 period.
Interest Income. Interest income increased by $663,000, or 17.7%, to $4.4 million for the nine months ended September 30, 2016 compared to $3.8 million for the nine months ended September 30, 2015. Most of the increase was attributable to the $590,000 increase in loan interest income resulting from the $28.5 million, or 28.4%, increase in average loan balances during the nine months ended September 30, 2016 compared to the same period last year. This was partially offset by a 45 basis point decrease in the average yield on our loans as a result of the lower yield on new loan originations as noted above. In addition, interest income on interest-earning deposits increased by $45,000 due to maintaining larger cash balances at the Federal Reserve along with larger stock dividends from the FHLB compared to the nine months ended September 30, 2015, and income on investment securities increased by $27,000 due to the purchase of higher yielding subordinated debt issuances since September 30, 2015.
Interest Expense. Interest expense increased by $259,000, or 54.8%, to $732,000 for the nine months ended September 30, 2016 compared to $473,000 for the nine months ended September 30, 2015. This increase was attributable to growth of $22.9 million, $6.4 million and $3.0 million, respectively, in the average balance of certificates of deposit, interest-bearing checking accounts and FHLB advances compared to the same period in 2015 along with a higher cost of funds for each of those items.
Provision for Loan Losses. The provision for loan losses decreased to $39,000 for the nine months ended September 30, 2016 compared to $93,000 for the nine months ended September 30, 2015. The decrease in the provision for loan losses was due to a slight increase in loan balances during the nine months ended September 30, 2016 compared to an increase of $21.1 million in loan balances during the nine months ended September 30, 2015. This decrease was partially offset by specific reserves being recognized for two loans in 2016 for $49,000.
Non-interest Income. Non-interest income was $189,000 for the nine months ended September 30, 2016 compared to $143,000 for the same period in 2015. The $46,000 increase in non-interest income was attributable to various items. We recognized $59,000 in gains on sale of loans held for sale during the nine months ended September 30, 2016, compared to $5,000 during the nine months ended September 30, 2015. In addition, customer service fees increased by $15,000 due a higher volume of debit card transactions and overdraft fee collections, and loan fee income increased by $7,000 due mostly to the collection of a prepayment penalty fee in 2016. These increases were partially offset by a $31,000 loss on sale taken on a foreclosed property during the nine months ended September 30, 2016.
Non-interest Expenses. Non-interest expenses increased by $613,000, or 20.5%, to $3.6 million for the nine months ended September 30, 2016 compared to $3.0 million during the same period in 2015. The increase was primarily due to a $374,000, or 22.9%, increase in salaries and employee benefits due to higher staffing levels relating to the expansion of our footprint along with merit salary increases and an increase in the 401K employer match. Premises and equipment increased by $112,000, or 38.3%, due to the opening of the Bethesda branch, the build-out of our headquarters building to convert the basement into office space, and licensing agreements for software relating to the selling of loans in the secondary market and commercial real estate research and listing service. Data processing expense increased by $45,000, or 13.7%, due to higher transaction volumes and additional technical support for our internal network. FDIC insurance premiums increased by $29,000, or 57.3%, due to the growth in total assets and an increase in our financial ratio factors included in the calculation of the premium primarily as a result of our level of past due loans and brokered deposits compared to last year. Other non-interest expenses increased by $63,000, or 29.0%, due to recruiting fees in connection with filling commercial lending positions as well as costs associated with our employee wellness initiative, advertising, our state assessment expense and customer check order expense. These items were partially offset by a decrease in directors’ fees of $28,000, or 17.1%, due to the reduction in their annual retainer and the total number of directors
Income Tax Expense. Income tax expense amounted to $62,000 and $124,000, respectively, for the nine months ended September 30, 2016 and 2015, resulting in effective tax rates of 27.4% and 37.0%, respectively. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance, loans and securities relative to pre-tax income. During the nine months ended September 30, 2016 our tax exempt income increased significantly compared to the same period in 2015.
Comparison of Financial Condition at September 30, 2016 and December 31, 2015.
Assets. Total assets increased by $13.8 million, or 9.1%, to $165.2 million at September 30, 2016 compared to $151.3 million at December 31, 2015.
Interest-bearing deposits with depository institutions. Interest-bearing deposits with depository institutions increased by $11.7 million, or 177.0%, to $18.3 million at September 30, 2016 from $6.6 million at December 31, 2015. The increase is primarily due to higher balances being maintained at the Federal Reserve Bank due to our core deposit growth exceeding our loan balance growth during the first nine months of 2016.
Loans. Net loans increased slightly to $130.5 million at September 30, 2016 compared to $128.4 million at December 31, 2015. New loan originations of $21.9 million, primarily commercial loans, during the nine month period ending September 30, 2016 were offset by loan payoffs of $11.5 million, mostly residential mortgages, and principal repayments of $8.1 million.
Nonperforming Loans and Assets. Our nonperforming loans and assets were $109,000 and $256,000, respectively, at September 30, 2016 compared to $0 and $199,000, respectively, at December 31, 2015. During the nine months ending September 30, 2016, two loans with balances totaling $109,000 were placed in nonaccrual status and specific reserves of $49,000 were recorded for those loans. The ratio of nonperforming loans to total loans was 0.08% at September 30, 2016 compared to 0.00% at December 31, 2015. In addition, our ratio of nonperforming assets to total assets was 0.15% at September 30, 2016 compared to 0.13% at December 31, 2015.
Deposits. Deposits increased by $13.8 million, or 11.3%, to $135.9 million at September 30, 2016 from $122.1 million at December 31, 2015, with core deposits increasing by $22.0 million, or 23.3%, and brokered certificates of deposit decreasing by $8.2 million during the nine months ended September 30, 2016. The increase in core deposits occurred primarily in non-interest and interest-bearing checking, which increased by $9.5 million, and certificates of deposit, which increased by $7.0 million.
Stockholders’ Equity. Stockholders’ equity remained flat at September 30, 2016 and December 31, 2015. Net income for the nine month period along with an increase in accumulated other comprehensive income was offset by our stock repurchases.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments and payoffs, advances from the FHLB, short-term lines of credit with correspondent banks and the sale of securities available for sale. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2016.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i) |
expected loan demand; |
(ii) |
expected deposit flows and borrowing maturities; |
(iii) |
yields available on interest-earning deposits and securities; and |
(iv) |
the objectives of our asset and liability management program. |
Excess liquid assets are invested generally in interest-earning deposits and short-term securities.
Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, investing and financing activities during any given period as reported in our statement of cash flows included in our financial statements. At September 30, 2016, cash and cash equivalents totaled $19.6 million.
At September 30, 2016, we had $5.7 million in loan origination commitments outstanding and $10.2 million in unused available lines of credit. Certificates of deposit due within one year of September 30, 2016 totaled $33.5 million, or 24.6% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including FHLB advances, loan and securities sales and draws on our short-term lines of credit with correspondent banks. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay. Of the $33.5 million in certificates of deposit due within one year of September 30, 2016, $19.6 million are brokered and listing service certificates of deposit. For the other certificates of deposit maturing in one year or less, we believe we will retain upon maturity a large portion of those deposits based on our historical experience and current market interest rates.
Our primary investing activity is loan originations. During the nine months ended September 30, 2016, we originated loan commitments of $24.5 million of which balances outstanding were $19.8 million at September 30, 2016.
Financing activities consist primarily of activity in deposit balances and FHLB advances. We experienced a net increase in deposits of $13.8 million, or 11.3%, and FHLB advances remained flat, during the nine months ended September 30, 2016. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB that provide an additional source of funds. FHLB advances totaled $12.5 million at September 30, 2016 and we had the ability to borrow up to an additional $27.1 million from the FHLB and $11.5 million from correspondent banks under short-term line of credit agreements. In addition, our Board of Directors has approved the use of brokered deposits, in amounts consisting of up to 15% of our total deposits, as a funding source for the Bank. At September 30, 2016, we had $19.6 million in brokered and listing service certificates of deposit.
Carroll Bancorp, Inc. is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations. Virtually all of the Company’s revenue is and will continue to be interest earned on the loan to the employee stock ownership plan trust to fund its purchase of the Company’s common stock and, when and if the Bank begins paying dividends, stock dividends received from the Bank.
Under Maryland law, the Bank will be permitted to declare a cash dividend, after providing for due or accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100% of its required capital stock. Also, if the Bank’s surplus is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, the bank regulatory agencies have the ability to prohibit or limit proposed dividends if such regulatory agencies determine the payment of such dividends would result in the Bank being in an unsafe and unsound condition.
Carroll Community Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2016, Carroll Community Bank exceeded all regulatory capital requirements. Carroll Community Bank is considered “well capitalized” under regulatory guidelines. See Note 7 of the accompanying consolidated financial statements for additional information.
Off-Balance Sheet Arrangements, Commitments and Aggregate Contractual Obligations
Commitments. We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments are limited to commitments to originate loans that involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks and management does not anticipate any losses that would have a material effect on our consolidated financial statements.
Outstanding loan commitments and available lines of credit at September 30, 2016 and December 31, 2015 are as follows:
At September 30, |
At December 31, |
|||||||
(in thousands) |
2016 |
2015 |
||||||
Commitments to extend credit: |
||||||||
Consumer loans |
$ | 381 | $ | 642 | ||||
Commercial loans |
5,371 | 4,251 | ||||||
5,752 | 4,893 | |||||||
Commitments under available lines of credit: |
||||||||
Consumer loans |
5,015 | 3,737 | ||||||
Commercial loans |
5,185 | 1,766 | ||||||
10,200 | 5,503 | |||||||
Total Commitments |
$ | 15,952 | $ | 10,396 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
The credit risks involved in these financial instruments are essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition at September 30, 2016 or December 31, 2015 as a liability for credit loss related to these commitments.
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Critical Accounting Policies
During the nine months ended September 30, 2016, there was no significant change in our critical accounting policies or the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require management to exercise significant judgment or discretion or make significant assumptions based on the information available that have, or could have, a material impact on the amounts reported in the financial statements and accompanying notes. We base these estimates, assumptions and judgments on the information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. These estimates, assumptions and judgments are necessary when financial instruments are required to be recorded at fair value or when the decline in the value of an asset carried on the statement of financial condition at historic cost requires an impairment write-down or a valuation reserve to be established. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the provision for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.
Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see Note 4 of the accompanying consolidated financial statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
● |
statements about our business plans, prospects, goals and operating strategies; particularly with respect to (i) continuing our focus on commercial real estate and business lending and related products, and (ii) retention of maturing certificates of deposit; |
● |
statements regarding the expected impact of new or pending accounting standards on the Company’s financial statements; |
● |
statements with respect to the impact of off-balance sheet arrangements; |
● |
statements regarding sources of liquidity and having adequate liquidity for our short- and long-term needs; |
● |
statements with respect to our allowance for loan losses, including expected increases in the allowance going forward, the adequacy thereof and that all known loan losses have been recorded; and |
● |
statement regarding the expected impact of any pending legal proceedings. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We undertake no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
● |
general economic conditions, either nationally or in our market area, that are worse than expected, including the impact of the pending exit of the United Kingdom from the European Union; |
● |
competition among depository and other financial institutions; |
● |
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; |
● |
adverse changes in the securities markets; |
● |
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
● |
changes in consumer spending, borrowing and savings habits; |
● |
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission ( the “SEC”) and the Public Company Accounting Oversight Board; |
● |
any interruption or breach of security of our information systems, including our third party vendors, resulting in failures or disruptions in service or processing; and |
● |
changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry as a whole and other risks and uncertainties discussed in this report and in other SEC filings we may make. |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. You should not put undue reliance on any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide material information about the Company to the chief executive officer, the chief financial officer, and others within the Company so that information may be recorded, processed, summarized, and reported as required under the SEC’s rules and forms. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and, based on that evaluation, have each concluded that such disclosure controls and procedures are effective as of September 30, 2016.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the quarter ended September 30, 2016, that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents a summary of the Company’s share repurchase during the quarter ended September 30, 2016:
Issuer Purchases of Equity Securities
Period |
Total number of shares purchased |
Average price per share |
Total number of shares purchased as part of publicly announced program (1) |
Maximum number of shares that may yet be purchased under the program (1) |
||||||||||||
July 2016 |
- | $ | - | - | 23,842 | |||||||||||
August 2016 |
6,500 | 15.96 | 6,500 | 17,342 | ||||||||||||
September 2016 |
2,700 | 16.55 | 2,700 | 14,642 | ||||||||||||
Total |
9,200 | $ | 16.13 | 9,200 |
(1) As the Company announced on April 22, 2015, the Company's Board of Directors, on April 20, 2015, approved the Company’s repurchase of up to 38,634 shares of its outstanding shares of common stock. Shares of common stock may be purchased from time to time, in the open market or through private transactions, as market conditions warrant.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 | Rule 13a-14(a) Certification by the Principal Executive Officer |
31.2 | Rule 13a-14(a) Certification by the Principal Financial Officer |
32.1 |
Certification by the Principal Executive Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
Certification by the Principal Financial Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CARROLL BANCORP, INC. | ||
Date: November 10, 2016 | By: | /s/ Russell J. Grimes |
Russell J. Grimes |
||
President, Chief Executive Officer and Director |
||
(Principal Executive Officer) | ||
Date: November 10, 2016 | By: | /s/ Michael J. Gallina |
Michael J. Gallina | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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