10-Q 1 mnsb-10q_20190930.htm MNSB Q3 20190930 mnsb-10q_20190930.htm

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from to                      to                     

Commission file number: 001-38817

 

 

MainStreet Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

Virginia

 

81-2871064

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

10089 Fairfax Boulevard, Fairfax, VA 22030

(Address of Principal Executive Offices and Zip Code)

(703) 481-4567

(Registrant’s Telephone Number, Including Area Code)

Not applicable

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

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

 

 

 

 

 

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock

 

MNSB

 

The Nasdaq Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 7, 2019, there were 8,260,259 outstanding shares, par value $4.00 per share, of the issuer’s common stock.

 

 

 

 


Table of Contents

 

INDEX

 

 

2


Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1 –  Consolidated Financial Statements – Unaudited

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition as of September 30, 2019 and December 31, 2018 (Dollars in thousands, except share and per share data)

 

 

 

At September 30,

2019

(unaudited)

 

 

At December 31,

2018

(*)

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

52,580

 

 

$

27,886

 

Federal funds sold

 

 

19,432

 

 

 

30,190

 

Cash and cash equivalents

 

 

72,012

 

 

 

58,076

 

Investment securities available-for-sale, at fair value

 

 

88,198

 

 

 

55,979

 

Investment securities held-to-maturity

 

 

24,410

 

 

 

26,178

 

Restricted securities, at cost

 

 

4,882

 

 

 

5,894

 

Loans, net of allowance for loan losses of $9,370 and $8,831, respectively

 

 

992,609

 

 

 

917,125

 

Premises and equipment, net

 

 

14,109

 

 

 

14,222

 

Other real estate owned, net

 

 

1,207

 

 

 

 

Accrued interest and other receivables

 

 

5,373

 

 

 

5,148

 

Bank owned life insurance

 

 

19,381

 

 

 

14,064

 

Other assets

 

 

12,095

 

 

 

3,927

 

Total Assets

 

$

1,234,276

 

 

$

1,100,613

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

218,087

 

 

$

211,749

 

Interest bearing demand deposits

 

 

54,438

 

 

 

60,588

 

Savings and NOW deposits

 

 

63,746

 

 

 

51,371

 

Money market deposits

 

 

125,716

 

 

 

138,152

 

Time deposits

 

 

602,577

 

 

 

458,277

 

Total deposits

 

 

1,064,564

 

 

 

920,137

 

Federal Home Loan Bank advances

 

 

10,000

 

 

 

40,000

 

Subordinated debt, net

 

 

14,798

 

 

 

14,776

 

Other liabilities

 

 

11,697

 

 

 

4,449

 

Total Liabilities

 

 

1,101,059

 

 

 

979,362

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value, 2,000,000 shares authorized; no shares issued and

   outstanding as of September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $4.00 par value, 10,000,000 shares authorized; issued and outstanding

   8,260,259 shares (including 160,961 nonvested shares) for September 30, 2019 and

   8,177,978 shares (including 133,869 nonvested shares) for December 31, 2018

 

 

32,397

 

 

 

32,176

 

Capital surplus

 

 

74,860

 

 

 

74,256

 

Retained earnings

 

 

25,535

 

 

 

15,186

 

Accumulated other comprehensive income (loss)

 

 

425

 

 

 

(367

)

Total Stockholders’ Equity

 

 

133,217

 

 

 

121,251

 

Total Liabilities and Stockholders’ Equity

 

$

1,234,276

 

 

$

1,100,613

 

 

*

Derived from audited consolidated financial statements.

See Notes to the Unaudited Consolidated Financial Statements

3


Table of Contents

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income for the Three and Nine months ended September 30, 2019 and 2018 (Dollars in thousands, except per share data)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

14,192

 

 

$

11,061

 

 

$

40,985

 

 

$

29,026

 

Interest on investments securities

 

 

497

 

 

 

341

 

 

 

1,668

 

 

 

1,089

 

Interest on federal funds sold

 

 

412

 

 

 

423

 

 

 

1,132

 

 

 

638

 

Total Interest Income

 

 

15,101

 

 

 

11,825

 

 

 

43,785

 

 

 

30,753

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on interest bearing DDA deposits

 

 

275

 

 

 

245

 

 

 

803

 

 

 

629

 

Interest on savings and NOW deposits

 

 

71

 

 

 

65

 

 

 

218

 

 

 

174

 

Interest on money market deposits

 

 

539

 

 

 

432

 

 

 

1,889

 

 

 

1,109

 

Interest on time deposits

 

 

3,900

 

 

 

2,677

 

 

 

10,466

 

 

 

5,283

 

Interest on Federal Home Loan Bank advances and other borrowings

 

 

76

 

 

 

199

 

 

 

457

 

 

 

589

 

Interest on subordinated debt

 

 

244

 

 

 

243

 

 

 

723

 

 

 

722

 

Total Interest Expense

 

 

5,105

 

 

 

3,861

 

 

 

14,556

 

 

 

8,506

 

Net interest income

 

 

9,996

 

 

 

7,964

 

 

 

29,229

 

 

 

22,247

 

Provision for Loan Losses

 

 

185

 

 

 

600

 

 

 

1,260

 

 

 

2,630

 

Net interest income after provision for loan losses

 

 

9,811

 

 

 

7,364

 

 

 

27,969

 

 

 

19,617

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit account service charges

 

 

392

 

 

 

320

 

 

 

1,208

 

 

 

792

 

Bank owned life insurance income

 

 

106

 

 

 

105

 

 

 

317

 

 

 

320

 

Loan swap fee income

 

 

407

 

 

 

 

 

 

878

 

 

 

 

Net gain on available-for-sale securities

 

 

 

 

 

 

 

 

5

 

 

 

 

Net gain on sale of loans

 

 

303

 

 

 

 

 

 

566

 

 

 

 

Other fee income

 

 

228

 

 

 

261

 

 

 

730

 

 

 

665

 

Total Non-Interest Income

 

 

1,436

 

 

 

686

 

 

 

3,704

 

 

 

1,777

 

Non-Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,890

 

 

 

3,018

 

 

 

11,597

 

 

 

8,578

 

Furniture and equipment expenses

 

 

451

 

 

 

493

 

 

 

1,271

 

 

 

1,325

 

Advertising and marketing

 

 

235

 

 

 

171

 

 

 

531

 

 

 

468

 

Occupancy expenses

 

 

214

 

 

 

206

 

 

 

644

 

 

 

515

 

Outside services

 

 

306

 

 

 

239

 

 

 

694

 

 

 

675

 

Administrative expenses

 

 

190

 

 

 

161

 

 

 

533

 

 

 

434

 

Other operating expenses

 

 

1,203

 

 

 

871

 

 

 

3,404

 

 

 

2,610

 

Total Non-Interest Expense

 

 

6,489

 

 

 

5,159

 

 

 

18,674

 

 

 

14,605

 

Income before income taxes

 

 

4,758

 

 

 

2,891

 

 

 

12,999

 

 

 

6,789

 

Income Tax Expense

 

 

1,049

 

 

 

539

 

 

 

2,612

 

 

 

1,248

 

Net Income

 

$

3,709

 

 

$

2,352

 

 

$

10,387

 

 

$

5,541

 

Net Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

 

$

0.35

 

 

$

1.26

 

 

$

0.90

 

Diluted

 

$

0.45

 

 

$

0.35

 

 

$

1.26

 

 

$

0.90

 

 

See Notes to the Unaudited Consolidated Financial Statements

4


Table of Contents

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended and Nine Months Ended September 30, 2019 and 2018 (Dollars in thousands)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Comprehensive Income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

3,709

 

 

$

2,352

 

 

$

10,387

 

 

$

5,541

 

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on available for sale securities arising

   during the period (net of tax (benefit), $54 and ($43),

   respectively for the three months ended September 30, and

   $205 and ($117), respectively for the nine months ended

   September 30).

 

 

205

 

 

 

(162

)

 

 

771

 

 

 

(441

)

Less: reclassification adjustment for securities gains included in

   net income (net of tax, $0 for the three months ended and $1 and $0 for the nine

   months ended, respectively).

 

 

 

 

 

 

 

 

4

 

 

 

 

Add: reclassification adjustment for amortization of unrealized

   losses on securities transferred from available for sale to held

   to maturity (net of tax, $2 and $2, respectively for the three

   months ended September 30, and $5 and $6, respectively for the nine months ended September 30).

 

 

6

 

 

 

7

 

 

 

17

 

 

 

21

 

Other comprehensive income (loss)

 

 

211

 

 

 

(155

)

 

 

792

 

 

 

(420

)

Comprehensive Income

 

$

3,920

 

 

$

2,197

 

 

$

11,179

 

 

$

5,121

 

 

See Notes to the Unaudited Consolidated Financial Statements

5


Table of Contents

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Nine months ended September 30, 2019 and 2018 (Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income

 

 

Total

 

Balance, June 30, 2019

 

$

32,387

 

 

$

74,609

 

 

$

21,826

 

 

$

214

 

 

$

129,036

 

Vesting of restricted stock

 

 

10

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

261

 

 

 

 

 

 

 

 

 

261

 

Net income

 

 

 

 

 

 

 

 

3,709

 

 

 

 

 

 

3,709

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

211

 

 

 

211

 

Balance, September 30, 2019

 

$

32,397

 

 

$

74,860

 

 

$

25,535

 

 

$

425

 

 

$

133,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income(Loss)

 

 

Total

 

Balance, December 31, 2018

 

$

32,176

 

 

$

74,256

 

 

$

15,186

 

 

$

(367

)

 

$

121,251

 

Vesting of restricted stock

 

 

221

 

 

 

(221

)

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

787

 

 

 

 

 

 

 

 

 

787

 

Net income

 

 

 

 

 

 

 

 

10,387

 

 

 

 

 

 

10,387

 

Change related to restricted stock awards

 

 

 

 

 

38

 

 

 

(38

)

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

792

 

 

 

792

 

Balance, September 30, 2019

 

$

32,397

 

 

$

74,860

 

 

$

25,535

 

 

$

425

 

 

$

133,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance, June 30, 2018

 

$

22,691

 

 

$

40,725

 

 

$

9,019

 

 

$

(285

)

 

$

72,150

 

Proceeds from sale of common stock, net of issuance costs

 

 

9,474

 

 

 

35,511

 

 

 

 

 

 

 

 

 

44,985

 

Vesting of restricted stock

 

 

12

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

203

 

 

 

 

 

 

 

 

 

203

 

Net income

 

 

 

 

 

 

 

 

2,352

 

 

 

 

 

 

2,352

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(155

)

 

 

(155

)

Balance, September 30, 2018

 

$

32,177

 

 

$

76,427

 

 

$

11,371

 

 

$

(440

)

 

$

119,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance, December 31, 2017

 

$

21,442

 

 

$

35,693

 

 

$

11,682

 

 

$

(20

)

 

$

68,797

 

Proceeds from sale of common stock, net of issuance costs

 

 

9,474

 

 

 

35,511

 

 

 

 

 

 

 

 

 

44,985

 

Vesting of restricted stock

 

 

155

 

 

 

(155

)

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

635

 

 

 

 

 

 

 

 

 

635

 

Stock dividend

 

 

1,106

 

 

 

4,743

 

 

 

(5,849

)

 

 

 

 

 

 

Cash in lieu of fractional shares

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Net income

 

 

 

 

 

 

 

 

5,541

 

 

 

 

 

 

5,541

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(420

)

 

 

(420

)

Balance, September 30, 2018

 

$

32,177

 

 

$

76,427

 

 

$

11,371

 

 

$

(440

)

 

$

119,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

6


Table of Contents

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

 

For the nine months ended September 30,

 

2019

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

10,387

 

 

$

5,541

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization, and accretion, net

 

 

1,215

 

 

 

1,309

 

Deferred income tax benefit

 

 

(240

)

 

 

(744

)

Provision for loan losses

 

 

1,260

 

 

 

2,630

 

Stock based compensation expense

 

 

787

 

 

 

635

 

Income from bank owned life insurance

 

 

(317

)

 

 

(320

)

Subordinated debt amortization expense

 

 

22

 

 

 

21

 

(Gain) Loss on disposal of premises and equipment

 

 

(67

)

 

 

5

 

Gain on sale of available-for-sale securities

 

 

(5

)

 

 

 

Change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other receivables

 

 

(213

)

 

 

(1,070

)

Other assets

 

 

(8,135

)

 

 

(105

)

Other liabilities

 

 

7,248

 

 

 

(183

)

Net cash provided by operating activities

 

 

11,942

 

 

 

7,719

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

 

 

 

 

Payments

 

 

3,233

 

 

 

2,854

 

Maturities

 

 

84,844

 

 

 

55,000

 

Purchases

 

 

(119,592

)

 

 

(87,003

)

Activity in held-to-maturity securities:

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

(500

)

Refunded

 

 

1,650

 

 

 

1,655

 

Purchases of restricted investment in bank stock

 

 

(3,239

)

 

 

(3,459

)

Redemption of restricted investment in bank stock

 

 

4,251

 

 

 

3,491

 

Purchases of bank owned life insurance

 

 

(5,000

)

 

 

 

Net increase in loan portfolio

 

 

(77,951

)

 

 

(199,113

)

Proceeds from sale of premises and equipment

 

 

77

 

 

 

 

Purchases of premises and equipment

 

 

(706

)

 

 

(1,206

)

Net cash used in investing activities

 

 

(112,433

)

 

 

(228,281

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net increase in non-interest deposits

 

 

6,338

 

 

 

20,414

 

Net increase in interest bearing demand, savings, and time deposits

 

 

138,089

 

 

 

201,823

 

Net decrease in Federal Home Loan Bank advances and other borrowings

 

 

(30,000

)

 

 

(23,780

)

Net proceeds from sale of common stock, net of offering costs

 

 

 

 

 

44,985

 

Net cash provided by financing activities

 

 

114,427

 

 

 

243,442

 

Increase in Cash and Cash Equivalents

 

 

13,936

 

 

 

22,880

 

Cash and Cash Equivalents, beginning of period

 

 

58,076

 

 

 

37,493

 

Cash and Cash Equivalents, end of period

 

$

72,012

 

 

$

60,373

 

Supplementary Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

14,223

 

 

$

7,827

 

Cash paid during the period for income taxes

 

$

3,019

 

 

$

2,631

 

Right of use assets obtained in exchange for new operating lease liabilities

 

$

2,647

 

 

$

 

Transfers from loans to other real estate owned

 

$

1,207

 

 

$

 

 

See Notes to the Unaudited Consolidated Financial Statements

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MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements

Organization

MainStreet Bancshares Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose principal activity is the ownership and management of MainStreet Bank. The Company is authorized to issue 10,000,000 shares of common stock with a par value of $4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $1.00 per share. There is currently no preferred stock outstanding. There are no plans currently nor does the Board of Directors of the Company anticipate any need in the foreseeable future to issue shares of preferred stock. The Company is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”) and is subject to inspection, examination, and supervision by the Federal Reserve Board.

On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”), pursuant to Section  12(b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b-2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the Securities and Exchange Commission, or the “SEC.”

We were approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April 22, 2019.

MainStreet Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003 and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004 and is supervised by the Bureau and the Federal Reserve Bank of Richmond. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of individuals, and small and medium-sized business and professional concerns in the Washington, D.C. metropolitan area.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2018 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 10 filed by the Company with the U.S. Securities and Exchange Commission on February 15, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, events through the date of issuance of the financial statements included herein.

Principles of Consolidation – The unaudited interim consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and cash equivalents – For the purpose of presentation in the Statements of Cash Flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet captions “Cash and due from banks” and “Federal funds sold.”

Investment securities – The Bank’s investment securities are classified as either held to maturity, available for sale or trading. At September 30, 2019 and December 31, 2018, the Bank held approximately $24.4 million and $26.2 million, respectively, in securities classified as held to maturity. The Bank held no securities classified as trading. Municipal securities that were originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. At September 30, 2019 and December 31, 2018, the unamortized unrealized loss was $88,164 and $109,420, respectively, before tax, and remains in accumulated other comprehensive income (loss), net of tax.

 

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Securities which are not classified as held to maturity or trading are classified as securities available for sale. Securities available for sale are reported at fair value. Any unrealized gain or loss, net of applicable income taxes, is reported as a separate addition to or reduction from stockholders’ equity. Gains and losses arising from the sale of securities available for sale are recognized based on the specific identification method on a trade-date basis and included in results of operations.

Securities held to maturity includes securities purchased with the ability and positive intent to hold to maturity. Debt securities are stated at historical cost adjusted for amortization of premiums and accretion of discount. Any investment security, for which there has been a value impairment deemed by management to be other than temporary, is written down to its estimated fair value with a charge to current operations.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Restricted equity securities consist of the Federal Reserve Bank and Federal Home Loan Bank of Atlanta (“FHLB”) stock in the amount of $3.3 million and $1.4 million respectively, as of September 30, 2019, compared to $3.3 million and $2.4 million, respectively, as of December 31, 2018. Restricted equity securities also consisted of $126,800 in Community Bankers Bank stock at September 30, 2019 and December 31, 2018. This restricted stock is recorded at cost because its ownership is restricted and it lacks a market for resale. The Bank is required to maintain Federal Reserve Bank stock at a level of 6% of capital and surplus. The FHLB requires the Bank to maintain stock, at a minimum, in an amount equal to 4.5% of outstanding borrowings and 0.20% of total assets. When evaluating restricted stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Bank does not consider these investments to be impaired at September 30, 2019 or December 31, 2018 and no previous impairment has been recognized.

Loans - The Bank makes commercial and consumer loans to customers. Our recorded investment in loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their unpaid principal balances adjusted for charge-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for loan losses. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the effective interest method. The Bank is amortizing these amounts over the contractual life of the related loans.

A loan’s past due status is based on the contractual due date of the most delinquent payment due. All loans which are 30 or more days past due at the end of the month are reported to the Board of Directors. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when the collection of principal or interest is 120 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. It is Bank policy to charge-off loans whose collectability is sufficiently questionable and can no longer be justified as an asset on the balance sheet. To determine if a loan should be charged-off, all possible sources of repayment are analysed, including: (1) the potential for future cash flow, (2) the value of the Bank’s collateral, and (3) the strength of co-makers or guarantors. All principal and previously accrued interest is charged to the allowance for loan losses. All future payments received on the loan are credited to the allowance for loan losses as a recovery. These policies are applied consistently across our loan portfolio.

Impairment of a loan - The Bank considers a loan impaired when it is probable that the Bank will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of an insignificant delay in payment if the ultimate collectability of all amounts due is expected. Impairment is measured on a loan by loan basis for all commercial, construction and residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Consistent with the Bank’s method for nonaccrual loans, payments on impaired loans are first applied to principal outstanding. Smaller balance consumer loans are not individually evaluated for impairment.

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Troubled Debt Restructuring (TDR) occurs when the Bank agrees to modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Bank evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Bank concludes that the borrower is able to continue making such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. Restructured loans for which there was no rate concession, and therefore made at a market rate of interest, may be eligible to be removed from TDR status in periods subsequent to the restructuring depending on the performance of the loan. As of September 30, 2019, and December 31, 2018, the Bank had approximately $1.5 million and $3.4 million of loans classified as TDR, respectively. At September 30, 2019 and December 31, 2018, TDR loans consisted of one and two loans, respectively. The one currently identified TDR loan in the amount of approximately $1.5 million is currently performing in accordance with its modified terms.  

 

Allowance for Loan Losses - The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when:

 

Management believes that the collectability of the principal is unlikely regardless of delinquency status.

 

The loan is a consumer loan and is 120 days past due.

 

The loan is a non-consumer loan, unless the loan is well secured and recovery is probable.

 

The borrower is in bankruptcy, unless the debt has been reaffirmed, is well secured and recovery is probable.

Subsequent recoveries, if any, are credited to the allowance.

The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics of each loan portfolio segment:

 

Real estate residential mortgage loans, including equity lines of credit, carry risks associated with the continued credit-worthiness of the borrower and the changes in the value of the collateral.

 

Real estate construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

 

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards.

 

Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

 

Consumer secured loans (indirect lending) carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles). These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

 

Consumer unsecured loans (credit cards) carry risks associated with the continued credit-worthiness of the borrower. Consumer unsecured loans are more likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

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The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with the relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified or performing loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. Non-impaired classified loans are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, than non-classified loans. The characteristics of the loan ratings are as follows:

 

Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

 

Watch rated loans have all the characteristics of pass rated loans but show signs of emerging financial weaknesses which the Bank will continue monitoring more closely Watch rated loans are still performing as agreed.

 

Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history is characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

 

Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due.

 

Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high.

 

Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Other Real Estate Owned (“OREO”) - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, and recent sales of like properties, length of time the properties have been held and our ability and intention with regard to continued ownership of the properties. The Bank may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market values. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets and improvements are capitalized.

Interest income on loans – Interest on loans is accrued and credited to income on daily balances of the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.

Generally, the Bank will return a loan to accrual status when all delinquent interest and principal becomes current and remains current for six consecutive months under the terms of the loan agreement or the loan is well-secured or in process of collection. Upon returning to accrual status, interest payments applied to the principal balance of a loan while in nonaccrual status are recognized as a yield adjustment over the remaining life.

Loan origination and commitment fees and certain related direct costs - Loan origination and commitment fees charged by the Bank and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment. The Bank amortizes these net amounts over the life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Premises and equipment – Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line basis over the estimated useful life of each asset, which ranges from 3 to 39 years. Leasehold improvements are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Construction in progress includes assets which will be reclassified and depreciated once placed into service.

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Table of Contents

 

Income taxes The Bank uses an asset and liability approach in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The principal items relate primarily to differences between the allowance for loan losses, deferred loan fees, and accumulated depreciation and amortization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of September 30, 2019, and December 31, 2018, there were no such liabilities recorded.

 

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional income taxes in the statement of operations.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Stock compensation plans Stock compensation accounting guidance (FASB ASC 718, “Compensation – Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Sholes model is used to estimate the fair value of stock options, while the market price of the Bank’s common stock at the date of grant is used for restricted stock awards. No stock options were granted during 2019 and 2018.

Earnings per share Net income per common share has been determined under the provisions of FASB ASC 260, “Earnings Per Share” and has been computed based on the weighted average common shares outstanding during the quarter and nine months ended September 30, 2019 and 2018 as adjusted for a 5% stock dividend issued April 30, 2018). Diluted earnings per share reflect additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The only potential dilutive stock of the Bank as defined in FASB ASC 260 would be stock options granted to various directors, officers, and employees of the Bank. There were no such options outstanding at September 30, 2019 or December 31, 2018. Restricted stock is included in the computation of basic earnings per share as the holder is entitled to full benefits of a stockholder during the vesting period.

Off-balance sheet instruments – In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded, or related fees are incurred or received.

Advertising and marketing expense – Advertising and marketing costs are expensed as incurred.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.

The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, (3) derivative financial instruments, (4) income taxes, and (5) other real estate owned. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. In connection with the determination of the allowances for losses on loans and valuation of other real estate owned management obtains independent appraisals for significant properties.

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Table of Contents

 

Fair value of financial instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Derivative Financial Instruments – The Bank recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Bank’s derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties. Because the interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as noninterest income or noninterest expense, as applicable. The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 4.

Transfers of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

 

Revenue Recognition

During 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606),” and all amendments thereto (collectively, ASU 2014-09), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain/loss from the transfer of nonfinancial assets, such as other real estate owned (OREO). The Company adopted ASU 2014-09 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09. The adoption of ASU 2014-09 did not result in a change to the accounting for any of the in-scope revenue streams; therefore, no cumulative effect adjustment was recorded.

 

Most revenue associated with the Company’s financial instruments, including interest income and gains/losses on investment securities, derivatives and sales of financial instruments are outside the scope of ASU 2014-09. The Company’s services that fall within the scope of ASU 2014-09 are presented within noninterest income and are recognized as revenue. A description of the primary revenue streams accounted for under ASU 2014-09 follows:

Service Charges on Deposit Accounts. The Company earns fees from its deposit customers for overdraft and account maintenance services. Overdraft fees are recognized when the overdraft occurs. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the company satisfies the performance obligation.

Other Service Charges and Fees. The Company earns fees from its customers for transaction-based services. Such services include safe deposit box, ATM, stop payment, wire transfer, and mortgage originations. In each case, these service charges and fees are recognized in income at the time or within the same period that the Company’s performance obligation is satisfied.

Interchange Income. The Company earns interchange fees from debit and credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services.

Swap Fee Income. The Company earns fees from certain qualifying commercial loan customers for entering into interest rate swaps in order for the customer to receive a fixed rate of interest while the Bank receives a floating rate. In each case, there are fees that are recognized in income as the time or within the same period that the Company’s performance obligation is satisfied.

 

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Impact of Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies. Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has formed a Committee to oversee the accounting impact of this ASU. In anticipation of the ASU, the Company is working with a third party to compile data and develop an estimate using historical and qualitative data based on the requirements of ASU 2016-13.  

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

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various TRG Meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.”  The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings.  The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

 

Note 2. Investment Securities

Investment securities available-for-sale was comprised of the following:

 

 

 

September 30, 2019

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S. Treasury Securities

 

$

49,996

 

 

$

 

 

$

(9

)

 

$

49,987

 

Collateralized Mortgage Backed

 

 

13,988

 

 

 

56

 

 

 

(46

)

 

 

13,998

 

Subordinated Debt

 

 

2,000

 

 

 

32

 

 

 

 

 

 

2,032

 

Municipal Securities

 

 

12,878

 

 

 

766

 

 

 

 

 

 

13,644

 

U.S. Governmental Agencies

 

 

8,717

 

 

 

 

 

 

(180

)

 

 

8,537

 

Total

 

$

87,579

 

 

$

854

 

 

$

(235

)

 

$

88,198

 

 

14


Table of Contents

 

Investment securities held-to-maturity was comprised of the following:

 

 

 

September 30, 2019

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Municipal Securities

 

$

22,910

 

 

$

793

 

 

$

(2

)

 

$

23,701

 

Subordinated Debt

 

 

1,500

 

 

 

 

 

 

 

 

 

1,500

 

Total

 

$

24,410

 

 

$

793

 

 

$

(2

)

 

$

25,201

 

 

Investment securities available-for-sale was comprised of the following:

 

 

 

December 31, 2018

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S. Treasury Securities

 

$

29,996

 

 

$

1

 

 

$

 

 

$

29,997

 

Collateralized Mortgage Backed

 

 

4,967

 

 

 

21

 

 

 

(95

)

 

 

4,893

 

Subordinated Debt

 

 

2,000

 

 

 

15

 

 

 

 

 

 

2,015

 

Municipal Securities

 

 

8,869

 

 

 

 

 

 

(36

)

 

 

8,833

 

U.S. Governmental Agencies

 

 

10,515

 

 

 

 

 

 

(274

)

 

 

10,241

 

Total

 

$

56,347

 

 

$

37

 

 

$

(405

)

 

$

55,979

 

 

Investment securities held-to-maturity was comprised of the following:

 

 

 

December 31, 2018

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Municipal Securities

 

$

24,678

 

 

$

315

 

 

$

(260

)

 

$

24,733

 

Subordinated Debt

 

 

1,500

 

 

 

 

 

 

 

 

 

1,500

 

Total

 

$

26,178

 

 

$

315

 

 

$

(260

)

 

$

26,233

 

 

The scheduled maturities of securities available-for-sale and held-to-maturity at September 30, 2019 were as follows:

 

 

 

September 30, 2019

 

 

 

Available-for-Sale

 

 

Held-to-Maturity

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Fair Value

 

 

Amortized

Cost

 

 

Fair Value

 

Due in one year or less

 

$

50,010

 

 

$

50,002

 

 

$

 

 

$

 

Due from one to five years

 

 

 

 

 

 

 

 

519

 

 

 

532

 

Due from after five to ten years

 

 

3,018

 

 

 

3,063

 

 

 

9,550

 

 

 

9,874

 

Due after ten years

 

 

34,551

 

 

 

35,133

 

 

 

14,341

 

 

 

14,795

 

Total

 

$

87,579

 

 

$

88,198

 

 

$

24,410

 

 

$

25,201

 

 

Securities with a fair value of $267,162 and $258,046 at September 30, 2019 and December 31, 2018, respectively, were pledged to secure FHLB advances.

There were seven and no securities sold from the available-for-sale portfolio for the nine months ended September 30, 2019 and 2018.

15


Table of Contents

 

The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of September 30, 2019 and December 31, 2018:

 

 

 

September 30, 2019

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(Dollars in thousands)

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

49,987

 

 

$

(9

)

 

$

 

 

$

 

 

$

49,987

 

 

$

(9

)

Collateralized Mortgage Backed

 

 

4,665

 

 

 

(26

)

 

 

2,024

 

 

 

(20

)

 

 

6,689

 

 

 

(46

)

U.S Governmental Agencies

 

 

 

 

 

 

 

 

8,537

 

 

 

(180

)

 

 

8,537

 

 

 

(180

)

Total

 

$

54,652

 

 

$

(35

)

 

$

10,561

 

 

$

(200

)

 

$

65,213

 

 

$

(235

)

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

 

539

 

 

 

(2

)

 

 

 

 

 

 

 

 

539

 

 

 

(2

)

Total

 

$

539

 

 

$

(2

)

 

$

 

 

$

 

 

$

539

 

 

$

(2

)

 

 

 

December 31, 2018

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(Dollars in thousands)

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

4,999

 

 

$

 

 

$

 

 

$

 

 

$

4,999

 

 

$

 

Collateralized Mortgage Backed

 

 

1,706

 

 

 

(14

)

 

 

2,659

 

 

 

(81

)

 

 

4,365

 

 

 

(95

)

Municipal Securities

 

 

3,683

 

 

 

(18

)

 

 

1,588

 

 

 

(17

)

 

 

5,271

 

 

 

(35

)

U.S Government Agencies

 

 

6,520

 

 

 

(121

)

 

 

3,586

 

 

 

(154

)

 

 

10,106

 

 

 

(275

)

Total

 

$

16,908

 

 

$

(153

)

 

$

7,833

 

 

$

(252

)

 

$

24,741

 

 

$

(405

)

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal Securities

 

$

1,025

 

 

$

(5

)

 

$

8,899

 

 

$

(255

)

 

$

9,924

 

 

$

(260

)

Total

 

$

1,025

 

 

$

(5

)

 

$

8,899

 

 

$

(255

)

 

$

9,924

 

 

$

(260

)

 

The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. These unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, causing bond prices to decline, and are not attributable to credit deterioration.

At September 30, 2019, there was one U.S. Treasury security with a fair value of approximately $50.0 million considered temporarily impaired and in an unrealized loss position of less than 12 months. At September 30, 2019, there were two collateralized mortgage backed securities with fair values totaling $4.7 million in an unrealized loss position of less than 12 months and four securities with a fair value totaling $2.0 milliont in an unrealized loss position greater than 12 months. At September 30, 2019 nine U.S. government agencies with fair values totaling approximately $8.5 million that were in an unrealized loss position of more than 12 months. At September 30, 2019, there was one held-to-maturity municipal security with a fair value of $539,000 in an unrealized loss position. The Bank does not consider any of the securities in the available for sale or held to maturity portfolio to be other-than-temporarily impaired at September 30, 2019 and December 31, 2018. There were seven securities sold during 2019; four were sold at a loss of $18,000 and three were sold at gain of $23,000 for a net gain of $5,000, and no securities were sold in 2018.

All municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at September 30, 2019 and December 31, 2018 was $88,164 and $109,420, respectively.

16


Table of Contents

 

Note 3. Loans Receivable

Loans receivable were comprised of the following:

 

(Dollars in thousands)

 

September 30,

2019

 

 

December 31,

2018

 

Residential Real Estate:

 

 

 

 

 

 

 

 

Single family

 

$

149,737

 

 

$

139,620

 

Multifamily

 

 

12,258

 

 

 

9,182

 

Farmland

 

 

806

 

 

 

825

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

Owner-occupied

 

 

145,974

 

 

 

121,622

 

Non-owner occupied

 

 

288,761

 

 

 

256,139

 

Construction and Land Development

 

 

207,441

 

 

 

183,551

 

Commercial – Non Real-Estate:

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

115,902

 

 

 

114,221

 

Consumer – Non Real Estate:

 

 

 

 

 

 

 

 

Unsecured

 

 

1,737

 

 

 

1,402

 

Secured

 

 

81,276

 

 

 

100,875

 

Total Gross Loans

 

 

1,003,892

 

 

 

927,437

 

Less: unearned fees

 

 

(1,884

)

 

 

(1,400

)

Less: unamortized discount on consumer secured loans

 

 

(29

)

 

 

(81

)

Less: allowance for loan losses

 

 

(9,370

)

 

 

(8,831

)

Net Loans

 

$

992,609

 

 

$

917,125

 

 

The secured consumer loans above include $620,890 and $452,190 of overdrafts reclassified as loans for the quarters ended September 30, 2019 and December 31, 2018, respectively.

The Bank held no loans for sale at September 30, 2019 and December 31, 2018.

The following tables summarize the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2019 and 2018.

17


Table of Contents

 

Allowance for Credit Losses By Portfolio Segment

For the Three and Nine months ended September 30, 2019

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2019

 

Residential

 

 

Commercial

 

 

Construction

 

 

Consumer

 

 

Commercial

 

 

Total

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,220

 

 

$

4,026

 

 

$

1,689

 

 

$

907

 

 

$

1,343

 

 

$

9,185

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(28

)

 

 

 

 

 

(28

)

Recoveries

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Provision

 

 

30

 

 

 

80

 

 

 

38

 

 

 

21

 

 

 

16

 

 

 

185

 

Ending Balance

 

$

1,278

 

 

$

4,106

 

 

$

1,727

 

 

$

900

 

 

$

1,359

 

 

$

9,370

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for Impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

102

 

 

$

102

 

Collectively evaluated for Impairment

 

$

1,278

 

 

$

4,106

 

 

$

1,727

 

 

$

900

 

 

$

1,257

 

 

$

9,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,019

 

 

$

4,299

 

 

$

1,469

 

 

$

826

 

 

$

1,218

 

 

$

8,831

 

Charge-offs

 

 

 

 

 

(733

)

 

 

 

 

 

(50

)

 

 

 

 

 

(783

)

Recoveries

 

 

58

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

62

 

Provision

 

 

201

 

 

 

540

 

 

 

258

 

 

 

120

 

 

 

141

 

 

 

1,260

 

Ending Balance

 

$

1,278

 

 

$

4,106

 

 

$

1,727

 

 

$

900

 

 

$

1,359

 

 

$

9,370

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for Impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

102

 

 

$

102

 

Collectively evaluated for Impairment

 

$

1,278

 

 

$

4,106

 

 

$

1,727

 

 

$

900

 

 

$

1,257

 

 

$

9,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses By Portfolio Segment

For the Three and Nine months ended September 30, 2018

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

Residential

 

 

Commercial

 

 

Construction

 

 

Consumer

 

 

Commercial

 

 

Total

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

893

 

 

$

3,783

 

 

$

1,046

 

 

$

836

 

 

$

1,173

 

 

$

7,731

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision

 

 

32

 

 

 

175

 

 

 

275

 

 

 

39

 

 

 

79

 

 

 

600

 

Ending Balance

 

$

925

 

 

$

3,958

 

 

$

1,321

 

 

$

871

 

 

$

1,252

 

 

$

8,327

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for Impairment

 

$

 

 

$

706

 

 

$

 

 

$

 

 

$

 

 

$

706

 

Collectively evaluated for Impairment

 

$

925

 

 

$

3,252

 

 

$

1,321

 

 

$

871

 

 

$

1,252

 

 

$

7,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

789

 

 

$

2,339

 

 

$

833

 

 

$

742

 

 

$

1,002

 

 

$

5,705

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

(14

)

Recoveries

 

 

 

 

 

2

 

 

 

 

 

 

2

 

 

 

2

 

 

 

6

 

Provision

 

 

136

 

 

 

1,617

 

 

 

488

 

 

 

141

 

 

 

248

 

 

 

2,630

 

Ending Balance

 

$

925

 

 

$

3,958

 

 

$

1,321

 

 

$

871

 

 

$

1,252

 

 

$

8,327

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for Impairment

 

$

 

 

$

706

 

 

$

 

 

$

 

 

$

 

 

$

706

 

Collectively evaluated for Impairment

 

$

925

 

 

$

3,252

 

 

$

1,321

 

 

$

871

 

 

$

1,252

 

 

$

7,621

 

 

18


Table of Contents

 

The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

The following tables summarize information in regards to the recorded investment in loans receivable by loan class as of September 30, 2019 and December 31, 2018:

 

September 30, 2019

 

Loans Receivable

 

(Dollars in thousands)

 

Ending

Balance

 

 

Ending

Balance:

Individually

Evaluated

for

Impairment

 

 

Ending

Balance:

Collectively

Evaluated

for

Impairment

 

Residential Real Estate

 

$

162,801

 

 

$

1,488

 

 

$

161,313

 

Commercial Real Estate

 

 

434,735

 

 

 

 

 

 

434,735

 

Construction and Land Development

 

 

207,441

 

 

 

 

 

 

207,441

 

Commercial & Industrial

 

 

115,902

 

 

 

102

 

 

 

115,800

 

Consumer

 

 

83,013

 

 

 

 

 

 

83,013

 

Total

 

$

1,003,892

 

 

$

1,590

 

 

$

1,002,302

 

 

December 31, 2018

 

Loans Receivable

 

(Dollars in thousands)

 

Ending

Balance

 

 

Ending

Balance:

Individually

Evaluated

for

Impairment

 

 

Ending

Balance:

Collectively

Evaluated

for

Impairment

 

Residential Real Estate

 

$

149,627

 

 

$

1,510

 

 

$

148,117

 

Commercial Real Estate

 

 

377,761

 

 

 

1,939

 

 

 

375,822

 

Construction and Land Development

 

 

183,551

 

 

 

 

 

 

183,551

 

Commercial & Industrial

 

 

114,221

 

 

 

 

 

 

114,221

 

Consumer

 

 

102,277

 

 

 

 

 

 

102,277

 

Total

 

$

927,437

 

 

$

3,449

 

 

$

923,988

 

 

The following table summarizes information in regard to impaired loans by loan portfolio class as of September 30, 2019 and December 31, 2018:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

(Dollars in thousands)

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

$

1,488

 

 

$

1,488

 

 

$

 

 

$

1,510

 

 

$

1,510

 

 

$

 

 

 

 

1,488

 

 

 

1,488

 

 

 

 

 

 

1,510

 

 

 

1,510

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

 

$

 

 

$

 

 

$

1,939

 

 

$

1,939

 

 

$

733

 

Commercial & Industrial

 

 

102

 

 

 

102

 

 

 

102

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 

 

 

102

 

 

 

102

 

 

 

1,939

 

 

 

1,939

 

 

 

733

 

Total

 

$

1,590

 

 

$

1,590

 

 

$

102

 

 

$

3,449

 

 

$

3,449

 

 

$

733

 

 

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The following table presents additional information regarding the impaired loans for the Three and Nine months ended September 30, 2019 and 2018:

 

 

 

Three Months Ended September 30,

 

 

 

2019

 

 

2018

 

(Dollars in thousands)

 

Average

Record

Investment

 

 

Interest

Income

Recognized

 

 

Average

Record

Investment

 

 

Interest

Income

Recognized

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

$

1,491

 

 

$

10

 

 

$

1,524

 

 

$

10

 

 

 

 

1,491

 

 

 

10

 

 

 

1,524

 

 

 

10

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

 

$

 

 

$

1,939

 

 

$

 

Commercial & Industrial

 

 

102

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

1,939

 

 

 

 

Total

 

$

1,593

 

 

$

10

 

 

$

3,463

 

 

$

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

(Dollars in thousands)

 

Average

Record

Investment

 

 

Interest

Income

Recognized

 

 

Average

Record

Investment

 

 

Interest

Income

Recognized

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

$

1,499

 

 

$

41

 

 

$

1,531

 

 

$

41

 

 

 

 

1,499

 

 

 

41

 

 

 

1,531

 

 

 

41

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

 

$

 

 

$

1,939

 

 

$

 

Commercial & Industrial

 

 

105

 

 

 

4

 

 

 

 

 

 

 

 

 

 

105

 

 

 

4

 

 

 

1,939

 

 

 

 

Total

 

$

1,604

 

 

$

45

 

 

$

3,470

 

 

$

41

 

 

If interest on nonaccrual loans had been accrued, such income would have been $51,006 and $106,635 for the nine months ended September 30, 2019 and 2018

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2019 and December 31, 2018:

 

(Dollars in thousands)

 

September 30,

2019

 

 

December 31,

2018

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

 

$

1,939

 

Commercial & Industrial

 

 

102

 

 

 

 

Total

 

$

102

 

 

$

1,939

 

 

Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

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Table of Contents

 

The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of September 30, 2019 and December 31, 2018:

 

 

 

September 30, 2019

 

(Dollars in thousands)

 

Pass

 

 

Watch

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single Family

 

$

149,201

 

 

$

 

 

$

 

 

$

536

 

 

$

 

 

$

149,737

 

Multifamily

 

 

12,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,258

 

Farmland

 

 

806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

806

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

145,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145,974

 

Non-owner occupied

 

 

288,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

288,761

 

Construction & Land Development

 

 

207,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207,441

 

Commercial – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

106,039

 

 

 

1,788

 

 

 

5,234

 

 

 

2,739

 

 

 

102

 

 

 

115,902

 

Consumer – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured

 

 

1,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,737

 

Secured

 

 

81,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81,276

 

Total

 

$

993,493

 

 

$

1,788

 

 

 

5,234

 

 

$

3,275

 

 

 

102

 

 

$

1,003,892

 

 

 

 

December 31, 2018

 

(Dollars in thousands)

 

Pass

 

 

Watch

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single Family

 

$

138,483

 

 

$

755

 

 

$

 

 

$

382

 

 

$

 

 

$

139,620

 

Multifamily

 

 

9,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,182

 

Farmland

 

 

825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

825

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

117,906

 

 

 

1,777

 

 

 

 

 

 

 

 

 

1,939

 

 

 

121,622

 

Non-owner occupied

 

 

256,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

256,139

 

Construction & Land Development

 

 

183,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183,551

 

Commercial – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

110,631

 

 

 

1,333

 

 

$

2,257

 

 

 

 

 

 

 

 

 

114,221

 

Consumer – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured

 

 

1,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,402

 

Secured

 

 

100,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100,875

 

Total

 

$

918,994

 

 

$

3,865

 

 

$

2,257

 

 

$

382

 

 

$

1,939

 

 

$

927,437

 

 

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The following tables present the segments of the loan portfolio summarized by aging categories as of September 30, 2019 and December 31, 2018:

 

 

 

September 30, 2019

 

(Dollars in thousands)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

Greater

than 90

Days

 

 

Total Past

Due

 

 

Current

 

 

Total

Loans

Receivable

 

 

Nonaccrual

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single Family

 

$

 

 

$

 

 

$

 

 

$

 

 

$

149,737

 

 

$

149,737

 

 

$

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,258

 

 

 

12,258

 

 

 

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

806

 

 

 

806

 

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145,974

 

 

 

145,974

 

 

 

 

Non-owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

288,761

 

 

 

288,761

 

 

 

 

Construction & Land Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207,441

 

 

 

207,441

 

 

 

 

Commercial – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

102

 

 

 

 

 

 

102

 

 

 

115,698

 

 

 

115,902

 

 

 

102

 

Consumer – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured

 

 

5

 

 

 

2

 

 

 

19

 

 

 

26

 

 

 

1,711

 

 

 

1,737

 

 

 

 

Secured

 

 

34

 

 

 

2

 

 

 

1

 

 

 

37

 

 

 

81,239

 

 

 

81,276

 

 

 

 

Total

 

$

39

 

 

$

106

 

 

$

20

 

 

$

165

 

 

$

1,003,625

 

 

$

1,003,892

 

 

$

102

 

 

 

 

December 31, 2018

 

(Dollars in thousands)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

Greater

than 90

Days

 

 

Total Past

Due

 

 

Current

 

 

Total

Loans

Receivable

 

 

Nonaccrual

 

Residential Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single Family

 

$

 

 

$

 

 

$

 

 

$

 

 

$

139,620

 

 

$

139,620

 

 

$

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,182

 

 

 

9,182

 

 

 

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

825

 

 

 

825

 

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119,683

 

 

 

121,622

 

 

 

1,939

 

Non-owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

256,139

 

 

 

256,139

 

 

 

 

Construction & Land Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183,551

 

 

 

183,551

 

 

 

 

Commercial – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

114,221

 

 

 

114,221

 

 

 

 

Consumer – Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured

 

 

50

 

 

 

9

 

 

 

11

 

 

 

70

 

 

 

1,332

 

 

 

1,402

 

 

 

 

Secured

 

 

57

 

 

 

5

 

 

 

 

 

 

62

 

 

 

100,813

 

 

 

100,875

 

 

 

 

Total

 

$

107

 

 

$

14

 

 

$

11

 

 

$

132

 

 

$

925,366

 

 

$

927,437

 

 

$

1,939

 

 

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan that is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses. TDRs are restored to accrual status when the obligation is brought current, has performed in accordance with the modified contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.

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As of September 30, 2019, and December 31, 2018, the Company had TDRs totaling $1.5 million and $3.4 million, respectively. At September 30, 2019 the Company had one TDR which was performing in compliance with the restructured terms and on accrual status. During the nine months ended September 30, 2019, the Company foreclosed on the collateral of one loan that was previously identified as a TDR. No other additional modifications occurred to TDR loans during the nine months ended September 30, 2019. No additional loan commitments were outstanding to these borrowers at September 30, 2019 and December 31, 2018. At September 30, 2019 there was no specific reserve related to TDR loans. As December 31, 2018, there was a specific reserve of $732,892 related to one TDR.

 

The following table details the Company’s TDRs that are on accrual status and non-accrual status at September 30, 2019:

 

 

 

As of September 30, 2019

 

(Dollars in thousands)

 

Number

Of Loans

 

 

Accrual

Status

 

 

Non-

Accrual

Status

 

 

Total TDRs

 

Residential Real Estate

 

 

1

 

 

$

1,488

 

 

$

 

 

$

1,488

 

Total

 

 

1

 

 

$

1,488

 

 

$

 

 

$

1,488

 

 

The following table details the Company’s TDRs that are on accrual status and non-accrual status at December 31, 2018:

 

 

 

As of December 31, 2018

 

(Dollars in thousands)

 

Number

Of Loans

 

 

Accrual

Status

 

 

Non-

Accrual

Status

 

 

Total TDRs

 

Residential Real Estate

 

 

1

 

 

$

1,510

 

 

$

 

 

$

1,510

 

Commercial Real Estate

 

 

1

 

 

 

 

 

 

1,939

 

 

 

1,939

 

Total

 

 

2

 

 

$

1,510

 

 

$

1,939

 

 

$

3,449

 

 

 

Note 4. Derivatives and Risk Management Activities

The Bank uses derivative financial instruments (or “derivatives”) primarily to assist customers with their risk management objectives. The Bank classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (or “interest rate loan swaps”). The Bank enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Bank receives a floating rate. These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.

The following tables summarize key elements of the Banks’s derivative instruments as of September 30, 2019 and December 31, 2018.

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related interest rate

contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars in thousands)

 

Notional

Amount

 

 

Positions

 

 

Assets

 

 

Liabilities

 

 

Collateral

Pledges

 

Matched interest rate swap with borrower

 

 

68,128

 

 

 

10

 

 

 

5,441

 

 

 

 

 

 

6,400

 

Matched interest rate swap with counterparty

 

 

68,128

 

 

 

10

 

 

 

 

 

 

5,441

 

 

 

6,400

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related interest rate

contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars in thousands)

 

Notional

Amount

 

 

Positions

 

 

Assets

 

 

Liabilities

 

 

Collateral

Pledges

 

Matched interest rate swap with borrower

 

 

36,607

 

 

 

5

 

 

 

1,192

 

 

 

 

 

 

1,290

 

Matched interest rate swap with counterparty

 

 

36,607

 

 

 

5

 

 

 

 

 

 

1,192

 

 

 

1,290

 

 

The Company is able to recognize fee income upon execution of the interest rate swap contract and completed its first contract in the fourth quarter of 2018. Interest rate swap fee income for the three and nine months ended September 30, 2019 was $407,000 and $878,000, respectively. There was no interest rate swap fee income for the same periods in 2018.

 

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Note 5. Fair Value Presentation

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows:

Level 1 –Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

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

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

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

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. As of September 30, 2019, and December 31, 2018, the Bank’s entire portfolio of available for sale securities are considered to be Level 2 securities.

Derivative asset (liability) – interest rate swaps on loans

As discussed in “Note 4: Derivative Financial Instruments”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 2.

 

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The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

 

 

 

September 30, 2019

 

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

 

 

$

49,987

 

 

$

 

 

$

49,987

 

Collateralized Mortgage Backed

 

 

 

 

 

13,998

 

 

 

 

 

 

13,998

 

Subordinated Debt

 

 

 

 

 

2,032

 

 

 

 

 

 

2,032

 

Municipal Securities

 

 

 

 

 

13,644

 

 

 

 

 

 

13,644

 

U.S. Government Agencies

 

 

 

 

 

8,537

 

 

 

 

 

 

8,537

 

Derivative asset – interest rate swap on loans

 

 

 

 

 

5,441

 

 

 

 

 

 

5,441

 

Total

 

$

 

 

$

93,639

 

 

$

 

 

$

93,639

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – interest rate swap on loans

 

 

 

 

 

5,441

 

 

 

 

 

 

5,441

 

Total

 

$

 

 

$

5,441

 

 

$

 

 

$

5,441

 

 

 

 

December 31, 2018

 

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities

 

$

 

 

$

29,998

 

 

$

 

 

$

29,998

 

Collateralized Mortgage Backed

 

 

 

 

 

4,893

 

 

 

 

 

 

4,893

 

Subordinated Debt

 

 

 

 

 

2,015

 

 

 

 

 

 

2,015

 

Municipal Securities

 

 

 

 

 

8,833

 

 

 

 

 

 

8,833

 

U.S. Government Agencies

 

 

 

 

 

10,241

 

 

 

 

 

 

10,241

 

Derivative asset – interest rate swap on loans

 

 

 

 

 

1,192

 

 

 

 

 

 

1,192

 

Total

 

$

 

 

$

57,172

 

 

$

 

 

$

57,172

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – interest rate swap on loans

 

 

 

 

 

1,192

 

 

 

 

 

 

1,192

 

Total

 

$

 

 

$

1,192

 

 

$

 

 

$

1,192

 

 

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

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

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

 

 

 

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Other real estate owned

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Bank. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Statements of Income.

The following table summarizes the value of the Bank’s assets as of September 30, 2019 and December 31, 2018 that were measured at fair value on a nonrecurring basis during the period:

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

 

 

$

 

 

$

 

 

$

 

Other Real Estate Owned

 

 

 

 

 

 

 

 

1,207

 

 

 

1,207

 

Total

 

$

 

 

$

 

 

$

1,207

 

 

$

1,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

$

 

 

$

 

 

$

1,207

 

 

$

1,207

 

Total

 

$

 

 

$

 

 

$

1,207

 

 

$

1,207

 

 

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, which the Company adopted on January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculation the fair values of financial instruments not measured at fair value on a recurring basis.

The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.

 

September 30, 2019

 

Carrying

 

 

Estimated

 

 

Quoted

Prices in

Active

Markets for

Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(Dollars in thousands)

 

Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

52,580

 

 

$

52,580

 

 

$

52,580

 

 

$

 

 

$

 

Restricted equity securities

 

 

4,882

 

 

 

4,882

 

 

 

 

 

 

4,882

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

88,198

 

 

 

88,198

 

 

 

 

 

 

88,198

 

 

 

 

Held to maturity

 

 

24,410

 

 

 

25,201

 

 

 

 

 

 

25,201

 

 

 

 

Loans, net

 

 

992,609

 

 

 

1,011,837

 

 

 

 

 

 

 

 

 

1,011,837

 

Derivative asset – interest rate swap on loans

 

 

5,441

 

 

 

5,441

 

 

 

 

 

 

5,441

 

 

 

 

Bank owned life insurance

 

 

19,381

 

 

 

19,381

 

 

 

 

 

 

19,381

 

 

 

 

Accrued interest receivable

 

 

5,373

 

 

 

5,373

 

 

 

 

 

 

5,373

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,064,564

 

 

$

1,081,540

 

 

$

 

 

$

471,456

 

 

$

610,084

 

Advances from the FHLB

 

 

10,000

 

 

 

10,014

 

 

 

 

 

 

10,014

 

 

 

 

Derivative liability – interest rate swaps on loans

 

 

5,441

 

 

 

5,441

 

 

 

 

 

 

5,441

 

 

 

 

Accrued interest payable

 

 

1,436

 

 

 

1,436

 

 

 

 

 

 

1,436

 

 

 

 

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Table of Contents

 

 

 

December 31, 2018

 

Carrying

 

 

Estimated

 

 

Quoted

Prices in

Active

Markets for

Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(Dollars in thousands)

 

Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

58,076

 

 

$

58,076

 

 

$

58,076

 

 

$

 

 

$

 

Restricted equity securities

 

 

5,894

 

 

 

5,894

 

 

 

 

 

 

5,894

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

55,979

 

 

 

55,979

 

 

 

 

 

 

55,979

 

 

 

 

Held to maturity

 

 

26,178

 

 

 

26,323

 

 

 

 

 

 

26,323

 

 

 

 

Loans, net

 

 

917,125

 

 

 

897,765

 

 

 

 

 

 

 

 

 

897,765

 

Derivative asset – interest rate swap on loans

 

 

1,192

 

 

 

1,192

 

 

 

 

 

 

1,192

 

 

 

 

Bank owned life insurance

 

 

14,064

 

 

 

14,064

 

 

 

 

 

 

14,064

 

 

 

 

Accrued interest receivable

 

 

4,333

 

 

 

4,333

 

 

 

 

 

 

4,333

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

920,137

 

 

$

920,917

 

 

$

 

 

$

463,552

 

 

$

457,365

 

Advances from the FHLB

 

 

40,000

 

 

 

39,848

 

 

 

 

 

 

39,848

 

 

 

 

Derivative liability – interest rate swaps on loans

 

 

1,192

 

 

 

1,192

 

 

 

 

 

 

1,192

 

 

 

 

Accrued interest payable

 

 

1,103

 

 

 

1,103

 

 

 

 

 

 

1,103

 

 

 

 

 

The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. There were no changes in methodologies or transfers between levels at September 30, 2019 from December 31, 2018.

Note 6. Earnings Per Common Share

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Bank. There were no such potentially dilutive securities outstanding in 2019 or 2018. On April 30, 2018, the Company issued a 5% stock dividend to stockholders on record as of April 9, 2018.

The weighted average number of shares used in the calculation of basic and diluted earnings per share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance requires that outstanding un-vested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common stockholders.

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

2019

 

 

2018

 

Net income

 

$

3,709

 

 

$

2,352

 

$

10,387

 

 

$

5,541

 

Weighted average number of shares issued,

   basic and diluted (1)

 

 

8,251,672

 

 

 

6,788,868

 

 

8,248,284

 

 

 

6,131,987

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income per share

 

$

0.45

 

 

$

0.35

 

$

1.26

 

 

$

0.90

 

 

(1)

All share and per share amounts for 2018 reflect the effect of the 5% stock dividend on April 30, 2018.

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Note 7. Accumulated Other Comprehensive Income(Loss)

The following table presents the cumulative balances of the components of accumulated other comprehensive income(loss) net of deferred taxes, as of September 30, 2019 and December 31, 2018:

 

 

 

2019

 

 

2018

 

Unrealized gain(loss) on securities

 

$

622

 

 

$

(358

)

Unrealized loss on securities transferred to HTM

 

 

(87

)

 

 

(109

)

Tax effect

 

 

(110

)

 

 

100

 

Total accumulated other comprehensive gain(loss)

 

$

425

 

 

$

(367

)

 

Note 8. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transition method provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10 registration document, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $2.7 million at the date of adoption, which is primarily related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

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

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2019 was $191,000. The Company adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Company measured lease expense in accordance with FASB Accounting Standards Codification Topic 840. During nine months ended September 30, 2018, the Company recognized lease expense of $240,000

The table below excludes payments of $3.8 million related to one lease agreement that has been executed where the Company has not obtained control of the real estate property under lease as of September 30, 2019 and has therefore not recognized a lease liability or right-of-use asset.

 

 

 

As of September 30,

 

(Dollars in thousands)

 

2019

 

Lease liabilities

 

$

2,542

 

Right-of-use assets

 

$

2,518

 

Weighted-average remaining lease term – operating leases

   (in months).

 

 

128.2

 

Weighted-average discount rate – operating leases

 

 

3.60

%

 

 

 

 

 

 

 

For the nine months

ended September 30,

 

(Dollars in thousands)

 

2019

 

Lease Cost

 

 

 

 

Operating lease cost

 

$

240

 

Total lease costs

 

$

240

 

Cash paid for amounts included in measurement of lease

   liabilities

 

$

191

 

 

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The Company is the lessor for three operating leases. One lease is extended on a month-to-month basis while two of these leases have arrangements for over twelve months with an option to extend the lease terms. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. Total rent income on these operating leases is approximately $6,000 per month.

As of September 30, 2019, all of the Company’s lease obligations are classified as operating leases. The Company does not have any finance lease obligations.

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of September 30, 2019 is as follows:

 

(Dollars in thousands)

 

 

 

 

2019

 

$

98

 

2020

 

 

294

 

2021

 

 

299

 

2022

 

 

307

 

2023

 

 

315

 

Thereafter

 

 

1,830

 

Total undiscounted cash flows

 

$

3,143

 

Discount

 

 

(601

)

Lease liabilities

 

$

2,542

 

 

Minimum annual rental commitments under the lease obligations are as follows as of December 31, 2018:

 

(Dollars in thousands)

 

 

 

 

2019

 

$

202

 

2020

 

 

199

 

2021

 

 

184

 

2022

 

 

100

 

Thereafter

 

 

572

 

 

 

$

1,257

 

 

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Table of Contents

 

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

The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Registration Statement on Form 10, as amended, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2018, previously filed with the Securities and Exchange Commission (“SEC”) on February 15, 2019, and amended on March 22, 2019. Results for the three months ended and nine months ended September 30, 2019 are not necessarily indicative of results for the year ending December 31, 2019 or any future period.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:

 

general economic conditions, either nationally or in our market area, that are worse than expected;

 

competition among depository and other financial institutions, particularly intensified competition for deposits;

 

inflation and an interest rate environment that may 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 structure and in regulatory fees and capital requirements;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

our ability to successfully integrate acquired entities;

 

changes in consumer spending, borrowing and savings habits;

 

changes in accounting policies and practices;

 

changes in our organization, compensation and benefit plans;

 

our ability to attract and retain key employees;

 

changes in our financial condition or results of operations that reduce capital;

 

changes in the financial condition or future prospects of issuers of securities that we own;

 

the concentration of our business in the Northern Virginia as well as the greater Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on this market;

 

adequacy of our allowance for loan losses;

 

deterioration of our asset quality;

 

future performance of our loan portfolio with respect to recently originated loans;

 

additional risks related to new lines of business, products, product enhancements or services;

 

results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take other supervisory action;

 

the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;

 

liquidity, interest rate and operational risks associated with our business; and

 

implications of our status as a smaller reporting company and as an emerging growth company

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

 

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Overview

The Company is a community-based commercial bank holding company. The Bank is focused on serving the borrowing, cash management and depository needs of small to medium-sized businesses, professional practices, consumers and retail customers. We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a locally-focused bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we distinguish ourselves from larger, regional banks operating in our market area and are able to compete effectively with other community banks.

We believe we have built a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.

We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to the most up-to-date banking technology. These unique systems and our highly skilled staff have allowed us to compete aggressively with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from the competition. We strive to be the leading community bank in our market.

We offer a full range of banking services to individuals, small to medium-sized businesses and professionals through traditional and electronic delivery. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that provides Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits up to $140 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control, and allow us to offer new and better products and services.

Our products and services include: free business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. Free internet account access is available for all personal and business accounts, free internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.

Both the Company and the Bank are incorporated in and chartered by the Commonwealth of Virginia and members of the Federal Reserve System. The Bank’s deposits are insured by the FDIC. The Bank opened for business on May 26, 2004 and is headquartered in Fairfax, Virginia. We currently operate six Bank branches in Herndon, Fairfax, Fairfax City, McLean, Clarendon, and Leesburg, Virginia. A seventh branch located at 1130 Connecticut Avenue, Washington D.C. is schedule to open in December 2019.

The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is www.mstreetbank.com . The information contained on our website shall not be considered part of this Memorandum and the Investor Presentation, and the reference to our website does not constitute incorporation by reference of the information contained on the website.

Critical Accounting Policies

The accounting and financial reporting policies of the Company 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 certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.

Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (IBOR) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (ARRs) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.

To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, the Company has established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or

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unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs.

 

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2019 have remained unchanged from the disclosures presented in our Annual Report on Form 10 Registration, for the year ended December 31, 2018, other than the items discussed in our Recently Adopted Accounting Pronouncements.

Comparison of Statements of Income for the Three Months Ended September 30, 2019 and 2018

General

Net income increased $1.3 million to $3.7 million for the three months ended September 30, 2019 from $2.4 million for the three months ended September 30, 2018. The increase in net income for the three months ended September 30, 2019 was primarily due to an increase in interest income from the Bank’s loan portfolio, an increase in non-interest income of $750,000, of which $407,000 was provided by loan swap fees and $303,000 provided by gains realized on the sale of the guaranteed portion of Small Business Administration (“SBA”) loans, and a decrease of $415,000 in provision for loan losses compared to the same period in 2018.

Interest Income

Total interest income increased $3.3 million, or 27.7%, to $15.1 million for the three months ended September 30, 2019, from $11.8 million for the three months ended September 30, 2018. The increase was primarily the result of an increase in interest and fees on loans of $3.1 million, an increase in interest on investment securities of $156,000 but was offset by a decrease in interest on federal funds sold and interest-earning deposits of $11,000. Total average interest-earning assets increased $155.3 million, to $1.2 billion for the three months ended September 30, 2019 from $994.7 million for the same period in 2018 primarily as a result of an increase in the average balance of loans of $154.2 million, a $16.0 million increase in the average balance of investment securities and offset by a decrease in the average balance of federal funds sold and interest-earning deposits with banks of $15.0 million. The average yield on our interest-earning assets increased 49 basis points to 5.25% for the three months ended September 30, 2019 as compared to 4.76% for the three months ended September 30, 2018 primarily as a result of a higher average yield on the loan portfolio.

Interest and fees on loans increased $3.1 million, to $14.2 million for the three months ended September 30, 2019 from $11.1 million for the same period in 2018. This increase was primarily due to an increase in average loans outstanding of $154.2 million, which increased to $996.8 million as of September 30, 2019 from $842.6 million as of September 30, 2018. In addition to the growth in the loan portfolio the Federal Reserve raised the federal interest rate by 25 basis points four times throughout 2018, which increased yields on the Bank’s asset sensitive balance sheet for the first half of 2019. This increase on yield was mitigated by two rate decreases of 25 basis points in the third quarter of 2019. The average yield on loans increased 45 basis points, or 8.6% for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.

Interest income on federal funds sold and interest-earning deposits decreased by $11,000 to $412,000 for the three months ended September 30, 2019, from $423,000 for the three months ended September 30, 2018. The decrease was primarily due to a decrease in the average balance on these deposits despite an increase of average yield on these deposits. The average yield increased 27 basis points, to 2.01% for the three months ended September 30, 2019 from 1.74% for the three months ended September 30, 2018. The average balance of interest-earning deposits and federal funds sold decreased $15.0 million to $82.1 million for the three months ended September 30, 2019 from $97.0 million for the three months ended September 30, 2018.

 

Interest on investment securities increased by $156,000 to $497,000 for the three months ended September 30, 2019 from $341,000 for the three months ended September 30, 2018, respectively. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $93,000 or 47.0% to $291,000 for the three months ended September 30, 2019, from $198,000 for the three months ended September 30, 2018. Mortgage backed securities increased by $62,000 or 229.6%, to $89,000 for the three months ended September 30, 2019, from $27,000 for the three months ended September 30, 2018. The average yield on total securities increased 32 basis points, to 2.79% for the three months ended September 30, 2019, from 2.47% for the same period in 2018, as a decrease in market rates resulted in stagnant yielding investments, investment income increased due to an increase in average balances for the comparison period. The average balance of investment securities increased by $16.0 million, to $71.2 million for the three months ended September 30, 2019, from $55.2 million for the three months ended September 30, 2018

Interest Expense

Total interest expense increased $1.2 million, to $5.1 million for the three months ended September 30, 2019 from $3.9 million for the three months ended September 30, 2018, primarily due to a $1.2 million increase in interest expense on time deposits.

Interest expense on deposits increased $1.4 million, to $4.8 million for the three months ended September 30, 2019 from $3.4 million for the three months ended September 30, 2018 primarily as a result of an increase in average interest bearing deposits of $122.2 million to

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$826.7 million during the three months ended September 30, 2019 as compared to $704.6 million for the three months ended September 30, 2018. The increase in the average balance of interest-bearing deposits was primarily a result of a $109.4 million increase in the average balance of our time deposit accounts and a $11.1 million increase in the average balance of our savings and NOW deposits. The increase in the average balance of our time deposits was primarily a result of retail growth and brokered deposits obtained through a deposit placement network on a reciprocal basis, such that amounts are under the standard FDIC insurance maximum of $250,000 making the deposits eligible for FDIC insurance. The average cost of deposits was 232 basis points for the three months ended September 30, 2019, compared to 194 basis points for the three months ended September 30, 2018. The average rate paid on money market deposits increased 30 basis points to 1.83% for the three months ended September 30, 2019 from 1.53% for the three months ended September 30, 2018. The increase in the average balance of our certificates of deposits of $109.4 million, from $478.2 million for the three months ended September 30, 2018 to $587.5 million for the three months ended September 30, 2019 was primarily the result of the Company’s retail growth strategies. The average cost of certificates of deposit increased by 42 basis points to 2.66% for the three months ended September 30, 2019 as compared to 2.24% for the three months ended September 30, 2018. The increase in the average cost of certificates of deposit for the three months ended September 30, 2019 was the result of increases in average deposits and particularly in higher interest brokered deposits as compared to the three months ended September 30, 2018.

Interest expense on advances from the Federal Home Loan Bank decreased $123,000 to $76,000 for the three months ended September 30, 2019, from $199,000 for the three months ended September 30, 2018 as a result of an decrease in the average balance on the Federal Home Loan Bank advances which decreased to $11.5 million for the three months ended September 30, 2019 from $34.4 million for the three months ended September 30, 2018. Offsetting this decrease was a increase in the average rate of the Federal Home Loan Bank advances which increased 32 basis points for the three months ended September 30, 2019 compared to the same period in the prior year. The average balance of the Federal Home Loan Bank advances decreased $22.9 million for the three months ended September 30, 2019, primarily due to the repayment of advances.

 

Net Interest Income

Net interest income increased approximately $2.0 million or 25.5%, to $10.0 million for the three months ended September 30, 2019 from $8.0 million for the three months ended September 30, 2018 as a result of our net interest-earning assets increasing $56.0 million to $297.0 million for the three months ended September 30, 2019 from $241.0 million for the three months ended September 30, 2018. Our interest rate spread increased by 15 basis points to 2.86% for the three months ended September 30, 2019 from 2.71% for the three months ended September 30, 2018. Our net interest margin increased by 28 basis points from 3.20% for the three months ended September 30, 2018 to 3.48% for the three months ended September 30, 2019.

 

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

 

 

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For the Three Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

Income/

Expense

 

 

Yield/

Cost (5)

 

 

Average

Balance

 

 

Interest

Income/

Expense

 

 

Yield/

Cost (5)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$

996,777

 

 

$

14,192

 

 

 

5.70

%

 

$

842,558

 

 

$

11,061

 

 

 

5.25

%

Investment securities

 

 

71,182

 

 

 

497

 

 

 

2.79

%

 

 

55,152

 

 

 

341

 

 

 

2.47

%

Federal funds and interest-bearing

   deposits

 

 

82,056

 

 

 

412

 

 

 

2.01

%

 

 

97,021

 

 

 

423

 

 

 

1.74

%

Total interest-earning assets

 

 

1,150,015

 

 

$

15,101

 

 

 

5.25

%

 

 

994,731

 

 

$

11,825

 

 

 

4.76

%

Non-interest-earning assets

 

 

43,524

 

 

 

 

 

 

 

 

 

 

 

37,623

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,193,539

 

 

 

 

 

 

 

 

 

 

$

1,032,354

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

58,510

 

 

$

275

 

 

 

1.88

%

 

$

61,440

 

 

$

245

 

 

 

1.60

%

Money market deposits

 

 

117,717

 

 

 

539

 

 

 

1.83

%

 

 

113,054

 

 

 

432

 

 

 

1.53

%

Savings and NOW deposits

 

 

62,975

 

 

 

71

 

 

 

0.45

%

 

 

51,893

 

 

 

65

 

 

 

0.50

%

Time deposits

 

 

587,537

 

 

 

3,900

 

 

 

2.66

%

 

 

478,164

 

 

 

2,677

 

 

 

2.24

%

Total interest-bearing deposits

 

 

826,739

 

 

 

4,785

 

 

 

2.32

%

 

 

704,551

 

 

 

3,419

 

 

 

1.94

%

Federal funds purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

11,522

 

 

 

76

 

 

 

2.64

%

 

 

34,376

 

 

 

199

 

 

 

2.32

%

Subordinated debt

 

 

14,795

 

 

 

244

 

 

 

6.60

%

 

 

14,766

 

 

 

243

 

 

 

6.58

%

Total interest-bearing liabilities

 

 

853,056

 

 

$

5,105

 

 

 

2.39

%

 

 

753,693

 

 

$

3,861

 

 

 

2.05

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and other liabilities

 

 

209,125

 

 

 

 

 

 

 

 

 

 

 

186,559

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,062,181

 

 

 

 

 

 

 

 

 

 

 

940,252

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

131,358

 

 

 

 

 

 

 

 

 

 

 

92,102

 

 

 

 

 

 

 

 

 

Total liabilities and Stockholders’

   equity

 

$

1,193,539

 

 

 

 

 

 

 

 

 

 

$

1,032,354

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

9,996

 

 

 

 

 

 

 

 

 

 

$

7,964

 

 

 

 

 

Interest rate spread (2)

 

 

 

 

 

 

 

 

 

 

2.86

%

 

 

 

 

 

 

 

 

 

 

2.71

%

Net interest-earning assets (3)

 

$

296,959

 

 

 

 

 

 

 

 

 

 

$

241,038

 

 

 

 

 

 

 

 

 

Net interest margin (4)

 

 

 

 

 

 

 

 

 

 

3.48

%

 

 

 

 

 

 

 

 

 

 

3.20

%

Average interest-earning assets to

   average interest-bearing liabilities

 

 

134.81

%

 

 

 

 

 

 

 

 

 

 

131.98

%

 

 

 

 

 

 

 

 

 

(1)

Includes loans classified as non-accrual

(2)

Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)

Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)

Net interest margin represents net interest income divided by total average interest-earning assets.

(5)

Annualized.

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns.

 

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For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

 

For the Three Months Ended

 

 

 

September 30, 2019 and 2018

 

 

 

Increase (Decrease) Due to

 

 

Total

Increase

 

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

 

(In thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

2,132

 

 

$

999

 

 

$

3,131

 

Investment securities

 

 

108

 

 

 

48

 

 

 

156

 

Federal funds and interest-bearing deposits

 

 

(266

)

 

 

255

 

 

 

(11

)

Total interest-earning assets

 

 

1,974

 

 

 

1,302

 

 

 

3,276

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

(67

)

 

 

97

 

 

 

30

 

Money market deposit accounts

 

 

19

 

 

 

88

 

 

 

107

 

Savings and NOW accounts

 

 

39

 

 

 

(33

)

 

 

6

 

Time deposits

 

 

672

 

 

 

551

 

 

 

1,223

 

Total deposits

 

 

663

 

 

 

703

 

 

 

1,366

 

Federal Home Loan Bank advances

 

 

(284

)

 

 

161

 

 

 

(123

)

Subordinated debt

 

 

 

 

 

1

 

 

 

 

Total interest-bearing liabilities

 

 

379

 

 

 

865

 

 

 

1,244

 

Change in net interest income

 

$

1,595

 

 

$

437

 

 

 

2,032

 

 

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 estimated 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 non-performing 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 as more information becomes available. The allowance for loan losses is assessed on a monthly basis and provisions are made for loan losses as required in order to maintain the allowance.

Provision for loan losses decreased by $415,000 to $185,000 for the three months ended September 30, 2019 from $600,000 for the three months ended September 30, 2018 primarily as a result of reduction in loan originations which totaled approximately $81.7 million for the three months ended September 30, 2018 compared to loan originations of $46.7 million for the three months ended September 30, 2019. Non-performing loans decreased $1.8 million, or 94% from $1.9 million at September 30, 2018 to $115,000 as of September 30, 2019, as a result of the Company foreclosing on a non-performing loan. The foreclosed loan had a specific reserve of $733,000 that was charged to the allowance for loans losses upon foreclosure. During the three months ended September 30, 2019, substandard loans decreased $1.9 million for a balance of $3.3 million; primarily due to a $1.7 million relationship paying off during the quarter. Special mention loans increased $5.2 million as of September 30, 2019 primarily due to one relationship. During the three months ended September 30, 2019, one loan with an outstanding balance of $102,000, was downgraded to doubtful and evaluated for impairment. During the three months ended September 30, 2019, there were $28,000 in charge-offs and recoveries of $28,000 were received. A specific reserve of $102,000 has been recorded pending additional information that could potentially strengthen the Company’s collateral position. During the three months ended September 30, 2018, $4,000 of charge-offs were recorded, and no recoveries were received.

Non-Interest Income

Non-interest income increased $750,000, or 109.3%, to $1.4 million for the three months ended September 30, 2019 from $686,000 for the three months ended September 30, 2018. The increase in non-interest income was primarily due to an increase in loan interest rate swaps of $407,000 and $303,000 in gains realized on sale of the guaranteed portion of SBA loans for the three months ended September 30, 2019. The Bank has focused on expanding these areas and expects similar opportunities throughout 2019. In addition, deposit account service fees increased $72,000 to $392,000 for the three months ended September 30, 2019 from $320,000 for the three months ended September 30, 2018 primarily as a result of an increased customer deposit portfolio. The increase in non-interest income was partially offset by a decrease of $33,000 in other fee income for the three months ended September 30, 2019 compared to the three months ended September 30, 2018

 

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Non-Interest Expense

Non-interest expense increased $1.3 million, or 25.8%, to $6.5 million for the three months ended September 30, 2019 from $5.2 million for the three months ended September 30, 2018 primarily as a result of increases in salary and employee benefits of $872,000 and other operating expenses of $331,000. Salaries and employee benefits expense increased by $872,000 to $3.9 million for the three months ended September 30, 2019 from $3.0 million for the three months ended September 30, 2018 primarily as a result of adding thirteen employees and the increases in additional health insurance premium expense for these additional employees. Other operating expenses increased $331,000, or 38.0%, to $1.2 million for the three months ended September 30, 2019 from $871,000 for the three months ended September 30, 2018 due to increases in professional and consulting fees and fees related to investments in technology infrastructure. Franchise tax increased approximately $136,000 to $307,000 for the three months ended September 30, 2019 from $171,000 for the three months ended September 30, 2018 as a result of the increase in the Company’s capital as of September 30, 2019 compared to the balance sheet as of September 30, 2018.

Income Tax Expense

Income tax expense increased $510,000, or 94.6%, to $1.0 million for the three months ended September 30, 2019 from $539,000 for the three months ended September 30, 2018. The increase in federal income tax expense for the three months ended September 30, 2019 compared to the same period a year ago was driven by the increase in income before income taxes of $1.9 million, or 64.6%, to $4.8 million as of September 30, 2019 compared to $2.9 million for the same period in the prior year. As a result of recent tax regulation, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $75,000 for the three months ended September 30, 2019. For the three months ended September 30, 2019, the Bank had an effective federal tax rate of 20.5%, compared to effective federal tax rate of 18.6% for the three months ended September 30, 2018.

Comparison of Statements of Income for the Nine Months Ended September 30, 2019 and 2018

General

Net income increased $4.8 million, to $10.4 million for the nine months ended September 30, 2019 from $5.5 million for the nine months ended September 30, 2018. The increase in net income for the nine months ended September 30, 2019 was primarily due to an increase in interest income from the Bank’s loan portfolio, an increase in non-interest income of $1.9 million, of which $878,000 was provided by loan swap fees, and $566,000 provided by gains realized on the sale of the guaranteed portion of Small Business Administration (“SBA”) loans, and a decrease of $1.4 million in provision for loan losses compared to the same period in 2018.

Interest Income

Total interest income increased $13.0 million, or 42.4%, to $43.8 million for the nine months ended September 30, 2019 from $30.8 million for the nine months ended September 30, 2018. The increase was primarily the result of an increase in interest and fees on loans of $12.0 million, an increase in interest on investment securities of $579,000 and an increase on interest on federal funds sold and interest-earning deposits of $494,000. Total average interest-earning assets increased $244.6 million, to $1.1 billion for the nine months ended September 30, 2019, from $869.2 million for the same period in 2018 primarily as a result of an increase in the average balance of loans of $208.7 million, a $15.8 million increase in the average balance of investment securities and an increase in the average balance of federal funds sold and interest-earning deposits with banks of $20.1 million. The average yield on our interest-earning assets increased 52 basis points to 5.24% for the nine months ended September 30, 2019 as compared to 4.72% for the nine months ended September 30, 2018 primarily as a result of a higher average yield on the loan portfolio.

Interest and fees on loans increased $12.0 million to $41.0 million for the nine months ended September 30, 2019 from $29.0 million for the same period in 2018. This increase was primarily due to an increase in loans outstanding of $208.7 million, which increased to $970.7 million as of September 30, 2019 from $762.0 million as of September 30, 2018. In addition to the growth in the loan portfolio the Federal Reserve raised the federal interest rate by 25 basis points four times throughout 2018, which increased yields on the Bank’s asset sensitive balance sheet. While the Federal Reserve did decrease the federal interest rate by 25 basis points twice in the third quarter of 2019, the Bank has not seen a significant impact at this time. The average yield on loans increased 55 basis points, or 10.8% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.

Interest income on federal funds sold and interest-earning deposits increased by $494,000 to $1.1 million for the nine months ended September 30, 2019, from $638,000 for the nine months ended September 30, 2018. The increase was primarily due to an increase average yield and average balance on these deposits. The average yield increased 46 basis points, to 2.10% for the nine months ended September 30, 2019 from 1.64% for the nine months ended September 30, 2018. The average balance of interest-earning deposits and federal funds sold increased $20.1 million to $72.0 million for the nine months ended September 30, 2019 from $51.9 million for the nine months ended September 30, 2018.

 

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Interest on investment securities increased by $579,000 to $1.7 million for the nine months ended September 30, 2019 from $1.1 million for the nine months ended September 30, 2018. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $353,000, or 52.9%, to $1.0 million for the nine months ended September 30, 2019, from $667,000 for the nine months ended September 30, 2018. Mortgage backed securities increased by $183,000, or 222.1%, to $266,000 for the nine months ended September 30, 2019, from $83,000 for the nine months ended September 30, 2018. The average yield on securities increased 50 basis points to 3.13% for the nine months ended September 30, 2019 from 2.63% for the same period in 2018, as increased market rates resulted in higher yielding investments for a majority of the first nine months. The average balance of investment securities increased by $15.8 million to $71.1 million for the nine months ended September 30, 2019, from $55.2 million for the nine months ended September 30, 2018.

Interest Expense

Total interest expense increased $6.1 million to $14.6 million for the nine months ended September 30, 2019 from $8.5 million for the nine months ended September 30, 2018, primarily due to a $5.2 million increase in interest expense on time deposits and a $780,000 increase in interest expense money market deposits.

Interest expense on deposits increased $6.2 million, to $13.4 million for the nine months ended September 30, 2019 from $7.2 million for the nine months ended September 30, 2018 primarily as a result of an increase in average interest bearing deposits of $187.1 million to $782.1 million during the nine months ended September 30, 2019 as compared to $595.1 million for the nine months ended September 30, 2018. The increase in the average balance of interest-bearing deposits was primarily as a result of a $157.7 million increase in the average balance of our time deposit accounts and a $23.8 million increase in the average balance of our money market deposits. The increase in the average balance of our time deposits was primarily a result of retail growth and brokered deposits obtained through a deposit placement network on a reciprocal basis, such that amounts are under the standard FDIC insurance maximum of $250,000 making the deposits eligible for FDIC insurance. The average cost of deposits was 228 basis points for the nine months ended September 30, 2019 compared to 161 basis points for the nine months ended September 30, 2018. The average rate paid on money market deposits increased 55 basis points to 1.97% for the nine months ended September 30, 2019 from 1.42% for the nine months ended September 30, 2018. The increase in the average balance of our certificates of deposits of $157.7 million from $377.4 million for the nine months ended September 30, 2018 to $535.1 million for the nine months ended September 30, 2019 was primarily the result of the Company’s retail growth strategies. The average cost of certificates of deposit increased by 74 basis points to 2.61% for the nine months ended September 30, 2019 as compared to 1.87% for the nine months ended September 30, 2018. The increase in the average cost of certificates of deposit for the nine months ended September 30, 2019 was the result of increases in short term market interest rates for a majority of the period and additional higher interest brokered deposits as compared to the nine months ended September 30, 2018.

Interest expense on advances from the Federal Home Loan Bank decreased $120,000 to $457,000 for the nine months ended September 30, 2019 from $577,000 for the nine months ended September 30, 2018 as a result of a decrease in the average balance on the Federal Home Loan Bank advances of $18.7 million, to $23.1 million for the nine months ended September 30, 2019 from $41.8 million for the nine months ended September 30, 2018. Offsetting this decrease was a increase in the average rate of the Federal Home Loan Bank advances. The average rate of the Federal Home Loan Bank advances increased 80 basis points to 2.64% for the nine months ended September 30, 2019 from 1.84% for the nine months ended September 30, 2018.

Net Interest Income

Net interest income increased approximately $7.0 million, or 31.4%, to $29.2 million for the nine months ended September 30, 2019 from $22.2 million for the nine months ended September 30, 2018 as a result of our net interest-earning assets increasing $76.8 million to $293.7 million for the nine months ended September 30, 2019 from $216.9 million for the nine months ended September 30, 2018. Our interest rate spread decreased by 11 basis points to 2.87% for the nine months ended September 30, 2019 from 2.98% for the nine months ended September 30, 2018. Our net interest margin increased by 9 basis points from 3.41% for the nine months ended September 30, 2018 to 3.50% for the nine months ended September 30, 2019.

 

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

 

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

Income/

Expense

 

 

Yield/

Cost (5)

 

 

Average

Balance

 

 

Interest

Income/

Expense

 

 

Yield/

Cost (5)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$

970,708

 

 

$

40,985

 

 

 

5.63

%

 

$

762,031

 

 

$

29,026

 

 

 

5.08

%

Investment securities

 

 

71,069

 

 

 

1,668

 

 

 

3.13

%

 

 

55,235

 

 

 

1,089

 

 

 

2.63

%

Federal funds and interest-bearing

   deposits

 

 

72,011

 

 

 

1,132

 

 

 

2.10

%

 

 

51,884

 

 

 

638

 

 

 

1.64

%

Total interest-earning assets

 

 

1,113,788

 

 

$

43,785

 

 

 

5.24

%

 

 

869,150

 

 

$

30,753

 

 

 

4.72

%

Non-interest-earning assets

 

 

41,883

 

 

 

 

 

 

 

 

 

 

 

36,885

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,155,671

 

 

 

 

 

 

 

 

 

 

$

906,035

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

57,517

 

 

$

803

 

 

 

1.86

%

 

$

63,395

 

 

$

629

 

 

 

1.32

%

Money market deposits

 

 

128,122

 

 

 

1,889

 

 

 

1.97

%

 

 

104,365

 

 

 

1,109

 

 

 

1.42

%

Savings and NOW deposits

 

 

61,418

 

 

 

218

 

 

 

0.47

%

 

 

49,923

 

 

 

174

 

 

 

0.46

%

Time deposits

 

 

535,083

 

 

 

10,466

 

 

 

2.61

%

 

 

377,376

 

 

 

5,283

 

 

 

1.87

%

Total interest-bearing deposits

 

 

782,140

 

 

 

13,376

 

 

 

2.28

%

 

 

595,059

 

 

 

7,195

 

 

 

1.61

%

Federal funds purchased

 

 

46

 

 

 

 

 

 

0.00

%

 

 

609

 

 

 

12

 

 

 

2.63

%

Federal Home Loan Bank advances

 

 

23,114

 

 

 

457

 

 

 

2.64

%

 

 

41,810

 

 

 

577

 

 

 

1.84

%

Subordinated debt

 

 

14,788

 

 

 

723

 

 

 

6.52

%

 

 

14,759

 

 

 

722

 

 

 

6.52

%

Total interest-bearing liabilities

 

 

820,088

 

 

$

14,556

 

 

 

2.37

%

 

 

652,237

 

 

$

8,506

 

 

 

1.74

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and other liabilities

 

 

208,328

 

 

 

 

 

 

 

 

 

 

 

175,916

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,028,416

 

 

 

 

 

 

 

 

 

 

 

828,153

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

127,255

 

 

 

 

 

 

 

 

 

 

 

77,882

 

 

 

 

 

 

 

 

 

Total liabilities and Stockholders’

   equity

 

$

1,155,671

 

 

 

 

 

 

 

 

 

 

$

906,035

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

29,229

 

 

 

 

 

 

 

 

 

 

$

22,247

 

 

 

 

 

Interest rate spread (2)

 

 

 

 

 

 

 

 

 

 

2.87

%

 

 

 

 

 

 

 

 

 

 

2.98

%

Net interest-earning assets (3)

 

$

293,700

 

 

 

 

 

 

 

 

 

 

$

216,913

 

 

 

 

 

 

 

 

 

Net interest margin (4)

 

 

 

 

 

 

 

 

 

 

3.50

%

 

 

 

 

 

 

 

 

 

 

3.41

%

Average interest-earning assets to

   average interest-bearing liabilities

 

 

135.81

%

 

 

 

 

 

 

 

 

 

 

133.26

%

 

 

 

 

 

 

 

 

 

 

(1)

Includes loans classified as non-accrual

(2)

Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)

Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)

Net interest margin represents net interest income divided by total average interest-earning assets.

(5)

Annualized.

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns.

 

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For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2019 and 2018

 

 

 

Increase (Decrease) Due to

 

 

Total Increase

 

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

 

(In thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

8,571

 

 

$

3,388

 

 

$

11,959

 

Investment securities

 

 

348

 

 

 

231

 

 

 

579

 

Federal funds and interest-bearing deposits

 

 

287

 

 

 

207

 

 

 

494

 

Total interest-earning assets

 

 

9,206

 

 

 

3,826

 

 

 

13,032

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

(95

)

 

 

269

 

 

 

174

 

Money market deposit accounts

 

 

289

 

 

 

491

 

 

 

780

 

Savings and NOW accounts

 

 

40

 

 

 

4

 

 

 

44

 

Time deposits

 

 

2,662

 

 

 

2,521

 

 

 

5,183

 

Total deposits

 

 

2,896

 

 

 

3,285

 

 

 

6,181

 

Federal funds purchased

 

 

(12

)

 

 

 

 

 

(12

)

Federal Home Loan Bank advances

 

 

(400

)

 

 

280

 

 

 

(120

)

Subordinated debt

 

 

1

 

 

 

 

 

 

1

 

Total interest-bearing liabilities

 

 

2,485

 

 

 

3,565

 

 

 

6,050

 

Change in net interest income

 

$

6,721

 

 

$

261

 

 

$

6,982

 

 

Provision for Loan Losses

Provision for loan losses decreased by $1.4 million, to $1.3 million for the nine months ended September 30, 2019 from $2.6 million for the nine months ended September 30, 2018 primarily as a result of reduction in loan originations which totaled approximately $395.3 million for the nine months ended September 30, 2018 compared to loan originations of $169.7 million for the nine months ended September 30, 2019. Non-performing loans decreased $1.8 million, or 94% from $1.9 million at September 30, 2018 to $115,000 as of September 30, 2019, as a result of the Company foreclosing on a non-performing loan. The foreclosed loan had a specific reserve of $733,000 that was charged to the allowance for loans losses upon foreclosure. During the nine months ended September 30, 2019, substandard loans increased to $3.3 million; however, the increase was primarily isolated to one relationship. Management believes it is adequately secured on this relationship and the borrowing relationship does not meet the definition of impaired at this time. During the nine months ended September 30, 2019, special mention loans increased $3.0 million due to one relationship whose collateral is backed by a government contract. This relationship was graded as special mention out of caution but management believes the collateral is well secured. Given that the increases in classified loans is primarily with loans with government based collateral, it is reasonable that there was not a significant impact on the allowance for loan losses. During the nine months ended September 30, 2019, there were $783,000 in total charge-offs and recoveries of $62,000 were received. During the nine months ended September 30, 2018, total charge-offs of $14,000 were recorded and recoveries received totaled $6,000.

Non-Interest Income

Non-interest income increased $1.9 million, or 108.4%, to $3.7 million for the nine months ended September 30, 2019 from $1.8 million for the nine months ended September 30, 2018. The increase in non-interest income was primarily due to an increase in loan fees from loan interest rate swaps of $878,000 and $566,000 in gains realized on sale of the guaranteed portion of SBA loans for the nine months ended September 30, 2019. The Bank has focused on expanding these areas and expects similar opportunities throughout 2019. In addition, deposit account service fees increased $416,000 to $1.2 million for the nine months ended September 30, 2019 from $792,000 for the nine months ended September 30, 2018 primarily as a result of an increased customer deposit portfolio. The increase in non-interest income was partially offset by a decrease of $3,000 in bank owned life insurance income for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

 

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Non-Interest Expense

Non-interest expense increased $4.1 million or 27.9% to $18.7 million for the nine months ended September 30, 2019 from $14.6 million for the nine months ended September 30, 2018 primarily as a result of increases in salary and employee benefits of $3.0 million and other operating expenses of $794,000. Salaries and employee benefits expense increased by $3.0 million to $11.6 million for the nine months ended September 30, 2019 from $8.6 million for the nine months ended September 30, 2018 primarily as a result of adding thirteen employees and the increases in additional health insurance premium expense for these additional employees. Other operating expenses increased $794,000, or 30.4%, to $3.4 million for the nine months ended September 30, 2019 from $2.6 million for the nine months ended September 30, 2018 due to increases in professional and consulting fees and fees related to investments in technology infrastructure. Franchise tax increased approximately $409,000 to $922,000 for the nine months ended September 30, 2019 from $513,000 for the nine months ended September 30, 2018 as a result of the increase in the Company’s capital as of September 30, 2019 compared to the balance sheet as of September 30, 2018.

Income Tax Expense

Income tax expense increased $1.4 million, or 109.3%, to $2.6 million for the nine months ended September 30, 2019 from $1.2 million for the nine months ended September 30, 2018. The increase in federal income tax expense for the nine months ended September 30, 2019 compared to the same period a year ago is driven by the increase in income before income taxes of $6.2 million, or 91.5% to $13.0 million for the nine months ended September 30, 2019 compared to $6.8 million for the same period in the prior year. As a result of recent tax regulation, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $125,000 for the nine months ended September 30, 2019. For the nine months ended September 30, 2019, the Bank had an effective federal tax rate of 19.1%, compared to effective federal tax rate of 18.4% for the nine months ended September 30, 2018.

 

Comparison of Statements of Financial Condition at September 30, 2019 and at December 31, 2018

Total Assets

Total assets increased $133.7 million, or 12.1%, to $1.2 billion at September 30, 2019 from $1.1 billion at December 31, 2018. The increase was primarily the result of increases of $76.5 million in gross loans receivable, $32.2 million in available-for-sale securities, $5 million in bank owned life insurance, $2.5 million in right-of-use leases, $5.4 million in loan interest rate swaps and $8.2 million in other assets.

Investment Securities

Investment securities increased $30.5 million, or 37.1%, from $82.2 million at December 31, 2018 to $112.6 million at September 30, 2019. The increase was primarily in the available for sale portfolio, particularly in the U.S. treasury, municipal, and collateralized mortgage backed portfolios. At September 30, 2019, our held-to-maturity portion of the securities portfolio, at amortized cost, was $24.4 million, and our available-for-sale portion of the securities portfolio, at fair value, was $88.2 million compared to our held-to-maturity portion of the securities portfolio of $26.2 million and our available-for-sale portion of the securities portfolio of $56.0 million at December 31, 2018.

Net Loans

Net loans increased $75.5 million, or 8.2%, to $992.6 million at September 30, 2019 from $917.1 million at December 31, 2018. Residential real estate loans increased $13.2 million, or 8.8%, to $162.8 million at September 30, 2019 from $149.6 million at December 31, 2018. Commercial real estate loans increased by $57.0 million from $377.8 million at December 31, 2018 to $434.7 million at September 30, 2019. Commercial and industrial loans increased by $1.7 million from $114.2 million at December 31, 2018 to $115.9 million at September 30, 2019. Construction loans increased $23.9 million to $207.4 million at September 30, 2019 from $183.6 million at December 31, 2018. Consumer loans decreased by $19.3 million from $102.3 million at December 31, 2018 to $83.0 million at September 30, 2019.

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Table of Contents

 

Allowance for Loan Losses

The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

 

 

For the Nine Months Ended September 30,

 

 

For the Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in thousands)

 

Balance at beginning of year

 

$

8,831

 

 

$

5,705

 

Charge-offs:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

(733

)

 

 

 

Consumer

 

 

(50

)

 

 

(44

)

Total charge-offs

 

 

(783

)

 

 

(44

)

Recoveries:

 

 

 

 

 

 

 

 

Residential real estate

 

 

58

 

 

 

1

 

Commercial real estate

 

 

 

 

 

38

 

Commercial and industrial

 

 

 

 

 

2

 

Consumer

 

 

4

 

 

 

3

 

Total recoveries

 

 

62

 

 

 

44

 

Net charge-offs

 

 

(721

)

 

 

 

Provision for loan losses

 

 

1,260

 

 

 

3,126

 

Balance at end of period

 

$

9,370

 

 

$

8,831

 

Ratios:

 

 

 

 

 

 

 

 

Net charge offs to average loans outstanding (annualized)

 

 

0.1

%

 

 

0.0

%

Allowance for loan losses to non-performing loans at end of

   period

 

 

81.48

 

 

 

4.53

 

Allowance for loan losses to gross loans at end of period

 

 

0.93

%

 

 

0.95

%

 

Deposits

Deposits increased $144.4 million, or 15.7%, to $1.1 billion at September 30, 2019 from $920.1 million at December 31, 2018. Our core deposits increased $69.6 million, or 11.9%, to $655.6 million at September 30, 2019 from $586.0 million at December 31, 2018. Certificates of deposit increased $144.3 million, or 31.5%, to $602.6 million at September 30, 2019 from $458.3 million at December 31, 2018. The increase in certificate of deposits was primarily the result of increased brokered deposits in order to continue funding the loan growth over the quarter.

 

Nonperforming Assets

The following table presents information regarding nonperforming assets at the dates indicated:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Commercial Real Estate

 

$

 

 

$

1,939

 

Commercial & Industrial

 

 

102

 

 

 

 

Total non-accrual loans

 

 

102

 

 

 

1,939

 

Consumer loans accruing past 120 days:

 

 

 

 

 

 

 

 

Credit card

 

 

13

 

 

 

11

 

Total non-performing loans

 

 

115

 

 

 

1,950

 

Other real estate owned

 

 

1,207

 

 

 

 

Total non-performing assets

 

$

1,322

 

 

$

1,950

 

Ratios:

 

 

 

 

 

 

 

 

Total non-performing loans to gross loans receivable

 

 

0.01

%

 

 

0.21

%

Total non-performing loans to total assets

 

 

0.01

%

 

 

0.18

%

Total non-performing assets to total assets

 

 

0.11

%

 

 

0.18

%

 

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Table of Contents

 

Liquidity and Capital Resources

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities; however, the Company also utilizes wholesale deposits as a funding source in addition to customer deposits. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, federal funds purchased, and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had Federal Home Loan Bank advances of $10.0 million outstanding with unused borrowing capacity of $285.9 million as of September 30, 2019. Additionally, at September 30, 2019, we had the ability to borrow $12.0 million from the Community Bankers’ Bank, $7.0 million from Pacific Coast Bankers Bank, $15.0 million from CenterState Bank, and $9.0 million from Zions Bank.

The Board of Directors, Management and the Asset Liability Committee (ALCO) are 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, 2019.

We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2019, cash and cash equivalents totaled $72.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $88.2 million at September 30, 2019.

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $11.9 million and $7.7 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $112.4 million and $228.3 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. During the nine months ended September 30, 2019, the Company realized gains on sale of available-for-sale securities of $5,000. There were no sales of available-for-sale securities in 2018. Net cash provided by financing activities was $114.4 million and $243.4 million for the nine months ended September 30, 2019 and 2018, respectively, which consisted primarily of increases in interest bearing deposits of $138.1 million and $201.8 million offset by net repayments of $30.0 million and $23.8 million from the Federal Home Loan Bank for the nine months ended September 30, 2019 and 2018, respectively.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2019, totaled $338.9 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management. MainStreet 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, 2019, MainStreet Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

Regulatory Capital

Information presented for September 30, 2019 and December 31, 2018, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

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The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2019 is 2.50% and 1.875% for 2018. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2019, the Company and the Bank meets all capital adequacy requirements to which it is subject.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of at least 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework will be available for banks to use in their March 31, 2020, Call Report. The Company is currently evaluating whether to opt into the CBLR framework.

 

The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):

 

 

 

Actual

 

 

Capital Adequacy

Purposes

 

To Be Well Capitalized

Under the Prompt

Corrective Action

Provision

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Amount

 

 

Ratio

As of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

153,940

 

 

 

13.66

%

 

$

90,184

 

 

≥ 8.0%

 

$

112,730

 

 

> 10.0%

Common equity tier 1 capital (to risk-weighted assets)

 

$

144,570

 

 

 

12.82

%

 

$

50,728

 

 

≥ 4.5%

 

$

90,184

 

 

> 8.0%

Tier 1 capital (to risk-weighted assets)

 

$

144,570

 

 

 

12.82

%

 

$

67,638

 

 

≥ 6.0%

 

$

90,184

 

 

> 8.0%

Tier 1 capital (to average assets)

 

$

144,570

 

 

 

12.12

%

 

$

47,694

 

 

≥ 4.0%

 

$

59,617

 

 

> 5.0%

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

142,360

 

 

 

13.75

%

 

$

82,807

 

 

≥ 8.0%

 

$

103,509

 

 

≥ 10.0%

Common equity tier 1 capital (to risk-weighted assets)

 

$

133,529

 

 

 

12.90

%

 

$

46,579

 

 

≥ 4.5%

 

$

82,807

 

 

≥ 8.0%

Tier 1 capital (to risk-weighted assets)

 

$

133,529

 

 

 

12.90

%

 

$

62,105

 

 

≥ 6.0%

 

$

82,807

 

 

≥ 8.0%

Tier 1 capital (to average assets)

 

$

133,529

 

 

 

12.41

%

 

$

43,056

 

 

≥ 4.0%

 

$

53,820

 

 

≥ 5.0%

 

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2019, we had outstanding loan commitments of $265.8 million and outstanding stand-by letters of credit of $672,000. We anticipate that we will have sufficient funds available to meet our current lending commitments.

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies

Item 4 – Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2019. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the third fiscal quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At September 30, 2019, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.

Item 1A – Risk Factors

Not required for smaller reporting companies. Reference is made to “Risk Factors” in our Registration Statement on Form 10, filed with the SEC on February 15, 2019, and amended on March 22, 2019.

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

(a)    Not applicable

(b)    Not applicable

(c)    Not Applicable

Item 3 – Defaults upon Senior Securities

Not Applicable

Item 4 – Mine Safety Disclosures

Not Applicable

Item 5 – Other Information

None

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Item 6 – Exhibits

 

  31.1

 

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

 

 

 

  31.2

 

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

 

 

 

  32.0

 

Section 1350 Certification *

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

*

Filed herewith

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SIGNATURES

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

 

 

 

 

 

MAINSTREET BANCHSHARES, INC

 

 

 

 

(Registrant)

 

 

 

 

 

Date: November 12, 2019

 

By:

 

/s/ Jeff W. Dick

 

 

 

 

Jeff W. Dick

 

 

 

 

Chairman & Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

Date: November 12, 2019

 

By:

 

/s/ Thomas J. Chmelik

 

 

 

 

Thomas J. Chmelik

 

 

 

 

Senior Executive Vice President and

 

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

47