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 June 30, 2017 | ||
or | ||
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from __________ to __________. | ||
Commission File Number: 000-50567 | ||
 | ||
MVB Financial Corp. | ||
(Exact name of registrant as specified in its charter) | ||
West Virginia | 20-0034461 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
301 Virginia Avenue, Fairmont, WV | 26554 | |
(Address of principal executive offices) | (Zip Code) | |
(304) 363-4800 | ||
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ | ||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): | ||||
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |
If a 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 if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ | ||||
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: | ||||
As of July 30, 2017, the Registrant had 10,443,273 shares of common stock outstanding with a par value of $1.00 per share.
TABLE OF CONTENTS | ||
Page | ||
2
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) (Dollars in thousands except per share data)
June 30, 2017 | December 31, 2016 | |||||||
(Unaudited) | (Note 1) | |||||||
ASSETS | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 17,026 | $ | 14,846 | ||||
Interest bearing balances with banks | 779 | 2,494 | ||||||
Total cash and cash equivalents | 17,805 | 17,340 | ||||||
Certificates of deposit with other banks | 14,527 | 14,527 | ||||||
Investment Securities: | ||||||||
Securities available-for-sale | 175,110 | 162,368 | ||||||
Loans held for sale | 107,825 | 90,174 | ||||||
Loans: | 1,102,378 | 1,052,865 | ||||||
Less: Allowance for loan losses | (9,748 | ) | (9,101 | ) | ||||
Net Loans | 1,092,630 | 1,043,764 | ||||||
Premises and equipment | 27,462 | 25,081 | ||||||
Bank owned life insurance | 23,322 | 22,970 | ||||||
Accrued interest receivable and other assets | 29,892 | 24,100 | ||||||
Goodwill | 18,480 | 18,480 | ||||||
TOTAL ASSETS | $ | 1,507,053 | $ | 1,418,804 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 121,355 | $ | 115,692 | ||||
Interest bearing | 978,253 | 991,325 | ||||||
Total deposits | 1,099,608 | 1,107,017 | ||||||
Accrued interest payable and other liabilities | 15,509 | 16,557 | ||||||
Repurchase agreements | 22,194 | 25,160 | ||||||
FHLB and other borrowings | 189,384 | 90,921 | ||||||
Subordinated debt | 33,524 | 33,524 | ||||||
Total liabilities | 1,360,219 | 1,273,179 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, par value $1,000; 20,000 authorized; 783 and 9,283 issued in 2017 and 2016, respectively (See Footnote 7) | 7,834 | 16,334 | ||||||
Common stock, par value $1; 20,000,000 shares authorized; 10,494,350 shares issued and 10,443,273 shares outstanding in 2017; 10,047,621 shares issued and 9,996,544 shares outstanding in 2016 | 10,494 | 10,048 | ||||||
Additional paid-in capital | 98,216 | 93,412 | ||||||
Retained earnings | 34,264 | 31,192 | ||||||
Accumulated other comprehensive loss | (2,890 | ) | (4,277 | ) | ||||
Treasury stock, 51,077 shares, at cost | (1,084 | ) | (1,084 | ) | ||||
Total stockholders’ equity | 146,834 | 145,625 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,507,053 | $ | 1,418,804 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Dollars in thousands except per share data)
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans | $ | 24,420 | $ | 25,018 | $ | 12,538 | $ | 12,587 | ||||||||
Interest on deposits with other banks | 161 | 170 | 82 | 82 | ||||||||||||
Interest on investment securities - taxable | 1,191 | 642 | 645 | 332 | ||||||||||||
Interest on tax exempt loans and securities | 1,110 | 1,132 | 549 | 579 | ||||||||||||
Total interest income | 26,882 | 26,962 | 13,814 | 13,580 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on deposits | 3,869 | 3,837 | 1,963 | 1,949 | ||||||||||||
Interest on repurchase agreements | 36 | 38 | 19 | 17 | ||||||||||||
Interest on FHLB and other borrowings | 668 | 545 | 380 | 319 | ||||||||||||
Interest on subordinated debt | 1,109 | 1,105 | 558 | 553 | ||||||||||||
Total interest expense | 5,682 | 5,525 | 2,920 | 2,838 | ||||||||||||
NET INTEREST INCOME | 21,200 | 21,437 | 10,894 | 10,742 | ||||||||||||
Provision for loan losses | 1,041 | 1,900 | 523 | 1,275 | ||||||||||||
Net interest income after provision for loan losses | 20,159 | 19,537 | 10,371 | 9,467 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges on deposit accounts | 352 | 358 | 165 | 185 | ||||||||||||
Income on bank owned life insurance | 302 | 319 | 155 | 158 | ||||||||||||
Visa debit card and interchange income | 613 | 601 | 318 | 309 | ||||||||||||
Mortgage fee income | 18,586 | 16,182 | 8,952 | 9,397 | ||||||||||||
Gain on sale of portfolio loans | 212 | 600 | 203 | 451 | ||||||||||||
Insurance and investment services income | 248 | 175 | 124 | 122 | ||||||||||||
Gain on sale of securities | 350 | 603 | 167 | 222 | ||||||||||||
(Loss) gain on derivatives | (910 | ) | 1,432 | 1,037 | 1,031 | |||||||||||
Other operating income | 638 | 343 | 446 | 126 | ||||||||||||
Total noninterest income | 20,391 | 20,613 | 11,567 | 12,001 | ||||||||||||
NONINTEREST EXPENSES | ||||||||||||||||
Salary and employee benefits | 21,760 | 22,044 | 11,798 | 11,735 | ||||||||||||
Occupancy expense | 2,041 | 1,839 | 1,047 | 901 | ||||||||||||
Equipment depreciation and maintenance | 1,431 | 1,146 | 742 | 586 | ||||||||||||
Data processing and communications | 2,694 | 2,381 | 1,480 | 1,256 | ||||||||||||
Mortgage processing | 1,637 | 1,654 | 743 | 793 | ||||||||||||
Marketing, contributions and sponsorships | 604 | 647 | 277 | 350 | ||||||||||||
Professional fees | 1,413 | 1,543 | 736 | 838 | ||||||||||||
Printing, postage and supplies | 463 | 417 | 246 | 202 | ||||||||||||
Insurance, tax and assessment expense | 928 | 732 | 467 | 359 | ||||||||||||
Travel, entertainment, dues and subscriptions | 1,059 | 819 | 558 | 451 | ||||||||||||
Other operating expenses | 790 | 434 | 409 | 285 | ||||||||||||
Total noninterest expense | 34,820 | 33,656 | 18,503 | 17,756 | ||||||||||||
Income from continuing operations, before income taxes | 5,730 | 6,494 | 3,435 | 3,712 | ||||||||||||
Income tax expense - continuing operations | 1,896 | 2,134 | 1,175 | 1,254 | ||||||||||||
Net income from continuing operations | 3,834 | 4,360 | 2,260 | 2,458 | ||||||||||||
Loss from discontinued operations, before income taxes | — | 6,346 | — | 6,516 | ||||||||||||
Income tax benefit - discontinued operations | — | 2,411 | — | 2,475 | ||||||||||||
Net loss from discontinued operations | — | 3,935 | — | 4,041 | ||||||||||||
Net income | $ | 3,834 | $ | 8,295 | $ | 2,260 | $ | 6,499 | ||||||||
Preferred dividends | 251 | 500 | 122 | 314 | ||||||||||||
Net income available to common shareholders | $ | 3,583 | $ | 7,795 | $ | 2,138 | $ | 6,185 | ||||||||
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Earnings per share from continuing operations - basic | $ | 0.35 | $ | 0.48 | $ | 0.21 | $ | 0.27 | ||||||||
Earnings per share from discontinued operations - basic | $ | — | $ | 0.49 | $ | — | $ | 0.50 | ||||||||
Earnings per common shareholder - basic | $ | 0.35 | $ | 0.97 | $ | 0.21 | $ | 0.77 | ||||||||
Earnings per share from continuing operations - diluted | $ | 0.35 | $ | 0.45 | $ | 0.20 | $ | 0.25 | ||||||||
Earnings per share from discontinued operations - diluted | $ | — | $ | 0.40 | $ | — | $ | 0.38 | ||||||||
Earnings per common shareholder - diluted | $ | 0.35 | $ | 0.85 | $ | 0.20 | $ | 0.63 | ||||||||
Cash dividends declared | $ | 0.05 | $ | 0.04 | $ | 0.025 | $ | 0.02 | ||||||||
Weighted average shares outstanding - basic | 10,171,198 | 8,070,082 | 10,343,933 | 8,078,000 | ||||||||||||
Weighted average shares outstanding - diluted | 10,172,254 | 9,925,573 | 12,181,433 | 10,433,120 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
5
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net Income | $ | 3,834 | $ | 8,295 | $ | 2,260 | $ | 6,499 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized holding gains on securities available-for-sale | 2,997 | 2,220 | 2,549 | 1,802 | ||||||||||||
Unrealized holding gains during the year related to reclassified held-to maturity securities | — | 1,825 | — | — | ||||||||||||
Income tax effect | (1,198 | ) | (1,618 | ) | (1,019 | ) | (721 | ) | ||||||||
Reclassification adjustment for gain recognized in income | (350 | ) | (334 | ) | (167 | ) | (222 | ) | ||||||||
Reclassification adjustment for gain recognized in income related to reclassified held-to-maturity securities | — | (269 | ) | — | — | |||||||||||
Income tax effect | 140 | 241 | 67 | 89 | ||||||||||||
Change in defined benefit pension plan | (336 | ) | (817 | ) | (500 | ) | (300 | ) | ||||||||
Income tax effect | 134 | 327 | 200 | 120 | ||||||||||||
Total other comprehensive income | 1,387 | 1,575 | 1,130 | 768 | ||||||||||||
Comprehensive income | $ | 5,221 | $ | 9,870 | $ | 3,390 | $ | 7,267 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
6
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) (Dollars in thousands except per share data)
Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Stock | Total Stockholders' Equity | ||||||||||||||||||||||
Balance December 31, 2015 | $ | 16,334 | $ | 8,113 | $ | 74,228 | $ | 20,054 | $ | (2,933 | ) | $ | (1,084 | ) | $ | 114,712 | ||||||||||||
Net Income | — | — | — | 8,295 | — | — | 8,295 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | 1,575 | — | 1,575 | |||||||||||||||||||||
Cash dividends paid ($0.04 per share) | — | — | — | (323 | ) | — | — | (323 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (500 | ) | — | — | (500 | ) | |||||||||||||||||||
Stock based compensation | — | — | 268 | — | — | — | 268 | |||||||||||||||||||||
Common stock options exercised | — | 16 | (24 | ) | — | — | — | (8 | ) | |||||||||||||||||||
Balance June 30, 2016 | $ | 16,334 | $ | 8,129 | $ | 74,472 | $ | 27,526 | $ | (1,358 | ) | $ | (1,084 | ) | $ | 124,019 | ||||||||||||
Balance December 31, 2016 | 16,334 | 10,048 | 93,412 | 31,192 | (4,277 | ) | (1,084 | ) | 145,625 | |||||||||||||||||||
Net Income | $ | — | $ | — | $ | — | $ | 3,834 | $ | — | $ | — | $ | 3,834 | ||||||||||||||
Other comprehensive income | — | — | — | — | 1,387 | — | 1,387 | |||||||||||||||||||||
Cash dividends paid ($0.05 per share) | — | — | — | (511 | ) | — | — | (511 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (251 | ) | — | — | (251 | ) | |||||||||||||||||||
Common stock issuance, net of issuance costs | — | 444 | 4,487 | — | — | — | 4,931 | |||||||||||||||||||||
Stock based compensation | — | — | 327 | — | — | — | 327 | |||||||||||||||||||||
Common stock options exercised | — | 2 | (10 | ) | — | — | — | (8 | ) | |||||||||||||||||||
Redemption of preferred stock | (8,500 | ) | — | — | — | — | — | (8,500 | ) | |||||||||||||||||||
Balance June 30, 2017 | $ | 7,834 | $ | 10,494 | $ | 98,216 | $ | 34,264 | $ | (2,890 | ) | $ | (1,084 | ) | $ | 146,834 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
7
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | 3,834 | $ | 8,295 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Net amortization and accretion of investments | 620 | 395 | ||||||
Net amortization of deferred loan (fees) costs | 54 | 1 | ||||||
Provision for loan losses | 1,041 | 1,900 | ||||||
Depreciation and amortization | 1,292 | 1,665 | ||||||
Stock based compensation | 327 | 268 | ||||||
Loans originated for sale | (702,136 | ) | (757,377 | ) | ||||
Proceeds of loans sold | 703,071 | 744,511 | ||||||
Mortgage fee income | (18,586 | ) | (16,182 | ) | ||||
Gain on sale of securities | (716 | ) | (605 | ) | ||||
Loss on sale of securities | 366 | 2 | ||||||
Gain on sale of portfolio loans | (212 | ) | (600 | ) | ||||
Gain on sale of subsidiary | — | (6,926 | ) | |||||
Income on bank owned life insurance | (302 | ) | (319 | ) | ||||
Deferred taxes | 178 | (656 | ) | |||||
Other, net | (5,008 | ) | 5,364 | |||||
Net cash used in operating activities | (16,177 | ) | (20,264 | ) | ||||
INVESTING ACTIVITIES | ||||||||
Purchases of investment securities available-for-sale | (51,026 | ) | (61,072 | ) | ||||
Maturities/paydowns of investment securities available-for-sale | 7,587 | 9,065 | ||||||
Maturities/paydowns of investment securities held-to-maturity | — | 400 | ||||||
Sales of investment securities available-for-sale | 33,075 | 39,527 | ||||||
Purchases of premises and equipment | (3,619 | ) | (1,274 | ) | ||||
Disposals of premises and equipment from sale of subsidiary | — | 581 | ||||||
Net increase in loans | (49,749 | ) | (55,552 | ) | ||||
Purchases of restricted bank stock | (12,257 | ) | (14,114 | ) | ||||
Redemptions of restricted bank stock | 8,932 | 12,752 | ||||||
Proceeds from sale of certificates of deposit with banks | 1,733 | — | ||||||
Purchases of certificates of deposit with banks | (1,733 | ) | — | |||||
Proceeds from sale of other real estate owned | — | 15 | ||||||
Purchase of bank owned life insurance | (50 | ) | — | |||||
Proceeds from sale of subsidiary | — | 7,047 | ||||||
Net cash used in investing activities | (67,107 | ) | (62,625 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net (decrease) increase in deposits | (7,409 | ) | 54,928 | |||||
Net decrease in repurchase agreements | (2,966 | ) | (1,389 | ) | ||||
Net change in short-term FHLB borrowings | 72,357 | 29,856 | ||||||
Principal payments on FHLB borrowings | (576 | ) | (46 | ) | ||||
Proceeds from new FHLB borrowings | 26,682 | — | ||||||
Proceeds from stock offering, net of issuance costs | 4,931 | — | ||||||
Preferred stock redemption | (8,500 | ) | — | |||||
Common stock options exercised | (8 | ) | (8 | ) | ||||
Cash dividends paid on common stock | (511 | ) | (323 | ) | ||||
Cash dividends paid on preferred stock | (251 | ) | (500 | ) | ||||
Net cash provided by financing activities | 83,749 | 82,518 | ||||||
Increase (decrease) in cash and cash equivalents | 465 | (371 | ) | |||||
Cash and cash equivalents at beginning of period | 17,340 | 29,133 | ||||||
Cash and cash equivalents at end of period | $ | 17,805 | $ | 28,762 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Loans transferred to other real estate owned | $ | 709 | $ | 127 | ||||
Cashless stock options exercised | $ | 2 | $ | 16 | ||||
Cash payments for: | ||||||||
Interest on deposits, repurchase agreements and borrowings | $ | 5,895 | $ | 5,404 | ||||
Income taxes | $ | 4,977 | $ | 1,382 | ||||
See accompanying notes to unaudited consolidated financial statements.
8
Notes to the Consolidated Financial Statements
Note 1 – Basis of Presentation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10‑Q. Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The consolidated balance sheet as of December 31, 2016 has been derived from audited financial statements included in the Company’s 2016 filing on Form 10-K. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The accounting and reporting policies of MVB Financial Corp. (“the Company” or “MVB”) and its subsidiary (“Subsidiary”), MVB Bank, Inc. (the “Bank”), the Bank’s subsidiaries Potomac Mortgage Group, Inc., which does business as MVB Mortgage (“MVB Mortgage”) and MVB Insurance, LLC ("MVB Insurance"), conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change. Actual results could differ from those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s December 31, 2016, Form 10-K filed with the Securities and Exchange Commission (the “SEC”).
In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation.
All financial information is reported on a continuing operations basis, unless otherwise noted. For a discussion regarding discontinued operations, see Note 12, "Discontinued Operations" of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.
Note 2 – Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting. This update provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award.The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For public companies, this update will be effective for fiscal years beginning after December 15, 2017, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2018, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements, as it is our current policy to amortize premiums of investment securities to the earliest call date.
In March 2017, the FASB issued ASU 2017-07, Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Topic 715, Compensation–Retirement Benefits, requires an entity to present net periodic pension cost and net periodic postretirement benefit cost as a net amount that may be capitalized as part of an asset where appropriate.Users have communicated that the service cost component generally is analyzed differently from the other components
9
of net periodic pension cost and net periodic postretirement benefit cost. To improve the consistency, transparency, and usefulness of financial information for users, the amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2017, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2019, including all interim periods within those fiscal years. The Company is currently evaluating the provisions of this ASU to determine the potential impact to the Company's consolidated financial statements.
In January 2017, the FASB Issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments–Equity Method and Joint Ventures (Topic 323). This Accounting Standards Update adds and amends SEC paragraphs pursuant to the SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force (EITF) meetings. The September announcement is about the Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards are Adopted in a Future Period. The November announcement made amendments to conform the SEC Observer Comment on Accounting for Tax Benefits Resulting from Investments in Qualified Affordable Housing Projects to the guidance issued in Accounting Standards Update No. 2014-01,Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The adoption of this guidance is not expected to be material to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendments in this Update provide a screen to determine when a set is not a business. If the screen is not met, it (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2017, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company's project management team and Management Loan Committee ("MLC") are in the process of developing an understanding of this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
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(2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. While we are currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.
In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement (Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has performed a preliminary evaluation of these amendments. Based on this evaluation, the Company has determined that this new standard is not expected to have a material impact on the Company's consolidated financial statements as it relates to accounting for financial instruments. However, the Company will continue to monitor developments and additional guidance up to the effective date of these amendments.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are, (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when each performance obligation is satisfied. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the update. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is now permitted as of the original effective date for interim and annual reporting periods in fiscal years beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, which amends the principle versus agent guidance in the revenue standard. In April 2016, the FASB issued ASU 2016-10, which clarifies when promised goods or services are separately identifiable in the revenue standard. In May 2016, FASB issued ASU 2016-12, which provides narrow-scope improvements and practical expedients to the revenue standard. While the Company is currently evaluating the impact of this standard on individual customer contracts, management has evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company currently anticipates this standard will not have a material impact on its consolidated financial statements because revenue related to financial instruments, including loans and investment securities are not in scope of these updates. Loan interest income, investment interest income, insurance services revenue and BOLI are accounted for under other U.S. GAAP standards and out of scope of ASC 606 revenue standard. The Company plans to adopt the revenue recognition standard as of January 1, 2018. The Company is currently reviewing all streams of revenue that may be subject to this revised guidance. While we have not yet identified any material changes to the timing of revenue recognition, the Company’s review is ongoing.
Note 3 – Investment Securities
Prior to the final determination of Basel III, investments were recorded as held-to-maturity due to the uncertainty of the capital treatment of available-for-sale investments. Upon the issuance of the final ruling, the Company opted out of the Other Comprehensive Income treatment of available-for-sale investments permitted under Basel III. Due to the change in capital treatment under the final
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ruling of Basel III, the Company’s purpose of recording investments as held-to-maturity changed; therefore, during the period ended March 31, 2016, the Company reclassified $52.4 million, with unrealized holding gains of $1.8 million, of the remaining held-to-maturity investments into available-for-sale investments.
There were no held-to-maturity securities at June 30, 2017 or December 31, 2016.
Amortized cost and fair values of investment securities available-for-sale at June 30, 2017 are summarized as follows:
(Dollars in thousands) | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
U. S. Agency securities | $ | 47,627 | $ | 148 | $ | (221 | ) | $ | 47,554 | |||||||
U.S. Sponsored Mortgage-backed securities | 59,094 | 84 | (931 | ) | 58,247 | |||||||||||
Municipal securities | 53,454 | 960 | (492 | ) | 53,922 | |||||||||||
Total debt securities | 160,175 | 1,192 | (1,644 | ) | 159,723 | |||||||||||
Equity and other securities | 14,952 | 435 | — | 15,387 | ||||||||||||
Total investment securities available-for-sale | $ | 175,127 | $ | 1,627 | $ | (1,644 | ) | $ | 175,110 | |||||||
Amortized cost and fair values of investment securities available-for-sale at December 31, 2016 are summarized as follows:
(Dollars in thousands) | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
U. S. Agency securities | $ | 29,234 | $ | 7 | $ | (425 | ) | $ | 28,816 | |||||||
U.S. Sponsored Mortgage-backed securities | 56,080 | 14 | (1,362 | ) | 54,732 | |||||||||||
Municipal securities | 72,075 | 744 | (2,023 | ) | 70,796 | |||||||||||
Total debt securities | 157,389 | 765 | (3,810 | ) | 154,344 | |||||||||||
Equity and other securities | 7,643 | 381 | — | 8,024 | ||||||||||||
Total investment securities available-for-sale | $ | 165,032 | $ | 1,146 | $ | (3,810 | ) | $ | 162,368 | |||||||
The following table summarizes amortized cost and fair values of debt securities by maturity: | ||||||||
June 30, 2017 | ||||||||
Available for sale | ||||||||
(Dollars in thousands) | Amortized Cost | Fair Value | ||||||
Within one year | $ | 200 | $ | 201 | ||||
After one year, but within five | 15,523 | 15,770 | ||||||
After five years, but within ten | 18,087 | 18,020 | ||||||
After ten years | 126,365 | 125,732 | ||||||
Total | $ | 160,175 | $ | 159,723 | ||||
Investment securities with a carrying value of $59.7 million at June 30, 2017, were pledged to secure public funds, repurchase agreements, and potential borrowings at the Federal Reserve discount window.
The Company’s investment portfolio includes securities that are in an unrealized loss position as of June 30, 2017, the details of which are included in the following table. Although these securities, if sold at June 30, 2017 would result in a pretax loss of $1.6 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. Management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis. Declines in the fair values of these securities can be traced to general market conditions which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not
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the security has been downgraded by a rating agency, and whether or not the financial condition of the security issuer has severely deteriorated. As of June 30, 2017, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain any material realized losses as a result of the current temporary decline in fair value.
The following table discloses investments in an unrealized loss position at June 30, 2017:
(Dollars in thousands) | Less than 12 months | 12 months or more | ||||||||||||||
Description and number of positions | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
U.S. Agency securities (10) | $ | 16,764 | $ | (196 | ) | $ | 1,975 | $ | (25 | ) | ||||||
U.S. Sponsored Mortgage-backed securities (33) | 28,772 | (479 | ) | 19,909 | (452 | ) | ||||||||||
Municipal securities (47) | 23,827 | (472 | ) | 858 | (20 | ) | ||||||||||
Equity and other securities (0) | $ | — | $ | — | $ | — | $ | — | ||||||||
$ | 69,363 | $ | (1,147 | ) | $ | 22,742 | $ | (497 | ) | |||||||
The following table discloses investments in an unrealized loss position at December 31, 2016:
(Dollars in thousands) | Less than 12 months | 12 months or more | ||||||||||||||
Description and number of positions | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
U.S. Agency securities (16) | $ | 28,814 | $ | (425 | ) | $ | — | $ | — | |||||||
U.S. Sponsored Mortgage-backed securities (29) | 33,209 | (1,040 | ) | 13,919 | (322 | ) | ||||||||||
Municipal securities (86) | 42,727 | (2,023 | ) | — | — | |||||||||||
$ | 104,750 | $ | (3,488 | ) | $ | 13,919 | $ | (322 | ) | |||||||
For the three month period ended June 30, 2017 and 2016, the Company sold investments available-for-sale of $10.1 million and$18.3 million, respectively. These sales resulted in gross gains of $167 thousand and $224 thousand and gross losses of $0 and $2 thousand, respectively.
For the six month period ended June 30, 2017 and 2016, the Company sold investments available-for-sale of $33.1 million and $39.5 million, respectively. These sales resulted in gross gains of $716 thousand and $605 thousand and gross losses of $366 thousand and $2 thousand, respectively.
For the three and six month periods ended June 30, 2017 and 2016, the Company sold no investments held-to-maturity.
Note 4 – Loans and Allowance for Loan Losses
All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan. As of June 30, 2017 and 2016, net deferred fees of $859 thousand and $845 thousand, respectively, were included in the carrying value of loans.
An allowance for loan losses is maintained to absorb losses from the loan portfolio. The allowance for loan losses is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Bank’s methodology for determining the allowance for loan losses is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s allowance for loan losses.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by qualified factors.
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The segments described above, which are based on the Federal call code assigned to each loan, provide the starting point for the allowance for loan losses analysis. Company and bank management tracks the historical net charge-off activity at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. All pools currently utilize a rolling 12 quarters.
“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volume and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.
To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of letters of credit, non-revolving lines of credit, and revolving lines of credit, and based its calculation on the expectation of future advances of each loan category. Letters of credit were determined to be highly unlikely to advance since they are generally in place only to ensure various forms of performance of the borrowers. In the Bank’s history, there have been no letters of credit drawn upon. In addition, many of the letters of credit are cash secured and do not warrant an allocation. Non-revolving lines of credit were determined to be highly likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.
Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which Management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. For the three and six months ended June 30, 2017 and 2016, the liability for unfunded commitments was $284 thousand and $224 thousand, respectively.
Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance for loan losses.
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an allowance for loan losses that is representative of the risk found in the components of the portfolio at any given date.
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The following tables summarize the primary segments of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2017:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Allowance for loan losses balance at March 31, 2017 | $ | 7,285 | $ | 1,085 | $ | 790 | $ | 212 | $ | 9,372 | ||||||||||
Charge-offs | (150 | ) | — | — | (13 | ) | (163 | ) | ||||||||||||
Recoveries | 12 | 2 | 1 | 1 | 16 | |||||||||||||||
Provision | 576 | (95 | ) | (14 | ) | 56 | 523 | |||||||||||||
Allowance for loan losses balance at June 30, 2017 | $ | 7,723 | $ | 992 | $ | 777 | $ | 256 | $ | 9,748 | ||||||||||
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Allowance for loan losses balance at December 31, 2016 | $ | 7,181 | $ | 990 | $ | 728 | $ | 202 | $ | 9,101 | ||||||||||
Charge-offs | (263 | ) | (141 | ) | (33 | ) | (16 | ) | (453 | ) | ||||||||||
Recoveries | 21 | 34 | 2 | 2 | 59 | |||||||||||||||
Provision | 784 | 109 | 80 | 68 | 1,041 | |||||||||||||||
Allowance for loan losses balance at June 30, 2017 | $ | 7,723 | $ | 992 | $ | 777 | $ | 256 | $ | 9,748 | ||||||||||
Individually evaluated for impairment | $ | 265 | $ | 14 | $ | 36 | $ | 71 | $ | 386 | ||||||||||
Collectively evaluated for impairment | $ | 7,458 | $ | 978 | $ | 741 | $ | 185 | $ | 9,362 | ||||||||||
The following table summarizes the primary segments of the Company loan portfolio as of June 30, 2017:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Individually evaluated for impairment | $ | 9,369 | $ | 1,051 | $ | 643 | $ | 267 | $ | 11,330 | ||||||||||
Collectively evaluated for impairment | 772,901 | 241,121 | 63,679 | 13,347 | 1,091,048 | |||||||||||||||
Total Loans | $ | 782,270 | $ | 242,172 | $ | 64,322 | $ | 13,614 | $ | 1,102,378 | ||||||||||
The following tables summarize the primary segments of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2016:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Allowance for loan losses balance at March 31, 2016 | $ | 6,221 | $ | 1,157 | $ | 747 | $ | 322 | $ | 8,447 | ||||||||||
Charge-offs | (578 | ) | (57 | ) | — | — | (635 | ) | ||||||||||||
Recoveries | — | — | — | 4 | 4 | |||||||||||||||
Provision | 1,313 | (89 | ) | 11 | 40 | 1,275 | ||||||||||||||
Allowance for loan losses balance at June 30, 2016 | $ | 6,956 | $ | 1,011 | $ | 758 | $ | 366 | $ | 9,091 | ||||||||||
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Allowance for loan losses balance at December 31, 2015 | $ | 6,066 | $ | 1,095 | $ | 715 | $ | 130 | $ | 8,006 | ||||||||||
Charge-offs | (680 | ) | (124 | ) | — | (22 | ) | (826 | ) | |||||||||||
Recoveries | — | — | — | 11 | 11 | |||||||||||||||
Provision | 1,570 | 40 | 43 | 247 | 1,900 | |||||||||||||||
Allowance for loan losses balance at June 30, 2016 | $ | 6,956 | $ | 1,011 | $ | 758 | $ | 366 | $ | 9,091 | ||||||||||
Individually evaluated for impairment | $ | 1,338 | $ | — | $ | — | $ | 258 | $ | 1,596 | ||||||||||
Collectively evaluated for impairment | $ | 5,618 | $ | 1,011 | $ | 758 | $ | 108 | $ | 7,495 | ||||||||||
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The following table summarizes the primary segments of the Company loan portfolio as of June 30, 2016:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Individually evaluated for impairment | $ | 12,101 | $ | 763 | $ | 28 | $ | 379 | $ | 13,271 | ||||||||||
Collectively evaluated for impairment | 749,201 | 241,157 | 68,526 | 15,351 | 1,074,235 | |||||||||||||||
Total Loans | $ | 761,302 | $ | 241,920 | $ | 68,554 | $ | 15,730 | $ | 1,087,506 | ||||||||||
Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company also separately evaluates individual consumer loans for impairment. The Chief Credit Officer identifies these loans individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow Management to evaluate the significance of the payment delays and the circumstances surrounding the loan and the borrower.
Once the determination has been made that a loan is impaired, the amount of the impairment is measured using one of three valuation methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
During December 2013, the Bank purchased $74.3 million in performing commercial real estate secured loans in the northern Virginia area. At the time of acquisition, none of these loans were considered impaired. They were acquired at a premium of roughly 1.024 or $1.8 million, which is being amortized in accordance with ASC 310-20. These loans are collectively evaluated for impairment under ASC 450. The loans continue to be individually monitored for payoff activity, and any necessary adjustments to the premium are made accordingly.
At June 30, 2017 and December 31, 2016, these balances totaled $20.0 million and $20.5 million, respectively. Of the $54.3 million decrease since originally purchased, MVB refinanced $19.6 million and sold participations totaling $10.5 million and sold $9.7 million back to the institution from which the loans were originally purchased in December 2013. The remainder of the decrease was the result of $6.8 million in loan amortization and $7.7 million in principal paydowns and/or loan payoffs. The weighted average yield on the remaining portfolio is 5.46%.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2017 and December 31, 2016:
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Impaired Loans with Specific Allowance | Impaired Loans with No Specific Allowance | Total Impaired Loans | ||||||||||||||||||
(Dollars in thousands) | Recorded Investment | Related Allowance | Recorded Investment | Recorded Investment | Unpaid Principal Balance | |||||||||||||||
June 30, 2017 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | 3,313 | $ | 14 | $ | 177 | $ | 3,490 | $ | 3,491 | ||||||||||
Commercial Real Estate | 1,237 | 177 | 1,437 | 2,674 | 2,701 | |||||||||||||||
Acquisition & Development | 262 | 74 | 2,943 | 3,205 | 5,474 | |||||||||||||||
Total Commercial | 4,812 | 265 | 4,557 | 9,369 | 11,666 | |||||||||||||||
Residential | 113 | 14 | 938 | 1,051 | 1,112 | |||||||||||||||
Home Equity | 573 | 36 | 70 | 643 | 655 | |||||||||||||||
Consumer | 205 | 71 | 62 | 267 | 474 | |||||||||||||||
Total Impaired Loans | $ | 5,703 | $ | 386 | $ | 5,627 | $ | 11,330 | $ | 13,907 | ||||||||||
December 31, 2016 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | — | $ | — | $ | 3,342 | $ | 3,342 | $ | 4,102 | ||||||||||
Commercial Real Estate | 2,757 | 302 | 892 | 3,649 | 3,676 | |||||||||||||||
Acquisition & Development | 264 | 74 | 3,526 | 3,790 | 6,059 | |||||||||||||||
Total Commercial | 3,021 | 376 | 7,760 | 10,781 | 13,837 | |||||||||||||||
Residential | 783 | 122 | 378 | 1,161 | 1,166 | |||||||||||||||
Home Equity | 62 | 36 | 70 | 132 | 135 | |||||||||||||||
Consumer | 16 | 9 | 62 | 78 | 285 | |||||||||||||||
Total Impaired Loans | $ | 3,882 | $ | 543 | $ | 8,270 | $ | 12,152 | $ | 15,423 | ||||||||||
Impaired loans have decreased by $822 thousand, or 6.8%, during 2017. This change is the net effect of multiple factors, including the identification of $946 thousand of impaired loans, principal curtailments of $645 thousand, partial charge-offs of $269 thousand, foreclosure and reclassification to other real estate owned of $713 thousand, reclassification of $45 thousand of previously reported impaired loans to performing loans, and normal loan amortization.
The following tables presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated: | ||||||||||||||||||||||||
Six Months Ended June 30, 2017 | Three Months Ended June 30, 2017 | |||||||||||||||||||||||
(Dollars in thousands) | Average Investment in Impaired Loans | Interest Income Recognized on Accrual Basis | Interest Income Recognized on Cash Basis | Average Investment in Impaired Loans | Interest Income Recognized on Accrual Basis | Interest Income Recognized on Cash Basis | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial Business | $ | 3,358 | $ | 78 | $ | 59 | $ | 3,368 | $ | 34 | $ | 46 | ||||||||||||
Commercial Real Estate | 2,718 | 50 | 50 | 2,632 | 50 | 24 | ||||||||||||||||||
Acquisition & Development | 3,673 | 4 | 6 | 3,571 | 4 | 3 | ||||||||||||||||||
Total Commercial | 9,749 | 132 | 115 | 9,571 | 88 | 73 | ||||||||||||||||||
Residential | 1,336 | 4 | 24 | 1,256 | 4 | 7 | ||||||||||||||||||
Home Equity | 649 | 1 | 1 | 644 | 1 | — | ||||||||||||||||||
Consumer | 163 | — | — | 184 | — | — | ||||||||||||||||||
Total | $ | 11,897 | $ | 137 | $ | 140 | $ | 11,655 | $ | 93 | $ | 80 | ||||||||||||
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