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 March 31, 2018 | ||
or | ||
¨ TRANSITION REPORT UNDER 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 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 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 May 6, 2018, the Registrant had 10,540,827 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)
March 31, 2018 | December 31, 2017 | ||||||||
(Unaudited) | (Note 1) | ||||||||
ASSETS | |||||||||
Cash and cash equivalents: | |||||||||
Cash and due from banks | $ | 17,088 | $ | 16,345 | |||||
Interest bearing balances with banks | 6,542 | 3,960 | |||||||
Total cash and cash equivalents | 23,630 | 20,305 | |||||||
Certificates of deposit with other banks | 14,778 | 14,778 | |||||||
Investment Securities: | |||||||||
Securities available-for-sale | 226,504 | 231,507 | |||||||
Equity securities | 16,265,000 | 6,979 | — | ||||||
Loans held for sale | 51,280 | 66,794 | |||||||
Loans: | 1,157,173 | 1,105,941 | |||||||
Less: Allowance for loan losses | (10,067 | ) | (9,878 | ) | |||||
Net Loans | 1,147,106 | 1,096,063 | |||||||
Premises and equipment | 26,477 | 26,686 | |||||||
Bank owned life insurance | 32,885 | 32,666 | |||||||
Accrued interest receivable and other assets | 33,399 | 27,023 | |||||||
Goodwill | 18,480 | 18,480 | |||||||
TOTAL ASSETS | $ | 1,581,518 | $ | 1,534,302 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
Deposits: | |||||||||
Noninterest bearing | $ | 142,826 | $ | 125,963 | |||||
Interest bearing | 1,011,081 | 1,033,617 | |||||||
Total deposits | 1,153,907 | 1,159,580 | |||||||
Accrued interest payable and other liabilities | 15,620 | 16,434 | |||||||
Repurchase agreements | 20,676 | 22,403 | |||||||
FHLB and other borrowings | 207,370 | 152,169 | |||||||
Subordinated debt | 33,524 | 33,524 | |||||||
Total liabilities | 1,431,097 | 1,384,110 | |||||||
STOCKHOLDERS’ EQUITY | |||||||||
Preferred stock, par value $1,000; 20,000 authorized; 783 issued in 2018 and 2017, respectively (See Footnote 7) | 7,834 | 7,834 | |||||||
Common stock, par value $1; 20,000,000 shares authorized; 10,589,704 shares issued and 10,538,627 shares outstanding in 2018 and 10,495,704 shares issued and 10,444,627 shares outstanding in 2017 | 10,590 | 10,496 | |||||||
Additional paid-in capital | 100,108 | 98,698 | |||||||
Retained earnings | 40,190 | 37,236 | |||||||
Accumulated other comprehensive loss | (7,217 | ) | (2,988 | ) | |||||
Treasury stock, 51,077 shares, at cost | (1,084 | ) | (1,084 | ) | |||||
Total stockholders’ equity | 150,421 | 150,192 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,581,518 | $ | 1,534,302 | |||||
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)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
INTEREST INCOME | ||||||||
Interest and fees on loans | $ | 13,291 | $ | 11,882 | ||||
Interest on deposits with other banks | 90 | 79 | ||||||
Interest on investment securities - taxable | 895 | 546 | ||||||
Interest on tax exempt loans and securities | 778 | 561 | ||||||
Total interest income | 15,054 | 13,068 | ||||||
INTEREST EXPENSE | ||||||||
Interest on deposits | 2,298 | 1,906 | ||||||
Interest on repurchase agreements | 19 | 17 | ||||||
Interest on FHLB and other borrowings | 714 | 288 | ||||||
Interest on subordinated debt | 558 | 551 | ||||||
Total interest expense | 3,589 | 2,762 | ||||||
NET INTEREST INCOME | 11,465 | 10,306 | ||||||
Provision for loan losses | 474 | 518 | ||||||
Net interest income after provision for loan losses | 10,991 | 9,788 | ||||||
NONINTEREST INCOME | ||||||||
Service charges on deposit accounts | 185 | 187 | ||||||
Income on bank owned life insurance | 218 | 147 | ||||||
Interchange and debit card transaction fees | 150 | 295 | ||||||
Mortgage fee income | 6,563 | 9,634 | ||||||
Gain on sale of portfolio loans | 212 | 9 | ||||||
Insurance and investment services income | 164 | 124 | ||||||
Gain on sale of securities | 326 | 183 | ||||||
Gain (loss) on derivatives | 584 | (1,947 | ) | |||||
Commercial swap fee income | 413 | — | ||||||
Other operating income | 224 | 192 | ||||||
Total noninterest income | 9,039 | 8,824 | ||||||
NONINTEREST EXPENSES | ||||||||
Salary and employee benefits | 10,473 | 9,962 | ||||||
Occupancy expense | 1,049 | 994 | ||||||
Equipment depreciation and maintenance | 784 | 689 | ||||||
Data processing and communications | 835 | 1,214 | ||||||
Mortgage processing | 892 | 894 | ||||||
Marketing, contributions, and sponsorships | 347 | 327 | ||||||
Professional fees | 745 | 677 | ||||||
Printing, postage, and supplies | 165 | 217 | ||||||
Insurance, tax, and assessment expense | 390 | 461 | ||||||
Travel, entertainment, dues, and subscriptions | 648 | 501 | ||||||
Other operating expenses | 411 | 381 | ||||||
Total noninterest expense | 16,739 | 16,317 | ||||||
Income before income taxes | 3,291 | 2,295 | ||||||
Income tax expense | 697 | 721 | ||||||
Net income | $ | 2,594 | $ | 1,574 | ||||
Preferred dividends | 121 | 129 | ||||||
Net income available to common shareholders | $ | 2,473 | $ | 1,445 | ||||
Earnings per share - basic | $ | 0.24 | $ | 0.14 | ||||
Earnings per share - diluted | $ | 0.23 | $ | 0.14 | ||||
Cash dividends declared | $ | 0.025 | $ | 0.025 | ||||
Weighted average shares outstanding - basic | 10,474,138 | 9,996,544 | ||||||
Weighted average shares outstanding - diluted | 12,714,353 | 10,009,341 | ||||||
See accompanying notes to unaudited consolidated financial statements.
4
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Net Income | $ | 2,594 | $ | 1,574 | ||||
Other comprehensive income (loss): | ||||||||
Unrealized holding gains (losses) on securities available-for-sale | (4,448 | ) | 448 | |||||
Income tax effect | 1,201 | (179 | ) | |||||
Reclassification adjustment for gain recognized in income | (326 | ) | (183 | ) | ||||
Income tax effect | 88 | 73 | ||||||
Change in defined benefit pension plan | — | 164 | ||||||
Income tax effect | — | (66 | ) | |||||
Total other comprehensive income (loss) | (3,485 | ) | 257 | |||||
Comprehensive income (loss) | $ | (891 | ) | $ | 1,832 | |||
See accompanying notes to unaudited consolidated financial statements.
5
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, 2016 | $ | 16,334 | $ | 10,048 | $ | 93,412 | $ | 31,192 | $ | (4,277 | ) | $ | (1,084 | ) | $ | 145,625 | ||||||||||||
Net Income | — | — | — | 1,574 | — | — | 1,574 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | 257 | — | 257 | |||||||||||||||||||||
Cash dividends paid ($0.025 per share) | — | — | — | (250 | ) | — | — | (250 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (129 | ) | — | — | (129 | ) | |||||||||||||||||||
Stock based compensation | — | — | 148 | — | — | — | 148 | |||||||||||||||||||||
Redemption of preferred stock | (8,500 | ) | — | — | — | — | — | (8,500 | ) | |||||||||||||||||||
Balance March 31, 2017 | $ | 7,834 | $ | 10,048 | $ | 93,560 | $ | 32,387 | $ | (4,020 | ) | $ | (1,084 | ) | $ | 138,725 | ||||||||||||
Balance December 31, 2017 | 7,834 | 10,496 | 98,698 | 37,236 | (2,988 | ) | (1,084 | ) | 150,192 | |||||||||||||||||||
Net Income | $ | — | $ | — | $ | — | $ | 2,594 | $ | — | $ | — | $ | 2,594 | ||||||||||||||
Other comprehensive loss | — | — | — | — | (3,485 | ) | — | (3,485 | ) | |||||||||||||||||||
Cash dividends paid ($0.025 per share) | — | — | — | (263 | ) | — | — | (263 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (121 | ) | — | — | (121 | ) | |||||||||||||||||||
Stock based compensation | — | — | 244 | — | — | — | 244 | |||||||||||||||||||||
Common stock options exercised | — | 94 | 1,166 | — | — | — | 1,260 | |||||||||||||||||||||
Stranded AOCI (See Footnote 2) | — | — | — | 646 | (646 | ) | — | — | ||||||||||||||||||||
Mark to Market on equity positions held at December 31, 2017 (See Footnote 2) | — | — | — | 98 | (98 | ) | — | — | ||||||||||||||||||||
Balance March 31, 2018 | $ | 7,834 | $ | 10,590 | $ | 100,108 | $ | 40,190 | $ | (7,217 | ) | $ | (1,084 | ) | $ | 150,421 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
6
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | 2,594 | $ | 1,574 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Net amortization and accretion of investments | 361 | 319 | ||||||
Net amortization of deferred loan costs | 16 | 90 | ||||||
Provision for loan losses | 474 | 518 | ||||||
Depreciation and amortization | 741 | 617 | ||||||
Stock based compensation | 244 | 148 | ||||||
Loans originated for sale | (238,935 | ) | (313,263 | ) | ||||
Proceeds of loans sold | 261,012 | 341,150 | ||||||
Mortgage fee income | (6,563 | ) | (9,634 | ) | ||||
Gain on sale of securities | (326 | ) | (549 | ) | ||||
Loss on sale of securities | — | 366 | ||||||
Gain on sale of portfolio loans | (212 | ) | (9 | ) | ||||
Income on bank owned life insurance | (218 | ) | (147 | ) | ||||
Deferred taxes | (51 | ) | (25 | ) | ||||
Other, net | (3,924 | ) | (1,414 | ) | ||||
Net cash provided by operating activities | 15,213 | 19,741 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchases of investment securities available-for-sale | (14,859 | ) | (37,919 | ) | ||||
Maturities/paydowns of investment securities available-for-sale | 7,364 | 4,717 | ||||||
Sales of investment securities available-for-sale | 680 | 22,945 | ||||||
Purchases of premises and equipment | (506 | ) | (1,588 | ) | ||||
Net increase in loans | (51,321 | ) | (24,245 | ) | ||||
Purchases of restricted bank stock | (5,901 | ) | (4,276 | ) | ||||
Redemptions of restricted bank stock | 3,797 | 4,818 | ||||||
Proceeds from sale of other real estate owned | 181 | — | ||||||
Purchase of bank owned life insurance | — | (50 | ) | |||||
Net cash used in investing activities | (60,565 | ) | (35,598 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net (decrease) increase in deposits | (5,673 | ) | 29,449 | |||||
Net decrease in repurchase agreements | (1,727 | ) | (3,465 | ) | ||||
Net change in short-term FHLB borrowings | 67,421 | (14,769 | ) | |||||
Principal payments on FHLB borrowings | (12,220 | ) | (24 | ) | ||||
Proceeds from new FHLB borrowings | — | 14,483 | ||||||
Preferred stock redemption | — | (8,500 | ) | |||||
Common stock options exercised | 1,260 | — | ||||||
Cash dividends paid on common stock | (263 | ) | (250 | ) | ||||
Cash dividends paid on preferred stock | (121 | ) | (129 | ) | ||||
Net cash provided by financing activities | 48,677 | 16,795 | ||||||
Increase in cash and cash equivalents | 3,325 | 938 | ||||||
Cash and cash equivalents at beginning of period | 20,305 | 17,340 | ||||||
Cash and cash equivalents at end of period | $ | 23,630 | $ | 18,278 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Loans transferred to other real estate owned | $ | 720 | $ | — | ||||
Cash payments for: | ||||||||
Interest on deposits, repurchase agreements and borrowings | $ | 3,635 | $ | 2,943 | ||||
See accompanying notes to unaudited consolidated financial statements.
7
Notes to the Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Nature of Operations
MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank”). MVB Bank’s operating subsidiaries include MVB Mortgage, MVB Insurance, LLC (“MVB Insurance”), and MVB Community Development Corporation (“CDC”).
Principles of Consolidation and 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, 2017 has been derived from audited financial statements included in the Company’s 2017 filing on Form 10-K. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The accounting and reporting policies of the Company 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, 2017, 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.
Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contract-revenue (i.e. gross versus net). Based on the evaluation, the Company determined that the classification of certain debit and credit card processing related costs should change (i.e. costs previously recorded as expense in now recorded as contract-revenue). These classification changes resulted in immaterial changes to both revenue and expense. Since
8
there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to beginning retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts related to the debit and credit card related cost reclassifications discussed above.
Note 2 – Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update requires a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act, which was enacted on December 22, 2017. The Tax Reform Act included a reduction to the corporate income tax rate from 34 percent to 21 percent effective January 1, 2018. The amendments in the ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected to early adopt ASU 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Reform Act from AOCI to retained earnings. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which amounted to $646 thousand.
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 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 adoption of this guidance did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“ASU 2017-01”) to improve such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 was effective for the Company on January 1, 2018 and is to be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.
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") engaged a third party to assist with a data gap analysis and will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired software to assist with implementation that will be tested throughout 2018.
9
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 (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. The Company established a project management team, which is currently evaluating the impact of the new standard, and expects 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 adopted this guidance in the first quarter of 2018. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on the Company's Consolidated Financial Statements. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion. See Note 6 "Fair Value of Financial Instruments" of the Notes to Consolidated Financial Statements for further information.
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. The Company evaluated the impact of this standard on individual customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company determined that this standard did 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 evaluated the impact of this standard on individual customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company adopted the revenue recognition standard as of January 1, 2018 and it did not have a material effect on the consolidated financial statements. See Note 1 "Summary of Significant Policies" of the Notes to the Consolidated Financial Statements for further information.
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Note 3 – Investment Securities
There were no held-to-maturity securities at March 31, 2018 or December 31, 2017.
Amortized cost and fair values of investment securities available-for-sale at March 31, 2018 are summarized as follows:
(Dollars in thousands) | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
U. S. Agency securities | $ | 82,518 | $ | 91 | $ | (1,814 | ) | $ | 80,795 | |||||||
U.S. Sponsored Mortgage-backed securities | 58,827 | — | (2,509 | ) | 56,318 | |||||||||||
Municipal securities | 80,839 | 996 | (1,730 | ) | 80,105 | |||||||||||
Total debt securities | 222,184 | 1,087 | (6,053 | ) | 217,218 | |||||||||||
Other securities | 9,235 | 87 | (36 | ) | 9,286 | |||||||||||
Total investment securities available-for-sale | $ | 231,419 | $ | 1,174 | $ | (6,089 | ) | $ | 226,504 | |||||||
Amortized cost and fair values of investment securities available-for-sale at December 31, 2017 are summarized as follows:
(Dollars in thousands) | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
U. S. Agency securities | $ | 81,705 | $ | 81 | $ | (841 | ) | $ | 80,945 | |||||||
U.S. Sponsored Mortgage-backed securities | 59,387 | 31 | (1,264 | ) | 58,154 | |||||||||||
Municipal securities | 74,482 | 1,733 | (373 | ) | 75,842 | |||||||||||
Total debt securities | 215,574 | 1,845 | (2,478 | ) | 214,941 | |||||||||||
Equity and other securities | 15,940 | 644 | (18 | ) | 16,566 | |||||||||||
Total investment securities available-for-sale | $ | 231,514 | $ | 2,489 | $ | (2,496 | ) | $ | 231,507 | |||||||
The following table summarizes amortized cost and fair values of debt securities by maturity: | ||||||||
March 31, 2018 | ||||||||
Available for sale | ||||||||
(Dollars in thousands) | Amortized Cost | Fair Value | ||||||
Within one year | $ | 524 | $ | 528 | ||||
After one year, but within five | 46,954 | 46,525 | ||||||
After five years, but within ten | 23,841 | 22,947 | ||||||
After ten years | 150,865 | 147,218 | ||||||
Total | $ | 222,184 | $ | 217,218 | ||||
Investment securities with a carrying value of $117.4 million at March 31, 2018, 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 March 31, 2018, the details of which are included in the following table. Although these securities, if sold at March 31, 2018 would result in a pretax loss of $6.1 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 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 March 31, 2018, 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.
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The following table discloses investments in an unrealized loss position at March 31, 2018:
(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 (45) | $ | 62,984 | $ | (1,471 | ) | $ | 7,789 | $ | (343 | ) | ||||||
U.S. Sponsored Mortgage-backed securities (42) | 19,632 | (541 | ) | 39,196 | (1,968 | ) | ||||||||||
Municipal securities (86) | 28,748 | (827 | ) | 18,100 | (903 | ) | ||||||||||
Other securities (3) | $ | 2,549 | $ | (36 | ) | $ | — | $ | — | |||||||
$ | 113,913 | $ | (2,875 | ) | $ | 65,085 | $ | (3,214 | ) | |||||||
The following table discloses investments in an unrealized loss position at December 31, 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 (45) | $ | 61,834 | $ | (659 | ) | $ | 7,709 | $ | (182 | ) | ||||||
U.S. Sponsored Mortgage-backed securities (39) | 16,825 | (159 | ) | 37,427 | (1,105 | ) | ||||||||||
Municipal securities (47) | 8,826 | (48 | ) | 16,781 | (325 | ) | ||||||||||
Equity and other securities (2) | 1,034 | (18 | ) | — | — | |||||||||||
$ | 88,519 | $ | (884 | ) | $ | 61,917 | $ | (1,612 | ) | |||||||
For the three month periods ended March 31, 2018 and 2017, the Company sold investments available-for-sale of $680 thousand, $22.9 million, respectively. These sales resulted in gross gains of $326 thousand and $549 thousand and gross losses of $0 and $366 thousand, respectively.
For the three months ended March 31, 2018, the Company recognized an unrealized loss of $30 thousand on equity securities held as of March 31, 2018, which was recorded in noninterest income in the consolidated statements of income.
Note 4 – Loans and Allowance for Loan Losses
The components of loans in the Consolidated Balance Sheet at March 31, 2018 and December 31, 2017, were as follows:
(Dollars in thousands) | March 31, 2018 | December 31, 2017 | ||||||
Commercial and Non-Residential Real Estate | $ | 824,625 | $ | 783,909 | ||||
Residential Real Estate | 260,513 | 246,214 | ||||||
Home Equity | 59,526 | 62,400 | ||||||
Consumer | 11,909 | 12,783 | ||||||
Total Loans | $ | 1,156,573 | $ | 1,105,306 | ||||
Deferred loan origination fees and costs, net | 600 | 635 | ||||||
Loans receivable | $ | 1,157,173 | $ | 1,105,941 | ||||
All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan.
An allowance for loan losses ("ALL") is maintained to absorb losses from the loan portfolio. The ALL 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 ALL 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 ALL. The Bank's methodology allows for the analysis of certain impaired loans in homogeneous pools, rather than on an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically, residential mortgage loans, home equity lines of credit, and consumer loans, when considered impaired, are
12
evaluated collectively for impairment by applying allocation rates derived from the Bank’s historical losses specific to impaired loans. Total collectively evaluated impaired loans were $1.4 million and $1.3 million, while the related reserves were $173 thousand and $169 thousand as of March 31, 2018 and December 31, 2017.
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.
The segments described below in the impaired loans by class table, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL 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: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, conclusion of loan reviews, audits, and exams, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions consumer sentiment, and other external factors. 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. As of March 31, 2018 and December 31, 2017, the liability for unfunded commitments related to loans held for investment was $284 thousand.
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 ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
The ALL 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 ALL 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 ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2018:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
ALL balance at December 31, 2017 | $ | 7,804 | $ | 1,119 | $ | 705 | $ | 250 | $ | 9,878 | ||||||||||
Charge-offs | (324 | ) | (11 | ) | — | (21 | ) | (356 | ) | |||||||||||
Recoveries | 2 | 9 | 56 | 4 | 71 | |||||||||||||||
Provision | 516 | 60 | (68 | ) | (34 | ) | 474 | |||||||||||||
ALL balance at March 31, 2018 | $ | 7,998 | $ | 1,177 | $ | 693 | $ | 199 | $ | 10,067 | ||||||||||
Individually evaluated for impairment | $ | 915 | $ | — | $ | — | $ | — | $ | 915 | ||||||||||
Collectively evaluated for impairment | $ | 7,083 | $ | 1,177 | $ | 693 | $ | 199 | $ | 9,152 | ||||||||||
The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2018:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Individually evaluated for impairment | $ | 12,957 | $ | 1,707 | $ | 44 | $ | 43 | $ | 14,751 | ||||||||||
Collectively evaluated for impairment | 811,668 | 258,806 | 59,482 | 11,866 | 1,141,822 | |||||||||||||||
Total Loans | $ | 824,625 | $ | 260,513 | $ | 59,526 | $ | 11,909 | $ | 1,156,573 | ||||||||||
The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2017:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
ALL balance at December 31, 2016 | $ | 7,181 | $ | 990 | $ | 728 | $ | 202 | $ | 9,101 | ||||||||||
Charge-offs | (113 | ) | (141 | ) | (33 | ) | (3 | ) | (290 | ) | ||||||||||
Recoveries | 9 | 32 | 1 | 1 | 43 | |||||||||||||||
Provision | 208 | 204 | 94 | 12 | 518 | |||||||||||||||
ALL balance at March 31, 2017 | $ | 7,285 | $ | 1,085 | $ | 790 | $ | 212 | $ | 9,372 | ||||||||||
Individually evaluated for impairment | $ | 279 | $ | 46 | $ | 36 | $ | 25 | $ | 386 | ||||||||||
Collectively evaluated for impairment | $ | 7,006 | $ | 1,039 | $ | 754 | $ | 187 | $ | 8,986 | ||||||||||
The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2017:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Individually evaluated for impairment | $ | 10,300 | $ | 1,356 | $ | 647 | $ | 125 | $ | 12,428 | ||||||||||
Collectively evaluated for impairment | 742,031 | 243,250 | 64,523 | 13,636 | 1,063,440 | |||||||||||||||
Total Loans | $ | 752,331 | $ | 244,606 | $ | 65,170 | $ | 13,761 | $ | 1,075,868 | ||||||||||
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 evaluates residential mortgage loans, home equity lines of credit, and consumer loans in homogeneous pools, rather than on an individual basis, when each of those loans are below specific thresholds based on outstanding principal balance. Such loans that individually exceed these thresholds are evaluated individually 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.
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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.
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 March 31, 2018 and December 31, 2017:
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 | |||||||||||||||
March 31, 2018 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | 139 | $ | 76 | $ | 4,738 | $ | 4,877 | $ | 4,898 | ||||||||||
Commercial Real Estate | 4,026 | 839 | 2,762 | 6,788 | 7,596 | |||||||||||||||
Acquisition & Development | — | — | 1,292 | 1,292 | 3,572 | |||||||||||||||
Total Commercial | 4,165 | 915 | 8,792 | 12,957 | 16,066 | |||||||||||||||
Residential | — | — | 1,707 | 1,707 | 1,755 | |||||||||||||||
Home Equity | — | — | 44 | 44 | 44 | |||||||||||||||
Consumer | — | — | 43 | 43 | 49 | |||||||||||||||
Total Impaired Loans | $ | 4,165 | $ | 915 | $ | 10,586 | $ | 14,751 | $ | 17,914 | ||||||||||
December 31, 2017 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | 3,283 | $ | 22 | $ | 979 | $ | 4,262 | $ | 4,275 | ||||||||||
Commercial Real Estate | 4,603 | 1,150 | 2,814 | 7,417 | 7,921 | |||||||||||||||
Acquisition & Development | — | — | 2,117 | 2,117 | 4,090 | |||||||||||||||
Total Commercial | 7,886 | 1,172 | 5,910 | 13,796 | 16,286 | |||||||||||||||
Residential | — | — | 1,569 | 1,569 | 1,601 | |||||||||||||||
Home Equity | — | — | 13 | 13 | 13 | |||||||||||||||
Consumer | 69 | 16 | 109 | 178 | 475 | |||||||||||||||
Total Impaired Loans | $ | 7,955 | $ | 1,188 | $ | 7,601 | $ | 15,556 | $ | 18,375 | ||||||||||
Impaired loans have decreased by $805 thousand, or 5.2%, during the first quarter of 2018. This change is the net effect of multiple factors, including the identification of $1.0 million of impaired loans, principal curtailments of $307 thousand, partial charge-offs of $335 thousand, the foreclosure of a commercial development loan which required the reclassification of $720 thousand to other real estate owned, the classification of $292 thousand to performing loans based on improved repayment performance, and normal loan amortization.
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The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated: | ||||||||||||||||||||||||
Three Months Ended March 31, 2018 | Three Months Ended March 31, 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 | $ | 4,525 | $ | 38 | $ | 53 | $ | 3,349 | $ | 39 | $ | 13 | ||||||||||||
Commercial Real Estate | 7,431 | 21 | 23 | 2,803 | 25 | 26 | ||||||||||||||||||
Acquisition & Development | 1,837 | — | — | 3,775 | 2 | 3 | ||||||||||||||||||
Total Commercial | 13,793 | 59 | 76 | 9,927 | 66 | 42 | ||||||||||||||||||
Residential | 1,747 | 5 | 48 | 1,417 | 2 | 17 | ||||||||||||||||||
Home Equity | 65 | — | — | 653 | — | — | ||||||||||||||||||
Consumer | 132 | — | — | 142 | — | — | ||||||||||||||||||
Total | $ | 15,737 | $ | 64 | $ | 124 | $ | 12,139 | $ | 68 | $ | 59 | ||||||||||||
As of March 31, 2018, the Bank's other real estate owned balance totaled $1.9 million. The Bank held nine foreclosed residential real estate properties representing $890 thousand, or 47%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two commercial loan relationships, one of which included three properties for a total of $395 thousand, while the other also included three properties for a total of $178 thousand. The three remaining residential real estate properties, totaling $317 thousand, were result of the foreclosure of three unrelated borrowers. The remaining $1.0 million, or 53%, of other real estate owned is the result of the foreclosure of three unrelated commercial development loans. There are two additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $329 thousand as of March 31, 2018. These loans are included in the table above and have $0 in specific allowance allocated to them.
Bank management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Any portion of a loan that has been or is expected to be charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures that a review of all commercial relationships of one million dollars or greater is performed annually.
Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis. The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Bank’s Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
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The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2018 and December 31, 2017:
(Dollars in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
March 31, 2018 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | 380,106 | $ | 4,793 | $ | 4,547 | $ | — | $ | 389,446 | ||||||||||
Commercial Real Estate | 304,669 | 14,553 | 2,394 | 4,236 | 325,852 | |||||||||||||||
Acquisition & Development | 105,111 | 994 | 2,230 | 992 | 109,327 | |||||||||||||||
Total Commercial | 789,886 | 20,340 | 9,171 | 5,228 | 824,625 | |||||||||||||||
Residential | 257,307 | 2,879 | 205 | 122 | 260,513 | |||||||||||||||
Home Equity | 58,413 | 1,074 | 39 | — | 59,526 | |||||||||||||||
Consumer | 11,695 | 191 | 16 | 7 | 11,909 | |||||||||||||||
Total Loans | $ | 1,117,301 | $ | 24,484 | $ | 9,431 | $ | 5,357 | $ | 1,156,573 | ||||||||||
December 31, 2017 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | 371,041 | $ | 4,816 | $ | 4,506 | $ | — | $ | 380,363 | ||||||||||
Commercial Real Estate | 271,751 | 22,995 | 5,961 | 1,149 | 301,856 | |||||||||||||||
Acquisition & Development | 96,712 | 931 | 2,230 | 1,817 | 101,690 | |||||||||||||||
Total Commercial | 739,504 | 28,742 | 12,697 | 2,966 | 783,909 | |||||||||||||||
Residential | 242,823 | 3,036 | 223 | 132 | 246,214 | |||||||||||||||
Home Equity | 61,037 | 1,311 | 52 | — | 62,400 | |||||||||||||||
Consumer | 12,453 | 174 | 25 | 131 | 12,783 | |||||||||||||||
Total Loans | $ | 1,055,817 | $ | 33,263 | $ | 12,997 | $ | 3,229 | $ | 1,105,306 | ||||||||||
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and or the MLC, as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless Management believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires a six-month recent history of payments due. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and or MLC.
Management is currently monitoring the payment performance of a $3.2 million commercial loan that has paid slow in recent months. This loan is classified as a troubled debt restructured loan based on multiple interest only periods being provided in the past, however, as of March 31, 2018, this loan was paid current. The borrower has continued to work through ongoing litigation, resolution of which is expected in the near future.
17
The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2018 and December 31, 2017:
(Dollars in thousands) | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Past Due | Total Past Due | Total Loans | Non-Accrual | 90+ Days Still Accruing | ||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial Business | $ | 387,428 | $ | 473 | $ | 393 | $ | 1,152 | $ | 2,018 | $ | 389,446 | $ | 1,758 | $ | — | ||||||||||||||||
Commercial Real Estate | 321,198 | 1,188 | — | 3,466 | 4,654 | 325,852 | 4,664 | — | ||||||||||||||||||||||||
Acquisition & Development | 108,035 | 860 | — | 432 | 1,292 | 109,327 | 1,292 | — | ||||||||||||||||||||||||
Total Commercial | 816,661 | 2,521 | 393 | 5,050 | 7,964 | 824,625 | 7,714 | — | ||||||||||||||||||||||||
Residential | 255,659 | 4,417 | 108 | 329 | 4,854 | 260,513 | 1,301 | — | ||||||||||||||||||||||||
Home Equity | 59,050 | 194 | 282 | — | 476 | 59,526 | 44 | — | ||||||||||||||||||||||||
Consumer | 11,831 | 28 | 19 | 31 | 78 | 11,909 | 43 | — | ||||||||||||||||||||||||
Total Loans | $ | 1,143,201 | $ | 7,160 | $ | 802 | $ | 5,410 | $ | 13,372 | $ | 1,156,573 | $ | 9,102 | $ | — | ||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||
Commercial Business | $ | 377,901 | $ | 512 | $ | 1,368 | $ | 582 | $ | 2,462 | $ | 380,363 | $ | 1,027 | $ | — | ||||||||||||||||
Commercial Real Estate | 300,282 | 45 | 1,149 | 380 | 1,574 | 301,856 | 5,206 | — | ||||||||||||||||||||||||
Acquisition & Development | 99,573 | — | 874 | 1,243 | 2,117 | 101,690 | 2,117 | — | ||||||||||||||||||||||||
Total Commercial | 777,756 | 557 | 3,391 | 2,205 | 6,153 | 783,909 | < | |||||||||||||||||||||||||