UNITED STATES | ||
SECURITIES AND EXCHANGE COMMISSION | ||
Washington, D.C. 20549 | ||
FORM 10-Q | ||
(Mark One) | ||
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 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 October 28, 2018, the Registrant had 11,540,770 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)
September 30, 2018 | December 31, 2017 | |||||||
(Unaudited) | (Note 1) | |||||||
ASSETS | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 18,641 | $ | 16,345 | ||||
Interest bearing balances with banks | 3,404 | 3,960 | ||||||
Total cash and cash equivalents | 22,045 | 20,305 | ||||||
Certificates of deposit with other banks | 14,778 | 14,778 | ||||||
Investment Securities: | ||||||||
Securities available-for-sale, at fair value | 216,714 | 231,507 | ||||||
Equity securities | 9,592 | — | ||||||
Loans held for sale | 63,706 | 66,794 | ||||||
Loans: | 1,296,460 | 1,105,941 | ||||||
Less: Allowance for loan losses | (11,439 | ) | (9,878 | ) | ||||
Net Loans | 1,285,021 | 1,096,063 | ||||||
Premises and equipment | 26,706 | 26,686 | ||||||
Bank owned life insurance | 32,918 | 32,666 | ||||||
Accrued interest receivable and other assets | 33,144 | 27,023 | ||||||
Goodwill | 18,480 | 18,480 | ||||||
TOTAL ASSETS | $ | 1,723,104 | $ | 1,534,302 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 240,847 | $ | 125,963 | ||||
Interest bearing | 1,138,339 | 1,033,617 | ||||||
Total deposits | 1,379,186 | 1,159,580 | ||||||
Accrued interest payable and other liabilities | 16,763 | 16,434 | ||||||
Repurchase agreements | 15,755 | 22,403 | ||||||
FHLB and other borrowings | 122,000 | 152,169 | ||||||
Subordinated debt | 18,524 | 33,524 | ||||||
Total liabilities | 1,552,228 | 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; 11,588,070 shares issued and 11,536,993 shares outstanding in 2018 and 10,495,704 shares issued and 10,444,627 shares outstanding in 2017 | 11,588 | 10,496 | ||||||
Additional paid-in capital | 115,497 | 98,698 | ||||||
Retained earnings | 45,745 | 37,236 | ||||||
Accumulated other comprehensive loss | (8,704 | ) | (2,988 | ) | ||||
Treasury stock, 51,077 shares, at cost | (1,084 | ) | (1,084 | ) | ||||
Total stockholders’ equity | 170,876 | 150,192 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,723,104 | $ | 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)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans | $ | 44,777 | $ | 37,695 | $ | 16,364 | $ | 13,275 | ||||||||
Interest on deposits with other banks | 284 | 250 | 103 | 89 | ||||||||||||
Interest on investment securities - taxable | 2,655 | 1,884 | 869 | 693 | ||||||||||||
Interest on tax exempt loans and securities | 2,458 | 1,683 | 840 | 573 | ||||||||||||
Total interest income | 50,174 | 41,512 | 18,176 | 14,630 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on deposits | 7,938 | 5,952 | 3,110 | 2,083 | ||||||||||||
Interest on repurchase agreements | 49 | 56 | 10 | 20 | ||||||||||||
Interest on FHLB and other borrowings | 3,110 | 1,216 | 1,199 | 548 | ||||||||||||
Interest on subordinated debt | 1,433 | 1,674 | 333 | 565 | ||||||||||||
Total interest expense | 12,530 | 8,898 | 4,652 | 3,216 | ||||||||||||
NET INTEREST INCOME | 37,644 | 32,614 | 13,524 | 11,414 | ||||||||||||
Provision for loan losses | 2,148 | 1,137 | 1,069 | 96 | ||||||||||||
Net interest income after provision for loan losses | 35,496 | 31,477 | 12,455 | 11,318 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges on deposit accounts | 741 | 559 | 275 | 207 | ||||||||||||
Income on bank owned life insurance | 958 | 453 | 520 | 151 | ||||||||||||
Interchange and debit card transaction fees | 459 | 906 | 167 | 293 | ||||||||||||
Mortgage fee income | 24,634 | 28,604 | 9,008 | 10,018 | ||||||||||||
Gain on sale of portfolio loans | 217 | 477 | 5 | 265 | ||||||||||||
Insurance and investment services income | 540 | 395 | 199 | 147 | ||||||||||||
Gain on sale of available-for-sale securities, net | 327 | 455 | 1 | 105 | ||||||||||||
Gain (loss) on derivatives, net | 509 | (2,216 | ) | (728 | ) | (1,306 | ) | |||||||||
Commercial swap fee income | 419 | 322 | 6 | 52 | ||||||||||||
Holding gain on equity securities | 583 | — | 623 | — | ||||||||||||
Other operating income | 958 | 594 | 435 | 226 | ||||||||||||
Total noninterest income | 30,345 | 30,549 | 10,511 | 10,158 | ||||||||||||
NONINTEREST EXPENSES | ||||||||||||||||
Salary and employee benefits | 34,487 | 33,009 | 11,520 | 11,249 | ||||||||||||
Occupancy expense | 3,178 | 3,083 | 1,049 | 1,042 | ||||||||||||
Equipment depreciation and maintenance | 2,439 | 2,214 | 834 | 783 | ||||||||||||
Data processing and communications | 2,735 | 3,833 | 938 | 1,139 | ||||||||||||
Mortgage processing | 2,751 | 2,455 | 867 | 818 | ||||||||||||
Marketing, contributions, and sponsorships | 966 | 867 | 271 | 263 | ||||||||||||
Professional fees | 2,548 | 2,264 | 1,015 | 851 | ||||||||||||
Printing, postage, and supplies | 597 | 783 | 198 | 320 | ||||||||||||
Insurance, tax, and assessment expense | 1,333 | 1,403 | 487 | 475 | ||||||||||||
Travel, entertainment, dues, and subscriptions | 1,991 | 1,621 | 712 | 562 | ||||||||||||
Other operating expenses | 1,380 | 1,254 | 526 | 464 | ||||||||||||
Total noninterest expense | 54,405 | 52,786 | 18,417 | 17,966 | ||||||||||||
Income before income taxes | 11,436 | 9,240 | 4,549 | 3,510 | ||||||||||||
Income tax expense | 2,432 | 3,088 | 970 | 1,192 | ||||||||||||
Net income | $ | 9,004 | $ | 6,152 | $ | 3,579 | $ | 2,318 | ||||||||
Preferred dividends | 366 | 374 | 123 | 123 | ||||||||||||
Net income available to common shareholders | $ | 8,638 | $ | 5,778 | $ | 3,456 | $ | 2,195 | ||||||||
Earnings per share - basic | $ | 0.80 | $ | 0.56 | $ | 0.30 | $ | 0.21 | ||||||||
Earnings per share - diluted | $ | 0.77 | $ | 0.56 | $ | 0.29 | $ | 0.21 | ||||||||
Cash dividends declared | $ | 0.080 | $ | 0.075 | $ | 0.030 | $ | 0.025 | ||||||||
Weighted average shares outstanding - basic | 10,845,166 | 10,262,944 | 11,416,202 | 10,443,443 | ||||||||||||
Weighted average shares outstanding - diluted | 11,690,314 | 10,288,534 | 13,113,259 | 12,410,070 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net Income | $ | 9,004 | $ | 6,152 | $ | 3,579 | $ | 2,318 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized holding gains (losses) on securities available-for-sale | (7,455 | ) | 3,158 | (2,119 | ) | 160 | ||||||||||
Income tax effect | 2,012 | (1,263 | ) | 571 | (64 | ) | ||||||||||
Reclassification adjustment for gain recognized in income | (327 | ) | (455 | ) | (1 | ) | (105 | ) | ||||||||
Income tax effect | 88 | 182 | — | 42 | ||||||||||||
Change in defined benefit pension plan | 972 | (336 | ) | 200 | — | |||||||||||
Income tax effect | (262 | ) | 134 | (54 | ) | — | ||||||||||
Total other comprehensive income (loss) | (4,972 | ) | 1,420 | (1,403 | ) | 33 | ||||||||||
Comprehensive income | $ | 4,032 | $ | 7,572 | $ | 2,176 | $ | 2,351 | ||||||||
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 | — | — | — | 6,152 | — | — | 6,152 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | 1,420 | — | 1,420 | |||||||||||||||||||||
Cash dividends paid ($0.075 per share) | — | — | — | (773 | ) | — | — | (773 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (374 | ) | — | — | (374 | ) | |||||||||||||||||||
Common stock issuance, net of issuance costs | — | 444 | 4,487 | — | — | — | 4,931 | |||||||||||||||||||||
Stock based compensation | — | — | 506 | — | — | — | 506 | |||||||||||||||||||||
Common stock options exercised | — | 4 | (14 | ) | — | — | — | (10 | ) | |||||||||||||||||||
Redemption of preferred stock | (8,500 | ) | — | — | — | — | — | (8,500 | ) | |||||||||||||||||||
Balance September 30, 2017 | $ | 7,834 | $ | 10,496 | $ | 98,391 | $ | 36,197 | $ | (2,857 | ) | $ | (1,084 | ) | $ | 148,977 | ||||||||||||
Balance December 31, 2017 | 7,834 | 10,496 | 98,698 | 37,236 | (2,988 | ) | (1,084 | ) | 150,192 | |||||||||||||||||||
Net Income | $ | — | $ | — | $ | — | $ | 9,004 | $ | — | $ | — | $ | 9,004 | ||||||||||||||
Other comprehensive loss | — | — | — | — | (4,972 | ) | — | (4,972 | ) | |||||||||||||||||||
Cash dividends paid ($0.08 per share) | — | — | — | (873 | ) | — | — | (873 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (366 | ) | — | — | (366 | ) | |||||||||||||||||||
Stock based compensation | — | — | 920 | — | — | — | 920 | |||||||||||||||||||||
Common stock options exercised | — | 153 | 1,853 | — | — | — | 2,006 | |||||||||||||||||||||
Restricted stock units vested | — | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||||
Stranded AOCI (See Footnote 2) | — | — | — | 646 | (646 | ) | — | — | ||||||||||||||||||||
Mark to Market on equity positions held at December 31, 2017 (See Footnote 2) | — | — | — | 98 | (98 | ) | — | — | ||||||||||||||||||||
Common stock issued from subordinated debt conversion, net of costs | — | 938 | 14,027 | — | — | — | 14,965 | |||||||||||||||||||||
Balance September 30, 2018 | $ | 7,834 | $ | 11,588 | $ | 115,497 | $ | 45,745 | $ | (8,704 | ) | $ | (1,084 | ) | $ | 170,876 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
6
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | 9,004 | $ | 6,152 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Net amortization and accretion of investments | 994 | 801 | ||||||
Net amortization of deferred loan costs | 105 | 95 | ||||||
Provision for loan losses | 2,148 | 1,137 | ||||||
Depreciation and amortization | 2,210 | 1,980 | ||||||
Stock based compensation | 920 | 506 | ||||||
Loans originated for sale | (933,134 | ) | (1,050,759 | ) | ||||
Proceeds of loans sold | 960,856 | 1,100,480 | ||||||
Mortgage fee income | (24,634 | ) | (28,604 | ) | ||||
Gain on sale of securities | (352 | ) | (827 | ) | ||||
Loss on sale of securities | 25 | 372 | ||||||
Gain on sale of portfolio loans | (217 | ) | (477 | ) | ||||
Income on bank owned life insurance | (958 | ) | (453 | ) | ||||
Deferred taxes | 263 | (470 | ) | |||||
Other, net | (4,056 | ) | (5,385 | ) | ||||
Net cash provided by operating activities | 13,174 | 24,548 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchases of investment securities available-for-sale | (19,742 | ) | (86,692 | ) | ||||
Maturities/paydowns of investment securities available-for-sale | 16,283 | 11,961 | ||||||
Sales of investment securities available-for-sale | 2,794 | 52,108 | ||||||
Purchases of premises and equipment | (2,164 | ) | (4,008 | ) | ||||
Net increase in loans | (190,994 | ) | (42,062 | ) | ||||
Purchases of restricted bank stock | (17,750 | ) | (15,450 | ) | ||||
Redemptions of restricted bank stock | 17,550 | 16,005 | ||||||
Proceeds from sale of certificates of deposit with banks | — | 1,978 | ||||||
Purchases of certificates of deposit with banks | — | (2,229 | ) | |||||
Proceeds from sale of other real estate owned | 362 | — | ||||||
Purchase (redemption) of bank owned life insurance | 706 | (50 | ) | |||||
Purchase of equity securities | (2,000 | ) | — | |||||
Net cash used in investing activities | (194,955 | ) | (68,439 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 219,606 | 58,182 | ||||||
Net decrease in repurchase agreements | (6,648 | ) | (115 | ) | ||||
Net change in short-term FHLB borrowings | (67,909 | ) | (32,605 | ) | ||||
Principal payments on FHLB borrowings | (12,260 | ) | (595 | ) | ||||
Proceeds from new FHLB borrowings | 50,000 | 26,682 | ||||||
Subordinated debt conversion costs | (35 | ) | — | |||||
Proceeds from stock offering | — | 4,931 | ||||||
Preferred stock redemption | — | (8,500 | ) | |||||
Common stock options exercised | 2,006 | (10 | ) | |||||
Cash dividends paid on common stock | (873 | ) | (773 | ) | ||||
Cash dividends paid on preferred stock | (366 | ) | (374 | ) | ||||
Net cash provided by financing activities | 183,521 | 46,823 | ||||||
Increase in cash and cash equivalents | 1,740 | 2,932 | ||||||
Cash and cash equivalents at beginning of period | 20,305 | 17,340 | ||||||
Cash and cash equivalents at end of period | $ | 22,045 | $ | 20,272 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Loans transferred to other real estate owned | $ | 720 | $ | 1,017 | ||||
Cashless stock options exercised | $ | 153 | $ | 4 | ||||
Restricted stock units vested | $ | 1 | $ | — | ||||
Common stock converted from subordinated debt | $ | 15 | $ | — | ||||
Cash payments for: | ||||||||
Interest on deposits, repurchase agreements and borrowings | $ | 13,607 | $ | 9,100 | ||||
Income taxes | $ | 107 | $ | 6,025 | ||||
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 and nine months ended September 30, 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.
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.
8
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 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 2019.
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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an alternative transition method of adoption by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. 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 (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; 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
9
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 measures the fair value of its loan portfolio on a quarterly basis using an exit price notion. See Note 6, “Fair Value of Financial Instruments” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
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 also completed an evaluation of certain costs related to customer contracts and revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on the evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs previously recorded as expense are now recorded as contra-revenue). This classification change resulted in immaterial changes to both revenue and expense. The Company adopted the revenue recognition standard and its related amendments as of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the debit and credit card related cost reclassifications noted above.
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Note 3 – Investment Securities
There were no held-to-maturity securities at September 30, 2018 or December 31, 2017.
Amortized cost and fair values of investment securities available-for-sale at September 30, 2018 are summarized as follows:
(Dollars in thousands) | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||
U. S. Agency securities | $ | 80,486 | $ | — | $ | (2,774 | ) | $ | 77,712 | |||||||
U.S. Sponsored Mortgage-backed securities | 53,882 | — | (2,928 | ) | 50,954 | |||||||||||
Municipal securities | 81,143 | 71 | (2,263 | ) | 78,951 | |||||||||||
Total debt securities | 215,511 | 71 | (7,965 | ) | 207,617 | |||||||||||
Other securities | 9,126 | 35 | (64 | ) | 9,097 | |||||||||||
Total investment securities available-for-sale | $ | 224,637 | $ | 106 | $ | (8,029 | ) | $ | 216,714 | |||||||
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: | ||||||||
September 30, 2018 | ||||||||
Available for sale | ||||||||
(Dollars in thousands) | Amortized Cost | Fair Value | ||||||
Within one year | $ | — | $ | — | ||||
After one year, but within five | 46,668 | 45,665 | ||||||
After five years, but within ten | 28,213 | 26,818 | ||||||
After ten years | 140,630 | 135,134 | ||||||
Total | $ | 215,511 | $ | 207,617 | ||||
Investment securities with a carrying value of $67.2 million at September 30, 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 September 30, 2018, the details of which are included in the following table. Although these securities, if sold at September 30, 2018 would result in a pretax loss of $8.0 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 September 30, 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 September 30, 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 (56) | $ | 35,654 | $ | (837 | ) | $ | 42,058 | $ | (1,937 | ) | ||||||
U.S. Sponsored Mortgage-backed securities (42) | 11,646 | (493 | ) | 39,309 | (2,435 | ) | ||||||||||
Municipal securities (97) | 34,043 | (973 | ) | 20,585 | (1,290 | ) | ||||||||||
Other securities (4) | $ | 1,977 | $ | (44 | ) | $ | 501 | $ | (20 | ) | ||||||
$ | 83,320 | $ | (2,347 | ) | $ | 102,453 | $ | (5,682 | ) | |||||||
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 September 30, 2018 and 2017, the Company sold investments available-for-sale of $2.1 million and $19.0 million, respectively. These sales resulted in gross gains of $27 thousand and $111 thousand and gross losses of $26 thousand and $6 thousand, respectively.
For the nine-month periods ended September 30, 2018 and 2017, the Company sold investments available-for-sale of $2.8 million and $52.1 million, respectively. These sales resulted in gross gains of $352 thousand and $827 thousand and gross losses of $25 thousand and $372 thousand, respectively.
For the three and nine months ended September 30, 2018, the Company recognized an unrealized gain of $623 thousand and $583 thousand, respectively, on equity securities held as of September 30, 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 September 30, 2018 and December 31, 2017, were as follows:
(Dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Commercial and Non-Residential Real Estate | $ | 929,284 | $ | 783,909 | ||||
Residential Real Estate | 298,749 | 246,214 | ||||||
Home Equity | 57,629 | 62,400 | ||||||
Consumer | 10,463 | 12,783 | ||||||
Total Loans | $ | 1,296,125 | $ | 1,105,306 | ||||
Deferred loan origination fees and costs, net | 335 | 635 | ||||||
Loans receivable | $ | 1,296,460 | $ | 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.
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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 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 $1.7 million and $1.3 million, while the related reserves were $168 thousand and $169 thousand as of September 30, 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 September 30, 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 September 30, 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 | (616 | ) | (11 | ) | — | (52 | ) | (679 | ) | |||||||||||
Recoveries | 10 | 19 | 58 | 5 | 92 | |||||||||||||||
Provision (recovery) | 1,827 | 242 | (139 | ) | 218 | 2,148 | ||||||||||||||
ALL balance at September 30, 2018 | $ | 9,025 | $ | 1,369 | $ | 624 | $ | 421 | $ | 11,439 | ||||||||||
Individually evaluated for impairment | $ | 1,262 | $ | 88 | $ | — | $ | 226 | $ | 1,576 | ||||||||||
Collectively evaluated for impairment | $ | 7,763 | $ | 1,281 | $ | 624 | $ | 195 | $ | 9,863 | ||||||||||
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
ALL balance at June 30, 2018 | $ | 8,664 | $ | 1,172 | $ | 602 | $ | 213 | $ | 10,651 | ||||||||||
Charge-offs | (292 | ) | — | — | (2 | ) | (294 | ) | ||||||||||||
Recoveries | — | 10 | 2 | 1 | 13 | |||||||||||||||
Provision (recovery) | 653 | 187 | 20 | 209 | 1,069 | |||||||||||||||
ALL balance at September 30, 2018 | $ | 9,025 | $ | 1,369 | $ | 624 | $ | 421 | $ | 11,439 | ||||||||||
The following table summarizes the primary segments of the Company loan portfolio as of September 30, 2018:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Individually evaluated for impairment | $ | 11,704 | $ | 3,287 | $ | 111 | $ | 334 | $ | 15,436 | ||||||||||
Collectively evaluated for impairment | 917,580 | 295,462 | 57,518 | 10,129 | 1,280,689 | |||||||||||||||
Total Loans | $ | 929,284 | $ | 298,749 | $ | 57,629 | $ | 10,463 | $ | 1,296,125 | ||||||||||
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 September 30, 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 | (645 | ) | (141 | ) | (33 | ) | (106 | ) | (925 | ) | ||||||||||
Recoveries | 22 | 40 | 3 | 18 | 83 | |||||||||||||||
Provision | 746 | 155 | 91 | 145 | 1,137 | |||||||||||||||
ALL balance at September 30, 2017 | $ | 7,304 | $ | 1,044 | $ | 789 | $ | 259 | $ | 9,396 | ||||||||||
Individually evaluated for impairment | $ | 420 | $ | — | $ | 1 | $ | — | $ | 421 | ||||||||||
Collectively evaluated for impairment | $ | 6,884 | $ | 1,044 | $ | 788 | $ | 259 | $ | 8,975 | ||||||||||
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
ALL balance at June 30, 2017 | $ | 7,723 | $ | 992 | $ | 777 | $ | 256 | $ | 9,748 | ||||||||||
Charge-offs | (382 | ) | — | — | (90 | ) | (472 | ) | ||||||||||||
Recoveries | 1 | 6 | 1 | 16 | 24 | |||||||||||||||
Provision (recovery) | (38 | ) | 46 | 11 | 77 | 96 | ||||||||||||||
ALL balance at September 30, 2017 | $ | 7,304 | $ | 1,044 | $ | 789 | $ | 259 | $ | 9,396 | ||||||||||
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The following table summarizes the primary segments of the Company loan portfolio as of September 30, 2017:
(Dollars in thousands) | Commercial | Residential | Home Equity | Consumer | Total | |||||||||||||||
Individually evaluated for impairment | $ | 10,457 | $ | 1,166 | $ | 581 | $ | 183 | $ | 12,387 | ||||||||||
Collectively evaluated for impairment | 771,739 | 233,070 | 63,692 | 12,912 | 1,081,413 | |||||||||||||||
Total Loans | $ | 782,196 | $ | 234,236 | $ | 64,273 | $ | 13,095 | $ | 1,093,800 | ||||||||||
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.
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.
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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 September 30, 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 | |||||||||||||||
September 30, 2018 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial Business | $ | 262 | $ | 103 | $ | 3,615 | $ | 3,877 | $ | 3,899 | ||||||||||
Commercial Real Estate | 5,090 | 1,159 | 1,580 | 6,670 | 7,490 | |||||||||||||||
Acquisition & Development | — | — | 1,157 | 1,157 | 3,437 | |||||||||||||||
Total Commercial | 5,352 | 1,262 | 6,352 | 11,704 | 14,826 | |||||||||||||||
Residential | 455 | 88 | 2,832 | 3,287 | 3,335 | |||||||||||||||
Home Equity | — | — | 111 | 111 | 111 | |||||||||||||||
Consumer | 289 | 226 | 45 | 334 | 336 | |||||||||||||||
Total Impaired Loans | $ | 6,096 | $ | 1,576 | $ | 9,340 | $ | 15,436 | $ | 18,608 | ||||||||||
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 $120 thousand, or 0.77%, during the nine months ended September 30, 2018. This change is the net effect of multiple factors, including the identification of $2.9 million of impaired loans, principal curtailments of $1.3 million, partial charge-offs of $362 thousand, the foreclosure of a commercial development loan which required the reclassification of $720 thousand to other real estate owned, the classification of $424 thousand to performing loans based on improved repayment performance, and normal loan amortization.
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated: | ||||||||||||||||||||||||
Nine Months Ended September 30, 2018 | Three Months Ended September 30, 2018 | |||||||||||||||||||||||
(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 | $ | 4,192 | $ | 119 | $ | 106 | $ | 3,917 | $ | 38 | $ | 2 | ||||||||||||
Commercial Real Estate | 7,060 | 71 | 63 | 6,836 | 24 | 21 | ||||||||||||||||||
Acquisition & Development | 1,399 | — | — | 1,158 | — | — | ||||||||||||||||||
Total Commercial | 12,651 | 190 | 169 | 11,911 | 62 | 23 | ||||||||||||||||||
Residential | 2,404 | 15 | 11 | 3,265 | 5 | 3 | ||||||||||||||||||
Home Equity | 90 | 1 | 1 | 113 | — | — | ||||||||||||||||||
Consumer | 139 | — | — | 233 | — | |||||||||||||||||||
Total | $ | 15,284 | $ | 206 | $ | 181 | $ | 15,522 | $ | 67 | $ | 26 | ||||||||||||
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Nine Months Ended September 30, 2017 | Three Months Ended September 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 | ||||||||||||||||||||||||