Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September
30, 2018 and 2017
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include
the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated
financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and
to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the
opinion of management all adjustments necessary to present fairly the consolidated financial position at September 30, 2018, the
consolidated results of income and comprehensive income for the three and nine months ended September 30, 2018 and 2017, and changes
in stockholders’ equity and cash flows for the nine months ended September 30, 2018 and 2017, have been included. All such
adjustments are of a normal recurring nature. The amounts as of December 31, 2017 were derived from the 2017 audited financial
statements. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of
the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read
in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2017. For purposes
of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current
period presentation.
When used in these notes, the term “the
Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiaries.
Recent Accounting Standards
ASU No. 2016-02,
“Leases
(Topic 842).”
This ASU stipulates that a lessee should recognize the assets and liabilities that arise from leases. All
leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6,
Elements of Financial
Statement
, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous
GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the
statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee
(and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option
to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying
asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise
that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most
variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or
are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it
should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU
are effective for fiscal years 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. Leases and lessors may not apply
a full retrospective transition approach. The Company is currently assessing the impact that ASU No. 2016-02 will have on its consolidated
financial statements. The Company has put together an inventory of all leases and accumulated the lease data necessary to apply
the amended guidance.
ASU No. 2016-13,
“Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
The amendments in this ASU will replace the
incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt
securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any
other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the
information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively
or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses,
which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create
an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity
to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for
periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments
retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310):
Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses,
updated to reflect the change from an incurred
loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured
in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than
a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for
fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the
amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we
calculate our credit losses, primarily on loans and held to maturity securities. At this time, the Company has established a project
management team which meets periodically to discuss and assign roles and responsibilities, key tasks to complete, and a general
time line to be followed for implementation. The team has been working with an advisory consultant and has purchased a vendor model
for implementation. Historical data has been collected and uploaded to the new model and the team is in the process of finalizing
the methodologies that will be utilized. The team expects to be running a parallel simulation to its current incurred loss impairment
model in the first quarter of 2019. The Company is continuing to evaluate the extent of the potential impact of this standard and
continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer
bank meetings.
ASU No. 2017-04 – In January
2017, FASB issued ASU No. 2017-04, “
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.”
The ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment
test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting
unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The
amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1,
2017. The guidance is not expected to have a significant impact on the Company’s financial positions, results of
operations or disclosures.
ASU No. 2017-08 – In March 2017,
the FASB issued ASU No. 2017-08,
“Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization
on Purchased Callable Debt Securities.”
Under current GAAP, entities normally amortize the premium as an adjustment of
yield over the contractual life of the instrument. This guidance shortens the amortization period of certain callable debt securities
held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s
consolidated financial statements.
ASU No. 2017-09 – In May 2017, the
FASB issued ASU No. 2017-09
“Stock Compensation, Scope of Modification Accounting.”
This ASU clarifies when
changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply
the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance
should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications,
as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications.
It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning
after December 15, 2017; early adoption is permitted. ASU No. 2017-09 did not have a material impact on the Company’s consolidated
financial statements.
ASU No. 2018-02 – In February 2018,
the FASB issued ASU No. 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments provide financial statement preparers with
an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period
in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof)
is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the
period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate
income tax rate in the Tax Cuts and Jobs Act is recognized. The Company elected to reclassify the stranded income tax effects from
the Tax Cuts and Jobs Act in the financial statements for the period ending December 31, 2017. The amount of this reclassification
in 2017 was $226 thousand.
ASU No. 2018-03 - In February 2018, the
FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities.” The amendments provide targeted improvements to address certain
aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include
clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without
readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities;
presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements
for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018.
Early adoption is permitted. The adoption of ASU No. 2018-03 did not have a material impact on the Company’s consolidated
financial statements.
ASU No. 2018-11 – In July 2018, the
FASB issued ASU 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing
certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may
elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect
not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as
ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is not expected
to have a material impact on the Company’s Consolidated Financial Statements.
ASU No. 2018-13 – In August 2018,
the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”
This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities
will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy,
but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair
value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early
adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and
delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements,
it will not have a material impact on the Company’s Consolidated Financial Statements.
Note 2 – Business Combination
Northwest Bank Branch Acquisition
On May 19, 2017, the Bank purchased three branches from Northwest
Bank (“NWBI”) located in Arbutus, Elkridge, and Owings Mills, Maryland. Pursuant to the transaction, the Bank acquired
$122.9 million in loans and $212.5 million in deposits, as well as the branch premises and equipment. In connection with its purchase
of the branches from NWBI, the Bank received a cash payment from NWBI of $64.0 million, which was net of a premium paid on deposits
of $17.2 million. In addition to the premium paid on deposits, other costs associated with the acquisition totaled $977 thousand.
This acquisition provides the Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across
the Chesapeake Bay to the greater Baltimore area communities of Elkridge, Owings Mills and Arbutus.
The Company has accounted for the branch purchases under the
acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired
assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date.
The acquired assets and assumed liabilities of the NWBI branches
were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting
for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors
to measure fair values for loans. Deposits were valued based upon interest rates, original and remaining terms and maturities,
as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment
was acquired based on the remaining book value from NWBI, which approximated fair value. Management engaged independent outside
experts to provide the fair value estimates. Subsequent to the purchase, management made a measurement period adjustment for deferred
taxes related to intangible assets of $291 thousand.
The following table provides the purchase price as of the acquisition
date of May 19, 2017, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting
goodwill of $15.0 million recorded from the acquisition:
(in thousands)
Purchase Price Consideration:
|
|
|
|
|
Cash consideration
|
|
$
|
17,186
|
|
Total purchase price for NWBI branch acquisition
|
|
$
|
17,186
|
|
|
|
|
|
|
Assets acquired at fair value:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
81,231
|
|
Loans
|
|
|
122,862
|
|
Premises and equipment, net
|
|
|
6,326
|
|
Core deposit intangible
|
|
|
3,954
|
|
Deferred tax assets
|
|
|
291
|
|
Total fair value of assets acquired
|
|
$
|
214,664
|
|
|
|
|
|
|
Liabilities assumed at fair value:
|
|
|
|
|
Deposits
|
|
$
|
212,456
|
|
Other liabilities
|
|
|
7
|
|
Total fair value of liabilities assumed
|
|
$
|
212,463
|
|
|
|
|
|
|
Net assets acquired at fair value:
|
|
$
|
2,201
|
|
|
|
|
|
|
Amount of goodwill resulting from acquisition
|
|
$
|
14,985
|
|
The total amount of goodwill arising from this transaction of
$15.0 million is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.
Acquired loans
The following table outlines the contractually required payments
receivable, cash flows we expect to receive, accretable yield and carrying value for all NWBI loans as of the acquisition date.
|
|
Contractually
|
|
|
|
|
|
|
|
|
|
|
|
|
Required
|
|
|
Cash Flows
|
|
|
|
|
|
Carrying Value
|
|
|
|
Payments
|
|
|
Expected To Be
|
|
|
Accretable FMV
|
|
|
of Loans
|
|
|
|
Receivable
|
|
|
Collected
|
|
|
Adjustments
|
|
|
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing loans acquired
|
|
$
|
125,131
|
|
|
|
125,131
|
|
|
|
2,269
|
|
|
$
|
122,862
|
|
The Company recorded all loans acquired at the estimated fair
value on the purchase date with no carryover of the related allowance for loan losses. The Company only acquired loans which were
deemed to be performing loans with no signs of credit deterioration.
The Company determined the net discounted value of cash flows
on approximately 864 performing loans totaling $125.1 million. The valuation took into consideration the loans’ underlying
characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of
principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing
loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net accretable
discount adjustment of $2.3 million at acquisition.
Note 3 – Earnings Per Share
Basic earnings per common share is calculated
by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted
average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents (stock-based
awards). The following table provides information relating to the calculation of earnings per common share:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,454
|
|
|
$
|
3,412
|
|
|
$
|
12,903
|
|
|
$
|
8,564
|
|
Weighted average shares outstanding - Basic
|
|
|
12,748
|
|
|
|
12,687
|
|
|
|
12,736
|
|
|
|
12,679
|
|
Dilutive effect of common stock equivalents-options
|
|
|
13
|
|
|
|
21
|
|
|
|
13
|
|
|
|
21
|
|
Dilutive effect of common stock equivalents-restricted stock units
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
6
|
|
Weighted average shares outstanding - Diluted
|
|
|
12,761
|
|
|
|
12,716
|
|
|
|
12,749
|
|
|
|
12,706
|
|
Earnings per common share - Basic
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
$
|
1.01
|
|
|
$
|
0.68
|
|
Earnings per common share - Diluted
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
$
|
1.01
|
|
|
$
|
0.67
|
|
There were no weighted average common stock
equivalents excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2018
and 2017.
Note 4 – Investment
Securities
The following table provides information on the amortized cost
and estimated fair values of investment securities.
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
42,411
|
|
|
$
|
2
|
|
|
$
|
867
|
|
|
$
|
41,546
|
|
Mortgage-backed
|
|
|
130,807
|
|
|
|
126
|
|
|
|
4,804
|
|
|
|
126,129
|
|
Total
|
|
$
|
173,218
|
|
|
$
|
128
|
|
|
$
|
5,671
|
|
|
$
|
167,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
45,806
|
|
|
$
|
23
|
|
|
$
|
497
|
|
|
$
|
45,332
|
|
Mortgage-backed
|
|
|
152,198
|
|
|
|
157
|
|
|
|
1,390
|
|
|
|
150,965
|
|
Equity
|
|
|
666
|
|
|
|
-
|
|
|
|
8
|
|
|
|
658
|
|
Total
|
|
$
|
198,670
|
|
|
$
|
180
|
|
|
$
|
1,895
|
|
|
$
|
196,955
|
|
The Company adopted
ASU 2016-01 effective January 1, 2018 and equity securities with an aggregate fair value of $649 thousand at September 30, 2018
are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $(20) thousand for
the nine months ended September 30, 2018.
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
1,635
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
$
|
1,585
|
|
States and political subdivisions
|
|
|
1,402
|
|
|
|
17
|
|
|
|
-
|
|
|
|
1,419
|
|
Other Debt securities (1)
|
|
|
3,000
|
|
|
|
-
|
|
|
|
21
|
|
|
|
2,979
|
|
Total
|
|
$
|
6,037
|
|
|
$
|
17
|
|
|
$
|
71
|
|
|
$
|
5,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
1,844
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
1,865
|
|
States and political subdivisions
|
|
|
1,403
|
|
|
|
47
|
|
|
|
-
|
|
|
|
1,450
|
|
Other Debt securities (1)
|
|
|
3,000
|
|
|
|
76
|
|
|
|
-
|
|
|
|
3,076
|
|
Total
|
|
$
|
6,247
|
|
|
$
|
144
|
|
|
$
|
-
|
|
|
$
|
6,391
|
|
|
(1)
|
On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating
rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.
|
The following tables provide information
about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized
loss position at September 30, 2018 and December 31, 2017.
|
|
Less than
|
|
More than
|
|
|
|
|
|
|
|
|
12 Months
|
|
12 Months
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(Dollars in thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
4,209
|
|
$
|
16
|
|
$
|
37,151
|
|
$
|
851
|
|
$
|
41,360
|
|
$
|
867
|
Mortgage-backed
|
|
|
64,423
|
|
|
2,247
|
|
|
54,037
|
|
|
2,557
|
|
|
118,460
|
|
|
4,804
|
Total
|
|
$
|
68,632
|
|
$
|
2,263
|
|
$
|
91,188
|
|
$
|
3,408
|
|
$
|
159,820
|
|
$
|
5,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
-
|
|
|
-
|
|
|
1,585
|
|
|
50
|
|
|
1,585
|
|
|
50
|
Other debt securities
|
|
|
2,979
|
|
|
21
|
|
|
-
|
|
|
-
|
|
|
2,979
|
|
|
21
|
Total
|
|
$
|
2,979
|
|
$
|
21
|
|
$
|
1,585
|
|
$
|
50
|
|
$
|
4,564
|
|
$
|
71
|
|
|
Less than
|
|
More than
|
|
|
|
|
|
|
|
|
12 Months
|
|
12 Months
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(Dollars in thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
37,550
|
|
$
|
453
|
|
$
|
5,956
|
|
$
|
44
|
|
$
|
43,506
|
|
$
|
497
|
Mortgage-backed
|
|
|
96,622
|
|
|
700
|
|
|
28,215
|
|
|
690
|
|
|
124,837
|
|
|
1,390
|
Equity securities
|
|
|
-
|
|
|
-
|
|
|
666
|
|
|
8
|
|
|
666
|
|
|
8
|
Total
|
|
$
|
134,172
|
|
$
|
1,153
|
|
$
|
34,837
|
|
$
|
742
|
|
$
|
169,009
|
|
$
|
1,895
|
All of the securities with unrealized losses
in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost. The unrealized
losses on debt securities that exist are the result of market changes in interest rates since original purchase. Because the Company
does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities
before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized
losses to be temporary. There were eighty-four available-for-sale securities and two held-to-maturity security in an unrealized
loss position at September 30, 2018.
The following table provides information
on the amortized cost and estimated fair values of investment securities by maturity date at September 30, 2018.
|
|
Available for sale
|
|
|
Held to maturity
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
8,000
|
|
|
$
|
7,985
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after one year through five years
|
|
|
34,457
|
|
|
|
33,577
|
|
|
|
901
|
|
|
|
913
|
|
Due after five years through ten years
|
|
|
63,419
|
|
|
|
61,099
|
|
|
|
3,501
|
|
|
|
3,485
|
|
Due after ten years
|
|
|
67,342
|
|
|
|
65,014
|
|
|
|
1,635
|
|
|
|
1,585
|
|
Total
|
|
$
|
173,218
|
|
|
$
|
167,675
|
|
|
$
|
6,037
|
|
|
$
|
5,983
|
|
The maturity dates for debt securities
are determined using contractual maturity dates.
Note 5 – Loans and Allowance for Credit Losses
The Company makes residential mortgage,
commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County,
Dorchester County, Baltimore County and Howard County in Maryland, Kent County, Delaware and Accomack County, Virginia. The following
table provides information about the principal classes of the loan portfolio at September 30, 2018 and December 31, 2017.
(Dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Construction
|
|
$
|
126,313
|
|
|
$
|
125,746
|
|
Residential real estate
|
|
|
425,842
|
|
|
|
399,190
|
|
Commercial real estate
|
|
|
513,169
|
|
|
|
464,887
|
|
Commercial
|
|
|
108,823
|
|
|
|
97,284
|
|
Consumer
|
|
|
6,410
|
|
|
|
6,407
|
|
Total loans
|
|
|
1,180,557
|
|
|
|
1,093,514
|
|
Allowance for credit losses
|
|
|
(10,328
|
)
|
|
|
(9,781
|
)
|
Total loans, net
|
|
$
|
1,170,229
|
|
|
$
|
1,083,733
|
|
Loans are stated at their principal amount
outstanding net of any purchase premiums, deferred fees and costs. Loans included deferred costs, net of deferred fees, of $725
thousand and discounts on acquired loans of $1.5 million at September 30, 2018. Loans included deferred costs, net of deferred
fees, of $609 thousand and discounts on acquired loans of $1.8 million at December 31, 2017. Interest income on loans is accrued
at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are
being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest
income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for
90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those
loans is reversed from income.
Interest payments received on nonaccrual
loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured,
in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts
contractually due are brought current and future payments are reasonably assured.
A loan is considered impaired if it is
probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms.
An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available
from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value
of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or
the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans
by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion
is charged off. Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance
outstanding (i.e., placing impaired loans on nonaccrual status). Generally, interest income is not recognized on impaired loans
unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired
loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous
loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for
probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the
allowance for credit losses. See additional discussion under the caption “Critical Accounting Policies” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
A loan is considered a troubled debt restructuring
(“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may
include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and
other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such
as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered
are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar,
untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry
standards or the current underwriting guidelines of the Company’s banking subsidiary, Shore United Bank (the “Bank”),
the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual
status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required
prior to returning the loan to accrual status.
All loans classified as TDRs which are
restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial
condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout
agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports
the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project
and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions
are also considered. Following a full analysis, the determination of the appropriate loan structure is made.
In the normal course of banking business,
risks related to specific loan categories are as follows:
Construction loans – Construction
loans are offered primarily to builders and individuals to finance the construction of single family dwellings. In addition, the
Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to
successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability
of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which
can impact both the borrower’s ability to repay and the collateral value.
Residential real estate – Residential
real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s
continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other
factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding
loan balance in the event of a default or subsequent liquidation of the real estate collateral.
Commercial real estate – Commercial
real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established
banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy
and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk
associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower
and the business to repay the loan. Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength,
lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.
Commercial – Commercial loans are
secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or
other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition,
rising interest rates, regulatory changes and adverse conditions in the local and regional economy.
Consumer – Consumer loans include
home equity loans and lines, installment loans and personal lines of credit. Credit risk is similar to residential real estate
loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the
loan.
The following tables include impairment information relating
to loans and the allowance for credit losses as of September 30, 2018 and December 31, 2017.
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Construction
|
|
|
real estate
|
|
|
real estate
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
3,104
|
|
|
$
|
6,931
|
|
|
$
|
5,936
|
|
|
$
|
324
|
|
|
$
|
-
|
|
|
$
|
16,295
|
|
Loans collectively evaluated for impairment
|
|
|
123,209
|
|
|
|
418,911
|
|
|
|
507,233
|
|
|
|
108,499
|
|
|
|
6,410
|
|
|
|
1,164,262
|
|
Total loans
|
|
$
|
126,313
|
|
|
$
|
425,842
|
|
|
$
|
513,169
|
|
|
$
|
108,823
|
|
|
$
|
6,410
|
|
|
$
|
1,180,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for creditlosses allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
375
|
|
|
$
|
194
|
|
|
$
|
32
|
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
621
|
|
Loans collectively evaluated for impairment
|
|
|
2,409
|
|
|
|
1,947
|
|
|
|
2,905
|
|
|
|
2,190
|
|
|
|
256
|
|
|
|
9,707
|
|
Total allowance
|
|
$
|
2,784
|
|
|
$
|
2,141
|
|
|
$
|
2,937
|
|
|
$
|
2,210
|
|
|
$
|
256
|
|
|
$
|
10,328
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Construction
|
|
|
real estate
|
|
|
real estate
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
6,975
|
|
|
$
|
6,018
|
|
|
$
|
4,967
|
|
|
$
|
337
|
|
|
$
|
-
|
|
|
$
|
18,297
|
|
Loans collectively evaluated for impairment
|
|
|
118,771
|
|
|
|
393,172
|
|
|
|
459,920
|
|
|
|
96,947
|
|
|
|
6,407
|
|
|
|
1,075,217
|
|
Total loans
|
|
$
|
125,746
|
|
|
$
|
399,190
|
|
|
$
|
464,887
|
|
|
$
|
97,284
|
|
|
$
|
6,407
|
|
|
$
|
1,093,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
500
|
|
|
$
|
239
|
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
-
|
|
|
$
|
805
|
|
Loans collectively evaluated for impairment
|
|
|
1,960
|
|
|
|
2,045
|
|
|
|
2,561
|
|
|
|
2,208
|
|
|
|
202
|
|
|
|
8,976
|
|
Total allowance
|
|
$
|
2,460
|
|
|
$
|
2,284
|
|
|
$
|
2,594
|
|
|
$
|
2,241
|
|
|
$
|
202
|
|
|
$
|
9,781
|
|
The following tables provide information
on impaired loans and any related allowance by loan class as of September 30, 2018 and December 31, 2017. The difference between
the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest
paid on nonaccrual loans that has been applied to principal.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
Quarter-to-date
|
|
|
Year-to-date
|
|
|
|
Unpaid
|
|
|
investment
|
|
|
investment
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
principal
|
|
|
with no
|
|
|
with an
|
|
|
Related
|
|
|
recorded
|
|
|
recorded
|
|
(Dollars in thousands)
|
|
balance
|
|
|
allowance
|
|
|
allowance
|
|
|
allowance
|
|
|
investment
|
|
|
investment
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
3,409
|
|
|
$
|
284
|
|
|
$
|
2,748
|
|
|
$
|
356
|
|
|
$
|
3,043
|
|
|
$
|
3,006
|
|
Residential real estate
|
|
|
2,399
|
|
|
|
2,267
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,710
|
|
|
|
1,573
|
|
Commercial real estate
|
|
|
2,155
|
|
|
|
1,739
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,742
|
|
|
|
1,438
|
|
Commercial
|
|
|
425
|
|
|
|
-
|
|
|
|
324
|
|
|
|
20
|
|
|
|
327
|
|
|
|
338
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,388
|
|
|
$
|
4,290
|
|
|
$
|
3,072
|
|
|
$
|
376
|
|
|
$
|
6,822
|
|
|
$
|
6,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired accruing TDRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
72
|
|
|
$
|
53
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
145
|
|
|
$
|
1,138
|
|
Residential real estate
|
|
|
4,664
|
|
|
|
1,635
|
|
|
|
3,029
|
|
|
|
194
|
|
|
|
4,709
|
|
|
|
4,613
|
|
Commercial real estate
|
|
|
4,197
|
|
|
|
3,485
|
|
|
|
712
|
|
|
|
32
|
|
|
|
4,307
|
|
|
|
4,499
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,933
|
|
|
$
|
5,173
|
|
|
$
|
3,760
|
|
|
$
|
245
|
|
|
$
|
9,161
|
|
|
$
|
10,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
3,481
|
|
|
$
|
337
|
|
|
$
|
2,767
|
|
|
$
|
375
|
|
|
$
|
3,188
|
|
|
$
|
4,144
|
|
Residential real estate
|
|
|
7,063
|
|
|
|
3,902
|
|
|
|
3,029
|
|
|
|
194
|
|
|
|
6,419
|
|
|
|
6,186
|
|
Commercial real estate
|
|
|
6,352
|
|
|
|
5,224
|
|
|
|
712
|
|
|
|
32
|
|
|
|
6,049
|
|
|
|
5,937
|
|
Commercial
|
|
|
425
|
|
|
|
-
|
|
|
|
324
|
|
|
|
20
|
|
|
|
327
|
|
|
|
338
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
17,321
|
|
|
$
|
9,463
|
|
|
$
|
6,832
|
|
|
$
|
621
|
|
|
$
|
15,983
|
|
|
$
|
16,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
Quarter-to-date
|
|
|
Year-to-date
|
|
|
|
Unpaid
|
|
|
investment
|
|
|
investment
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
principal
|
|
|
with no
|
|
|
with an
|
|
|
Related
|
|
|
recorded
|
|
|
recorded
|
|
(Dollars in thousands)
|
|
balance
|
|
|
allowance
|
|
|
allowance
|
|
|
allowance
|
|
|
investment
|
|
|
investment
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
3,100
|
|
|
$
|
182
|
|
|
$
|
2,821
|
|
|
$
|
459
|
|
|
$
|
2,890
|
|
|
$
|
3,253
|
|
Residential real estate
|
|
|
1,620
|
|
|
|
1,482
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,840
|
|
|
|
3,573
|
|
Commercial real estate
|
|
|
795
|
|
|
|
149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
489
|
|
|
|
627
|
|
Commercial
|
|
|
425
|
|
|
|
-
|
|
|
|
337
|
|
|
|
33
|
|
|
|
344
|
|
|
|
153
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
Total
|
|
$
|
5,940
|
|
|
$
|
1,813
|
|
|
$
|
3,158
|
|
|
$
|
492
|
|
|
$
|
6,563
|
|
|
$
|
7,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired accruing TDRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
3,972
|
|
|
$
|
3,038
|
|
|
$
|
934
|
|
|
$
|
41
|
|
|
$
|
4,034
|
|
|
$
|
4,086
|
|
Residential real estate
|
|
|
4,536
|
|
|
|
2,042
|
|
|
|
2,494
|
|
|
|
239
|
|
|
|
3,691
|
|
|
|
3,620
|
|
Commercial real estate
|
|
|
4,818
|
|
|
|
4,084
|
|
|
|
734
|
|
|
|
33
|
|
|
|
4,841
|
|
|
|
4,872
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
13,326
|
|
|
$
|
9,164
|
|
|
$
|
4,162
|
|
|
$
|
313
|
|
|
$
|
12,566
|
|
|
$
|
12,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
7,072
|
|
|
$
|
3,220
|
|
|
$
|
3,755
|
|
|
$
|
500
|
|
|
$
|
6,924
|
|
|
$
|
7,339
|
|
Residential real estate
|
|
|
6,156
|
|
|
|
3,524
|
|
|
|
2,494
|
|
|
|
239
|
|
|
|
6,531
|
|
|
|
7,193
|
|
Commercial real estate
|
|
|
5,613
|
|
|
|
4,233
|
|
|
|
734
|
|
|
|
33
|
|
|
|
5,330
|
|
|
|
5,499
|
|
Commercial
|
|
|
425
|
|
|
|
-
|
|
|
|
337
|
|
|
|
33
|
|
|
|
344
|
|
|
|
153
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
Total
|
|
$
|
19,266
|
|
|
$
|
10,977
|
|
|
$
|
7,320
|
|
|
$
|
805
|
|
|
$
|
19,129
|
|
|
$
|
20,239
|
|
The following tables provide a roll-forward
for troubled debt restructurings as of September 30, 2018 and September 30, 2017.
|
|
1/1/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2018
|
|
|
|
|
|
|
TDR
|
|
|
New
|
|
|
Disbursements
|
|
|
Charge-
|
|
|
Reclassifications/
|
|
|
|
|
|
TDR
|
|
|
Related
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
TDRs
|
|
|
(Payments)
|
|
|
offs
|
|
|
Transfer In/(Out)
|
|
|
Payoffs
|
|
|
Balance
|
|
|
Allowance
|
|
For nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
3,972
|
|
|
$
|
-
|
|
|
$
|
(225
|
)
|
|
$
|
(379
|
)
|
|
$
|
(696
|
)
|
|
$
|
(2,600
|
)
|
|
$
|
72
|
|
|
$
|
19
|
|
Residential real estate
|
|
|
4,536
|
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
542
|
|
|
|
(351
|
)
|
|
|
4,664
|
|
|
|
194
|
|
Commercial real estate
|
|
|
4,818
|
|
|
|
-
|
|
|
|
(402
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(219
|
)
|
|
|
4,197
|
|
|
|
32
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
13,326
|
|
|
$
|
-
|
|
|
$
|
(690
|
)
|
|
$
|
(379
|
)
|
|
$
|
(154
|
)
|
|
$
|
(3,170
|
)
|
|
$
|
8,933
|
|
|
$
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
2,878
|
|
|
$
|
-
|
|
|
$
|
(73
|
)
|
|
$
|
-
|
|
|
$
|
83
|
|
|
$
|
-
|
|
|
$
|
2,888
|
|
|
$
|
356
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
337
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
324
|
|
|
|
20
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,298
|
|
|
$
|
-
|
|
|
$
|
(86
|
)
|
|
$
|
(80
|
)
|
|
$
|
80
|
|
|
$
|
-
|
|
|
$
|
3,212
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,624
|
|
|
$
|
-
|
|
|
$
|
(776
|
)
|
|
$
|
(459
|
)
|
|
$
|
(74
|
)
|
|
$
|
(3,170
|
)
|
|
$
|
12,145
|
|
|
$
|
621
|
|
|
|
1/1/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2017
|
|
|
|
|
|
|
TDR
|
|
|
New
|
|
|
Disbursements
|
|
|
Charge-
|
|
|
Reclassifications/
|
|
|
|
|
|
TDR
|
|
|
Related
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
TDRs
|
|
|
(Payments)
|
|
|
offs
|
|
|
Transfer In/(Out)
|
|
|
Payoffs
|
|
|
Balance
|
|
|
Allowance
|
|
For nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
4,189
|
|
|
$
|
-
|
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(134
|
)
|
|
$
|
4,033
|
|
|
$
|
41
|
|
Residential real estate
|
|
|
3,875
|
|
|
|
-
|
|
|
|
(120
|
)
|
|
|
(89
|
)
|
|
|
1,411
|
|
|
|
(452
|
)
|
|
|
4,625
|
|
|
|
228
|
|
Commercial real estate
|
|
|
4,936
|
|
|
|
-
|
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,835
|
|
|
|
35
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
13,000
|
|
|
$
|
-
|
|
|
$
|
(243
|
)
|
|
$
|
(89
|
)
|
|
$
|
1,411
|
|
|
$
|
(586
|
)
|
|
$
|
13,493
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
3,818
|
|
|
$
|
-
|
|
|
$
|
(882
|
)
|
|
$
|
-
|
|
|
$
|
(108
|
)
|
|
$
|
-
|
|
|
$
|
2,828
|
|
|
$
|
548
|
|
Residential real estate
|
|
|
1,603
|
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
(1,411
|
)
|
|
|
-
|
|
|
|
126
|
|
|
|
23
|
|
Commercial real estate
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
345
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
341
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
5,504
|
|
|
$
|
345
|
|
|
$
|
(952
|
)
|
|
$
|
-
|
|
|
$
|
(1,519
|
)
|
|
$
|
-
|
|
|
$
|
3,378
|
|
|
$
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,504
|
|
|
$
|
345
|
|
|
$
|
(1,195
|
)
|
|
$
|
(89
|
)
|
|
$
|
(108
|
)
|
|
$
|
(586
|
)
|
|
$
|
16,871
|
|
|
$
|
875
|
|
The following tables provide information
on loans that were modified and considered TDRs during the nine months ended September 30, 2018 and September 30, 2017.
|
|
|
|
Premodification
|
|
Postmodification
|
|
|
|
|
|
|
|
outstanding
|
|
outstanding
|
|
|
|
|
|
Number of
|
|
recorded
|
|
recorded
|
|
Related
|
(Dollars in thousands)
|
|
contracts
|
|
investment
|
|
investment
|
|
allowance
|
TDRs:
|
|
|
|
|
|
|
|
|
For nine months ended
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Residential real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Commercial real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Commercial
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Consumer
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
For nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Residential real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Commercial real estate
|
|
1
|
|
|
760
|
|
|
755
|
|
|
-
|
Commercial
|
|
1
|
|
|
462
|
|
|
345
|
|
|
-
|
Consumer
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
|
2
|
|
$
|
1,222
|
|
$
|
1,100
|
|
$
|
-
|
During the nine months ended September 30, 2018, there were
no new TDR’s or previously recorded TDR’s which were modified.
The following tables provide information
on TDRs that defaulted within twelve months of restructuring during the nine months ended September 30, 2018 and September 30,
2017. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on
nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Recorded
|
|
Related
|
(Dollars in thousands)
|
|
contracts
|
|
investment
|
|
allowance
|
TDRs that subsequently defaulted:
|
|
|
|
|
|
|
For nine months ended
September 30, 2018
|
|
|
|
|
|
|
|
|
Construction
|
|
1
|
|
$
|
379
|
|
$
|
-
|
Residential real estate
|
|
1
|
|
|
154
|
|
|
-
|
Commercial real estate
|
|
-
|
|
|
-
|
|
|
-
|
Commercial
|
|
-
|
|
|
-
|
|
|
-
|
Consumer
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
|
2
|
|
$
|
533
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
For nine months ended
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
Construction
|
|
-
|
|
$
|
-
|
|
$
|
-
|
Residential real estate
|
|
1
|
|
|
89
|
|
|
-
|
Commercial real estate
|
|
-
|
|
|
-
|
|
|
-
|
Commercial
|
|
-
|
|
|
-
|
|
|
-
|
Consumer
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
|
1
|
|
$
|
89
|
|
$
|
-
|
Management uses risk ratings as part of its monitoring of the
credit quality in the Company’s loan portfolio. The Company added pass/watch credits to an existing pool that included loans
that are risk rated as special mention and substandard to be collectively evaluated for impairment for both quantitative and qualitative
factors at December 31, 2017. The Company believes that attributing additional reserves to this pool of loans better reflects
the perceived risk for the total loan portfolio going forward, due to the significant organic loan growth over the past 24 months,
the increase in pass/watch rated credits, and increasing balances/concentrations in certain segments of the loan portfolio. Loans
that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are assigned
higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses.
At September 30, 2018, there were no nonaccrual loans classified as special mention or doubtful and $7.4 million of nonaccrual
loans were identified as substandard. Similarly, at December 31, 2017, there were no nonaccrual loans classified as special mention
or doubtful and $5.0 million of nonaccrual loans were identified as substandard.
The following tables provide information
on loan risk ratings as of September 30, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Pass/Performing
|
|
|
Pass/Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
92,937
|
|
|
$
|
30,307
|
|
|
$
|
-
|
|
|
$
|
3,069
|
|
|
$
|
-
|
|
|
$
|
126,313
|
|
Residential real estate
|
|
|
382,280
|
|
|
|
35,793
|
|
|
|
3,433
|
|
|
|
4,336
|
|
|
|
-
|
|
|
|
425,842
|
|
Commercial real estate
|
|
|
384,759
|
|
|
|
115,459
|
|
|
|
5,604
|
|
|
|
7,347
|
|
|
|
-
|
|
|
|
513,169
|
|
Commercial
|
|
|
83,245
|
|
|
|
24,569
|
|
|
|
645
|
|
|
|
364
|
|
|
|
-
|
|
|
|
108,823
|
|
Consumer
|
|
|
5,898
|
|
|
|
509
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
6,410
|
|
Total
|
|
$
|
949,119
|
|
|
$
|
206,637
|
|
|
$
|
9,682
|
|
|
$
|
15,119
|
|
|
$
|
-
|
|
|
$
|
1,180,557
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Pass/Performing
|
|
|
Pass/Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
88,836
|
|
|
$
|
30,674
|
|
|
$
|
-
|
|
|
$
|
6,236
|
|
|
$
|
-
|
|
|
$
|
125,746
|
|
Residential real estate
|
|
|
355,575
|
|
|
|
34,973
|
|
|
|
4,456
|
|
|
|
4,186
|
|
|
|
-
|
|
|
|
399,190
|
|
Commercial real estate
|
|
|
342,051
|
|
|
|
109,041
|
|
|
|
7,420
|
|
|
|
6,375
|
|
|
|
-
|
|
|
|
464,887
|
|
Commercial
|
|
|
72,440
|
|
|
|
24,102
|
|
|
|
308
|
|
|
|
434
|
|
|
|
-
|
|
|
|
97,284
|
|
Consumer
|
|
|
5,260
|
|
|
|
1,147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,407
|
|
Total
|
|
$
|
864,162
|
|
|
$
|
199,937
|
|
|
$
|
12,184
|
|
|
$
|
17,231
|
|
|
$
|
-
|
|
|
$
|
1,093,514
|
|
The following tables provide information
on the aging of the loan portfolio as of September 30, 2018 and December 31, 2017.
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 days
|
|
|
60-89 days
|
|
|
Greater than
|
|
|
Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Current
|
|
|
past due
|
|
|
past due
|
|
|
90 days
|
|
|
past due
|
|
|
Nonaccrual
|
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
123,262
|
|
|
$
|
19
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
3,032
|
|
|
$
|
126,313
|
|
Residential real estate
|
|
|
421,384
|
|
|
|
1,707
|
|
|
|
484
|
|
|
|
-
|
|
|
|
2,191
|
|
|
|
2,267
|
|
|
|
425,842
|
|
Commercial real estate
|
|
|
508,781
|
|
|
|
723
|
|
|
|
1,926
|
|
|
|
-
|
|
|
|
2,649
|
|
|
|
1,739
|
|
|
|
513,169
|
|
Commercial
|
|
|
107,632
|
|
|
|
519
|
|
|
|
348
|
|
|
|
-
|
|
|
|
867
|
|
|
|
324
|
|
|
|
108,823
|
|
Consumer
|
|
|
6,399
|
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
|
|
11
|
|
|
|
-
|
|
|
|
6,410
|
|
Total
|
|
$
|
1,167,458
|
|
|
$
|
2,972
|
|
|
$
|
2,762
|
|
|
$
|
3
|
|
|
$
|
5,737
|
|
|
$
|
7,362
|
|
|
$
|
1,180,557
|
|
Percent of total loans
|
|
|
98.9
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
-
|
%
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
100.0
|
%
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 days
|
|
|
60-89 days
|
|
|
Greater than
|
|
|
Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Current
|
|
|
past due
|
|
|
past due
|
|
|
90 days
|
|
|
past due
|
|
|
Nonaccrual
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
122,475
|
|
|
$
|
268
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268
|
|
|
$
|
3,003
|
|
|
$
|
125,746
|
|
Residential real estate
|
|
|
394,653
|
|
|
|
1,589
|
|
|
|
1,045
|
|
|
|
421
|
|
|
|
3,055
|
|
|
|
1,482
|
|
|
|
399,190
|
|
Commercial real estate
|
|
|
460,998
|
|
|
|
1,061
|
|
|
|
2,461
|
|
|
|
218
|
|
|
|
3,740
|
|
|
|
149
|
|
|
|
464,887
|
|
Commercial
|
|
|
96,774
|
|
|
|
173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
173
|
|
|
|
337
|
|
|
|
97,284
|
|
Consumer
|
|
|
6,395
|
|
|
|
6
|
|
|
|
6
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
6,407
|
|
Total
|
|
$
|
1,081,295
|
|
|
$
|
3,097
|
|
|
$
|
3,512
|
|
|
$
|
639
|
|
|
$
|
7,248
|
|
|
$
|
4,971
|
|
|
$
|
1,093,514
|
|
Percent of total loans
|
|
|
98.8
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
0.7
|
%
|
|
|
0.5
|
%
|
|
|
100.0
|
%
|
The following tables provide a summary
of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2018
and September 30, 2017. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb
losses in other loan classes.
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Construction
|
|
|
real estate
|
|
|
real estate
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
For three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
2,593
|
|
|
$
|
2,150
|
|
|
$
|
2,845
|
|
|
$
|
2,210
|
|
|
$
|
323
|
|
|
$
|
-
|
|
|
$
|
10,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
-
|
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
(137
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(246
|
)
|
Recoveries
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
|
|
122
|
|
|
|
11
|
|
|
|
-
|
|
|
|
146
|
|
Net charge-offs
|
|
|
3
|
|
|
|
(104
|
)
|
|
|
5
|
|
|
|
(15
|
)
|
|
|
11
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
188
|
|
|
|
95
|
|
|
|
87
|
|
|
|
15
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
307
|
|
Ending Balance
|
|
$
|
2,784
|
|
|
$
|
2,141
|
|
|
$
|
2,937
|
|
|
$
|
2,210
|
|
|
$
|
256
|
|
|
$
|
-
|
|
|
$
|
10,328
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Construction
|
|
|
real estate
|
|
|
real estate
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
For three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
2,349
|
|
|
$
|
2,096
|
|
|
$
|
2,802
|
|
|
$
|
1,652
|
|
|
$
|
233
|
|
|
$
|
-
|
|
|
$
|
9,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
(100
|
)
|
|
|
(99
|
)
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(287
|
)
|
Recoveries
|
|
|
11
|
|
|
|
11
|
|
|
|
8
|
|
|
|
67
|
|
|
|
8
|
|
|
|
-
|
|
|
|
105
|
|
Net charge-offs
|
|
|
11
|
|
|
|
(59
|
)
|
|
|
(92
|
)
|
|
|
(32
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
(119
|
)
|
|
|
6
|
|
|
|
174
|
|
|
|
184
|
|
|
|
100
|
|
|
|
-
|
|
|
|
345
|
|
Ending Balance
|
|
$
|
2,241
|
|
|
$
|
2,043
|
|
|
$
|
2,884
|
|
|
$
|
1,804
|
|
|
$
|
323
|
|
|
$
|
-
|
|
|
$
|
9,295
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Construction
|
|
|
real estate
|
|
|
real estate
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
For nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
2,460
|
|
|
$
|
2,284
|
|
|
$
|
2,594
|
|
|
$
|
2,241
|
|
|
$
|
202
|
|
|
$
|
-
|
|
|
$
|
9,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(379
|
)
|
|
|
(288
|
)
|
|
|
-
|
|
|
|
(263
|
)
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
(954
|
)
|
Recoveries
|
|
|
18
|
|
|
|
91
|
|
|
|
23
|
|
|
|
144
|
|
|
|
11
|
|
|
|
-
|
|
|
|
287
|
|
Net charge-offs
|
|
|
(361
|
)
|
|
|
(197
|
)
|
|
|
23
|
|
|
|
(119
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
685
|
|
|
|
54
|
|
|
|
320
|
|
|
|
88
|
|
|
|
67
|
|
|
|
-
|
|
|
|
1,214
|
|
Ending Balance
|
|
$
|
2,784
|
|
|
$
|
2,141
|
|
|
$
|
2,937
|
|
|
$
|
2,210
|
|
|
$
|
256
|
|
|
$
|
-
|
|
|
$
|
10,328
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Construction
|
|
|
real estate
|
|
|
real estate
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
For nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
2,787
|
|
|
$
|
1,953
|
|
|
$
|
2,610
|
|
|
$
|
1,145
|
|
|
$
|
231
|
|
|
$
|
-
|
|
|
$
|
8,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(54
|
)
|
|
|
(393
|
)
|
|
|
(100
|
)
|
|
|
(870
|
)
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
(1,450
|
)
|
Recoveries
|
|
|
27
|
|
|
|
32
|
|
|
|
27
|
|
|
|
167
|
|
|
|
20
|
|
|
|
-
|
|
|
|
273
|
|
Net charge-offs
|
|
|
(27
|
)
|
|
|
(361
|
)
|
|
|
(73
|
)
|
|
|
(703
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(1,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
(519
|
)
|
|
|
451
|
|
|
|
347
|
|
|
|
1,362
|
|
|
|
105
|
|
|
|
-
|
|
|
|
1,746
|
|
Ending Balance
|
|
$
|
2,241
|
|
|
$
|
2,043
|
|
|
$
|
2,884
|
|
|
$
|
1,804
|
|
|
$
|
323
|
|
|
$
|
-
|
|
|
$
|
9,295
|
|
Foreclosure Proceedings
Consumer mortgage loans collateralized
by residential real estate property that were in the process of foreclosure totaled $132 thousand and $530 thousand as of September
30, 2018 and December 31, 2017, respectively. There was one residential property included in the balance of other real estate owned
of $77 thousand at September 30, 2018 and no residential properties included in the balance of other real estate owned at December
31, 2017.
All accruing TDRs were in compliance with
their modified terms. One loan was transferred to nonaccrual as of September 30, 2018. Both performing and non-performing TDRs
had no further commitments associated with them as of September 30, 2018 and December 31, 2017.
Note 6 – Goodwill and Other Intangibles
The following table provides information
on the significant components of goodwill and other acquired intangible assets at September 30, 2018 and December 31, 2017. On
May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI. The purchase
of these branches resulted in core deposit intangibles of $4.0 million and goodwill of $15.0 million.
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
Net
|
|
|
Average
|
|
|
|
Carrying
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Remaining Life
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Charges
|
|
|
Amortization
|
|
|
Amount
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
30,922
|
|
|
$
|
(2,637
|
)
|
|
$
|
(667
|
)
|
|
$
|
27,618
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
$
|
440
|
|
|
$
|
-
|
|
|
$
|
(440
|
)
|
|
$
|
-
|
|
|
|
-
|
|
Insurance expirations
|
|
|
1,270
|
|
|
|
-
|
|
|
|
(1,270
|
)
|
|
|
-
|
|
|
|
-
|
|
Customer relationships
|
|
|
795
|
|
|
|
(95
|
)
|
|
|
(519
|
)
|
|
|
181
|
|
|
|
3.9
|
|
Core deposit intangible
|
|
|
3,954
|
|
|
|
-
|
|
|
|
(827
|
)
|
|
|
3,127
|
|
|
|
8.7
|
|
|
|
|
6,459
|
|
|
|
(95
|
)
|
|
|
(3,056
|
)
|
|
|
3,308
|
|
|
|
|
|
Unamortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780
|
|
|
|
-
|
|
Total other intangible assets
|
|
$
|
7,239
|
|
|
$
|
(95
|
)
|
|
$
|
(3,056
|
)
|
|
$
|
4,088
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
Net
|
|
|
Average
|
|
|
|
Carrying
|
|
|
Impairment
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Remaining Life
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Charges
|
|
|
Amortization
|
|
|
Amount
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
30,922
|
|
|
$
|
(2,637
|
)
|
|
$
|
(667
|
)
|
|
$
|
27,618
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
$
|
440
|
|
|
$
|
-
|
|
|
$
|
(440
|
)
|
|
$
|
-
|
|
|
|
-
|
|
Insurance expirations
|
|
|
1,270
|
|
|
|
-
|
|
|
|
(1,270
|
)
|
|
|
-
|
|
|
|
-
|
|
Customer relationships
|
|
|
795
|
|
|
|
(95
|
)
|
|
|
(484
|
)
|
|
|
216
|
|
|
|
4.6
|
|
Core deposit intangible
|
|
|
3,954
|
|
|
|
-
|
|
|
|
(231
|
)
|
|
|
3,723
|
|
|
|
9.4
|
|
|
|
|
6,459
|
|
|
|
(95
|
)
|
|
|
(2,425
|
)
|
|
|
3,939
|
|
|
|
|
|
Unamortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780
|
|
|
|
-
|
|
Total other intangible assets
|
|
$
|
7,239
|
|
|
$
|
(95
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
4,719
|
|
|
|
|
|
The aggregate amortization expense was
$631 thousand and $203 thousand for the nine months ended September 30, 2018 and September 30, 2017, respectively.
At September 30, 2018, estimated future
remaining amortization for amortizing intangibles within the years ending December 31, is as follows:
(Dollars in thousands)
|
|
|
|
2018
|
|
$
|
270
|
|
2019
|
|
|
652
|
|
2020
|
|
|
580
|
|
2021
|
|
|
505
|
|
2022
|
|
|
421
|
|
2023
|
|
|
317
|
|
Thereafter
|
|
|
563
|
|
Total amortizing intangible assets
|
|
$
|
3,308
|
|
Note 7 – Other Assets
The Company had the following other assets at September 30,
2018 and December 31, 2017.
(Dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Restricted securities
|
|
$
|
8,110
|
|
|
$
|
3,735
|
|
Accrued interest receivable
|
|
|
3,601
|
|
|
|
3,502
|
|
Deferred income taxes
|
|
|
2,440
|
|
|
|
1,935
|
|
Prepaid expenses
|
|
|
1,546
|
|
|
|
1,475
|
|
Cash surrender value on life insurance
|
|
|
3,676
|
|
|
|
3,637
|
|
Other assets
|
|
|
4,327
|
|
|
|
3,636
|
|
Total
|
|
$
|
23,700
|
|
|
$
|
17,920
|
|
The following table provides information on significant components
of the Company’s deferred tax assets and liabilities as of September 30, 2018 and December 31, 2017.
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
2,801
|
|
|
$
|
2,625
|
|
Reserve for off-balance sheet commitments
|
|
|
81
|
|
|
|
81
|
|
Net operating loss carry forward
|
|
|
397
|
|
|
|
741
|
|
Write-downs of other real estate owned
|
|
|
217
|
|
|
|
212
|
|
Deferred income
|
|
|
132
|
|
|
|
95
|
|
Unrealized losses on available-for-sale securities
|
|
|
1,514
|
|
|
|
460
|
|
Unrealized losses on available-for-sale securities transferred to held to maturity
|
|
|
22
|
|
|
|
20
|
|
Other
|
|
|
345
|
|
|
|
635
|
|
Total deferred tax assets
|
|
|
5,509
|
|
|
|
4,869
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
267
|
|
|
|
408
|
|
Amortization on loans FMV adjustment
|
|
|
65
|
|
|
|
84
|
|
Acquisition accounting adjustments
|
|
|
2,239
|
|
|
|
1,994
|
|
Deferred capital gain on branch sale
|
|
|
202
|
|
|
|
207
|
|
Other
|
|
|
296
|
|
|
|
241
|
|
Total deferred tax liabilities
|
|
|
3,069
|
|
|
|
2,934
|
|
Net deferred tax assets
|
|
$
|
2,440
|
|
|
$
|
1,935
|
|
The Company’s deferred tax assets
consist of gross net operating loss carryovers for state tax purposes of $6.0 million that will be used to offset taxable income
in future periods. The Company’s state net operating loss carryovers will begin to expire in the year ending December 31,
2026 with limited amounts available through December 31, 2034.
No valuation allowance on these deferred
tax assets was recorded at September 30, 2018 and December 31, 2017 as management believes it is more likely than not that all
deferred tax assets will be realized.
Note 8 – Other Liabilities
The Company had the following other liabilities
at September 30, 2018 and December 31, 2017.
(Dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accrued interest payable
|
|
$
|
396
|
|
|
$
|
65
|
|
Other accounts payable
|
|
|
4,178
|
|
|
|
4,286
|
|
Deferred compensation liability
|
|
|
1,083
|
|
|
|
1,219
|
|
Other liabilities
|
|
|
588
|
|
|
|
39
|
|
Total
|
|
$
|
6,245
|
|
|
$
|
5,609
|
|
Note 9 - Stock-Based Compensation
At the 2016 annual meeting, stockholders
approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares,
Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of
common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally
are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time,
and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive
award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive
awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance
cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period
for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock
for grant, and 653,391 shares remained available for grant at September 30, 2018.
The following tables provide information
on stock-based compensation expense for the three and nine months ended September 30, 2018 and 2017.
|
|
For Three Months Ended
|
|
|
For Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation expense
|
|
$
|
163
|
|
|
$
|
158
|
|
|
$
|
474
|
|
|
$
|
748
|
|
Excess tax benefits related to stock-based compensation
|
|
|
11
|
|
|
|
15
|
|
|
|
146
|
|
|
|
26
|
|
|
|
As of
|
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Unrecognized stock-based compensation expense
|
|
$
|
530
|
|
|
|
|
$
|
1,147
|
|
|
Weighted average period unrecognized expense is expected to be
recognized
|
|
|
0.8
years
|
|
|
|
|
|
1.3 years
|
|
|
The following table summarizes restricted stock award activity
for the Company under the 2016 Equity Plan for the nine months ended September 30, 2018 and 2017.
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested at beginning of period
|
|
|
15,913
|
|
|
$
|
15.39
|
|
Granted
|
|
|
14,602
|
|
|
|
18.74
|
|
Vested
|
|
|
(30,515
|
)
|
|
|
17.04
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested at end of period
|
|
|
-
|
|
|
$
|
-
|
|
The fair value of restricted stock awards
that vested during the first nine months of 2018 and 2017 was $520 thousand and $309 thousand, respectively.
Restricted stock units (RSUs) are similar
to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions
of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year
period. Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock
on a specified issuance date. The recipient does not have any stockholder rights, including voting rights, with respect to the
shares underlying awarded RSUs until the recipient becomes the holder of those shares.
During 2018, the Company entered into a
long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric
to be achieved as of December 31, 2020. Assuming the performance metric is achieved, these awards will cliff vest on this date,
in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded
at the end of the performance cycle is between 13,188 shares and 52,769 shares, assuming a certain performance metric is met. The
table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the
performance cycle.
During 2017, the Company entered into a
long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric
to be achieved as of December 31, 2019. Assuming the performance metric is achieved, these awards will cliff vest on this date,
in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded
at the end of the performance cycle is between 12,703 shares and 50,830 shares, assuming a certain performance metric is met. The
table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the
performance cycle.
During 2016, the Company entered into a
long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric
to be achieved as of December 31, 2018. Assuming the performance metric is achieved, these awards will cliff vest on this date,
in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded
at the end of the performance cycle is between 12,214 shares and 48,871 shares, assuming a certain performance metric is met. In
addition, two members of the long-term incentive plan from 2015 forfeited their RSUs due to leaving the Company before the end
of the vesting period. The table below presents management’s evaluation of the probable number of common stock awards to
be issued at the end of the performance cycle.
The following table summarizes restricted
stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end
of the performance cycle for the Company under the 2016 Equity Plan for the nine months ended September 30, 2018.
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Outstanding at beginning of period
|
|
|
90,266
|
|
|
$
|
12.08
|
|
Granted
|
|
|
26,381
|
|
|
|
17.36
|
|
Vested
|
|
|
(40,423
|
)
|
|
|
9.49
|
|
Forfeited
|
|
|
(16,308
|
)
|
|
|
11.68
|
|
Outstanding at end of period
|
|
|
59,916
|
|
|
$
|
15.38
|
|
The fair value of restricted stock units
that vested during the first nine months of 2018 and 2017 was $383 thousand and $0, respectively.
The following table summarizes stock option
activity for the Company under the 2016 Equity Plan for the nine months ended September 30, 2018 and 2017.
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at beginning of period
|
|
|
62,429
|
|
|
$
|
8.48
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(35,180
|
)
|
|
|
7.54
|
|
Expired/Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at end of period
|
|
|
27,249
|
|
|
$
|
9.68
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
27,249
|
|
|
$
|
9.68
|
|
There were no stock options granted during the nine months ended
September 30, 2018. The weighted average fair value of stock options granted during the nine months ended September 30, 2017 was
$10.99. The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions
for dividend yield, expected volatility, risk-free interest rate and expected lives (in years). The expected dividend yield is
calculated by dividing the total expected annual dividend payout by the average stock price. The expected volatility is based on
historical volatility of the underlying securities. The risk-free interest rate is based on the Federal Reserve Bank’s constant
maturities daily interest rate in effect at grant date. The expected contract life of the options represents the period of time
that the Company expects the awards to be outstanding based on historical experience with similar awards. The following weighted
average assumptions were used as inputs to the Black-Scholes valuation model for options granted in 2017.
|
|
2017
|
|
Dividend yield
|
|
|
0.84
|
%
|
Expected volatility
|
|
|
64.80
|
%
|
Risk-free interest rate
|
|
|
2.42
|
%
|
Expected contract life (in years)
|
|
|
10 years
|
|
At the end of the third quarter of 2018,
the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $222 thousand based on the $17.82 market
value per share of the Company’s common stock at September 30, 2018. Similarly, the aggregate intrinsic value of the options
exercisable was $222 thousand at September 30, 2018. The intrinsic value on options exercised during the nine months ended September
30, 2018 was $365 thousand based on the $17.92 market value per share of the Company’s common stock at January 31, 2018.
The intrinsic value on options exercised in 2017 was $8 thousand based on the $15.89 market value per share of the Company’s
common stock at January 30, 2017. At September 30, 2018, the weighted average remaining contract life of options outstanding was
6.7 years.
Note 10 – Accumulated Other Comprehensive Income
The Company records unrealized holding
gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate
component of stockholders’ equity. The following table provides information on the changes in the components of accumulated
other comprehensive income (loss) for the nine months ended September 30, 2018 and 2017.
|
|
|
|
|
Unrealized gains
|
|
|
|
|
|
|
|
|
|
(losses) on securities
|
|
|
|
|
|
|
Unrealized
|
|
|
transferred from
|
|
|
Accumulated
|
|
|
|
gains (losses) on
|
|
|
Available-for-sale
|
|
|
other
|
|
|
|
available for sale
|
|
|
to
|
|
|
comprehensive
|
|
(Dollars in thousands)
|
|
securities
|
|
|
Held-to-maturity
|
|
|
income (loss)
|
|
Balance, December 31, 2017
|
|
$
|
(1,255
|
)
|
|
$
|
(54
|
)
|
|
$
|
(1,309
|
)
|
Cumulative effect adjustment (ASU 2016-01)
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
Other comprehensive (loss) income
|
|
|
(2,778
|
)
|
|
|
15
|
|
|
|
(2,763
|
)
|
Balance, September 30, 2018
|
|
$
|
(4,027
|
)
|
|
$
|
(39
|
)
|
|
$
|
(4,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
(931
|
)
|
|
$
|
(62
|
)
|
|
$
|
(993
|
)
|
Other comprehensive income
|
|
|
927
|
|
|
|
15
|
|
|
|
942
|
|
Reclassification of (gains) recognized
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Balances, September 30, 2017
|
|
$
|
(7
|
)
|
|
$
|
(47
|
)
|
|
$
|
(54
|
)
|
Note 11 – Fair Value Measurements
Accounting guidance under GAAP defines
fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The Company uses fair value measurements
to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available
for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record
at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and other real estate owned (foreclosed
assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs
of individual assets.
Under fair value accounting guidance, assets
and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded
and the reliability of the assumptions used to determine their fair values. These hierarchy levels are:
Level
1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability
to access at the measurement date.
Level
2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly
quoted intervals.
Level
3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own
assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Below is a discussion
on the Company’s assets measured at fair value on a recurring basis.
Investment Securities Available for
Sale
Fair value measurement for investment securities
available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable
data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The
Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies
its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored
entities as Level 2.
Equity Securities
Fair value measurement for equity securities
is based on quoted market prices retrieved by the Company via on-line resources. Although these securities have readily available
fair market values, the Company deems that they be classified as level 2 investments in the fair value hierarchy due to not being
considered traded in a highly active market.
The tables below present the recorded amount of assets measured
at fair value on a recurring basis at September 30, 2018 and December 31, 2017. No assets were transferred from one hierarchy level
to another during the first nine months of 2018 or 2017.
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Quoted
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Prices
|
|
|
Inputs
|
|
|
Inputs
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
41,546
|
|
|
$
|
-
|
|
|
$
|
41,546
|
|
|
$
|
-
|
|
Mortgage-backed
|
|
|
126,129
|
|
|
|
-
|
|
|
|
126,129
|
|
|
|
-
|
|
|
|
|
167,675
|
|
|
|
-
|
|
|
|
167,675
|
|
|
|
-
|
|
Equity
|
|
|
649
|
|
|
|
-
|
|
|
|
649
|
|
|
|
-
|
|
Total
|
|
$
|
168,324
|
|
|
$
|
-
|
|
|
$
|
168,324
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Quoted
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Prices
|
|
|
Inputs
|
|
|
Inputs
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
45,332
|
|
|
$
|
-
|
|
|
$
|
45,332
|
|
|
$
|
-
|
|
Mortgage-backed
|
|
|
150,965
|
|
|
|
-
|
|
|
|
150,965
|
|
|
|
-
|
|
Equity
|
|
|
658
|
|
|
|
-
|
|
|
|
658
|
|
|
|
-
|
|
Total
|
|
$
|
196,955
|
|
|
$
|
-
|
|
|
$
|
196,955
|
|
|
$
|
-
|
|
Below is a discussion
on the Company’s assets measured at fair value on a nonrecurring basis.
Impaired Loans
Loans are considered impaired when, based
on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Loan impairment is measured using the present value of expected cash flows, the loan’s observable
market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered
Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or
accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review
and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market
conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.
Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based
on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.
Other Real Estate Owned (Foreclosed
Assets)
Foreclosed assets are adjusted for fair
value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and
fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals
and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed
sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the
foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior
periods.
The tables below
present the recorded amount of assets measured at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017.
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
Valuation Technique
|
|
|
|
|
Unobservable Input
|
|
|
|
|
Range
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
303
|
|
|
Appraisal of collateral
|
|
|
1
|
|
|
Liquidation expense
|
|
|
2
|
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
5,908
|
|
|
Discounted cash flow analysis
|
|
|
1
|
|
|
Discount rate
|
|
|
|
|
|
|
4% - 8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
1,518
|
|
|
Appraisal of collateral
|
|
|
1
|
|
|
Appraisal adjustments
|
|
|
2
|
|
|
|
20% - 30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation expense
|
|
|
2
|
|
|
|
5% - 10%
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
|
Valuation Technique
|
|
|
|
|
Unobservable Input
|
|
|
|
|
Range
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
510
|
|
|
Appraisal of collateral
|
|
|
1
|
|
|
Liquidation expense
|
|
|
2
|
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,005
|
|
|
Discounted cash flow analysis
|
|
|
1
|
|
|
Discount rate
|
|
|
|
|
|
|
4% - 8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
1,794
|
|
|
Appraisal of collateral
|
|
|
1
|
|
|
Appraisal adjustments
|
|
|
2
|
|
|
|
20% - 30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation expense
|
|
|
2
|
|
|
|
5% - 10%
|
|
|
(1)
|
Fair value is generally determined through independent
appraisals of the underlying collateral (impaired loans and OREO) or discounted cash flow analyses (impaired loans), which generally
include various level III inputs which are not identifiable.
|
|
(2)
|
Appraisals may be adjusted by management for qualitative
factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses
and other appraisal adjustments are presented as a percent of the appraisal.
|
The following table provides information
on the estimated fair values of the Company’s financial assets and liabilities that are reported in the balance sheets not
recorded at fair value on a recurring basis as of September 30, 2018 and December 31, 2017. The financial assets and liabilities
have been segregated by their classification level in the fair value hierarchy.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,777
|
|
|
$
|
48,777
|
|
|
$
|
31,820
|
|
|
$
|
31,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity
|
|
$
|
6,037
|
|
|
$
|
5,983
|
|
|
$
|
6,247
|
|
|
$
|
6,391
|
|
Restricted securities
|
|
|
8,110
|
|
|
|
8,110
|
|
|
|
3,735
|
|
|
|
3,735
|
|
Cash surrender value on life insurance
|
|
|
3,676
|
|
|
|
3,676
|
|
|
|
3,637
|
|
|
|
3,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net (1)
|
|
$
|
1,170,229
|
|
|
$
|
1,139,344
|
|
|
$
|
1,083,733
|
|
|
$
|
1,072,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
331,766
|
|
|
$
|
331,766
|
|
|
$
|
328,322
|
|
|
$
|
328,322
|
|
Checking plus interest
|
|
|
214,898
|
|
|
|
214,898
|
|
|
|
231,898
|
|
|
|
231,898
|
|
Money market
|
|
|
216,394
|
|
|
|
216,394
|
|
|
|
223,123
|
|
|
|
223,123
|
|
Savings
|
|
|
153,973
|
|
|
|
153,973
|
|
|
|
156,623
|
|
|
|
156,623
|
|
Club
|
|
|
1,535
|
|
|
|
1,535
|
|
|
|
398
|
|
|
|
398
|
|
Brokered Deposits
|
|
|
23,547
|
|
|
|
23,519
|
|
|
|
-
|
|
|
|
-
|
|
Certificates of deposit, $100,000 or more
|
|
|
96,498
|
|
|
|
94,212
|
|
|
|
107,343
|
|
|
|
105,691
|
|
Other time
|
|
|
143,225
|
|
|
|
138,187
|
|
|
|
155,074
|
|
|
|
151,339
|
|
Short-term borrowings
|
|
|
114,043
|
|
|
|
114,043
|
|
|
|
21,734
|
|
|
|
21,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Carrying amount is net of unearned income and the allowance
for credit losses. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of September 30,
2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price
notion.
|
Note 12 – Financial Instruments with Off-Balance Sheet
Risk
In the normal course of business, to meet
the financial needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial
instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters
of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent
future cash requirements.
The following table provides information on commitments outstanding
at September 30, 2018 and December 31, 2017.
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Commitments to extend credit
|
|
$
|
188,961
|
|
|
$
|
206,065
|
|
Letters of credit
|
|
|
6,816
|
|
|
|
7,142
|
|
Total
|
|
$
|
195,777
|
|
|
$
|
213,207
|
|
Note 13 – Segment Reporting
The Company operates two primary business
segments: Community Banking and Insurance Products and Services. Through the Community Banking business, the Company provides services
to consumers and small businesses in Maryland, Delaware and Virginia through its 21branch network and two loan production offices.
Community banking activities include small business services, retail brokerage, trust services and consumer banking products and
services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit
cards and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate
development loans, equipment and operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable
financing arrangements, and merchant card services.
Through the Insurance Products and Services
business, the Company provides a full range of insurance products and services to businesses and consumers in the Company’s
market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and
profit-sharing plans and retirement plans for executives and employees are available to suit the needs of individual businesses.
The following tables include selected financial information
by business segments for the three and nine months of September 30, 2018 and 2017.
|
|
Community
|
|
|
Insurance Products
|
|
|
Parent
|
|
|
Consolidated
|
|
(Dollars in thousands)
|
|
Banking
|
|
|
and Services
|
|
|
Company
|
|
|
Total
|
|
For the three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
14,231
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
14,236
|
|
Interest Expense
|
|
|
(1,289
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,289
|
)
|
Provision for credit losses
|
|
|
(307
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(307
|
)
|
Noninterest income
|
|
|
2,464
|
|
|
|
2,246
|
|
|
|
-
|
|
|
|
4,710
|
|
Noninterest expense
|
|
|
(7,166
|
)
|
|
|
(1,978
|
)
|
|
|
(2,142
|
)
|
|
|
(11,286
|
)
|
Net intersegment (expense) income
|
|
|
(1,893
|
)
|
|
|
(143
|
)
|
|
|
2,036
|
|
|
|
-
|
|
Income (loss) before taxes
|
|
|
6,040
|
|
|
|
125
|
|
|
|
(101
|
)
|
|
|
6,064
|
|
Income tax (expense) benefit
|
|
|
(1,586
|
)
|
|
|
(33
|
)
|
|
|
9
|
|
|
|
(1,610
|
)
|
Net Income (loss)
|
|
$
|
4,454
|
|
|
$
|
92
|
|
|
$
|
(92
|
)
|
|
$
|
4,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, September 30, 2018
|
|
$
|
1,455,060
|
|
|
$
|
11,305
|
|
|
$
|
7,178
|
|
|
$
|
1,473,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
12,931
|
|
|
|
-
|
|
|
|
6
|
|
|
|
12,937
|
|
Interest Expense
|
|
|
(611
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(611
|
)
|
Provision for credit losses
|
|
|
(345
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(345
|
)
|
Noninterest income
|
|
|
2,178
|
|
|
|
2,247
|
|
|
|
-
|
|
|
|
4,425
|
|
Noninterest expense
|
|
|
(6,607
|
)
|
|
|
(2,201
|
)
|
|
|
(1,912
|
)
|
|
|
(10,720
|
)
|
Net intersegment (expense) income
|
|
|
(1,906
|
)
|
|
|
78
|
|
|
|
1,828
|
|
|
|
-
|
|
Income (loss) before taxes
|
|
|
5,640
|
|
|
|
124
|
|
|
|
(78
|
)
|
|
|
5,686
|
|
Income tax (expense) benefit
|
|
|
(2,255
|
)
|
|
|
(50
|
)
|
|
|
31
|
|
|
|
(2,274
|
)
|
Net Income (loss)
|
|
$
|
3,385
|
|
|
|
74
|
|
|
|
(47
|
)
|
|
|
3,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, September 30, 2017
|
|
$
|
1,359,930
|
|
|
|
9,909
|
|
|
|
6,289
|
|
|
|
1,376,127
|
|
|
|
Community
|
|
|
Insurance Products
|
|
|
Parent
|
|
|
Consolidated
|
|
(Dollars in thousands)
|
|
Banking
|
|
|
and Services
|
|
|
Company
|
|
|
Total
|
|
For the nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
40,996
|
|
|
$
|
-
|
|
|
$
|
17
|
|
|
$
|
41,013
|
|
Interest Expense
|
|
|
(3,104
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,104
|
)
|
Provision for credit losses
|
|
|
(1,214
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,214
|
)
|
Noninterest income
|
|
|
6,899
|
|
|
|
7,280
|
|
|
|
-
|
|
|
|
14,179
|
|
Noninterest expense
|
|
|
(21,178
|
)
|
|
|
(5,953
|
)
|
|
|
(6,445
|
)
|
|
|
(33,576
|
)
|
Net intersegment (expense) income
|
|
|
(5,627
|
)
|
|
|
(439
|
)
|
|
|
6,066
|
|
|
|
-
|
|
Income (loss) before taxes
|
|
|
16,772
|
|
|
|
888
|
|
|
|
(362
|
)
|
|
|
17,298
|
|
Income tax (expense) benefit
|
|
|
(4,375
|
)
|
|
|
(233
|
)
|
|
|
213
|
|
|
|
(4,395
|
)
|
Net Income (loss)
|
|
$
|
12,397
|
|
|
|
655
|
|
|
|
(149
|
)
|
|
|
12,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, September 30, 2018
|
|
|
1,455,060
|
|
|
|
11,305
|
|
|
|
7,178
|
|
|
$
|
1,473,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
34,761
|
|
|
$
|
(1
|
)
|
|
$
|
73
|
|
|
$
|
34,833
|
|
Interest Expense
|
|
|
(1,674
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,674
|
)
|
Provision for credit losses
|
|
|
(1,746
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,746
|
)
|
Noninterest income
|
|
|
6,111
|
|
|
|
7,300
|
|
|
|
-
|
|
|
|
13,411
|
|
Noninterest expense
|
|
|
(18,651
|
)
|
|
|
(6,035
|
)
|
|
|
(5,884
|
)
|
|
|
(30,570
|
)
|
Net intersegment (expense) income
|
|
|
(5,500
|
)
|
|
|
(84
|
)
|
|
|
5,584
|
|
|
|
-
|
|
Income (loss) before taxes
|
|
|
13,301
|
|
|
|
1,180
|
|
|
|
(227
|
)
|
|
|
14,254
|
|
Income tax (expense) benefit
|
|
|
(5,309
|
)
|
|
|
(472
|
)
|
|
|
91
|
|
|
|
(5,690
|
)
|
Net Income (loss)
|
|
$
|
7,992
|
|
|
$
|
708
|
|
|
$
|
(136
|
)
|
|
$
|
8,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, September 30, 2017
|
|
$
|
1,359,930
|
|
|
$
|
9,909
|
|
|
$
|
6,289
|
|
|
$
|
1,376,127
|
|
Note 14 – Revenue Recognition
On January 1, 2018, the Company adopted
ASU No. 2014-09
“Revenue from Contracts with Customers” (Topic 606)
and all subsequent ASUs that modified Topic
606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such,
a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after
January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance
with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated
with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams
such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions.
However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of
the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed
below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist
of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check
orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly
service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check
orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation
is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily
received immediately or at the end of the month through a direct charge to customers’ accounts.
Trust and Investment Fee Income
Trust and investment fee income are primarily
comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance
obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value
of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a
direct charge to customers’ accounts. The Company does not earn performance-based incentives.
Optional services such as real estate sales
and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance
obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e.,
as incurred). Payment is received shortly after services are rendered.
Insurance Agency Commissions
Insurance income primarily consists of
commissions received on insurance premiums from customer policies. The Company acts as an intermediary between the Company’s
customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the
insurance policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company
recognizes the revenue. The Company does not earn a significant amount of trailer fees on individual insurance policies.
Other Noninterest Income
Other noninterest income consists of: fees, exchange, other
service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily
comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card
income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through
card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company
cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and
credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers,
bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and
other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.
Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on
an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes
will be recognized on a monthly basis consistent with the duration of the performance obligation.
The following presents noninterest income, segregated by revenue
streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2018 and 2017.
|
|
For Three Months Ended
|
|
|
For Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
In-scope of Topic 606:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
982
|
|
|
$
|
945
|
|
|
$
|
2,834
|
|
|
$
|
2,657
|
|
Trust and investment fee income
|
|
|
383
|
|
|
|
389
|
|
|
|
1,197
|
|
|
|
1,122
|
|
Gains on sales and calls of investment securities
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Insurance agency commissions
|
|
|
2,170
|
|
|
|
2,088
|
|
|
|
7,015
|
|
|
|
6,939
|
|
Other noninterest income
|
|
|
1,130
|
|
|
|
870
|
|
|
|
2,969
|
|
|
|
2,413
|
|
Noninterest Income (in-scope of Topic 606)
|
|
|
4,665
|
|
|
|
4,297
|
|
|
|
14,015
|
|
|
|
13,136
|
|
Noninterest Income (out-of-scope of Topic 606)
|
|
|
45
|
|
|
|
128
|
|
|
|
164
|
|
|
|
275
|
|
Total Noninterest Income
|
|
$
|
4,710
|
|
|
$
|
4,425
|
|
|
$
|
14,179
|
|
|
$
|
13,411
|
|
Contract Balances
A contract asset balance occurs when an
entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before
payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service
to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest
revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees
based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance
obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and
therefore, does not experience significant contract balances. As of September 30, 2018 and December 31, 2017, the Company
did not have any significant contract balances.