Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to________
Commission File Number: 001-36448
Bankwell Financial Group, Inc.
(Exact Name of Registrant as specified in its Charter)
|
| | |
Connecticut | | 20-8251355 |
(State or other jurisdiction of | | (I.R.S. Employer |
Incorporation or organization) | | Identification No.) |
220 Elm Street
New Canaan, Connecticut 06840
(203) 652-0166
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| |
Large accelerated filer ¨ | Accelerated filer þ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Emerging growth company þ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of July 31, 2018, there were 7,842,820 shares of the registrant’s common stock outstanding.
Bankwell Financial Group, Inc.
Form 10-Q
Table of Contents
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
Bankwell Financial Group, Inc.
Consolidated Balance Sheets - (unaudited)
(Dollars in thousands, except share data)
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
ASSETS | | | |
Cash and due from banks | $ | 89,214 |
| | $ | 70,545 |
|
Federal funds sold | 105 |
| | 186 |
|
Cash and cash equivalents | 89,319 |
| | 70,731 |
|
| | | |
Available for sale investment securities, at fair value | 92,608 |
| | 92,188 |
|
Held to maturity investment securities, at amortized cost | 21,505 |
| | 21,579 |
|
Loans receivable (net of allowance for loan losses of $19,006 at June 30, 2018 and $18,904 at December 31, 2017) | 1,572,591 |
| | 1,520,879 |
|
Accrued interest receivable | 5,522 |
| | 5,910 |
|
Federal Home Loan Bank stock, at cost | 9,333 |
| | 9,183 |
|
Premises and equipment, net | 20,313 |
| | 18,196 |
|
Bank-owned life insurance | 40,146 |
| | 39,618 |
|
Goodwill | 2,589 |
| | 2,589 |
|
Other intangible assets | 334 |
| | 382 |
|
Deferred income taxes, net | 4,683 |
| | 4,904 |
|
Other assets | 11,859 |
| | 10,448 |
|
Total assets | $ | 1,870,802 |
| | $ | 1,796,607 |
|
| | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Liabilities | | | |
Deposits | | | |
Noninterest bearing deposits | $ | 168,295 |
| | $ | 172,638 |
|
Interest bearing deposits | 1,297,343 |
| | 1,225,767 |
|
Total deposits | 1,465,638 |
| | 1,398,405 |
|
| | | |
Advances from the Federal Home Loan Bank | 199,000 |
| | 199,000 |
|
Subordinated debentures | 25,129 |
| | 25,103 |
|
Accrued expenses and other liabilities | 11,462 |
| | 13,072 |
|
Total liabilities | 1,701,229 |
| | 1,635,580 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Shareholders' equity | | | |
Common stock, no par value; 10,000,000 shares authorized, 7,841,720 and 7,751,424 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 119,824 |
| | 118,301 |
|
Retained earnings | 48,470 |
| | 41,032 |
|
Accumulated other comprehensive income | 1,279 |
| | 1,694 |
|
Total shareholders' equity | 169,573 |
| | 161,027 |
|
| | | |
Total liabilities and shareholders' equity | $ | 1,870,802 |
| | $ | 1,796,607 |
|
See accompanying notes to consolidated financial statements (unaudited)
Bankwell Financial Group, Inc.
Consolidated Statements of Income – (unaudited)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Interest and dividend income | | | | | | | |
Interest and fees on loans | $ | 18,114 |
| | $ | 16,660 |
| | $ | 35,532 |
| | $ | 32,173 |
|
Interest and dividends on securities | 975 |
| | 880 |
| | 1,910 |
| | 1,689 |
|
Interest on cash and cash equivalents | 325 |
| | 148 |
| | 579 |
| | 262 |
|
Total interest income | 19,414 |
| | 17,688 |
| | 38,021 |
| | 34,124 |
|
| | | | | | | |
Interest expense | | | | | | | |
Interest expense on deposits | 4,309 |
| | 3,095 |
| | 7,965 |
| | 5,676 |
|
Interest on borrowings | 1,197 |
| | 952 |
| | 2,443 |
| | 1,859 |
|
Total interest expense | 5,506 |
| | 4,047 |
| | 10,408 |
| | 7,535 |
|
| | | | | | | |
Net interest income | 13,908 |
| | 13,641 |
| | 27,613 |
| | 26,589 |
|
| | | | | | | |
Provision for loan losses | 310 |
| | 895 |
| | 323 |
| | 1,438 |
|
| | | | | | | |
Net interest income after provision for loan losses | 13,598 |
| | 12,746 |
| | 27,290 |
| | 25,151 |
|
| | | | | | | |
Noninterest income | | | | | | | |
Gains and fees from sales of loans | 315 |
| | 199 |
| | 685 |
| | 523 |
|
Bank owned life insurance | 265 |
| | 295 |
| | 528 |
| | 586 |
|
Service charges and fees | 265 |
| | 261 |
| | 521 |
| | 501 |
|
Net gain on sale of available for sale securities | — |
| | — |
| | 222 |
| | 165 |
|
Other | 262 |
| | 243 |
| | 484 |
| | 489 |
|
Total noninterest income | 1,107 |
| | 998 |
| | 2,440 |
| | 2,264 |
|
| | | | | | | |
Noninterest expense | | | | | | | |
Salaries and employee benefits | 4,539 |
| | 3,800 |
| | 9,567 |
| | 7,729 |
|
Occupancy and equipment | 1,731 |
| | 1,439 |
| | 3,348 |
| | 3,131 |
|
Data processing | 509 |
| | 401 |
| | 1,034 |
| | 846 |
|
Marketing | 479 |
| | 311 |
| | 776 |
| | 577 |
|
Professional services | 424 |
| | 523 |
| | 1,199 |
| | 935 |
|
Director fees | 274 |
| | 243 |
| | 489 |
| | 476 |
|
FDIC insurance | 203 |
| | 243 |
| | 417 |
| | 626 |
|
Amortization of intangibles | 24 |
| | 31 |
| | 48 |
| | 62 |
|
Other | 581 |
| | 590 |
| | 1,089 |
| | 1,433 |
|
Total noninterest expense | 8,764 |
| | 7,581 |
| | 17,967 |
| | 15,815 |
|
Income before income tax expense | 5,941 |
| | 6,163 |
| | 11,763 |
| | 11,600 |
|
Income tax expense | 1,226 |
| | 2,394 |
| | 2,448 |
| | 4,129 |
|
Net income | $ | 4,715 |
| | $ | 3,769 |
| | $ | 9,315 |
| | $ | 7,471 |
|
| | | | | | | |
Earnings Per Common Share: | | | | | | | |
Basic | $ | 0.60 |
| | $ | 0.49 |
| | $ | 1.19 |
| | $ | 0.98 |
|
Diluted | $ | 0.60 |
| | $ | 0.49 |
| | $ | 1.19 |
| | $ | 0.97 |
|
| | | | | | | |
Weighted Average Common Shares Outstanding: | | | | | | | |
Basic | 7,722,892 |
| | 7,550,734 |
| | 7,699,977 |
| | 7,538,069 |
|
Diluted | 7,761,560 |
| | 7,645,930 |
| | 7,747,068 |
| | 7,638,350 |
|
Dividends per common share | $ | 0.12 |
| | $ | 0.07 |
| | $ | 0.24 |
| | $ | 0.14 |
|
See accompanying notes to consolidated financial statements (unaudited)
Bankwell Financial Group, Inc.
Consolidated Statements of Comprehensive Income – (unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 4,715 |
| | $ | 3,769 |
| | $ | 9,315 |
| | $ | 7,471 |
|
Other comprehensive income: | | | | | | | |
Unrealized (losses) gains on securities: | | | | | | | |
Unrealized holding (losses) gains on available for sale securities | (584 | ) | | 293 |
| | (2,119 | ) | | 453 |
|
Reclassification adjustment for gain realized in net income | — |
| | — |
| | (222 | ) | | (165 | ) |
Net change in unrealized (losses) gains | (584 | ) | | 293 |
| | (2,341 | ) | | 288 |
|
Income tax benefit (expense) | 122 |
| | (103 | ) | | 492 |
| | (101 | ) |
Unrealized (losses) gains on securities, net of tax | (462 | ) | | 190 |
| | (1,849 | ) | | 187 |
|
Unrealized (losses) gains on interest rate swaps: | | | | | | | |
Unrealized (losses) gains on interest rate swaps | (187 | ) | | (302 | ) | | 1,815 |
| | (84 | ) |
Income tax benefit (expense) | 39 |
| | 105 |
| | (381 | ) | | 29 |
|
Unrealized (losses) gains on interest rate swaps, net of tax | (148 | ) | | (197 | ) | | 1,434 |
| | (55 | ) |
Total other comprehensive (loss) income, net of tax | (610 | ) | | (7 | ) | | (415 | ) | | 132 |
|
Comprehensive income | $ | 4,105 |
| | $ | 3,762 |
| | $ | 8,900 |
| | $ | 7,603 |
|
See accompanying notes to consolidated financial statements (unaudited)
Bankwell Financial Group, Inc.
Consolidated Statements of Shareholders' Equity – (unaudited)
(In thousands, except share data)
|
| | | | | | | | | | | | | | | | | | |
| Number of Outstanding Shares | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total |
Balance at December 31, 2017 | 7,751,424 |
| | $ | 118,301 |
| | $ | 41,032 |
| | $ | 1,694 |
| | $ | 161,027 |
|
Net income | — |
| | — |
| | 9,315 |
| | — |
| | 9,315 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (415 | ) | | (415 | ) |
Cash dividends declared ($0.24 per share) | — |
| | — |
| | (1,877 | ) | | — |
| | (1,877 | ) |
Stock-based compensation expense | — |
| | 633 |
| | — |
| | — |
| | 633 |
|
Forfeitures of restricted stock | (674 | ) | | — |
| | — |
| | — |
| | — |
|
Warrants exercised | 22,400 |
| | 400 |
| | — |
| | — |
| | 400 |
|
Issuance of restricted stock | 43,550 |
| | — |
| | — |
| | — |
| | — |
|
Stock options exercised | 25,020 |
| | 490 |
| | — |
| | — |
| | 490 |
|
Balance at June 30, 2018 | 7,841,720 |
| | $ | 119,824 |
| | $ | 48,470 |
| | $ | 1,279 |
| | $ | 169,573 |
|
|
| | | | | | | | | | | | | | | | | | |
| Number of Outstanding Shares | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total |
Balance at December 31, 2016 | 7,620,663 |
| | $ | 115,353 |
| | $ | 29,652 |
| | $ | 890 |
| | $ | 145,895 |
|
Net income | — |
| | — |
| | 7,471 |
| | — |
| | 7,471 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 132 |
| | 132 |
|
Cash dividends declared ($0.14 per share) | — |
| | — |
| | (1,070 | ) | | — |
| | (1,070 | ) |
Stock-based compensation expense | — |
| | 434 |
| | — |
| | — |
| | 434 |
|
Forfeitures of restricted stock | (14,774 | ) | | — |
| | — |
| | — |
| | — |
|
Issuance of restricted stock | 28,250 |
| | — |
| | — |
| | — |
| | — |
|
Warrants exercised | 11,200 |
| | 200 |
| | — |
| | — |
| | 200 |
|
Stock options exercised | 28,511 |
| | 515 |
| | — |
| | — |
| | 515 |
|
Balance at June 30, 2017 | 7,673,850 |
| | $ | 116,502 |
| | $ | 36,053 |
| | $ | 1,022 |
| | $ | 153,577 |
|
See accompanying notes to consolidated financial statements (unaudited)
Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows – (unaudited)
(In thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Cash flows from operating activities | | | |
Net income | $ | 9,315 |
| | $ | 7,471 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net accretion of premiums and discounts on investment securities | (21 | ) | | (17 | ) |
Provision for loan losses | 323 |
| | 1,438 |
|
Provision for deferred taxes | 332 |
| | 56 |
|
Net gain on sales of available for sale securities | (222 | ) | | (165 | ) |
Depreciation and amortization | 782 |
| | 760 |
|
Amortization of debt issuance costs | 26 |
| | 26 |
|
Increase in cash surrender value of bank-owned life insurance | (528 | ) | | (586 | ) |
Loan principal sold from loans originated for sale | — |
| | (631 | ) |
Proceeds from sales of loans originated for sale | — |
| | 897 |
|
Net gain on sales of loans | (685 | ) | | (523 | ) |
Stock-based compensation | 633 |
| | 434 |
|
Net amortization (accretion) of purchase accounting adjustments | 332 |
| | (49 | ) |
Loss on sale of premises and equipment | 44 |
| | — |
|
Gain on sale and write-downs of foreclosed real estate | — |
| | 50 |
|
Net change in: | | | |
Deferred loan fees | (418 | ) | | (550 | ) |
Accrued interest receivable | 388 |
| | (281 | ) |
Other assets | 452 |
| | (2,920 | ) |
Accrued expenses and other liabilities | (1,610 | ) | | 3,929 |
|
Net cash provided by operating activities | 9,143 |
| | 9,339 |
|
| | | |
Cash flows from investing activities | | | |
Proceeds from principal repayments on available for sale securities | 4,725 |
| | 2,003 |
|
Proceeds from principal repayments on held to maturity securities | 85 |
| | 98 |
|
Net proceeds from sales and calls of available for sale securities | 12,057 |
| | 49,555 |
|
Purchases of available for sale securities | (19,311 | ) | | (54,290 | ) |
Purchase of held to maturity securities | — |
| | (6,852 | ) |
Purchase of bank-owned life insurance | — |
| | (5,000 | ) |
Net increase in loans | (51,950 | ) | | (120,260 | ) |
Loan principal sold from loans not originated for sale | (6,009 | ) | | (8,911 | ) |
Proceeds from sales of loans not originated for sale | 6,694 |
| | 9,421 |
|
Purchases of premises and equipment | (2,943 | ) | | (291 | ) |
Purchase of Federal Home Loan Bank stock | (150 | ) | | (90 | ) |
Net cash used in investing activities | (56,802 | ) | | (134,617 | ) |
See accompanying notes to consolidated financial statements (unaudited)
Bankwell Financial Group, Inc.
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Cash flows from financing activities | | | |
Net change in time certificates of deposit | $ | (11,382 | ) | | $ | 53,451 |
|
Net change in other deposits | 78,616 |
| | 71,814 |
|
Net change in FHLB advances | — |
| | (10,000 | ) |
Proceeds from exercise of warrants | 400 |
| | 200 |
|
Proceeds from exercise of options | 490 |
| | 515 |
|
Dividends paid on common stock | (1,877 | ) | | (1,070 | ) |
Net cash provided by financing activities | 66,247 |
| | 114,910 |
|
Net increase (decrease) in cash and cash equivalents | 18,588 |
| | (10,368 | ) |
Cash and cash equivalents: | | | |
Beginning of year | 70,731 |
| | 96,355 |
|
End of period | $ | 89,319 |
| | $ | 85,987 |
|
Supplemental disclosures of cash flows information: | | | |
Cash paid for: | | | |
Interest | $ | 10,605 |
| | $ | 7,528 |
|
Income taxes | 1,515 |
| | 3,565 |
|
Noncash investing and financing activities | | | |
Net change in unrealized gains or losses on available-for-sale securities | (2,341 | ) | | 288 |
|
See accompanying notes to consolidated financial statements (unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
Bankwell Financial Group, Inc. (the “Company” or “Bankwell”) is a bank holding company headquartered in New Canaan, Connecticut. The Company offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the “Bank”). The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a full range of banking services to commercial and consumer customers, primarily concentrated in the New York metropolitan area and throughout Connecticut, with the majority of our loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, Hamden and North Haven Connecticut.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the consolidated balance sheet and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, stock-based compensation, derivative instrument valuation, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes valuation.
Basis of consolidated financial statement presentation
The unaudited consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Rule 10-1 of Regulation S-X and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited interim consolidated financial statements have been included. Interim results are not necessarily reflective of the results that may be expected for the year ending December 31, 2018. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2017.
Significant concentrations of credit risk
Most of the Company’s activities are with customers located in the New York metropolitan area and throughout Fairfield and New Haven Counties and the surrounding region of Connecticut, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate loans. Management does not believe they present any special risk. The Company does not have any significant concentrations in any one industry or customer.
Reclassification
Certain prior period amounts have been reclassified to conform to the 2018 financial statement presentation. These reclassifications only changed the reporting categories and did not affect the consolidated results of operations or consolidated financial position of the Company.
Recent accounting pronouncements
The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): This ASU clarifies the principles for recognizing revenue. The guidance notes that an entity should apply the following steps when recognizing revenue: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the guidance on January 1, 2018 using the modified retrospective method. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard and for in-scope revenue streams management determined that a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard is not needed.
ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard is effective for the Company beginning on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial statements.
ASU No. 2016-02, Leases (Topic 842): The amendments in this ASU require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for the Company, on January 1, 2019, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for the Company on January 1, 2020, including interim periods within that fiscal year. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.
ASU No. 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.” This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows; debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s financial statements.
ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash.” This ASU provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this ASU did not have a material impact on the Company’s financial statements.
ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the test for goodwill impairment by eliminating step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments will be effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): “Premium Amortization on Purchased Callable Debt Securities.” The amendments in this update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s financial statements.
ASU No. 2017-12, Derivatives and Hedging: “Targeted Improvements to Accounting for Hedging Activities” (Topic 815): The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. This ASU requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate tax rate. The amount of the reclassification would be the difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate tax rate. The amendments would be effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments would be permitted including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and all other entities for reporting periods for which financial statements have not yet been made available for
issuance. An entity would apply the amendments in the update retrospectively to 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 of 2017 is recognized. The Company elected to adopt this update and recorded a $0.3 million reduction to retained earnings and increase to accumulated other comprehensive income as of December 31, 2017.
ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): The purpose of this update is to clarify certain aspects of the guidance in ASU No. 2016-01 regarding equity securities without a readily determinable fair value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018 and public business entities with fiscal years beginning between June 15, 2018 and December 15, 2018 are not required to adopt these amendments before adopting the amendments in update 2016-01. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): "Improvements to Nonemployee Share-Based Payment Accounting” (ASU 2018-07). The amendments in this update expand the scope of Topic 718 to include share based payments to nonemployees. An entity is required to apply the requirements of Topic 718 to nonemployee awards except for specific guidance related to option pricing models and the attribution of cost. ASU 2018-07 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
2. Investment Securities
The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at June 30, 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2018 |
| Amortized Cost | | Gross Unrealized | | Fair Value |
| | Gains | | Losses | |
| (In thousands) |
Available for sale securities: | | | | | | | |
U.S. Government and agency obligations | | | | | | | |
Due from one through five years | $ | 13,012 |
| | $ | — |
| | $ | (271 | ) | | $ | 12,741 |
|
Due from five through ten years | 100 |
| | — |
| | (7 | ) | | 93 |
|
Due after ten years | 70,283 |
| | — |
| | (1,862 | ) | | 68,421 |
|
| 83,395 |
| | — |
| | (2,140 | ) | | 81,255 |
|
| | | | | | | |
State agency and municipal obligations | | | | | | | |
Due from one through five years | 2,208 |
| | 15 |
| | — |
| | 2,223 |
|
Due from five through ten years | 1,569 |
| | 18 |
| | — |
| | 1,587 |
|
Due after ten years | 589 |
| | — |
| | (54 | ) | | 535 |
|
| 4,366 |
| | 33 |
| | (54 | ) | | 4,345 |
|
| | | | | | | |
Corporate bonds | | | | | | | |
Due from one through five years | 7,078 |
| | — |
| | (70 | ) | | 7,008 |
|
Total available for sale securities | $ | 94,839 |
| | $ | 33 |
| | $ | (2,264 | ) | | $ | 92,608 |
|
| | | | | | | |
Held to maturity securities: | | | | | | | |
State agency and municipal obligations | | | | | | | |
Less than one year | $ | 3,887 |
| | $ | 13 |
| | $ | — |
| | $ | 3,900 |
|
Due after ten years | 16,516 |
| | 631 |
| | (206 | ) | | 16,941 |
|
| 20,403 |
| | 644 |
| | (206 | ) | | 20,841 |
|
| | | | | | | |
Corporate bonds | | | | | | | |
Due from one through five years | 1,000 |
| | — |
| | (9 | ) | | 991 |
|
| | | | | | | |
Government-sponsored mortgage backed securities | | | | | | | |
No contractual maturity | 102 |
| | 7 |
| | — |
| | 109 |
|
Total held to maturity securities | $ | 21,505 |
| | $ | 651 |
| | $ | (215 | ) | | $ | 21,941 |
|
The amortized cost, gross unrealized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Amortized Cost | | Gross Unrealized | | Fair Value |
| | Gains | | Losses | |
| (In thousands) |
Available for sale securities: | | | | | | | |
U.S. Government and agency obligations | | | | | | | |
Due from one through five years | $ | 13,000 |
| | $ | — |
| | $ | (82 | ) | | $ | 12,918 |
|
Due from five through ten years | 100 |
| | — |
| | (4 | ) | | 96 |
|
Due after ten years | 59,924 |
| | 10 |
| | (174 | ) | | 59,760 |
|
| 73,024 |
| | 10 |
| | (260 | ) | | 72,774 |
|
| | | | | | | |
State agency and municipal obligations | | | | | | | |
Due from one through five years | 2,873 |
| | 84 |
| | — |
| | 2,957 |
|
Due from five through ten years | 7,386 |
| | 228 |
| | — |
| | 7,614 |
|
Due after ten years | 1,700 |
| | 33 |
| | (27 | ) | | 1,706 |
|
| 11,959 |
| | 345 |
| | (27 | ) | | 12,277 |
|
| | | | | | | |
Corporate bonds | | | | | | | |
Due from one through five years | 7,096 |
| | 41 |
| | — |
| | 7,137 |
|
Total available for sale securities | $ | 92,079 |
| | $ | 396 |
| | $ | (287 | ) | | $ | 92,188 |
|
| | | | | | | |
Held to maturity securities: | | | | | | | |
State agency and municipal obligations | | | | | | | |
Less than one year | $ | 198 |
| | $ | 5 |
| | $ | — |
| | $ | 203 |
|
Due from one through five years | 3,880 |
| | 20 |
| | — |
| | 3,900 |
|
Due after ten years | 16,387 |
| | 1,227 |
| | — |
| | 17,614 |
|
| 20,465 |
| | 1,252 |
| | — |
| | 21,717 |
|
| | | | | | | |
Corporate bonds | | | | | | | |
Due from one through five years | 1,000 |
| | — |
| | (5 | ) | | 995 |
|
| | | | | | | |
Government-sponsored mortgage backed securities | | | | | | | |
No contractual maturity | 114 |
| | 10 |
| | — |
| | 124 |
|
Total held to maturity securities | $ | 21,579 |
| | $ | 1,262 |
| | $ | (5 | ) | | $ | 22,836 |
|
The gross realized gains on the sale of investment securities totaled $0.2 million for the six months ended June 30, 2018. The gross realized losses on the sale of investment securities totaled $2.0 thousand for the six months ended June 30, 2018. Sales proceeds and calls totaled $12.1 million for the six months ended June 30, 2018. There were no sales of investment securities during the three months ended June 30, 2018. The gross realized gains on the sale of investment securities totaled $0.2 million for the six months ended June 30, 2017. There were no gross realized losses on the sale of investment securities for the six months ended June 30, 2017. Sales proceeds and calls totaled $49.6 million for the six months ended June 30, 2017. There were no sales of investment securities during the three months ended June 30, 2017.
At June 30, 2018 and December 31, 2017 there were no securities pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution.
The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Length of Time in Continuous Unrealized Loss Position | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Loss | | Percent Decline from Amortized Cost | | Fair Value | | Unrealized Loss | | Percent Decline from Amortized Cost | | Fair Value | | Unrealized Loss | | Percent Decline from Amortized Cost |
| (In thousands) |
June 30, 2018 | | | | | | | | | | | | | | | | | |
U.S. Government and agency obligations | $ | 78,009 |
| | $ | (2,040 | ) | | 2.55 | % | | $ | 3,246 |
| | $ | (100 | ) | | 2.97 | % | | $ | 81,255 |
| | $ | (2,140 | ) | | 2.57 | % |
State agency and municipal obligations | 11,188 |
| | (206 | ) | | 1.81 | % | | 535 |
| | (54 | ) | | 9.19 | % | | 11,723 |
| | (260 | ) | | 2.17 | % |
Corporate bonds | 7,008 |
| | (70 | ) | | 0.99 | % | | 991 |
| | (9 | ) | | 0.88 | % | | 7,999 |
| | (79 | ) | | 0.98 | % |
Total investment securities | $ | 96,205 |
| | $ | (2,316 | ) | | 2.35 | % | | $ | 4,772 |
| | $ | (163 | ) | | 3.29 | % | | $ | 100,977 |
| | $ | (2,479 | ) | | 2.40 | % |
| | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | | | | | |
U.S. Government and agency obligations | $ | 70,419 |
| | $ | (225 | ) | | 0.32 | % | | $ | 2,064 |
| | $ | (35 | ) | | 1.67 | % | | $ | 72,483 |
| | $ | (260 | ) | | 0.36 | % |
State agency and municipal obligations | 92 |
| | — |
| | 0.16 | % | | 656 |
| | (27 | ) | | 3.95 | % | | 748 |
| | (27 | ) | | 3.50 | % |
Corporate bonds | — |
| | — |
| | — | % | | 995 |
| | (5 | ) | | 0.50 | % | | 995 |
| | (5 | ) | | 0.50 | % |
Total investment securities | $ | 70,511 |
| | $ | (225 | ) | | 0.32 | % | | $ | 3,715 |
| | $ | (67 | ) | | 1.77 | % | | $ | 74,226 |
| | $ | (292 | ) | | 0.39 | % |
There were twenty-five and fifteen investment securities as of June 30, 2018 and December 31, 2017, respectively, in which the fair value of the security was less than the amortized cost of the security.
The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or guaranteed by the U.S. Government, therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are not considered other than temporarily impaired.
The Company continually monitors its state agency, municipal and corporate bond portfolios and at this time these portfolios have minimal default risk because state agency, municipal and corporate bonds are all rated investment grade or deemed to be of investment grade quality.
The Company has the intent and ability to retain its investment securities in an unrealized loss position at June 30, 2018 until the decline in value has recovered or the security has matured.
3. Loans Receivable and Allowance for Loan Losses
The following table sets forth a summary of the loan portfolio at June 30, 2018 and December 31, 2017:
|
| | | | | | | |
(In thousands) | June 30, 2018 | | December 31, 2017 |
Real estate loans: | | | |
Residential | $ | 188,546 |
| | $ | 193,524 |
|
Commercial | 1,042,689 |
| | 987,242 |
|
Construction | 100,147 |
| | 101,636 |
|
| 1,331,382 |
| | 1,282,402 |
|
| | | |
Commercial business | 262,625 |
| | 259,995 |
|
| | | |
Consumer | 406 |
| | 619 |
|
Total loans | 1,594,413 |
| | 1,543,016 |
|
| | | |
Allowance for loan losses | (19,006 | ) | | (18,904 | ) |
Deferred loan origination fees, net | (2,824 | ) | | (3,242 | ) |
Unamortized loan premiums | 8 |
| | 9 |
|
Loans receivable, net | $ | 1,572,591 |
| | $ | 1,520,879 |
|
Lending activities are conducted principally in the New York metropolitan area, including the Fairfield and New Haven County regions of Connecticut, and consist of commercial real estate loans, commercial business loans and a variety of consumer loans. Loans may also be granted for the construction of residential homes and commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate.
Risk management
The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017, management made the strategic decision to cease the origination of residential mortgage loans. The Company’s policy for residential lending allowed that, generally, the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, or a religious or civic organization.
Credit quality of loans and the allowance for loan losses
Management segregates the loan portfolio into defined segments, which are used to develop and document a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
The Company's loan portfolio is segregated into the following portfolio segments:
Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, multi-family dwellings and investor-owned one-to-four family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans.
Construction: This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. In addition, this portfolio includes residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment through sale or refinance. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue paying debt service, which exposes the Company to greater risk of non-payment and loss.
Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also have increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.
Consumer: This portfolio segment includes loans secured by savings or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan entails greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.
Residential Real Estate: This portfolio segment consists of first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in our market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type are written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties.
Allowance for loan losses
As of December 31, 2017 the Company changed its methodology to estimate its allowance for loan losses. The change in methodology resulted in an update to the underlying loan loss assumptions, incorporating the most recent industry, peer and product loss trends. This resulted in a non-recurring, pretax $1.3 million reduction in the reserve during the fourth quarter of 2017 and for the year ended December 31, 2017.
The following tables set forth the activity in the Company’s allowance for loan losses for the three and six months ended June 30, 2018 and 2017, by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate | | Commercial Real Estate | | Construction | | Commercial Business | | Consumer | | Total |
| (In thousands) |
Three Months Ended June 30, 2018 | | | | | | | | | | | |
Beginning balance | $ | 1,695 |
| | $ | 12,645 |
| | $ | 767 |
| | $ | 3,692 |
| | $ | 2 |
| | $ | 18,801 |
|
Charge-offs | (56 | ) | | — |
| | — |
| | — |
| | (57 | ) | | (113 | ) |
Recoveries | — |
| | — |
| | — |
| | 4 |
| | 4 |
| | 8 |
|
(Credits) Provisions | (889 | ) | | 1,540 |
| | (286 | ) | | (107 | ) | | 52 |
| | 310 |
|
Ending balance | $ | 750 |
| | $ | 14,185 |
| | $ | 481 |
| | $ | 3,589 |
| | $ | 1 |
| | $ | 19,006 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate | | Commercial Real Estate | | Construction | | Commercial Business | | Consumer | | Total |
| (In thousands) |
Three Months Ended June 30, 2017 | | | | | | | | | | | |
Beginning balance | $ | 1,647 |
| | $ | 9,549 |
| | $ | 2,122 |
| | $ | 4,821 |
| | $ | 372 |
| | $ | 18,511 |
|
Charge-offs | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) |
Recoveries | 146 |
| | — |
| | — |
| | — |
| | — |
| | 146 |
|
(Credits) Provisions | (160 | ) | | 146 |
| | 146 |
| | 743 |
| | 20 |
| | 895 |
|
Ending balance | $ | 1,633 |
| | $ | 9,695 |
| | $ | 2,268 |
| | $ | 5,564 |
| | $ | 376 |
| | $ | 19,536 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate | | Commercial Real Estate | | Construction | | Commercial Business | | Consumer | | Total |
| (In thousands) |
Six Months Ended June 30, 2018 | | | | | | | | | | | |
Beginning balance | $ | 1,721 |
| | $ | 12,777 |
| | $ | 907 |
| | $ | 3,498 |
| | $ | 1 |
| | $ | 18,904 |
|
Charge-offs | (56 | ) | | (18 | ) | | — |
| | (96 | ) | | (60 | ) | | $ | (230 | ) |
Recoveries | — |
| | — |
| | — |
| | 4 |
| | 5 |
| | 9 |
|
(Credits) Provisions | (915 | ) | | 1,426 |
| | (426 | ) | | 183 |
| | 55 |
| | 323 |
|
Ending balance | $ | 750 |
| | $ | 14,185 |
| | $ | 481 |
| | $ | 3,589 |
| | $ | 1 |
| | $ | 19,006 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate | | Commercial Real Estate | | Construction | | Commercial Business | | Consumer | | Total |
| (In thousands) |
Six Months Ended June 30, 2017 | | | | | | | | | | | |
Beginning balance | $ | 1,654 |
| | $ | 9,563 |
| | $ | 2,105 |
| | $ | 4,283 |
| | $ | 377 |
| | $ | 17,982 |
|
Charge-offs | — |
| | — |
| | — |
| | — |
| | (31 | ) | | $ | (31 | ) |
Recoveries | 146 |
| | — |
| | — |
| | — |
| | 1 |
| | 147 |
|
(Credits) Provisions | (167 | ) | | 132 |
| | 163 |
| | 1,281 |
| | 29 |
| | 1,438 |
|
Ending balance | $ | 1,633 |
| | $ | 9,695 |
| | $ | 2,268 |
| | $ | 5,564 |
| | $ | 376 |
| | $ | 19,536 |
|
| | | | | | | | | | | |
Loans evaluated for impairment and the related allowance for loan losses as of June 30, 2018 and December 31, 2017 were as follows:
|
| | | | | | | |
| Portfolio | | Allowance |
| (In thousands) |
June 30, 2018 | | | |
Loans individually evaluated for impairment: | | | |
Residential real estate | $ | 7,317 |
| | $ | — |
|
Commercial real estate | 23,935 |
| | 2,844 |
|
Commercial business | 5,914 |
| | 675 |
|
Consumer | 5 |
| | — |
|
Subtotal | 37,171 |
| | 3,519 |
|
Loans collectively evaluated for impairment: | | | |
Residential real estate | 181,229 |
| | 750 |
|
Commercial real estate | 1,018,754 |
| | 11,341 |
|
Construction | 100,147 |
| | 481 |
|
Commercial business | 256,711 |
| | 2,914 |
|
Consumer | 401 |
| | 1 |
|
Subtotal | 1,557,242 |
| | 15,487 |
|
| | | |
Total | $ | 1,594,413 |
| | $ | 19,006 |
|
|
| | | | | | | |
| Portfolio | | Allowance |
| (In thousands) |
December 31, 2017 | | | |
Loans individually evaluated for impairment: | | | |
Residential real estate | $ | 4,607 |
| | $ | 8 |
|
Commercial real estate | 7,586 |
| | 876 |
|
Commercial business | 2,660 |
| | 71 |
|
Subtotal | 14,853 |
| | 955 |
|
Loans collectively evaluated for impairment: | | | |
Residential real estate | 188,917 |
| | 1,713 |
|
Commercial real estate | 979,656 |
| | 11,901 |
|
Construction | 101,636 |
| | 907 |
|
Commercial business | 257,335 |
| | 3,427 |
|
Consumer | 619 |
| | 1 |
|
Subtotal | 1,528,163 |
| | 17,949 |
|
| | | |
Total | $ | 1,543,016 |
| | $ | 18,904 |
|
Credit quality indicators
To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of a loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any.
The objectives of the Company’s risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses. The Company’s credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default. Risk ratings of 1 through 5 are "Pass" categories and risk ratings of 6 through 9 are criticized asset categories as defined by the regulatory agencies.
A “Special Mention” (6) credit has a potential weakness which, if uncorrected, may result in a deterioration of the repayment prospects or inadequately protect the Company’s credit position at some time in the future. “Substandard” (7) loans are credits that have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. An asset rated “Doubtful” (8) has all the weaknesses inherent in a substandard asset and which, in addition, make collection or liquidation in full highly questionable and improbable, when considering existing facts, conditions, and values. Loans classified as “Loss” (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this basically worthless asset even though partial recovery may be made in the future.
Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity and the quarterly watchlist and watched asset report process. They are revised to reflect changes in the borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers.
The following table presents credit risk ratings by loan segment as of June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Credit Quality Indicators |
| June 30, 2018 | | December 31, 2017 |
| Commercial Real Estate | | Construction | | Commercial Business | | Total | | Commercial Real Estate | | Construction | | Commercial Business | | Total |
| (In thousands) |
Pass | $ | 1,015,217 |
| | $ | 89,662 |
| | $ | 252,367 |
| | $ | 1,357,246 |
| | $ | 960,902 |
| | $ | 101,636 |
| | $ | 252,570 |
| | $ | 1,315,108 |
|
Special Mention | 3,537 |
| | 10,485 |
| | 4,344 |
| | 18,366 |
| | 9,371 |
| | — |
| | 4,019 |
| | 13,390 |
|
Substandard | 23,809 |
| | — |
| | 5,810 |
| | 29,619 |
| | 16,969 |
| | — |
| | 3,297 |
| | 20,266 |
|
Doubtful | 126 |
| | — |
| | 104 |
| | 230 |
| | — |
| | — |
| | 109 |
| | 109 |
|
Total loans | $ | 1,042,689 |
| | $ | 100,147 |
| | $ | 262,625 |
| | $ | 1,405,461 |
| | $ | 987,242 |
| | $ | 101,636 |
| | $ | 259,995 |
| | $ | 1,348,873 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residential and Consumer Credit Quality Indicators |
| June 30, 2018 | | December 31, 2017 |
| Residential Real Estate | | Consumer | | Total | | Residential Real Estate | | Consumer | | Total |
| (In thousands) |
Pass | $ | 180,901 |
| | $ | 401 |
| | $ | 181,302 |
| | $ | 188,917 |
| | $ | 619 |
| | $ | 189,536 |
|
Special Mention | 328 |
| | — |
| | 328 |
| | — |
| | — |
| | — |
|
Substandard | 7,317 |
| | 5 |
| | 7,322 |
| | 4,607 |
| | — |
| | 4,607 |
|
Total loans | $ | 188,546 |
| | $ | 406 |
| | $ | 188,952 |
| | $ | 193,524 |
| | $ | 619 |
| | $ | 194,143 |
|
Loan portfolio aging analysis
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent.
When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, on the subsequent 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. Loans greater than 90 days past due are generally put on nonaccrual status. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms.
The following tables set forth certain information with respect to our loan portfolio delinquencies by portfolio segment and amount as of June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater Past Due | | Total Past Due | | Current | | Total Loans |
| (In thousands) |
Real estate loans: | | | | | | | | | | | |
Residential real estate | $ | 3,074 |
| | $ | — |
| | $ | 1,160 |
| | $ | 4,234 |
| | $ | 184,312 |
| | $ | 188,546 |
|
Commercial real estate | 1,140 |
| | — |
| | 14,517 |
| | 15,657 |
| | 1,027,032 |
| | 1,042,689 |
|
Construction | 2,895 |
| | — |
| | — |
| | 2,895 |
| | 97,252 |
| | 100,147 |
|
Commercial business | 259 |
| | 462 |
| | 3,818 |
| | 4,539 |
| | 258,086 |
| | 262,625 |
|
Consumer | — |
| | 1 |
| | — |
| | 1 |
| | 405 |
| | 406 |
|
Total loans | $ | 7,368 |
| | $ | 463 |
| | $ | 19,495 |
| | $ | 27,326 |
| | $ | 1,567,087 |
| | $ | 1,594,413 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater Past Due | | Total Past Due | | Current | | Total Loans |
| (In thousands) |
Real estate loans: | | | | | | | | | | | |
Residential real estate | $ | 1,248 |
| | $ | 2,244 |
| | $ | 1,161 |
| | $ | 4,653 |
| | $ | 188,871 |
| | $ | 193,524 |
|
Commercial real estate | 10,028 |
| | 4,116 |
| | 2,074 |
| | 16,218 |
| | 971,024 |
| | 987,242 |
|
Construction | — |
| | — |
| | — |
| | — |
| | 101,636 |
| | 101,636 |
|
Commercial business | 4,318 |
| | 162 |
| | 481 |
| | 4,961 |
| | 255,034 |
| | 259,995 |
|
Consumer | 3 |
| | — |
| | 2 |
| | 5 |
| | 614 |
| | 619 |
|
|