Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION
Parke Bancorp, Inc. (the “Company, we, us, our”) is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, the Company provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, principally loans and deposits. The Company was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank").
The Bank is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999. The Bank is chartered by the New Jersey Department of Banking and Insurance and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Sewell, New Jersey, and seven additional branch office locations; 501 Tilton Road, Northfield, New Jersey, 567 Egg Harbor Road, Washington Township, New Jersey, 67 East Jimmie Leeds Road, Galloway Township, New Jersey, 1150 Haddon Avenue, Collingswood, New Jersey, 1610 Spruce Street, Philadelphia, Pennsylvania, and 1032 Arch Street, Philadelphia, Pennsylvania.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation: We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary the Bank (including certain partnership interests). Also included are the accounts of Parke Direct Lending LLC ("PDL"), a joint venture formed in 2018 to originate short-term alternative real estate loan products. Parke Bank has a 51% ownership interest in the joint venture. Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated because they do not meet the requirements for consolidation under applicable accounting guidance. We have eliminated inter-company balances and transactions. We have also reclassified certain prior year amounts to conform to the current year presentation, which did not have a material impact on our consolidated financial condition or results of operations.
The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying interim financial statements for the three and six months ended June 30, 2020 and 2019 are unaudited. The balance sheet as of December 31, 2019, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the full year.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses, the valuation of deferred income taxes, and the carrying value of other real estate owned ("OREO").
Recently Issued Accounting Pronouncements:
During June 2016, the Financial Accounting Standard Board (FASB) issued accounting standards update ("ASU") 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 (Topic 326), replaces the incurred loss impairment methodology in current GAAP with an expected credit loss (CECL) methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The ASU was amended in some aspects by subsequent Accounting Standards Updates. The guidance of the Financial Instruments-Credit Losses became effective for public entities except small reporting companies ("SRCs") for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all entities, early adoption will continue to be allowed. As a small reporting company, CECL is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement-Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 (Topic 820) requires public entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements for instruments held at the end of the reporting period, and also disclose the range and weighted average used to develop
significant inputs for Level 3 fair value measurements. This ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance in the first quarter of 2020. The adoption of the guidance did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General-Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 (Subtopic 715) requires entities to disclose weighted-average interest crediting rates for plans with promised interest crediting rates and reasons for significant gains and losses related to changes in the benefit obligation for reporting period. it also clarifies some disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020, for public business entities. The Company does not expect the amendments will have any material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain tax exceptions to the general principles in Topic 740. The ASU also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for public business entities for fiscal years ending after December 15, 2020. Early adoption of the ASU is permitted. The Company is currently evaluating the impact of this new guidance and doesn't expect the adoption of the ASU will have a material impact to our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. ASU 2020-3 improves various financial instruments Topics in the Accounting Standard Codification, such as: fair value option, applicability of portfolio exception in Topic 820 to nonfinancial items, disclosures for depository and lending institutions, etc.. The confirming amendments are effective upon issuance of this Update for public entities. The amendments related to other issues are effective on various dates depending on the affects the guidance in the amendments in Accounting Standards Updates. The Company has adopted certain items in the guidance and is currently evaluating the impact of the other areas of the guidance and doesn't expect the adoption of the ASU have or will have a material impact to our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-4 (Topic 848) provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the amendments will have any material impact on our consolidated financial statements.
NOTE 3. INVESTMENT SECURITIES
The following is a summary of the Company's investments in available for sale and held to maturity securities as of June 30, 2020 and December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Fair value
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Corporate debt obligations
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
Residential mortgage-backed securities
|
22,999
|
|
|
863
|
|
|
3
|
|
|
23,859
|
|
|
Collateralized mortgage obligations
|
32
|
|
|
1
|
|
|
—
|
|
|
33
|
|
|
Total available for sale
|
$
|
23,531
|
|
|
$
|
864
|
|
|
$
|
3
|
|
|
$
|
24,392
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
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|
|
|
|
|
|
|
States and political subdivisions
|
$
|
1,195
|
|
|
$
|
311
|
|
|
$
|
—
|
|
|
$
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Fair value
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Corporate debt obligations
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
Residential mortgage-backed securities
|
25,989
|
|
|
282
|
|
|
196
|
|
|
26,075
|
|
|
Collateralized mortgage obligations
|
37
|
|
|
1
|
|
|
—
|
|
|
38
|
|
|
Total available for sale
|
$
|
26,526
|
|
|
$
|
283
|
|
|
$
|
196
|
|
|
$
|
26,613
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
$
|
1,167
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
1,430
|
|
The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of June 30, 2020 are as follows:
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|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
(Dollars in thousands)
|
|
|
|
Available for sale:
|
|
|
|
|
Due within one year
|
$
|
—
|
|
|
$
|
—
|
|
|
Due after one year through five years
|
105
|
|
|
104
|
|
|
Due after five years through ten years
|
13,173
|
|
|
13,633
|
|
|
Due after ten years
|
10,253
|
|
|
10,655
|
|
|
Total available for sale
|
$
|
23,531
|
|
|
$
|
24,392
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
Due within one year
|
$
|
—
|
|
|
$
|
—
|
|
|
Due after one year through five years
|
—
|
|
|
—
|
|
|
Due after five years through ten years
|
1,195
|
|
|
1,506
|
|
|
Due after ten years
|
—
|
|
|
—
|
|
|
Total held to maturity
|
$
|
1,195
|
|
|
$
|
1,506
|
|
Expected maturities may differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty.
The Company did not sell any securities during the three and six months ended June 30, 2020. The following tables show the gross unrealized losses and fair value of the Company's investments which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
Less Than 12 Months
|
|
|
|
12 Months or Greater
|
|
|
|
Total
|
|
|
|
Description of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousand)
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
299
|
|
|
$
|
3
|
|
|
$
|
299
|
|
|
$
|
3
|
|
|
Total available for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
299
|
|
|
$
|
3
|
|
|
$
|
299
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Less Than 12 Months
|
|
|
|
12 Months or Greater
|
|
|
|
Total
|
|
|
|
Description of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
232
|
|
|
$
|
1
|
|
|
$
|
10,271
|
|
|
$
|
195
|
|
|
$
|
10,503
|
|
|
$
|
196
|
|
|
Total available for sale
|
|
$
|
232
|
|
|
$
|
1
|
|
|
$
|
10,271
|
|
|
$
|
195
|
|
|
$
|
10,503
|
|
|
$
|
196
|
|
Other Than Temporarily Impaired Debt Securities (OTTI)
On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for OTTI. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, and previous other-than-temporary impairments. After an investment security is determined to be impaired, we evaluate whether the decline in value is other-than-temporary. Estimating recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of the cash flows expected to be collected, discounted at the security’s effective yield, is less than the security’s amortized cost, OTTI is considered to have occurred.
For a debt security for which there has been a decline in the fair value below the amortized cost basis, if we intend to sell the security, or if it is more likely than not we will be required to sell the security before recovery of the amortized cost basis, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. For debt securities that are considered OTTI and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of expected future cash flows is due to factors that are not credit-related and, therefore, is recognized in other comprehensive income.
We have a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other than temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events; (4) any change in rating agencies’ credit ratings at evaluation date from acquisition date and any likely imminent action; (5) for asset-backed securities, the credit performance of the underlying collateral, including delinquency rates, level of non-performing assets, cumulative losses to date, collateral value and the remaining credit enhancement compared with expected credit losses.
The Company’s unrealized loss for the debt securities is comprised of 2 securities in the 12 months or greater loss position at June 30, 2020, and 1 security in the less than 12 months loss position and 7 securities in the 12 months or greater loss position at December 31, 2019. The mortgage-backed securities that had unrealized losses were issued or guaranteed by the US government or US government sponsored entities. The unrealized losses associated with those mortgage-backed securities are generally driven by changes in interest rates and are not due to credit losses given the explicit or implicit guarantees provided by the U.S. government. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider the unrealized loss in these securities to be OTTI at June 30, 2020.
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
At June 30, 2020 and December 31, 2019, the Company had $1.54 billion and $1.42 billion, respectively, in loans receivable outstanding. Outstanding balances include a total net reduction of $1.4 million at June 30, 2020 and a net increase of $138,000 at December 31, 2019, respectively, for unearned income, net deferred loan fees, and unamortized discounts and premiums. We had $193,000 and $190,000 for loans held for sale at June 30, 2020 and December 31, 2019. Also, at June 30, 2020, our commercial and industrial loan portfolio includes $78.0 million loans to small businesses through Paycheck Protection Program loans ("SBA PPP" loans), which is a loan designed by Federal government to provide a direct incentive for small businesses to keep their workers on the payroll. The portfolios of loans receivable at June 30, 2020 and December 31, 2019, consist of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
Amount
|
|
Amount
|
|
|
(Dollars in thousands)
|
|
|
|
Commercial and Industrial
|
$
|
112,067
|
|
|
$
|
36,777
|
|
|
Construction
|
253,537
|
|
|
231,095
|
|
|
Real Estate Mortgage:
|
|
|
|
|
Commercial – Owner Occupied
|
139,542
|
|
|
136,753
|
|
|
Commercial – Non-owner Occupied
|
302,528
|
|
|
298,204
|
|
|
Residential – 1 to 4 Family
|
640,369
|
|
|
636,891
|
|
|
Residential – Multifamily
|
84,677
|
|
|
68,258
|
|
|
Consumer
|
11,513
|
|
|
12,771
|
|
|
Total Loans
|
$
|
1,544,233
|
|
|
$
|
1,420,749
|
|
An age analysis of past due loans by class at June 30, 2020 and December 31, 2019 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
30-59
Days Past
Due
|
|
60-89
Days Past
Due
|
|
Greater
than 90
Days and
Not
Accruing
|
|
Total Past
Due
|
|
Current
|
|
Total
Loans
|
|
Loans > 90 Days and Accruing
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
324
|
|
|
$
|
324
|
|
|
$
|
111,743
|
|
|
$
|
112,067
|
|
|
$
|
—
|
|
|
Construction
|
—
|
|
|
—
|
|
|
1,365
|
|
|
1,365
|
|
|
252,172
|
|
|
253,537
|
|
|
—
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
—
|
|
|
—
|
|
|
5,630
|
|
|
5,630
|
|
|
133,912
|
|
|
139,542
|
|
|
—
|
|
|
Commercial – Non-owner Occupied
|
—
|
|
|
499
|
|
|
69
|
|
|
568
|
|
|
301,960
|
|
|
302,528
|
|
|
—
|
|
|
Residential – 1 to 4 Family
|
—
|
|
|
277
|
|
|
2,624
|
|
|
2,901
|
|
|
637,468
|
|
|
640,369
|
|
|
—
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84,677
|
|
|
84,677
|
|
|
—
|
|
|
Consumer
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
11,485
|
|
|
11,513
|
|
|
—
|
|
|
Total Loans
|
$
|
28
|
|
|
$
|
776
|
|
|
$
|
10,012
|
|
|
$
|
10,816
|
|
|
$
|
1,533,417
|
|
|
$
|
1,544,233
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
30-59
Days Past
Due
|
|
60-89
Days Past
Due
|
|
Greater
than 90
Days and
Not
Accruing
|
|
Total Past
Due
|
|
Current
|
|
Total
Loans
|
|
Loans > 90 Days and Accruing
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
286
|
|
|
$
|
286
|
|
|
$
|
36,491
|
|
|
$
|
36,777
|
|
|
$
|
—
|
|
|
Construction
|
—
|
|
|
—
|
|
|
1,365
|
|
|
1,365
|
|
|
229,730
|
|
|
231,095
|
|
|
—
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
—
|
|
|
1,722
|
|
|
2,702
|
|
|
4,424
|
|
|
132,329
|
|
|
136,753
|
|
|
—
|
|
|
Commercial – Non-owner Occupied
|
—
|
|
|
—
|
|
|
70
|
|
|
70
|
|
|
298,134
|
|
|
298,204
|
|
|
—
|
|
|
Residential – 1 to 4 Family
|
—
|
|
|
262
|
|
|
925
|
|
|
1,187
|
|
|
635,704
|
|
|
636,891
|
|
|
—
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,258
|
|
|
68,258
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,771
|
|
|
12,771
|
|
|
—
|
|
|
Total Loans
|
$
|
—
|
|
|
$
|
1,984
|
|
|
$
|
5,348
|
|
|
$
|
7,332
|
|
|
$
|
1,413,417
|
|
|
$
|
1,420,749
|
|
|
$
|
—
|
|
Allowance For Loan and Lease Losses (ALLL)
We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan portfolios as of the balance sheet date. We established our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - Contingencies ("ASC 450") and Receivables ("ASC 310").
The allowance for loan and lease losses represents management’s estimate of probable losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for loan losses is maintained through charges to the provision for loan losses in the Consolidated Statements of Income as losses are estimated to have occurred. Loans or portions thereof that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.
The Company performs periodic reviews of its loan and lease portfolios to identify credit risks and to assess the overall collectability of those portfolios. The Company's allowance for loan losses includes a general component and an asset-specific component. The asset-specific component of the allowance relates to loans considered to be impaired, which includes performing troubled debt restructurings (“TDRs”) as well as nonperforming loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the borrower's ability to repay amounts owed, collateral, relative risk grade of the loans, and other factors given current events and conditions. The Company generally measures the asset-specific allowance as the difference between the fair value (net realizable value) and the recorded investment of a loan.
The general component of the allowance evaluates the impairments of pools of the loan and lease portfolio collectively. It incorporates a historical valuation allowance and general valuation allowance. The historical loss experience is measured by type of credit and internal risk grade, loss severity, specific homogeneous risk pools. A historical loss ratio and valuation allowance are established for each pool of similar loans and updated periodically based on actual charge-off experience and current events. The general valuation allowance is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; (ix) the impact of rising interest rates on portfolio risk; and (x) national and local economic trends and conditions, and industry conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.
The process of determining the level of the allowance for loan and lease losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates.
The following tables present the information regarding the allowance for loan and lease losses and associated loan data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
Construction
|
|
Commercial Owner Occupied
|
|
Commercial Non-owner Occupied
|
|
Residential 1 to 4 Family
|
|
Residential Multifamily
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended Mach 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
$
|
961
|
|
|
$
|
3,127
|
|
|
$
|
2,235
|
|
|
$
|
6,211
|
|
|
$
|
9,625
|
|
|
$
|
890
|
|
|
$
|
170
|
|
|
$
|
23,219
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Recoveries
|
3
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
Provisions
|
23
|
|
|
533
|
|
|
176
|
|
|
(33)
|
|
|
1,141
|
|
|
168
|
|
|
(8)
|
|
|
2,000
|
|
|
Ending Balance at June 30, 2020
|
$
|
987
|
|
|
$
|
3,660
|
|
|
$
|
2,414
|
|
|
$
|
6,181
|
|
|
$
|
10,766
|
|
|
$
|
1,058
|
|
|
$
|
162
|
|
|
$
|
25,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
964
|
|
|
$
|
2,807
|
|
|
$
|
2,023
|
|
|
$
|
5,860
|
|
|
$
|
9,151
|
|
|
$
|
819
|
|
|
$
|
187
|
|
|
$
|
21,811
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Recoveries
|
7
|
|
|
—
|
|
|
8
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
Provisions
|
16
|
|
|
853
|
|
|
383
|
|
|
315
|
|
|
1,615
|
|
|
239
|
|
|
(25)
|
|
|
3,396
|
|
|
Ending Balance at June 30, 2020
|
$
|
987
|
|
|
$
|
3,660
|
|
|
$
|
2,414
|
|
|
$
|
6,181
|
|
|
$
|
10,766
|
|
|
$
|
1,058
|
|
|
$
|
162
|
|
|
$
|
25,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
325
|
|
|
$
|
329
|
|
|
$
|
163
|
|
|
$
|
458
|
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,505
|
|
|
Collectively evaluated for impairment
|
662
|
|
|
3,331
|
|
|
2,251
|
|
|
5,723
|
|
|
10,536
|
|
|
1,058
|
|
|
162
|
|
|
23,723
|
|
|
Ending Balance at June 30, 2020
|
$
|
987
|
|
|
$
|
3,660
|
|
|
$
|
2,414
|
|
|
$
|
6,181
|
|
|
$
|
10,766
|
|
|
$
|
1,058
|
|
|
$
|
162
|
|
|
$
|
25,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
325
|
|
|
$
|
4,990
|
|
|
$
|
7,582
|
|
|
$
|
10,292
|
|
|
$
|
3,132
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,321
|
|
|
Collectively evaluated for impairment
|
111,742
|
|
|
248,547
|
|
|
131,960
|
|
|
292,236
|
|
|
637,237
|
|
|
84,677
|
|
|
11,513
|
|
|
1,517,912
|
|
|
Ending Balance at June 30, 2020
|
$
|
112,067
|
|
|
$
|
253,537
|
|
|
$
|
139,542
|
|
|
$
|
302,528
|
|
|
$
|
640,369
|
|
|
$
|
84,677
|
|
|
$
|
11,513
|
|
|
$
|
1,544,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
Construction
|
|
Commercial Owner Occupied
|
|
Commercial Non-owner Occupied
|
|
Residential 1 to 4 Family
|
|
Residential Multifamily
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
$
|
688
|
|
|
$
|
1,796
|
|
|
$
|
1,884
|
|
|
$
|
6,398
|
|
|
$
|
8,098
|
|
|
$
|
743
|
|
|
$
|
203
|
|
|
$
|
19,810
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Recoveries
|
4
|
|
|
6
|
|
|
7
|
|
|
12
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
Provisions
|
1
|
|
|
725
|
|
|
(145)
|
|
|
(506)
|
|
|
381
|
|
|
1
|
|
|
(7)
|
|
|
450
|
|
|
Ending Balance at June 30, 2019
|
$
|
693
|
|
|
$
|
2,527
|
|
|
$
|
1,746
|
|
|
$
|
5,904
|
|
|
$
|
8,480
|
|
|
$
|
744
|
|
|
$
|
196
|
|
|
$
|
20,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
718
|
|
|
$
|
1,694
|
|
|
$
|
2,062
|
|
|
$
|
5,853
|
|
|
$
|
7,917
|
|
|
$
|
621
|
|
|
$
|
210
|
|
|
$
|
19,075
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Recoveries
|
10
|
|
|
6
|
|
|
13
|
|
|
33
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
Provisions
|
(35)
|
|
|
827
|
|
|
(329)
|
|
|
18
|
|
|
560
|
|
|
123
|
|
|
(14)
|
|
|
1,150
|
|
|
Ending Balance at June 30, 2019
|
$
|
693
|
|
|
$
|
2,527
|
|
|
$
|
1,746
|
|
|
$
|
5,904
|
|
|
$
|
8,480
|
|
|
$
|
744
|
|
|
$
|
196
|
|
|
$
|
20,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
13
|
|
|
$
|
107
|
|
|
$
|
34
|
|
|
$
|
188
|
|
|
$
|
458
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
Collectively evaluated for impairment
|
680
|
|
|
2,420
|
|
|
1,712
|
|
|
5,716
|
|
|
8,022
|
|
|
744
|
|
|
196
|
|
|
19,490
|
|
|
Ending Balance at June 30, 2019
|
$
|
693
|
|
|
$
|
2,527
|
|
|
$
|
1,746
|
|
|
$
|
5,904
|
|
|
$
|
8,480
|
|
|
$
|
744
|
|
|
$
|
196
|
|
|
$
|
20,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
13
|
|
|
$
|
5,350
|
|
|
$
|
5,282
|
|
|
$
|
12,976
|
|
|
$
|
2,649
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,270
|
|
|
Collectively evaluated for impairment
|
36,001
|
|
|
194,542
|
|
|
130,212
|
|
|
275,751
|
|
|
573,326
|
|
|
59,611
|
|
|
13,426
|
|
|
1,282,869
|
|
|
Ending Balance at June 30, 2019
|
$
|
36,014
|
|
|
$
|
199,892
|
|
|
$
|
135,494
|
|
|
$
|
288,727
|
|
|
$
|
575,975
|
|
|
$
|
59,611
|
|
|
$
|
13,426
|
|
|
$
|
1,309,139
|
|
Impaired Loans
A loan is considered impaired when, based on the current information and events, it is probable that the Company will be unable to collect the payments of principal and interest as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provisions. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
All our impaired loans are assessed for recoverability based on an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell and other costs or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent.
The following tables provide further detail on impaired loans and the associated ALLL at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
2,927
|
|
|
2,927
|
|
|
—
|
|
|
Commercial – Non-owner Occupied
|
69
|
|
|
69
|
|
|
—
|
|
|
Residential – 1 to 4 Family
|
1,856
|
|
|
1,856
|
|
|
—
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
|
4,852
|
|
|
4,852
|
|
|
—
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
Commercial and Industrial
|
325
|
|
|
331
|
|
|
325
|
|
|
Construction
|
4,990
|
|
|
9,480
|
|
|
329
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
4,655
|
|
|
4,655
|
|
|
163
|
|
|
Commercial – Non-owner Occupied
|
10,223
|
|
|
10,223
|
|
|
458
|
|
|
Residential – 1 to 4 Family
|
1,276
|
|
|
1,276
|
|
|
230
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
|
21,469
|
|
|
25,965
|
|
|
1,505
|
|
|
Total:
|
|
|
|
|
|
|
Commercial and Industrial
|
325
|
|
|
331
|
|
|
325
|
|
|
Construction
|
4,990
|
|
|
9,480
|
|
|
329
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
7,582
|
|
|
7,582
|
|
|
163
|
|
|
Commercial – Non-owner Occupied
|
10,292
|
|
|
10,292
|
|
|
458
|
|
|
Residential – 1 to 4 Family
|
3,132
|
|
|
3,132
|
|
|
230
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
26,321
|
|
|
$
|
30,817
|
|
|
$
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
2,702
|
|
|
2,702
|
|
|
—
|
|
|
Commercial – Non-owner Occupied
|
70
|
|
|
70
|
|
|
—
|
|
|
Residential – 1 to 4 Family
|
194
|
|
|
194
|
|
|
—
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
|
2,966
|
|
|
2,966
|
|
|
—
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
Commercial and Industrial
|
286
|
|
|
292
|
|
|
286
|
|
|
Construction
|
5,110
|
|
|
9,600
|
|
|
141
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
2,131
|
|
|
2,131
|
|
|
33
|
|
|
Commercial – Non-owner Occupied
|
10,354
|
|
|
10,355
|
|
|
457
|
|
|
Residential – 1 to 4 Family
|
1,251
|
|
|
1,251
|
|
|
211
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
|
19,132
|
|
|
23,629
|
|
|
1,128
|
|
|
Total:
|
|
|
|
|
|
|
Commercial and Industrial
|
286
|
|
|
292
|
|
|
286
|
|
|
Construction
|
5,110
|
|
|
9,600
|
|
|
141
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
4,833
|
|
|
4,833
|
|
|
33
|
|
|
Commercial – Non-owner Occupied
|
10,424
|
|
|
10,425
|
|
|
457
|
|
|
Residential – 1 to 4 Family
|
1,445
|
|
|
1,445
|
|
|
211
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
22,098
|
|
|
$
|
26,595
|
|
|
$
|
1,128
|
|
The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
361
|
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
1
|
|
|
Construction
|
4,991
|
|
|
39
|
|
|
5,410
|
|
|
44
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
6,193
|
|
|
49
|
|
|
3,810
|
|
|
23
|
|
|
Commercial – Non-owner Occupied
|
10,298
|
|
|
16
|
|
|
12,072
|
|
|
177
|
|
|
Residential – 1 to 4 Family
|
2,478
|
|
|
40
|
|
|
2,767
|
|
|
3
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
24,321
|
|
|
$
|
152
|
|
|
$
|
24,072
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
336
|
|
|
$
|
12
|
|
|
$
|
13
|
|
|
$
|
1
|
|
|
Construction
|
5,030
|
|
|
79
|
|
|
5,470
|
|
|
89
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
5,740
|
|
|
81
|
|
|
3,354
|
|
|
66
|
|
|
Commercial – Non-owner Occupied
|
10,340
|
|
|
154
|
|
|
11,814
|
|
|
329
|
|
|
Residential – 1 to 4 Family
|
2,133
|
|
|
54
|
|
|
2,682
|
|
|
13
|
|
|
Residential – Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
23,579
|
|
|
$
|
380
|
|
|
$
|
23,333
|
|
|
$
|
498
|
|
Troubled debt restructuring (TDRs)
We reported performing TDR loans (not reported as non-accrual loans) of $16.3 million and $16.8 million, respectively, at June 30, 2020 and December 31, 2019. Nonperforming TDR loans were $277,500 and $281,000 at June 30, 2020 and December 31, 2019, respectively. There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified in TDRs for the three and six months ended June 30, 2020 and the year ended December 31, 2019, respectively. Under Interagency Statement ("Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)") issued by Federal banking agencies, financial institutions generally do not need to categorize COVID-19-related modifications as TDRs. As the result, Loans that have been restructured for short term through our loan deferral program for COVID-19 related hardships and meet certain other criteria specified in the Interagency Statement are not categorized as TDRs.
A TDR is a loan the terms of which have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. TDRs result from our loss mitigation activities that include rate reductions, extension of maturity, or a combination of both, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. TDRs are classified as impaired loans and are included in the impaired loan disclosures. TDRs are also evaluated to determine whether they should be placed on non-accrual status. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, foreclosed, sold or it meets the criteria to be removed from TDR status.
At the time a loan is modified in a TDR, we consider the following factors to determine whether the loan should accrue interest:
•Whether there is a period of current payment history under the current terms, typically 6 months;
•Whether the loan is current at the time of restructuring; and
•Whether we expect the loan to continue to perform under the restructured terms with a debt coverage ratio that complies with the Bank’s credit underwriting policy of 1.25 times debt service.
TDRs are generally included in nonaccrual loans and may return to performing status after a minimum of six consecutive monthly payments under restructured terms and also meeting other performance indicators. We review the financial performance of the borrower over the past year to be reasonably assured of repayment and performance according to the modified terms. This review consists of an analysis of the borrower’s historical results; the borrower’s projected results over the next four quarters; and current financial information of the borrower and any guarantors. The projected repayment source needs to be reliable, verifiable, quantifiable and sustainable. At the time of restructuring, the amount of the loan principal for which we are not reasonably assured of repayment is charged-off, but not forgiven.
All TDRs are also reviewed quarterly to determine the amount of any impairment. The nature and extent of impairment of TDRs, including those that have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. For the TDR loans, we had specific reserves of $629,000 and $607,300 in the allowance at June 30, 2020 and December 31, 2019, respectively. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate.
Credit Quality Indicators: As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region.
The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows:
1.Good: Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile.
2.Satisfactory (A): Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank.
3.Satisfactory (B): Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable.
4.Watch List: Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present.
5.Other Assets Especially Mentioned (OAEM): Financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently impaired. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans that require an increased degree of monitoring or servicing as a result of internal or external changes.
6.Substandard: This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value.
7.Doubtful: Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable
and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank.
An analysis of the credit risk profile by internally assigned grades as of June 30, 2020 and December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2020
|
Pass
|
|
OAEM
|
|
Substandard
|
|
Doubtful
|
|
Total
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
110,520
|
|
|
$
|
1,223
|
|
|
$
|
324
|
|
|
$
|
—
|
|
|
$
|
112,067
|
|
|
Construction
|
241,373
|
|
|
4,833
|
|
|
7,331
|
|
|
—
|
|
|
253,537
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
133,912
|
|
|
—
|
|
|
5,630
|
|
|
—
|
|
|
139,542
|
|
|
Commercial – Non-owner Occupied
|
302,334
|
|
|
—
|
|
|
194
|
|
|
—
|
|
|
302,528
|
|
|
Residential – 1 to 4 Family
|
636,947
|
|
|
691
|
|
|
2,731
|
|
|
—
|
|
|
640,369
|
|
|
Residential – Multifamily
|
84,677
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84,677
|
|
|
Consumer
|
11,513
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,513
|
|
|
Total
|
$
|
1,521,276
|
|
|
$
|
6,747
|
|
|
$
|
16,210
|
|
|
$
|
—
|
|
|
$
|
1,544,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
Pass
|
|
OAEM
|
|
Substandard
|
|
Doubtful
|
|
Total
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
$
|
36,491
|
|
|
$
|
—
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
36,777
|
|
|
Construction
|
219,289
|
|
|
4,275
|
|
|
7,531
|
|
|
—
|
|
|
231,095
|
|
|
Real Estate Mortgage:
|
|
|
|
|
|
|
|
|
|
|
Commercial – Owner Occupied
|
134,051
|
|
|
—
|
|
|
2,702
|
|
|
—
|
|
|
136,753
|
|
|
Commercial – Non-owner Occupied
|
298,006
|
|
|
—
|
|
|
198
|
|
|
—
|
|
|
298,204
|
|
|
Residential – 1 to 4 Family
|
634,937
|
|
|
920
|
|
|
1,034
|
|
|
—
|
|
|
636,891
|
|
|
Residential – Multifamily
|
68,258
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,258
|
|
|
Consumer
|
12,771
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,771
|
|
|
Total
|
$
|
1,403,803
|
|
|
$
|
5,195
|
|
|
$
|
11,751
|
|
|
$
|
—
|
|
|
$
|
1,420,749
|
|
NOTE 5. TIME DEPOSITS
The Company’s total deposits were $1.51 billion and $1.34 billion at June 30, 2020 and December 31, 2019. The time deposits greater than $250,000 were $97.7 million and $123.8 million at June 30, 2020 and December 31, 2019, respectively.
NOTE 6. EQUITY AND CHANGES IN OTHER COMPREHENSIVE INCOME
The Company's total equity was $189.7 million and $179.4 million at June 30, 2020 and December 31, 2019, respectively.
Common stock dividend: On June 30, 2020, the Company declared a quarterly cash dividend of $0.16 per share to the common shareholders of record as of July 10, 2020 and paid the dividend on July 24, 2020. On March 27, 2020, the Company declared a quarterly cash dividend of $0.16 per share to the common shareholders of record as of April 10, 2020 and paid the dividend on April 24, 2020. The Company also paid a cash dividend $1.7 million on the common stock on January 24, 2020 which had been declared in the fourth quarter of 2019.
In January 2020, the Company declared a 10% common stock dividend to shareholders. The Company declared the stock dividend before the Company's 2019 financial statements were issued or were available to be issued. As a result, the Company retroactively adjusted the assumed 10% dividend shares 1,077,121 to the outstanding shares at December 31, 2019. At March 3, 2020, actual shares issued to the shareholders excluding the cash distribution on the fraction shares was 1,077,061.
Preferred stock dividend: The Company paid cash dividend $15,000 and $19,250 to preferred stock holders during the six months ended June 30, 2020 and June 30, 2019.
Conversion of preferred stock: During the six months ended June 30, 2020, there was no conversion from preferred stock shares to common shares. The preferred stock holders converted 674 shares of preferred shares into 84,280 shares of common shares during the six months ended June 30, 2019.
Non-controlling interests: The Company has a joint venture with Bridgestone Capital LLC in PDL LLC, a joint venture formed in 2018 to originate short-term alternative real estate loan products. The Company has a 51% ownership interest in the joint venture. The Company distributed PDL earnings $594,000 to Bridgestone during the first six months of 2020.
Other comprehensive income
The changes in accumulated other comprehensive income (loss) consisted of the following for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(Dollars in thousands)
|
|
|
|
Investment securities:
|
|
|
|
|
Net unrealized gains arising during the period
|
$
|
91
|
|
|
$
|
289
|
|
|
Less: Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
Tax effect related to the unrealized gains during the periods
|
(22)
|
|
|
(71)
|
|
|
|
|
|
|
|
Change in other comprehensive income
|
$
|
69
|
|
|
$
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(Dollars in thousands)
|
|
|
|
Investment securities:
|
|
|
|
|
Net unrealized gains arising during the period
|
$
|
774
|
|
|
$
|
769
|
|
|
Less: Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
Tax effect related to the unrealized gains during the periods
|
(190)
|
|
|
(190)
|
|
|
|
|
|
|
|
Change in other comprehensive income
|
$
|
584
|
|
|
$
|
579
|
|
NOTE 7. EARNINGS PER SHARE (“EPS”)
The following tables set forth the calculation of basic and diluted EPS for the three and six-month periods ended June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
(Dollars in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to the Company
|
$
|
6,541
|
|
|
$
|
7,468
|
|
|
$
|
13,753
|
|
|
$
|
14,529
|
|
|
|
|
|
|
Less: Dividend on series B preferred stock
|
7
|
|
|
8
|
|
|
15
|
|
|
9
|
|
|
|
|
|
|
Net income available to common shareholders
|
6,534
|
|
|
7,460
|
|
|
13,738
|
|
|
14,520
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
11,849,118
|
|
|
11,837,378
|
|
|
11,849,041
|
|
|
11,828,432
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.55
|
|
|
$
|
0.63
|
|
|
$
|
1.16
|
|
|
$
|
1.23
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shares
|
$
|
6,534
|
|
|
$
|
7,460
|
|
|
$
|
13,738
|
|
|
$
|
14,520
|
|
|
|
|
|
|
Add: Dividend on series B preferred stock
|
7
|
|
|
8
|
|
|
15
|
|
|
9
|
|
|
|
|
|
|
Net income available to diluted common shares
|
6,541
|
|
|
7,468
|
|
|
13,753
|
|
|
14,529
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
11,849,118
|
|
|
11,837,378
|
|
|
11,849,041
|
|
|
11,828,432
|
|
|
|
|
|
|
Dilutive potential common shares
|
128,479
|
|
|
173,381
|
|
|
143,858
|
|
|
178,654
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
11,977,597
|
|
|
12,010,759
|
|
|
11,992,899
|
|
|
12,007,086
|
|
|
|
|
|
|
Diluted earnings per common share
|
$
|
0.55
|
|
|
$
|
0.62
|
|
|
$
|
1.15
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All share and per share information as of June 30, 2019 has been adjusted for the 10% stock dividend effective on March 3, 2020.
NOTE 8. FAIR VALUE
Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures (Topic 820) of FASB Accounting Standards Codification, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair value is a market-based measurement, not an entity-specific measurement. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows:
Level 1 Input:
1)Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Inputs:
1)Quoted prices for similar assets or liabilities in active markets.
2)Quoted prices for identical or similar assets or liabilities in markets that are not active.
3)Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”
Level 3 Inputs:
1)Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.
2)These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Fair Value on a Recurring Basis:
The following is a description of the Company’s valuation methodologies for assets carried at fair value on a recurring basis. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting measurement date.
Investments in Available for Sale Securities and Loans Held for Sale:
Where quoted prices are available in an active market, securities or other assets are classified in Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security or available for sale loans, then fair values are provided by independent third-party valuation services. These valuation services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the Company’s principal markets. For the loans held for sale, the fair value represents the face value of the guaranteed portion of the SBA loans pending settlement. Securities and loans in Level 2 include mortgage-backed securities, corporate debt obligations, collateralized mortgage-backed securities, and SBA loans available for sale.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Available for Sale Securities and Loans Held for Sale
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
Corporate debt obligations
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
Residential mortgage-backed securities
|
|
—
|
|
|
23,859
|
|
|
—
|
|
|
23,859
|
|
|
Collateralized mortgage-backed securities
|
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
|
Loans held for sale
|
|
—
|
|
|
193
|
|
|
—
|
|
|
193
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
24,585
|
|
|
$
|
—
|
|
|
$
|
24,585
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
Corporate debt obligations
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
Residential mortgage-backed securities
|
|
—
|
|
|
26,075
|
|
|
—
|
|
|
26,075
|
|
|
Collateralized mortgage-backed securities
|
|
—
|
|
|
38
|
|
|
—
|
|
|
38
|
|
|
Loans held for sale
|
|
—
|
|
|
190
|
|
|
—
|
|
|
190
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
26,803
|
|
|
$
|
—
|
|
|
$
|
26,803
|
|
For the six months ended June 30, 2020, there were no transfers between the levels within the fair value hierarchy. There were no level 3 assets or liabilities held during three and six months ended June 30, 2020 and 2019.
Fair Value on a Non-recurring Basis:
Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,631
|
|
|
$
|
12,631
|
|
|
OREO
|
|
—
|
|
|
—
|
|
|
3,772
|
|
|
3,772
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,460
|
|
|
$
|
8,460
|
|
|
OREO
|
|
—
|
|
|
—
|
|
|
4,727
|
|
|
4,727
|
|
All collateral-dependent impaired loans have an independent third-party full appraisal to determine the NRV based on the fair value of the underlying collateral, less cost to sell (a range of 5% to 10%) and other costs, such as unpaid real estate taxes, that have been identified, or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent. The appraisal will be based on an "as-is" valuation and will follow a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value.
OREO consists of real estate properties that are recorded at fair value based upon current appraised value, or agreements of sale, less estimated disposition costs using level 3 inputs. Properties are reappraised annually.
Fair Value of Financial Instruments
The Company discloses estimated fair values for its significant financial instruments in accordance with FASB ASC (Topic 825), “Disclosures about Fair Value of Financial Instruments”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other financial assets and liabilities are discussed below.
For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, accrued interest receivable, demand and other non-maturity deposits and accrued interest payable.
The Company used the following methods and assumptions in estimating the fair value of the following financial instruments:
Investment Securities: Fair value of securities available for sale is described above. Fair value of held to maturity securities is based upon quoted market prices for identical or similar assets.
Loans Held for Sale: Fair value represents the face value of the guaranteed portion of SBA loans pending settlement.
Loans Receivable: For residential mortgages loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the risk adjusting current interest rates at which similar loans would be made to borrowers with similar credit ratings and same remaining maturities, adjusted for the liquidity discount and underwriting uncertainty.
Restricted stock: Carrying value of FHLBNY and the Atlantic Central Bankers Bank stocks represent the par values of the stocks
and is adjusted for impairments if any. The carrying value approximated fair value.
Time deposits: The fair value of time deposits is based on the discounted value of contractual cash flows, where the discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.
Borrowings: The fair values of FHLBNY borrowings and Federal Reserve bank advance, other borrowed funds and subordinated debt are based on the discounted value of estimated cash flows. The discounted rate is estimated using market rates currently offered for debts with similar credit rating, terms and remaining maturities.
For a further discussion of the Company’s valuation methodologies for financial instruments measured at fair value, see the descriptions in the Company's 2019 Annual Report included in its Annual Report on Form 10-K.
Bank premises and equipment, customer relationships, deposit base and other information required to compute the Company’s aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of the Company.
The following table summarizes the carrying amounts and fair values for financial instruments at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Carrying Amount
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
320,923
|
|
|
$
|
320,923
|
|
|
$
|
320,923
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment securities AFS
|
24,392
|
|
|
24,392
|
|
|
—
|
|
|
24,392
|
|
|
—
|
|
|
Investment securities HTM
|
1,195
|
|
|
1,506
|
|
|
—
|
|
|
1,506
|
|
|
—
|
|
|
Restricted stock
|
7,542
|
|
|
7,542
|
|
|
—
|
|
|
—
|
|
|
7,542
|
|
|
Loans held for sale
|
193
|
|
|
193
|
|
|
—
|
|
|
193
|
|
|
—
|
|
|
Loans, net
|
1,519,005
|
|
|
1,539,438
|
|
|
—
|
|
|
1,514,622
|
|
|
24,816
|
|
|
Accrued interest receivable
|
10,193
|
|
|
10,193
|
|
|
—
|
|
|
10,193
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Non-time deposits
|
$
|
815,395
|
|
|
$
|
815,395
|
|
|
$
|
—
|
|
|
$
|
815,395
|
|
|
$
|
—
|
|
|
Time deposits
|
693,166
|
|
|
699,853
|
|
|
—
|
|
|
699,853
|
|
|
—
|
|
|
Borrowings
|
220,949
|
|
|
225,942
|
|
|
—
|
|
|
225,942
|
|
|
—
|
|
|
Accrued interest payable
|
1,754
|
|
|
1,754
|
|
|
—
|
|
|
1,754
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Carrying Amount
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
191,607
|
|
|
$
|
191,607
|
|
|
$
|
191,607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment securities AFS
|
26,613
|
|
|
26,613
|
|
|
—
|
|
|
26,613
|
|
|
—
|
|
|
Investment securities HTM
|
1,167
|
|
|
1,430
|
|
|
—
|
|
|
1,430
|
|
|
—
|
|
|
Restricted stock
|
7,440
|
|
|
7,440
|
|
|
—
|
|
|
—
|
|
|
7,440
|
|
|
Loans held for sale
|
190
|
|
|
190
|
|
|
—
|
|
|
190
|
|
|
—
|
|
|
Loans, net
|
1,398,938
|
|
|
1,393,288
|
|
|
—
|
|
|
1,372,317
|
|
|
20,971
|
|
|
Accrued interest receivable
|
6,069
|
|
|
6,069
|
|
|
—
|
|
|
6,069
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Non-time deposits
|
$
|
652,544
|
|
|
$
|
652,544
|
|
|
$
|
—
|
|
|
$
|
652,544
|
|
|
$
|
—
|
|
|
Time deposits
|
686,675
|
|
|
692,177
|
|
|
—
|
|
|
692,177
|
|
|
—
|
|
|
Borrowings
|
148,053
|
|
|
156,479
|
|
|
—
|
|
|
156,479
|
|
|
—
|
|
|
Accrued interest payable
|
2,260
|
|
|
2,260
|
|
|
—
|
|
|
2,260
|
|
|
—
|
|
Note 9. Leases
We lease three retail branches and a parcel of land for a retail branch location. These leases generally have remaining terms of 6 years or less except the land lease, which has a remaining lease term of eighty-six years. Some of the leases may include options to renew the leases. The exercise of lease renewal is at our sole discretion.
When we adopted the ASU 2016-02, we recognized operating right-of-use assets and lease liabilities each for $2.8 million. At adoption of ASU 2016-02, we elected the practical expedients package, which allows us to not reassess the lease classification for any existing leases. All our leases existed before the adoption of the new lease standard were measured under operating leases according to the applicable GAAP standard then. As a result, we have recorded all our lease as operating leases.
Our right-of-use assets and lease liabilities for operating leases are included in other assets and other liabilities on our consolidated balance sheets. We use interest rate implicit in the lease or incremental borrowing rate in determining the present value of lease payments. At June 30, 2020, we had future minimum lease payments of $27.5 million, imputed interest $25.1 million, and lease liability $2.4 million. The weighted average remaining lease term was 52.49 years and weighted average discount rate was 7.30% at June 30, 2020, respectively. We also sublease some space for one of our leased facilities to a company. Our operating lease expense is included in occupancy expenses within non-interest expense in our consolidated statements of income. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred.
The following table presents information about our operating leases at the year ended June 30, 2020:
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|
June 30, 2020
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(Dollars in thousands )
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|
Lease right of use ("ROU") assets
|
$
|
2,423
|
|
|
Lease liabilities
|
$
|
2,423
|
|
The following table presents future undiscounted cash flows on our operating leases:
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|
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|
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June 30, 2020
|
|
|
(Dollars in thousands)
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|
Remainder of 2020
|
$
|
155
|
|
|
2021
|
319
|
|
|
2022
|
290
|
|
|
2023
|
250
|
|
|
2024
|
252
|
|
|
Thereafter
|
26,211
|
|
|
Total undiscounted lease payments
|
$
|
27,477
|
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in these particular classes of financial instruments. The Company’s exposure to the maximum possible credit risk in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
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. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment and income-producing commercial properties. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to fund fixed-rate loans were immaterial at June 30, 2020. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. Management believes that off-balance sheet risk is not material to the results of operations or financial condition. As of June 30, 2020 and December 31, 2019, unused commitments to extend credit amounted to approximately $163.6 million and $205.1 million, respectively.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of June 30, 2020 and December 31, 2019, standby letters of credit with customers were $19.0 million and $20.8 million, respectively.
On March 4, 2020, the Bank entered into an agreement with the FHLBNY, for a Municipal Letter of Credit ("MLOC"), of $40.0 million. The MLOC is used to pledge against public deposits and expires on March 4, 2021. There were no outstanding borrowings on the letter of credit as of June 30, 2020.
We provide banking services to customers that are licensed by various States to do business in the cannabis industry as growers, processors and dispensaries. Cannabis businesses are legal in these States, although it is not legal at the federal level. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis businesses. A financial institution that provides services to cannabis-related businesses can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines. We maintain stringent written policies and procedures related to the acceptance of such businesses and to the monitoring and maintenance of such business accounts. We conduct a significant due diligence review of the cannabis business before the business is accepted, including confirmation that the business is properly licensed by the applicable state. Throughout the relationship, we continue monitoring the business, including site visits, to ensure that the business continues to meet our stringent requirements, including maintenance of required licenses and periodic financial reviews of the business.
While we believe we are operating in compliance with the FinCEN guidelines, there can be no assurance that federal enforcement guidelines will not change. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the Federal government’s enforcement position, could cause us to immediately cease providing banking services to the cannabis industry.
At June 30, 2020 and December 31, 2019, deposit balances from cannabis customers were approximately $184.6 million and $129.2 million, or 12.2% and 9.6% of total deposits, respectively, with two customers accounting for 10.6% and 13.6% of the total at June 30, 2020 and December 31, 2019. At June 30, 2020 and December 31, 2019, there were cannabis-related loans in the amounts of $8.0 million and $5.5 million, respectively. We recorded approximately $220,000 and $74,500 of interest income in the six months ended June, 2020 and 2019, respectively, related to these loans.
NOTE 11 REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was being phased in from 0.0% for 2015 to 2.50% by 2019. The Bank made a one-time election to opt-out the net unrealized gain or loss on available for sale securities in computing regulatory capital. At June 30, 2020 and December 31, 2019, the Company and Bank were both considered “well capitalized".
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, under capitalized, significantly under capitalized, and critically under-capitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits.If under capitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of June 30, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.
In November 2019, Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to optionally adopt a simple leverage ratio to measure capital adequacy, which removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. The community bank leverage ratio framework was effective on January 1, 2020. The Company has elected to adopt the optional community bank leverage ratio framework in the first quarter of 2020.
In April 2020, the Federal banking regulatory agencies modified the original Community Bank Leverage Ratio (CBLR) framework and provided that, as of the second quarter 2020, a banking organization with a leverage ratio of 8 percent or greater and that meets the other existing qualifying criteria may elect to use the community bank leverage ratio framework. The modified rule also states that the community bank leverage ratio requirement will be greater than 8 percent for the second through fourth quarters of calendar year 2020, greater than 8.5 percent for calendar year 2021, and greater than 9 percent thereafter. The transition rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 100 basis points below the applicable community bank leverage ratio requirement.
The leverage ratios of the Company and the Bank at June 30, 2020 are as follow:
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|
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|
|
|
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|
Regulatory Capital Compliance
|
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As of June 30, 2020
|
Actual
|
|
|
|
For Capital Adequacy
Purposes
|
|
|
|
For Capital Adequacy Purposes With Capital Conservation Buffer*
|
|
|
|
To be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
|
|
(Dollars in thousands except ratios)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Company:
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|
|
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Tier 1 leverage **
|
$
|
202,098
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|
|
11.28
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%
|
|
$
|
71,670
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|
|
4.00
|
%
|
|
$
|
71,670
|
|
|
4.00
|
%
|
|
$
|
89,588
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|
|
5.00
|
%
|
|
Parke Bank:
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Tier 1 leverage**
|
$
|
201,737
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|
|
11.26
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%
|
|
$
|
71,653
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|
|
4.00
|
%
|
|
$
|
71,653
|
|
|
4.00
|
%
|
|
$
|
89,567
|
|
|
5.00
|
%
|
The following table presents the total risk based, Tier 1 risk based, Tier 1 common equity, and Tier 1 leverage ratios of the Company and the Bank as of December 31, 2019:
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|
|
|
|
|
|
As of December 31, 2019
|
Actual
|
|
|
|
For Capital Adequacy
Purposes
|
|
|
|
For Capital Adequacy Purposes With Capital Conservation Buffer*
|
|
|
|
To be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
|
|
(Dollars in thousands except ratios)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Company:
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Total risk-based capital
|
$
|
208,013
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|
|
16.70
|
%
|
|
$
|
99,654
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|
|
8.00
|
%
|
|
$
|
130,795
|
|
|
10.50
|
%
|
|
$
|
124,567
|
|
|
10.00
|
%
|
|
Tier 1 risk-based capital
|
192,365
|
|
|
15.44
|
%
|
|
74,740
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|
|
6.00
|
%
|
|
105,882
|
|
|
8.50
|
%
|
|
99,654
|
|
|
8.00
|
%
|
|
Tier 1 leverage
|
192,365
|
|
|
11.87
|
%
|
|
64,802
|
|
|
4.00
|
%
|
|
64,802
|
|
|
4.00
|
%
|
|
81,002
|
|
|
5.00
|
%
|
|
Tier 1 common equity
|
177,068
|
|
|
14.21
|
%
|
|
56,055
|
|
|
4.50
|
%
|
|
87,197
|
|
|
7.00
|
%
|
|
80,969
|
|
|
6.50
|
%
|
|
Parke Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
$
|
207,620
|
|
|
16.67
|
%
|
|
$
|
99,621
|
|
|
8.00
|
%
|
|
$
|
130,752
|
|
|
10.50
|
%
|
|
$
|
124,526
|
|
|
10.00
|
%
|
|
Tier 1 risk-based capital
|
191,977
|
|
|
15.42
|
%
|
|
74,716
|
|
|
6.00
|
%
|
|
105,847
|
|
|
8.50
|
%
|
|
99,621
|
|
|
8.00
|
%
|
|
Tier 1 leverage
|
191,977
|
|
|
11.85
|
%
|
|
64,785
|
|
|
4.00
|
%
|
|
64,785
|
|
|
4.00
|
%
|
|
80,982
|
|
|
5.00
|
%
|
|
Tier 1 common equity
|
190,158
|
|
|
15.27
|
%
|
|
56,037
|
|
|
4.50
|
%
|
|
87,168
|
|
|
7.00
|
%
|
|
80,942
|
|
|
6.50
|
%
|
* The general capital rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The fully phased-in minimums are 10.5% (Total risk-based capital), 8.5% (Tier 1 risk-based capital), and 7.0% (Tier 1 common equity).
** Excluded exposures pledged as collateral to the PPPL Facility from the total leverage exposure, average total consolidated assets according to Regulatory Capital Rule-Rule “ Paycheck Protection Program Lending Facility and Paycheck Protection Program Loans”.
NOTE 12. SUBSEQUENT EVENTS
In July 2020, the Company completed a private placement of $30 million in ten-year, fixed-to-floating rate subordinated notes due 2030 to certain qualified institutional buyers and accredited investors. The Notes will initially bear interest at a fixed annual rate of 6.50%, for five years and will reset quarterly thereafter to the then current three-month SOFR plus 644 basis points. The Company may redeem the Notes on or after July 15, 2025, or at any time upon certain other specified events. The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of the offering for general corporate purposes.