Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

bayk-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-22955

 

BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

VIRGINIA

54-1838100

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER

IDENTIFICATION NO.)

1801 BAYBERRY COURT, SUITE 101

RICHMOND, VIRGINIA 23226

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 325-3775

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      yes      no

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).      yes      no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      yes      no

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

 

1


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 13,314,850 shares of common stock on May 2, 2019.

 

 

2


 

FORM 10-Q

For the interim period ending March 31, 2019

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

4

 

 

 

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2019 (UNAUDITED) AND DECEMBER 31, 2018

 

4

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

 

5

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

 

6

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

 

7

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

 

8

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

26

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

34

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

35

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

35

 

 

 

ITEM 1A. RISK FACTORS

 

35

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

35

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

35

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

35

 

 

 

ITEM 5. OTHER INFORMATION

 

35

 

 

 

ITEM 6. EXHIBITS

 

36

 

3


 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

2019

 

 

December 31,

2018 (1)

 

(Dollars in thousands, except share data)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

7,404

 

 

$

7,685

 

Interest-earning deposits

 

 

23,091

 

 

 

18,981

 

Certificates of deposit

 

 

3,746

 

 

 

3,746

 

Federal funds sold

 

 

182

 

 

 

625

 

Available-for-sale securities, at fair value

 

 

82,030

 

 

 

82,232

 

Restricted securities

 

 

7,804

 

 

 

7,600

 

Loans receivable, net of allowance for loan losses of $7,858 and

   $7,902, respectively

 

 

910,762

 

 

 

894,191

 

Loans held for sale

 

 

 

 

 

368

 

Premises and equipment, net

 

 

21,822

 

 

 

18,169

 

Accrued interest receivable

 

 

3,274

 

 

 

3,172

 

Other real estate owned, net

 

 

3,718

 

 

 

3,597

 

Bank owned life insurance

 

 

19,390

 

 

 

19,270

 

Goodwill

 

 

10,374

 

 

 

10,374

 

Mortgage servicing rights

 

 

923

 

 

 

977

 

Core deposit intangible

 

 

2,013

 

 

 

2,193

 

Deferred tax asset, net

 

 

1,295

 

 

 

1,510

 

Other assets

 

 

6,012

 

 

 

5,927

 

Total assets

 

$

1,103,840

 

 

$

1,080,617

 

LIABILITIES

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

112,315

 

 

$

114,122

 

Savings and interest-bearing demand deposits

 

 

371,587

 

 

 

359,400

 

Time deposits

 

 

372,751

 

 

 

368,670

 

Total deposits

 

 

856,653

 

 

 

842,192

 

Securities sold under repurchase agreements

 

 

7,220

 

 

 

6,089

 

Federal Home Loan Bank advances

 

 

100,000

 

 

 

100,000

 

Subordinated notes, net of issuance costs

 

 

6,897

 

 

 

6,893

 

Other liabilities

 

 

13,133

 

 

 

7,967

 

Total liabilities

 

 

983,903

 

 

 

963,141

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock ($5 par value; authorized - 30,000,000 shares;

   outstanding - 13,313,537 and 13,201,682 shares, respectively) (2)

 

 

66,568

 

 

 

66,008

 

Additional paid-in capital

 

 

36,493

 

 

 

36,972

 

Unearned employee stock ownership plan shares

 

 

(1,697

)

 

 

(1,734

)

Retained earnings

 

 

19,094

 

 

 

17,557

 

Accumulated other comprehensive loss, net

 

 

(521

)

 

 

(1,327

)

Total shareholders’ equity

 

 

119,937

 

 

 

117,476

 

Total liabilities and shareholders’ equity

 

$

1,103,840

 

 

$

1,080,617

 

 

(1)

Derived from audited December 31, 2018 Consolidated Financial Statements.

(2)

Preferred stock is authorized; however, none was outstanding as of March 31, 2019 and December 31, 2018.

See Notes to Consolidated Financial Statements.

4


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands, except per share data)

 

March 31, 2019

 

 

March 31, 2018

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

11,461

 

 

$

9,984

 

Securities:

 

 

 

 

 

 

 

 

Taxable

 

 

595

 

 

 

397

 

Tax-exempt

 

 

118

 

 

 

120

 

Federal funds sold

 

 

56

 

 

 

74

 

Interest-bearing deposit accounts

 

 

86

 

 

 

98

 

Certificates of deposit

 

 

20

 

 

 

19

 

Total interest income

 

 

12,336

 

 

 

10,692

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

2,809

 

 

 

1,604

 

Securities sold under repurchase agreements

 

 

3

 

 

 

3

 

Subordinated notes

 

 

137

 

 

 

128

 

Federal Home Loan Bank advances

 

 

704

 

 

 

313

 

Total interest expense

 

 

3,653

 

 

 

2,048

 

Net interest income

 

 

8,683

 

 

 

8,644

 

Provision for loan losses

 

 

314

 

 

 

320

 

Net interest income after provision for loan losses

 

 

8,369

 

 

 

8,324

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Income from fiduciary activities

 

 

214

 

 

 

247

 

Service charges and fees on deposit accounts

 

 

238

 

 

 

135

 

Wealth management

 

 

206

 

 

 

132

 

Interchange fees, net

 

 

101

 

 

 

(8

)

Other service charges and fees

 

 

29

 

 

 

30

 

Secondary market sales and servicing

 

 

71

 

 

 

133

 

Increase in cash surrender value of bank owned life insurance

 

 

120

 

 

 

127

 

Net (loss) on disposition of other assets

 

 

(1

)

 

 

(69

)

Gain on rabbi trust assets

 

 

90

 

 

 

52

 

Gain on curtailment of post-retirement benefit plan

 

 

 

 

 

352

 

Other

 

 

22

 

 

 

39

 

Total noninterest income

 

 

1,090

 

 

 

1,170

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,001

 

 

 

4,106

 

Occupancy

 

 

868

 

 

 

785

 

Data processing

 

 

588

 

 

 

472

 

Bank franchise tax

 

 

216

 

 

 

176

 

Telecommunications and other technology

 

 

207

 

 

 

195

 

FDIC assessments

 

 

216

 

 

 

183

 

Foreclosed property

 

 

43

 

 

 

12

 

Consulting

 

 

115

 

 

 

382

 

Advertising and marketing

 

 

67

 

 

 

68

 

Directors’ fees

 

 

164

 

 

 

168

 

Audit and accounting

 

 

204

 

 

 

363

 

Legal

 

 

83

 

 

 

133

 

Merger-related

 

 

 

 

 

363

 

Core deposit intangible amortization

 

 

180

 

 

 

211

 

Net other real estate owned (gains)

 

 

(6

)

 

 

(141

)

Other

 

 

684

 

 

 

644

 

Total noninterest expense

 

 

7,630

 

 

 

8,120

 

Income before income taxes

 

 

1,829

 

 

 

1,374

 

Income tax expense

 

 

337

 

 

 

250

 

Net income

 

$

1,492

 

 

$

1,124

 

Basic and diluted earnings per share

 

$

0.11

 

 

$

0.09

 

 

See Notes to Consolidated Financial Statements.

5


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

March 31, 2019

 

 

March 31, 2018

 

Net income

 

$

1,492

 

 

$

1,124

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on available-for-sale securities arising during the period

 

 

1,020

 

 

 

(1,192

)

Deferred tax (expense) benefit

 

 

(214

)

 

 

248

 

Total other comprehensive income (loss)

 

 

806

 

 

 

(944

)

Comprehensive income

 

$

2,298

 

 

$

180

 

 

See Notes to Consolidated Financial Statements.

6


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

13,201,682

 

 

$

66,008

 

 

$

36,972

 

 

$

(1,734

)

 

$

17,557

 

 

$

(1,327

)

 

$

117,476

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,492

 

 

 

 

 

 

1,492

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

806

 

 

 

806

 

Stock options exercised, net

 

 

5,173

 

 

 

26

 

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

9

 

Director stock grant

 

 

762

 

 

 

4

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Restricted stock awards

 

 

105,920

 

 

 

530

 

 

 

(530

)

 

 

 

 

 

 

 

 

 

 

 

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Share-based compensation expense

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Cumulative effect adjustment of adoption of accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

45

 

Balance at end of period

 

 

13,313,537

 

 

$

66,568

 

 

$

36,493

 

 

$

(1,697

)

 

$

19,094

 

 

$

(521

)

 

$

119,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

13,203,605

 

 

$

66,018

 

 

$

37,142

 

 

$

(1,129

)

 

$

13,679

 

 

$

(1,156

)

 

$

114,554

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,124

 

 

 

 

 

 

1,124

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(944

)

 

 

(944

)

Stock options exercised, net

 

 

19,491

 

 

 

97

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

113

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

41

 

Share-based compensation expense

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

31

 

Balance at end of period

 

 

13,223,096

 

 

$

66,115

 

 

$

37,189

 

 

$

(1,088

)

 

$

14,803

 

 

$

(2,100

)

 

$

114,919

 

 

See Notes to Consolidated Financial Statements.

 

7


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

March 31, 2019

 

 

March 31, 2018

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

1,492

 

 

$

1,124

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

446

 

 

 

382

 

Net premium amortization on available-for-sale securities

 

 

118

 

 

 

111

 

Amortization of subordinated notes issuance costs

 

 

4

 

 

 

4

 

Amortization of core deposit intangible

 

 

180

 

 

 

211

 

Accretion of fair value adjustment on acquired time deposits

 

 

(34

)

 

 

(68

)

Accretion of fair value adjustments (discounts) on acquired loans

 

 

(439

)

 

 

(503

)

Provision for loan losses

 

 

314

 

 

 

320

 

Share-based compensation expense

 

 

66

 

 

 

31

 

Increase in other real estate owned valuation allowance

 

 

16

 

 

 

78

 

Gain on sale of other real estate owned

 

 

(22

)

 

 

(219

)

Net loss on the disposition of fixed and other assets

 

 

1

 

 

 

69

 

Decrease in value of mortgage servicing rights

 

 

54

 

 

 

69

 

Originations of loans held for sale (HFS)

 

 

(2,344

)

 

 

(7,189

)

Proceeds from HFS loan sales

 

 

2,773

 

 

 

8,544

 

Gain on HFS sold loans

 

 

(61

)

 

 

(118

)

Increase in cash surrender value of bank owned life insurance

 

 

(120

)

 

 

(127

)

Gain on curtailment of post-retirement benefit plan

 

 

 

 

 

(352

)

(Increase) decrease in other assets and accrued interest receivable

 

 

(4,099

)

 

 

787

 

Increase in other liabilities

 

 

5,110

 

 

 

1,986

 

Net cash provided by operating activities

 

 

3,455

 

 

 

5,140

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Proceeds from maturities and principal paydowns of available-for-sale securities

 

 

1,098

 

 

 

816

 

Purchases of available-for-sale securities

 

 

 

 

 

(400

)

(Purchases) sales of restricted securities, net

 

 

(204

)

 

 

277

 

Decrease in federal funds sold

 

 

443

 

 

 

3,603

 

Net increase in loans

 

 

(16,583

)

 

 

(24,103

)

Proceeds from sale of other real estate owned

 

 

22

 

 

 

1,879

 

Net disposals (purchases) of premises and equipment

 

 

27

 

 

 

(580

)

Net cash used in investing activities

 

 

(15,197

)

 

 

(18,508

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Increase in demand, savings, and other interest-bearing demand deposits

 

 

10,380

 

 

 

20,931

 

Net increase in time deposits

 

 

4,115

 

 

 

14,242

 

Stock options exercised, net

 

 

9

 

 

 

113

 

Net increase (decrease) in securities sold under repurchase agreements and other borrowings

 

 

1,061

 

 

 

(2,947

)

Director stock grant

 

 

6

 

 

 

 

(Decrease) in Federal Home Loan Bank advances

 

 

 

 

 

(10,000

)

Net cash provided by financing activities

 

 

15,571

 

 

 

22,339

 

Net increase in cash and due from banks

 

 

3,829

 

 

 

8,971

 

Cash and cash equivalents (including interest-earning deposits) at beginning of period

 

 

26,666

 

 

 

51,367

 

Cash and cash equivalents (including interest-earning deposits) at end of period

 

$

30,495

 

 

$

60,338

 

Supplemental Schedule of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

3,587

 

 

$

2,166

 

Income taxes

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

 

1,020

 

 

 

(1,192

)

Loans transferred to other real estate owned

 

 

137

 

 

 

47

 

Changes in deferred taxes resulting from other comprehensive income transactions

 

 

(214

)

 

 

248

 

Cumulative effect adjustment of adoption of accounting principle

 

 

(45

)

 

 

 

Employee stock ownership plan transactions

 

 

(37

)

 

 

(41

)

 

See Notes to Consolidated Financial Statements.

 


8


Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank (the “Bank”), for VCB Financial Group, Inc. (the “Financial Group” or “VCBFG”), and for Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements of the Company include the accounts of Bay Banks of Virginia, Inc., the Bank, the Financial Group, and Steptoes Holdings.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. In management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, or shareholders’ equity as previously reported.

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

Note 2: Amendments to the Accounting Standards Codification

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Accounting Standards Codification (“ASC”) 326), which is new guidance for the accounting for credit losses on instruments within its scope. This ASU introduces a new model for current expected credit losses (“CECL”), which will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures, including loans, held-to-maturity debt securities, loan commitments, financial guarantees, net investments in leases, reinsurance, and trade receivables. The CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In addition, this ASC will replace the current available-for-sale debt securities other-than-temporary impairment model with an estimate of expected credit losses only when the fair value falls below the amortized cost of the asset. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses and subsequent recoveries. This ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company has a CECL cross-functional working group that is evaluating the effect this ASU will have on the Company’s consolidated financial statements. During 2019, this working group has begun implementation of the standard supported by its third-party vendor.

 

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) (“ASU 2016-02”). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. This ASU is effective for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is a lessee in several lease agreements, such as for office space, which were considered operating leases and not recognized on its consolidated balance sheet for the year ended December 31, 2018. On January 1, 2019, the Company adopted the requirements of ASU 2016-02, and as part of the transition to the new standard, the Company measured and recognized leases that existed on January 1, 2019 using a modified retrospective approach.

 

The adoption of ASU 2016-02 resulted in the recognition of operating Right-of-Use (ROU) assets and operating lease liabilities of $3.5 million and $3.8 million, respectively, primarily related to real estate leases for branches and office space and information technology related equipment. The Company does not have any finance leases as stipulated in ASC 842. A cumulative effect adjustment of $45 thousand was recorded upon adoption of ASU 2016-02, which is reflected in the Company’s statement of shareholders’ equity. Refer to Note 7 for additional information and disclosures regarding ASU 2016-02.

 


9


Note 3: Securities

The aggregate amortized costs and fair values of available-for-sale securities as of the dates stated were as follows.

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

March 31, 2019

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

49,965

 

 

$

74

 

 

$

(735

)

 

$

49,304

 

State and municipal obligations

 

 

20,437

 

 

 

192

 

 

 

(98

)

 

 

20,531

 

Corporate bonds

 

 

12,187

 

 

 

46

 

 

 

(38

)

 

 

12,195

 

Total available-for-sale securities

 

$

82,589

 

 

$

312

 

 

$

(871

)

 

$

82,030

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2018

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

51,126

 

 

$

35

 

 

$

(1,279

)

 

$

49,882

 

State and municipal obligations

 

 

20,484

 

 

 

60

 

 

 

(327

)

 

 

20,217

 

Corporate bonds

 

 

12,194

 

 

 

23

 

 

 

(84

)

 

 

12,133

 

Total available-for-sale securities

 

$

83,804

 

 

$

118

 

 

$

(1,690

)

 

$

82,232

 

Securities with fair values of $18.8 million and $17.5 million were pledged as collateral for securities sold under repurchase agreements as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019 and December 31, 2018, all of the securities pledged for repurchase agreements were state and municipal obligations. All of the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were $7.2 million and $6.1 million as of March 31, 2019 and December 31, 2018, respectively, and are included in liabilities on the consolidated balance sheets. The securities pledged to each agreement are reviewed daily and can be changed at the option of the Bank with minimal risk of loss due to fair value changes.

Securities in an unrealized loss position as of March 31, 2019 and December 31, 2018, by period of the unrealized loss, are shown below. The unrealized loss positions were primarily related to interest rate movements and not the credit quality of the issuers. All agency securities and state and municipal securities are investment grade or better, and their losses are considered temporary. Management does not intend to sell nor expect to be required to sell these securities, and all amortized cost bases are expected to be recovered.

The following tables provide information on securities in an unrealized loss position as of the dates stated.

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

March 31, 2019

 

Number of Securities

 

 

Fair

Value

 

 

Unrealized

Loss