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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

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, 2020

OR

☐  

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

 

For the transition period from                         to                        

Commission file number 0‑22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Maryland

    

52‑1974638

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

28969 Information Lane, Easton, Maryland

 

21601

(Address of Principal Executive Offices)

 

(Zip Code)

 

(410) 763‑7800

Registrant’s Telephone Number, Including Area Code

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

SHBI

NASDAQ

 

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 periods 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 or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting 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 Act). Yes ◻ No ☑

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,523,667 shares of common stock outstanding as of May 11, 2020.

 

 

 

 

 

 

Table of Contents

INDEX

 

   

Page

 

 

 

Part I. Financial Information 

 

3

 

 

 

Item 1. Financial Statements 

 

3

 

 

 

Consolidated Balance Sheets – March 31, 2020 (unaudited) and December 31, 2019 

 

3

 

 

 

Consolidated Statements of Income For the three months ended March 31, 2020 and 2019 (unaudited) 

 

4

 

 

 

Consolidated Statements of Comprehensive Income For the three months ended March 31, 2020 and 2019 (unaudited) 

 

5

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity For the three months ended March 31, 2020 and 2019 (unaudited) 

 

6

 

 

 

Consolidated Statements of Cash Flows For the three months ended March 31, 2020 and 2019 (unaudited) 

 

7

 

 

 

Notes to Consolidated Financial Statements (unaudited) 

 

8

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

35

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

47

 

 

 

Item 4. Controls and Procedures 

 

47

 

 

 

Part II. Other Information 

 

47

 

 

 

Item 1. Legal Proceedings 

 

47

 

 

 

Item 1A. Risk Factors 

 

47

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

50

 

 

 

Item 3. Defaults Upon Senior Securities 

 

50

 

 

 

Item 4. Mine Safety Disclosures 

 

50

 

 

 

Item 5. Other Information 

 

50

 

 

 

Item 6. Exhibits 

 

50

 

 

 

Exhibit Index 

 

51

 

 

 

Signatures 

 

52

 

 

 

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(In thousands, except share and per share data)

 

2020

 

2019

ASSETS

 

 

(Unaudited)

 

 

  

Cash and due from banks

 

$

16,432

 

$

18,465

Interest-bearing deposits with other banks

 

 

79,819

 

 

76,506

Cash and cash equivalents

 

 

96,251

 

 

94,971

Investment securities:

 

 

 

 

 

  

Available-for-sale, at fair value

 

 

104,375

 

 

122,791

Held to maturity, at amortized cost - fair value of $8,718 (2020) and $8,654 (2019)

 

 

8,687

 

 

8,786

Equity securities, at fair value

 

 

1,350

 

 

1,342

Restricted securities

 

 

4,263

 

 

4,190

 

 

 

 

 

 

 

Loans

 

 

1,276,993

 

 

1,248,654

Less: allowance for credit losses

 

 

(10,378)

 

 

(10,507)

Loans, net

 

 

1,266,615

 

 

1,238,147

 

 

 

 

 

 

 

Premises and equipment, net

 

 

24,930

 

 

23,821

Goodwill

 

 

17,518

 

 

17,518

Other intangible assets, net

 

 

2,108

 

 

2,252

Other real estate owned, net

 

 

38

 

 

74

Right-of-use assets

 

 

5,019

 

 

4,771

Other assets

 

 

40,267

 

 

40,572

TOTAL ASSETS

 

$

1,571,421

 

$

1,559,235

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

  

Deposits:

 

 

 

 

 

  

Noninterest-bearing

 

$

355,054

 

$

356,618

Interest-bearing

 

 

993,740

 

 

984,716

Total deposits

 

 

1,348,794

 

 

1,341,334

 

 

 

 

 

 

 

Short-term borrowings

 

 

2,162

 

 

1,226

Long-term borrowings

 

 

15,000

 

 

15,000

Lease liabilities

 

 

5,072

 

 

4,792

Other liabilities

 

 

4,699

 

 

4,081

TOTAL LIABILITIES

 

 

1,375,727

 

 

1,366,433

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

  

Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 12,524,569 (2020) and 12,500,372 (2019)

 

 

125

 

 

125

Additional paid in capital

 

 

61,067

 

 

61,045

Retained earnings

 

 

133,044

 

 

131,425

Accumulated other comprehensive income

 

 

1,458

 

 

207

TOTAL STOCKHOLDERS' EQUITY

 

 

195,694

 

 

192,802

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,571,421

 

$

1,559,235

 

See accompanying notes to Consolidated Financial Statements.

3

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

For Three Months Ended

 

 

 

March 31, 

 

(In thousands, except per share data)

    

2020

    

2019

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

Interest and fees on loans

 

$

13,795

 

$

13,499

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

Taxable

 

 

719

 

 

998

 

Interest on deposits with other banks

 

 

172

 

 

163

 

Total interest income

 

 

14,686

 

 

14,660

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Interest on deposits

 

 

2,059

 

 

1,947

 

Interest on short-term borrowings

 

 

 2

 

 

213

 

Interest on long-term borrowings

 

 

107

 

 

106

 

Total interest expense

 

 

2,168

 

 

2,266

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

12,518

 

 

12,394

 

Provision for credit losses

 

 

350

 

 

100

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

12,168

 

 

12,294

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

866

 

 

934

 

Trust and investment fee income

 

 

375

 

 

372

 

Other noninterest income

 

 

1,111

 

 

882

 

Total noninterest income

 

 

2,352

 

 

2,188

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and wages

 

 

4,296

 

 

3,766

 

Employee benefits

 

 

1,722

 

 

1,254

 

Occupancy expense

 

 

698

 

 

691

 

Furniture and equipment expense

 

 

317

 

 

263

 

Data processing

 

 

1,044

 

 

910

 

Directors' fees

 

 

141

 

 

86

 

Amortization of other intangible assets

 

 

144

 

 

162

 

FDIC insurance premium expense

 

 

91

 

 

205

 

Other real estate owned expenses, net

 

 

18

 

 

233

 

Legal and professional fees

 

 

634

 

 

601

 

Other noninterest expenses

 

 

1,244

 

 

1,172

 

Total noninterest expense

 

 

10,349

 

 

9,343

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

4,171

 

 

5,139

 

Income tax expense

 

 

1,053

 

 

1,311

 

Income from continuing operations

 

 

3,118

 

 

3,828

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 

 —

 

 

(99)

 

Income tax benefit

 

 

 —

 

 

(25)

 

Loss from discontinued operations

 

 

 —

 

 

(74)

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

3,118

 

$

3,754

 

 

See accompanying notes to Consolidated Financial Statements.

4

Table of Contents

 

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

For Three Months Ended

 

 

 

March 31, 

 

(Dollars in thousands)

    

2020

    

2019

    

Net income

 

$

3,118

 

$

3,754

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

Unrealized holding gains on available-for-sale-securities

 

 

1,714

 

 

1,983

 

Tax effect

 

 

(468)

 

 

(541)

 

 

 

 

 

 

 

 

 

Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity

 

 

 8

 

 

 7

 

Tax effect

 

 

(3)

 

 

(3)

 

Total other comprehensive income 

 

 

1,251

 

 

1,446

 

Comprehensive income

 

$

4,369

 

$

5,200

 

 

See accompanying notes to Consolidated Financial Statements.

5

Table of Contents

 

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three months Ended March 31, 2020 and 2019

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

Stockholders’

 

    

Stock

    

Capital

    

Earnings

    

Income

    

Equity

Balances, January 1, 2020

 

$

125

 

$

61,045

 

$

131,425

 

$

207

 

$

192,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

3,118

 

 

 —

 

 

3,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

1,251

 

 

1,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 —

 

 

61

 

 

 —

 

 

 —

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock, net of shares surrendered

 

 

 —

 

 

(39)

 

 

 —

 

 

 —

 

 

(39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 —

 

 

 —

 

 

(1,499)

 

 

 —

 

 

(1,499)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, March 31, 2020

 

$

125

 

$

61,067

 

$

133,044

 

$

1,458

 

$

195,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

Stockholders’

 

 

Stock

    

Capital

    

Earnings

    

(Loss)

    

Equity

Balances, January 1, 2019

 

$

127

 

$

65,434

 

$

120,574

 

$

(2,950)

 

$

183,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 —

 

 

 —

 

 

3,754

 

 

 —

 

 

3,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

1,446

 

 

1,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 —

 

 

63

 

 

 —

 

 

 —

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of options and vesting of restricted stock, net of shares surrendered

 

 

 1

 

 

(89)

 

 

 —

 

 

 —

 

 

(88)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 —

 

 

 —

 

 

(1,278)

 

 

 —

 

 

(1,278)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, March 31, 2019

 

$

128

 

$

65,408

 

$

123,050

 

$

(1,504)

 

$

187,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to Consolidated Financial Statements.

6

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

For Three Months Ended

 

 

March 31, 

 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net Income

 

$

3,118

 

$

3,754

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

 

 

 

 

 

 

Net accretion of acquisition accounting estimates

 

 

(110)

 

 

(145)

Provision for credit losses

 

 

350

 

 

100

Depreciation and amortization

 

 

620

 

 

506

Net amortization of securities

 

 

111

 

 

127

Stock-based compensation expense

 

 

61

 

 

63

Deferred income tax benefit

 

 

(108)

 

 

(143)

Losses on sales and valuation adjustments on other real estate owned

 

 

18

 

 

226

Fair value adjustment on equity securities

 

 

(1)

 

 

(22)

Bank owned life insurance income

 

 

(257)

 

 

(38)

Net changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

(215)

 

 

(414)

Other assets

 

 

397

 

 

3,612

Accrued interest payable

 

 

 —

 

 

(295)

Other liabilities

 

 

479

 

 

404

Net cash provided by operating activities

 

 

4,463

 

 

7,735

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Proceeds from maturities and principal payments of investment securities available for sale

 

 

20,021

 

 

5,475

Proceeds from maturities and principal payments of investment securities held to maturity

 

 

105

 

 

150

Purchases of equity securities

 

 

(7)

 

 

(8)

Net change in loans

 

 

(28,739)

 

 

(16,304)

Purchases of premises and equipment

 

 

(1,397)

 

 

(192)

Proceeds from sales of other real estate owned

 

 

18

 

 

17

Net (purchase) redemption of restricted securities

 

 

(73)

 

 

1,184

Net cash (used in) investing activities

 

 

(10,072)

 

 

(9,678)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net changes in:

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

(1,564)

 

 

14,685

Interest-bearing deposits

 

 

9,055

 

 

10,306

Short-term borrowings

 

 

936

 

 

(30,088)

Common stock dividends paid

 

 

(1,499)

 

 

(1,278)

Repurchase of shares for tax withholding on exercised options and vested restricted stock

 

 

(39)

 

 

(88)

Net cash provided by (used in) financing activities

 

 

6,889

 

 

(6,463)

Net increase in cash and cash equivalents

 

 

1,280

 

 

(8,406)

Cash and cash equivalents at beginning of period

 

 

94,971

 

 

67,225

Cash and cash equivalents at end of period

 

$

96,251

 

$

58,819

 

 

 

 

 

 

 

Supplemental cash flows information:

 

 

 

 

 

 

Interest paid

 

$

2,199

 

$

2,624

Income taxes paid

 

$

77

 

$

 —

Lease liabilities arising from right-of-use assets

 

$

419

 

$

3,877

Unrealized gain on securities available for sale

 

$

1,714

 

$

1,983

Amortization of unrealized loss on securities transferred from available for sale to held to maturity

 

$

 8

 

$

 7

 

 

 

 

 

 

 

 

See accompanying notes to Consolidated Financial Statements.

7

Table of Contents

Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three and Months Ended March 31, 2020 and 2019

(Unaudited)

 

Note 1 – Basis of Presentation

 

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at March 31, 2020, the consolidated results of income and comprehensive income for the three months ended March 31, 2020 and 2019, changes in stockholders’ equity for the three months ended March 31, 2020 and 2019 and cash flows for the three months ended March 31, 2020 and 2019, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, 2019 were derived from the 2019 audited financial statements. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2019. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

 

When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiary.

 

Risks and Uncertainties

 

The novel coronavirus (“COVID-19”) spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operations in March and will likely adversely affect our operations in subsequent quarters, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic most likely to affect our future earnings, cash flows and financial condition in future quarters primarily include the nature and duration of the financial effects felt by our customers and the related impact on the customers' ability to fulfill their financial obligations to the Company as well as the potential decline of real estate values resulting from market disruption which may impair the recorded values of collateral-dependent loans.  Further, these factors, in addition to those pervasive to the industry and overall U.S. economy, may negatively impact the overall value of our Company in such a way that an impairment charge to the carrying value of goodwill is required.  Accordingly, significant estimates used in the preparation of our financial statements may be subject to significant adjustments in future periods.  The greater the duration and severity of the pandemic the more likely that estimates will be materially impacted by its effects.

 

Recent Accounting Standards and Other Authoritative Guidance

ASU No. 2016-13 – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies.   Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.  

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At this time, the Company has established a project management team which meets periodically to discuss and assign roles and responsibilities, key tasks to complete, and a general timeline to be followed for implementation. The team has been working with an advisory consultant and has purchased a vendor model for implementation. Historical data has been collected and uploaded to the new model and the team is in the process of finalizing the methodologies that will be utilized. The team is currently running a parallel simulation to its current incurred loss impairment model. The Company is continuing to evaluate the extent of the potential impact of this standard and continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer bank meetings.

 

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.”  It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

ASU No. 2019-12 – In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.”  The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.  For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

 

ASU No. 2020-01 – In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

 

ASU No. 2020-04 –  In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.  At present, the Bank has limited exposure to Libor based pricing. Libor based loans only comprise 14 loans or 2.6% of the loan portfolio. The bank is confident it can successfully negotiate a migration to SOFR between now and the implementation date. The Bank will notify customers within 120 days prior to migration to SOFR. The Bank acknowledges the replacement rate will be more volatile based on different countries migrating to different indexes and limited liquidity to support the rate. The Bank further acknowledges the volatility will be greatly influenced by the support provided by the Federal Reserve.   

 

On March 12, 2020, the SEC finalized amendments to its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date.  Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley

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Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter.  The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues.  The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer after the 2020 Annual report. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”.  The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K.  Smaller reporting companies also have additional time to file quarterly and annual financial statements.  All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies.  As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting.  As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.

 

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of March 31, 2020, the Company has offered payment deferrals for commercial and consumer customers for up to six months. The loan modifications offered to specific loan types are as follows: 

 

·

Full payment-balloon or full amortization loans – Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the balloon maturity/payoff date occurs.

·

Full payment ARM loans – Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the ARM repricing occurs.

·

Full Payment Rate Reset Loans - Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the rate reset occurs.

·

Principal deferral only loans (any type) - Once the deferral period has ended, the Company will go back to billing principal and interest. The principal amount that has been deferred will be re-amortized when either the maturity, ARM repricing or rate reset occurs.

·

Consumer loans – Borrowers are required to sign a change in the terms and agreements at the time of deferral, which re-amortizes the loan and extends the maturity date based on the number of months deferred.

 

This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.    

 

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Note 2 – Discontinued Operations

On December 31, 2018, the Company completed the sale of the specific assets and activities related to its insurance agency, Avon-Dixon Agency, LLC (“Avon-Dixon”) to Avon-Dixon, an Alera Group Agency, LLC (“Alera”). Also, on this date the Company discontinued the operations of its premium finance company, Mubell Finance, LLC (“Mubell”). Together, Avon-Dixon and Mubell companies are referred to as the “Insurance Subsidiaries”. The Insurance Subsidiaries represented the Company’s insurance products and services segment, the activities of which related to originating, servicing and underwriting retail insurance policies. Certain other assets and liabilities to be sold or settled separately within one year, were classified as discontinued operations in the Company’s consolidated financial statements. All of the remaining assets and liabilities of discontinued operations were settled prior to December 31, 2019.

There were no assets or liabilities of discontinued operations at March 31, 2020 or December 31, 2019. The following table presents the financial information of discontinued operations for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

For Three Months Ended

 

 

 

March 31, 

($ in thousands)

    

 

2020

    

2019

Noninterest income

 

 

 

 

 

 

 

All other income

 

 

$

 —

 

$

14

Total noninterest income

 

 

 

 —

 

 

14

Noninterest expense

 

 

 

 

 

 

 

Salaries and wages

 

 

 

 —

 

 

31

Employee benefits

 

 

 

 —

 

 

 7

Occupancy expense

 

 

 

 —

 

 

18

Furniture and equipment

 

 

 

 —

 

 

 1

Legal and professional fees

 

 

 

 —

 

 

64

Other noninterest expenses

 

 

 

 —

 

 

(8)

Total noninterest expense

 

 

 

 —

 

 

113

Loss from discontinued operations before income taxes

 

 

 

 —

 

 

(99)

Income tax benefit

 

 

 

 —

 

 

(25)

Loss from discontinued operations

 

 

$

 —

 

$

(74)

 

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Note 3 – Earnings Per Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of potential common stock equivalents (stock-based awards). The following table provides information relating to the calculation of earnings per common share:

 

 

 

 

 

 

 

(In thousands, except per share data)

    

2020

    

2019

Net income from continuing operations

 

$

3,118

 

$

3,828

Net loss from discontinued operations

 

 

 -

 

 

(74)

Net Income

 

$

3,118

 

$

3,754

Weighted average shares outstanding - Basic

 

 

12,513

 

 

12,769

Dilutive effect of common stock equivalents-options

 

 

 5

 

 

 4

Weighted average shares outstanding - Diluted

 

 

12,518

 

 

12,773

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

 

Income from continuing operations

 

$

0.25

 

$

0.30

Loss from discontinued operations

 

 

 —

 

 

(0.01)

Net income

 

$

0.25

 

$

0.29

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

  

 

 

  

Income from continuing operations

 

$

0.25

 

$

0.30

Loss from discontinued operations

 

 

 —

 

 

(0.01)

Net income

 

$

0.25

 

$

0.29

 

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three months ended March  31, 2020 and 2019.

Note 4 – Investment Securities

The following tables provide information on the amortized cost and estimated fair values of debt securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

Estimated

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

9,721

 

$

37

 

$

 3

 

$

9,755

Mortgage-backed

 

 

92,641

 

 

2,001

 

 

22

 

 

94,620

Total

 

$

102,362

 

$

2,038

 

$

25

 

$

104,375

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

23,854

 

$

 3

 

$

31

 

$

23,826

Mortgage-backed

 

 

98,638

 

 

574

 

 

247

 

 

98,965

Total

 

$

122,492

 

$

577

 

$

278

 

$

122,791

 

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Held-to-maturity securities:

    

 

 

    

 

 

    

 

 

    

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,287

 

$

43

 

$

 —

 

$

1,330

States and political subdivisions

 

 

400

 

 

 1

 

 

 —

 

 

401

Other Debt securities

 

 

7,000

 

 

20

 

 

33

 

 

6,987

Total

 

$

8,687

 

$

64

 

$

33

 

$

8,718

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,386

 

$

 —

 

$

 5

 

$

1,381

States and political subdivisions