SB ONE BANCORP MANAGEMENT STRATEGY
We are a community-oriented financial institution serving northern
While offering traditional community bank loan and deposit products and services, we obtain non-interest income through our insurance brokerage operations and the sale of non-deposit products.
We continue to focus on strengthening our core operating performance by improving our net interest income and margin by closely monitoring our yield on earning assets and adjusting the rates offered on deposit products. We have been focused on building for the future and strengthening our core operating results within our risk management framework. OnMarch 12, 2020 , the Company announced the signing of a definitive merger agreement with Provident whereby Provident will acquire the Company in an all-stock transaction. Each outstanding share of Company common stock will be exchanged for 1.357 shares of Provident common stock. The Merger is expected to close in the third quarter of 2020, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of the Company.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance withU.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. The economic impact of the COVID-19 pandemic increases uncertainty, which has reduced our ability to use past results to estimate future performance. Actual results could differ from those estimates and may be subject to greater volatility than has been the case in the past. Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the three months endedMarch 31, 2018 . For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our Annual Report on Form 10K for the year endedDecember 31, 2019 . 33 Table of Contents
COMPARISON OF OPERATING RESULTS FOR THREE MONTHS ENDED
Overview - For the quarter endedMarch 31, 2020 , the Company reported net income of$5.1 million , or$0.55 per basic and diluted share, a decrease of 11.9%, as compared to net income of$5.8 million , or$0.62 per basic and diluted share, for the quarter ended March 31, 2019. The decrease in net income was primarily driven by a decrease in purchase accounting amortization of$653 thousand and merger-related expenses net of tax of$249 thousand as a result of the merger with Provident. The COVID-19 pandemic has resulted in widespread infections inthe United States during the first quarter of 2020 and beyond. Regions and states ofthe United States of America , have implemented varying degrees of "stay at home" directives in an effort to prevent the spread of the virus. These "stay at home" directives have significantly reduced economic activity inthe United States . The "stay at home" directive excludes essential businesses including banks. The Company's remains open and fully operational. While the Company continues to evaluate the disruption caused by the COVID-19 pandemic, it may have a material adverse impact on the Company's results of future operations, financial position, capital and liquidity in fiscal year 2020. For further discussion of the impact of the COVID-19 pandemic on the Company, see "Note 16 - Impact of COVID-19." Comparative Average Balances and Average Interest Rates - The following table presents, on a fully tax equivalent basis, a summary of our interest-earning assets and their average yields, and interest-bearing liabilities and their average costs for the three month periods endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Average Average Average Average (Dollars in thousands) Balance Interest Rate (2) Balance Interest Rate (2) Earning Assets: Securities: Tax exempt (3)$ 16,638 $ 179 4.33 %$ 62,654 $ 675 4.37 % Taxable 212,922 1,508 2.85 % 142,137 1,175 3.35 % Total securities 229,560 1,687 2.96 % 204,791 1,850 3.66 % Total loans receivable (1) (4) 1,656,231 19,330 4.69 % 1,500,604 18,160 4.91 % Other interest-earning assets 25,591 20 0.31 % 14,691 49 1.35 % Total earning assets$ 1,911,382 $ 21,037 4.43 %$ 1,720,086 $ 20,059 4.73 % Non-interest earning assets 125,001 114,358 Allowance for loan losses (10,457) (8,815) Total Assets$ 2,025,926 $ 1,825,629 Sources of Funds: Interest bearing deposits: NOW$ 250,791 $ 431 0.69 %$ 255,959 $ 446 0.71 % Money market 253,810 898 1.42 % 240,936 1,178 1.98 % Savings 218,326 222 0.41 % 221,608 327 0.60 % Time 562,388 2,791 2.00 % 436,376 1,913 1.78 % Total interest bearing deposits 1,285,315 4,342 1.36 % 1,154,879 3,864 1.36 % Borrowed funds 206,398 1,141 2.22 % 188,983 1,214 2.61 % Junior subordinated debentures 27,870 316 4.56 % 27,860 315 4.59 % Total interest bearing liabilities$ 1,519,583 $ 5,799 1.53 %$ 1,371,722 $ 5,393 1.59 % Non-interest bearing liabilities: Demand deposits 282,875 259,363 Other liabilities 21,395 6,481 Total non-interest bearing liabilities 304,270 265,844 Stockholders' equity 202,073 188,063 Total Liabilities and Stockholders' Equity$ 2,025,926 $ 1,825,629 Net Interest Income and Margin (5) 15,238 3.21 % 14,666 3.46 % Tax-equivalent basis adjustment (58) (227) Net Interest Income$ 15,180 $ 14,439
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(1) Includes loan fee income.
(2) Average rates on securities are calculated on amortized costs.
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(3) Full taxable equivalent basis, using an effective tax rate of 30.09% in 2020
and 2019 and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act)
interest expense disallowance
(4) Loans outstanding include non-accrual loans.
(5) Represents the difference between interest earned and interest paid, divided
by average total interest-earning assets.
Net Interest Income - Net interest income is the difference between interest and
deferred fees earned on loans and other interest-earning assets and interest
paid on interest-bearing liabilities. Net interest income is directly affected
by changes in volume and mix of interest-earning assets and interest-bearing
liabilities that support those assets, as well as changing interest rates when
differences exist in repricing dates of assets and liabilities.
Net interest income on a fully tax equivalent basis increased $572 thousand , or
3.9%, to $15.2 million for the first quarter of 2020, as compared to $14.7
million for the same period in 2019. The increase in net interest income was
largely due to a $191.3 million , or 11.1%, increase in average interest earning
assets, principally organic growth of loans receivable, which increased $155.6
million , or 10.4%. Net interest margin decreased 25 basis points to 3.21% for
the first quarter of 2020, as compared to the same period in 2019. The decrease
in net interest margin for the first quarter 2020 is mostly due to a decrease in
purchase accounting amortization of $653 thousand , a decrease of prepayment
penalties on loans receivable of $207 thousand and a down rate environment on
interest earning assets. The Company's average deposits grew $153.9 million , or
10.9%, for the first quarter of 2020, as compared to the same period in 2019.
The Company's cost of funds in the first quarter of 2020 decreased by 6 basis
points as compared to the first quarter of 2019.
Interest Income - Our total interest income, on a fully tax equivalent basis,
increased $978 thousand , or 4.9%, to $21.0 million for the quarter ended March
31, 2020 as compared to the same period last year. The increase was primarily
due to higher average earning assets, which increased $191.3 million for the
quarter ended March 31, 2020 , as compared to the same period in 2019. The
average yield decreased 30 basis points to 4.43% for the quarter ended March 31,
2020 , as compared to 4.73% for the same period last year.
Our total interest income earned on loans receivable increased $1.2 million , or
6.4%, to $19.3 million for the first quarter of 2020, as compared to the same
period in 2019. The increase was primarily driven by an increase in average
balance of loans receivable of $155.6 million , or 10.4%, for the three months
ended March 31, 2020 , as compared to the same period last year. The average
yield decreased 22 basis points to 4.69% for the quarter ended March 31, 2020 ,
as compared to 4.91% for the same period last year.
Our total interest income earned on securities, on a fully tax equivalent basis,
decreased $163 thousand , to $1.7 million for the quarter ended March 31, 2020
from $1.9 million for the same period in 2019. The average yield for the
quarter ended March 31, 2020 decreased 70 basis points to 2.96% as compared to
the same period in 2019.
Other interest-earning assets include federal funds sold and interest bearing
deposits in other banks. Our interest earned on total other interest-earning
assets decreased $29 thousand to $20 thousand for the first quarter of 2020 as
compared to the same period last year. The average balances in other
interest-earning assets increased $10.9 million to $25.6 million in the first
quarter of 2020 from $14.7 million during the first quarter a year earlier. The
average yield for the quarter endedMarch 31, 2020 increased 104 basis points to 0.31% as compared to 1.35% in the same period in 2019 which was mainly driven by the deposits held at theFederal Reserve Bank andWilmington Trust . Interest Expense - Our interest expense for the three months endedMarch 31, 2020 increased$406 thousand , or 7.5%, to$5.8 million from$5.4 million for the same period in 2019. The increase was principally due to higher average balances in interest-bearing liabilities, which increased$130.4 million , or 11.3%, to$1.3 billion for the first quarter of 2020 from$1.2 billion for the same period in 2019.
Our interest expense on deposits increased
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The average rate remained the same at 1.36% for the quarter ended
Our interest expense on borrowed funds decreased$73 thousand , or 6.0%, for the quarter endedMarch 31, 2020 , as compared to the same period last year. The decrease was largely attributed to a decrease in the average rate of 39 basis points to 2.22% as compared to 2.61% in the same period in 2019. The decrease was offset by a$17.4 million increase in the average balance of borrowed funds during the first quarter of 2020, as compared to the same period in 2019.
Our interest expense on all of the Company's subordinated debt increased
Provision for Loan Losses - Provision for loan losses increased$308 thousand , or 53.9%, to$879 thousand for the first quarter of 2020, as compared to$571 thousand for the same period in 2019. The increase in provision for loan losses was primarily driven by changes to our qualitative modeling factors for a possible deterioration of the economic environment due to the circumstances surrounding the state of the COVID-19 pandemic and by an increase in the ALLL due to larger portfolio volume partially offset by a write off that occurred during the first quarter. The provision for loan losses reflects management's judgment concerning the risks inherent in our existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods. Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions as management may deem necessary. Non-Interest Income - Our non-interest income increased$48 thousand , or 1.3%, to$3.7 million for the first quarter of 2020, as compared to the same period in 2019. The growth was largely due to increases in other income of$52 thousand , and insurance commissions and fees relating toSB One Insurance Agency of$36 thousand , for the first quarter of 2020, as compared to the same period in 2019. The increases in non-interest income were partially offset by a decrease in investment brokerage fees of$41 thousand for the first quarter of 2020, as compared to the same period in 2019. Non-Interest Expense - Our non-interest expenses excluding merger related expenses of$315 thousand increased$0.9 million , or 8.6%, to$11.1 million for the first quarter of 2020, as compared to the same period in 2019. The increase in non-interest expenses, excluding merger related expenses, occurred largely in salaries and employee benefits, which increased$640 thousand , data processing, which increased$114 thousand , and occupancy, which increased$100 thousand , for the first quarter of 2020, as compared to the same period in 2019. Salary and employee benefits increased for the first quarter of 2020 versus the first quarter of 2019 mostly due to annual staff pay increases and additional staff to support the continued growth of the Company. Data processing increased as a result of increased customer transaction volume period over period. Income Taxes - Our income tax expense, which includes both federal and state tax expenses, decreased$13 thousand to$1.5 million for the first quarter of 2020, as compared to the same period last year. The Company's effective tax rate for the first quarter of 2020 was 22.5%, as compared to 20.5% for the first quarter of 2019.
COMPARISON OF FINANCIAL CONDITION AT
Total Assets - AtMarch 31, 2020 , our total assets were$2.1 billion , an increase of$78.6 million , or 3.9%, as compared to total assets of$2.0 billion atDecember 31, 2019 . The increase was mainly attributable to an increase in loans receivable of$56.3 million , or 3.5%, to$1.7 billion .
Cash and Cash Equivalents - Our cash and cash equivalents decreased by
Securities Portfolio - AtMarch 31, 2020 , the securities portfolio, which includes available for sale and held to maturity securities, was$238.5 million , compared to$216.2 million atDecember 31, 2019 . Available for sale securities were$232.2 million atMarch 31, 2020 , compared to$212.2 million atDecember 31, 2019 . The available for sale securities are held primarily for liquidity, interest rate risk management and profitability. Accordingly, our investment policy is to invest in 36 Table of Contents securities with low credit risk, such asU.S. government agency obligations, state and political subdivision obligations and mortgage-backed securities. Held to maturity securities were$6.3 million atMarch 31, 2020 and$4.0 million atDecember 31, 2019 .
Net unrealized gain in the available for sale securities portfolio was
We conduct a regular assessment of our investment securities to determine whether any securities are OTTI. Further details of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 3 - Securities to our unaudited consolidated financial statements.
The unrealized losses in our securities portfolio are mostly driven by changes in spreads and market interest rates. All of our securities in an unrealized loss position have been evaluated for other-than-temporary impairment as ofMarch 31, 2020 and we do not consider any security OTTI. We evaluated the prospects of the issuers in relation to the severity and the duration of the unrealized losses. In addition, we do not intend to sell, and it is more likely than not that we will not have to sell, any of our securities before recovery of their cost basis.
Other investments, which consisted primarily of FHLB stock, decreased
Loans - The loan portfolio comprises our largest class of earning assets. Total loans receivable, net of unearned income, increased$55.7 million , or 3.4%, to$1.7 billion atMarch 31, 2020 , as compared to$1.6 billion atDecember 31, 2019 . The following table summarizes the composition of our gross loan portfolio by type: (Dollars in thousands) March 31, 2020 December 31, 2019
Commercial and industrial loans
Construction 114,734 125,291
Commercial real estate 1,056,745 995,220
Residential real estate 379,396 382,567
Consumer and other 1,903 2,097
Total gross loans $ 1,686,432 $ 1,630,112
Loan and Asset Quality - The ratio of non-performing assets ("NPAs"), which
include non-accrual loans, loans 90 days past due and still accruing, troubled
debt restructured loans currently performing in accordance with renegotiated
terms and foreclosed real estate, to total assets increased to 0.85% at March
31, 2020 , as compared to 0.83% at December 31, 2019 . The ratio of NPAs to total
assets decreased to 0.85% at March 31, 2020 , as compared to 1.35% at March 31,
2019 . NPAs exclude $2.5 million of Purchased Credit-Impaired ("PCI") loans
acquired through the merger with Community Bank of Bergen County ("Community
Bank "). NPAs increased $942 thousand to $17.6 million at March 31, 2020 , as
compared to $16.7 million at December 31, 2019 . Non-accrual loans, excluding
$2.5 million of PCI loans, increased $1.6 million , or 14.4%, to $13.1 million at
March 31, 2020 , as compared to $11.4 million at December 31, 2019 . Loans past
due 30 to 89 days totaled $5.0 million at March 31, 2020 , representing a
decrease of $2.8 million , or 36.4%, as compared to $7.8 million at December 31,
2019 .
We continue to actively market our foreclosed real estate properties, the value
of which decreased $696 thousand to $3.1 million at March 31, 2020 as compared
to $3.8 million at December 31, 2019 . The decrease in foreclosed real estate
properties was attributable to the sale of two properties totaling $696
thousand . At March 31, 2020 , the Company's foreclosed real estate properties had
an average carrying value of approximately $310 thousand per property.
Management continues to monitor our asset quality and believes that the NPAs are
adequately collateralized and anticipated material losses have been adequately
reserved for in the allowance for loan losses. However, given the
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uncertainty of the current real estate market, additional provisions for losses
may be deemed necessary in future periods. The following table provides
information regarding risk elements in the loan portfolio at each of the periods
presented:
(Dollars in thousands) March 31, 2020 December 31, 2019
Non-accrual loans $ 13,061 $ 11,415
Non-accrual loans to total loans 0.78 % 0.70 %
NPAs $ 17,606 $ 16,664
NPAs to total assets 0.83 % 0.83 %
Allowance for loan losses as a % of non-accrual
loans 83.20 % 89.94 %
Allowance for loan losses to total loans 0.64 % 0.63 %
A loan is considered impaired, in accordance with the impairment accounting
guidance, when based on current information and events, it is probable that we
will be unable to collect all amounts due from the borrower in accordance with
the contractual terms of the loan. Total impaired loans were $13.2 million and
$14.3 million at March 31, 2020 and December 31, 2019 , respectively. The
Company also had PCI loans from the acquisition of Community with a carrying
value of $3.0 million at March 31, 2020 .
Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.
These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Not all impaired loans and restructured loans are non-accrual, and therefore not all are considered non-performing loans.
Restructured loans still accruing totaled
We also continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans which cause management to have serious concerns as to the ability of such borrowers to comply with the present loan repayment terms and which may cause the loan to be placed on non-accrual status. As ofMarch 31, 2020 , we had$13.0 million that we deemed potential problem loans. Management is actively monitoring these loans. As ofMarch 31, 2020 , the Company has granted payment deferrals totaling$125.1 million for 129 commercial and residential loans as a result of the COVID-19 pandemic. While the Company continues to evaluate the disruption caused by the pandemic and the impact of the CARES Act based on the incurred loss methodology currently utilized by the Company, the provision for loan losses and charge-offs may be impacted in future periods.
Further detail of the credit quality of the loan portfolio is included in Note 5 - Allowance for Loan Losses and Credit Quality of Financing Receivables to our unaudited consolidated financial statements.
Allowance for Loan Losses - The allowance for loan losses consists of general, allocated and unallocated components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience and expected losses derived from our internal risk rating process. The unallocated component covers the potential for other adjustments that may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the reserve is reasonable and adequate for each of the periods presented. The Company's allowance for loan losses increased$600 thousand , or 5.8%, to$10.9 million , atMarch 31, 2020 as compared to$10.3 million atDecember 31, 2019 . The Company's outstanding credit mark recorded on the legacyCommunity Bank and Enterprise Bank, N.J. ("Enterprise") portfolios of$315.5 million totaled$6.1 million atMarch 31 , 38 Table of Contents 2020. The Company's combined allowance for loan loss and the credit mark on the legacyCommunity Bank and Enterprise portfolios totaled approximately$17.0 million , or 1.00% of the overall loan portfolio, atMarch 31, 2020 . The Company recorded$866 thousand in provision for loan losses for the quarter endedMarch 31, 2020 , as compared to$552 thousand for the quarter endedMarch 31, 2019 . Additionally, the Company recorded net charge-offs of$276 thousand for the quarter endedMarch 31, 2020 , as compared to$163 thousand in net charge-offs for the quarter endedMarch 31, 2019 .
The table below presents information regarding our provision and allowance for
loan losses for the three months ended
(Dollars in thousands) March 31, 2020 March 31,
2019
Balance, beginning of period$ 10,267 $
8,775
Provision charged to operating expenses 879 571 Charge-offs (352) (168) Recoveries 73 12 Balance, end of period$ 10,867 $ 9,190 The table below presents details concerning the allocation of the allowance for loan losses to the various categories for each of the periods presented. The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses from any category of loans. March 31, 2020 December 31, 2019 Percentage of Percentage of Loans In Each Loans In Each Category To Category To (Dollars in thousands) Amount to Total Amount Gross Loans Commercial and industrial$ 920 7.9 %$ 1,175 7.7 % Construction 880 6.8 % 537 7.7 % Commercial real estate 7,341 62.7 % 6,717 61.0 % Residential real estate 1,482 22.5 % 1,338 23.5 % Consumer and other loans 12 0.1 % 9 0.1 % Unallocated 232 - % 491 - % Total$ 10,867 100.0 %$ 10,267 100.0 % Bank-Owned Life Insurance ("BOLI") - Our BOLI carrying value amounted to$36.9 million atMarch 31, 2020 and$37.2 million atDecember 31, 2019 . The decrease of$273 thousand is largely due to the payback on a BOLI preliminary contract of$500 thousand that we decided not to pursue offset by net earnings on BOLI policies.Goodwill and Other Intangibles -Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. AtMarch 31, 2020 andDecember 31, 2018 , we had recorded goodwill totaling$27.3 million . Our recorded goodwill includes the acquisition of Tri-State in 2001, the 2006 acquisition of deposits and the acquisitions of Community and Enterprise. In accordance withU.S. GAAP, goodwill is not amortized, but evaluated at least annually for impairment. Any impairment of goodwill results in a charge to income. We recorded a core deposit intangible of$1.3 million and$1.1 million for the Community and Enterprise acquisitions, respectively. For the period endedMarch 31, 2020 , we amortized$91 thousand in core deposit intangible.
We
periodically assess whether events and changes in circumstances indicate that the carrying amounts of goodwill and intangible assets may be impaired. The Company prepared a Step 1 goodwill impairment analysis atMarch 31, 2020 , due to ongoing economic uncertainty. In testing goodwill for impairment, the Company compared the estimated fair value of its reporting unit to its carrying amount, including goodwill. The estimated fair value of each reporting unit exceeded its book value, therefore, no write-down of goodwill was required atMarch 31, 2020 . The goodwill related to the insurance agency is not deductible for tax purposes. 39 Table of Contents Deposits - Our total deposits increased$73.5 million , or 4.8%, to$1.6 billion atMarch 31, 2020 , from$1.5 billion atDecember 31, 2019 . The growth in deposits was mostly due to an increase in interest bearing deposits of$46.0 million , or 3.6%, and an increase in non-interest bearing deposits of$27.5 million , or 10.7%, atMarch 31, 2020 , as compared toDecember 31, 2019 . Borrowings - Our borrowings consist of short-term and long-term advances from the FHLB. The advances are secured under terms of a blanket collateral agreement by a pledge of qualifying mortgage loans. We had$230.3 million and$233.1 million in borrowings at the FHLB, at a weighted average interest rate of 1.10% and 1.87% atMarch 31, 2020 andDecember 31, 2019 , respectively. The long-term borrowings atMarch 31, 2020 consisted of$34.1 million of fixed rate advances. During the quarter endedMarch 31, 2016 , the Company entered into forward starting interest rate swap agreements related to four of its FHLB borrowings. Please refer to Liquidity and Capital Resources - Off-Balance Sheet Arrangements. Subordinated Debentures - OnJune 28, 2007 , Sussex Capital Trust II (the "Trust"), aDelaware statutory business trust and our non-consolidated wholly owned subsidiary, issued$12.5 million of variable rate capital trust pass-through securities to investors. The Trust purchased$12.9 million of variable rate junior subordinated deferrable interest debentures from us. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. We have also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The interest rate is based on the three-month LIBOR plus 144 basis points and adjusts quarterly. The rate atMarch 31, 2020 was 2.18%. During the quarter endedMarch 31, 2016 , the Company entered into an interest rate swap agreement related to the junior subordinated debentures where the Company pays a fixed rate of 3.10% and receives the three-month LIBOR plus 144 basis points. Please refer to Liquidity and Capital Resources - Off-Balance Sheet Arrangements. The capital securities are currently redeemable by us at par in whole or in part. The capital securities must be redeemed upon final maturity of the subordinated debentures onSeptember 15, 2037 . The proceeds of these trust preferred securities, which have been contributed to the Bank, are included in the Bank's capital ratio calculations and treated as Tier I capital. During the quarter endedDecember 31, 2016 , the Company completed the private placement of the subordinated notes. The subordinated notes have a maturity date ofDecember 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the first five years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3month LIBOR plus 350 basis points over the remainder of the term.
In accordance with FASB ASC 810, Consolidations, our wholly owned subsidiary, the Trust, is not included in our consolidated financial statements.
Equity - Stockholders' equity, inclusive of accumulated other comprehensive income, net of income taxes, was$194.9 million atMarch 31, 2020 , a decrease of$4.3 million when compared toDecember 31, 2019 . AtMarch 31, 2020 , the leverage, Tier I risk-based capital, total risk-based capital and common equity Tier I capital ratios for the Bank were 9.97%, 11.52%, 12.15%, and 11.52%, respectively, all in excess of the ratios required to be deemed "well-capitalized."
LIQUIDITY AND CAPITAL RESOURCES
A fundamental component of our business strategy is to manage liquidity to ensure the availability of sufficient resources to meet all financial obligations and to finance prospective business opportunities. Liquidity management is critical to our stability. Our liquidity position over any given period of time is a product of our operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and loan demand.
Traditionally, financing for our loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments.
AtMarch 31, 2020 , total deposits amounted to$1.6 billion , an increase of$73.5 million , or 4.8%, fromDecember 31, 2019 . AtMarch 31, 2020 andDecember 31, 2019 , borrowings from the FHLB and subordinated debentures totaled$258.1 million and$261.0 million , respectively, and represented 12.4% and 13.0% of total assets, respectively. 40 Table of Contents Loan production continued to be our principal investing activity. Total loans receivable, net of unearned income, atMarch 31, 2020 , amounted to$1.7 billion , an increase of$56.3 million , or 3.5%, compared toDecember 31, 2019 . Our most liquid assets are cash and due from banks and federal funds sold. AtMarch 31, 2020 , the total of such assets amounted to$40.3 million , or 1.9%, of total assets, compared to$43.7 million , or 2.2% of total assets atDecember 31, 2019 . Another significant liquidity source is our available for sale securities portfolio. AtMarch 31, 2020 , available for sale securities amounted to$232.2 million , compared to$212.2 million atDecember 31, 2019 . In addition to the aforementioned sources of liquidity, we have available various other sources of liquidity, including federal funds purchased from other banks and the FRB discount window. The Bank also has the capacity to borrow an additional$110.1 million through its membership in the FHLB and$10.0 million from ACBB atMarch 31, 2020 . Management believes that our sources of funds are sufficient to meet our present funding requirements. InJuly 2013 , the FRB, theOffice of the Comptroller of the Currency and theFDIC approved final rules (the "Capital Rules") that established a new capital framework forU.S. banking organizations. The Capital Rules generally implement theBasel Committee on Banking Supervision's December 2010 final capital framework referred to as "Basel III" for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies' rules. AtMarch 31, 2020 , the Bank's Tier I, Total and Common Equity Tier I ("CET1") capital ratios were 11.52%, 12.15% and 11.52%, respectively. In addition to the risk-based guidelines, the Bank's regulators require that banks which meet the regulators' highest performance and operational standards maintain a minimum leverage ratio (Tier I capital as a percentage of tangible assets) of 4.0%.
As
of
The Capital Rules also require a "capital conservation buffer," composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. BeginningJanuary 1, 2016 , the capital standards applicable to the Company include an additional capital conservation buffer of 0.625%, increasing 0.625% each year thereafter. The Company maintains an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%. As ofMarch 31, 2020 , the Bank had a capital conservation buffer of 4.15%. EffectiveJanuary 1, 2020 community banks with total consolidated assets under$10 billion , total off-balance sheet exposures of 25% or less of total consolidated assets, leverage ratio greater than 9% and trading assets and liabilities of 5% or less of total consolidated assets can opt into the Community Bank Leverage Ratio ("CBLR") framework. A qualifying bank can opt into the CBLR framework at any time or opt out and become subject to general capital rules by completing the associated reporting data in the FFIEC Call Report. The impact of this regulatory simplification allows the electing bank to not have to complete the risk weighting schedules for schedule RC-R in the FFIEC Call Report. Instead, if the Company opts into the CBLR framework and meets the qualifying criteria, it will be considered to have satisfied the risk-based and leverage capital requirements in the generally applicable Capital Rules and to have met the well-capitalized ratio requirements for PCA purposes. AtMarch 31, 2020 , the Company has elected not to adopt the CBLR framework. The Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The risk-based capital guidelines are designed to make regulatory capital requirements sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposures and to minimize disincentives for holding liquid, low-risk assets. The capital guidelines apply on a consolidated basis to bank holding companies with consolidated assets of$1 billion or more, and to certain bank holding companies with less than$1 billion in assets if they are engaged in substantial non-banking activity or meet certain other criteria. 41 Table of Contents We have no investment or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources, except for the trust preferred securities of the Trust. We are not aware of any known trends or any known demands, commitments, events or uncertainties, which would result in any material increase or decrease in liquidity. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. Off-Balance Sheet Arrangements - Our consolidated financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business. These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. AtMarch 31, 2020 , these unused commitments totaled$310.2 million and consisted of$176.6 million in commitments to grant commercial real estate, construction and land development loans,$39.4 million in home equity lines of credit,$92.2 million in other unused commitments and$2.0 million in letters of credit. These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to us. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. During the first quarter of 2016, the Company entered into interest rate swap agreements with notional amounts totaling$38.5 million , of which all are designated as cash flow hedges. The Company entered into$26.0 million in forward starting interest rate swap agreements coinciding with the maturity of five FHLB advances over the next 21 months that had an average rate of 4.03%. The forward interest rate swaps have a term of 10 years at an average fixed rate of 1.97% and will hedge short term wholesale funding. Additionally, the Company entered into a$12.5 million interest rate swap agreement to coincide with a junior subordinated debt issued by Sussex Capital Trust II, for a term of 10 years at a fixed rate of 3.10%. During the second quarter of 2018, the Company entered into two interest rate swap agreements with notional amounts totaling$40 million , of which all are designated as cash flow hedges. The Company entered into$20.0 million in two different forward starting interest rate swap agreements coinciding with the maturity of two FHLB advances over 36 and 48 months both beginning onSeptember 15, 2018 . The forward interest rate swap with a 3 year term has a fixed rate of 2.89% and the forward interest rate swap with a 4 year term has a fixed rate of 2.90%. During the third quarter of 2018, the Company entered into two interest rate swap agreements with notional amounts totaling$35 million , of which all are designated as cash flow hedges. The Company entered into$17.5 million in two different forward starting interest rate swap agreements coinciding with the maturity of two FHLB advances over 36 and 48 months both beginning onSeptember 15, 2018 . The forward interest rate swap with a 3 year term has a fixed rate of 2.85% and the forward interest rate swap with a 4 year term has a fixed rate of 2.86%. During the quarter endedMarch 31, 2019 , the Company entered into a forward starting interest rate swap agreement with a notional amount totaling$40 million , designated as a cash flow hedge. The Company entered into a$40 million brokered CD. The forward interest rate swap with a 3 year term has a fixed rate of 2.56%. During the quarter endedJune 30, 2019 , the Company entered into five forward starting interest rate swap agreements with a notional amount totaling$85 million , designated as a cash flow hedge of variable cash flows, one associated with a$20 million with a one month LIBOR (IND Promontory) or similar funding, with a 3 year term and a fixed rate of 1.87%, one associated with a$25 million brokered CD, with a 3 year term and a fixed rate of 2.21%, one associated with a$20 million brokered CD, with a 3 year term and a fixed rate of 2.13%, one associated with a$10 million one month LIBOR (IND Promontory) or similar funding, with a 4 year term and a fixed rate of 1.59%, and one associated with a$10 million one month LIBOR (IND Promontory) or similar funding, with a 5 year term and a fixed rate of 1.62%.
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