BAY BANKS OF VIRGINIA, INC. The following discussion is intended to assist in understanding the results of operations and the financial condition ofBay Banks of Virginia, Inc. (the "Company"), the holding company forVirginia Commonwealth Bank (the "Bank") andVCB Financial Group, Inc. (the "Financial Group "). This discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "2019 Form 10-K").
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements concerning the Company's expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may constitute "forward-looking statements" as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. These forward-looking statements include statements about the Company's plans, obligations, expectations and intentions, and other statements that are not historical facts. Words such as "anticipates," "believes," "intends," "should," "expects," "will," and variations of similar expressions are intended to identify forward-looking statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to: the effect of the COVID-19 pandemic, including its potential adverse effect on economic conditions, and the Company's employees, customers, loan losses, and financial performance; changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of theU.S. Government , including policies of theU.S. Treasury and theBoard of Governors of theFederal Reserve System (the "Federal Reserve"); the quality or composition of the loan and investment portfolios; demand for loan products; deposit flows; competition; expansion activities; demand for financial services in the Company's market area; accounting principles, policies, and guidelines; changes in banking, tax, and other laws and regulations and interpretations or guidance thereunder; and other factors detailed in the Company's publicly filed documents, including the factors described in Item 1A., "Risk Factors," in the 2019 Form 10-K. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.
GENERAL
All dollar amounts included in the tables of this discussion are in thousands, except per share data, unless otherwise stated. There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2019 Form 10-K. The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Changes in the volume and/or mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, the level of noninterest-bearing deposits, and the volume of nonperforming assets have an effect on net interest income, net interest margin, and net income.
OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• Net (loss) income for the three months ended
was
the three months ended
2020 includes loan loss provision expense of
significant portion of which related to management's estimate of incurred
losses as a result of the COVID-19 pandemic.
• (Loss) income before income taxes was
the three months ended
• Return on average assets (annualized) decreased to 0.00% for the three
months ended
• Return on average equity (annualized) decreased to (0.04)% for the three
months ended
• Total assets increased
from
• Loans, net of allowance for loan losses were
2020 compared to $916.6 million as of December 31, 2019 , an increase of
$43.4 million and an annualized growth rate of 19%.
• Allowance for loan losses increased
of gross loans, as of
loans, as of December 31, 2019 .
25
--------------------------------------------------------------------------------
• Total deposits increased by
million increase in deposits in the first quarter of 2020,
attributable to time deposits.
• The ratio of nonperforming assets to total assets increased to 0.60% as of
• Capital levels and regulatory capital ratios for the Bank were above
regulatory minimums for well-capitalized banks as of
total capital ratio and tier 1 leverage ratio of 13.29% and 10.69%,
respectively.
• Beginning in
Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic
Security ("CARES") Act, processing 512 loans totaling
month of April. Through the PPP, the federal government partnered with banks
to provide over
other operating expenses.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
The following table presents average interest-earning assets and interest-bearing liabilities, taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, net interest margin ("NIM"), and net interest spread, as of and for the periods stated. Yields and costs are annualized.
Average Balances, Income and Expense, Yields and Rates
As of and for the For the Three Months Ended
2020 2019 2020 Compared to 2019
Variance Attributable to
Average Income/ Yield/ Average Income/ Yield/ Income/ Expense (8)
Balance Expense Cost Balance Expense Cost Variance Rate Volume
INTEREST-EARNING ASSETS:
Taxable securities $ 87,997 $ 652 2.98 % $ 70,263 $ 595 3.43 % $ 57 $ (94 ) $ 151
Tax-exempt securities (1) 15,280 119 3.13 % 19,257 149 3.15 % (30 ) 1 (31 )
Total securities 103,277 771 3.00 % 89,520 744 3.37 % 27 (93 ) 120
Gross loans (2) (3) 938,625 11,352 4.86 % 907,606 11,461 5.12 % (109 ) (504 ) 395
Interest-earning deposits and
federal funds sold 34,695 106 1.23 % 23,186 142 2.48 % (36 ) (107 ) 71
Certificates of deposits 2,754 14 2.04 % 3,746 20 2.17 % (6 ) (1 ) (5 )
Total interest-earning assets 1,079,351 12,243 4.56 % 1,024,058 12,367 4.90 % $ (124 ) $ (705 ) $ 581
Noninterest-earning assets 64,528 64,122
Total average assets $ 1,143,879 $ 1,088,180
INTEREST-BEARING LIABILITIES:
Savings deposits $ 57,160 $ 35 0.25 % $ 57,502 $ 42 0.30 % $ (7 ) $ (7 ) $ -
Demand deposits 72,455 24 0.13 % 75,266 35 0.19 % (11 ) (10 ) (1 )
Time deposits (4) 406,839 2,065 2.04 % 369,629 1,826 2.00 % 239 54 185
Money market deposits 257,128 724 1.13 % 236,399 906 1.55 % (182 ) (262 ) 80
Total deposits 793,582 2,848 1.44 % 738,796 2,809 1.54 % 39 (225 ) 264
Securities sold under repurchase
agreements 4,240 2 0.19 % 6,217 3 0.20 % (1 ) - (1 )
Subordinated notes and ESOP debt 32,511 513 6.35 % 8,598 137 6.46 % 376 (8 ) 384
FHLB advances 41,264 233 2.27 % 100,000 704 2.86 % (471 ) (54 ) (417 )
Total interest-bearing liabilities 871,597 3,596 1.66 % 853,611 3,653 1.74 % $ (57 ) $ (287 ) $ 230
Noninterest-bearing deposits 133,053 108,916
Other noninterest-bearing
liabilities 12,274 7,554
Total average liabilities 1,016,924 970,081
Average shareholders' equity 126,955 118,099
Total average liabilities and
shareholders' equity $ 1,143,879 $ 1,088,180
Net interest income and NIM (5) $ 8,647 3.22 % $ 8,714 3.45 % $ (67 ) $ (418 ) $ 351
Total cost of funds (6) 1.44 % 1.54 %
Net interest spread (7) 2.90 % 3.16 %
26
--------------------------------------------------------------------------------
(1) Income and yield on tax-exempt securities assumes a federal income tax rate
of 21%.
(2) Includes loan fees and nonaccrual loans.
(3) Includes accretion of fair value discounts on loans acquired in the Merger of
2019, respectively.
(4) Includes amortization of fair value adjustments on time deposits assumed in
the Merger of
31, 2020 and 2019, respectively.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
(6) Cost of funds is total interest expense divided by total interest-bearing
liabilities and noninterest-bearing deposits.
(7) Net interest spread is the yield on average interest-earning assets less the
cost of average interest-bearing liabilities.
(8) Change in income/expense due to both volume and rates has been allocated in
proportion to the absolute dollar amounts of the change in each.
Interest income, on a taxable-equivalent basis, for the three months endedMarch 31, 2020 was$12.2 million , a decrease of$124 thousand from the first quarter of 2019, primarily attributable to lower yields on loans in the 2020 period and higher accretion of acquired loan discounts in the 2019 period. The decline in yields and accretion income was partially offset by higher average interest-earning assets of$1.08 billion in the 2020 period compared to$1.02 billion in the 2019 period, an increase of$55.3 million ($31.0 million attributable to gross loans). Yields on average interest-earning assets were 4.56% and 4.90% for the first quarters of 2020 and 2019, respectively. The decline in yield on average interest-earning assets was primarily attributable to lower loan yields in the 2020 period and higher accretion of acquired loan discounts in the 2019 period of$250 thousand , which had a positive 11 basis point effect compared to the first quarter of 2020. Loans acquired in the Merger were discounted to estimated fair value (for credit losses and interest rates) as of the effective date of the Merger. A portion of the acquisition accounting adjustments (discounts) to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans for those loans that were deemed to be, as of the Merger date, purchased performing and over the period of expected cash flows from the loans that were deemed to be purchased credit-impaired ("PCI"), as of the Merger date. The amount of accretion income recognized within a period is based on many factors, including among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility. Accretion of discounts on acquired loans was$189 and$439 thousand in the first quarters of 2020 and 2019, respectively.
Average interest-earning assets comprised 94.4% and 94.1% of the Company's
average assets for the three months ended
Interest expense for the three months endedMarch 31, 2020 was$3.6 million , a decrease of$57 thousand from the first quarter of 2019, primarily attributable to lower costs of funds of 1.44% in the 2020 period compared to 1.54% in the 2019 period. Average interest-bearing liabilities increased by$18.0 million to$871.6 million in the 2020 period compared to$853.6 million in the 2019 period. Interest expense on the Company's$25 million of 5.625% subordinated notes issued onOctober 7, 2019 and maturing onOctober 15, 2029 (the "2029 Notes") contributed$375 thousand and 12 basis points to interest expense and cost of funds, respectively, in the first quarter of 2020. Offsetting the higher funding cost contributed by the 2029 Notes was lower deposit costs, which declined 10 basis points to 1.24% in the first quarter of 2020 from 1.34% in the first quarter of 2019. Higher average balances of noninterest-bearing deposits also contributed to the decline in deposit cost.
Net interest income, on a taxable-equivalent basis, for the three months ended
Net interest margin was 3.22% for the first quarter of 2020 compared to 3.45% for the first quarter of 2019. The decrease in NIM was primarily attributable to lower accretion of acquired loan discounts and lower yields on interest-earning assets, partially offset by lower cost of funds. The Company expects NIM to be negatively affected in the periods subsequent toMarch 31, 2020 as a result in a significant decline in interest rates inMarch 2020 , most notably the federal funds rate.
PROVISION FOR LOAN LOSSES
Provision for loan losses was$2.8 million for the three months endedMarch 31, 2020 , while provision for loan losses was$314 thousand for the same period of 2019. Of the first quarter of 2020 amount, approximately$1.5 million was attributable to estimated reserve needs due to the negative economic impact related to the COVID-19 pandemic. Of this$1.5 million , approximately$200 thousand was due to rating downgrades on loans to borrowers in highly-impacted industry segments; the remaining$1.3 million relates to a qualitative loss factor applied to the majority of the Company's loan portfolio for negative economic implications, such as rising unemployment in the Bank's markets. The remaining$1.3 million of the total provision for loan losses was unrelated to COVID-19 and primarily due to gross loan growth of$46.0 million and higher specific reserves recorded in the quarter. 27
--------------------------------------------------------------------------------
NONINTEREST INCOME
The following table presents a summary of noninterest income and the dollar and percentage change for the periods presented.
Three Months Ended
March 31, 2020 March 31, 2019 $ Change % Change
Trust management $ 193 $ 214 $ (21 ) (9.8 %)
Service charges and fees on deposit 236 238 (2 )
accounts (0.8 %)
Wealth management 247 206 41 19.9 %
Interchange fees, net 98 101 (3 ) (3.0 %)
Other service charges and fees 33 29 4 13.8 %
Secondary market sales and servicing 202 71 131 184.5 %
Increase in cash surrender value of 118 120 (2 )
bank owned life insurance (1.7 %)
Net gains on sales and calls of 26 - 26
available-for-sale securities 100.0 %
Net losses on disposition of other (7 ) (1 ) (6 )
assets 600.0 %
Net (loss) gains on rabbi trust assets (263 ) 90 (353 ) (392.2 %)
Referral fees 471 - 471 100.0 %
Other 37 22 15 68.2 %
Total noninterest income $ 1,391 $ 1,090 $ 301 27.6 %
Higher noninterest income in the 2020 period was primarily due to referral fees
earned for referring loan customers to a third-party financial institution to
execute interest rate swaps and higher income from secondary market sales and
servicing activity, partially offset by a net unrealized loss on rabbi trust
assets of $263 thousand in the 2020 period compared to a $90 thousand net
unrealized gain in the 2019 period. Greater secondary market sales and servicing
activity was primarily due to increased refinancing of residential mortgage
loans (due to low interest rates) and the Company's strategy to sell more
mortgages into this market.
NONINTEREST EXPENSE
The following table presents a summary of noninterest expense and the dollar and percentage change for the periods presented.
Three Months Ended
March 31, 2020 March 31, 2019 $ Change % Change
Salaries and employee benefits $ 3,628 $ 4,001 $ (373 ) (9.3 %)
Occupancy 751 868 (117 ) (13.5 %)
Data processing 537 588 (51 ) (8.7 %)
Bank franchise tax 256 216 40 18.5 %
Telecommunications and other technology 358 207 151 72.9 %
FDIC assessments 148 216 (68 ) (31.5 %)
Foreclosed property 7 43 (36 ) (83.7 %)
Consulting 71 115 (44 ) (38.3 %)
Advertising and marketing 67 67 - (- %)
Directors' fees 192 164 28 17.1 %
Audit and accounting 140 204 (64 ) (31.4 %)
Legal 191 83 108 130.1 %
Core deposit intangible amortization 149 180 (31 ) (17.2 %)
Net other real estate owned gains - (6 ) 6 (100.0 %)
Other 813 684 129 18.9 %
Total noninterest expense $ 7,308 $ 7,630 $ (322 ) (4.2 %)
28
-------------------------------------------------------------------------------- Lower noninterest expense in the 2020 period was primarily due to lower salaries and employee benefits, primarily due to a lower management incentive accrual being recorded and the unrealized loss on rabbi trust assets. The Company's efficiency ratio was 73.0% and 78.1% for the first quarters of 2020 and 2019, respectively.
The following table presents income tax (benefit) expense and effective income tax rates for the periods presented.
Three Months Ended
March 31, 2020 March 31, 2019
Income tax (benefit) expense $ (58 ) $ 337
Effective income tax rate 80.6 % 18.4 %
The effective income tax rate of 80.6% in the 2020 period was primarily due to
the amount of tax-exempt income relative to the Company's pre-tax net loss for
the period.
ASSET QUALITY
Loans charged-off during the first quarter of 2020, net of recoveries, totaled
$166 thousand compared to $358 thousand for the first quarter of 2019. This
resulted in a decrease in the annualized net charge-off ratio to 0.07% for the
first quarter of 2020 compared to 0.16% for the first quarter of 2019.
The ratio of allowance for loan losses to gross loans was 1.05% as of March 31,
2020 compared to 0.82% as of December 31, 2019 , an increase of 23 basis points.
Of the increase, 15 basis points was attributable to a qualitative loss factor
applied to the majority of the Company's loan portfolio for management's
estimate of losses due to negative economic implications, such as rising
unemployment, as a result of the COVID-19 pandemic. The remaining increase in
the first quarter of 2020 was attributable to risk rating downgrades, also in
response to COVID-19, $46.0 million of gross loan growth, and higher specific
reserves on impaired loans.
As noted, the Company downgraded risk ratings on $88.5 million of loans to
businesses in industries highly affected by the COVID-19 pandemic in the first
quarter of 2020. Management expects that these loans may require further
downgrades and/or other loans to borrowers affected by the COVID-19 pandemic
will require risk rating downgrades. Additionally, loan modifications made
during the first quarter of 2020, on loan balances of $86.5 million , do not
necessarily represent that these borrowers will be able to pay amounts deferred
or any amounts owed to the Company. The length of the economic slow-down,
including the pace at which the economy recovers once governmental mandates are
lifted, could have a material adverse effect on the Company's asset quality and
the amount of ALL required.
The following table presents certain asset quality measures as of the dates
stated.
March 31, 2020 December 31, 2019
Loans past due 90 days or more and still accruing (1) $ - $ -
Nonaccrual loans (1) 5,441 4,476
Total nonperforming loans 5,441 4,476
Other real estate owned, net 1,679 1,916
Total nonperforming assets $ 7,120 $ 6,392
Allowance for loan losses $ 10,172 $ 7,562
Gross loans 970,195 924,190
Total assets 1,183,553 1,131,923
Allowance for loan losses to gross loans 1.05 % 0.82 %
Allowance for loan losses to nonperforming loans 187.0 % 168.9 %
Nonperforming assets to total assets 0.60 % 0.56 %
Nonperforming loans to gross loans 0.56 % 0.48 %
(1) Excludes PCI loans.
FINANCIAL CONDITION
Total assets increased by $51.6 million to $1.18 billion as of March 31, 2020
from $1.13 billion as of December 31, 2019 , primarily due to net loan growth in
the first three months of 2020 of $43.4 million .
29
--------------------------------------------------------------------------------
The following tables present information about the securities portfolio on a
taxable-equivalent basis as of the dates stated. As of March 31, 2020 and
December 31, 2019 , available-for-sale securities represented 8.0% and 8.8% of
total assets, respectively.
March 31, 2020
Weighted
Average
Life in Weighted
Amortized Cost Fair Value Years Average Yield
U.S. Government agencies and mortgage
backed securities $ 60,305 $ 61,541 5.8 2.18 %
State and municipal obligations 15,492 15,861 4.3 3.16 %
Corporate bonds 17,175 17,216 4.8 5.39 %
Total available-for-sale securities 92,972 94,618 5.0 2.87 %
Restricted securities 5,752 5,752 n/a 5.83 %
Total securities $ 98,724 $ 100,370 3.03 %
December 31, 2019
Weighted
Average
Life in Weighted
Amortized Cost Fair Value Years Average Yield
U.S. Government agencies and mortgage
backed securities $ 67,491 $ 67,597 6.1 2.18 %
State and municipal obligations 16,238 16,576 5.4 3.16 %
Corporate bonds 15,165 15,281 3.8 5.61 %
Total available-for-sale securities 98,894 99,454 5.1 2.92 %
Restricted securities 5,706 5,706 n/a 6.30 %
Total securities $ 104,600 $ 105,160 3.18 %
The following table presents the composition of loans in dollar amounts and as a percentage of total loans as of the dates stated.
March 31, 2020 December 31, 2019
Amount Percent of Total Amount Percent of Total
Mortgage loans on real estate:
Residential first mortgages $ 298,539 30.9 % $ 293,913 31.8 %
Commercial mortgages (non-owner
occupied) 229,488 23.6 % 196,143 21.2 %
Construction, land and land
development 127,417 13.1 % 126,010 13.6 %
Commercial mortgages (owner
occupied) 75,455 7.8 % 82,829 9.0 %
Residential revolving and junior
mortgages 31,505 3.2 % 31,893 3.4 %
Commercial and industrial 198,278 20.4 % 181,730 19.7 %
Consumer 9,846 1.0 % 11,985 1.3 %
Total loans 970,528 100.0 % 924,503 100.0 %
Net unamortized deferred loan fees (333 ) (313 )
Allowance for loan losses (10,172 ) (7,562 )
Loans receivable, net $ 960,023 $ 916,628 During the three months ended
The following table presents the Company's ALL by loan type and the percent of loans in each category to total loans as of the dates stated.
March 31, 2020 December 31, 2019
Percent of Percent of
loans in loans in
each each
category to category to
Amount total loans Amount total loans
Mortgage loans on real estate $ 7,255 78.6 % $ 5,372 79.0 %
Commercial and industrial 2,400 20.4 % 1,571 19.7 %
Consumer 517 1.0 % 619 1.3 %
Total allowance for loan losses $ 10,172 100.0 % $ 7,562 100.0 %
30
-------------------------------------------------------------------------------- As ofMarch 31, 2020 , OREO was$1.7 million , consisting of 15 properties (11 of which were land lots), compared to$1.9 million of OREO (18 properties) as ofDecember 31, 2019 , or a$237 thousand decrease. As ofMarch 31, 2020 , total deposits were$964.5 million compared to$910.4 million atDecember 31, 2019 , a$54.0 million increase. Time deposits comprised$43.5 million of this increase, a substantial portion of which was attributable to short-term time deposits sourced from thePromontory Interfinancial Network's Certificate of Deposit Account Registry Service ("CDARS"). As ofMarch 31, 2020 andDecember 31, 2019 , CDARS time deposits were$47.0 million and$10.5 million , respectively. The growth in these deposits was primarily in anticipation of liquidity for PPP loans and other depositor requirements as a result of the COVID-19 pandemic.
Maturities of large denomination time deposits (equal to or greater than
Percent of
Within 3 Months 3-6 Months 6-12 Months Over 12 Months Total Total Deposits
Time deposits $ 92,797 $ 26,239 $ 39,176 $ 124,526 $ 282,738 29.3 %
As of
Three Months Ended March 31, 2020 Twelve Months Ended December 31, 2019
Highest Highest
Month-End Average Weighted Month-End Average Weighted
Period-End Balance Balance Balance Average Rate Period-End Balance Balance Balance Average Rate
FHLB advances $ 45,000 $ 50,000 $ 41,264 2.27 % $ 45,000 $ 100,000 $ 76,181 2.74 %
LIQUIDITY
Liquidity represents an institution's ability to meet present and future
financial obligations (such as commitments to fund loans or meet depositors'
requirements) through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest-earning deposits with other banks, federal funds sold,
and investments and loans maturing within one year. The Company's ability to
obtain deposits and purchase funds at favorable rates are major factors for
liquidity. Management believes that the Company maintains overall liquidity that
is sufficient to satisfy its depositors' requirements and its customers' credit
needs.
As of March 31, 2020 , cash and cash equivalents totaled $54.7 million ;
investment securities maturing in one year or less totaled $11.0 million ; and
loans maturing in one year or less totaled $108.5 million . This resulted in a
liquidity ratio as of March 31, 2020 of 14.7% compared to 13.0% as of
December 31, 2019 . The Company determines this ratio by dividing the sum of cash
and cash equivalents, and investment securities and loans maturing in one year
or less, by total assets.
As of March 31, 2020 , the Company had a secured borrowing line with the FHLB of
$281.9 million , with $205.9 million available, and unsecured federal funds lines
of credit with various correspondent banks totaling $41.0 million . Federal funds
lines of credit are uncommitted and can be cancelled at any time by the lending
bank.
As of March 31, 2020 , other than the potential effect on liquidity of the
COVID-19 pandemic, the Company was not aware of any other known trends, events,
or uncertainties that have or are reasonably likely to have a material effect on
liquidity. Management has and continues to monitor the effects of the COVID-19
pandemic on the Company's liquidity. For example, management monitors for
unusual changes in deposit balances, access to funding sources, amortization of
loan balances, and the various liquidity programs offered by the FRB (in
response to COVID-19). The Company is participating in the FRB's PPP Liquidity
Facility ("PPPLF"), which allows banks to pledge PPP loans as collateral in
exchange for advances. The PPPLF advances are at 100% of the PPP loan value and
term, have a fixed cost of 35 basis points, and receive favorable regulatory
capital treatment. As of March 31, 2020 , management believes the COVID-19
pandemic has not had an adverse effect on the Company's liquidity.
CAPITAL RESOURCES
Capital resources represent funds, earned or obtained, over which a financial
institution can exercise greater long-term control in comparison with deposits
and borrowed funds. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to size, composition, and quality
of the Company's resources, and consistency with regulatory requirements and
industry standards. Management seeks to maintain a capital structure that will
assure an adequate level of capital to support anticipated asset growth and to
absorb potential losses, yet allows management to effectively leverage its
capital to maximize return to
31--------------------------------------------------------------------------------
shareholders. The Company's capital, also known as shareholders' equity, is comprised primarily of outstanding common stock, additional paid-in capital, and retained earnings.
Shareholders' equity is primarily affected by net income and net unrealized gains or losses on available-for-sale securities, net of taxes. The available-for-sale securities portfolio is reported at fair value with unrealized gains or losses, net of taxes, recognized as accumulated other comprehensive income on the Company's consolidated balance sheets. Another factor affecting accumulated other comprehensive income is changes in the fair value of the Company's pension and post-retirement benefit plans and changes in said plan obligations. Shareholders' equity before accumulated other comprehensive income, net of taxes, was$126.5 million as ofMarch 31, 2020 compared to$126.1 million as ofDecember 31, 2019 . The increase of$351 thousand was primarily attributable to share-based compensation expense of$142 thousand , director and executive stock grants of$105 thousand , and stock options exercised, net, of$81 thousand in the three months endedMarch 31, 2020 . Accumulated other comprehensive income, net of taxes, increased by$866 thousand fromDecember 31, 2019 toMarch 31, 2020 , due to an increase in unrealized net gains, net of taxes, in the Company's available-for-sale securities portfolio. Book value per share of the Company's common stock, including accumulated other comprehensive income, net of tax, increased to$9.55 as ofMarch 31, 2020 from$9.51 as ofDecember 31, 2019 . The Company and the Bank are subject to minimum regulatory capital ratios as defined by theFederal Reserve . As ofMarch 31, 2020 , the Company and the Bank's capital ratios continue to be in excess of regulatory minimums and the Bank was "well capitalized" by these guidelines. The Bank is subject to capital rules adopted by federal bank regulators implementing the Basel III regulatory capital reforms adopted by theBasel Committee, and certain changes required by the Dodd-Frank Act. These rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of average adjusted assets. The following additional capital requirements related to the capital conservation buffer (promulgated by the Basel III regulatory capital rules) require the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% Common Equity Tier 1, effectively resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will be subject to constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. As ofMarch 31, 2020 andDecember 31, 2019 , capital ratios of the Bank were in excess of the regulatory conservation buffer levels. The following tables present capital ratios for the Bank, minimum capital ratios required with conservation buffer, and ratios defined as "well capitalized" by the Bank's regulators as of the dates stated. Minimum Capital Minimum Actual Requirement Ratio to be Well As of March 31, 2020 Ratio with Conservation Buffer Capitalized Total risk-based capital 13.29 % 10.50 % 10.00 % Tier 1 capital 12.24 % 8.50 % 8.00 % Common equity tier 1 12.24 % 7.00 % 6.50 % Tier 1 leverage ratio 10.69 % 4.00 % 5.00 % Minimum Capital Minimum Actual Requirement Ratio to be Well As of December 31, 2019 Ratio with Conservation Buffer Capitalized Total risk-based capital 13.07 % 10.50 % 10.00 % Tier 1 capital 12.26 % 8.50 % 8.00 % Common equity tier 1 12.26 % 7.00 % 6.50 % Tier 1 leverage ratio 10.42 % 4.00 % 5.00 % 32
--------------------------------------------------------------------------------
OFF BALANCE SHEET COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company offers various financial products
to our customers to meet their credit and liquidity needs. These instruments may
involve elements of liquidity, credit, and interest rate risk in excess of the
amount recognized in the Company's consolidated balance sheets. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby-letters of
credit is represented by the contractual amount of these instruments. Subject to
normal credit standards and risk monitoring procedures, the Company makes
contractual commitments to extend credit. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments may expire without being completely drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Conditional commitments are issued by the Company in the form of
performance stand-by letters of credit, which guarantee the performance of a
customer to a third party. The credit risk of issuing letters of credit is
essentially the same as that involved in extending loans to customers.
The following table presents off balance sheet commitments as of the dates
stated.
March 31, 2020 December 31, 2019
Total loan commitments outstanding
Stand-by letters of credit 6,584 6,118 CONTRACTUAL OBLIGATIONS
There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company's 2019 Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2, Amendments to the Accounting Standards Codification, in the Notes to the Consolidated Financial Statements contained in Item 1 of this report, for information related to the adoption of amendments to the Accounting Standards Codification.
© Edgar Online, source
