HOWARD BA The following is a discussion of our consolidated financial condition as ofJune 30, 2020 , as compared toDecember 31, 2019 , and our results of operations for the six and three month periods endedJune 30, 2020 andJune 30, 2019 . This discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and related notes as well as the financial and statistical data appearing elsewhere in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations for any future periods. We have made, and will continue to make, various forward-looking statements with respect to financial, business and economic matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the cautionary note regarding "Forward-Looking Statements" at the beginning of this report.
In this report, unless the context suggests otherwise, references to the
"Company" refer to
General
Howard Bancorp, Inc. is the holding company forHoward Bank .Howard Bank was formed in 2004.Howard Bank's business has consisted primarily of originating both commercial and real estate loans secured by property in our market area. We are headquartered inBaltimore, Maryland . We consider our primary market area to be theGreater Baltimore Metropolitan Area . We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services primarily to small- and medium-sized businesses and their owners, professionals and executives, and high-net-worth individuals. Our loans are primarily funded by core deposits of customers in our market.
Recent Business Developments
OnDecember 18, 2019 , we entered into an agreement to release certain management members of our mortgage division from their employment contracts and allow those individuals to create a limited liability company ("LLC") for the purpose of hiring our 91 remaining mortgage employees. We also agreed to transfer ownership of the domain name "VAmortgage.com" to the newly created LLC. In consideration of the release of the employment agreements, the transfer of our mortgage employees, and the sale of the domain name, the LLC paid us$750 thousand . Under the agreement, there was a transition period of approximately 45 days, after which we agreed to cease originating residential first lien mortgage loans and exit our mortgage banking activities. Accordingly, we completed processing the residential first lien mortgage pipeline by the end of the first quarter of 2020 and the remaining loans held for sale were sold during the second quarter of 2020. In order to manage future loan run-off within our residential mortgage loan portfolio, we plan on buying first lien residential mortgage loans, on a servicing released basis, from both the LLC and other third-party originators. While our mortgage banking activities were marginally profitable in two of the last three years and our decision to exit this activity eliminates that source of income, we believe that the exit of these activities will have a negligible impact on our net income over the next twelve months and will improve our efficiency ratio. Most importantly, we believe that exiting these activities will allow us to focus resources on growing our more profitable and less volatile commercial banking business that represents our core competency. We expect that this renewed focus will more than replace the marginal levels of net income from our mortgage banking activities within the next twelve months. While we estimate that the after tax income from these activities in 2019 was$1.6 million , the operating expenses we attributed to the mortgage banking activities represented only direct costs and did not include shared services expense for staff and support activities such as loan operations, wire transfer operations, human resources, finance, internal audit, and compliance. If we had allocated these shared services expenses to our mortgage banking activities, the financial returns on our mortgage banking activities would have been even less. The exit of our mortgage banking activities is discussed in Note 2 to the Consolidated Financial Statements. 41 Table of Contents Recent Events - COVID-19 InDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced inChina , and has since spread to many other countries, includingthe United States . InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic andthe United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, theState of Maryland and most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that were deemed to be non-essential. Although many businesses have begun to reopen, some states, includingMaryland , have since experienced a resurgence of COVID-19 cases, which may further slow overall economic activity and recovery. Uncertainty also remains regarding if, how and when schools will reopen and the impact of such reopening decisions on the economy. The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-yearTreasury bond falling below 1.00% onMarch 3, 2020 for the first time, and declining further to 0.65% as ofJune 30, 2020 . OnMarch 3, 2020 , theFederal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent onMarch 16, 2020 . These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition, and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary market and inthe United States as a whole.
Our COVID-19 Operational Response
Our response has continued to evolve since the first confirmed case of COVID-19 was reported inMaryland onMarch 5 . We have implemented the following measures in an effort to ensure the safety of both our customers and employees while continuing to serve our customers during this challenging period:
? Twelve of the Bank's fifteen branches remain accessible to customers - nine
through drive thru capabilities and all twelve through pre-scheduled meetings.
? Encouraged utilization of our mobile, online, ATM, and other banking channels
to limit personal contact.
? Implemented a work-from-home policy for substantially all employees other than
branch personnel.
Added one week of paid time off to all full-time employees to be used in either
? 2020 or 2021, to acknowledge long hours devoted to providing extraordinary
customer service.
? Implemented deep cleaning procedures at all branch locations and other bank
facilities.
? Instituted mandatory social distancing policies and wearing of masks for
employees working in bank facilities.
? Held the annual meeting of stockholders as a virtual meeting.
42
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Lending Operations and Accommodations to Borrowers
We have actively participated in theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act) that was enacted onMarch 27, 2020 . Among other provisions, the CARES Act created the$349 billion PPP loan program for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the "PPPHE Act"), was enacted onApril 24, 2020 . Among other things, the PPPHE Act provided an additional$310 billion of funding for the PPP of which,$30 billion is specifically allocated for use by banks and other insured depository institutions that have assets between$10 billion and$50 billion . The Paycheck Protection Program Flexibility Act of 2020" (the "PPPF Act") was enacted inJune 2020 and modifies the PPP as follows: (i) establishes a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree; (ii) extends the "covered period" of the CARES Act fromJune 30, 2020 , toDecember 31, 2020 ; (iii) extends the eight-week "covered period" for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination orDecember 31, 2020 ; (iv) extends the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the SBA; (v) requires the borrower to use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan; (vi) delays fromJune 30, 2020 toDecember 31, 2020 the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a "rehiring safe harbor" that allows businesses to remain eligible for loan forgiveness if they make a good-faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures; and (vii) allows borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose which of the two would be more advantageous. InJuly 2020 , the CARES Act was amended to extend, throughAugust 8, 2020 , the SBA's authority to make commitments under the PPP. The SBA's existing authority had previously expired onJune 30, 2020 . We are continuing to monitor the potential development of additional legislation and further actions taken by theU.S. government. AtJune 30, 2020 , we had originated$199.0 million of loans under the PPP. During the first phase of the program, which commenced onApril 3 , we funded 777 loans totaling$178.7 million . During phase 2, which commenced onApril 27 , we funded an additional 251 loans totaling$20.3 million throughJune 30 . The average loan size under phase 1 and phase 2 of the PPP program was$230 thousand and$82 thousand , respectively. We will continue to support our customers throughout the duration of this program. Total processing fees from the SBA for the PPP loans originated throughJune 30 were$6.6 million and were deferred. In addition,$770 thousand of origination costs were deferred. The net deferred fees are being accreted as a yield adjustment over the contractual term of the underlying PPP loans. The effective yield of our PPP portfolio is 2.53%. The PPP loans generated pretax income of$1.0 million , or$0.04 after tax per share, in the second quarter of 2020. PPP loans, net of unearned income, totaled$193.7 million atJune 30, 2020 . During this unprecedented situation, we have also established client assistance programs, including offering commercial and retail customers loan modifications, on a case by case basis, in the form of payment deferrals for periods up to six months, as discussed below. Certain information in this report is presented with respect to "portfolio loans," a non-GAAP measure defined as total loans (which term includes leases), but excluding our PPP loans. We believe that portfolio loan related measures provide additional useful information for purposes of evaluating our results of operations and financial condition with respect to the second quarter of 2020 and comparing it to other periods, since the PPP loans are guaranteed by the SBA, were not subject to traditional loan underwriting standards, and a substantial portion of these loans are expected to be forgiven and repaid by the SBA in the next six to nine months. We commenced making loans under the PPP program in the second quarter of 2020. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below under "Use of Non-GAAP Measures." 43
Table of Contents
As ofJune 30, 2020 , a total of$291.4 million of loans (representing 15.3% of total loans and leases or 17.1% of portfolio loans) were performing under some form of deferral or other payment relief. By comparison,$347.0 million (representing 19.7% of total loans and leases atMarch 31, 2020 ) were performing under some form of deferral or other payment relief as ofMay 8, 2020 . As ofAugust 6, 2020 ,$159.0 million of loans (representing 8.4% of total loans and leases or 9.3% of portfolio loans atJune 30, 2020 ) were performing under some form of deferral or other payment relief. We expect that some requests for payment deferral extensions will continue during the third quarter while other borrowers currently on payment deferral will resume payments. The CARES Act permits financial institutions to suspend requirements under GAAP for certain loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs. In addition, federal banking regulators issued, shortly before the CARES Act was enacted, an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowerswho were current prior to any relief are not TDRs. We have also temporarily ceased making collection calls, are temporarily waiving a higher proportion of late fees assessed for consumer loans, and have paused new foreclosure and repossession actions. We will continue to re-evaluate these temporary actions based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.
Impact on Our Results of Operation and Financial Condition
We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. While it has not yet had a significant impact to our financial condition as ofJune 30, 2020 , in the form of incurred losses or any communications from our borrowers that significant losses were imminent, we nevertheless determined it prudent to increase our allowance for credit losses by$6.0 million in the first six months of 2020, related to changes in qualitative factors, primarily as a result of the abrupt slowdown in commercial economic activity related to COVID-19, as well as the dramatic rise in the unemployment rate in our market area. Our allowance for credit losses for periods ending afterJune 30, 2020 may be materially impacted by the COVID-19 pandemic. In addition, due to the pandemic and the related economic fallout, including most specifically, declining stock prices at both the Company and peer banks, theFederal Reserve's significant reduction in interest rates, and other business and market considerations, we performed an interim goodwill impairment analysis as ofJune 30, 2020 . Based on this analysis, the estimated fair value of the Company was less than book value, resulting in a$34.5 million impairment charge, recorded in noninterest expense, in the second quarter of 2020. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position.
Capital and Liquidity
As ofJune 30, 2020 , all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses. We anticipated potential stresses on liquidity management as a result of the COVID-19 pandemic and our participation in the PPP. We built on-balance sheet liquidity during the first quarter of 2020 in anticipation of a possible increase in the utilization of existing lines of credit or decreases in customer deposits. Since these events didn't materialize, in part due to the various actions initiated by theFederal Reserve to provide market liquidity, we reduced this on-balance sheet liquidity to pre-COVID-19 levels during the second quarter of 2020. 44 Table of Contents TheFederal Reserve created the Paycheck Protection Program Lending Facility ("PPPLF"), a lending facility that will allow us to obtain funding specifically for loans that we make under the PPP, and allow us to retain existing sources of liquidity for our traditional operations. Borrowings under theFederal Reserve Bank of Richmond's ("FRB") PPPLF were$31.1 million atJune 30, 2020 . While we had originally planned to use the PPPLF as the funding source for all PPP loans, strong customer deposit growth and the availability of alternative short-term funding sources at a lower cost resulted in the limited usage during the quarter.
Financial Highlights
Financial highlights during the six months ended
We reported a net loss of
? share in the first six months of 2020; this compares to net income of
million, or
A goodwill impairment charge of
? was recorded in the second quarter of 2020. The impairment charge is a non-cash
charge that does not affect regulatory capital ratios, liquidity, or our
overall financial strength.
? We recorded a provision for credit losses of
increase from the first six months of 2019.
Our net interest margin was 3.28% in the first six months of 2020, a decrease
? of 30 basis points ("bp") from the first six months of 2019, due primarily to a
71 bp decrease in the yield on our earning assets, partially offset by a 46 bp
decrease in the average rate paid on our interest-bearing liabilities.
Total assets were
end 2019 with this asset growth attributable to securities available for sale,
? up
million. Offsetting this growth were interest bearing deposits with banks,
down
Total loans and leases, net of unearned income, were
2020, up
? (net of unamortized deferred fees and costs) of PPP loans in the second quarter
of 2020; all other loan portfolios decreased by
2019.
? Total deposits were
end 2019, with customer deposits up
Our borrowings of
? since year end 2019 as strong customer deposit growth and our reduction of
on-balance sheet liquidity reduced our need for this source of funds.
We completed our
? total of 372,801 shares were repurchased during the first quarter for
million.
? We remain "well capitalized" by all regulatory measures.
Our book value per common share was
? share from
in book value per share was driven by the goodwill impairment charge in the
second quarter 2020 of$1.84 per common share. 45 Table of Contents
Our tangible book value per common share (a non-GAAP financial measure - refer
to the "Use of Non-GAAP Financial Measures" section for additional detail) was
?
per share from
tangible book value.
Critical Accounting Policies
Our accounting and financial reporting policies conform to GAAP and general practice within the banking industry. Accordingly, preparation of the financial statements requires management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. The accounting policies we view as critical are those relating to the allowance for credit losses, goodwill and other intangible assets, income taxes, share based compensation, accounting for business combinations and loans acquired in business combinations. These critical accounting policies and the significant assumptions and estimates made by management related to them are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Our significant accounting policies are discussed in detail in "Notes to Consolidated Financial Statements - Note 1: Summary of Significant Account Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no material changes to the significant accounting policies as described in the Annual Report on Form 10-K for the year endedDecember 31, 2019 . Disclosures regarding the effects of new accounting pronouncements are included in Note 1 of this report.
Financial Condition
A comparison between
General
Total assets increased$88.8 million , or 3.7%, to$2.46 billion atJune 30, 2020 compared to$2.37 billion atDecember 31, 2019 . Our asset growth consisted primarily of increases in loans and leases of$153.1 million and securities available for sale of$61.4 million . The growth in these assets was partially offset by decreases in interest-bearing deposits with banks of$50.6 million , goodwill of$34.5 million , and loans held for sale of$30.7 million . The primary source of funding net asset growth was deposits. Total deposits increased by$116.3 million , including an increase in customer deposits of$194.5 million .
Borrowings decreased by
Securities Available for Sale and Held to Maturity
Available for sale
Our available for sale securities are reported at fair value. At bothJune 30, 2020 andDecember 31, 2019 , we heldU.S. agency debentures, mortgage backed securities, and corporate debentures. This portfolio is used primarily to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposits. In addition, this portfolio is used as collateral for funding via commercial customer overnight securities sold under agreement to repurchase ("repurchase agreements") and as a source of earnings. AtJune 30, 2020 andDecember 31, 2019 ,$99.7 million and$11.6 million in fair value of available for sale securities, respectively, were pledged as collateral. These securities were pledged at theFederal Reserve's Discount Window as well as for repurchase agreements and deposits of local government entities that require pledged collateral as a condition of maintaining these deposit accounts. 46 Table of Contents Held to maturity Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are certain corporate debentures. These investments are intended to be held until maturity.
The following table sets forth the composition of our investment securities portfolio at the dates indicated.
June 30, 2020 December 31, 2019
Amortized Estimated Amortized Estimated $ Change in
(in thousands) Cost Fair Value Cost Fair Value Fair Value % Change
Available for sale
U.S. Government Agencies $ 77,835 $ 79,615 $ 66,428 $ 67,312 $ 12,303 18.3 %
Mortgage-backed 188,099 191,826 139,918 142,699 49,127 34.4
Other investments 5,509 5,448 5,510 5,494 (46) (0.8)
$ 271,443 $ 276,889 $ 211,856 $ 215,505 $ 61,384 28.5 %
Held to maturity
Corporate debentures $ 7,250 $ 7,195 $ 7,750 $ 7,897 $ (702) (8.9) %
During the quarter ended June 30, 2020 , we embarked on a strategy to monetize
certain unrealized gains in our mortgage-backed securities ("MBS") portfolio by
selling $105 million of MBS with high prepayment speeds, resulting in net gains
of $3.0 million . We then purchased $125 million of lower coupon MBS. The total
available for sale securities portfolio of $276.9 million at June 30, 2020
increased by $61.4 million , or 28.5%, since December 31, 2019 . Our portfolio
growth, consisting of both MBS and U.S. Government agency securities, was part
of our overall earnings and interest rate risk management strategies.
Our securities portfolio contained 22 securities with unrealized losses of $496
thousand at June 30, 2020 , and 15 securities with unrealized losses of $166
thousand at December 31, 2019 . Changes in the fair value of these securities
resulted primarily from interest rate fluctuations. We do not intend to sell
these securities nor is it more likely than not that we would be required to
sell these securities before their anticipated recovery, and we believe the
collection of the investment and related interest is probable. Based on this
analysis, we do not consider any of the unrealized losses to be other than
temporary impairments. Note 3 to our Consolidated Financial Statements provides
more detail concerning the composition of our portfolio and our process for
evaluating the portfolio for other-than-temporary impairment.
Loan and Lease Portfolio
Total loans and leases were$1.90 billion atJune 30, 2020 , an increase of$153.1 million , or 8.8% from$1.75 billion atDecember 31, 2019 . We originated$193.7 million of PPP loans, net of unamortized deferred fees and origination costs, during the quarter endedJune 30, 2020 . Our portfolio loans, which exclude PPP loans (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures" section for additional detail), decreased by$40.6 million , or 2.3%, to$1.70 billion atJune 30, 2020 from$1.74 billion atDecember 31, 2019 . Commercial real estate loans increased$14.0 million , or 2.0%, with our continued focus on the needs of small to mid-size businesses in our market area.
Our commercial loan and lease portfolio decreased by
Our residential mortgage portfolio decreased by$34.7 million , or 6.8%, as a result of a substantially higher level of prepayments due to the lower level of mortgage market rates that led to strong mortgage refinance activity in the first six months of 2020. The level of mortgage runoff was partially mitigated by new loan originations, but the wind down of our mortgage banking activities during the first quarter of 2020 resulted in a lower level of new mortgage originations than in prior quarters. In order to manage loan run-off within our residential mortgage loan portfolio, we plan on buying first lien residential mortgage loans on a servicing released basis. In that regard, we are currently negotiating investor agreements that may provide a future flow of new mortgage originations. 47 Table of Contents The following table sets forth the composition of our loan portfolio at the dates indicated. June 30, 2020 December 31, 2019 (in thousands) Total % of Total Total % of Total $ Change % Change Real estate Construction and land$ 128,567 6.8 %$ 128,285 7.3 %$ 282 0.2 % Residential - first lien 409,402 21.6 437,409 25.1 (28,007) (6.4) Residential - junior lien 67,430 3.6 74,164 4.2 (6,734) (9.1) Total residential real estate 476,832 25.1 511,573 29.3 (34,741) (6.8) Commercial - owner occupied 244,802 12.9 241,795 13.9 3,007 1.2 Commercial - non-owner occupied 455,051 24.0 444,052 25.4 10,999 2.5 Total commercial real estate 699,853 36.9 685,847 39.3 14,006 2.0 Total real estate loans 1,305,252 68.7 1,325,705
75.9 (20,453) (1.5) Commercial loans and leases 1 352,999 18.6 372,872 21.4 (19,873) (5.3) Consumer 46,660 2.5 46,936 2.7 (276) (0.6) Paycheck Protection Program 193,719 10.2 -
- 193,719 NM
Total loans and leases
1 Includes leases of
Paycheck Protection Program Loans
OnMarch 27, 2020 , the CARES Act was signed into law, providing, financial relief and funding opportunities for small businesses under the SBA's PPP program from approved SBA lenders. In response to the COVID-19 pandemic, the Bank, a SBA lender, began accepting applications and has originated PPP loans within the guidelines of the CARES Act, as amended by subsequent legislation. During the quarter endedJune 30, 2020 , the Bank had funded 1,028 loans totaling$199.0 million ; net of unamortized deferred fees and origination costs, PPP loans totaled$193.7 million atJune 30, 2020 .
Loan Held for Sale
We completed the processing of our remaining residential first lien mortgage pipeline during the first quarter of 2020 and sold the remaining loans held for sale during the second quarter of 2020, each in connection with exiting our mortgage banking activities. As a result, we did not have any loans held for sale atJune 30, 2020 compared to$30.7 million atDecember 31, 2019 .
Interest-Bearing Deposits with Banks
Interest-bearing deposits with banks, primarily with theFederal Reserve Bank of Richmond ("FRB"), were$46.4 million atJune 30, 2020 , a decrease of$50.6 million from theDecember 31, 2019 balance of$97.0 million . As the threat of market disruption in response to the pandemic appeared during the first quarter of 2020, including possible increases in the utilization of existing lines of credit or decreases in customer deposits, we built on-balance sheet liquidity, increasing interest-bearing deposits with banks to$180.0 million atMarch 31, 2020 . Since these events didn't materialize, in part due to the various actions initiated by theFederal Reserve to provide market liquidity, we reduced this on-balance sheet liquidity to pre-COVID-19 levels during the second quarter of 2020.
AtJune 30, 2020 andDecember 31, 2019 , we held an investment in stock of theFederal Home Loan Bank ("FHLB") of$12.6 million and$14.2 million , respectively. This investment is required for continued FHLB membership and is based partially upon the amount of borrowings outstanding from the FHLB. This FHLB stock is carried at cost. 48 Table of Contents Deposits Total deposits were$1.83 billion atJune 30, 2020 , a$116.3 million , or 6.8%, increase from$1.71 billion atDecember 31, 2019 . Customer deposits, which excludes brokered deposits and other non-customer deposits, were up$194.5 million , or 13.2%, in the first six months of 2020. Our transaction accounts (noninterest-bearing demand and interest-bearing checking) increased by$205.9 million . Brokered and other non-customer deposits were$161.8 million atJune 30, 2020 , a$78.2 million decrease since year end 2019. Brokered and other non-customer deposits were$347.1 million atMarch 31, 2020 , with the first quarter 2020 growth in this deposit funding source supporting the increase in our on-balance sheet liquidity as the threat of market disruption in response to the pandemic appeared during the first quarter. We reduced this funding source during the second quarter due to the strong customer deposit growth.
The following tables set forth the distribution of total deposits, by account type, at the dates indicated:
June 30, 2020 December 31, 2019
% of % of
(dollars in thousands) Amount Total Amount Total $ Change % Change
Noninterest-bearing demand $ 671,598 37 % $ 468,975 27 % $ 202,623 43.2 %
Interest-bearing checking 186,768 10 183,447 11 3,321 1.8
Money market accounts 383,031 21 360,711 21 22,320 6.2
Savings 146,148 7 130,141 7 16,007 12.3
Certificates of deposit $250
and over 65,769 4 77,782 5 (12,013) (15.4)
Certificates of deposit
under $250 377,360 21 493,309 29 (115,949) (23.5)
Total deposits $ 1,830,674 100 % $ 1,714,365 100 % $ 116,309 6.8 %
By deposit source:
Customer deposits $ 1,668,908 91 % $ 1,474,393 86 % $ 194,515 13.2 %
Brokered and other
non-customer deposits 161,766 9 239,972 14 (78,206) (32.6)
Total deposits $ 1,830,674 100 % $ 1,714,365 100 % $ 116,309 6.8 %
FHLB Advances
Our primary source of non-deposit funding is FHLB advances. We use a variety of
term structures in order to manage liquidity and interest rate risk. FHLB
advances were $246.0 million at June 30, 2020 , a decrease of $39.0 million from
December 31, 2019 . As of June 30, 2020 , $200.0 million of FHLB advances have
maturities beyond one year. In the second quarter of 2020, we repaid $5.0
million of long-term FHLB borrowings, recording a prepayment penalty of $224
thousand in other operating expenses. The early repayment of this advance was
primarily for asset/liability management purposes and a result of the current
rate environment.
PPPLF Borrowings
The Federal Reserve has created the PPPLF, a lending facility that will allow us
to obtain funding specifically for loans that we make under the PPP, and allow
us to retain existing sources of liquidity for our traditional operations.
During the second quarter of 2020 we pledged certain PPP loans as collateral for
PPPLF borrowings, with $31.1 million of PPPLF borrowings at June 30, 2020 . While
we had originally planned to use the PPPLF as the funding source for all PPP
loans, strong customer deposit growth and the availability of alternative
short-term funding sources at a lower cost resulted in the limited usage during
the quarter. We will continue to evaluate additional utilization of the PPPLF
during the remainder of 2020.
49
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Stockholders' Equity
Total stockholders' equity was $283.3 million at June 30, 2020 , a $30.9 million
decrease from $314.1 million at December 31, 2019 . Our decrease in
stockholders' equity was primarily the result of our $26.1 million net loss for
the six months ended June 30, 2020 ; included in this net loss was a $34.5
million goodwill impairment charge. On February 24, 2020 , we completed our stock
repurchase program authorized by the Board of Directors on April 24, 2019 . A
total of 392,565 shares at an average price paid per share of $17.83 , for an
aggregate amount of $7.0 million , were repurchased under the program. A total
of 372,801 shares were repurchased during the first quarter of 2020 for an
aggregate amount of $6.7 million .
Total stockholders' equity at June 30, 2020 represents an equity to assets ratio
of 11.5%, compared to 13.2% at December 31, 2019 . Our book value per common
share was $15.14 at June 30, 2020 , down $1.71 per share from March 31, 2020 and
down $1.44 from December 31, 2019 . The decrease in book value per share was
driven by the goodwill impairment charge in the second quarter 2020 of $1.84 per
common share.
Results of Operations
A comparison between the six months ended
In the second quarter of 2020 we recorded a$34.5 million goodwill impairment charge that resulted in a net loss for the first six months of 2020 of$26.1 million , or a loss of$1.39 per diluted common share. This compares to net income for the first six months of 2019 of$6.3 million , or$0.33 per diluted common share. The goodwill impairment charge, which was not tax deductible, reduced earnings for the first six months of 2020 by$34.5 million , or$1.84 per diluted common share. Outside of the goodwill impairment, earnings increased$2.1 million , or$0.12 per diluted common share, in the first six months of 2020, compared to the same period in 2019, primarily as a result of the following: (a) a$2.4 million increase in securities gains in the first six months of 2020 (or$0.10 after tax per common share), (b) a$1.2 million tax benefit (or$0.06 per diluted common share) in the first six months of 2020 resulting from a net operating loss carryback provision in the CARES Act; (c) a$427 thousand reduction in prepayment penalties on FHLB advances in the first six months of 2020 (or$0.02 after tax per diluted common share); (d)$3.6 million of branch optimization expenses in the first six months of 2019 (or$0.14 after tax per diluted common share); and (e)$1.0 million in pretax income from PPP loans in the second quarter of 2020 (or$0.04 after tax per diluted common share). These items were partially offset by: (a) a higher loan loss provision of$3.6 million for the first six months of 2020 (or$0.14 after tax per diluted common share) as we increased our allowance for loan losses due to the current economic environment; (b) a$1.0 million decrease in pretax income as a result of exiting our mortgage banking activities of (or$0.04 after tax per diluted common share); and (c) a$1.0 million accrual related to potential litigation claims and$788 thousand of expenses attributable to the departure of our former CFO, each in the first six months of 2020 (combined, a$0.07 after tax decrease per diluted common share). TheFederal Reserve's Federal Open Market Committee's target for federal funds increased 125 basis points in 2017 and 100 basis points in 2018 to a range of 2.25% to 2.50% for the year endedDecember 31, 2018 . During 2019, the federal funds target rate remained at the 2.25% to 2.50% range untilJuly 2019 when theFederal Reserve began to drop the federal funds target rate. In the last half of 2019, theFederal Reserve dropped the federal funds target rate 75 basis points to the range of 1.50% to 1.75% atDecember 31, 2019 . InMarch 2020 , in response to the COVID19 pandemic, theFederal Reserve then dropped the federal funds target rate 150 basis points to a range of 0.00% to 0.25%. 50 Table of Contents Net Interest Income
Net interest income for the first six months of 2020 was$35.6 million , an increase of$817 thousand from the first six months of 2019. Our net interest margin was 3.28% for the first six months of 2020, a decrease of 30 bp from the net interest margin of 3.58% in the first six months of 2019. Average earning assets for the first six months of 2020 were$2.19 billion , an increase of$227.7 million , or 11.6%, while total interest income decreased by$2.2 million when compared to the same period in 2019, as the 71 bp decrease in the yield on our earning assets more than offset growth in balances. Our average interest-bearing liabilities for the first six months of 2020 increased by$64.1 million while interest expense decreased by$3.0 million when compared to the same period in 2019, as the 46 bp decrease in the average rate paid on our interest-bearing liabilities also more than offset growth in balances. The net accretion of fair value adjustments on acquired loans added 9 bp to our net interest margin in the first six months of 2020, a 1 bp decrease from 10 bp in the first six months of 2019. We expect the impact of this net accretion to continue declining in future periods. PPP loans, with an average yield of 2.52% and an interest spread (net of an assumed funding cost at 0.35%) of 2.17%, reduced the net interest margin by 3 bp for the first six months of 2020.
Interest Income
Interest income decreased$2.2 million , or 4.8%, to$43.7 million for the first six months of 2020 compared to$45.9 million for the same period in 2019. Interest income on loans and leases decreased$1.7 million , or 4.0%, for the first six months of 2020, compared to the same period in 2019, while average loans and leases increased by 9.9% to$1.82 billion for the first six months of 2020 when compared to the same period in 2019. The average yield on loans and leases of 4.37% for the first six months of 2020 was down 65 bp from the same period in 2019, driven primarily by the lower interest rate environment as well as the impact of the lower-yielding PPP loans. PPP loans reduced the average loan yield by 5 bp for the first six months of 2020. The average yield on available for sale securities decreased by 57 bp to 2.50%, as we added$81.6 million of MBS in the first six months of 2020, compared to the same period in 2019, at lower yields. Higher prepayment speeds within this portfolio also adversely impacted the portfolio's yield. Reflective of the significant decline in the federal funds target rate, the average yield on our interest-bearing deposits with banks fell 137 bp to 0.60% in the first six months of 2020 compared to the same period in 2019.
Interest Expense
Interest expense decreased by$3.0 million , or 27.5%, to$8.1 million for the first six months of 2020, compared to$11.1 million for the same period in 2019. The average rate on interest-bearing liabilities decreased by 46 bp to 1.04% for the first six months of 2020 compared to the same period in 2019. Interest expense on deposits decreased by$2.0 million for the first six months of 2020 compared to the same period in 2019, while average interest-bearing deposits decreased by$27.5 million and the average rate paid on total interest-bearing deposits was down 30 bp for the first six months of 2020, compared to the same period in 2019. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in late February, with the full impact of those rate actions to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased$1.0 million while the average balance increased by$90.6 million for the first six months of 2020 when compared to the same period in 2019. The average rate paid on FHLB advances of 1.07% for the first six months of 2020 decreased by 153 bp when compared to the same period in 2019.
Average Balances, Yields and Rates
The following tables set forth average balances, yields and rates, and certain
other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances, and have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense as well as any amortization and accretion of fair value
adjustments.
51
Table of Contents
Six months ended June 30,
2020 2019
Average Income / Yield / Average Income / Yield / Change
(dollars in thousands) Balance Expense Rate Balance Expense Rate Prior Yr
Earning assets
Loans and leases: (1)
Commercial loans and leases $ 376,517 $ 8,034 4.29 % $ 337,331 $ 8,703 5.20 % (0.91) %
Commercial real estate 692,772 16,589 4.82 657,035 16,517 5.07 (0.25)
Construction and land 132,194 2,750 4.18 121,358 3,507 5.83 (1.64)
Residential real estate 499,572 10,193 4.10 486,882 11,170 4.63 (0.52)
Consumer 45,641 1,056 4.65 52,424 1,288 4.95 (0.30)
Paycheck Protection Program 71,357 896 2.52 - - 2.52
Total loans and leases 1,818,053 39,518 4.37 1,655,030 41,185 5.02 (0.65)
Securities available for sale:
(2)
U.S Gov agencies 75,523 1,024 2.73 104,233 1,431 2.77 (0.04)
Mortgage-backed 170,409 1,923 2.27 88,764 1,426 3.24 (0.97)
Corporate debentures 5,515 184 6.72 2,990 124 8.36 (1.64)
Total available for sale
securities 251,447 3,131 2.50 195,987 2,981 3.07 (0.56)
Securities held to maturity:
(2) 7,747 225 5.83 9,264 286 6.23 (0.39)
FHLB Atlanta stock, at cost 14,361 393 5.51 10,446 329 6.35 (0.85)
Interest bearing deposit in
banks 85,521 254 0.60 65,031 636 1.97 (1.37)
Loans held for sale 9,894 179 3.64 23,530 512 4.39 (0.75)
Total earning assets 2,187,023 43,700 4.02 % 1,959,288 45,929 4.73 % (0.71) %Cash and due from banks 14,833 14,248 Bank premises and equipment, net 42,560 44,791 Other assets 217,474 223,198 Less: allowance for credit losses (12,068) (9,470) Total assets$ 2,449,822 $ 2,232,055 Interest-bearing liabilities Deposits: Interest-bearing demand accounts$ 185,043 214 0.23 %$ 216,305 $ 542 0.51 % (0.27) % Money market 367,218 1,047 0.57 355,429 1,282 0.73 (0.15) Savings 137,240 70 0.10 138,703 124 0.18 (0.08) Time deposits 540,691 4,262 1.59 547,256 5,620 2.07 (0.49) Total interest-bearing deposits 1,230,192 5,593 0.91 1,257,693 7,568 1.21 (0.30) Borrowings: FHLB advances 288,407 1,532 1.07 197,763 2,548 2.60 (1.53) Fed funds and other borrowings 11,707 17 0.29
10,950 26 0.48 (0.19) Subordinated debt 28,282 913 6.49 28,094 959 6.88 (0.39) Total borrowings 328,396 2,462 1.51 236,807 3,533 3.01 (1.50) Total interest-bearing funds 1,558,588 8,055 1.04 % 1,494,500 11,101 1.50 % (0.46) % Noninterest-bearing deposits 548,390 416,647 Other liabilities 25,864 20,336 Total liabilities 2,132,842 1,931,483 Stockholders' equity 316,980 300,572 Total liabilities & equity$ 2,449,822 $ 2,232,055
Net interest rate spread (3)$ 35,645 2.98 %$ 34,828 3.23 % Effect of noninterest-bearing funds 0.30 0.35 Net interest margin on earning assets (4) 3.28 % 3.58 % 52 Table of Contents (1)Loan fee income is included in the interest income calculation, and non-accrual loans are included in the average loan balance; they have been reflected as loans carrying a zero yield. (2)Available for sale securities are presented at fair value, held to maturity securities are presented at amortized cost. (3)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4)Net interest margin represents net interest income divided by average total interest-earning assets. Rate/Volume Analysis The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate) as well as any impact of number of days and mix. 53 Table of Contents The total of the changes set forth in the rate and volume columns are presented in the total column. Six months ended June 30, 2020 vs. 2019 Due to variances in (in thousands) Total Rates Volumes Interest income on earning assets: Loans and leases: Commercial loans and leases$ (669) $ (1,529) $ 860 Commercial real estate 72 (830) 902 Construction and land (757) (992) 235 Residential real estate (977) (1,267) 290 Consumer (232) (79) (153) Paycheck Protection Program 896 - 896
Total interest on loans and leases (1,667) (4,697)
3,030
Securities available for sale: U.S. Gov agencies (407) (22) (385) Mortgage-backed 497 (429) 926 Corporate debentures 60 (24.44) 84
Total interest on available for sale securities 150 (475)
625
Securities held to maturity (61) (18) (43)
FHLB Atlanta stock, at cost 64 (44) 108Interest bearing deposit in banks (382) (444)
62
Loans held for sale (333) (88) (245)
Total interest income (2,229) (5,766) 3,537
Interest expense on interest-bearing liabilities:
Deposits:
Interest-bearing demand accounts (328) (293)
(35)
Money market (235) (272) 37
Savings (54) (53) (1)
Time deposits (1,358) (1,322) (36)
Total deposit on deposits (1,975) (1,940) (35)
Borrowings:
FHLB advances (1,016) (1,505) 489Fed funds and other borrowings (9) (10)
1
Subordinated debt (46) (55)
9
Totaal interest on borrowings (1,071) (1,570)
499
Total interest expense (3,046) (3,510) 464
Net interest earned $ 817 $ (2,256) $ 3,073 Provision for Credit Losses
We recorded a provision for credit losses of$6.4 million for the first six months of 2020, compared to a$2.8 million provision for the first six months of 2019, an increase of$3.6 million . The first six months of 2020 provision, net of net charge-offs of$490 thousand , resulted in an increase in the allowance for credit losses of$6.0 million . The first six months of 2019 provision, net of net charge-offs of$3.6 million , resulted in a decrease in the allowance of$753 thousand . The increase in our allowance for credit losses is more fully discussed below under the sections entitled "Nonperforming and Problem Assets" and "Allowance for Credit Losses" of this Management's Discussion and Analysis of Financial Condition and Results of Operations. 54 Table of Contents Noninterest Income
The following table presents the major categories of noninterest income for the
six months ended
Six months ended
June 30,
(in thousands) 2020 2019 Change % ChangeService charges on deposit accounts$ 1,075 $ 1,311 $ (236) (18.0) % Realized and unrealized gains on mortgage banking activity 1,036 3,793 (2,757) (72.7) Gain on the sale of securities 3,044 658 2,386 (362.6) Gain (loss) on the disposal of bank premises & equipment 6 (83) 89 107.2 Income from bank owned life insurance 886 907 (21) (2.3) Loan related fees and service charges 755 2,038
(1,283) (63.0) Other operating income 1,323 1,752 (429) (24.5) Total noninterest income$ 8,125 $ 10,376 $ (2,251) (21.7) %
Noninterest income was$8.1 million for the six months endedJune 30, 2020 , a decrease of$2.3 million , or 21.7%, compared to$10.4 million for the same period in 2019. Two primary components contributing to the change in noninterest income for the first six months of 2020 were the$3.6 million decrease in noninterest income attributable to exiting our mortgage banking activities, partially offset by the$2.4 million increase in gain on the sale of investment securities. Outside of noninterest income from mortgage banking activities and securities gains, noninterest income was$3.7 million for the first six months of 2020, down$1.0 million compared to the same period in 2019. Noninterest income from our mortgage banking activities consisted of realized and unrealized gains on mortgage banking activity as well as a portion of the line item "loan related fees and service charges." Noninterest income attributable to our mortgage banking activities was$1.4 million in the first six months of 2020, compared to$5.1 million in the first six months of 2019. In connection with the exit of our mortgage banking activities, we completed the processing of the remaining residential first lien mortgage pipeline during the first quarter of 2020 and the remaining loans held for sale were sold during the second quarter of 2020. During the quarter endedJune 30, 2020 , we embarked on a strategy to monetize certain unrealized gains in our mortgage-backed securities ("MBS") portfolio by selling$105 million of MBS with high prepayment speeds, resulting in net gains of$3.0 million . Securities gains increased by$2.4 million over the$658 thousand recorded in the same period of 2019. Service charges on deposit accounts, which consisted of account activity fees such as nonsufficient funds ("NSF") and overdraft fees in addition to other traditional banking fees, decreased$236 thousand in the first six months of 2020. While the traditional banking fee component was up$121 thousand , NSF and overdraft fees were down$356 thousand from the first six months of 2019, with a portion of this reduction representing accommodations to COVID-19 impacted customers. Loan related fees and service charges decreased$1.3 million in the first six months of 2020, compared to the same period in 2019, which included$389 thousand and$1.3 million related to our now exited mortgage banking activities in the first six months of 2020 and 2019, respectively. Outside of our mortgage banking activities, we had loan related fees and service charges of$366 thousand in the first six months of 2020, compared to$718 thousand in the same period of 2019, a reduction of$352 thousand . The first six months of 2019 also included an early loan payoff fee of$308 thousand . Other operating income, which consisted mainly of non-depository account fees such as interchange, wire, merchant card and ATM services, decreased$429 thousand in the first six months of 2020 compared to the first six months of 2019. Fee income from merchant card activity declined by$281 thousand , with a portion of the decline in transaction volumes attributable to the COVID-19 related drop in economic activity. Additionally, the first six months of 2019 included a one-time refund of$100 thousand . 55 Table of Contents Noninterest Expenses
The following table presents the major categories of noninterest expense for the
six months ended
Six months ended
June 30,
(in thousands) 2020 2019 Change % Change
Compensation and benefits $ 14,700 $ 16,306 $ (1,606) (9.8) %
Occupancy and equipment 2,275 6,754 (4,479) (66.3)Marketing and business development 903 941
(38) (4.0) Professional fees 1,360 1,503 (143) (9.5) Data processing fees 1,776 2,525 (749) (29.7) FDIC assessment 499 568 (69) (12.1) Other real estate owned 346 131 215 164.1 Loan production expense 660 1,220 (560) (45.9)
Amortization of core deposit intangible 1,379 1,551 (172) (11.1) Other operating expense 3,789 2,812 977 34.7 Total noninterest expense before goodwill impairment 27,687 34,311 (6,624) (19.3) Goodwill impairment 34,500 - 34,500 N/M Total noninterest expense$ 62,187 $ 34,311 $ 27,876 81.2 % Noninterest expenses were$62.2 million for the first six months of 2020, an increase of$27.9 million compared to$34.3 million for the first six months of 2019. In the second quarter of 2020 we recorded a$34.5 million goodwill impairment charge. Noninterest expenses attributable to our now exited mortgage banking activities were$1.4 million for the first six months of 2020, down$2.8 million from the same period in 2019. Outside of our goodwill impairment charge and mortgage banking expenses, noninterest expenses were$26.2 million for the first six months of 2020, down$3.8 million , or 12.6%, from the same period in 2019. The first six months of 2019 included a$3.6 million branch optimization charge, while the first six months of 2020 included$788 thousand of expenses attributable to the departure of our former CFO and a$1.0 million accrual related to potential litigation claims. Compensation and benefits expense are the largest component of our noninterest expenses, and decreased by$1.6 million in the first six months of 2020, compared to the same period in 2019. Compensation and benefits expense attributable to our now exited mortgage banking activities were$928 thousand in the first six months of 2020, compared to$3.1 million in the first six months of 2019, a$2.1 million decrease. Compensation and benefits other than from mortgage banking activities were$13.8 million in the first six months of 2020 compared to$13.2 million in the first six months of 2019, an increase of$529 thousand . Included in this increase was$698 thousand of expenses attributable to the departure of our former CFO. In addition, the compensation expense savings resulting from our branch optimization initiative in 2019 were offset by increased compensation costs as we continued to build our commercial banking team. Offsetting this increase was net loan origination costs deferred on PPP loans of$242 thousand . Occupancy and equipment expense decreased$4.5 million in the first six months of 2020 compared to the same period in 2019, primarily related to a branch optimization charge of$3.6 million in the first six month of 2019. The projected cost savings from our 2019 branch optimization initiative have been realized, as we closed three branch locations in 2019 and consolidated two other existing branch locations into a new smaller branch location during the first six months of 2020. Data processing expenses decreased by$749 thousand for the first six months of 2020 as we realize the benefits from our renegotiated core processing contract. Loan production expenses decreased by$560 thousand , with$352 thousand of the decrease attributable to our now exited mortgage banking activities. Other real estate owned expenses increased by$215 thousand in the first six months of 2020, compared to the same period in 2019, as a result of an increase in OREO valuation allowances of$192 thousand . 56
Table of Contents
Other operating expenses increased by$977 thousand in the first six months of 2020 compared to the same period in 2019. Other operating expenses consist mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, litigation-related accruals, prepayment penalties and other miscellaneous expenses. The increase in other expenses in the first six months of 2020, compared to the same period in 2019, primarily resulted from a$1.0 million accrual for potential litigation claims stemming from certain mortgages originated byFirst Mariner Bank before its merger withHoward Bank . We also reevaluated certain expense accruals during the first quarter of 2020 and recorded$403 thousand of additional expenses within this expense category. These increases were partially offset by a$427 thousand decrease in prepayment penalties on FHLB advances in the first six months of 2020, compared to the
same period in 2019. Income Tax Expense
For the first six months of 2020, we recorded an income tax expense of$1.2 million compared to$1.7 million for the first six months of 2019. The goodwill impairment charge of$34.5 million recorded during the second quarter of 2020 was not tax deductible. The first six months of 2020 was favorably impacted by certain provisions of the CARES Act that was signed into law onMarch 27, 2020 . The CARES Act permits corporate taxpayers to recover prior period taxes paid by carrying back net operating losses incurred in tax years ending afterDecember 31, 2017 , to tax years ending up to five years earlier. As a result, we will be able to carryback the 2018 tax net operating loss of$9.1 million to tax years 2013-2015. The$1.2 million tax benefit represents the difference between the current federal statutory tax rate of 21% and the 34% statutory federal tax rate applicable during the carryback years. Our effective tax rate for the first six months of 2020 was (4.8)%; outside the impact of the$34.5 million non-deductible goodwill impairment charge and the$1.2 million benefit from the CARES Act, the effective tax rate for the first six months of 2020 would have been 24.7%. Income tax expense for the first six months of 2019 was favorably impacted by a 2019U.S. Treasury Department change in tax regulations that provided for retroactive application to the taxability of income from BOLI contracts that were acquired in certain tax-free merger transactions. As a result of this change, we recognized a$232 thousand net reduction in income tax expense in the first quarter of 2019 pertaining to BOLI income that was earned, and initially treated as subject to income tax, in 2018. Our effective tax rate for the first six months of 2019 was 21.3%; outside the impact of this item, the effective tax rate for the first six months of 2019 would have been 24.1%.
A comparison between the three months ended
In the second quarter of 2020, we recorded a$34.5 million goodwill impairment charge that resulted in a net loss of$29.4 million , or a loss of$1.57 per diluted common share. This compares to net income for the second quarter of 2019 of$2.1 million , or$0.11 per diluted common share. The goodwill impairment charge, which was not tax deductible, reduced earnings for the second quarter of 2020 by$34.5 million , or$1.84 per diluted common share. Outside of the goodwill impairment, earnings increased$3.0 million , or$0.16 per diluted common share, in the second quarter of 2020, compared to 2019, primarily as a result of the following: (a) a$2.4 million increase in securities gains ($0.10 after tax per common share) in the second quarter of 2020, (b) a$427 thousand reduction in prepayment penalties on FHLB advances (or$0.02 after tax per diluted common share) in the second quarter of 2020; (c) a$3.6 million branch optimization charge (or$0.14 after tax per diluted common share)in the second quarter of 2019; and (d)$1.0 million in pretax income from PPP loans in the second quarter of 2020 (or$0.04 after tax per diluted common share). These items were partially offset by: (a) a higher loan loss provision of$1.9 million for the second quarter of 2020 (or$0.08 after tax per diluted common share) as we increased our allowance for loan losses due to the current economic environment; (b) a$1.2 million decrease in pretax income in the second quarter of 2020, as a result of exiting our mortgage banking activities (or$0.05 after tax per diluted common share); and (c) a$1.0 million accrual related to potential litigation claims in the second quarter of 2020 (or$0.04 after tax decrease per diluted common share). 57 Table of Contents Net Interest Income Net interest income for the second quarter of 2020 was$18.1 million , an increase of$766 thousand from the second quarter of 2019. Our net interest margin was 3.22% for the second quarter of 2020, a decrease of 31 bp from the net interest margin of 3.53% in the second quarter of 2019. Average earning assets for the second quarter of 2020 were$2.27 billion , an increase of$294.7 million , or 15.0%, while total interest income decreased by$1.7 million when compared to the same period in 2019, as the 90 bp decrease in the average yield on our interest-earning assets more than offset growth in balances. Our average interest-bearing liabilities for the second quarter of 2020 increased by$48.1 million while interest expense decreased by$2.4 million when compared to the same period in 2019, as the 67 bp decrease in the average rate paid on our interest-bearing liabilities more than offset the growth in balances. The net accretion of fair value adjustments on acquired loans added 9 bp to our net interest margin in the second quarter of 2020, a 3 bp decrease from 12 bp in the second quarter of 2019. We expect the impact of this net accretion to continue declining in future periods. PPP loans, with an average yield of 2.53% and an interest spread (net of an assumed funding cost at 0.35%) of 2.18%, reduced the net interest margin by 7 bp in the second quarter of 2020.
Interest Income
Interest income decreased by$1.7 million , or 7.2%, to$21.5 million for the second quarter of 2020, compared to$23.1 million for the second quarter of 2019. Interest income on loans and leases decreased by$1.3 million , or 6.1%, for the second quarter of 2020, compared to the second quarter of 2019, while average loans and leases increased by 12.7% to$1.88 billion for the second quarter of 2020, compared to the second quarter of 2019. The average yield on loans and leases of 4.18% for the second quarter of 2020 was down 82 bp from the second quarter of 2019, primarily driven by the lower interest rate environment as well as the impact of the lower-yielding PPP loans. PPP loans reduced the average loan yield by 13 bp for the second quarter of 2020. The average yield on available for sale securities decreased by 76 bp to 2.29%, as we added$101.5 million in MBS for the second quarter of 2020, compared to the same period in 2019, at lower yields. Higher prepayment speeds within this portfolio also adversely impacted the portfolio's yield. Reflective of the significant decline in the federal funds target rate, the average yield on our interest-bearing deposits with banks fell 166 bp to 0.09% in the second quarter of 2020 compared to the same period in 2019.
Interest Expense
Interest expense decreased by$2.4 million , or 42.1%, to$3.4 million for the second quarter of 2020, compared to$5.8 million for the same period in 2019. The average rate on our interest-bearing liabilities decreased by 67 bp to 0.87% for the second quarter of 2020 compared to the second quarter of 2019. Interest expense on deposits decreased by$1.6 million for the second quarter of 2020 compared to the same period in 2019, while our average interest-bearing deposits decreased by$17.2 million and the average rate on total interest-bearing deposits was down 50 bp. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in late February, with the full impact of those rate actions to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased$788 thousand while the average balance increased$55.8 million . The average rate on FHLB advances dropped 179 bp to 0.80% in the second quarter of 2020, compared to the same period in 2019.
Average Balances, Yields and Rates
The following tables set forth average balances, yields and rates, and certain
other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances, and have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense as well as any amortization and accretion of fair value
adjustments.
58
Table of Contents
Three months ended June 30,
2020 2019
Average Income Yield Average Income Yield Change
(dollars in thousands) Balance / Expense / Rate Balance / Expense / Rate Prior Yr
Earning assets
Loans and leases: (1)Commercial loans and leases$ 375,835 $ 3,730 3.99 % $
345,180$ 4,478 5.20 % (1.21) % Commercial real estate 694,613 8,143 4.71 664,079 8,407 5.08 (0.36) Construction and land 132,899 1,287 3.89 116,057 1,686 5.83 (1.93) Residential real estate 490,110 4,948 4.06 493,003 5,598 4.55 (0.49) Consumer 45,619 536 4.73 51,174 641 5.02 (0.30)
Paycheck Protection Program 142,715 896 2.53 - - - 2.53 Total loans and leases 1,881,791 19,540 4.18 1,669,493 20,810 5.00 (0.82) Securities available for sale: (2) U.S Gov agencies 80,217 532 2.67 97,128 669 2.76 (0.10) Mortgage-backed 189,419 945 2.01 87,954 699 3.19 (1.18) Corporate debentures 5,507 92 6.72 2,979 62 8.35 (1.63) Total available for sale securities 275,143 1,569 2.29 188,061 1,430 3.05 (0.76) Securities held to maturity: (2) 7,745 112 5.82 9,278 143 6.18 (0.37) FHLB Atlanta stock, at cost 13,015 220 6.78 10,615 167 6.31 0.47 Interest bearing deposit in banks 86,181 20 0.09 62,629 274 1.75 (1.66) Loans held for sale 1,365 13 3.83 30,432 321 4.23 (0.40) Total earning assets 2,265,240 21,474 3.81 % 1,970,508 23,145 4.71 % (0.90) % Cash and due from banks 16,056 13,853 Bank premises and equipment, net 42,431 44,567 Other assets 219,487 226,852 Less: allowance for credit losses (13,417) (8,980) Total assets$ 2,529,797 $ 2,246,800 Interest-bearing liabilities Deposits: Interest-bearing demand accounts$ 186,781 57 0.12 %$ 207,159 $ 248 0.48 % (0.36) % Money market 365,658 342 0.38 354,808 670 0.76 (0.38) Savings 140,904 25 0.07 139,673 66 0.19 (0.12) Time deposits 557,401 1,959 1.41 566,284 3,020 2.14 (0.73) Total interest-bearing deposits 1,250,744 2,383 0.77 1,267,924 4,004 1.27 (0.50) Borrowings: FHLB advances 255,945 506 0.80 200,186 1,294 2.59 (1.80)
Fed funds and other borrowings 16,747 13 0.30
7,468 13 0.70 (0.40) Subordinated debt 28,307 452 6.42 28,112 480 6.85 (0.43) Total borrowings 300,999 971 1.30 235,766 1,787 3.04 (1.74)
Total interest-bearing funds 1,551,743 3,354 0.87 % 1,503,690 5,791 1.54 % (0.68) % Noninterest-bearing deposits 632,080 414,502 Other liabilities 26,822 25,009 Total liabilities 2,210,645 1,943,201 Stockholders' equity 319,152 303,599 Total liabilities & equity$ 2,529,797 $ 2,246,800 Net interest rate spread (3)$ 18,120 2.94 %$ 17,354 3.17 % Effect of noninterest-bearing funds 0.28 0.36 Net interest margin on earning assets (4) 3.22 % 3.53 % 59 Table of Contents
Loan fee income is included in the interest income calculation, and
(1) non-accrual loans are included in the average loan balance; they have been
reflected as loans carrying a zero yield.
(2) Available for sale securities are presented at fair value, held to maturity
securities are presented at amortized cost.
Net interest rate spread represents the difference between the yield on(3) average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate) as well as any impact of number of
days and mix.
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The total of the changes set forth in the rate and volume columns are presented
in the total column.
Three months ended June 30,
2020 vs. 2019
Due to variances in
(in thousands) Total Rates Volumes
Interest income on earning assets:
Loans and leases:
Commercial loans and leases $ (748) $ (1,040) $ 292
Commercial real estate (264) (599) 335
Construction and land (399) (557) 158
Residential real estate (650) (605) (45)
Consumer (105) (38) (67)
Paycheck Protection Program 896 - 896
Total interest on loans and leases (1,270) (2,840) 1,570
Securities available for sale:
U.S. Gov agencies (137) (23) (114)
Mortgage-backed 246 (258) 504
Corporate debentures 30 (12) 42
Total interest on available for sale securities 139 (293) 432
Securities held to maturity (31) (8) (23)
FHLB Atlanta stock, at cost 53 12 41
Interest bearing deposit in banks (254) (259) 5
Loans held for sale (308) (30) (278)
Total interest income (1,671) (3,418) 1,747
Interest expense on interest-bearing liabilities:
Deposits:
Interest-bearing demand accounts (191) (184) (7)
Money market (328) (336) 8
Savings (41) (41) -
Time deposits (1,061) (1,022) (39)
Total deposit on deposits (1,621) (1,583) (38)
Borrowings:
FHLB advances (788) (895) 107
Fed funds and other borrowings - (7) 7
Subordinated debt (28) (30) 2
Totaal interest on borrowings (816) (932) 116
Total interest expense (2,437) (2,515) 78
Net interest earned $ 766 $ (903) $ 1,669 Provision for Credit Losses
We recorded a provision for credit losses of$3.0 million for the second quarter of 2020, compared to a$1.1 million provision for the second quarter of 2019, an increase of$1.9 million . The second quarter of 2020 provision, net of net charge-offs of$28 thousand , resulted in an increase in the allowance for credit losses of$3.0 million . The second quarter of 2019 provision, net of net charge-offs of$744 thousand , resulted in an increase in the allowance of$366 thousand . The increase in our allowance for credit losses is more fully discussed below under the sections entitled "Nonperforming and Problem Assets" and "Allowance for Credit Losses" of this Management's Discussion and Analysis of Financial Condition and Results of Operations. 61 Table of Contents Noninterest Income
The following table presents the major categories of noninterest income for the
three months ended
Three months ended
June 30,
(in thousands) 2020 2019 $ Change % ChangeService charges on deposit accounts$ 432 $ 684 $ (252) (36.8) % Realized and unrealized gains on mortgage banking activity - 2,308 (2,308) (100.0) Gain (loss) on the sale of securities 3,044 658 2,386 362.6 Loss on the disposal of bank premises & equipment 6 (83) 89 (107.2) Income from bank owned life insurance 441 460 (19) (4.1) Loan related fees and service charges 175 995
(820) (82.4)
Other operating income 661 819 (158) (19.3)
Total noninterest income $ 4,759 $ 5,841 $ (1,082) (18.5) %
Noninterest income was$4.8 million for the quarter endedJune 30, 2020 , a decrease of$1.1 million , or 18.5%, compared to$5.8 million for the same period in 2019. Two primary components contributed to the change in noninterest income in the second quarter of 2020 were the$3.1 million decrease in noninterest income attributable to exiting our mortgage banking activities, partially offset by the$2.4 million increase in gain on the sale of investment securities. Outside of noninterest income from mortgage banking activities and securities gains, noninterest income was$1.7 million for the first six months of 2020, down$356 thousand compared to$2.1 million for the same period in 2019. Noninterest income from our mortgage banking activities consisted of realized and unrealized gains on mortgage banking activity as well as a portion of the line item "loan related fees and service charges." We had no noninterest income attributable to our mortgage banking activities in the second quarter of 2020, compared to$3.1 million in the second quarter 2019. In connection with the exit of our mortgage banking activities, we completed the processing of the remaining residential first lien mortgage pipeline during the first quarter of 2020 and the remaining loans held for sale were sold during the second quarter of 2020. During the quarter endedJune 30, 2020 , we embarked on a strategy to monetize certain unrealized gains in our MBS portfolio, selling$105 million of MBS with high prepayment speeds, resulting in net gains of$3.0 million . Securities gains increased by$2.4 million over the$658 thousand recorded in the same period of 2019. Service charges on deposit accounts, which consisted of account activity fees such as nonsufficient funds ("NSF") and overdraft fees in addition to other traditional banking fees, decreased$252 thousand in the second quarter of 2020, compared to the same period in 2019. While the traditional banking fee component was up slightly, NSF and overdraft fees were down$273 thousand from the second quarter of 2019, with a portion of this reduction representing accommodations to COVID-19 impacted customers. Loan related fees and service charges decreased$822 thousand in the second quarter of 2020, compared to the same period in 2019, which included$816 thousand related to our now exited mortgage banking activities in the second quarter of 2019. We had no noninterest income attributable to mortgage banking activities in the second quarter of 2020. Outside of our mortgage banking activities, loan related fees and service charges was$175 thousand for the second quarter of 2020, a reduction of$4 thousand from the second quarter of 2019.
Other operating income, which consisted mainly of non-depository account fees
such as interchange, wire, merchant card and ATM services, decreased
Fee income from merchant card activity declined by
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Noninterest Expenses
The following table presents the major categories of noninterest expense for the
three months ended
Three months ended
June 30,
(in thousands) 2020 2019 $ Change % Change
Compensation and benefits $ 6,259 $ 8,272 $ (2,013) (24.3) %
Occupancy and equipment 1,242 5,183 (3,941) (76.0)Marketing and business development 453 484
(31) (6.4)
Professional fees 634 718 (84) (11.7)
Data processing fees 849 1,147 (298) (26.0)
FDIC assessment 287 281 6 2.1
Other real estate owned 268 104 164 157.7
Loan production expense 192 700 (508) (72.6)Amortization of core deposit intangible 680 767 (87) (11.3) Other operating expense 2,264 1,798 466 25.9 Total noninterest expense before goodwill impairment 13,128 19,454 (6,326) (32.5) Goodwill impairment 34,500 - 34,500 N/M Total noninterest expense$ 47,628 $ 19,454 $ 28,174 144.8 %
Noninterest expenses were$47.6 million for the second quarter of 2020, an increase of$28.2 million compared to$19.5 million for the second quarter of 2019. In the second quarter of 2020 we recorded a$34.5 million goodwill impairment charge. We recorded no noninterest expenses attributable to our now exited mortgage banking activities in the second quarter of 2020, compared to$2.1 million for the same period in 2019. Outside of our goodwill impairment charge and mortgage banking expenses, noninterest expenses were$13.1 million for the second quarter of 2020, down$4.2 million , or 24.3%, from the same period in 2019. The second quarter of 2019 included a$3.6 million branch optimization charge, while the second quarter of 2020 included a$1.0 million litigation accrual. Compensation and benefits expense are the largest component of our noninterest expenses, and decreased by$2.0 million in second quarter of 2020, compared to the same period in 2019. We recorded no compensation and benefits expense attributable to our now exited mortgage banking activities in the second quarter of 2020, compared to$1.5 million in the second quarter of 2019. Compensation and benefits not related to mortgage banking were$6.3 million in the second quarter of 2020 compared to$6.8 million in the second quarter of 2019, a decrease of$557 thousand . Compensation and benefits expense was reduced in the second quarter of 2020 as a result of the net loan origination costs deferred on PPP loans of$242 thousand . Occupancy and equipment expense decreased$3.9 million in the second quarter of 2020 compared to the second quarter of 2019, primarily related to a$3.6 million branch optimization charge in the second quarter of 2019. The projected cost savings from our 2019 branch optimization initiative have been realized, as we closed three branch locations in 2019 and consolidated two other existing branch locations into a new smaller branch location during the first quarter of 2020. Data processing expenses decreased by$298 thousand for the second quarter of 2020 as we realize the benefits from our renegotiated core processing contract. Loan production expenses decreased by$508 thousand , with$338 thousand of the decrease attributable to our now exited mortgage banking activities. Other real estate owned expenses increased by$164 thousand in the second quarter of 2020 compared to the same period in 2019 as a result of an increase in OREO valuation allowances of$171 thousand . 63 Table of Contents Other operating expenses increased by$466 thousand in the second quarter of 2020 compared to the same period in 2020. Other operating expenses consist mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, litigation-related accruals, prepayment penalties and other miscellaneous expenses. The increase in other expenses in the second quarter of 2020, compared to the second quarter of 2019, primarily resulted from a$1.0 million accrual for potential litigation claims stemming from certain mortgages originated byFirst Mariner Bank before its merger withHoward Bank , partially offset by a$427 thousand decrease in prepayment penalties on FHLB advances.
Income Tax Expense
For the second quarter of 2020, we recorded an income tax expense of$1.7 million compared to$543 thousand for the second quarter of 2019. The goodwill impairment charge of$34.5 million recorded during the second quarter of 2020 was not tax deductible. Our effective tax rate for the second quarter of 2020 was (6.0%); outside the impact of the$34.5 million non-deductible goodwill impairment charge, our effective tax rate for the second quarter of 2020 would have been 24.6%. Our effective tax rate for the second quarter of 2019 was 20.6%.
Nonperforming and Problem Assets
We perform reviews of all delinquent loans and our loan officers contact customers to attempt to resolve potential credit issues in a timely manner.
Loans are placed on non-accrual status when payment of principal or interest is
90 days or more past due and the value of the collateral securing the loan, if
any, is less than the outstanding balance of the loan. Loans are also placed on
non-accrual status if we have serious doubt about further collectability of
principal or interest on the loan, even though the loan is currently performing.
When loans are placed on a non-accrual status, unpaid accrued interest is fully
reversed, and subsequent income, if any, is recognized only to the extent
received. The loan may be returned to accrual status if the loan is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time and ultimate collectability of the total contractual principal
and interest is no longer in doubt.
Under GAAP we are required to account for certain loan modifications or
restructurings as troubled debt restructurings ("TDRs"). In general, the
modification or restructuring of a debt constitutes a TDR if we, for economic or
legal reasons related to the borrower's financial difficulties, grant a
concession, such as a reduction in the effective interest rate, to the borrower
that we would not otherwise consider. However, all debt restructurings or loan
modifications for a borrower do not necessarily constitute troubled debt
restructurings. We believe loan modifications will potentially result in a lower
level of loan losses and loan collection costs than if we proceeded immediately
through the foreclosure process with these borrowers.
The CARES Act permits financial institutions to suspend requirements under GAAP
for certain loan modifications to borrowers affected by COVID-19 that would
otherwise be characterized as TDRs. In addition, federal banking regulators
issued, shortly before the CARES Act was enacted, an interagency statement that
included guidance on their approach for the accounting of loan modifications in
light of the economic impact of the COVID-19 pandemic. The guidance interprets
current accounting standards and indicates that a lender can conclude that a
borrower is not experiencing financial difficulty if short-term modifications
are made in response to COVID-19, such as payment deferrals, fee waivers,
extensions of repayment terms, or other delays in payment that are insignificant
related to the loans in which the borrower is less than 30 days past due on its
contractual payments at the time a modification program is implemented. The
agencies confirmed in working 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 TDRs.
As noted above, the term "portfolio loans," represents a non-GAAP measure defined as total loans (which term includes leases), but excluding our PPP loans. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below under "Use of Non-GAAP Measures." We commenced making loans under the PPP program in the second quarter of 2020.
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As ofJune 30, 2020 , a total of$291.4 million of loans (representing 15.3% of total loans and leases or 17.1% of portfolio loans were performing under some form of deferral or other payment relief. By comparison,$347.0 million of loans (representing 19.7% ofMarch 31, 2020 total loans and leases) were performing under some form of deferral or other payment relief as ofMay 8, 2020 . As ofAugust 6, 2020 ,$159.0 million of loans (representing 8.4% of total loans and leases or 9.3% of portfolio loans) were performing under some form of deferral or other payment relief. We expect that some requests for payment deferral extensions will continue during the third quarter while other borrowers currently on payment deferral will resume payments. The table below sets forth the amounts and categories of our nonperforming assets, which consist of non-accrual loans, troubled debt restructurings and OREO (which includes real estate acquired through, or in lieu of, foreclosure), at the dates indicated. June 30, December 31, (in thousands) 2020 2019 Non-accrual loans: Real estate loans: Construction and land$ 347 $ 481 Residential - first lien 12,716 12,162 Residential - junior lien 1,365 786 Commercial owner occupied 800 566 Commercial non-owner occupied 576 1,725 Commercial and leases 1,237 1,960 Consumer 102 127 Total non-accrual loans 17,143 17,807 Accruing troubled debt restructured loans: Real estate loans: Residential - first lien 963 968 Commercial and leases 363 367 Total accruing troubled debt restructured loans 1,326 1,335 Total non-performing loans 18,469 19,142 Other real estate owned: Land 1,092 1,559 Residential - first lien 1,045 1,344
Commercial non-owner occupied -
195
Total other real estate owned 2,137
3,098
Total non-performing assets$ 20,606 $
22,240
Ratios:
Non-performing loans to total loans and leases 0.97 % 1.10 % Non-performing loans to portfolio loans (1) 1.08 % 1.10 % Non-performing assets to total assets 0.84 % 0.94 % Loans past due 90 days still accruing: Real estate loans: Residential - first lien$ 423 $
47
Total loans past due 90 days and still accruing
Portfolio loans is a non-GAAP measure defined as total loans and leases (1) excluding the PPP loans (refer to the "Use of Non-GAAP Financial Measures"
section for additional detail).
Nonperforming Loans
Included in non-accrual loans at June 30, 2020 are four TDRs with a new carrying
balance totaling $675 thousand that were not performing in accordance with their
modified terms, and the accrual of interest has ceased. In addition, there were
four TDRs totaling $1.3 million that were performing in accordance with their
modified terms at June 30, 2020 . There were no additional TDRs during the first
six months of 2020.
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Nonperforming loans were$18.5 million , or 0.97% of total loans and leases and 1.08% of portfolio loans, atJune 30, 2020 . Nonperforming loans were down$673 thousand from$19.1 million , or 1.10% of total loans and leases, atDecember 31, 2019 . The decrease was the result of$3.6 million in payoffs and$614 thousand of charge-offs, offset by$3.5 million of new nonaccruals in 2020.$564 thousand of the 2020 nonperforming loan charge-offs were attributable to the full charge-off of loans to one borrower during the first quarter of 2020 where we had recorded a specific allocation of the allowance for credit losses of$500 thousand atDecember 31, 2019 .
The composition of our nonperforming loans at
Non-Accrual Loans:
? One construction and land loan
? 52 residential first lien loans, two with a combined fair value of
in the process of foreclosure
? 27 residential junior lien loans, one with a fair value of
process of foreclosure
? Three commercial owner-occupied loans
? Five commercial non-owner-occupied loans
? Six commercial loans ? One consumer loan Accruing TDRs:
? Two residential real estate loans
? Two commercial loans Nonperforming Assets Our nonperforming assets were$20.6 million , or 0.84% of total assets, atJune 30, 2020 compared to$22.2 million , or 0.94% of total assets, atDecember 31, 2019 . Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming assets decreased$1.6 million during the first six months of 2020, with$673 thousand of the decrease attributable to nonperforming loans and$961 thousand attributable to a decrease in other real estate owned.
Other Real Estate Owned
Real estate we acquire as a result of foreclosure is classified as Other Real
Estate Owned ("OREO"). When a property is acquired as a result of foreclosure,
it is recorded at fair value less the anticipated costs to sell at the date of
foreclosure. If there is a subsequent change in the value of OREO, we record a
valuation allowance to adjust the carrying value of the real estate to its
current fair value less estimated disposal costs. Costs relating to holding
such real estate are expensed in the current period while costs relating to
improving such real estate are capitalized up to the property's net realizable
value until a saleable condition is reached. Costs in excess of the property's
net realizable value would be expensed in the current period.
Our OREO totaled $2.1 million at June 30, 2020 , a $961 thousand decrease from
$3.1 million at December 31, 2019 . Included in noninterest expenses during the
first six months of 2020 was $257 thousand attributable to net increases in
valuation allowances as the current appraised value of OREO properties, less
estimated costs to sell, was insufficient to cover the recorded OREO amount.
There was a $65 thousand increase in valuation allowances for the same period of
2019. In addition, we sold several parcels of land, one commercial real estate
property, and one residential real estate property with a combined net carrying
balance of $755 thousand . These sales resulted in a $28 thousand net loss on the
disposition of OREO in 2020. We added one new residential real estate property
with a carrying balance of $51 thousand in 2020.
OREO at
? Several parcels of unimproved land.
? Four residential 1-4 family properties.
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Allowance for Credit Losses
Our allowance for credit losses (the "allowance") at June 30, 2020 was $16.4
million , up $6.0 million from $10.4 million at December 31, 2019 . Net
charge-offs for the first six months of 2020 were $490 thousand while we
recorded a $6.4 million provision for credit losses. The allowance was 0.86% of
total loans and leases and 0.96% of portfolio loans at June 30, 2020 , compared
to 0.60% of total loans and leases at December 31, 2019 . The allowance was also
88.56% of nonperforming loans at June 30, 2020 , an increase of 34.22% from
54.34% of nonperforming loans at December 31, 2019 . The $6.0 million increase in
our allowance was primarily the result of management's response to the COVID-19
pandemic and changes in the qualitative factors discussed below.
COVID-19 and Our Evaluation of the Allowance
TheJune 30, 2020 allowance reflects management's assessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Our approach to COVID-19 and the evaluation of the allowance considered the following: (1) any change in historical loss rates resulting from COVID-19; (2) any risk rating downgrades related to COVID-19; and (3) any changes to collateral valuations or cash flow assumptions for impaired loans. Based on our review, we determined that some risk rating downgrades had occurred and were factored into the quantitative allowance atJune 30, 2020 .
We then reviewed our qualitative factors and identified three factors that warranted further evaluation:
Changes in international, national, regional, and local economic and business
? conditions and developments that affect the collectibility of the portfolio,
including the condition of various market segments;
? The existence and effect of any concentrations of credit, and changes in the
level of such concentrations; and
? Changes in the value of underlying collateral for collateral-dependent loans.
Our evaluation of changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, considered the abrupt slowdown in commercial economic activity resulting from actions announced by theState of Maryland between theMarch 5 disclosure of the first confirmed cases of COVID-19 in the state and theMarch 23 executive order closing all non-essential businesses in the state. In addition, we considered the dramatic rise in the unemployment rate in our market area. Based onU.S. Department of Labor weekly initial unemployment claims by state, we noted that the average weekly initial unemployment claims for theState of Maryland during the two weeks endingMarch 28, 2020 were 19 times higher than the average weekly claims for the first eleven weeks of 2020. While the rate of change in average weekly initial unemployment claims slowed during the second quarter of 2020, they were still 13 times higher than the average weekly claims for the first eleven weeks of 2020. While theMaryland economy has substantially reopened, the decline in economic activity during the second quarter and the heightened risk of setbacks in the pace of reopening the economy resulted in an increase in this qualitative factor applied to all loan portfolio categories. 67
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We also evaluated the existence and effect of any concentrations of credit, and changes in the level of such concentrations. We performed an analysis of our loan portfolio to identify our exposure to industry segments that we believe may potentially be the most highly impacted by COVID-19. Based on our evaluation, the following table identifies those industry segments within our loan portfolio that we believe may potentially be most highly impacted by COVID-19. Loan balances and total credit exposures are as ofJune 30, 2020 while the modification and SBA PPP balances are as ofJuly 24, 2020 ; note that the column "SBA PPP Loan Relief" indicates the amount of PPP loans received by the Company's borrowers in each of the identified loan segments. As % of As % of Balance As % of As % of ($in millions) Loan Total Total Total with Total SBA PPP Loans Loan Category Balance Loans (1) Exposure (2) Exposure Modifications Category Loan Relief Category CRE - retail$ 109.1 6.4 %$ 109.1 5.3 % $ 27.2 24.9 % $ - 0.0 % Hotels 60.8 3.6 % 62.8 3.0 % 52.7 86.6 % 1.5 2.5 % CRE - residential rental 47.8 2.8 % 47.8 2.3 % 8.8 18.4 % - 0.0 % Nursing and residential care 39.7 2.3 % 44.8 2.2 % 2.5 6.4 % 2.2 5.6 % Retail trade 23.6 1.4 % 38.3 1.9 % 2.1 8.9 % 12.9 54.7 % Restaurants and caterers 28.4 1.7 % 32.0 1.6 % 19.5 68.5 % 14.7 51.6 % Religious and similar organizations 29.1 1.7 % 31.1 1.5 % 3.3 11.4 % 6.1 20.8 % Arts, entertainment, and recreation 15.0 0.9 % 17.6 0.9 % 7.5 49.9 % 3.2 21.0 % Total - selected categories$ 353.6 20.7 %$ 383.5 18.6 % $ 123.6 35.0 %$ 40.5 11.5 %
(1) Portfolio loans is a non-GAAP financial measure - refer to the "Use of
Non-GAAP Financial Measures" section for additional detail
(2) Includes unused lines of credit, unfunded commitments, and letters of credit
The breakdown by loan portfolio segment is as follows:
As % of
($in millions) Loan Total
Loan Portfolio Segment Balance Loans (1)
Commercial real estate - non-owner occupied
65.4 3.8 %
Construction and land 51.9 3.0 %
Commercial loans and leases 28.7 1.7 %
Other 0.6 - %
Total $ 353.6 20.7 %
(1) Portfolio loans is a non-GAAP financial measure - refer to the "Use of
Non-GAAP Financial Measures" section for additional detail
The potentially highly impacted loan exposures noted in the above tables (the
"high impacts") were concentrated in non-owner-occupied commercial real estate
(58.5% of total high impacts), owner-occupied commercial real estate (18.5% of
total high impacts), construction and land (14.7% of total high impacts), and
commercial loans (8.1% of total high impacts). An increase in this qualitative
factor was applied to these high impact loan portfolio categories.
Our evaluation of potential changes in the value of underlying collateral for
collateral-dependent loans considered the potential impact of the economic
fallout from COVID-19 on commercial property values due to rent relief and
possible business failures resulting in vacancies. In addition, the need for
office space may diminish in the future as work from home policies have allowed
much office-oriented business activity to continue. Excluding the high impact
portfolios, we concluded that 55% of our non-owner-occupied commercial real
estate portfolio was not included in the high impact exposure. An increase in
this qualitative factor was applied to our non-owner-occupied commercial real
estate portfolio.
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Credit Risk Management and Allowance Methodology
We provide for credit losses based upon the consistent application of our documented allowance for credit loss methodology. All credit losses are charged to the allowance for credit losses and all recoveries are credited to it. Additions to the allowance for credit losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for credit losses in order to maintain the allowance for credit losses in accordance with GAAP. In accordance with accounting guidance for business combinations, there was no allowance for credit losses brought forward on any acquired loans in our acquisitions. For acquired performing loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for credit losses. We recorded acquired credit impaired loans in our acquisitions net of purchase accounting adjustments. Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to management's initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance for credit losses through a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods. 1)Specific allowances are established for loans classified as Substandard or Doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the impaired loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan's observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for credit losses; and 2)General allowances established for credit losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. The allowance for credit losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Our periodic evaluation of the adequacy of the allowance is based on past credit loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired
loans.
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A loan is considered past due or delinquent when a contractual payment is not
paid on the day it is due. A loan is considered impaired when, based on current
information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. We determine the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. The impairment of a loan may be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral if repayment is
expected to be provided by the collateral. Generally, our impairment on such
loans is measured by reference to the fair value of the collateral. Interest
income on impaired loans is recognized on the cash basis.
Our loan policies state that after all collection efforts have been exhausted,
and the loan is deemed to be a loss, then the remaining loan balance will be
charged to the established allowance for credit losses. All loans are evaluated
for loss potential once it has been determined by our Watch Committee that the
likelihood of repayment is in doubt. When a loan is past due for at least 90
days or a deterioration in debt service coverage ratio, guarantor liquidity, or
loan-to-value ratio has occurred that would cause concern regarding the
likelihood of the full repayment of principal and interest, and the loan is
deemed not to be well secured, the loan should be moved to non-accrual status
and a specific reserve is established if the net realizable value is less than
the principal value of the loan balance(s). Once the actual loss value has been
determined a charge-off against the allowance for credit losses for the amount
of the loss is taken. Each loss is evaluated on its specific facts regarding the
appropriate timing to recognize the loss.
The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:
? changes in lending policies, procedures, and practices;
changes in international, national, state and local economic and business
? conditions and developments that affect the collectibility of the portfolio,
including the condition of various market segments;
? changes in the nature and volume of the loan portfolio;
? changes in the experience, ability and depth of the lending staff;
? changes in the volume and severity of past due, nonaccrual, and adversely
classified loans;
? changes in the quality of our loan review system;
? changes in the value of underlying collateral for collateral-dependent loans;
? the existence of any concentrations of credit, and changes in the level of such
concentrations;
? the effect of other external factors such as competition and legal and
regulatory requirements; and
? any other factors that management considers relevant to the quality or
performance of the loan portfolio.
We evaluate the allowance for credit losses based upon the combined total of the
specific and general components. Generally when the loan portfolio increases,
absent other factors, the allowance for credit loss methodology results in a
higher dollar amount of estimated probable losses than would be the case without
the increase. Generally when the loan portfolio decreases, absent other factors,
the allowance for credit loss methodology results in a lower dollar amount of
estimated probable losses than would be the case without the decrease.
Commercial and commercial real estate loans generally have greater credit risks
compared to the one- to four-family residential mortgage loans we originate, as
they typically involve larger loan balances concentrated with single borrowers
or groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties typically depends on the successful
operation of the related business and thus may be subject to a greater extent to
adverse conditions in the real estate market and in the general economy. Actual
credit losses may be significantly more than the allowance for credit losses we
have established, which could have a material negative effect on our financial
results.
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Generally, we underwrite commercial loans based on cash flow and business
history and receive personal guarantees from the borrowers where appropriate. We
generally underwrite commercial real estate loans and residential real estate
loans at a loan-to-value ratio of 85% or less at origination. Accordingly, in
the event that a loan becomes past due and, randomly with respect to performing
loans, we will conduct visual inspections of collateral properties and/or review
publicly available information, such as online databases, to ascertain property
values. We will also obtain formal appraisals on a regular basis even if we are
not considering liquidation of the property to repay a loan. It is our practice
to obtain updated appraisals if there is a material change in market conditions
or if we become aware of new or additional facts that indicate a potential
material reduction in the value of any individual property collateral.
For impaired loans, we utilize the appraised value or present value of expected
cash flows in determining the appropriate specific allowance for credit losses
attributable to a loan. In addition, changes in the appraised value of multiple
properties securing our loans may result in an increase or decrease in our
general allowance for credit losses as an adjustment to our historical loss
experience due to qualitative and environmental factors, as described above.
Nonperforming loans are evaluated and valued at the time the loan is identified
as impaired on a case by case basis, at the lower of cost or market value.
Market value is measured based on the value of the collateral securing the loan.
The value of real estate collateral is determined based on an appraisal by
qualified licensed appraisers hired by us. Appraised values may be discounted
based on management's historical experience, changes in market conditions from
the time of valuation, and/or management's expertise and knowledge of the client
and client's business. The difference between the appraised value and the
principal balance of the loan will determine the specific allowance valuation
required for the loan, if any. Nonperforming loans are reviewed and evaluated on
at least a quarterly basis for additional impairment and adjusted accordingly.
We evaluate the loan portfolio on at least a quarterly basis, more frequently if
conditions warrant, and the allowance is adjusted accordingly. While we use the
best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
information used in making the evaluations. In addition, as an integral part of
their examination process, the Commissioner and the FDIC will periodically
review the allowance for credit losses. The Commissioner and the FDIC may
require us to recognize additions to the allowance based on their analysis of
information available to them at the time of their examination.
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The following table sets forth activity in our allowance for credit losses for
the periods ended:
June 30, December 31,
(in thousands) 2020 2019Balance at beginning of year$ 10,401 $ 9,873 Charge-offs: Real estate Construction and land loans - (282) Residential first lien loans (33) (518) Residential junior lien loans - (532) Commercial owner occupied loans - (46) Commercial non-owner occupied loans (23)
(2,026)
Commercial loans and leases (549)
(622)
Consumer loans (9) (210)
Total charge-offs (614) (4,236)
Recoveries:
Real estateConstruction and land loans - 80 Residential first lien loans 3 - Residential junior lien loans 52 115 Commercial non-owner occupied loans -
17
Commercial loans and leases 67 357
Consumer loans 2 2
Total recoveries 124 571
Net charge-offs (490) (3,665)
Provision for credit losses 6,445 4,193
Balance at end of year $ 16,356 $ 10,401 Allowance as a % of total loans and leases 0.86 % 0.60 % Allowance as a % of portfolio loans (1) 0.96 0.60 Allowance as a % of nonperforming loans 88.56 54.34 Net charge-offs to average loans and leases (2) 0.06 0.22 Provision for credit losses to average loans and leases (2) 0.74
0.25
Portfolio loans is a non-GAAP measure defined as total loans and leases
(1) excluding the PPP loans (refer to the "Use of Non-GAAP Financial Measures"
section for additional detail).
(2) Annualized
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Allocation of Allowance for Credit Losses
The following tables set forth the allowance for credit losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. Loans funded through the PPP program are fully guaranteed by theU.S. government and the Company anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Therefore, no allowance for credit losses is attributable to this loan portfolio segment.
June 30, 2020 December 31, 2019
(in thousands) Amount Percent (1) Amount Percent (1)
Real estate loans:Construction and land loans$ 1,525 6.8 %$ 1,256 7.3 % Residential first lien loans 2,714 21.5 2,256 25.1 Residential junior lien loans 924 3.5 478 4.2 Commercial owner occupied loans 1,806 12.9 788 13.9 Commercial non-owner occupied loans 5,590 24.0 2,968 25.4 Total real estate loans 12,559 68.7 7,746 75.9 Commercial loans and leases 3,056 18.6 2,103 21.4 Consumer loans 741 2.5 552 2.7 Paycheck Protection Program - 10.2
- -
Total $ 16,356 100.0 % $ 10,401 100.0 %
(1)Represents the percent of loans in each category to total loans and leases
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our
primary sources of funds consist of deposit inflows, loan repayments, advances
from the FHLB, and the sale of securities available for sale. While maturities
and scheduled amortization of loans and securities are predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. Our Asset/Liability
Committee ("ALCO") is responsible for establishing and monitoring our liquidity
targets and strategies in order to ensure that sufficient liquidity exists for
meeting the borrowing needs and deposit withdrawals of our customers as well as
unanticipated contingencies. We believe that we have enough sources of liquidity
to satisfy our short- and long-term liquidity needs as of June 30, 2020 and
December 31, 2019 .
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
? Expected loan demand;
? Expected deposit flows and borrowing maturities;
? Yields available on interest-earning deposits and securities; and
? The objectives of our asset/liability management program.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our statements of cash flows included in our financial statements. Excess liquid assets are generally invested in interest-bearing deposits in banks (primarily the FRB) and short-term investment securities. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. AtJune 30, 2020 andDecember 31, 2019 , interest-bearing deposits in banks totaled$46.4 million and$97.0 million , respectively. As the threat of market disruption in response to the pandemic appeared during the first quarter of 2020, including possible increases in the utilization of existing lines of credit or decreases in customer deposits, we built on-balance sheet liquidity, increasing interest-bearing deposits with banks to$180.0 million atMarch 31, 2020 . Since these events didn't materialize, in part due to the various actions initiated by theFederal Reserve to provide market liquidity, we have reduced this on-balance sheet liquidity to pre-COVID-19 levels during the second quarter of 2020. 73
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Our total commitments to extend credit and available credit lines are discussed in the following section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, including a table presenting our comparative exposure atJune 30, 2020 andDecember 31, 2019 . CDs due within one year totaled$369.3 million , or 20.2% of total deposits, and$458.9 million , or$26 .8% of total deposits, atJune 30, 2020 andDecember 31, 2019 , respectively. If we do not retain these deposits, we may be required to seek other sources of funds, including loan and securities sales and FHLB advances. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the CDs held in our portfolio. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our CDs with maturities of one year or less as ofJune 30, 2020 . Our primary investing activity is originating loans. During the first six months of 2020, cash used to fund net loan growth was$153.1 million , up$98.8 million from$54.3 million of cash used to fund net loan growth for the first six months of 2019. PPP loans originated during the second quarter of 2020, net of unamortized deferred fees and origination costs, accounted for$193.7 million of the net loan growth. During the first six months of 2020 we purchased$189.9 million of securities while securities sales, maturities, calls, and principal repayments totaled$130.8 million ; this resulted in net securities purchases of$59.1 million . For the same period in 2019, we purchased$6.5 million of securities while securities sales, maturities, calls, and principal repayments totaled$81.2 million ; this resulted in net securities sales, maturities, calls and principal repayments of$74.7 million . Financing activities consist primarily of activity in deposit accounts and FHLB advances. For the first six months of 2020, our deposit growth was$116.3 million compared to$31.4 million during the first six months of 2019. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB, which provide an additional source of funds. FHLB advances decreased to$246.0 million atJune 30, 2020 compared to$285.0 million atDecember 31, 2019 . AtJune 30, 2020 , we had an available line of credit for$626.9 million at the FHLB, with borrowings limited to a total of$510.4 million based on pledged collateral. This provides us with$264.4 million of borrowing availability atJune 30, 2020 . We also utilized the PPPLF during the second quarter of 2020, with total borrowings outstanding of$31.1 million atJune 30, 2020 . We have additional PPPLF borrowing capacity, based on the principal balance of unpledged PPP loans, totaling$157.9 million atJune 30, 2020 . The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. AtJune 30, 2020 andDecember 31, 2019 , we exceeded all regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments are limited to commitments to originate loans and involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks, and management does not anticipate any losses that would have a material effect on us.
Total commitments to extend credit and available credit lines at
June 30, December 31,
(in thousands) 2020 2019
Unfunded loan commitments $ 94,370 $ 77,314
Unused lines of credit 276,070 309,519
Letters of credit 14,529 13,853
Total commitments to extend credit and available credit lines
$ 400,686 74 Table of Contents Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any one time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer's credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in consolidated balance sheets atJune 30, 2020 orDecember 31, 2019 as a liability for credit loss related to these commitments.
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Use of Non-GAAP Financial Measures
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of our tangible book value per share, portfolio loans and related asset quality ratios, core noninterest income and core noninterest expense. Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance and provides a meaningful comparison to our peers, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered in isolation or as an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below.
Tangible book value per common share is calculated by dividing tangible common stockholders' equity by total common shares outstanding. Tangible common stockholders' equity is calculated by subtracting goodwill and our net core deposit intangible from total stockholders' equity.
Portfolio loans is calculated by subtracting PPP loans (net of unamortized deferred fees and origination costs) from total loans and leases. The change in portfolio loans is then calculated. In addition, nonperforming loans and the allowance for credit losses are calculated as a percentage of portfolio loans.
The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined under GAAP.
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Tangible Book Value per Common Share
June 30, March 31, December 31, June 30,
($in thousands except per share data) 2020 2020 2019 2019Total stockholders' equity$ 283,281 $ 315,358 $ 314,148 $ 303,527 Subtract: Goodwill 31,449 65,949 65,949 65,949 Core deposit intangible, net of deferred tax liability 5,358 5,802 6,339 7,414 Total subtractions 36,807 71,751 72,288 73,363 Tangible common stockholders' equity$ 246,474 $ 243,607 $ 241,860 $ 230,164 Total common shares outstanding at end of period 18,715,678 18,714,844 19,066,913 19,063,080 Book value per common share$ 15.14 $ 16.85 $ 16.48 $ 15.92 Tangible book value per common share$ 13.17 $ 13.02
$ 12.68 $ 12.07
Portfolio Loans And Related Asset Quality Ratios
($ in thousands) June 30, 2020 December 31, 2019 June 30, 2019 $ change % changeTotal loans and leases$ 1,898,630 $ 1,745,513$ 1,701,020 $ 153,117 8.8 % Subtract PPP loans, net 193,719 - - 193,719 N/M Total portfolio loans$ 1,704,911 $ 1,745,513$ 1,701,020 $ (40,602) (2.3) % Nonperformng loans$ 18,469 $ 19,142$ 19,305 As a % of: Total loans and leases 0.97 % 1.10 % 1.13 % Portfolio loans 1.08 1.10 1.13 Allowance for credit losses$ 16,356 $ 10,401 $ 9,120 As a % of: 0.86 % 0.60 % 0.54 % Total loans and leases Portfolio loans 0.96 0.60 0.54
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