UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2016 | |
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to | |
Commission file number 000-27719 |
Southern First Bancshares,
Inc.
(Exact name of registrant as
specified in its charter)
South Carolina | 58-2459561 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
100 Verdae Boulevard, Suite 100 | ||
Greenville, S.C. | 29606 | |
(Address of principal executive offices) | (Zip Code) |
864-679-9000
(Registrants
telephone number, including area code)
Not Applicable
(Former name,
former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller Reporting Company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 6,382,666 shares of common stock, par value $0.01 per share, were issued and outstanding as of October 25, 2016.
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
September 30, 2016
Form 10-Q
INDEX
2
PART I. CONSOLIDATED FINANCIAL
INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | ||||||
(dollars in thousands, except share data) | 2016 | 2015 | |||||
(Unaudited) | (Audited) | ||||||
ASSETS | |||||||
Cash and cash equivalents: | |||||||
Cash and due from banks | $ | 11,215 | 12,280 | ||||
Federal funds sold | 20,584 | 33,582 | |||||
Interest-bearing deposits with banks | 10,111 | 17,004 | |||||
Total cash and cash equivalents | 41,910 | 62,866 | |||||
Investment securities: | |||||||
Investment securities available for sale | 67,874 | 89,939 | |||||
Other investments | 5,741 | 5,532 | |||||
Total investment securities | 73,615 | 95,471 | |||||
Mortgage loans held for sale | 9,126 | 4,943 | |||||
Loans | 1,114,099 | 1,004,944 | |||||
Less allowance for loan losses | (14,478 | ) | (13,629 | ) | |||
Loans, net | 1,099,621 | 991,315 | |||||
Bank owned life insurance | 25,288 | 24,735 | |||||
Property and equipment, net | 27,325 | 24,185 | |||||
Deferred income taxes | 5,990 | 6,923 | |||||
Other assets | 6,871 | 6,855 | |||||
Total assets | $ | 1,289,746 | 1,217,293 | ||||
LIABILITIES | |||||||
Deposits | $ | 1,045,075 | 985,733 | ||||
Federal Home Loan Bank advances and other borrowings | 115,200 | 115,200 | |||||
Junior subordinated debentures | 13,403 | 13,403 | |||||
Other liabilities | 10,045 | 8,717 | |||||
Total liabilities | 1,183,723 | 1,123,053 | |||||
SHAREHOLDERS EQUITY | |||||||
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no | |||||||
shares issued and outstanding | - | - | |||||
Common stock, par value $.01 per share, 10,000,000 shares authorized, | |||||||
6,382,666 and 6,289,038 shares issued and outstanding at September 30, | |||||||
2016 and December 31, 2015, respectively | 64 | 63 | |||||
Nonvested restricted stock | (675 | ) | (360 | ) | |||
Additional paid-in capital | 71,649 | 70,037 | |||||
Accumulated other comprehensive income (loss) | 736 | (4 | ) | ||||
Retained earnings | 34,249 | 24,504 | |||||
Total shareholders equity | 106,023 | 94,240 | |||||
Total liabilities and shareholders equity | $ | 1,289,746 | 1,217,293 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
3
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months | For the nine months | |||||||||
ended September 30, | ended September 30, | |||||||||
(dollars in thousands, except share data) | 2016 | 2015 | 2016 | 2015 | ||||||
Interest income | ||||||||||
Loans | $ | 12,486 | $ | 11,362 | 36,280 | 32,703 | ||||
Investment securities | 395 | 371 | 1,342 | 1,102 | ||||||
Federal funds sold | 31 | 33 | 122 | 79 | ||||||
Total interest income | 12,912 | 11,766 | 37,744 | 33,884 | ||||||
Interest expense | ||||||||||
Deposits | 957 | 941 | 2,891 | 2,563 | ||||||
Borrowings | 1,075 | 987 | 3,153 | 2,922 | ||||||
Total interest expense | 2,032 | 1,928 | 6,044 | 5,485 | ||||||
Net interest income | 10,880 | 9,838 | 31,700 | 28,399 | ||||||
Provision for loan losses | 825 | 875 | 2,025 | 2,500 | ||||||
Net interest income after provision for loan losses | 10,055 | 8,963 | 29,675 | 25,899 | ||||||
Noninterest income | ||||||||||
Mortgage banking income | 2,003 | 1,332 | 5,685 | 3,816 | ||||||
Service fees on deposit accounts | 269 | 230 | 732 | 676 | ||||||
Income from bank owned life insurance | 187 | 167 | 553 | 498 | ||||||
Gain on sale of investment securities | 106 | 2 | 431 | 297 | ||||||
Other income | 452 | 393 | 1,320 | 1,093 | ||||||
Total noninterest income | 3,017 | 2,124 | 8,721 | 6,380 | ||||||
Noninterest expenses | ||||||||||
Compensation and benefits | 4,948 | 4,313 | 14,353 | 12,695 | ||||||
Occupancy | 908 | 845 | 2,670 | 2,424 | ||||||
Real estate owned expenses | 81 | 148 | 725 | 1,003 | ||||||
Data processing and related costs | 690 | 588 | 1,916 | 1,747 | ||||||
Insurance | 227 | 215 | 678 | 630 | ||||||
Professional fees | 326 | 180 | 864 | 646 | ||||||
Marketing | 195 | 217 | 625 | 677 | ||||||
Other | 425 | 365 | 1,339 | 1,155 | ||||||
Total noninterest expenses | 7,800 | 6,871 | 23,170 | 20,977 | ||||||
Income before income tax expense | 5,272 | 4,216 | 15,226 | 11,302 | ||||||
Income tax expense | 1,839 | 1,489 | 5,481 | 3,987 | ||||||
Net income available to common shareholders | $ | 3,433 | 2,727 | 9,745 | 7,315 | |||||
Earnings per common share | ||||||||||
Basic | $ | 0.54 | 0.44 | 1.55 | 1.18 | |||||
Diluted | $ | 0.51 | 0.41 | 1.45 | 1.12 | |||||
Weighted average common shares outstanding | ||||||||||
Basic | 6,322,073 | 6,205,877 | 6,299,009 | 6,194,418 | ||||||
Diluted | 6,740,751 | 6,579,448 | 6,702,475 | 6,542,896 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
4
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(Unaudited)
For the three months | For the nine months | |||||||||||||
ended September 30, | ended September 30, | |||||||||||||
(dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||
Net income | $ | 3,433 | $ | 2,727 | 9,745 | 7,315 | ||||||||
Other comprehensive income (loss): | ||||||||||||||
Unrealized gain (loss) on securities available for sale: | ||||||||||||||
Unrealized holding gain (loss) arising during the period, pretax | (222 | ) | 604 | 1,552 | 272 | |||||||||
Tax (expense) benefit | 75 | (205 | ) | (528 | ) | (92 | ) | |||||||
Reclassification of realized gain | (106 | ) | (2 | ) | (431 | ) | (297 | ) | ||||||
Tax expense | 37 | 1 | 147 | 101 | ||||||||||
Other comprehensive income (loss) | (216 | ) | 398 | 740 | (16 | ) | ||||||||
Comprehensive income | $ | 3,217 | $ | 3,125 | 10,485 | 7,299 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
5
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2016 AND 2015
(Unaudited)
(dollars in thousands, except share data) | Common stock |
Preferred stock | Nonvested restricted stock |
Additional paid-in capital |
Accumulated other comprehensive income (loss) |
Retained earnings |
Total | ||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
December 31, 2014 | 6,219,002 | $ | 62 | - | - | $ | (494 | ) | $ | 68,785 | $ | 302 | $ | 14,337 | $ | 82,992 | |||||||||||
Net income | - | - | - | - | - | - | - | 7,315 | 7,315 | ||||||||||||||||||
Proceeds from exercise of stock options | 24,130 | - | - | - | - | 189 | - | - | 189 | ||||||||||||||||||
Amortization of deferred compensation on restricted stock | - | - | - | - | 144 | - | - | - | 144 | ||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 426 | - | - | 426 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (16 | ) | - | (16 | ) | ||||||||||||||||
September 30, 2015 | 6,243,132 | 62 | - | - | (350 | ) | 69,400 | 286 | 21,652 | 91,050 | |||||||||||||||||
December 31, 2015 | 6,289,038 | 63 | - | - | (360 | ) | 70,037 | (4 | ) | 24,504 | 94,240 | ||||||||||||||||
Net income | - | - | - | - | - | - | - | 9,745 | 9,745 | ||||||||||||||||||
Proceeds from exercise of stock options | 71,628 | 1 | - | - | - | 533 | - | - | 534 | ||||||||||||||||||
Issuance of restricted stock | 22,000 | - | - | - | (526 | ) | 526 | - | - | - | |||||||||||||||||
Amortization of deferred compensation on restricted stock | - | - | - | - | 211 | - | - | - | 211 | ||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 553 | - | - | 553 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 740 | - | 740 | ||||||||||||||||||
September 30, 2016 | 6,382,666 | $ | 64 | - | $ | - | $ | (675 | ) | $ | 71,649 | $ | 736 | $ | 34,249 | $ | 106,023 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
6
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30, | ||||||||
(dollars in thousands) | 2016 | 2015 | ||||||
Operating activities | ||||||||
Net income | $ | 9,745 | $ | 7,315 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for loan losses | 2,025 | 2,500 | ||||||
Depreciation and other amortization | 939 | 990 | ||||||
Accretion and amortization of securities discounts and premium, net | 433 | 237 | ||||||
Gain on sale of investment securities available for sale | (431 | ) | (297 | ) | ||||
(Gain) loss on sale of real estate owned | 51 | (66 | ) | |||||
Write-down of real estate owned | 389 | 787 | ||||||
Compensation expense related to stock options and grants | 764 | 570 | ||||||
Gain on sale of loans held for sale | (5,704 | ) | (3,816 | ) | ||||
Loans originated and held for sale | (198,601 | ) | (162,352 | ) | ||||
Proceeds from sale of loans held for sale | 200,122 | 167,046 | ||||||
Increase in cash surrender value of bank owned life insurance | (553 | ) | (498 | ) | ||||
(Increase) decrease in deferred tax asset | 552 | (562 | ) | |||||
(Increase) decrease in other assets, net | (606 | ) | 41 | |||||
Increase in other liabilities | 1,328 | 623 | ||||||
Net cash provided by operating activities | 10,453 | 12,518 | ||||||
Investing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Origination of loans, net | (110,576 | ) | (123,014 | ) | ||||
Purchase of property and equipment | (4,079 | ) | (3,606 | ) | ||||
Purchase of investment securities: | ||||||||
Available for sale | (16,852 | ) | (25,096 | ) | ||||
Other | (806 | ) | (149 | ) | ||||
Payments and maturities, calls and repayments of investment securities: | ||||||||
Available for sale | 18,448 | 3,446 | ||||||
Other | - | 1,140 | ||||||
Purchase of bank owned life insurance | (2,000 | ) | ||||||
Proceeds from sale of investment securities available for sale | 22,185 | 10,362 | ||||||
Proceeds from sale of real estate owned | 395 | 272 | ||||||
Net cash used for investing activities | (91,285 | ) | (138,645 | ) | ||||
Financing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Increase in deposits, net | 59,342 | 155,011 | ||||||
Decrease in Federal Home Loan Bank advances and other borrowings | - | (20,000 | ) | |||||
Proceeds from the exercise of stock options and warrants | 534 | 189 | ||||||
Net cash provided by financing activities | 59,876 | 135,200 | ||||||
Net increase (decrease) in cash and cash equivalents | (20,956 | ) | 9,073 | |||||
Cash and cash equivalents at beginning of the period | 62,866 | 41,264 | ||||||
Cash and cash equivalents at end of the period | $ | 41,910 | $ | 50,337 | ||||
Supplemental information | ||||||||
Cash paid for | ||||||||
Interest | $ | 5,951 | $ | 5,451 | ||||
Income taxes | 4,930 | 4,550 | ||||||
Schedule of non-cash transactions | ||||||||
Real estate acquired in settlement of loans | 245 | 343 | ||||||
Unrealized gain on securities, net of income taxes | 1,024 | 180 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
7
SOUTHERN FIRST BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Nature of Business and Basis of Presentation
Business
Activity
Southern First Bancshares,
Inc. (the "Company") is a South Carolina
corporation that owns all of the capital stock of Southern First Bank (the
"Bank") and all of the stock of Greenville First Statutory Trust I and II
(collectively, the "Trusts"). The Trusts are special purpose non-consolidated
entities organized for the sole purpose of issuing trust preferred securities.
The Bank's primary federal regulator is the Federal Deposit Insurance
Corporation (the "FDIC"). The Bank is also regulated and examined by the South
Carolina Board of Financial Institutions. The Bank is primarily engaged in the
business of accepting demand deposits and savings deposits insured by the FDIC,
and providing commercial, consumer and mortgage loans to the general public.
Basis of
Presentation
The accompanying consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2016 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2016. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2015 as
filed with the Securities and Exchange Commission on March 2, 2016. The
consolidated financial statements include the accounts of the Company and the
Bank. In accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 810, Consolidation, the financial
statements related to the Trusts have not been consolidated.
Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the consolidated financial statements and the
reported amount of income and expenses during the reporting periods. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, real estate acquired in the
settlement of loans, fair value of financial instruments, evaluating
other-than-temporary-impairment of investment securities and valuation of
deferred tax assets.
Business
Segments
Beginning in 2016 the Company
reports its activities as three business segments Commercial and Retail
Banking, Mortgage Banking and Corporate. In determining proper segment
definition, the Company considers the materiality of a potential segment and
components of the business about which financial information is available and
regularly evaluated, relative to a resource allocation and performance
assessment. The Company accounts for intersegment revenues and expenses as if
the revenue/expense transactions were generated to third parties, that is, at
current market prices. Please refer to Note 7 Reportable Segments for
further information on the reporting for the three business segments.
Reclassifications
Certain amounts,
previously reported, have been reclassified to state all periods on a comparable
basis and had no effect on shareholders equity or net income.
Subsequent
Events
Subsequent events are events or
transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions
that provide additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the process of preparing financial
statements. Non-recognized subsequent events are events that provide evidence
about conditions that did not exist at the date of the balance sheet but arose
after that date. Management performed an evaluation to determine whether there
have been any subsequent events since the balance sheet date and determined that
no subsequent events occurred requiring accrual or disclosure.
8
Initial Adoption of Fair Value
Option
In accordance with ASC 825-10
Financial Instruments, the Company adopted the fair value option for mortgage loans
held for sale beginning on April 1, 2016. ASC 825-10 allows the Company to
measure eligible financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value and to offset changes in the
fair values of derivative instruments and the related hedged item by selecting
the fair value option for the hedged item. Unrealized gains and losses on items
for which the fair value option has been elected are reported in earnings at
each subsequent reporting date. Prior to adoption, mortgage loans held for sale
were carried at the lower of cost or fair value.
NOTE 2 Investment Securities
The amortized costs and fair value of investment securities are as follows:
September 30, 2016 | |||||||||
Amortized | Gross Unrealized | Fair | |||||||
(dollars in thousands) | Cost | Gains | Losses | Value | |||||
Available for sale | |||||||||
US government agencies | $ | 6,277 | 122 | - | 6,399 | ||||
SBA securities | 1,464 | - | 12 | 1,452 | |||||
State and political subdivisions | 20,991 | 700 | 3 | 21,688 | |||||
Mortgage-backed securities | 38,027 | 348 | 40 | 38,335 | |||||
Total investment securities available for sale | $ | 66,759 | 1,170 | 55 | 67,874 | ||||
December 31, 2015 | |||||||||
Amortized | Gross Unrealized | Fair | |||||||
Cost | Gains | Losses | Value | ||||||
Available for sale | |||||||||
US government agencies | $ | 14,711 | 1 | 113 | 14,599 | ||||
SBA securities | 6,410 | - | 133 | 6,277 | |||||
State and political subdivisions | 21,771 | 525 | 37 | 22,259 | |||||
Mortgage-backed securities | 47,053 | 191 | 440 | 46,804 | |||||
Total investment securities available for sale | $ | 89,945 | 717 | 723 | 89,939 |
During the first nine months of 2016, approximately $33.5 million of investment securities were either sold or called, subsequently resulting in a gain on sale of investment securities of $431,000.
Contractual maturities and yields on the Companys investment securities at September 30, 2016 and December 31, 2015 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2016 | |||||||||||||||||||||
Less than one year | One to five years | Five to ten years | Over ten years | Total | |||||||||||||||||
(dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||
Available for sale | |||||||||||||||||||||
US government agencies | $ | - | - | 1,001 | 1.15% | 5,398 | 2.23% | - | - | 6,399 | 2.06% | ||||||||||
SBA securities | - | - | - | - | - | - | 1,452 | 1.32% | 1,452 | 1.32% | |||||||||||
State and political subdivisions | - | - | 2,324 | 1.73% | 11,967 | 2.24% | 7,397 | 2.88% | 21,688 | 2.40% | |||||||||||
Mortgage-backed securities | - | - | - | - | 6,686 | 1.45% | 31,649 | 1.67% | 38,335 | 1.63% | |||||||||||
Total | $ | - | - | 3,325 | 1.55% | 24,051 | 2.02% | 40,498 | 1.87% | 67,874 | 1.91% |
9
December 31, 2015 | |||||||||||||||||||||||
Less than one year | One to five years | Five to ten years | Over ten years | Total | |||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||
Available for sale | |||||||||||||||||||||||
US government agencies | $ | - | - | 4,149 | 1.74% | 8,704 | 2.49% | 1,746 | 3.03 | % | 14,599 | 2.34 | % | ||||||||||
SBA securities | - | - | - | - | - | - | 6,277 | 1.79 | % | 6,277 | 1.79 | % | |||||||||||
State and political subdivisions | - | - | 464 | 1.63% | 14,032 | 2.64% | 7,763 | 2.84 | % | 22,259 | 2.69 | % | |||||||||||
Mortgage-backed securities | - | - | - | - | 8,048 | 1.56% | 38,756 | 2.08 | % | 46,804 | 1.99 | % | |||||||||||
Total | $ | - | - | 4,613 | 1.73% | 30,784 | 2.31% | 54,542 | 2.18 | % | 89,939 | 2.20 | % |
The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at September 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
September 30, 2016 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(dollars in thousands) | # | value | losses | # | value | losses | # | value | losses | |||||||||||||||
Available for sale | ||||||||||||||||||||||||
SBA securities | 1 | $ | 1,452 | $ | 12 | - | $ | - | $ | - | 1 | $ | 1,452 | $ | 12 | |||||||||
State and political subdivisions | 3 | 1,225 | 3 | - | - | - | 3 | 1,225 | 3 | |||||||||||||||
Mortgage-backed securities | 4 | 6,661 | 21 | 1 | 2,257 | 19 | 5 | 8,918 | 40 | |||||||||||||||
Total | 8 | $ | 9,338 | $ | 36 | 1 | $ | 2,257 | $ | 19 | 9 | $ | 11,595 | $ | 55 |
December 31, 2015 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
# | value | losses | # | value | losses | # | value | losses | ||||||||||||||||
Available for sale | ||||||||||||||||||||||||
US government agencies | 9 | $ | 12,853 | $ | 113 | - | $ | - | $ | - | 9 | $ | 12,853 | $ | 113 | |||||||||
SBA securities | - | - | - | 2 | 4,691 | 133 | 2 | 4,691 | 133 | |||||||||||||||
State and political subdivisions | 7 | 3,125 | 17 | 3 | 1,220 | 20 | 10 | 4,345 | 37 | |||||||||||||||
Mortgage-backed securities | 27 | 40,868 | 440 | - | - | - | 27 | 40,868 | 440 | |||||||||||||||
Total | 43 | $ | 56,846 | $ | 570 | 5 | $ | 5,911 | $ | 153 | 48 | $ | 62,757 | $ | 723 |
At September 30, 2016, the Company had eight individual investments with a fair market value of $9.3 million that were in an unrealized loss position for less than 12 months and one individual investment with a fair market value of $2.3 million that was in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. The Company also considers other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, the Company has concluded that these securities are not impaired on an other-than-temporary basis.
Other investments are comprised of the following and are recorded at cost which approximates fair value.
(dollars in thousands) | September 30, 2016 | December 31, 2015 | |||
Federal Home Loan Bank stock | $ | 5,173 | 5,005 | ||
Investment in Trust Preferred securities | 403 | 403 | |||
Other investments | 165 | 124 | |||
Total other investments | $ | 5,741 | 5,532 |
10
The Company has evaluated the Federal Home Loan Bank (FHLB) stock for impairment and determined that the investment in the FHLB stock is not other than temporarily impaired as of September 30, 2016 and ultimate recoverability of the par value of this investment is probable. All of the FHLB stock is used to collateralize advances with the FHLB.
At September 30, 2016, $20.9 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $16.8 million of securities were pledged to secure client deposits. At December 31, 2015, $21.3 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $11.1 million of securities were pledged to secure client deposits.
NOTE 3 Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option, which was adopted by the Company on April 1, 2016, with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At September 30, 2016, mortgage loans held for sale totaled $9.1 million compared to $4.9 million at December 31, 2015.
Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets.
Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in mortgage banking income in the statement of income. Mortgage banking income also includes the unrealized gains and losses associated with the loans held for sale and the realized and unrealized gains and losses from derivatives.
Mortgage loans sold to investors by the Company, and which were believed to have met investor and agency underwriting guidelines at the time of sale, may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans.
11
NOTE 4 Loans and Allowance for Loan Losses
The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $1.9 million as of September 30, 2016 and $1.7 million as of December 31, 2015.
September 30, 2016 | December 31, 2015 | |||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||
Commercial | ||||||||||||||
Owner occupied RE | $ | 267,652 | 24.0 | % | $ | 236,083 | 23.5 | % | ||||||
Non-owner occupied RE | 235,273 | 21.1 | % | 205,604 | 20.5 | % | ||||||||
Construction | 30,564 | 2.7 | % | 41,751 | 4.1 | % | ||||||||
Business | 191,439 | 17.2 | % | 171,743 | 17.1 | % | ||||||||
Total commercial loans | 724,928 | 65.0 | % | 655,181 | 65.2 | % | ||||||||
Consumer | ||||||||||||||
Real estate | 210,356 | 18.9 | % | 174,802 | 17.4 | % | ||||||||
Home equity | 132,623 | 11.9 | % | 116,563 | 11.6 | % | ||||||||
Construction | 28,568 | 2.6 | % | 43,318 | 4.3 | % | ||||||||
Other | 17,624 | 1.6 | % | 15,080 | 1.5 | % | ||||||||
Total consumer loans | 389,171 | 35.0 | % | 349,763 | 34.8 | % | ||||||||
Total gross loans, net of deferred fees | 1,114,099 | 100.0 | % | 1,004,944 | 100.0 | % | ||||||||
Lessallowance for loan losses | (14,478 | ) | (13,629 | ) | ||||||||||
Total loans, net | $ | 1,099,621 | $ | 991,315 |
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.
September 30, 2016 | ||||||||||
After one | ||||||||||
One year | but within | After five | ||||||||
(dollars in thousands) | or less | five years | years | Total | ||||||
Commercial | ||||||||||
Owner occupied RE | $ | 26,577 | 135,967 | 105,108 | 267,652 | |||||
Non-owner occupied RE | 42,243 | 128,885 | 64,145 | 235,273 | ||||||
Construction | 6,864 | 8,291 | 15,409 | 30,564 | ||||||
Business | 67,031 | 93,470 | 30,938 | 191,439 | ||||||
Total commercial loans | 142,715 | 366,613 | 215,600 | 724,928 | ||||||
Consumer | ||||||||||
Real estate | 31,734 | 42,804 | 135,818 | 210,356 | ||||||
Home equity | 6,311 | 30,584 | 95,728 | 132,623 | ||||||
Construction | 12,913 | 592 | 15,063 | 28,568 | ||||||
Other | 6,222 | 8,323 | 3,079 | 17,624 | ||||||
Total consumer loans | 57,180 | 82,303 | 249,688 | 389,171 | ||||||
Total gross loans, net of deferred fees | $ | 199,895 | 448,916 | 465,288 | 1,114,099 | |||||
Loans maturing after one year with: | ||||||||||
Fixed interest rates | $ | 688,567 | ||||||||
Floating interest rates | 225,637 |
12
December 31, 2015 | ||||||||||
After one | ||||||||||
One year | but within | After five | ||||||||
or less | five years | years | Total | |||||||
Commercial | ||||||||||
Owner occupied RE | $ | 16,836 | 126,156 | 93,091 | 236,083 | |||||
Non-owner occupied RE | 40,690 | 111,087 | 53,827 | 205,604 | ||||||
Construction | 9,183 | 23,206 | 9,362 | 41,751 | ||||||
Business | 64,099 | 83,435 | 24,209 | 171,743 | ||||||
Total commercial loans | 130,808 | 343,884 | 180,489 | 655,181 | ||||||
Consumer | ||||||||||
Real estate | 28,348 | 35,509 | 110,945 | 174,802 | ||||||
Home equity | 5,105 | 31,326 | 80,132 | 116,563 | ||||||
Construction | 14,095 | 1,445 | 27,778 | 43,318 | ||||||
Other | 6,430 | 6,270 | 2,380 | 15,080 | ||||||
Total consumer | 53,978 | 74,550 | 221,235 | 349,763 | ||||||
Total gross loan, net of deferred fees | $ | 184,786 | 418,434 | 401,724 | 1,004,944 | |||||
Loans maturing after one year with: | ||||||||||
Fixed interest rates | $ | 612,251 | ||||||||
Floating interest rates | 207,907 |
Portfolio Segment Methodology
Commercial
Commercial loans are assessed for
estimated losses by grading each loan using various risk factors identified
through periodic reviews. The Company applies historic grade-specific loss
factors to each loan class. In the development of statistically derived loan
grade loss factors, the Company observes historical losses over 20 quarters for
each loan grade. These loss estimates are adjusted as appropriate based on
additional analysis of external loss data or other risks identified from current
economic conditions and credit quality trends. The allowance also includes an
amount for the estimated impairment on nonaccrual commercial loans and
commercial loans modified in a troubled debt restructuring (TDR), whether on
accrual or nonaccrual status.
Consumer
For consumer loans, the Company
determines the allowance on a collective basis utilizing historical losses over
20 quarters to represent its best estimate of inherent loss. The Company pools
loans, generally by loan class with similar risk characteristics. The allowance
also includes an amount for the estimated impairment on nonaccrual consumer
loans and consumer loans modified in a TDR, whether on accrual or nonaccrual
status.
Credit Quality Indicators
Commercial
The Company manages a consistent
process for assessing commercial loan credit quality by monitoring its loan
grading trends and past due statistics. All loans are subject to individual risk
assessment. The Companys risk categories include Pass, Special Mention,
Substandard, and Doubtful, each of which is defined by banking regulatory
agencies. Delinquency statistics are also an important indicator of credit
quality in the establishment of the Companys allowance for credit losses.
13
The Company categorizes its loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:
● |
PassThese loans range from
minimal credit risk to average however still acceptable credit
risk. |
● |
Special mentionA special mention
loan has potential weaknesses that deserve managements close attention.
If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan or the institutions
credit position at some future date. |
● |
SubstandardA substandard loan is
inadequately protected by the current sound worth and paying capacity of
the obligor or of the collateral pledged, if any. Loans so classified must
have a well-defined weakness, or weaknesses, that may jeopardize the
liquidation of the debt. A substandard loan is characterized by the
distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. |
● |
DoubtfulA doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. |
The tables below provide a breakdown of outstanding commercial loans by risk category.
September 30, 2016 | |||||||||||
Owner | Non-owner | ||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||
Pass | $ | 260,310 | 228,655 | 30,564 | 183,122 | 702,651 | |||||
Special mention | 4,542 | 1,054 | - | 1,846 | 7,442 | ||||||
Substandard | 2,800 | 5,564 | - | 6,471 | 14,835 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 267,652 | 235,273 | 30,564 | 191,439 | 724,928 | ||||||
December 31, 2015 | |||||||||||
Owner | Non-owner | ||||||||||
occupied RE | occupied RE | Construction | Business | Total | |||||||
Pass | $ | 230,460 | 198,144 | 39,678 | 161,920 | 630,202 | |||||
Special mention | 3,887 | 1,574 | 286 | 5,511 | 11,258 | ||||||
Substandard | 1,736 | 5,886 | 1,787 | 4,312 | 13,721 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 236,083 | 205,604 | 41,751 | 171,743 | 655,181 |
The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.
September 30, 2016 | |||||||||||
Owner | Non-owner | ||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||
Current | $ | 267,390 | 233,916 | 30,564 | 190,969 | 722,839 | |||||
30-59 days past due | - | 212 | - | 9 | 221 | ||||||
60-89 days past due | 262 | - | - | 4 | 266 | ||||||
Greater than 90 Days | - | 1,145 | - | 457 | 1,602 | ||||||
$ | 267,652 | 235,273 | 30,564 | 191,439 | 724,928 | ||||||
December 31, 2015 | |||||||||||
Owner | Non-owner | ||||||||||
occupied RE | occupied RE | Construction | Business | Total | |||||||
Current | $ | 235,795 | 201,381 | 41,354 | 170,644 | 649,174 | |||||
30-59 days past due | - | - | - | 205 | 205 | ||||||
60-89 days past due | 43 | 1,452 | - | 18 | 1,513 | ||||||
Greater than 90 Days | 245 | 2,771 | 397 | 876 | 4,289 | ||||||
$ | 236,083 | 205,604 | 41,751 | 171,743 | 655,181 |
14
As of September 30, 2016 and December 31, 2015, loans 30 days or more past due represented 0.33% and 0.66% of the Companys total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.19% and 0.60% of the Companys total loan portfolio as of September 30, 2016 and December 31, 2015, respectively.
Consumer
The Company manages a consistent
process for assessing consumer loan credit quality by monitoring its loan
grading trends and past due statistics. All loans are subject to individual risk
assessment. The Companys categories include Pass, Special Mention, Substandard,
and Doubtful, which are defined above. Delinquency statistics are also an
important indicator of credit quality in the establishment of the allowance for
loan losses.
The tables below provide a breakdown of outstanding consumer loans by risk category.
September 30, 2016 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Pass | $ | 206,543 | 129,706 | 28,568 | 17,477 | 382,294 | |||||
Special mention | 1,071 | 2,109 | - | 59 | 3,239 | ||||||
Substandard | 2,742 | 808 | - | 88 | 3,638 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 210,356 | 132,623 | 28,568 | 17,624 | 389,171 | ||||||
December 31, 2015 | |||||||||||
Real estate | Home equity | Construction | Other | Total | |||||||
Pass | $ | 172,589 | 112,080 | 42,319 | 14,967 | 341,955 | |||||
Special mention | 961 | 3,388 | - | 45 | 4,394 | ||||||
Substandard | 1,252 | 1,095 | 999 | 68 | 3,414 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 174,802 | 116,563 | 43,318 | 15,080 | 349,763 |
The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.
September 30, 2016 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Current | $ | 209,737 | 131,797 | 28,568 | 17,444 | 387,546 | |||||
30-59 days past due | 344 | 369 | - | 151 | 864 | ||||||
60-89 days past due | 238 | 199 | - | 29 | 466 | ||||||
Greater than 90 Days | 37 | 258 | - | - | 295 | ||||||
$ | 210,356 | 132,623 | 28,568 | 17,624 | 389,171 | ||||||
December 31, 2015 | |||||||||||
Real estate | Home equity | Construction | Other | Total | |||||||
Current | $ | 174,576 | 116,305 | 43,258 | 14,994 | 349,133 | |||||
30-59 days past due | 187 | - | 60 | 86 | 333 | ||||||
60-89 days past due | 39 | - | - | - | 39 | ||||||
Greater than 90 Days | - | 258 | - | - | 258 | ||||||
$ | 174,802 | 116,563 | 43,318 | 15,080 | 349,763 |
As of September 30, 2016 and December 31, 2015, consumer loans 30 days or more past due were 0.14% and 0.06% of total loans, respectively.
15
Nonperforming assets
The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrowers financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.
Following is a summary of our nonperforming assets, including nonaccruing TDRs.
(dollars in thousands) | September 30, 2016 | December 31, 2015 | |||
Commercial | |||||
Owner occupied RE | $ | 446 | 704 | ||
Non-owner occupied RE | 3,941 | 4,170 | |||
Construction | - | - | |||
Business | 244 | 779 | |||
Consumer | |||||
Real estate | 275 | - | |||
Home equity | 258 | 258 | |||
Construction | - | - | |||
Other | - | 5 | |||
Nonaccruing troubled debt restructurings | 441 | 701 | |||
Total nonaccrual loans, including nonaccruing TDRs | 5,605 | 6,617 | |||
Other real estate owned | 1,885 | 2,475 | |||
Total nonperforming assets | $ | 7,490 | 9,092 | ||
Nonperforming assets as a percentage of: | |||||
Total assets | 0.58% | 0.75% | |||
Gross loans | 0.67% | 0.90% | |||
Total loans over 90 days past due | 1,897 | 4,547 | |||
Loans over 90 days past due and still accruing | - | - | |||
Accruing troubled debt restructurings | $ | 8,761 | 7,266 |
16
Impaired Loans
The table below summarizes key information for impaired loans. The Companys impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. The Companys commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.
September 30, 2016 | |||||||||
Recorded investment | |||||||||
Impaired loans | |||||||||
Unpaid | with related | Related | |||||||
Principal | Impaired | allowance for | allowance for | ||||||
(dollars in thousands) | Balance | loans | loan losses | loan losses | |||||
Commercial | |||||||||
Owner occupied RE | $ | 2,029 | 1,994 | 1,978 | 230 | ||||
Non-owner occupied RE | 8,703 | 5,463 | 3,650 | 576 | |||||
Construction | - | - | - | - | |||||
Business | 5,797 | 4,876 | 1,702 | 1,287 | |||||
Total commercial | 16,529 | 12,333 | 7,330 | 2,093 | |||||
Consumer | |||||||||
Real estate | 1,573 | 1,571 | 1,571 | 601 | |||||
Home equity | 262 | 258 | - | - | |||||
Construction | - | - | - | - | |||||
Other | 208 | 204 | 204 | 94 | |||||
Total consumer | 2,043 | 2,033 | 1,775 | 695 | |||||
Total | $ | 18,572 | 14,366 | 9,105 | 2,788 | ||||
December 31, 2015 | |||||||||
Recorded investment | |||||||||
Impaired loans | |||||||||
Unpaid | with related | Related | |||||||
Principal | Impaired | allowance for | allowance for | ||||||
Balance | loans | loan losses | loan losses | ||||||
Commercial | |||||||||
Owner occupied RE | $ | 964 | 863 | 863 | 260 | ||||
Non-owner occupied RE | 9,144 | 5,792 | 4,161 | 1,321 | |||||
Construction | 1,855 | 1,787 | 397 | 31 | |||||
Business | 4,756 | 3,861 | 2,936 | 1,932 | |||||
Total commercial | 16,719 | 12,303 | 8,357 | 3,544 | |||||
Consumer | |||||||||
Real estate | 1,121 | 1,121 | 805 | 489 | |||||
Home equity | 260 | 258 | - | - | |||||
Construction | - | - | - | - | |||||
Other | 201 | 201 | 201 | 191 | |||||
Total consumer | 1,582 | 1,580 | 1,006 | 680 | |||||
Total | $ | 18,301 | 13,883 | 9,363 | 4,224 |
17
The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
Three months ended | Three months ended | |||||||||||||
|
September 30, 2016 | September 30, 2015 | ||||||||||||
Average | Recognized | Average | Recognized | |||||||||||
recorded | interest | recorded | interest | |||||||||||
(dollars in thousands) | investment | income | investment | income | ||||||||||
Commercial | ||||||||||||||
Owner occupied RE | $ | 2,000 | 30 | 1,191 | 1 | |||||||||
Non-owner occupied RE | 5,515 | 39 | 5,622 | 22 | ||||||||||
Construction | - | - | 1,887 | 12 | ||||||||||
Business | 5,072 | 71 | 3,923 | 30 | ||||||||||
Total commercial | 12,587 | 140 | 12,623 | 65 | ||||||||||
Consumer | ||||||||||||||
Real estate | 1,573 | 16 | 1,395 | 12 | ||||||||||
Home equity | 207 | - | 406 | 3 | ||||||||||
Construction | - | - | - | - | ||||||||||
Other | 257 | 2 | 208 | 2 | ||||||||||
Total consumer | 2,037 | 18 | 2,009 | 17 | ||||||||||
Total | $ | 14,624 | 158 | 14,632 | 82 | |||||||||
Nine months ended | Nine months ended | Year ended | ||||||||||||
September 30, 2016 | September 30, 2015 | December 31, 2015 | ||||||||||||
Average | Recognized | Average | Recognized | Average | Recognized | |||||||||
recorded | interest | recorded | interest | recorded | interest | |||||||||
(dollars in thousands) | investment | income | investment | income | investment | income | ||||||||
Commercial | ||||||||||||||
Owner occupied RE | $ | 2,009 | 72 | $ | 1,146 | 5 | 884 | 6 | ||||||
Non-owner occupied RE | 5,594 | 124 | 5,268 | 107 | 6,137 | 128 | ||||||||
Construction | - | - | 2,110 | 53 | 1,888 | 74 | ||||||||
Business | 5,134 | 199 | 4,168 | 99 | 4,067 | 148 | ||||||||
Total commercial | 12,737 | 395 | 12,692 | 264 | 12,976 | 356 | ||||||||
Consumer | ||||||||||||||
Real estate | 1,578 | 49 | 1,529 | 34 | 1,112 | 46 | ||||||||
Home equity | 257 | 1 | 376 | 13 | 252 | 7 | ||||||||
Construction | - | - | - | - | - | - | ||||||||
Other | 208 | 5 | 237 | 5 | 208 | 7 | ||||||||
Total consumer | 2,043 | 55 | 2,142 | 52 | 1,572 | 60 | ||||||||
Total | $ | 14,780 | 450 | $ | 14,834 | 316 | 14,548 | 416 |
Allowance for Loan Losses
The allowance for loan loss is managements estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company has an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in the portfolio. While the Company attributes portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The Companys process involves procedures to appropriately consider the unique risk characteristics of the commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. The Companys allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.
18
The following table summarizes the activity related to the allowance for loan losses by commercial and consumer portfolio segments:
Nine months ended September 30, 2016 | ||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||
Owner | Non-owner | |||||||||||||||||||||||||||
occupied | occupied | Real | Home | |||||||||||||||||||||||||
(dollars in thousands) | RE | RE | Construction | Business | Estate | equity | Construction | Other | Total | |||||||||||||||||||
Balance, beginning of period | $ | 2,347 | 3,187 | 338 | 3,800 | 2,070 | 1,202 | 313 | 372 | 13,629 | ||||||||||||||||||
Provision for loan losses | 553 | (81 | ) | 2 | 666 | 641 | 236 | (106 | ) | 114 | 2,025 | |||||||||||||||||
Loan charge-offs | (5 | ) | (100 | ) | (43 | ) | (862 | ) | (194 | ) | (66 | ) | - | (192 | ) | (1,462 | ) | |||||||||||
Loan recoveries | - | 32 | - | 250 | - | - | - | 4 | 286 | |||||||||||||||||||
Net loan charge-offs | (5 | ) | (68 | ) | (43 | ) | (612 | ) | (194 | ) | (66 | ) | - | (188 | ) | (1,176 | ) | |||||||||||
Balance, end of period | $ | 2,895 | 3,038 | 297 | 3,854 | 2,517 | 1,372 | 207 | 298 | 14,478 | ||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.15% | |||||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.30% | |||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 258.30% | |||||||||||||||||||||||||||
Nine months ended September 30, 2015 | ||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||
Owner | Non-owner | |||||||||||||||||||||||||||
occupied | occupied | Real | Home | |||||||||||||||||||||||||
(dollars in thousands) | RE | RE | Construction | Business | Estate | equity | Construction | Other | Total | |||||||||||||||||||
Balance, beginning of period | $ | 1,645 | 2,332 | 614 | 3,625 | 1,714 | 1,162 | 236 | 424 | 11,752 | ||||||||||||||||||
Provision for loan losses | 816 | 797 | (304 | ) | 653 | 439 | 75 | 57 | (33 | ) | 2,500 | |||||||||||||||||
Loan charge-offs | (24 | ) | (204 | ) | - | (621 | ) | (173 | ) | (13 | ) | - | (5 | ) | (1,040 | ) | ||||||||||||
Loan recoveries | - | 8 | - | 102 | - | 46 | - | - | 156 | |||||||||||||||||||
Net loan charge-offs | (24 | ) | (196 | ) | - | (519 | ) | (173 | ) | 33 | - | (5 | ) | (884 | ) | |||||||||||||
Balance, end of period | $ | 2,437 | 2,933 | 310 | 3,759 | 1,980 | 1,270 | 293 | 386 | 13,368 | ||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.13% | |||||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.35% | |||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 186.05% |
The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology.
September 30, 2016 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||
Individually evaluated | $ | 2,093 | 695 | 2,788 | 12,333 | 2,033 | 14,366 | ||||||
Collectively evaluated | 7,991 | 3,699 | 11,690 | 712,595 | 387,138 | 1,099,733 | |||||||
Total | $ | 10,084 | 4,394 | 14,478 | 724,928 | 389,171 | 1,114,099 | ||||||
December 31, 2015 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
Commercial | Consumer | Total | Commercial | Consumer | Total | ||||||||
Individually evaluated | $ | 3,544 | 680 | 4,224 | 12,303 | 1,580 | 13,883 | ||||||
Collectively evaluated | 6,128 | 3,277 | 9,405 | 642,878 | 348,183 | 991,061 | |||||||
Total | $ | 9,672 | 3,957 | 13,629 | 655,181 | 349,763 | 1,004,944 |
NOTE 5 Troubled Debt Restructurings
At September 30, 2016, the Company had 27 loans totaling $9.2 million compared to 29 loans totaling $8.0 million at December 31, 2015, which were considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of the workout plan for individual loan relationships, the Company may restructure loan terms to assist borrowers facing financial challenges in the current economic environment. To date, the Company has restored three commercial loans previously classified as TDRs to accrual status.
19
The following table summarizes the concession at the time of modification and the recorded investment in the Companys TDRs before and after their modification during the nine months ended September 30, 2016 and 2015, respectively.
For the nine months ended September 30, 2016 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
modification | modification | |||||||||||||||
Renewals | Reduced | Converted | Maturity | Total | outstanding | outstanding | ||||||||||
deemed a | or deferred | to interest | date | Number | recorded | recorded | ||||||||||
(dollars in thousands) | concession | payments | only | extensions | of loans | investment | investment | |||||||||
Commercial | ||||||||||||||||
Owner occupied | 1 | - | - | - | 1 | $ | 18 | $ | 22 | |||||||
Business | 1 | - | - | - | 1 | 2,381 | 2,381 | |||||||||
Consumer | ||||||||||||||||
Real estate | 1 | - | - | - | 1 | 188 | 188 | |||||||||
Other | 1 | - | - | - | 1 | 26 | 30 | |||||||||
Total loans | 4 | - | - | - | 4 | $ | 2,613 | $ | 2,621 | |||||||
For the nine months ended September 30, 2015 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
modification | modification | |||||||||||||||
Renewals | Reduced | Converted | Maturity | Total | outstanding | outstanding | ||||||||||
deemed a | or deferred | to interest | date | Number | recorded | recorded | ||||||||||
(dollars in thousands) | concession | payments | only | extensions | of loans | investment | investment | |||||||||
Commercial | ||||||||||||||||
Non-owner occupied RE | 1 | - | - | 1 | 2 | $ | 112 | $ | 112 | |||||||
Business | - | - | - | - | - | - | - | |||||||||
Total loans | 1 | - | - | 1 | 2 | $ | 112 | $ | 112 |
As of September 30, 2016 there was one loan with a recorded investment of $30,000 modified as a TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date. There were no such loans as of September 30, 2015.
NOTE 6 Derivative Financial Instruments
The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Companys statement of income during the period of change.
The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (IRLCs) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (MBS) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.
The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge.
20
The following table summarizes the Companys outstanding financial derivative instruments as of September 30, 2016. Derivative financial instruments were not material at December 31, 2015.
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 40,322 | Other assets | $ | 619 | ||||
MBS forward sales commitments | 26,750 | Other assets | (112 | ) | |||||
Total derivative financial instruments | $ | 67,072 | $ | 507 |
NOTE 7 Fair Value Accounting
FASB ASC 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted market price in active markets
Quoted prices in active
markets for identical assets or liabilities. Level 1 assets and liabilities
include certain debt and equity securities that are traded in an active exchange
market.
Level
2 Significant other observable inputs
Observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. Level 2 assets and liabilities include fixed income
securities and mortgage-backed securities that are held in the Companys
available-for-sale portfolio and valued by a third-party pricing service, as
well as certain impaired loans.
Level
3 Significant unobservable inputs
Unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or
estimation. These methodologies may result in a significant portion of the fair
value being derived from unobservable data.
Following is a description of valuation methodologies used for assets recorded at fair value.
Investment Securities
Securities available for sale are
valued on a recurring basis at quoted market prices where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable securities. Level 1 securities include those traded on an active
exchange, such as the New York Stock Exchange or U.S. Treasury securities that
are traded by dealers or brokers in active over-the-counter markets and money
market funds. Level 2 securities include mortgage-backed securities and
debentures issued by government sponsored entities, municipal bonds and
corporate debt securities. In certain cases where there is limited activity or
less transparency around inputs to valuations, securities are classified as
Level 3 within the valuation hierarchy. Securities held to maturity are valued
at quoted market prices or dealer quotes similar to securities available for
sale. The carrying value of Other Investments, such as FHLB stock, approximates
fair value based on their redemption provisions.
21
Mortgage Loans Held for Sale
Loans held for sale include mortgage
loans which are saleable into the secondary mortgage markets and their fair
values are estimated using observable quoted market or contracted prices or
market price equivalents, which would be used by other market participants.
These saleable loans are considered Level 2.
Loans
The Company does not record loans at fair value on a recurring
basis. However, from time to time, a loan may be considered impaired and an
allowance for loan losses may be established. Loans for which it is probable
that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once a loan is
identified as individually impaired, management measures the impairment in
accordance with FASB ASC 310, Receivables. The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value, and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At September 30, 2016, a significant portion of the
impaired loans were evaluated based on the fair value of the collateral. In
accordance with FASB ASC 820, Fair Value Measurement and Disclosures, impaired
loans where an allowance is established based on the fair value of collateral
require classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company considers the impaired loan as nonrecurring Level 2. The Companys
current loan and appraisal policies require the Bank to obtain updated
appraisals on an as is basis at renewal, or in the case of an impaired loan,
on an annual basis, either through a new external appraisal or an appraisal
evaluation. When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company considers the impaired loan
as nonrecurring Level 3. The fair value of impaired loans may also be estimated
using the present value of expected future cash flows to be realized on the
loan, which is also considered a Level 3 valuation. These fair value estimates
are subject to fluctuations in assumptions about the amount and timing of
expected cash flows as well as the choice of discount rate used in the present
value calculation.
Other Real Estate Owned (OREO)
OREO, consisting of properties obtained
through foreclosure or in satisfaction of loans, is reported at the lower of
cost or fair value, determined on the basis of current appraisals, comparable
sales, and other estimates of value obtained principally from independent
sources, adjusted for estimated selling costs (Level 2). At the time of
foreclosure, any excess of the loan balance over the fair value of the real
estate held as collateral is treated as a charge against the allowance for loan
losses. Gains or losses on sale and generally any subsequent adjustments to the
value are recorded as a component of real estate owned activity. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no
observable market price, the Company considers the OREO as nonrecurring Level 3.
Derivative Financial Instruments
The Company estimates the fair value of
IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and
an estimate of the probability that the mortgage loan will fund within the terms
of the IRLC, net of commission expenses (Level 2). The Company estimates the
fair value of forward sales commitments based on quoted MBS prices (Level
2).
22
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.
September 30, 2016 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale | |||||||||
US government agencies | $ | - | 6,399 | - | 6,399 | ||||
SBA securities | - | 1,452 | - | 1,452 | |||||
State and political subdivisions | - | 21,688 | - | 21,688 | |||||
Mortgage-backed securities | - | 38,335 | - | 38,335 | |||||
Interest rate lock commitments | - | 619 | - | 619 | |||||
Total assets measured at fair value on a recurring basis | $ | - | 68,493 | - | 68,493 | ||||
Liabilities | |||||||||
MBS forward sales commitments | $ | - | 112 | - | 112 | ||||
Total liabilities measured at fair value on a recurring basis | $ | - | 112 | - | 112 | ||||
December 31, 2015 | |||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||
Assets | |||||||||
Securities available for sale | |||||||||
US government agencies | $ | - | 14,599 | - | 14,599 | ||||
SBA securities | - | 6,277 | - | 6,277 | |||||
State and political subdivisions | - | 22,259 | - | 22,259 | |||||
Mortgage-backed securities | - | 46,804 | - | 46,804 | |||||
Total assets measured at fair value on a recurring basis | $ | - | 89,939 | - | 89,939 |
The Company has no liabilities carried at fair value or measured at fair value on a recurring basis as of December 31, 2015.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of September 30, 2016. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs. The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015.
As of September 30, 2016 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Impaired loans | $ | - | 5,243 | 6,335 | 11,578 | ||||
Other real estate owned | - | 1,772 | 113 | 1,885 | |||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 7,015 | 6,448 | 13,463 | ||||
As of December 31, 2015 | |||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||
Assets | |||||||||
Impaired loans | $ | - | 9,102 | 557 | 9,659 | ||||
Other real estate owned | - | 2,208 | 267 | 2,475 | |||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 11,310 | 824 | 12,134 |
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015.
23
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows:
Valuation Technique | Significant Unobservable Inputs | Range of Inputs | |||
Impaired loans |
Appraised Value/ |
Discounts to appraisals or
cash flows for estimated holding and/or selling costs or age of appraisal |
0-25% | ||
Other real estate owned |
Appraised Value/ |
Discounts to appraisals
for |
0-25% |
Fair Value of Financial Instruments
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Companys common stock, premises and equipment and other assets and liabilities.
The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments.
Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, federal funds purchased, and securities sold under agreement to repurchase.
Deposits Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
FHLB Advances and Other Borrowings Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
Junior subordinated debentures Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
The Company has used managements best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.
The estimated fair values of the Companys financial instruments at September 30, 2016 and December 31, 2015 are as follows:
September 30, 2016 | |||||||||||
Carrying | Fair | ||||||||||
(dollars in thousands) | Amount | Value | Level 1 | Level 2 | Level 3 | ||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 5,741 | 5,741 | - | - | 5,741 | |||||
Mortgage loans held for sale | 9,126 | 9,126 | - | 9,126 | - | ||||||
Loans, net | 1,099,621 | 1,101,122 | - | 5,243 | 1,095,879 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 1,045,075 | 991,822 | - | 991,822 | - | ||||||
FHLB and other borrowings | 115,200 | 116,565 | - | 116,565 | - | ||||||
Junior subordinated debentures | 13,403 | 11,762 | - | 11,762 | - |
24
December 31, 2015 | |||||||||||
Carrying | Fair | ||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | |||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 5,532 | 5,532 | - | - | 5,532 | |||||
Mortgage loans held for sale | 4,943 | 4,943 | - | 4,943 | - | ||||||
Loans, net | 991,315 | 992,379 | - | 9,102 | 983,277 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 985,733 | 918,303 | - | 918,303 | - | ||||||
FHLB and other borrowings | 115,200 | 117,317 | - | 117,317 | - | ||||||
Junior subordinated debentures | 13,403 | 11,511 | - | 11,511 | - |
NOTE 8 Earnings Per Common Share
The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and nine month periods ended September 30, 2016 and 2015. Dilutive common shares arise from the potentially dilutive effect of the Companys stock options that were outstanding at September 30, 2016. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At September 30, 2016 and 2015, there were 108,457 and 88,000 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.
Three months ended | Nine months ended | |||||||||
September 30, | September 30, | |||||||||
(dollars in thousands, except share data) | 2016 | 2015 | 2016 | 2015 | ||||||
Numerator: | ||||||||||
Net income available to common shareholders | $ | 3,433 | 2,727 | 9,745 | 7,315 | |||||
Denominator: | ||||||||||
Weighted-average common shares outstanding basic | 6,322,073 | 6,205,877 | 6,299,009 | 6,194,418 | ||||||
Common stock equivalents | 418,678 | 373,571 | 403,466 | 348,478 | ||||||
Weighted-average common shares outstanding diluted | 6,740,751 | 6,579,448 | 6,702,475 | 6,542,896 | ||||||
Earnings per common share: | ||||||||||
Basic | $ | 0.54 | $ | 0.44 | 1.55 | 1.18 | ||||
Diluted | $ | 0.51 | $ | 0.41 | 1.45 | 1.12 |
NOTE 9 Reportable Segments
The Companys reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate. The following schedule presents financial information for each reportable segment.
Three months ended September 30, 2016 | ||||||||||||||||
Commercial | ||||||||||||||||
and Retail | Mortgage | |||||||||||||||
(dollars in thousands) | Banking | Banking | Corporate | Eliminations | Consolidated | |||||||||||
Interest income | $ | 12,824 | 87 | 1 | - | 12,912 | ||||||||||
Interest expense | 1,932 | - | 100 | - | 2,032 | |||||||||||
Net interest income (loss) | 10,892 | 87 | (99 | ) | - | 10,880 | ||||||||||
Provision for loan losses | 825 | - | - | - | 825 | |||||||||||
Noninterest income | 1,014 | 2,003 | - | - | 3,017 | |||||||||||
Noninterest expense | 6,484 | 1,256 | 60 | - | 7,800 | |||||||||||
Net income (loss) before taxes | 4,597 | 834 | (159 | ) | - | 5,272 | ||||||||||
Income tax (provision) benefit | (1,596 | ) | (299 | ) | 56 | - | (1,839 | ) | ||||||||
Net income (loss) | $ | 3,001 | 535 | (103 | ) | - | 3,433 | |||||||||
Total assets | $ | 1,277,213 | 9,678 | 119,431 | (116,576 | ) | 1,289,746 |
25
Nine months ended September 30, 2016 | ||||||||||||||||
Commercial | ||||||||||||||||
and Retail | Mortgage | |||||||||||||||
(dollars in thousands) | Banking | Banking | Corporate | Eliminations | Consolidated | |||||||||||
Interest income | $ | 37,501 | 243 | 1 | (1 | ) | 37,744 | |||||||||
Interest expense | 5,750 | - | 295 | (1 | ) | 6,044 | ||||||||||
Net interest income (loss) | 31,751 | 243 | (294 | ) | - | 31,700 | ||||||||||
Provision for loan losses | 2,025 | - | - | - | 2,025 | |||||||||||
Noninterest income | 3,036 | 5,685 | - | - | 8,721 | |||||||||||
Noninterest expense | 19,516 | 3,471 | 183 | - | 23,170 | |||||||||||
Net income before taxes | 13,246 | 2,457 | (477 | ) | - | 15,226 | ||||||||||
Income tax (provision) benefit | (4,686 | ) | (909 | ) | 114 | - | (5,481 | ) | ||||||||
Net income (loss) | $ | 8,560 | 1,548 | (363 | ) | - | 9,745 | |||||||||
Total assets | $ | 1,277,213 | 9,678 | 119,431 | (116,576 | ) | 1,289,746 |
Commercial and retail banking. The Companys primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.
Mortgage banking. The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors.
Corporate. Corporate is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion reviews our results of operations for the three and nine month periods ended September 30, 2016 as compared to the three and nine month periods ended September 30, 2015 and assesses our financial condition as of September 30, 2016 as compared to December 31, 2015. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K for that period. Results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 or any future period.
CAUTIONARY WARNING REGARDING FORWARD-LOOKING STATEMENTS
This report, including information included or incorporated by reference in this report, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words may, would, could, should, will, expect, anticipate, predict, project, potential, believe, continue, assume, intend, plan, and estimate, as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described under Item 1A- Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015, as well as the following:
● | Restrictions or conditions imposed by our regulators on our operations; |
● |
Increases in competitive pressure in the banking and financial services industries; |
26
● | Our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand, including our newly announced Raleigh, North Carolina market; |
● | The time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; |
● | Changes in access to funding or increased regulatory requirements with regard to funding; |
● | Changes in deposit flows; |
● | Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors; |
● | Credit losses due to loan concentration; |
● | Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; |
● | Our ability to attract and retain key personnel; |
● | Changes in the interest rate environment which could reduce anticipated or actual margins; |
● | Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry; |
● | Changes in economic conditions resulting in, among other things, a deterioration in credit quality; |
● | Changes occurring in business conditions and inflation; |
● | Cybersecurity breaches, including potential business disruptions or financial losses; |
● | Changes in technology; |
● | The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods; |
● | Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets; |
● | Changes in monetary and tax policies; |
● | The rate of delinquencies and amounts of loans charged-off; |
● | The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; |
● | Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements; |
● | Adverse changes in asset quality and resulting credit risk-related losses and expenses; |
● | Changes in accounting policies and practices; and |
● |
Other risks and uncertainties detailed in this Quarterly Report on Form 10-Q and, from time to time, in our other filings with the Securities and Exchange Commission (the SEC). |
If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see Risk Factors under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements.
27
OVERVIEW
Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as "ClientFIRST."
At September 30, 2016, we had total assets of $1.29 billion, a 6.0% increase from total assets of $1.22 billion at December 31, 2015. The largest components of our total assets are net loans and securities which were $1.10 billion and $73.6 million, respectively, at September 30, 2016. Comparatively, our net loans and securities totaled $991.3 million and $95.5 million, respectively, at December 31, 2015. Our liabilities and shareholders equity at September 30, 2016 totaled $1.18 billion and $106.0 million, respectively, compared to liabilities of $1.12 billion and shareholders equity of $94.2 million at December 31, 2015. The principal component of our liabilities is deposits which were $1.05 billion and $985.7 million at September 30, 2016 and December 31, 2015, respectively. We received a short-term client deposit of approximately $40 million in June 2016; however, a majority of the deposit was withdrawn in early July 2016.
Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.
Our net income to common shareholders was $3.4 million and $2.7 million for the three months ended September 30, 2016 and 2015, respectively, an increase of $706 thousand, or 25.9%. Diluted earnings per share (EPS) was $0.51, for the third quarter of 2016 as compared to $0.41 for the same period in 2015. The increase in net income resulted primarily from increases in net interest income and noninterest income, partially offset by an increase in noninterest and income tax expenses.
Our net income to common shareholders was $9.7 million and $7.3 million for the nine months ended September 30, 2016 and 2015, respectively, an increase of $2.4 million, or 33.2%. Diluted EPS was $1.45 for the nine months ended September 30, 2016 as compared to $1.12 for the same period in 2015. The increase in net income resulted primarily from increases in net interest income and noninterest income, partially offset by an increase in noninterest and income tax expenses.
Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.
RESULTS OF OPERATIONS
Net Interest Income and Margin
Our level of net interest income is
determined by the level of earning assets and the management of our net interest
margin. Our net interest income was $10.9 million for the three month period
ended September 30, 2016, a 10.6% increase over net interest income of $9.8
million for the same period in 2015. In comparison, our average earning assets
increased 10.6%, or $115.2 million, during the third quarter of 2016 compared to
the third quarter of 2015, while our interest-bearing liabilities increased by
$65.8 million during the same period. Our net interest income was $31.7 million
for the nine month period ended September 30, 2016, an 11.6% increase over net
interest income of $28.4 million for the same period in 2015. In comparison, our
average earning assets increased 12.5%, or $129.3 million, during the first nine
months of 2016 compared to the first nine months of 2015, while our
interest-bearing liabilities increased by $88.9 million during the same period.
The increase in average earning assets is primarily related to an increase in
average loans and investment securities, while the increase in average
interest-bearing liabilities is primarily a result of an increase in
interest-bearing deposits.
28
We have included a number of tables to assist in our description of various measures of our financial performance. For example, the Average Balances, Income and Expenses, Yields and Rates table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three and nine month periods ended September 30, 2016 and 2015. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the Rate/Volume Analysis table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.
The following tables set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.
Average Balances, Income and Expenses, Yields and Rates | |||||||||||||||||
For the Three Months Ended September 30, | |||||||||||||||||
2016 | 2015 | ||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||
(dollars in thousands) | Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | |||||||||||
Interest-earning assets | |||||||||||||||||
Federal funds sold | $ | 22,611 | $ | 31 | 0.55 | % | $ | 46,547 | $ | 33 | 0.28 | % | |||||
Investment securities, taxable | 60,219 | 267 | 1.76 | % | 45,114 | 251 | 2.21 | % | |||||||||
Investment securities, nontaxable(2) | 21,095 | 206 | 3.89 | % | 16,206 | 194 | 4.74 | % | |||||||||
Loans(3) | 1,097,201 | 12,486 | 4.53 | % | 978,051 | 11,362 | 4.61 | % | |||||||||
Total interest-earning assets | 1,201,126 | 12,990 | 4.30 | % | 1,085,918 | 11,840 | 4.33 | % | |||||||||
Noninterest-earning assets | 60,801 | 54,918 | |||||||||||||||
Total assets | $ | 1,261,927 | $ | 1,140,836 | |||||||||||||
Interest-bearing liabilities | |||||||||||||||||
NOW accounts | $ | 205,795 | 78 | 0.15 | % | $ | 166,072 | 63 | 0.15 | % | |||||||
Savings & money market | 326,722 | 329 | 0.40 | % | 280,117 | 284 | 0.40 | % | |||||||||
Time deposits | 267,609 | 550 | 0.82 | % | 295,282 | 594 | 0.80 | % | |||||||||
Total interest-bearing deposits | 800,126 | 957 | 0.48 | % | 741,471 | 941 | 0.50 | % | |||||||||
FHLB advances and other borrowings | 122,308 | 980 | 3.19 | % | 115,200 | 904 | 3.11 | % | |||||||||
Junior subordinated debentures | 13,403 | 95 | 2.82 | % | 13,403 | 83 | 2.46 | % | |||||||||
Total interest-bearing liabilities | 935,837 | 2,032 | 0.86 | % | 870,074 | 1,928 | 0.88 | % | |||||||||
Noninterest-bearing liabilities | 221,797 | 180,494 | |||||||||||||||
Shareholders equity | 104,293 | 90,268 | |||||||||||||||
Total liabilities and shareholders equity | $ | 1,261,927 | $ | 1,140,836 | |||||||||||||
Net interest spread | 3.44 | % | 3.45 | % | |||||||||||||
Net interest income (tax equivalent) / margin | $ | 10,958 | 3.63 | % | $ | 9,912 | 3.62 | % | |||||||||
Less: tax-equivalent adjustment(2) | 78 | 74 | |||||||||||||||
Net interest income | $ | 10,880 | $ | 9,838 |
(1) | Annualized for the three month period. | ||
(2) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. | ||
(3) | Includes mortgage loans held for sale. |
Our net interest margin, on a tax-equivalent basis, was 3.63% for the three months ended September 30, 2016 compared to 3.62% for the third quarter of 2015. While the yield on our interest-earning assets decreased by three basis points, our net interest margin increased by one basis point during the 2016 period as our interest-earning assets grew by $115.2 million at an average rate of 4.30% compared to growth of $65.8 million in interest-bearing liabilities at an average cost of 0.86%.
29
Our average interest-earning assets increased by $115.2 million for the three months ended September 30, 2016 as compared to the same quarter in 2015, primarily related to an $119.2 million increase in our average loan balances during the 2016 period. However, the yield on our interest-earning assets decreased by three basis points driven by an eight basis point decrease in our loan yield. The decline in yield on our loan portfolio was driven primarily by loans being originated or renewed at market rates which are lower than those in the past.
In addition, our average interest-bearing liabilities increased by $65.8 million during the third quarter of 2016 as compared to the third quarter of 2015, while the cost of our interest-bearing liabilities declined by two basis points during the same period. The slight reduction in cost during the 2016 period resulted primarily from a $58.7 million increase in our interest-bearing deposits which have a lower cost than our other interest-bearing liabilities. In addition, the cost of our other interest-bearing liabilities, of which 56% are at variable rates tied to LIBOR, increased in relation to current market rates and trends.
Our net interest spread was 3.44% for the three months ended September 30, 2016 compared to 3.45% for the same period in 2015. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The three basis point reduction in yield on our interest-earning assets, slightly offset by the two basis point decrease in rate on our interest-bearing liabilities, resulted in a one basis point decrease in our net interest spread for the 2016 period.
For the Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | ||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||
(dollars in thousands) | Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | |||||||||
Interest-earning assets | |||||||||||||||
Federal funds sold | $ | 27,746 | $ | 122 | 0.59% | $ | 35,173 | $ | 79 | 0.30% | |||||
Investment securities, taxable | 64,502 | 949 | 1.97% | 43,112 | 777 | 2.41% | |||||||||
Investment securities, nontaxable (2) | 20,745 | 634 | 4.08% | 15,436 | 524 | 4.54% | |||||||||
Loans | 1,052,804 | 36,280 | 4.60% | 942,791 | 32,703 | 4.64% | |||||||||
Total interest-earning assets | 1,165,797 | 37,985 | 4.35% | 1,036,512 | 34,083 | 4.40% | |||||||||
Noninterest-earning assets | 70,827 | 54,056 | |||||||||||||
Total assets | $ | 1,236,624 | $ | 1,090,568 | |||||||||||
Interest-bearing liabilities | |||||||||||||||
NOW accounts | $ | 201,257 | 242 | 0.16% | $ | 168,080 | 213 | 0.17% | |||||||
Savings & money market | 325,271 | 999 | 0.41% | 253,667 | 740 | 0.39% | |||||||||
Time deposits | 269,780 | 1,650 | 0.82% | 285,211 | 1,610 | 0.75% | |||||||||
Total interest-bearing deposits | 796,308 | 2,891 | 0.48% | 706,958 | 2,563 | 0.48% | |||||||||
Note payable and other borrowings | 117,934 | 2,873 | 3.25% | 118,374 | 2,678 | 3.02% | |||||||||
Junior subordinated debentures | 13,403 | 280 | 2.79% | 13,403 | 244 | 2.43% | |||||||||
Total interest-bearing liabilities | 927,645 | 6,044 | 0.87% | 838,735 | 5,485 | 0.87% | |||||||||
Noninterest-bearing liabilities | 208,396 | 164,234 | |||||||||||||
Shareholders equity | 100,583 | 87,599 | |||||||||||||
Total liabilities and shareholders equity | $ | 1,236,624 | $ | 1,090,568 | |||||||||||
Net interest spread | 3.48% | 3.53% | |||||||||||||
Net interest income (tax equivalent) / margin | $ | 31,941 | 3.66% | $ | 28,598 | 3.69% | |||||||||
Less: tax-equivalent adjustment (2) | 241 | 199 | |||||||||||||
Net interest income | $ | 31,700 | $ | 28,399 |
(1) | Annualized for the nine month period. | ||
(2) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. | ||
(3) | Includes mortgage loans held for sale. |
30
Our net interest margin, on a tax-equivalent basis, was 3.66% for the nine months ended September 30, 2016 compared to 3.69% for the first nine months of 2015. The decrease in net interest margin for the first nine months of 2016 as compared to the same period in 2015 was driven primarily by a five basis point reduction in the yield on our interest-earning assets.
Our average interest-earning assets increased by $129.3 million for the first nine months of 2016 as compared to the 2015 period due primarily to a $110.0 million increase in our average loan balances for the 2016 period. However, the yield on our interest-earning assets decreased by five basis points due primarily to a four basis point decrease in our loan yield combined with a lower yield on our investment securities. The decline in yield on our loan portfolio was driven primarily by loans being originated or renewed at market rates which are lower than those in the past.
In addition, our average interest-bearing liabilities increased by $88.9 million during the nine months ended September 30, 2016 as compared to the first nine months of 2015. Both the cost of our interest-bearing liabilities and interest-bearing deposits remained flat during the same period, despite the $89.4 million increase in our average interest-bearing deposits. In addition, the cost of our other interest-bearing liabilities, of which 56% are at variable rates tied to LIBOR, increased in relation to current market rates and trends.
Our net interest spread was 3.48% for the nine months ended September 30, 2016 compared to 3.53% for the same period in 2015. The five basis point decrease in our net interest spread for the 2016 period was driven by the five basis point reduction in yield on our interest-earning assets.
Rate/Volume Analysis
Net interest income can be analyzed in
terms of the impact of changing interest rates and changing volume. The
following table sets forth the effect which the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income for the periods presented.
Three Months Ended | |||||||||||||||||||||||||
September 30, 2016 vs. 2015 | September 30, 2015 vs. 2014 | ||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||||
Rate/ | Rate/ | ||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Total | Volume | Rate | Volume | Total | |||||||||||||||||
Interest income | |||||||||||||||||||||||||
Loans | $ | 1,343 | (195 | ) | (24 | ) | 1,124 | $ | 1,781 | (210 | ) | (38 | ) | 1,533 | |||||||||||
Investment securities | 116 | (69 | ) | (23 | ) | 24 | (15 | ) | (15 | ) | 1 | (29 | ) | ||||||||||||
Federal funds sold | (18 | ) | 32 | (16 | ) | (2 | ) | 6 | 3 | - | 9 | ||||||||||||||
Total interest income | 1,441 | (232 | ) | (63 | ) | 1,146 | 1,772 | (222 | ) | (37 | ) | 1,513 | |||||||||||||
Interest expense | |||||||||||||||||||||||||
Deposits | 85 | (63 | ) | (6 | ) | 16 | 144 | 66 | 13 | 223 | |||||||||||||||
FHLB advances and other borrowings | 54 | 21 | 1 | 76 | (75 | ) | 17 | (1 | ) | (59 | ) | ||||||||||||||
Junior subordinated debt | - | 12 | - | 12 | - | 2 | - | 2 | |||||||||||||||||
Total interest expense | 139 | (30 | ) | (5 | ) | 104 | 69 | 85 | 12 | 166 | |||||||||||||||
Net interest income | $ | 1,302 | (202 | ) | (58 | ) | 1,042 | $ | 1,703 | (307 | ) | (49 | ) | 1,347 |
Net interest income, the largest component of our income, was $10.9 million for the three-month period ended September 30, 2016 and $9.8 million for the three months ended September 30, 2015, a $1.0 million, or 10.6%, increase during the third quarter of 2016. The increase in net interest income is due to a $1.1 million increase in interest income, partially offset by a $104,000 increase in interest expense. During the third quarter of 2016, the primary driver of the increase in net interest income was the $115.2 million increase in our average interest-earning assets as compared to the third quarter of 2015.
31
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2016 vs. 2015 | September 30, 2015 vs. 2014 | |||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
Rate/ | Rate/ | |||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Total | Volume | Rate | Volume | Total | ||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans | $ | 3,713 | (122 | ) | (14 | ) | 3,577 | $ | 5,255 | (428 | ) | (80 | ) | 4,747 | ||||||||||
Investment securities | 495 | (175 | ) | (80 | ) | 240 | (223 | ) | (63 | ) | 10 | (276 | ) | |||||||||||
Federal funds sold | (17 | ) | 76 | (16 | ) | 43 | 13 | 10 | 2 | 25 | ||||||||||||||
Total interest income | 4,191 | (221 | ) | (110 | ) | 3,860 | 5,045 | (481 | ) | (68 | ) | 4,496 | ||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits | 382 | (47 | ) | (7 | ) | 328 | 398 | 60 | 11 | 469 | ||||||||||||||
Note payable and other | (10 | ) | 206 | (1 | ) | 195 | (147 | ) | (23 | ) | 1 | (169 | ) | |||||||||||
Junior subordinated debt | - | 36 | - | 36 | - | 3 | - | 3 | ||||||||||||||||
Total interest expense | 372 | 195 | (8 | ) | 559 | 251 | 40 | 12 | 303 | |||||||||||||||
Net interest income | $ | 3,819 | (416 | ) | (102 | ) | 3,301 | $ | 4,794 | (521 | ) | (80 | ) | 4,193 |
Net interest income for the nine months ended September 30, 2016 was $31.7 million compared to $28.4 million for the first nine months ended September 30, 2015, a $3.3 million, or 11.6% increase during the first nine months of 2016. The increase in net interest income is due to a $3.9 million increase in interest income, offset in part by a $559,000 increase in interest expense. The $129.3 million increase in average earning assets during the nine months ended September 30, 2016 as compared to nine months ended September 30, 2015 was the primary driver of the increase in net interest income during the 2016 period.
Provision for Loan
Losses
We have established an allowance
for loan losses through a provision for loan losses charged as an expense on our
consolidated statements of income. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the performance of the
portfolio and the adequacy of the allowance for loan losses. Please see the
discussion below under Balance Sheet Review Allowance for Loan Losses for a
description of the factors we consider in determining the amount of the
provision we expense each period to maintain this allowance.
For the three and nine months ended September 30, 2016, we incurred a noncash expense related to the provision for loan losses of $825,000 and $2.0 million, respectively, which resulted in an allowance for loan losses of $14.5 million, or 1.30% of gross loans, for the 2016 period. For the three and nine months ended September 30, 2015, our provision for loan losses of $875,000 and $2.5 million, respectively, resulted in an allowance for loan losses of $13.4 million, or 1.35% of gross loans, for the 2015 period. During the past 12 months, our loan balances increased by $120.9 million, while the amount of our nonperforming loans and classified loans declined. Factors such as these are also considered in determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an adequate level.
Noninterest Income | ||||||||
The following table sets forth information related to our noninterest income. | ||||||||
Three months ended | Nine months ended | |||||||
September 30, | September 30, | |||||||
(dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||
Mortgage banking income | $ | 2,003 | 1,332 | 5,685 | 3,816 | |||
Service fees on deposit accounts | 269 | 230 | 732 | 676 | ||||
Income from bank owned life insurance | 187 | 167 | 553 | 498 | ||||
Gain on sale of investment securities | 106 | 2 | 431 | 297 | ||||
Other income | 452 | 393 | 1,320 | 1,093 | ||||
Total noninterest income | $ | 3,017 | 2,124 | 8,721 | 6,380 |
32
Noninterest income increased $893,000, or 42.0%, for the third quarter of 2016 as compared to the same period in 2015. The increase in total noninterest income during this 2016 period resulted primarily from the following:
● |
Mortgage banking income increased by $671,000, or 50.4%, driven primarily by a transition to mandatory delivery of mortgage loans to the secondary market in April 2016 (which traditionally results in a higher profit margin upon sale) combined with an increased volume of loans originated. In addition, we have added two mortgage originators to our mortgage team within the past 12 months which has contributed to the increased volume in mortgage loan originations. |
● |
Service fees on deposit accounts increased $39,000, or 17.0%, driven by increased non-sufficient funds (NSF) and overdraft fee income. |
● |
Gain on sale of investment securities increased to $106,000 for the third quarter of 2016. |
● |
Other income increased $59,000, or 15.0%, driven by increased appraisal review fees, rental income, ATM and debit card exchange income, and wire transfer fees. |
Noninterest income increased $2.3 million, or 36.7%, during the nine months ended September 30, 2016 as compared to the same period in 2015. The increase in total noninterest income during the nine months ended September 30, 2016 resulted primarily from a $1.9 million increase in mortgage banking income, a $56,000 increase in service fees on deposit accounts, a $55,000 increase in income from bank owned life insurance, a $134,000 increase in gain on sale of investment securities, and a $227,000 increase in other income which consists primarily of loan fee income from late charges, line of credit fees, and appraisal review fees; ATM and debit card transactions; wire transfer fees; and rent income from tenants at our Columbia, South Carolina office.
In accordance with the requirement set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in June 2011, the Federal Reserve approved a final rule which caps an issuer's base interchange fee at 21 cents per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Although the rule does not apply to institutions with less than $10 billion in assets, such as our Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. Our ATM/Debit card fee income is included in other noninterest income and was $220,000 and $201,000 for the three months ended September 30, 2016 and 2015, respectively, and $641,000 and $573,000 for the nine months ended September 30, 2016 and 2015, respectively, the majority of which related to interchange fee income.
Noninterest expenses
The following table sets forth
information related to our noninterest expenses.
Three months ended | Nine months ended | ||||||||
September 30, | September 30, | ||||||||
(dollars in thousands) | 2016 | 2015 | 2016 | 2015 | |||||
Compensation and benefits | $ | 4,948 | $ | 4,313 | 14,353 | 12,695 | |||
Occupancy | 908 | 845 | 2,670 | 2,424 | |||||
Real estate owned expenses | 81 | 148 | 725 | 1,003 | |||||
Data processing and related costs | 690 | 588 | 1,916 | 1,747 | |||||
Insurance | 227 | 215 | 678 | 630 | |||||
Professional fees | 326 | 180 | 864 | 646 | |||||
Marketing | 195 | 217 | 625 | 677 | |||||
Other | 425 | 365 | 1,339 | 1,155 | |||||
Total noninterest expense | $ | 7,800 | $ | 6,871 | 23,170 | 20,977 |
Noninterest expense was $7.8 million for the three months ended September 30, 2016, a $929,000, or 13.5%, increase from noninterest expense of $6.9 million for the three months ended September 30, 2015. Significant fluctuations in noninterest expenses resulted from the following:
● |
Compensation and benefits expense increased $635,000, or 14.7%, relating primarily to increases in base compensation, incentive compensation and benefits expenses. Base compensation increased by $1.0 million driven by the cost of 10 additional employees, four of which were hired in conjunction with the opening of our new office in Raleigh, North Carolina, with the remainder being hired to support our mortgage department as well as service our clients and support loan and deposit growth. Incentive compensation increased by $127,000, while benefits expense decreased by $79,000 during the 2016 period. The increase in incentive compensation related to the additional number of employees at September 30, 2016 while the decrease in benefits expenses was driven by a decrease in retirement expenses for the 2016 period. |
33
● |
Occupancy expenses increased by $63,000, or 7.5%, driven by increased rent expense as well as additional insurance and property tax expenses on the properties we own. |
● |
Data processing and related costs increased by $102,000, or 17.3%, driven by increased software licensing and maintenance costs as well as ATM/Debit card related expenses. |
● |
Professional fees increased by $146,000, or 81.1%, due to increased legal and accounting costs primarily related to the increased size of our institution as well as professional service fees related to our mortgage operations. |
● |
Other noninterest expenses increased by $60,000, or 16.4%, driven by an increase in travel and entertainment expenses, collection expenses, and deposit account losses. |
Partially offsetting the increases in noninterest expense was a decrease in real estate owned expenses of $67,000, or 45.3%, due primarily to a loss on sale of property during the 2015 period.
Our efficiency ratio was 56.1% for the third quarter of 2016 compared to 57.4% for the same period in 2015. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income.
Noninterest expense for the nine months ended September 30, 2016 increased 10.5%, or $2.2 million, as compared to the nine months ended September 30, 2015. The increase was driven primarily by the $1.7 million increase in compensation and benefits expense which relates to the 10 additional employees during the 2016 period, as stated above. In addition, noninterest expense also included increases of $246,000 in occupancy expense, $169,000 in data processing and related costs, $218,000 in professional fees, and $184,000 in other noninterest expenses. Partially offsetting the increases in noninterest expense was a decrease of $278,000 in real estate owned expenses during the first nine months of 2016.
We incurred income tax expense of $1.8 million for the three months ended September 30, 2016 as compared to $1.5 million during the same period in 2015. Income tax expense for the nine months ended September 30, 2016 was $5.5 million as compared to $4.0 million for the same period of 2015. Our effective tax rate was 36.0% and 35.3% for the nine months ended September 30, 2016 and 2015, respectively. The increase in the effective tax rate during the 2016 period is primarily a result of the lesser impact of tax-exempt income.
BALANCE SHEET REVIEW
Investment Securities
At September 30, 2016, the $73.6 million
in our investment securities portfolio represented approximately 5.7% of our
total assets. Our available for sale investment
portfolio included US government agency securities, SBA securities, state and
political subdivisions, and mortgage-backed securities with a fair value of $67.9 million and an amortized cost of $66.8
million resulting in an unrealized gain of $1.1 million. At December 31, 2015,
the $95.5 million in our investment securities portfolio represented
approximately 7.8% of our total assets. At December 31, 2015, we held investment
securities available for sale with a fair value and amortized cost of $89.9
million for an unrealized loss of $6,000.
Loans
Since loans typically provide higher interest yields than
other types of interest earning assets, a substantial percentage of our earning
assets are invested in our loan portfolio. Average loans, excluding mortgage
loans held for sale, for the nine months ended September 30, 2016 and 2015 were
$1.05 billion and $931.6 million, respectively. Before the allowance for loan
losses, total loans outstanding at September 30, 2016 and December 31, 2015 were
$1.11 billion and $1.00 billion, respectively.
34
The principal component of our loan portfolio is loans secured by real estate mortgages. As of September 30, 2016, our loan portfolio included $905.0 million, or 81.2%, of real estate loans. As of December 31, 2015, real estate loans made up 81.4% of our loan portfolio and totaled $818.1 million. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. We do not generally originate traditional long term residential mortgages to hold in our loan portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled $132.6 million as of September 30, 2016, of which approximately 37% were in a first lien position, while the remaining balance was second liens, compared to $116.6 million as of December 31, 2015, with approximately 33% in first lien positions and the remaining balance in second liens. The average loan had a balance of approximately $91,000 and a loan to value of 72% as of September 30, 2016, compared to an average loan balance of $91,000 and a loan to value of approximately 70% as of December 31, 2015. Further, 0.6% of our total home equity lines of credit were over 30 days past due as of both September 30, 2016 and December 31, 2015.
Following is a summary of our loan composition at September 30, 2016 and December 31, 2015. During the first nine months of 2016, our loan portfolio increased by $109.2 million, or 10.9%. Our commercial and consumer loan portfolios experienced similar growth during the nine months ended September 30, 2016 with a 10.6% increase in commercial loans and an 11.3% increase in consumer loans during the period. Of the $109.2 million in loan growth during the first nine months of 2016, $86.9 million of the increase was in loans secured by real estate, and $19.7 million in commercial business loans. Our consumer real estate portfolio includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $336,000, compared to $309,000 at December 31, 2015, a term of nine years, and an average rate of 4.37% as of both September 30, 2016 and December 31, 2015.
September 30, 2016 | December 31, 2015 | ||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | |||||||
Commercial | |||||||||||
Owner occupied RE | $ | 267,652 | 24.0% | $ | 236,083 | 23.5% | |||||
Non-owner occupied RE | 235,273 | 21.1% | 205,604 | 20.5% | |||||||
Construction | 30,564 | 2.7% | 41,751 | 4.1% | |||||||
Business | 191,439 | 17.2% | 171,743 | 17.1% | |||||||
Total commercial loans | 724,928 | 65.0% | 655,181 | 65.2% | |||||||
Consumer | |||||||||||
Real estate | 210,356 | 18.9% | 174,802 | 17.4% | |||||||
Home equity | 132,623 | 11.9% | 116,563 | 11.6% | |||||||
Construction | 28,568 | 2.6% | 43,318 | 4.3% | |||||||
Other | 17,624 | 1.6% | 15,080 | 1.5% | |||||||
Total consumer loans | 389,171 | 35.0% | 349,763 | 34.8% | |||||||
Total gross loans, net of deferred fees | 1,114,099 | 100.0% | 1,004,944 | 100.0% | |||||||
Lessallowance for loan losses | (14,478 | ) | (13,629 | ) | |||||||
Total loans, net | $ | 1,099,621 | $ | 991,315 |
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Nonperforming assets
Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrowers financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of September 30, 2016 and December 31, 2015, we had no loans 90 days past due and still accruing.
Following is a summary of our nonperforming assets, including nonaccruing TDRs.
(dollars in thousands) | September 30, 2016 | December 31, 2015 | ||
Commercial | $ | 4,631 | 5,653 | |
Consumer | 533 | 263 | ||
Nonaccruing troubled debt restructurings | 441 | 701 | ||
Total nonaccrual loans | 5,605 | 6,617 | ||
Other real estate owned | 1,885 | 2,475 | ||
Total nonperforming assets | $ | 7,490 | 9,092 |
At September 30, 2016, nonperforming assets were $7.5 million, or 0.58% of total assets and 0.67% of gross loans. Comparatively, nonperforming assets were $9.1 million, or 0.75% of total assets and 0.90% of gross loans at December 31, 2015. Nonaccrual loans were $5.6 million at September 30, 2016, a $1.0 million decrease from December 31, 2015. During the first nine months of 2016, seven loans were put on nonaccrual status and nine nonaccrual loans were either paid or charged-off. The amount of foregone interest income on the nonaccrual loans in the first nine months of 2016 and 2015 was approximately $341,000 and $286,000, respectively.
Nonperforming assets include other real estate owned which totaled $1.9 million at September 30, 2016, a $590,000 decrease from December 31, 2015. The balance at September 30, 2016 includes six commercial properties totaling $1.5 million and three residential properties totaling $364,000. All of these properties are located in the Upstate of South Carolina and Georgia. We believe that these properties are appropriately valued at the lower of cost or market as of September 30, 2016.
At September 30, 2016 and 2015, the allowance for loan losses represented 258.3% and 186.0% of the total amount of nonperforming loans, respectively. A significant portion, or 98%, of nonperforming loans at September 30, 2016 is secured by real estate. Our nonperforming loans have been written down to approximately 57% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of $14.5 million as of September 30, 2016 to be adequate.
As a general practice, most of our loans are originated with relatively short maturities of less than 10 years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using the same credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonperforming after evaluating the loans collateral value and financial strength of its guarantors. Nonperforming loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases the Company will seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, the Company will typically seek performance under the guarantee.
In addition, at September 30, 2016, 81.2% of our loans are collateralized by real estate and 88.0% of our impaired loans are secured by real estate. The Company utilizes third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Company to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of September 30, 2016, we do not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.
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At September 30, 2016, impaired loans totaled $14.4 million for which $9.1 million of these loans have a reserve of approximately $2.8 million allocated in the allowance. During the first nine months of 2016, the average recorded investment in impaired loans was approximately $14.8 million. Comparatively, impaired loans totaled $13.9 million at December 31, 2015, and $9.4 million of these loans had a reserve of approximately $4.2 million allocated in the allowance. During 2015, the average recorded investment in impaired loans was approximately $14.5 million.
We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of September 30, 2016, we determined that we had loans totaling $9.2 million that we considered TDRs. As of December 31, 2015, we had loans totaling $8.0 million, that we considered TDRs.
Allowance for Loan
Losses
The allowance for loan losses was
$14.5 million and $13.4 million at September 30, 2016 and 2015, respectively, or
1.30% of outstanding loans at September 30, 2016 and 1.34% of outstanding loans
at September 30, 2015. At December 31, 2015, our allowance for loan losses was
$13.6 million, or 1.36% of outstanding loans, and we had net loans charged-off
of $1.3 million for the year ended December 31, 2015.
During the nine months ended September 30, 2016, we charged-off $1.5 million of loans and recorded $286,000 of recoveries on loans previously charged-off, for net charge-offs of $1.2 million, or 0.15% of average loans, annualized. Comparatively, we charged-off $1.0 million of loans and recorded $156,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $884,000, or 0.13% of average loans, annualized, for the first nine months of 2015.
Following is a summary of the activity in the allowance for loan losses.
Nine months ended | ||||||||||
September 30, | Year ended | |||||||||
(dollars in thousands) | 2016 | 2015 | December 31, 2015 | |||||||
Balance, beginning of period | $ | 13,629 | $ | 11,752 | 11,752 | |||||
Provision | 2,025 | 2,500 | 3,200 | |||||||
Loan charge-offs | (1,462 | ) | (1,040 | ) | (1,508 | ) | ||||
Loan recoveries | 286 | 156 | 185 | |||||||
Net loan charge-offs | (1,176 | ) | (884 | ) | (1,323 | ) | ||||
Balance, end of period | $ | 14,478 | $ | 13,368 | 13,629 |
Deposits and Other Interest-Bearing
Liabilities
Our primary source of funds
for loans and investments is our deposits, advances from the FHLB, and
structured repurchase agreements. In the past, we have chosen to obtain a
portion of our certificates of deposits from areas outside of our market in
order to obtain longer term deposits than are
readily available in our local market. We have adopted guidelines regarding our
use of brokered CDs that limit our brokered CDs to 25% of total deposits and
dictate that our current interest rate risk profile determines the terms. In
addition, we do not obtain time deposits of $100,000 or more through the
Internet. These guidelines allow us to take advantage of the attractive terms
that wholesale funding can offer while mitigating the related inherent risk.
Our retail deposits represented $976.1 million, or 93.4% of total deposits at September 30, 2016, while our out-of-market, or brokered, deposits represented $68.9 million, or 6.6% of our total deposits at September 30, 2016. At December 31, 2015, retail deposits represented $926.8 million, or 94.0% of our total deposits, and brokered CDs were $58.9 million, representing 6.0% of our total deposits. Our loan-to-deposit ratio was 107% at September 30, 2016 and 102% at December 31, 2015.
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The following is a detail of our deposit accounts:
September 30, | December 31, | ||||
(dollars in thousands) | 2016 | 2015 | |||
Non-interest bearing | $ | 222,165 | 189,686 | ||
Interest bearing: | |||||
NOW accounts | 212,880 | 194,835 | |||
Money market accounts | 317,253 | 311,167 | |||
Savings | 14,040 | 10,806 | |||
Time, less than $100,000 | 52,496 | 60,153 | |||
Time and out-of-market deposits, $100,000 and over | 226,241 | 219,086 | |||
Total deposits | $ | 1,045,075 | 985,733 |
During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $880.4 million and $840.2 million at September 30, 2016, and December 31, 2015, respectively. In late June 2016, we received a short-term deposit of approximately $40 million into a NOW account; however, a majority of this deposit was withdrawn in early July 2016.
The following table shows the average balance amounts and the average rates paid on deposits.
Nine months ended | ||||||||||
September 30, | ||||||||||
2016 | 2015 | |||||||||
(dollars in thousands) | Amount | Rate | Amount | Rate | ||||||
Noninterest bearing demand deposits | $ | 198,166 | -% | $ | 155,921 | -% | ||||
Interest bearing demand deposits | 201,257 | 0.16% | 168,080 | 0.17% | ||||||
Money market accounts | 312,833 | 0.42% | 244,787 | 0.40% | ||||||
Savings accounts | 12,438 | 0.05% | 8,880 | 0.07% | ||||||
Time deposits less than $100,000 | 56,034 | 0.73% | 61,564 | 0.76% | ||||||
Time deposits greater than $100,000 | 213,746 | 0.84% | 223,647 | 0.75% | ||||||
Total deposits | $ | 994,474 | 0.39% | $ | 862,879 | 0.40% |
During the twelve months ended September 30, 2016, our average transaction account balances increased by $147.0 million, or 25.5%, from the nine months ended September 30, 2015, while our average time deposit balances decreased by $15.4 million during the same twelve-month period.
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at September 30, 2016 was as follows:
(dollars in thousands) | September 30, 2016 | |
Three months or less | $ | 72,396 |
Over three through six months | 39,364 | |
Over six through twelve months | 67,701 | |
Over twelve months | 46,780 | |
Total | $ | 226,241 |
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Included in time deposits of $100,000 or more at September 30, 2016 is $68.9 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 0.75%. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at September 30, 2016 and December 31, 2015 were $164.7 million and $145.5 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
At September 30, 2016 and December 31, 2015, our liquid assets, consisting of cash and due from banks and federal funds sold, amounted to $41.9 million and $62.9 million, or 3.2% and 5.2% of total assets, respectively. Our investment securities at September 30, 2016 and December 31, 2015 amounted to $73.6 million and $95.5 million, or 5.7% and 7.8% of total assets, respectively. The decrease in liquid assets and investment securities is primarily attributable to our intentional decrease of these asset classes in favor of funding new loan growth. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately 55% of these securities are pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash. In addition, approximately 20% of our investment securities are pledged to secure client deposits.
Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain three federal funds purchased lines of credit with correspondent banks totaling $45.0 million for which there were no borrowings against the lines of credit at September 30, 2016.
We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at September 30, 2016 was $144.9 million, based on the Banks $5.2 million investment in FHLB stock, as well as qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at September 30, 2016 and December 31, 2015 we had $103.0 million and $114.9 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.
We also have a line of credit with another financial institution for $10 million, which was unused at September 30, 2016. The line of credit bears interest at LIBOR plus 2.90% with a floor of 3.25% and a ceiling of 5.15%, and matures on June 6, 2017.
We believe that our existing stable base of core deposits, borrowings from the FHLB, and short-term repurchase agreements will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.
Total shareholders equity at September 30, 2016 was $106.0 million. At December 31, 2015, total shareholders equity was $94.2 million. The $11.8 million increase from December 31, 2015 is primarily related to net income of $9.7 million during the first nine months of 2016, combined with a $740,000 increase in accumulated other comprehensive income and $1.3 million related to equity compensation transactions.
39
The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the nine months ended September 30, 2016 and the year ended December 31, 2015. Since our inception, we have not paid cash dividends.
September 30, 2016 | December 31, 2015 | ||
Return on average assets | 1.05% | 0.90% | |
Return on average equity | 12.94% | 11.42% | |
Return on average common equity | 12.94% | 11.42% | |
Average equity to average assets ratio | 8.13% | 7.93% | |
Tangible common equity to assets ratio | 8.22% | 7.74% |
At both the holding company and Bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
Regulatory capital rules released in July 2013 to implement capital standards referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with more than $1 billion in total consolidated assets. More stringent requirements are imposed on advanced approaches banking organizations-those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The requirements in the rule began to phase in on January 1, 2015, for us. The requirements in the rule will be fully phased in by January 1, 2019.
The rule includes certain new and higher risk-based capital and leverage requirements than those currently in place. Specifically, the following minimum capital requirements apply to us:
● |
a new common equity Tier 1 risk-based capital ratio of 4.5%; |
● |
a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement); |
● |
a total risk-based capital ratio of 8% (unchanged from the former requirement); and |
● |
a leverage ratio of 4% (also unchanged from the former requirement). |
Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a onetime opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.
40
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a capital conservation buffer on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, we are required to hold a capital conservation buffer of 0.625%, increasing by that amount each successive year until 2019.
In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.
It is managements belief that, as of September 30, 2016, the Company and the Bank would have met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.
September 30, 2016 | ||||||||||||
To be well capitalized | ||||||||||||
under prompt | ||||||||||||
For capital | corrective | |||||||||||
adequacy purposes | action provisions | |||||||||||
Actual | minimum | minimum | ||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||
Total Capital (to risk weighted assets) | $ | 128,183 | 11.77% | 87,120 | 8.00% | 108,899 | 10.00% | |||||
Tier 1 Capital (to risk weighted assets) | 114,560 | 10.52% | 65,120 | 6.00% | 87,120 | 8.00% | ||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 114,560 | 10.52% | 49,005 | 4.50% | 70,785 | 6.50% | ||||||
Tier 1 Capital (to average assets) | 114,560 | 9.10% | 56,633 | 4.00% | 62,925 | 5.00% |
The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.
September 30, 2016 | |||||||||||
To be well capitalized | |||||||||||
under prompt | |||||||||||
For capital | corrective | ||||||||||
adequacy purposes | action provisions | ||||||||||
Actual | minimum | minimum | |||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||
Total Capital (to risk weighted assets) | 131,910 | 12.11% | 87,120 | 8.00% | N/A | N/A | |||||
Tier 1 Capital (to risk weighted assets) | 118,287 | 10.86% | 65,340 | 6.00% | N/A | N/A | |||||
Common Equity Tier 1 Capital (to risk weighted assets) | 105,287 | 9.67% | 49,005 | 4.50% | N/A | N/A | |||||
Tier 1 Capital (to average assets) | 118,287 | 9.38% | 50,454 | 4.00% | N/A | N/A |
The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.
EFFECT OF INFLATION AND CHANGING PRICES
The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.
41
OFF-BALANCE SHEET RISK
Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At September 30, 2016, unfunded commitments to extend credit were $214.9 million, of which $55.2 million was at fixed rates and $159.6 million was at variable rates. At December 31, 2015, unfunded commitments to extend credit were $194.7 million, of which approximately $61.8 million was at fixed rates and $133.0 million was at variable rates. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each clients credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
At both September 30, 2016 and December 31, 2015, there were commitments under letters of credit for $4.7 million and $4.3 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
A portion of our business is to originate mortgage loans that will be sold in the secondary market to investors. Loan types that we originate include conventional loans, jumbo loans and other governmental agency loan products. We adhere to the legal lending limits and guidelines as set forth by the various governmental agencies and investors to whom we sell loans. Under a best efforts selling procedure, we make our best effort to process, fund, and deliver the loan to a particular investor. If the loan fails to fund, there is no immediate cost to us, as the market risk has been transferred to the investor. In the event of a customer loan default, we may be required to reimburse the investor.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
MARKET RISK AND INTEREST RATE SENSITIVITY
Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (ALCO) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
42
As of September 30, 2016, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, managements assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.
Change in net interest | ||
Interest rate scenario | income from base | |
Up 300 basis points | 5.63 | % |
Up 200 basis points | 4.50 | % |
Up 100 basis points | 2.48 | % |
Base | - | |
Down 100 basis points | (6.06 | )% |
Down 200 basis points | (9.33 | )% |
Down 300 basis points | (11.78 | )% |
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2015, as filed in our Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
ACCOUNTING, REPORTING, AND REGULATORY MATTERS
Recently Issued Accounting Standards
The following is a summary of recent
authoritative pronouncements that could affect accounting, reporting, and
disclosure of financial information by us:
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The Company does not expect these amendments to have a material effect on its financial statements.
43
In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. These amendments did not have a material effect on the Companys financial statements.
In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all of its previous consolidation conclusions. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. These amendments did not have a material effect on the Companys financial statements.
In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
44
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Market Risk and Interest Rate Sensitivity and Liquidity Risk.
Item 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in the Companys internal control over financial reporting during the three months ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 1. LEGAL
PROCEEDINGS.
We are a party to claims and lawsuits arising in the course of
normal business activities. Management is not aware of any material pending
legal proceedings against the Company which, if determined adversely, would have
a material adverse impact on the companys financial position, results of
operations or cash flows.
Item 1A RISK
FACTORS.
Investing in shares of our common stock involves certain
risks, including those identified and described in Item 1A of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2015, as well as cautionary
statements contained in this Form 10-Q, including those under the caption
Cautionary Warning Regarding Forward-Looking Statements set forth in Part 1,
Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form
10-Q and in our other filings with the SEC.
Item 2. UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR
SECURITIES.
Not applicable
Item 4. MINE SAFETY
DISCLOSURES.
Not applicable
Item 5. OTHER
INFORMATION.
Not applicable
Item 6.
EXHIBITS.
The exhibits required to be filed as part of this Quarterly
Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are
incorporated herein by reference.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOUTHERN FIRST BANCSHARES, INC. | ||
Registrant | ||
Date: October 31, 2016 | /s/R. Arthur Seaver, Jr. | |
R. Arthur Seaver, Jr. | ||
Chief Executive Officer (Principal Executive Officer) | ||
Date: October 31, 2016 | /s/Michael D. Dowling | |
Michael D. Dowling | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |
46
INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. | |
31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. | |
32 | Section 1350 Certifications. | |
101 |
The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended September 30, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements. |
47
Exhibit 31.1
Rule 13a-14(a) Certification of the Principal Executive Officer.
Exhibit 31.1
Rule 13a-14(a) Certification of the Principal Executive Officer.
I, R. Arthur Seaver, Jr., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Southern First Bancshares, Inc.; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
a) | All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: October 31, 2016 | By: | /s/ R. Arthur Seaver, Jr. | |
R. Arthur Seaver, Jr. | |||
Chief Executive Officer |
Exhibit 31.2
Rule 13a-14(a) Certification of the Principal Financial Officer.
Exhibit 31.2
Rule 13a-14(a) Certification of the Principal Financial Officer.
I, Michael D. Dowling, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Southern First Bancshares, Inc.; | |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
a) | All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: October 31, 2016 | By: | /s/ Michael D. Dowling | |
Michael D. Dowling | |||
Chief Financial Officer |
Exhibit 32
Section 1350 Certifications.
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the Chief Executive Officer and the Chief Financial Officer of Southern First Bancshares, Inc. (the "Company"), each certify that, to his knowledge on the date of this certification:
1. | The quarterly report of the Company for the period ended September 30, 2016 as filed with the Securities and Exchange Commission on this date (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ R. Arthur Seaver, Jr. | |
R. Arthur Seaver, Jr. | |
Chief Executive Officer | |
Date: October 31, 2016 | |
/s/ Michael D. Dowling | |
Michael D. Dowling | |
Chief Financial Officer | |
Date: October 31, 2016 |
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Oct. 25, 2016 |
|
Document and Entity Information [Abstract] | ||
Entity Registrant Name | SOUTHERN FIRST BANCSHARES INC | |
Entity Central Index Key | 0001090009 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2016 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q3 | |
Entity Filer Category | Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 6,382,666 |
Consolidated Balance Sheets (Parenthetical) - $ / shares |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Balance Sheets [Abstract] | ||
Preferred stock, par value | $ 0.01 | $ 0.01 |
Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, shares issued | ||
Preferred stock, shares outstanding | ||
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 10,000,000 | 10,000,000 |
Common stock, shares issued | 6,382,666 | 6,289,038 |
Common stock, shares outstanding | 6,382,666 | 6,289,038 |
Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Interest income | ||||
Loans | $ 12,486 | $ 11,362 | $ 36,280 | $ 32,703 |
Investment securities | 395 | 371 | 1,342 | 1,102 |
Federal funds sold | 31 | 33 | 122 | 79 |
Total interest income | 12,912 | 11,766 | 37,744 | 33,884 |
Interest expense | ||||
Deposits | 957 | 941 | 2,891 | 2,563 |
Borrowings | 1,075 | 987 | 3,153 | 2,922 |
Total interest expense | 2,032 | 1,928 | 6,044 | 5,485 |
Net interest income | 10,880 | 9,838 | 31,700 | 28,399 |
Provision for loan losses | 825 | 875 | 2,025 | 2,500 |
Net interest income after provision for loan losses | 10,055 | 8,963 | 29,675 | 25,899 |
Noninterest income | ||||
Mortgage banking income | 2,003 | 1,332 | 5,685 | 3,816 |
Service fees on deposit accounts | 269 | 230 | 732 | 676 |
Income from bank owned life insurance | 187 | 167 | 553 | 498 |
Gain on sale of investment securities | 106 | 2 | 431 | 297 |
Other income | 452 | 393 | 1,320 | 1,093 |
Total noninterest income | 3,017 | 2,124 | 8,721 | 6,380 |
Noninterest expenses | ||||
Compensation and benefits | 4,948 | 4,313 | 14,353 | 12,695 |
Occupancy | 908 | 845 | 2,670 | 2,424 |
Real estate owned expenses | 81 | 148 | 725 | 1,003 |
Data processing and related costs | 690 | 588 | 1,916 | 1,747 |
Insurance | 227 | 215 | 678 | 630 |
Professional fees | 326 | 180 | 864 | 646 |
Marketing | 195 | 217 | 625 | 677 |
Other | 425 | 365 | 1,339 | 1,155 |
Total noninterest expenses | 7,800 | 6,871 | 23,170 | 20,977 |
Income before income tax expense | 5,272 | 4,216 | 15,226 | 11,302 |
Income tax expense | 1,839 | 1,489 | 5,481 | 3,987 |
Net income available to common shareholders | $ 3,433 | $ 2,727 | $ 9,745 | $ 7,315 |
Earnings per common share | ||||
Basic | $ 0.54 | $ 0.44 | $ 1.55 | $ 1.18 |
Diluted | $ 0.51 | $ 0.41 | $ 1.45 | $ 1.12 |
Weighted average common shares outstanding | ||||
Basic | 6,322,073 | 6,205,877 | 6,299,009 | 6,194,418 |
Diluted | 6,740,751 | 6,579,448 | 6,702,475 | 6,542,896 |
Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Statements of Comprehensive Income (Loss) [Abstract] | ||||
Net income | $ 3,433 | $ 2,727 | $ 9,745 | $ 7,315 |
Unrealized gain (loss) on securities available for sale: | ||||
Unrealized holding gain (loss) arising during the period, pretax | (222) | 604 | 1,552 | 272 |
Tax (expense) benefit | 75 | (205) | (528) | (92) |
Reclassification of realized gain | (106) | (2) | (431) | (297) |
Tax expense | 37 | 1 | 147 | 101 |
Other comprehensive income (loss) | (216) | 398 | 740 | (16) |
Comprehensive income | $ 3,217 | $ 3,125 | $ 10,485 | $ 7,299 |
Nature of Business and Basis of Presentation |
9 Months Ended |
---|---|
Sep. 30, 2016 | |
Nature of Business and Basis of Presentation [Abstract] | |
Nature of Business and Basis of Presentation | NOTE 1 – Nature of Business and Basis of Presentation Business Activity Basis of Presentation Use of Estimates Business Segments Reclassifications Subsequent Events In accordance with ASC 825-10 – Financial Instruments, the Company adopted the fair value option for mortgage loans held for sale beginning on April 1, 2016. ASC 825-10 allows the Company to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value and to offset changes in the fair values of derivative instruments and the related hedged item by selecting the fair value option for the hedged item. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. Prior to adoption, mortgage loans held for sale were carried at the lower of cost or fair value. |
Investment Securities |
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Investment Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment Securities | NOTE 2 – Investment Securities The amortized costs and fair value of investment securities are as follows:
During the first nine months of 2016, approximately $33.5 million of investment securities were either sold or called, subsequently resulting in a gain on sale of investment securities of $431,000. Contractual maturities and yields on the Company’s investment securities at September 30, 2016 and December 31, 2015 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at September 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
At September 30, 2016, the Company had eight individual investments with a fair market value of $9.3 million that were in an unrealized loss position for less than 12 months and one individual investment with a fair market value of $2.3 million that was in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. The Company also considers other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, the Company has concluded that these securities are not impaired on an other-than-temporary basis. Other investments are comprised of the following and are recorded at cost which approximates fair value.
At September 30, 2016, $20.9 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $16.8 million of securities were pledged to secure client deposits. At December 31, 2015, $21.3 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $11.1 million of securities were pledged to secure client deposits. |
Mortgage Loans Held for Sale |
9 Months Ended |
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Sep. 30, 2016 | |
Mortgage Loans Held for Sale [Abstract] | |
Mortgage Loans Held for Sale | NOTE 3 – Mortgage Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option, which was adopted by the Company on April 1, 2016, with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At September 30, 2016, mortgage loans held for sale totaled $9.1 million compared to $4.9 million at December 31, 2015. Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in mortgage banking income in the statement of income. Mortgage banking income also includes the unrealized gains and losses associated with the loans held for sale and the realized and unrealized gains and losses from derivatives. Mortgage loans sold to investors by the Company, and which were believed to have met investor and agency underwriting guidelines at the time of sale, may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans. |
Loans and Allowance for Loan Losses |
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Loans and Allowance for Loan Losses [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and Allowance for Loan Losses | NOTE 4 – Loans and Allowance for Loan Losses The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $1.9 million as of September 30, 2016 and $1.7 million as of December 31, 2015.
Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.
Portfolio Segment Methodology Commercial Consumer Credit Quality Indicators Commercial The Company categorizes its loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:
The tables below provide a breakdown of outstanding commercial loans by risk category.
The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.
As of September 30, 2016 and December 31, 2015, loans 30 days or more past due represented 0.33% and 0.66% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.19% and 0.60% of the Company’s total loan portfolio as of September 30, 2016 and December 31, 2015, respectively. Consumer The tables below provide a breakdown of outstanding consumer loans by risk category.
The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.
As of September 30, 2016 and December 31, 2015, consumer loans 30 days or more past due were 0.14% and 0.06% of total loans, respectively. Nonperforming assets The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Following is a summary of our nonperforming assets, including nonaccruing TDRs.
Impaired Loans The table below summarizes key information for impaired loans. The Company’s impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.
The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
Allowance for Loan Losses The allowance for loan loss is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Company has an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in the portfolio. While the Company attributes portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The Company’s process involves procedures to appropriately consider the unique risk characteristics of the commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. The Company’s allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions. The following table summarizes the activity related to the allowance for loan losses by commercial and consumer portfolio segments:
The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology.
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Troubled Debt Restructurings |
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Troubled Debt Restructurings [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Troubled Debt Restructurings | NOTE 5 – Troubled Debt Restructurings At September 30, 2016, the Company had 27 loans totaling $9.2 million compared to 29 loans totaling $8.0 million at December 31, 2015, which were considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of the workout plan for individual loan relationships, the Company may restructure loan terms to assist borrowers facing financial challenges in the current economic environment. To date, the Company has restored three commercial loans previously classified as TDRs to accrual status. The following table summarizes the concession at the time of modification and the recorded investment in the Company’s TDRs before and after their modification during the nine months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016 there was one loan with a recorded investment of $30,000 modified as a TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date. There were no such loans as of September 30, 2015. |
Derivative Financial Instruments |
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Derivative Financial Instruments | NOTE 6 – Derivative Financial Instruments The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change. The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses. The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge. The following table summarizes the Company’s outstanding financial derivative instruments as of September 30, 2016. Derivative financial instruments were not material at December 31, 2015.
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Fair Value Accounting |
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Fair Value Accounting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Accounting | NOTE 7 – Fair Value Accounting FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted market price in active markets Level 2 – Significant other observable inputs Level 3 – Significant unobservable inputs Following is a description of valuation methodologies used for assets recorded at fair value. Investment Securities Mortgage Loans Held for Sale Loans Other Real Estate Owned (“OREO”) Derivative Financial Instruments Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.
The Company has no liabilities carried at fair value or measured at fair value on a recurring basis as of December 31, 2015. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of September 30, 2016. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs. The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015.
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015. For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value of Financial Instruments Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities. The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments. Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, federal funds purchased, and securities sold under agreement to repurchase. Deposits – Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. FHLB Advances and Other Borrowings – Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Junior subordinated debentures – Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented. The estimated fair values of the Company’s financial instruments at September 30, 2016 and December 31, 2015 are as follows:
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Earnings Per Common Share |
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Earnings Per Common Share | NOTE 8 – Earnings Per Common Share The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and nine month periods ended September 30, 2016 and 2015. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at September 30, 2016. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At September 30, 2016 and 2015, there were 108,457 and 88,000 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.
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Reportable Segments |
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Reportable Segments | NOTE 9 – Reportable Segments The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate. The following schedule presents financial information for each reportable segment.
Commercial and retail banking. The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients. Mortgage banking. The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors. Corporate. Corporate is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt. |
Nature of Business and Basis of Presentation (Policies) |
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Nature of Business and Basis of Presentation [Abstract] | |
Business Activity | Business Activity |
Basis of Presentation | Basis of Presentation |
Use of Estimates | Use of Estimates |
Business Segments | Business Segments |
Reclassifications | Reclassifications |
Subsequent Events | Subsequent Events |
Initial Adoption of Fair Value Option | Initial Adoption of Fair Value Option |
Investment Securities (Tables) |
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Summary of amortized costs and fair value of investment securities |
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Summary of contractual maturities and yields |
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Summary of gross unrealized losses on investment securities and fair market value of related securities |
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Summary of other investments |
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Loans and Allowance for Loan Losses (Tables) |
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financing Receivable, Allowance for Credit Losses [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of composition of loan portfolio |
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Summary of loan maturity distribution by type and related interest rate |
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Summary of nonperforming assets, including nonaccruing TDRs |
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Summary of key information for impaired loans |
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Summary of average recorded investment and interest income recognized on impaired loans |
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Summary of allowance for loan losses by commercial and consumer portfolio segments |
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Summary of allowance for loan losses and recorded investment in loans by impairment methodology |
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Commercial [Member] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financing Receivable, Allowance for Credit Losses [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of breakdown of outstanding loans by risk category |
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Summary of outstanding loans which include loans on nonaccrual by past due status |
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Consumer [Member] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financing Receivable, Allowance for Credit Losses [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of breakdown of outstanding loans by risk category |
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Summary of outstanding loans which include loans on nonaccrual by past due status |
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Troubled Debt Restructurings (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Troubled Debt Restructurings [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of concession at the time of modification and the recorded investment in TDRs before and after their modification |
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Derivative Financial Instruments (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Financial Instruments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of outstanding financial derivative instruments |
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Fair Value Accounting (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Accounting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of assets and liabilities measured at fair value on recurring basis |
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Schedule of assets and liabilities measured on a nonrecurring basis |
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Schedule of unobservable inputs used in the fair value measurements |
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Estimated fair values of the company's financial instruments |
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Earnings Per Common Share (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Earnings Per Common Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of earnings per share reconciliation |
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Reportable Segments (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reportable Segments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of financial information for each reportable segment |
|
Investment Securities (Details 3) - USD ($) $ in Thousands |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Other investments | ||
Federal Home Loan Bank stock | $ 5,173 | $ 5,005 |
Investment in Trust Preferred securities | 403 | 403 |
Other investments | 165 | 124 |
Total other investments | $ 5,741 | $ 5,532 |
Investment Securities (Details Textual) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2016
USD ($)
Investment
|
Sep. 30, 2015
USD ($)
|
Sep. 30, 2016
USD ($)
Investment
|
Sep. 30, 2015
USD ($)
|
Dec. 31, 2015
USD ($)
Investment
|
|
Investment Securities (Textual) | |||||
Sale of investment securities | $ 33,500 | ||||
Gain on sale of investment securities | $ 106 | $ 2 | 431 | $ 297 | |
Fair market value, less than 12 months | 9,300 | 9,300 | |||
Fair market value, 12 months or longer | 2,300 | 2,300 | |||
Securities pledged as collateral for repurchase agreements from brokers | 20,900 | 20,900 | $ 21,300 | ||
Securities pledged to secure client deposit | $ 16,800 | $ 16,800 | $ 11,100 | ||
Number of investments, less than 12 months | Investment | 8 | 8 | 43 | ||
Number of investments, 12 months or longer | Investment | 1 | 1 | 5 |
Mortgage Loans Held for Sale (Details) - USD ($) $ in Millions |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Mortgage Loans Held for Sale (Textual) | ||
Mortgage loans held for sale, fair value | $ 9.1 | $ 4.9 |
Loans and Allowance for Loan Losses (Details Textual) - USD ($) $ in Millions |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Loans and Allowance for Loan Losses (Textual) | ||
Net of deferred loan fees and costs | $ 1.9 | $ 1.7 |
Part of loans of 30 days or More past due as a percentage of total loan portfolio | 0.33% | 0.66% |
Commercial [Member] | ||
Loans and Allowance for Loan Losses (Textual) | ||
Part of loans of 30 days or More past due as a percentage of total loan portfolio | 0.19% | 0.60% |
Consumer [Member] | ||
Loans and Allowance for Loan Losses (Textual) | ||
Part of loans of 30 days or More past due as a percentage of total loan portfolio | 0.14% | 0.06% |
Troubled Debt Restructurings (Details Textual) $ in Thousands |
9 Months Ended | |
---|---|---|
Sep. 30, 2016
USD ($)
Investment
|
Dec. 31, 2015
USD ($)
Investment
|
|
Troubled Debt Restructurings (Textual) | ||
Total number of loans classified under troubled debt restructurings (TDRs) | Investment | 27 | 29 |
Total sum of loans classified as troubled debt restructurings (TDRs) | $ | $ 9,200 | $ 8,000 |
Number of months previous loan payment defaulted | 12 months | |
Modified investment amount | $ | $ 30,000 | |
Number of loans | Investment | 1 |
Fair Value Accounting (Details 1) - Fair Value, Measurements, Nonrecurring [Member] - USD ($) $ in Thousands |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Assets | ||
Impaired loans | $ 11,578 | $ 9,659 |
Other real estate owned | 1,885 | 2,475 |
Total assets measured at fair value on a nonrecurring basis | 13,463 | 12,134 |
Fair Value, Level 1 [Member] | ||
Assets | ||
Impaired loans | ||
Other real estate owned | ||
Total assets measured at fair value on a nonrecurring basis | ||
Fair Value, Level 2 [Member] | ||
Assets | ||
Impaired loans | 5,243 | 9,102 |
Other real estate owned | 1,772 | 2,208 |
Total assets measured at fair value on a nonrecurring basis | 7,015 | 11,310 |
Fair Value, Level 3 [Member] | ||
Assets | ||
Impaired loans | 6,335 | 557 |
Other real estate owned | 113 | 267 |
Total assets measured at fair value on a nonrecurring basis | $ 6,448 | $ 824 |
Fair Value Accounting (Details Textual) |
9 Months Ended |
---|---|
Sep. 30, 2016 | |
Fair Value Accounting (Textual) | |
Percentage of loans collateralize by real estate, description | More than 80 |
Earnings Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Numerator: | ||||
Net income available to common shareholders | $ 3,433 | $ 2,727 | $ 9,745 | $ 7,315 |
Denominator: | ||||
Weighted-average common shares outstanding - basic | 6,322,073 | 6,205,877 | 6,299,009 | 6,194,418 |
Common stock equivalents | 418,678 | 373,571 | 403,466 | 348,478 |
Weighted-average common shares outstanding - diluted | 6,740,751 | 6,579,448 | 6,702,475 | 6,542,896 |
Earnings per common share: | ||||
Basic | $ 0.54 | $ 0.44 | $ 1.55 | $ 1.18 |
Diluted | $ 0.51 | $ 0.41 | $ 1.45 | $ 1.12 |
Earnings Per Common Share (Details Textual) - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Earnings Per Common Share (Textual) | ||
Anti-dilutive securities excluded from computation of earnings per share, amount | 108,457 | 88,000 |
Reportable Segments (Details Textual) |
9 Months Ended |
---|---|
Sep. 30, 2016
Segments
| |
Reportable Segments (Textual) | |
Number of segments | 3 |
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