EX-99.1 2 d482332dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

Clayton Bank and Trust and American City Bank

(wholly-owned subsidiaries of Clayton HC, Inc.)

(“Clayton Banks”)

Combined Financial Statements (unaudited)

As of and for the Six Months Ended June 30, 2017 and 2016


Table of Contents

 

     Page  

Financial Statements

  

Combined Balance Sheets (unaudited)

     1  

Combined Statements of Income (unaudited)

     2  

Combined Statements of Comprehensive Income (unaudited)

     3  

Combined Statements of Changes in Shareholder’s Equity (unaudited)

     4  

Combined Statements of Cash Flows (unaudited)

     5  

Notes to Combined Financial Statements (unaudited)

     7  


CLAYTON BANKS

Combined Balance Sheet (unaudited)

(dollars in thousands, except for per share amounts)

 

      June 30,      December 31,  
     2017      2016  

ASSETS

     

Cash and cash equivalents

     

Cash and due from banks

   $ 28,705      $ 37,735  

Federal funds sold

     595        11,857  
  

 

 

    

 

 

 

Total cash and cash equivalents

     29,300        49,592  
  

 

 

    

 

 

 

Securities

     

Securities available for sale, at fair value

     46,650        52,981  

Securities held to maturity, at cost

     13,519        13,691  
  

 

 

    

 

 

 

Total securities

     60,169        66,672  
  

 

 

    

 

 

 

Loans, net of discounts and unearned income

     1,069,267        1,052,570  

Less: allowance for loan losses

     20,437        20,395  
  

 

 

    

 

 

 

Net loans

     1,048,830        1,032,175  
  

 

 

    

 

 

 

Other assets

     

Premises and equipment, net of accumulated depreciation

     22,450        22,662  

Goodwill

     8,425        8,425  

Federal Home Loan Bank stock, at cost

     3,408        3,370  

Accrued interest receivable

     4,800        5,050  

Other real estate owned

     2,917        3,103  

Cash surrender value of life insurance

     467        464  

Repossessed assets

     3,036        263  

Other

     4,269        3,040  
  

 

 

    

 

 

 

Total other assets

     49,772        46,377  
  

 

 

    

 

 

 

Total assets

   $ 1,188,071      $ 1,194,816  
  

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

     

Liabilities

     

Deposits

     

Non-interest bearing

   $ 212,813      $ 193,525  

Interest bearing

     679,133        724,849  
  

 

 

    

 

 

 

Total deposits

     891,946        918,374  

Federal funds purchased

     —          308  

Federal Home Loan Bank advances

     64,883        52,414  

Accrued interest payable

     574        553  

Other liabilities

     6,202        9,590  
  

 

 

    

 

 

 

Total liabilities

     963,605        981,239  
  

 

 

    

 

 

 

Shareholder’s Equity

     

CBT Common stock, $25 par value; authorized 200,000 shares; 153,600 shares issued and outstanding and ACB Common stock $362.09 par value; authorized 105,000; 1,000 shares issued and outstanding

     4,202        4,202  

Additional paid in capital

     89,902        89,902  

Retained earnings

     128,939        118,389  

Accumulated other comprehensive income, net of applicable taxes

     1,423        1,084  
  

 

 

    

 

 

 

Total shareholder’s equity

     224,466        213,577  
  

 

 

    

 

 

 

Total liabilities and shareholder’s equity

   $ 1,188,071      $ 1,194,816  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

See accompanying notes to unaudited combined financial statements

 

1


CLAYTON BANKS

Combined Income Statement (unaudited)

(dollars in thousands)

 

      Six Months Ended  
     June 30,  
     2017     2016  

Interest income:

    

Loans, including fees

   $ 33,433     $ 29,123  

Securities

     1,050       1,192  

Other

     177       164  
  

 

 

   

 

 

 

Total interest income

     34,660       30,479  
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     2,897       2,711  

Other borrowings

     695       629  
  

 

 

   

 

 

 

Total interest expense

     3,592       3,340  
  

 

 

   

 

 

 

Net interest income

     31,068       27,139  

Provision for loan losses

     486       508  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     30,582       26,631  
  

 

 

   

 

 

 

Non-interest income:

    

Service charges on deposit accounts

     388       416  

Trust fee income

     449       368  

Net loss on sales of foreclosed real estate owned and other assets

     (101     (105

Loan servicing income

     1,112       947  

Other non-interest income

     1,180       1,133  
  

 

 

   

 

 

 

Total non-interest income

     3,028       2,759  
  

 

 

   

 

 

 

Non-interest expense:

    

Salaries and employee benefits

     6,780       7,258  

Occupancy and equipment

     1,256       1,166  

FDIC and state banking fees

     239       313  

Collection expense

     235       97  

Amortization of intangible assets

     —         29  

Professional fees

     306       171  

Other non-interest expense

     2,078       1,780  
  

 

 

   

 

 

 

Total non-interest expense

     10,894       10,814  
  

 

 

   

 

 

 

Income before income taxes

     22,716       18,571  

State income tax expense

     1,716       1,271  
  

 

 

   

 

 

 

Net income

   $ 21,000     $ 17,305  
  

 

 

   

 

 

 
    

 

 

   

 

 

 

See accompanying notes to unaudited combined financial statements

 

2


CLAYTON BANKS

Combined Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

      Six Months Ended June 30,  
     2017     2016  

Net Income

   $ 21,000     $ 17,305  

Other comprehensive income, net of income taxes

    

Net change in unrealized gains on securities available for sale, net of tax effect

     339       401  

Reclassification adjustment for gain on sale of securities included in net income, net of tax expense of $1 and $2

     (20     (24
  

 

 

   

 

 

 

Total comprehensive income

   $ 21,319     $ 17,682  
  

 

 

   

 

 

 
    

 

 

   

 

 

 

See accompanying notes to unaudited combined financial statements

 

3


CLAYTON BANKS

Combined Statements of Changes in Shareholder’s Equity (unaudited)

(dollars in thousands)

 

                             Accumulated          
            Additional            Other      Total  
     Common      Paid In      Retained     Comprehensive      Shareholder’s  
     Stock      Capital      Earnings     Income      Equity  

Balance, December 31, 2015

   $ 4,202      $ 89,902      $ 101,242     $ 2,086      $ 197,432  

Net income

     —          —          17,305       —          17,305  

Dividends declared

     —          —          (11,000     —          (11,000

Other comprehensive income

     —          —          —         401        401  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance, June 30, 2016

   $ 4,202      $ 89,902      $ 107,547     $ 2,487      $ 204,138  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance, December 31, 2016

   $ 4,202      $ 89,902      $ 118,389     $ 1,084      $ 213,577  

Net income

     —          —          21,000       —          21,000  

Dividends declared

     —          —          (10,450     —          (10,450

Other comprehensive income

     —          —          —         339        339  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance, June 30, 2017

   $ 4,202      $ 89,902      $ 128,939     $ 1,423      $ 224,466  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to unaudited combined financial statements

 

4


CLAYTON BANKS

Combined Statements of Cash Flows (unaudited)

(dollars in thousands)

 

      Six Months Ended June 30,  
     2017     2016  

Cash flows from operating activities:

    

Net income

   $ 21,000     $ 17,305  

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     266       305  

Provision for loan losses

     486       508  

Net accretion of discounts and amortization of premiums on securities

     72       119  

Net gains on sales of securities

     (21     (26

Net loss on sales of foreclosed real estate owned and other assets

     101       105  

Net change in:

    

Accrued interest receivable

     250       (39

Accrued interest payable

     21       74  

Other, net

     (4,584     6,960  
  

 

 

   

 

 

 

Net cash flows from operating activities

     17,591       25,311  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Available-for-sale securities:

    

Sales

     4,366       537  

Maturities, prepayments and calls

     2,285       5,626  

Held-to-maturity securities

    

Maturities, prepayments and calls

     164       —    

Purchase of FHLB Stock

     (38     —    

Net change in loans

     (17,966     (37,999

Purchases of premises and equipment

     (90     (50

Proceeds from the sales of foreclosed real estate and other assets

     515       865  
  

 

 

   

 

 

 

Net cash from (used in) investing activities

     (10,764     (31,021
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net change in deposits

     (26,428     38,157  

Proceeds from FHLB advances

     27,000       —    

Repayments of FHLB advances

     (14,531     (531

Repayments of federal funds purchased

     (308     (10,587

Dividends paid

     (12,852     (11,000
  

 

 

   

 

 

 

Net cash flows from (used in) financing activities

     (27,119     16,039  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (20,292     10,329  

Cash and cash equivalents at the beginning of the period

     49,592       44,459  
  

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 29,300     $ 54,788  

 

 

See accompanying notes to unaudited combined financial statements

 

5


CLAYTON BANKS

Combined Statements of Cash Flows (Continued) (unaudited)

(dollars in thousands)

 

 

      Six Months Ended June 30,  
     2017      2016  

Supplemental disclosures of cash flow information:

     

Cash paid during year for:

     

Interest

   $ 3,571      $ 6,669  

Income taxes, net of refunds

     2,425        2,650  

Supplemental schedule of non-cash activities:

     

Transfers from loans to other real estate owned

   $ 266      $ 490  

Transfers from loans to repossessed assets

     2,774        573  

See accompanying notes to unaudited combined financial statements

 

6


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Combination - The combined financial statements include Clayton Bank and Trust and American City Bank, together referred to as “Clayton Banks” or “the Banks.” Intercompany transactions and balances are eliminated in consolidation. The Banks are wholly-owned by Clayton HC Inc.

The Banks provide financial services through its branches in the counties of Chester, Blount, Knox, Madison, Tipton, Crockett, Henderson, Putnam, Franklin, Coffee, Moore, and Fayette, Tennessee. Their primary deposit products are checking, savings, and term certificate accounts, and their primary lending products are residential mortgage including Manufactured Housing, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. However, the customers’ ability to repay their loans is dependent on the cash flow of borrowers, which can be impacted by the general economic conditions in the area.

Basis of Presentation - The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices of the banking industry. The Combined Balance Sheet at December 31, 2016 has been derived from the audited combined financial statements included in the prospectus filed by FB Financial Corporation (“FBK”) on July 7, 2017. Certain prior period amounts have been reclassified to conform to the current period presentation without any impact on the reported amounts of net income or shareholders’ equity.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan loss, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the determination of the fair value of financial instruments, and the realization of deferred tax assets. In connection with the determination of the allowance for loan loss and the estimated fair value of real estate owned, management obtains independent appraisals for significant properties.

There are currently no new accounting policies that were not disclosed in the Bank’s December 31, 2016 audited financial statements included in the prospectus filed by FBK on July 7, 2017, except as described below.

Repossessed assets- includes other non-real estate, including notes receivable, vehicles and mobile homes carried at their estimated fair value.

Subsequent Events – On July 31, 2017, the banks were acquired pursuant to the stock purchase agreement dated February 8, 2017. Following the completion of the acquisition, the Banks were merged with, and into FirstBank, with FirstBank, a wholly-owned subsidiary of FBK, continuing as the surviving corporation. In conjunction with the closing, a $79.5 million cash dividend was paid from the combined Clayton Banks to Clayton HC Inc., along with a cash dividend of $9.3 million related to the S-Corp taxes as specified in the stock purchase agreement. Additionally, the Clayton Banks paid a dividend of certain assets with a value $4.8 million to Clayton HC Inc., prior to the effective date of the merger.

Date of Management’s Review - Management has evaluated events and transactions occurring subsequent to the balance sheet date for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date of this filing, which is the date these financial statements were available to be issued. There were no other subsequent events that occurred after June 30, 2017, but prior to the issuance of these financial statements, other than discussed above, that would have a material impact on the Banks’ combined financial statements.

 

7


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

NOTE 2 - SECURITIES

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows for June 30, 2017 and December 31, 2016:

 

                      Gross          
     Amortized      Gross Unrealized      Unrealized      Fair  

June 30, 2017

   Cost      Gains      Losses      Value  

Mortgage-backed securities

   $ 30,405      $ 885      $ (48    $ 31,242  

State and municipal

     14,723        685        —          15,408  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 45,128      $ 1,570      $ (48    $ 46,650  
  

 

 

    

 

 

    

 

 

    

 

 

 
                   Gross         
     Amortized      Gross Unrealized      Unrealized      Fair  

December 31, 2016

   Cost      Gains      Losses      Value  

Mortgage-backed securities

   $ 34,378      $ 791      $ (173    $ 34,996  

State and municipal

     17,444        583        (42      17,985  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,822      $ 1,374      $ (215    $ 52,981  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows:

 

              Gross      Gross          
     Amortized      Unrealized      Unrealized         

June 30, 2017

   Cost      Gains      Losses      Fair Value  

Mortgage-backed securities

   $ 613      $ 21      $ —        $ 634  

State and municipal

     12,906        421        —          13,327  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,519      $ 442      $ —        $ 13,961  
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized         

December 31, 2016

   Cost      Gains      Losses      Fair Value  

Mortgage-backed securities

   $ 777      $ 31      $ —        $ 808  

State and municipal

     12,914        482        (4      13,392  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,691      $ 513      $ (4    $ 14,200  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

8


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

The amortized cost and fair value of debt securities at June 30, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 

      Available For Sale      Held to Maturity  
     Amortized             Amortized         
     Cost      Fair Value      Cost      Fair Value  

Due in one year

   $ 704 $        720      $ 2,409      $  2,464  

Due in one to five years

     5,348        5,671        3,552        3,679  

Due in five to ten years

     5,164        5,365        6,281        6,489  

Due in greater than ten years

     3,507        3,652        664        695  

Mortgage-backed securities

     30,405        31,242        613        634  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $  45,128      $ 46,650      $  13,519      $ 13,961  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

There were 27 securities sold and 1 securities redeemed during the six months ended June 30, 2017 for a net gain of $21 and there were 1 securities sold and 3 securities redeemed during the six months ended June 30, 2016 for a net gain of $26. Securities carried at $52,540 and $55,560 at June 30, 2017 and December 31, 2016 respectively, were pledged to secure deposits and for other purposes as required or permitted by law.

At June 30, 2017 and December 31, 2016 there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholder’s equity.

The following table shows securities with unrealized losses and their fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017 and December 31, 2016:

 

      Less than 12 Months     12 Months or More     Total  
            Unrealized            Unrealized            Unrealized  

Description of Securities

   Fair Value      Loss     Fair Value      Loss     Fair Value      Loss  

June 30, 2017

               

Mortgage-backed securities

   $ —        $ —       $ 1,816      $ (48   $ 1,816      $ (48

State and municipal

     —          —         —          —       $ —        $ —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ —        $ —       $ 1,816      $ (48   $ 1,816      $ (48
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2016

               

Mortgage-backed securities

   $ 9,242      $ (97   $ 2,059      $ (76   $ 11,301      $ (173

State and municipal

     4,197        (46     —          —       $ 4,197      $ (46
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 13,439      $ (143   $ 2,059      $ (76   $ 15,498      $ (219
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Unrealized losses on debt securities have not been recognized into income because the issuers are of high credit quality (rated AA or higher), management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in market interest rates. The fair value is expected to recover as the investments approach their maturity date.

In connection with the subsequent merger, as discussed in Note 1, the entire securities portfolio was sold by FirstBank.

 

9


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

NOTE 3 - LOANS

A summary of loans outstanding by category at June 30, 2017 and December 31, 2016 follows:

 

      June 30,      December 31,  
     2017      2016  

Construction and land

   $ 122,405      $ 147,182  

Commercial real estate

     327,746        299,059  

Commercial and agriculture

     171,824        155,771  

Consumer real estate

     102,771        103,668  

Consumer

     21,209        23,349  

Manufactured homes

     323,312        323,541  
  

 

 

    

 

 

 
     1,069,267      1,052,570  

Less: Allowance for loan losses

     (20,437      (20,395
  

 

 

    

 

 

 

Loans, net of unearned fees

   $ 1,048,830      $ 1,032,175  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

For purposes of the disclosures required pursuant to the Banks’ adoption of ASU 2010-20, the Banks’ loan portfolio is disaggregated into portfolio segments and then further disaggregated into classes. A portfolio segment is defined as the level at which management develops and documents a systematic method for determining its allowance for loan losses. The Banks had the following loan portfolio segments - Construction and land; Commercial real estate; Commercial and agriculture; Consumer real estate; Consumer; and Manufactured homes loans. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and the Banks’ method for monitoring and assessing credit risk. Classes within the Construction and land segment are Land acquisition, Commercial construction, and Residential construction. Classes within the Commercial real estate segment are Rental, Business and industrial, and Other. Classes within the Consumer segment are Auto, Credit cards and Other consumer.

The allowance for loan losses (ALLL) includes the following components - reserves for loans collectively evaluated for impairment (determined in accordance with FASB ASC 450-20 Contingencies) and reserves for loans individually evaluated for impairment (determined in accordance with FASB ASC 310-10 Receivables).

The reserves for loans collectively evaluated for impairment are determined based on an application of average historical charge-off percentages by loan portfolio segment, adjusted for loans internally assigned loan grades, and also adjusted for management’s evaluation of current economic events, trends, and conditions in accordance with FASB ASC 450-20 Contingencies. The Banks used a three-year average historical charge-off percentages.

The reserves for loans individually evaluated for impairment are determined based on the present value of the expected future repayments discounted at the loan’s effective interest rate, or for loans that are mainly dependent on the collateral for repayment, the estimated fair value of the collateral less estimated selling costs (net realizable value).

 

10


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

A summary of the allowance for loan losses for the six months ended June 30, 2017 and 2016 was as follows:

 

      June 30,      June 30,  
     2017      2016  

Beginning balance

   $ 20,395      $ 21,780  

Provision for loan losses

     486        508  

Loans charged off

     (788      (1,051

Recoveries

     344        165  
  

 

 

    

 

 

 

Ending balance

   $ 20,437      $ 21,402  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

The following tables provide a detailed roll forward of the allowance for loan losses for the six months ended June 30, 2017 and 2016 by portfolio segment:

 

Six Months Ended June 30, 2017

   Construction
and
Land
    Commercial
Real
Estate
    Commercial
and
Agriculture
    Consumer
Real
Estate
    Consumer     Manufactured
Homes
    Total  

Allowance for loan loss

              

Beginning balance

   $ 1,660     $ 5,353     $ 2,900     $ 1,399     $ 480     $ 8,603     $ 20,395  

Charge-offs

     —         (16     (204     (8     (163     (397     (788

Recoveries

     21       18       22       227       51       5       344  

Provision

     22       (218     598       56       28       —         486  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,703     $ 5,137     $ 3,316     $ 1,674     $ 396     $ 8,211     $ 20,437  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - individually evaluated for impairment

   $ —       $ 1,000     $ 1,622     $ 20     $ 40     $ 19     $ 2,701  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - collectively evaluated for impairment

   $ 1,703     $ 4,137     $ 1,694     $ 1,654     $ 356     $ 8,192     $ 17,736  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2017

                                          

Loans

              

Ending balance - individually evaluated for impairment

   $ 203     $ 11,798     $ 2,858     $ 1,814     $ 287     $ 14,355     $ 31,315  

Ending balance - collectively evaluated for impairment

     122,202       315,948       168,966       100,957       20,922       308,957       1,037,952  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance total loans

   $ 122,405     $ 327,746     $ 171,824     $ 102,771     $ 21,209     $ 323,312     $ 1,069,267  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2016

   Construction
and
Land
    Commercial
Real
Estate
    Commercial
and
Agriculture
    Consumer
Real
Estate
    Consumer     Manufactured
Homes
    Total  

Allowance for loan loss

              

Beginning balance

   $ 3,561     $ 6,582     $ 1,811     $ 1,446     $ 859     $ 7,521     $ 21,780  

Charge-offs

     (30     —         (3     (168     (632     (218     (1,051

Recoveries

     4       16       21       14       47       63       165  

Provision

     (282     (518     (205     171       399       943       508  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,253     $ 6,080     $ 1,624     $ 1,463     $ 673     $ 8,309     $ 21,402  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - individually evaluated for impairment

   $ —       $ 2,354     $ 170     $ 213     $ —       $ 23     $ 2,760  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - collectively evaluated for impairment

   $ 3,253     $ 3,726     $ 1,454     $ 1,250     $ 673     $ 8,286     $ 18,642  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

                                          

Loans

              

Ending balance - individually evaluated for impairment

   $ 1,668     $ 7,471     $ 2,816     $ 1,597     $ 440     $ 14,792     $ 28,784  

Ending balance - collectively evaluated for impairment

     145,514       291,588       152,955       102,071       22,909       308,749       1,023,786  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance total loans

   $ 147,182     $ 299,059     $ 155,771     $ 103,668     $ 23,349     $ 323,541     $ 1,052,570  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

11


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

The Banks use internally assigned loan grades as credit quality indicator. Loans are graded as Pass, Special Mention, or Substandard.

Pass – Loans considered to have a normal credit risk. The borrower has the apparent ability to satisfy its obligations to the Banks, and therefore no loss in ultimate collection is anticipated based on current facts and circumstances. Pass grade loans have reasonable collateral and low to normal loan to value ratios.

Special Mention - Loans considered to have a slightly above normal credit risk. These loans have potential weaknesses that deserve management’s close attention, and if left uncorrected, such potential weaknesses may result in an increased risk of loss in the future. Special Mention grade loans do not expose the Banks to sufficient risk to warrant adverse classification.

Substandard - Loans considered to be inadequately protected by the current net worth and financial capacity of the borrower or the collateral pledged, if any. These loans are characterized by the distinct possibility that the Bank will sustain some loss in the future, if the weaknesses are not corrected. Loss potential, while existing in the aggregate amount of the Substandard grade loans, does not have to exist in the individual loans classified as Substandard.

 

12


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

The following table provides the balances of loans by loan classes disaggregated based on credit quality indicator - internally assigned loan grades as of June 30, 2017 and December 31, 2016:

 

June 30, 2017    Loan Grade          

Loan Class

   Pass      Special
Mention
     Substandard      Total  

Construction and land

   $ 121,363      $ 831      $ 211      $ 122,405  

Commercial real estate

     295,520        17,902        14,324        327,746  

Commercial & agriculture

     168,764        394        2,666        171,824  

Consumer real estate

     98,879        1,720        2,172        102,771  

Consumer

     20,550        302        357        21,209  

Manufactured homes

     291,238        16,059        16,015        323,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 996,314      $ 37,208      $ 35,745      $ 1,069,267  
  

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2016    Loan Grade         

Loan Class

   Pass      Special
Mention
     Substandard      Total  

Construction and land

   $ 144,654      $ 852      $ 1,676      $ 147,182  

Commercial real estate

     265,044        20,854        13,161        299,059  

Commercial & agriculture

     152,063        716        2,992        155,771  

Consumer real estate

     97,988        3,614        2,066        103,668  

Consumer

     22,326        523        500        23,349  

Manufactured homes

     287,601        18,971        16,969        323,541  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 969,676      $ 45,530      $ 37,364      $ 1,052,570  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans individually evaluated for impairment in accordance with ASC 310 at June 30, 2017 and December 31, 2016 were as follows:

 

      June 30, 2017      December 31, 2016  

Carrying value of total impaired loans

   $ 31,315      $ 28,784  

Amount of the direct allowance for loan losses allocated

     2,701        2,669  

Average of impaired loans during the period

     30,052        35,549  

Interest income recognized during impairment

     840        1,406  

 

13


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Impaired loans individually evaluated for impairment in accordance with ASC 310 disaggregated by class as of June 30, 2017 were as follows:

 

June 30, 2017    Recorded      Unpaid
Principal
     Related      Average
Recorded
     Interest
Income
 

Loan Class

   Investment      Balance      Allowance      Investment      Recognized  

Impaired loans with related allowance recorded:

              

Construction and land

   $ —        $ —        $ —        $ —        $ —    

Commercial real estate

     4,331        4,278        1,000        4,341        12  

Commercial & agriculture

     2,046        2,101        1,622        1,878        50  

Consumer real estate

     255        267        20        229        8  

Consumer

     44        44        40        45        3  

Manufactured homes

     1,825        1,825        19        1,952        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with related allowance recorded

   $ 8,501      $ 8,515      $ 2,701      $ 8,445      $ 73  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan Class

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no related allowance recorded:

              

Construction and land

   $ 203      $ 1,548      $ —        $ 936      $ 79  

Commercial real estate

     7,467        8,729        —          5,294        158  

Commercial & agriculture

     812        1,636        —          959        29  

Consumer real estate

     1,559        1,751        —          1,477        46  

Consumer

     243        460        —          319        8  

Manufactured homes

     12,530        12,785        —          12,622        447  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     22,814        26,909        —          21,607        767  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 31,315      $ 35,424      $ 2,701      $ 30,052      $ 840  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Impaired loans individually evaluated for impairment in accordance with ASC 310 disaggregated by class as of December 31, 2016 were as follows:

 

December 31, 2016            Unpaid              Average      Interest  
     Recorded      Principal      Related      Recorded      Income  

Loan Class

   Investment      Balance      Allowance      Investment      Recognized  

Impaired loans with related allowance recorded:

              

Construction and land

   $ —        $ —        $ —        $ —        $ —    

Commercial real estate

     4,350        4,518        1,275        4,627        86  

Commercial & agriculture

     1,710        1,766        1,315        1,829        69  

Consumer real estate

     202        203        17        204        10  

Consumer

     45        45        40        2        —    

Manufactured homes

     2,079        2,078        22        2,198        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with related allowance recorded

   $ 8,386      $ 8,610      $ 2,669      $ 8,860      $ 165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  

Loan Class

   Investment      Balance      Allowance      Investment      Recognized  

Impaired loans with no related allowance recorded:

              

Construction and land

   $ 1,668      $ 2,842      $ —        $ 2,861      $ 8  

Commercial real estate

     3,121        4,200        —          4,485        125  

Commercial & agriculture

     1,106        1,860        —          2,949        82  

Consumer real estate

     1,395        1,648        —          1,930        63  

Consumer

     395        628        —          536        29  

Manufactured homes

     12,713        13,744        —          13,928        934  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     20,398        24,922        —          26,689        1,241  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 28,784      $ 33,532      $ 2,669      $ 35,549      $ 1,406  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Impaired loans with individually evaluated for impairment in accordance with ASC 310 disaggregated by class as of June 30, 2016 were as follows:

 

June 30, 2016    Average      Interest  
     Recorded      Income  

Loan Class

   Investment      Recognized  

Impaired loans with related allowance recorded

     

Construction and land

   $ 130      $ 1  

Commercial real estate

     6,581        81  

Commercial & agriculture

     776        15  

Consumer real estate

     504        17  

Consumer

     —          —    

Manufactured homes

     —          —    
  

 

 

    

 

 

 

Total loans with related allowance recorded

   $ 7,991      $ 114  
  

 

 

    

 

 

 
     Average      Interest  
     Recorded      Income  

Loan Class

   Investment      Recognized  

Impaired loans with no related allowance recorded

     

Construction and land

   $ 318      $ 1  

Commercial real estate

     6,509        128  

Commercial & agriculture

     1,850        37  

Consumer real estate

     2,328        58  

Consumer

     4,622        50  

Manufactured homes

     2,078        24  
  

 

 

    

 

 

 

Total loans with no related allowance recorded

     17,705        298  
  

 

 

    

 

 

 

Total impaired loans

   $ 25,696      $ 412  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

16


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Non-performing loans were as follows at June 30, 2017 and December 31, 2016:

 

      June 30, 2017      December 31, 2016  

Loans past due over 90 days still on accrual

   $ 3,979      $ 1,270  

Non-accrual loans

     9,537        10,169  
  

 

 

    

 

 

 
   $ 13,516      $ 11,439  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

Non-performing loans and impaired loans are defined differently. All non-performing loans were loans past due 90 days or greater and still on accrual or loans on non-accrual status as of June 30, 2017 and December 31, 2016. Impaired loans are loans for which, based on current information and events, it is considered probable that the Bank will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. Some loans may be included in both categories, whereas other loans may only be included in one category.

Age analysis of past due loans disaggregated by class as of June, 2017:

 

June 30, 2017            Greater              Current          
     30 - 89 Days      Than             and Accruing      Total  

Loan Class

   Past Due      90 Days      Non-accruals      Interest      Loans  

Construction and land

   $ 21      $ —        $ 203      $ 122,181      $ 122,405  

Commercial real estate

     1,249        2,468        8,069        315,960        327,746  

Commercial & agriculture

     697        114        414        170,599        171,824  

Consumer real estate

     911        281        492        101,087        102,771  

Consumer

     245        91        134        20,739        21,209  

Manufactured homes

     9,020        1,025        225        313,042        323,312  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 12,143      $ 3,979      $ 9,537      $ 1,043,608      $ 1,069,267  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Age analysis of past due loans disaggregated by class as of December 31, 2016:

 

December 31, 2016            Greater              Current          
     30 - 89 Days      Than             and Accruing      Total  

Loan Class

   Past Due      90 Days      Non-accruals      Interest      Loans  

Construction and land

   $ 1,264      $ 1      $ 1,668      $ 144,249      $ 147,182  

Commercial real estate

     178        —          6,441        292,440        299,059  

Commercial & agriculture

     1,017        —          627        154,127        155,771  

Consumer real estate

     2,074        291        821        100,482        103,668  

Consumer

     491        69        277        22,512        23,349  

Manufactured homes

     14,362        909        335        307,935        323,541  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 19,386      $ 1,270      $ 10,169      $ 1,021,745      $ 1,052,570  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Troubled debt restructurings (TDR) - as part of the Banks’ ongoing risk management practices, the Banks attempt to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. The Banks consider regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan.

A modification is classified as TDR if the borrower is experiencing financial difficulty and it is determined that the Banks have granted a concession to the borrower. The Banks may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that the borrower may default in the foreseeable future without a modification of its debt. Generally, a concession is granted when the Banks no longer expect to collect all amounts due at the original contractual rate subsequent to modification.

Concessions could include reductions of interest rates, extension of the maturity date at a rate lower than current market rate for a new loan with similar risk, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Banks also consider whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Banks for the restructured terms. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management judgment is required when determining whether a modification is classified as TDR. The Banks’ determination whether a TDR is placed on nonaccrual status generally follows the same internal policies and procedures as for the other portfolio loans.

As of June 30, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $22,339 and $21,755, respectively. The modifications included extensions of the maturity date and/or a stated rate of interest to one lower than the current market rate. The Company has allocated $708 and $677 of specific reserves for those loans at June 30, 2017 and December 31, 2016, respectively, and has committed to lend additional amounts totaling up to $1,339 and $1,167, respectively to these customers. Of these loans, $4,243 and $4,574 were classified as non-accrual loans as of June 30, 2017 and December 31, 2016, respectively.

The following tables reflect TDR occurring during the six months ended June 30, 2017 and 2016 by class:

 

June 30, 2017            Pre-Modification      Post-Modification          
            Outstanding      Outstanding      Charge-offs  
     Number of      Recorded      Recorded      to Specific  

Loan Class

   Contracts      Investment      Investment      Reserves  

Commercial real estate

     1      $ 131      $ 131      $ —    

Consumer real estate

     2        211        211        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     3      $ 342      $ 342      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2016           Pre-Modification      Post-Modification         
            Outstanding      Outstanding      Charge-offs  
     Number of      Recorded      Recorded      to Specific  

Loan Class

   Contracts      Investment      Investment      Reserves  

Commercial real estate

     —        $ —        $ —        $ —    

Consumer real estate

     3        202        205        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     3      $ 202      $ 205      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

NOTE 4 - REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of June 30, 2017 and December 31, 2016, the most recent regulatory notifications categorized Clayton Bank and Trust, and American City Bank (the “Banks”) as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Banks’ categories.

Actual and required capital amounts and ratios are presented below as of June 30, 2017 and December 31, 2016:

 

                                    To Be Well Capitalized  
                  For Capital Adequacy     Under Prompt Corrective  
     Actual     Purposes     Action Provisions  
June 30, 2017    Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total Capital to risk weighted assets

               

Clayton Bank & Trust

   $ 174,561        19.05   $ 73,288        8.00   $ 91,610        10.00

American City Bank

     54,515        18.43     23,664        8.00     29,580        10.00

Tier 1 (Core) Capital to risk weighted assets

               

Clayton Bank & Trust

     163,035        17.80     54,966        6.00     54,966        6.00

American City Bank

     51,583        17.44     17,748        6.00     17,748        6.00

Tier 1 (Core) Capital to average assets

               

Clayton Bank & Trust

     163,035        18.50     35,251        4.00     44,064        5.00

American City Bank

     51,583        16.79     12,289        4.00     15,361        5.00

Tier 1 (Common) Capital to risk weighted assets

               

Clayton Bank & Trust

     163,035        17.80     41,225        4.50     59,547        6.50

American City Bank

     51,583        17.44     13,311        4.50     19,227        6.50
                                                     

 

19


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

                     For Capital Adequacy     To Be Well Capitalized  
     Actual     Purposes     Under Prompt Corrective  
December 31, 2016    Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total Capital to risk weighted assets

               

Clayton Bank & Trust

   $ 167,513        18.86   $ 71,038        8.00   $ 88,797        10.00

American City Bank

     50,454        16.87     23,927        8.00     29,909        10.00

Tier 1 (Core) Capital to risk weighted assets

 

            

Clayton Bank & Trust

     156,332        17.61     53,278        6.00     53,278        6.00

American City Bank

     47,736        15.96     17,945        6.00     17,945        6.00

Tier 1 (Core) Capital to average assets

               

Clayton Bank & Trust

     156,332        18.10     34,557        4.00     43,196        5.00

American City Bank

     47,736        16.48     11,585        4.00     14,481        5.00

Tier 1 (Common) Capital to risk weighted assets

 

            

Clayton Bank & Trust

     156,332        17.61     39,959        4.50     57,718        6.50

American City Bank

     47,736        15.96     13,459        4.50     19,441        6.50
                                                     

NOTE 5 - LOAN COMMITMENTS, CONTINGENCIES AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet credit loss risk exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as the ones used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end:

 

      June 30, 2017      December 31, 2016  

Commitments to make Loans

   $ 283,109      $ 243,068  

Lines of Credit

     2,122        1,653  

Letters of Credit

     5,892        6,878  
                   

In the normal course of business, the Banks are subject to various claims and litigation arising out of claims or other disputes. Because litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance, it is reasonably possible that some of the legal actions and claims could be filed and decided as unfavorable to the Banks. Although the amount of ultimate liabilities with respect to such matters cannot be ascertained, management, after evaluating current ongoing litigation or claims, believes that any resulting liability should not materially affect the financial position of the Banks.

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820, “Fair Value Measurements 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. The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements.

 

20


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3: Significant unobservable inputs based on the Banks’ assumptions used to measure assets and liabilities at fair value.

The Banks utilize fair value measurements to record fair value adjustments to certain assets and liabilities. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Securities Available for Sale - Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Level 2 securities include mortgage-backed securities and municipal bonds. In certain cases, where there is limited activity or fair values are estimated using discounted cash flow models, securities are classified within Level 3 of the valuation hierarchy.

Impaired Loans - A loan is considered to be impaired when it is probable the Banks will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy.

Other Real Estate Owned - Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, is initially recorded at lower of carrying value 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. Other real estate owned is included in Level 3 of the valuation hierarchy.

The Banks had no liabilities measured at fair value on a recurring or non-recurring basis at June 30, 2017 and December 31, 2016.

Assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 are as follows:

 

June 30, 2017

   Level 1      Level 2      Level 3      Total  

Investment securities available for sale

           

Mortgage-backed securities

   $ —        $ 31,242      $ —        $ 31,242  

State and municipal securities

     —          15,408        —          15,408  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 46,650      $ —        $ 46,650  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

   Level 1      Level 2      Level 3      Total  

Investment securities available for sale

           

Mortgage-backed securities

   $ —        $ 34,996      $ —        $ 34,996  

State and municipal securities

     —          17,985        —          17,985  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 52,981      $ —        $ 52,981  
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

 

21


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Assets measured at fair value on a non-recurring basis as of June 30, 2017 and December 31, 2016 are as follows:

 

June 30, 2017

   Level 1      Level 2      Level 3      Total  

Other real estate owned

   $ —        $ —        $ 63      $ 63  

Repossessed assets

     —          —          2,633        2,633  

Impaired loans, net

     —          —          4,767        4,767  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —        $ —        $ 7,463      $ 7,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

   Level 1      Level 2      Level 3      Total  

Other real estate owned

   $ —        $ —        $ 1,315      $ 1,315  

Impaired loans, net

     —          —          16,471        16,471  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —        $ —        $ 17,786      $ 17,786  
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

There were no transfers between Level 1, 2 or 3 during the periods presented.

The following methods and assumptions were used in estimating its fair value disclosure for financial instruments that are not measured at fair value.

Cash and Cash Equivalents - The carrying amounts of cash, due from banks, and federal funds sold approximate their fair value.

Loans - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality.

Deposits, Federal Home Loan Bank Advances and Other Borrowed Funds - The carrying amounts of demand deposits, savings deposits and floating rate advances from the Federal Home Loan Bank approximate their fair values. Fair values for certificates of deposit, fixed rate advances from the Federal Home Loan Bank are estimated using discounted cash flow models using current market interest rates offered on certificates, advances and other borrowings.

Federal Funds Purchased - The carrying amounts of federal funds purchased approximate their fair value.

 

22


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Carrying amount and estimated fair values of financial instruments were as follows at June 30, 2017 and December 31, 2016:

 

      Carrying                                  

June 30, 2017

   Amount      Level 1      Level 2      Level 3      Fair Value  

Financial Assets:

              

Cash and cash equivalent

   $ 29,300      $ 29,300        —          —        $ 29,300  

Securities available for sale

     46,650        —          46,650        —          46,650  

Securities held to maturity

     13,519        —          13,961        —          13,961  

Loans, net

     1,048,830        —          1,049,758        4,767        1,054,525  

FHLB stock

     3,408        —          —          3,408        3,408  

Accrued interest receivable

     4,800        —          4,800        —          4,800  

Financial Liabilities:

              

Non maturing deposits

     553,130        553,130        —          —          553,130  

Time deposits

     338,816        —          337,760        —          337,760  

FHLB advances

     64,883        —          65,482        —          65,482  

Fed funds purchased

     —          —          —          —          —    

Accrued interest payable

     574        —          574        —          574  
                                              
              
      Carrying                                  

December 31, 2016

   Amount      Level 1      Level 2      Level 3      Fair Value  

Financial Assets:

              

Cash and cash equivalent

   $ 49,592      $ 49,592        —          —        $ 49,592  

Securities available for sale

     52,981        —          52,981        —          52,981  

Securities held to maturity

     13,691        —          14,200        —          14,200  

Loans, net

     1,032,175        —          1,005,310        16,471        1,021,781  

FHLB stock

     3,370        —          —          3,370        3,370  

Accrued interest receivable

     5,050        —          5,050        —          5,050  

Financial Liabilities:

              

Non maturing deposits

     583,048        583,048        —          —          583,048  

Time deposits

     335,326        —          333,634        —          333,634  

FHLB advances

     52,414        —          52,780        —          52,780  

Fed funds purchased

     308        308        —          —          308  

Accrued interest payable

     553        —          553        —          553  
                                              

NOTE 7 – RELATED PARTY TRANSACTIONS

The Banks offer loans in the ordinary course of business to our insiders, including our executive officers and directors, their related interests and immediate family members and other employees. Applicable law and our written credit policies require that loans to insiders be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and must not involve more than the normal risk of repayment or present other unfavorable features. Loans to non-insider employees and other non-insiders are subject to the same requirements and underwriting standards and meet our normal lending guidelines, except that non-insider employees and other non-insiders may receive preferential interest rates and fees as an employee benefit. Loans to individual employees, directors and executive officers must also comply with the Banks’ statutory lending limits and regulatory requirements regarding lending limits and collateral. All extensions of credit to the related parties must be reviewed and approved by the Banks’ Boards of Directors. Directors with a personal interest in any loan application are excluded from the consideration of such loan application.

 

23


CLAYTON BANKS

Notes to Combined Financial Statements (unaudited)

June 30, 2017

(dollars in thousands)

 

Such loans amounted to $46,572 (representing 32 loans) and $46,107 (representing 38 loans) at June 30, 2017 and December 31, 2016, respectively.

Deposits from principal officers, directors and their affiliates were $65,568 and $42,894 at June 30, 2017 and December 31, 2016, respectively.

At June 30, 2017 and December 31, 2016, Clayton HC, Inc. had cash balances on deposit with Clayton Bank and Trust totaling $41,793 and $28,170, respectively, for ongoing corporate needs.

The Banks also have available lines of credit (or the equivalent thereof) with the majority shareholder totaling approximately $52,000 as of June 30, 2017 and December 31, 2016. There were no balances outstanding on those lines at June 30, 2017 or December 31, 2016.

The Banks entered into aircraft time sharing agreement, dated July 2015, with companies controlled by the majority shareholder, (CFA Holdings LLC and CF Services LLC), pursuant to which the Banks have the right to use, from time to time, an aircraft leased and operated by CFA Holdings. This replaces the previous agreement entered into during 2007. CFA Holdings and CF Services LLC bill the Banks for usage of the aircraft based on hours of use and operating costs. During the six months ended June 30, 2017 and 2016 the banks paid CFA Holdings and CF Services $126 and $98, respectively, under the aviation timesharing agreement for the use of the aircraft.

Clayton Bank and Trust leases branch space from Clayton HC, Inc. Annual lease for space is $6 per year. Clayton HC has a management agreement with Clayton Bank and Trust to provide support for collection of debts, management of ORE, accounting and other management duties, amounting to $93 and $93 during the six months ended June 30, 2017 and 2016, respectively.

Apex Bank, 50% owned by Clayton HC, has a management agreement with Clayton Bank and Trust to provide support for IT and other management duties, amounting to $5 and $10 during the six months ended June 30, 2017 and 2016, respectively.

 

24