Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the
three
months ended
March 31, 2016
are not necessarily indicative of the results expected for the year ending
December 31, 2016
or any other period. The
March 31, 2016
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended
December 31, 2015
.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions where changes in any of these could have a significant impact on the financial statements.
The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly-owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s wholly-owned subsidiary, JKH Realty Services, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.
Certain reclassifications have been made to the
2015
financial statements to conform to the presentation of the
2016
financial statements. These reclassifications had no effect on net income.
Note 2: Earnings Per Share
Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.
The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the
three
months ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,432
|
|
|
$
|
2,063
|
|
|
Weighted-average common shares
|
|
4,541,728
|
|
|
4,516,776
|
|
|
Basic earnings per common share
|
|
$
|
0.54
|
|
|
$
|
0.46
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,432
|
|
|
$
|
2,063
|
|
|
Weighted-average common shares
|
|
4,541,728
|
|
|
4,516,776
|
|
|
Dilutive effect of warrants
|
|
11,293
|
|
|
—
|
|
|
Dilutive effect of equity compensation
|
|
22,534
|
|
|
6,470
|
|
|
Weighted-average common and incremental shares
|
|
4,575,555
|
|
|
4,523,246
|
|
|
Diluted earnings per common share
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
|
Number of warrants excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the Company’s common stock during the period
|
|
—
|
|
|
48,750
|
|
Note 3: Securities
The following tables summarize securities available-for-sale as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
60,511
|
|
|
$
|
466
|
|
|
$
|
(185
|
)
|
|
$
|
60,792
|
|
|
Municipal securities
|
|
35,016
|
|
|
626
|
|
|
(3
|
)
|
|
35,639
|
|
|
Mortgage-backed securities
|
|
177,337
|
|
|
771
|
|
|
(119
|
)
|
|
177,989
|
|
|
Asset-backed securities
|
|
19,451
|
|
|
—
|
|
|
(559
|
)
|
|
18,892
|
|
|
Corporate securities
|
|
20,000
|
|
|
—
|
|
|
(1,022
|
)
|
|
18,978
|
|
|
Other securities
|
|
3,000
|
|
|
21
|
|
|
—
|
|
|
3,021
|
|
|
Total available-for-sale
|
|
$
|
315,315
|
|
|
$
|
1,884
|
|
|
$
|
(1,888
|
)
|
|
$
|
315,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
38,093
|
|
|
$
|
139
|
|
|
$
|
(482
|
)
|
|
$
|
37,750
|
|
|
Municipal securities
|
|
21,091
|
|
|
385
|
|
|
(7
|
)
|
|
21,469
|
|
|
Mortgage-backed securities
|
|
113,948
|
|
|
110
|
|
|
(1,006
|
)
|
|
113,052
|
|
|
Asset-backed securities
|
|
19,444
|
|
|
—
|
|
|
(83
|
)
|
|
19,361
|
|
|
Corporate securities
|
|
20,000
|
|
|
—
|
|
|
(913
|
)
|
|
19,087
|
|
|
Other securities
|
|
3,000
|
|
|
—
|
|
|
(21
|
)
|
|
2,979
|
|
|
Total available-for-sale
|
|
$
|
215,576
|
|
|
$
|
634
|
|
|
$
|
(2,512
|
)
|
|
$
|
213,698
|
|
The carrying value of securities at
March 31, 2016
is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Within one year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
One to five years
|
|
403
|
|
|
364
|
|
|
Five to ten years
|
|
33,739
|
|
|
33,361
|
|
|
After ten years
|
|
81,385
|
|
|
81,684
|
|
|
|
|
115,527
|
|
|
115,409
|
|
|
Mortgage-backed securities
|
|
177,337
|
|
|
177,989
|
|
|
Asset-backed securities
|
|
19,451
|
|
|
18,892
|
|
|
Other securities
|
|
3,000
|
|
|
3,021
|
|
|
Total
|
|
$
|
315,315
|
|
|
$
|
315,311
|
|
The Company did not sell any available-for-sale securities during the
three months ended
March 31, 2016
and
2015
, and therefore, did not recognize any gross realized gains or losses.
Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at
March 31, 2016
and
December 31, 2015
was
$91.9
million and $
166.1
million, which was approximately
29%
and
78%
, respectively, of the Company’s available-for-sale securities portfolio. These declines resulted primarily from fluctuations in market interest rates after purchase.
Should the impairment of any of these securities become other-than-temporary, the cost basis of the security will be reduced, with the resulting loss recognized in net income in the period in which the other-than-temporary impairment (“OTTI”) is identified.
The following tables show the available-for-sale securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
12,548
|
|
|
$
|
(116
|
)
|
|
$
|
8,307
|
|
|
$
|
(69
|
)
|
|
$
|
20,855
|
|
|
$
|
(185
|
)
|
|
Municipal securities
|
|
1,299
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
1,299
|
|
|
(3
|
)
|
|
Mortgage-backed securities
|
|
27,993
|
|
|
(93
|
)
|
|
3,906
|
|
|
(26
|
)
|
|
31,899
|
|
|
(119
|
)
|
|
Asset-backed securities
|
|
14,003
|
|
|
(365
|
)
|
|
4,889
|
|
|
(194
|
)
|
|
18,892
|
|
|
(559
|
)
|
|
Corporate securities
|
|
18,978
|
|
|
(1,022
|
)
|
|
—
|
|
|
—
|
|
|
18,978
|
|
|
(1,022
|
)
|
|
Total
|
|
$
|
74,821
|
|
|
$
|
(1,599
|
)
|
|
$
|
17,102
|
|
|
$
|
(289
|
)
|
|
$
|
91,923
|
|
|
$
|
(1,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
18,289
|
|
|
$
|
(237
|
)
|
|
$
|
8,537
|
|
|
$
|
(245
|
)
|
|
$
|
26,826
|
|
|
$
|
(482
|
)
|
|
Municipal securities
|
|
1,026
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
1,026
|
|
|
(7
|
)
|
|
Mortgage-backed securities
|
|
74,198
|
|
|
(562
|
)
|
|
22,655
|
|
|
(444
|
)
|
|
96,853
|
|
|
(1,006
|
)
|
|
Asset-backed securities
|
|
19,361
|
|
|
(83
|
)
|
|
—
|
|
|
—
|
|
|
19,361
|
|
|
(83
|
)
|
|
Corporate securities
|
|
19,087
|
|
|
(913
|
)
|
|
—
|
|
|
—
|
|
|
19,087
|
|
|
(913
|
)
|
|
Other securities
|
|
2,979
|
|
|
(21
|
)
|
|
—
|
|
|
—
|
|
|
2,979
|
|
|
(21
|
)
|
|
Total
|
|
$
|
134,940
|
|
|
$
|
(1,823
|
)
|
|
$
|
31,192
|
|
|
$
|
(689
|
)
|
|
$
|
166,132
|
|
|
$
|
(2,512
|
)
|
U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities
The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
March 31, 2016
.
Mortgage-Backed and Asset-Backed Securities
The unrealized losses on the Company’s investments in mortgage-backed and asset-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
March 31, 2016
.
Note 4: Loans Receivable
Loans that management intends to hold until maturity are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans.
For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
Categories of loans include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
Commercial loans
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
106,431
|
|
|
$
|
102,000
|
|
|
Owner-occupied commercial real estate
|
|
47,010
|
|
|
44,462
|
|
|
Investor commercial real estate
|
|
14,756
|
|
|
16,184
|
|
|
Construction
|
|
52,591
|
|
|
45,898
|
|
|
Single tenant lease financing
|
|
445,534
|
|
|
374,344
|
|
|
Total commercial loans
|
|
666,322
|
|
|
582,888
|
|
|
Consumer loans
|
|
|
|
|
|
Residential mortgage
|
|
208,636
|
|
|
214,559
|
|
|
Home equity
|
|
40,000
|
|
|
43,279
|
|
|
Other consumer
|
|
121,323
|
|
|
108,312
|
|
|
Total consumer loans
|
|
369,959
|
|
|
366,150
|
|
|
Total commercial and consumer loans
|
|
1,036,281
|
|
|
949,038
|
|
|
Deferred loan origination costs and premiums and discounts on purchased loans
|
|
4,402
|
|
|
4,821
|
|
|
Total loans receivable
|
|
1,040,683
|
|
|
953,859
|
|
|
Allowance for loan losses
|
|
(9,220
|
)
|
|
(8,351
|
)
|
|
Net loans receivable
|
|
$
|
1,031,463
|
|
|
$
|
945,508
|
|
The risk characteristics of each loan portfolio segment are as follows:
Commercial and Industrial:
Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee.
Owner-Occupied Commercial Real Estate:
The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Central Indiana and greater Phoenix, Arizona markets and its loans often times are secured by manufacturing and service facilities, as well as office buildings.
Investor Commercial Real Estate:
These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee. This portfolio segment typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by conditions in the real estate markets, changing industry dynamics, or the overall health of the general economy. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are typically located in the state of Indiana and markets adjacent to Indiana. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, and other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to help mitigate risk.
Construction:
Construction loans are secured by real estate and improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes.
Single Tenant Lease Financing:
These loans are made to property owners of real estate subject to long term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.
Residential Mortgage:
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Home Equity:
Home equity loans and lines of credit are typically secured by a subordinate interest in 1-4 family residences. The properties securing the Company's home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of home equity loans and lines of credit may be impacted by changes in property values on residential properties and unemployment levels, among other economic conditions and financial circumstances in the market.
Other Consumer:
These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Allowance for Loan Losses Methodology
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management believes the historical loss experience methodology is appropriate in the current economic environment as it captures loss rates that are comparable to the current period being analyzed. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310,
Receivables
, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.
Provision for Loan Losses
A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
Policy for Charging Off Loans
The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is
120 days
past due as to principal or interest. An unsecured loan generally is charged off no later than when it is
180 days
past due as to principal or interest.
The following tables present changes in the balance of the ALLL during the
three
month periods ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
Commercial and industrial
|
|
Owner-occupied commercial real estate
|
|
Investor commercial real estate
|
|
Construction
|
|
Single tenant lease financing
|
|
Residential mortgage
|
|
Home equity
|
|
Other consumer
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,367
|
|
|
$
|
476
|
|
|
$
|
212
|
|
|
$
|
500
|
|
|
$
|
3,931
|
|
|
$
|
896
|
|
|
$
|
125
|
|
|
$
|
844
|
|
|
$
|
8,351
|
|
|
Provision (credit) charged to expense
|
|
16
|
|
|
(1
|
)
|
|
(15
|
)
|
|
63
|
|
|
747
|
|
|
(50
|
)
|
|
(7
|
)
|
|
193
|
|
|
946
|
|
|
Losses charged off
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(149
|
)
|
|
(149
|
)
|
|
Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
2
|
|
|
45
|
|
|
72
|
|
|
Balance, end of period
|
|
$
|
1,383
|
|
|
$
|
475
|
|
|
$
|
197
|
|
|
$
|
563
|
|
|
$
|
4,678
|
|
|
$
|
871
|
|
|
$
|
120
|
|
|
$
|
933
|
|
|
$
|
9,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
Commercial and industrial
|
|
Owner-occupied commercial real estate
|
|
Investor commercial real estate
|
|
Construction
|
|
Single tenant lease financing
|
|
Residential mortgage
|
|
Home equity
|
|
Other consumer
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
920
|
|
|
$
|
345
|
|
|
$
|
261
|
|
|
$
|
330
|
|
|
$
|
2,061
|
|
|
$
|
985
|
|
|
$
|
207
|
|
|
$
|
691
|
|
|
$
|
5,800
|
|
|
Provision (credit) charged to expense
|
|
90
|
|
|
46
|
|
|
(43
|
)
|
|
29
|
|
|
391
|
|
|
(194
|
)
|
|
(4
|
)
|
|
127
|
|
|
442
|
|
|
Losses charged off
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(71
|
)
|
|
—
|
|
|
(157
|
)
|
|
(228
|
)
|
|
Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
268
|
|
|
—
|
|
|
96
|
|
|
364
|
|
|
Balance, end of period
|
|
$
|
1,010
|
|
|
$
|
391
|
|
|
$
|
218
|
|
|
$
|
359
|
|
|
$
|
2,452
|
|
|
$
|
988
|
|
|
$
|
203
|
|
|
$
|
757
|
|
|
$
|
6,378
|
|
The following tables present the recorded investment in loans based on portfolio segment and impairment method as of
March 31, 2016
, and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Commercial and industrial
|
|
Owner-occupied commercial real estate
|
|
Investor commercial real estate
|
|
Construction
|
|
Single tenant lease financing
|
|
Residential mortgage
|
|
Home equity
|
|
Other consumer
|
|
Total
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
106,431
|
|
|
$
|
47,010
|
|
|
$
|
14,756
|
|
|
$
|
52,591
|
|
|
$
|
445,534
|
|
|
$
|
207,515
|
|
|
$
|
40,000
|
|
|
$
|
121,171
|
|
|
$
|
1,035,008
|
|
|
Ending balance: individually evaluated for impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,121
|
|
|
—
|
|
|
152
|
|
|
1,273
|
|
|
Ending balance
|
|
$
|
106,431
|
|
|
$
|
47,010
|
|
|
$
|
14,756
|
|
|
$
|
52,591
|
|
|
$
|
445,534
|
|
|
$
|
208,636
|
|
|
$
|
40,000
|
|
|
$
|
121,323
|
|
|
$
|
1,036,281
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,383
|
|
|
$
|
475
|
|
|
$
|
197
|
|
|
$
|
563
|
|
|
$
|
4,678
|
|
|
$
|
871
|
|
|
$
|
120
|
|
|
$
|
933
|
|
|
$
|
9,220
|
|
|
Ending balance: individually evaluated for impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
$
|
1,383
|
|
|
$
|
475
|
|
|
$
|
197
|
|
|
$
|
563
|
|
|
$
|
4,678
|
|
|
$
|
871
|
|
|
$
|
120
|
|
|
$
|
933
|
|
|
$
|
9,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Commercial and industrial
|
|
Owner-occupied commercial real estate
|
|
Investor commercial real estate
|
|
Construction
|
|
Single tenant lease financing
|
|
Residential mortgage
|
|
Home equity
|
|
Other consumer
|
|
Total
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
102,000
|
|
|
$
|
44,462
|
|
|
$
|
16,184
|
|
|
$
|
45,898
|
|
|
$
|
374,344
|
|
|
$
|
213,426
|
|
|
$
|
43,279
|
|
|
$
|
108,163
|
|
|
$
|
947,756
|
|
|
Ending balance: individually evaluated for impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,133
|
|
|
—
|
|
|
149
|
|
|
1,282
|
|
|
Ending balance
|
|
$
|
102,000
|
|
|
$
|
44,462
|
|
|
$
|
16,184
|
|
|
$
|
45,898
|
|
|
$
|
374,344
|
|
|
$
|
214,559
|
|
|
$
|
43,279
|
|
|
$
|
108,312
|
|
|
$
|
949,038
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,367
|
|
|
$
|
476
|
|
|
$
|
212
|
|
|
$
|
500
|
|
|
$
|
3,931
|
|
|
$
|
896
|
|
|
$
|
125
|
|
|
$
|
844
|
|
|
$
|
8,351
|
|
|
Ending balance: individually evaluated for impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
$
|
1,367
|
|
|
$
|
476
|
|
|
$
|
212
|
|
|
$
|
500
|
|
|
$
|
3,931
|
|
|
$
|
896
|
|
|
$
|
125
|
|
|
$
|
844
|
|
|
$
|
8,351
|
|
The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows:
|
|
|
|
•
|
“Pass” (Grades 1-5) - Higher quality loans that do not fit any of the other categories described below.
|
|
|
|
|
•
|
“Special Mention” (Grade 6) - Loans that possess some credit deficiency or potential weakness which deserve close attention.
|
|
|
|
|
•
|
“Substandard” (Grade 7) - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
|
|
|
|
|
•
|
“Doubtful” (Grade 8) - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.
|
|
|
|
|
•
|
“Loss” (Grade 9) - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.
|
Nonaccrual Loans
Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest.
The following tables present the credit risk profile of the Company’s commercial loan portfolio based on rating category and payment activity as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Commercial and industrial
|
|
Owner-occupied commercial real estate
|
|
Investor commercial real estate
|
|
Construction
|
|
Single tenant lease financing
|
|
Total
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 Pass
|
|
$
|
96,712
|
|
|
$
|
46,469
|
|
|
$
|
14,756
|
|
|
$
|
52,294
|
|
|
$
|
444,590
|
|
|
$
|
654,821
|
|
|
6 Special Mention
|
|
4,766
|
|
|
528
|
|
|
—
|
|
|
297
|
|
|
944
|
|
|
6,535
|
|
|
7 Substandard
|
|
4,953
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,966
|
|
|
8 Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
106,431
|
|
|
$
|
47,010
|
|
|
$
|
14,756
|
|
|
$
|
52,591
|
|
|
$
|
445,534
|
|
|
$
|
666,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Residential mortgage
|
|
Home equity
|
|
Other consumer
|
|
Total
|
|
Performing
|
|
$
|
208,533
|
|
|
$
|
40,000
|
|
|
$
|
121,254
|
|
|
$
|
369,787
|
|
|
Nonaccrual
|
|
103
|
|
|
—
|
|
|
69
|
|
|
172
|
|
|
Total
|
|
$
|
208,636
|
|
|
$
|
40,000
|
|
|
$
|
121,323
|
|
|
$
|
369,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Commercial and industrial
|
|
Owner-occupied commercial real estate
|
|
Investor commercial real estate
|
|
Construction
|
|
Single tenant lease financing
|
|
Total
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 Pass
|
|
$
|
95,589
|
|
|
$
|
43,913
|
|
|
$
|
14,746
|
|
|
$
|
45,599
|
|
|
$
|
374,344
|
|
|
$
|
574,191
|
|
|
6 Special Mention
|
|
2,006
|
|
|
535
|
|
|
—
|
|
|
299
|
|
|
—
|
|
|
2,840
|
|
|
7 Substandard
|
|
4,405
|
|
|
14
|
|
|
1,438
|
|
|
—
|
|
|
—
|
|
|
5,857
|
|
|
8 Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
102,000
|
|
|
$
|
44,462
|
|
|
$
|
16,184
|
|
|
$
|
45,898
|
|
|
$
|
374,344
|
|
|
$
|
582,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Residential mortgage
|
|
Home equity
|
|
Other consumer
|
|
Total
|
|
Performing
|
|
$
|
214,456
|
|
|
$
|
43,279
|
|
|
$
|
108,248
|
|
|
$
|
365,983
|
|
|
Nonaccrual
|
|
103
|
|
|
—
|
|
|
64
|
|
|
167
|
|
|
Total
|
|
$
|
214,559
|
|
|
$
|
43,279
|
|
|
$
|
108,312
|
|
|
$
|
366,150
|
|
The following tables present the Company’s loan portfolio delinquency analysis as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
30-59
Days
Past Due
|
|
60-89
Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Commercial and Consumer Loans
|
|
Non-
accrual
Loans
|
|
Total Loans
90 Days or
More Past
Due and
Accruing
|
|
Commercial and industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
106,431
|
|
|
$
|
106,431
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Owner-occupied commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,010
|
|
|
47,010
|
|
|
—
|
|
|
—
|
|
|
Investor commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,756
|
|
|
14,756
|
|
|
—
|
|
|
—
|
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52,591
|
|
|
52,591
|
|
|
—
|
|
|
—
|
|
|
Single tenant lease financing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
445,534
|
|
|
445,534
|
|
|
—
|
|
|
—
|
|
|
Residential mortgage
|
|
871
|
|
|
—
|
|
|
264
|
|
|
1,135
|
|
|
207,501
|
|
|
208,636
|
|
|
103
|
|
|
195
|
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,000
|
|
|
40,000
|
|
|
—
|
|
|
—
|
|
|
Other consumer
|
|
94
|
|
|
29
|
|
|
1
|
|
|
124
|
|
|
121,199
|
|
|
121,323
|
|
|
69
|
|
|
—
|
|
|
Total
|
|
$
|
965
|
|
|
$
|
29
|
|
|
$
|
265
|
|
|
$
|
1,259
|
|
|
$
|
1,035,022
|
|
|
$
|
1,036,281
|
|
|
$
|
172
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
30-59
Days
Past Due
|
|
60-89
Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Commercial and C
onsumer Loans
|
|
Non-
accrual
Loans
|
|
Total Loans
90 Days or
More Past
Due and
Accruing
|
|
Commercial and industrial
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
101,971
|
|
|
$
|
102,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Owner-occupied commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,462
|
|
|
44,462
|
|
|
—
|
|
|
—
|
|
|
Investor commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,184
|
|
|
16,184
|
|
|
—
|
|
|
—
|
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,898
|
|
|
45,898
|
|
|
—
|
|
|
—
|
|
|
Single tenant lease financing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
374,344
|
|
|
374,344
|
|
|
—
|
|
|
—
|
|
|
Residential mortgage
|
|
300
|
|
|
23
|
|
|
45
|
|
|
368
|
|
|
214,191
|
|
|
214,559
|
|
|
103
|
|
|
—
|
|
|
Home equity
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
43,259
|
|
|
43,279
|
|
|
—
|
|
|
—
|
|
|
Other consumer
|
|
116
|
|
|
12
|
|
|
—
|
|
|
128
|
|
|
108,184
|
|
|
108,312
|
|
|
64
|
|
|
—
|
|
|
Total
|
|
$
|
465
|
|
|
$
|
35
|
|
|
$
|
45
|
|
|
$
|
545
|
|
|
$
|
948,493
|
|
|
$
|
949,038
|
|
|
$
|
167
|
|
|
$
|
—
|
|
Impaired Loans
A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
ASC Topic 310,
Receivables
, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.
The following table presents the Company’s impaired loans as of
March 31, 2016
and
December 31, 2015
. The Company had no impaired loans with a specific valuation allowance as of
March 31, 2016
or
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
Recorded
Balance
|
|
Unpaid
Principal
Balance
|
|
Specific
Allowance
|
|
Recorded
Balance
|
|
Unpaid
Principal
Balance
|
|
Specific
Allowance
|
|
Loans without a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
1,121
|
|
|
$
|
1,121
|
|
|
$
|
—
|
|
|
$
|
1,133
|
|
|
$
|
1,154
|
|
|
$
|
—
|
|
|
Other consumer
|
|
152
|
|
|
152
|
|
|
—
|
|
|
149
|
|
|
178
|
|
|
—
|
|
|
Total impaired loans
|
|
$
|
1,273
|
|
|
$
|
1,273
|
|
|
$
|
—
|
|
|
$
|
1,282
|
|
|
$
|
1,332
|
|
|
$
|
—
|
|
The table below presents average balances and interest income recognized for impaired loans during the
three
month periods ended
March 31, 2016
and
March 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
March 31, 2015
|
|
|
|
Average
Balance
|
|
Interest
Income
|
|
Average
Balance
|
|
Interest
Income
|
|
Loans without a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85
|
|
|
$
|
2
|
|
|
Residential mortgage
|
|
1,068
|
|
|
3
|
|
|
1,060
|
|
|
2
|
|
|
Other consumer
|
|
155
|
|
|
2
|
|
|
121
|
|
|
3
|
|
|
Total
|
|
1,223
|
|
|
5
|
|
|
1,266
|
|
|
7
|
|
|
Loans with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer
|
|
—
|
|
|
—
|
|
|
53
|
|
|
1
|
|
|
Total
|
|
—
|
|
|
—
|
|
|
53
|
|
|
1
|
|
|
Total impaired loans
|
|
$
|
1,223
|
|
|
$
|
5
|
|
|
$
|
1,319
|
|
|
$
|
8
|
|
There were no residential mortgage loans in other real estate owned at
March 31,
2016
or
December 31, 2015
and there were less than $0.1 million of loans at
March 31,
2016
and
December 31, 2015
in the process of foreclosure.
Note 5: Premises and Equipment
The following table summarizes premises and equipment at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
Land
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
|
Building and improvements
|
|
4,853
|
|
|
4,636
|
|
|
Furniture and equipment
|
|
6,215
|
|
|
6,164
|
|
|
Less: accumulated depreciation
|
|
(5,083
|
)
|
|
(4,779
|
)
|
|
|
|
$
|
8,485
|
|
|
$
|
8,521
|
|
Note 6: Goodwill
The following table shows the changes in the carrying amount of goodwill for the
three
month period ended
March 31, 2016
and the year ended
December 31, 2015
.
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
4,687
|
|
|
Changes in goodwill during the year
|
—
|
|
|
Balance as of December 31, 2015
|
4,687
|
|
|
Changes in goodwill during the period
|
—
|
|
|
Balance as of March 31, 2016
|
$
|
4,687
|
|
Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the
August 31, 2015
annual impairment test that would suggest it was more likely than not goodwill impairment existed.
Note 7: Subordinated Debt
In
June 2013
, the Company issued a subordinated debenture (the “Debenture”) in the principal amount of $
3.0
million. The Debenture bears a fixed interest rate of
8.00%
per year, payable quarterly, and is scheduled to mature on
June 28, 2021
. The Debenture may be repaid, without penalty, at any time after
June 28, 2016
. The Debenture is intended to qualify as Tier 2 capital under regulatory guidelines.
In connection with the Debenture, the Company also issued a warrant to purchase up to
48,750
shares of common stock at an initial per share exercise price equal to
$19.33
. The warrant became exercisable on
June 28, 2014
and, unless previously exercised, will expire on
June 28, 2021
. The Company has the right to force an exercise of the warrant after the Debenture has been repaid in full if the
20
-day volume-weighted average price of a share of its common stock exceeds
$30.00
.
The Company used the Black-Scholes option pricing model to assign a fair value of
$0.3
million to the warrant as of June 28, 2013. The following assumptions were used to value the warrant: a risk-free interest rate of
0.66%
per the U.S. Treasury yield curve in effect at the date of issuance, an expected dividend yield of
1.19%
calculated using the dividend rate and stock price at the date of the issuance, and an expected volatility of
34%
based on the estimated volatility of the Company’s stock over the expected term of the warrant, which is estimated to be
three years
.
In October 2015, the Company issued subordinated notes (the “Notes”) in the principal amount of
$10.0 million
. The Notes bear a fixed interest rate of
6.4375%
per year, payable quarterly, and are scheduled to mature on October 1, 2025. The Notes may be repaid, without penalty, on any interest payment date on or after October 15, 2020. The Notes are intended to qualify as Tier 2 capital under regulatory guidelines.
The following table presents the principal balance and unamortized discount and debt issuance costs for the Debenture and the Notes as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
8.00% subordinated debenture, due 2021
|
$
|
3,000
|
|
|
(21
|
)
|
|
3,000
|
|
|
(42
|
)
|
|
6.4375% subordinated notes, due 2025
|
10,000
|
|
|
(228
|
)
|
|
10,000
|
|
|
(234
|
)
|
|
Total
|
$
|
13,000
|
|
|
(249
|
)
|
|
13,000
|
|
|
(276
|
)
|
Note 8: Benefit Plans
Employment Agreement
The Company has entered into an employment agreement with its Chief Executive Officer that provides for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreement, these payments could occur in the event of a change in control of the Company, as defined in the agreement, along with other specific conditions.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of
750,000
shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan.
The Company recorded
$0.2 million
and
$0.3 million
of share-based compensation expense for the
three
month periods ended
March 31, 2016
and
2015
, respectively, related to awards made under th
e 2013 Plan.
The following table summarizes the status of the 2013 Plan awards as of
March 31, 2016
, and activity for the
three
months ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted-Average Grant Date Fair Value Per Share
|
|
Restricted Stock Awards
|
|
Weighted-Average Grant Date Fair Value Per Share
|
|
Deferred Stock Units
|
|
Weighted-Average Grant Date Fair Value Per Share
|
|
Nonvested at December 31, 2015
|
28,302
|
|
|
$
|
18.90
|
|
|
27,529
|
|
|
$
|
18.17
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
30,583
|
|
|
25.64
|
|
|
10,232
|
|
|
24.44
|
|
|
3
|
|
|
24.44
|
|
|
Vested
|
(9,470
|
)
|
|
18.86
|
|
|
(17,507
|
)
|
|
19.60
|
|
|
(3
|
)
|
|
24.44
|
|
|
Nonvested at March 31, 2016
|
49,415
|
|
|
$
|
23.07
|
|
|
20,254
|
|
|
$
|
20.10
|
|
|
—
|
|
|
$
|
—
|
|
At
March 31, 2016
,
the total unrecognized compensation cost related to nonvested awards was $
1.3 million
with a weighted-average expense recognition period of
2.3 years
.
Directors Deferred Stock Plan
Until January 1, 2014, the Company had a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved
180,000
shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to
100%
of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right.
The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the
three
months ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
Deferred Stock Rights
|
|
Outstanding, beginning of period
|
|
81,693
|
|
|
Granted
|
|
171
|
|
|
Exercised
|
|
—
|
|
|
Outstanding, end of period
|
|
81,864
|
|
All deferred stock rights granted during the
2016
period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.
Note 9: Fair Value of Financial Instruments
ASC Topic 820,
Fair Value Measurement
, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies 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 prices in active markets for identical assets or liabilities
|
|
|
|
|
Level 2
|
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 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of
March 31, 2016
or
December 31, 2015
.
Loans Held-for-Sale (mandatory pricing agreements)
The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Forward Contracts
The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).
Interest Rate Lock Commitments
The fair values of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).
The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
Fair Value Measurements Using
|
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
U.S. Government-sponsored agencies
|
|
$
|
60,792
|
|
|
$
|
—
|
|
|
$
|
60,792
|
|
|
$
|
—
|
|
|
Municipal securities
|
|
35,639
|
|
|
—
|
|
|
35,639
|
|
|
—
|
|
|
Mortgage-backed securities
|
|
177,989
|
|
|
—
|
|
|
177,989
|
|
|
—
|
|
|
Asset-backed securities
|
|
18,892
|
|
|
—
|
|
|
18,892
|
|
|
—
|
|
|
Corporate securities
|
|
18,978
|
|
|
—
|
|
|
18,978
|
|
|
—
|
|
|
Other securities
|
|
3,021
|
|
|
3,021
|
|
|
—
|
|
|
—
|
|
|
Total available-for-sale securities
|
|
315,311
|
|
|
3,021
|
|
|
312,290
|
|
|
—
|
|
|
Loans held-for-sale (mandatory pricing agreements)
|
|
26,688
|
|
|
—
|
|
|
26,688
|
|
|
—
|
|
|
Forward contracts
|
|
(371
|
)
|
|
(371
|
)
|
|
—
|
|
|
—
|
|
|
IRLCs
|
|
1,283
|
|
|
—
|
|
|
—
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
Fair Value Measurements Using
|
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
U.S. Government-sponsored agencies
|
|
$
|
37,750
|
|
|
$
|
—
|
|
|
$
|
37,750
|
|
|
$
|
—
|
|
|
Municipal securities
|
|
21,469
|
|
|
—
|
|
|
21,469
|
|
|
—
|
|
|
Mortgage-backed securities
|
|
113,052
|
|
|
—
|
|
|
113,052
|
|
|
—
|
|
|
Asset-backed securities
|
|
19,361
|
|
|
—
|
|
|
19,361
|
|
|
—
|
|
|
Corporate securities
|
|
19,087
|
|
|
—
|
|
|
19,087
|
|
|
—
|
|
|
Other securities
|
|
2,979
|
|
|
2,979
|
|
|
—
|
|
|
—
|
|
|
Total available-for-sale securities
|
|
213,698
|
|
|
2,979
|
|
|
210,719
|
|
|
—
|
|
|
Loans held-for-sale (mandatory pricing agreements)
|
|
24,065
|
|
|
—
|
|
|
24,065
|
|
|
—
|
|
|
Forward contracts
|
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
IRLCs
|
|
582
|
|
|
—
|
|
|
—
|
|
|
582
|
|
The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the
three
month periods ended
March 31, 2016
and
March 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Interest Rate Lock Commitments
|
|
Balance, January 1, 2016
|
|
$
|
582
|
|
|
Total realized gains
|
|
|
|
|
Included in net income
|
|
701
|
|
|
Balance, March 31, 2016
|
|
$
|
1,283
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
$
|
521
|
|
|
Total realized gains
|
|
|
|
Included in net income
|
|
392
|
|
|
Balance, March 31, 2015
|
|
$
|
913
|
|
The following describes valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral, less costs to sell, for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
There were no impaired loans that were measured at fair value on a nonrecurring basis at
March 31, 2016
or
December 31, 2015
.
Significant Unobservable (Level 3) Inputs
The following tables present quantitative information about significant unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
March 31, 2016
|
|
Valuation
Technique
|
|
Significant Unobservable
Inputs
|
|
Range
|
|
IRLCs
|
|
1,283
|
|
|
Discounted cash flow
|
|
Loan closing rates
|
|
40% - 99%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
December 31, 2015
|
|
Valuation
Technique
|
|
Significant Unobservable
Inputs
|
|
Range
|
|
IRLCs
|
|
$
|
582
|
|
|
Discounted cash flow
|
|
Loan closing rates
|
|
43% - 100%
|
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents
For these instruments, the carrying amount is a reasonable estimate of fair value.
Interest-Bearing Time Deposits
The fair value of these financial instruments approximates carrying value.
Loans Held-for-Sale (best efforts pricing agreements)
The fair value of these loans approximates carrying value.
Loans Receivable
The fair value of loans receivable is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.
Accrued Interest Receivable
The fair value of these financial instruments approximates carrying value.
Federal Home Loan Bank of Indianapolis Stock
The fair value approximates carrying value.
Deposits
The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value.
Subordinated Debt
The fair value of the Company’s subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments.
Accrued Interest Payable
The fair value of these financial instruments approximates carrying value.
Commitments
The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of
March 31, 2016
and
December 31, 2015
.
The following tables summarize the carrying value and estimated fair value of all financial assets and liabilities at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
Fair Value Measurements Using
|
|
|
|
Carrying
Amount
|
|
Quoted Prices
In Active
Market for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and cash equivalents
|
|
$
|
100,944
|
|
|
$
|
100,944
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest-bearing time deposits
|
|
1,000
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
Loans held-for-sale (best efforts pricing agreements)
|
|
2,803
|
|
|
—
|
|
|
2,803
|
|
|
|
|
|
Loans receivable
|
|
1,040,683
|
|
|
—
|
|
|
—
|
|
|
1,061,086
|
|
|
Accrued interest receivable
|
|
4,528
|
|
|
4,528
|
|
|
—
|
|
|
—
|
|
|
Federal Home Loan Bank of Indianapolis stock
|
|
8,595
|
|
|
—
|
|
|
8,595
|
|
|
—
|
|
|
Deposits
|
|
1,243,178
|
|
|
511,599
|
|
|
—
|
|
|
722,428
|
|
|
Advances from Federal Home Loan Bank
|
|
150,969
|
|
|
—
|
|
|
148,568
|
|
|
—
|
|
|
Subordinated debt
|
|
12,751
|
|
|
—
|
|
|
13,027
|
|
|
—
|
|
|
Accrued interest payable
|
|
108
|
|
|
108
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
Fair Value Measurements Using
|
|
|
|
Carrying
Amount
|
|
Quoted Prices
In Active
Market for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and cash equivalents
|
|
$
|
25,152
|
|
|
$
|
25,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest-bearing time deposits
|
|
1,000
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
Loans held-for-sale (best efforts pricing agreements)
|
|
12,453
|
|
|
—
|
|
|
12,453
|
|
|
—
|
|
|
Loans receivable
|
|
953,859
|
|
|
—
|
|
|
—
|
|
|
967,303
|
|
|
Accrued interest receivable
|
|
4,105
|
|
|
4,105
|
|
|
—
|
|
|
—
|
|
|
Federal Home Loan Bank of Indianapolis stock
|
|
8,595
|
|
|
—
|
|
|
8,595
|
|
|
—
|
|
|
Deposits
|
|
956,054
|
|
|
472,481
|
|
|
—
|
|
|
478,360
|
|
|
Advances from Federal Home Loan Bank
|
|
190,957
|
|
|
—
|
|
|
188,126
|
|
|
—
|
|
|
Subordinated debt
|
|
12,724
|
|
|
—
|
|
|
13,212
|
|
|
—
|
|
|
Accrued interest payable
|
|
117
|
|
|
117
|
|
|
—
|
|
|
—
|
|
Note 10: Mortgage Banking Activities
The Company’s residential real estate lending business originates mortgage loans for customers and sells a majority of the originated loans into the secondary market. The Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, interest rate lock commitments and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 11 for further information on derivative financial instruments.
During the
three months ended
March 31, 2016
and
2015
, the Company originated mortgage loans held-for-sale of
$108.0 million
and
$134.2 million
, respectively, and sold
$117.0 million
and
$143.7 million
of mortgage loans, respectively, into the secondary market.
The following table provides the components of income from mortgage banking activities for the
three months ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Gain on loans sold
|
$
|
1,600
|
|
|
$
|
2,314
|
|
|
Gain resulting from the change in fair value of loans held-for-sale
|
354
|
|
|
177
|
|
|
Gain resulting from the change in fair value of derivatives
|
300
|
|
|
395
|
|
|
Net revenue from mortgage banking activities
|
$
|
2,254
|
|
|
$
|
2,886
|
|
Note 11: Derivative Financial Instruments
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.
Each of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.
The following table presents the notional amount and fair value of IRLCs and forward contracts utilized by the Company at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
$
|
55,004
|
|
|
$
|
1,283
|
|
|
$
|
28,444
|
|
|
$
|
582
|
|
|
Forward contracts
|
|
—
|
|
|
—
|
|
|
42,743
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
83,000
|
|
|
(371
|
)
|
|
—
|
|
|
—
|
|
Fair values of derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the
three
month periods ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain / (loss) recognized in the three months ended
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
IRLCs
|
|
$
|
701
|
|
|
$
|
392
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
Forward contracts
|
|
(401
|
)
|
|
3
|
|
Note 12: Recent Accounting Pronouncements
Accounting Standards Update (“Update”) 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
(March 2016)
The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in this Update clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be implemented using a modified retrospective method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements.
Accounting Standards Update 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
(March 2016)
The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.
The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.
For all business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be implemented using the prospective method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements.
Accounting Standards Update 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(March 2016)
This Update is part of an initiative to reduce complexity in accounting standards (the “Simplification Initiative”) implemented by the Financial Accounting Standards Board. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Below is a summary of simplifications for the current GAAP areas contained in this Update.
•
Accounting for Income Taxes: All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.
•
Classification of Excess Tax Benefits on the Statement of Cash Flows: Excess tax benefits should be classified along with other income tax cash flows as an operating activity.
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Forfeitures: An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.
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Minimum Statutory Tax Withholding Requirements: The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions.
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Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes: Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements.