ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS
INTRODUCTION
Citizens Bancshares Corporation (the “Company”)
is a holding company that provides a full range of commercial and personal banking services to individuals and corporate customers
in its primary market areas, metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly owned
subsidiary, Citizens Trust Bank (the “Bank”). The Bank is a member of the Federal Reserve System and operates under
a state charter. The Company serves its customers through 10 full-service financial centers in Georgia and Alabama.
Forward Looking Statements
In addition to historical information,
this report on Form 10-Q may contain forward-looking statements. For this purpose, any statements contained herein, including documents
incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking
statements are subject to numerous assumptions, risks, and uncertainties. Without limiting the foregoing, the words “believe,”
“anticipates,” “plan,” expects,” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are based on
current management expectations and, by their nature, are subject to risk and uncertainties because of the possibility of changes
in underlying factors and assumptions. Actual conditions, events or results could differ materially from those contained in or
implied by such forward-looking statements for a variety of reasons, including: sharp and/or rapid changes in interest rates; significant
changes in the economic scenario from the current anticipated scenario which could materially change anticipated credit quality
trends and the ability to generate loans and gather deposits; significant delay in or inability to execute strategic initiatives
designed to grow revenues and/or control expenses; unanticipated issues during the integration of acquisitions; and significant
changes in accounting, tax or regulatory practices or requirements. The Company undertakes no obligation to, nor does it intend
to, update forward-looking statements to reflect circumstances or events that occur after the date hereof or to reflect the occurrence
of unanticipated events.
The following discussion is of the Company’s
financial condition as of June 30, 2016 and December 31, 2015, and the changes in the financial condition and results of operations
for the three and six month periods ended June 30, 2016 and 2015.
Critical Accounting Policies
In response to the Securities and Exchange
Commission’s (“SEC”) Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies,
the Company has identified the following as the most critical accounting policies upon which its financial status depends. The
critical policies were determined by considering accounting policies that involve the most complex or subjective decisions or assessments.
The Company’s most critical accounting policies relate to:
Investment
Securities
-
The Company
classifies investments in one of three categories based on management’s intent upon purchase: held to maturity securities
which are reported at amortized cost, trading securities which are reported at fair value with unrealized holding gains and losses
included in earnings, and available for sale securities which are recorded at fair value with unrealized holding gains and losses
included as a component of accumulated other comprehensive income. The Company had no investment securities classified as trading
securities during 2016 or 2015.
Premiums and discounts on available
for sale and held to maturity securities are amortized or accreted using a method which approximates a level yield.
Gains and losses on sales of
investment securities are recognized upon disposition, based on the adjusted cost of the specific security. A decline in market
value of any security below cost that is deemed other than temporary is charged to earnings or OCI resulting in the establishment
of a new cost basis for the security.
Loans
-
Loans are reported at
principal amounts outstanding less unearned income and the allowance for loan losses. Interest income on loans is recognized on
a level-yield basis. Loan fees and certain direct origination costs are deferred and amortized over the estimated terms of the
loans using the level-yield method. Discounts on loans purchased are accreted using the level-yield method over the estimated remaining
life of the loan purchased.
Allowance for Loan Losses
- The Company provides for estimated losses on loans receivable when any significant and permanent decline in value occurs. These
estimates for losses are based, not only on individual assets and their related cash flow forecasts, sales values, and independent
appraisals, but also on the volatility of certain real estate markets, and the concern for disposing of real estate in distressed
markets. For loans that are pooled for purposes of determining the necessary provisions, estimates are based on loan types, history
of charge-offs, and other delinquency analyses. Therefore, the value used to determine the provision for losses is subject to the
reasonableness of these estimates. The adequacy of the allowance for loan losses is reviewed on a monthly basis by management and
the Board of Directors. On a semi-annual basis an independent comprehensive review of the methodology and allocation of the allowance
for loan losses is performed. This assessment is made in the context of historical losses as well as existing economic conditions,
and individual concentrations of credit. Loans are charged against the allowance when, in the opinion of management, such loans
are deemed uncollectible and subsequent recoveries are added to the allowance.
Other Real Estate Owned
-
Other real estate owned is reported at the lower of cost or fair value less estimated disposal costs, determined on
the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources.
Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is treated
as a charge-off against the allowance for loan losses. Any subsequent declines in value are charged to earnings.
Income Taxes
- Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense
in the period that includes the enactment date.
In the event the future tax
consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities
result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such
assets is required. A valuation allowance is provided for the portion of a deferred tax asset when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets,
management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.
The Company believes that its
income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit
by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s
financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
A description of other accounting policies
are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. The Company has followed those policies in preparing this report.
FINANCIAL CONDITION
At June 30, 2016, the Company had
total assets of $414,176,000 compared to $388,620,000 at December 31, 2015. The $25,556,000 increase is primarily related to
an increase in interest-bearing deposits with banks of $23,278,000 and net loans of $12,261,000; offset by declines in
available for sale investments securities of $8,526,000, and other real estate owned (OREO) of $1,614,000. Interest-bearing
deposits with banks primarily represent funds maintained on deposit at the Federal Reserve Bank (FRB) and the Federal Home
Loan Bank (FHLB). These funds fluctuate daily and are used to manage the Company’s liquidity. The decrease in available
for sale securities is primarily attributed to securities called/matured and paydowns. At June 30, 2016, total assets consisted primarily of
$114,732,000 in investment securities and $197,097,000 in net loans representing 28% and 48% of total assets, respectively.
Investment securities and net loans represented 32% and 48% of total assets at December 31, 2015.
Loans typically provide higher
interest yields than other types of interest-earning assets and, therefore, continue to be the largest component of the
Company’s assets. We saw meaningful growth in our net loans receivable which increased by $12,261,000 at June 30, 2016
compared to December 31, 2015, reflecting the additional resources we added to our lending area. The increases were in all
categories principally in commercial real estate of $4,344,000, construction and development of $4,618,000, commercial,
financial and agriculture of $1,597,000, single-family residential loans of $1,088,000 and consumer loans of $548,000 coupled
with a net decrease in allowance for loan losses of $66,000. The Company continues to pursue opportunities to enhance its
lending as well as investing in the resources needed to strengthen these efforts.
At June 30, 2016, OREO decreased by $1,614,000
to $2,849,000 compared to $4,463,000 reported at the year-end of 2015. This decrease is primarily related to the sale of OREO properties
totaling $1,871,000 and $98,000 in write-downs, partially offset by $355,000 in additions to the OREO balance during the first
half of 2016.
Cash value of life insurance, a comprehensive
compensation program for directors and certain senior managers of the Company, increased by $134,000 to $10,224,000 at June 30,
2016. The increase is primarily due to the earnings on the premiums paid over the life of the insurance contract during the first
half of 2016.
The Company’s liabilities at June
30, 2016 totaled $361,313,000 and consisted primarily of $351,245,000 in deposits, which increased by $22,383,000 compared to total
deposits of $328,862,000 at December 31, 2015. Accrued expenses and other liabilities were $4,843,000, representing an increase
of $696,000 compared to $4,147,000 at December 31, 2015 primarily in deferred income taxes and accrued other expenses. FHLB advances
totaled $5,225,000 at June 30, 2016 compared to $5,235,000 at December 31, 2015.
The Company’s asset/liability
management program, which monitors the Company’s interest rate sensitivity as well as volume and mix changes in earning assets
and interest bearing liabilities, may impact the growth of the Company’s balance sheet as it seeks to maximize net interest
income and minimize its interest rate risk.
INVESTMENT SECURITIES
The composition of the Company’s investment
securities portfolio reflects the Company’s investment strategy of maximizing portfolio yields commensurate with risk and liquidity
considerations. The primary objective of the Company’s investment strategy is to maintain an appropriate level of liquidity and
provide a tool to assist in controlling the Company’s interest rate sensitivity position, while at the same time producing adequate
levels of interest income.
At June 30, 2016, and December 31, 2015,
the investment securities portfolio represented approximately 28% and 32%, respectively, of the Company’s total assets.
LOANS
Loans outstanding, by classification, are
summarized as follows (in thousands):
|
|
June 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
44,345
|
|
|
$
|
42,748
|
|
Commercial Real Estate
|
|
|
108,436
|
|
|
|
104,092
|
|
Single-Family Residential
|
|
|
32,184
|
|
|
|
31,096
|
|
Construction and Development
|
|
|
6,838
|
|
|
|
2,220
|
|
Consumer
|
|
|
7,352
|
|
|
|
6,804
|
|
|
|
|
199,155
|
|
|
|
186,960
|
|
Allowance for loan losses
|
|
|
2,058
|
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197,097
|
|
|
$
|
184,836
|
|
The Company does not have any concentrations
of loans exceeding 10% of total loans of which management is aware and which are not otherwise disclosed as a category of loans
in the table above or in other sections of this Quarterly Report on Form 10-Q. A substantial portion of the Company’s loan
portfolio is secured by real estate in metropolitan Atlanta and Birmingham.
The largest component of loans in the Company’s
loan portfolio is real estate loans. At June 30, 2016 and December 31, 2015, real estate loans, which represent commercial
and industrial real estate and other loans secured by single-family properties, totaled $140.6 million and $135.2 million, respectively,
and represented 70.6% and 72.3% of loans, respectively, net of unearned income for the period.
As stated above, a substantial portion
of the Company’s loan portfolio is collateralized by real estate in metropolitan Atlanta and Birmingham markets. Accordingly,
the ultimate collectability of a substantial portion of the Company’s loan portfolio is susceptible to changes in market
conditions in the metropolitan Atlanta and Birmingham areas.
|
·
|
The Company’s loans
to area churches, which are generally secured by real estate, were approximately $46.8 million and $42.0 million at June 30, 2016
and December 31, 2015, respectively.
|
|
·
|
The Company’s loans
to area convenience stores were approximately $5.5 million and $6.1 million at June 30, 2016 and December 31, 2015, respectively.
Loans to convenience stores are generally secured by real estate.
|
|
·
|
The Company’s loans
to area hotels, which are generally secured by real estate, were approximately $14.6 million and $15.6 million at June 30, 2016
and December 31, 2015, respectively.
|
NONPERFORMING ASSETS
Nonperforming assets include nonperforming
loans, real estate acquired through foreclosure, and repossessed assets. Nonperforming loans generally include loans and leases
whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties
or are past due with respect to principal or interest more than 90 days and have been placed on nonaccrual status.
Accrued interest income is reversed when
a loan is placed on nonaccrual status. Interest collections on nonaccruing loans and leases for which the ultimate collectability
of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received.
Nonperforming loans may be restored to accrual status when all principal and interest is current and the full repayment of the
remaining contractual principal and interest is expected, or when the loan becomes well-secured and is in the process of collection.
With the exception of the loans included
within nonperforming assets in the table below, management is not aware of any loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention that have not been disclosed which (1) represent or result from trends or uncertainties
which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represent
any information on material credits of which management is aware that causes management to have serious doubts as to the abilities
of such borrowers to comply with the loan repayment terms.
During the first half of 2016, nonperforming
assets decreased by $1,486,000, or 19.9%, to $5,993,000 when compared to December 31, 2015. The year-to-date decrease is primarily
attributed to a $1,614,000 decline in other real estate owned (OREO); offset by an increase in nonperforming loans of $128,000.
The Company charged-off $407,000 in nonperforming loans during the first half of 2016 which is a increase of $43,000 compared to
$364,000 charged-off for the same period last year. Charged-offs, net of recoveries, for the same period decreased by $137,000.
At June 30, 2016, nonperforming assets represent 1.45% of total assets compared to 1.92% at December 31, 2015. There was one (1)
loan greater than 90 days past due and still accruing interest at June 30, 2016 and none at December 31, 2015.
The table below presents a summary of the
Company’s nonperforming assets at June 30, 2016 and December 31, 2015.
|
|
June 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands, except
|
|
|
financial ratios)
|
Nonperforming assets:
|
|
|
|
|
|
|
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
Restructured nonperforming loans (TDRs)
|
|
$
|
2,117
|
|
|
$
|
2,497
|
|
Other nonaccrual loans
|
|
|
1,026
|
|
|
|
519
|
|
Past-due loans of 90 days or more and still accruing
|
|
|
1
|
|
|
|
—
|
|
Nonperforming loans
|
|
|
3,144
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired through foreclosure
|
|
|
2,849
|
|
|
|
4,463
|
|
Total nonperforming assets
|
|
$
|
5,993
|
|
|
$
|
7,479
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Nonperforming loans to loans, net of unearned income
|
|
|
1.58
|
%
|
|
|
1.61
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to loans, net of unearned income,and real estate acquired through foreclosure
|
|
|
2.97
|
%
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets
|
|
|
1.45
|
%
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming loans
|
|
|
65.46
|
%
|
|
|
70.42
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming assets
|
|
|
34.34
|
%
|
|
|
28.40
|
%
|
TROUBLED DEBT RESTRUCTURINGS
Loans to be restructured are identified
based on an assessment of the borrower’s credit status, which involves, but is not limited to, a review of financial statements,
payment delinquency, non-accrual status, and risk rating. Determining the borrower’s credit status is a continual process
that is performed by the Company’s staff with periodic participation from an independent external loan review group.
Troubled debt restructurings (“TDR”)
generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and it is
probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.
The Company seeks to assist these borrowers by working with them to prevent further difficulties, and ultimately to improve the
likelihood of recovery on the loan while ensuring compliance with the Federal Financial Institutions Examination Council (FFIEC)
guidelines. To facilitate this process, a formal concessionary modification that would not otherwise be considered may be granted
resulting in classification of the loan as a TDR. All concessionary modifications are considered troubled debt restructurings.
The modification may include a change
in the interest rate or the payment amount or a combination of both. Substantially all modifications completed under a formal restructuring
agreement are considered TDRs. Modifications can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on
accruing status, depending on the individual facts and circumstances of the borrower. These restructurings rarely result in the
forgiveness of principal or interest.
With respect to commercial TDRs, an analysis
of the credit evaluation, in conjunction with an evaluation of the borrower’s performance prior to the restructuring, are
considered when evaluating the borrower’s ability to meet the restructured terms of the loan agreement. Nonperforming commercial
TDRs may be returned to accrual status based on a current, well-documented credit evaluation of the borrower’s financial
condition and prospects for repayment under the modified terms. This evaluation must include consideration of the borrower’s
sustained historical repayment performance for a reasonable period (generally a minimum of six months) prior to the date on which
the loan is returned to accrual status.
In connection with consumer loan TDRs,
a nonperforming loan will be returned to accruing status when current as to principal and interest and upon a sustained historical
repayment performance (generally a minimum of six months).
The following table summarizes the Company’s
TDRs and loans modifications (in thousands):
|
|
June 30, 2016
|
|
December 31,
2015
|
Troubled Debt Restructured Loans:
|
|
|
|
|
|
|
|
|
Restructured loans still accruing
|
|
|
$ 5,098
|
|
|
$
|
5,285
|
|
Restructured loans nonaccruing
|
|
|
2,117
|
|
|
|
2,497
|
|
Total restructured and modified loans
|
|
|
$ 7,215
|
|
|
$
|
7,782
|
|
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is primarily
available to absorb losses inherent in the loan portfolio. Credit exposures deemed uncollectible are charged against the allowance
for loan losses.
The Company provides for estimated losses
on loans receivable when any significant and permanent decline in value occurs. These estimates for losses are based on individual
assets and their cash flow forecasts, sales values, independent appraisals, the volatility of certain real estate markets, and
concern for disposing of real estate in distressed markets. For loans that are pooled for purposes of determining the necessary
provisions, estimates are based on loan types, history of charge-offs, and other delinquency analyses. Therefore, the value used
to determine the provision for losses is subject to the reasonableness of these estimates. The adequacy of the allowance for loan
losses is reviewed on a monthly basis by management and the Board of Directors. On a semi-annual basis an independent review of
the adequacy of allowance for loan losses is performed. This assessment is made in the context of historical losses as well as
existing economic conditions, and individual concentrations of credit.
Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However,
the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off. For
the first half of 2016, the Company was able to recapture previous provision for loan losses of $100,000 due to the receipt of
two large recoveries in the second quarter of 2016. For the first half of 2015, provision for loan losses of $125,000 was charged
against operating earnings based on growth of the loan portfolio and the Company’s evaluation of the loan portfolio. Approximately
$680,000 of the allowance for loan losses was allocated to loans management considered impaired at June 30, 2016 compared to $650,000
at December 31, 2015.
At June 30, 2016, management believes the
allowance for loan losses is adequate. Management uses available information to recognize losses on loans; however, future additions
to the allowance may be necessary based on changes in economic conditions, particularly in the metropolitan Atlanta, Georgia and
Birmingham, Alabama areas. In addition, regulatory agencies, as an integral part of their examination process, periodically review
the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on
their judgments about information available to them at the time of their examination.
The following table summarizes loans, changes
in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and
additions to the allowance which have been charged to operating expense as of and for the six months ended June 30, 2016 and 2015
(amount in thousands, except financial ratios):
|
|
2016
|
|
2015
|
|
|
|
|
|
Loans, net of unearned income
|
|
$
|
199,155
|
|
|
$
|
196,829
|
|
|
|
|
|
|
|
|
|
|
Average loans, net of unearned income and the allowance for loan losses
|
|
$
|
189,112
|
|
|
$
|
191,256
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at the beginning of period
|
|
$
|
2,124
|
|
|
$
|
2,299
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
30
|
|
|
|
—
|
|
Real estate - loans
|
|
|
280
|
|
|
|
253
|
|
Installment loans to individuals
|
|
|
97
|
|
|
|
111
|
|
Total loans charged-off
|
|
|
407
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
11
|
|
|
|
10
|
|
Real estate - loans
|
|
|
399
|
|
|
|
206
|
|
Installment loans to individuals
|
|
|
31
|
|
|
|
45
|
|
Total loans recovered
|
|
|
441
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off (recovered)
|
|
|
(34
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
(Recovery
of) Provisions for loan losses
|
|
|
(100
|
)
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at period end
|
|
$
|
2,058
|
|
|
$
|
2,321
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net loans charged-off (recovered) to average loans, net of unearned income and the allowance for loan losses
|
|
|
-0.02
|
%
|
|
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to loans, net of unearned income
|
|
|
1.03
|
%
|
|
|
1.18
|
%
|
The following table presents the allocation
of the allowance for loan losses. The allocation is based on an evaluation of defined loan problems, historical ratios of loan
losses, and other factors that may affect future loan losses in the categories of loans shown (amount in thousands):
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
|
Amount
|
|
Total Loans
|
|
Amount
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
428
|
|
|
|
22
|
%
|
|
$
|
342
|
|
|
|
23
|
%
|
Commercial Real Estate
|
|
|
925
|
|
|
|
54
|
%
|
|
|
1,170
|
|
|
|
56
|
%
|
Single-family Residential
|
|
|
483
|
|
|
|
16
|
%
|
|
|
435
|
|
|
|
17
|
%
|
Construction and Development
|
|
|
9
|
|
|
|
3
|
%
|
|
|
3
|
|
|
|
1
|
%
|
Consumer
|
|
|
213
|
|
|
|
5
|
%
|
|
|
174
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
2,058
|
|
|
|
100
|
%
|
|
$
|
2,124
|
|
|
|
100
|
%
|
DEPOSITS
Deposits are the Company’s primary
source of funding loan growth. Total deposits at June 30, 2016 increased by 6.8% or $22,383,000 to $351,245,000 compared to December
31, 2015. The bank has a stable core deposit base with a high percentage of non-interest bearing deposits. Noninterest-bearing
deposits increased by $3,376,000, or approximately 3.8% to $91,919,000 and interest-bearing deposits increased by $19,007,000,
or 7.9%, to $259,326,000 for the six months period ending June 30, 2016. On an average basis, noninterest-bearing deposits increased
by $3,487,000 to $91,457,000 during the first half of 2016 compared to $87,970,000 for the year ended December 31, 2015. Average
interest-bearing deposits decreased by $732,000 to $250,762,000 at June 30, 2016 compared to $251,494,000 for the year ended December
31, 2015. At June 30, 2016, the Company’s cost of funds was approximately 0.18% compared to 0.20% for the same period last
year.
The Company participates in Certificate
of Deposit Account Registry Services (“CDARS”), a program that allows its customers the ability to benefit from the
FDIC insurance coverage on their time deposits over the $250,000 limit. At June 30, 2016 and December 31, 2015, the Company had
$21,481,000 and $21,020,000, respectively, in CDARS deposits. Participation in this program has enhanced the Company’s ability
to retain customers with time deposits higher than the FDIC $250,000 insurance coverage limit.
Time deposits that meet or exceed the FDIC
Insurance limit of $250,000 were $42,613,000 and $35,020,000 at June 30, 2016 and December 31, 2015, respectively.
The following is a summary of interest-bearing
deposits (in thousands):
|
|
June 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
NOW and money market accounts
|
|
$
|
98,542
|
|
|
$
|
89,470
|
|
Savings accounts
|
|
|
37,291
|
|
|
|
34,807
|
|
Time deposits of $100,000 or more
|
|
|
95,431
|
|
|
|
86,914
|
|
Other time deposits
|
|
|
28,062
|
|
|
|
29,128
|
|
|
|
$
|
259,326
|
|
|
$
|
240,319
|
|
OTHER BORROWED FUNDS
The Company continues to emphasize funding
earning asset growth through core deposits; however, the Company has relied on other borrowings as a supplemental funding source.
Other borrowings consist of Federal funds purchased, short-term borrowings, and FHLB advances.
These advances are collateralized by FHLB
stock, a blanket lien on 1-4 family and multifamily mortgage loans, certain commercial real estate loans and investment securities.
As of June 30, 2016 and December 31, 2015, total loans pledged as collateral were $28,013,000 and $27,033,000, respectively.
Maturity
|
|
Callable
|
|
Type
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
July 2016
(1)
|
|
|
|
|
|
|
|
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2026
(2)
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Principal Outstanding
|
|
|
|
|
|
|
|
|
|
$
|
5,225
|
|
|
$
|
5,235
|
|
|
(1)
|
This FHLB advance had a fixed rate of 0.40% as of June 30, 2016.
|
|
(2)
|
Represents an Affordable Housing Program (AHP) award used to subsidize
loans for homeownership or rental initiatives. The AHP is a principal reducing credit, scheduled to mature on August 17, 2026 with
an interest rate of zero.
|
At June 30, 2016 the Company had approximately
a $80.7 million line of credit facility at the FHLB of which $25.2 million was committed consisting of advances of $5,225,000 and
a letter of credit to secure public deposits in the amount of $20.0 million. The Company also had approximately $28.2 million of
borrowing capacity at the Federal Reserve Bank discount window and an unsecured $4.0 million fed funds line of credit.
RESULTS OF OPERATIONS
Net Interest Income:
Net interest income is the principal component
of a financial institution’s income stream and represents the difference, or spread, between interest and fee income generated
from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.
For the three-month period ended June 30,
2016, net interest income increased by $5,000 or 0.17% to $2,990,000 compared to $2,985,000 reported for the same period last year.
Total interest income decreased by $9,000, or 0.28%, to $3,155,000 compared to $3,164,000 for the same three months period in 2015.
Interest income on loans decreased by $33,000 due to a 7 bps decrease in yields earned on loans while the average loan balances
remained the same compared to the same period last year. Interest income on investment securities decreased by $23,000 primarily
due to a 2 bps decrease in investment yields and lower average balances compared to second quarter of 2015. This decline was offset
by an increase in interest earned on federal funds sold and interest-bearing deposits of $47,000 compared to the same period last
year. Total interest expense for the period decreased by $14,000 or 7.82% compared to the same three month period in 2015 as the
Company continues to manage the funding cost and deposit mix. At June 30, 2016, the Company’s cost of funds was approximately
0.18% compared to 0.20% for the same period last year.
On a year-to-date basis, net interest
income decreased by $51,000 or 0.85% to $5,924,000 compared to $5,975,000 reported for the same period last year. Total
interest income decreased by $80,000 or 1.26% to $6,258,000 compared to the same six month period in 2015. Interest income on
loans decreased by $139,000 while interest income on federal funds sold and interest bearing deposits increased by $105,000
compared to the same period in 2015. Interest income on investment securities decreased by $46,000 primarily due to a 3 bps
decrease in investment yields compared to the first half of 2015 and the investment portfolio having a lower
average investment balance compared to the first half of 2015. Total interest expense for the six month period ended June 30,
2016, decreased by $29,000 or 7.99% compared to the same period in 2015 as the Company lowered its funding cost and improved
its deposit mix.
For the six months ended June 30, 2016,
the Company maintained an annualized net interest margin on a fully tax equivalent basis of 3.29% compared to 3.36% reported
at June 30, 2015. The decrease in the net interest margin on a fully tax equivalent basis compared to the same period last
year is primarily due to the paydown of higher rate legacy loans that are being replaced by lower yielding loans.
Similarly, interest income on investment securities declined due to lower investment yields caused by higher yielding bonds
being paid down, maturing or being called and being replaced with lower yielding securities. The Company is mindful of the interest rate risk of investing in a low rate environment which would negatively impact its
liquidity and capital position in a rising rate environment.
The Company has an asset/liability management
program which monitors the Company’s interest rate sensitivity and ensures the Company is competitive in the loan and deposit market.
The Company continues to monitor its asset/liability mix and will make changes as appropriate to ensure it is properly positioned
to react to changing interest rates and inflationary trends.
Provision for loan losses
For the three months ended June 30, 2016, the Company was able to recapture previous provision for loan losses
of $175,000 due to the receipt of two large recoveries during the quarter. For the three months ended June 30, 2015, the Company
charged against operating earnings a provision for loan losses of $50,000.
For the six months ended June 30, 2016, the Company was able to recapture previous provision for loan losses
of $100,000 due to the receipt of the previously mentioned two large recoveries. For the six months ended June 30, 2015, the
Company charged against operating earnings a provision for loan losses of $125,000.
The allowance for loan losses was $2,058,000,
$2,124,000, and $2,321,000 at June 30, 2016, December 31, 2015, and June 30, 2015, respectively. The allowance for loan losses
was 65.46%, 70.42%, and 40.58% of nonperforming loans at June 30, 2016, December 31, 2015, and June 30, 2015, respectively. The
provision for loan losses and the resulting allowance for loan losses are based on changes in the size and character of the Company’s
loan portfolio, changes in nonperforming and past due loans, the existing risk of individual loans, concentrations of loans to
specific borrowers or industries, and economic conditions. At June 30, 2016, the Company considered its allowance for loan losses
to be adequate.
Noninterest income:
Noninterest income consists of revenues
generated from a broad range of financial services and activities, including fee-based services and commissions earned through
insurance sales. In addition, gains and losses realized from the sale of investment portfolio securities and sales of assets are
included in noninterest income.
Noninterest income totaled $1,203,000 for
the three months period ended June 30, 2016, an increase of $144,000, or 13.60% compared with the same period last year. This
increase is primarily due to a $186,000 legal judgment that the Company collected and a $78,000 recovery; offset by gains on the sale of investment securities of $121,000 reported for the second quarter of 2015. There
were no gains on sale of investment securities for the same period in 2016. The service charges on deposits income decreased
by $6,000 and other operating income increased by $271,000 compared to the same period last year.
For the year-to-date, noninterest income
decreased by $117,000 or 5.26% to $2,106,000 compared to the same period last year. This decrease is primarily due the fact that
there were no gains on the sale of investments for the first half of 2016 compared to $312,000 in 2015. Service charges on deposits
declined by $30,000 while other operating income increased by $225,000. The increase is primarily due to the aforementioned legal
judgment and recovery.
Noninterest expense:
Noninterest expense includes compensation
and benefits, occupancy expenses, advertising and marketing, professional fees, office supplies, data processing, telephone expenses,
miscellaneous items, and other losses.
Non-interest expense in the second quarter of 2016 decreased by $245,000 to $3,335,000 compared to $3,580,000 for the same
quarter last year primarily due to a decrease of $118,000 in the amortization of core deposit intangible which was fully amortized
in the first quarter of 2016. Salaries and employee benefits expense decreased by $4,000. Net occupancy and equipment expense
decreased by $18,000 compared to the same period of last year. OREO related expenses decreased by $95,000 compared to the
same period last year primarily due to a gain on sale of OREO. FDIC insurance expenses decreased by $14,000 compared to the
same period in the prior year. Other operating expenses increased by $4,000 compared to the same period in the prior year.
For the six months period ended June 30, 2016, non-interest expense decreased by $475,000 to $6,663,000 compared to $7,138,000
for the same period last year. Salaries and employee benefits expense increased by $54,000 due to the hiring of additional
lending officers to enhance loan production, and the filling of one officer level position that was vacant in early 2015.
Net occupancy and equipment expense decreased by $44,000 primarily due to lower rent expense, building maintenance expense
and insurance costs compared to the same period of last year. OREO related expenses declined by $247,000 compared to the same
period last year due to gain on sale of OREO of $269,000 during 2016. Amortization of core deposit intangible decreased by
$118,000 which was fully amortized in the first quarter of 2016. FDIC insurance expenses decreased by $21,000 compared to
the same period in the prior year. Other operating expenses decreased by $99,000 compared to the same period in the prior
year. The decline in other operating expenses is in multiple expense categories as the Company continues to manage its expenses
in line with the decline in interest income caused by the prolonged low interest rate environment.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity management involves
managing the potential impact of interest rate movements on net interest income within acceptable levels of risk. The Company seeks
to accomplish this by structuring the balance sheet so that repricing opportunities exist for both assets and liabilities in equivalent
amounts and time intervals. Imbalances in these repricing opportunities at any point in time constitute a financial institution’s
interest rate risk. The Company’s ability to reprice assets and liabilities in the same dollar amounts and at the same time
minimizes interest rate risk.
One method of measuring the impact of interest
rate sensitivity is the cumulative gap analysis. The difference between interest rate sensitive assets and interest rate sensitive
liabilities at various time intervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected
in the following table. Generally, a net liability sensitive position indicates that there would be a negative impact on net interest
income in an increasing rate environment. However, interest rate sensitivity gap does not necessarily indicate the impact of general
interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and
the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s
customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different
times within such period and at different rates. The following table shows the contractual maturities of all interest rate sensitive
assets and liabilities at June 30, 2016. Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Taking a conservative approach, the Company has
included demand deposits such as NOW, money market, and savings accounts in the three month category. However, the actual repricing
of these accounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator of potential effects
of interest rate changes on net interest income.
The following table sets forth the distribution
of the repricing of the Company’s interest rate sensitive assets and interest rate sensitive liabilities as of June 30, 2016.
|
|
Cumulative amounts as of June 30, 2016
|
|
|
Maturing and repricing within
|
|
|
3
|
|
3 to 12
|
|
1 to 5
|
|
Over
|
|
|
|
|
Months
|
|
Months
|
|
Years
|
|
5 Years
|
|
Total
|
|
|
|
|
(amounts in thousands, except ratios)
|
|
|
Interest-sensitive assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with other banks
|
|
$
|
53,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53,098
|
|
Federal funds sold
|
|
|
16,537
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,537
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
900
|
|
Investments
|
|
|
—
|
|
|
|
824
|
|
|
|
4,418
|
|
|
|
109,490
|
|
|
|
114,732
|
|
Loans
|
|
|
82,130
|
|
|
|
19,589
|
|
|
|
74,622
|
|
|
|
22,814
|
|
|
|
199,155
|
|
Total interest-sensitive assets
|
|
$
|
151,765
|
|
|
$
|
21,313
|
|
|
$
|
79,040
|
|
|
$
|
132,304
|
|
|
$
|
384,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitive liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
(a)
|
|
$
|
167,762
|
|
|
$
|
67,980
|
|
|
$
|
23,584
|
|
|
$
|
—
|
|
|
$
|
259,326
|
|
Other borrowings
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
225
|
|
|
|
5,225
|
|
Total interest-sensitive liabilities
|
|
$
|
167,762
|
|
|
$
|
72,980
|
|
|
$
|
23,584
|
|
|
$
|
225
|
|
|
$
|
264,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitivity gap
|
|
$
|
(15,997
|
)
|
|
$
|
(51,667
|
)
|
|
$
|
55,456
|
|
|
$
|
132,079
|
|
|
$
|
119,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest-sensitivity gap
|
|
|
(15,997
|
)
|
|
|
(67,664
|
)
|
|
|
(12,208
|
)
|
|
|
119,871
|
|
|
|
119,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest-sensitivity gap to total interest-sensitive assets
|
|
|
(4.16
|
)%
|
|
|
(17.60
|
)%
|
|
|
(3.18
|
)%
|
|
|
31.18
|
%
|
|
|
31.18
|
%
|
(a) Savings, NOW, and money market deposits
totaling $135,833 are included in the maturing in 3 months classification.
LIQUIDITY
Liquidity is the ability of the Company
to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers,
whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not
be able to meet the needs of the communities it serves. Additionally, the Company requires cash for various operating needs including:
dividends to shareholders; business combinations; capital injections to its subsidiary; the servicing of debt; and the payment
of general corporate expenses. The Company has access to various capital markets and on March 6, 2009, the Company issued 7,462
shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Department of the Treasury (“Treasury”)
under the TARP Program for an investment of $7,462,000. On August 13, 2010, the Company exchanged the outstanding 7,462 shares
of Series A Preferred Stock for 7,462 shares of Series B Preferred Stock. No monetary consideration was given in connection with
this exchange. The Company also issued 4,379 shares of Series C Preferred Stock for $4,379,000 to the Treasury on September 17,
2010. However, the primary source of liquidity for the Company is dividends from its bank subsidiary. Statutory and regulatory
limitations apply to the Bank’s payment of dividends to the Company as well as the Company’s payment of dividends to
its stockholders. The Georgia Department of Banking and Finance regulates the Bank’s dividend payments and must approve dividend
payments that exceed 50 percent of the Bank’s prior year net income. The payment of dividends may also be affected or limited
by other factors, such as the requirement by federal agencies to maintain adequate capital above regulatory guidelines and that
bank holding companies and insured banks pay dividends out of current earnings.
Asset and liability management functions
not only serve to assure adequate liquidity in order to meet the needs of the Company’s customers, but also to maintain an appropriate
balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return that meets the
investment requirements of its shareholders. Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable
cash position that meets both requirements.
The asset portion of the balance sheet
provides liquidity primarily through loan principal repayments, maturities of investment securities and, to a lesser extent, sales
or paydowns of investment securities available for sale and held to maturity. Other short-term investments such as federal funds
sold and maturing interest bearing deposits with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet
provides liquidity through various customers’ interest bearing and noninterest bearing deposit accounts. Federal funds purchased
and other short-term borrowings from the Federal Reserve Bank Discount Window and the Federal Home Loan Bank are additional sources
of liquidity and, basically, represent the Company’s incremental borrowing capacity. At June 30, 2016 the Company had approximately
a $80.7 million line of credit facility at the FHLB of which $25.2 million was committed consisting of advances of $5,225,000 and
a letter of credit to secure public deposits in the amount of $20.0 million. The Company also had approximately $28.2 million of
borrowing capacity at the Federal Reserve Bank discount window and an unsecured $4.0 million fed funds line of credit. These sources
of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. The Company
does not anticipate any liquidity requirements in the near future that it will not be able to meet.
CAPITAL RESOURCES
Stockholders’ equity increased by $2,487,000
during the six months period ended June 30, 2016 due to multiple factors. Accumulated other comprehensive income, net of income
taxes, increased by $1,644,000. This increase is attributed to the volatility in interest rates and swings in credit spreads, and
their impact on the fair value of the Company’s available for sale securities portfolio. Retained earnings increased by $815,000
primarily due to a net income of $1,107,000; offset by $118,000 of preferred dividends paid to the U.S. Treasury and $174,000 in
cash dividends paid to common stockholders. Additional paid-in-capital decreased by $22,000 due to issuance of common stock associated
with restricted stock.
Quantitative measures established by regulation
to ensure capital adequacy require the Company to maintain minimum amount and ratios of total and Tier 1 capital to risk weighted
assets, and Tier 1 capital to average assets. Effective January 1, 2015, the regulation now also requires the Company to maintain
a minimum amount and ratio of common equity Tier 1 capital to risk weighted assets. Furthermore, effective January 1, 2016, in addition
to the minimum risk-based capital and leverage ratios, banking organizations must maintain a “capital conservation buffer”
consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital
distributions and to pay certain discretionary bonus payments to executive officers. At June 30, 2016, the Company and the Bank
met all capital adequacy requirements to which they are subject and considered to be “well capitalized” under
regulatory standards.
The following table presents regulatory
capital adequacy ratios for the Company and the Bank as at June 30, 2016 and December 31, 2015:
|
|
June 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
The Company
|
|
The Bank
|
|
The Company
|
|
The Bank
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to average assets)
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
19
|
%
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
Tier 1 Common Equity (to risk weighted assets)
|
|
|
N/A
|
|
|
|
19
|
%
|
|
|
N/A
|
|
|
|
20
|
%
|
Total Capital (to risk weighted assets)
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
21
|
%
|