NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements as of and for the period ended March 31, 2017 include CapStar Financial Holdings, Inc. and its wholly owned subsidiary, CapStar Bank (the “Bank”, together referred to as the “Company”). Significant intercompany transactions and accounts are eliminated in consolidation. On February 5, 2016, CapStar Financial Holdings, Inc. acquired all of the Bank’s issued and outstanding shares of common stock, preferred stock, common stock options and warrants, and the Bank became the wholly owned subsidiary of CapStar Financial Holdings, Inc.
The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Initial Public Offering
On September 21, 2016, the Securities and Exchange Commission (“SEC”) declared effective our registration statement on Form S-1 registering the shares of our common stock. On September 27, 2016, we completed the initial public offering of 2,972,750 shares of our common stock. Of the 2,972,750 shares sold, 1,688,049 shares were sold by us and 1,284,701 shares were sold by certain selling shareholders. Of the 1,284,701 shares sold by certain selling shareholders, 731,707 were from preferred shares converted to common shares and 79,166 from the cashless exercise of 250,000 common share warrants. We received net proceeds of approximately $21.9 million from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses. We did not receive any proceeds from the sale of shares by the selling shareholders.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, determination of impairment of intangible assets, including goodwill, the valuation of our investment portfolio, deferred tax assets and estimated liabilities. There have been no significant changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Subsequent Events
Accounting Standards Codification (“ASC”) 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after March 31, 2017 through the date of the issued financial statements.
10
NOTE 2 –
SECURITIES
The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
(losses)
|
|
|
Estimated
fair value
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
(losses)
|
|
|
Estimated
fair value
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government agency securities
|
|
$
|
11,531
|
|
|
$
|
—
|
|
|
$
|
(217
|
)
|
|
$
|
11,314
|
|
|
$
|
9,517
|
|
|
$
|
—
|
|
|
$
|
(143
|
)
|
|
$
|
9,374
|
|
State and municipal securities
|
|
|
27,781
|
|
|
|
101
|
|
|
|
(542
|
)
|
|
|
27,340
|
|
|
|
28,480
|
|
|
|
65
|
|
|
|
(632
|
)
|
|
|
27,913
|
|
Mortgage-backed securities
|
|
|
131,232
|
|
|
|
3
|
|
|
|
(2,097
|
)
|
|
|
129,138
|
|
|
|
126,637
|
|
|
|
17
|
|
|
|
(2,059
|
)
|
|
|
124,595
|
|
Asset-backed securities
|
|
|
21,291
|
|
|
|
—
|
|
|
|
(567
|
)
|
|
|
20,724
|
|
|
|
21,620
|
|
|
|
—
|
|
|
|
(1,147
|
)
|
|
|
20,473
|
|
Total
|
|
$
|
191,835
|
|
|
$
|
104
|
|
|
$
|
(3,423
|
)
|
|
$
|
188,516
|
|
|
$
|
186,254
|
|
|
$
|
82
|
|
|
$
|
(3,981
|
)
|
|
$
|
182,355
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities
|
|
$
|
36,865
|
|
|
$
|
2,818
|
|
|
$
|
—
|
|
|
$
|
39,683
|
|
|
$
|
36,842
|
|
|
$
|
2,784
|
|
|
$
|
—
|
|
|
$
|
39,626
|
|
Mortgage-backed securities
|
|
|
4,657
|
|
|
|
63
|
|
|
|
—
|
|
|
|
4,720
|
|
|
|
4,687
|
|
|
|
79
|
|
|
|
—
|
|
|
|
4,766
|
|
Other debt securities
|
|
|
5,333
|
|
|
|
33
|
|
|
|
—
|
|
|
|
5,366
|
|
|
|
5,335
|
|
|
|
11
|
|
|
|
(7
|
)
|
|
|
5,339
|
|
Total
|
|
$
|
46,855
|
|
|
$
|
2,914
|
|
|
$
|
—
|
|
|
$
|
49,769
|
|
|
$
|
46,864
|
|
|
$
|
2,874
|
|
|
$
|
(7
|
)
|
|
$
|
49,731
|
|
Security fair values are established by an independent pricing service as of the dates indicated. The difference between amortized cost and fair value reflects current interest rates and represents the potential gain (loss) had the portfolio been liquidated on those dates. Security gains (losses) are realized only in the event of dispositions prior to maturity or other-than-temporary impairment. Securities with unrealized losses as of March 31, 2017 and December 31, 2016, and the length of time they were in continuous loss positions as of such dates are as follows (in thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
March 31, 2017
|
|
Estimated
fair value
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair value
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair value
|
|
|
Gross
unrealized
losses
|
|
U. S. government agency securities
|
|
$
|
9,297
|
|
|
$
|
(217
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,297
|
|
|
$
|
(217
|
)
|
State and municipal securities
|
|
|
15,691
|
|
|
|
(542
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
15,691
|
|
|
|
(542
|
)
|
Mortgage-backed securities
|
|
|
114,688
|
|
|
|
(1,949
|
)
|
|
|
8,720
|
|
|
|
(148
|
)
|
|
|
123,408
|
|
|
|
(2,097
|
)
|
Asset-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
20,724
|
|
|
|
(567
|
)
|
|
|
20,724
|
|
|
|
(567
|
)
|
Total temporarily impaired securities
|
|
$
|
139,676
|
|
|
$
|
(2,708
|
)
|
|
$
|
29,444
|
|
|
$
|
(715
|
)
|
|
$
|
169,120
|
|
|
$
|
(3,423
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government agency securities
|
|
$
|
9,374
|
|
|
$
|
(143
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,374
|
|
|
$
|
(143
|
)
|
State and municipal securities
|
|
|
20,279
|
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
20,279
|
|
|
|
(632
|
)
|
Mortgage-backed securities
|
|
|
110,563
|
|
|
|
(1,955
|
)
|
|
|
4,150
|
|
|
|
(104
|
)
|
|
|
114,713
|
|
|
|
(2,059
|
)
|
Asset-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
20,473
|
|
|
|
(1,147
|
)
|
|
|
20,473
|
|
|
|
(1,147
|
)
|
Other debt securities
|
|
|
2,029
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,029
|
|
|
|
(7
|
)
|
Total temporarily impaired securities
|
|
$
|
142,245
|
|
|
$
|
(2,737
|
)
|
|
$
|
24,623
|
|
|
$
|
(1,251
|
)
|
|
$
|
166,868
|
|
|
$
|
(3,988
|
)
|
As noted in the table above, as of March 31, 2017, the Company had unrealized losses of $3.4 million in its investment securities portfolio. The unrealized losses associated with these investment securities are driven by changes in interest rates and are recorded as a component of equity. These investment securities will continue to be monitored as a part of our ongoing impairment analysis. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.
Because the Company currently does not intend to sell any investment securities that have an unrealized loss at March 31, 2017, and it is not more-likely-than-not that we will be required to sell these investment securities before recovery of their amortized cost bases, which may be at maturity, we do not consider these securities to be other-than-temporarily impaired at March 31, 2017.
Securities with a carrying value of $120.2 million at March 31, 2017 were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.
11
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Proceeds
|
|
$
|
5,860
|
|
|
$
|
23,195
|
|
Gross gains
|
|
|
—
|
|
|
|
85
|
|
Gross losses
|
|
|
(6
|
)
|
|
|
(46
|
)
|
The amortized cost and fair value of securities at March 31, 2017, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
|
|
Available-for-sale
|
|
|
Held-to-maturity
|
|
|
|
Amortized
cost
|
|
|
Estimated
fair value
|
|
|
Amortized
cost
|
|
|
Estimated
fair value
|
|
Due one to five years
|
|
$
|
13,294
|
|
|
$
|
13,304
|
|
|
$
|
22,204
|
|
|
$
|
23,436
|
|
Due five to ten years
|
|
|
20,526
|
|
|
|
20,220
|
|
|
|
14,562
|
|
|
|
15,548
|
|
Due beyond ten years
|
|
|
5,492
|
|
|
|
5,130
|
|
|
|
5,432
|
|
|
|
6,065
|
|
Mortgage-backed securities
|
|
|
131,232
|
|
|
|
129,138
|
|
|
|
4,657
|
|
|
|
4,720
|
|
Asset-backed securities
|
|
|
21,291
|
|
|
|
20,724
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
191,835
|
|
|
$
|
188,516
|
|
|
$
|
46,855
|
|
|
$
|
49,769
|
|
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of the loan portfolio as of March 31, 2017 and December 31, 2016 follows (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Commercial real estate
|
|
$
|
360,955
|
|
|
$
|
302,322
|
|
Consumer real estate
|
|
|
99,952
|
|
|
|
97,015
|
|
Construction and land development
|
|
|
74,007
|
|
|
|
94,491
|
|
Commercial and industrial
|
|
|
420,825
|
|
|
|
379,620
|
|
Consumer
|
|
|
4,495
|
|
|
|
5,974
|
|
Other
|
|
|
43,984
|
|
|
|
56,796
|
|
Total
|
|
|
1,004,218
|
|
|
|
936,218
|
|
Less net unearned income
|
|
|
(784
|
)
|
|
|
(967
|
)
|
|
|
|
1,003,434
|
|
|
|
935,251
|
|
Allowance for loan and lease losses
|
|
|
(13,997
|
)
|
|
|
(11,634
|
)
|
|
|
$
|
989,437
|
|
|
$
|
923,617
|
|
The adequacy of the allowance for loan and lease losses (ALLL) is assessed at the end of each quarter. The ALLL includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogenous pools and collectively evaluated for impairment. The ALLL factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors.
12
The Company categorizes
loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, amon
g other factors. The Company analyzes all commercial loans, and consumer relationships with an outstanding balance greater than $500,000, individually and assigns each loan a risk rating. This analysis is performed on a continual basis by the relationship
managers and credit department personnel. On at least an annual basis an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The C
ompany uses the following definitions for risk ratings:
Special Mention
– A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future.
Substandard
– A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.
Doubtful
– A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating.
The following tables present the loan balances by category as well as risk rating (in thousands):
|
|
Performing Loans
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Pass/Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total
Performing
|
|
|
Total
Impaired
Loans
|
|
|
Total
|
|
Commercial real estate
|
|
$
|
359,668
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
359,668
|
|
|
$
|
1,287
|
|
|
$
|
360,955
|
|
Consumer real estate
|
|
|
99,661
|
|
|
|
—
|
|
|
|
291
|
|
|
|
99,952
|
|
|
|
—
|
|
|
|
99,952
|
|
Construction and land development
|
|
|
74,007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,007
|
|
|
|
—
|
|
|
|
74,007
|
|
Commercial and industrial
|
|
|
385,188
|
|
|
|
16,288
|
|
|
|
7,012
|
|
|
|
408,488
|
|
|
|
12,337
|
|
|
|
420,825
|
|
Consumer
|
|
|
4,480
|
|
|
|
—
|
|
|
|
15
|
|
|
|
4,495
|
|
|
|
—
|
|
|
|
4,495
|
|
Other
|
|
|
43,984
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,984
|
|
|
|
—
|
|
|
|
43,984
|
|
Total
|
|
$
|
966,988
|
|
|
$
|
16,288
|
|
|
$
|
7,318
|
|
|
$
|
990,594
|
|
|
$
|
13,624
|
|
|
$
|
1,004,218
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
301,012
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
301,012
|
|
|
$
|
1,310
|
|
|
$
|
302,322
|
|
Consumer real estate
|
|
|
96,722
|
|
|
|
—
|
|
|
|
293
|
|
|
|
97,015
|
|
|
|
—
|
|
|
|
97,015
|
|
Construction and land development
|
|
|
94,491
|
|
|
|
—
|
|
|
|
—
|
|
|
|
94,491
|
|
|
|
—
|
|
|
|
94,491
|
|
Commercial and industrial
|
|
|
349,857
|
|
|
|
11,035
|
|
|
|
16,419
|
|
|
|
377,311
|
|
|
|
2,309
|
|
|
|
379,620
|
|
Consumer
|
|
|
5,958
|
|
|
|
—
|
|
|
|
16
|
|
|
|
5,974
|
|
|
|
—
|
|
|
|
5,974
|
|
Other
|
|
|
56,796
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,796
|
|
|
|
—
|
|
|
|
56,796
|
|
Total
|
|
$
|
904,836
|
|
|
$
|
11,035
|
|
|
$
|
16,728
|
|
|
$
|
932,599
|
|
|
$
|
3,619
|
|
|
$
|
936,218
|
|
None of the Company’s loans had a risk rating of “Doubtful” as of March 31, 2017 or December 31, 2016.
13
The following table details the changes in the ALLL for
the three months ended March 31, 2017 and 2016 (in thousands):
|
|
Commercial
real estate
|
|
|
Consumer
real estate
|
|
|
Construction
and land
development
|
|
|
Commercial
and
industrial
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
2,655
|
|
|
$
|
1,013
|
|
|
$
|
1,574
|
|
|
$
|
5,618
|
|
|
$
|
76
|
|
|
$
|
698
|
|
|
$
|
11,634
|
|
Charged-off loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,124
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,124
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
80
|
|
|
|
—
|
|
|
|
82
|
|
Provision for loan and lease losses
|
|
|
602
|
|
|
|
35
|
|
|
|
(484
|
)
|
|
|
3,517
|
|
|
|
(96
|
)
|
|
|
(169
|
)
|
|
|
3,405
|
|
Balance, end of period
|
|
$
|
3,257
|
|
|
$
|
1,048
|
|
|
$
|
1,090
|
|
|
$
|
8,013
|
|
|
$
|
60
|
|
|
$
|
529
|
|
|
$
|
13,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
2,879
|
|
|
$
|
968
|
|
|
$
|
914
|
|
|
$
|
4,693
|
|
|
$
|
103
|
|
|
$
|
575
|
|
|
$
|
10,132
|
|
Charged-off loans
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(300
|
)
|
|
|
(124
|
)
|
|
|
—
|
|
|
|
(774
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Provision for loan and lease losses
|
|
|
441
|
|
|
|
(5
|
)
|
|
|
(115
|
)
|
|
|
527
|
|
|
|
134
|
|
|
|
(45
|
)
|
|
|
937
|
|
Balance, end of period
|
|
$
|
2,970
|
|
|
$
|
963
|
|
|
$
|
799
|
|
|
$
|
4,924
|
|
|
$
|
113
|
|
|
$
|
530
|
|
|
$
|
10,299
|
|
A breakdown of the ALLL and the loan portfolio by loan category at March 31, 2017 and December 31, 2016 follows (in thousands):
|
|
Commercial
real estate
|
|
|
Consumer
real estate
|
|
|
Construction
and land
development
|
|
|
Commercial
and
industrial
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
3,257
|
|
|
$
|
1,048
|
|
|
$
|
1,090
|
|
|
$
|
5,401
|
|
|
$
|
60
|
|
|
$
|
529
|
|
|
$
|
11,385
|
|
Individually evaluated for impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,612
|
|
Balances, end of period
|
|
$
|
3,257
|
|
|
$
|
1,048
|
|
|
$
|
1,090
|
|
|
$
|
8,013
|
|
|
$
|
60
|
|
|
$
|
529
|
|
|
$
|
13,997
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
359,668
|
|
|
$
|
99,952
|
|
|
$
|
74,007
|
|
|
$
|
408,488
|
|
|
$
|
4,495
|
|
|
$
|
43,984
|
|
|
$
|
990,594
|
|
Individually evaluated for impairment
|
|
|
1,287
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,337
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,624
|
|
Balances, end of period
|
|
$
|
360,955
|
|
|
$
|
99,952
|
|
|
$
|
74,007
|
|
|
$
|
420,825
|
|
|
$
|
4,495
|
|
|
$
|
43,984
|
|
|
$
|
1,004,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
2,655
|
|
|
$
|
1,013
|
|
|
$
|
1,574
|
|
|
$
|
3,006
|
|
|
$
|
76
|
|
|
$
|
698
|
|
|
$
|
9,022
|
|
Individually evaluated for impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,612
|
|
Balances, end of period
|
|
$
|
2,655
|
|
|
$
|
1,013
|
|
|
$
|
1,574
|
|
|
$
|
5,618
|
|
|
$
|
76
|
|
|
$
|
698
|
|
|
$
|
11,634
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
301,012
|
|
|
$
|
97,015
|
|
|
$
|
94,491
|
|
|
$
|
377,311
|
|
|
$
|
5,974
|
|
|
$
|
56,796
|
|
|
$
|
932,599
|
|
Individually evaluated for impairment
|
|
|
1,310
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,309
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,619
|
|
Balances, end of period
|
|
$
|
302,322
|
|
|
$
|
97,015
|
|
|
$
|
94,491
|
|
|
$
|
379,620
|
|
|
$
|
5,974
|
|
|
$
|
56,796
|
|
|
$
|
936,218
|
|
The following table presents the allocation of the ALLL for each respective loan category with the corresponding percentage of the ALLL in each category to total loans, net of deferred fees as of March 31, 2017 and December 31, 2016 (dollars in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
Percent of total
loans, net of
deferred fees
|
|
|
Amount
|
|
|
Percent of total
loans, net of
deferred fees
|
|
Commercial real estate
|
|
$
|
3,257
|
|
|
|
0.32
|
%
|
|
$
|
2,655
|
|
|
|
0.28
|
%
|
Consumer real estate
|
|
|
1,048
|
|
|
|
0.10
|
|
|
|
1,013
|
|
|
|
0.11
|
|
Construction and land development
|
|
|
1,090
|
|
|
|
0.11
|
|
|
|
1,574
|
|
|
|
0.17
|
|
Commercial and industrial
|
|
|
8,013
|
|
|
|
0.80
|
|
|
|
5,618
|
|
|
|
0.60
|
|
Consumer
|
|
|
60
|
|
|
|
0.01
|
|
|
|
76
|
|
|
|
0.01
|
|
Other
|
|
|
529
|
|
|
|
0.05
|
|
|
|
698
|
|
|
|
0.07
|
|
Total allowance for loan and lease losses
|
|
$
|
13,997
|
|
|
|
1.39
|
%
|
|
$
|
11,634
|
|
|
|
1.24
|
%
|
14
The following table presents the Company’s impaired loans that were evaluated for specific loss allowance as of March 31, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Recorded
investment
|
|
|
Unpaid
principal
balance
|
|
|
Related
allowance
|
|
|
Recorded
investment
|
|
|
Unpaid
principal
balance
|
|
|
Related
allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,287
|
|
|
$
|
1,682
|
|
|
$
|
—
|
|
|
$
|
1,310
|
|
|
$
|
1,686
|
|
|
$
|
—
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
1,287
|
|
|
|
1,682
|
|
|
|
—
|
|
|
|
1,310
|
|
|
|
1,686
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
12,337
|
|
|
|
14,237
|
|
|
|
2,612
|
|
|
|
2,309
|
|
|
|
2,921
|
|
|
|
500
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
12,337
|
|
|
|
14,237
|
|
|
|
2,612
|
|
|
|
2,309
|
|
|
|
2,921
|
|
|
|
500
|
|
Total
|
|
$
|
13,624
|
|
|
$
|
15,919
|
|
|
$
|
2,612
|
|
|
$
|
3,619
|
|
|
$
|
4,607
|
|
|
$
|
500
|
|
The following presents information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2017 and 2016 (in thousands):
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
Average
recorded
investment
|
|
|
Interest
income
recognized
|
|
|
Average
recorded
investment
|
|
|
Interest
income
recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,299
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
240
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
3,596
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
1,299
|
|
|
|
—
|
|
|
|
3,836
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
1,944
|
|
|
|
—
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
13,106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
13,106
|
|
|
|
—
|
|
|
|
1,944
|
|
|
|
—
|
|
Total
|
|
$
|
14,405
|
|
|
$
|
—
|
|
|
$
|
5,780
|
|
|
$
|
—
|
|
There was no interest income recognized on a cash basis for impaired loans for the three months ended March 31, 2017 or 2016.
15
The following table presents the aging of the recorded investment in past-due loans as of March 31, 2017 and December 31, 2016 by class of loa
ns (in thousands):
|
|
30 - 59
|
|
|
60 - 89
|
|
|
Greater Than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
89 Days
|
|
|
Total
|
|
|
Loans Not
|
|
|
|
|
|
March 31, 2017
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total
|
|
Commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
360,955
|
|
|
$
|
360,955
|
|
Consumer real estate
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143
|
|
|
|
99,809
|
|
|
|
99,952
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,007
|
|
|
|
74,007
|
|
Commercial and industrial
|
|
|
8,948
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,948
|
|
|
|
411,877
|
|
|
|
420,825
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,495
|
|
|
|
4,495
|
|
Other
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
|
43,894
|
|
|
|
43,984
|
|
Total
|
|
$
|
9,181
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,181
|
|
|
$
|
995,037
|
|
|
$
|
1,004,218
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
302,322
|
|
|
$
|
302,322
|
|
Consumer real estate
|
|
|
81
|
|
|
|
282
|
|
|
|
—
|
|
|
|
363
|
|
|
|
96,652
|
|
|
|
97,015
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
94,491
|
|
|
|
94,491
|
|
Commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
379,620
|
|
|
|
379,620
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,974
|
|
|
|
5,974
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,796
|
|
|
|
56,796
|
|
Total
|
|
$
|
81
|
|
|
$
|
282
|
|
|
$
|
—
|
|
|
$
|
363
|
|
|
$
|
935,855
|
|
|
$
|
936,218
|
|
The Company had no loans past due 90 days or more that were not on nonaccrual status as of March 31, 2017 and December 31, 2016.
The following table presents the recorded investment in non-accrual loans and troubled debt restructurings (“TDR”) by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):
|
|
Non-Accrual
|
|
|
Troubled Debt Restructurings
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Commercial real estate
|
|
$
|
1,287
|
|
|
$
|
1,310
|
|
|
$
|
1,256
|
|
|
$
|
1,272
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
12,337
|
|
|
|
2,309
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
13,624
|
|
|
$
|
3,619
|
|
|
$
|
1,256
|
|
|
$
|
1,272
|
|
As of March 31, 2017 and December 31, 2016, all loans classified as nonperforming were deemed to be impaired.
As of March 31, 2017 and December 31, 2016, the Company had a recorded investment in TDR of $1.3 million and $1.3 million, respectively. The Company had no specific allowance for those loans at March 31, 2017 or December 31, 2016 and there were no commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s loan policy. Loans accounted for as TDR are individually evaluated for impairment.
16
The following table presents loans by class modified as TDR that occurred during the three months ended March 31, 2016
(in thousands). There were no TDR identi
fied during the three months ended March 31, 2017.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
Number of contracts
|
|
|
Pre modification outstanding recorded investment
|
|
|
Post modification outstanding recorded investment, net of related allowance
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1
|
|
|
$
|
1,948
|
|
|
$
|
1,170
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
1
|
|
|
$
|
1,948
|
|
|
$
|
1,170
|
|
The following table presents loans by class modified as TDR for which there was a payment default within twelve months following the modification during the three months ended March 31, 2016 (in thousands). There were no TDR for which there was a payment default within twelve months following the modification during the three months ended March 31, 2017.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
Number of contracts
|
|
|
Recorded investment
|
|
2016
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
—
|
|
|
$
|
—
|
|
Consumer real estate
|
|
|
—
|
|
|
|
—
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
1
|
|
|
|
124
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
1
|
|
|
$
|
124
|
|
The consumer loan TDR that subsequently defaulted during the three months ended March 31, 2016 had no specific reserve in the allowance for loan and lease losses and resulted in a $0.1 million charge-off.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES
The Company had outstanding borrowings totaling of $75.0 million and $55.0 million at March 31, 2017 and December 31, 2016, respectively, via two separate advances. These advances are non-callable; interest payments are due monthly, with principal due at maturity.
The following is a summary of the contractual maturities and average effective rates of outstanding advances (dollars in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Year
|
|
Amount
|
|
|
Interest Rates
|
|
|
Amount
|
|
|
Interest Rates
|
|
2017
|
|
$
|
75,000
|
|
|
|
0.96
|
%
|
|
$
|
55,000
|
|
|
|
0.80
|
%
|
2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2021
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
75,000
|
|
|
|
0.96
|
%
|
|
$
|
55,000
|
|
|
|
0.80
|
%
|
17
Advances from the FHLB are collateralized by investment securities, FHLB stock and certain commercial and residential real estate mortgage loans totaling $
400.2
m
illion under a blanket mortgage collateral agreement. At
March 31, 2017
, the amount of available credit from the FHLB totaled $
91.2
million.
NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following were changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods ended March 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
Unrealized Gains
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Gains and
|
|
|
and Losses
|
|
|
Losses on
|
|
|
|
|
|
|
|
Losses on
|
|
|
on Available
|
|
|
Securities
|
|
|
|
|
|
|
|
Cash Flow
|
|
|
for Sale
|
|
|
Transferred to
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Hedges
|
|
|
Securities
|
|
|
Held to Maturity
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
(4,241
|
)
|
|
$
|
(698
|
)
|
|
$
|
(1,212
|
)
|
|
$
|
(6,151
|
)
|
Other comprehensive income (loss) before
reclassification
|
|
|
—
|
|
|
|
354
|
|
|
|
—
|
|
|
|
354
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
154
|
|
|
|
4
|
|
|
|
26
|
|
|
|
184
|
|
Net current period other comprehensive income (loss)
|
|
|
154
|
|
|
|
358
|
|
|
|
26
|
|
|
|
538
|
|
Ending Balance
|
|
$
|
(4,087
|
)
|
|
$
|
(340
|
)
|
|
$
|
(1,186
|
)
|
|
$
|
(5,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
(3,705
|
)
|
|
$
|
105
|
|
|
$
|
(1,315
|
)
|
|
$
|
(4,915
|
)
|
Other comprehensive income (loss) before
reclassification
|
|
|
(927
|
)
|
|
|
1,320
|
|
|
|
—
|
|
|
|
393
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
86
|
|
|
|
(24
|
)
|
|
|
26
|
|
|
|
88
|
|
Net current period other comprehensive income (loss)
|
|
|
(841
|
)
|
|
|
1,296
|
|
|
|
26
|
|
|
|
481
|
|
Ending Balance
|
|
$
|
(4,546
|
)
|
|
$
|
1,401
|
|
|
$
|
(1,289
|
)
|
|
$
|
(4,434
|
)
|
The following were significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2017 (in thousands):
|
|
Amount Reclassified from
|
|
|
Affected Line Item
|
Details about Accumulated Other
|
|
Accumulated Other
|
|
|
in the Statement Where
|
Comprehensive Income Components
|
|
Comprehensive Income
|
|
|
Net Income is Presented
|
Unrealized losses on cash flow hedges
|
|
$
|
105
|
|
|
Interest expense - money market
|
|
|
|
49
|
|
|
Interest expense - Federal Home Loan Bank advances
|
|
|
$
|
154
|
|
|
Net of tax
|
Unrealized gains and losses on available for
sale securities
|
|
$
|
6
|
|
|
Net loss on sale of securities
|
|
|
|
(2
|
)
|
|
Income tax expense (benefit)
|
|
|
$
|
4
|
|
|
Net of tax
|
Unrealized losses on securities transferred to
held to maturity
|
|
$
|
42
|
|
|
Interest income - securities
|
|
|
|
(16
|
)
|
|
Income tax expense (benefit)
|
|
|
$
|
26
|
|
|
Net of tax
|
18
The following were significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2016
(in thousands):
|
|
Amount Reclassified from
|
|
|
Affected Line Item
|
Details about Accumulated Other
|
|
Accumulated Other
|
|
|
in the Statement
Where
|
Comprehensive Income Components
|
|
Comprehensive Income
|
|
|
Net Income is Presented
|
Unrealized losses on cash flow hedges
|
|
$
|
37
|
|
|
Interest expense - money market
|
|
|
|
49
|
|
|
Interest expense - Federal Home Loan Bank Advances
|
|
|
$
|
86
|
|
|
Net of tax
|
Unrealized gains and losses on available for
sale securities
|
|
$
|
(39
|
)
|
|
Net gain on sale of securities
|
|
|
|
15
|
|
|
Income tax expense (benefit)
|
|
|
$
|
(24
|
)
|
|
Net of tax
|
Unrealized losses on securities transferred to
held to maturity
|
|
$
|
42
|
|
|
Interest income - securities
|
|
|
|
(16
|
)
|
|
Income tax expense (benefit)
|
|
|
$
|
26
|
|
|
Net of tax
|
NOTE 6 – INCOME TAXES
The Company’s effective tax rate for the three months ended March 31, 2017 was -16.6% compared to 33.5% for the three months ended March 31, 2016. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences. In addition to other changes, the guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur. The Company adopted the new guidance in the first quarter of 2017. As a result, the Company’s income tax expense was reduced by $145,000 for the period ended March 31, 2017.
The effective tax rate compared favorably to the statutory federal rate of 34% and Tennessee excise tax rate of 6.5% primarily due to investments in qualified municipal securities, company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses and the recognition of excess tax benefits related to stock compensation.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.
The following table sets forth outstanding financial instruments whose contract amounts represent credit risk as of March 31, 2017 and December 31, 2016 (in thousands):
|
|
Contract or notional amount
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Financial instruments whose contract amounts represent
credit risk:
|
|
|
|
|
|
|
|
|
Unused commitments to extend credit
|
|
$
|
542,542
|
|
|
$
|
508,990
|
|
Standby letters of credit
|
|
|
11,401
|
|
|
|
10,886
|
|
Total
|
|
$
|
553,943
|
|
|
$
|
519,876
|
|
The Company is party to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims as of March 31, 2017, will not have a material impact on the financial statements of the Company.
19
NOTE 8 – DERIVATIVES
The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Interest Rate Swaps Designated as Cash Flow Hedges
Forward starting interest rate swaps with notional amounts totaling $20 million and $20 million as of March 31, 2017 and December 31, 2016, respectively, were designated as cash flow hedges of certain liabilities and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.
Summary information about the interest-rate swaps designated as cash flow hedges was as follows (dollars in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Notional amounts
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Weighted average pay rates
|
|
|
3.54
|
%
|
|
|
3.54
|
%
|
Weighted average receive rates
|
|
3 month
LIBOR
|
|
|
3 month LIBOR
|
|
Weighted average maturity
|
|
6.2 years
|
|
|
6.5 years
|
|
Fair value
|
|
$
|
(1,535
|
)
|
|
$
|
(1,535
|
)
|
Amount of unrealized loss recognized in accumulated
other comprehensive income, net of tax
|
|
$
|
(947
|
)
|
|
$
|
(947
|
)
|
Pursuant to its interest rate swap agreements, the Company pledged collateral to the counterparties in the form of investment securities with a carrying value of $2.3 million at March 31, 2017. There was no collateral posted from the counterparties to the Company as of March 31, 2017. It is possible that the Company may need to post additional collateral in the future or that the counterparties may be required to post collateral to the Company in the future.
Other Interest Rate Swaps
The Company also enters into swaps to facilitate customer transactions and meet their financing needs. Upon entering into these transactions the Company enters into offsetting positions with large U.S. financial institutions in order to minimize risk to the Company. A summary of the Company’s customer related interest rate swaps was as follows (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
Notional
|
|
|
Estimated
|
|
|
|
amount
|
|
|
fair value
|
|
|
amount
|
|
|
fair value
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed/receive variable swaps
|
|
$
|
41,703
|
|
|
$
|
214
|
|
|
$
|
41,254
|
|
|
$
|
460
|
|
Pay variable/receive fixed swaps
|
|
|
41,703
|
|
|
|
(214
|
)
|
|
|
41,254
|
|
|
|
(460
|
)
|
Total
|
|
$
|
83,406
|
|
|
$
|
—
|
|
|
$
|
82,508
|
|
|
$
|
—
|
|
NOTE 9 - STOCK OPTIONS AND RESTRICTED SHARES
During 2008, the board of directors of the Bank approved the CapStar Bank 2008 Stock Incentive Plan (the Plan). The Plan was intended to provide incentives to certain officers, employees, and directors to stimulate their efforts toward the continued success of the Bank and to operate and manage the business in a manner that will provide for the long‑term growth and profitability of the Bank. Additionally the Plan was intended to encourage stock ownership to align the interests of employees and shareholders and to provide a means of obtaining, rewarding and retaining officers, employees, and directors.
20
Following the form
ation of CapStar Financial Holdings, Inc. in 2016, and in connection with the Share Exchange, the outstanding awards of restricted stock and stock options under the CapStar Bank 2008 Stock Incentive Plan were exchanged for similar awards of restricted stoc
k and stock options issued by CapStar Financial Holdings, Inc. under the CapStar Financial Holdings, Inc. Stock Incentive Plan, which the board of directors adopted in 2016. The Stock Incentive Plan provides for the grant of stock-based incentives, includi
ng stock options, restricted stock units, performance awards and restricted stock, to employees, directors and service providers that are subject to forfeiture until vesting conditions have been satisfied by the award recipient under the terms of the award
. The Plan reserved 1,569,475 shares of stock for issuance of stock incentives. Stock incentives include both restricted share and stock option grants. Total shares issuable under the plan were 199,891 at March 31, 2017.
The Company has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock-based compensation expense before income taxes
|
|
$
|
236
|
|
|
$
|
196
|
|
Less: deferred tax benefit
|
|
|
(90
|
)
|
|
|
(75
|
)
|
Reduction of net income
|
|
$
|
146
|
|
|
$
|
121
|
|
Restricted Shares
Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of each restricted stock grant is based on valuations performed by independent consultants. The recipients have the right to vote and receive dividends but cannot sell, transfer, assign, pledge, hypothecate, or otherwise encumber the restricted stock until the shares have vested. Restricted shares fully vest on the third anniversary of the grant date. A summary of the changes in the Company’s nonvested restricted shares for the three months ended March 31, 2017 follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
Nonvested Shares
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested at beginning of period
|
|
|
199,641
|
|
|
$
|
12.34
|
|
Granted
|
|
|
7,333
|
|
|
|
19.85
|
|
Vested
|
|
|
(43,002
|
)
|
|
|
12.24
|
|
Forfeited
|
|
|
(1,500
|
)
|
|
|
13.22
|
|
Nonvested at end of period
|
|
|
162,472
|
|
|
$
|
12.70
|
|
As of March 31, 2017, there was $1.4 million of unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of shares vested during the three months ended March 31, 2017 and 2016 was $0.5 million and $0.2 million.
Stock Options
Option awards are generally granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant. Option awards generally have a three year vesting period and a ten year contractual term.
The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model that uses the assumptions noted in the table below. Expected volatility is based on calculations performed by management using industry data. The Company’s expected dividend yield is 0.00% because the Company has not paid dividends in the past. The expected term of options granted was calculated using the “simplified” method for plain vanilla options as permitted under authoritative literature. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted in 2017.
21
The fair valu
e of options granted was determined using the following weighted average assumptions as of the grant date:
|
|
2017
|
|
|
2016
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
—
|
|
|
|
7.48
|
|
Expected stock price volatility
|
|
|
—
|
|
|
|
17.20
|
%
|
Risk-free interest rate
|
|
|
—
|
|
|
|
1.66
|
%
|
Pre-vest forfeiture rate
|
|
|
—
|
|
|
|
10.25
|
%
|
A summary of the activity in stock options for the three months ended March 31, 2017 follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (years)
|
|
Outstanding at beginning of period
|
|
|
1,006,000
|
|
|
$
|
10.48
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
(20,000
|
)
|
|
|
10.00
|
|
|
|
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at end of period
|
|
|
986,000
|
|
|
$
|
10.49
|
|
|
|
2.9
|
|
Fully vested and expected to vest
|
|
|
978,308
|
|
|
$
|
10.47
|
|
|
|
2.9
|
|
Exercisable at end of period
|
|
|
931,000
|
|
|
$
|
10.39
|
|
|
|
2.6
|
|
Information related to stock options during each year follows:
|
|
2017
|
|
|
2016
|
|
Intrinsic value of options exercised
|
|
$
|
193,800
|
|
|
$
|
53,756
|
|
Cash received from option exercises
|
|
|
200,000
|
|
|
|
96,306
|
|
Tax benefit realized from option exercises
|
|
|
74,206
|
|
|
|
20,583
|
|
Weighted average fair value of options granted
|
|
|
—
|
|
|
|
3.16
|
|
As of March 31, 2017, there was $0.1 million of unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.3 years.
NOTE 10 – REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to regulatory capital requirements administered by the Federal Reserve and the Bank is also subject to the regulatory capital requirements of the Tennessee Department of Financial Institutions. Failure to meet capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that could, in that event, have a material adverse effect on the institutions’ financial statements. The relevant regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting principles. The capital classifications of the Company and the Bank are also subject to qualitative judgments by their regulators about components, risk weightings, and other factors. Those qualitative judgments could also affect the capital status of the Company and the Bank and the amount of dividends the Company and the Bank may distribute. The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of March 31, 2017, the Company and the Bank met all regulatory capital adequacy requirements to which they are subject.
22
The Company’s and the Bank’s capital amounts and ratios as of March 31, 2017 and December 31, 2016 are presented in the following table (dollars in thousands).
|
|
Actual
|
|
|
Minimum capital
requirement (1)
|
|
|
Minimum to be
well-capitalized (2)
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
At March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
$
|
152,445
|
|
|
|
12.1
|
%
|
|
$
|
100,502
|
|
|
|
8.0
|
%
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
129,571
|
|
|
|
10.3
|
|
|
|
100,483
|
|
|
|
8.0
|
|
|
$
|
125,604
|
|
|
|
10.0
|
|
Tier I capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
|
138,375
|
|
|
|
11.0
|
|
|
|
75,377
|
|
|
|
6.0
|
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
115,501
|
|
|
|
9.2
|
|
|
|
75,362
|
|
|
|
6.0
|
|
|
|
100,483
|
|
|
|
8.0
|
|
Common equity Tier 1 capital to risk weighted
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
|
129,685
|
|
|
|
10.3
|
|
|
|
56,533
|
|
|
|
4.5
|
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
99,311
|
|
|
|
7.9
|
|
|
|
56,522
|
|
|
|
4.5
|
|
|
|
81,643
|
|
|
|
6.5
|
|
Tier I capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
|
138,375
|
|
|
|
10.4
|
|
|
|
53,396
|
|
|
|
4.0
|
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
115,501
|
|
|
|
8.7
|
|
|
|
53,394
|
|
|
|
4.0
|
|
|
|
66,742
|
|
|
|
5.0
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
$
|
149,616
|
|
|
|
12.6
|
%
|
|
$
|
95,028
|
|
|
|
8.0
|
%
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
126,718
|
|
|
|
10.7
|
|
|
|
95,028
|
|
|
|
8.0
|
|
|
$
|
118,785
|
|
|
|
10.0
|
|
Tier I capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
|
137,909
|
|
|
|
11.6
|
|
|
|
71,271
|
|
|
|
6.0
|
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
115,011
|
|
|
|
9.7
|
|
|
|
71,271
|
|
|
|
6.0
|
|
|
|
95,028
|
|
|
|
8.0
|
|
Common equity Tier 1 capital to risk weighted
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
|
129,528
|
|
|
|
10.9
|
|
|
|
53,453
|
|
|
|
4.5
|
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
99,130
|
|
|
|
8.3
|
|
|
|
53,453
|
|
|
|
4.5
|
|
|
|
77,210
|
|
|
|
6.5
|
|
Tier I capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapStar Financial Holdings, Inc.
|
|
|
137,909
|
|
|
|
10.5
|
|
|
|
52,727
|
|
|
|
4.0
|
|
|
N/A
|
|
|
N/A
|
|
CapStar Bank
|
|
|
115,011
|
|
|
|
8.7
|
|
|
|
52,727
|
|
|
|
4.0
|
|
|
|
65,909
|
|
|
|
5.0
|
|
(1)
|
For the calendar year 2017, the Company must maintain a capital conservation buffer of Tier 1 common equity capital in excess of minimum risk-based capital ratios by at least 1.25% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.
|
(2)
|
For the Company to be well-capitalized, the Bank must be well-capitalized and the Company must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve to meet and maintain a specific capital level for any capital measure.
|
23
NOTE 11 – EARNINGS PER SHARE
The following is a summary of the basic and diluted earnings per share calculation for the three months ended March 31, 2017 and 2016:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic net income per share calculation:
|
|
|
|
|
|
|
|
|
Numerator – Net income
|
|
$
|
332,058
|
|
|
$
|
1,583,846
|
|
Denominator – Average common shares outstanding
|
|
|
11,210,948
|
|
|
|
8,628,683
|
|
Basic net income per share
|
|
$
|
0.03
|
|
|
$
|
0.18
|
|
Diluted net income per share calculation:
|
|
|
|
|
|
|
|
|
Numerator – Net income
|
|
$
|
332,058
|
|
|
$
|
1,583,846
|
|
Denominator – Average common shares outstanding
|
|
|
11,210,948
|
|
|
|
8,628,683
|
|
Dilutive shares contingently issuable
|
|
|
1,573,169
|
|
|
|
1,943,510
|
|
Average diluted common shares outstanding
|
|
|
12,784,117
|
|
|
|
10,572,193
|
|
Diluted net income per share
|
|
$
|
0.03
|
|
|
$
|
0.15
|
|
NOTE 12 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1:
|
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
|
Level 2:
|
Significant 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.
|
Level 3:
|
Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
|
The Bank used the following methods and significant assumptions to estimate fair value:
Investment Securities
: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded and, values debt securities by relying on quoted prices for the specific securities and the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). See below for additional discussion of Level 3 valuation methodologies and significant inputs. The fair values of all securities are determined from third party pricing services without adjustment.
Derivatives-Interest Rate Swaps
: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Bank’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third party pricing services without adjustment.
24
Impaired Loans
: The fair value of impaired loans with specific allocations of the allowance for loan and lease losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar
loans and collateral underlying such loans. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports
, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification
. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted in accordance with the loan policy.
Other Real Estate Owned
: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Appraisals may be adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and/or management’s expertise and knowledge of the collateral. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The Company had no other real estate owned at March 31, 2017 or December 31, 2016.
Loans Held For Sale
: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2). There were no loans held for sale carried at fair value at March 31, 2017 or December 31, 2016.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
Fair value measurements at March 31, 2017
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Carrying
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored agencies
|
|
$
|
11,314
|
|
|
$
|
—
|
|
|
$
|
11,314
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
27,340
|
|
|
|
—
|
|
|
|
27,340
|
|
|
|
—
|
|
Mortgage-backed securities-residential
|
|
|
129,138
|
|
|
|
—
|
|
|
|
129,138
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
20,724
|
|
|
|
—
|
|
|
|
20,724
|
|
|
|
—
|
|
Total securities available for sale
|
|
$
|
188,516
|
|
|
$
|
—
|
|
|
$
|
188,516
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - customer related
|
|
$
|
328
|
|
|
$
|
—
|
|
|
$
|
328
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - customer related
|
|
$
|
(328
|
)
|
|
$
|
—
|
|
|
$
|
(328
|
)
|
|
$
|
—
|
|
Interest rate swaps - cash flow hedges
|
|
|
(1,535
|
)
|
|
|
—
|
|
|
|
(1,535
|
)
|
|
|
—
|
|
Total derivatives
|
|
$
|
(1,863
|
)
|
|
$
|
—
|
|
|
$
|
(1,863
|
)
|
|
$
|
—
|
|
25
|
|
Fair value measurements at December 31, 2016
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Carrying
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored agencies
|
|
$
|
9,374
|
|
|
$
|
—
|
|
|
$
|
9,374
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
27,913
|
|
|
|
—
|
|
|
|
27,913
|
|
|
|
—
|
|
Mortgage-backed securities-residential
|
|
|
124,595
|
|
|
|
—
|
|
|
|
124,595
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
20,473
|
|
|
|
—
|
|
|
|
20,473
|
|
|
|
—
|
|
Total securities available for sale
|
|
$
|
182,355
|
|
|
$
|
—
|
|
|
$
|
182,355
|
|
|
$
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - customer related
|
|
$
|
460
|
|
|
$
|
—
|
|
|
$
|
460
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - customer related
|
|
$
|
(460
|
)
|
|
$
|
—
|
|
|
$
|
(460
|
)
|
|
$
|
—
|
|
Interest rate swaps - cash flow hedges
|
|
|
(1,535
|
)
|
|
|
—
|
|
|
|
(1,535
|
)
|
|
|
—
|
|
Total derivatives
|
|
$
|
(1,995
|
)
|
|
$
|
—
|
|
|
$
|
(1,995
|
)
|
|
$
|
—
|
|
Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):
|
|
Fair value measurements at March 31, 2017
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Carrying
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
Value
|
|
|
(level 1)
|
|
|
(level 2)
|
|
|
(level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
9,725
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,725
|
|
|
|
Fair value measurements at December 31, 2016
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Carrying
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
Value
|
|
|
(level 1)
|
|
|
(level 2)
|
|
|
(level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,809
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,809
|
|
The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
Fair
|
|
|
Valuation
|
|
|
|
(Weighted-
|
March 31, 2017
|
|
Value
|
|
|
Technique(s)
|
|
Unobservable Input(s)
|
|
Average)
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
9,725
|
|
|
Sales comparison approach
|
|
Appraisal discounts
|
|
10 - 25%
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
|
Fair
|
|
|
Valuation
|
|
|
|
(Weighted-
|
|
December 31, 2016
|
|
Value
|
|
|
Technique(s)
|
|
Unobservable Input(s)
|
|
Average)
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,809
|
|
|
Sales comparison approach
|
|
Appraisal discounts
|
|
|
25
|
%
|
26
Fair Value of Financial Instruments
The carrying value and estimated fair values of the Bank’s financial instruments at March 31, 2017 and December 31, 2016 were as follows (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair value
|
|
|
amount
|
|
|
Fair value
|
|
|
amount
|
|
|
Fair value
|
|
|
level of input
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks, interest-bearing deposits in
financial institutions
|
|
$
|
58,629
|
|
|
$
|
58,629
|
|
|
$
|
63,456
|
|
|
$
|
63,456
|
|
|
Level 1
|
Federal funds sold
|
|
|
1,410
|
|
|
|
1,410
|
|
|
|
16,654
|
|
|
|
16,654
|
|
|
Level 1
|
Securities available for sale
|
|
|
188,516
|
|
|
|
188,516
|
|
|
|
182,355
|
|
|
|
182,355
|
|
|
Level 2
|
Securities held to maturity
|
|
|
46,855
|
|
|
|
49,769
|
|
|
|
46,864
|
|
|
|
49,731
|
|
|
Level 2
|
Loans held for sale
|
|
|
35,371
|
|
|
|
35,410
|
|
|
|
42,111
|
|
|
|
42,302
|
|
|
Level 2
|
Restricted equity securities
|
|
|
6,544
|
|
|
N/A
|
|
|
|
6,032
|
|
|
N/A
|
|
|
N/A
|
Loans, net
|
|
|
1,003,434
|
|
|
|
1,002,131
|
|
|
|
935,251
|
|
|
|
934,628
|
|
|
Level 3
|
Accrued interest receivable
|
|
|
4,012
|
|
|
|
4,012
|
|
|
|
3,942
|
|
|
|
3,942
|
|
|
Level 2
|
Bank owned life insurance
|
|
|
22,044
|
|
|
|
22,044
|
|
|
|
21,900
|
|
|
|
21,900
|
|
|
Level 2
|
Other assets
|
|
|
328
|
|
|
|
328
|
|
|
|
460
|
|
|
|
460
|
|
|
Level 2
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,157,995
|
|
|
|
1,116,924
|
|
|
|
1,128,722
|
|
|
|
1,088,758
|
|
|
Level 3
|
Federal Home Loan Bank advances
|
|
|
75,000
|
|
|
|
74,993
|
|
|
|
55,000
|
|
|
|
54,989
|
|
|
Level 2
|
Accrued interest payable
|
|
|
236
|
|
|
|
236
|
|
|
|
212
|
|
|
|
212
|
|
|
Level 2
|
Other liabilities
|
|
|
3,789
|
|
|
|
3,789
|
|
|
|
5,349
|
|
|
|
5,349
|
|
|
Level 3
|
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
(a)
|
Cash and Due from Banks, Interest-Bearing Deposits in Financial Institutions
|
For these short‑term instruments, the carrying amount is a reasonable estimate of fair value.
Federal funds sold clear on a daily basis. For this reason, the carrying amount is a reasonable estimate of fair value.
(c)
|
Restricted Equity Securities
|
It is not practical to determine the fair value of restricted securities due to restrictions placed on their transferability.
The fair value of the Bank’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Bank’s loan portfolio is initially fair valued using a segmented approach. The Bank divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. For variable‑rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
(e)
|
Bank Owned Life Insurance
|
For bank owned life insurance, the carrying amount is based on the cash surrender value and is a reasonable estimate of fair value.
27
Included in other assets are certain interest rate swap agreements and the cash flow hedge relationships. The fair values of interest rate swap agreements and the cash flow hedge relationships are based on independent pricing services that utilize pricing models with observable market inputs.
The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounted cash flow models, using current market interest rates offered on certificates with similar remaining maturities.
(
h
)
|
Federal Home Loan Bank Advances
|
The fair value of fixed rate Federal Home Loan Bank Advances is estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities.
(
i
)
|
Accrued Interest Receivable/Payable
|
The carrying amounts of accrued interest approximate fair value.
Included in other liabilities are certain interest rate swap agreements, the cash flow hedge relationships and contingent consideration. The fair values of interest rate swap agreements and the cash flow hedge relationships are based on independent pricing services that utilize pricing models with observable market inputs. The fair value of contingent consideration is estimated by a discounted cash flow model that utilizes various unobservable inputs.
(
k
)
|
Off-Balance Sheet Instruments
|
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on estimating on and off‑balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, fixed assets are not considered financial instruments and their value has not been incorporated into the fair value estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
28