ITEM 1. FINANCIAL STATEMENTS
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
June 30,
2017
|
|
December 31,
2016
|
ASSETS
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
54,553,718
|
|
|
$
|
34,290,617
|
|
Interest-bearing deposits at other financial institutions
|
|
28,281,708
|
|
|
34,457,691
|
|
Total cash and cash equivalents
|
|
82,835,426
|
|
|
68,748,308
|
|
|
|
|
|
|
Securities available for sale
|
|
132,761,710
|
|
|
129,421,914
|
|
Restricted investments, at cost
|
|
6,080,700
|
|
|
5,627,950
|
|
Loans, net of allowance for loan losses of $5,498,169 at June 30, 2017 and $5,105,255 at December 31, 2016
|
|
859,922,516
|
|
|
808,271,003
|
|
Bank premises and equipment, net
|
|
33,764,516
|
|
|
30,535,594
|
|
Foreclosed assets
|
|
2,369,056
|
|
|
2,386,239
|
|
Goodwill and core deposit intangible, net
|
|
7,492,177
|
|
|
6,635,655
|
|
Cash surrender value of life insurance
|
|
11,391,637
|
|
|
1,320,723
|
|
Other assets
|
|
8,861,374
|
|
|
9,508,899
|
|
Total assets
|
|
$
|
1,145,479,112
|
|
|
$
|
1,062,456,285
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
183,324,236
|
|
|
$
|
153,482,650
|
|
Interest-bearing demand deposits
|
|
156,149,846
|
|
|
162,702,457
|
|
Money market and savings deposits
|
|
324,014,445
|
|
|
274,604,724
|
|
Time deposits
|
|
318,146,778
|
|
|
316,275,340
|
|
Total deposits
|
|
981,635,305
|
|
|
907,065,171
|
|
|
|
|
|
|
Securities sold under agreement to repurchase
|
|
22,945,984
|
|
|
26,621,984
|
|
Federal Home Loan Bank advances and other borrowings
|
|
—
|
|
|
18,505,390
|
|
Accrued expenses and other liabilities
|
|
6,163,812
|
|
|
5,023,600
|
|
Total liabilities
|
|
1,010,745,101
|
|
|
957,216,145
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Preferred stock - $1 par value; 2,000,000 shares authorized; None issued and outstanding in 2017. 12,000 issued and outstanding in 2016.
|
|
—
|
|
|
12,000
|
|
Common stock - $1 par value; 40,000,000 shares authorized; 8,219,261 and 5,896,033 shares issued and outstanding in 2017 and 2016, respectively
|
|
8,219,261
|
|
|
5,896,033
|
|
Additional paid-in capital
|
|
106,793,832
|
|
|
83,463,051
|
|
Retained earnings
|
|
19,968,434
|
|
|
16,871,296
|
|
Accumulated other comprehensive loss
|
|
(247,516
|
)
|
|
(1,002,240
|
)
|
Total stockholders' equity
|
|
134,734,011
|
|
|
105,240,140
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,145,479,112
|
|
|
$
|
1,062,456,285
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Three Months Ended
June 30,
|
|
Unaudited
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
10,747,217
|
|
|
$
|
9,954,218
|
|
|
$
|
20,962,823
|
|
|
$
|
19,328,675
|
|
Securities and interest-bearing deposits at other financial institutions
|
|
692,223
|
|
|
665,402
|
|
|
1,353,043
|
|
|
1,381,982
|
|
Federal funds sold and other earning assets
|
|
78,049
|
|
|
50,171
|
|
|
150,946
|
|
|
113,481
|
|
Total interest income
|
|
11,517,489
|
|
|
10,669,791
|
|
|
22,466,812
|
|
|
20,824,138
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,241,551
|
|
|
1,012,684
|
|
|
2,339,089
|
|
|
1,973,951
|
|
Securities sold under agreements to repurchase
|
|
15,588
|
|
|
15,279
|
|
|
31,539
|
|
|
31,739
|
|
Federal Home Loan Bank advances and other borrowings
|
|
11,682
|
|
|
29,263
|
|
|
27,156
|
|
|
74,549
|
|
Total interest expense
|
|
1,268,821
|
|
|
1,057,226
|
|
|
2,397,784
|
|
|
2,080,239
|
|
Net interest income before provision for loan losses
|
|
10,248,668
|
|
|
9,612,565
|
|
|
20,069,028
|
|
|
18,743,899
|
|
Provision for loan losses
|
|
298,033
|
|
|
218,420
|
|
|
310,482
|
|
|
355,976
|
|
Net interest income after provision for loan losses
|
|
9,950,635
|
|
|
9,394,145
|
|
|
19,758,546
|
|
|
18,387,923
|
|
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
290,626
|
|
|
258,877
|
|
|
555,299
|
|
|
554,680
|
|
Gain on sale of securities
|
|
—
|
|
|
98,100
|
|
|
—
|
|
|
181,363
|
|
Gain on sale of loans and other assets
|
|
405,418
|
|
|
197,479
|
|
|
680,583
|
|
|
419,405
|
|
(Loss) gain on sale of foreclosed assets
|
|
500
|
|
|
(3,734
|
)
|
|
(15,064
|
)
|
|
54,243
|
|
Other noninterest income
|
|
555,963
|
|
|
410,155
|
|
|
958,396
|
|
|
822,018
|
|
Total noninterest income
|
|
1,252,507
|
|
|
960,877
|
|
|
2,179,214
|
|
|
2,031,709
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
4,757,618
|
|
|
4,486,148
|
|
|
9,404,367
|
|
|
8,981,156
|
|
Net occupancy and equipment expense
|
|
962,593
|
|
|
1,136,648
|
|
|
1,941,052
|
|
|
2,155,075
|
|
Depository insurance
|
|
60,987
|
|
|
150,943
|
|
|
214,286
|
|
|
286,747
|
|
Foreclosed assets
|
|
12,008
|
|
|
63,773
|
|
|
10,521
|
|
|
120,431
|
|
Advertising
|
|
129,398
|
|
|
184,065
|
|
|
293,659
|
|
|
357,510
|
|
Data processing
|
|
475,343
|
|
|
554,612
|
|
|
808,558
|
|
|
895,992
|
|
Professional services
|
|
473,351
|
|
|
551,432
|
|
|
1,043,192
|
|
|
1,006,605
|
|
Amortization of intangible assets
|
|
61,071
|
|
|
93,353
|
|
|
113,648
|
|
|
186,706
|
|
Service contracts
|
|
312,905
|
|
|
315,611
|
|
|
608,534
|
|
|
601,239
|
|
Other operating expenses
|
|
1,583,888
|
|
|
935,740
|
|
|
2,536,257
|
|
|
1,832,765
|
|
Total noninterest expenses
|
|
8,829,162
|
|
|
8,472,325
|
|
|
16,974,074
|
|
|
16,424,226
|
|
Income before income tax expense
|
|
2,373,980
|
|
|
1,882,697
|
|
|
4,963,686
|
|
|
3,995,406
|
|
Income tax expense
|
|
725,694
|
|
|
691,067
|
|
|
1,671,548
|
|
|
1,454,913
|
|
Net income
|
|
1,648,286
|
|
|
1,191,630
|
|
|
3,292,138
|
|
|
2,540,493
|
|
Preferred stock dividends
|
|
—
|
|
|
270,000
|
|
|
195,000
|
|
|
482,000
|
|
Net income available to common stockholders
|
|
$
|
1,648,286
|
|
|
$
|
921,630
|
|
|
$
|
3,097,138
|
|
|
$
|
2,058,493
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
Diluted
|
|
0.20
|
|
|
0.15
|
|
|
0.39
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
8,216,567
|
|
|
5,820,342
|
|
|
7,872,609
|
|
|
5,813,915
|
|
Diluted
|
|
8,325,538
|
|
|
6,131,820
|
|
|
7,977,282
|
|
|
6,118,530
|
|
Dividends per share
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Three Months Ended
June 30,
|
|
|
2017
|
|
2016
|
Net income
|
|
$
|
1,648,286
|
|
|
$
|
1,191,630
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
Unrealized holding gains arising during the period, net of tax expense of $270,461 and $76,857 in 2017 and 2016, respectively
|
|
435,890
|
|
|
124,607
|
|
|
|
|
|
|
Reclassification adjustment for gains included in net income, net of tax expense of $0 and $32,278 in 2017 and 2016, respectively
|
|
—
|
|
|
(60,822
|
)
|
|
|
|
|
|
Total other comprehensive income
|
|
435,890
|
|
|
63,785
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,084,176
|
|
|
$
|
1,255,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
Net income
|
|
$
|
3,292,138
|
|
|
$
|
2,540,493
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
Unrealized holding gains arising during the period, net of tax expense of $468,293 and $458,148 in 2017 and 2016, respectively
|
|
754,724
|
|
|
739,315
|
|
|
|
|
|
|
Reclassification adjustment for gains included in net income, net of tax expense of $- and $68,918 in 2017 and 2016, respectively
|
|
—
|
|
|
(112,445
|
)
|
|
|
|
|
|
Total other comprehensive income
|
|
754,724
|
|
|
626,870
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,046,862
|
|
|
$
|
3,167,363
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
For the
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Shares
|
|
Common
Shares
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2016
|
|
12,000
|
|
|
5,896,033
|
|
|
$
|
12,000
|
|
|
$
|
5,896,033
|
|
|
$
|
83,463,051
|
|
|
$
|
16,871,296
|
|
|
$
|
(1,002,240
|
)
|
|
$
|
105,240,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,292,138
|
|
|
—
|
|
|
3,292,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
754,724
|
|
|
754,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
—
|
|
|
1,840,000
|
|
|
—
|
|
|
1,840,000
|
|
|
31,094,676
|
|
|
—
|
|
|
—
|
|
|
32,934,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock grants
|
|
—
|
|
|
1,511
|
|
|
—
|
|
|
1,511
|
|
|
30,280
|
|
|
—
|
|
|
—
|
|
|
31,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
—
|
|
|
481,717
|
|
|
—
|
|
|
481,717
|
|
|
4,143,295
|
|
|
—
|
|
|
—
|
|
|
4,625,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend on preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(195,000
|
)
|
|
—
|
|
|
(195,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred stock
|
|
(12,000
|
)
|
|
|
|
(12,000
|
)
|
|
|
|
(11,988,000
|
)
|
|
|
|
|
|
(12,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,530
|
|
|
—
|
|
|
—
|
|
|
50,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2017
|
|
—
|
|
|
8,219,261
|
|
|
$
|
—
|
|
|
$
|
8,219,261
|
|
|
$
|
106,793,832
|
|
|
$
|
19,968,434
|
|
|
$
|
(247,516
|
)
|
|
$
|
134,734,011
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
SMARTFINANICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
3,292,138
|
|
|
$
|
2,540,493
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,165,930
|
|
|
1,063,117
|
|
Provision for loan losses
|
|
310,482
|
|
|
355,976
|
|
Stock compensation expense
|
|
50,530
|
|
|
66,635
|
|
Gains from sale of securities
|
|
—
|
|
|
(181,363
|
)
|
Net gains from sale of loans and other assets
|
|
(680,583
|
)
|
|
(419,405
|
)
|
Net losses (gains) from sale of foreclosed assets
|
|
15,064
|
|
|
(54,243
|
)
|
Changes in other assets and liabilities:
|
|
|
|
|
|
|
Accrued interest receivable
|
|
18,144
|
|
|
280,727
|
|
Accrued interest payable
|
|
13,117
|
|
|
4,315
|
|
Other assets and liabilities
|
|
1,457,176
|
|
|
5,330,459
|
|
Net cash provided by operating activities
|
|
5,641,998
|
|
|
8,986,711
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from security sales, maturities, and paydowns
|
|
10,062,386
|
|
|
29,349,635
|
|
Purchase of securities
|
|
(12,507,860
|
)
|
|
(5,000,000
|
)
|
Purchase of bank owned life insurance
|
|
(10,070,914
|
)
|
|
—
|
|
Purchase of restricted investments
|
|
(452,750
|
)
|
|
(200
|
)
|
Net cash for purchase of branch acquisition
|
|
(1,049,878
|
)
|
|
—
|
|
Loan originations and principal collections, net
|
|
(27,248,001
|
)
|
|
(45,399,008
|
)
|
Purchase of bank premises and equipment
|
|
(1,226,898
|
)
|
|
(1,454,765
|
)
|
Proceeds from sale of foreclosed assets
|
|
41,636
|
|
|
652,364
|
|
Net cash used in investing activities
|
|
(42,452,279
|
)
|
|
(21,851,974
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Net increase in deposits
|
|
47,682,310
|
|
|
30,266,395
|
|
Net decrease in securities sold under agreements to repurchase
|
|
(3,676,000
|
)
|
|
(1,185,467
|
)
|
Issuance of common stock
|
|
37,591,479
|
|
|
135,079
|
|
Redemption of preferred stock
|
|
(12,000,000
|
)
|
|
—
|
|
Payment of dividends on preferred stock
|
|
(195,000
|
)
|
|
(482,000
|
)
|
Proceeds from Federal Home Loan Bank advances and other borrowings
|
|
79,268,072
|
|
|
100,000
|
|
Repayment of Federal Home Loan Bank advances and other borrowings
|
|
(97,773,462
|
)
|
|
(24,196,260
|
)
|
Net cash provided by financing activities
|
|
50,897,399
|
|
|
4,637,747
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
14,087,118
|
|
|
(8,227,516
|
)
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
68,748,308
|
|
|
79,964,633
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
82,835,426
|
|
|
$
|
71,737,117
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,374,250
|
|
|
$
|
2,075,924
|
|
Cash paid during the period for taxes
|
|
1,366,172
|
|
|
726,528
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
Change in unrealized losses on securities available for sale
|
|
$
|
(1,223,017
|
)
|
|
$
|
(1,016,100
|
)
|
Acquisition of real estate through foreclosure
|
|
39,517
|
|
|
1,296,077
|
|
Financed sales of foreclosed assets
|
|
—
|
|
|
1,120,138
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Presentation of Financial Information
Nature of Business:
SmartFinancial, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the “Bank”). The Company provides a variety of financial services to individuals and corporate customers through its offices in eastern Tennessee, northwest Florida, and north Georgia. The Company’s primary deposit products are interest-bearing demand deposits and certificates of deposit. Its primary lending products are commercial, residential, and consumer loans. On May 22, 2017, the Company along with the Bank entered into an agreement and plan of merger with Capstone Bancshares, Inc., an Alabama corporation and Capstone Bank, an Alabama-chartered commercial bank and wholly owned subsidiary of Capstone Bancshares, Inc where the Company will be the surviving entity and Capstone Bank will merge with and into the Bank. A copy of the agreement and plan of merger is attached as Exhibit 2.1 and is incorporated by reference herin.
Interim Financial Information (Unaudited):
The financial information in this report for
June 30, 2017
and
June 30, 2016
has not been audited. The information included herein should be read in conjunction with the Company’s
2016
annual consolidated financial statements and footnotes included elsewhere. The consolidated financial statements presented herein conform to U.S. generally accepted accounting principles and to general industry practices. In the opinion of SmartFinancial’s management, the accompanying interim financial statements contain all material adjustments necessary to present fairly the financial condition, the results of operations, and cash flows for the interim period. Results for interim periods are not necessarily indicative of the results to be expected for a full year.
Basis of Presentation and Accounting Estimates:
All adjustments consisting of normal recurring accruals, that in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with those appearing the in the
2016
Annual Report previously filed on Form 10-K.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and 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 in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and deferred taxes, other-than-temporary impairments of securities, and the fair value of financial instruments.
The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.
The Company’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Presentation of Financial Information, Continued
Recently Issued Accounting Pronouncements:
During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended
December 31, 2016
as filed with the Securities and Exchange Commission. The following is a summary of recent authoritative pronouncements not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company issued since
December 31, 2016
.
In January 2017, FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2017, FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2017, FASB issued ASU No. 2017-08,
Receivables - Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities.
The ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonably estimable. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This update should be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings on the date of adoption. The Company does not expect these amendments to have a material effect on its financial statements.
Reclassifications:
Certain captions and amounts in the 2016 financial statements were reclassified to conform to the 2017 presentation.
Earnings per common share:
Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 2. Earnings per share
The following is a summary of the basic and diluted earnings per share for the
three and six
month periods ended
June 30, 2017
and
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income available to common shareholders
|
$
|
1,648,286
|
|
|
$
|
921,630
|
|
|
$
|
3,097,138
|
|
|
$
|
2,058,493
|
|
Weighted average common shares outstanding
|
8,216,567
|
|
|
5,820,342
|
|
|
7,872,609
|
|
|
5,813,915
|
|
Effect of dilutive stock options
|
108,971
|
|
|
311,478
|
|
|
104,673
|
|
|
304,615
|
|
Diluted shares
|
8,325,538
|
|
|
6,131,820
|
|
|
7,977,282
|
|
|
6,118,530
|
|
Basic earnings per common share
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
Diluted earnings per common share
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.39
|
|
|
$
|
0.34
|
|
For the
three and six
months ended
June 30, 2017
and
2016
, the effects of outstanding antidilutive stock options are excluded from the computation of diluted earnings per common share because the exercise price of such options is higher than the market price. There were
13,916
and
18,100
antidilutive stock options as of
June 30, 2017
and
2016
, respectively.
Note 3. Securities
The amortized cost and fair value of securities available-for-sale at
June 30, 2017
and
December 31, 2016
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Government-sponsored enterprises (GSEs)
|
|
$
|
18,244
|
|
|
$
|
5
|
|
|
$
|
(278
|
)
|
|
$
|
17,971
|
|
Municipal securities
|
|
8,362
|
|
|
77
|
|
|
(42
|
)
|
|
8,397
|
|
Other debt securities
|
|
972
|
|
|
—
|
|
|
(24
|
)
|
|
948
|
|
Mortgage-backed securities
|
|
105,585
|
|
|
347
|
|
|
(486
|
)
|
|
105,446
|
|
|
|
$
|
133,163
|
|
|
$
|
429
|
|
|
$
|
(830
|
)
|
|
$
|
132,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Government-sponsored enterprises (GSEs)
|
|
$
|
18,279
|
|
|
$
|
8
|
|
|
$
|
(564
|
)
|
|
$
|
17,723
|
|
Municipal securities
|
|
8,182
|
|
|
16
|
|
|
(179
|
)
|
|
8,019
|
|
Mortgage-backed securities
|
|
104,585
|
|
|
185
|
|
|
(1,090
|
)
|
|
103,680
|
|
|
|
$
|
131,046
|
|
|
$
|
209
|
|
|
$
|
(1,833
|
)
|
|
$
|
129,422
|
|
At
June 30, 2017
, securities with a fair value totaling approximately
$81,000,000
were pledged to secure public funds and securities sold under agreements to repurchase.
For the
three and six
months ended
June 30, 2017
, there were no available-for-sale securities sold. For the
three and six
months ended
June 30, 2016
there were available-for-sale securities sold with proceeds totaling
$3,098,100
and
$8,170,600
which resulted in gross gains realized of
$98,100
and
$181,363
, respectively.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3. Securities, Continued
The amortized cost and estimated fair value of securities at
June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
Due in one year or less
|
|
$
|
4,179
|
|
|
$
|
4,182
|
|
Due from one year to five years
|
|
11,165
|
|
|
10,961
|
|
Due from five years to ten years
|
|
8,789
|
|
|
8,703
|
|
Due after ten years
|
|
3,445
|
|
|
3,470
|
|
|
|
27,578
|
|
|
27,316
|
|
Mortgage-backed securities
|
|
105,585
|
|
|
105,446
|
|
|
|
$
|
133,163
|
|
|
$
|
132,762
|
|
The following tables present the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities available-for-sale have been in a continuous unrealized loss position, as of
June 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
U.S. Government- sponsored enterprises (GSEs)
|
|
13,572
|
|
|
(278
|
)
|
|
—
|
|
|
—
|
|
|
13,572
|
|
|
(278
|
)
|
Municipal securities
|
|
2,897
|
|
|
(41
|
)
|
|
253
|
|
|
(1
|
)
|
|
3,150
|
|
|
(42
|
)
|
Other debt securities
|
|
948
|
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
|
948
|
|
|
(24
|
)
|
Mortgage-backed securities
|
|
33,086
|
|
|
(139
|
)
|
|
17,662
|
|
|
(347
|
)
|
|
50,748
|
|
|
(486
|
)
|
|
|
50,503
|
|
|
(482
|
)
|
|
17,915
|
|
|
(348
|
)
|
|
68,418
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
U.S. Government- sponsored enterprises (GSEs)
|
|
$
|
14,702
|
|
|
$
|
(564
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,702
|
|
|
$
|
(564
|
)
|
Municipal securities
|
|
6,368
|
|
|
(179
|
)
|
|
—
|
|
|
—
|
|
|
6,368
|
|
|
(179
|
)
|
Mortgage-backed securities
|
|
67,063
|
|
|
(690
|
)
|
|
8,948
|
|
|
(400
|
)
|
|
76,011
|
|
|
(1,090
|
)
|
|
|
$
|
88,133
|
|
|
$
|
(1,433
|
)
|
|
$
|
8,948
|
|
|
$
|
(400
|
)
|
|
$
|
97,081
|
|
|
$
|
(1,833
|
)
|
At
June 30, 2017
, the categories of temporarily impaired securities, and management’s evaluation of those securities, are as follows:
U.S. Government-sponsored enterprises
:
At
June 30, 2017
,
4
(or four) investment in U.S. GSE securities had unrealized losses. These unrealized losses related principally to changes in market interest rates. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Bank does not intend to sell the investments and it is more likely than not that the Bank will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at
June 30, 2017
.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3. Securities, Continued
Municipal securities
: At
June 30, 2017
,
8
(or eight) investments in obligations of municipal securities had unrealized losses. The Bank believes the unrealized losses on those investments were caused by the interest rate environment and do not relate to the underlying credit quality of the issuers. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at
June 30, 2017
.
Other debt securities
: At
June 30, 2017
,
1
(or one) investment in other debt securities had unrealized losses. The Bank believes the unrealized loss on this investment was caused by the interest rate environment and does not relate to the underlying credit quality of the issuer. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its amortized cost bases, which may be maturity, the Bank does not consider this investment to be other-than temporarily impaired at
June 30, 2017
.
Mortgage-backed securities
:
At
June 30, 2017
,
43
(or forty three) investments in residential mortgage-backed securities had unrealized losses. This impairment is believed to be caused by the current interest rate environment. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not deem these investments to be other-than-temporarily impaired at
June 30, 2017
.
Note 4. Loans and Allowance for Loan Losses
Portfolio Segmentation:
At
June 30, 2017
and
December 31, 2016
, loans are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
PCI Loans
|
|
All Other
Loans
|
|
Total
|
|
PCI
Loans
|
|
All Other
Loans
|
|
Total
|
Commercial real estate
|
|
$
|
14,417
|
|
|
$
|
430,772
|
|
|
$
|
445,189
|
|
|
$
|
14,943
|
|
|
$
|
400,265
|
|
|
$
|
415,208
|
|
Consumer real estate
|
|
8,071
|
|
|
198,596
|
|
|
206,667
|
|
|
9,004
|
|
|
178,798
|
|
|
187,802
|
|
Construction and land development
|
|
1,474
|
|
|
99,682
|
|
|
101,156
|
|
|
1,678
|
|
|
116,191
|
|
|
117,869
|
|
Commercial and industrial
|
|
1,249
|
|
|
103,984
|
|
|
105,233
|
|
|
1,568
|
|
|
83,454
|
|
|
85,022
|
|
Consumer and other
|
|
—
|
|
|
7,176
|
|
|
7,176
|
|
|
—
|
|
|
7,475
|
|
|
7,475
|
|
Total loans
|
|
25,211
|
|
|
840,210
|
|
|
865,421
|
|
|
27,193
|
|
|
786,183
|
|
|
813,376
|
|
Less: Allowance for loan losses
|
|
—
|
|
|
(5,498
|
)
|
|
(5,498
|
)
|
|
—
|
|
|
(5,105
|
)
|
|
(5,105
|
)
|
Loans, net
|
|
$
|
25,211
|
|
|
$
|
834,712
|
|
|
$
|
859,923
|
|
|
$
|
27,193
|
|
|
$
|
781,078
|
|
|
$
|
808,271
|
|
For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are five loan portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, and consumer and other.
The following describe risk characteristics relevant to each of the portfolio segments:
Commercial Real Estate:
Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Portfolio Segmentation (continued):
Consumer Real Estate:
Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. One to four family first mortgage loans are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Construction and Land Development:
Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Commercial and Industrial:
The commercial and industrial loan portfolio segment includes commercial, financial, and agricultural loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers' business operations.
Consumer and Other:
The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.
Credit Risk Management:
The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored.
Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status.
Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by the Senior Credit Officer and the Directors Loan Committee.
The allowance for loan losses is a valuation reserve allowance established through provisions for loan losses charged against income. The allowance for loan losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for impairment and general allocations for pools of homogeneous loans with similar risk characteristics and trends.
The allowance for loan losses related to specific loans is based on management's estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent or (3) the loan's observable market price. The Company's homogeneous loan pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, and consumer and other loans. The general allocations to these loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan structuring and pricing; (6) the impact of interest rate changes on portfolio risk and (7) effectiveness of the Company's loan policies, procedures and internal controls. The total allowance established for each homogeneous loan pool represents the product of the historical loss ratio adjusted for qualitative factors and the total dollar amount of the loans in the pool.
The composition of loans by loan classification for impaired and performing loan status at
June 30, 2017
and
December 31, 2016
, is summarized in the tables below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Performing loans
|
|
$
|
430,653
|
|
|
$
|
197,755
|
|
|
$
|
99,135
|
|
|
$
|
103,940
|
|
|
$
|
7,176
|
|
|
$
|
838,659
|
|
Impaired loans
|
|
119
|
|
|
841
|
|
|
547
|
|
|
44
|
|
|
—
|
|
|
1,551
|
|
|
|
430,772
|
|
|
198,596
|
|
|
99,682
|
|
|
103,984
|
|
|
7,176
|
|
|
840,210
|
|
PCI loans
|
|
14,417
|
|
|
8,071
|
|
|
1,474
|
|
|
1,249
|
|
|
—
|
|
|
25,211
|
|
Total
|
|
$
|
445,189
|
|
|
$
|
206,667
|
|
|
$
|
101,156
|
|
|
$
|
105,233
|
|
|
$
|
7,176
|
|
|
$
|
865,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Performing loans
|
|
$
|
400,146
|
|
|
$
|
177,977
|
|
|
$
|
115,326
|
|
|
$
|
83,244
|
|
|
$
|
7,475
|
|
|
$
|
784,168
|
|
Impaired loans
|
|
119
|
|
|
821
|
|
|
865
|
|
|
210
|
|
|
—
|
|
|
2,015
|
|
|
|
400,265
|
|
|
178,798
|
|
|
116,191
|
|
|
83,454
|
|
|
7,475
|
|
|
786,183
|
|
PCI loans
|
|
14,943
|
|
|
9,004
|
|
|
1,678
|
|
|
1,568
|
|
|
—
|
|
|
27,193
|
|
Total loans
|
|
$
|
415,208
|
|
|
$
|
187,802
|
|
|
$
|
117,869
|
|
|
$
|
85,022
|
|
|
$
|
7,475
|
|
|
$
|
813,376
|
|
The following tables show the allowance for loan losses allocation by loan classification for impaired, PCI, and performing loans as of
June 30, 2017
and
December 31, 2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and
Other
|
|
Total
|
Performing loans
|
|
$
|
2,489
|
|
|
$
|
1,556
|
|
|
$
|
609
|
|
|
$
|
644
|
|
|
$
|
103
|
|
|
$
|
5,401
|
|
Impaired loans
|
|
—
|
|
|
97
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
97
|
|
Total
|
|
$
|
2,489
|
|
|
$
|
1,653
|
|
|
$
|
609
|
|
|
$
|
644
|
|
|
$
|
103
|
|
|
$
|
5,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and
Other
|
|
Total
|
Performing loans
|
|
$
|
2,369
|
|
|
$
|
1,382
|
|
|
$
|
717
|
|
|
$
|
516
|
|
|
$
|
117
|
|
|
$
|
5,101
|
|
Impaired loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total
|
|
$
|
2,369
|
|
|
$
|
1,382
|
|
|
$
|
717
|
|
|
$
|
520
|
|
|
$
|
117
|
|
|
$
|
5,105
|
|
There was
no
allowance for PCI loans at
June 30, 2017
or
December 31, 2016
.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
The following tables detail the changes in the allowance for loan losses for the
six
month period ending
June 30, 2017
and year ending
December 31, 2016
, by loan classification (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Consumer
Real
Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Beginning balance
|
|
$
|
2,369
|
|
|
$
|
1,382
|
|
|
$
|
717
|
|
|
$
|
520
|
|
|
$
|
117
|
|
|
$
|
5,105
|
|
Loans charged off
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(40
|
)
|
|
(46
|
)
|
Recoveries of loans charged off
|
|
6
|
|
|
47
|
|
|
8
|
|
|
32
|
|
|
36
|
|
|
129
|
|
Provision (reallocation) charged to operating expense
|
|
114
|
|
|
230
|
|
|
(116
|
)
|
|
92
|
|
|
(10
|
)
|
|
310
|
|
Ending balance
|
|
$
|
2,489
|
|
|
$
|
1,653
|
|
|
$
|
609
|
|
|
$
|
644
|
|
|
$
|
103
|
|
|
$
|
5,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Commercial
Real Estate
|
|
Consumer
Real
Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Beginning balance
|
|
$
|
1,906
|
|
|
$
|
1,015
|
|
|
$
|
627
|
|
|
$
|
777
|
|
|
$
|
29
|
|
|
$
|
4,354
|
|
Loans charged off
|
|
—
|
|
|
(102
|
)
|
|
(14
|
)
|
|
(35
|
)
|
|
(155
|
)
|
|
(306
|
)
|
Recoveries of charge-offs
|
|
45
|
|
|
76
|
|
|
22
|
|
|
58
|
|
|
68
|
|
|
269
|
|
Provision (reallocation) charged to operating expense
|
|
418
|
|
|
393
|
|
|
82
|
|
|
(280
|
)
|
|
175
|
|
|
788
|
|
Ending balance
|
|
$
|
2,369
|
|
|
$
|
1,382
|
|
|
$
|
717
|
|
|
$
|
520
|
|
|
$
|
117
|
|
|
$
|
5,105
|
|
A description of the general characteristics of the risk grades used by the Company is as follows:
Pass:
Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.
Special Mention:
Loans in this risk grade are the equivalent of the regulatory definition of "Other Assets Especially Mentioned" classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company's credit position.
Substandard:
Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful:
Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
Uncollectible:
Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans within this category.
The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of
June 30, 2017
and
December 31, 2016
(amounts in thousands):
Non PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Pass
|
|
$
|
430,490
|
|
|
$
|
197,314
|
|
|
$
|
99,048
|
|
|
$
|
103,031
|
|
|
$
|
6,959
|
|
|
$
|
836,842
|
|
Watch
|
|
159
|
|
|
509
|
|
|
87
|
|
|
870
|
|
|
—
|
|
|
1,625
|
|
Special mention
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
217
|
|
|
233
|
|
Substandard
|
|
123
|
|
|
757
|
|
|
547
|
|
|
83
|
|
|
—
|
|
|
1,510
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
430,772
|
|
|
$
|
198,596
|
|
|
$
|
99,682
|
|
|
$
|
103,984
|
|
|
$
|
7,176
|
|
|
$
|
840,210
|
|
PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Pass
|
|
$
|
11,548
|
|
|
$
|
6,116
|
|
|
$
|
816
|
|
|
$
|
970
|
|
|
$
|
—
|
|
|
$
|
19,450
|
|
Watch
|
|
865
|
|
|
1,221
|
|
|
646
|
|
|
16
|
|
|
—
|
|
|
2,748
|
|
Special mention
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238
|
|
|
—
|
|
|
238
|
|
Substandard
|
|
2,004
|
|
|
734
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
2,750
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
25
|
|
Total
|
|
$
|
14,417
|
|
|
$
|
8,071
|
|
|
$
|
1,474
|
|
|
$
|
1,249
|
|
|
$
|
—
|
|
|
$
|
25,211
|
|
Total loans
|
|
$
|
445,189
|
|
|
$
|
206,667
|
|
|
$
|
101,156
|
|
|
$
|
105,233
|
|
|
$
|
7,176
|
|
|
$
|
865,421
|
|
Non PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Pass
|
|
$
|
399,505
|
|
|
$
|
177,466
|
|
|
$
|
115,237
|
|
|
$
|
82,992
|
|
|
$
|
7,238
|
|
|
$
|
782,438
|
|
Watch
|
|
640
|
|
|
550
|
|
|
89
|
|
|
252
|
|
|
—
|
|
|
1,531
|
|
Special mention
|
|
—
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
237
|
|
|
341
|
|
Substandard
|
|
120
|
|
|
678
|
|
|
865
|
|
|
210
|
|
|
—
|
|
|
1,873
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
400,265
|
|
|
$
|
178,798
|
|
|
$
|
116,191
|
|
|
$
|
83,454
|
|
|
$
|
7,475
|
|
|
$
|
786,183
|
|
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Commercial
Real Estate
|
|
Consumer
Real Estate
|
|
Construction
and Land
Development
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
Pass
|
|
$
|
11,836
|
|
|
$
|
6,811
|
|
|
$
|
1,019
|
|
|
$
|
1,507
|
|
|
$
|
—
|
|
|
$
|
21,173
|
|
Watch
|
|
1,045
|
|
|
1,577
|
|
|
645
|
|
|
22
|
|
|
—
|
|
|
3,289
|
|
Special mention
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Substandard
|
|
2,062
|
|
|
616
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
2,692
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
27
|
|
Total
|
|
$
|
14,943
|
|
|
$
|
9,004
|
|
|
$
|
1,678
|
|
|
$
|
1,568
|
|
|
$
|
—
|
|
|
$
|
27,193
|
|
Total loans
|
|
$
|
415,208
|
|
|
$
|
187,802
|
|
|
$
|
117,869
|
|
|
$
|
85,022
|
|
|
$
|
7,475
|
|
|
$
|
813,376
|
|
Past Due Loans:
A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. Generally, management places a loan on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.
The following tables present the aging of the recorded investment in loans as of
June 30, 2017
and
December 31, 2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
30-89 Days
Past Due and
Accruing
|
|
Past Due 90
Days or More
and Accruing
|
|
Nonaccrual
|
|
Total
Past Due
and NonAccrual
|
|
PCI Loans
|
|
Current
Loans
|
|
Total
Loans
|
Commercial real estate
|
|
$
|
240
|
|
|
$
|
—
|
|
|
$
|
123
|
|
|
$
|
363
|
|
|
$
|
14,417
|
|
|
$
|
430,409
|
|
|
$
|
445,189
|
|
Consumer real estate
|
|
1,193
|
|
|
—
|
|
|
414
|
|
|
1,607
|
|
|
8,071
|
|
|
196,989
|
|
|
206,667
|
|
Construction and land development
|
|
—
|
|
|
—
|
|
|
547
|
|
|
547
|
|
|
1,474
|
|
|
99,135
|
|
|
101,156
|
|
Commercial and industrial
|
|
9
|
|
|
19
|
|
|
—
|
|
|
28
|
|
|
1,249
|
|
|
103,956
|
|
|
105,233
|
|
Consumer and other
|
|
40
|
|
|
11
|
|
|
—
|
|
|
51
|
|
|
—
|
|
|
7,125
|
|
|
7,176
|
|
Total
|
|
$
|
1,482
|
|
|
$
|
30
|
|
|
$
|
1,084
|
|
|
$
|
2,596
|
|
|
$
|
25,211
|
|
|
$
|
837,614
|
|
|
$
|
865,421
|
|
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Past Due Loans (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
30-89 Days
Past Due and
Accruing
|
|
Past Due 90
Days or More
and Accruing
|
|
Nonaccrual
|
|
Total
Past Due
and NonAccrual
|
|
PCI
Loans
|
|
Current
Loans
|
|
Total
Loans
|
Commercial real estate
|
|
$
|
395
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
395
|
|
|
$
|
14,943
|
|
|
$
|
399,870
|
|
|
$
|
415,208
|
|
Consumer real estate
|
|
695
|
|
|
699
|
|
|
386
|
|
|
1,780
|
|
|
9,004
|
|
|
177,018
|
|
|
187,802
|
|
Construction and land development
|
|
690
|
|
|
—
|
|
|
865
|
|
|
1,555
|
|
|
1,678
|
|
|
114,636
|
|
|
117,869
|
|
Commercial and industrial
|
|
257
|
|
|
—
|
|
|
164
|
|
|
421
|
|
|
1,568
|
|
|
83,033
|
|
|
85,022
|
|
Consumer and other
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
7,458
|
|
|
7,475
|
|
Total
|
|
$
|
2,054
|
|
|
$
|
699
|
|
|
$
|
1,415
|
|
|
$
|
4,168
|
|
|
$
|
27,193
|
|
|
$
|
782,015
|
|
|
$
|
813,376
|
|
Impaired Loans:
The following is an analysis of the impaired loan portfolio, excluding PCI loans, detailing the related allowance recorded as of
June 30, 2017
and
December 31, 2016
(amounts in thoudands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
At June 30, 2017
|
|
June 30, 2017
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
Impaired loans without a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
119
|
|
|
$
|
124
|
|
|
$
|
—
|
|
|
$
|
159
|
|
|
$
|
6
|
|
Consumer real estate
|
|
93
|
|
|
93
|
|
|
—
|
|
|
427
|
|
|
5
|
|
Construction and land development
|
|
547
|
|
|
547
|
|
|
—
|
|
|
682
|
|
|
—
|
|
Commercial and industrial
|
|
44
|
|
|
44
|
|
|
—
|
|
|
45
|
|
|
1
|
|
Consumer and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
803
|
|
|
808
|
|
|
—
|
|
|
1,313
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer real estate
|
|
748
|
|
|
772
|
|
|
97
|
|
|
458
|
|
|
14
|
|
Construction and land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Consumer and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
748
|
|
|
772
|
|
|
97
|
|
|
567
|
|
|
14
|
|
Total impaired loans
|
|
$
|
1,551
|
|
|
$
|
1,580
|
|
|
$
|
97
|
|
|
$
|
1,880
|
|
|
$
|
26
|
|
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Impaired Loans (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
At December 31, 2016
|
|
December 31, 2016
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
Impaired loans without a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
119
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
1,311
|
|
|
$
|
73
|
|
Consumer real estate
|
|
821
|
|
|
849
|
|
|
—
|
|
|
2,334
|
|
|
100
|
|
Construction and land development
|
|
865
|
|
|
865
|
|
|
—
|
|
|
967
|
|
|
3
|
|
Commercial and industrial
|
|
46
|
|
|
46
|
|
|
—
|
|
|
47
|
|
|
4
|
|
Consumer and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
1,851
|
|
|
1,879
|
|
|
—
|
|
|
4,659
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction and land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
164
|
|
|
243
|
|
|
4
|
|
|
306
|
|
|
70
|
|
Consumer and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
164
|
|
|
243
|
|
|
4
|
|
|
306
|
|
|
70
|
|
Total impaired loans
|
|
$
|
2,015
|
|
|
$
|
2,122
|
|
|
$
|
4
|
|
|
$
|
4,965
|
|
|
$
|
250
|
|
Troubled Debt Restructurings:
At
June 30, 2017
and
December 31, 2016
, impaired loans included loans that were classified as Troubled Debt Restructurings ("TDRs"). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor's projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.
The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan.
The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of
June 30, 2017
and
December 31, 2016
, management had approximately,
$44,000
and
$608,000
, respectively, in loans that met the criteria for restructured, which included approximately
$0
and
$442,000
, respectively, of loans on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that management will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Troubled Debt Restructurings (continued):
There were
no
loans that were modified as troubled debt restructurings during the six month period ended June 30, 2017.
The following table presents a summary of loans that were modified as troubled debt restructurings during the twelve month period ended
December 31, 2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Modification
Outstanding
Recorded
|
|
Post-Modification
Outstanding
Recorded
|
December 31, 2016
|
|
Number of Contracts
|
|
Investment
|
|
Investment
|
Construction and land development
|
|
1
|
|
$
|
278
|
|
|
$
|
278
|
|
Commercial and industrial
|
|
1
|
|
$
|
164
|
|
|
$
|
164
|
|
There were no loans that were modified as troubled debt restructurings during the past twelve months and for which there was a subsequent payment default.
Purchased Credit Impaired Loans:
The Company has acquired loans which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2017
|
December 31, 2016
|
Commercial real estate
|
$
|
17,713
|
|
$
|
18,473
|
|
Consumer real estate
|
11,030
|
|
12,111
|
|
Construction and land development
|
1,778
|
|
2,553
|
|
Commercial and industrial
|
1,978
|
|
2,482
|
|
Consumer and other
|
—
|
|
—
|
|
Total loans
|
32,499
|
|
35,619
|
|
Less remaining purchase discount
|
(7,288
|
)
|
(8,426
|
)
|
Total loans, net of purchase discount
|
25,211
|
|
27,193
|
|
Less: Allowance for loan losses
|
—
|
|
—
|
|
Carrying amount, net of allowance
|
$
|
25,211
|
|
$
|
27,193
|
|
Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the
three and six
months period ended
June 30, 2017
and
2016
:
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Purchased Credit Impaired Loans (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2017
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Accretable yield, beginning of period
|
|
$
|
8,482
|
|
|
$
|
9,606
|
|
|
$
|
8,950
|
|
|
$
|
10,216
|
|
Additions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accretion income
|
|
(973
|
)
|
|
(586
|
)
|
|
(1,670
|
)
|
|
(1,215
|
)
|
Reclassification to accretable
|
|
366
|
|
|
1,378
|
|
|
610
|
|
|
1,337
|
|
Other changes, net
|
|
600
|
|
|
(189
|
)
|
|
585
|
|
|
(129
|
)
|
Accretable yield
|
|
$
|
8,475
|
|
|
$
|
10,209
|
|
|
$
|
8,475
|
|
|
$
|
10,209
|
|
Note 5. Employee Benefit Plans
401(k) Plan:
The Company provides a deferred salary reduction plan (“
Plan
”) under Section 401(k) of the Internal Revenue Code covering substantially all employees.
After one year of service the Company matches 100 percent of employee contributions up to 3 percent of compensation and 50 percent of employee contributions on the next 2 percent of compensation.
The Company's contribution to the Plan for the three month period ending June 30, 2017 and 2016 respectively was
$106,130
and
$99,568
and for the six month period ending June 30, 2017 and 2016 respectively was $
208,846
and $
190,423
Stock Option Plans:
The Company has one currently active equity incentive plan administered by the Board of Directors, and four plans or programs, pursuant to which the Company has outstanding prior grants. These plans are described below:
Legacy Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan –
The plan provided Cornerstone Bancshares, Inc. officers and employees incentive stock options or non-qualified stock options to purchase shares of common stock. The exercise price for incentive stock options was not less than
100 percent
of the fair market value of the common stock on the date of the grant. The exercise price of the non-qualified stock options was equal to or more or less than the fair market value of the common stock on the date of the grant. This plan expired in 2012.
Legacy Cornerstone Non-Qualified Plan Options —
During 2013 and 2014, Cornerstone issued non-qualified options to employees and directors. The options were originally documented in 2013 as being issued out of the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan but that plan expired in 2012. The non-qualified options are governed by the grant document issued to the holders which incorporate the terms of the plan by reference.
Legacy SmartBank Stock Option Plan –
This plan was assumed by the Company on August 31, 2015. The plan provides for incentive stock options and nonqualified stock options. The maximum number of common shares that could be sold or optioned under the plan is
525,000
shares. Under the plan, the exercise price of each option could not be less than
100 percent
of the fair market value of the common stock on the date of grant.
Legacy SmartFinancial, Inc. 2010 Incentive Plan -
This plan was assumed by the Company on August 31, 2015. This plan provides for incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance awards, dividend equivalents and stock or other stock-based awards. The maximum number of common shares that could be sold or optioned under the plan is
525,000
shares. Under the plan, the exercise price of each option could not be less than
100 percent
of the fair market value of the common stock on the date of grant.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 5. Employee Benefit Plans, Continued
Stock Option Plans (Continued):
2015 Stock Incentive Plan –
This plan provides for incentive stock options, nonqualified stock options, and restricted stock. The maximum number of shares of common stock that can be sold or optioned under the plan is
2,000,000
shares. The term of each option shall be no more than
ten years
from the date of grant. In the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than ten percent of the voting power of all classes of stock of the Company or any parent or subsidiary thereof, the term of the option shall be
five years
from the date of grant or such shorter term as may be provided in the award agreement.
The per share exercise price for the shares to be issued upon exercise of an option shall be such price as is determined by the plan administrator, subject to the following: In the case of an incentive stock option: (1) granted to an employee who, at the time of grant of such option, owns stock representing more than ten percent of the voting power of all classes of stock of the company or any parent or subsidiary thereof, the exercise price shall be no less than one hundred and ten percent of the fair market value per share on the date of grant; or (2) granted to any other employee, the per share exercise price shall be no less than one hundred percent of the fair market value per share on the date of grant. In the case of a nonstatutory stock option, the per share exercise price shall be no less than one hundred percent of the fair market value per share on the date of grant, unless otherwise determined by the Administrator.
The incentive stock options vest
30%
on the second anniversary of the grant date,
30%
on the third anniversary of the grant date and
40%
on the fourth anniversary of the grant date. Director non-qualified stock options vest
50%
on the first anniversary of the grant date and
50%
on the second anniversary of the grant date.
A summary of the status of these stock option plans is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted
Average
Exercisable
Price
|
Outstanding at December 31, 2016
|
|
717,524
|
|
|
$
|
10.57
|
|
Exercised
|
|
(481,717
|
)
|
|
9.60
|
|
Forfeited
|
|
(22,721
|
)
|
|
19.72
|
|
Outstanding at June 30, 2017
|
|
213,086
|
|
|
$
|
11.77
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted
Average
Exercisable
Price
|
Outstanding at December 31, 2015
|
|
817,414
|
|
|
$
|
10.62
|
|
Exercised
|
|
(89,556
|
)
|
|
8.98
|
|
Forfeited
|
|
(10,334
|
)
|
|
28.49
|
|
Outstanding at December 31, 2016
|
|
717,524
|
|
|
$
|
10.57
|
|
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 5. Employee Benefit Plans, Continued
Stock Option Plans (continued):
Information pertaining to options outstanding at
June 30, 2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted-
Average
Remaining
|
|
Weighted-
Average
|
|
|
|
Weighted-
Average
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
Prices
|
|
Outstanding
|
|
Life
|
|
Price
|
|
Exercisable
|
|
Price
|
6.60
|
|
|
39,000
|
|
|
4.7 years
|
|
6.60
|
|
|
39,000
|
|
|
6.60
|
|
6.80
|
|
|
17,625
|
|
|
3.7 years
|
|
6.80
|
|
|
17,625
|
|
|
6.80
|
|
9.48
|
|
|
27,375
|
|
|
5.7 years
|
|
9.48
|
|
|
27,375
|
|
|
9.48
|
|
9.60
|
|
|
35,625
|
|
|
6.7 years
|
|
9.60
|
|
|
35,625
|
|
|
9.60
|
|
10.48
|
|
|
20,245
|
|
|
0.2 years
|
|
10.48
|
|
|
20,245
|
|
|
10.48
|
|
11.67
|
|
|
3,250
|
|
|
3.6 years
|
|
11.67
|
|
|
3,250
|
|
|
11.67
|
|
14.40
|
|
|
13,305
|
|
|
1.7 years
|
|
14.40
|
|
|
13,305
|
|
|
14.40
|
|
15.05
|
|
|
42,745
|
|
|
8.3 years
|
|
15.05
|
|
|
4,104
|
|
|
15.05
|
|
31.96
|
|
|
13,916
|
|
|
0.7 years
|
|
31.96
|
|
|
13,916
|
|
|
31.96
|
|
Outstanding, end of period
|
|
213,086
|
|
|
4.9 years
|
|
11.77
|
|
|
174,445
|
|
|
11.05
|
|
The Company recognized stock-based compensation expense of
$23,718
and
$33,000
for the three months ended June 30, 2017 and June 30, 2016, respectively and $
50,530
and $
66,635
for the six months ended June 30, 2017 and June 30, 2016, respecitvely. For the six months period ended June 30, 2017, direct stock grant expense issued to local advisory board members of
$31,791
was included in professional services. There was
no
direct grant stock grant expense for the six months period ended June 30, 2016. The total fair value of shares underlying the options which vested during the six months period ended June 30, 2017 and June 30, 2016 was
$0
and
$16,800
, respectively. There were no income tax benefits recognized for the exercise of options for the periods ended June 30, 2017 and June 30, 2016, respectively.
The intrinsic value of options exercised during the period ended
June 30, 2017
was
$5,135,088
. The aggregate intrinsic value of total options outstanding and exercisable options at
June 30, 2017
was
$2,692,426
and
$2,351,226
, respectively. Cash received from options exercised under all share-based payment arrangements for the period ended
June 30, 2017
was
$4,625,012
.
Information related to non-vested options for the period ended
June 30, 2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted
Average
Grant-Date
Fair Value
|
Nonvested at December 31, 2016
|
|
47,970
|
|
|
$
|
12.31
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited/expired
|
|
(9,329
|
)
|
|
12.31
|
|
Nonvested at June 30, 2017
|
|
38,641
|
|
|
$
|
12.31
|
|
As of
June 30, 2017
, there was approximately
$316,824
of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Plans. The cost is expected to be recognized over a weighted-average period of
1.3 years
. There were
no
stock options granted during the six months period ended
June 30, 2017
.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 6. Commitments and Contingent Liabilities
Off Balance Sheet Arrangements
In the normal course of business, the Bank has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions; thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are generally issued on behalf of an applicant (our client) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of
two years
or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Bank under certain prescribed circumstances. Subsequently, the Bank would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.
The Bank follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each client’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment and personal property.
The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should customers default on their resulting obligation to the Bank the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.
A summary of the Bank’s total contractual amount for all off-balance sheet commitments at
June 30, 2017
is as follows:
|
|
|
|
|
Commitments to extend credit
|
$
|
154.1
|
million
|
Standby letters of credit
|
$
|
2.8
|
million
|
Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of claims outstanding at
June 30, 2017
will not have a material effect on SmartFinancial’s consolidated financial statements.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures
Determination of Fair Value:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy:
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1
- Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuation is based on inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 -
Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents:
For cash and due from banks, interest-bearing deposits, and federal funds sold, the carrying amount is a reasonable estimate of fair value based on the short-term nature of the assets and are considered Level 1 inputs.
Securities Available for Sale:
Where quoted prices are available in an active market, management classifies the securities within Level 1 of the valuation hierarchy. If quoted market prices are not available, management estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, including GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, management classifies those securities in Level 3.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Fair Value Hierarchy (continued):
Restricted Investments:
It is not practicable to determine the fair value of restricted investments due the restrictions placed on its transferability.
Loans:
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair value for fixed rate loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. These methods are considered Level 3 inputs.
Deposits:
The fair values disclosed for demand deposits (for example, interest and noninterest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts) and are considered Level 1 inputs. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits, and are considered Level 2 inputs.
Securities Sold Under Agreement to Repurchase:
The carrying value of these liabilities approximates their fair value, and are considered Level 1 inputs.
Federal Home Loan Bank Advances and Other Borrowings:
The fair value of the FHLB fixed rate borrowings are estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements, and are considered Level 2 inputs.
Commitments to Extend Credit and Standby Letters of Credit:
Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure.
Measurements of Fair Value:
Assets and liabilities recorded at fair value on a recurring basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June 30,
2017
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
Debt securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises (GSEs)
|
|
$
|
17,971
|
|
|
$
|
—
|
|
|
$
|
17,971
|
|
|
$
|
—
|
|
Mortgage-backed securities
|
|
105,446
|
|
|
—
|
|
|
105,446
|
|
|
—
|
|
Other debt securities
|
|
948
|
|
|
—
|
|
|
948
|
|
|
—
|
|
Municipal securities
|
|
8,397
|
|
|
—
|
|
|
8,397
|
|
|
—
|
|
Total securities available-for-sale
|
|
$
|
132,762
|
|
|
$
|
—
|
|
|
$
|
132,762
|
|
|
$
|
—
|
|
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Measurements of Fair Value (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2016
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
Debt securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises (GSEs)
|
|
$
|
17,723
|
|
|
$
|
—
|
|
|
$
|
17,723
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
103,680
|
|
|
—
|
|
|
103,680
|
|
|
—
|
|
Municipal securities
|
|
8,019
|
|
|
—
|
|
|
8,019
|
|
|
—
|
|
Total securities available-for-sale
|
|
$
|
129,422
|
|
|
$
|
—
|
|
|
$
|
129,422
|
|
|
$
|
—
|
|
The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
Assets Measured at Fair Value on a Nonrecurring Basis:
Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June 30,
2017
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
Impaired loans
|
|
$
|
651
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
651
|
|
Foreclosed assets
|
|
2,369
|
|
|
—
|
|
|
—
|
|
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2016
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
Impaired loans
|
|
$
|
239
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
239
|
|
Foreclosed assets
|
|
2,386
|
|
|
—
|
|
|
—
|
|
|
2,386
|
|
For Level 3 assets measured at fair value on a non-recurring basis as of
June 30, 2017
and
December 31, 2016
, the significant unobservable inputs used in the fair value measurements are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June 30,
2017
|
|
Valuation
Technique
|
|
Significant Other
Unobservable Input
|
|
Weighted
Average of
Input
|
Impaired loans
|
|
$
|
651
|
|
|
Appraisal
|
|
Appraisal Discounts
|
|
13.0
|
%
|
Foreclosed assets
|
|
2,369
|
|
|
Appraisal
|
|
Appraisal Discounts
|
|
22.5
|
%
|
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Assets Measured at Fair Value on a Nonrecurring Basis (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2016
(in thousands)
|
|
Valuation
Technique
|
|
Significant Other
Unobservable Input
|
|
Weighted
Average of Input
|
Impaired loans
|
|
$
|
239
|
|
|
Cash Flow
|
|
Discounted Cash Flow / Appraisal Discounts
|
|
2.4
|
%
|
Foreclosed assets
|
|
2,386
|
|
|
Appraisal
|
|
Appraisal Discounts
|
|
12.2
|
%
|
Impaired Loans:
Loans considered impaired under ASC 310-10-35,
Receivables
, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.
The fair value of impaired loans were measured based on the value of the collateral securing these loans or the discounted cash flows of the loans, as applicable. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real
estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are
discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.
Foreclosed assets:
Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Carrying value and estimated fair value:
The carrying amount and estimated fair value of the Company’s financial instruments at
June 30, 2017
and
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82,835
|
|
|
$
|
82,835
|
|
|
$
|
68,748
|
|
|
$
|
68,748
|
|
Securities available for sale
|
|
132,762
|
|
|
132,762
|
|
|
129,422
|
|
|
129,422
|
|
Restricted investments
|
|
6,081
|
|
|
N/A
|
|
|
5,628
|
|
|
N/A
|
|
Loans, net
|
|
859,923
|
|
|
851,841
|
|
|
808,271
|
|
|
803,057
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
183,324
|
|
|
183,324
|
|
|
153,483
|
|
|
153,483
|
|
Interest-bearing demand deposits
|
|
156,150
|
|
|
156,150
|
|
|
162,702
|
|
|
162,702
|
|
Money Market and Savings deposits
|
|
324,014
|
|
|
324,014
|
|
|
274,605
|
|
|
274,605
|
|
Time deposits
|
|
318,147
|
|
|
318,211
|
|
|
316,275
|
|
|
316,734
|
|
Securities sold under agreements to repurchase
|
|
22,946
|
|
|
22,946
|
|
|
26,622
|
|
|
26,622
|
|
Federal Home Loan Bank advances and other borrowings
|
|
—
|
|
|
—
|
|
|
18,505
|
|
|
18,505
|
|
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. 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 existing 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. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. 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.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 8. Small Business Lending Fund
During 2011, the Company issued to the Secretary of the Treasury
12,000
shares of preferred stock at
$1,000
per share under the Small Business Lending Fund Program (the "
SBLF Program
"). Subject to regulatory approval, the Company may redeem the preferred stock for
$1,000
per share, plus accrued and unpaid dividends, in whole or in part at any time. The SBLF Program is a voluntary program authorized under the Business Jobs Acts of 2010, whereby the United States Treasury can make capital investments in eligible institutions; the capital investments, in turn, are designed to increase the availability of credit for small businesses and promote economic growth by providing capital to qualified community banks at favorable rates. The Company paid cash dividends at a
one percent
rate or
$120,000
for the year ended
December 31, 2015
. On February 4, 2016 the dividend rate for the preferred shares increased to
nine percent
and as a result the company incurred preferred stock dividends of
$1,022,000
for the year ended
December 31, 2016
.
On January 30, 2017, the Company completed a public offering of
2,010,084
million shares of its common stock, par value
$1.00
per share, with the net proceeds to the Company of approximately
$33.2 million
. Subsequent to the public offering the Company used proceeds from the offering to redeem the
$12 million
of preferred stock and pay the
$195 thousand
accrued dividend on March 6, 2017.
Note 9. Business Combination
On December 8, 2016, the Bank entered into a purchase and assumption agreement with Atlantic Capital Bank, N.A. that provided for the acquisition and assumption by the Bank of certain assets and liabilities associated with Atlantic Capital Bank’s branch office located at 3200 Keith Street NW, Cleveland, Tennessee 37312. The purchase was completed on May 19, 2017 for total cash consideration of
$1,183,007
.
The assets and liabilities as of the effective date of the merger were recorded at their respective estimated fair values. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill.
In the periods following the acquisition, the financial statements will include the results attributable to the Cleveland branch purchase beginning on the date of purchase. For the six months period ended June 30, 2017, the revenues and net income attributable to the Cleveland branch were
$178,847
and
$52,465
, respectively. It is impracticable to determine the pro-forma impact to the 2016 revenues and net income if the acquisition had occurred on January 1, 2016 as the Company does not have access to those records for a single branch.
The following table details the financial impact of the merger, including the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:
|
|
|
|
|
Allocation of Purchase Price (amounts in thousands)
|
|
Total consideration in cash
|
$
|
1,183
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Cash and cash equivalents
|
133
|
|
Loans
|
24,073
|
|
Premises and equipment
|
2,839
|
|
Core deposit intangible
|
310
|
|
Prepaid and other assets
|
77
|
|
Deposits
|
(26,888
|
)
|
Payables and other liabilities
|
(21
|
)
|
Total fair value of net assets acquired
|
523
|
|
Goodwill
|
$
|
660
|
|
As of June 30, 2017 there have not been any changes to the initial fair values recorded as part of the business combination.
SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SmartFinancial, Inc. (the “Company” or “SmartFinancial”) is a bank holding company incorporated under the laws of Tennessee and headquartered in Knoxville, Tennessee. The Company conducts its business operations primarily through its wholly-owned subsidiary, SmartBank, a Tennessee chartered community bank providing services through fourteen branches, one loan production office, and one mortgage production office located in East Tennessee, the Florida Panhandle, and North Georgia.
Executive Summary
The following is a summary of the Company’s financial highlights and significant events during the
second
quarter and the first
six
months of
2017
:
|
|
•
|
Net income available to common shareholders totaled
$1.6 million
, or
$0.20
per share, during the
second
quarter of
2017
compared to
$0.9 million
, or
$0.15
per share, during the
second
quarter of
2016
.
|
|
|
•
|
Closed acquisition of Cleveland, Tennessee, branch purchasing approximately $24.4 million in loans and assuming $26.8 million in deposits, in book value, resulting in approximately $1.0 million in intangible assets.
|
|
|
•
|
Annualized return on average assets was
0.61 percent
in the
second
quarter of
2017
, compared to
0.48 percent
a year ago.
|
|
|
•
|
Gross loan growth of
$52.0 million
for first
six
months of
2017
, including loans purchased in 2017 which had a net carrying of approximately $20.6 million at quarter end.
|
|
|
•
|
Net interest margin, taxable equivalent, of
4.11 percent
for first
six
months of
2017
, up from
4.06 percent
a year ago.
|
|
|
•
|
Asset quality was outstanding with nonperforming assets to total assets dropping to just
0.30 percent
.
|
|
|
•
|
Announced pending acquisition of Capstone Bancshares, Inc of Tuscaloosa, Alabama which upon completion the Company is expected to have assets in excess of $1.5 billion.
|
Analysis of Results of Operations
Second
quarter of
2017
compared to
2016
Net income was
$1.6 million
in the
second
quarter of
2017
, which was up from
$1.2 million
in the
second
quarter of
2016
. Net income available to common shareholders was
$1.6 million
, or
$0.20
per diluted common share, in the
second
quarter of
2017
, an increase from
$0.9 million
, or
$0.15
per diluted common share, in the
second
quarter of
2016
. Net interest income to average assets of
3.81 percent
in the
second
quarter of
2017
was down from
3.87 percent
in the
second
quarter of
2016
as the percentage of non-earning assets increased compared to the prior year. Noninterest income to average assets of
0.47 percent
was up from
0.39 percent
in the
second
quarter of
2016
primarily due to gains from higher sales volumes of SBA and mortgage loans. Noninterest expense to average assets decreased from
3.41 percent
in the
second
quarter of
2016
to
3.29 percent
in
second
quarter of
2017
primarily due to increases in average assets as the Company continues to capitalize on efficiencies of scale.
The first
six
months of
2017
compared to
2016
Net income was
$3.3 million
in the first
six
months of
2017
, which was up from
$2.5 million
in the first
six
months of
2016
. Net income available to common shareholders was
$3.1 million
, or
$0.39
per diluted common share, in the first
six
months of
2017
, an increase from
$2.1 million
, or
$0.34
per diluted common share, in the first
six
months of
2016
. Net interest income to average assets of
3.81 percent
in the first
six
months of
2017
was up from
3.77 percent
in the first
six
months of
2016
due to increases in the net interest spread. Noninterest income to average assets of
0.41 percent
was unchanged from
0.41 percent
in the first
six
months of
2016
. Noninterest expense to average assets decreased from
3.30 percent
in the first
six
months of
2016
to
3.22 percent
in first
six
months of
2017
primarily due to increases in average assets as the Company continues to capitalize on efficiencies of scale.
Net Interest Income and Yield Analysis
Second
quarter of
2017
compared to
2016
Net interest income, taxable equivalent, improved to
$10.3 million
in the
second
quarter of
2017
from
$9.6 million
in the
second
quarter of
2016
. The increase in net interest income was primarily due to increases in average loan balances. Average earning assets increased from
$928.7 million
in the
second
quarter of
2016
to
$992.1 million
in the
second
quarter of
2017
. Over this period, average loan balances increased by
$83.2 million
primarily as a result of organic growth. In addition, average interest-bearing deposits increased by
$38.5 million
and average noninterest-bearing deposits increased
$25.2 million
, a result of organic growth combined with the acquired deposits. Net interest income to average assets of
3.81 percent
for the
second
quarter in
2017
was down from
3.87 percent
during the same period in
2016
as the percentage of non-earning assets increased compared to the prior year. Net interest margin, taxable equivalent, was
4.15 percent
in the quarter, compared to
4.16 percent
a year ago as a result of higher costs on interest-bearing deposits. The yield on earning assets increased from
4.62 percent
a year ago to
4.66 percent
in the quarter due to higher loan balances and higher yields on securities.
The following table summarizes the major components of net interest income and the related yields and costs for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Three Months Ended June 30, 2016
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
Balance
|
|
Interest *
|
|
Cost*
|
|
Balance
|
|
Interest *
|
|
Cost*
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
834,665
|
|
|
$
|
10,752
|
|
|
5.17
|
%
|
|
$
|
751,425
|
|
|
$
|
9,960
|
|
|
5.32
|
%
|
Investment securities and interest-bearing due from banks (2)
|
|
138,965
|
|
|
707
|
|
|
2.04
|
%
|
|
171,526
|
|
|
678
|
|
|
1.59
|
%
|
Federal funds and other
|
|
18,503
|
|
|
78
|
|
|
1.69
|
%
|
|
5,719
|
|
|
50
|
|
|
3.51
|
%
|
Total interest-earning assets
|
|
992,133
|
|
|
11,537
|
|
|
4.66
|
%
|
|
928,670
|
|
|
10,688
|
|
|
4.62
|
%
|
Noninterest-earning assets
|
|
85,553
|
|
|
|
|
|
|
66,530
|
|
|
|
|
|
Total assets
|
|
$
|
1,077,686
|
|
|
|
|
|
|
$
|
995,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
156,387
|
|
|
$
|
115
|
|
|
0.29
|
%
|
|
$
|
153,881
|
|
|
$
|
69
|
|
|
0.18
|
%
|
Money market and savings deposits
|
|
300,448
|
|
|
424
|
|
|
0.57
|
%
|
|
248,401
|
|
|
299
|
|
|
0.48
|
%
|
Time deposits
|
|
305,171
|
|
|
702
|
|
|
0.92
|
%
|
|
321,244
|
|
|
645
|
|
|
0.81
|
%
|
Total interest-bearing deposits
|
|
762,006
|
|
|
1,241
|
|
|
0.65
|
%
|
|
723,526
|
|
|
1,013
|
|
|
0.56
|
%
|
Securities sold under agreement to repurchase
|
|
19,903
|
|
|
16
|
|
|
0.32
|
%
|
|
19,742
|
|
|
15
|
|
|
0.31
|
%
|
Federal Home Loan Bank advances and other borrowings
|
|
3,482
|
|
|
11
|
|
|
1.27
|
%
|
|
11,287
|
|
|
29
|
|
|
1.03
|
%
|
Total interest-bearing liabilities
|
|
785,391
|
|
|
1,268
|
|
|
0.65
|
%
|
|
754,555
|
|
|
1,057
|
|
|
0.56
|
%
|
Noninterest-bearing deposits
|
|
157,965
|
|
|
|
|
|
|
132,765
|
|
|
|
|
|
Other liabilities
|
|
659
|
|
|
|
|
|
|
5,261
|
|
|
|
|
|
Total liabilities
|
|
944,015
|
|
|
|
|
|
|
891,431
|
|
|
|
|
|
Stockholders’ equity
|
|
133,671
|
|
|
|
|
|
|
102,619
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,077,686
|
|
|
|
|
|
|
$
|
995,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, taxable equivalent
|
|
|
|
$
|
10,269
|
|
|
|
|
|
|
$
|
9,631
|
|
|
|
Interest rate spread (3)
|
|
|
|
|
|
4.01
|
%
|
|
|
|
|
|
4.06
|
%
|
Tax equivalent net interest margin (4)
|
|
|
|
|
|
4.15
|
%
|
|
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
126.32
|
%
|
|
|
|
|
|
123.08
|
%
|
Percentage of average equity to average assets
|
|
|
|
|
|
12.40
|
%
|
|
|
|
|
|
10.31
|
%
|
* Taxable equivalent basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans include nonaccrual loans. Loan fees included in loan income was
$589 thousand
and
$714 thousand
for the quarters ended
June 2017
and
2016
, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$5 thousand
for the period ended
June 30, 2017
and
$6 thousand
for the period ended
June 30, 2016
.
|
|
|
(2)
|
Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$15 thousand
for the period ended
June 30, 2017
and
$13 thousand
for the period ended
June 30, 2016
.
|
|
|
(3)
|
Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
|
|
|
(4)
|
Net interest margin represents net interest income divided by average interest-earning assets.
|
The first
six
months of
2017
compared to
2016
Net interest income, taxable equivalent, improved to
$20.1 million
in the first
six
months of
2017
from
$18.8 million
in the first
six
months of
2016
. The increase in net interest income was primarily due to increases in average loan balances. Average earning assets increased from
$927.7 million
in the first
six
months of
2016
to
$985.9 million
in the first
six
months of
2017
. Over this period, average loan balances increased by
$80.0 million
primarily as a result of organic growth. In addition, average interest-bearing deposits increased by
$24.1 million
and average noninterest-bearing deposits increased
$25.7 million
, a result of organic growth combined with the acquired deposits. Net interest income to average assets of
3.81 percent
in the first
six
months of
2017
was up from
3.77 percent
in the first
six
months of
2016
due to increases in the net interest spread. Net interest margin, taxable equivalent, was
4.11 percent
in the quarter, compared to
4.06 percent
a year ago due to higher yields on earning assets and increases in the balances of noninterest bearing deposits. The yield on earning assets increased from
4.51 percent
a year ago to
4.60 percent
due to higher loan balances and higher yields on securities.
The following table summarizes the major components of net interest income and the related yields and costs for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
Balance
|
|
Interest *
|
|
Cost*
|
|
Balance
|
|
Interest *
|
|
Cost*
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
823,157
|
|
|
$
|
20,972
|
|
|
5.14
|
%
|
|
$
|
743,172
|
|
|
$
|
19,338
|
|
|
5.22
|
%
|
Investment securities and interest-bearing due from banks (2)
|
|
150,117
|
|
|
1,384
|
|
|
1.86
|
%
|
|
177,257
|
|
|
1,408
|
|
|
1.59
|
%
|
Federal funds and other
|
|
12,595
|
|
|
151
|
|
|
2.42
|
%
|
|
7,268
|
|
|
113
|
|
|
3.15
|
%
|
Total interest-earning assets
|
|
985,869
|
|
|
22,507
|
|
|
4.60
|
%
|
|
927,697
|
|
|
20,859
|
|
|
4.51
|
%
|
Noninterest-earning assets
|
|
75,934
|
|
|
|
|
|
|
70,449
|
|
|
|
|
|
Total assets
|
|
$
|
1,061,803
|
|
|
|
|
|
|
$
|
998,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
157,813
|
|
|
$
|
208
|
|
|
0.27
|
%
|
|
$
|
152,210
|
|
|
$
|
135
|
|
|
0.18
|
%
|
Money market and savings deposits
|
|
288,081
|
|
|
752
|
|
|
0.53
|
%
|
|
245,263
|
|
|
571
|
|
|
0.47
|
%
|
Time deposits
|
|
303,721
|
|
|
1,379
|
|
|
0.92
|
%
|
|
328,013
|
|
|
1,268
|
|
|
0.78
|
%
|
Total interest-bearing deposits
|
|
749,615
|
|
|
2,339
|
|
|
0.63
|
%
|
|
725,486
|
|
|
1,974
|
|
|
0.55
|
%
|
Securities sold under agreement to repurchase
|
|
19,296
|
|
|
32
|
|
|
0.33
|
%
|
|
20,490
|
|
|
32
|
|
|
0.31
|
%
|
Federal Home Loan Bank advances and other borrowings
|
|
5,453
|
|
|
26
|
|
|
0.96
|
%
|
|
17,396
|
|
|
74
|
|
|
0.85
|
%
|
Total interest-bearing liabilities
|
|
774,364
|
|
|
2,397
|
|
|
0.62
|
%
|
|
763,372
|
|
|
2,080
|
|
|
0.55
|
%
|
Noninterest-bearing deposits
|
|
153,659
|
|
|
|
|
|
|
128,004
|
|
|
|
|
|
Other liabilities
|
|
2,609
|
|
|
|
|
|
|
4,711
|
|
|
|
|
|
Total liabilities
|
|
930,632
|
|
|
|
|
|
|
896,087
|
|
|
|
|
|
Stockholders’ equity
|
|
131,171
|
|
|
|
|
|
|
102,061
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,061,803
|
|
|
|
|
|
|
$
|
998,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, taxable equivalent
|
|
|
|
$
|
20,110
|
|
|
|
|
|
|
$
|
18,779
|
|
|
|
Interest rate spread (3)
|
|
|
|
|
|
3.98
|
%
|
|
|
|
|
|
3.96
|
%
|
Tax equivalent net interest margin (4)
|
|
|
|
|
|
4.11
|
%
|
|
|
|
|
|
4.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
127.31
|
%
|
|
|
|
|
|
121.53
|
%
|
Percentage of average equity to average assets
|
|
|
|
|
|
12.35
|
%
|
|
|
|
|
|
10.23
|
%
|
* Taxable equivalent basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans include nonaccrual loans. Loan fees included in loan income was
$1.2 million
and
$1.3 million
for the first
six
months ended
June 2017
and
2016
, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$9 thousand
for the period ended
June 30, 2017
and
$11 thousand
for the period ended
June 30, 2016
.
|
|
|
(2)
|
Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$31 thousand
for the period ended
June 30, 2017
and
$26 thousand
for the period ended
June 30, 2016
.
|
|
|
(3)
|
Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
|
|
|
(4)
|
Net interest margin represents net interest income divided by average interest-earning assets.
|
Rate and Volume Analysis
Changes in net interest income are attributed to changes in average balances (volume change), changes in average rates (rate change), and, when applicable, changes in the number of days (days change) in the period presented (for earning assets and sources of funds on which interest is received or paid. Days change is calculated as change in days times current interest per day, volume change is calculated as change in volume times the previous rate, and rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is considered as a change in volume.
Second
quarter of
2017
compared to
2016
Net interest income, taxable equivalent, increased by
$0.6 million
between the quarters ended
June 30, 2017
and
2016
. The following is an analysis of the changes in net interest income comparing the changes attributable to days those attributable to rates and those attributable to volumes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
Compared to
|
2016
|
|
Increase (decrease) due to
|
|
|
Rate
|
|
|
Volume
|
|
Net
|
Interest-earning assets:
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
(312
|
)
|
|
$
|
1,104
|
|
|
$
|
792
|
|
Investment securities and interest-bearing due from banks (2)
|
|
158
|
|
|
(129
|
)
|
|
29
|
|
Federal funds and other
|
|
(84
|
)
|
|
112
|
|
|
28
|
|
Total interest-earning assets
|
|
(238
|
)
|
|
1,087
|
|
|
849
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
45
|
|
|
1
|
|
|
46
|
|
Money market and savings deposits
|
|
63
|
|
|
62
|
|
|
125
|
|
Time deposits
|
|
89
|
|
|
(32
|
)
|
|
57
|
|
Total interest-bearing deposits
|
|
197
|
|
|
31
|
|
|
228
|
|
Securities sold under agreement to repurchase
|
|
1
|
|
|
—
|
|
|
1
|
|
Federal Home Loan Bank advances and other borrowings
|
|
2
|
|
|
(20
|
)
|
|
(18
|
)
|
Total interest-bearing liabilities
|
|
200
|
|
|
11
|
|
|
211
|
|
Net interest income
|
|
$
|
(438
|
)
|
|
$
|
1,076
|
|
|
$
|
638
|
|
|
|
(1)
|
Loans include nonaccrual loans.Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$5 thousand
for the period ended
June 30, 2017
and
$6 thousand
for the period ended
June 30, 2016
.
|
|
|
(2)
|
Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$15 thousand
for the period ended
June 30, 2017
and
$13 thousand
for the period ended
June 30, 2016
.
|
The first
six
months of
2017
compared to
2016
Net interest income, taxable equivalent, increased by
$1.3 million
between the first
six
months ended
June 30, 2017
and
2016
. The following is an analysis of the changes in net interest income comparing the changes attributable to days those attributable to rates and those attributable to volumes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
Compared to
|
2016
|
|
Increase (decrease) due to
|
|
|
Rate
|
|
|
Days
|
|
Volume
|
|
Net
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
(342
|
)
|
|
$
|
(106
|
)
|
|
$
|
2,082
|
|
|
$
|
1,634
|
|
Investment securities and interest-bearing due from banks (2)
|
|
199
|
|
|
(8
|
)
|
|
(215
|
)
|
|
(24
|
)
|
Federal funds and other
|
|
(45
|
)
|
|
(1
|
)
|
|
84
|
|
|
38
|
|
Total interest-earning assets
|
|
(188
|
)
|
|
(115
|
)
|
|
1,951
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
69
|
|
|
(1
|
)
|
|
5
|
|
|
73
|
|
Money market and savings deposits
|
|
84
|
|
|
(3
|
)
|
|
100
|
|
|
181
|
|
Time deposits
|
|
212
|
|
|
(7
|
)
|
|
(94
|
)
|
|
111
|
|
Total interest-bearing deposits
|
|
365
|
|
|
(11
|
)
|
|
11
|
|
|
365
|
|
Securities sold under agreement to repurchase
|
|
2
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Federal Home Loan Bank advances and other borrowings
|
|
3
|
|
|
—
|
|
|
(51
|
)
|
|
(48
|
)
|
Total interest-bearing liabilities
|
|
370
|
|
|
(11
|
)
|
|
(42
|
)
|
|
317
|
|
Net interest income
|
|
$
|
(558
|
)
|
|
$
|
(104
|
)
|
|
$
|
1,993
|
|
|
$
|
1,331
|
|
|
|
(1)
|
Loans include nonaccrual loans. Loan fees included in loan income was
$1.2 million
and
$1.3 million
for the first
six
months ended
June 2017
and
2016
, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$9 thousand
for the period ended
June 30, 2017
and
$11 thousand
for the period ended
June 30, 2016
.
|
|
|
(2)
|
Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was
$31 thousand
for the period ended
June 30, 2017
and
$26 thousand
for the period ended
June 30, 2016
.
|
Noninterest Income
Second
quarter of
2017
compared to
2016
Noninterest income totaled
$1.3 million
in the
second
quarter of
2017
, compared to
$1.0 million
in the
second
quarter of
2016
. Noninterest income to average assets of
0.47 percent
for the quarter was up from
0.39 percent
in
2016
primarily due to gains from higher sales volumes of SBA and mortgage loans which were
$405 thousand
, up from
$197 thousand
a year ago.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Service charges and fees on deposit accounts
|
|
$
|
291
|
|
|
$
|
259
|
|
Gain on sale of securities
|
|
—
|
|
|
98
|
|
Gain on sale of loans and other assets
|
|
405
|
|
|
198
|
|
Gain (loss) on sale of foreclosed assets
|
|
1
|
|
|
(4
|
)
|
Other noninterest income
|
|
556
|
|
|
410
|
|
Total noninterest income
|
|
$
|
1,253
|
|
|
$
|
961
|
|
The first
six
months of
2017
compared to
2016
Noninterest income totaled
$2.2 million
in the first
six
months of
2017
, compared to
$2.0 million
in the first
six
months of
2016
. Noninterest income to average assets of
0.41 percent
was unchanged from
0.41 percent
in the first
six
months of
2016
. Charges and fees on deposit accounts were unchanged from a year ago. Gains on the sale of loans, which includes mortgage and SBA loans, were
$681 thousand
, up from
$419 thousand
a year ago.
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Service charges and fees on deposit accounts
|
|
$
|
555
|
|
|
$
|
555
|
|
Gain on sale of securities
|
|
—
|
|
|
181
|
|
Gain on sale of loans and other assets
|
|
681
|
|
|
419
|
|
Gain (loss) on sale of foreclosed assets
|
|
(15
|
)
|
|
54
|
|
Other noninterest income
|
|
958
|
|
|
822
|
|
Total noninterest income
|
|
$
|
2,179
|
|
|
$
|
2,032
|
|
Noninterest Expense
Second
quarter of
2017
compared to
2016
Noninterest expense totaled
$8.8 million
in the
second
quarter of
2017
compared to
$8.5 million
in the
second
quarter of
2016
. Noninterest expense to average assets decreased from
3.41 percent
a year ago to
3.29 percent
in the quarter. The increase in noninterest expense compared to the prior year was primarily due to annual merit based salary increases and merger and conversion costs related to this quarter's branch acquisition and the pending Capstone Bancshares acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Salaries and employee benefits
|
|
$
|
4,758
|
|
|
$
|
4,486
|
|
Net occupancy and equipment expense
|
|
963
|
|
|
1,137
|
|
Depository insurance
|
|
61
|
|
|
151
|
|
Foreclosed assets
|
|
12
|
|
|
64
|
|
Advertising
|
|
129
|
|
|
184
|
|
Data processing
|
|
475
|
|
|
554
|
|
Professional services
|
|
473
|
|
|
551
|
|
Amortization of intangible assets
|
|
61
|
|
|
93
|
|
Service contracts
|
|
313
|
|
|
316
|
|
Other operating expenses
|
|
1,584
|
|
|
936
|
|
Total noninterest expense
|
|
$
|
8,829
|
|
|
$
|
8,472
|
|
The first
six
months of
2017
compared to
2016
Noninterest expense totaled
$17.0 million
in the first
six
months of
2017
compared to
$16.4 million
in the first
six
months of
2016
. Noninterest expense to average assets decreased from
3.30 percent
a year ago to
3.22 percent
in the during the period. The increase in noninterest expense compared to the prior year was primarily due to annual merit based salary increases and merger and conversion costs related to this quarter's branch acquisition and the pending Capstone Bancshares acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
Salaries and employee benefits
|
|
$
|
9,404
|
|
|
$
|
8,981
|
|
Net occupancy and equipment expense
|
|
1,941
|
|
|
2,155
|
|
Depository insurance
|
|
214
|
|
|
287
|
|
Foreclosed assets
|
|
11
|
|
|
120
|
|
Advertising
|
|
294
|
|
|
357
|
|
Data processing
|
|
808
|
|
|
896
|
|
Professional services
|
|
1,043
|
|
|
1,007
|
|
Amortization of intangible assets
|
|
114
|
|
|
187
|
|
Service contracts
|
|
609
|
|
|
601
|
|
Other operating expenses
|
|
2,536
|
|
|
1,833
|
|
Total noninterest expense
|
|
$
|
16,974
|
|
|
$
|
16,424
|
|
Taxes
Second
quarter of
2017
compared to
2016
In the
second
quarter of
2017
income tax expense totaled
$726 thousand
compared to
$691 thousand
a year ago. The effective tax rate was approximately
36.7 percent
a year ago compared to approximately
30.6 percent
in the
second
quarter of
2017
.
The first
six
months of
2017
compared to
2016
In the first
six
months of
2017
income tax expense totaled
$1.7 million
compared to
$1.5 million
a year ago. The effective tax rate was approximately
36.4 percent
a year ago compared to approximately
33.7 percent
in the first
six
months of
2017
.
Loan Portfolio Composition
The Company had total net loans outstanding, including organic and purchased loans, of approximately
$859.9 million
at
June 30, 2017
and
$808.3 million
at
December 31, 2016
. Loans secured by real estate, consisting of commercial or residential property, are the principal component of our loan portfolio. We do not generally originate traditional long-term residential fixed rate mortgages for our portfolio but we do originate and hold traditional second mortgage residential real estate loans, adjustable rate mortgages and home equity lines of credit. Even if the principal purpose of the loan is not to finance real estate, when reasonable, we attempt to obtain a security interest in the real estate in addition to any other available collateral to increase the likelihood of ultimate repayment or collection of the loan.
Organic Loans
Our organic net loans increased by
$62.0 million
, or
10.1 percent
, from
December 31, 2016
, to
$674.0 million
at
June 30, 2017
as we continue to originate well-underwritten loans. Our goal of streamlining the credit process has improved our efficiency and is a competitive advantage in many of our markets. In addition, the overall business environment continues to rebound from recessionary conditions. Organic loans include loans which were originally purchased non-credit impaired loans but have been renewed since purchase.
Purchased Loans
Purchased non-credit impaired loans of
$160.8 million
at
June 30, 2017
were down from
$169.2 million
at
December 31, 2016
as a result of loan payoffs and renewals. Since
December 31, 2016
, our net purchased credit impaired (“PCI”) loans decreased by
$2.0 million
to
$25.2 million
at
June 30, 2017
. The activity within the purchased credit impaired loans will be impacted by how quickly these loans are resolved and/or our future acquisition activity.
The following tables summarize the composition of our loan portfolio for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Organic
Loans
|
|
Purchased
Non-Credit
Impaired Loans
|
|
Purchased
Credit
Impaired Loans
|
|
Total Amount
|
|
% of
Gross
Total
|
Commercial real estate-mortgage
|
|
$
|
329,432
|
|
|
$
|
101,340
|
|
|
$
|
14,417
|
|
|
$
|
445,189
|
|
|
51.4
|
%
|
Consumer real estate-mortgage
|
|
156,501
|
|
|
42,095
|
|
|
8,071
|
|
|
206,667
|
|
|
23.9
|
%
|
Construction and land development
|
|
95,033
|
|
|
4,649
|
|
|
1,474
|
|
|
101,156
|
|
|
11.7
|
%
|
Commercial and industrial
|
|
92,317
|
|
|
11,667
|
|
|
1,249
|
|
|
105,233
|
|
|
12.2
|
%
|
Consumer and other
|
|
6,167
|
|
|
1,009
|
|
|
—
|
|
|
7,176
|
|
|
0.8
|
%
|
Total gross loans receivable, net of deferred fees
|
|
679,450
|
|
|
160,760
|
|
|
25,211
|
|
|
865,421
|
|
|
100.0
|
%
|
Allowance for loan and lease losses
|
|
(5,498
|
)
|
|
—
|
|
|
—
|
|
|
(5,498
|
)
|
|
|
|
Total loans, net
|
|
$
|
673,952
|
|
|
$
|
160,760
|
|
|
$
|
25,211
|
|
|
$
|
859,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Organic
Loans
|
|
Purchased
Non-Credit
Impaired Loans
|
|
Purchased
Credit
Impaired Loans
|
|
Total Amount
|
|
% of
Gross
Total
|
Commercial real estate-mortgage
|
|
$
|
297,689
|
|
|
$
|
102,576
|
|
|
$
|
14,943
|
|
|
$
|
415,208
|
|
|
51.0
|
%
|
Consumer real estate-mortgage
|
|
135,923
|
|
|
42,875
|
|
|
9,004
|
|
|
187,802
|
|
|
23.1
|
%
|
Construction and land development
|
|
108,390
|
|
|
7,801
|
|
|
1,678
|
|
|
117,869
|
|
|
14.5
|
%
|
Commercial and industrial
|
|
68,235
|
|
|
15,219
|
|
|
1,568
|
|
|
85,022
|
|
|
10.5
|
%
|
Consumer and other
|
|
6,786
|
|
|
689
|
|
|
—
|
|
|
7,475
|
|
|
0.9
|
%
|
Total gross loans receivable, net of deferred fees
|
|
617,023
|
|
|
169,160
|
|
|
27,193
|
|
|
813,376
|
|
|
100.0
|
%
|
Allowance for loan and lease losses
|
|
(5,105
|
)
|
|
—
|
|
|
—
|
|
|
(5,105
|
)
|
|
|
|
Total loans, net
|
|
$
|
611,918
|
|
|
$
|
169,160
|
|
|
$
|
27,193
|
|
|
$
|
808,271
|
|
|
|
|
Loan Portfolio Maturities
The following table sets forth the maturity distribution of our loans, including the interest rate sensitivity for loans maturing after one year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Structure for Loans
|
|
|
|
|
Maturing Over One Year
|
|
|
One Year
or Less
|
|
One through
Five Years
|
|
Over Five
Years
|
|
Total
|
|
Fixed
Rate
|
|
Floating
Rate
|
Commercial real estate-mortgage
|
|
$
|
30,973
|
|
|
$
|
208,909
|
|
|
$
|
205,307
|
|
|
$
|
445,189
|
|
|
$
|
279,353
|
|
|
$
|
134,863
|
|
Consumer real estate-mortgage
|
|
18,473
|
|
|
93,863
|
|
|
94,331
|
|
|
206,667
|
|
|
109,783
|
|
|
78,411
|
|
Construction and land development
|
|
21,783
|
|
|
44,822
|
|
|
34,551
|
|
|
101,156
|
|
|
40,620
|
|
|
38,753
|
|
Commercial and industrial
|
|
23,740
|
|
|
56,354
|
|
|
25,139
|
|
|
105,233
|
|
|
67,444
|
|
|
14,049
|
|
Consumer and other
|
|
2,581
|
|
|
3,943
|
|
|
652
|
|
|
7,176
|
|
|
2,694
|
|
|
1,901
|
|
Total Loans
|
|
$
|
97,550
|
|
|
$
|
407,891
|
|
|
$
|
359,980
|
|
|
$
|
865,421
|
|
|
$
|
499,894
|
|
|
$
|
267,977
|
|
Nonaccrual, Past Due, and Restructured Loans
Nonperforming loans as a percentage of total gross loans, net of deferred fees, was
0.13 percent
as of
June 30, 2017
, which was down from
0.26 percent
as of
December 31, 2016
. Total nonperforming assets as a percentage of total assets as of
June 30, 2017
totaled
0.30 percent
compared to
0.42 percent
as of
December 31, 2016
. Acquired PCI loans that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets unless the pools are 90 days or greater past due.
The following table summarizes the Company's nonperforming assets for the periods presented.
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
Nonaccrual loans
|
|
$
|
1,084
|
|
|
$
|
1,415
|
|
Accruing loans past due 90 days or more (1)
|
|
30
|
|
|
699
|
|
Total nonperforming loans
|
|
1,114
|
|
|
2,114
|
|
Foreclosed assets
|
|
2,369
|
|
|
2,386
|
|
Total nonperforming assets
|
|
$
|
3,483
|
|
|
$
|
4,500
|
|
|
|
|
|
|
Restructured loans not included above
|
|
$
|
44
|
|
|
$
|
166
|
|
(1) Balances include PCI loans past due 90 days or more that are grouped in pools which accrue interest based on pool yields.
Potential Problem Loans
At
June 30, 2017
potential problem loans amounted to approximately
$906.2 thousand
or
0.10 percent
of total loans outstanding. Potential problem loans, which are not included in nonperforming loans, represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank’s primary regulators, for loans classified as substandard or worse, but not considered nonperforming loans.
Allocation of the Allowance for Loan Losses
We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. As of
June 30, 2017
and
December 31, 2016
, our allowance for loan losses was
$5.5 million
and
$5.1 million
, respectively, which we deemed to be adequate at each of the respective dates. The increase in the allowance for loan losses in
2017
as compared to
2016
is the result of increases in the organic loan portfolio. Our allowance for loan loss as a percentage of total loans has increased slightly from
0.63 percent
at
December 31, 2016
to
0.64 percent
at
June 30, 2017
. As a percentage of organic loans the allowance for loan losses decreased from
0.83 percent
at
December 31, 2016
to
0.81 percent
at
June 30, 2017
.
Our purchased loans were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans will be accreted into income over the life of the loans. As of
June 30, 2017
the balance on PCI loans was
$32.5 million
while the carrying value was
$25.2 million
. These loans are subject to the same allowance methodology as our legacy portfolio. The calculated allowance is compared to the remaining fair value discount to determine if additional provisioning should be recognized. At
June 30, 2017
, there were no allowances on PCI loans.
The following table sets forth, based on our best estimate, the allocation of the allowance to types of loans as of
June 30, 2017
and
December 31, 2016
and the percentage of loans in each category to total loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Commercial real estate-mortgage
|
|
$
|
2,489
|
|
|
45.2
|
%
|
|
$
|
2,369
|
|
|
46.4
|
%
|
Consumer real estate-mortgage
|
|
1,653
|
|
|
30.1
|
%
|
|
1,382
|
|
|
27.1
|
%
|
Construction and land development
|
|
609
|
|
|
11.1
|
%
|
|
717
|
|
|
14.0
|
%
|
Commercial and industrial
|
|
644
|
|
|
11.7
|
%
|
|
520
|
|
|
10.2
|
%
|
Consumer and other
|
|
103
|
|
|
1.9
|
%
|
|
117
|
|
|
2.3
|
%
|
Total allowance for loan losses
|
|
$
|
5,498
|
|
|
100.0
|
%
|
|
$
|
5,105
|
|
|
100.0
|
%
|
The increase in the overall allowance for loan losses is due to the increased balance of organic loans offset by improvements of our loan portfolio and the reduction of nonperforming loans and net charge-offs, which is largely influenced by the overall improvement in the economies in our market areas. The allocation by category is determined based on the assigned risk rating, if applicable, and environmental factors applicable to each category of loans. For impaired loans, those loans are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired loans were approximately
$4 thousand
at
December 31, 2016
compared to
$97 thousand
at
June 30, 2017
.
Analysis of the Allowance for Loan Losses
The following is a summary of changes in the allowance for loan losses for the periods ended
June 30, 2017
and
December 31, 2016
including the ratio of the allowance for loan losses to total loans as of the end of each period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Balance at beginning of period
|
|
$
|
5,105
|
|
|
$
|
4,354
|
|
Provision for loan losses
|
|
310
|
|
|
788
|
|
Charged-off loans:
|
|
|
|
|
|
|
Commercial real estate-mortgage
|
|
—
|
|
|
—
|
|
Consumer real estate-mortgage
|
|
(6
|
)
|
|
(102
|
)
|
Construction and land development
|
|
—
|
|
|
(14
|
)
|
Commercial and industrial
|
|
—
|
|
|
(35
|
)
|
Consumer and other
|
|
(40
|
)
|
|
(155
|
)
|
Total charged-off loans
|
|
(46
|
)
|
|
(306
|
)
|
Recoveries of previously charged-off loans:
|
|
|
|
|
|
|
Commercial real estate-mortgage
|
|
6
|
|
|
45
|
|
Consumer real estate-mortgage
|
|
47
|
|
|
76
|
|
Construction and land development
|
|
8
|
|
|
22
|
|
Commercial and industrial
|
|
32
|
|
|
58
|
|
Consumer and other
|
|
36
|
|
|
68
|
|
Total recoveries of previously charged-off loans
|
|
129
|
|
|
269
|
|
Net charge-offs
|
|
83
|
|
|
(37
|
)
|
Balance at end of period
|
|
$
|
5,498
|
|
|
$
|
5,105
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans outstanding at end of period
|
|
0.64
|
%
|
|
0.63
|
%
|
Ratio of net charge-offs (recoveries) to average loans outstanding for the period
|
|
(0.04
|
)%
|
|
0.09
|
%
|
We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan portfolio, past loan loss experience, known and inherent risks in the portfolio, the views of the Bank’s regulators, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
Investment Portfolio
Our investment portfolio, consisting primarily of Federal agency bonds, mortgage-backed securities, and state and municipal securities amounted to fair values of
$132.8 million
and
$129.4 million
at
June 30, 2017
and
December 31, 2016
, respectively. Our investments to assets ratio decreased slightly from
12.2 percent
at
December 31, 2016
to
11.6 percent
at
June 30, 2017
as we reduced reinvestments when the five year treasury rate, and other fixed income investments of a similar term, fell in the latter part of the quarter. Our investment portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income.
The following table shows the amortized cost of the Company’s investment securities. In the periods ended
June 30, 2017
and
December 31, 2016
all investment securities were classified as available for sale.
|
|
|
|
|
|
|
|
|
|
Book Value of Investment Securities
|
|
|
|
|
(in thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
U.S. Government agencies
|
|
$
|
18,244
|
|
|
$
|
18,279
|
|
State and political subdivisions
|
|
8,362
|
|
|
8,182
|
|
Mortgage-backed securities
|
|
105,585
|
|
|
104,585
|
|
Other debt securities
|
|
972
|
|
|
—
|
|
Total securities
|
|
$
|
133,163
|
|
|
$
|
131,046
|
|
The following table presents the contractual maturity of investment securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis). The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity of Investment Securities
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Maturity By Years
|
|
|
1 or Less
|
|
1 to 5
|
|
5 to 10
|
|
Over 10
|
|
Total
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
3,999
|
|
|
$
|
11,000
|
|
|
$
|
3,245
|
|
|
$
|
—
|
|
|
$
|
18,244
|
|
State and political subdivisions
|
|
180
|
|
|
165
|
|
|
4,572
|
|
|
3,445
|
|
|
8,362
|
|
Mortgage-backed securities
|
|
—
|
|
|
6,098
|
|
|
29,526
|
|
|
69,961
|
|
|
105,585
|
|
Other debt securities
|
|
—
|
|
|
—
|
|
|
972
|
|
|
—
|
|
|
972
|
|
Total securities available for sale
|
|
$
|
4,179
|
|
|
$
|
17,263
|
|
|
$
|
38,315
|
|
|
$
|
73,406
|
|
|
$
|
133,163
|
|
Weighted average yield
(1)
|
|
1.31
|
%
|
|
1.73
|
%
|
|
1.91
|
%
|
|
2.11
|
%
|
|
1.97
|
%
|
(1) Based on amortized cost, taxable equivalent basis
Deposits
Deposits are the primary source of funds for the Company's lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company's primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of
June 30, 2017
, brokered deposits represented approximately
13.0 percent
of total deposits.
Over the last couple years the overall mix of average deposits has shifted to a higher percentage of noninterest-bearing and money market and savings deposits, with reductions in the percentage of deposits held in interest-bearing demand accounts. The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the
three and six
months ended
June 30, 2017
was
0.65 percent
and
0.63 percent
, compared to
0.56 percent
and
0.55 percent
for the same period in
2016
. The increase in the costs were due to changes in deposit mix and higher rates on interest-bearing deposit accounts.
Total deposits as of
June 30, 2017
were
$981.6 million
, which was an increase of
$74.6 million
from
December 31, 2016
. As of
June 30, 2017
the Company had outstanding time deposits under $100,000 with balances of
$139.0 million
, time deposits over $100,000 with balances of
$178.9 million
, and a fair value premium for time deposits of approximately
$204 thousand
.
The following table summarizes the maturities of time deposits $100,000 or more as of
June 30, 2017
.
|
|
|
|
|
Remaining maturity:
(Dollars in thousands)
|
June 30,
2017
|
Three months or less
|
$
|
43,740
|
|
Three to six months
|
79,490
|
|
Six to twelve months
|
41,070
|
|
More than twelve months
|
14,628
|
|
Total
|
$
|
178,928
|
|
Borrowings
The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. There were
zero
short-term borrowings at
June 30, 2017
. Short-term borrowings totaled
$18.5 million
at
December 31, 2016
comprised of $5 million in FHLB advances maturing within twelve months and the remainder consisted of Federal Funds purchased. There was no long-term debt outstanding at
June 30, 2017
.
Capital Resources
The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At
June 30, 2017
and
December 31, 2016
, our capital ratios, including our Bank’s capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary.
Liquidity and Off-Balance Sheet Arrangements
At
June 30, 2017
, we had
$154.1 million
of pre-approved but unused lines of credit and
$2.8 million
of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions.
Market Risk and Liquidity Risk Management
The Bank’s Asset Liability Management Committee (“ALCO”) is responsible for making decisions regarding liquidity and funding solutions based upon approved liquidity, loan, capital and investment policies. The ALCO must consider interest rate sensitivity and liquidity risk management when rendering a decision on funding solutions and loan pricing. To assist in this process the Bank has contracted with an independent third party to prepare quarterly reports that summarize several key asset-liability measurements. In addition, the third party will also provide recommendations to the Bank’s ALCO regarding future balance sheet structure, earnings and liquidity strategies. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management. We do not believe there have been any material changes to the Company’s interest rate sensitivity or liquidity risk from
December 31, 2016
to the period ended
June 30, 2017
.