Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by
direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the
allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company
recorded provisions for loan losses of $77,000 and $252,000 for the quarters ended March 31, 2019 and 2018, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future
charges to the allowance for loan losses may not be significant in relation to the amount provided during a particular period, or that future evaluations of the loan portfolio based on conditions then prevailing will not require sizable
additions to the allowance, thus necessitating similarly sizable charges to income.
Item 2
. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of
operations of Carolina Trust BancShares, Inc. (the “Company”). The Company conducts its business operations primarily through its wholly owned subsidiary, Carolina Trust Bank, a North Carolina-chartered commercial bank (which we refer to
herein as the “Bank”)
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements generally relate to the financial condition of the Company, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of
forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of
these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to those
described in this quarterly report on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat
these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. Forward-looking statements contained in this report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made
by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially
from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
|
☐
|
deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and
other adverse impacts to results of operations and financial condition;
|
|
☐
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changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest-sensitive
assets and liabilities;
|
|
☐
|
the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;
|
|
☐
|
the impact of liquidity needs on our results of operations and financial condition;
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|
☐
|
risks related to the concentration in commercial real estate;
|
|
☐
|
declines in commercial and residential real estate;
|
|
☐
|
changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
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|
☐
|
a failure in or a breach of the Company’s operational or security systems or those of its third-party service providers;
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☐
|
the effect of any mergers, acquisitions, or other transactions to which the Company may from time to time be a party, including management’s ability to successfully
integrate any businesses acquired;
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☐
|
the costs, effects, and outcomes of existing or future litigation, including any litigation related to our acquisition activities;
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☐
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changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including demand for the
Company’s products and services and commercial and residential real estate development and prices;
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|
☐
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changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
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☐
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the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, and other financial institutions operating in
the Company’s market area and elsewhere, together with such competitors offering banking products and services by mail, telephone and the Internet;
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|
☐
|
the Company’s ability to attract and retain key personnel;
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☐
|
changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes;
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☐
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changes in political and economic conditions;
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☐
|
the Company’s ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result; and
|
|
☐
|
the success at managing the risks involved in the foregoing.
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Except as otherwise disclosed, forward-looking statements do not reflect any changes in laws, regulations or regulatory interpretations after the
date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Note Regarding Use of Non-GAAP Financial Measures
This report presents certain non-GAAP financial measures including, without limitation, adjusted net income. Non-GAAP financial measures include
numerical measures of a company’s historical financial performance, financial position, or cash flows that exclude (or include) amounts, or that are subject to adjustments that have the effect of excluding (or including) amounts, that are
included (or, as applicable, excluded) in the most directly comparable measures calculated and presented in accordance with GAAP. The Company has presented the adjustments to reconcile from the applicable GAAP financial measures to the
non-GAAP financial measures where applicable. The Company considers these adjustments to the GAAP financial measures to be relevant to ongoing operating results. The Company believes that excluding the amounts associated with these
adjustments to present the non-GAAP financial measures provides a meaningful base for the period-to-period comparisons, which will assist investors and analysts in analyzing the operating results or financial position of the Company. The
non-GAAP financial measures are used by management to assess the performance of the Company’s business, including for presentations of Company performance to investors. The Company further believes that presenting the non-GAAP financial
measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are
not audited. Although non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results
reported under GAAP. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included with this report.
Completion of Merger with Clover Community Bankshares, Inc.
On January 1, 2019, the Company completed its previously announced merger with Clover Community Bankshares, Inc. (“Clover”), parent company of
Clover Community Bank. Also under the merger agreement, Clover Community Bank merged with the Bank. Pursuant to the merger agreement, each share of Clover common stock and preferred stock was converted into the right to receive, at the
election of each Clover shareholder, either 2.7181 shares of Company common stock or $22.00 in cash, subject to proration procedures that resulted in an aggregate 80% stock and 20% cash consideration mix. Total consideration was $20.4
million in stock and cash. Overall, the Company issued 2,123,858 shares of common stock in exchange for 80% of Clover’s shares and paid $3,008 in lieu of fractional Company shares. Cash consideration paid in exchange for 20% of Clover’s
shares totaled $4,298,360. The stock consideration was valued at $7.58 per share, the most recent closing price at the effective time of the merger. In accordance with the merger agreement, cash paid in lieu of fractional shares was
valued at a rate of $7.6305 per share, the average of the closing sales prices of the Company’s common stock as reported on Nasdaq for the twenty consecutive full trading days ending on the trading day immediately prior to the closing date
of the merger. The fair market value of loans and deposits acquired on the merger date was $64.1 million and $111.6 million, respectively. The Bank recorded $5.4 million in goodwill, reflecting the amount of consideration given in excess
of the fair market value of net assets acquired. In addition, the Bank recognized $3.2 million in core deposit intangible, the premium recognized for Clover Community Bank’s deposits, which is amortized over the estimated life of those
deposits.
Discussion of Financial Condition at March 31, 2019 and December 31, 2018
During the period from December 31, 2018 to March 31, 2019, total assets increased by approximately $146.2 million, or 30.77%. The increase was
mostly attributed to the acquisition of Clover Communty Bankshares, Inc. (“Clover”), on January 1, 2019, and was reflected primarily in cash and due from banks, interest-earning deposits with banks, and loans. The increase in total assets
was funded by an increase in deposits. Interest-earning deposits with banks, and investment securities including investment securities available for sale and equity securities at March 31, 2019 totaled $98.5 million compared to $53.6
million at December 31, 2018.
The Company’s investment securities portfolio as of March 31, 2019 totaled $69.7 million, an increase of $37.2 million when compared to the $32.6
million reported at December 31, 2018. This increase included $39.6 million acquired from Clover. At March 31, 2019, the Company had a net unrealized gain on available-for-sale securities of $127,000, net of tax, as compared to a net
unrealized loss of $549,000, net of tax, at December 31, 2018. On January 1, 2018 the Company adopted the FASB ASU 2016-01 in which there was an initial adjustment of accumulated other comprehensive loss in the amount of $443,000 recorded
in retained earnings for the loss on equity securities.
At March 31, 2019, net loans constituted 75.68% of the Company’s total assets. Net loans increased by $80.9 million from December 31, 2018 to March
31, 2019. The increase in loans since December 31, 2018 included $64.1 million acquired from Clover on the effective date of the merger, January 1, 2019, and $17.1 million in additional growth. Of all of the portfolio segments that
increased during the first three months of 2019 including the loans acquired from Clover, commercial real estate experienced the largest amount of growth at $46.1 million or 18.4%. Management’s continued goal is to grow the loan portfolio
to provide maximum income proportionate with acceptable risks.
As part of the ongoing monitoring of credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including
trends related to (i) the local, state and national economic outlook, (ii) concentrations of credit, (iii) interest rate movements, (iv) volume, mix and size of loans, and (v) delinquencies. The Company also has an internal Loan Review
Officer who monitors risk grades on an ongoing basis. Furthermore, the Company employs a third party contractor to perform an annual loan review. The scope of the review is typically 50 – 60% of the loan portfolio.
At March 31, 2019 and December 31, 2018 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $4.3
million and $4.4 million, respectively. The Company also had $3.3 million of purchased credit impaired, or PCI, loans at March 31, 2019. Recorded investment in impaired loans of $1.7 million had related allowances for loan losses totaling
$231,000 and $245,000 at March 31, 2019 and December 31, 2018, respectively. There were $2.6 million of impaired loans without a specific allowance at March 31, 2019 and December 31, 2018. Impaired loans at March 31, 2019 and December 31,
2018 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At March 31, 2019, there were nine loans totaling approximately $3.8 million, which were restructured to facilitate the borrowers’
ability to repay the outstanding balances. These nine restructured loans are considered troubled debt restructurings at March 31, 2019 and have specific reserves amounting to approximately $224,000. Of these nine loans, eight loans totaling
$3.1 million were accruing interest at March 31, 2019. At December 31, 2018, there were ten loans totaling $3.9 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these ten loans,
nine loans totaling $3.1 million were accruing interest. Reserves for loans not considered impaired were approximately $3.8 million and $3.7 million at March 31, 2019 and December 31, 2018, respectively. The allowance for loan losses at
both March 31, 2019 and December 31, 2018 was 0.86% and 1.01%, respectively, of gross loans outstanding.
The Company records provision for loan losses based upon known problem loans and estimated probable losses in the existing loan portfolio. The
Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key components, which are a specific allowance for identified problem or impaired loans and a model estimating probable losses for the
remainder of the portfolio.
Identified problem and impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair value of the collateral, if the loan is collateral-dependent. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to
significant change. The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new
loan products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio, trends in portfolio credit quality, including delinquency and charge-off rates and current economic conditions that may affect a
borrower's ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ
substantially from the current operating environment.
Non-interest earning assets consisting of cash and due from banks, bank premises, equipment and software, foreclosed assets and other assets
increased to $27.4 million at March 31, 2019 compared to $21.0 million at December 31, 2018. The increase is attributed mostly to the increase in cash and due from banks of $2.6 million, or 23.91%, increase in bank premises, equipment and
software of $2.8 million or 46.64%, and to an increase in foreclosed assets of $1.0 million or 89.28%. At March 31, 2019, foreclosed assets consisted of seven properties valued at $2.2 million. Of these seven properties, two properties
valued at $960,000 were acquired from Clover.
Deposit accounts represent the Company’s primary funding source and consist of non-interest bearing demand deposits, interest-bearing demand
deposits, savings accounts and time deposits. Total deposits increased by approximately $128.2 million, or 32.45%, for the three months ended March 31, 2019. Of this growth, $111.6 million is due to the acquisition of Clover. The additional
$16.6 million was organic growth. The total increase includes increases in noninterest-earning demand deposits of $40.2 million, or 65.70%, interest-earning demand deposits of $50.9 million, or 35.64%, savings deposits of $16.9 million or
74.67%, and time deposits of $20.2 million or 12.00%.
Federal Home Loan Bank advances totaled $16.1 million at March 31, 2019 and December 31, 2018.
Stockholders’ equity amounted to $67.4 million, or 10.85% of total assets at March 31, 2019, compared to $50.3 million, or 10.58% of total assets
at December 31, 2018.
Discussion of Results of Operations
For the three months ended March 31, 2019 and 2018
Net Income
Net income for the three months ended March 31, 2019 was $337,000 compared to $581,000 for the first quarter of 2018, a decrease of $244,000.
Common and diluted earnings per common share was $0.04 for the three months ended March 31, 2019 compared to $0.12 for the first quarter of 2018. During the first quarter of 2019 the Company incurred $1,722,000 in merger-related expenses.
If the merger expenses, and certain other income statement items including accretion of discounts recorded on loans and deposits and amortization of the core deposit intangibles, net of tax, were excluded, net income for first quarter 2019
would have been $1,710,000, which is a non-GAAP (Generally Accepted Accounting Principles) measurement. Please refer to “Note Regarding Use of non-GAAP Financial Measures” and the non-GAAP reconciliation table below for additional
information.
Net Interest Income
Net interest income is the primary source of earnings for the Company. Net interest income is the difference between interest income on earning
assets (primarily loans and investment securities) and the interest expense on deposits and other interest bearing liabilities. Net interest spread is the difference between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets for the period. Changes in net interest income result from changes in interest rates and the volume and mix of earning assets
and interest-bearing liabilities.
Net interest income for the quarter ended March 31, 2019 totaled $5,658,000 compared to $3,767,000 for the quarter ended March 31, 2018. The
Company’s net interest spread was approximately 3.81% and 3.62% for the quarters ended March 31, 2019 and 2018, respectively. Net interest margin on average interest earning assets was 4.09% and 3.79% for the quarters ended March 31, 2019
and 2018, respectively. Net interest spread increased by 19 basis points, and net interest margin increased by 30 basis points.
The yield on earning assets increased by 25 basis points from 4.86% for the quarter ended March 31, 2018 to 5.11% for the quarter ended March 31, 2019. Comparatively, the cost of funds, including
deposits, borrowings and holding company debt, was flat at 1.08% from the first quarter of 2019 compared to the first quarter of 2018. The improvement in the yield on earning assets and the net interest margin was softened by the shift
in the earning asset mix, as the ratio of average loans to average earning assets declined from 89% in the quarter ended March 31, 2018 to 83% in the quarter ended March 31, 2019. The additional liquidity maintained in interest earning
cash and securities resulted in those categories increasing from 11% to 17% as a percentage of earning assets for the same periods.
The margin and asset yield increases were attributed primarily to the 45 basis point increase in loan yield from 5.15% in the first quarter of 2018
to 5.60% in the first quarter of 2019. Loan yields were positively impacted by prime rate increases of 25 basis points each in March 2018, June 2018, September 2018, and December 2018. The loan yields also benefited from accretion of the
discounts on purchased loans and were partially offset by accretion of the discounts on acquired time deposits. The net of loan and deposit accretion added 8 basis points to the net interest margin.
Provision for Loan Losses
The Company recorded a provision for loan losses of $77,000 for the quarter ended March 31, 2019 and $252,000 for the quarter ended March 31, 2018.
This decrease of $175,000 in the provision for loan losses is due to continued improvement in credit quality. The ratio of the allowance for loan and lease losses as a percentage of total loans was 0.86% and 1.01% at March 31, 2019 and
December 31, 2018, respectively. The decrease of 17 basis points is due primarily to the addition of the Clover loan portfolio and no additional allowance recorded since the discount credit marks are currently sufficient. The provision for
loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.
The following table sets forth information with respect to the asset quality of our loan portfolio as of the dates indicated. The non-performing
loans exclude PCI loans.
|
|
Loans
Outstanding
|
|
|
Non-
Performing
Loans
|
|
|
Net
Charge-offs
(Recoveries)
|
|
|
Allowance
for Loan
Losses
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2019
|
|
$
|
474,239
|
|
|
$
|
1,035
|
|
|
$
|
(13
|
)
|
|
$
|
4,068
|
|
December 31, 2018
|
|
|
393,282
|
|
|
|
1,051
|
|
|
|
(133
|
)
|
|
|
3,978
|
|
September 30, 2018
|
|
|
380,746
|
|
|
|
1,057
|
|
|
|
(6
|
)
|
|
|
3,925
|
|
June 30, 2018
|
|
|
374,026
|
|
|
|
1,105
|
|
|
|
95
|
|
|
|
3,844
|
|
March 31, 2018
|
|
|
367,039
|
|
|
|
1,125
|
|
|
|
71
|
|
|
|
3,780
|
|
December 31, 2017
|
|
|
348,679
|
|
|
|
2,746
|
|
|
|
(26
|
)
|
|
|
3,599
|
|
September 30, 2017
|
|
|
340,038
|
|
|
|
2,142
|
|
|
|
130
|
|
|
|
3,423
|
|
June 30, 2017
|
|
|
324,349
|
|
|
|
2,896
|
|
|
|
322
|
|
|
|
3,213
|
|
March 31, 2017
|
|
|
311,609
|
|
|
|
2,937
|
|
|
|
73
|
|
|
|
3,471
|
|
December 31, 2016
|
|
|
308,492
|
|
|
|
2,875
|
|
|
|
(303
|
)
|
|
|
3,393
|
|
September 30, 2016
|
|
|
301,420
|
|
|
|
3,579
|
|
|
|
56
|
|
|
|
3,687
|
|
June 30, 2016
|
|
|
293,157
|
|
|
|
1,739
|
|
|
|
(20
|
)
|
|
|
3,541
|
|
March 31, 2016
|
|
|
297,746
|
|
|
|
2,100
|
|
|
|
122
|
|
|
|
3,521
|
|
December 31, 2015
|
|
|
292,362
|
|
|
|
2,164
|
|
|
|
2
|
|
|
|
3,723
|
|
September 30, 2015
|
|
|
286,469
|
|
|
|
2,079
|
|
|
|
(109
|
)
|
|
|
3,825
|
|
June 30, 2015
|
|
|
278,305
|
|
|
|
3,335
|
|
|
|
68
|
|
|
|
3,886
|
|
March 31, 2015
|
|
|
257,919
|
|
|
|
3,562
|
|
|
|
48
|
|
|
|
3,954
|
|
December 31, 2014
|
|
|
244,646
|
|
|
|
4,166
|
|
|
|
162
|
|
|
|
4,002
|
|
September 30, 2014
|
|
|
227,933
|
|
|
|
3,081
|
|
|
|
(22
|
)
|
|
|
4,165
|
|
Non-interest Income
Non-interest income for the quarter ended March 31, 2019 totaled $620,000, an increase of $290,000 over the $330,000 reported for the quarter ended
March 31, 2018. The primary factors contributing to the overall increase were the increase in mortgage fee income of $110,000, the increase in overdraft fees on deposits of $60,000, the increase in interchange fee income, net of $34,000,
and the increase in unrealized gain on equity securities of $30,000 for the quarter ended March 31, 2019
.
Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment
transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09,
Revenue from
Contracts with Customers (Topic 606)
, in 2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this
Report. Previously, such costs were reported as check card expense. Interchange fees for the three months ended March 31, 2019 and March 31, 2018 reported on a net basis totaled $80,000 and $46,000, respectively.
Non-interest Expense
Non-interest expenses for the March 31, 2019 and 2018 quarters totaled $5,791,000
and $3,096,000, respectively. The $2,695,000 increase was due in part to merger expenses of $1,722,000 related to the acquisition of Clover which was completed on January 1, 2019
.
There were smaller increases in salaries and benefits, up $556,000 or 29.98%, and in amortization of core deposit intangibles, up $152,000 or 1,689%,
both of which were attributed primarily to the acquisition of Clover. Merger expenses included $1,224,000 paid to former Clover employees in accordance with change-in-control agreements or severance packages and the related payroll
taxes. The other merger expenses included $242,000 for data processing due to the system conversion to the Bank’s core system and processes and $173,000 due to various products and services including investment banking services, debit
cards, a product brochure for former Clover customers, and training for former Clover employees. Salaries and wages were up by $463,000 or 36%, as new employees joined the Bank in conjunction with the acquisition of Clover. This
increase included $52,000 for several employees whose employment ended as planned after conversion of Clover’s operating system to the Bank’s operating system in mid-February. Overtime salaries were up
$21,000 or 141% from first quarter of 2018 to the first quarter of 2019, which was in part due to the effort to convert Clover to the Bank’s core system and processes.
Income Tax Expense
The Company recorded income tax expense of $73,000 for the three-months ended March 31, 2019 resulting in an effective tax rate of 18%. For the
same period in 2018, the Company recorded income tax expense of $168,000 with an effective tax rate of 22%.
Liquidity
The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a
cost-effective manner. The Company’s principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid assets, and funds provided by operations. While
scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquid assets, which
consist of cash and due from banks, interest-earning deposits with banks, certificates of deposit with banks, investment securities classified as available-for-sale, and equity securities represented 18.48% and 13.89% of total assets at
March 31, 2019 and December 31, 2018, respectively.
Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow
funds as necessary to meet the Company’s cash flow demands. The Company has established credit lines with other financial institutions to purchase up to $14 million in federal funds and to borrow up to $10 million under a reverse
repurchase agreement. There were no borrowings outstanding against these credit lines at March 31, 2019. The Company has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of
the Company’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at March 31, 2019 was $91.6 million, of which $16.1 million was advanced and $11 million was securing
a letter of credit.
Total deposits were $523.4 million and $395.1 million at March 31, 2019 and December 31, 2018, respectively. Time deposits, which are the only
deposit accounts that have stated maturity dates, are generally considered to be rate-sensitive. Time deposits represented 36.04% and 42.63% of total deposits at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and
December 31, 2018, the Company had brokered time deposits of $15.5 million and $15.0 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At March 31,
2019 and December 31, 2018, respectively, the deposits attributed to the listing service were $7.3 million and $10.2 million, respectively. Management accepts time deposits from outside the Bank’s local market area when such funding
sources are necessary to fund growth and the rates paid are comparable to rates offered to retail customers or lower. Management believes most time deposits are relationship-oriented.
While the Company will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior
experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.
Management believes that the Company's current sources of funds provide adequate liquidity for its current cash flow needs.
Capital Resources
Future growth and expansion of the Company are dictated by the ability to create capital, which is generated principally by retained earnings.
Adequacy of the Company’s and the Bank’s capital is also monitored to ensure compliance with regulatory requirements. One of management’s primary objectives is to maintain a strong capital position in order to warrant confidence from
customers, investors, bank regulators and stockholders. A measure of capital position is capital adequacy, defined as the amount of capital needed to maintain future asset growth and absorb unforeseen losses. Regulators consider a variety
of factors in determining an institution’s capital adequacy, including quality and stability of earnings, asset quality, guidance and expertise and liquidity. Regulatory guidelines place an emphasis on stockholders’ equity in relationship
to total assets adjusted for risk.
In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III
regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5%
“capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to
risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to
risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%,
calculated as the ratio of Tier 1 capital to average assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity
Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
Management considers the Company and the Bank to be well-capitalized and expects to be able to meet future needs caused by growth and expansion, as
well as capital requirements implemented by the regulatory agencies. In the course of its ongoing capital management, the Company evaluates regularly any potential need for additional capital both at the Company and subsidiary Bank. The
Company considers various alternatives such as debt or equity issued by the Company, from which proceeds may be invested in the Bank to support asset growth and to increase regulatory capital ratios.
The table below presents the regulatory capital ratios for the Bank.
|
|
At March 31, 2019
|
|
|
|
Actual
Ratio
|
|
|
Minimum
Requirement
|
|
|
Well-Capitalized
Requirement
|
|
Common equity tier 1 capital ratio
|
|
|
12.45
|
%
|
|
|
7.00
|
%
|
|
|
6.50
|
%
|
Total risk-based capital ratio
|
|
|
13.25
|
%
|
|
|
10.50
|
%
|
|
|
10.00
|
%
|
Tier 1 risk-based capital ratio
|
|
|
12.45
|
%
|
|
|
8.50
|
%
|
|
|
8.00
|
%
|
Tier 1 leverage ratio
|
|
|
10.64
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
Non-GAAP Reconciliation
The table below presents the Non-GAAP reconciliation for adjusted net income for the period.
|
|
March 31, 2019
|
|
Dollars in thousands
|
|
|
|
Net income
|
|
$
|
337
|
|
Adjustments:
|
|
|
|
|
Merger expenses
|
|
|
1,722
|
|
Accretion of purchased loan discounts
|
|
|
(117
|
)
|
Accretion of purchased time deposit discounts
|
|
|
12
|
|
Amortization of core deposit intangible
|
|
|
161
|
|
Net tax effect of adjustments
|
|
|
(405
|
)
|
Adjusted net income
|
|
$
|
1,710
|
|