NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial
Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”), EagleBank (the “Bank”),
Eagle Commercial Ventures, LLC (“ECV”), Eagle Insurance Services, LLC, and Bethesda Leasing, LLC, with all significant
intercompany transactions eliminated.
The Consolidated Financial
Statements of the Company included herein are unaudited. The Consolidated Financial Statements reflect all adjustments, consisting
of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented.
The amounts as of and for the year ended December 31, 2016 were derived from audited Consolidated Financial Statements. Certain
information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission. There have been no significant changes to the Company’s Accounting Policies as disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company believes that the disclosures are
adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported
to conform to the current period presentation.
These statements should be
read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016. Operating results for the three and nine months ended September 30, 2017
are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.
Nature of Operations
The Company, through the Bank,
conducts a full service community banking business, primarily in the metropolitan Washington, D.C area. The primary financial services
offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement
products. The Bank is also active in the origination and sale of residential mortgage loans, the origination of small business
loans, and the origination, securitization and sale of FHA loans. The Bank offers its products and services through twenty-one
banking offices, five lending centers and various electronic capabilities, including remote deposit services and mobile banking
services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral
program with a third party insurance broker. Eagle Commercial Ventures, LLC, a direct subsidiary of the Company, provides subordinated
financing for the acquisition, development and construction of real estate projects; these transactions involve higher levels of
risk, together with commensurate higher returns. Refer to Higher Risk Lending – Revenue Recognition below.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material
to the financial statements.
Cash Flows
For purposes of reporting cash
flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other
banks which have an original maturity of three months or less.
Investment Securities
The Company has no securities
classified as trading, or as held to maturity. Securities available-for-sale are acquired as part of the Company’s asset/liability
management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in
prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses being
reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred
income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest
income in the Consolidated Statements of Operations.
Premiums and discounts on investment
securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on
prepayment assumptions and call optionality if any. Declines in the fair value of individual available-for-sale securities below
their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors
affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a
rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and
ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Management systematically
evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management
to consider various factors, which include the: (1) duration and magnitude of the decline in value; (2) financial condition of
the issuer or issuers; and (3) structure of the security.
The entire amount of an impairment
loss is recognized in earnings only when: (1) the Company intends to sell the security; or (2) it is more likely than not that
the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover
the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing
the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive
income, net of deferred taxes.
Loans Held for Sale
The Company regularly engages
in sales of residential mortgage loans held for sale and the guaranteed portion of small business loans, guaranteed by the Small
Business Administration (“SBA”), and originated by the Bank. The Company has elected to carry loans held for sale at
fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these
loans are recorded as a component of noninterest income in the Consolidated Statements of Operations.
The Company’s current
practice is to sell residential mortgage loans held for sale on a servicing released basis, and, therefore, it has no intangible
asset recorded in the normal course of business for the value of such servicing as of September 30, 2017, December 31, 2016 and
September 30, 2016. The sale of the guaranteed portion of SBA loans on a servicing retained basis, in a transaction apart from
the loan’s origination, gives rise to an excess servicing asset, which is computed on a loan by loan basis with the unamortized
amount being included in intangible assets in the Consolidated Balance Sheets. This excess servicing asset is being amortized on
a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other income
in the Consolidated Statements of Operations.
The Company enters into commitments
to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate
lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be
derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes both “best
efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in
the values of loans that would result from the exercise of the derivative loan commitments. Under a “best efforts”
contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor
and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes.
The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby
the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with
the intent that the buyer/investor has assumed the interest rate risk on the loan. As a result, the Bank is not generally exposed
to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest
rates. The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision
because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate
lock commitments and best efforts contracts, no gain or loss should occur on the interest rate lock commitments. Under a “mandatory
delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified
price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment
by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to
compensate the investor for the shortfall. The Company manages the interest rate risk on interest rate lock commitments by entering
into forward sale contracts of mortgage backed securities, whereby the Company obtains the right to deliver securities to investors
in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value in derivative
assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities with changes in fair
value recorded in other income within the Consolidated Statements of Operations. The period of time between issuance of a loan
commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market
conditions. The gross gains on loan sales are recognized based on new loan commitments with adjustment for price and pair-off activity.
Commission expenses on loans held for sale are recognized based on loans closed.
In circumstances where the
Company does not deliver the whole loan to an investor, but rather elects to retain the loan in its portfolio, the loan is transferred
from held for sale to loans at fair value at date of transfer.
The Company originates a small
number of FHA loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”).
The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program
and sells the resulting securities in the open market to authorized dealers in the normal course of business and generally retains
the servicing rights. When servicing is retained on FHA loans securitized and sold, the Company computes an excess servicing asset
on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets. Revenue
represents gains from the sale of the Ginnie Mae securities and net revenues earned on the servicing of FHA loans securitizing
the Ginnie Mae securities. The gains on Ginnie Mae securities include the realized and unrealized gains and losses on sales of
FHA mortgage loans, as well as the changes in fair value of FHA interest rate lock commitments and FHA forward loan sale commitments.
Revenue from servicing commercial FHA mortgages is recognized as earned based on the specific contractual terms of the underlying
servicing agreements, along with amortization of and changes in impairment of mortgage servicing rights.
Loans
Loans are stated at the principal
amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on
the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate
that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan.
Management considers loans
impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments
according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring
and ongoing risk assessment procedures. Management considers the financial condition of the borrower, cash flow of the borrower,
payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, impaired loans do not include
large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively
for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans
specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (90 days
or less) provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present
value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral
if repayment is expected to be provided solely by the collateral. In appropriate circumstances, interest income on impaired loans
may be recognized on a cash basis.
Higher Risk Lending – Revenue Recognition
The Company had occasionally
made higher risk acquisition, development, and construction (“ADC”) loans that entailed higher risks than ADC loans
made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions
were made through the Company’s subsidiary, ECV. This activity was limited as to individual transaction amount and total
exposure amounts, based on capital levels, and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding.
ECV had three higher risk loan transactions outstanding as of September 30, 2017 and December 31, 2016, amounting to $9.5 million
and $9.3 million, respectively.
Allowance for Credit Losses
The allowance for credit losses
represents an amount which, in management’s judgment, is adequate to absorb probable losses on loans and other extensions
of credit that may become uncollectible. The adequacy of the allowance for credit losses is determined through careful and continuous
review and evaluation of the loan portfolio and involves the balancing of a number of factors to establish a prudent level of allowance.
Among the factors considered in evaluating the adequacy of the allowance for credit losses are lending risks associated with growth
and entry into new markets, loss allocations for specific credits, the level of the allowance to nonperforming loans, historical
loss experience, economic conditions, portfolio trends and credit concentrations, changes in the size and character of the loan
portfolio, and management’s judgment with respect to current and expected economic conditions and their impact on the existing
loan portfolio. Allowances for impaired loans are generally determined based on collateral values. Loans or any portion thereof
deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the
level of the allowance through the provision for credit losses, which is recorded as a current period operating expense. The allowance
for credit losses consists of allocated and unallocated components.
The components of the allowance
for credit losses represent an estimation done pursuant to Accounting Standards Codification (“ASC”) Topic 450,
“Contingencies,”
or ASC Topic 310,
“Receivables.”
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss
may be incurred. For potential problem credits for which specific allowance amounts have not been determined, the Company establishes
allowances according to the application of credit risk factors. These factors are set by management and approved by the appropriate
Board committee to reflect its assessment of the relative level of risk inherent in each risk grade. A third component of the allowance
computation, termed a nonspecific or environmental factors allowance, is based upon management’s evaluation of various environmental
conditions that are not directly measured in the determination of either the specific allowance or formula allowance. Such conditions
include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies
and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions
within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of outside review consultants, and management’s judgment with respect to various
other conditions including credit administration and management and the quality of risk identification systems. Executive management
reviews these environmental conditions quarterly, and documents the rationale for all changes.
Management believes that the
allowance for credit losses is adequate; however, determination of the allowance is inherently subjective and requires significant
estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high
degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic
downturn in the current cycle. In addition, various banking agencies, as an integral part of their examination process, and independent
consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for credit losses. Such review
may result in recognition of additions to the allowance based on their judgments of information available to them at the time of
their examination.
Premises and Equipment
Premises and equipment are
stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes.
Premises and equipment are depreciated over the useful lives of the assets, which generally range from three to seven years for
furniture, fixtures and equipment, three to five years for computer software and hardware, and five to twenty years for building
improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where
management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter.
The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as
incurred. These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Operations.
Other Real Estate Owned (OREO)
Assets acquired through loan
foreclosure are held for sale and are recorded at fair value less estimated selling costs when acquired, establishing a new cost
basis. The new basis is supported by appraisals that are generally no more than twelve months old. Costs after acquisition are
generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation
of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised
values.
Goodwill and Other Intangible Assets
Goodwill represents the excess
of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets
that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets
that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic
impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods
over their respective estimated useful lives.
Goodwill is subject to impairment
testing at the reporting unit level, which must be conducted at least annually. The Company performs impairment testing during
the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired.
The Company performs a qualitative
assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If, after assessing updated qualitative factors, the Company determines it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, it does not have to perform the two-step goodwill impairment test. Determining
the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual
assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental and often involve
the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of
other intangible assets. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent
transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates
reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables.
Based on the results of qualitative assessments of all reporting units, the Company concluded that no impairment existed at December
31, 2016. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which
would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s
financial condition and results of operations.
Interest Rate Swap Derivatives
The Company is exposed to certain
risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide
variety of business and operational risks through management of its core business activities. The Company manages economic risks,
including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and
liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain
cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments designated
as cash flow hedges are used to manage differences in the amount, timing, and duration of the Company’s known or expected
cash receipts and its known or expected cash payments principally related to certain variable rate deposits. Refer to the “Loans
Held for Sale” section for a discussion on forward commitment contracts, which are also considered derivatives.
At the inception of a derivative
contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to
likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with
no hedging designation (“stand-alone derivative”). Regarding Interest Rate Swap Derivatives, the Company has no fair
value hedges, only cash flow hedges. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive
income and is reclassified into earnings in the same period(s) during which the hedged transaction affects earnings (i.e. the period
when cash flows are exchanged between counterparties). For both fair value and cash flow hedges, changes in the fair value of derivatives
that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately
in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in
earnings, as noninterest income.
Net cash settlements on derivatives
that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash
settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are
classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents
the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking
hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges
to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company
also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are
used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge
accounting when it determines that the derivative is no longer highly effective in offsetting changes in the fair value or cash
flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged
firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued,
subsequent changes in fair value of the derivative are recorded as noninterest income or expense. When a fair value hedge is discontinued,
the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or
accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or
forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized
into earnings over the same periods in which the hedged transactions will affect earnings.
Customer Repurchase Agreements
The Company enters into agreements
under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company
may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates
the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized
financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as
accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability
in the Company’s Consolidated Balance Sheets, while the securities underlying the securities sold under agreements to repurchase
remain in the respective assets accounts and are delivered to and held as collateral by third party trustees.
Marketing and Advertising
Marketing and advertising costs are generally expensed
as incurred.
Income Taxes
The Company employs the asset
and liability method of accounting for income taxes as required by ASC Topic 740, “
Income Taxes
.” Under this
method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates
that will be in effect when these differences reverse. In accordance with ASC Topic 740, the Company may establish a reserve against
deferred tax assets in those cases where realization is less than certain, although no such reserves exist at September 30, 2017,
December 31, 2016, or September 30, 2016.
Transfer of Financial Assets
Transfers of financial assets
are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases,
the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.
Earnings per Common Share
Basic net income per common
share is derived by dividing net income by the weighted-average number of common shares outstanding during the period measured.
Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding
during the period measured including the potential dilutive effects of common stock equivalents.
Stock-Based Compensation
In accordance with ASC Topic
718,
“Compensation,”
the Company records as compensation expense an amount equal to the amortization (over the
remaining service period) of the fair value of option and restricted stock awards computed at the date of grant. Compensation expense
on performance based grants is recorded based on the probability of achievement of the goals underlying the performance grant.
Refer to Note 10 for a description of stock-based compensation awards, activity and expense.
New Authoritative Accounting Guidance
ASU 2014-09,
“Revenue
from Contracts with Customers (Topic 606).”
In May 2014, the FASB and the International Accounting Standards Board (the
“IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition
guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries
or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided
limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB
and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard
for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust
framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries,
jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure
requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity
must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The
standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These
may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in
the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially
effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not
permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of
the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after
December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard
is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most
current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at
the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues
of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus
Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope
Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue
from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including
loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact
on revenue most closely associated with financial instruments, including interest income and expense. The Company is substantially
complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU including
deposit related fees, sale of OREO, interchange fees, and other fee income. The Company’s assessment suggests that adoption
of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. The Company
is also substantially complete with its evaluation of certain costs related to these revenue streams to determine whether such
costs should be presented as expenses or contra-revenue (i.e., gross vs. net). In addition, the Company is evaluating the ASU’s
expanded disclosure requirements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective
approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.
ASU 2016-01,
“Financial
Instruments—(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”
ASU
2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making
targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of
accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized
in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at
cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical
or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable
fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment
exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value
of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities
to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity
to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting
from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance
with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities
by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the
accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company has performed
a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No.
2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company
will continue to closely monitor developments and additional guidance.
ASU 2016-02,
“Leases
(Topic 842).”
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception
of short-term leases): (1) a lease liability, which is the present value of a lessee’s obligation to make lease payments,
and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent
to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated,
although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes
were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will
classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will
be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing,
and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded
in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU 2016-02
is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities
are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited.
The Company is currently evaluating the provisions of ASU 2016-02 and will be closely monitoring developments and additional guidance
to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
ASU 2016-09,
“Improvements
to Employee Share-Based Payment Accounting (Topic 718).”
ASU 2016-09 includes provisions intended to simplify various
aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions
of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in
capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit
in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits
be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as
an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can
withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy
the employer’s statutory income tax withholding obligation. The new guidance also requires an employer to classify the cash
paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity
on its statement of cash flows (prior guidance did not specify how these cash flows should be classified); and (3) permit companies
to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards.
Forfeitures can be estimated, as required today, or recognized when they occur. ASU 2016-09 was effective for the Company on January
1, 2017 and the adoption of this new standard (ASU 2016-09) resulted in a net $460 thousand, or $0.01 per basic common share, reduction
to income tax expense for the nine months ended September 30, 2017.
ASU 2016-13,
“Measurement
of Credit Losses on Financial Instruments (Topic 326).”
This ASU significantly changes how entities will measure credit
losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing
the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard
will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred
to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses
and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans,
leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale
(“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner
similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized
cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather
than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired
debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models,
and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost
balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13
is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim
and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified
retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact
the new standard will have on the Company’s Consolidated Financial Statements.
ASU No. 2016-15,
“Classification
of Certain Cash Receipts and Cash Payments.”
FASB issued this update in August 2016. Current GAAP is unclear or does
not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce
diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective
for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the
amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable
to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this
guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material
impact on the Company’s Consolidated Financial Statements.
ASU No. 2017-04,
“Simplifying
the Test for Goodwill Impairment.”
FASB issued this update in January 2017. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill
impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning
after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1,
2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have
a material impact on the Company’s Consolidated Financial Statements.
ASU 2017-12,
“Derivatives
and Hedging: Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12)
”
. The Financial Accounting Standards
Board issued this update in August 2017. The purpose of this updated guidance is to better align a company’s financial reporting
for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities
for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The
Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which
the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the
statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the
standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.
Note 2. Cash and Due from Banks
Regulation D of the Federal
Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type
and amount of their deposits. During 2017, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements,
as well as significant excess reserves, on which interest is paid.
Additionally, the Bank maintains
interest bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with domestic correspondent
banks as compensation for services they provide to the Bank.
Note 3. Investment Securities Available-for-Sale
Amortized cost
and estimated fair value of securities available-for-sale are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
September 30, 2017
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U. S. agency securities
|
|
$
|
179,100
|
|
|
$
|
342
|
|
|
$
|
1,524
|
|
|
$
|
177,918
|
|
Residential mortgage backed securities
|
|
|
303,822
|
|
|
|
374
|
|
|
|
2,670
|
|
|
|
301,526
|
|
Municipal bonds
|
|
|
61,593
|
|
|
|
1,673
|
|
|
|
119
|
|
|
|
63,147
|
|
Corporate bonds
|
|
|
13,011
|
|
|
|
206
|
|
|
|
—
|
|
|
|
13,217
|
|
Other equity investments
|
|
|
218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
$
|
557,744
|
|
|
$
|
2,595
|
|
|
$
|
4,313
|
|
|
$
|
556,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
December 31, 2016
|
|
|
Amortized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Fair
|
|
(dollars in thousands)
|
|
|
Cost
|
|
|
|
Gains
|
|
|
|
Losses
|
|
|
|
Value
|
|
U. S. agency securities
|
|
$
|
107,425
|
|
|
$
|
519
|
|
|
$
|
1,802
|
|
|
$
|
106,142
|
|
Residential mortgage backed securities
|
|
|
329,606
|
|
|
|
324
|
|
|
|
3,691
|
|
|
|
326,239
|
|
Municipal bonds
|
|
|
94,607
|
|
|
|
1,723
|
|
|
|
400
|
|
|
|
95,930
|
|
Corporate bonds
|
|
|
9,508
|
|
|
|
82
|
|
|
|
11
|
|
|
|
9,579
|
|
Other equity investments
|
|
|
218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
$
|
541,364
|
|
|
$
|
2,648
|
|
|
$
|
5,904
|
|
|
$
|
538,108
|
|
In addition, at September 30,
2017, the Company held $31.0 million in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal
Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and which are not marketable,
and therefore are carried at cost.
Gross unrealized
losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized
loss position are as follows:
|
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
September 30, 2017
|
|
Number of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U. S. agency securities
|
|
|
32
|
|
|
$
|
97,832
|
|
|
$
|
1,101
|
|
|
$
|
28,299
|
|
|
$
|
423
|
|
|
$
|
126,131
|
|
|
$
|
1,524
|
|
Residential mortgage backed securities
|
|
|
113
|
|
|
|
198,670
|
|
|
|
1,523
|
|
|
|
55,920
|
|
|
|
1,147
|
|
|
|
254,590
|
|
|
|
2,670
|
|
Municipal bonds
|
|
|
5
|
|
|
|
13,301
|
|
|
|
119
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,301
|
|
|
|
119
|
|
|
|
|
150
|
|
|
$
|
309,803
|
|
|
$
|
2,743
|
|
|
$
|
84,219
|
|
|
$
|
1,570
|
|
|
$
|
394,022
|
|
|
$
|
4,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
|
or Greater
|
|
|
|
Total
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
December 31, 2016
|
|
Number
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U. S. agency securities
|
|
|
27
|
|
|
$
|
88,991
|
|
|
$
|
1,764
|
|
|
$
|
3,768
|
|
|
$
|
38
|
|
|
$
|
92,759
|
|
|
$
|
1,802
|
|
Residential mortgage backed securities
|
|
|
112
|
|
|
|
232,347
|
|
|
|
3,110
|
|
|
|
19,402
|
|
|
|
581
|
|
|
|
251,749
|
|
|
|
3,691
|
|
Municipal bonds
|
|
|
16
|
|
|
|
34,743
|
|
|
|
400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,743
|
|
|
|
400
|
|
Corporate bonds
|
|
|
2
|
|
|
|
4,998
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,998
|
|
|
|
11
|
|
|
|
|
157
|
|
|
$
|
361,079
|
|
|
$
|
5,285
|
|
|
$
|
23,170
|
|
|
$
|
619
|
|
|
$
|
384,249
|
|
|
$
|
5,904
|
|
The unrealized losses that
exist are generally the result of changes in market interest rates and interest spread relationships since original purchases.
The weighted average duration of debt securities, which comprise 99.9% of total investment securities, is relatively short at 3.5
years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation
techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions
and other factors such as credit loss assumptions. The Company does not believe that the investment securities that were in an
unrealized loss position as of September 30, 2017 represent an other-than-temporary impairment. The Company does not intend to
sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its
amortized cost basis, which may be at maturity.
The amortized cost and estimated
fair value of investments available-for-sale at September 30, 2017 and December 31, 2016 by contractual maturity are shown in the
table below. Expected maturities for residential mortgage backed securities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
U. S. agency securities maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
90,495
|
|
|
$
|
89,503
|
|
|
$
|
83,885
|
|
|
$
|
82,548
|
|
After one year through five years
|
|
|
74,481
|
|
|
|
74,433
|
|
|
|
20,736
|
|
|
|
20,897
|
|
Five years through ten years
|
|
|
14,124
|
|
|
|
13,982
|
|
|
|
2,804
|
|
|
|
2,697
|
|
Residential mortgage backed securities
|
|
|
303,822
|
|
|
|
301,526
|
|
|
|
329,606
|
|
|
|
326,239
|
|
Municipal bonds maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
2,537
|
|
|
|
2,586
|
|
|
|
1,056
|
|
|
|
1,070
|
|
After one year through five years
|
|
|
21,116
|
|
|
|
21,875
|
|
|
|
45,808
|
|
|
|
46,865
|
|
Five years through ten years
|
|
|
36,868
|
|
|
|
37,493
|
|
|
|
46,668
|
|
|
|
46,839
|
|
After ten years
|
|
|
1,072
|
|
|
|
1,193
|
|
|
|
1,075
|
|
|
|
1,156
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
11,511
|
|
|
|
11,717
|
|
|
|
8,008
|
|
|
|
8,079
|
|
After ten years
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1,500
|
|
Other equity investments
|
|
|
218
|
|
|
|
218
|
|
|
|
218
|
|
|
|
218
|
|
|
|
$
|
557,744
|
|
|
$
|
556,026
|
|
|
$
|
541,364
|
|
|
$
|
538,108
|
|
For the nine months ended September
30, 2017, gross realized gains on sales of investments securities were $795 thousand and gross realized losses on sales of investment
securities were $254 thousand. For the nine months ended September 30, 2016, gross realized gains on sales of investments securities
were $1.3 million and gross realized losses on sales of investment securities were $202 thousand.
Proceeds from sales and calls
of investment securities for the nine months ended September 30, 2017 were $70.1 million, and in 2016 were $94.2 million.
The carrying value of securities
pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit
with correspondent banks at September 30, 2017 was $459.9 million, which is well in excess of required amounts in order to operationally
provide significant reserve amounts for new business. As of September 30, 2017 and December 31, 2016, there were no holdings of
securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ten percent of shareholders’
equity.
Note 4. Mortgage Banking Derivative
As part of its mortgage banking
activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate
on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan
and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits
to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest
rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales
contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments
and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and
best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets.
The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the
underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate
lock commitments will close or will be funded.
Certain additional risks arise
from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts.
The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery
programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still
be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur
significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.
The fair value of the mortgage
banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings
during the period of change.
At September 30, 2017 the Bank
had mortgage banking derivative financial instruments with a notional value of $59.6 million related to its forward contracts as
compared to $81.7 million at September 30, 2016. The fair value of these mortgage banking derivative instruments at September 30,
2017 was $63 thousand included in other assets and $36 thousand included in other liabilities as compared to $217 thousand included
in other assets and $222 thousand included in other liabilities at September 30, 2016.
Included in other noninterest
income for the three and nine months ended September 30, 2017 was a net gain of $71 thousand and a net gain of $335 thousand, relating
to mortgage banking derivative instruments as compared to a net loss of $46 thousand and a net gain of $274 thousand for the three
and nine months ended September 30, 2016. The amount included in other noninterest income for the three and nine months ended September
30, 2017 pertaining to its mortgage banking hedging activities was a net realized loss of $14 thousand and $912 thousand as compared
to a net realized gain of $151 thousand and net unrealized loss of $156 thousand for the same periods in September 30, 2016.
Note 5. Loans and Allowance for Credit Losses
The Bank makes loans to customers
primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan
portfolio consists of loans to businesses secured by real estate and other business assets.
Loans, net of unamortized net
deferred fees, at September 30, 2017, December 31, 2016, and September 30, 2016 are summarized by type as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
1,244,184
|
|
|
|
20
|
%
|
|
$
|
1,200,728
|
|
|
|
21
|
%
|
|
$
|
1,130,042
|
|
|
|
21
|
%
|
Income producing - commercial real estate
|
|
|
2,898,948
|
|
|
|
48
|
%
|
|
|
2,509,517
|
|
|
|
44
|
%
|
|
|
2,551,186
|
|
|
|
46
|
%
|
Owner occupied - commercial real estate
|
|
|
749,580
|
|
|
|
12
|
%
|
|
|
640,870
|
|
|
|
12
|
%
|
|
|
590,427
|
|
|
|
11
|
%
|
Real estate mortgage - residential
|
|
|
109,460
|
|
|
|
2
|
%
|
|
|
152,748
|
|
|
|
3
|
%
|
|
|
154,439
|
|
|
|
3
|
%
|
Construction - commercial and residential*
|
|
|
915,493
|
|
|
|
15
|
%
|
|
|
932,531
|
|
|
|
16
|
%
|
|
|
838,137
|
|
|
|
15
|
%
|
Construction - C&I (owner occupied)
|
|
|
55,828
|
|
|
|
1
|
%
|
|
|
126,038
|
|
|
|
2
|
%
|
|
|
104,676
|
|
|
|
2
|
%
|
Home equity
|
|
|
101,898
|
|
|
|
2
|
%
|
|
|
105,096
|
|
|
|
2
|
%
|
|
|
106,856
|
|
|
|
2
|
%
|
Other consumer
|
|
|
8,813
|
|
|
|
—
|
|
|
|
10,365
|
|
|
|
—
|
|
|
|
6,212
|
|
|
|
—
|
|
Total loans
|
|
|
6,084,204
|
|
|
|
100
|
%
|
|
|
5,677,893
|
|
|
|
100
|
%
|
|
|
5,481,975
|
|
|
|
100
|
%
|
Less: allowance for credit losses
|
|
|
(62,967
|
)
|
|
|
|
|
|
|
(59,074
|
)
|
|
|
|
|
|
|
(56,864
|
)
|
|
|
|
|
Net loans
|
|
$
|
6,021,237
|
|
|
|
|
|
|
$
|
5,618,819
|
|
|
|
|
|
|
$
|
5,425,111
|
|
|
|
|
|
*Includes
land loans.
Unamortized net deferred fees
amounted to $23.3 million, $22.3 million, and $20.9 million at September 30, 2017, December 31, 2016, and September 30, 2016, respectively.
As of September 30, 2017 and
December 31, 2016, the Bank serviced $176.5 million and $128.8 million, respectively, of FHA loans, SBA loans and other loan participations
which are not reflected as loan balances on the Consolidated Balance Sheets.
Loan Origination / Risk Management
The Company’s goal is
to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences.
Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating
each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary
and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific
loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed
to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.
The composition of the Company’s
loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At September
30, 2017, owner occupied - commercial real estate and construction - C&I (owner occupied) represent approximately 13% of the
loan portfolio. At September 30, 2017, non-owner occupied commercial real estate and real estate construction represented approximately
63% of the loan portfolio. The combined owner occupied and commercial real estate loans represent approximately 76% of the loan
portfolio. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate
values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80%
and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees may be required, but may be limited. In making
real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.
The Company is also an active
traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable
financing. This loan category represents approximately 20% of the loan portfolio at September 30, 2017 and was generally variable
or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary
to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 2% of
the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed
portion of the credit. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains
on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other
commercial loans. SBA loans are subject to a maximum loan size established by the SBA.
Approximately 2% of the loan
portfolio at September 30, 2017 consists of home equity loans and lines of credit and other consumer loans. These credits, while
making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types
of loans advanced by the Bank.
Approximately 2% of the loan
portfolio consists of residential mortgage loans. The repricing duration of these loans was 15 months. These credits represent
first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell
(servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet
the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold
to another investor at a later date or mature.
Loans are secured primarily
by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general,
borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory
financial condition. Additionally, an equity contribution toward the project is customarily required.
Construction loans require
that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed,
fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger
scale projects.
Loans intended for residential
land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building
sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential zoned real
properties, including the creation of housing. Residential development and construction loans will finance projects such as single
family subdivisions, planned unit developments, townhouses, and condominiums.
Commercial land acquisition
and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately
zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required
to put equity into each project at levels determined by the appropriate Loan Committee.
Substantially all construction
draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor,
the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown
certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project
to determine that the work has been completed, to justify the draw requisition.
Commercial permanent loans
are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage,
assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily
at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis
point increase in interest rates from their current levels.
Commercial permanent loans
generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower.
The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.
The Company’s loan portfolio
includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.44 billion at September
30, 2017. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination.
ADC loans are serviced by loan funded interest reserves and represent approximately 79% of the outstanding ADC loan portfolio at
September 30, 2017. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based
upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience
of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) borrower equity contribution; and (5) the level of
collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics
of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company
recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with
the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs
a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1)
construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the
timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third
party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of
the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to
the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction
meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If
a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.
From time to time the Company
may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects
(which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower
priority interests and/or higher loan to value ratios. The Company seeks an overall financial return on these transactions commensurate
with the risks and structure of each individual loan. Certain transactions may bear current interest at a rate with a significant
premium to normal market rates. Other loan transactions may carry a standard rate of current interest, but also earn additional
interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.
Allowance for Credit Losses
The following tables detail
activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2017 and 2016.
Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other
categories.
|
|
|
|
|
Income Producing -
|
|
|
Owner Occupied -
|
|
|
Real Estate
|
|
|
Construction -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Commercial and
|
|
|
Home
|
|
|
Other
|
|
|
|
|
(dollars
in thousands)
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Residential
|
|
|
Residential
|
|
|
Equity
|
|
|
Consumer
|
|
|
Total
|
|
Three
months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of
period
|
|
$
|
14,225
|
|
|
$
|
23,308
|
|
|
$
|
4,189
|
|
|
$
|
1,081
|
|
|
$
|
16,727
|
|
|
$
|
1,216
|
|
|
$
|
301
|
|
|
$
|
61,047
|
|
Loans charged-off
|
|
|
(522
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
(593
|
)
|
Recoveries
of loans previously charged-off
|
|
|
407
|
|
|
|
30
|
|
|
|
—
|
|
|
|
2
|
|
|
|
146
|
|
|
|
1
|
|
|
|
6
|
|
|
|
592
|
|
Net loans (charged-off)
recoveries
|
|
|
(115
|
)
|
|
|
30
|
|
|
|
—
|
|
|
|
2
|
|
|
|
107
|
|
|
|
1
|
|
|
|
(26
|
)
|
|
|
(1
|
)
|
Provision
for credit losses
|
|
|
(2,266
|
)
|
|
|
(963
|
)
|
|
|
1,273
|
|
|
|
(126
|
)
|
|
|
4,052
|
|
|
|
(120
|
)
|
|
|
71
|
|
|
|
1,921
|
|
Ending
balance
|
|
$
|
11,844
|
|
|
$
|
22,375
|
|
|
$
|
5,462
|
|
|
$
|
957
|
|
|
$
|
20,886
|
|
|
$
|
1,097
|
|
|
$
|
346
|
|
|
$
|
62,967
|
|
Nine
months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
14,700
|
|
|
$
|
21,105
|
|
|
$
|
4,010
|
|
|
$
|
1,284
|
|
|
$
|
16,487
|
|
|
$
|
1,328
|
|
|
$
|
160
|
|
|
$
|
59,074
|
|
Loans charged-off
|
|
|
(659
|
)
|
|
|
(1,470
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(98
|
)
|
|
|
(2,266
|
)
|
Recoveries
of loans previously charged-off
|
|
|
675
|
|
|
|
80
|
|
|
|
2
|
|
|
|
5
|
|
|
|
491
|
|
|
|
4
|
|
|
|
18
|
|
|
|
1,275
|
|
Net loans charged-off
|
|
|
16
|
|
|
|
(1,390
|
)
|
|
|
2
|
|
|
|
5
|
|
|
|
452
|
|
|
|
4
|
|
|
|
(80
|
)
|
|
|
(991
|
)
|
Provision
for credit losses
|
|
|
(2,872
|
)
|
|
|
2,660
|
|
|
|
1,450
|
|
|
|
(332
|
)
|
|
|
3,947
|
|
|
|
(235
|
)
|
|
|
266
|
|
|
|
4,884
|
|
Ending
balance
|
|
$
|
11,844
|
|
|
$
|
22,375
|
|
|
$
|
5,462
|
|
|
$
|
957
|
|
|
$
|
20,886
|
|
|
$
|
1,097
|
|
|
$
|
346
|
|
|
$
|
62,967
|
|
As
of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
3,246
|
|
|
$
|
1,378
|
|
|
$
|
1,005
|
|
|
$
|
—
|
|
|
$
|
2,900
|
|
|
$
|
90
|
|
|
$
|
81
|
|
|
$
|
8,700
|
|
Collectively
evaluated for impairment
|
|
|
8,598
|
|
|
|
20,997
|
|
|
|
4,457
|
|
|
|
957
|
|
|
|
17,986
|
|
|
|
1,007
|
|
|
|
265
|
|
|
|
54,267
|
|
Ending
balance
|
|
$
|
11,844
|
|
|
$
|
22,375
|
|
|
$
|
5,462
|
|
|
$
|
957
|
|
|
$
|
20,886
|
|
|
$
|
1,097
|
|
|
$
|
346
|
|
|
$
|
62,967
|
|
Three
months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
13,386
|
|
|
$
|
19,072
|
|
|
$
|
4,202
|
|
|
$
|
1,061
|
|
|
$
|
17,024
|
|
|
$
|
1,556
|
|
|
$
|
235
|
|
|
$
|
56,536
|
|
Loans charged-off
|
|
|
(109
|
)
|
|
|
(1,751
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(121
|
)
|
|
|
(12
|
)
|
|
|
(1,993
|
)
|
Recoveries
of loans previously charged-off
|
|
|
7
|
|
|
|
10
|
|
|
|
—
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
8
|
|
|
|
33
|
|
Net loans (charged-off)
recoveries
|
|
|
(102
|
)
|
|
|
(1,741
|
)
|
|
|
—
|
|
|
|
2
|
|
|
|
3
|
|
|
|
(118
|
)
|
|
|
(4
|
)
|
|
|
(1,960
|
)
|
Provision
for credit losses
|
|
|
(523
|
)
|
|
|
3,178
|
|
|
|
59
|
|
|
|
47
|
|
|
|
(513
|
)
|
|
|
(69
|
)
|
|
|
109
|
|
|
|
2,288
|
|
Ending
balance
|
|
$
|
12,761
|
|
|
$
|
20,509
|
|
|
$
|
4,261
|
|
|
$
|
1,110
|
|
|
$
|
16,514
|
|
|
$
|
1,369
|
|
|
$
|
340
|
|
|
$
|
56,864
|
|
Nine
months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
11,563
|
|
|
$
|
14,122
|
|
|
$
|
3,279
|
|
|
$
|
1,268
|
|
|
$
|
21,088
|
|
|
$
|
1,292
|
|
|
$
|
75
|
|
|
$
|
52,687
|
|
Loans charged-off
|
|
|
(2,802
|
)
|
|
|
(2,342
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(217
|
)
|
|
|
(37
|
)
|
|
|
(5,398
|
)
|
Recoveries
of loans previously charged-off
|
|
|
93
|
|
|
|
14
|
|
|
|
2
|
|
|
|
5
|
|
|
|
207
|
|
|
|
11
|
|
|
|
24
|
|
|
|
356
|
|
Net loans charged-off
|
|
|
(2,709
|
)
|
|
|
(2,328
|
)
|
|
|
2
|
|
|
|
5
|
|
|
|
207
|
|
|
|
(206
|
)
|
|
|
(13
|
)
|
|
|
(5,042
|
)
|
Provision
for credit losses
|
|
|
3,907
|
|
|
|
8,715
|
|
|
|
980
|
|
|
|
(163
|
)
|
|
|
(4,781
|
)
|
|
|
283
|
|
|
|
278
|
|
|
|
9,219
|
|
Ending
balance
|
|
$
|
12,761
|
|
|
$
|
20,509
|
|
|
$
|
4,261
|
|
|
$
|
1,110
|
|
|
$
|
16,514
|
|
|
$
|
1,369
|
|
|
$
|
340
|
|
|
$
|
56,864
|
|
As
of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
1,997
|
|
|
$
|
1,714
|
|
|
$
|
360
|
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
$
|
4,471
|
|
Collectively
evaluated for impairment
|
|
|
10,764
|
|
|
|
18,795
|
|
|
|
3,901
|
|
|
|
1,110
|
|
|
|
16,214
|
|
|
|
1,369
|
|
|
|
240
|
|
|
|
52,393
|
|
Ending
balance
|
|
$
|
12,761
|
|
|
$
|
20,509
|
|
|
$
|
4,261
|
|
|
$
|
1,110
|
|
|
$
|
16,514
|
|
|
$
|
1,369
|
|
|
$
|
340
|
|
|
$
|
56,864
|
|
The Company’s recorded
investments in loans as of September 30, 2017, December 31, 2016 and September 30, 2016 related to each balance in the allowance
for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:
|
|
|
|
|
Income Producing -
|
|
|
Owner occupied -
|
|
|
Real Estate
|
|
|
Construction -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Commercial and
|
|
|
Home
|
|
|
Other
|
|
|
|
|
(dollars
in thousands)
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Residential
|
|
|
Residential
|
|
|
Equity
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
8,309
|
|
|
$
|
10,241
|
|
|
$
|
6,570
|
|
|
$
|
—
|
|
|
$
|
7,728
|
|
|
$
|
594
|
|
|
$
|
92
|
|
|
$
|
33,534
|
|
Collectively
evaluated for impairment
|
|
|
1,235,875
|
|
|
|
2,888,707
|
|
|
|
743,010
|
|
|
|
109,460
|
|
|
|
963,593
|
|
|
|
101,304
|
|
|
|
8,721
|
|
|
|
6,050,670
|
|
Ending
balance
|
|
$
|
1,244,184
|
|
|
$
|
2,898,948
|
|
|
$
|
749,580
|
|
|
$
|
109,460
|
|
|
$
|
971,321
|
|
|
$
|
101,898
|
|
|
$
|
8,813
|
|
|
$
|
6,084,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
10,437
|
|
|
$
|
15,057
|
|
|
$
|
2,093
|
|
|
$
|
241
|
|
|
$
|
6,517
|
|
|
$
|
—
|
|
|
$
|
126
|
|
|
$
|
34,471
|
|
Collectively
evaluated for impairment
|
|
|
1,190,291
|
|
|
|
2,494,460
|
|
|
|
638,777
|
|
|
|
152,507
|
|
|
|
1,052,052
|
|
|
|
105,096
|
|
|
|
10,239
|
|
|
|
5,643,422
|
|
Ending
balance
|
|
$
|
1,200,728
|
|
|
$
|
2,509,517
|
|
|
$
|
640,870
|
|
|
$
|
152,748
|
|
|
$
|
1,058,569
|
|
|
$
|
105,096
|
|
|
$
|
10,365
|
|
|
$
|
5,677,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
12,448
|
|
|
$
|
14,648
|
|
|
$
|
2,517
|
|
|
$
|
244
|
|
|
$
|
4,878
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
34,848
|
|
Collectively
evaluated for impairment
|
|
|
1,117,594
|
|
|
|
2,536,538
|
|
|
|
587,910
|
|
|
|
154,195
|
|
|
|
937,935
|
|
|
|
106,743
|
|
|
|
6,212
|
|
|
|
5,447,127
|
|
Ending
balance
|
|
$
|
1,130,042
|
|
|
$
|
2,551,186
|
|
|
$
|
590,427
|
|
|
$
|
154,439
|
|
|
$
|
942,813
|
|
|
$
|
106,856
|
|
|
$
|
6,212
|
|
|
$
|
5,481,975
|
|
At September 30, 2017, nonperforming
loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia
Heritage”) have a carrying value of $476 thousand and $507 thousand, and an unpaid principal balance of $533 thousand and
$1.5 million, respectively, and were evaluated separately in accordance with ASC Topic 310-30,
“Loans and Debt Securities
Acquired with Deteriorated Credit Quality
.” The various impaired loans were recorded at estimated fair value with any
excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired
loans acquired will result in additional loan loss provisions and related allowance for credit losses.
Credit Quality Indicators
The Company uses several credit
quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use
an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit
risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit
from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial
portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as
statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are
typically loans to individuals in the classes which comprise the consumer portfolio segment.
The following are the definitions of the Company’s
credit quality indicators:
|
Pass:
|
Loans in all classes that comprise the commercial and consumer portfolio segments that are not
adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms
of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
|
|
Watch:
|
Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance
has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not
sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral
within a reasonable period of time.
|
|
Special Mention:
|
Loans in the classes that comprise the commercial portfolio
segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses
may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used
for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of
some loss related to those loans that are considered special mention.
|
|
Classified:
|
Classified (a) Substandard
- Loans inadequately protected by the current sound worth and
paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some
loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not
have to exist in individual loans classified substandard.
|
Classified (b) Doubtful
- Loans
that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may
work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact
status may be determined.
The Company’s credit quality indicators are
updated generally on a quarterly basis, but no less frequently than annually. The following table presents by class and by credit
quality indicator, the recorded investment in the Company’s loans and leases as of September 30, 2017, December 31, 2016
and September 30, 2016.
|
|
|
|
|
Watch and
|
|
|
|
|
|
|
|
|
Total
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,204,850
|
|
|
$
|
31,025
|
|
|
$
|
8,309
|
|
|
$
|
—
|
|
|
$
|
1,244,184
|
|
Income producing - commercial real estate
|
|
|
2,861,346
|
|
|
|
27,361
|
|
|
|
10,241
|
|
|
|
—
|
|
|
|
2,898,948
|
|
Owner occupied - commercial real estate
|
|
|
720,693
|
|
|
|
22,317
|
|
|
|
6,570
|
|
|
|
—
|
|
|
|
749,580
|
|
Real estate mortgage – residential
|
|
|
108,797
|
|
|
|
663
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109,460
|
|
Construction - commercial and residential
|
|
|
963,593
|
|
|
|
—
|
|
|
|
7,728
|
|
|
|
—
|
|
|
|
971,321
|
|
Home equity
|
|
|
100,618
|
|
|
|
686
|
|
|
|
594
|
|
|
|
—
|
|
|
|
101,898
|
|
Other consumer
|
|
|
8,719
|
|
|
|
2
|
|
|
|
92
|
|
|
|
—
|
|
|
|
8,813
|
|
Total
|
|
$
|
5,968,616
|
|
|
$
|
82,054
|
|
|
$
|
33,534
|
|
|
$
|
—
|
|
|
$
|
6,084,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,160,185
|
|
|
$
|
30,106
|
|
|
$
|
10,437
|
|
|
$
|
—
|
|
|
$
|
1,200,728
|
|
Income producing - commercial real estate
|
|
|
2,489,407
|
|
|
|
5,053
|
|
|
|
15,057
|
|
|
|
—
|
|
|
|
2,509,517
|
|
Owner occupied - commercial real estate
|
|
|
630,827
|
|
|
|
7,950
|
|
|
|
2,093
|
|
|
|
—
|
|
|
|
640,870
|
|
Real estate mortgage – residential
|
|
|
151,831
|
|
|
|
676
|
|
|
|
241
|
|
|
|
—
|
|
|
|
152,748
|
|
Construction - commercial and residential
|
|
|
1,051,445
|
|
|
|
607
|
|
|
|
6,517
|
|
|
|
—
|
|
|
|
1,058,569
|
|
Home equity
|
|
|
103,484
|
|
|
|
1,612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,096
|
|
Other consumer
|
|
|
10,237
|
|
|
|
2
|
|
|
|
126
|
|
|
|
—
|
|
|
|
10,365
|
|
Total
|
|
$
|
5,597,416
|
|
|
$
|
46,006
|
|
|
$
|
34,471
|
|
|
$
|
—
|
|
|
$
|
5,677,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,099,894
|
|
|
$
|
18,599
|
|
|
$
|
11,549
|
|
|
$
|
—
|
|
|
$
|
1,130,042
|
|
Income producing - commercial real estate
|
|
|
2,527,318
|
|
|
|
9,220
|
|
|
|
14,648
|
|
|
|
—
|
|
|
|
2,551,186
|
|
Owner occupied - commercial real estate
|
|
|
577,925
|
|
|
|
10,399
|
|
|
|
2,103
|
|
|
|
—
|
|
|
|
590,427
|
|
Real estate mortgage – residential
|
|
|
153,515
|
|
|
|
680
|
|
|
|
244
|
|
|
|
—
|
|
|
|
154,439
|
|
Construction - commercial and residential
|
|
|
937,198
|
|
|
|
737
|
|
|
|
4,878
|
|
|
|
—
|
|
|
|
942,813
|
|
Home equity
|
|
|
105,126
|
|
|
|
1,617
|
|
|
|
113
|
|
|
|
—
|
|
|
|
106,856
|
|
Other consumer
|
|
|
6,209
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,212
|
|
Total
|
|
$
|
5,407,185
|
|
|
$
|
41,255
|
|
|
$
|
33,535
|
|
|
$
|
—
|
|
|
$
|
5,481,975
|
|
Nonaccrual and Past Due Loans
Loans are considered past due
if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed
on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become
due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such
loans are considered past due. Interest income is subsequently recognized only to the extent cash payments are received in excess
of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
The following table presents,
by class of loan, information related to nonaccrual loans as of September 30, 2017, December 31, 2016 and September 30, 2016.
(dollars in thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,242
|
|
|
$
|
2,490
|
|
|
$
|
2,986
|
|
Income producing - commercial real estate
|
|
|
880
|
|
|
|
10,539
|
|
|
|
10,098
|
|
Owner occupied - commercial real estate
|
|
|
6,570
|
|
|
|
2,093
|
|
|
|
2,103
|
|
Real estate mortgage - residential
|
|
|
301
|
|
|
|
555
|
|
|
|
562
|
|
Construction - commercial and residential
|
|
|
4,930
|
|
|
|
2,072
|
|
|
|
6,412
|
|
Home equity
|
|
|
594
|
|
|
|
—
|
|
|
|
113
|
|
Other consumer
|
|
|
92
|
|
|
|
126
|
|
|
|
—
|
|
Total nonaccrual loans (1)(2)
|
|
$
|
16,609
|
|
|
$
|
17,875
|
|
|
$
|
22,274
|
|
|
(1)
|
Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured
terms totaling $12.3 million at September 30, 2017, as compared to $7.9 million at December 31, 2016 and $2.9 million at September
30, 2016.
|
|
(2)
|
Gross interest income of $176 thousand and $802 thousand would have been recorded for the three
and nine months ended September 30, 2017, if nonaccrual loans shown above had been current and in accordance with their original
terms while interest actually recorded on such loans was $31 thousand and $56 thousand for the three and nine months ended September
30, 2017. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans
on nonaccrual status.
|
The following table presents,
by class of loan, an aging analysis and the recorded investments in loans past due as of September 30, 2017 and December 31, 2016.
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
|
|
|
|
|
Total Recorded
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or
|
|
|
Total Past
|
|
|
Current
|
|
|
Investment in
|
|
(dollars in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
More Past Due
|
|
|
Due Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
401
|
|
|
$
|
662
|
|
|
$
|
3,242
|
|
|
$
|
4,305
|
|
|
$
|
1,239,879
|
|
|
$
|
1,244,184
|
|
Income producing - commercial real estate
|
|
|
3,160
|
|
|
|
770
|
|
|
|
880
|
|
|
|
4,810
|
|
|
|
2,894,138
|
|
|
|
2,898,948
|
|
Owner occupied - commercial real estate
|
|
|
817
|
|
|
|
3,268
|
|
|
|
6,570
|
|
|
|
10,655
|
|
|
|
738,925
|
|
|
|
749,580
|
|
Real estate mortgage – residential
|
|
|
1,480
|
|
|
|
2,123
|
|
|
|
301
|
|
|
|
3,904
|
|
|
|
105,556
|
|
|
|
109,460
|
|
Construction - commercial and residential
|
|
|
197
|
|
|
|
—
|
|
|
|
4,930
|
|
|
|
5,127
|
|
|
|
966,194
|
|
|
|
971,321
|
|
Home equity
|
|
|
637
|
|
|
|
100
|
|
|
|
594
|
|
|
|
1,331
|
|
|
|
100,567
|
|
|
|
101,898
|
|
Other consumer
|
|
|
21
|
|
|
|
4
|
|
|
|
92
|
|
|
|
117
|
|
|
|
8,696
|
|
|
|
8,813
|
|
Total
|
|
$
|
6,713
|
|
|
$
|
6,927
|
|
|
$
|
16,609
|
|
|
$
|
30,249
|
|
|
$
|
6,053,955
|
|
|
$
|
6,084,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,634
|
|
|
$
|
757
|
|
|
$
|
2,490
|
|
|
$
|
4,881
|
|
|
$
|
1,195,847
|
|
|
$
|
1,200,728
|
|
Income producing - commercial real estate
|
|
|
511
|
|
|
|
—
|
|
|
|
10,539
|
|
|
|
11,050
|
|
|
|
2,498,467
|
|
|
|
2,509,517
|
|
Owner occupied - commercial real estate
|
|
|
3,987
|
|
|
|
3,328
|
|
|
|
2,093
|
|
|
|
9,408
|
|
|
|
631,462
|
|
|
|
640,870
|
|
Real estate mortgage – residential
|
|
|
1,015
|
|
|
|
163
|
|
|
|
555
|
|
|
|
1,733
|
|
|
|
151,015
|
|
|
|
152,748
|
|
Construction - commercial and residential
|
|
|
360
|
|
|
|
1,342
|
|
|
|
2,072
|
|
|
|
3,774
|
|
|
|
1,054,795
|
|
|
|
1,058,569
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,096
|
|
|
|
105,096
|
|
Other consumer
|
|
|
101
|
|
|
|
9
|
|
|
|
126
|
|
|
|
236
|
|
|
|
10,129
|
|
|
|
10,365
|
|
Total
|
|
$
|
7,608
|
|
|
$
|
5,599
|
|
|
$
|
17,875
|
|
|
$
|
31,082
|
|
|
$
|
5,646,811
|
|
|
$
|
5,677,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,173
|
|
|
$
|
495
|
|
|
$
|
2,986
|
|
|
$
|
4,654
|
|
|
$
|
1,125,388
|
|
|
$
|
1,130,042
|
|
Income producing - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
10,098
|
|
|
|
10,098
|
|
|
|
2,541,088
|
|
|
|
2,551,186
|
|
Owner occupied - commercial real estate
|
|
|
—
|
|
|
|
3,338
|
|
|
|
2,103
|
|
|
|
5,441
|
|
|
|
584,986
|
|
|
|
590,427
|
|
Real estate mortgage – residential
|
|
|
—
|
|
|
|
164
|
|
|
|
562
|
|
|
|
726
|
|
|
|
153,713
|
|
|
|
154,439
|
|
Construction - commercial and residential
|
|
|
—
|
|
|
|
—
|
|
|
|
6,412
|
|
|
|
6,412
|
|
|
|
936,401
|
|
|
|
942,813
|
|
Home equity
|
|
|
562
|
|
|
|
620
|
|
|
|
113
|
|
|
|
1,295
|
|
|
|
105,561
|
|
|
|
106,856
|
|
Other consumer
|
|
|
8
|
|
|
|
16
|
|
|
|
—
|
|
|
|
24
|
|
|
|
6,188
|
|
|
|
6,212
|
|
Total
|
|
$
|
1,743
|
|
|
$
|
4,633
|
|
|
$
|
22,274
|
|
|
$
|
28,650
|
|
|
$
|
5,453,325
|
|
|
$
|
5,481,975
|
|
Impaired Loans
Loans are considered impaired
when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance
with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated
in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired,
a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from
the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount
is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off
when deemed uncollectible.
The following table presents,
by class of loan, information related to impaired loans for the periods ended September 30, 2017, December 31, 2016 and September
30, 2016.
|
|
Unpaid
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
|
|
|
Principal
|
|
|
With No
|
|
|
With
|
|
|
Recorded
|
|
|
Related
|
|
|
Quarter
|
|
|
Year
|
|
|
Quarter
|
|
|
Year
|
|
(dollars
in thousands)
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Allowance
|
|
|
To
Date
|
|
|
To
Date
|
|
|
To
Date
|
|
|
To
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,047
|
|
|
$
|
2,363
|
|
|
$
|
3,640
|
|
|
$
|
6,003
|
|
|
$
|
3,246
|
|
|
$
|
5,977
|
|
|
$
|
5,790
|
|
|
$
|
31
|
|
|
$
|
97
|
|
Income producing -
commercial real estate
|
|
|
10,092
|
|
|
|
828
|
|
|
|
9,264
|
|
|
|
10,092
|
|
|
|
1,378
|
|
|
|
10,222
|
|
|
|
11,350
|
|
|
|
121
|
|
|
|
373
|
|
Owner occupied - commercial
real estate
|
|
|
6,890
|
|
|
|
1,612
|
|
|
|
5,278
|
|
|
|
6,890
|
|
|
|
1,005
|
|
|
|
5,623
|
|
|
|
4,182
|
|
|
|
26
|
|
|
|
46
|
|
Real estate mortgage
– residential
|
|
|
301
|
|
|
|
301
|
|
|
|
—
|
|
|
|
301
|
|
|
|
—
|
|
|
|
304
|
|
|
|
368
|
|
|
|
—
|
|
|
|
—
|
|
Construction - commercial
and residential
|
|
|
4,930
|
|
|
|
1,534
|
|
|
|
3,396
|
|
|
|
4,930
|
|
|
|
2,900
|
|
|
|
4,808
|
|
|
|
3,736
|
|
|
|
—
|
|
|
|
14
|
|
Home equity
|
|
|
594
|
|
|
|
494
|
|
|
|
100
|
|
|
|
594
|
|
|
|
90
|
|
|
|
446
|
|
|
|
223
|
|
|
|
—
|
|
|
|
2
|
|
Other
consumer
|
|
|
92
|
|
|
|
—
|
|
|
|
92
|
|
|
|
92
|
|
|
|
81
|
|
|
|
93
|
|
|
|
101
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
28,946
|
|
|
$
|
7,132
|
|
|
$
|
21,770
|
|
|
$
|
28,902
|
|
|
$
|
8,700
|
|
|
$
|
27,473
|
|
|
$
|
25,750
|
|
|
$
|
178
|
|
|
$
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,296
|
|
|
$
|
2,532
|
|
|
$
|
3,095
|
|
|
$
|
5,627
|
|
|
$
|
2,671
|
|
|
$
|
12,620
|
|
|
$
|
12,755
|
|
|
$
|
79
|
|
|
$
|
191
|
|
Income producing -
commercial real estate
|
|
|
14,936
|
|
|
|
5,048
|
|
|
|
9,888
|
|
|
|
14,936
|
|
|
|
1,943
|
|
|
|
16,742
|
|
|
|
17,533
|
|
|
|
54
|
|
|
|
198
|
|
Owner occupied - commercial
real estate
|
|
|
2,483
|
|
|
|
1,691
|
|
|
|
792
|
|
|
|
2,483
|
|
|
|
350
|
|
|
|
2,233
|
|
|
|
2,106
|
|
|
|
—
|
|
|
|
13
|
|
Real estate mortgage
– residential
|
|
|
555
|
|
|
|
555
|
|
|
|
—
|
|
|
|
555
|
|
|
|
—
|
|
|
|
246
|
|
|
|
249
|
|
|
|
—
|
|
|
|
—
|
|
Construction - commercial
and residential
|
|
|
2,072
|
|
|
|
1,535
|
|
|
|
537
|
|
|
|
2,072
|
|
|
|
522
|
|
|
|
5,091
|
|
|
|
5,174
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78
|
|
|
|
89
|
|
|
|
—
|
|
|
|
—
|
|
Other
consumer
|
|
|
126
|
|
|
|
—
|
|
|
|
126
|
|
|
|
126
|
|
|
|
113
|
|
|
|
42
|
|
|
|
32
|
|
|
|
2
|
|
|
|
4
|
|
Total
|
|
$
|
28,468
|
|
|
$
|
11,361
|
|
|
$
|
14,438
|
|
|
$
|
25,799
|
|
|
$
|
5,599
|
|
|
$
|
37,052
|
|
|
$
|
37,938
|
|
|
$
|
135
|
|
|
$
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
15,517
|
|
|
$
|
2,370
|
|
|
$
|
10,078
|
|
|
$
|
12,448
|
|
|
$
|
1,997
|
|
|
$
|
12,838
|
|
|
$
|
12,879
|
|
|
$
|
54
|
|
|
$
|
112
|
|
Income producing -
commercial real estate
|
|
|
14,648
|
|
|
|
—
|
|
|
|
14,648
|
|
|
|
14,648
|
|
|
|
1,714
|
|
|
|
17,584
|
|
|
|
15,298
|
|
|
|
28
|
|
|
|
144
|
|
Owner occupied - commercial
real estate
|
|
|
2,517
|
|
|
|
—
|
|
|
|
2,517
|
|
|
|
2,517
|
|
|
|
360
|
|
|
|
2,108
|
|
|
|
1,923
|
|
|
|
13
|
|
|
|
13
|
|
Real estate mortgage
– residential
|
|
|
244
|
|
|
|
244
|
|
|
|
—
|
|
|
|
244
|
|
|
|
—
|
|
|
|
249
|
|
|
|
271
|
|
|
|
—
|
|
|
|
—
|
|
Construction - commercial
and residential
|
|
|
4,878
|
|
|
|
4,340
|
|
|
|
538
|
|
|
|
4,878
|
|
|
|
300
|
|
|
|
5,146
|
|
|
|
6,542
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
113
|
|
|
|
—
|
|
|
|
113
|
|
|
|
113
|
|
|
|
100
|
|
|
|
117
|
|
|
|
129
|
|
|
|
2
|
|
|
|
2
|
|
Other
consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
37,917
|
|
|
$
|
6,954
|
|
|
$
|
27,894
|
|
|
$
|
34,848
|
|
|
$
|
4,471
|
|
|
$
|
38,042
|
|
|
$
|
37,048
|
|
|
$
|
97
|
|
|
$
|
271
|
|
Modifications
A modification of a loan constitutes
a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various
types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only
payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor
is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the
remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with
similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending
the interest-only payment period. As of September 30, 2017, all performing TDRs were categorized as interest-only modifications.
Loans modified in a TDR for
the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired
consumer and commercial loans that have been modified in a TDR is measured 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 estimated fair value of
the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing
these estimates.
The following table presents
by class, the recorded investment of loans modified in a TDR during the three months ended September 30, 2017 and 2016.
|
|
For the Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Income
Producing -
|
|
|
Owner
Occupied -
|
|
|
Construction -
|
|
|
|
|
(dollars in thousands)
|
|
Number of
Contracts
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Total
|
|
Troubled debt restructings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured accruing
|
|
|
—
|
|
|
$
|
(356
|
)
|
|
$
|
—
|
|
|
$
|
(23
|
)
|
|
$
|
—
|
|
|
$
|
(379
|
)
|
Restructured nonaccruing
|
|
|
2
|
|
|
|
586
|
|
|
|
(560
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
26
|
|
Total
|
|
|
2
|
|
|
$
|
230
|
|
|
$
|
(560
|
)
|
|
$
|
(23
|
)
|
|
$
|
—
|
|
|
$
|
(353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allowance
|
|
|
|
|
|
$
|
(185
|
)
|
|
$
|
(559
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured and subsequently defaulted
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Income
Producing -
|
|
|
Owner
Occupied -
|
|
|
Construction -
|
|
|
|
|
(dollars in thousands)
|
|
Number of
Contracts
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Total
|
|
Troubled debt restructings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured accruing
|
|
|
1
|
|
|
$
|
801
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
801
|
|
Restructured nonaccruing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
1
|
|
|
$
|
801
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific allowance
|
|
|
|
|
|
$
|
363
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured and subsequently defaulted
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table presents
by class, the recorded investment of loans modified in TDRs held by the Company at September 30, 2017 and September 30, 2016.
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Income
Producing -
|
|
|
Owner
Occupied -
|
|
|
Construction -
|
|
|
|
|
(dollars
in thousands)
|
|
Number
of
Contracts
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Total
|
|
Troubled debt restructings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
accruing
|
|
|
9
|
|
|
$
|
2,761
|
|
|
$
|
9,212
|
|
|
$
|
320
|
|
|
$
|
—
|
|
|
$
|
12,293
|
|
Restructured
nonaccruing
|
|
|
4
|
|
|
|
776
|
|
|
|
136
|
|
|
|
—
|
|
|
|
—
|
|
|
|
912
|
|
Total
|
|
|
13
|
|
|
$
|
3,537
|
|
|
$
|
9,348
|
|
|
$
|
320
|
|
|
$
|
—
|
|
|
$
|
13,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
allowance
|
|
|
|
|
|
$
|
685
|
|
|
$
|
1,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
and subsequently defaulted
|
|
|
|
|
|
$
|
237
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Income
Producing -
|
|
|
Owner
Occupied -
|
|
|
Construction -
|
|
|
|
|
(dollars
in thousands)
|
|
Number
of
Contracts
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Total
|
|
Troubled debt restructings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
accruing
|
|
|
7
|
|
|
$
|
1,725
|
|
|
$
|
742
|
|
|
$
|
414
|
|
|
$
|
—
|
|
|
$
|
2,881
|
|
Restructured
nonaccruing
|
|
|
2
|
|
|
|
199
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,948
|
|
|
|
5,147
|
|
Total
|
|
|
9
|
|
|
$
|
1,924
|
|
|
$
|
742
|
|
|
$
|
414
|
|
|
$
|
4,948
|
|
|
$
|
8,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
allowance
|
|
|
|
|
|
$
|
456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
and subsequently defaulted
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,948
|
|
|
$
|
4,948
|
|
The Company had thirteen TDR’s
at September 30, 2017 totaling approximately $13.2 million. Nine of these loans, totaling approximately $12.3 million, are performing
under their modified terms. During the nine months of 2017, there was one default on a $237 thousand restructured loan which was
charged off, as compared to the same period in 2016, which had one default on a $5.0 million restructured loan. A default is considered
to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. There were two nonperforming TDRs
totaling $588 thousand reclassified to nonperforming loans during the nine months ended September 30, 2017. There was one nonperforming
TDR totaling $5.0 million reclassified to nonperforming loans during the nine months ended September 30, 2016. Commercial and consumer
loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified
in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased,
adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying
value of the loan. There were two loans totaling $251 thousand modified in a TDR during the three months ended September 30, 2017,
as compared to the three months ended September 30, 2016 which had one loan totaling $801 thousand modified in a TDR.
Note 6. Interest Rate Swap Derivatives
The Company uses interest rate
swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives
designated as cash flow hedges is to add stability to interest expense and to manage its exposure to interest rate movements. To
accomplish this objective, the Company entered into forward starting interest rate swaps in April 2015 as part of its interest
rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds.
The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties,
but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between
the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts
from two counterparties in exchange for the Company making fixed payments beginning in April 2016. The Company’s intent is
to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.
As of September 30, 2017, the
Company had three forward starting designated cash flow hedge interest rate swap transactions outstanding that had an aggregate
notional amount of $250 million associated with the Company’s variable rate deposits. The net unrealized gain before income
tax on the swaps was $167 thousand at September 30, 2017 compared to a net unrealized loss before income tax of $692 thousand at
December 31, 2016. The net unrealized gain at September 30, 2017 compared to the net unrealized loss at December 31, 2016 is due
to the increase in current market expectation of short term interest rates for the remaining term of the designated cash flow hedge
interest rate swap.
For derivatives designated
as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive
income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings,
and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses
the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with
the changes in cash flows of the designated hedged transactions. The Company recognized an immaterial amount in earnings due to
hedge ineffectiveness during both the nine month periods ended September 30, 2017 and September 30, 2016.
Amounts reported in accumulated
other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as
interest payments are made/received on the Company’s variable-rate assets/liabilities. During the quarter ended September
30, 2017, the Company reclassified $307 thousand related to designated cash flow hedge derivatives from accumulated other comprehensive
income to interest expense. During the next twelve months, the Company estimates (based on existing interest rates) that $657 thousand
will be reclassified as an increase in interest expense.
The Company is exposed to credit
risk in the event of nonperformance by the interest rate swap counterparty. The Company minimizes this risk by entering into derivative
contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses
from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions
of ASC Topic 815,
“Derivatives and Hedging.”
In addition, the interest rate swap agreements contain language
outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain
threshold limits.
The designated cash flow hedge
interest rate swap agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated
with the secured party’s exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment
of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative
obligations; 3) if the Company fails to maintain its status as a well/adequately capitalized institution then the counterparty
could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of September 30, 2017, the
aggregate fair value of all designated cash flow hedge derivative contracts with credit risk contingent features (i.e., those containing
collateral posting or termination provisions based on our capital status) were in a net asset position of $167 thousand (none of
these contracts were in a net liability position as of September 30, 2017). As of September 30, 2017, the Company has minimum collateral
posting thresholds with certain of its derivative counterparties and has posted collateral of $890 thousand against its obligations
under these agreements. If the Company had breached any provisions under the agreements at September 30, 2017, it could have been
required to settle its obligations under the agreements at the termination value.
The table below identifies
the balance sheet category and fair values of the Company’s designated cash flow hedge derivative instruments as of September
30, 2017 and December 31, 2016.
|
|
Swap
|
|
|
Notional
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
Number
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
Category
|
|
Receive Rate
|
|
Pay
Rate
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
|
(1
|
)
|
|
$
|
75,000
|
|
|
$
|
116
|
|
|
Other Assets
|
|
1 month USD-LIBOR-BBA w/ -1 day
lookback +10 basis points
|
|
|
1.71
|
%
|
|
March 31, 2020
|
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
100,000
|
|
|
|
(24
|
)
|
|
Other Liabilities
|
|
Federal Funds Effective Rate +10 basis points
|
|
|
1.74
|
%
|
|
April 15, 2021
|
|
Interest
rate swap
|
|
|
(3
|
)
|
|
|
75,000
|
|
|
|
75
|
|
|
Other
Assets
|
|
1
month USD-LIBOR-BBA w/ -1 day lookback +10 basis points
|
|
|
1.92
|
%
|
|
March 31, 2022
|
|
|
|
|
Total
|
|
|
$
|
250,000
|
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
|
|
|
Notional
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Number
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Category
|
|
Receive Rate
|
|
Pay Rate
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
(1
|
)
|
|
$
|
75,000
|
|
|
$
|
(197
|
)
|
|
Other Liabilities
|
|
1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points
|
|
|
1.71
|
%
|
|
March 31, 2020
|
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
100,000
|
|
|
|
(514
|
)
|
|
Other Liabilities
|
|
Federal Funds Effective Rate +10 basis points
|
|
|
1.74
|
%
|
|
April 15, 2021
|
|
Interest rate swap
|
|
|
(3
|
)
|
|
|
75,000
|
|
|
|
19
|
|
|
Other Assets
|
|
1 month USD-LIBOR-BBA w/ -1 day lookback +10 basis points
|
|
|
1.92
|
%
|
|
March 31, 2022
|
|
|
|
|
Total
|
|
|
$
|
250,000
|
|
|
$
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents the pre-tax net gains (losses)
of the Company’s cash flow hedges for the nine months ended September 30, 2017 and for the year ended December 31, 2016.
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
Effective Portion
|
|
|
Ineffective Portion
|
|
|
|
|
|
|
|
|
|
Reclassified from AOCI
|
|
|
Recognized in Income
|
|
|
|
|
|
|
Amount of
|
|
|
into income
|
|
|
on Derivatives
|
|
|
|
Swap
|
|
|
Pre-tax gain (loss)
|
|
|
|
|
Amount of
|
|
|
|
|
Amount of
|
|
|
|
Number
|
|
|
Recognized in OCI
|
|
|
Category
|
|
Gain (Loss)
|
|
|
Category
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
(1
|
)
|
|
$
|
116
|
|
|
Interest Expense
|
|
$
|
(338
|
)
|
|
Other Expense
|
|
$
|
—
|
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
(24
|
)
|
|
Interest Expense
|
|
|
(525
|
)
|
|
Other Expense
|
|
|
—
|
|
Interest rate swap
|
|
|
(3
|
)
|
|
|
75
|
|
|
Interest Expense
|
|
|
(458
|
)
|
|
Other Expense
|
|
|
(1
|
)
|
|
|
|
Total
|
|
|
$
|
167
|
|
|
|
|
$
|
(1,321
|
)
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
Effective Portion
|
|
|
Ineffective Portion
|
|
|
|
|
|
|
|
|
|
Reclassified from AOCI
|
|
|
Recognized in Income
|
|
|
|
|
|
|
Amount of
|
|
|
into income
|
|
|
on Derivatives
|
|
|
Swap
|
|
|
Pre-tax gain (loss)
|
|
|
|
|
Amount of
|
|
|
|
|
Amount of
|
|
|
|
Number
|
|
|
Recognized in OCI
|
|
|
Category
|
|
Gain (Loss)
|
|
|
Category
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
(1
|
)
|
|
$
|
(197
|
)
|
|
Interest Expense
|
|
$
|
(628
|
)
|
|
Other Expense
|
|
$
|
—
|
|
Interest rate swap
|
|
|
(2
|
)
|
|
|
(514
|
)
|
|
Interest Expense
|
|
|
(880
|
)
|
|
Other Expense
|
|
|
—
|
|
Interest rate swap
|
|
|
(3
|
)
|
|
|
19
|
|
|
Interest Expense
|
|
|
(747
|
)
|
|
Other Expense
|
|
|
1
|
|
|
|
|
Total
|
|
|
$
|
(692
|
)
|
|
|
|
$
|
(2,255
|
)
|
|
|
|
$
|
1
|
|
Balance Sheet Offsetting
:
Our designated cash flow hedge interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheets and are
subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International
Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions.
In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle
such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes.
Nine Months Ended September 30, 2017
|
Offsetting of Derivative Liabilities
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|
Gross Amounts of Recognized Liabilities
|
|
|
Gross Amounts Offset in the Balance Sheet
|
|
|
Net Amounts of Liabilities presented in the Balance Sheet
|
|
|
Financial Instruments
|
|
|
Cash Collateral Posted
|
|
|
Net Amount
|
|
Counterparty 1
|
|
$
|
24
|
|
|
$
|
(75
|
)
|
|
$
|
(51
|
)
|
|
$
|
—
|
|
|
$
|
(560
|
)
|
|
$
|
(611
|
)
|
Counterparty 2
|
|
|
(116
|
)
|
|
|
—
|
|
|
|
(116
|
)
|
|
|
—
|
|
|
|
(330
|
)
|
|
|
(446
|
)
|
|
|
$
|
(92
|
)
|
|
$
|
(75
|
)
|
|
$
|
(167
|
)
|
|
$
|
—
|
|
|
$
|
(890
|
)
|
|
$
|
(1,057
|
)
|
Year Ended December 31, 2016
|
Offsetting of Derivative Liabilities
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|
Gross Amounts of Recognized Liabilities
|
|
|
Gross Amounts Offset in the Balance Sheet
|
|
|
Net Amounts of Liabilities presented in the Balance Sheet
|
|
|
Financial Instruments
|
|
|
Cash Collateral Posted
|
|
|
Net Amount
|
|
Counterparty 1
|
|
$
|
514
|
|
|
$
|
(19
|
)
|
|
$
|
495
|
|
|
$
|
—
|
|
|
$
|
(380
|
)
|
|
$
|
115
|
|
Counterparty 2
|
|
|
197
|
|
|
|
—
|
|
|
|
197
|
|
|
|
—
|
|
|
|
(170
|
)
|
|
|
27
|
|
|
|
$
|
711
|
|
|
$
|
(19
|
)
|
|
$
|
692
|
|
|
$
|
—
|
|
|
$
|
(550
|
)
|
|
$
|
142
|
|
Note 7. Other Real Estate Owned
The activity within Other Real
Estate Owned (“OREO”) for the three and nine months ended September 30, 2017 and 2016 is presented in the table below.
There were no residential real estate loans in the process of foreclosure as of September 30, 2017. For the three and nine months
ended September 30, 2017, proceeds on sale of OREO were $1.2 million and $2.1 million. For the three months ended September 30,
2017, there were two OREO properties with a total carrying value of $1.1 million were sold for a net gain of $60 thousand. For
the nine months ended September 30, 2017, there were a total of three OREO properties sold for a net loss of $301 thousand.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
1,394
|
|
|
$
|
3,152
|
|
|
$
|
2,694
|
|
|
$
|
5,852
|
|
Real estate acquired from borrowers
|
|
|
1,145
|
|
|
|
2,500
|
|
|
|
1,145
|
|
|
|
2,500
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(200
|
)
|
Properties sold
|
|
|
(1,145
|
)
|
|
|
(458
|
)
|
|
|
(2,445
|
)
|
|
|
(2,958
|
)
|
Balance end of period
|
|
$
|
1,394
|
|
|
$
|
5,194
|
|
|
$
|
1,394
|
|
|
$
|
5,194
|
|
Note 8. Long-Term Borrowings
The following table presents
information related to the Company’s long-term borrowings as of September 30, 2017, December 31, 2016 and September 30, 2016.
(dollars in thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes, 5.75%
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
Subordinated Notes, 5.0%
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
150,000
|
|
Less: debt issuance costs
|
|
|
(3,193
|
)
|
|
|
(3,486
|
)
|
|
|
(3,581
|
)
|
Long-term borrowings
|
|
$
|
216,807
|
|
|
$
|
216,514
|
|
|
$
|
216,419
|
|
On August 5, 2014, the Company
completed the sale of $70.0 million of its 5.75% subordinated notes, due September 1, 2024 (the “Notes”). The Notes
were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the
Basel III Rule capital requirements. The net proceeds were approximately $68.8 million, which includes $1.2 million in deferred
financing costs which are being amortized over the life of the Notes.
On July 26, 2016, the Company
completed the sale of $150.0 million of its 5.00% Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026
Notes”). The 2026 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest
extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $147.35 million, which includes
$2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes.
Note 9. Net Income per Common Share
The calculation of net income
per common share for the three and nine months ended September 30, 2017 and 2016 was as follows.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars and shares in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,874
|
|
|
$
|
24,523
|
|
|
$
|
84,663
|
|
|
$
|
71,990
|
|
Average common shares outstanding
|
|
|
34,174
|
|
|
|
33,590
|
|
|
|
34,124
|
|
|
|
33,566
|
|
Basic net income per common share
|
|
$
|
0.87
|
|
|
$
|
0.73
|
|
|
$
|
2.48
|
|
|
$
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,874
|
|
|
$
|
24,523
|
|
|
$
|
84,663
|
|
|
$
|
71,990
|
|
Average common shares outstanding
|
|
|
34,174
|
|
|
|
33,590
|
|
|
|
34,124
|
|
|
|
33,566
|
|
Adjustment for common share equivalents
|
|
|
164
|
|
|
|
597
|
|
|
|
192
|
|
|
|
596
|
|
Average common shares outstanding-diluted
|
|
|
34,338
|
|
|
|
34,187
|
|
|
|
34,316
|
|
|
|
34,162
|
|
Diluted net income per common share
|
|
$
|
0.87
|
|
|
$
|
0.72
|
|
|
$
|
2.47
|
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Note 10. Stock-Based Compensation
The Company maintains the 2016
Stock Plan (“2016 Plan”), the 2006 Stock Plan (“2006 Plan”) and the 2011 Employee Stock Purchase Plan (“2011
ESPP”).
In connection with the acquisition
of Virginia Heritage, the Company assumed the Virginia Heritage 2006 Stock Option Plan and the 2010 Long Term Incentive Plan (the
“Virginia Heritage Plans”).
No additional options may be
granted under the 2006 Plan or the Virginia Heritage Plans.
The Company adopted the 2016
Plan upon approval by the shareholders at the 2016 Annual Meeting held on May 12, 2016. The 2016 Plan provides directors and selected
employees of the Bank, the Company and their affiliates with the opportunity to acquire shares of stock, through awards of options,
time vested restricted stock, performance-based restricted stock and stock appreciation rights. Under the 2016 Plan, 1,000,000
shares of common stock were initially reserved for issuance.
For awards that are service
based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants
is computed using the Black-Scholes model. For restricted stock awards granted under the 2006 plan, fair value is based on the
average of the high and low stock price of the Company’s shares on the date of grant. For restricted stock awards granted
under the 2016 plan, fair value is based on the Company’s closing price on the date of grant. For awards that are performance-based,
compensation expense is recorded based on the probability of achievement of the goals underlying the grant.
In February 2017, the Company
awarded 91,097 shares of time vested restricted stock to senior officers, directors, and certain employees. The shares vest in
three substantially equal installments beginning on the first anniversary of the date of grant.
In February 2017, the Company
awarded senior officers a targeted number of 36,523 performance vested restricted stock units (PRSUs). The vesting of PRSUs is
100% after three years with payouts based on threshold, target or maximum average performance targets over the three year period
relative to a peer index. There are three performance metrics: 1) average annual earnings per share growth; 2) average annual total
shareholder return; and 3) average annual return on average assets. Each metric is measured against companies in the KBW Regional
Banking Index.
The Company has unvested restricted
stock awards and PRSU grants of 227,324 shares at September 30, 2017. Unrecognized stock based compensation expense related to
restricted stock awards totaled $9.3 million at September 30, 2017. At such date, the weighted-average period over which this unrecognized
expense was expected to be recognized was 2.13 years. The following tables summarize the unvested restricted stock awards at September
30, 2017 and 2016.
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Perfomance Awards
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at beginning
|
|
|
33,226
|
|
|
$
|
42.60
|
|
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
|
36,523
|
|
|
|
57.49
|
|
|
|
34,957
|
|
|
|
42.60
|
|
Forfeited
|
|
|
(3,097
|
)
|
|
|
42.60
|
|
|
|
(1,731
|
)
|
|
|
42.60
|
|
Vested
|
|
|
(4,314
|
)
|
|
|
54.92
|
|
|
|
—
|
|
|
|
—
|
|
Unvested at end
|
|
|
62,338
|
|
|
$
|
50.45
|
|
|
|
33,226
|
|
|
$
|
42.60
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Time Vested Awards
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at beginning
|
|
|
262,966
|
|
|
$
|
33.60
|
|
|
|
369,093
|
|
|
$
|
24.43
|
|
Issued
|
|
|
91,097
|
|
|
|
62.70
|
|
|
|
104,775
|
|
|
|
46.39
|
|
Forfeited
|
|
|
(1,477
|
)
|
|
|
47.69
|
|
|
|
(7,815
|
)
|
|
|
40.17
|
|
Vested
|
|
|
(187,600
|
)
|
|
|
30.07
|
|
|
|
(195,738
|
)
|
|
|
22.53
|
|
Unvested at end
|
|
|
164,986
|
|
|
$
|
53.56
|
|
|
|
270,315
|
|
|
$
|
33.87
|
|
Below is a summary of stock
option activity for the nine months ended September 30, 2017 and 2016. The information excludes restricted stock units and awards.
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
216,859
|
|
|
$
|
8.80
|
|
|
|
298,740
|
|
|
$
|
9.97
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
49.49
|
|
Exercised
|
|
|
(64,420
|
)
|
|
|
7.46
|
|
|
|
(24,458
|
)
|
|
|
13.10
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,100
|
)
|
|
|
15.48
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,637
|
)
|
|
|
12.87
|
|
Ending balance
|
|
|
152,439
|
|
|
$
|
9.36
|
|
|
|
269,545
|
|
|
$
|
10.03
|
|
The following summarizes information about stock
options outstanding at September 30, 2017. The information excludes restricted stock units and awards.
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
Outstanding
:
|
|
|
Stock Options
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
Range of Exercise Prices
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
$5.76
|
|
|
$10.72
|
|
|
|
101,075
|
|
|
$
|
5.76
|
|
|
|
1.26
|
|
$10.73
|
|
|
$11.40
|
|
|
|
41,389
|
|
|
|
10.84
|
|
|
|
0.77
|
|
$11.41
|
|
|
$24.86
|
|
|
|
3,225
|
|
|
|
22.79
|
|
|
|
6.02
|
|
$24.87
|
|
|
$49.91
|
|
|
|
6,750
|
|
|
|
47.83
|
|
|
|
8.37
|
|
|
|
|
|
|
|
|
152,439
|
|
|
$
|
9.36
|
|
|
|
1.54
|
|
Exercisable
:
|
|
|
Stock Options
|
|
|
Weighted-Average
|
|
Range of Exercise Prices
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
$5.76
|
|
|
$10.72
|
|
|
|
66,377
|
|
|
$
|
5.76
|
|
$10.73
|
|
|
$11.40
|
|
|
|
41,389
|
|
|
|
10.84
|
|
$11.41
|
|
|
$24.86
|
|
|
|
2,065
|
|
|
|
23.18
|
|
$24.87
|
|
|
$49.91
|
|
|
|
750
|
|
|
|
49.49
|
|
|
|
|
|
|
|
|
110,581
|
|
|
$
|
8.28
|
|
The fair value of each stock
option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the
table below used for grants during the years ended December 31, 2016 and 2015. There were no grants of stock options during the
nine months ended September 30, 2017.
|
|
Nine Months Ended
|
|
|
Years Ended December 31,
|
|
|
|
September 30, 2017
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
n/a
|
|
|
|
24.23
|
%
|
|
|
31.21
|
%
|
Weighted-Average volatility
|
|
|
n/a
|
|
|
|
24.23
|
%
|
|
|
31.21
|
%
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
n/a
|
|
|
|
7.0
|
|
|
|
7.0
|
|
Risk-free rate
|
|
|
n/a
|
|
|
|
1.37
|
%
|
|
|
1.64
|
%
|
Weighted-average fair value (grant date)
|
|
|
n/a
|
|
|
$
|
14.27
|
|
|
$
|
16.73
|
|
The total intrinsic value of
outstanding stock options was $8.8 million at September 30, 2017. The total intrinsic value of stock options exercised during the
nine months ended September 30, 2017 and 2016 was $3.5 million and $855 thousand, respectively. The total fair value of stock options
vested was $50 thousand and $45 thousand for the nine months ended September 30, 2017 and 2016, respectively. Unrecognized stock-based
compensation expense related to stock options totaled $90 thousand at September 30, 2017. At such date, the weighted-average period
over which this unrecognized expense was expected to be recognized was 2.09 years.
Approved by shareholders in
May 2011, the 2011 ESPP reserved 550,000 shares of common stock (as adjusted for stock dividends) for issuance to employees. Whole
shares are sold to participants in the plan at 85% of the lower of the stock price at the beginning or end of each quarterly offering
period. The 2011 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work
at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $10 per pay period to a maximum
of $6,250 per offering period or $25,000 annually (not to exceed more than 10% of compensation per pay period). At September 30,
2017, the 2011 ESPP had 406,081 shares remaining for issuance.
Included in salaries and employee
benefits in the accompanying Consolidated Statements of Operations, the Company recognized $4.2 million and $5.2 million in stock-based
compensation expense for the nine months ended September 30, 2017 and 2016, respectively. Stock-based compensation expense is recognized
ratably over the requisite service period for all awards.
Note 11. Other Comprehensive Income
The following table presents the components of other
comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016.
(dollars in thousands)
|
|
Before Tax
|
|
|
Tax Effect
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
25
|
|
|
$
|
10
|
|
|
$
|
15
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(11
|
)
|
|
|
(4
|
)
|
|
|
(7
|
)
|
Total unrealized gain
|
|
|
14
|
|
|
|
6
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
|
557
|
|
|
|
210
|
|
|
|
347
|
|
Less: Reclassification adjustment for gain included in net income
|
|
|
(289
|
)
|
|
|
(106
|
)
|
|
|
(183
|
)
|
Total unrealized gain
|
|
|
268
|
|
|
|
104
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
282
|
|
|
$
|
110
|
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale
|
|
$
|
(1,512
|
)
|
|
$
|
(605
|
)
|
|
$
|
(907
|
)
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Total unrealized loss
|
|
|
(1,511
|
)
|
|
|
(605
|
)
|
|
|
(906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
|
2,927
|
|
|
|
1,171
|
|
|
|
1,756
|
|
Less: Reclassification adjustment for losses included in net income
|
|
|
(777
|
)
|
|
|
(311
|
)
|
|
|
(466
|
)
|
Total unrealized gain
|
|
|
2,150
|
|
|
|
860
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
639
|
|
|
$
|
255
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
2,080
|
|
|
$
|
837
|
|
|
$
|
1,243
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(542
|
)
|
|
|
(202
|
)
|
|
|
(340
|
)
|
Total unrealized gain
|
|
|
1,538
|
|
|
|
635
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
|
2,186
|
|
|
|
836
|
|
|
|
1,350
|
|
Less: Reclassification adjustment for gain included in net income
|
|
|
(1,308
|
)
|
|
|
(487
|
)
|
|
|
(821
|
)
|
Total unrealized gain
|
|
|
878
|
|
|
|
349
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
2,416
|
|
|
$
|
984
|
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
6,850
|
|
|
$
|
2,740
|
|
|
$
|
4,110
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(1,123
|
)
|
|
|
(449
|
)
|
|
|
(674
|
)
|
Total unrealized gain
|
|
|
5,727
|
|
|
|
2,291
|
|
|
|
3,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives
|
|
|
(9,132
|
)
|
|
|
(3,654
|
)
|
|
|
(5,478
|
)
|
Less: Reclassification adjustment for losses included in net income
|
|
|
(1,519
|
)
|
|
|
(608
|
)
|
|
|
(911
|
)
|
Total unrealized loss
|
|
|
(7,613
|
)
|
|
|
(3,046
|
)
|
|
|
(4,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
$
|
(1,886
|
)
|
|
$
|
(755
|
)
|
|
$
|
(1,131
|
)
|
The following table presents the changes in each
component of accumulated other comprehensive (loss) income, net of tax, for the three and nine months ended September 30, 2017
and 2016.
|
|
Securities
|
|
|
|
|
|
Accumulated Other
|
|
(dollars in thousands)
|
|
Available For Sale
|
|
|
Derivatives
|
|
|
Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(1,060
|
)
|
|
$
|
(61
|
)
|
|
$
|
(1,121
|
)
|
Other comprehensive income before reclassifications
|
|
|
15
|
|
|
|
347
|
|
|
|
362
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(7
|
)
|
|
|
(183
|
)
|
|
|
(190
|
)
|
Net other comprehensive income during period
|
|
|
8
|
|
|
|
164
|
|
|
|
172
|
|
Balance at End of Period
|
|
$
|
(1,052
|
)
|
|
$
|
103
|
|
|
$
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
5,383
|
|
|
$
|
(6,707
|
)
|
|
$
|
(1,324
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(907
|
)
|
|
|
1,756
|
|
|
|
849
|
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
|
1
|
|
|
|
(466
|
)
|
|
|
(465
|
)
|
Net other comprehensive (loss) income during period
|
|
|
(906
|
)
|
|
|
1,290
|
|
|
|
384
|
|
Balance at End of Period
|
|
$
|
4,477
|
|
|
$
|
(5,417
|
)
|
|
$
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(1,955
|
)
|
|
$
|
(426
|
)
|
|
$
|
(2,381
|
)
|
Other comprehensive income before reclassifications
|
|
|
1,243
|
|
|
|
1,350
|
|
|
|
2,593
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(340
|
)
|
|
|
(821
|
)
|
|
|
(1,161
|
)
|
Net other comprehensive income during period
|
|
|
903
|
|
|
|
529
|
|
|
|
1,432
|
|
Balance at End of Period
|
|
$
|
(1,052
|
)
|
|
$
|
103
|
|
|
$
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
1,041
|
|
|
$
|
(850
|
)
|
|
$
|
191
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
4,110
|
|
|
|
(5,478
|
)
|
|
|
(1,368
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
|
(674
|
)
|
|
|
911
|
|
|
|
237
|
|
Net other comprehensive income (loss) during period
|
|
|
3,436
|
|
|
|
(4,567
|
)
|
|
|
(1,131
|
)
|
Balance at End of Period
|
|
$
|
4,477
|
|
|
$
|
(5,417
|
)
|
|
$
|
(940
|
)
|
The following table presents the amounts reclassified
out of each component of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2017 and
2016.
Details about Accumulated Other
|
|
Amount Reclassified from
|
|
|
Affected Line Item in
|
Comprehensive Income Components
|
|
Accumulated Other
|
|
|
the Statement Where
|
(dollars in thousands)
|
|
Comprehensive (Loss) Income
|
|
|
Net Income is Presented
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Realized gain on sale of investment securities
|
|
$
|
(11
|
)
|
|
$
|
(1
|
)
|
|
Gain on sale of investment securities
|
Interest expense derivative deposits
|
|
|
(289
|
)
|
|
|
(470
|
)
|
|
Interest expense on deposits
|
Interest expense derivative borrowings
|
|
|
—
|
|
|
|
(306
|
)
|
|
Interest expense on short-term borrowings
|
Income tax expense
|
|
|
110
|
|
|
|
311
|
|
|
Tax expense
|
Total Reclassifications for the Period
|
|
$
|
(190
|
)
|
|
$
|
(466
|
)
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other
|
|
Amount Reclassified from
|
|
|
Affected Line Item in
|
Comprehensive Income Components
|
|
Accumulated Other
|
|
|
the Statement Where
|
(dollars in thousands)
|
|
Comprehensive (Loss) Income
|
|
|
Net Income is Presented
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
Realized gain on sale of investment securities
|
|
$
|
(542
|
)
|
|
$
|
(1,123
|
)
|
|
Gain on sale of investment securities
|
Interest expense derivative deposits
|
|
|
(1,308
|
)
|
|
|
(952
|
)
|
|
Interest expense on deposits
|
Interest expense derivative borrowings
|
|
|
—
|
|
|
|
(567
|
)
|
|
Interest expense on short-term borrowings
|
Income tax expense
|
|
|
689
|
|
|
|
2,405
|
|
|
Tax expense
|
Total Reclassifications for the Period
|
|
$
|
(1,161
|
)
|
|
$
|
(237
|
)
|
|
Net Income
|
Note 12. Fair Value Measurements
The fair value of an asset
or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction
occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.
In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach
and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions
that market participants would use in pricing an asset or liability. ASC Topic 820,
“Fair Value Measurements and Disclosures,”
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
Level 1
|
Quoted prices in active exchange markets for identical
assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in
over-the-counter markets.
|
|
Level 2
|
Observable inputs other than Level 1 including quoted
prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated
by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable
market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain
U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held
for sale.
|
|
Level 3
|
Unobservable inputs supported by little or no market
activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation;
also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category
generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt
obligations.
|
Assets and Liabilities Recorded at Fair Value
on a Recurring Basis
The table below presents the
recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31,
2016.
(dollars in thousands)
|
|
Quoted Prices
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. agency securities
|
|
$
|
—
|
|
|
$
|
177,918
|
|
|
$
|
—
|
|
|
$
|
177,918
|
|
Residential mortgage backed securities
|
|
|
—
|
|
|
|
301,526
|
|
|
|
—
|
|
|
|
301,526
|
|
Municipal bonds
|
|
|
—
|
|
|
|
63,147
|
|
|
|
—
|
|
|
|
63,147
|
|
Corporate bonds
|
|
|
—
|
|
|
|
11,717
|
|
|
|
1,500
|
|
|
|
13,217
|
|
Other equity investments
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
218
|
|
Loans held for sale
|
|
|
—
|
|
|
|
25,980
|
|
|
|
—
|
|
|
|
25,980
|
|
Mortgage banking derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
63
|
|
|
|
63
|
|
Interest rate swap derivatives
|
|
|
—
|
|
|
|
191
|
|
|
|
—
|
|
|
|
191
|
|
Total assets measured at fair value on a recurring basis as of September 30,
2017
|
|
$
|
—
|
|
|
$
|
580,479
|
|
|
$
|
1,781
|
|
|
$
|
582,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
36
|
|
Interest rate swap derivatives
|
|
|
—
|
|
|
|
24
|
|
|
|
—
|
|
|
|
24
|
|
Total liabilities measured at fair value on a recurring basis as of September
30, 2017
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
36
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. agency securities
|
|
$
|
—
|
|
|
$
|
106,142
|
|
|
$
|
—
|
|
|
$
|
106,142
|
|
Residential mortgage backed securities
|
|
|
—
|
|
|
|
326,239
|
|
|
|
—
|
|
|
|
326,239
|
|
Municipal bonds
|
|
|
—
|
|
|
|
95,930
|
|
|
|
—
|
|
|
|
95,930
|
|
Corporate bonds
|
|
|
—
|
|
|
|
8,079
|
|
|
|
1,500
|
|
|
|
9,579
|
|
Other equity investments
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
218
|
|
Loans held for sale
|
|
|
—
|
|
|
|
51,629
|
|
|
|
—
|
|
|
|
51,629
|
|
Mortgage banking derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
114
|
|
|
|
114
|
|
Total assets measured at fair value on a recurring basis as of December 31,
2016
|
|
$
|
—
|
|
|
$
|
588,019
|
|
|
$
|
1,832
|
|
|
$
|
589,851
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
55
|
|
Interest rate swap derivatives
|
|
|
—
|
|
|
|
692
|
|
|
|
—
|
|
|
|
692
|
|
Total liabilities measured at fair value on a recurring basis as of December
31, 2016
|
|
$
|
—
|
|
|
$
|
692
|
|
|
$
|
55
|
|
|
$
|
747
|
|
Investment Securities Available-for-Sale
Investment securities available-for-sale
are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices
are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such
as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange,
Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities
include U.S. agency debt securities, mortgage backed securities issued by Government Sponsored Entities (“GSE’s”)
and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate
the fair value.
Loans held for sale
:
The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated
Statement of Operations and better aligns with the management of the portfolio from a business perspective. Fair value is derived
from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded
as a component of noninterest income in the Consolidated Statements of Operations. Gains and losses on sales of FHA securities
are recorded as a component of noninterest income in the Consolidated Statements of Operations. As such, the Company classifies
loans subjected to fair value adjustments as Level 2 valuation.
The following table summarizes
the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate loans held
for sale measured at fair value as of September 30, 2017 and December 31, 2016.
|
|
September 30, 2017
|
|
|
|
|
|
|
|
Aggregate Unpaid
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Principal Balance
|
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for sale
|
|
$
|
25,980
|
|
|
$
|
25,473
|
|
|
$
|
507
|
|
FHA mortgage loans held for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Aggregate Unpaid
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Principal Balance
|
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for sale
|
|
$
|
51,629
|
|
|
$
|
51,021
|
|
|
$
|
608
|
|
FHA mortgage loans held for sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
No residential mortgage loans
held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2017 or December 31, 2016.
Interest rate swap derivatives:
These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow
hedges. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models
generally accepted in the financial services industry and that use actively quoted or observable market input values from external
market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted
cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant
observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed
with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain
threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit
rating deterioration.
Mortgage banking derivatives:
The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities,
which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate
lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by
interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted
investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock
expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value
of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate
the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms
and maturities of the forward commitments against applicable investor pricing.
The following is a reconciliation
of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3):
|
|
Investment
|
|
|
Mortgage Banking
|
|
|
|
|
(dollars in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
|
$
|
1,718
|
|
|
$
|
114
|
|
|
$
|
1,832
|
|
Realized loss included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
(51
|
)
|
Purchases of available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at September 30, 2017
|
|
$
|
1,718
|
|
|
$
|
63
|
|
|
$
|
1,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
55
|
|
Realized loss included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at September 30, 2017
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
Investment
|
|
|
Mortgage Banking
|
|
|
|
|
(dollars in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2016
|
|
$
|
219
|
|
|
$
|
24
|
|
|
$
|
243
|
|
Realized gain included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
90
|
|
|
|
90
|
|
Purchases of available-for-sale securities
|
|
|
1,500
|
|
|
|
—
|
|
|
|
1,500
|
|
Principal redemption
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Ending balance at December 31, 2016
|
|
$
|
1,718
|
|
|
$
|
114
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2016
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
30
|
|
Realized loss included in earnings - net mortgage banking derivatives
|
|
|
—
|
|
|
|
25
|
|
|
|
25
|
|
Principal redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance at December 31, 2016
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
55
|
|
The other equity securities
classified as Level 3 consist of equity investments in the form of common stock of two local banking companies which are not publicly
traded, and for which the carrying amount approximates fair value.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company measures certain
assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.
Impaired loans
: The
Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the
original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual
loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For
individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted
at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans,
which the Company classifies as a Level 3 valuation.
Other real estate owned
:
Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent
market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company
classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below:
(dollars in thousands)
|
|
Quoted Prices
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,757
|
|
|
$
|
2,757
|
|
Income producing - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
8,714
|
|
|
|
8,714
|
|
Owner occupied - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
5,885
|
|
|
|
5,885
|
|
Real estate mortgage - residential
|
|
|
—
|
|
|
|
—
|
|
|
|
301
|
|
|
|
301
|
|
Construction - commercial and residential
|
|
|
—
|
|
|
|
—
|
|
|
|
2,030
|
|
|
|
2,030
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
504
|
|
|
|
504
|
|
Other consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
11
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
1,394
|
|
Total assets measured at fair value on a nonrecurring basis as of September 30, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,596
|
|
|
$
|
21,596
|
|
(dollars in thousands)
|
|
Quoted Prices
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,956
|
|
|
$
|
2,956
|
|
Income producing - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
12,993
|
|
|
|
12,993
|
|
Owner occupied - commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
2,133
|
|
|
|
2,133
|
|
Real estate mortgage - residential
|
|
|
—
|
|
|
|
—
|
|
|
|
555
|
|
|
|
555
|
|
Construction - commercial and residential
|
|
|
—
|
|
|
|
—
|
|
|
|
1,550
|
|
|
|
1,550
|
|
Other consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
13
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
2,694
|
|
|
|
2,694
|
|
Total assets measured at fair value on a nonrecurring basis as of December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,894
|
|
|
$
|
22,894
|
|
Loans
The Company does not record
loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss
is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in
accordance with ASC Topic 310,
“Receivables.”
The fair value of impaired loans is estimated using one of several
methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments
or collateral exceed the recorded investment in such loans. At September 30, 2017, substantially all of the totally impaired loans
were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance
is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of
the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring
Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired
below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
Fair Value of Financial Instruments
The Company discloses fair
value information about financial instruments for which it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market
price, if one exists.
Quoted market prices, if available, are shown
as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the
fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions,
the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these
estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition,
the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair
value of the Company taken as a whole.
The following methods and assumptions
were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate value:
Cash due from banks and
federal funds sold:
For cash and due from banks and federal funds sold the carrying amount approximates fair value.
Interest bearing deposits
with other banks:
For interest bearing deposits with other banks the carrying amount approximates fair value.
Investment securities:
For these instruments, fair values are based upon quoted prices, if available. If quoted prices are not available, fair value is
measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows,
adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.
Federal Reserve and Federal
Home Loan Bank stock:
The carrying amounts approximate the fair values at the reporting date.
Loans held for sale:
As the Company has elected the fair value option, the fair value of residential mortgage loans held for sale is the carrying value
and is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios
with similar characteristics for residential mortgage loans held for sale since such loans are typically committed to be sold (servicing
released) at a profit. The fair value of FHA loans held for sale is the carrying value and is based on commitments outstanding
from investors as well as what secondary markets are currently offering for portfolios with similar characteristics for FHA loans
held for sale since such loans are typically committed to be securitized and sold (servicing retained) at a profit.
Loans:
For variable
rate loans that re-price on a scheduled basis, fair values are based on carrying values. The fair value of the remaining loans
are estimated by discounting the estimated future cash flows using the current interest rate at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining term.
Bank owned life insurance:
The fair value of bank owned life insurance is the current cash surrender value, which is the carrying value.
Annuity investment:
The
fair value of the annuity investments is the carrying amount at the reporting date.
Mortgage banking derivatives:
The Company enters into interest rate lock commitments (IRLCs) with prospective residential
mortgage borrowers. These commitments are carried at fair value based on the fair value of the underlying mortgage loans which
are based on market data. These commitments are classified as Level 3 in the fair value disclosures, as the valuations are based
on market unobservable inputs. The Company hedges the risk of the overall change in the fair value of loan commitments to borrowers
by selling forward contracts on securities of GSEs. These forward settling contracts are classified as Level 3, as valuations are
based on market unobservable inputs. See Note 4 to the Consolidated Financial Statements for additional detail.
Interest rate swap derivatives:
These derivative instruments consist of forward starting interest rate swap agreements, which are accounted for as cash flow
hedges. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models
generally accepted in the financial services industry and that use actively quoted or observable market input values from external
market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted
cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant
observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed
with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain
threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit
rating deterioration.
Noninterest bearing deposits:
The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards
do not permit an assumption of core deposit value.
Interest bearing deposits:
The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable
on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.
Certificates of deposit:
The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar
deposits with remaining maturities would be accepted.
Customer repurchase agreements:
The carrying amount approximate the fair values at the reporting date.
Borrowings:
The carrying
amount for variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate FHLB advances
and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest
rates for obligations with similar remaining terms. The fair value of variable rate FHLB advances is estimated to be carrying value
since these liabilities are based on a spread to a current pricing index.
Off-balance sheet items:
Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and
has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment
made.
The estimated fair values of
the Company’s financial instruments at September 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(dollars in thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
8,246
|
|
|
$
|
8,246
|
|
|
$
|
—
|
|
|
$
|
8,246
|
|
|
$
|
—
|
|
Federal funds sold
|
|
|
8,548
|
|
|
|
8,548
|
|
|
|
—
|
|
|
|
8,548
|
|
|
|
—
|
|
Interest bearing deposits with other banks
|
|
|
432,156
|
|
|
|
432,156
|
|
|
|
—
|
|
|
|
432,156
|
|
|
|
—
|
|
Investment securities
|
|
|
556,026
|
|
|
|
556,026
|
|
|
|
—
|
|
|
|
554,308
|
|
|
|
1,718
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
30,980
|
|
|
|
30,980
|
|
|
|
—
|
|
|
|
30,980
|
|
|
|
—
|
|
Loans held for sale
|
|
|
25,980
|
|
|
|
25,980
|
|
|
|
—
|
|
|
|
25,980
|
|
|
|
—
|
|
Loans, net
|
|
|
6,021,237
|
|
|
|
6,075,997
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,075,997
|
|
Bank owned life insurance
|
|
|
61,238
|
|
|
|
61,238
|
|
|
|
—
|
|
|
|
61,238
|
|
|
|
—
|
|
Annuity investment
|
|
|
11,591
|
|
|
|
11,591
|
|
|
|
—
|
|
|
|
11,591
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
63
|
|
|
|
63
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63
|
|
Interst rate swap derivatives
|
|
|
191
|
|
|
|
191
|
|
|
|
—
|
|
|
|
191
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
1,843,157
|
|
|
|
1,843,157
|
|
|
|
—
|
|
|
|
1,843,157
|
|
|
|
—
|
|
Interest bearing deposits
|
|
|
3,248,118
|
|
|
|
3,248,118
|
|
|
|
—
|
|
|
|
3,248,118
|
|
|
|
—
|
|
Certificates of deposit
|
|
|
822,677
|
|
|
|
821,892
|
|
|
|
—
|
|
|
|
821,892
|
|
|
|
—
|
|
Customer repurchase agreements
|
|
|
73,569
|
|
|
|
73,569
|
|
|
|
—
|
|
|
|
73,569
|
|
|
|
—
|
|
Borrowings
|
|
|
416,807
|
|
|
|
448,768
|
|
|
|
—
|
|
|
|
448,768
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
36
|
|
|
|
36
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
Interest rate swap derivatives
|
|
|
24
|
|
|
|
24
|
|
|
|
—
|
|
|
|
24
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,285
|
|
|
$
|
10,285
|
|
|
$
|
—
|
|
|
$
|
10,285
|
|
|
$
|
—
|
|
Federal funds sold
|
|
|
2,397
|
|
|
|
2,397
|
|
|
|
—
|
|
|
|
2,397
|
|
|
|
—
|
|
Interest bearing deposits with other banks
|
|
|
355,481
|
|
|
|
355,481
|
|
|
|
—
|
|
|
|
355,481
|
|
|
|
—
|
|
Investment securities
|
|
|
538,108
|
|
|
|
538,108
|
|
|
|
—
|
|
|
|
536,390
|
|
|
|
1,718
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
21,600
|
|
|
|
21,600
|
|
|
|
—
|
|
|
|
21,600
|
|
|
|
—
|
|
Loans held for sale
|
|
|
51,629
|
|
|
|
51,629
|
|
|
|
—
|
|
|
|
51,629
|
|
|
|
—
|
|
Loans, net
|
|
|
5,618,819
|
|
|
|
5,624,084
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,624,084
|
|
Bank owned life insurance
|
|
|
60,130
|
|
|
|
60,130
|
|
|
|
—
|
|
|
|
60,130
|
|
|
|
—
|
|
Annuity investment
|
|
|
11,929
|
|
|
|
11,929
|
|
|
|
—
|
|
|
|
11,929
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
114
|
|
|
|
114
|
|
|
|
—
|
|
|
|
—
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
1,775,684
|
|
|
|
1,775,684
|
|
|
|
—
|
|
|
|
1,775,684
|
|
|
|
—
|
|
Interest bearing deposits
|
|
|
3,191,682
|
|
|
|
3,191,682
|
|
|
|
—
|
|
|
|
3,191,682
|
|
|
|
—
|
|
Certificates of deposit
|
|
|
748,748
|
|
|
|
745,985
|
|
|
|
—
|
|
|
|
745,985
|
|
|
|
—
|
|
Customer repurchase agreements
|
|
|
68,876
|
|
|
|
68,876
|
|
|
|
—
|
|
|
|
68,876
|
|
|
|
—
|
|
Borrowings
|
|
|
216,514
|
|
|
|
203,657
|
|
|
|
—
|
|
|
|
203,657
|
|
|
|
—
|
|
Mortgage banking derivatives
|
|
|
55
|
|
|
|
55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
Interest rate swap derivatives
|
|
|
692
|
|
|
|
692
|
|
|
|
—
|
|
|
|
692
|
|
|
|
—
|
|
Note 13. Supplemental Executive Retirement Plan
The Bank has entered into Supplemental
Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain of the Bank’s executive
officers other than Mr. Paul, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s
lifetime subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s
projected average base salary over the five years preceding retirement, assuming retirement at age 67. The SERP Agreements provide
that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service
prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting, and (c)
the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control.
The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly
installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary
has received payment(s) sufficient to equate to a cumulative 180 monthly installments.
The SERP Agreements are unfunded
arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue
Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with four insurance in 2013 carriers totaling
$11.4 million that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements.
The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to
a traditional SERP Agreement. For the quarter ended September 30, 2017, the annuity contracts accrued $54 thousand of income, which
was included in other noninterest income on the Consolidated Statement of Operations. The cash surrender value of the annuity contracts
was $11.6 million at September 30, 2017 and is included in other assets on the Consolidated Balance Sheet. For the three and nine
months ended September 30, 2017, the Company recorded benefit expense accruals of $103 thousand and $308 thousand, for this post
retirement benefit.
Upon death of a named executive,
the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts,
which would effectively finance payments (up to a 15 year certain amount) to the executives’ named beneficiaries.