NOTE 1 – Summary of Significant Accounting Policies and Activities
Southern First Bancshares, Inc.
(the "Company") is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the "Bank") and all of the stock of Greenville First Statutory Trust I and II (collectively, the "Trusts"). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Southern First Bank. In consolidation, all significant intercompany transactions have been eliminated. The accounting and reporting policies conform to accounting principles generally accepted in the United States of America. In accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), the operations of the Trusts have not been consolidated in these financial statements.
Business Segments
ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s three reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. Please refer to “Note 23 – Reportable Segments” for further information on the reporting for the Company’s three business segments.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, derivatives, real estate acquired in settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default within the Company’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to changes with respect to valuation of assets, amount of required loan loss allowance and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.
The Bank makes loans to individuals and businesses in the Upstate, Midlands, and Lowcountry regions of South Carolina as well as the Triangle and Triad regions of North Carolina and Atlanta, Georgia for various personal and commercial purposes. The Bank’s loan portfolio has a concentration of real estate loans. As of December 31, 2018 and 2017, real estate loans represented 82.3% and 82.1%, respectively, of total loans. However, borrowers’ ability to repay their loans is not dependent upon any specific economic sector.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure.
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Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest bearing deposits and federal funds sold. Cash and cash equivalents have original maturities of three months or less, and federal funds sold are generally purchased and sold for one-day periods. Accordingly, the carrying value of these instruments is deemed to be a reasonable estimate of fair value. At December 31, 2018 and 2017, included in cash and cash equivalents was $4.9 million and $7.3 million, respectively, on deposit with the Federal Reserve Bank.
Investment Securities
We classify our investment securities as held to maturity securities, trading securities and available for sale securities as applicable.
Investment securities are designated as held to maturity if we have the intent and the ability to hold the securities to maturity. Held to maturity securities are carried at amortized cost, adjusted for the amortization of any related premiums or the accretion of any related discounts into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until maturity. Unrealized losses on held to maturity securities, reflecting a decline in value judged by us to be other than temporary, are charged to income in the Consolidated Statements of Income.
Investment securities that are purchased and held principally for the purpose of selling in the near term are reported as trading securities. Trading securities are carried at fair value with unrealized holding gains and losses included in earnings.
We classify investment securities as available for sale when at the time of purchase we determine that such securities may be sold at a future date or if we do not have the intent or ability to hold such securities to maturity. Securities designated as available for sale are recorded at fair value. Changes in the fair value of debt and equity securities available for sale are included in shareholders’ equity as unrealized gains or losses, net of the related tax effect. Unrealized losses on available for sale securities, reflecting a decline in value judged to be other than temporary, are charged to income in the Consolidated Statements of Income. Realized gains or losses on available for sale securities are computed on the specific identification basis.
Other Investments
The Bank, as a member institution, is required to own a stock investment in the Federal Home Loan Bank of Atlanta (“FHLB”). This stock is generally pledged against any borrowings from the FHLB and cash dividends on our FHLB stock are recorded in investment income. No ready market exists for these stocks and they have no quoted market value. However, redemption of this stock has historically been at par value. Other investments also include a $403,000 investment in the Trusts.
Loans
Loans are stated at the principal balance outstanding. Unamortized net loan fees and the allowance for possible loan losses are deducted from total loans on the balance sheets. Interest income is recognized over the term of the loan based on the principal amount outstanding. The net of loan origination fees received and direct costs incurred in the origination of loans is deferred and amortized to interest income over the contractual life of the loans adjusted for actual principal prepayments using a method approximating the interest method.
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Nonaccrual and Past Due Loans
Loans are generally placed on nonaccrual status when principal or interest becomes 90 days past due, or when payment in full is not anticipated. When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce the loan’s principal balance. A nonaccrual loan is generally returned to accrual status and accrual of interest is resumed when payments have been made according to the terms and conditions of the loan for a continuous six month period. Our loans are considered past due when contractually required principal or interest payments have not been made on the due dates.
Nonperforming Assets
Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure, loans on nonaccrual status and loans past due 90 days or more and still accruing interest. Loans are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is uncertain. Thereafter no interest is taken into income until such time as the borrower demonstrates the ability to pay both principal and interest.
Impaired Loans
Our impaired loans include loans on nonaccrual status and loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status. For loans that are classified as impaired, an allowance is established when the fair value (discounted cash flows, collateral value, or observable market price) of the impaired loan less costs to sell, are lower than the carrying value of that loan. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due, among other factors. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including, without limitation, the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Prior to this change, large groups of smaller balance homogeneous consumer loans were collectively evaluated for impairment, and we did not separately identify individual consumer loans for impairment disclosures.
Loan Charge-off Policy
For commercial loans, we generally fully charge off or charge collateralized loans down to net realizable value when management determines the loan to be uncollectible; repayment is deemed to be projected beyond reasonable time frames; the loan has been classified as a loss by either our internal loan review process or our banking regulatory agencies; the client has filed bankruptcy and the loss becomes evident owing to a lack of assets; or the loan is 120 days past due unless both well-secured and in the process of collection. For consumer loans, we generally charge down to net realizable value when the loan is 180 days past due.
Troubled Debt Restructuring (TDRs)
The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company provides concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment.
Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring, but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time and the borrower continues to experience financial difficulties, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments of principal and interest in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. In addition, our policy, in accordance with supervisory guidance, also provides for a loan to be removed from TDR status if the loan is modified or renewed at terms consistent with current market rates and the loan has been performing under modified terms for an extended period of time or under certain circumstances.
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In the determination of the allowance for loan losses, management considers TDRs on commercial and consumer loans and subsequent defaults in these restructurings by measuring impairment, on a loan by loan basis, based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.
Allowance for Loan Losses
The allowance for loan losses is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions. See Note 4 to the Consolidated Financial Statements for additional information on the allowance for loan losses.
Other Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of cost or estimated fair value less selling costs. Subsequent to the date of acquisition, it is carried at the lower of cost or fair value, adjusted for net selling costs. Fair values of real estate owned are reviewed regularly and write-downs are recorded when it is determined that the carrying value of real estate exceeds the fair value less estimated costs to sell. Costs relating to the development and improvement of such property are capitalized, whereas those costs relating to holding the property are expensed.
Property and Equipment
Property and equipment are stated at cost. Major repairs are charged to operations, while major improvements are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in income from operations.
Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use.
Bank Owned Life Insurance Policies
Bank owned life insurance policies represent the cash value of policies on certain officers of the Company.
Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets in the Consolidated Balance Sheets.
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Comprehensive Income
Comprehensive income (loss) consists of net income and net unrealized gains (losses) on securities and is presented in the statements of shareholders’ equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect our results of operations.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Our accounting policies will not change materially since the principles of revenue recognition from the Accounting Standards Update are largely consistent with existing guidance and current practices applied by our business. The following is a discussion of revenues within the scope of the new guidance:
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Service fees on deposit accounts
- The Company earns fees from its deposit clients for various transaction-based, account maintenance, and overdraft or non-sufficient funds (“NSF”) services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the client's request. Account maintenance fees, which relate primarily to monthly maintenance and account management, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft and NSF fees are recognized at the point in time that the overdraft occurs or the NSF item is presented. Service charges on deposits are withdrawn from the client's account balance.
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●
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ATM and debit card income
- The Company earns interchange fees from debit cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
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Income Taxes
The financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Company believes that its income tax filing positions taken or expected to be taken on its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded. The Company’s federal and state income tax returns are open and subject to examination from the 2015 tax return year and forward.
On December 22, 2017, the Tax Act was signed into law and includes numerous provisions that impact the Company, most notably a reduction in the corporate tax rate from the maximum rate of 35% to a flat rate of 21%. As a result, the Company recorded an incremental income tax expense of $2.4 million in the fourth quarter of 2017. During the fourth quarter of 2018, the Company completed its accounting for the income tax effects related to the Tax Act which resulted in no change to the provisional adjustment recorded in income tax expense in 2017.
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Stock-Based Compensation
The Company has a stock-based employee compensation plan. Compensation cost is recognized for all stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant.
Adoption of New Accounting Standards
In May 2014, the FASB issued ASU 2014-09
, “Revenue from Contracts with Customers”
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts, ATM and debit card income, and gains/losses on the sale of other real estate owned, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.
In January 2016, the FASB issued ASU No. 2016-01,
“Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”.
The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Company on January 1, 2018 and resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 13 – Fair Value Accounting for further information regarding the valuation of these loans.
In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In November 2016, the FASB again amended the Statement of Cash Flows topic to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments were effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. These amendments did not have a material effect on the Company’s financial statements.
In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments were effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and did not have a material effect on its financial statements.
In February 2018, the FASB amended certain aspects of the guidance issued in ASU 2016-01, the Financial Instruments Topic of the ASC. The amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments were effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018 and did not have a material effect on the Company’s financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires Companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act. The Company has opted to early adopt this pronouncement by retrospective application to each period (or periods) in which the effect of the change in the tax rate under the Tax Act is recognized. The impact of the reclassification from other comprehensive income to retained earnings did not have a material effect on the Company’s financial statements.
Newly Issued, But Not yet Effective Accounting Standards
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”
. The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The Company expects that the adoption of ASU 2016-02 will result in the recognition of lease liabilities totaling approximately $18.5 million and the recognition of right-of-use assets totaling approximately $18.5 million. The initial balance sheet gross up upon adoption is primarily related to operating leases of certain real estate properties. The Company has no material leasing arrangements for which it is the lessor of property or equipment. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company expects to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) using the modified retrospective approach and practical expedients for transition and will not restate comparative periods. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts and activities. We have also started developing our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2018 future minimum lease payments were $15.7 million). We do not expect a material change to the timing of expense recognition but we will continue to evaluate the financial impact as implementation occurs. We are evaluating our existing disclosures and may need to provide additional information as a result of adoption of the ASU.
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In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for all annual and interim periods beginning after December 31, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. Adoption will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company intends to adopt the guidance on January 1, 2020 and has established a team of individuals from credit, finance and risk management to evaluate the requirements of the new standard and the impact it will have on our processes. Our implementation plan has progressed through the initial design, build, and testing phase and, in the first quarter of 2019, we will begin running parallel models. While we continue to evaluate the impact the new guidance will have on our financial position and results of operations, we currently expect the new guidance may result in an increase to our allowance for credit losses given the change to estimated losses over the contractual life of the loan portfolio. The amount of any change to our allowance is still under review and will depend, in part, upon the composition of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.
In March 2017, the FASB amended the requirement in the Receivables-Nonrefundable Fees and Other Costs Topic of the ASC related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments were effective for the Company for interim and annual periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 2 – Investment Securities
The amortized costs and fair value of investment securities are as follows:
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|
|
|
|
December 31, 2018
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|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
(dollars in thousands)
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Available for sale
|
|
|
|
|
|
|
|
|
|
US government agencies
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|
$
|
8,975
|
|
1
|
|
194
|
|
8,782
|
SBA securities
|
|
|
3,628
|
|
-
|
|
103
|
|
3,525
|
State and political subdivisions
|
|
|
8,371
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|
48
|
|
63
|
|
8,356
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Asset-backed securities
|
|
|
9,595
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|
12
|
|
49
|
|
9,558
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
12,258
|
|
87
|
|
242
|
|
12,103
|
FNMA
|
|
|
29,068
|
|
25
|
|
551
|
|
28,542
|
GNMA
|
|
|
4,170
|
|
1
|
|
132
|
|
4,039
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Total mortgage-backed securities
|
|
|
45,496
|
|
113
|
|
925
|
|
44,684
|
Total
|
|
$
|
76,065
|
|
174
|
|
1,334
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|
74,905
|
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|
|
December 31, 2017
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Amortized
|
|
Gross Unrealized
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Fair
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|
|
|
Cost
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|
Gains
|
|
Losses
|
|
Value
|
Available for sale
|
|
|
|
|
|
|
|
|
|
US government agencies
|
|
$
|
8,749
|
|
1
|
|
97
|
|
8,653
|
SBA securities
|
|
|
4,087
|
|
-
|
|
24
|
|
4,063
|
State and political subdivisions
|
|
|
11,242
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|
179
|
|
25
|
|
11,396
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
9,102
|
|
-
|
|
149
|
|
8,953
|
FNMA
|
|
|
29,383
|
|
3
|
|
386
|
|
29,000
|
GNMA
|
|
|
5,618
|
|
2
|
|
82
|
|
5,538
|
Total mortgage-backed securities
|
|
|
44,103
|
|
5
|
|
617
|
|
43,491
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Total
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$
|
68,181
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|
185
|
|
763
|
|
67,603
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The amortized costs and fair values of investment securities available for sale at December 31, 2018 and 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.
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December 31,
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2018
|
|
|
|
2017
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
(dollars in thousands)
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
Available for sale
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
-
|
|
-
|
|
1,435
|
|
1,427
|
Due after one through five years
|
|
|
8,681
|
|
8,578
|
|
2,677
|
|
2,666
|
Due after five through ten years
|
|
|
22,796
|
|
22,379
|
|
24,796
|
|
24,645
|
Due after ten years
|
|
|
44,588
|
|
43,948
|
|
39,273
|
|
38,865
|
|
|
$
|
76,065
|
|
74,905
|
|
68,181
|
|
67,603
|
The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Fair
|
|
Unrealized
|
|
|
|
Fair
|
|
Unrealized
|
|
|
|
Fair
|
|
Unrealized
|
(dollars in thousands)
|
|
#
|
|
value
|
|
losses
|
|
#
|
|
value
|
|
losses
|
|
#
|
|
value
|
|
losses
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agencies
|
|
1
|
|
$
|
1,246
|
|
$
|
3
|
|
8
|
|
$
|
7,035
|
|
$
|
191
|
|
9
|
|
$
|
8,281
|
|
$
|
194
|
SBA securities
|
|
-
|
|
|
-
|
|
|
-
|
|
2
|
|
|
3,525
|
|
|
103
|
|
2
|
|
|
3,525
|
|
|
103
|
State and political subdivisions
|
|
-
|
|
|
-
|
|
|
-
|
|
7
|
|
|
2,829
|
|
|
63
|
|
7
|
|
|
2,829
|
|
|
63
|
Asset-backed
|
|
4
|
|
|
6,707
|
|
|
49
|
|
-
|
|
|
-
|
|
|
-
|
|
4
|
|
|
6,707
|
|
|
49
|
Mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
-
|
|
|
-
|
|
|
-
|
|
10
|
|
|
7,402
|
|
|
242
|
|
10
|
|
|
7,402
|
|
|
242
|
FNMA
|
|
2
|
|
|
2,689
|
|
|
6
|
|
23
|
|
|
22,814
|
|
|
545
|
|
25
|
|
|
25,503
|
|
|
551
|
GNMA
|
|
1
|
|
|
1,104
|
|
|
6
|
|
3
|
|
|
2,919
|
|
|
126
|
|
4
|
|
|
4,023
|
|
|
132
|
|
|
8
|
|
$
|
11,746
|
|
$
|
64
|
|
53
|
|
$
|
46,524
|
|
$
|
1,270
|
|
61
|
|
$
|
58,270
|
|
$
|
1,334
|
75
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
|
|
Fair
|
|
Unrealized
|
|
|
|
Fair
|
|
Unrealized
|
|
|
|
Fair
|
|
Unrealized
|
|
|
#
|
|
value
|
|
losses
|
|
#
|
|
value
|
|
losses
|
|
#
|
|
value
|
|
losses
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agencies
|
|
5
|
|
$
|
4,184
|
|
$
|
22
|
|
4
|
|
$
|
3,968
|
|
$
|
75
|
|
9
|
|
$
|
8,152
|
|
$
|
97
|
SBA securities
|
|
1
|
|
|
2,936
|
|
|
13
|
|
1
|
|
|
1,127
|
|
|
11
|
|
2
|
|
|
4,063
|
|
|
24
|
State and political subdivisions
|
|
3
|
|
|
1,214
|
|
|
9
|
|
2
|
|
|
792
|
|
|
16
|
|
5
|
|
|
2,006
|
|
|
25
|
Mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
3
|
|
|
2,897
|
|
|
26
|
|
7
|
|
|
6,056
|
|
|
123
|
|
10
|
|
|
8,953
|
|
|
149
|
FNMA
|
|
11
|
|
|
14,345
|
|
|
135
|
|
13
|
|
|
14,597
|
|
|
251
|
|
24
|
|
|
29,940
|
|
|
386
|
GNMA
|
|
2
|
|
|
2,270
|
|
|
40
|
|
1
|
|
|
971
|
|
|
42
|
|
3
|
|
|
2,243
|
|
|
82
|
|
|
25
|
|
$
|
27,846
|
|
$
|
245
|
|
28
|
|
$
|
27,511
|
|
$
|
518
|
|
53
|
|
$
|
55,357
|
|
$
|
763
|
At December 31, 2018, the Company had 8 individual investments with a fair market value of $11.7 million that were in an unrealized loss position for less than 12 months and 53 individual investments with a fair market value of $46.5 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities were not other-than-temporarily impaired. We also consider other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, we have concluded that the securities are not impaired on an other-than-temporary basis.
Other investments are comprised of the following and are recorded at cost which approximates fair value:
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Federal Home Loan Bank stock
|
|
$
|
3,587
|
|
3,754
|
Other investments
|
|
|
131
|
|
305
|
Investment in Trust Preferred subsidiaries
|
|
|
403
|
|
403
|
|
|
$
|
4,121
|
|
4,462
|
The Company has evaluated the FHLB stock for impairment and determined that the investment in FHLB stock is not other than temporarily impaired as of December 31, 2018 and ultimate recoverability of the par value of this investment is probable. All of the FHLB stock is used to collateralize advances with the FHLB.
At December 31, 2018, there were no securities pledged as collateral for repurchase agreements from brokers. At December 31, 2017, $7.7 million of securities were pledged as collateral for repurchase agreements from brokers.
NOTE 3 – Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option, which was adopted by the Company on April 1, 2016, with changes in fair value recognized in current period earnings. Loans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At December 31, 2018, mortgage loans held for sale totaled $9.2 million compared to $11.8 million at December 31, 2017.
Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets.
76
Table of Contents
Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in mortgage banking income in the statement of income. Mortgage banking income also includes the unrealized gains and losses associated with the loans held for sale and the realized and unrealized gains and losses from derivatives.
Mortgage loans sold to investors by the Company, and which were believed to have met investor and agency underwriting guidelines at the time of sale, may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans.
The Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses based on a combination of factors. The Company establishes a reserve at the time loans are sold and quarterly updates the reserve estimate during the estimated loan life.
NOTE 4 – Loans and Allowance for Loan Losses
The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Upstate, Midlands, and Lowcountry regions of South Carolina, the Triangle and Triad regions of North Carolina as well as Atlanta, Georgia. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. The Company focuses its lending activities primarily on the professional markets in these regions including doctors, dentists, and small business owners. The principal component of the loan portfolio is loans secured by real estate mortgages which account for 82.3% of total loans at December 31, 2018. Commercial loans comprise 62.0% of total real estate loans and consumer loans account for 38.0%. Commercial real estate loans are further categorized into owner occupied which represents 21.9% of total loans and non-owner occupied loans represent 24.1%. Commercial construction loans represent only 5.0% of the total loan portfolio.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). The various types of loans are individually underwritten and monitored to manage the associated risks.
The allowance for loan losses is management's estimate of credit losses inherent in the loan portfolio at the balance sheet date. We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.
Portfolio Segment Methodology
Commercial
Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a TDR, whether on accrual or nonaccrual status.
77
Table of Contents
Consumer
For consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.
The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $2.8 million and $2.3 million as of December 31, 2018 and December 31, 2017, respectively.
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
$
|
367,018
|
|
|
21.9
|
%
|
|
316,818
|
|
|
22.8
|
%
|
Non-owner occupied RE
|
|
|
404,296
|
|
|
24.1
|
%
|
|
312,798
|
|
|
22.6
|
%
|
Construction
|
|
|
84,411
|
|
|
5.0
|
%
|
|
51,179
|
|
|
3.7
|
%
|
Business
|
|
|
272,980
|
|
|
16.3
|
%
|
|
226,158
|
|
|
16.3
|
%
|
Total commercial loans
|
|
|
1,128,705
|
|
|
67.3
|
%
|
|
906,953
|
|
|
65.4
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
320,943
|
|
|
19.1
|
%
|
|
273,050
|
|
|
19.7
|
%
|
Home equity
|
|
|
165,937
|
|
|
9.9
|
%
|
|
156,141
|
|
|
11.3
|
%
|
Construction
|
|
|
37,925
|
|
|
2.3
|
%
|
|
28,351
|
|
|
2.0
|
%
|
Other
|
|
|
23,822
|
|
|
1.4
|
%
|
|
22,575
|
|
|
1.6
|
%
|
Total consumer loans
|
|
|
548,627
|
|
|
32.7
|
%
|
|
480,117
|
|
|
34.6
|
%
|
Total gross loans, net of deferred fees
|
|
|
1,677,332
|
|
|
100.0
|
%
|
|
1,387,070
|
|
|
100.0
|
%
|
Less – allowance for loan losses
|
|
|
(15,762
|
)
|
|
|
|
|
(15,523
|
)
|
|
|
|
Total loans, net
|
|
$
|
1,661,570
|
|
|
|
|
|
1,371,547
|
|
|
|
|
The composition of gross loans by rate type is as follows:
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Variable rate loans
|
|
$
|
402,148
|
|
349,493
|
Fixed rate loans
|
|
|
1,275,184
|
|
1,037,577
|
|
|
$
|
1,677,332
|
|
1,387,070
|
At December 31, 2018, approximately $597.6 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 9.
Credit Quality Indicators
Commercial
We manage a consistent process for assessing commercial loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.
We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:
●
|
Pass—These loans range from minimal credit risk to average however still acceptable credit risk.
|
●
|
Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.
|
●
|
Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
|
78
Table of Contents
●
|
Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.
|
The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status.
|
|
|
|
|
December 31, 2018
|
|
|
Owner
|
|
Non-owner
|
|
|
|
|
|
|
(dollars in thousands)
|
|
occupied RE
|
|
occupied RE
|
|
Construction
|
|
Business
|
|
Total
|
Current
|
|
$
|
367,018
|
|
404,179
|
|
84,411
|
|
272,864
|
|
1,128,472
|
30-59 days past due
|
|
|
-
|
|
117
|
|
-
|
|
36
|
|
153
|
60-89 days past due
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Greater than 90 days
|
|
|
-
|
|
-
|
|
-
|
|
80
|
|
80
|
|
|
$
|
367,018
|
|
404,296
|
|
84,411
|
|
272,980
|
|
1,128,705
|
|
|
|
December 31, 2017
|
|
|
Owner
|
|
Non-owner
|
|
|
|
|
|
|
|
|
occupied RE
|
|
occupied RE
|
|
Construction
|
|
Business
|
|
Total
|
Current
|
|
$
|
316,818
|
|
312,477
|
|
51,179
|
|
224,861
|
|
905,335
|
30-59 days past due
|
|
|
-
|
|
129
|
|
-
|
|
416
|
|
545
|
60-89 days past due
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Greater than 90 days
|
|
|
-
|
|
192
|
|
-
|
|
881
|
|
1,073
|
|
|
$
|
316,818
|
|
312,798
|
|
51,179
|
|
226,158
|
|
906,953
|
As of December 31, 2018 and 2017, loans 30 days or more past due represented 0.26% and 0.34% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01% and 0.12% as of December 31, 2018 and 2017, respectively.
The tables below provide a breakdown of outstanding commercial loans by risk category.
|
|
|
|
|
December 31, 2018
|
|
|
Owner
|
|
Non-owner
|
|
|
|
|
|
|
(dollars in thousands)
|
|
occupied RE
|
|
occupied RE
|
|
Construction
|
|
Business
|
|
Total
|
Pass
|
|
$
|
363,621
|
|
400,266
|
|
84,411
|
|
266,898
|
|
1,115,196
|
Special Mention
|
|
|
296
|
|
118
|
|
-
|
|
2,971
|
|
3,385
|
Substandard
|
|
|
3,101
|
|
3,912
|
|
-
|
|
3,111
|
|
10,124
|
Doubtful
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
$
|
367,018
|
|
404,296
|
|
84,411
|
|
272,980
|
|
1,128,705
|
|
|
|
December 31, 2017
|
|
|
Owner
|
|
Non-owner
|
|
|
|
|
|
|
|
|
occupied RE
|
|
occupied RE
|
|
Construction
|
|
Business
|
|
Total
|
Pass
|
|
$
|
312,628
|
|
306,965
|
|
51,179
|
|
215,729
|
|
886,501
|
Special Mention
|
|
|
1,770
|
|
2,082
|
|
-
|
|
5,540
|
|
9,392
|
Substandard
|
|
|
2,420
|
|
3,751
|
|
-
|
|
4,889
|
|
11,060
|
Doubtful
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
$
|
316,818
|
|
312,798
|
|
51,179
|
|
226,158
|
|
906,953
|
Consumer
We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.
79
Table of Contents
The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status.
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
|
Real estate
|
|
Home equity
|
|
Construction
|
|
Other
|
|
Total
|
Current
|
|
$
|
317,267
|
|
165,727
|
|
37,925
|
|
23,603
|
|
544,522
|
30-59 days past due
|
|
|
2,555
|
|
30
|
|
-
|
|
106
|
|
2,691
|
60-89 days past due
|
|
|
923
|
|
-
|
|
-
|
|
113
|
|
1,036
|
Greater than 90 days
|
|
|
198
|
|
180
|
|
-
|
|
-
|
|
378
|
|
|
$
|
320,943
|
|
165,937
|
|
37,925
|
|
23,822
|
|
548,627
|
|
|
|
December 31, 2017
|
|
|
Real estate
|
|
Home equity
|
|
Construction
|
|
Other
|
|
Total
|
Current
|
|
$
|
271,284
|
|
154,821
|
|
28,351
|
|
22,506
|
|
476,962
|
30-59 days past due
|
|
|
681
|
|
325
|
|
-
|
|
69
|
|
1,075
|
60-89 days past due
|
|
|
131
|
|
995
|
|
-
|
|
-
|
|
1,126
|
Greater than 90 days
|
|
|
954
|
|
-
|
|
-
|
|
-
|
|
954
|
|
|
$
|
273,050
|
|
156,141
|
|
28,351
|
|
22,575
|
|
480,117
|
Consumer loans 30 days or more past due were 0.25% and 0.23% as of December 31, 2018 and 2017, respectively.
The tables below provide a breakdown of outstanding consumer loans by risk category.
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
|
Real estate
|
|
Home equity
|
|
Construction
|
|
Other
|
|
Total
|
Pass
|
|
$
|
314,586
|
|
162,626
|
|
37,925
|
|
23,586
|
|
538,723
|
Special Mention
|
|
|
1,792
|
|
864
|
|
-
|
|
139
|
|
2,795
|
Substandard
|
|
|
4,565
|
|
2,447
|
|
-
|
|
97
|
|
7,109
|
Doubtful
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Loss
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
$
|
320,943
|
|
165,937
|
|
37,925
|
|
23,822
|
|
548,627
|
|
|
|
|
|
December 31, 2017
|
(dollars in thousands)
|
|
Real estate
|
|
Home equity
|
|
Construction
|
|
Other
|
|
Total
|
Pass
|
|
$
|
269,422
|
|
152,545
|
|
28,351
|
|
22,367
|
|
472,685
|
Special Mention
|
|
|
715
|
|
1,025
|
|
-
|
|
88
|
|
1,828
|
Substandard
|
|
|
2,913
|
|
2,571
|
|
-
|
|
120
|
|
5,604
|
Doubtful
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Loss
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
$
|
273,050
|
|
156,141
|
|
28,351
|
|
22,575
|
|
480,117
|
Nonperforming assets
The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.
80
Table of Contents
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Commercial
|
|
|
|
|
|
Owner occupied RE
|
|
$
|
-
|
|
-
|
Non-owner occupied RE
|
|
|
210
|
|
1,581
|
Construction
|
|
|
-
|
|
-
|
Business
|
|
|
81
|
|
910
|
Consumer
|
|
|
|
|
|
Real estate
|
|
|
1,980
|
|
992
|
Home equity
|
|
|
1,006
|
|
1,144
|
Construction
|
|
|
-
|
|
-
|
Other
|
|
|
12
|
|
1
|
Nonaccruing troubled debt restructurings
|
|
|
2,541
|
|
2,673
|
Total nonaccrual loans, including nonaccruing TDRs
|
|
|
5,830
|
|
7,301
|
Other real estate owned
|
|
|
-
|
|
242
|
Total nonperforming assets
|
|
$
|
5,830
|
|
7,543
|
Nonperforming assets as a percentage of:
|
|
|
|
|
|
Total assets
|
|
|
0.31
%
|
|
0.46
%
|
Gross loans
|
|
|
0.35
%
|
|
0.54
%
|
Total loans over 90 days past due
|
|
$
|
458
|
|
2,027
|
Loans over 90 days past due and still accruing
|
|
|
-
|
|
-
|
Accruing TDRs
|
|
|
6,742
|
|
5,145
|
Foregone interest income on the nonaccrual loans for the year ended December 31, 2018 was approximately $53,000 and approximately $309,000 for the same period in 2017.
Impaired Loans
The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Recorded investment
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
Unpaid
|
|
|
|
with related
|
|
Related
|
|
|
Principal
|
|
Impaired
|
|
allowance for
|
|
allowance for
|
(dollars in thousands)
|
|
Balance
|
|
loans
|
|
loan losses
|
|
loan losses
|
Commercial
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
$
|
2,827
|
|
2,762
|
|
451
|
|
75
|
Non-owner occupied RE
|
|
|
3,321
|
|
2,807
|
|
2,204
|
|
558
|
Construction
|
|
|
-
|
|
-
|
|
-
|
|
-
|
Business
|
|
|
3,745
|
|
2,520
|
|
2,005
|
|
895
|
Total commercial
|
|
|
9,893
|
|
8,089
|
|
4,660
|
|
1,528
|
Consumer
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
2,993
|
|
2,892
|
|
1,398
|
|
456
|
Home equity
|
|
|
1,935
|
|
1,421
|
|
-
|
|
-
|
Construction
|
|
|
-
|
|
-
|
|
-
|
|
-
|
Other
|
|
|
170
|
|
170
|
|
170
|
|
30
|
Total consumer
|
|
|
5,098
|
|
4,483
|
|
1,568
|
|
486
|
Total
|
|
$
|
14,991
|
|
12,572
|
|
6,228
|
|
2,014
|
81
Table of Contents
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
Recorded investment
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
Unpaid
|
|
|
|
with related
|
|
Related
|
|
|
Principal
|
|
Impaired
|
|
allowance for
|
|
allowance for
|
(dollars in thousands)
|
|
Balance
|
|
loans
|
|
loan losses
|
|
loan losses
|
Commercial
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
$
|
2,281
|
|
2,235
|
|
464
|
|
179
|
Non-owner occupied RE
|
|
|
6,827
|
|
3,665
|
|
2,646
|
|
750
|
Construction
|
|
|
-
|
|
-
|
|
-
|
|
-
|
Business
|
|
|
3,735
|
|
2,764
|
|
1,993
|
|
1,061
|
Total commercial
|
|
|
12,843
|
|
8,664
|
|
5,103
|
|
1,990
|
Consumer
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
2,062
|
|
2,037
|
|
2,037
|
|
1,379
|
Home equity
|
|
|
2,010
|
|
1,575
|
|
680
|
|
286
|
Construction
|
|
|
-
|
|
-
|
|
-
|
|
-
|
Other
|
|
|
171
|
|
170
|
|
170
|
|
22
|
Total consumer
|
|
|
4,243
|
|
3,782
|
|
2,887
|
|
1,687
|
Total
|
|
$
|
17,086
|
|
12,446
|
|
7,990
|
|
3,677
|
The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Average
|
|
Recognized
|
|
Average
|
|
Recognized
|
|
Average
|
|
Recognized
|
|
|
recorded
|
|
interest
|
|
recorded
|
|
interest
|
|
recorded
|
|
interest
|
(dollars in thousands)
|
|
investment
|
|
income
|
|
investment
|
|
income
|
|
investment
|
|
income
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
$
|
2,784
|
|
142
|
|
2,255
|
|
104
|
|
2,263
|
|
112
|
Non-owner occupied RE
|
|
|
2,860
|
|
174
|
|
4,144
|
|
199
|
|
4,106
|
|
200
|
Construction
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Business
|
|
|
2,883
|
|
162
|
|
2,823
|
|
162
|
|
2,873
|
|
135
|
Total commercial
|
|
|
8,527
|
|
478
|
|
9,222
|
|
465
|
|
9,242
|
|
447
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
2,930
|
|
151
|
|
2,047
|
|
69
|
|
1,854
|
|
81
|
Home equity
|
|
|
1,453
|
|
99
|
|
1,576
|
|
97
|
|
257
|
|
2
|
Construction
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Other
|
|
|
174
|
|
5
|
|
174
|
|
6
|
|
203
|
|
6
|
Total consumer
|
|
|
4,557
|
|
255
|
|
3,797
|
|
172
|
|
2,314
|
|
89
|
Total
|
|
$
|
13,084
|
|
733
|
|
13,019
|
|
637
|
|
11,556
|
|
536
|
82
Table of Contents
Allowance for Loan Losses
The following table summarizes the activity related to our allowance for loan losses:
|
|
|
|
|
|
Year ended December 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
15,523
|
|
|
14,855
|
|
|
13,629
|
|
Provision for loan losses
|
|
|
1,900
|
|
|
2,000
|
|
|
2,300
|
|
Loan charge-offs:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
Non-owner occupied RE
|
|
|
(432
|
)
|
|
(589
|
)
|
|
(100
|
)
|
Construction
|
|
|
-
|
|
|
-
|
|
|
(42
|
)
|
Business
|
|
|
(695
|
)
|
|
(638
|
)
|
|
(1,031
|
)
|
Total commercial
|
|
|
(1,127
|
)
|
|
(1,227
|
)
|
|
(1,178
|
)
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
(749
|
)
|
|
-
|
|
|
(194
|
)
|
Home equity
|
|
|
(217
|
)
|
|
(400
|
)
|
|
(66
|
)
|
Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(53
|
)
|
|
(11
|
)
|
|
(210
|
)
|
Total consumer
|
|
|
(1,019
|
)
|
|
(411
|
)
|
|
(470
|
)
|
Total loan charge-offs
|
|
|
(2,146
|
)
|
|
(1,638
|
)
|
|
(1,648
|
)
|
Loan recoveries:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Non-owner occupied RE
|
|
|
132
|
|
|
119
|
|
|
155
|
|
Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Business
|
|
|
229
|
|
|
86
|
|
|
403
|
|
Total commercial
|
|
|
361
|
|
|
205
|
|
|
558
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
5
|
|
|
86
|
|
|
10
|
|
Home equity
|
|
|
115
|
|
|
13
|
|
|
1
|
|
Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
4
|
|
|
2
|
|
|
5
|
|
Total consumer
|
|
|
124
|
|
|
101
|
|
|
16
|
|
Total recoveries
|
|
|
485
|
|
|
306
|
|
|
574
|
|
Net loan charge-offs
|
|
|
(1,661
|
)
|
|
(1,332
|
)
|
|
(1,074
|
)
|
Balance, end of period
|
|
$
|
15,762
|
|
|
15,523
|
|
|
14,855
|
|
The following tables summarize the activity in the allowance for loan losses by our commercial and consumer portfolio segments.
|
|
|
|
|
|
Year ended December 31, 2018
|
|
(dollars in thousands)
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
Total
|
|
Balance, beginning of period
|
|
$
|
9,937
|
|
|
5,586
|
|
|
-
|
|
15,523
|
|
Provision
|
|
|
1,597
|
|
|
303
|
|
|
-
|
|
1,900
|
|
Loan charge-offs
|
|
|
(1,127
|
)
|
|
(1,019
|
)
|
|
-
|
|
(2,146
|
)
|
Loan recoveries
|
|
|
361
|
|
|
124
|
|
|
-
|
|
485
|
|
Net loan charge-offs
|
|
|
(766
|
)
|
|
(895
|
)
|
|
-
|
|
(1,661
|
)
|
Balance, end of period
|
|
$
|
10,768
|
|
|
4,994
|
|
|
-
|
|
15,762
|
|
|
|
|
Year ended December 31, 2017
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Unallocated
|
|
Total
|
|
Balance, beginning of period
|
|
$
|
10,039
|
|
|
4,816
|
|
|
-
|
|
14,855
|
|
Provision
|
|
|
920
|
|
|
1,080
|
|
|
-
|
|
2,000
|
|
Loan charge-offs
|
|
|
(1,227
|
)
|
|
(411
|
)
|
|
-
|
|
(1,638
|
)
|
Loan recoveries
|
|
|
205
|
|
|
101
|
|
|
-
|
|
306
|
|
Net loan charge-offs
|
|
|
(1,022
|
)
|
|
(310
|
)
|
|
-
|
|
(1,332
|
)
|
Balance, end of period
|
|
$
|
9,937
|
|
|
5,586
|
|
|
-
|
|
15,523
|
|
83
Table of Contents
The following table disaggregates our allowance for loan losses and recorded investment in loans by method of impairment evaluation.
|
|
|
|
|
December 31, 2018
|
|
|
Allowance for loan losses
|
|
Recorded investment in loans
|
(dollars in thousands)
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Commercial
|
|
Consumer
|
|
Total
|
Individually evaluated
|
|
$
|
1,528
|
|
486
|
|
2,014
|
|
8,089
|
|
4,483
|
|
12,572
|
Collectively evaluated
|
|
|
9,240
|
|
4,508
|
|
13,748
|
|
1,120,616
|
|
544,144
|
|
1,664,760
|
Total
|
|
$
|
10,768
|
|
4,994
|
|
15,762
|
|
1,128,705
|
|
548,627
|
|
1,677,332
|
|
|
|
December 31, 2017
|
|
|
Allowance for loan losses
|
|
Recorded investment in loans
|
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Commercial
|
|
Consumer
|
|
Total
|
Individually evaluated
|
|
$
|
1,990
|
|
1,687
|
|
3,677
|
|
8,664
|
|
3,782
|
|
12,446
|
Collectively evaluated
|
|
|
7,947
|
|
3,899
|
|
11,846
|
|
898,289
|
|
476,335
|
|
1,374,624
|
Total
|
|
$
|
9,937
|
|
5,586
|
|
15,523
|
|
906,953
|
|
480,117
|
|
1,387,070
|
NOTE 5 – Troubled Debt Restructurings
At December 31, 2018, we had 26 loans totaling $9.3 million and at December 31, 2017 we had 21 loans totaling $7.8 million, which we considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. During 2018, we have added six commercial and two consumer loans totaling $3.5 million as TDRs and removed one loan from TDR status due to pay-offs or in accordance with our nonperforming loans and TDR policies. To date, we have restored five nonaccrual commercial loans previously classified as TDRs to accrual status.
The following table summarizes the concession at the time of modification and the recorded investment in our TDRs before and after their modification.
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-
|
|
Post-
|
|
|
|
|
|
|
|
|
|
|
|
|
modification
|
|
modification
|
|
|
Renewals
|
|
Reduced
|
|
Converted
|
|
Maturity
|
|
Total
|
|
outstanding
|
|
outstanding
|
|
|
deemed a
|
|
or deferred
|
|
to interest
|
|
date
|
|
number
|
|
recorded
|
|
recorded
|
(dollars in thousands)
|
|
concession
|
|
payments
|
|
only
|
|
extensions
|
|
of loans
|
|
investment
|
|
Investment
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
1
|
|
-
|
|
-
|
|
-
|
|
1
|
|
$
|
506
|
|
$
|
592
|
Non-owner occupied RE
|
|
-
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
1,287
|
|
|
1,287
|
Business
|
|
4
|
|
-
|
|
-
|
|
-
|
|
4
|
|
|
1,207
|
|
|
1,532
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
2
|
|
-
|
|
-
|
|
-
|
|
2
|
|
|
549
|
|
|
669
|
Total loans
|
|
7
|
|
1
|
|
-
|
|
-
|
|
8
|
|
$
|
3,549
|
|
$
|
4,080
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-
|
|
Post-
|
|
|
|
|
|
|
|
|
|
|
|
|
modification
|
|
modification
|
|
|
Renewals
|
|
Reduced
|
|
Converted
|
|
Maturity
|
|
Total
|
|
outstanding
|
|
outstanding
|
|
|
deemed a
|
|
or deferred
|
|
to interest
|
|
date
|
|
number
|
|
recorded
|
|
recorded
|
|
|
concession
|
|
payments
|
|
only
|
|
extensions
|
|
of loans
|
|
investment
|
|
Investment
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
1
|
|
-
|
|
-
|
|
-
|
|
1
|
|
$
|
254
|
|
$
|
310
|
Non-owner occupied RE
|
|
1
|
|
-
|
|
-
|
|
-
|
|
1
|
|
|
976
|
|
|
976
|
Business
|
|
2
|
|
1
|
|
-
|
|
-
|
|
3
|
|
|
591
|
|
|
600
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
1
|
|
-
|
|
-
|
|
-
|
|
1
|
|
|
281
|
|
|
270
|
Home equity
|
|
1
|
|
1
|
|
-
|
|
-
|
|
2
|
|
|
363
|
|
|
456
|
Total loans
|
|
6
|
|
2
|
|
-
|
|
-
|
|
8
|
|
$
|
2,465
|
|
$
|
2,612
|
84
Table of Contents
As of December 31, 2018 and 2017 there were no loans modified as TDRs for which there was a payment default (60 days past due) within 12 months of the restructuring date.
NOTE 6 – Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Components of property and equipment included in the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
6,827
|
|
|
6,827
|
|
Buildings
|
|
|
24,064
|
|
|
23,990
|
|
Leasehold Improvements
|
|
|
2,899
|
|
|
2,220
|
|
Furniture and equipment
|
|
|
8,890
|
|
|
8,075
|
|
Software
|
|
|
329
|
|
|
306
|
|
Construction in process
|
|
|
281
|
|
|
40
|
|
|
|
|
43,290
|
|
|
41,458
|
|
Accumulated depreciation
|
|
|
(10,860
|
)
|
|
(9,224
|
)
|
Total property and equipment
|
|
$
|
32,430
|
|
|
32,234
|
|
Construction in process at December 31, 2018 included costs associated with the upfit of leased office space in Greensboro, North Carolina, while the balance at December 31, 2017 included costs associated with the upfit of leased office space in Atlanta, Georgia. Depreciation and amortization expense for the years ended December 31, 2018 and 2017 was $1.8 million and $1.5 million, respectively. Depreciation is charged to operations utilizing a straight-line method over the estimated useful lives of the assets. The estimated useful lives for the principal items follow:
|
|
Type of Asset
|
Life in Years
|
Software
|
3
|
Furniture and equipment
|
5 to 7
|
Leasehold improvements
|
5 to 15
|
Buildings
|
40
|
NOTE 7 – Other Real Estate Owned
Other real estate owned is comprised of real estate acquired in settlement of loans and is included in other assets on the balance sheet. At December 31, 2018, there was no other real estate owned, compared to three properties owned totaling $242,000 at December 31, 2017. The following summarizes the activity in the real estate acquired in settlement of loans portion of other real estate owned:
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
(dollars in thousands)
|
2018
|
|
|
2017
|
|
Balance, beginning of year
|
$
|
242
|
|
|
$
|
639
|
|
Additions
|
|
-
|
|
|
|
289
|
|
Sales
|
|
(125
|
)
|
|
|
(501
|
)
|
Write-downs, net
|
|
(117
|
)
|
|
|
(185
|
)
|
Balance, end of year
|
$
|
-
|
|
|
$
|
242
|
|
85
Table of Contents
NOTE 8 – Deposits
The following is a detail of the deposit accounts:
|
|
|
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Noninterest bearing
|
|
$
|
346,570
|
|
295,680
|
Interest bearing:
|
|
|
|
|
|
NOW accounts
|
|
|
186,795
|
|
229,945
|
Money market accounts
|
|
|
730,765
|
|
545,029
|
Savings
|
|
|
15,486
|
|
16,298
|
Time, less than $100,000
|
|
|
63,073
|
|
55,461
|
Time, $100,000 and over
|
|
|
305,447
|
|
238,710
|
Total deposits
|
|
$
|
1,648,136
|
|
1,381,123
|
During December 2018, the Company modified the account classification of $45.3 million from interest bearing to noninterest bearing which contributed to the increase in noninterest bearing accounts and the decrease in NOW accounts from December 31, 2017. In addition, at December 31, 2018 and 2017, time deposits greater than $250,000 were $214.0 million and $131.7 million, respectively.
Also, at December 31, 2018 and 2017, the Company had approximately $79.3 million and $28.1 million, respectively, of time deposits that were obtained outside of the Company’s primary market. Interest expense on time deposits greater than $100,000 was $4.7 million for the year ended December 31, 2018, $2.7 million for the year ended December 31, 2017, and $1.8 million for the year ended December 31, 2016.
At December 31, 2018 the scheduled maturities of certificates of deposit are as follows:
|
|
|
|
|
|
(dollars in thousands)
|
|
|
2019
|
$
|
241,771
|
2020
|
|
92,684
|
2021
|
|
24,513
|
2022
|
|
4,306
|
2023 and after
|
|
5,246
|
|
$
|
368,520
|
NOTE 9 – Federal Home Loan Bank Advances and Other Borrowings
At December 31, 2018 the Company had $50.0 million in FHLB Advances. At December 31, 2017, the Company had $67.2 million in FHLB advances and other borrowings. Of the $67.2 million outstanding at December 31, 2017, FHLB advances represented $60.0 million and securities sold under structured agreements to repurchase represented $7.2 million.
The FHLB advances are secured with approximately $597.6 million of mortgage loans and $3.6 million of stock in the FHLB. During the third quarter of 2017, the Company restructured two FHLB advances totaling $25.0 million. In accordance with accounting guidance, we determined that the present value of the cash flows of the modified advance did not change by more than 10% from the present value of the cash flows of the original advances. Therefore, the modified FHLB advance was considered to be a restructuring and no gain or loss was recorded in the transaction. The original FHLB advances had a weighted rate of 4.39% and an average remaining life of 8 months. Under the modified arrangement, the FHLB advances had a weighted average rate of 3.36% and an average remaining life of 22 months. There were no FHLB advances restructured during 2018.
Listed below is a summary of the terms and maturities of the advances outstanding at December 31, 2018 and 2017. As of December 31, 2018, each of the Company’s advances were at fixed rates.
86
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
|
|
|
2018
|
|
|
|
|
2017
|
Maturity
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
January 30, 2018
|
|
$
|
-
|
|
-%
|
|
$
|
5,000
|
|
4.06%
|
December 31, 2018
|
|
|
-
|
|
-%
|
|
|
30,000
|
|
1.59%
|
December 31, 2019
|
|
|
25,000
|
|
2.65%
|
|
|
-
|
|
-%
|
July 7, 2022
|
|
|
10,000
|
|
3.11%
|
|
|
10,000
|
|
3.11%
|
July 7, 2023
|
|
|
15,000
|
|
3.53%
|
|
|
15,000
|
|
3.53%
|
|
|
$
|
50,000
|
|
3.01%
|
|
$
|
60,000
|
|
2.53%
|
At December 31, 2017, the Company had two structured debt agreements secured by approximately $7.7 million of various investment securities. Both agreements were repaid at maturity during 2018.
The Company also has an unsecured, interest only line of credit for $15 million with another financial institution which was unused at December 31, 2018. The line of credit bears interest at LIBOR plus 2.50% and matures on June 30, 2020. The loan agreement contains various financial covenants related to capital, earnings and asset quality.
NOTE 10 – Junior Subordinated Debentures
On June 26, 2003, Greenville First Statutory Trust I (a non-consolidated subsidiary) issued $6.0 million floating rate trust preferred securities with a maturity of June 26, 2033. At December 31, 2018, the interest rate was 5.92% and is indexed to the 3-month LIBOR rate plus 3.10% and adjusted quarterly. The Company received from the Trust the $6.0 million proceeds from the issuance of the securities and the $186,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $6.2 million junior subordinated debentures.
On December 22, 2005, Greenville First Statutory Trust II (a non-consolidated subsidiary) issued $7.0 million floating rate trust preferred securities with a maturity of December 22, 2035. At December 31, 2018, the interest rate was 4.24% and is indexed to the 3-month LIBOR rate plus 1.44% and adjusted quarterly. The Company received from the Trust the $7.0 million proceeds from the issuance of the securities and the $217,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $7.2 million junior subordinated debentures.
The current regulatory rules allow certain amounts of junior subordinated debentures to be included in the calculation of regulatory capital. However, provisions within the Dodd-Frank Act prohibit institutions that had more than $15 billion in assets on December 31, 2009 from including trust preferred securities as Tier 1 capital beginning in 2013, with one-third phased out over the two years ending in 2015. Financial institutions with less than $15 billion in total assets, such as the Bank, may continue to include their trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, but cannot include in Tier 1 capital trust preferred securities issued after such date.
NOTE 11 – Unused Lines of Credit
At December 31, 2018, the Company had four lines of credit to purchase federal funds that totaled $72.0 million which were unused at December 31, 2018. The lines of credit are available on a one to 14 day basis for general corporate purposes of the Company. The lender has reserved the right to withdraw the line at their option. The Company has an additional line of credit with the FHLB to borrow funds, subject to a pledge of qualified collateral. The Company has collateral that would support approximately $313.3 million in additional borrowings at December 31, 2018.
NOTE 12 – Derivative Financial Instruments
The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change.
The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.
87
Table of Contents
The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge.
The following table summarizes the Company’s outstanding financial derivative instruments at December 31, 2018 and December 31, 2017.
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Fair Value
|
|
(dollars in thousands)
|
|
Notional
|
|
Balance Sheet Location
|
|
Asset/(Liability)
|
|
Mortgage loan interest rate lock commitments
|
|
$
|
20,552
|
|
Other assets
|
|
$
|
345
|
|
MBS forward sales commitments
|
|
|
11,750
|
|
Other liabilities
|
|
|
(121
|
)
|
Total derivative financial instruments
|
|
$
|
32,302
|
|
|
|
$
|
224
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
|
|
Balance Sheet Location
|
|
Asset/(Liability)
|
|
Mortgage loan interest rate lock commitments
|
|
$
|
15,430
|
|
Other assets
|
|
$
|
196
|
|
MBS forward sales commitments
|
|
|
10,750
|
|
Other liabilities
|
|
|
(28
|
)
|
Total derivative financial instruments
|
|
$
|
26,180
|
|
|
|
$
|
168
|
|
NOTE 13 – Fair Value Accounting
FASB ASC 820, “Fair Value Measurement and Disclosures Topic,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted market price in active markets
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market.
Level 2 – Significant other observable inputs
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.
Level 3 – Significant unobservable inputs
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data.
Fair Value of Financial Instruments
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.
88
Table of Contents
The following is a description of valuation methodologies used to estimate fair value for assets recorded at fair value. Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, other investments, federal funds purchased, and securities sold under agreement to repurchase.
Investment Securities
Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Other Investments, such as Federal Reserve Bank and FHLB stock, approximates fair value based on their redemption provisions.
Mortgage Loans Held for Sale
Loans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be 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 agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” 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 considers the impaired loan as nonrecurring Level 2. The Company’s current loan and appraisal policies require the Company to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation. 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 considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimated using the present value of expected future cash flows to be realized on the loan, which is also considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation.
Other Real Estate Owned
OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. 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 considers the OREO as nonrecurring Level 3.
Derivative Financial Instruments
The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and an estimate of the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expenses (Level 2). The Company estimates the fair value of forward sales commitments based on quoted MBS prices (Level 2).
89
Table of Contents
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
US government agencies
|
|
$
|
-
|
|
8,782
|
|
-
|
|
8,782
|
SBA securities
|
|
|
-
|
|
3,525
|
|
-
|
|
3,525
|
State and political subdivisions
|
|
|
-
|
|
8,356
|
|
-
|
|
8,356
|
Asset-backed securities
|
|
|
-
|
|
9,558
|
|
-
|
|
9,558
|
Mortgage-backed securities
|
|
|
-
|
|
44,684
|
|
-
|
|
44,684
|
Mortgage loans held for sale
|
|
|
-
|
|
9,241
|
|
-
|
|
9,241
|
Mortgage loan interest rate lock commitments
|
|
|
-
|
|
345
|
|
-
|
|
345
|
Total assets measured at fair value on a recurring basis
|
|
$
|
-
|
|
84,491
|
|
-
|
|
84,491
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
MBS forward sales commitments
|
|
$
|
-
|
|
121
|
|
-
|
|
121
|
Total liabilities measured at fair value on a recurring basis
|
|
$
|
-
|
|
121
|
|
-
|
|
121
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
US government agencies
|
|
$
|
-
|
|
8,653
|
|
-
|
|
8,653
|
SBA securities
|
|
|
-
|
|
4,063
|
|
-
|
|
4,063
|
State and political subdivisions
|
|
|
-
|
|
11,396
|
|
-
|
|
11,396
|
Mortgage-backed securities
|
|
|
-
|
|
43,491
|
|
-
|
|
43,491
|
Mortgage loans held for sale
|
|
|
-
|
|
11,790
|
|
-
|
|
11,790
|
Mortgage loan interest rate lock commitments
|
|
|
-
|
|
196
|
|
-
|
|
196
|
Total assets measured at fair value on a recurring basis
|
|
$
|
-
|
|
79,589
|
|
-
|
|
79,589
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
MBS forward sales commitments
|
|
$
|
-
|
|
28
|
|
-
|
|
28
|
Total liabilities measured at fair value on a recurring basis
|
|
$
|
-
|
|
28
|
|
-
|
|
28
|
90
Table of Contents
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of December 31, 2018. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs. The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis.
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
2,190
|
|
8,368
|
|
10,558
|
Total assets measured at fair value on a nonrecurring basis
|
|
$
|
-
|
|
2,190
|
|
8,368
|
|
10,558
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
2,685
|
|
6,084
|
|
8,769
|
Other real estate owned
|
|
|
-
|
|
148
|
|
94
|
|
242
|
Total assets measured at fair value on a nonrecurring basis
|
|
$
|
-
|
|
2,833
|
|
6,178
|
|
9,011
|
The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis.
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
Range of Inputs
|
Impaired loans
|
|
Appraised Value/
Discounted Cash Flows
|
|
Discounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal
|
|
0-25%
|
Other real estate owned
|
|
Appraised Value/
Comparable Sales
|
|
Discounts to appraisals for estimated holding or selling costs
|
|
0-25%
|
Fair Value of Financial Instruments
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.
The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments.
Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, other investments, federal funds purchased, and securities sold under agreement to repurchase.
Loans
– The valuation of loans held for investment was impacted by the adoption of ASU 2016-01 during 2018. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of December 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 classification.
Deposits –
Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
FHLB Advances and Other Borrowings –
Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
91
Table of Contents
Junior subordinated debentures
– Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.
The estimated fair values of the Company’s financial instruments at December 31, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
|
|
Carrying
|
|
Fair
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Other investments, at cost
|
|
$
|
4,121
|
|
4,121
|
|
-
|
|
-
|
|
4,121
|
Loans
1
|
|
|
1,648,998
|
|
1,618,618
|
|
-
|
|
-
|
|
1,618,618
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,648,136
|
|
1,515,123
|
|
-
|
|
1,515,123
|
|
-
|
FHLB and other borrowings
|
|
|
50,000
|
|
50,147
|
|
-
|
|
50,147
|
|
-
|
Junior subordinated debentures
|
|
|
13,403
|
|
14,807
|
|
-
|
|
14,807
|
|
-
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(dollars in thousands)
|
|
|
Carrying
|
|
Fair
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Other investments, at cost
|
|
$
|
4,462
|
|
4,462
|
|
-
|
|
-
|
|
4,462
|
Loans
1
|
|
|
1,371,547
|
|
1,372,684
|
|
-
|
|
2,685
|
|
1,369,999
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,381,123
|
|
1,269,462
|
|
-
|
|
1,269,462
|
|
-
|
FHLB and other borrowings
|
|
|
67,200
|
|
67,890
|
|
-
|
|
67,890
|
|
-
|
Junior subordinated debentures
|
|
|
13,403
|
|
13,166
|
|
-
|
|
13,166
|
|
-
|
1
|
Carrying amount is net of the allowance for loan losses and previously presented impaired loans. In accordance with the prospective adoption of ASU No. 2016-01, the fair value of loans as of December 31, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.
|
NOTE 14 – Earnings Per Common Share
The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2018, 2017 and 2016. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options and warrants that are outstanding. The assumed conversion of stock options and warrants can create a difference between basic and dilutive net income per common share.
At December 31, 2018, 2017 and 2016, options totaling 195,425, 107,015, and 108,315, respectively, were anti-dilutive in the calculation of earnings per share as their exercise price exceeded the fair market value. These options were therefore excluded from the diluted earnings per share calculation.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(dollars in thousands, except share data)
|
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,289
|
|
13,045
|
|
13,036
|
Net income available to common shareholders
|
|
$
|
22,289
|
|
13,045
|
|
13,036
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
7,384,200
|
|
7,005,703
|
|
6,318,322
|
Common stock equivalents
|
|
|
353,295
|
|
387,674
|
|
402,566
|
Weighted-average common shares outstanding - diluted
|
|
|
7,737,495
|
|
7,393,377
|
|
6,720,888
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.02
|
|
1.86
|
|
2.06
|
Diluted
|
|
$
|
2.88
|
|
1.76
|
|
1.94
|
92
Table of Contents
NOTE 15 – Commitments and Contingencies
The Company has entered into a three year employment agreement with its chief executive officer and a two year employment agreement with its president and with 12 executive vice presidents. These agreements also include a) an incentive program, b) a stock option plan, c) a one-year non-compete agreement upon termination and a severance payment equal to one year of compensation. The total estimated aggregate salary commitment is approximately $3.1 million.
The Company has an agreement with a data processor which expires in 2023 to provide certain item processing, electronic banking, and general ledger processing services. Components of this contract vary based on transaction and account volume, including a base monthly charge of approximately $102,000 and certain termination fees.
The Company has occupied land and banking office space under leases expiring on various dates through 2028. The estimated future minimum lease payments under these noncancelable operating leases are summarized as follows:
|
|
(dollars in thousands)
|
For the years ended December 31,
|
2019
|
$
|
2,048
|
2020
|
|
2,129
|
2021
|
|
2,181
|
2022
|
|
1,734
|
2023
|
|
1,278
|
Thereafter
|
|
6,378
|
|
$
|
15,748
|
Lease expense for the years ended December 31, 2018, 2017, and 2016, totaled $1.8 million, $1.3 million, and $1.2 million, respectively.
The Company may be subject to litigation and claims in the normal course of business. As of December 31, 2018, management believes there is no material litigation pending.
NOTE 16 – Income Taxes
The components of income tax expense were as follows:
|
|
|
|
|
For the years ended December 31,
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
2016
|
Current income taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,536
|
|
|
7,139
|
|
6,429
|
State
|
|
|
990
|
|
|
573
|
|
548
|
Total current tax expense
|
|
|
6,526
|
|
|
7,712
|
|
6,977
|
Deferred income tax expense (benefit)
|
|
|
(125
|
)
|
|
2,904
|
|
356
|
Income tax expense
|
|
$
|
6,401
|
|
|
10,616
|
|
7,333
|
The following is a summary of the items that caused recorded income taxes to differ from taxes computed using the statutory tax rate:
|
|
|
|
|
|
For the years ended December 31,
|
|
(dollars in thousands)
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Tax expense at statutory rate
|
|
$
|
6,025
|
|
|
8,281
|
|
|
7,129
|
|
Effect of state income taxes, net of federal benefit
|
|
|
782
|
|
|
372
|
|
|
356
|
|
Exempt income
|
|
|
(34
|
)
|
|
(146
|
)
|
|
(162
|
)
|
Effect of change in federal tax rate
|
|
|
-
|
|
|
2,441
|
|
|
-
|
|
Effect of stock-based compensation
|
|
|
(248
|
)
|
|
(2
|
)
|
|
160
|
|
Other
|
|
|
(124
|
)
|
|
(330
|
)
|
|
(150
|
)
|
Income tax expense
|
|
$
|
6,401
|
|
|
10,616
|
|
|
7,333
|
|
Income tax expense for the year ended December 31, 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Act, which was enacted on December 22, 2017. As a result of the new law, we recognized a provisional net tax expense totaling $2.4 million, as noted in the table above. During the fourth quarter of 2018, the Company completed its accounting for the income tax effects related to the Tax Act which resulted in no change to the provisional adjustment recorded in income tax expense in 2017.
93
Table of Contents
As a result of the Tax Act, deferred taxes as of December 31, 2018 and 2017 are based on the newly enacted U.S. statutory federal income tax rate of 21%, while deferred taxes as of December 31, 2016 are based on the previous federal income tax rate of 35%. The components of the deferred tax assets and liabilities are as follows:
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
3,310
|
|
3,260
|
Unrealized loss on securities available for sale
|
|
|
244
|
|
121
|
Net deferred loan fees
|
|
|
592
|
|
480
|
Deferred compensation
|
|
|
1,280
|
|
1,124
|
Sale of real estate owned
|
|
|
128
|
|
104
|
Accrued expenses
|
|
|
-
|
|
16
|
Other
|
|
|
130
|
|
136
|
|
|
|
5,684
|
|
5,241
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
|
|
1,433
|
|
1,208
|
Hedging transactions
|
|
|
112
|
|
88
|
Prepaid expenses
|
|
|
107
|
|
99
|
Other
|
|
|
12
|
|
64
|
|
|
|
1,664
|
|
1,459
|
Net deferred tax asset
|
|
$
|
4,020
|
|
3,782
|
The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions.
NOTE 17 – Related Party Transactions
Certain directors, executive officers, and companies with which they are affiliated, are clients of and have banking transactions with the Company in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the lender.
A summary of loan transactions with directors and executive officers, including their affiliates is as follows:
|
|
|
|
|
|
For the years ended December 31,
|
|
(dollars in thousands)
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of year
|
|
$
|
15,276
|
|
|
14,825
|
|
New loans
|
|
|
5,686
|
|
|
6,843
|
|
Less loan payments
|
|
|
(6,993
|
)
|
|
(6,392
|
)
|
Balance, end of year
|
|
$
|
13,969
|
|
|
15,276
|
|
Deposits by executive officers and directors and their related interests at December 31, 2018 and 2017, were $2.7 million and $3.5 million, respectively.
The Company has a land lease with a director on the property for a branch office, with monthly payments of $5,388. In addition, the Company periodically enters into various consulting agreements with the director for development, administration and advisory services related to the purchase of property and construction of current and future branch office sites. Also, the Company contracts with the director on an annual basis to provide property management services for its four offices in the Greenville market. The Company paid the director approximately $21,000, $38,000, and $29,000 for these services during 2018, 2017, and 2016, respectively.
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Table of Contents
The Company also utilizes employment recruiting services from a vendor for which one of the Company’s directors is an owner and serves as the chairman of the board. The Company paid approximately $38,000 to the vendor for the year ended December 31, 2018.
The Company is of the opinion that the lease payments, consulting fees, and signage costs represent market costs that could have been obtained in similar “arms length” transactions.
NOTE 18 – Financial Instruments With Off-Balance Sheet Risk
In the ordinary course of business, and to meet the financing needs of its clients, the Company is a party to various financial instruments with off-balance sheet risk. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The contract amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At December 31, 2018, unfunded commitments to extend credit were approximately $399.4 million, of which $130.5 million is at fixed rates and $269.0 million is at variable rates. At December 31, 2017, unfunded commitments to extend credit were approximately $345.9 million, of which $96.4 million is at fixed rates and $249.5 million is at variable rates. The Company evaluates each client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
At December 31, 2018 and 2017, there was a $10.0 million and $6.3 million commitment, respectively, under letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. The fair value of off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The total fair value of such instruments is not material.
NOTE 19 – Employee Benefit Plan
On January 1, 2000, the Company adopted the Southern First Bancshares, Inc. Profit Sharing and 401(k) Plan for the benefit of all eligible employees. The Company contributes to the Plan annually upon approval by the Board of Directors. Contributions made to the Plan for the years ended December 31, 2018, 2017, and 2016 amounted to $587,000, $476,000, and $356,000, respectively.
The Company also provides a nonqualified deferred compensation plan for 20 executive officers in the form of a Supplemental Executive Retirement Plan (“SERP”). The SERP provides retirement income for these officers. As of December 31, 2018 and 2017, the Company had an accrued benefit obligation of $6.1 million and $5.4 million, respectively. The Company incurred expenses related to this plan of $940,000, $792,000, and $782,000 in 2018, 2017, and 2016, respectively.
NOTE 20 – Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees and non-employee directors. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option and restricted stock awards.
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Table of Contents
The Company’s stock incentive programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.
Stock-based compensation expense was recorded as follows:
|
|
|
|
|
For the yea
rs ended December 31,
|
(dollars in thousands)
|
|
|
2018
|
|
2017
|
|
2016
|
Stock option expense
|
|
$
|
1,183
|
|
959
|
|
746
|
Restricted stock grant expense
|
|
|
319
|
|
299
|
|
286
|
Total stock-based compensation expense
|
|
$
|
1,502
|
|
1,258
|
|
1,032
|
Stock Options
On May 18, 2010, the Company adopted the 2010 Incentive Plan, making available for issuance 366,025 stock options (adjusted for the 10% stock dividends in 2013, 2012, and 2011). The options may be exercised at an exercise price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date. On May 20, 2014, the Company amended the 2010 Incentive Plan to add an additional 200,000 shares of common stock to be issuable as stock options, for a total of 566,025 shares. As of December 31, 2018, there were 14,375 options available for grant under the 2010 Incentive Plan.
On May 17, 2016, the Company adopted the 2016 Equity Incentive Plan, making available for issuance 400,000 stock options. The options may be exercised at an exercise price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date. As of December 31, 2018, there were 255,715 options available for grant under the 2016 Equity Incentive Plan.
A summary of the status of the stock option plan and changes for the period is presented below:
|
|
|
|
|
F
or the years ended December 31,
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
average
|
|
Remaining
|
|
|
|
|
average
|
|
Remaining
|
|
|
|
|
average
|
|
Remaining
|
|
|
|
|
|
exercise
|
|
Contractual
|
|
|
|
|
exercise
|
|
Contractual
|
|
|
|
|
exercise
|
|
Contractual
|
|
|
Shares
|
|
|
price
|
|
Life
|
|
Shares
|
|
|
price
|
|
Life
|
|
Shares
|
|
|
price
|
|
Life
|
Outstanding at beginning of year
|
|
662,841
|
|
|
$
|
15.70
|
|
|
|
642,203
|
|
|
$
|
11.77
|
|
|
|
693,954
|
|
|
$
|
8.94
|
|
|
Granted
|
|
93,200
|
|
|
|
43.32
|
|
|
|
110,950
|
|
|
|
35.34
|
|
|
|
109,500
|
|
|
|
23.65
|
|
|
Exercised
|
|
(105,630
|
)
|
|
|
8.51
|
|
|
|
(74,437
|
)
|
|
|
9.48
|
|
|
|
(152,751
|
)
|
|
|
7.19
|
|
|
Forfeited or expired
|
|
(3,600
|
)
|
|
|
40.03
|
|
|
|
(15,875
|
)
|
|
|
23.49
|
|
|
|
(8,500
|
)
|
|
|
15.69
|
|
|
Outstanding at end of year
|
|
646,811
|
|
|
$
|
20.71
|
|
5.6 years
|
|
662,841
|
|
|
$
|
15.70
|
|
5.6 years
|
|
642,203
|
|
|
$
|
11.77
|
|
5.9 years
|
Options exercisable at year-end
|
|
404,851
|
|
|
$
|
12.58
|
|
4.0 years
|
|
419,766
|
|
|
$
|
9.20
|
|
4.1 years
|
|
399,256
|
|
|
$
|
7.62
|
|
4.4 years
|
Weighted average fair value of options granted during the year
|
|
|
|
|
$
|
16.83
|
|
|
|
|
|
|
$
|
14.14
|
|
|
|
|
|
|
$
|
10.96
|
|
|
Shares available for grant
|
|
270,090
|
|
|
|
|
|
|
|
359,690
|
|
|
|
|
|
|
|
454,765
|
|
|
|
|
|
|
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) of 646,811 and 662,841 stock options outstanding at December 31, 2018 and 2017 was $8.7 million and $16.9 million, respectively. The aggregate intrinsic value of 404,851 and 419,766 stock options exercisable at December 31, 2018 and 2017 was $8.0 million and $13.5 million, respectively.
The fair value of the option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Dividend yield
|
|
-
|
|
-
|
|
-
|
Expected life
|
|
7 years
|
|
7 years
|
|
7 years
|
Expected volatility
|
|
32.08%
|
|
34.63%
|
|
43.22%
|
Risk-free interest rate
|
|
2.50%
|
|
2.04%
|
|
1.65%
|
96
Table of Contents
At December 31, 2018, there was $2.3 million of total unrecognized compensation cost related to nonvested stock option grants. The cost is expected to be recognized over a weighted-average period of 2.5 years. The fair value of stock option grants that vested during 2018, 2017, and 2016 was $973,000, $775,000 and $593,000, respectively.
Restricted Stock Grants
On May 18, 2010, the Company adopted the 2010 Incentive Plan which included a provision for the issuance of 79,860 shares of restricted stock (adjusted for all subsequent stock dividends). On May 19, 2015, the Company amended the 2010 Incentive Plan to add an additional 25,000 shares of common stock to be issuable as restricted stock grants, for a total of 104,860 shares. As of December 31, 2018, all shares of restricted stock, authorized under the plan had been granted.
On May 17, 2016, the Company adopted the 2016 Equity Incentive Plan which included a provision for the issuance of 50,000 shares of common stock to be issuable as restricted stock grants. As of December 31, 2018, 46,424 of restricted stock were available for grant.
Shares of restricted stock granted to employees under the stock plans are subject to restrictions as to continuous employment for a specified time period following the date of grant. During this period, the holder is entitled to full voting rights and dividends.
A summary of the status of the Company’s nonvested restricted stock and changes for the years ended December 31, 2018, 2017, and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Restricted
|
|
|
Grant-Date
|
|
Restricted
|
|
|
Grant-Date
|
|
Restricted
|
|
|
Grant-Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Shares
|
|
|
Fair Value
|
|
Shares
|
|
|
Fair Value
|
Nonvested at beginning of year
|
|
25,000
|
|
|
$
|
26.43
|
|
36,125
|
|
|
$
|
20.13
|
|
33,749
|
|
|
$
|
12.92
|
Granted
|
|
13,000
|
|
|
|
42.87
|
|
6,500
|
|
|
|
35.14
|
|
22,000
|
|
|
|
23.91
|
Vested
|
|
(8,375
|
)
|
|
|
25.17
|
|
(17,625
|
)
|
|
|
16.73
|
|
(17,749
|
)
|
|
|
11.68
|
Forfeited
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
(1,875
|
)
|
|
|
14.72
|
Nonvested at end of year
|
|
29,625
|
|
|
$
|
34.00
|
|
25,000
|
|
|
$
|
26.43
|
|
36,125
|
|
|
$
|
20.13
|
At December 31, 2018, there was $741,000 of total unrecognized compensation cost related to nonvested restricted stock grants. The cost is expected to be recognized over a weighted-average period of 2.6 years.
NOTE 21 – Dividends
The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.
Also, the payment of cash dividends on the Company's common stock by the Company in the future will be subject to certain other legal and regulatory limitations (including the requirement that the Company’s capital be maintained at certain minimum levels) and will be subject to ongoing review by banking regulators. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.
NOTE 22 – Regulatory Matters
At both the Company and Bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. The capital rules require banks and bank holding companies to maintain a minimum total risked-based capital ratio of at least 8%, a total Tier 1 capital ratio of at least 6%, a minimum common equity Tier 1 capital ratio of at least 4.5%, and a leverage ratio of at least 4%. Bank holding companies and banks are also required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% to avoid limitations on capital distributions and discretionary executive compensation payments. The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets.
97
Table of Contents
To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of December 31, 2018, our capital ratios exceed these ratios and we remain “well capitalized.”
The following table summarizes the capital amounts and ratios of the Bank and the Company and the regulatory minimum requirements at December 31, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized
|
|
|
|
|
|
|
|
For capital
|
|
under prompt
|
|
|
|
|
|
|
|
adequacy purposes
|
|
corrective action
|
|
|
|
|
|
Actual
|
|
minimum
|
|
provisions minimum
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
$
|
198,195
|
|
12.16%
|
|
$
|
130,368
|
|
8.00%
|
|
$
|
162,960
|
|
10.00%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
182,433
|
|
11.20%
|
|
|
97,776
|
|
6.00%
|
|
|
130,368
|
|
8.00%
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
182,433
|
|
11.20%
|
|
|
73,332
|
|
4.50%
|
|
|
105,924
|
|
6.50%
|
Tier 1 Capital (to average assets)
|
|
|
182,433
|
|
9.84%
|
|
|
74,126
|
|
4.00%
|
|
|
92,658
|
|
5.00%
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
|
203,595
|
|
12.49%
|
|
|
130,368
|
|
8.00%
|
|
|
n/a
|
|
n/a
|
Tier 1 Capital (to risk weighted assets)
|
|
|
187,833
|
|
11.53%
|
|
|
97,776
|
|
6.00%
|
|
|
n/a
|
|
n/a
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
174,833
|
|
10.73%
|
|
|
73,332
|
|
4.50%
|
|
|
n/a
|
|
n/a
|
Tier 1 Capital (to average assets)
|
|
|
187,833
|
|
10.14%
|
|
|
74,126
|
|
4.00%
|
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized
|
|
|
|
|
|
|
|
For capital
|
|
under prompt
|
|
|
|
|
|
|
|
adequacy purposes
|
|
corrective action
|
|
|
|
|
|
Actual
|
|
minimum
|
|
provisions minimum
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
$
|
175,016
|
|
12.99%
|
|
$
|
107,749
|
|
8.00%
|
|
$
|
134,686
|
|
10.00%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
159,493
|
|
11.84%
|
|
|
80,812
|
|
6.00%
|
|
|
107,749
|
|
8.00%
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
159,493
|
|
11.84%
|
|
|
60,609
|
|
4.50%
|
|
|
87,546
|
|
6.50%
|
Tier 1 Capital (to average assets)
|
|
|
159,493
|
|
10.04%
|
|
|
63,573
|
|
4.00%
|
|
|
79,466
|
|
5.00%
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
|
178,665
|
|
13.27%
|
|
|
107,749
|
|
8.00%
|
|
|
n/a
|
|
n/a
|
Tier 1 Capital (to risk weighted assets)
|
|
|
163,142
|
|
12.11%
|
|
|
80,812
|
|
6.00%
|
|
|
n/a
|
|
n/a
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
150,142
|
|
11.15%
|
|
|
60,609
|
|
4.50%
|
|
|
n/a
|
|
n/a
|
Tier 1 Capital (to average assets)
|
|
|
163,142
|
|
10.26%
|
|
|
63,573
|
|
4.00%
|
|
|
n/a
|
|
n/a
|
NOTE 23 – Reportable Segments
The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate. The following schedule presents financial information for each reportable segment.
98
Table of Contents
|
|
|
Year ended December 31, 2018
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
and Retail
|
|
Mortgage
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Banking
|
|
Banking
|
|
Corporate
|
|
|
Eliminations
|
|
|
Consolidated
|
Interest income
|
|
$
|
76,282
|
|
375
|
|
9
|
|
|
(9
|
)
|
|
76,657
|
Interest expense
|
|
|
15,922
|
|
-
|
|
592
|
|
|
(9
|
)
|
|
16,505
|
Net interest income (loss)
|
|
|
60,360
|
|
375
|
|
(583
|
)
|
|
-
|
|
|
60,152
|
Provision for loan losses
|
|
|
1,900
|
|
-
|
|
-
|
|
|
-
|
|
|
1,900
|
Noninterest income
|
|
|
4,657
|
|
5,544
|
|
-
|
|
|
-
|
|
|
10,201
|
Noninterest expense
|
|
|
35,371
|
|
4,152
|
|
240
|
|
|
-
|
|
|
39,763
|
Net income (loss) before taxes
|
|
|
27,746
|
|
1,767
|
|
(823
|
)
|
|
-
|
|
|
28,690
|
Income tax provision (benefit)
|
|
|
6,185
|
|
389
|
|
(173
|
)
|
|
-
|
|
|
6,401
|
Net income (loss)
|
|
$
|
21,561
|
|
1,378
|
|
(650
|
)
|
|
-
|
|
|
22,289
|
Total assets
|
|
$
|
1,905,474
|
|
8,602
|
|
187,327
|
|
|
(200,789
|
)
|
|
1,900,614
|
|
|
|
Year ended December 31, 2017
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
and Retail
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
Banking
|
|
Corporate
|
|
|
Eliminations
|
|
|
Consolidated
|
Interest income
|
|
$
|
60,895
|
|
314
|
|
11
|
|
|
(11
|
)
|
|
61,209
|
Interest expense
|
|
|
9,830
|
|
-
|
|
514
|
|
|
(11
|
)
|
|
10,333
|
Net interest income (loss)
|
|
|
51,065
|
|
314
|
|
(503
|
)
|
|
-
|
|
|
50,876
|
Provision for loan losses
|
|
|
2,000
|
|
-
|
|
-
|
|
|
-
|
|
|
2,000
|
Noninterest income
|
|
|
4,185
|
|
5,152
|
|
-
|
|
|
-
|
|
|
9,337
|
Noninterest expense
|
|
|
30,568
|
|
3,738
|
|
246
|
|
|
-
|
|
|
34,552
|
Net income (loss) before taxes
|
|
|
22,682
|
|
1,728
|
|
(749
|
)
|
|
-
|
|
|
23,661
|
Income tax expense (benefit)
|
|
|
10,239
|
|
639
|
|
(262
|
)
|
|
-
|
|
|
10,616
|
Net income (loss)
|
|
$
|
12,443
|
|
1,089
|
|
(487
|
)
|
|
-
|
|
|
13,045
|
Total assets
|
|
$
|
1,615,960
|
|
8,230
|
|
163,095
|
|
|
(162,660
|
)
|
|
1,624,625
|
Commercial and retail banking.
The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.
Mortgage banking.
The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors.
Corporate.
Corporate is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt.
NOTE 24 – Parent Company Financial Information
Following is condensed financial information of Southern First Bancshares, Inc. (parent company only):
Condensed Balance Sheets
|
|
|
|
|
December 31,
|
(dollars in thousands)
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,389
|
|
3,623
|
Investment in subsidiaries
|
|
|
181,919
|
|
159,440
|
Other assets
|
|
|
19
|
|
32
|
Total assets
|
|
$
|
187,327
|
|
163,095
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
8
|
|
6
|
Junior subordinated debentures
|
|
|
13,403
|
|
13,403
|
Shareholders’ equity
|
|
|
173,916
|
|
149,686
|
Total liabilities and shareholders’ equity
|
|
$
|
187,327
|
|
163,095
|
99
Table of Contents
Condensed Statements of Income
|
|
|
|
|
|
For the years ended December 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
9
|
|
|
11
|
|
|
2
|
|
Total revenue
|
|
|
9
|
|
|
11
|
|
|
2
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
592
|
|
|
514
|
|
|
402
|
|
Other expenses
|
|
|
240
|
|
|
246
|
|
|
243
|
|
Total expenses
|
|
|
832
|
|
|
760
|
|
|
645
|
|
Income tax benefit
|
|
|
173
|
|
|
262
|
|
|
172
|
|
Loss before equity in undistributed net income of subsidiaries
|
|
|
(650
|
)
|
|
(487
|
)
|
|
(471
|
)
|
Equity in undistributed net income of subsidiaries
|
|
|
22,939
|
|
|
13,532
|
|
|
13,507
|
|
Net income
|
|
$
|
22,289
|
|
|
13,045
|
|
|
13,036
|
|
Condensed Statements of Cash Flows
|
|
|
|
|
|
For the years ended December 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,289
|
|
|
13,045
|
|
|
13,036
|
|
Adjustments to reconcile net income to cash provided by (used for) operating activities
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiaries
|
|
|
(22,939
|
)
|
|
(13,532
|
)
|
|
(13,507
|
)
|
Compensation expense related to stock options and restricted stock grants
|
|
|
1,502
|
|
|
1,258
|
|
|
1,998
|
|
(Increase) decrease in other assets
|
|
|
12
|
|
|
2,772
|
|
|
(449
|
)
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
2
|
|
|
2
|
|
|
(1
|
)
|
Net cash provided by operating activities
|
|
|
866
|
|
|
3,545
|
|
|
1,077
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries, net
|
|
|
-
|
|
|
(27,334
|
)
|
|
(668
|
)
|
Net cash used for investing activities
|
|
|
-
|
|
|
(27,334
|
)
|
|
(668
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
-
|
|
|
24,758
|
|
|
-
|
|
Proceeds from the exercise of stock options and warrants
|
|
|
900
|
|
|
705
|
|
|
1,098
|
|
Net cash provided by financing activities
|
|
|
900
|
|
|
25,463
|
|
|
1,098
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,766
|
|
|
1,674
|
|
|
1,507
|
|
Cash and cash equivalents, beginning of year
|
|
|
3,623
|
|
|
1,949
|
|
|
442
|
|
Cash and cash equivalents, end of year
|
|
$
|
5,389
|
|
|
3,623
|
|
|
1,949
|
|
100
Table of Contents
NOTE 25 – Selected Condensed Quarterly Financial Data (Unaudited)
|
|
2018
|
|
|
For the quarters ended
|
(dollars in thousands, except share data)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Interest income
|
|
$
|
17,178
|
|
18,535
|
|
19,865
|
|
21,079
|
Interest expense
|
|
|
3,136
|
|
3,923
|
|
4,364
|
|
5,082
|
Net interest income
|
|
|
14,042
|
|
14,612
|
|
15,501
|
|
15,997
|
Provision for loan losses
|
|
|
500
|
|
400
|
|
400
|
|
600
|
Noninterest income
|
|
|
2,420
|
|
2,771
|
|
2,533
|
|
2,477
|
Noninterest expenses
|
|
|
9,205
|
|
9,979
|
|
10,188
|
|
10,391
|
Income before income tax expense
|
|
|
6,757
|
|
7,004
|
|
7,446
|
|
7,483
|
Income tax expense
|
|
|
1,543
|
|
1,494
|
|
1,664
|
|
1,700
|
Net income available to common shareholders
|
|
$
|
5,214
|
|
5,510
|
|
5,782
|
|
5,783
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.71
|
|
0.75
|
|
0.78
|
|
0.78
|
Diluted
|
|
$
|
0.67
|
|
0.71
|
|
0.75
|
|
0.75
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,336,839
|
|
7,370,709
|
|
7,400,174
|
|
7,427,902
|
Diluted
|
|
|
7,726,885
|
|
7,751,146
|
|
7,746,205
|
|
7,725,661
|
|
|
|
2017
|
|
|
For the quarters ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Interest income
|
|
$
|
13,959
|
|
14,931
|
|
15,955
|
|
16,364
|
Interest expense
|
|
|
2,352
|
|
2,579
|
|
2,646
|
|
2,756
|
Net interest income
|
|
|
11,607
|
|
12,352
|
|
13,309
|
|
13,608
|
Provision for loan losses
|
|
|
500
|
|
500
|
|
500
|
|
500
|
Noninterest income
|
|
|
2,051
|
|
2,563
|
|
2,542
|
|
2,181
|
Noninterest expenses
|
|
|
8,360
|
|
8,763
|
|
8,806
|
|
8,623
|
Income before income tax expense
|
|
|
4,798
|
|
5,652
|
|
6,545
|
|
6,666
|
Income tax expense
|
|
|
1,687
|
|
2,048
|
|
2,295
|
|
4,586
|
Net income available to common shareholders
|
|
$
|
3,111
|
|
3,604
|
|
4,250
|
|
2,080
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
0.52
|
|
0.58
|
|
0.28
|
Diluted
|
|
$
|
0.45
|
|
0.49
|
|
0.55
|
|
0.27
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,437,231
|
|
6,986,948
|
|
7,281,594
|
|
7,304,478
|
Diluted
|
|
|
6,829,590
|
|
7,366,208
|
|
7,668,476
|
|
7,696,684
|