Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion reviews our results of operations for the three month period ended March 31, 2019 as compared to the three month period ended March 31, 2018 and assesses our financial condition as of March 31, 2019 as compared to December 31, 2018. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2018 included in our Annual Report on Form 10-K for that period. Results for the three month period ended March 31, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or any future period.
C
AUTIONARY
W
ARNING
R
EGARDING FORWARD
-
LOOKING STATEMENTS
This report, including information included or incorporated by reference in this report, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described under Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018, as well as the following:
●
|
Restrictions or conditions imposed by our regulators on our operations;
|
●
|
Increases in competitive pressure in the banking and financial services industries;
|
24
●
|
Changes in access to funding or increased regulatory requirements with regard to funding;
|
●
|
Changes in deposit flows;
|
●
|
Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
|
●
|
Credit losses due to loan concentration;
|
●
|
Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
|
●
|
Our ability to successfully execute our business strategy;
|
●
|
Our ability to attract and retain key personnel;
|
●
|
The success and costs of our expansion into the Greensboro, North Carolina, Raleigh, North Carolina and Atlanta, Georgia markets;
|
●
|
Changes in the interest rate environment which could reduce anticipated or actual margins;
|
●
|
Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
|
●
|
Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
|
●
|
Changes occurring in business conditions and inflation;
|
●
|
Increased cybersecurity risk, including potential business disruptions or financial losses;
|
●
|
Changes in technology;
|
●
|
The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
|
●
|
Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
|
●
|
Changes in monetary and tax policies;
|
●
|
The rate of delinquencies and amounts of loans charged-off;
|
●
|
The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
|
●
|
Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
|
●
|
Adverse changes in asset quality and resulting credit risk-related losses and expenses;
|
●
|
Changes in accounting policies and practices; and
|
●
|
Other risks and uncertainties detailed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, in Part II, Item 1A of this Quarterly Report on Form 10-Q, and from time to time in our other filings with the SEC.
|
If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and “Risk Factors” under Part II, Item 1A of this Quarterly Report on Form 10-Q. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements.
OVERVIEW
Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as "ClientFIRST."
25
At March 31, 2019, we had total assets of $2.01 billion, a 6.0% increase from total assets of $1.90 billion at December 31, 2018. The largest components of our total assets are loans, cash and cash equivalents and securities which were $1.73 billion, $117.3 million and $76.6 million, respectively, at March 31, 2019. Comparatively, our loans, cash and cash equivalents and securities totaled $1.68 billion, $72.9 million and $79.0 million, respectively, at December 31, 2018. Our liabilities and shareholders’ equity at March 31, 2019 totaled $1.83 billion and $181.2 million, respectively, compared to liabilities of $1.73 billion and shareholders’ equity of $173.9 million at December 31, 2018. The principal component of our liabilities is deposits which were $1.76 billion and $1.65 billion at March 31, 2019 and December 31, 2018, respectively.
Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.
Our net income to common shareholders was $6.0 million and $5.2 million for the three months ended March 31, 2019 and 2018, respectively, an increase of $795,000, or 15.3%. Diluted earnings per share (“EPS”) was $0.78 for the first quarter of 2019 as compared to $0.67 for the same period in 2018. The increase in net income resulted primarily from increases in net interest income and noninterest income, which were partially offset due to an increase in noninterest expense.
Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.
RESULTS OF OPERATIONS
Net Interest Income and Margin
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $15.8 million for the three month period ended March 31, 2019, a 12.7% increase over net interest income of $14.0 million for the same period in 2018. In addition, our average earning assets increased 16.1%, or $252.4 million, during the first quarter of 2019 compared to the first quarter of 2018, while our interest-bearing liabilities increased by $184.5 million, or 15.4%, during the same period. The increase in average earning assets was primarily related to an increase in average loans partially offset by a decrease in federal funds sold, while the increase in average interest-bearing liabilities was primarily a result of an increase in interest-bearing deposits.
We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three month periods ended March 31, 2019 and 2018. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.
26
The following table sets forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.
Average Balances, Income and Expenses, Yields and Rates
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
2018
|
(dollars in thousands)
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield/
Rate
(1)
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield/
Rate
(1)
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
30,656
|
|
$
|
174
|
|
2.30
|
%
|
|
$
|
61,743
|
|
$
|
247
|
|
1.62
|
%
|
Investment securities, taxable
|
|
|
71,876
|
|
|
508
|
|
2.87
|
%
|
|
|
58,029
|
|
|
312
|
|
2.18
|
%
|
Investment securities, nontaxable
(2)
|
|
|
5,427
|
|
|
53
|
|
3.98
|
%
|
|
|
7,046
|
|
|
73
|
|
4.19
|
%
|
Loans
(3)
|
|
|
1,715,570
|
|
|
20,889
|
|
4.94
|
%
|
|
|
1,444,343
|
|
|
16,563
|
|
4.65
|
%
|
Total interest-earning assets
|
|
|
1,823,529
|
|
|
21,624
|
|
4.81
|
%
|
|
|
1,571,161
|
|
|
17,195
|
|
4.44
|
%
|
Noninterest-earning assets
|
|
|
86,431
|
|
|
|
|
|
|
|
|
74,685
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,909,960
|
|
|
|
|
|
|
|
$
|
1,645,846
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
186,070
|
|
|
86
|
|
0.19
|
%
|
|
$
|
238,690
|
|
|
91
|
|
0.15
|
%
|
Savings & money market
|
|
|
780,115
|
|
|
3,300
|
|
1.72
|
%
|
|
|
595,374
|
|
|
1,577
|
|
1.07
|
%
|
Time deposits
|
|
|
371,694
|
|
|
1,989
|
|
2.17
|
%
|
|
|
315,344
|
|
|
1,070
|
|
1.38
|
%
|
Total interest-bearing deposits
|
|
|
1,337,879
|
|
|
5,375
|
|
1.63
|
%
|
|
|
1,149,408
|
|
|
2,738
|
|
0.97
|
%
|
FHLB advances and other borrowings
|
|
|
31,302
|
|
|
256
|
|
3.32
|
%
|
|
|
35,287
|
|
|
283
|
|
3.25
|
%
|
Junior subordinated debentures
|
|
|
13,403
|
|
|
163
|
|
4.93
|
%
|
|
|
13,403
|
|
|
115
|
|
3.48
|
%
|
Total interest-bearing liabilities
|
|
|
1,382,584
|
|
|
5,794
|
|
1.70
|
%
|
|
|
1,198,098
|
|
|
3,136
|
|
1.06
|
%
|
Noninterest-bearing liabilities
|
|
|
349,988
|
|
|
|
|
|
|
|
|
295,374
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
177,388
|
|
|
|
|
|
|
|
|
152,374
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,909,960
|
|
|
|
|
|
|
|
$
|
1,645,846
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
3.38
|
%
|
Net interest income (tax equivalent) / margin
|
|
|
|
|
$
|
15,830
|
|
3.52
|
%
|
|
|
|
|
$
|
14,059
|
|
3.63
|
%
|
Less: tax-equivalent adjustment
(2)
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
17
|
|
|
|
Net interest income
|
|
|
|
|
$
|
15,818
|
|
|
|
|
|
|
|
$
|
14,042
|
|
|
|
(1)
|
Annualized for the three month period.
|
(2)
|
The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
|
(3)
|
Includes mortgage loans held for sale.
|
Our net interest margin, on a tax-equivalent basis, was 3.52% for the three months ended March 31, 2019 compared to 3.63% for the first quarter of 2018. The 11 basis point decrease in net interest margin was driven by the increase in rate on our interest-bearing liabilities, partially offset by the increased rate on our interest-earning assets as compared to the prior year period. Our average interest-earning assets grew by $252.4 million during the first three months of 2019 as compared to the same period in 2018, while the average yield on these assets increased by 37 basis points. In addition, our average interest-bearing liabilities grew by $184.5 million during the 2019 period while the rate on these liabilities increased 64 basis points to 1.70% for the three months ended March 31, 2019.
The increase in average interest-earning assets for the three months ended March 31, 2019 as compared to the same period in 2018 primarily related to a $271.2 million increase in our average loan balances. The 37 basis point increase in yield on these assets was driven by a 29 basis point increase in our loan yield. The higher yield on our loan portfolio was due to loans being originated or renewed at market rates which are higher than those in the past.
27
In addition, the increase in our interest-bearing liabilities resulted primarily from a $188.5 million increase in our interest-bearing deposits at an average rate of 1.63%, a 66 basis point increase from the average rate in the first quarter of 2018. This increase was partially offset by a $4.0 million decrease in FHLB advances and other borrowings at an average rate of 3.32%, a seven basis point increase from the first quarter of 2018.
Our net interest spread was 3.11% for the three months ended March 31, 2019 compared to 3.38% for the same period in 2018. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 37 basis point increase in yield on our interest-earning assets and the 64 basis point increase in rate on our interest-bearing liabilities, resulted in a 27 basis point decrease in our net interest spread for the 2019 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods based on the competitive rate environment around our deposits.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2019 vs. 2018
|
|
March 31, 2018 vs. 2017
|
|
|
Increase (Decrease) Due to
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
(dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Volume
|
|
Total
|
|
Volume
|
|
Rate
|
|
Volume
|
|
Total
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,110
|
|
|
1,024
|
|
|
192
|
|
|
4,326
|
|
|
$
|
2,582
|
|
|
382
|
|
|
73
|
|
|
3,037
|
|
Investment securities
|
|
|
69
|
|
|
94
|
|
|
18
|
|
|
181
|
|
|
|
(25
|
)
|
|
18
|
|
|
(1
|
)
|
|
(8
|
)
|
Federal funds sold
|
|
|
(124
|
)
|
|
103
|
|
|
(52
|
)
|
|
(73
|
)
|
|
|
62
|
|
|
61
|
|
|
67
|
|
|
190
|
|
Total interest income
|
|
|
3,055
|
|
|
1,221
|
|
|
158
|
|
|
4,434
|
|
|
|
2,619
|
|
|
461
|
|
|
139
|
|
|
3,219
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
439
|
|
|
1,894
|
|
|
304
|
|
|
2,637
|
|
|
|
404
|
|
|
820
|
|
|
265
|
|
|
1,489
|
|
FHLB advances and other borrowings
|
|
|
(32
|
)
|
|
6
|
|
|
(1
|
)
|
|
(27
|
)
|
|
|
(714
|
)
|
|
(9
|
)
|
|
7
|
|
|
(716
|
)
|
Junior subordinated debt
|
|
|
-
|
|
|
48
|
|
|
-
|
|
|
48
|
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
11
|
|
Total interest expense
|
|
|
407
|
|
|
1,948
|
|
|
303
|
|
|
2,658
|
|
|
|
(310
|
)
|
|
822
|
|
|
272
|
|
|
784
|
|
Net interest income
|
|
$
|
2,648
|
|
|
(727
|
)
|
|
(145
|
)
|
|
1,776
|
|
|
$
|
2,929
|
|
|
(361
|
)
|
|
(133
|
)
|
|
2,435
|
|
Net interest income, the largest component of our income, was $15.8 million for the three months ended March 31, 2019 and $14.0 million for the three months ended March 31, 2018, a $1.8 million, or 12.7%, increase during the first quarter of 2019. The increase in net interest income is due to a $4.4 million increase in interest income, partially offset by a $2.7 million increase in interest expense. During the first quarter of 2019,
our average interest-earning assets increased $252.4 million as compared to the same period in 2018, resulting in $3.1 million of additional interest income, while higher rates on our interest-earning assets also increased interest income by $1.2 million from the prior year period. Overall, our average interest-bearing deposits increased by $188.5 million. While the growth in interest-bearing deposits resulted in additional interest expense, the reduction in FHLB advances and other borrowings partially offset the increase, resulting in a net increase in interest expense of $407,000. However, higher rates on our interest-bearing deposits, junior subordinated debt, as well as FHLB advances and other borrowings, resulted in an increase in interest expense of $1.9 million from the prior year period.
Provision for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion included in Footnote 4 – Loans and Allowance for Loan Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.
28
For the three months ended March 31, 2019, we incurred a noncash expense related to the provision for loan losses of $300,000, which resulted in an allowance for loan losses of $16.1 million, or 0.93% of gross loans. For the three months ended March 31, 2018, our provision for loan losses of $500,000 resulted in an allowance for loan losses of $15.9 million, or 1.09% of gross loans. During the past 12 months, our loan balances increased by $274.6 million, while the percentage of our nonperforming loans and classified loans have declined. Factors such as these are also considered in determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an adequate level.
Noninterest Income
The following table sets forth information related to our noninterest income.
|
|
|
Three months ended
|
|
March 31,
|
(dollars in thousands)
|
2019
|
|
2018
|
Mortgage banking income
|
$
|
1,857
|
|
1,328
|
Service fees on deposit accounts
|
|
265
|
|
257
|
ATM and debit card income
|
|
380
|
|
334
|
Income from bank owned life insurance
|
|
216
|
|
220
|
Other income
|
|
276
|
|
281
|
Total noninterest income
|
$
|
2,994
|
|
2,420
|
Noninterest income increased $574,000, or 23.7%, for the first quarter of 2019 as compared to the same period in 2018. The increase in total noninterest income during the 2019 period resulted primarily from the following:
●
|
Mortgage banking income increased by $529,000, or 39.8%, driven by higher mortgage origination volume during the first quarter of 2019 due in part to the favorable interest rate environment for mortgage loans.
|
●
|
ATM and debit card income increased by $46,000, or 13.8%, driven by an increase in transaction volume.
|
Noninterest expenses
The following table sets forth information related to our noninterest expenses.
|
|
|
Three months ended
|
|
March 31,
|
(dollars in thousands)
|
2019
|
|
2018
|
Compensation and benefits
|
$
|
6,783
|
|
5,843
|
Occupancy
|
|
1,339
|
|
1,137
|
Outside service and data processing costs
|
|
960
|
|
736
|
Insurance
|
|
318
|
|
313
|
Professional fees
|
|
439
|
|
476
|
Marketing
|
|
260
|
|
209
|
Other
|
|
549
|
|
491
|
Total noninterest expense
|
$
|
10,648
|
|
9,205
|
Noninterest expense was $10.6 million for the three months ended March 31, 2019, a $1.4 million, or 15.7%, increase from noninterest expense of $9.2 million for the three months ended March 31, 2018. The increase in noninterest expenses during the 2019 period was driven by the following:
●
|
Compensation and benefits expense increased $940,000, or 16.1%, relating primarily to increases in base compensation, incentive compensation and benefits expenses. Base compensation increased by $756,000 driven by the cost of 14 additional employees, five of which were hired in conjunction with the opening of our new office in Atlanta, Georgia; five of which were hired as additional team leaders or mortgage executives in our existing markets; and the remainder being hired to support loan, deposit and corporate growth. Incentive compensation increased by $90,000 and benefits expense increased by $97,000 during the 2019 period. The increase in incentive compensation related to the additional number of employees at March 31, 2019 while the increase in benefits expenses was driven by an increase in payroll taxes and partially offset by a decrease in group insurance costs for the 2019 period.
|
29
●
|
Occupancy expenses increased by $202,000, or 17.8%, primarily driven by our new office in Atlanta, Georgia as well as additional rent expense recognized due to the implementation of the new lease accounting standard.
|
●
|
Outside service and data processing fees increased by $224,000, or 30.4%, primarily due to increased electronic banking and software licensing costs.
|
Our efficiency ratio was 56.6% for the first quarter of 2019 compared to 55.9% for the same period in 2018. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The higher ratio during the 2019 period relates primarily to the increase in noninterest expenses as a percentage of net interest and noninterest income compared to the prior year.
We incurred income tax expense of $1.9 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively. Our effective tax rate was 23.6% and 22.8% for the three months ended March 31, 2019 and 2018, respectively. The higher tax rate for the 2019 period relates to the lesser impact of our tax exempt income on our taxable income.
Balance Sheet Review
Investment Securities
At March 31, 2019, the $76.6 million in our investment securities portfolio represented approximately 3.8% of our total assets.
Our available for sale investment portfolio included U.S. government agency securities, SBA securities, state and political subdivisions, and mortgage-backed securities with
a fair value of $73.3 million and an amortized cost of $73.8 million, resulting in an unrealized loss of $480,000. At December 31, 2018, the $79.0 million in our investment securities portfolio represented approximately 4.2% of our total assets. At December 31, 2018, we held investment securities available for sale with a fair value of $74.9 million and an amortized cost of $76.1 million for an unrealized loss of $1.2 million.
Loans
Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans for the three months ended March 31, 2019 and 2018 were $1.72 billion and $1.44 billion, respectively. Before the allowance for loan losses, total loans outstanding at March 31, 2019 and December 31, 2018 were $1.73 billion and $1.68 billion, respectively.
The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, 2019, our loan portfolio included $1.4 billion, or 82.4%, of real estate loans. As of December 31, 2018, real estate loans made up 82.3% of our loan portfolio and totaled $1.4 billion. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. We do not generally originate traditional long term residential mortgages to hold in our loan portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled $167.1 million as of March 31, 2019, of which approximately 60% were in a first lien position, while the remaining balance was second liens, compared to $165.9 million as of December 31, 2018, with approximately 56% in first lien positions and the remaining balance in second liens. The average loan had a balance of approximately $88,000 and a loan to value of 69% as of March 31, 2019, compared to an average loan balance of $88,000 and a loan to value of approximately 70% as of December 31, 2018. Further, 0.3% and 0.1% of our total home equity lines of credit were over 30 days past due as of March 31, 2019 and December 31, 2018, respectively.
30
Following is a summary of our loan composition at March 31, 2019 and December 31, 2018. During the first three months of 2019, our loan portfolio increased by $56.6 million, or 3.4%. Our commercial and consumer loan portfolios each experienced growth during the three months ended March 31, 2019 with a 3.9% increase in commercial loans and a 2.4% increase in consumer loans during the period. Of the $56.6 million in loan growth during the first three months of 2019, $47.8 million of the increase was in loans secured by real estate, $8.5 million in commercial business loans, and $348,000 in other consumer loans. Our consumer real estate portfolio includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $377,000, a term of eleven years, and an average rate of 4.52% as of March 31, 2019, compared to a principal balance of $377,000, a term of eleven years, and an average rate of 4.47% as of December 31, 2018.
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
(dollars in thousands)
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied RE
|
|
$
|
386,256
|
|
|
22.3
|
%
|
|
$
|
367,018
|
|
|
21.9
|
%
|
Non-owner occupied RE
|
|
|
423,953
|
|
|
24.4
|
%
|
|
|
404,296
|
|
|
24.1
|
%
|
Construction
|
|
|
80,561
|
|
|
4.7
|
%
|
|
|
84,411
|
|
|
5.0
|
%
|
Business
|
|
|
281,502
|
|
|
16.2
|
%
|
|
|
272,980
|
|
|
16.3
|
%
|
Total commercial loans
|
|
|
1,172,272
|
|
|
67.6
|
%
|
|
|
1,128,705
|
|
|
67.3
|
%
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
330,538
|
|
|
19.1
|
%
|
|
|
320,943
|
|
|
19.1
|
%
|
Home equity
|
|
|
167,146
|
|
|
9.6
|
%
|
|
|
165,937
|
|
|
9.9
|
%
|
Construction
|
|
|
39,838
|
|
|
2.3
|
%
|
|
|
37,925
|
|
|
2.3
|
%
|
Other
|
|
|
24,170
|
|
|
1.4
|
%
|
|
|
23,822
|
|
|
1.4
|
%
|
Total consumer loans
|
|
|
561,692
|
|
|
32.4
|
%
|
|
|
548,627
|
|
|
32.7
|
%
|
Total gross loans, net of deferred fees
|
|
|
1,733,964
|
|
|
100.0
|
%
|
|
|
1,677,332
|
|
|
100.0
|
%
|
Less—allowance for loan losses
|
|
|
(16,051
|
)
|
|
|
|
|
|
(15,762
|
)
|
|
|
|
Total loans, net
|
|
$
|
1,717,913
|
|
|
|
|
|
$
|
1,661,570
|
|
|
|
|
Nonperforming assets
Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. 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. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of March 31, 2019 and December 31, 2018, we had no loans 90 days past due and still accruing.
Following is a summary of our nonperforming assets, including nonaccruing TDRs.
|
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Commercial
|
|
$
|
475
|
|
291
|
Consumer
|
|
|
3,089
|
|
2,998
|
Nonaccruing troubled debt restructurings
|
|
|
2,485
|
|
2,541
|
Total nonaccrual loans
|
|
|
6,049
|
|
5,830
|
Other real estate owned
|
|
|
-
|
|
-
|
Total nonperforming assets
|
|
$
|
6,049
|
|
5,830
|
At March 31, 2019, nonperforming assets were $6.0 million, or 0.30% of total assets and 0.35% of gross loans. Comparatively, nonperforming assets were $5.8 million, or 0.31% of total assets and 0.35% of gross loans at December 31, 2018. Nonaccrual loans were $6.0 million at March 31, 2019, a slight increase from December 31, 2018. During the first three months of 2019, three loans were put on nonaccrual status and two nonaccrual loans were either paid off or returned to accrual status. The amount of foregone interest income on the nonaccrual loans in the first three months of 2019 and 2018 was approximately $20,000 and $72,000, respectively.
31
At March 31, 2019 and 2018, the allowance for loan losses represented 265.4% and 217.9% of the total amount of nonperforming loans, respectively. A significant portion, or approximately 84%, of nonperforming loans at March 31, 2019 was secured by real estate. Our nonperforming loans have been written down to approximately 92% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of $16.1 million as of March 31, 2019 to be adequate.
As a general practice, most of our loans are originated with relatively short maturities of less than 10 years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using the same credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonperforming after evaluating the loan’s collateral value and financial strength of its guarantors. Nonperforming loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we will seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, we will typically seek performance under the guarantee.
In addition, at March 31, 2019, 82.4% of our loans were collateralized by real estate and 80% of our impaired loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of March 31, 2019, we did not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.
At March 31, 2019, impaired loans totaled $12.9 million, for which $5.9 million of these loans had a reserve of approximately $2.1 million allocated in the allowance. During the first three months of 2019, the average recorded investment in impaired loans was approximately $12.9 million. Comparatively, impaired loans totaled $12.6 million at December 31, 2018, and $6.2 million of these loans had a reserve of approximately $2.0 million allocated in the allowance. During 2018, the average recorded investment in impaired loans was approximately $13.1 million.
We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide 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. As of March 31, 2019 and December 31, 2018, we determined that we had loans totaling $9.3 million that we considered TDRs.
Allowance for Loan Losses
The allowance for loan losses was $16.1 million and $15.9 million at March 31, 2019 and 2018, respectively, or 0.93% of outstanding loans at March 31, 2019 and 1.09% of outstanding loans at March 31, 2018. At December 31, 2018, our allowance for loan losses was $15.8 million, or 0.94% of outstanding loans, and we had net loans charged-off of $1.7 million for the year ended December 31, 2018.
During the three months ended March 31, 2019, we charged-off $41,000 of loans and recorded $30,000 of recoveries on loans previously charged-off, for net charge-offs of $11,000. Comparatively, we charged-off $293,000 of loans and recorded $122,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $171,000, or 0.05% of average loans, annualized, for the first three months of 2018.
32
Following is a summary of the activity in the allowance for loan losses.
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year ended
|
|
(dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
December 31, 2018
|
|
Balance, beginning of period
|
|
$
|
15,762
|
|
|
15,523
|
|
|
15,523
|
|
Provision
|
|
|
300
|
|
|
500
|
|
|
1,900
|
|
Loan charge-offs
|
|
|
(41
|
)
|
|
(293
|
)
|
|
(2,146
|
)
|
Loan recoveries
|
|
|
30
|
|
|
122
|
|
|
485
|
|
Net loan charge-offs
|
|
|
(11
|
)
|
|
(171
|
)
|
|
(1,661
|
)
|
Balance, end of period
|
|
$
|
16,051
|
|
|
15,852
|
|
|
15,762
|
|
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order
to obtain longer term deposits than are readily available in our local market.
Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total deposits.
In addition, we do not obtain time deposits of $100,000 or more through the Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.
Our retail deposits represented $1.68 billion, or 95.5% of total deposits at March 31, 2019, while our out-of-market, or brokered, deposits represented $79.7 million, or 4.5% of our total deposits at March 31, 2019. At December 31, 2018, retail deposits represented $1.57 billion, or 95.2% of our total deposits, and brokered CDs were $79.3 million, representing 4.8% of our total deposits. Our loan-to-deposit ratio was 99% at March 31, 2019 and 102% at December 31, 2018.
The following is a detail of our deposit accounts:
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(dollars in thousands)
|
|
2019
|
|
2018
|
Non-interest bearing
|
|
$
|
359,754
|
|
346,570
|
Interest bearing:
|
|
|
|
|
|
NOW accounts
|
|
|
211,613
|
|
186,795
|
Money market accounts
|
|
|
791,490
|
|
730,765
|
Savings
|
|
|
15,451
|
|
15,486
|
Time, less than $100,000
|
|
|
61,331
|
|
63,073
|
Time and out-of-market deposits, $100,000 and over
|
|
|
318,596
|
|
305,447
|
Total deposits
|
|
$
|
1,758,235
|
|
1,648,136
|
During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $1.5 billion and $1.4 billion at March 31, 2019, and December 31, 2018, respectively.
The following table shows the average balance amounts and the average rates paid on deposits.
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
(dollars in thousands)
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
Noninterest bearing demand deposits
|
|
$
|
323,800
|
|
-
|
%
|
|
$
|
282,559
|
|
-
|
%
|
Interest bearing demand deposits
|
|
|
186,070
|
|
0.19
|
%
|
|
|
238,690
|
|
0.15
|
%
|
Money market accounts
|
|
|
764,638
|
|
1.75
|
%
|
|
|
579,088
|
|
1.10
|
%
|
Savings accounts
|
|
|
15,477
|
|
0.05
|
%
|
|
|
16,286
|
|
0.06
|
%
|
Time deposits less than $100,000
|
|
|
62,371
|
|
1.85
|
%
|
|
|
56,425
|
|
1.14
|
%
|
Time deposits greater than $100,000
|
|
|
309,323
|
|
2.24
|
%
|
|
|
258,919
|
|
1.43
|
%
|
Total deposits
|
|
$
|
1,661,679
|
|
1.31
|
%
|
|
$
|
1,431,967
|
|
0.77
|
%
|
33
During the three months ended March 31, 2019, our average transaction account balances increased by $173.4 million, or 15.5%, from the three months ended March 31, 2018, while our average time deposit balances increased by $56.4 million, or 17.9%, during the same three-month period.
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, 2019 was as follows:
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
Three months or less
|
|
$
|
38,579
|
Over three through six months
|
|
|
53,719
|
Over six through twelve months
|
|
|
146,758
|
Over twelve months
|
|
|
79,540
|
Total
|
|
$
|
318,596
|
Included in time deposits of $100,000 or more at March 31, 2019 is $62.6 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 2.42%. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at March 31, 2019 and December 31, 2018 were $230.5 million and $214.0 million, respectively.
L
IQUIDITY AND
C
APITAL
R
ESOURCES
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
At March 31, 2019 and December 31, 2018, cash and cash equivalents amounted to $117.3 million and $72.9 million, respectively, or 5.8% and 3.8% of total assets, respectively. Our investment securities at March 31, 2019 and December 31, 2018 amounted to $76.6 million and $79.0 million, respectively, or 3.8% and 4.2% of total assets, respectively.
Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.
Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain four federal funds purchased lines of credit with correspondent banks totaling $72.0 million for which there were no borrowings against the lines of credit at March 31, 2019.
We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at March 31, 2019 was $329.8 million, based on the Bank’s $2.8 million investment in FHLB stock, as well as qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at March 31, 2019 and December 31, 2018 we had $215.6 million and $194.7 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.
We also have a line of credit with another financial institution for $15.0 million, which was unused at March 31, 2019. The line of credit bears interest at LIBOR plus 2.50% and matures on June 30, 2020.
We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.
34
Total shareholders’ equity was $181.2 million at March 31, 2019 and $173.9 million at December 31, 2018. The $7.3 million increase from December 31, 2018 is primarily related to net income of $6.0 million during the first three months of 2019, stock option exercises and expenses of $723,000, and $538,000 in other comprehensive income.
The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the three months ended March 31, 2019 and the year ended December 31, 2018. Since our inception, we have not paid cash dividends.
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Return on average assets
|
|
1.28
|
%
|
|
1.27
|
%
|
Return on average equity
|
|
13.74
|
%
|
|
13.83
|
%
|
Return on average common equity
|
|
13.74
|
%
|
|
13.83
|
%
|
Average equity to average assets ratio
|
|
9.29
|
%
|
|
9.15
|
%
|
Tangible common equity to assets ratio
|
|
8.99
|
%
|
|
9.15
|
%
|
Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.
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 became fully effective on January 1, 2019, and consists of an additional amount of common equity equal to 2.5% of risk-weighted assets.
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 March 31, 2019, our capital ratios exceed these ratios and we remain “well capitalized.”
35
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
|
|
|
|
|
|
|
For capital
|
|
corrective
|
|
|
|
|
|
|
|
adequacy purposes
|
|
action provisions
|
|
|
|
|
|
Actual
|
|
minimum
|
|
minimum
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Total Capital (to risk weighted assets)
|
|
$
|
204,670
|
|
12.08%
|
|
|
135,549
|
|
8.00%
|
|
|
169,436
|
|
10.00%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
188,619
|
|
11.13%
|
|
|
101,662
|
|
6.00%
|
|
|
135,549
|
|
8.00%
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
188,619
|
|
11.13%
|
|
|
76,246
|
|
4.50%
|
|
|
110,133
|
|
6.50%
|
Tier 1 Capital (to average assets)
|
|
|
188,619
|
|
9.86%
|
|
|
76,529
|
|
4.00%
|
|
|
95,661
|
|
5.00%
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
|
|
|
|
|
|
For capital
|
|
corrective
|
|
|
|
|
|
|
|
adequacy purposes
|
|
action provisions
|
|
|
|
|
|
Actual
|
|
minimum
|
|
minimum
|
(dollars in thousands)
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
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 following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
|
|
|
|
|
|
|
|
For capital
|
|
corrective
|
|
|
|
|
|
|
|
adequacy purposes
|
|
action provisions
|
|
|
|
|
|
Actual
|
|
minimum
|
|
minimum
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Total Capital (to risk weighted assets)
|
|
$
|
210,616
|
|
12.43%
|
|
135,549
|
|
8.00%
|
|
N/A
|
|
N/A
|
Tier 1 Capital (to risk weighted assets)
|
|
|
194,565
|
|
11.48%
|
|
101,662
|
|
6.00%
|
|
N/A
|
|
N/A
|
Common Equity Tier 1 Capital (to risk weighted assets)
|
|
|
181,565
|
|
10.72%
|
|
76,246
|
|
4.50%
|
|
N/A
|
|
N/A
|
Tier 1 Capital (to average assets)
|
|
|
194,565
|
|
10.17%
|
|
76,529
|
|
4.00%
|
|
N/A
|
|
N/A
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
|
|
|
|
|
|
For capital
|
|
corrective
|
|
|
|
|
|
|
|
adequacy purposes
|
|
action provisions
|
|
|
|
|
|
Actual
|
|
minimum
|
|
|
|
minimum
|
(dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
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
|
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.
36
Effect of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.
Off-Balance Sheet Risk
Commitments to extend credit are agreements to lend money to a client as long as the client has not violated 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 March 31, 2019, unfunded commitments to extend credit were $400.2 million, of which $122.6 million was at fixed rates and $277.6 million was at variable rates. At December 31, 2018, unfunded commitments to extend credit were $399.4 million, of which approximately $130.5 million was at fixed rates and $269.0 million was at variable rates. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
At March 31, 2019 and December 31, 2018, there were commitments under letters of credit for $10.0 million. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Market Risk and Interest Rate Sensitivity
Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
37
As of March 31, 2019, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.
|
|
Change in net interest
|
Interest rate scenario
|
|
income from base
|
Up 300 basis points
|
|
(4.23
|
)%
|
Up 200 basis points
|
|
(1.97
|
)%
|
Up 100 basis points
|
|
(0.46
|
)%
|
Base
|
|
-
|
|
Down 100 basis points
|
|
(3.53
|
)%
|
Down 200 basis points
|
|
(5.22
|
)%
|
Down 300 basis points
|
|
(4.24
|
)%
|
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2018, as filed in our Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Accounting, Reporting, and Regulatory Matters
See Note 1 – Nature of Business and Basis of Presentation in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated 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.