NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Carolina
Financial Corporation (“Carolina Financial” or the “Company”), incorporated under the laws of the State
of Delaware, is a financial holding company with one wholly-owned subsidiary, CresCom Bank (the “Bank”). In June 2017,
the Company applied, and was approved by the Federal Reserve Bank of Richmond, to be a financial holding company from a bank holding
company. CresCom Bank operates two wholly-owned subsidiaries, Crescent Mortgage Company and Carolina Services Corporation of Charleston
(“Carolina Services”). The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, the Bank. In consolidation, all material intercompany accounts and transactions have been eliminated. The results
of operations of the businesses acquired in transactions accounted for as purchases are included only from the dates of acquisition.
All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with the Company.
At
September 30, 2017, statutory business trusts (“Trusts”) created or acquired by the Company had outstanding trust
preferred securities with a balance of $23.3 million. The principal assets of the Trusts are the Company’s subordinated
debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts have issued $806,000
of common securities to the Company and are included in other investments in the accompanying consolidated balance sheets. The
Trusts are not consolidated subsidiaries of the Company.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
(“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended
September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For
further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (the “SEC”)
on March 10, 2017. There have been no significant changes to the accounting policies as disclosed in the Company’s Form
10-K.
Management’s
Estimates
The
financial statements are prepared in accordance with GAAP, which require 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 financial
statements and the reported amounts of revenues 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, including valuation for impaired loans, the valuation of real estate acquired in connection with foreclosure
or in satisfaction of loans, the valuation of securities, the valuation of derivative instruments, the valuation of assets acquired
and liabilities assumed in business combinations, the valuation of mortgage servicing rights, the determination of the reserve
for mortgage loan repurchase losses, asserted and unasserted legal claims and deferred tax assets or liabilities. In connection
with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals
for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating
premises and equipment.
Management
uses available information to recognize losses on loans and foreclosed real estate. However, future additions to the allowance
may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank’s allowance for loan losses and foreclosed real estate. Such agencies
may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses and valuation
of foreclosed real estate may change materially in the near term.
Earnings
Per Share
Basic
earnings per share (“EPS”) represents income available to common stockholders divided by the weighted-average number
of shares outstanding during the period. Diluted earnings per share reflects additional shares that would have been outstanding
if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding
stock options, restricted stock (non-vested shares), restricted stock units (“RSUs”) and warrants, and are determined
using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the
issuance of stock for the outstanding stock options, unvested restricted stock and RSUs, and warrants, reduced by the number of
shares assumed to be repurchased from the issuance proceeds, using the average market price for the period of the Company’s
stock.
Subsequent
Events
Subsequent
events are material 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 statement of financial condition
but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and
no subsequent events occurred requiring accrual or disclosure except as follows:
On
October 18, 2017 the Company declared a $0.05 dividend per common share, payable on January 5, 2018, to stockholders of record
on December 14, 2017.
Pursuant
to an Agreement and Plan of Merger and Reorganization, dated as of June 9, 2017, by and between the Company and First South Bancorp,
Inc. (“First South”), on November 1, 2017 First South merged with and into the Company, with the Company as the surviving
corporation. Immediately thereafter, First South Bank, a wholly owned subsidiary of First South, merged with and into the Bank,
with the Bank as the surviving Bank. Pursuant to the merger agreement, holders of First South common stock received 0.5064 shares
of the common stock of the Company for each share of First South common stock held immediately prior to the effective time of
the merger. The Company issued 4.8 million shares of common stock to the former shareholders
of First South in the transaction.
Reclassification
Certain
reclassifications of accounts reported for previous periods have been made in these consolidated financial statements. Such reclassifications
had no effect on stockholders’ equity or the net income as previously reported.
Recently
Issued Accounting Pronouncements
In
August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities
(“ASU 2017-12”). ASU 2017-12 amends the requirements of the Derivatives and Hedging Topic of
the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic
results of an entity’s risk management activities in its financial statements. The amendments will be effective for the
Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect
these amendments to have a material effect on its financial statements.
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-09,
Compensation-Stock Compensation (Topic 718)
(“ASU 2017-09”). ASU 2017-09 provides clarity when
applying guidance to a change to the terms or conditions of a share-based payment award. The amendments are effective for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period for public business entities for which financial statements have not yet been issued. The amendments
should be applied prospectively to an award modified on or after the adoption date. The Company has determined that this guidance
is not expected to have a material impact on the Company’s consolidated financial statements.
In
March 2017, the FASB issued ASU No. 2017-08,
Receivables-Nonrefundable Fees and Other Cost (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities
(“ASU 2017-08”). ASU 2017-08 shortens the amortization
period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. The
amendments do not require an accounting change for securities held at a discount; an entity will continue to amortize to the contractual
maturity date the discount related to callable debt securities. The amendments apply to the amortization of premiums on callable
debt securities with explicit, non-contingent call features that are callable at fixed prices on preset dates. For
public business entities, ASU 2017-08 is effective in fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early adoption is permitted for all entities, including in an interim period. The amendments should
be applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of
the first reporting period in which the amendments are adopted. The Company has determined that this guidance will not have
a material impact on the Company’s consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangible-Goodwill and other (Topic 350): Simplifying the Test for
Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities
by requiring impairment charges to be based on the first step in today’s two-step impairment test under Accounting Standards
Codification ASC 350 and eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment
test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should
recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The
guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within
those years. The amendments should be adopted prospectively and early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company has determined that this guidance is not expected
to have a material impact on the Company’s consolidated financial statements.
In
June 2016, the FASB ASU No. 2016-13
, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 requires an entity to utilize a new impairment
model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss”
and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected
to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU
2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The
updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted. Entities will apply the standard’s provisions
as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance
is adopted. The Company is assessing the impact that this new guidance will have on its consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share – Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 introduces targeted amendments
intended to simplify the accounting for stock compensation. Specifically, ASU 2016-09 requires all excess tax benefits and tax
deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit
in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period
in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless
of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses
stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they
arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance
if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain
and track an “APIC pool.” For public business entities, ASU 2016-09 became effective for interim and annual
periods beginning after December 15, 2016, with early adoption permitted. The Company adopted the guidance in the second quarter
of 2016. These amendments did not have a material impact on the Company’s financial statements.
In
March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent considerations
(Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU 2016-08 updates the new revenue standard by clarifying
the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to
the principal versus agent guidance: (i) require an entity to determine whether it is a principal or an agent for each
distinct good or service (or a distinct bundle of goods or services) to be provided to the customer; (ii) illustrate how an entity
that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved
in providing goods or services to a customer and (iii) clarify that the purpose of certain specific control indicators is to support
or assist in the assessment of whether an entity controls a good or service before it is transferred to the customer, provide
more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the
facts and circumstances. For
business entities, the effective date and transition
requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09 which is effective
for interim and annual periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior
reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date
of initial application. The Company’s revenue is primarily comprised of net interest income on financial assets
and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has
evaluated ASU 2016-08 and 2014-09 and determined that this guidance is not expected to have a significant impact on its financial
statements.
In
March 2016, the FASB issued ASU No. 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on
Existing Hedge Accounting Relationships
(“ASU 2016-05”). ASU 2016-05 requires an entity to discontinue a
designated hedging relationship in certain circumstances, including termination of the derivative hedging instrument or if the
entity wishes to change any of the critical terms of the hedging relationship. ASU 2016-05 amends Topic 815 to clarify that novation
of a derivative (replacing one of the parties to a derivative instrument with a new party) designated as the hedging instrument
would not, in and of itself, be considered a termination of the derivative instrument or a change in critical terms requiring
discontinuation of the designated hedging relationship. For public business entities, the amendments in ASU 2016-05 are effective
for interim and annual periods beginning after December 15, 2016. An entity has an option to apply the amendments in
ASU 2016-05 on either a prospective basis or a modified retrospective basis. ASU 2016-05 became effective for the Company
on January 1, 2017 and did not have a significant impact on the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 applies
a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months,
an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of
12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize
an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria.
Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement,
as well as the effect on the statement of cash flows, differs depending on the lease classification. For public business
entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. In
transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply.
The Company is currently evaluating the provisions of ASU 2016-02 in relation to its outstanding leases to determine the potential
impact the new standard will have to the Company’s financial statements.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments – Overall (Subtopic 825-10); Recognition and Measurement
of Financial Assets and Financial Liabilities
(“ASU 2016-01”). This update is intended to improve the
recognition and measurement of financial instruments and it requires an entity to: (i) measure equity investments at fair value
through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial
liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category
and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price;
and (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination
with other deferred tax assets. ASU 2016-01 also provides an
election to subsequently measure
certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes and requires
a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. For
public business entities, the amendments in ASU 2016-01 are effective for interim and annual periods beginning after December
15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as
of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable
fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date
of adoption of the ASU 2016-01. Management is currently evaluating the provisions of ASU 2016-01 on the Company, however,
management does not expect these changes to have a significant impact on the Company’s financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have
a material impact on the Company’s financial position, results of operations or cash flows.
NOTE
2 – BUSINESS COMBINATIONS
Acquisition
of Greer Bancshares Incorporated
On
March 18, 2017, the Company completed its acquisition of Greer Bancshares Incorporated (“Greer”), the holding company
for Greer State Bank, pursuant to the Agreement and Plan of Merger, dated as of November 7, 2016. Under the terms of the merger
agreement, each share of Greer common stock was converted into the right to receive $18.00 in cash or 0.782 shares of the Company’s
common stock, or a combination thereof, subject to certain limitations.
The
following table presents a summary of total consideration paid by the Company at the acquisition date (dollars in thousand).
Common
stock issued (1,789,523 shares at $30.30 per share)
|
|
$
|
54,223
|
|
Cash
payments to common stockholders
|
|
|
4,422
|
|
Total
consideration paid
|
|
$
|
58,645
|
|
|
|
|
|
|
The
assets acquired and liabilities assumed from Greer were recorded at their fair value as of the closing date of the merger. Fair
values were preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information
regarding the closing date fair values became available. Goodwill of $33.0 million was recorded at the time of the acquisition.
The following table summarizes the consideration paid by the Company in the merger with Greer and the amounts of the assets acquired
and liabilities assumed recognized at the acquisition date.
March
18, 2017
|
|
As
Reported
by Greer
|
|
|
Fair
Value
Adjustments
|
|
|
As
Recorded by
the Company
|
|
|
|
(In
thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
42,187
|
|
|
|
—
|
|
|
|
42,187
|
|
Securities
available for sale
|
|
|
121,374
|
|
|
|
—
|
|
|
|
121,374
|
|
Loans
held for sale
|
|
|
105
|
|
|
|
—
|
|
|
|
105
|
|
Loans
receivable
|
|
|
205,209
|
|
|
|
(10,559
|
)(a)
|
|
|
194,650
|
|
Allowance
for loan losses
|
|
|
(3,198
|
)
|
|
|
3,198
|
(b)
|
|
|
—
|
|
Premises
and equipment
|
|
|
3,928
|
|
|
|
4,202
|
(c)
|
|
|
8,130
|
|
Foreclosed
assets
|
|
|
42
|
|
|
|
—
|
|
|
|
42
|
|
Core
deposit intangible
|
|
|
—
|
|
|
|
4,480
|
(d)
|
|
|
4,480
|
|
Deferred
tax asset, net
|
|
|
3,831
|
|
|
|
(1,434
|
)(e)
|
|
|
2,397
|
|
Other
assets
|
|
|
11,367
|
|
|
|
(241
|
)(f)
|
|
|
11,126
|
|
Total
assets acquired
|
|
$
|
384,845
|
|
|
|
(354
|
)
|
|
|
384,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
310,866
|
|
|
|
200
|
(g)
|
|
|
311,066
|
|
Borrowings
|
|
|
43,712
|
|
|
|
(3,510
|
)(h)
|
|
|
40,202
|
|
Other
liabilities
|
|
|
7,086
|
|
|
|
512
|
(i)
|
|
|
7,598
|
|
Total
liabilities assumed
|
|
$
|
361,664
|
|
|
|
(2,798
|
)
|
|
|
358,866
|
|
Net
identifiable assets acquired over liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
25,625
|
|
Total
consideration paid
|
|
|
|
|
|
|
|
|
|
|
58,645
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
33,020
|
|
Explanation of fair
value adjustments:
|
(a)
|
Adjustment represents
the amount necessary to adjust loans to their fair value due to interest rate and credit factors.
|
(b)
|
Adjustment reflects the elimination
of Greer’s historical allowance for loan losses.
|
(c)
|
Adjustment reflects fair value adjustments
on acquired branch and administrative offices based on third party appraisals.
|
(d)
|
Adjustment reflects the fair value
adjustment to record the estimated core deposit intangible based on the Company’s
third party valuation report.
|
(e)
|
Adjustment reflects the tax impact
of acquisition accounting fair value adjustments.
|
(f)
|
Adjustment reflects the fair value
adjustment based on the Company’s evaluation of acquired other assets.
|
(g)
|
Adjustment represents the fair value
adjustment due to interest rate factors.
|
(h)
|
Adjustment represents the fair value
adjustment due to interest rate factors.
|
(i)
|
Adjustment reflects the fair value
adjustment based on the Company’s evaluation of acquired other liabilities.
|
The
following table presents additional information related to the purchased credit impaired (“PCI”) acquired loan portfolio
at March 18, 2017 (in thousands):
Contractual
principal and interest at acquisition
|
|
$
|
37,683
|
|
Nonaccretable
difference
|
|
|
7,248
|
|
Expected
cash flows at acquisition
|
|
|
30,435
|
|
Accretable
yield
|
|
|
4,995
|
|
Basis
in PCI loans at acquisition - estimated fair value
|
|
$
|
25,440
|
|
Acquisition
of Congaree Bancshares, Inc.
On
June 11, 2016, the Company completed its acquisition of Congaree Bancshares, Inc. (“Congaree”), the holding company
for Congaree State Bank, pursuant to the Agreement and Plan of Merger, dated as of January 5, 2016. Under the terms of the merger
agreement, each share of Congaree common stock was converted into the right to receive $8.10 in cash or 0.4806 shares of the Company’s
common stock, or a combination thereof, subject to certain limitations.
The
following table presents a summary of total consideration paid by the Company at the acquisition date (dollars in thousands).
Common
stock issued (509,370 shares at $16.80 per share)
|
|
$
|
8,557
|
|
Cash
payments to common stockholders
|
|
|
5,724
|
|
Preferred
shares assumed and redeemed at par
|
|
|
1,564
|
|
Fair
value of Congaree stock options assumed - paid out in cash
|
|
|
439
|
|
Total
consideration paid
|
|
$
|
16,284
|
|
The
following table presents the Congaree assets acquired and liabilities assumed as of June 11, 2016 as well as the related fair
value adjustments and determination of goodwill. There have been no adjustments to initial fair values recorded by the Company
for the Congaree acquisition to date.
|
|
As
Reported by
Congaree
|
|
|
Fair
Value
Adjustments
|
|
|
As
Recorded by
the Company
|
|
Assets
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
11,394
|
|
|
|
—
|
|
|
|
11,394
|
|
Securities
|
|
|
9,453
|
|
|
|
(59
|
)(a)
|
|
|
9,394
|
|
Loans
receivable
|
|
|
78,712
|
|
|
|
(4,111
|
)(b)
|
|
|
74,601
|
|
Allowance
for loan losses
|
|
|
(1,112
|
)
|
|
|
1,112
|
(c)
|
|
|
—
|
|
Premises
and equipment
|
|
|
2,712
|
|
|
|
38
|
(d)
|
|
|
2,750
|
|
Foreclosed
assets
|
|
|
1,710
|
|
|
|
(250
|
)(e)
|
|
|
1,460
|
|
Core
deposit intangible
|
|
|
—
|
|
|
|
1,104
|
(f)
|
|
|
1,104
|
|
Deferred
tax asset, net
|
|
|
1,813
|
|
|
|
915
|
(g)
|
|
|
2,728
|
|
Other
assets
|
|
|
942
|
|
|
|
(152
|
)(h)
|
|
|
790
|
|
Total
assets acquired
|
|
$
|
105,624
|
|
|
|
(1,403
|
)
|
|
|
104,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
89,227
|
|
|
|
98
|
(i)
|
|
|
89,325
|
|
Borrowings
|
|
|
2,500
|
|
|
|
—
|
|
|
|
2,500
|
|
Other
liabilities
|
|
|
378
|
|
|
|
—
|
|
|
|
378
|
|
Total
liabilities assumed
|
|
$
|
92,105
|
|
|
|
98
|
|
|
|
92,203
|
|
Net
identifiable assets acquired over liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
12,018
|
|
Total
consideration paid
|
|
|
|
|
|
|
|
|
|
|
16,284
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
4,266
|
|
Explanation
of fair value adjustments:
|
(a)
|
Adjustment
reflects opening fair value of securities portfolio, which was established as the new
book basis of the portfolio.
|
|
(b)
|
Adjustment
represents the amount necessary to adjust loans to their fair value due to interest rate
and credit factors.
|
|
(c)
|
Adjustment
reflects the elimination of Congaree’s historical allowance for loan losses.
|
|
(d)
|
Adjustment
reflects fair value adjustments on acquired branch and administrative offices based on
third party appraisals.
|
|
(e)
|
Adjustment
reflects the fair value adjustment based on the Company’s evaluation of the foreclosed
assets.
|
|
(f)
|
Adjustment
reflects the fair value adjustment to record the estimated core deposit intangible based
on the Company’s third party valuation report.
|
|
(g)
|
Adjustment
reflects the tax impact of acquisition accounting fair value adjustments.
|
|
(h)
|
Adjustment
reflects the fair value adjustment based on the Company’s evaluation of acquired other
assets.
|
|
(i)
|
Adjustment
reflects the fair value adjustment based on the Company’s third party evaluation report
on deposits assumed.
|
NOTE
3 – SECURITIES
The
amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities available-for-sale at September 30,
2017 and December 31, 2016 follows:
|
|
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Securities
available-for-sale:
|
|
(In thousands)
|
|
Municipal
securities
|
|
$
|
161,446
|
|
|
|
5,436
|
|
|
|
(275
|
)
|
|
|
166,607
|
|
|
|
92,792
|
|
|
|
1,475
|
|
|
|
(1,055
|
)
|
|
|
93,212
|
|
US
government agencies
|
|
|
10,301
|
|
|
|
53
|
|
|
|
—
|
|
|
|
10,354
|
|
|
|
3,438
|
|
|
|
—
|
|
|
|
(52
|
)
|
|
|
3,386
|
|
Collateralized
loan obligations
|
|
|
111,478
|
|
|
|
681
|
|
|
|
(33
|
)
|
|
|
112,126
|
|
|
|
76,202
|
|
|
|
138
|
|
|
|
(91
|
)
|
|
|
76,249
|
|
Corporate
securities
|
|
|
476
|
|
|
|
18
|
|
|
|
—
|
|
|
|
494
|
|
|
|
474
|
|
|
|
17
|
|
|
|
—
|
|
|
|
491
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
166,451
|
|
|
|
1,725
|
|
|
|
(285
|
)
|
|
|
167,891
|
|
|
|
90,477
|
|
|
|
995
|
|
|
|
(486
|
)
|
|
|
90,986
|
|
Non-agency
|
|
|
56,862
|
|
|
|
592
|
|
|
|
(125
|
)
|
|
|
57,329
|
|
|
|
63,628
|
|
|
|
424
|
|
|
|
(188
|
)
|
|
|
63,864
|
|
Total
mortgage-backed securities
|
|
|
223,313
|
|
|
|
2,317
|
|
|
|
(410
|
)
|
|
|
225,220
|
|
|
|
154,105
|
|
|
|
1,419
|
|
|
|
(674
|
)
|
|
|
154,850
|
|
Trust
preferred securities
|
|
|
11,200
|
|
|
|
1,019
|
|
|
|
(3,276
|
)
|
|
|
8,943
|
|
|
|
11,203
|
|
|
|
545
|
|
|
|
(4,584
|
)
|
|
|
7,164
|
|
Total
|
|
$
|
518,214
|
|
|
|
9,524
|
|
|
|
(3,994
|
)
|
|
|
523,744
|
|
|
|
338,214
|
|
|
|
3,594
|
|
|
|
(6,456
|
)
|
|
|
335,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had no held-to-maturity securities as of September 30, 2017 or December 31, 2016. During the second quarter of 2016, the
Company tainted its securities held-to-maturity portfolio as a result of a change in the intent to hold these securities until
maturity to provide opportunities to maximize its asset utilization. As a result, the securities were moved to available-for-sale
resulting in an increase to accumulated other comprehensive income of $655,000.
The
amortized cost and fair value of debt securities by contractual maturity at September 30, 2017 follows:
|
|
At
September 30, 2017
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
298
|
|
|
|
299
|
|
One
to five years
|
|
|
1,320
|
|
|
|
1,328
|
|
Six
to ten years
|
|
|
108,513
|
|
|
|
109,913
|
|
After
ten years
|
|
|
408,083
|
|
|
|
412,204
|
|
Total
|
|
$
|
518,214
|
|
|
|
523,744
|
|
|
|
|
|
|
|
|
|
|
The
contractual maturity dates of the securities were used for mortgage-backed securities and asset-backed securities. No estimates
were made to anticipate principal repayments.
The
following table summarizes the gross realized gains and losses from sales of investment securities available-for-sale for the
periods indicated.
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
22,430
|
|
|
|
19,024
|
|
|
|
103,451
|
|
|
|
69,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains
|
|
$
|
368
|
|
|
|
111
|
|
|
|
1,388
|
|
|
|
758
|
|
Realized
losses
|
|
|
—
|
|
|
|
—
|
|
|
|
(214
|
)
|
|
|
(117
|
)
|
Total
investment securities gains, net
|
|
$
|
368
|
|
|
|
111
|
|
|
|
1,174
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2017, the Company had pledged securities with a market value of $6.7 million for Federal Home Loan Bank (“FHLB”)
advances.
At
September 30, 2017, the Company has pledged $79.6 million of securities to secure public agency funds.
The
following tables summarize gross unrealized losses on investment securities and the fair market value of the related securities
at September 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position.
|
|
At
September 30, 2017
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
8,436
|
|
|
|
8,382
|
|
|
|
(54
|
)
|
|
|
6,849
|
|
|
|
6,628
|
|
|
|
(221
|
)
|
|
|
15,285
|
|
|
|
15,010
|
|
|
|
(275
|
)
|
Collateralized
loan
obligations
|
|
|
21,000
|
|
|
|
20,968
|
|
|
|
(32
|
)
|
|
|
5,000
|
|
|
|
4,999
|
|
|
|
(1
|
)
|
|
|
26,000
|
|
|
|
25,967
|
|
|
|
(33
|
)
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
22,605
|
|
|
|
22,445
|
|
|
|
(160
|
)
|
|
|
16,627
|
|
|
|
16,502
|
|
|
|
(125
|
)
|
|
|
39,232
|
|
|
|
38,947
|
|
|
|
(285
|
)
|
Non-agency
|
|
|
3,083
|
|
|
|
3,057
|
|
|
|
(26
|
)
|
|
|
10,585
|
|
|
|
10,486
|
|
|
|
(99
|
)
|
|
|
13,668
|
|
|
|
13,543
|
|
|
|
(125
|
)
|
Total
mortgage-backed
securities
|
|
|
25,688
|
|
|
|
25,502
|
|
|
|
(186
|
)
|
|
|
27,212
|
|
|
|
26,988
|
|
|
|
(224
|
)
|
|
|
52,900
|
|
|
|
52,490
|
|
|
|
(410
|
)
|
Trust
preferred securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,550
|
|
|
|
5,274
|
|
|
|
(3,276
|
)
|
|
|
8,550
|
|
|
|
5,274
|
|
|
|
(3,276
|
)
|
Total
|
|
$
|
55,124
|
|
|
|
54,852
|
|
|
|
(272
|
)
|
|
|
47,611
|
|
|
|
43,889
|
|
|
|
(3,722
|
)
|
|
|
102,735
|
|
|
|
98,741
|
|
|
|
(3,994
|
)
|
|
|
At
December 31, 2016
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
40,479
|
|
|
|
39,424
|
|
|
|
(1,055
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,479
|
|
|
|
39,424
|
|
|
|
(1,055
|
)
|
US
government agencies
|
|
|
3,438
|
|
|
|
3,386
|
|
|
|
(52
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,438
|
|
|
|
3,386
|
|
|
|
(52
|
)
|
Collateralized
loan obligations
|
|
|
16,792
|
|
|
|
16,748
|
|
|
|
(44
|
)
|
|
|
8,500
|
|
|
|
8,453
|
|
|
|
(47
|
)
|
|
|
25,292
|
|
|
|
25,201
|
|
|
|
(91
|
)
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
33,323
|
|
|
|
32,960
|
|
|
|
(363
|
)
|
|
|
10,125
|
|
|
|
10,002
|
|
|
|
(123
|
)
|
|
|
43,448
|
|
|
|
42,962
|
|
|
|
(486
|
)
|
Non-agency
|
|
|
9,357
|
|
|
|
9,240
|
|
|
|
(117
|
)
|
|
|
8,801
|
|
|
|
8,730
|
|
|
|
(71
|
)
|
|
|
18,158
|
|
|
|
17,970
|
|
|
|
(188
|
)
|
Total
mortgage-backed securities
|
|
|
42,680
|
|
|
|
42,200
|
|
|
|
(480
|
)
|
|
|
18,926
|
|
|
|
18,732
|
|
|
|
(194
|
)
|
|
|
61,606
|
|
|
|
60,932
|
|
|
|
(674
|
)
|
Trust
preferred securities
|
|
|
1,362
|
|
|
|
1,112
|
|
|
|
(250
|
)
|
|
|
8,667
|
|
|
|
4,333
|
|
|
|
(4,334
|
)
|
|
|
10,029
|
|
|
|
5,445
|
|
|
|
(4,584
|
)
|
Total
|
|
$
|
104,751
|
|
|
|
102,870
|
|
|
|
(1,881
|
)
|
|
|
36,093
|
|
|
|
31,518
|
|
|
|
(4,575
|
)
|
|
|
140,844
|
|
|
|
134,388
|
|
|
|
(6,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing
whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include
estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition
and near term prospect of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in
market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference
between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment
is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized
then becomes the new cost basis of the investment.
As
of September 30, 2017, trust preferred securities had an amortized cost of $11.2 million and a fair value of $8.9 million. For
each trust preferred security, impairment testing is performed on a quarterly basis using a detailed cash flow analysis. The major
assumptions used during the quarterly impairment testing are described in the subsequent paragraph.
In
2009, the Company adopted a four year “burst” scenario for its modeled default rates (2010 - 2013) that replicated
the default rates for the banking industry from the four peak years of the savings and loan crisis, which then reduced to 0.25%
annually. The elevated default rate ended in 2013, and the constant default rate used by the Company is now 0.25% annually. All
issuers that are currently in deferral were presumed to be in default. Additionally, all defaults are assumed to have a 15% recovery
after two years and 1% of the pool is presumed to prepay annually. If this analysis results in a present value of expected cash
flows that is less than the book value of a security (that is, a credit loss exists), OTTI is considered to have occurred. If
there is no credit loss, any impairment is considered temporary. The cash flow analysis management performed used discount rates
equal to the credit spread at the time of purchase for each security and then added the current three-month LIBOR forward
interest rate curve.
Based
on the cash flow analysis performed at period end, management believes that there are no additional securities other-than-temporarily
impaired at September 30, 2017.
The
underlying issuers in the pools were primarily financial institutions and to a lesser extent, insurance companies and real estate
investment trusts. The Company owns both senior and mezzanine tranches in pooled trust preferred securities; however, the Company
does not own any income notes. The senior and mezzanine tranches of trust preferred collateralized debt obligations generally
have some protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures
that redirect cash flows in the event certain coverage test requirements are failed. Generally, senior tranches have the greatest
protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches.
At
September 30, 2017 and December 31, 2016, the Company had 46 and 81, respectively, individual investments available-for-sale that
were in an unrealized loss position. The unrealized losses on the Company’s investments in US government-sponsored agencies,
municipal securities, mortgage-backed securities (agency and non-agency), and trust preferred securities summarized above were
attributable primarily to changes in interest rates. Management has performed various analyses, including cash flows testing as
needed, and determined that no OTTI expense was necessary during 2017 or 2016.
Management
believes that there are no additional securities other-than-temporarily impaired at September 30, 2017. The Company does not currently
intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities
before recovery of their amortized cost. Management continues to monitor these securities with a high degree of scrutiny. There
can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or
all of the securities may be sold or are other-than-temporarily impaired, which would require a charge to earnings in such periods.
NOTE
4 – DERIVATIVES
In
the ordinary course of business, the Company enters into various types of derivative transactions. The Company’s primary
uses of derivative instruments are related to the mortgage banking activities. As such, the Company holds derivative instruments,
which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (interest rate lock
commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The Company’s
objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments
and the mortgage loans that are held for sale. Derivative instruments not related to mortgage banking activities primarily relate
to interest rate swap agreements.
The
derivative positions of the Company at September 30, 2017 and December 31, 2016 are as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Derivative
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$
|
205
|
|
|
|
30,000
|
|
|
|
421
|
|
|
|
30,000
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
613
|
|
|
|
45,000
|
|
|
|
532
|
|
|
|
20,000
|
|
Mortgage
loan interest rate lock commitments
|
|
|
913
|
|
|
|
121,805
|
|
|
|
1,113
|
|
|
|
117,439
|
|
Mortgage
loan forward sales commitments
|
|
|
245
|
|
|
|
17,882
|
|
|
|
153
|
|
|
|
94,001
|
|
Mortgage-backed
securities forward sales commitments
|
|
|
356
|
|
|
|
89,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
derivative assets
|
|
$
|
2,332
|
|
|
|
303,687
|
|
|
|
2,219
|
|
|
|
261,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$
|
1
|
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
200
|
|
|
|
10,000
|
|
|
|
195
|
|
|
|
10,000
|
|
Mortgage-backed
securities forward sales commitments
|
|
|
—
|
|
|
|
—
|
|
|
|
147
|
|
|
|
22,784
|
|
Total
derivative liabilities
|
|
$
|
201
|
|
|
|
25,000
|
|
|
|
342
|
|
|
|
32,784
|
|
Non-Designated
Hedges
Derivative
Loan Commitments and Forward Sales Commitments
The
Company enters into mortgage loan commitments that are also referred to as derivative loan commitments, if the loan that will
result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential
mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the
secondary market.
Outstanding
derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment
might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest
rates increase, the value of these loan commitments typically decreases. Conversely, if interest rates decrease, the value of
these loan commitments typically increases.
To
protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery”
and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans
that would result from the exercise of the derivative loan commitments.
With
a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an
investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary
to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market
prices, to the investor to compensate the investor for the shortfall.
With
a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount
and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller
for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to
a potential borrower). The Company expects that these forward loan sale commitments will experience changes in fair value opposite
to the change in fair value of derivative loan commitments.
Derivatives
related to these commitments are recorded as either a derivative asset or a derivative liability on the balance sheet and are
measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments
recorded in current period earnings in “mortgage banking income” within noninterest income in the consolidated statements
of operations.
Interest
Rate Swaps
The
Company enters into interest rate swaps that do not meet the hedge accounting requirements and are recorded at fair value as a
derivative asset or liability. Interest rate swaps that are not designated as hedges are primarily used to more closely match
the interest rate characteristics of assets and liabilities and to mitigate the risks arising from timing mismatches between assets
and liabilities including duration mismatches. Fair value changes are recognized in noninterest income as “fair value adjustments
on interest rate swaps.”
Cash
Flow Hedges of Interest Rate Risk
The
Company’s objectives in using certain interest rate derivatives are to add stability to interest expense and to manage its
exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest
rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from
a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount.
The
Company has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable
to changes in forecasted LIBOR-based FHLB borrowings. These derivative instruments are designated as cash flow hedges. The hedged
item is the LIBOR portion of the series of future adjustable rate borrowings over the term of the interest rate swap. Accordingly,
changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded
from our assessment of hedge effectiveness. The Company tests for hedging effectiveness on a quarterly basis. The effective portion
of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive
income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The
ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company has not recorded
any hedge ineffectiveness since inception.
Risk
Management Objective of Using Derivatives
When
using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the counterparty
to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates as interest rates
change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative
transaction. The Company seeks to minimize credit risk by dealing with highly rated counterparties and by obtaining collateralization
for exposures above certain predetermined limits. If significant counterparty risk is determined, the Company would adjust the
fair value of the derivative recorded asset balance to consider such risk.
NOTE
5 - LOANS RECEIVABLE, NET
We
emphasize a range of lending services, including commercial and residential real estate mortgage loans, real estate construction
loans, commercial and industrial loans and consumer loans. Our customers are generally individuals and small to medium-sized businesses
and professional firms that are located in or conduct a substantial portion of their business in our market areas. We have focused
our lending activities primarily on the professional market, including doctors, dentists, small business to medium-sized owners
and commercial real estate developers.
Certain
credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value
of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual
borrowers. We attempt to mitigate repayment risks by adhering to internal credit policies and procedures. These policies and procedures
include officer and customer lending limits, with approval processes for larger loans, documentation examination, and follow-up
procedures for any exceptions to credit policies. Our loan approval policies provide for various levels of officer lending authority.
When the amount of aggregate loans to a single borrower exceeds the maximum senior officer’s lending authority, the loan
request will be considered by the management loan committee, or MLC, which is comprised of four members, all of whom are part
of the senior management team of the Bank. The MLC meets weekly to approve loans with total loan commitment relationships generally
exceeding $1.5 million. The loan authority of the MLC is equal to two-thirds of the legal lending limit of the Bank which is equivalent
to the in-house loan limit. Total credit exposure above the in-house limit requires approval by the majority of the board of directors.
We do not make any loans to any director, executive officer of the Bank, or the related interests of each, unless the loan is
approved by the full Board of Directors of the Bank and is on terms not more favorable than would be available to a person not
affiliated with the Bank.
The
following is a description of the risk characteristics of the material loan portfolio segments:
Residential
Mortgage Loans and Home Equity Loans
.
We generally originate and hold short-term and long-term first mortgages and traditional
second mortgage residential real estate loans. Generally, we limit the loan-to-value ratio on our residential real estate loans
to 80%. We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years. We also offer a variety
of lot loan options to consumers to purchase the lot on which they intend to build their home. The options available depend on
whether the borrower intends to begin building within 12 months of the lot purchase or at an undetermined future date. We also
offer traditional home equity loans and lines of credit. Our underwriting criteria for, and the risks associated with, home equity
loans and lines of credit are generally the same as those for first mortgage loans. Home equity loans typically have terms of
10 years or less. We generally limit the extension of credit to 90% of the available equity of each property, although we may
extend up to 100% of the available equity.
Commercial
Real Estate
.
Commercial real estate loans generally have terms of five years or less, although payments may be structured
on a longer amortization basis. We evaluate each borrower on an individual basis and attempt to determine their business risks
and credit profile. We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied
office and retail buildings where the loan-to-value ratio, established by independent appraisals, generally does not exceed 80%.
We also generally require that a borrower’s cash flow exceed 120% of monthly debt service obligations. In order to ensure
secondary sources of payment and liquidity to support a loan request, we typically review all of the personal financial statements
of the principal owners and require their personal guarantees.
Real
Estate Construction and Development Loans.
We offer fixed and adjustable rate residential and commercial construction
loan financing to builders and developers and to consumers who wish to build their own home. The term of construction and development
loans generally is limited to 18 months, although payments may be structured on a longer amortization basis. Most loans will mature
and require payment in full upon the sale of the property. We believe that construction and development loans generally carry
a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of
the project and usually on the subsequent sale of the property. We attempt to reduce risk associated with construction and development
loans by obtaining personal guarantees and by keeping the maximum loan-to-value ratio at or below 65%-80% of the lesser of cost
or appraised value, depending on the project type.
Commercial
Business Loans.
We make loans for commercial purposes in various lines of businesses, including the manufacturing industry,
service industry, and professional service areas. Commercial loans are generally considered to have greater risk than first or
second mortgages on real estate because they may be unsecured, or if they are secured, the value of the collateral may be difficult
to assess and more likely to decrease than real estate. Equipment loans typically will be made for a term of 10 years or less
at fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment. Generally, we limit
the loan-to-value ratio on these loans to 75% of cost. Working capital loans typically have terms not exceeding one year and usually
are secured by accounts receivable, inventory, or personal guarantees of the principals of the business. For loans secured by
accounts receivable or inventory, principal will typically be repaid as the assets securing the loan are converted into cash,
and in other cases principal will typically be due at maturity. Trade letters of credit, standby letters of credit, and foreign
exchange will generally be handled through a correspondent bank as agent for the Bank.
The
Company’s primary markets are generally concentrated in real estate lending. However, in order to diversify our lending
portfolio, the Company purchases nationally syndicated commercial and industrial loans. These loans typically have terms of seven
years and are generally tied to a floating rate index such as LIBOR or prime. To effectively manage this line of business, the
Company has an experienced senior lending executive with relevant experience to manage this area of this segment of the loan portfolio.
In addition, the Company engaged a consulting firm that specializes in syndicated loans to assist in monitoring performance analytics.
As of September 30, 2017 and December 31, 2016, there were approximately $83.5 million and $91.5 million in syndicated loans outstanding.
Syndicated loans are grouped within commercial business loans below.
Consumer
Loans.
We make a variety of loans to individuals for personal and household purposes, including secured and unsecured
installment loans and revolving lines of credit. Consumer loans are underwritten based on the borrower’s income, current
debt level, past credit history, and the availability and value of collateral. Consumer rates are both fixed and variable, with
negotiable terms. Our installment loans typically amortize over periods up to 72 months. Although we typically require monthly
payments of interest and a portion of the principal on our loan products, we will offer consumer loans with a single maturity
date when a specific source of repayment is available. Consumer loans are generally considered to have greater risk than first
or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be
difficult to assess and more likely to decrease in value than real estate.
Loans
receivable, net at September 30, 2017 and December 31, 2016 are summarized by category as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
%
of Total
|
|
|
|
|
|
%
of Total
|
|
All
Loans:
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
475,949
|
|
|
|
32.06
|
%
|
|
$
|
411,399
|
|
|
|
34.91
|
%
|
Home
equity
|
|
|
46,162
|
|
|
|
3.11
|
%
|
|
|
36,026
|
|
|
|
3.06
|
%
|
Commercial
real estate
|
|
|
575,200
|
|
|
|
38.75
|
%
|
|
|
445,344
|
|
|
|
37.80
|
%
|
Construction
and development
|
|
|
175,799
|
|
|
|
11.84
|
%
|
|
|
115,682
|
|
|
|
9.82
|
%
|
Consumer
loans
|
|
|
9,010
|
|
|
|
0.61
|
%
|
|
|
5,714
|
|
|
|
0.48
|
%
|
Commercial
business loans
|
|
|
202,341
|
|
|
|
13.63
|
%
|
|
|
164,101
|
|
|
|
13.93
|
%
|
Total
gross loans receivable
|
|
|
1,484,461
|
|
|
|
100.00
|
%
|
|
|
1,178,266
|
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
|
|
|
|
10,688
|
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
1,473,799
|
|
|
|
|
|
|
$
|
1,167,578
|
|
|
|
|
|
Loans
receivable, net at September 30, 2017 and December 31, 2016 for acquired non-credit impaired loans and nonacquired loans are summarized
by category as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Acquired
Non-Credit Impaired Loans
|
|
|
|
|
%
of Total
|
|
|
|
|
|
%
of Total
|
|
(ASC
310-20) and Nonacquired Loans:
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
470,357
|
|
|
|
32.13
|
%
|
|
$
|
411,399
|
|
|
|
34.91
|
%
|
Home
equity
|
|
|
46,111
|
|
|
|
3.15
|
%
|
|
|
36,026
|
|
|
|
3.06
|
%
|
Commercial
real estate
|
|
|
563,996
|
|
|
|
38.53
|
%
|
|
|
445,344
|
|
|
|
37.80
|
%
|
Construction
and development
|
|
|
172,983
|
|
|
|
11.82
|
%
|
|
|
115,682
|
|
|
|
9.82
|
%
|
Consumer
loans
|
|
|
8,973
|
|
|
|
0.61
|
%
|
|
|
5,714
|
|
|
|
0.48
|
%
|
Commercial
business loans
|
|
|
201,454
|
|
|
|
13.76
|
%
|
|
|
164,101
|
|
|
|
13.93
|
%
|
Total
gross loans receivable
|
|
|
1,463,874
|
|
|
|
100.00
|
%
|
|
|
1,178,266
|
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
|
|
|
|
10,688
|
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
1,453,212
|
|
|
|
|
|
|
$
|
1,167,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net at September 30, 2017 for acquired credit impaired loans are summarized by category below. There were no acquired
credit impaired loans at December 31, 2016.
|
|
At
September 30,
|
|
|
|
2017
|
|
Acquired
Credit Impaired
|
|
|
|
|
%
of Total
|
|
Loans
(ASC 310-30):
|
|
Amount
|
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
5,592
|
|
|
|
27.16
|
%
|
Home
equity
|
|
|
51
|
|
|
|
0.25
|
%
|
Commercial
real estate
|
|
|
11,204
|
|
|
|
54.42
|
%
|
Construction
and development
|
|
|
2,816
|
|
|
|
13.68
|
%
|
Consumer
loans
|
|
|
37
|
|
|
|
0.18
|
%
|
Commercial
business loans
|
|
|
887
|
|
|
|
4.31
|
%
|
Total
gross loans receivable
|
|
|
20,587
|
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
—
|
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
20,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the loan totals, net of purchase discount, were $252.8 million and $111.4 million in loans acquired through acquisitions at
September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, the purchase discount on
acquired non-credit impaired loans was $5.3 million and $3.2 million, respectively. No allowance for loan losses related to the
acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding
credit risk.
There
are two methods to account for acquired loans as part of a business combination. Acquired loans that contain evidence of credit
deterioration on the date of purchase are carried at the net present value of expected future proceeds in accordance with ASC
310-30 and are considered purchased credit impaired (“PCI”) loans. All other acquired loans are recorded at their
initial fair value, adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on purchase,
charge-offs and any other adjustment to carrying value in accordance with ASC 310-20.
PCI
loans are aggregated into pools of loans based on common risk characteristics such as the type of loan, payment status, or collateral
type. The Company estimates the amount and timing of expected cash flows for each purchased loan pool and the expected cash flows
in excess of the amount paid are recorded as interest income over the remaining life of the pool (accretable yield). The excess
of the pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over
the life of the loan pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than
the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is
recognized as part of future interest income.
At
September 30, 2017, the outstanding balance and recorded investment of PCI loans was $27.5 million and $20.6 million, respectively.
The Company had no PCI loans prior to 2017.
The
following table presents changes in the value of PCI loans receivable for the three and nine months ended September 30, 2017:
|
|
For
the
Three Months
|
|
|
For
the
Nine Months
|
|
|
|
Ended
September 30,
2017
|
|
|
Ended
September 30,
2017
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
23,993
|
|
|
$
|
—
|
|
Fair
value of acquired loans
|
|
|
—
|
|
|
|
25,439
|
|
Net
reductions for payments, foreclosures, and accretion
|
|
|
(3,406
|
)
|
|
|
(4,852
|
)
|
Change
in the allowance for loan losses on acquired loans
|
|
|
—
|
|
|
|
—
|
|
Balance
at end of period, net of allowance for loan losses on acquired loans
|
|
$
|
20,587
|
|
|
$
|
20,587
|
|
The
following table presents changes in the value of the accretable yield for PCI loans for the three and nine months ended September
30, 2017 (in thousands):
|
|
For the
Three Months
|
|
|
For the
Nine Months
|
|
|
|
Ended
September 30,
2017
|
|
|
Ended
September 30,
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Accretable yield, beginning of period
|
|
$
|
4,542
|
|
|
$
|
—
|
|
Additions
|
|
|
—
|
|
|
|
4,995
|
|
Accretion
|
|
|
(322
|
)
|
|
|
(775
|
)
|
Reclassification from nonaccretable balance, net
|
|
|
—
|
|
|
|
—
|
|
Other changes, net
|
|
|
—
|
|
|
|
—
|
|
Accretable yield, end of period
|
|
$
|
4,220
|
|
|
$
|
4,220
|
|
|
|
|
|
|
|
|
|
|
The
composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate loans
|
|
$
|
579,895
|
|
|
|
39.06
|
%
|
|
$
|
455,589
|
|
|
|
38.67
|
%
|
Fixed
rate loans
|
|
|
904,566
|
|
|
|
60.94
|
%
|
|
|
722,677
|
|
|
|
61.33
|
%
|
Total
loans outstanding
|
|
$
|
1,484,461
|
|
|
|
100.00
|
%
|
|
$
|
1,178,266
|
|
|
|
100.00
|
%
|
The
following table presents activity in the allowance for loan losses for the period indicated. Allocation of a portion of the allowance
to one category of loans does not preclude its availability to absorb losses in other categories.
Allowance
for loan losses:
|
|
For
the Three Months Ended September 30, 2017
|
|
|
|
Loans
Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance,
beginning of period
|
|
$
|
2,725
|
|
|
|
218
|
|
|
|
3,331
|
|
|
|
948
|
|
|
|
101
|
|
|
|
2,901
|
|
|
|
526
|
|
|
|
10,750
|
|
Provision
for loan losses
|
|
|
(125
|
)
|
|
|
18
|
|
|
|
243
|
|
|
|
181
|
|
|
|
(36
|
)
|
|
|
(342
|
)
|
|
|
61
|
|
|
|
—
|
|
Charge-offs
|
|
|
(127
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(132
|
)
|
Recoveries
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
|
26
|
|
|
|
—
|
|
|
|
44
|
|
Balance,
end of period
|
|
$
|
2,475
|
|
|
|
236
|
|
|
|
3,574
|
|
|
|
1,129
|
|
|
|
76
|
|
|
|
2,585
|
|
|
|
587
|
|
|
|
10,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30, 2016
|
|
|
|
|
Loans
Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
|
Home
|
|
|
|
real
|
|
|
|
and
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
family
|
|
|
|
equity
|
|
|
|
estate
|
|
|
|
development
|
|
|
|
Consumer
|
|
|
|
business
|
|
|
|
Unallocated
|
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
Balance,
beginning of period
|
|
$
|
2,706
|
|
|
|
167
|
|
|
|
3,393
|
|
|
|
1,210
|
|
|
|
30
|
|
|
|
2,423
|
|
|
|
368
|
|
|
|
10,297
|
|
Provision
for loan losses
|
|
|
(174
|
)
|
|
|
21
|
|
|
|
189
|
|
|
|
(140
|
)
|
|
|
(1
|
)
|
|
|
43
|
|
|
|
62
|
|
|
|
—
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
Recoveries
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
8
|
|
|
|
26
|
|
|
|
—
|
|
|
|
47
|
|
Balance,
end of period
|
|
$
|
2,541
|
|
|
|
188
|
|
|
|
3,582
|
|
|
|
1,074
|
|
|
|
35
|
|
|
|
2,490
|
|
|
|
430
|
|
|
|
10,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
For
the Nine Months Ended September 30, 2017
|
|
|
|
|
Loans
Secured by Real Estate
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
|
Home
|
|
|
|
real
|
|
|
|
and
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
family
|
|
|
|
equity
|
|
|
|
estate
|
|
|
|
development
|
|
|
|
Consumer
|
|
|
|
business
|
|
|
|
Unallocated
|
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
Balance,
beginning of period
|
|
$
|
2,636
|
|
|
|
197
|
|
|
|
3,344
|
|
|
|
1,132
|
|
|
|
80
|
|
|
|
2,805
|
|
|
|
494
|
|
|
|
10,688
|
|
Provision
for loan losses
|
|
|
(2
|
)
|
|
|
39
|
|
|
|
204
|
|
|
|
(5
|
)
|
|
|
(16
|
)
|
|
|
(313
|
)
|
|
|
93
|
|
|
|
—
|
|
Charge-offs
|
|
|
(162
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(178
|
)
|
Recoveries
|
|
|
3
|
|
|
|
—
|
|
|
|
26
|
|
|
|
2
|
|
|
|
28
|
|
|
|
93
|
|
|
|
—
|
|
|
|
152
|
|
Balance,
end of period
|
|
$
|
2,475
|
|
|
|
236
|
|
|
|
3,574
|
|
|
|
1,129
|
|
|
|
76
|
|
|
|
2,585
|
|
|
|
587
|
|
|
|
10,662
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, 2016
|
|
|
|
|
Loans
Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
|
Home
|
|
|
|
real
|
|
|
|
and
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
family
|
|
|
|
equity
|
|
|
|
estate
|
|
|
|
development
|
|
|
|
Consumer
|
|
|
|
business
|
|
|
|
Unallocated
|
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
Balance,
beginning of period
|
|
$
|
2,903
|
|
|
|
151
|
|
|
|
3,402
|
|
|
|
1,138
|
|
|
|
27
|
|
|
|
2,100
|
|
|
|
420
|
|
|
|
10,141
|
|
Provision
for loan losses
|
|
|
(465
|
)
|
|
|
37
|
|
|
|
180
|
|
|
|
(74
|
)
|
|
|
16
|
|
|
|
296
|
|
|
|
10
|
|
|
|
—
|
|
Charge-offs
|
|
|
(45
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
(121
|
)
|
|
|
—
|
|
|
|
(197
|
)
|
Recoveries
|
|
|
148
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
23
|
|
|
|
215
|
|
|
|
—
|
|
|
|
396
|
|
Balance,
end of period
|
|
$
|
2,541
|
|
|
|
188
|
|
|
|
3,582
|
|
|
|
1,074
|
|
|
|
35
|
|
|
|
2,490
|
|
|
|
430
|
|
|
|
10,340
|
|
The
following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.
|
|
Loans
Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
At
September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
98
|
|
|
|
54
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
167
|
|
Collectively
evaluated for impairment
|
|
|
2,377
|
|
|
|
182
|
|
|
|
3,574
|
|
|
|
1,129
|
|
|
|
76
|
|
|
|
2,570
|
|
|
|
587
|
|
|
|
10,495
|
|
|
|
$
|
2,475
|
|
|
|
236
|
|
|
|
3,574
|
|
|
|
1,129
|
|
|
|
76
|
|
|
|
2,585
|
|
|
|
587
|
|
|
|
10,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
4,145
|
|
|
|
623
|
|
|
|
4,805
|
|
|
|
391
|
|
|
|
16
|
|
|
|
206
|
|
|
|
—
|
|
|
|
10,186
|
|
Collectively
evaluated for impairment
|
|
|
466,212
|
|
|
|
45,488
|
|
|
|
559,191
|
|
|
|
172,592
|
|
|
|
8,957
|
|
|
|
201,248
|
|
|
|
—
|
|
|
|
1,453,688
|
|
Purchased
Credit-Impaired Loans
|
|
|
5,592
|
|
|
|
51
|
|
|
|
11,204
|
|
|
|
2,816
|
|
|
|
37
|
|
|
|
887
|
|
|
|
—
|
|
|
|
20,587
|
|
Total
loans receivable
|
|
$
|
475,949
|
|
|
|
46,162
|
|
|
|
575,200
|
|
|
|
175,799
|
|
|
|
9,010
|
|
|
|
202,341
|
|
|
|
—
|
|
|
|
1,484,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
27
|
|
|
|
29
|
|
|
|
92
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
157
|
|
Collectively
evaluated for impairment
|
|
|
2,609
|
|
|
|
168
|
|
|
|
3,252
|
|
|
|
1,132
|
|
|
|
80
|
|
|
|
2,796
|
|
|
|
494
|
|
|
|
10,531
|
|
|
|
$
|
2,636
|
|
|
|
197
|
|
|
|
3,344
|
|
|
|
1,132
|
|
|
|
80
|
|
|
|
2,805
|
|
|
|
494
|
|
|
|
10,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
4,668
|
|
|
|
108
|
|
|
|
5,247
|
|
|
|
507
|
|
|
|
24
|
|
|
|
267
|
|
|
|
—
|
|
|
|
10,821
|
|
Collectively
evaluated for impairment
|
|
|
406,731
|
|
|
|
35,918
|
|
|
|
440,097
|
|
|
|
115,175
|
|
|
|
5,690
|
|
|
|
163,834
|
|
|
|
—
|
|
|
|
1,167,445
|
|
Total
loans receivable
|
|
$
|
411,399
|
|
|
|
36,026
|
|
|
|
445,344
|
|
|
|
115,682
|
|
|
|
5,714
|
|
|
|
164,101
|
|
|
|
—
|
|
|
|
1,178,266
|
|
The
following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories and the corresponding
allowance for loan losses as of September 30, 2017 and December 31, 2016. The recorded investment is defined as the original amount
of the loan, net of any deferred costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance
includes amounts previously included in charge-offs.
|
|
At
September 30, 2017
|
|
|
At
December 31, 2016
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
|
(In thousands)
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
3,295
|
|
|
|
3,416
|
|
|
|
—
|
|
|
|
4,125
|
|
|
|
4,366
|
|
|
|
—
|
|
Home
equity
|
|
|
353
|
|
|
|
353
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
real estate
|
|
|
3,350
|
|
|
|
3,350
|
|
|
|
—
|
|
|
|
4,011
|
|
|
|
4,011
|
|
|
|
—
|
|
Construction
and development
|
|
|
391
|
|
|
|
391
|
|
|
|
—
|
|
|
|
507
|
|
|
|
507
|
|
|
|
—
|
|
Consumer
loans
|
|
|
16
|
|
|
|
16
|
|
|
|
—
|
|
|
|
24
|
|
|
|
24
|
|
|
|
—
|
|
Commercial
business loans
|
|
|
23
|
|
|
|
24
|
|
|
|
—
|
|
|
|
258
|
|
|
|
258
|
|
|
|
—
|
|
|
|
|
7,428
|
|
|
|
7,550
|
|
|
|
—
|
|
|
|
8,925
|
|
|
|
9,166
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
850
|
|
|
|
850
|
|
|
|
98
|
|
|
|
543
|
|
|
|
543
|
|
|
|
27
|
|
Home
equity
|
|
|
270
|
|
|
|
270
|
|
|
|
54
|
|
|
|
108
|
|
|
|
108
|
|
|
|
29
|
|
Commercial
real estate
|
|
|
1,455
|
|
|
|
1,455
|
|
|
|
—
|
|
|
|
1,236
|
|
|
|
1,236
|
|
|
|
92
|
|
Construction
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
business loans
|
|
|
183
|
|
|
|
183
|
|
|
|
16
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
2,758
|
|
|
|
2,758
|
|
|
|
168
|
|
|
|
1,896
|
|
|
|
1,896
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
4,145
|
|
|
|
4,266
|
|
|
|
98
|
|
|
|
4,668
|
|
|
|
4,909
|
|
|
|
27
|
|
Home
equity
|
|
|
623
|
|
|
|
623
|
|
|
|
54
|
|
|
|
108
|
|
|
|
108
|
|
|
|
29
|
|
Commercial
real estate
|
|
|
4,805
|
|
|
|
4,805
|
|
|
|
—
|
|
|
|
5,247
|
|
|
|
5,247
|
|
|
|
92
|
|
Construction
and development
|
|
|
391
|
|
|
|
391
|
|
|
|
—
|
|
|
|
507
|
|
|
|
507
|
|
|
|
—
|
|
Consumer
loans
|
|
|
16
|
|
|
|
16
|
|
|
|
—
|
|
|
|
24
|
|
|
|
24
|
|
|
|
—
|
|
Commercial
business loans
|
|
|
206
|
|
|
|
207
|
|
|
|
15
|
|
|
|
267
|
|
|
|
267
|
|
|
|
9
|
|
|
|
$
|
10,186
|
|
|
|
10,308
|
|
|
|
167
|
|
|
|
10,821
|
|
|
|
11,062
|
|
|
|
157
|
|
The
following table presents the average recorded investment and interest income recognized on impaired loans individually evaluated
for impairment in the segmented portfolio categories for the three and nine months ended September 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
2,686
|
|
|
|
13
|
|
|
|
2,218
|
|
|
|
9
|
|
|
|
2,757
|
|
|
|
34
|
|
|
|
2,445
|
|
|
|
32
|
|
Home
equity
|
|
|
347
|
|
|
|
6
|
|
|
|
111
|
|
|
|
4
|
|
|
|
290
|
|
|
|
18
|
|
|
|
37
|
|
|
|
5
|
|
Commercial
real estate
|
|
|
3,552
|
|
|
|
(13
|
)
|
|
|
3,889
|
|
|
|
61
|
|
|
|
3,543
|
|
|
|
85
|
|
|
|
7,411
|
|
|
|
289
|
|
Construction
and development
|
|
|
158
|
|
|
|
6
|
|
|
|
503
|
|
|
|
1
|
|
|
|
182
|
|
|
|
14
|
|
|
|
501
|
|
|
|
1
|
|
Consumer
loans
|
|
|
19
|
|
|
|
—
|
|
|
|
20
|
|
|
|
9
|
|
|
|
19
|
|
|
|
—
|
|
|
|
29
|
|
|
|
8
|
|
Commercial
business loans
|
|
|
32
|
|
|
|
—
|
|
|
|
286
|
|
|
|
4
|
|
|
|
32
|
|
|
|
1
|
|
|
|
465
|
|
|
|
56
|
|
|
|
|
6,794
|
|
|
|
12
|
|
|
|
7,027
|
|
|
|
88
|
|
|
|
6,823
|
|
|
|
152
|
|
|
|
10,888
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
775
|
|
|
|
6
|
|
|
|
550
|
|
|
|
4
|
|
|
|
748
|
|
|
|
14
|
|
|
|
555
|
|
|
|
14
|
|
Home
equity
|
|
|
274
|
|
|
|
—
|
|
|
|
55
|
|
|
|
2
|
|
|
|
246
|
|
|
|
(1
|
)
|
|
|
18
|
|
|
|
2
|
|
Commercial
real estate
|
|
|
1,472
|
|
|
|
62
|
|
|
|
1,256
|
|
|
|
—
|
|
|
|
1,472
|
|
|
|
62
|
|
|
|
1,274
|
|
|
|
—
|
|
Construction
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
business loans
|
|
|
193
|
|
|
|
2
|
|
|
|
9
|
|
|
|
—
|
|
|
|
192
|
|
|
|
8
|
|
|
|
9
|
|
|
|
—
|
|
|
|
|
2,714
|
|
|
|
70
|
|
|
|
1,870
|
|
|
|
6
|
|
|
|
2,658
|
|
|
|
83
|
|
|
|
1,856
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
3,461
|
|
|
|
19
|
|
|
|
2,768
|
|
|
|
13
|
|
|
|
3,505
|
|
|
|
48
|
|
|
|
3,000
|
|
|
|
46
|
|
Home
equity
|
|
|
621
|
|
|
|
6
|
|
|
|
166
|
|
|
|
6
|
|
|
|
536
|
|
|
|
17
|
|
|
|
55
|
|
|
|
7
|
|
Commercial
real estate
|
|
|
5,024
|
|
|
|
49
|
|
|
|
5,145
|
|
|
|
61
|
|
|
|
5,015
|
|
|
|
147
|
|
|
|
8,685
|
|
|
|
289
|
|
Construction
and development
|
|
|
158
|
|
|
|
6
|
|
|
|
503
|
|
|
|
1
|
|
|
|
182
|
|
|
|
14
|
|
|
|
501
|
|
|
|
1
|
|
Consumer
loans
|
|
|
19
|
|
|
|
—
|
|
|
|
20
|
|
|
|
9
|
|
|
|
19
|
|
|
|
—
|
|
|
|
29
|
|
|
|
8
|
|
Commercial
business loans
|
|
|
225
|
|
|
|
2
|
|
|
|
295
|
|
|
|
4
|
|
|
|
224
|
|
|
|
9
|
|
|
|
474
|
|
|
|
56
|
|
|
|
$
|
9,508
|
|
|
|
82
|
|
|
|
8,897
|
|
|
|
94
|
|
|
|
9,481
|
|
|
|
235
|
|
|
|
12,744
|
|
|
|
407
|
|
A
loan is considered past due if the required principal and interest payment has not been received as of the due date. The following
schedule is an aging of past due loans receivable by portfolio segment as of September 30, 2017 and December 31, 2016.
|
|
At
September 30, 2017
|
|
Acquired
Non-Credit
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
(ASC
310-20) and
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
Nonacquired
Loans:
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In thousands)
|
|
30-59
days past due
|
|
$
|
251
|
|
|
|
543
|
|
|
|
980
|
|
|
|
70
|
|
|
|
208
|
|
|
|
190
|
|
|
|
2,242
|
|
60-89
days past due
|
|
|
503
|
|
|
|
35
|
|
|
|
1,086
|
|
|
|
—
|
|
|
|
21
|
|
|
|
23
|
|
|
|
1,668
|
|
90
days or more past due
|
|
|
1,551
|
|
|
|
108
|
|
|
|
—
|
|
|
|
90
|
|
|
|
5
|
|
|
|
5
|
|
|
|
1,759
|
|
Total
past due
|
|
|
2,305
|
|
|
|
686
|
|
|
|
2,066
|
|
|
|
160
|
|
|
|
234
|
|
|
|
218
|
|
|
|
5,669
|
|
Current
|
|
|
468,052
|
|
|
|
45,425
|
|
|
|
561,930
|
|
|
|
172,823
|
|
|
|
8,739
|
|
|
|
201,236
|
|
|
|
1,458,205
|
|
Total
loans receivable
|
|
$
|
470,357
|
|
|
|
46,111
|
|
|
|
563,996
|
|
|
|
172,983
|
|
|
|
8,973
|
|
|
|
201,454
|
|
|
|
1,463,874
|
|
|
|
At
September 30, 2017
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
Acquired
Credit Impaired
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
Loans
(ASC 310-30):
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
30-59
days past due
|
|
$
|
298
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
298
|
|
60-89
days past due
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
90
days or more past due
|
|
|
427
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,261
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,688
|
|
Total
past due
|
|
|
750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,261
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,011
|
|
Current
|
|
|
4,842
|
|
|
|
51
|
|
|
|
11,204
|
|
|
|
1,555
|
|
|
|
37
|
|
|
|
887
|
|
|
|
18,576
|
|
Total
loans receivable
|
|
$
|
5,592
|
|
|
|
51
|
|
|
|
11,204
|
|
|
|
2,816
|
|
|
|
37
|
|
|
|
887
|
|
|
|
20,587
|
|
|
|
At
December 31, 2016
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
30-59
days past due
|
|
$
|
3,864
|
|
|
|
379
|
|
|
|
206
|
|
|
|
62
|
|
|
|
55
|
|
|
|
136
|
|
|
|
4,702
|
|
60-89
days past due
|
|
|
635
|
|
|
|
497
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
1,135
|
|
90
days or more past due
|
|
|
3,170
|
|
|
|
108
|
|
|
|
334
|
|
|
|
507
|
|
|
|
26
|
|
|
|
16
|
|
|
|
4,161
|
|
Total
past due
|
|
|
7,669
|
|
|
|
984
|
|
|
|
540
|
|
|
|
569
|
|
|
|
84
|
|
|
|
152
|
|
|
|
9,998
|
|
Current
|
|
|
403,730
|
|
|
|
35,042
|
|
|
|
444,804
|
|
|
|
115,113
|
|
|
|
5,630
|
|
|
|
163,949
|
|
|
|
1,168,268
|
|
Total
loans receivable
|
|
$
|
411,399
|
|
|
|
36,026
|
|
|
|
445,344
|
|
|
|
115,682
|
|
|
|
5,714
|
|
|
|
164,101
|
|
|
|
1,178,266
|
|
Loans
are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the
obligation is both well-secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest payments received while the loan is on nonaccrual are applied to the principal balance. No interest income
was recognized on impaired loans subsequent to the nonaccrual status designation. A loan is returned to accrual status when the
borrower makes consistent payments according to contractual terms and future payments are reasonably assured.
The
following is a schedule of loans receivable, by portfolio segment, on nonaccrual at September 30, 2017 and December 31, 2016.
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loans secured
by real estate:
|
|
(In
thousands)
|
|
One-to-four
family
|
|
$
|
2,974
|
|
|
|
3,256
|
|
Home
equity
|
|
|
270
|
|
|
|
108
|
|
Commercial
real estate
|
|
|
1,360
|
|
|
|
1,703
|
|
Construction
and development
|
|
|
124
|
|
|
|
507
|
|
Consumer
loans
|
|
|
22
|
|
|
|
27
|
|
Commercial
business loans
|
|
|
174
|
|
|
|
24
|
|
|
|
$
|
4,924
|
|
|
|
5,625
|
|
The
Company uses several metrics as credit quality indicators of current or potential risks as part of the ongoing monitoring of credit
quality of its loan portfolio. The credit quality indicators are periodically reviewed and updated on a case-by-case basis. The
Company uses the following definitions for the internal risk rating grades, listed from the least risk to the highest risk.
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 Company will sustain some loss if the deficiencies
are not corrected.
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
Company uses the following definitions in the tables below:
Nonperforming:
Loans on nonaccrual status plus loans greater than 90 days past due still accruing interest.
Performing:
All current accrual loans plus loans less than 90 days past due.
The
following is a schedule of the credit quality of loans receivable, by portfolio segment, as of September 30, 2017 and December
31, 2016.
|
|
At
September 30, 2017
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
Total
Loans:
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Internal
Risk Rating Grades:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
472,354
|
|
|
|
45,469
|
|
|
|
571,745
|
|
|
|
173,594
|
|
|
|
8,992
|
|
|
|
200,490
|
|
|
|
1,472,644
|
|
Special
Mention
|
|
|
483
|
|
|
|
—
|
|
|
|
2,095
|
|
|
|
138
|
|
|
|
—
|
|
|
|
1,851
|
|
|
|
4,567
|
|
Substandard
|
|
|
3,112
|
|
|
|
693
|
|
|
|
1,360
|
|
|
|
2,067
|
|
|
|
18
|
|
|
|
—
|
|
|
|
7,250
|
|
Total
loans receivable
|
|
$
|
475,949
|
|
|
|
46,162
|
|
|
|
575,200
|
|
|
|
175,799
|
|
|
|
9,010
|
|
|
|
202,341
|
|
|
|
1,484,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
472,548
|
|
|
|
45,892
|
|
|
|
573,840
|
|
|
|
174,414
|
|
|
|
8,988
|
|
|
|
202,167
|
|
|
|
1,477,849
|
|
Nonperforming:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
days past due still accruing
|
|
|
427
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,261
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,688
|
|
Nonaccrual
|
|
|
2,974
|
|
|
|
270
|
|
|
|
1,360
|
|
|
|
124
|
|
|
|
22
|
|
|
|
174
|
|
|
|
4,924
|
|
Total
nonperforming
|
|
|
3,401
|
|
|
|
270
|
|
|
|
1,360
|
|
|
|
1,385
|
|
|
|
22
|
|
|
|
174
|
|
|
|
6,612
|
|
Total
loans receivable
|
|
$
|
475,949
|
|
|
|
46,162
|
|
|
|
575,200
|
|
|
|
175,799
|
|
|
|
9,010
|
|
|
|
202,341
|
|
|
|
1,484,461
|
|
|
|
At
September 30, 2017
|
|
Acquired
Non-Credit
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
(ASC
310-20) and
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
Nonacquired
Loans:
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Internal
Risk Rating Grades:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
467,245
|
|
|
|
45,418
|
|
|
|
561,387
|
|
|
|
172,439
|
|
|
|
8,955
|
|
|
|
199,854
|
|
|
|
1,455,298
|
|
Special
Mention
|
|
|
188
|
|
|
|
—
|
|
|
|
1,249
|
|
|
|
74
|
|
|
|
—
|
|
|
|
1,600
|
|
|
|
3,111
|
|
Substandard
|
|
|
2,924
|
|
|
|
693
|
|
|
|
1,360
|
|
|
|
470
|
|
|
|
18
|
|
|
|
—
|
|
|
|
5,465
|
|
Total
loans receivable
|
|
$
|
470,357
|
|
|
|
46,111
|
|
|
|
563,996
|
|
|
|
172,983
|
|
|
|
8,973
|
|
|
|
201,454
|
|
|
|
1,463,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
467,383
|
|
|
|
45,841
|
|
|
|
562,636
|
|
|
|
172,859
|
|
|
|
8,951
|
|
|
|
201,280
|
|
|
|
1,458,950
|
|
Nonperforming:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
days past due still accruing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual
|
|
|
2,974
|
|
|
|
270
|
|
|
|
1,360
|
|
|
|
124
|
|
|
|
22
|
|
|
|
174
|
|
|
|
4,924
|
|
Total
nonperforming
|
|
|
2,974
|
|
|
|
270
|
|
|
|
1,360
|
|
|
|
124
|
|
|
|
22
|
|
|
|
174
|
|
|
|
4,924
|
|
Total
loans receivable
|
|
$
|
470,357
|
|
|
|
46,111
|
|
|
|
563,996
|
|
|
|
172,983
|
|
|
|
8,973
|
|
|
|
201,454
|
|
|
|
1,463,874
|
|
|
|
At
September 30, 2017
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
Acquired
Credit Impaired
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
Loans
(ASC 310-30):
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Internal
Risk Rating Grades:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
5,109
|
|
|
|
51
|
|
|
|
10,358
|
|
|
|
1,155
|
|
|
|
37
|
|
|
|
636
|
|
|
|
17,346
|
|
Special
Mention
|
|
|
295
|
|
|
|
—
|
|
|
|
846
|
|
|
|
64
|
|
|
|
—
|
|
|
|
251
|
|
|
|
1,456
|
|
Substandard
|
|
|
188
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,597
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,785
|
|
Total
loans receivable
|
|
$
|
5,592
|
|
|
|
51
|
|
|
|
11,204
|
|
|
|
2,816
|
|
|
|
37
|
|
|
|
887
|
|
|
|
20,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
5,165
|
|
|
|
51
|
|
|
|
11,204
|
|
|
|
1,555
|
|
|
|
37
|
|
|
|
887
|
|
|
|
18,899
|
|
Nonperforming:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
days past due still accruing
|
|
|
427
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,261
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,688
|
|
Nonaccrual
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
nonperforming
|
|
|
427
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,261
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,688
|
|
Total
loans receivable
|
|
$
|
5,592
|
|
|
|
51
|
|
|
|
11,204
|
|
|
|
2,816
|
|
|
|
37
|
|
|
|
887
|
|
|
|
20,587
|
|
|
|
At
December 31, 2016
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
four
|
|
|
Home
|
|
|
real
|
|
|
and
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
family
|
|
|
equity
|
|
|
estate
|
|
|
development
|
|
|
Consumer
|
|
|
business
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Internal
Risk Rating Grades:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
407,612
|
|
|
|
35,903
|
|
|
|
442,323
|
|
|
|
114,751
|
|
|
|
5,683
|
|
|
|
162,235
|
|
|
|
1,168,507
|
|
Special
Mention
|
|
|
438
|
|
|
|
15
|
|
|
|
1,318
|
|
|
|
424
|
|
|
|
19
|
|
|
|
1,849
|
|
|
|
4,063
|
|
Substandard
|
|
|
3,349
|
|
|
|
108
|
|
|
|
1,703
|
|
|
|
507
|
|
|
|
12
|
|
|
|
17
|
|
|
|
5,696
|
|
Total
loans receivable
|
|
$
|
411,399
|
|
|
|
36,026
|
|
|
|
445,344
|
|
|
|
115,682
|
|
|
|
5,714
|
|
|
|
164,101
|
|
|
|
1,178,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
408,143
|
|
|
|
35,918
|
|
|
|
443,641
|
|
|
|
115,175
|
|
|
|
5,687
|
|
|
|
164,077
|
|
|
|
1,172,641
|
|
Nonperforming:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
3,256
|
|
|
|
108
|
|
|
|
1,703
|
|
|
|
507
|
|
|
|
27
|
|
|
|
24
|
|
|
|
5,625
|
|
Total
nonperforming
|
|
|
3,256
|
|
|
|
108
|
|
|
|
1,703
|
|
|
|
507
|
|
|
|
27
|
|
|
|
24
|
|
|
|
5,625
|
|
Total
loans receivable
|
|
$
|
411,399
|
|
|
|
36,026
|
|
|
|
445,344
|
|
|
|
115,682
|
|
|
|
5,714
|
|
|
|
164,101
|
|
|
|
1,178,266
|
|
There
were no loans 90 days or more past due and still accruing at December 31, 2016.
The
Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
Troubled
Debt Restructurings
At
September 30, 2017, there were $6.5 million in loans designated as troubled debt restructurings of which $5.5 million were accruing.
At September 30, 2016, there were $6.3 million in loans designated as troubled debt restructurings of which $4.9 million were
accruing. At December 31, 2016, there were $6.4 million in loans designated as troubled debt restructurings of which $5.2 million
were accruing.
There
were no loans identified as a troubled debt restructuring during the three months ended September 30, 2016 or 2017.
No
loans previously restructured in the twelve months prior to September 30, 2017 and 2016 went into default during the three and
nine months ended September 30, 2017 and 2016.
NOTE
6 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The
following presents summarized activity in real estate acquired through foreclosure for the periods ended September 30, 2017 and
December 31, 2016:
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In
thousands)
|
|
Balance
at beginning of period
|
|
$
|
1,179
|
|
|
|
2,374
|
|
Additions
|
|
|
1,089
|
|
|
|
2,630
|
|
Sales
|
|
|
(628
|
)
|
|
|
(3,810
|
)
|
Write
downs
|
|
|
—
|
|
|
|
(15
|
)
|
Balance
at end of period
|
|
$
|
1,640
|
|
|
|
1,179
|
|
A
summary of the composition of real estate acquired through foreclosure follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In
thousands)
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
291
|
|
|
|
—
|
|
Construction
and development
|
|
|
1,349
|
|
|
|
1,179
|
|
|
|
$
|
1,640
|
|
|
|
1,179
|
|
NOTE
7 - DEPOSITS
Deposits
outstanding by type of account at September 30, 2017 and December 31, 2016 are summarized as follows:
|
|
At
September 30,
|
|
|
At December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Noninterest-bearing
demand accounts
|
|
$
|
333,267
|
|
|
|
229,905
|
|
Interest-bearing
demand accounts
|
|
|
309,241
|
|
|
|
191,851
|
|
Savings
accounts
|
|
|
69,552
|
|
|
|
48,648
|
|
Money
market accounts
|
|
|
377,754
|
|
|
|
292,639
|
|
Certificates
of deposit:
|
|
|
|
|
|
|
|
|
Less
than $250,000
|
|
|
567,483
|
|
|
|
467,937
|
|
$250,000
or more
|
|
|
50,357
|
|
|
|
27,280
|
|
Total
certificates of deposit
|
|
|
617,840
|
|
|
|
495,217
|
|
Total
deposits
|
|
$
|
1,707,654
|
|
|
|
1,258,260
|
|
The
aggregate amount of brokered certificates of deposit was $112.0 million and $98.3 million at September 30, 2017 and December 31,
2016, respectively. Brokered certificates of deposit are included in the table above under certificates of deposit less than $250,000.
The aggregate amount of institutional certificates of deposit was $43.7 million and $44.3 million at September 30, 2017 and December
31, 2016, respectively.
NOTE
8 – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Current
accounting literature requires disclosures about the fair value of all financial instruments whether or not recognized in the
balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases, could not be realized through immediate settlement of
the instrument. Certain items are specifically excluded from disclosure requirements, including the Company’s stock, premises
and equipment, accrued interest receivable and payable and other assets and liabilities.
The
fair value of a financial instrument is an amount at which the asset or obligation could be exchanged in a current transaction
between willing parties, other than in a forced sale. Fair values are estimated at a specific point in time based on relevant
market information and information about the financial instruments. Because no market value exists for a significant portion of
the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other factors.
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 that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.
The
Company determines the fair value of its financial instruments based on the fair value hierarchy established under ASC 820-10,
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that
is significant to the financial instrument’s fair value measurement in its entirety. There are three levels of inputs that
may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:
Level
1
|
Quoted
prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level
1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid and are actively
traded in over-the-counter markets.
|
Level
2
|
Observable
inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted
prices in markets that are not active, or model-based valuation techniques for which all significant assumptions are derived
principally from or corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted
prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined
by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated
by observable market data. U.S. Government sponsored agency securities, mortgage-backed securities issued by U.S. Government
sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by
U.S. Government sponsored enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private
equity investments that invest in publicly traded companies are also considered Level 2 assets.
|
Level
3
|
Unobservable
inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow models and similar techniques,
and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset
or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable
assumptions that reflect The Company’s own estimates for assumptions that market participants would use in pricing the
asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity
investments, and certain private equity investments.
|
Cash
and due from banks - The carrying amounts of these financial instruments approximate fair value. All mature within 90 days and
present no anticipated credit concerns.
Interest-bearing
cash - The carrying amount of these financial instruments approximates fair value.
Securities
available-for-sale and securities held to maturity – Fair values for investment securities available-for-sale and securities
held to maturity are based upon quoted prices, if available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted
for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.
FHLB
stock and other non-marketable equity securities - The carrying amount of these financial instruments approximates fair value.
Mortgage
loans held for sale – Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or
fair value on an individual loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market
are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination
fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value.
Fair value is derived from observable current market prices, when available, and includes loan servicing value. When observable
market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the Company
uses its best estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans
held for sale are classified within Level 2 of the valuation hierarchy.
Loans
receivable - The fair value of other types of loans is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Further adjustments
are made to reflect current market conditions. There is no discount for liquidity included in the expected cash flow assumptions.
Loans receivable are classified within Level 3 of the valuation hierarchy.
Accrued
interest receivable - The carrying value approximates the fair value.
Mortgage
servicing rights - The Company initially measures servicing assets and liabilities retained related to the sale of residential
loans held for sale (“mortgage servicing rights”) at fair value, if practicable. For subsequent measurement purposes,
the Company measures servicing assets and liabilities based on the lower of cost or market.
Deposits
- The estimated fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at
the reporting date. The estimated fair value of fixed maturity certificates of deposits is estimated by discounting the future
cash flows using rates currently offered for deposits of similar remaining maturities.
Short-term
borrowed funds - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term
borrowings maturing within 90 days approximate their fair values. Estimated fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing
arrangements.
Long-term
debt - The estimated fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based
on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Other
Investments – The carrying value approximates the fair value.
Derivative
assets and liabilities – The primary use of derivative instruments are related to the mortgage banking activities of the
Company. The Company’s wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected
funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination
of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such,
The Company records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount
that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course
of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at
a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers “lock-in”
a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest
rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor.
To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage
banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock
in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments
to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives,
and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment,
the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the
loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans,
which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The
fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies
and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for
the difference between retail and wholesale mortgage rates. Management also applies fall-out ratio assumptions for those interest
rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary’s
historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not
exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for
determining the appropriate hedge ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis
of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the
date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security
prices. The expected fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined
fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments
are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage
of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security
between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.
Derivative
instruments not related to mortgage banking activities interest rate swap agreements - Fair values for these instruments are based
on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted
market prices are recurring Level 1.
Commitments
to extend credit – The carrying amounts of these commitments are considered to be a reasonable estimate of fair value because
the commitments underlying interest rates are based upon current market rates.
Accrued
interest payable - The fair value approximates the carrying value.
Off-balance
sheet financial instruments – Contract values and fair values for off-balance sheet, credit-related financial instruments
are based on estimated fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and counterparties’ credit standing.
The
carrying amount and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016
are as follows:
|
|
At
September 30, 2017
|
|
|
|
Carrying
|
|
|
Fair
Value
|
|
|
|
Amount
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Financial
assets:
|
|
(In thousands)
|
|
Cash
and due from banks
|
|
$
|
14,046
|
|
|
|
14,046
|
|
|
|
14,046
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing
cash
|
|
|
31,198
|
|
|
|
31,198
|
|
|
|
31,198
|
|
|
|
—
|
|
|
|
—
|
|
Securities
available-for-sale
|
|
|
523,744
|
|
|
|
523,744
|
|
|
|
—
|
|
|
|
514,801
|
|
|
|
8,943
|
|
Federal
Home Loan Bank stock
|
|
|
10,970
|
|
|
|
10,970
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,970
|
|
Other
investments
|
|
|
2,139
|
|
|
|
2,139
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,139
|
|
Derivative
assets
|
|
|
2,332
|
|
|
|
2,332
|
|
|
|
818
|
|
|
|
1,514
|
|
|
|
—
|
|
Loans
held for sale
|
|
|
26,786
|
|
|
|
26,786
|
|
|
|
—
|
|
|
|
26,786
|
|
|
|
—
|
|
Loans
receivable, net
|
|
|
1,473,799
|
|
|
|
1,472,666
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,472,666
|
|
Accrued
interest receivable
|
|
|
7,320
|
|
|
|
7,320
|
|
|
|
—
|
|
|
|
7,320
|
|
|
|
—
|
|
Mortgage
servicing rights
|
|
|
17,444
|
|
|
|
22,764
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,764
|
|
Cash
value life insurance
|
|
|
38,317
|
|
|
|
38,317
|
|
|
|
—
|
|
|
|
38,317
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,707,654
|
|
|
|
1,705,605
|
|
|
|
—
|
|
|
|
1,705,605
|
|
|
|
—
|
|
Short-term
borrowed funds
|
|
|
180,000
|
|
|
|
179,775
|
|
|
|
—
|
|
|
|
179,775
|
|
|
|
—
|
|
Long-term
debt
|
|
|
54,351
|
|
|
|
54,165
|
|
|
|
—
|
|
|
|
54,165
|
|
|
|
—
|
|
Derivative
liabilities
|
|
|
201
|
|
|
|
201
|
|
|
|
201
|
|
|
|
—
|
|
|
|
—
|
|
Accrued
interest payable
|
|
|
1,053
|
|
|
|
1,053
|
|
|
|
—
|
|
|
|
1,053
|
|
|
|
—
|
|
|
|
At
December 31, 2016
|
|
|
|
Carrying
|
|
|
Fair
Value
|
|
|
|
Amount
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Financial
assets:
|
|
(In thousands)
|
|
Cash
and due from banks
|
|
$
|
9,761
|
|
|
|
9,761
|
|
|
|
9,761
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing
cash
|
|
|
14,591
|
|
|
|
14,591
|
|
|
|
14,591
|
|
|
|
—
|
|
|
|
—
|
|
Securities
available-for-sale
|
|
|
335,352
|
|
|
|
335,352
|
|
|
|
—
|
|
|
|
328,188
|
|
|
|
7,164
|
|
Federal
Home Loan Bank stock
|
|
|
11,072
|
|
|
|
11,072
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,072
|
|
Other
investments
|
|
|
1,768
|
|
|
|
1,768
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,768
|
|
Derivative
assets
|
|
|
2,219
|
|
|
|
2,219
|
|
|
|
953
|
|
|
|
1,266
|
|
|
|
—
|
|
Loans
held for sale
|
|
|
31,569
|
|
|
|
31,569
|
|
|
|
—
|
|
|
|
31,569
|
|
|
|
—
|
|
Loans
receivable, net
|
|
|
1,167,578
|
|
|
|
1,173,118
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,173,118
|
|
Cash
value life insurance
|
|
|
28,984
|
|
|
|
28,984
|
|
|
|
—
|
|
|
|
28,984
|
|
|
|
—
|
|
Accrued
interest receivable
|
|
|
5,373
|
|
|
|
5,373
|
|
|
|
—
|
|
|
|
5,373
|
|
|
|
—
|
|
Mortgage
servicing rights
|
|
|
15,032
|
|
|
|
20,961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,258,260
|
|
|
|
1,256,119
|
|
|
|
—
|
|
|
|
1,256,119
|
|
|
|
—
|
|
Short-term
borrowed funds
|
|
|
203,000
|
|
|
|
202,455
|
|
|
|
—
|
|
|
|
202,455
|
|
|
|
—
|
|
Long-term
debt
|
|
|
38,465
|
|
|
|
38,442
|
|
|
|
—
|
|
|
|
38,442
|
|
|
|
—
|
|
Derivative
liabilities
|
|
|
342
|
|
|
|
342
|
|
|
|
195
|
|
|
|
147
|
|
|
|
—
|
|
Accrued
interest payable
|
|
|
327
|
|
|
|
327
|
|
|
|
—
|
|
|
|
327
|
|
|
|
—
|
|
|
|
At
September 30, 2017
|
|
|
At
December 31, 2016
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
Notional
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair
Value
|
|
|
Amount
|
|
|
Fair
Value
|
|
Off-Balance Sheet
Financial Instruments:
|
|
(In
thousands)
|
|
Commitments
to extend credit
|
|
$
|
209,319
|
|
|
|
—
|
|
|
|
111,446
|
|
|
|
—
|
|
Standby
letters of credit
|
|
|
3,272
|
|
|
|
—
|
|
|
|
2,248
|
|
|
|
—
|
|
In
determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair
value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant
unobservable inputs are classified as Level 3.
Following
is a description of valuation methodologies used for assets recorded at fair value on a recurring and non-recurring basis.
Securities
Available-for-Sale
Measurement
is on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured
using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted
for prepayment assumptions, projected credit losses, and liquidity. At September 30, 2017 and December 31, 2016, the Company’s
investment securities available-for-sale are recurring Level 2 except for trust preferred securities which are determined to be
Level 3.
Mortgage
Loans Held for Sale
Mortgage
loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual loan basis.
Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan
and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings
at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from observable current
market prices, when available, and includes loan servicing value. When observable market prices are not available, the Company
uses judgment and estimates fair value using internal models, in which the Company uses its best estimates of assumptions it believes
would be used by market participants in estimating fair value. Mortgage loans held for sale are classified within Level 2 of the
valuation hierarchy.
Derivative
Assets and Liabilities
The
primary use of derivative instruments is related to the mortgage banking activities of the Company. The Company’s wholesale
mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans
at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be
held-for-sale are considered derivative instruments under applicable accounting guidance. As such, the Company records its interest
rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle
each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary
enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed
expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within the
time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time
of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest
rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best
efforts forward sales contracts with third party investors. The forward sales contracts lock in a price for the sale of loans
similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward
sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked
to fair value through earnings. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability
to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value
of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market
data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock
commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up
and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail
and wholesale mortgage rates. The Company also applies fall-out ratio assumptions for those interest rate lock commitments for
which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary’s historical
experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions
of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the
appropriate hedge ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock
fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment
through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected
fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed
mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on
interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value
of the forward sales contracts to investors considers the market price movement of the same type of security between the trade
date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.
Derivative
instruments not related to mortgage banking activities include interest rate swap agreements. Fair values for these instruments
are based on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based
on quoted market prices in an active market are recurring Level 1.
Impaired
Loans
Loans
that are considered impaired are recorded at fair value on a nonrecurring basis. Once a loan is considered impaired, the fair
value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted
cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for which the fair value
of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired
are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are
obtained using independent appraisals, which the Company considers to be Level 3 inputs.
Other
Real Estate Owned (“OREO”)
OREO
is carried at the lower of carrying value or fair value on a nonrecurring basis. Fair value is based upon independent appraisals
or management’s estimation of the collateral and is considered a Level 3 measurement. When the OREO value is based
upon a current appraisal or when a current appraisal is not available or there is estimated further impairment, the measurement
is considered a Level 3 measurement.
Mortgage
Servicing Rights
A
mortgage servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received
from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The Company initially
measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage servicing
rights”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities
based on the lower of cost or market on a quarterly basis. The quarterly determination of fair value of servicing rights is provided
by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation
model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value
are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level
3 of the valuation hierarchy.
Assets
and liabilities measured at fair value on a recurring basis are as follows as of September 30, 2017 and December 31, 2016:
|
|
Quoted
market
|
|
|
Significant
other
|
|
|
Significant
other
|
|
|
|
price
in active
markets
|
|
|
observable
inputs
|
|
|
unobservable
inputs
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
(In
thousands)
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
—
|
|
|
|
166,607
|
|
|
|
—
|
|
US
government agencies
|
|
|
—
|
|
|
|
10,354
|
|
|
|
—
|
|
Collateralized
loan obligations
|
|
|
—
|
|
|
|
112,126
|
|
|
|
—
|
|
Corporate
securities
|
|
|
—
|
|
|
|
494
|
|
|
|
—
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
—
|
|
|
|
167,891
|
|
|
|
—
|
|
Non-agency
|
|
|
—
|
|
|
|
57,329
|
|
|
|
—
|
|
Trust
Preferred Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
8,943
|
|
Loans
held for sale
|
|
|
—
|
|
|
|
26,786
|
|
|
|
—
|
|
Derivative
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
205
|
|
|
|
—
|
|
|
|
—
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
613
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage
loan interest rate lock commitments
|
|
|
—
|
|
|
|
913
|
|
|
|
—
|
|
Mortgage
loan forward sales commitments
|
|
|
—
|
|
|
|
245
|
|
|
|
—
|
|
Mortgage-backed
securities forward sales commitments
|
|
|
—
|
|
|
|
356
|
|
|
|
—
|
|
Derivative
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
200
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,019
|
|
|
|
543,101
|
|
|
|
8,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
—
|
|
|
|
93,212
|
|
|
|
—
|
|
US
government agencies
|
|
|
—
|
|
|
|
3,386
|
|
|
|
—
|
|
Collateralized
loan obligations
|
|
|
—
|
|
|
|
76,249
|
|
|
|
—
|
|
Corporate
securities
|
|
|
—
|
|
|
|
491
|
|
|
|
—
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
—
|
|
|
|
90,986
|
|
|
|
—
|
|
Non-agency
|
|
|
—
|
|
|
|
63,864
|
|
|
|
—
|
|
Trust
preferred securities
|
|
|
—
|
|
|
|
—
|
|
|
|
7,164
|
|
Loans
held for sale
|
|
|
—
|
|
|
|
31,569
|
|
|
|
—
|
|
Derivative
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
421
|
|
|
|
—
|
|
|
|
—
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
532
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage
loan interest rate lock commitments
|
|
|
—
|
|
|
|
1,113
|
|
|
|
—
|
|
Mortgage
loan forward sales commitments
|
|
|
—
|
|
|
|
153
|
|
|
|
—
|
|
Derivative
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedging
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
195
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage-backed
securities forward sales commitments
|
|
|
—
|
|
|
|
147
|
|
|
|
—
|
|
Total
|
|
$
|
1,148
|
|
|
|
361,170
|
|
|
|
7,164
|
|
Assets
measured at fair value on a nonrecurring basis are as follows as of September 30, 2017 and December 31, 2016:
|
|
Quoted
market
|
|
|
Significant
other
|
|
|
Significant
other
|
|
|
|
price
in active
markets
|
|
|
observable
inputs
|
|
|
unobservable
inputs
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
(In thousands)
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
—
|
|
|
|
—
|
|
|
|
4,047
|
|
Home
equity
|
|
|
—
|
|
|
|
—
|
|
|
|
569
|
|
Commercial
real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
4,805
|
|
Construction
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
391
|
|
Consumer
loans
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
Commercial
business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
191
|
|
Real
estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
—
|
|
|
|
—
|
|
|
|
291
|
|
Construction
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
1,349
|
|
Mortgage
servicing rights
|
|
|
—
|
|
|
|
—
|
|
|
|
22,764
|
|
Total
|
|
$
|
—
|
|
|
|
—
|
|
|
|
34,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
—
|
|
|
|
—
|
|
|
|
4,641
|
|
Home
equity
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
Commercial
real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
5,155
|
|
Construction
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
507
|
|
Consumer
loans
|
|
|
—
|
|
|
|
—
|
|
|
|
24
|
|
Commercial
business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
258
|
|
Real
estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and development
|
|
|
—
|
|
|
|
—
|
|
|
|
1,179
|
|
Mortgage
servicing rights
|
|
|
—
|
|
|
|
—
|
|
|
|
20,961
|
|
Total
|
|
$
|
—
|
|
|
|
—
|
|
|
|
32,804
|
|
For Level
3 assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016, the significant
unobservable inputs used in the fair value measurements were as follows:
|
September
30, 2017 and December 31, 2016
|
|
|
|
Significant
|
|
Significant
Unobservable
|
|
Valuation
Technique
|
|
Observable
Inputs
|
|
Inputs
|
Impaired Loans
|
Appraisal Value
|
|
Appraisals and or sales
of
|
|
Appraisals discounted
10% to 20% for
|
|
|
|
comparable properties
|
|
sales commissions and
other holding costs
|
|
|
|
|
|
|
Real estate owned
|
Appraisal Value/
|
|
Appraisals and or sales
of
|
|
Appraisals discounted
10% to 20% for
|
|
Comparison Sales
|
|
comparable properties
|
|
sales commissions and
other holding costs
|
|
|
|
|
|
|
Mortgage Servicing Rights
|
Discounted cash flows
|
|
Comparable sales
|
|
Discount rates averaging
12% - 13%
|
|
|
|
|
|
in each period presented
|
|
|
|
|
|
Prepayment rates averaging
7% - 8% - 2016
|
|
|
|
|
|
Prepayment rates averaging
9% -10% -2017
|
NOTE
9 - EARNINGS PER SHARE
Basic
earnings per share (“EPS”) represents income available to common stockholders divided by the weighted-average number
of shares outstanding during the period. Diluted earnings per share reflects additional shares that would have been outstanding
if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding
stock options, restricted stock (non-vested shares), restricted stock units (“RSUs”) and warrants, and are determined
using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the
issuance of stock for the outstanding stock options, unvested restricted stock and RSUs, and warrants, reduced by the number of
shares assumed to be repurchased from the issuance proceeds, using the average market price for the period of the Company’s
stock.
The following
is a summary of the reconciliation of weighted average shares outstanding for the three and nine months ended September 30, 2017
and 2016:
|
|
For
the Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
16,029,332
|
|
|
|
16,029,332
|
|
|
|
12,327,921
|
|
|
|
12,327,921
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
158,537
|
|
|
|
—
|
|
|
|
207,630
|
|
Weighted
average shares outstanding
|
|
|
16,029,332
|
|
|
|
16,187,869
|
|
|
|
12,327,921
|
|
|
|
12,535,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
14,980,349
|
|
|
|
14,980,349
|
|
|
|
11,995,477
|
|
|
|
11,995,477
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
166,623
|
|
|
|
—
|
|
|
|
206,244
|
|
Weighted
average shares outstanding
|
|
|
14,980,349
|
|
|
|
15,146,972
|
|
|
|
11,995,477
|
|
|
|
12,201,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following
is a summary of the reconciliation of shares issued and outstanding and unvested restricted stock awards as of September 30, 2017
and 2016 used to calculate book value per share:
|
|
As
of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Issued and
outstanding shares
|
|
|
16,159,309
|
|
|
|
12,546,220
|
|
Less
nonvested restricted stock awards
|
|
|
(99,639
|
)
|
|
|
(216,828
|
)
|
Period end dilutive
shares
|
|
|
16,059,670
|
|
|
|
12,329,392
|
|
|
|
|
|
|
|
|
|
|
NOTE
10 – SUPPLEMENTAL SEGMENT INFORMATION
The Company
has three reportable segments: community banking, wholesale mortgage banking (“mortgage banking”) and other. The community
banking segment includes traditional banking services offered through the Bank as well as the managerial and operational support
provided by Carolina Services. The mortgage banking segment provides wholesale mortgage loan origination and servicing offered
through Crescent Mortgage Company. The other segment includes parent company financial information and represents an overhead
function rather than an operating segment. The parent company’s most significant assets are its net investments in its subsidiaries.
The accounting
policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates
performance based on net income.
The Company
accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is,
at current market prices.
The Company’s
reportable segments are strategic business units that offer different products and services. They are managed separately because
each segment has different types and levels of credit and interest rate risk.
The following tables present
selected financial information for the Company’s reportable business segments for the three and nine months ended September
30, 2017 and 2016:
|
|
Community
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30, 2017
|
|
Banking
|
|
|
Banking
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Interest
income
|
|
$
|
22,460
|
|
|
|
480
|
|
|
|
8
|
|
|
|
(22
|
)
|
|
|
22,926
|
|
Interest
expense
|
|
|
3,086
|
|
|
|
65
|
|
|
|
291
|
|
|
|
(65
|
)
|
|
|
3,377
|
|
Net
interest income (expense)
|
|
|
19,374
|
|
|
|
415
|
|
|
|
(283
|
)
|
|
|
43
|
|
|
|
19,549
|
|
Provision
for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noninterest
income from external customers
|
|
|
3,097
|
|
|
|
4,778
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,875
|
|
Intersegment
noninterest income
|
|
|
242
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(242
|
)
|
|
|
—
|
|
Noninterest
expense
|
|
|
10,999
|
|
|
|
4,234
|
|
|
|
223
|
|
|
|
—
|
|
|
|
15,456
|
|
Intersegment
noninterest expense
|
|
|
—
|
|
|
|
240
|
|
|
|
2
|
|
|
|
(242
|
)
|
|
|
—
|
|
Income
(loss) before income taxes
|
|
|
11,714
|
|
|
|
719
|
|
|
|
(508
|
)
|
|
|
43
|
|
|
|
11,968
|
|
Income
tax expense (benefit)
|
|
|
3,877
|
|
|
|
270
|
|
|
|
(188
|
)
|
|
|
16
|
|
|
|
3,975
|
|
Net
income (loss)
|
|
$
|
7,837
|
|
|
|
449
|
|
|
|
(320
|
)
|
|
|
27
|
|
|
|
7,993
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30, 2016
|
|
Banking
|
|
|
Banking
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Interest
income
|
|
$
|
15,760
|
|
|
|
435
|
|
|
|
4
|
|
|
|
9
|
|
|
|
16,208
|
|
Interest
expense
|
|
|
2,102
|
|
|
|
33
|
|
|
|
151
|
|
|
|
(34
|
)
|
|
|
2,252
|
|
Net
interest income (expense)
|
|
|
13,658
|
|
|
|
402
|
|
|
|
(147
|
)
|
|
|
43
|
|
|
|
13,956
|
|
Provision
for loan losses
|
|
|
(12
|
)
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noninterest
income from external customers
|
|
|
2,512
|
|
|
|
6,361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,873
|
|
Intersegment
noninterest income
|
|
|
242
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(233
|
)
|
|
|
—
|
|
Noninterest
expense
|
|
|
9,448
|
|
|
|
4,254
|
|
|
|
188
|
|
|
|
—
|
|
|
|
13,890
|
|
Intersegment
noninterest expense
|
|
|
—
|
|
|
|
240
|
|
|
|
2
|
|
|
|
(242
|
)
|
|
|
—
|
|
Income
(loss) before income taxes
|
|
|
6,976
|
|
|
|
2,248
|
|
|
|
(337
|
)
|
|
|
52
|
|
|
|
8,939
|
|
Income
tax expense (benefit)
|
|
|
2,242
|
|
|
|
846
|
|
|
|
(109
|
)
|
|
|
19
|
|
|
|
2,998
|
|
Net
income (loss)
|
|
$
|
4,734
|
|
|
|
1,402
|
|
|
|
(228
|
)
|
|
|
33
|
|
|
|
5,941
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, 2017
|
|
Banking
|
|
|
Banking
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Interest
income
|
|
$
|
61,409
|
|
|
|
1,302
|
|
|
|
21
|
|
|
|
(14
|
)
|
|
|
62,718
|
|
Interest
expense
|
|
|
8,051
|
|
|
|
119
|
|
|
|
750
|
|
|
|
(119
|
)
|
|
|
8,801
|
|
Net
interest income (expense)
|
|
|
53,358
|
|
|
|
1,183
|
|
|
|
(729
|
)
|
|
|
105
|
|
|
|
53,917
|
|
Provision
for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noninterest
income from external customers
|
|
|
9,011
|
|
|
|
14,899
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,910
|
|
Intersegment
noninterest income
|
|
|
725
|
|
|
|
64
|
|
|
|
—
|
|
|
|
(789
|
)
|
|
|
—
|
|
Noninterest
expense
|
|
|
33,773
|
|
|
|
12,448
|
|
|
|
711
|
|
|
|
—
|
|
|
|
46,932
|
|
Intersegment
noninterest expense
|
|
|
—
|
|
|
|
720
|
|
|
|
5
|
|
|
|
(725
|
)
|
|
|
—
|
|
Income
(loss) before income taxes
|
|
|
29,321
|
|
|
|
2,978
|
|
|
|
(1,445
|
)
|
|
|
41
|
|
|
|
30,895
|
|
Income
tax expense (benefit)
|
|
|
8,533
|
|
|
|
645
|
|
|
|
(535
|
)
|
|
|
16
|
|
|
|
8,659
|
|
Net
income (loss)
|
|
$
|
20,788
|
|
|
|
2,333
|
|
|
|
(910
|
)
|
|
|
25
|
|
|
|
22,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months September 30, 2016
|
|
Banking
|
|
|
Banking
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Interest
income
|
|
$
|
42,790
|
|
|
|
1,133
|
|
|
|
13
|
|
|
|
75
|
|
|
|
44,011
|
|
Interest
expense
|
|
|
6,066
|
|
|
|
42
|
|
|
|
447
|
|
|
|
(43
|
)
|
|
|
6,512
|
|
Net
interest income (expense)
|
|
|
36,724
|
|
|
|
1,091
|
|
|
|
(434
|
)
|
|
|
118
|
|
|
|
37,499
|
|
Provision
for loan losses
|
|
|
(12
|
)
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noninterest
income from external customers
|
|
|
6,773
|
|
|
|
15,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,388
|
|
Intersegment
noninterest income
|
|
|
727
|
|
|
|
25
|
|
|
|
—
|
|
|
|
(752
|
)
|
|
|
—
|
|
Noninterest
expense
|
|
|
29,523
|
|
|
|
11,825
|
|
|
|
619
|
|
|
|
—
|
|
|
|
41,967
|
|
Intersegment
noninterest expense
|
|
|
—
|
|
|
|
721
|
|
|
|
6
|
|
|
|
(727
|
)
|
|
|
—
|
|
Income
(loss) before income taxes
|
|
|
14,713
|
|
|
|
4,173
|
|
|
|
(1,059
|
)
|
|
|
93
|
|
|
|
17,920
|
|
Income
tax expense (benefit)
|
|
|
4,404
|
|
|
|
1,451
|
|
|
|
(390
|
)
|
|
|
35
|
|
|
|
5,500
|
|
Net
income (loss)
|
|
$
|
10,309
|
|
|
|
2,722
|
|
|
|
(669
|
)
|
|
|
58
|
|
|
|
12,420
|
|
The following
tables present selected financial information for the Company’s reportable business segments for September 30, 2017 and
December 31, 2016:
|
|
Community
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2017
|
|
Banking
|
|
|
Banking
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Assets
|
|
$
|
2,255,640
|
|
|
|
76,579
|
|
|
|
310,281
|
|
|
|
(385,761
|
)
|
|
|
2,256,739
|
|
Loans receivable, net
|
|
|
1,457,942
|
|
|
|
25,549
|
|
|
|
—
|
|
|
|
(9,692
|
)
|
|
|
1,473,799
|
|
Loans held for sale
|
|
|
1,658
|
|
|
|
25,128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,786
|
|
Deposits
|
|
|
1,715,798
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,144
|
)
|
|
|
1,707,654
|
|
Borrowed funds
|
|
|
211,000
|
|
|
|
9,163
|
|
|
|
23,351
|
|
|
|
(9,163
|
)
|
|
|
234,351
|
|
|
|
Community
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2016
|
|
Banking
|
|
|
Banking
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Assets
|
|
$
|
1,678,541
|
|
|
|
78,315
|
|
|
|
179,681
|
|
|
|
(252,801
|
)
|
|
|
1,683,736
|
|
Loans receivable, net
|
|
|
1,151,704
|
|
|
|
27,433
|
|
|
|
—
|
|
|
|
(11,559
|
)
|
|
|
1,167,578
|
|
Loans held for sale
|
|
|
2,159
|
|
|
|
29,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,569
|
|
Deposits
|
|
|
1,263,030
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,770
|
)
|
|
|
1,258,260
|
|
Borrowed funds
|
|
|
226,000
|
|
|
|
10,990
|
|
|
|
15,465
|
|
|
|
(10,990
|
)
|
|
|
241,465
|
|
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 and nine months ended September 30, 2017 as compared to the three and
nine months ended September 30, 2016 and assesses our financial condition as of September 30, 2017 as compared to December 31,
2016. 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, 2016 included
in our Form 10-K for that period. Results for the three and nine months ended September 30, 2017 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2017 or any future period.
Cautionary Warning Regarding 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.
Forward-looking statements may relate to our financial condition, results of operation, 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, the following:
|
·
|
our
ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
|
|
·
|
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 or otherwise impose restrictions or conditions on our operations,
including, but not limited to, our ability to acquire or be acquired;
|
|
·
|
changes
in economic conditions, either nationally or regionally and especially in our primary market areas, resulting in, among other
things, a deterioration in credit quality;
|
|
·
|
changes
in interest rates, or changes in regulatory environment resulting in a decline in our mortgage production and a decrease in
the profitability of our mortgage banking operations;
|
|
·
|
greater
than expected losses due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio
secured by real estate are greater than expected due to economic factors, including, but not limited to, declining real estate
values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;
|
|
·
|
greater
than expected losses due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower
type, or location of the borrower or collateral;
|
|
·
|
changes
in the amount of our loan portfolio collateralized by real estate and weaknesses in the South Carolina, eastern North Carolina
and national real estate markets;
|
|
·
|
the
rate of delinquencies and amount of loans charged-off;
|
|
·
|
the
adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
|
|
·
|
the
rate of loan growth in recent or future years;
|
|
·
|
our
ability to attract and retain key personnel;
|
|
·
|
our
ability to retain our existing customers, including our deposit relationships;
|
|
·
|
significant
increases in competitive pressure in the banking and financial services industries;
|
|
·
|
adverse
changes in asset quality and resulting credit risk-related losses and expenses;
|
|
·
|
changes
in the interest rate environment which could reduce anticipated or actual margins;
|
|
·
|
changes
in political conditions or the legislative or regulatory environment, including, but not limited to, the Dodd-Frank Act and
regulations adopted thereunder, changes in federal or state tax laws or interpretations thereof by taxing authorities and
other governmental initiatives affecting the banking, mortgage banking, and financial service industries;
|
|
·
|
changes
occurring in business conditions and inflation;
|
|
·
|
increased
funding costs due to market illiquidity, increased competition for funding, or increased regulatory requirements with regard
to funding;
|
|
·
|
our
business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in,
or disruption to, business and a negative impact on results of operations;
|
|
·
|
changes
in deposit flows;
|
|
·
|
changes in monetary
and tax policies;
|
|
·
|
changes in accounting
policies, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board and the FASB;
|
|
·
|
loss
of consumer confidence and economic disruptions resulting from terrorist activities or other military actions;
|
|
·
|
our
expectations regarding our operating revenues, expenses, effective tax rates and other results of operations;
|
|
·
|
our
anticipated capital expenditures and our estimates regarding our capital requirements;
|
|
·
|
our
liquidity and working capital requirements;
|
|
·
|
competitive
pressures among depository and other financial institutions;
|
|
·
|
the
growth rates of the markets in which we compete;
|
|
·
|
our
anticipated strategies for growth and sources of new operating revenues;
|
|
·
|
our
current and future products, services, applications and functionality and plans to promote them;
|
|
·
|
anticipated
trends and challenges in our business and in the markets in which we operate;
|
|
·
|
the
evolution of technology affecting our products, services and markets;
|
|
·
|
our
ability to retain and hire necessary employees and to staff our operations appropriately;
|
|
·
|
management
compensation and the methodology for its determination;
|
|
·
|
our
ability to compete in our industry and innovation by our competitors;
|
|
·
|
increased
cybersecurity risk, including potential business disruptions or financial losses;
|
|
·
|
acquisition
integration risks, including potential deposit attrition, higher than expected costs, customer loss and business disruption,
including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration
related matters, and the inability to identify and successfully negotiate and complete additional combinations with potential
merger or acquisition partners or to successfully integrate such businesses into the Company, including the ability to realize
the benefits and cost savings from, and limit any unexpected liabilities associated with, any such business combinations;
|
|
·
|
our
ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;
and
|
|
·
|
estimates
and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices
and stock-based compensation.
|
If any of these
risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements prove 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, 2016. 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 and our other reports filed pursuant to the Securities Exchange Act of 1934. 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, implied or projected by us in the forward-looking
statements.
Company Overview
Carolina
Financial Corporation is a Delaware corporation and a financial holding company registered under the Bank Holding Company Act
of 1956, as amended. Its primary business is to serve as the holding company to CresCom Bank, a South Carolina state-chartered
bank. CresCom Bank operates Crescent Mortgage Company and Carolina Service Corporation of Charleston as wholly-owned subsidiaries
of CresCom Bank. Except where the context otherwise requires, the “Company”, “we”, “us” and
“our” refer to Carolina Financial Corporation and its consolidated subsidiaries and the “Bank” refers
to CresCom Bank.
CresCom
Bank provides a full range of commercial and retail banking financial services designed to meet the financial needs of our customers
through its branch network in South Carolina and North Carolina. Crescent Mortgage Company, headquartered in Atlanta, Georgia,
is a wholesale mortgage company licensed to provide mortgage banking services in 48 states and partners with community banks,
credit unions and mortgage brokers.
Like
most community banks, we derive a significant portion of our income from interest we receive on our loans and investments. Our
primary source of funds for making these loans and investments is our deposits, both interest-bearing and noninterest-bearing.
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 borrowed funds. In order to maximize our net interest income, we must not only manage the volume of these balance sheet items,
but also the yields that we earn on our interest-earning assets and the rates that we pay on interest-bearing liabilities.
There
are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that
may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating
earnings.
In
addition to earning interest on our loans and investments, we derive a portion of our income from Crescent Mortgage Company through
mortgage banking income as well as servicing income. We also earn income through fees that we charge to our customers. Likewise,
we incur other operating expenses as well.
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 client preferences, interest rate conditions and prevailing market rates on competing products in our market areas.
Recent
Events
On
January 25, 2017, the Company closed a public offering of 1.8 million shares of its common stock with net proceeds of approximately
$47.7 million.
On
March 18, 2017, the Company closed its acquisition of Greer Bancshares Incorporated, the holding company for Greer State Bank
(“Greer”) ,with the operational conversion completed in April 2017.
Pursuant
to an Agreement and Plan of Merger and Reorganization, dated as of June 9, 2017, by and between the Company and First South Bancorp,
Inc. (“First South”), on November 1, 2017 First South merged with and into the Company, with the Company as the surviving
corporation. Immediately thereafter, First South Bank, a wholly owned subsidiary of First South, merged with and into the Bank,
with the Bank as the surviving Bank. Pursuant to the merger agreement, holders of First South common stock received 0.5064 shares
of the common stock of the Company for each share of First South common stock held immediately prior to the effective time of
the merger. The Company issued 4.8 million shares of common stock to the former shareholders of First South in the transaction.
Executive
Summary of Operating Results
The
following is a summary of the Company’s financial highlights and significant events in third quarter of 2017:
|
·
|
Net
income for the third quarter 2017 increased 34.5% to $8.0 million, or $0.49 per diluted
share, from $5.9 million, or $0.47 per diluted share for the third quarter of 2016. Included
in earnings are pretax merger related expenses of $0.3 million for the third quarter
of 2017. There were no merger related expenses in the third quarter of 2016.
|
|
·
|
Operating
earnings for the third quarter of 2017, which excludes certain non-operating income and
expenses, increased 34.3% to $7.9 million, or $0.49 per diluted share, from $5.9 million,
or $0.47 per diluted share, from the third quarter of 2016.
|
|
·
|
Performance
ratios third quarter of 2017 compared to third quarter of 2016:
|
|
o
|
Return
on average assets was 1.43% compared to 1.46%.
|
|
o
|
Operating
return on average assets was 1.42% compared to 1.45%.
|
|
o
|
Return
on average tangible equity was 13.24% compared to 15.93%.
|
|
o
|
Operating
return on average tangible equity was 13.08% compared to 15.76%.
|
|
o
|
Average
stockholders’ equity to average assets increased to 12.85% compared to 9.67%.
|
|
·
|
Loans
receivable, excluding Greer loans acquired, grew at an annualized rate of 12.6%, or $111.5
million, since December 31, 2016.
|
|
·
|
Nonperforming
assets to total assets were 0.29% at September 30, 2017 compared to 0.40% at December
31, 2016.
|
|
·
|
Total
deposits, excluding Greer deposits acquired, increased $138.3 million since December
31, 2016. Core deposits, excluding Greer core deposits acquired, increased $78.0 million
since December 31, 2016
.
|
Non-GAAP Financial Measures
Statements
included in this management’s discussion and analysis include non-GAAP financial measures and should be read along with
the accompanying tables which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s
management uses these non-GAAP financial measures, including: (i) operating earnings; (ii) operating earnings per common share
(iii) operating return on average assets, (iv) operating return on average tangible equity, (v) core deposits, (vi) tangible book
value and (vii) allowance for loan losses to non-acquired loans.
Management
believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance
of the Company without regard to transactional activities. Non-GAAP financial measures should not be considered as an alternative
to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s
performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or
financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not
consider them in isolation or as a substitute for analysis of the Company’s results or financial condition as reported under
GAAP.
The
following is a summary of the Company’s performance measures:
|
|
At
or for the Three
|
|
|
At
or for the Nine
|
|
|
|
Months
Ended
|
|
|
Months
Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios (annualized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average equity
|
|
|
11.16
|
%
|
|
|
15.11
|
%
|
|
|
11.49
|
%
|
|
|
11.18
|
%
|
Return
on average assets
|
|
|
1.43
|
%
|
|
|
1.46
|
%
|
|
|
1.44
|
%
|
|
|
1.10
|
%
|
Return
on average tangible equity (Non-GAAP)
|
|
|
13.24
|
%
|
|
|
15.93
|
%
|
|
|
13.25
|
%
|
|
|
11.41
|
%
|
Average
earning assets to average total assets
|
|
|
91.09
|
%
|
|
|
92.94
|
%
|
|
|
91.18
|
%
|
|
|
93.63
|
%
|
Average
loans receivable to average deposits
|
|
|
85.59
|
%
|
|
|
84.68
|
%
|
|
|
87.53
|
%
|
|
|
85.65
|
%
|
Average
stockholders’ equity to average assets
|
|
|
12.85
|
%
|
|
|
9.67
|
%
|
|
|
12.56
|
%
|
|
|
9.87
|
%
|
Net
interest margin-tax equivalent (1)
|
|
|
3.94
|
%
|
|
|
3.75
|
%
|
|
|
3.97
|
%
|
|
|
3.67
|
%
|
Net
charge-offs (recovery) to average loans receivable
|
|
|
0.02
|
%
|
|
|
(0.02
|
)%
|
|
|
0.00
|
%
|
|
|
(0.03
|
)%
|
Nonperforming
assets to period end loans receivable
|
|
|
0.44
|
%
|
|
|
0.62
|
%
|
|
|
0.44
|
%
|
|
|
0.62
|
%
|
Nonperforming
assets to total assets
|
|
|
0.29
|
%
|
|
|
0.42
|
%
|
|
|
0.29
|
%
|
|
|
0.42
|
%
|
Nonperforming
loans to total loans
|
|
|
0.33
|
%
|
|
|
0.37
|
%
|
|
|
0.33
|
%
|
|
|
0.37
|
%
|
Allowance
for loan losses as a percentage of loans receivable (end of period)
|
|
|
0.72
|
%
|
|
|
0.91
|
%
|
|
|
0.72
|
%
|
|
|
0.91
|
%
|
Allowance
for loan losses as a percentage of non-acquired loans receivable (Non-GAAP)
|
|
|
0.87
|
%
|
|
|
1.03
|
%
|
|
|
0.87
|
%
|
|
|
1.03
|
%
|
Allowance
for loan losses as a percentage of nonperforming loans
|
|
|
216.53
|
%
|
|
|
247.72
|
%
|
|
|
216.53
|
%
|
|
|
247.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Net interest margin-tax equivalent reflects tax-exempt income on a tax-equivalent basis.
The
following table presents a reconciliation of Non-GAAP performance measures for consolidated operating earnings and corresponding
ratios:
Carolina
Financial Corporation
|
Reconciliation
of Non-GAAP Financial Measures - Consolidated
|
(Unaudited)
|
(In
thousands, except share data)
|
|
|
For
the Three Months Ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
Operating
Earnings and Performance Ratios:
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Income
before income taxes
|
|
$
|
11,968
|
|
|
|
12,013
|
|
|
|
6,915
|
|
|
|
7,498
|
|
|
|
8,939
|
|
Gain
on sale of securities
|
|
|
(368
|
)
|
|
|
(621
|
)
|
|
|
(185
|
)
|
|
|
(65
|
)
|
|
|
(111
|
)
|
Net
loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,694
|
|
|
|
118
|
|
Fair
value adjustments on interest rate swaps
|
|
|
(90
|
)
|
|
|
69
|
|
|
|
58
|
|
|
|
(998
|
)
|
|
|
(99
|
)
|
Merger
related expenses
|
|
|
311
|
|
|
|
279
|
|
|
|
1,319
|
|
|
|
260
|
|
|
|
—
|
|
Operating
earnings before income taxes
|
|
|
11,821
|
|
|
|
11,740
|
|
|
|
8,107
|
|
|
|
8,389
|
|
|
|
8,847
|
|
Tax
expense (1)
|
|
|
3,926
|
|
|
|
2,612
|
|
|
|
2,358
|
|
|
|
2,627
|
|
|
|
2,967
|
|
Operating
earnings (Non-GAAP)
|
|
$
|
7,895
|
|
|
|
9,128
|
|
|
|
5,749
|
|
|
|
5,762
|
|
|
|
5,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
equity
|
|
$
|
286,524
|
|
|
|
277,708
|
|
|
|
210,071
|
|
|
|
160,991
|
|
|
|
157,311
|
|
Average
assets
|
|
$
|
2,230,586
|
|
|
|
2,166,803
|
|
|
|
1,768,323
|
|
|
|
1,651,653
|
|
|
|
1,626,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Equity
|
|
$
|
286,524
|
|
|
|
277,708
|
|
|
|
210,071
|
|
|
|
160,991
|
|
|
|
157,311
|
|
Less
average intangible assets
|
|
|
(45,035
|
)
|
|
|
(44,452
|
)
|
|
|
(13,510
|
)
|
|
|
(7,979
|
)
|
|
|
(8,092
|
)
|
Average
tangible common equity (Non-GAAP)
|
|
$
|
241,489
|
|
|
|
233,256
|
|
|
|
196,561
|
|
|
|
153,012
|
|
|
|
149,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
return on average assets (Non-GAAP)
|
|
|
1.42
|
%
|
|
|
1.69
|
%
|
|
|
1.30
|
%
|
|
|
1.40
|
%
|
|
|
1.45
|
%
|
Operating
return on average equity (Non-GAAP)
|
|
|
11.02
|
%
|
|
|
13.15
|
%
|
|
|
10.95
|
%
|
|
|
14.32
|
%
|
|
|
14.95
|
%
|
Operating
return on average tangible equity (Non-GAAP)
|
|
|
13.08
|
%
|
|
|
15.65
|
%
|
|
|
11.70
|
%
|
|
|
15.06
|
%
|
|
|
15.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,029,332
|
|
|
|
16,029,332
|
|
|
|
13,919,711
|
|
|
|
12,336,420
|
|
|
|
12,327,921
|
|
Diluted
|
|
|
16,187,869
|
|
|
|
16,180,171
|
|
|
|
14,139,241
|
|
|
|
12,585,518
|
|
|
|
12,535,551
|
|
Operating
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(Non-GAAP)
|
|
$
|
0.49
|
|
|
|
0.57
|
|
|
|
0.41
|
|
|
|
0.47
|
|
|
|
0.48
|
|
Diluted
(Non-GAAP)
|
|
$
|
0.49
|
|
|
|
0.56
|
|
|
|
0.41
|
|
|
|
0.46
|
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
11,968
|
|
|
|
12,013
|
|
|
|
6,915
|
|
|
|
7,498
|
|
|
|
8,939
|
|
Tax
expense
|
|
|
3,975
|
|
|
|
2,673
|
|
|
|
2,011
|
|
|
|
2,348
|
|
|
|
2,998
|
|
Net
Income
|
|
$
|
7,993
|
|
|
|
9,340
|
|
|
|
4,904
|
|
|
|
5,150
|
|
|
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
equity
|
|
$
|
286,524
|
|
|
|
277,708
|
|
|
|
210,071
|
|
|
|
160,991
|
|
|
|
157,311
|
|
Average
tangible equity (Non-GAAP)
|
|
$
|
241,489
|
|
|
|
233,256
|
|
|
|
196,561
|
|
|
|
153,012
|
|
|
|
149,219
|
|
Average
assets
|
|
$
|
2,230,586
|
|
|
|
2,166,803
|
|
|
|
1,768,323
|
|
|
|
1,651,653
|
|
|
|
1,626,717
|
|
Return
on average assets
|
|
|
1.43
|
%
|
|
|
1.72
|
%
|
|
|
1.11
|
%
|
|
|
1.25
|
%
|
|
|
1.46
|
%
|
Return
on average equity
|
|
|
11.16
|
%
|
|
|
13.45
|
%
|
|
|
9.34
|
%
|
|
|
12.80
|
%
|
|
|
15.11
|
%
|
Return
on average tangible equity (Non-GAAP)
|
|
|
13.24
|
%
|
|
|
16.02
|
%
|
|
|
9.98
|
%
|
|
|
13.46
|
%
|
|
|
15.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,029,332
|
|
|
|
16,029,332
|
|
|
|
13,919,711
|
|
|
|
12,336,420
|
|
|
|
12,327,921
|
|
Diluted
|
|
|
16,187,869
|
|
|
|
16,180,171
|
|
|
|
14,139,241
|
|
|
|
12,585,518
|
|
|
|
12,535,551
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
|
0.58
|
|
|
|
0.35
|
|
|
|
0.42
|
|
|
|
0.48
|
|
Diluted
|
|
$
|
0.49
|
|
|
|
0.58
|
|
|
|
0.35
|
|
|
|
0.41
|
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Tax expense is determined
using the effective tax rate reflected in the accompanying income statement for the applicable reporting period.
|
Carolina
Financial Corporation
|
Reconciliation
of Non-GAAP Financial Measures - Consolidated
|
(Unaudited)
|
(In thousands,
except share data)
|
|
|
|
|
|
At
the Month Ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand accounts
|
|
$
|
333,267
|
|
|
$
|
330,641
|
|
|
|
298,365
|
|
|
|
229,905
|
|
|
|
267,892
|
|
Interest-bearing
demand accounts
|
|
|
309,241
|
|
|
|
298,123
|
|
|
|
309,961
|
|
|
|
191,851
|
|
|
|
195,792
|
|
Savings
accounts
|
|
|
69,552
|
|
|
|
70,336
|
|
|
|
66,506
|
|
|
|
48,648
|
|
|
|
47,035
|
|
Money
market accounts
|
|
|
377,754
|
|
|
|
380,108
|
|
|
|
363,600
|
|
|
|
292,639
|
|
|
|
299,960
|
|
Total
core deposits (Non-GAAP)
|
|
|
1,089,814
|
|
|
|
1,079,208
|
|
|
|
1,038,432
|
|
|
|
763,043
|
|
|
|
810,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than $250,000
|
|
|
567,483
|
|
|
|
539,177
|
|
|
|
524,836
|
|
|
|
467,937
|
|
|
|
476,744
|
|
$250,000
or more
|
|
|
50,357
|
|
|
|
45,344
|
|
|
|
44,452
|
|
|
|
27,280
|
|
|
|
24,853
|
|
Total
certificates of deposit
|
|
|
617,840
|
|
|
|
584,521
|
|
|
|
569,288
|
|
|
|
495,217
|
|
|
|
501,597
|
|
Total
deposits
|
|
$
|
1,707,654
|
|
|
$
|
1,663,729
|
|
|
|
1,607,720
|
|
|
|
1,258,260
|
|
|
|
1,312,276
|
|
|
|
At
the Month Ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
book value per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
$
|
290,224
|
|
|
|
281,818
|
|
|
|
271,454
|
|
|
|
163,190
|
|
|
|
160,331
|
|
Less
intangible assets
|
|
|
(44,953
|
)
|
|
|
(45,123
|
)
|
|
|
(45,292
|
)
|
|
|
(7,924
|
)
|
|
|
(8,037
|
)
|
Tangible
common equity (Non-GAAP)
|
|
$
|
245,271
|
|
|
|
236,695
|
|
|
|
226,162
|
|
|
|
155,266
|
|
|
|
152,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding shares
|
|
|
16,159,309
|
|
|
|
16,156,943
|
|
|
|
16,185,408
|
|
|
|
12,548,328
|
|
|
|
12,546,220
|
|
Less
nonvested restricted stock awards
|
|
|
(99,639
|
)
|
|
|
(101,489
|
)
|
|
|
(227,439
|
)
|
|
|
(211,908
|
)
|
|
|
(216,828
|
)
|
Period
end dilutive shares
|
|
|
16,059,670
|
|
|
|
16,055,454
|
|
|
|
15,957,969
|
|
|
|
12,336,420
|
|
|
|
12,329,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders equity
|
|
$
|
290,224
|
|
|
|
281,818
|
|
|
|
271,454
|
|
|
|
163,190
|
|
|
|
160,331
|
|
Divided
by period end dilutive shares
|
|
|
16,059,670
|
|
|
|
16,055,454
|
|
|
|
15,957,969
|
|
|
|
12,336,420
|
|
|
|
12,329,392
|
|
Common
book value per share
|
|
$
|
18.07
|
|
|
|
17.55
|
|
|
|
17.01
|
|
|
|
13.23
|
|
|
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
common equity (Non-GAAP)
|
|
$
|
245,271
|
|
|
|
236,695
|
|
|
|
226,162
|
|
|
|
155,266
|
|
|
|
152,294
|
|
Divided
by period end dilutive shares
|
|
|
16,059,670
|
|
|
|
16,055,454
|
|
|
|
15,957,969
|
|
|
|
12,336,420
|
|
|
|
12,329,392
|
|
Tangible
common book value per share (Non-GAAP)
|
|
$
|
15.27
|
|
|
|
14.74
|
|
|
|
14.17
|
|
|
|
12.59
|
|
|
|
12.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
the Month Ended
|
|
|
|
|
September
30,
|
|
|
|
June
30,
|
|
|
|
March
31,
|
|
|
|
December
31,
|
|
|
|
September
30,
|
|
|
|
|
2017
|
|
|
|
2017
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2016
|
|
Acquired
and non-acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
loans receivable
|
|
$
|
257,461
|
|
|
$
|
278,275
|
|
|
|
303,244
|
|
|
|
119,422
|
|
|
|
129,505
|
|
Non-acquired
loans receivable
|
|
|
1,227,000
|
|
|
|
1,157,145
|
|
|
|
1,113,766
|
|
|
|
1,058,844
|
|
|
|
1,003,724
|
|
Total
loans receivable
|
|
$
|
1,484,461
|
|
|
$
|
1,435,420
|
|
|
|
1,417,010
|
|
|
|
1,178,266
|
|
|
|
1,133,229
|
|
%
Acquired
|
|
|
17.34
|
%
|
|
|
19.39
|
%
|
|
|
21.40
|
%
|
|
|
10.14
|
%
|
|
|
11.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-acquired
loans
|
|
$
|
1,227,000
|
|
|
$
|
1,157,145
|
|
|
|
1,113,766
|
|
|
|
1,058,844
|
|
|
|
1,003,724
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
10,750
|
|
|
|
10,715
|
|
|
|
10,688
|
|
|
|
10,340
|
|
Allowance
for loan losses to non-acquired loans (Non-GAAP)
|
|
|
0.87
|
%
|
|
|
0.93
|
%
|
|
|
0.96
|
%
|
|
|
1.01
|
%
|
|
|
1.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable
|
|
$
|
1,484,461
|
|
|
$
|
1,435,420
|
|
|
|
1,417,010
|
|
|
|
1,178,266
|
|
|
|
1,133,229
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
10,750
|
|
|
|
10,715
|
|
|
|
10,688
|
|
|
|
10,340
|
|
Allowance
for loan losses to total loans receivable
|
|
|
0.72
|
%
|
|
|
0.75
|
%
|
|
|
0.76
|
%
|
|
|
0.91
|
%
|
|
|
0.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Accounting Policies
There
have been no significant changes to our critical accounting policies from those disclosed in our 2016 Annual Report on Form 10-K.
Refer to the notes to our consolidated financial statements in our 2016 Annual Report on Form 10-K for a full disclosure of all
critical accounting policies.
Results
of Operations
Summary
The
Company reported an increase in net income for the three months ended September 30, 2017 to $8.0 million, or $0.49 per diluted
share, as compared to $5.9 million, or $0.47 per diluted share, for the three months ended September 30, 2016. Included in net
income for the three months ended September 30, 2017 were pretax merger related expenses of $0.3 million. There were no merger
related expenses for the three months ended September 30, 2016. The Company reported increased net income for the nine months
ended September 30, 2017 of $22.2 million, or $1.47 per diluted share, as compared to $12.4 million, or $1.02 per diluted share,
for the nine months ended September 30, 2016. Included in net income for the nine months ended September 30, 2017 and 2016 were
pretax merger related expenses of $1.9 million and $3.0 million, respectively.
Net
Interest Income and Margin
Net
interest income is a significant component of our net income. Net interest income is the difference between income earned on interest-earning
assets and interest paid on interest-bearing liabilities. Net interest income is determined by the yields earned on interest-earning
assets, rates paid on interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities,
the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities.
Net
interest income increased to $19.5 million for the three months ended September 30, 2017 from $14.0 million for the three months
ended September 30, 2016. Net interest income increased to $53.9 million for the nine months ended September 30, 2017 from $37.5
million for the nine months ended September 30, 2016. The increase in net interest income is a result of the increase in average
interest-earning assets balances, as well as an increase in the net interest margin on a tax equivalent yield basis of 19 basis
points over the comparable prior year quarter. The increase in average earnings assets for the three months ended September 30,
2017 is primarily the result of increased balances of securities available for sale and loans receivable.
The
growth in loan balances was primarily the result of the following:
|
·
|
On
June 11, 2016, the Company acquired approximately $74.6 million of loans, net of purchase
accounting adjustments, as part of the acquisition of Congaree Bancshares, Inc. (“Congaree”).
The recorded investment in loans acquired from the Congaree acquisition were $55.8 million
as of September 30, 2017.
|
|
·
|
On
March 18, 2017, the Company acquired approximately $194.7 million of loans, net of purchase
accounting adjustments, as part of the acquisition of Greer. The recorded investment
in loans acquired from the Greer acquisition were $159.5 million as of September 30,
2017. Loans that have been refinanced are not included below. The recorded investment
as of September 30, 2017 for loans acquired in the acquisition of Greer are presented
in the following table:
|
|
|
At
September 30, 2017
|
|
|
|
|
|
|
%
of Total
|
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
Loans secured by real
estate:
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
42,006
|
|
|
|
26.33
|
%
|
Home
equity
|
|
|
14,484
|
|
|
|
9.08
|
%
|
Commercial
real estate
|
|
|
62,588
|
|
|
|
39.24
|
%
|
Construction
and development
|
|
|
17,542
|
|
|
|
11.00
|
%
|
Consumer loans
|
|
|
3,128
|
|
|
|
1.96
|
%
|
Commercial
business loans
|
|
|
19,769
|
|
|
|
12.39
|
%
|
Total
loans receivable, net
|
|
|
159,517
|
|
|
|
100.00
|
%
|
|
·
|
Residential
mortgage – In addition to selling a portion of its production, the Company has
retained a portion of its mortgage production. Due to management’s emphasis on
growing the Company’s residential mortgage portfolio, loans receivable within the
one-to-four family portfolio has increased $75.4 million since September 30, 2016. This
growth includes loans acquired in the acquisition of Greer.
|
|
·
|
Commercial
lending – The Company continues to expand its commercial lending team throughout
its markets. As a result, gross loans receivable within commercial real estate and construction
and development increased $204.5 million since September 30, 2016. This growth includes
loans acquired in the acquisition of Greer.
|
The
following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities
for the periods indicated (dollars in thousands). We derived these yields or costs 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 were owned at an
original maturity of over one year. Nonaccrual loans are included in earning assets in the following tables. Loan yields reflect
the negative impact on our earnings of loans on nonaccrual status. The net capitalized loan costs and fees, which are considered
immaterial, are amortized into interest income on loans.
|
|
For
The Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Earned/
|
|
|
Yield/
|
|
|
Average
|
|
|
Earned/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Paid
|
|
|
Rate
|
|
|
Balance
|
|
|
Paid
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$
|
27,282
|
|
|
|
269
|
|
|
|
3.91
|
%
|
|
|
32,196
|
|
|
|
282
|
|
|
|
3.48
|
%
|
Loans
receivable, net (1)
|
|
|
1,463,771
|
|
|
|
18,691
|
|
|
|
5.07
|
%
|
|
|
1,093,669
|
|
|
|
13,544
|
|
|
|
4.93
|
%
|
Interest-bearing
cash
|
|
|
16,533
|
|
|
|
52
|
|
|
|
1.25
|
%
|
|
|
29,989
|
|
|
|
19
|
|
|
|
0.25
|
%
|
Securities
available for sale
|
|
|
511,564
|
|
|
|
3,757
|
|
|
|
2.87
|
%
|
|
|
345,385
|
|
|
|
2,264
|
|
|
|
2.57
|
%
|
Dividends
from non-equitable securities
|
|
|
10,005
|
|
|
|
135
|
|
|
|
5.35
|
%
|
|
|
7,477
|
|
|
|
83
|
|
|
|
4.42
|
%
|
Other
investments
|
|
|
2,629
|
|
|
|
22
|
|
|
|
3.32
|
%
|
|
|
3,201
|
|
|
|
16
|
|
|
|
1.96
|
%
|
Total
interest-earning assets
|
|
|
2,031,784
|
|
|
|
22,926
|
|
|
|
4.48
|
%
|
|
|
1,511,917
|
|
|
|
16,208
|
|
|
|
4.26
|
%
|
Non-earning
assets
|
|
|
198,802
|
|
|
|
|
|
|
|
|
|
|
|
114,800
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,230,586
|
|
|
|
|
|
|
|
|
|
|
|
1,626,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
accounts
|
|
|
297,163
|
|
|
|
228
|
|
|
|
0.30
|
%
|
|
|
175,484
|
|
|
|
64
|
|
|
|
0.15
|
%
|
Money
market accounts
|
|
|
381,711
|
|
|
|
500
|
|
|
|
0.52
|
%
|
|
|
298,961
|
|
|
|
233
|
|
|
|
0.31
|
%
|
Savings
accounts
|
|
|
69,233
|
|
|
|
36
|
|
|
|
0.21
|
%
|
|
|
46,875
|
|
|
|
15
|
|
|
|
0.13
|
%
|
Certificates
of deposit
|
|
|
607,532
|
|
|
|
1,658
|
|
|
|
1.08
|
%
|
|
|
504,492
|
|
|
|
1,258
|
|
|
|
0.99
|
%
|
Short-term
borrowed funds
|
|
|
146,670
|
|
|
|
441
|
|
|
|
1.19
|
%
|
|
|
88,452
|
|
|
|
124
|
|
|
|
0.56
|
%
|
Long-term
debt
|
|
|
64,855
|
|
|
|
514
|
|
|
|
3.14
|
%
|
|
|
68,282
|
|
|
|
558
|
|
|
|
3.25
|
%
|
Total
interest-bearing liabilities
|
|
|
1,567,164
|
|
|
|
3,377
|
|
|
|
0.85
|
%
|
|
|
1,182,546
|
|
|
|
2,252
|
|
|
|
0.76
|
%
|
Noninterest-bearing
deposits
|
|
|
354,624
|
|
|
|
|
|
|
|
|
|
|
|
265,755
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
22,274
|
|
|
|
|
|
|
|
|
|
|
|
21,105
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
286,524
|
|
|
|
|
|
|
|
|
|
|
|
157,311
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$
|
2,230,586
|
|
|
|
|
|
|
|
|
|
|
|
1,626,717
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
Net
interest margin
|
|
|
3.82
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (tax-equivalent) (2)
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
19,549
|
|
|
|
|
|
|
|
|
|
|
|
13,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average balances of loans
include nonaccrual loans.
|
(2) The tax-equivalent net
interest margin reflects tax-exempt income on a tax-equivalent basis.
|
|
Our
net interest margin was 3.82%, or 3.94% on a tax-equivalent basis, for the three months ended September 30, 2017 compared to 3.67%,
or 3.75% on a tax equivalent basis, for the three months ended September 30, 2016. The increase in margin from period to period
is the result of an increase in yield on securities available for sale and loans receivable. The yield on loans receivable during
the quarter ended September 30, 2017 and 2016 reflects accretion income of $601,000 and $399,000 respectively.
Our
net interest spread, which is not on a tax-equivalent basis, was 3.63% for the three months ended September 30, 2017 as compared
to 3.50% for the same period in 2016. 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 13 basis point increase in net interest spread is a result
of the 22 basis point increase in yield on interest-earning assets net of a 9 basis point increase in rates paid on interest-bearing
liabilities. The increase in the rate realized on loans is primarily the result of variable rate loans repricing as a result of
the increases in the prime rate and the impact of accretion income from acquired loans.
|
|
For
The Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Earned/
|
|
|
Yield/
|
|
|
Average
|
|
|
Earned/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Paid
|
|
|
Rate
|
|
|
Balance
|
|
|
Paid
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$
|
22,507
|
|
|
|
657
|
|
|
|
3.90
|
%
|
|
|
27,388
|
|
|
|
717
|
|
|
|
3.50
|
%
|
Loans
receivable, net (1)
|
|
|
1,363,830
|
|
|
|
51,550
|
|
|
|
5.05
|
%
|
|
|
1,000,780
|
|
|
|
36,074
|
|
|
|
4.81
|
%
|
Interest-bearing
cash
|
|
|
15,160
|
|
|
|
117
|
|
|
|
1.03
|
%
|
|
|
29,222
|
|
|
|
55
|
|
|
|
0.25
|
%
|
Securities
available for sale
|
|
|
458,266
|
|
|
|
9,966
|
|
|
|
2.87
|
%
|
|
|
327,860
|
|
|
|
6,618
|
|
|
|
2.65
|
%
|
Securities
held to maturity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,452
|
|
|
|
217
|
|
|
|
3.02
|
%
|
Dividends
from non-equitable securities
|
|
|
10,342
|
|
|
|
351
|
|
|
|
4.54
|
%
|
|
|
7,740
|
|
|
|
288
|
|
|
|
4.97
|
%
|
Other
investments
|
|
|
3,855
|
|
|
|
77
|
|
|
|
2.63
|
%
|
|
|
2,772
|
|
|
|
42
|
|
|
|
1.99
|
%
|
Total
interest-earning assets
|
|
|
1,873,960
|
|
|
|
62,718
|
|
|
|
4.47
|
%
|
|
|
1,405,214
|
|
|
|
44,011
|
|
|
|
4.18
|
%
|
Non-earning
assets
|
|
|
181,277
|
|
|
|
|
|
|
|
|
|
|
|
95,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,055,237
|
|
|
|
|
|
|
|
|
|
|
|
1,500,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
accounts
|
|
|
253,735
|
|
|
|
540
|
|
|
|
0.28
|
%
|
|
|
140,092
|
|
|
|
157
|
|
|
|
0.15
|
%
|
Money
market accounts
|
|
|
355,049
|
|
|
|
1,202
|
|
|
|
0.45
|
%
|
|
|
266,000
|
|
|
|
574
|
|
|
|
0.29
|
%
|
Savings
accounts
|
|
|
63,678
|
|
|
|
91
|
|
|
|
0.19
|
%
|
|
|
43,602
|
|
|
|
43
|
|
|
|
0.13
|
%
|
Certificates
of deposit
|
|
|
563,688
|
|
|
|
4,379
|
|
|
|
1.04
|
%
|
|
|
484,581
|
|
|
|
3,675
|
|
|
|
1.01
|
%
|
Short-term
borrowed funds
|
|
|
165,610
|
|
|
|
1,225
|
|
|
|
0.99
|
%
|
|
|
84,590
|
|
|
|
320
|
|
|
|
0.51
|
%
|
Long-term
debt
|
|
|
52,108
|
|
|
|
1,364
|
|
|
|
3.51
|
%
|
|
|
82,586
|
|
|
|
1,743
|
|
|
|
2.82
|
%
|
Total
interest-bearing liabilities
|
|
|
1,453,868
|
|
|
|
8,801
|
|
|
|
0.81
|
%
|
|
|
1,101,451
|
|
|
|
6,512
|
|
|
|
0.79
|
%
|
Noninterest-bearing
deposits
|
|
|
321,894
|
|
|
|
|
|
|
|
|
|
|
|
234,243
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
21,374
|
|
|
|
|
|
|
|
|
|
|
|
16,991
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
258,101
|
|
|
|
|
|
|
|
|
|
|
|
148,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$
|
2,055,237
|
|
|
|
|
|
|
|
|
|
|
|
1,500,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
Net
interest margin
|
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
3.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (tax-equivalent) (2)
|
|
|
3.97
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
53,917
|
|
|
|
|
|
|
|
|
|
|
|
37,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average balances of loans
include nonaccrual loans.
|
(2) The tax-equivalent net
interest margin reflects tax-exempt income on a tax-equivalent basis.
|
Our
net interest margin was 3.85%, or 3.97% on a tax-equivalent basis, for the nine months ended September 30, 2017 compared to 3.59%,
or 3.67% on a tax equivalent basis, for the nine months ended September 30, 2016. The increase in margin from period to period
is the result of a shift to higher yielding earning assets as well as an increase in yield on securities available for sale and
loans receivable. Average loans receivable comprised 72.8% of earnings assets for the nine months ended September 30, 2017 compared
to 71.2% for the nine months ended September 30, 2016. The yield on loans receivable during the nine months ended September 30,
2017 and 2016 reflects accretion income of $2.1 million and $471,000, respectively.
Our
net interest spread, which is not on a tax-equivalent basis, was 3.66% for the nine months ended September 30, 2017 as compared
to 3.39% for the same period in 2016. 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 27 basis point increase in net interest spread is a result
of the 29 basis point increase in yield on interest-earning assets as well as a two basis point increase in rates paid on interest-bearing
liabilities. The increase in the rate realized on loans is primarily the result of variable rate loans repricing as a result of
the increases in the prime rate and the impact of accretion income from acquired loans.
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 operations. 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 below under “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.
Following
is a summary of the activity in the allowance for loan losses during the periods ended September 30, 2017 and 2016.
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Balance, beginning of period
|
|
$
|
10,750
|
|
|
|
10,297
|
|
|
|
10,688
|
|
|
|
10,141
|
|
Provision
for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loan charge-offs
|
|
|
(132
|
)
|
|
|
(4
|
)
|
|
|
(178
|
)
|
|
|
(197
|
)
|
Loan
recoveries
|
|
|
44
|
|
|
|
47
|
|
|
|
152
|
|
|
|
396
|
|
Balance, end of
period
|
|
$
|
10,662
|
|
|
|
10,340
|
|
|
|
10,662
|
|
|
|
10,340
|
|
The
Company experienced net charge-offs of $88,000 for the three months ended September 30, 2017 and net recoveries of $43,000 for
the three months ended September 30, 2016. The Company experienced net charge-offs of $26,000 for the nine months ended September
30, 2017 and net recoveries of $199,000 for the nine months ended September 30, 2016. Asset quality has remained relatively consistent
since December 31, 2016, with nonperforming assets to total assets decreasing to 0.29% as of September 30, 2017 as compared to
0.40% as of December 31, 2016. No provision expense for loan losses was recorded during the first nine months of 2017 or the year
2016 primarily due to the net recoveries experienced and asset quality.
Provision
expense is recorded based on our assessment of general loan loss risk as well as asset quality. The allowance for loan losses
is management’s estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Management
determines the allowance based on an ongoing evaluation. Estimating the amount of the allowance for loan losses requires significant
judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated
losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions,
all of which may be susceptible to significant change. For further discussion regarding the calculation of the allowance, see
the “Allowance for Loan Losses” discussion below.
Noninterest Income and
Expense
Noninterest
income provides us with additional revenues that are significant sources of income. The major components of noninterest income
for the three and nine months ended September 30, 2017 and 2016 are presented below:
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In
thousands)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
banking income
|
|
$
|
3,625
|
|
|
|
5,605
|
|
|
|
11,522
|
|
|
|
12,967
|
|
Deposit
service charges
|
|
|
1,072
|
|
|
|
953
|
|
|
|
2,928
|
|
|
|
2,712
|
|
Net
loss on extinguishment of debt
|
|
|
—
|
|
|
|
(118
|
)
|
|
|
—
|
|
|
|
(174
|
)
|
Net
gain on sale of securities
|
|
|
368
|
|
|
|
111
|
|
|
|
1,174
|
|
|
|
641
|
|
Fair
value adjustments on interest rate swaps
|
|
|
90
|
|
|
|
99
|
|
|
|
(37
|
)
|
|
|
(408
|
)
|
Net
increase in cash value life insurance
|
|
|
267
|
|
|
|
226
|
|
|
|
759
|
|
|
|
684
|
|
Mortgage
loan servicing income
|
|
|
1,652
|
|
|
|
1,437
|
|
|
|
4,822
|
|
|
|
4,238
|
|
Other
|
|
|
801
|
|
|
|
560
|
|
|
|
2,742
|
|
|
|
1,728
|
|
Total
noninterest income
|
|
$
|
7,875
|
|
|
|
8,873
|
|
|
|
23,910
|
|
|
|
22,388
|
|
Noninterest
income decreased $1.0 million to $7.9 million for the three months ended September 30, 2017 from $8.9 million for the three months
ended September 30, 2016. Noninterest income increased $1.5 million to $23.9 million for the nine months ended September 30, 2017
from $22.4 million for the nine months ended September 30, 2016. The decrease in noninterest income for the three months ended
September 30, 2017 primarily relates to a decrease in mortgage banking income. The increase in noninterest income for the nine
months ended September 30, 2017 primarily relates to net gain on sale of securities, mortgage loan servicing income related to
an increase in loans service for third parties and other noninterest income.
The
following table provides a break out of mortgage banking income from our Bank’s retail mortgage team “Community banking”
and Crescent Mortgage Company “Wholesale mortgage banking”.
|
|
For
the Three Months Ended September 30,
|
|
|
|
Loan
Originations
|
|
|
Mortgage
Banking Income
|
|
|
Margin
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Additional
segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
banking
|
|
$
|
20,342
|
|
|
|
25,633
|
|
|
|
500
|
|
|
|
680
|
|
|
|
2.46
|
%
|
|
|
2.65
|
%
|
Wholesale
mortgage banking
|
|
|
217,014
|
|
|
|
253,485
|
|
|
|
3,125
|
|
|
|
4,925
|
|
|
|
1.44
|
%
|
|
|
1.94
|
%
|
Total
|
|
$
|
237,356
|
|
|
|
279,118
|
|
|
|
3,625
|
|
|
|
5,605
|
|
|
|
1.53
|
%
|
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
Loan Originations
|
|
|
Mortgage Banking Income
|
|
|
Margin
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Additional
segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
banking
|
|
$
|
59,511
|
|
|
|
68,263
|
|
|
|
1,441
|
|
|
|
1,586
|
|
|
|
2.42
|
%
|
|
|
2.32
|
%
|
Wholesale
mortgage banking
|
|
|
611,597
|
|
|
|
645,412
|
|
|
|
10,081
|
|
|
|
11,381
|
|
|
|
1.65
|
%
|
|
|
1.76
|
%
|
Total
|
|
$
|
671,108
|
|
|
|
713,675
|
|
|
|
11,522
|
|
|
|
12,967
|
|
|
|
1.72
|
%
|
|
|
1.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three months ended September 30, 2017 and 2016, the Company recognized net gains on sale of available-for-sale securities
of $368,000 and $111,000 respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized net gains
on sale of available-for-sale securities of $1.2 million and $641,000 respectively.
The
fair value adjustment on interest rate swaps increased noninterest income by $90,000 for the three months ended September 30,
2017 compared to an increase in noninterest income of $99,000 for three months ended September 30, 2016. The fair value adjustment
on interest rate swaps decreased noninterest income by $37,000 for the nine months ended September 30, 2017 compared to a reduction
in noninterest income of $408,000 for nine months ended September 30, 2016. The change in fair value adjustment on interest rate
swaps relates to the change in interest rates from period to period. The Company uses standalone interest rate swaps to more closely
match the interest rate characteristics of assets and liabilities and to mitigate the risks arising from timing mismatches between
assets and liabilities including duration mismatches.
The
following table sets forth for the periods indicated the primary components of noninterest expense:
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
8,623
|
|
|
|
8,481
|
|
|
|
26,487
|
|
|
|
23,306
|
|
Occupancy
and equipment
|
|
|
2,508
|
|
|
|
2,067
|
|
|
|
7,129
|
|
|
|
5,836
|
|
Marketing
and public relations
|
|
|
385
|
|
|
|
374
|
|
|
|
1,182
|
|
|
|
1,144
|
|
FDIC
insurance
|
|
|
205
|
|
|
|
180
|
|
|
|
380
|
|
|
|
527
|
|
Recovery
of mortgage loan repurchase losses
|
|
|
(225
|
)
|
|
|
(250
|
)
|
|
|
(675
|
)
|
|
|
(750
|
)
|
Legal
expense
|
|
|
157
|
|
|
|
80
|
|
|
|
373
|
|
|
|
185
|
|
Other
real estate expense, net
|
|
|
(5
|
)
|
|
|
(96
|
)
|
|
|
40
|
|
|
|
(37
|
)
|
Mortgage
subservicing expense
|
|
|
494
|
|
|
|
462
|
|
|
|
1,485
|
|
|
|
1,353
|
|
Amortization
of mortgage servicing rights
|
|
|
748
|
|
|
|
586
|
|
|
|
2,083
|
|
|
|
1,659
|
|
Merger
related expenses
|
|
|
311
|
|
|
|
—
|
|
|
|
1,910
|
|
|
|
2,985
|
|
Other
|
|
|
2,255
|
|
|
|
2,006
|
|
|
|
6,538
|
|
|
|
5,759
|
|
Total
noninterest expense
|
|
$
|
15,456
|
|
|
|
13,890
|
|
|
|
46,932
|
|
|
|
41,967
|
|
Noninterest
expense represents the largest expense category for the Company. Noninterest expense increased to $15.5 million for the three
months ended September 30, 2017 from $13.9 million for the three months ended September 30, 2016. Noninterest expense increased
to $46.9 million for the nine months ended September 30, 2017 from $42.0 million for the nine months ended September 30, 2016.
The increase in noninterest expense is primarily the result of an increase in salaries and employee benefits and occupancy and
equipment as well as merger related expense related to the acquisition of Greer during the first quarter of 2017. Merger related
expenses totaled $0.3 million for the three months ended September 30, 2017. There were no merger related expenses for the three
months ended September 30, 2016. Merger related expenses totaled $1.9 million for the nine months ended September 30, 2017 as
compared to $3.0 million for the nine months ended September 30, 2016.
Income
Tax Expense
Our
effective tax rate was 33.2% for three month period ended September 30, 2017, compared to 33.5% for the three month period ended
September 30, 2016. Our effective tax rate was 28.0% for nine month period ended September 30, 2017, compared to 30.7% for the
nine month period ended September 30, 2016. The decrease in the effective tax rate from period to period reflects an increase
in interest income on municipal securities during 2017 and
tax benefits related to excess stock-based
compensation. Tax preferenced municipal securities interest comprised 5.3% and 3.7% of interest income for the quarter ended September
30, 2017 and 2016, respectively. Municipal securities interest comprised 5.1% and 4.0% of interest income for the nine months
ended September 30, 2017 and 2016, respectively. In addition, the Company recognized tax benefits related to excess stock-based
compensation of approximately $1.2 million and $400,000 for the nine months ended September 30, 2017 and 2016, respectively. The
impact of tax benefits related to excess stock-based compensation for the three months ended September 30, 2017 and 2016 was not
significant.
Balance Sheet Review
Securities
Our
primary objective in managing the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding
competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations.
We maintain investment balances based on a continuing assessment of cash flows, the level of current and expected loan production,
current interest rate risk strategies and the assessment of the potential future direction of market interest rate changes. Investment
securities differ in terms of default, interest rate, liquidity and expected rate of return risk.
At
September 30, 2017, our securities portfolio, excluding FHLB stock and other investments, was $523.7 million or approximately
23.2% of our assets. Our available-for-sale securities portfolio included US agency securities, municipal securities, collateralized
loan obligations, mortgage-backed securities (agency and non-agency), and trust preferred securities with a fair value of $523.7
million and an amortized cost of $518.2 million resulting in a net unrealized gain of $5.5 million.
As
securities are purchased, they are designated as held-to-maturity or available-for-sale based upon our intent, which incorporates
liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. We do not currently
hold, nor have we ever held, any securities that are designated as trading securities.
The
increase in securities from period to period is attributable to the securities acquired with the acquisition of Greer on March
18, 2017. Securities acquired in the acquisition of Greer were approximately $121.4 million on March 18, 2017. For additional
information, see note 2 “Business Combinations” in the accompanying financial statements.
Loans by Type
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. Gross loans receivable at September 30, 2017 and December 2016 were $1.5 billion and
$1.2 billion, respectively.
Our
loan portfolio consists primarily of loans secured by real estate mortgages. As of September 30, 2017, our loan portfolio included
$1.3 billion, or 85.8%, of gross loans secured by real estate. As of December 31, 2016, our loan portfolio included $1.0 billion,
or 85.6%, of gross loans secured by real estate. Substantially all 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.
As
shown in the table below, gross loans receivable increased $306.2 million since December 31, 2016. The increase in loans receivable
primarily relates to the loans acquired in the acquisition of Greer well as the Bank’s focus on growing residential mortgage
and commercial lending. The recorded investment in loans acquired in the acquisition of Greer was $159.5 million as of September
30, 2017. For additional information, see the net interest margin discussion above as well as Note 2 “Business Combinations”
in the accompanying financial statements. For additional information regarding acquired loans, see Note 5, “Loans Receivable,
Net”.
The
following table summarizes loans by type and percent of total at the end of the periods indicated:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
%
of Total
|
|
|
|
|
|
%
of Total
|
|
All
Loans:
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
475,949
|
|
|
|
32.06
|
%
|
|
$
|
411,399
|
|
|
|
34.91
|
%
|
Home
equity
|
|
|
46,162
|
|
|
|
3.11
|
%
|
|
|
36,026
|
|
|
|
3.06
|
%
|
Commercial
real estate
|
|
|
575,200
|
|
|
|
38.75
|
%
|
|
|
445,344
|
|
|
|
37.80
|
%
|
Construction
and development
|
|
|
175,799
|
|
|
|
11.84
|
%
|
|
|
115,682
|
|
|
|
9.82
|
%
|
Consumer
loans
|
|
|
9,010
|
|
|
|
0.61
|
%
|
|
|
5,714
|
|
|
|
0.48
|
%
|
Commercial
business loans
|
|
|
202,341
|
|
|
|
13.63
|
%
|
|
|
164,101
|
|
|
|
13.93
|
%
|
Total
gross loans receivable
|
|
|
1,484,461
|
|
|
|
100.00
|
%
|
|
|
1,178,266
|
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
|
|
|
|
10,688
|
|
|
|
|
|
Total
loans receivable, net
|
|
$
|
1,473,799
|
|
|
|
|
|
|
$
|
1,167,578
|
|
|
|
|
|
Maturities
and Sensitivity of Loans to Changes in Interest Rates
The
information in the following table is based on the contractual maturities of individual loans, including loans which may be subject
to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification
of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right
to prepay obligations with or without prepayment penalties.
The
following table summarizes the loan maturity distribution by type and related interest rate characteristics.
|
|
At
September 30, 2017
|
|
|
|
|
|
|
After
one
|
|
|
|
|
|
|
|
|
|
One
Year
|
|
|
but
within
|
|
|
After
five
|
|
|
|
|
|
|
or
Less
|
|
|
five
years
|
|
|
years
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Loans secured by real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
$
|
19,256
|
|
|
|
57,015
|
|
|
|
399,678
|
|
|
|
475,949
|
|
Home
equity
|
|
|
4,638
|
|
|
|
5,298
|
|
|
|
36,226
|
|
|
|
46,162
|
|
Commercial
real estate
|
|
|
64,409
|
|
|
|
391,500
|
|
|
|
119,291
|
|
|
|
575,200
|
|
Construction
and development
|
|
|
58,440
|
|
|
|
93,527
|
|
|
|
23,832
|
|
|
|
175,799
|
|
Consumer loans
|
|
|
1,459
|
|
|
|
6,085
|
|
|
|
1,466
|
|
|
|
9,010
|
|
Commercial
business loans
|
|
|
28,535
|
|
|
|
83,557
|
|
|
|
90,249
|
|
|
|
202,341
|
|
Total
gross loans receivable
|
|
$
|
176,737
|
|
|
|
636,982
|
|
|
|
670,742
|
|
|
|
1,484,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans maturing - after
one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
479,706
|
|
Fixed
rate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,307,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming and Problem
Assets
Nonperforming
assets include loans on which interest is not being accrued, accruing loans that are 90 days or more delinquent and foreclosed
property. Foreclosed property consists of real estate and other assets acquired as a result of a borrower’s loan default.
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 loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction
of principal when received. In general, a nonaccrual loan may be placed back onto accruing status once the borrower has made a
minimum of nine consecutive payments in accordance with the loan terms. Further, the borrower must show capacity to continue performing
into the future prior to restoration of accrual status. As of September 30, 2017, the Company had $1.7 million of PCI loans that
were 90 days past due and accruing. At December 31 2016, we had no loans 90 days past due and still accruing.
Troubled
Debt Restructurings (“TDRs”)
The
Company designates loan modifications as TDRs when, for economic or legal reasons related to the borrower’s financial difficulties,
it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date of modification
are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as
accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance is in accordance with
its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists
as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accrual status
when there is economic substance to the restructuring, there is well documented credit evaluation of the borrower’s financial
condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has
demonstrated repayment performance in accordance with the modified terms for a reasonable period of time, generally a minimum
of nine months.
The
following table summarizes nonperforming and problem assets at the end of the periods indicated.
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In
thousands)
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
Nonaccrual
loans-renegotiated loans
|
|
$
|
1,001
|
|
|
|
1,227
|
|
Nonaccrual loans-other
|
|
|
3,923
|
|
|
|
4,398
|
|
Real
estate acquired through foreclosure, net
|
|
|
1,640
|
|
|
|
1,179
|
|
Total
Non-Performing Assets
|
|
$
|
6,564
|
|
|
|
6,804
|
|
|
|
|
|
|
|
|
|
|
Problem Assets not included
in Non-Performing Assets-
|
|
|
|
|
|
|
|
|
Accruing
renegotiated loans outstanding
|
|
$
|
5,488
|
|
|
|
5,216
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2017, nonperforming assets were $6.6 million, or 0.29% of total assets. Comparatively, nonperforming assets were
$6.8 million, or 0.40% of total assets, at December 31, 2016. Nonperforming loans were 0.33% and 0.48% of gross loans receivable
at September 30, 2017 and December 31, 2016, respectively.
Potential
problem loans, which are not included in nonperforming loans, amounted to approximately $5.5 million at September 30, 2017, compared
to $5.2 million at December 31, 2016. Potential problem loans represent those loans with a well-defined weakness and where information
about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to
comply with present repayment terms.
Substantially
all of the nonaccrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans at September 30, 2017 and
December 31, 2016 are collateralized by real estate. The Bank utilizes third party appraisers to determine the fair value of collateral
dependent loans. Our current loan and appraisal policies require the Bank to obtain updated appraisals on loans greater than $100,000
on an annual basis, either through a new external appraisal or an internal appraisal evaluation. Impaired loans are individually
reviewed on a quarterly basis to determine the level of impairment. 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. Management
believes based on information known and available currently, the probable losses related to problem assets are adequately reserved
in the allowance for loan losses.
Credit
quality indicators continue to show improvement as the Company experienced reduced loan migrations to nonaccrual status, and lower
loss severity on individual problem asset. The Company believes this general trend in reduced loans migrating into nonaccrual
status is an indication of improving credit quality in the Company’s overall loan portfolio and a leading indicator of reduced
credit losses going forward. Nevertheless, the Company can make no assurances that nonperforming assets will continue to improve
in future periods. The Company continues to monitor the loan portfolio and foreclosed assets carefully and is continually working
to reduce its problem assets.
Allowance
for Loan Losses
The
allowance for loan losses is management’s estimate of probable credit losses inherent in the loan portfolio at the balance
sheet date. Management determines the allowance based on an ongoing evaluation. Estimating the amount of the allowance for loan
losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change. The allowance consists of specific and general components.
The
general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical
loss experience is determined by major loan category and is based on the actual loss history trends for the previous 20 quarters.
The actual loss experience is supplemented with internal and external qualitative factors as considered necessary at each period
and given the facts at the time. These qualitative factors adjust the 20 quarter historical loss rate to recognize the most recent
loss results and changes in the economic conditions to ensure the estimated losses in the portfolio are recognized in the period
incurred and that the allowance at each balance sheet date is adequate and appropriate in accordance with GAAP. Qualitative factors
include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs
and recoveries for the most recent twelve quarters; trends in volume and terms of loans; effects of any changes in risk selection
and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes
in credit concentrations.
The
specific component relates to loans that are individually classified as impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating
the amount and timing of future cash flows and collateral values. Impaired loans are evaluated for impairment using the discounted
cash flow methodology or based on the net realizable value of the underlying collateral. Impaired loans are individually reviewed
on a quarterly basis to determine the level of impairment. See additional discussion in section “Nonperforming and Problem
Assets.”
While
management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required
by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates,
as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary
from previous estimates. To the extent actual outcomes differ from management’s estimates, additional provisions for loan
losses could be required that could adversely affect the Bank’s earnings or financial position in future periods.
The
allowance for loan losses was $10.7 million, or 0.87% of non-acquired loans, at September 30, 2017, compared to $10.7 million,
or 1.01% of total non-acquired loans, at December 31, 2016. Loans acquired in business combinations were $257.3 million and $119.4
million at September 30, 2017 and December 31, 2016, respectively. No allowance for loan losses related to the acquired loans
is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
At September 30, 2017 and December 31, 2016, acquired non-credit impaired loans had a purchase discount remaining of $5.3 million
and $3.2 million, respectively.
The
table below shows a reconciliation of acquired and non-acquired loans and allowance for loan losses to non-acquired loans:
|
|
At
the Month Ended
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Acquired
and non-acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
loans receivable
|
|
$
|
257,461
|
|
|
$
|
278,275
|
|
|
|
303,244
|
|
|
|
119,422
|
|
|
|
129,505
|
|
Non-acquired
loans receivable
|
|
|
1,227,000
|
|
|
|
1,157,145
|
|
|
|
1,113,766
|
|
|
|
1,058,844
|
|
|
|
1,003,724
|
|
Total
loans receivable
|
|
$
|
1,484,461
|
|
|
$
|
1,435,420
|
|
|
|
1,417,010
|
|
|
|
1,178,266
|
|
|
|
1,133,229
|
|
% Acquired
|
|
|
17.34
|
%
|
|
|
19.39
|
%
|
|
|
21.40
|
%
|
|
|
10.14
|
%
|
|
|
11.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-acquired loans
|
|
$
|
1,227,000
|
|
|
$
|
1,157,145
|
|
|
|
1,113,766
|
|
|
|
1,058,844
|
|
|
|
1,003,724
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
10,750
|
|
|
|
10,715
|
|
|
|
10,688
|
|
|
|
10,340
|
|
Allowance
for loan losses to non-acquired loans (Non-GAAP)
|
|
|
0.87
|
%
|
|
|
0.93
|
%
|
|
|
0.96
|
%
|
|
|
1.01
|
%
|
|
|
1.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
$
|
1,484,461
|
|
|
$
|
1,435,420
|
|
|
|
1,417,010
|
|
|
|
1,178,266
|
|
|
|
1,133,229
|
|
Allowance
for loan losses
|
|
|
10,662
|
|
|
|
10,750
|
|
|
|
10,715
|
|
|
|
10,688
|
|
|
|
10,340
|
|
Allowance
for loan losses to total loans receivable
|
|
|
0.72
|
%
|
|
|
0.75
|
%
|
|
|
0.76
|
%
|
|
|
0.91
|
%
|
|
|
0.91
|
%
|
The
Company experienced net charge-offs of $88,000 for the three months ended September 30, 2017 and net recoveries of $43,000 for
the three months ended September 30, 2016. The Company experienced net charge-offs of $26,000 for the nine months ended September
30, 2017 and net recoveries of $199,000 for the nine months ended September 30, 2016. Asset quality has remained relatively consistent
since year end, with nonperforming assets to total assets slightly decreasing to 0.29% as of September 30, 2017 as compared to
0.40% as of December 31, 2016.
The
following table summarizes the activity related to our allowance for loan losses for the three and nine months ended September
30, 2017 and 2016.
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars
in thousands)
|
|
Balance,
beginning of period
|
|
$
|
10,750
|
|
|
|
10,297
|
|
|
|
10,688
|
|
|
|
10,141
|
|
Provision
for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
(127
|
)
|
|
|
—
|
|
|
|
(162
|
)
|
|
|
(45
|
)
|
Consumer
loans
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(16
|
)
|
|
|
(31
|
)
|
Commercial
business loans
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(121
|
)
|
Total
loan charge-offs
|
|
|
(132
|
)
|
|
|
(4
|
)
|
|
|
(178
|
)
|
|
|
(197
|
)
|
Loan
recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family
|
|
|
2
|
|
|
|
9
|
|
|
|
3
|
|
|
|
148
|
|
Commercial
real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
26
|
|
|
|
—
|
|
Construction
and development
|
|
|
—
|
|
|
|
4
|
|
|
|
2
|
|
|
|
10
|
|
Consumer
loans
|
|
|
16
|
|
|
|
8
|
|
|
|
28
|
|
|
|
23
|
|
Commercial
business loans
|
|
|
26
|
|
|
|
26
|
|
|
|
93
|
|
|
|
215
|
|
Total
loan recoveries
|
|
|
44
|
|
|
|
47
|
|
|
|
152
|
|
|
|
396
|
|
Net
loan recoveries
|
|
|
(88
|
)
|
|
|
43
|
|
|
|
(26
|
)
|
|
|
199
|
|
Balance,
end of period
|
|
$
|
10,662
|
|
|
|
10,340
|
|
|
|
10,662
|
|
|
|
10,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of loans receivable (end of period)
|
|
|
0.72
|
%
|
|
|
0.91
|
%
|
|
|
0.72
|
%
|
|
|
0.91
|
%
|
Net
charge-offs (recoveries) to average
loans
receivable (annualized)
|
|
|
0.02
|
%
|
|
|
(0.02
|
)%
|
|
|
0.00
|
%
|
|
|
(0.04
|
)%
|
Mortgage
Operations
Mortgage
Activities and Servicing
Our
wholesale mortgage banking operations are conducted through our mortgage origination subsidiary, Crescent Mortgage Company. Mortgage
activities involve the purchase of mortgage loans and table funded originations for the purpose of generating gains on sales of
loans and fee income on the origination of loans and is included in mortgage banking income in the accompanying consolidated statements
of operations. While the Company originates residential one-to-four family loans that are held in its loan portfolio, the majority
of new loans are generally sold pursuant to secondary market guidelines through Crescent Mortgage Company. Generally, residential
mortgage loans are sold and, depending on the pricing in the marketplace, servicing rights are either sold or retained. The level
of loan sale activity and its contribution to the Company’s profitability depends on maintaining a sufficient volume of
loan originations and margin. Changes in the level of interest rates and the local economy affect the volume of loans originated
by the Company and the amount of loan sales and loan fees earned. Discussion related to the impact and changes within the mortgage
operations is provided in “Results of Operations – Noninterest Income and Expense”. Additional segment information
is provided in Note 10 “Supplemental Segment Information” in the accompanying financial statements.
Loan
Servicing
We
retain the rights to service a portion of the loans we sell on the secondary market, as part of our mortgage banking activities,
for which we receive service fee income. These rights are known as mortgage servicing rights, or MSRs, where the owner of the
MSR acts on behalf of the mortgage loan owner and has the contractual right to receive a stream of cash flows in exchange for
performing specified mortgage servicing functions. These duties typically include, but are not limited to, performing loan administration,
collection, and default activities, including the collection and remittance of loan payments, responding to customer inquiries,
accounting for principal and interest, holding custodial (impound) funds for the payment of property taxes and insurance premiums,
counseling delinquent mortgagors, modifying loans and supervising foreclosures and property dispositions. We subservice the duties
and responsibilities obligated to the owner of the MSR to a third party provider for which we pay a fee.
We
recognize the rights to service mortgage loans for others as an asset. We initially record the MSR at fair value and subsequently
account for the asset at lower of cost or market using the amortization method. Servicing assets are amortized in proportion to,
and over the period of, the estimated net servicing income and are carried at amortized cost. A valuation is performed by an independent
third party on a quarterly basis to assess the servicing assets for impairment based on the fair value at each reporting date.
The fair value of servicing assets is determined by calculating the present value of the estimated net future cash flows consistent
with contractually specified servicing fees. This valuation is performed on a disaggregated basis, based on loan type and year
of production. Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and
less valuable when interest rates decline (as prepayments typically increase). As discussed in detail in notes to the consolidated
financial statements, we use an appropriate weighted average constant prepayment rate, discount rate, and other defined assumptions
to model the respective cash flows and determine the fair value of the servicing asset at each reporting date.
The
Company was servicing $2.5 billion loans for others at September 30, 2017 and $2.2 billion at December 31, 2016. Mortgage servicing
rights asset had a balance of $17.4 million and $15.0 million at September 30, 2017 and December 31, 2016, respectively. The economic
estimated fair value of the mortgage servicing rights was $22.8 million and $21.0 million at September 30, 2017 and December 31,
2016, respectively. Amortization expense related to the mortgage servicing rights was $748,000 and $586,000 during the three months
ended September 30, 2017 and 2016, respectively. Amortization expense related to the mortgage servicing rights was $2.1 million
and $1.7 million during the nine months ended September 30, 2017 and 2016, respectively.
Below
is a roll-forward of activity in the balance of the servicing assets for the three months ended September 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
MSR beginning
balance
|
|
$
|
16,692
|
|
|
|
12,400
|
|
|
|
15,032
|
|
|
|
11,433
|
|
Amount
capitalized
|
|
|
1,500
|
|
|
|
1,743
|
|
|
|
4,495
|
|
|
|
3,782
|
|
Amount
amortized
|
|
|
(748
|
)
|
|
|
(587
|
)
|
|
|
(2,083
|
)
|
|
|
(1,659
|
)
|
MSR ending balance
|
|
$
|
17,444
|
|
|
|
13,556
|
|
|
|
17,444
|
|
|
|
13,556
|
|
Reserve
For Mortgage Repurchase Losses
Loans
held for sale have primarily been fixed-rate single-family residential mortgage loans under contracts to be sold in the secondary
market. In most cases, loans in this category are sold within 30 days of closing. Buyers generally have recourse to return a purchased
loan to the Company under limited circumstances. An estimation of mortgage repurchase losses is reviewed on a quarterly basis. The
representations and warranties in our loan sale agreements provide that we repurchase or indemnify the investors for losses or
costs on loans we sell under certain limited conditions. Some of these conditions include underwriting errors or omissions,
fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due
to deficiencies in the appraisal. In addition to these representations and warranties, our loan sale contracts define
a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an early payment
default, or EPD. In the event of an EPD, we are required to return the premium paid by the investor for the loan as
well as certain administrative fees, and in some cases repurchase the loan or indemnify the investor. Because the level
of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that
may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult
to estimate and requires considerable management judgment.
The
following table demonstrates the activity for the reserve for mortgage repurchase losses for the three and nine months ended September
30, 2017 and 2016.
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
2,354
|
|
|
|
3,355
|
|
|
|
2,880
|
|
|
|
3,876
|
|
Losses
paid
|
|
|
—
|
|
|
|
—
|
|
|
|
(76
|
)
|
|
|
(21
|
)
|
Recoveries
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
25
|
|
Provision
for mortgage repurchase losses
|
|
|
(225
|
)
|
|
|
(250
|
)
|
|
|
(675
|
)
|
|
|
(750
|
)
|
Ending
balance
|
|
$
|
2,129
|
|
|
|
3,130
|
|
|
|
2,129
|
|
|
|
3,130
|
|
For
the three months ended September 30, 2017 and 2016, the Company recorded a recovery of mortgage repurchase losses of $225,000
and $250,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded a recovery of mortgage
repurchase losses of $675,000 and $750,000, respectively. The decline in the provision for mortgage loan repurchase losses is
related to several factors. The Company sells mortgage loans to various third parties, including government-sponsored entities
(“GSEs”), under contractual provisions that include various representations and warranties as previously stated. The
Company establishes the reserve for mortgage loan repurchase losses based on a combination of factors, including estimated levels
of defects on internal quality assurance, default expectations, historical investor repurchase demand and appeals success rates,
reimbursement by correspondent and other third party originators, and projected loss severity. Prior to 2012, there was no expiration
date related to representations and warranties as long as the loan sold to the investor was outstanding. As a result, the Company
received loan repurchase requests years after the loan was originated and sold to various third parties. In the latter part of
2012, the regulatory framework for certain GSEs changed where, under certain circumstances, the loan repurchase risk was limited
for production beginning in January 2013. In addition, in May 2014, additional regulatory changes further limited loan repurchase
risk.
As
a result, the Company performed an analysis of its reserve for mortgage loan repurchase losses and, based on management’s
judgment and interpretation of such regulatory changes, reduced the reserve accordingly. Management will continue to monitor how
the GSEs implement the regulatory changes and trends. If such trends continue to be favorable, there is a possibility that additional
reductions in this reserve could occur in future periods.
Deposits
We
provide a range of deposit services, including noninterest-bearing demand accounts, interest-bearing demand and savings accounts,
money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive
market factors and management’s desire to increase or decrease certain types or maturities of deposits. Deposits continue
to be our primary funding source. At September 30, 2017, deposits totaled $1.7 billion, an increase of $449.4 million from deposits
of $1.3 billion at December 31, 2016. The increase in deposits since December 31, 2016 primarily relates to the $311.1 million
in deposits assumed with the completion of the acquisition of Greer on March 18, 2017 as well as continued efforts to increase
our core deposits through business development.
The following
table shows the average balance amounts and the average rates paid on deposits held by us.
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand accounts
|
|
$
|
253,735
|
|
|
|
0.28
|
%
|
|
|
140,092
|
|
|
|
0.15
|
%
|
Money
market accounts
|
|
|
355,049
|
|
|
|
0.45
|
%
|
|
|
266,000
|
|
|
|
0.29
|
%
|
Savings
accounts
|
|
|
63,678
|
|
|
|
0.19
|
%
|
|
|
43,602
|
|
|
|
0.13
|
%
|
Certificates
of deposit less than $100,000
|
|
|
291,856
|
|
|
|
0.94
|
%
|
|
|
268,385
|
|
|
|
0.95
|
%
|
Certificates
of deposit of $100,000 or more
|
|
|
271,832
|
|
|
|
1.14
|
%
|
|
|
216,196
|
|
|
|
1.09
|
%
|
Total
interest-bearing average deposits
|
|
|
1,236,150
|
|
|
|
|
|
|
|
934,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
321,894
|
|
|
|
|
|
|
|
234,243
|
|
|
|
|
|
Total
average deposits
|
|
$
|
1,558,044
|
|
|
|
|
|
|
|
1,168,518
|
|
|
|
|
|
The
maturity distribution of our time deposits of $100,000 or more is as follows:
|
|
At
September 30, 2017
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Three months or less
|
|
$
|
52,139
|
|
Over three through six months
|
|
|
33,455
|
|
Over six through twelve
months
|
|
|
97,555
|
|
Over twelve months
|
|
|
113,668
|
|
Total
certificates of deposits
|
|
$
|
296,817
|
|
Borrowings
The
followings table outlines our various sources of short-term borrowed funds during the three and nine months ended September 30,
2017 and 2016 and the amounts outstanding at the end of each period, the maximum amount for each component during the periods,
the average amounts for each period, and the average interest rate that we paid for each borrowings source. The maximum month-end
balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown.
|
|
|
|
|
|
|
|
Maximum
|
|
|
Average
for the
|
|
|
|
|
|
|
Contractual
|
|
|
Month
|
|
|
Period
including
|
|
|
|
Ending
|
|
|
Period
End
|
|
|
End
|
|
|
Fair
Value Amortization
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
At
or for the three months ended September 30, 2017
|
|
(Dollars
in thousands)
|
|
Short-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
FHLB advances
|
|
$
|
180,000
|
|
|
|
0.83%
- 2.70
|
%
|
|
|
180,000
|
|
|
|
146,670
|
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
FHLB advances, due 2018 through 2020
|
|
|
31,000
|
|
|
|
1.20%
- 1.22
|
%
|
|
|
52,000
|
|
|
|
41,516
|
|
|
|
2.14
|
%
|
Subordinated
debentures, due 2032 through 2037
|
|
|
23,351
|
|
|
|
3.04%
- 4.75
|
%
|
|
|
23,355
|
|
|
|
23,339
|
|
|
|
4.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Average
for the
|
|
|
|
|
|
|
Contractual
|
|
|
Month
|
|
|
Period
including
|
|
|
|
Ending
|
|
|
Period
End
|
|
|
End
|
|
|
Fair
Value Amortization
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
At
or for the three months ended September 30, 2016
|
|
(Dollars
in thousands)
|
|
Short-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
FHLB advances
|
|
$
|
87,500
|
|
|
|
0.36%
- 0.95
|
%
|
|
|
117,500
|
|
|
|
88,452
|
|
|
|
0.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
FHLB advances, due 2017 through 2021
|
|
|
53,000
|
|
|
|
0.83%
- 4.00
|
%
|
|
|
53,000
|
|
|
|
52,817
|
|
|
|
3.09
|
%
|
Subordinated
debentures, due 2032 through 2034
|
|
|
15,465
|
|
|
|
3.73%
- 4.00
|
%
|
|
|
15,465
|
|
|
|
15,465
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Average
for the
|
|
|
|
|
|
|
Contractual
|
|
|
Month
|
|
|
Period
including
|
|
|
|
Ending
|
|
|
Period
End
|
|
|
End
|
|
|
Fair
Value Amortization
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
At
or for the nine months ended September 30, 2017
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
FHLB advances
|
|
$
|
180,000
|
|
|
|
0.83%
- 2.70
|
%
|
|
|
214,500
|
|
|
|
165,610
|
|
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
FHLB advances, due 2018 through 2020
|
|
|
31,000
|
|
|
|
1.20%
- 1.22
|
%
|
|
|
52,000
|
|
|
|
31,008
|
|
|
|
2.64
|
%
|
Subordinated
debentures, due 2032 through 2037
|
|
|
23,351
|
|
|
|
3.04%
- 4.75
|
%
|
|
|
23,355
|
|
|
|
21,100
|
|
|
|
4.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Average
for the
|
|
|
|
|
|
|
Contractual
|
|
|
Month
|
|
|
Period
including
|
|
|
|
Ending
|
|
|
Period
End
|
|
|
End
|
|
|
Fair
Value Amortization
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
At
or for the nine months ended September 30, 2016
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
FHLB advances
|
|
$
|
87,500
|
|
|
|
0.36%
- 0.95
|
%
|
|
|
117,500
|
|
|
|
84,590
|
|
|
|
0.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
FHLB advances, due 2017 through 2021
|
|
|
53,000
|
|
|
|
0.83%
- 4.00
|
%
|
|
|
88,000
|
|
|
|
67,121
|
|
|
|
2.58
|
%
|
Subordinated
debentures, due 2032 through 2034
|
|
|
15,465
|
|
|
|
3.73%
- 4.00
|
%
|
|
|
15,465
|
|
|
|
15,465
|
|
|
|
3.83
|
%
|
Liquidity
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.
The
Company utilizes borrowing facilities in order to maintain adequate liquidity including: the FHLB of Atlanta, the Federal Reserve
Bank (“FRB”), and federal funds purchased. The Company also uses wholesale deposit products, including brokered deposits
as well as national certificate of deposit services. Additionally, the Company has certain investment securities classified as
available-for-sale that are carried at market value with changes in market value, net of tax, recorded through stockholders’
equity.
Lines
of credit with the FHLB of Atlanta are based upon FHLB-approved percentages of Bank assets, but must be supported by appropriate
collateral to be available. The Company has pledged first lien residential mortgage, second lien residential mortgage, residential
home equity line of credit, commercial mortgage and multifamily mortgage portfolios under blanket lien agreements. At September
30, 2017, the Company had FHLB advances of $211 million outstanding with excess collateral pledged to the FHLB during those periods
that would support additional borrowings of approximately $281.3 million.
Lines
of credit with the FRB are based on collateral pledged. At September 30, 2017 the Company had lines available with the FRB for
$196.3 million. At September 30, 2017 the Company had no FRB advances outstanding.
Capital
Resources
The
Company and the Bank are subject to various federal and state regulatory requirements, including regulatory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions that
if undertaken could have a direct material effect on the Company’s and the Bank’s financial statements.
Effective
January 2, 2015, the Company and Bank became subject to the regulatory risk-based capital rules adopted by the federal banking
agencies implementing Basel III. Under the new capital guidelines, applicable regulatory capital components consist of (1) common
equity Tier 1 capital (common stock, including related surplus, and retained earnings, plus limited amounts of minority interest
in the form of common stock, net of goodwill and other intangibles (other than mortgage servicing assets), deferred tax assets
arising from net operating loss and tax credit carry forwards above certain levels, mortgage servicing rights above certain levels,
gain on sale of securitization exposures and certain investments in the capital of unconsolidated financial institutions, and
adjusted by unrealized gains or losses on cash flow hedges and accumulated other comprehensive income items (subject to the ability
of a non-advanced approaches institution to make a one-time irrevocable election to exclude from regulatory capital most components
of AOCI), (2) additional Tier 1 capital (qualifying non-cumulative perpetual preferred stock, including related surplus, plus
qualifying Tier 1 minority interest and, in the case of holding companies with less than $15 billion in consolidated assets at
December 31, 2009, certain grandfathered trust preferred securities and cumulative perpetual preferred stock in limited amounts,
net of mortgage servicing rights, deferred tax assets related to temporary timing differences, and certain investments in financial
institutions) and (3) Tier 2 capital (the allowance for loan and lease losses in an amount not exceeding 1.25% of standardized
risk-weighted assets, plus qualifying preferred stock, qualifying subordinated debt and qualifying total capital minority interest,
net of Tier 2 investments in financial institutions). Total Tier 1 capital, plus Tier 2 capital, constitutes total risk-based
capital.
The
required minimum ratios are as follows:
|
·
|
Common
equity Tier 1 capital ratio (common equity Tier 1 capital to total risk-weighted assets)
of 4.5%
|
|
·
|
Tier
1 Capital Ratio (Tier 1 capital to total risk-weighted assets) of 6%
|
|
·
|
Total
capital ratio (total capital to total risk-weighted assets) of 8%; and
|
|
·
|
Leverage
ratio (Tier 1 capital to average total consolidated assets) of 4%
|
The
new capital guidelines also provide that all covered banking organizations must maintain a new capital conservation buffer of
common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations
on capital distributions and discretionary bonus payments to executive officers. The phase-in of the capital conservation buffer
requirement began on January 1, 2016.
The
final regulatory capital rules also incorporate these changes in regulatory capital into the prompt corrective action framework,
under which the thresholds for “adequately capitalized” banking organizations are equal to the new minimum capital
requirements. Under this framework, in order to be considered “well capitalized”, insured depository institutions
are required to maintain a Tier 1 leverage ratio of 5%, a common equity Tier 1 risk-based capital measure of 6.5%, a Tier 1 risked-based
capital ratio of 8% and a total risk-based capital ratio of 10%.
The
actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the Company and the Bank
at September 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
|
|
Minimum
Capital
|
|
|
Minimum
Capital
|
|
|
Capitalized
Under
|
|
|
|
|
|
|
|
|
|
Required
- Basel III
|
|
|
Required
- Basel III
|
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
|
Phase-In
Schedule
|
|
|
Fully
Phased-In
|
|
|
Action
Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Financial Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted assets)
|
|
$
|
243,149
|
|
|
|
14.93
|
%
|
|
|
83,446
|
|
|
|
5.125
|
%
|
|
|
113,975
|
|
|
|
7.000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to risk weighted assets)
|
|
|
265,694
|
|
|
|
16.32
|
%
|
|
|
107,869
|
|
|
|
6.625
|
%
|
|
|
138,398
|
|
|
|
8.500
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
capital (to risk weighted assets)
|
|
|
276,356
|
|
|
|
16.97
|
%
|
|
|
140,433
|
|
|
|
8.625
|
%
|
|
|
170,962
|
|
|
|
10.500
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to total average assets)
|
|
|
265,694
|
|
|
|
12.13
|
%
|
|
|
87,334
|
|
|
|
4.000
|
%
|
|
|
87,334
|
|
|
|
4.000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CresCom
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted assets)
|
|
|
261,395
|
|
|
|
16.05
|
%
|
|
|
83,445
|
|
|
|
5.125
|
%
|
|
|
113,974
|
|
|
|
7.000
|
%
|
|
|
105,833
|
|
|
|
6.50
|
%
|
Tier
1 capital (to risk weighted assets)
|
|
|
261,395
|
|
|
|
16.05
|
%
|
|
|
107,868
|
|
|
|
6.625
|
%
|
|
|
138,397
|
|
|
|
8.500
|
%
|
|
|
130,256
|
|
|
|
8.00
|
%
|
Total
capital (to risk weighted assets)
|
|
|
272,057
|
|
|
|
16.71
|
%
|
|
|
140,433
|
|
|
|
8.625
|
%
|
|
|
170,961
|
|
|
|
10.500
|
%
|
|
|
162,820
|
|
|
|
10.00
|
%
|
Tier
1 capital (to total average assets)
|
|
|
261,395
|
|
|
|
11.93
|
%
|
|
|
87,639
|
|
|
|
4.000
|
%
|
|
|
87,639
|
|
|
|
4.000
|
%
|
|
|
109,549
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Financial Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted assets)
|
|
$
|
157,876
|
|
|
|
12.87
|
%
|
|
|
62,859
|
|
|
|
5.125
|
%
|
|
|
85,857
|
|
|
|
7.000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to risk weighted assets)
|
|
|
172,876
|
|
|
|
14.09
|
%
|
|
|
81,257
|
|
|
|
6.625
|
%
|
|
|
104,254
|
|
|
|
8.500
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
capital (to risk weighted assets)
|
|
|
183,564
|
|
|
|
14.97
|
%
|
|
|
105,788
|
|
|
|
8.625
|
%
|
|
|
128,785
|
|
|
|
10.500
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier
1 capital (to total average assets)
|
|
|
172,876
|
|
|
|
10.49
|
%
|
|
|
65,911
|
|
|
|
4.000
|
%
|
|
|
65,911
|
|
|
|
4.000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CresCom
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1
capital (to risk weighted assets)
|
|
|
169,222
|
|
|
|
13.81
|
%
|
|
|
62,811
|
|
|
|
5.125
|
%
|
|
|
85,791
|
|
|
|
7.000
|
%
|
|
|
79,663
|
|
|
|
6.50
|
%
|
Tier
1 capital (to risk weighted assets)
|
|
|
169,222
|
|
|
|
13.81
|
%
|
|
|
81,195
|
|
|
|
6.625
|
%
|
|
|
104,174
|
|
|
|
8.500
|
%
|
|
|
98,046
|
|
|
|
8.00
|
%
|
Total
capital (to risk weighted assets)
|
|
|
179,910
|
|
|
|
14.68
|
%
|
|
|
105,706
|
|
|
|
8.625
|
%
|
|
|
128,686
|
|
|
|
10.500
|
%
|
|
|
122,558
|
|
|
|
10.00
|
%
|
Tier
1 capital (to total average assets)
|
|
|
169,222
|
|
|
|
10.30
|
%
|
|
|
65,701
|
|
|
|
4.000
|
%
|
|
|
65,701
|
|
|
|
4.000
|
%
|
|
|
82,126
|
|
|
|
5.00
|
%
|
The following table provides
the amount of dividends and dividend payout ratios (dividends declared divided by net income) for the three and nine months ended
September 30, 2017 and 2016.
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
$
|
646
|
|
|
|
376
|
|
|
|
1,869
|
|
|
|
1,114
|
|
Dividend
payout ratios
|
|
|
8.08
|
%
|
|
|
6.33
|
%
|
|
|
8.41
|
%
|
|
|
8.97
|
%
|
Off Balance Sheet Arrangements
Through
the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities.
These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified
period of time. We evaluate each customer’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. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit
risk on these commitments by subjecting them to normal underwriting and risk management processes.
At
September 30, 2017, we had issued commitments to extend credit and standby letters of credit of approximately $212.6 million through
various types of lending arrangements. There were 39 standby letters of credit included in the commitments for $3.3 million.
Total fixed rate commitments were $59.0 million and variable rate commitments were $153.6 million.
Commitments
generally have fixed expiration dates or other termination clauses and may require the payment of a fee. A significant portion
of the unfunded commitments relate to consumer equity lines of credit and commercial lines of credit. Based on historical experience,
we anticipate that a portion of these lines of credit will not be funded.
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 Management and Interest Rate Risk
The
effective management of market risk is essential to achieving the Company’s objectives. As a financial institution, the
Company’s most significant market risk exposure is interest rate risk. The primary objective of managing interest rate risk
is to minimize the effect that changes in interest rates have on net income. This is accomplished through active asset and liability
management, which requires the strategic pricing of asset and liability accounts and management of appropriate maturity mixes
of assets and liabilities. The expected result of these strategies is the development of appropriate maturity and re-pricing opportunities
in those accounts to produce consistent net income during periods of changing interest rates. The Bank’s asset/liability
management committee, or ALCO, monitors loan, investment and liability portfolios to ensure comprehensive management of interest
rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating
the volumes, maturities or re-pricing opportunities of interest-earning assets, deposits and borrowed funds. It is the responsibility
of the ALCO to determine and achieve the most appropriate volume and mix of interest-earning assets and interest-bearing liabilities,
as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO meets
regularly to review the Company’s interest rate risk and liquidity positions in relation to present and prospective market
and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential
impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. The Board of Directors
also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity.
The
Company uses interest rate sensitivity analysis to measure the sensitivity of projected net interest income to changes in interest
rates. Management monitors the Company’s interest sensitivity by means of a computer model that incorporates current volumes,
average rates earned and paid, and scheduled maturities, payments of asset and liability portfolios, together with multiple scenarios
of prepayments, repricing opportunities and anticipated volume growth. Interest rate sensitivity analysis shows the effect that
the indicated changes in interest rates would have on net interest income as projected for the next 12 months under the current
interest rate environment. The resulting change in net interest income reflects the level of sensitivity that net interest income
has in relation to changing interest rates.
As
of September 30, 2017, the following table summarizes the forecasted impact on net interest income using a base case scenario
given upward 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 condition.
|
|
|
|
|
Annualized Hypothetical
|
Interest
Rate Scenario
|
|
Percentage Change in
|
Change
|
|
Prime Rate
|
|
Net Interest Income
|
|
|
|
|
|
|
|
(1.00)%
|
|
|
3.25
|
%
|
|
|
(3.90
|
)%
|
0.00%
|
|
|
4.25
|
%
|
|
|
0.00
|
%
|
1.00%
|
|
|
5.25
|
%
|
|
|
0.20
|
%
|
2.00%
|
|
|
6.25
|
%
|
|
|
0.00
|
%
|
3.00%
|
|
|
7.25
|
%
|
|
|
(0.10
|
)%
|
The
primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the Company holds
derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers
(interest rate lock commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage
loans. The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with
the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are
recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value. Both the
interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period
earnings within the noninterest income of the consolidated statements of operations.
Derivative
instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements
that do not satisfy the hedge accounting requirements, are recorded at fair value and are classified with resultant changes in
fair value being recognized in noninterest income in the consolidated statement of operations.
When
using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the counterparty
to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates as interest rates
change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative
transaction. The Company seeks to minimize credit risk by dealing with highly rated counterparties and by obtaining collateralization
for exposures above certain predetermined limits. If significant counterparty risk is determined, the Company would adjust the
fair value of the derivative recorded asset balance to consider such risk.
Accounting,
Reporting, and Regulatory Matters
Information
regarding recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of the financial
information by the Company are included in Note 1 “Summary of Significant Accounting Polices” in the accompanying
financial statements.
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 GAAP.
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 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.