NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
– BASIS OF PRESENTATION
On July
3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“the Company”) became the parent holding company for Oak Valley Community Bank ( the “Bank”). On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Bank was converted into one share of the Company and the Company became the sole wholly-owned subsidiary of the holding company.
The consolidated financial statements include the accounts of
the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank.
All material intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows. All adjustments are of a normal, recurring nature. The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2016.
Oak Valley Community Bank is a Calif
ornia state-chartered bank. The Company was incorporated under the laws of the State of California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, and Escalon, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.
On December 23, 2015, the Company completed its acquisition of Mother Lode Bank (“MLB”), a California state-chartered bank headquartered in Sonora, California, in a transaction in which Mother Lode Bank was merged with and into the Bank, with the Bank as the surviving company in the transaction. The purchase price for Mother Lode Bank was approximately $7.3 million.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company
’s consolidated financial statements include the allowance for loan losses, accounting for income taxes, fair value measurements, and the determination, recognition and measurement of impaired loans. Actual results could differ from these estimates.
NOTE 2
– RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a converged standard involving FASB and International Financial Reporting Standards that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount and at a time that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent updates related to Revenue from Contracts with Customers (Topic 606) are as follows:
|
●
|
August 2015 ASU No. 2015-14 - Deferral of the Effective Date, institutes a one-year deferral of the effective date of this amendment to annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
|
|
●
|
March 2016 ASU No. 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies the implementation guidance on principal versus agent considerations and on the use of indicators that assist an entity in determining whether it controls a specified good or service before it is transferred to the customer.
|
|
●
|
April 2016 ASU No. 2016-10 - Identifying Performance Obligations and Licensing, provides guidance in determining performance obligations in a contract with a customer and clarifies whether a promise to grant a license provides a right to access or the right to use intellectual property.
|
|
●
|
May 2016 ASU No. 2016-12 - Narrow Scope Improvements and Practical Expedients, gives further guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.
|
The adoption of this update is
not expected to have a material impact on the Company’s consolidated financial statements.
In September, 2015, the FASB issued ASU No. 2015-16,
Simplifying the Accounting for Measurement Period Adjustments (Topic 805).
This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date. The adoption of this update did not have a material impact on the Company’s consolidated 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. The amendments in this ASU make improvements to GAAP related to financial instruments that include the following as applicable to us:
|
●
|
Equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, are required to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
|
|
●
|
Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment - if impairment exists, this requires measuring the investment at fair value.
|
|
●
|
Eliminates the requirement for public companies to disclose the method(s) and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
|
|
●
|
Public companies will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
|
|
●
|
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.
|
|
●
|
The reporting entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.
|
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not expect this ASU to have a material impact on our financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption. Early application of the amendments is permitted. While the Company has not quantified the impact to its balance sheet, it does expect the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and a lease liability for each lease, which is expected to decrease our leverage ratio by less than one percent.
In March 2016, FASB issued ASU 2016-09,
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company adopted this ASU for the full fiscal year of 2016 and it did not have a significant impact on its consolidated financial statements.
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326).
This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements. Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet. This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings. The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted. Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses, and an increase to our allowance for loan losses.
In August
2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230).
This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the amendments within this update will have a material impact on the Company’s financial statements.
In January 2017, FASB issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.
These amendments apply to ASU 2014-9 (Revenue from Contracts with Customers), ASU 2016-02 (Leases), and ASU 2016-13 (Financial Instruments - Credit Losses). The Company does not expect these amendments to have a significant impact on its consolidated financial statements.
NOTE
3
– SECURITIES
The amortized cost and estimated fair values of debt securities as of
September 30, 2017 are as follows:
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
26,780
|
|
|
$
|
513
|
|
|
$
|
(84
|
)
|
|
$
|
27,209
|
|
Collateralized mortgage obligations
|
|
|
3,963
|
|
|
|
6
|
|
|
|
(29
|
)
|
|
|
3,940
|
|
Municipalities
|
|
|
88,026
|
|
|
|
2,677
|
|
|
|
(103
|
)
|
|
|
90,600
|
|
SBA pools
|
|
|
12,389
|
|
|
|
33
|
|
|
|
(15
|
)
|
|
|
12,407
|
|
Corporate debt
|
|
|
19,356
|
|
|
|
98
|
|
|
|
(722
|
)
|
|
|
18,732
|
|
Asset backed securities
|
|
|
24,727
|
|
|
|
137
|
|
|
|
(11
|
)
|
|
|
24,853
|
|
Mutual fund
|
|
|
3,324
|
|
|
|
0
|
|
|
|
(208
|
)
|
|
|
3,116
|
|
|
|
$
|
178,565
|
|
|
$
|
3,464
|
|
|
$
|
(1,172
|
)
|
|
$
|
180,857
|
|
The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
September 30, 2017
.
(dollars in thousands)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
U.S. agencies
|
|
$
|
6,464
|
|
|
|
(72
|
)
|
|
$
|
1,841
|
|
|
$
|
(12
|
)
|
|
$
|
8,305
|
|
|
$
|
(84
|
)
|
Collateralized mortgage obligations
|
|
|
1,122
|
|
|
|
(10
|
)
|
|
|
968
|
|
|
|
(19
|
)
|
|
|
2,090
|
|
|
|
(29
|
)
|
Municipalities
|
|
|
10,158
|
|
|
|
(58
|
)
|
|
|
2,879
|
|
|
|
(45
|
)
|
|
|
13,037
|
|
|
|
(103
|
)
|
SBA pools
|
|
|
3,812
|
|
|
|
(8
|
)
|
|
|
716
|
|
|
|
(7
|
)
|
|
|
4,528
|
|
|
|
(15
|
)
|
Corporate debt
|
|
|
1,984
|
|
|
|
(16
|
)
|
|
|
13,785
|
|
|
|
(706
|
)
|
|
|
15,769
|
|
|
|
(722
|
)
|
Asset backed securities
|
|
|
6,219
|
|
|
|
(9
|
)
|
|
|
347
|
|
|
|
(2
|
)
|
|
|
6,566
|
|
|
|
(11
|
)
|
Mutual fund
|
|
|
0
|
|
|
|
0
|
|
|
|
3,116
|
|
|
|
(208
|
)
|
|
|
3,116
|
|
|
|
(208
|
)
|
Total temporarily impaired securities
|
|
$
|
29,759
|
|
|
$
|
(173
|
)
|
|
$
|
23,652
|
|
|
$
|
(999
|
)
|
|
$
|
53,411
|
|
|
$
|
(1,172
|
)
|
At
September 30, 2017, there were ten corporate debts, four municipalities, two SBA pools, one U.S. agency, one collateralized mortgage obligation, one asset backed securities and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12 months and twelve municipalities, five U.S. agencies, four asset backed securities, two SBA pools, one collateralized mortgage obligation, and one corporate debt that make up the total securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary.
This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.
The a
mortized cost and estimated fair value of investment securities at September 30, 2017, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(dollars in thousands)
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
12,724
|
|
|
$
|
12,981
|
|
Due after one year through five years
|
|
|
57,326
|
|
|
|
57,740
|
|
Due after five years through ten years
|
|
|
56,841
|
|
|
|
58,143
|
|
Due after ten years
|
|
|
51,674
|
|
|
|
51,993
|
|
|
|
$
|
178,565
|
|
|
$
|
180,857
|
|
The amortized cost and estimated fair values of debt securities as of December
31, 2016, are as follows:
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
27,879
|
|
|
$
|
616
|
|
|
$
|
(209
|
)
|
|
$
|
28,286
|
|
Collateralized mortgage obligations
|
|
|
4,159
|
|
|
|
7
|
|
|
|
(57
|
)
|
|
|
4,109
|
|
Municipalities
|
|
|
77,957
|
|
|
|
1,318
|
|
|
|
(946
|
)
|
|
|
78,329
|
|
SBA pools
|
|
|
7,219
|
|
|
|
0
|
|
|
|
(51
|
)
|
|
|
7,168
|
|
Corporate debt
|
|
|
21,349
|
|
|
|
81
|
|
|
|
(867
|
)
|
|
|
20,563
|
|
Asset backed securities
|
|
|
18,888
|
|
|
|
32
|
|
|
|
(101
|
)
|
|
|
18,819
|
|
Mutual fund
|
|
|
3,264
|
|
|
|
0
|
|
|
|
(205
|
)
|
|
|
3,059
|
|
|
|
$
|
160,715
|
|
|
$
|
2,054
|
|
|
$
|
(2,436
|
)
|
|
$
|
160,333
|
|
The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December
31, 2016.
(dollars in thousands)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
U.S. agencies
|
|
$
|
8,769
|
|
|
$
|
(208
|
)
|
|
$
|
718
|
|
|
$
|
(1
|
)
|
|
$
|
9,487
|
|
|
$
|
(209
|
)
|
Collateralized mortgage obligations
|
|
|
3,166
|
|
|
|
(57
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
3,166
|
|
|
|
(57
|
)
|
Municipalities
|
|
|
45,137
|
|
|
|
(917
|
)
|
|
|
402
|
|
|
|
(29
|
)
|
|
|
45,539
|
|
|
|
(946
|
)
|
SBA pools
|
|
|
6,415
|
|
|
|
(46
|
)
|
|
|
753
|
|
|
|
(5
|
)
|
|
|
7,168
|
|
|
|
(51
|
)
|
Corporate debt
|
|
|
12,776
|
|
|
|
(757
|
)
|
|
|
2,884
|
|
|
|
(110
|
)
|
|
|
15,660
|
|
|
|
(867
|
)
|
Asset backed securities
|
|
|
2,576
|
|
|
|
(15
|
)
|
|
|
8,272
|
|
|
|
(86
|
)
|
|
|
10,848
|
|
|
|
(101
|
)
|
Mutual fund
|
|
|
0
|
|
|
|
0
|
|
|
|
3,059
|
|
|
|
(205
|
)
|
|
|
3,059
|
|
|
|
(205
|
)
|
Total temporarily impaired securities
|
|
$
|
78,839
|
|
|
$
|
(2,000
|
)
|
|
$
|
16,088
|
|
|
$
|
(436
|
)
|
|
$
|
94,927
|
|
|
$
|
(2,436
|
)
|
We
recognized gross gains of $4,000 and $394,000 for the three and nine month periods ended September 30, 2017
, respectively, on certain available-for-sale securities that were called, which compares to $10
,000 and $29
,000 in the same periods of 2016. There were no securities sold during the first nine months of 2017 or 2016.
Securities ca
rried at $93,594
,000 and $89,362
,000 at September 30, 2017 and December 31, 2016, respectively, were pledged to secure deposits of public funds.
NOTE
4
– LOANS
Our customers are primarily located in Stanislaus, San Joaquin, Tuo
lumne, Inyo, and Mono Counties. As of September 30, 2017, approximately 79% of the Company’s loans are commercial real estate loans which include construction loans. Approximately 10% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 6% of the Company’s loans are for residential real estate and other consumer loans. The remaining 5% are agriculture loans. Loan totals were as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate- construction
|
|
$
|
20,254
|
|
|
$
|
23,378
|
|
Commercial real estate- mortgages
|
|
|
417,253
|
|
|
|
389,495
|
|
Land
|
|
|
8,496
|
|
|
|
9,823
|
|
Farmland
|
|
|
56,670
|
|
|
|
56,159
|
|
Commercial and industrial
|
|
|
65,444
|
|
|
|
64,201
|
|
Consumer
|
|
|
607
|
|
|
|
767
|
|
Consumer residential
|
|
|
37,836
|
|
|
|
38,672
|
|
Agriculture
|
|
|
30,049
|
|
|
|
28,454
|
|
|
|
|
636,609
|
|
|
|
610,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees and costs, net
|
|
|
(1,781
|
)
|
|
|
(2,013
|
)
|
Allowance for loan losses
|
|
|
(7,917
|
)
|
|
|
(7,832
|
)
|
|
|
$
|
626,911
|
|
|
$
|
601,104
|
|
Loan Origination/Risk Management.
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower
’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company
’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At September 30, 2017 and December 31, 2016, commercial real estate loans equal to approximately 42.3% and 40.9%, respectively, of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.
With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs may also be used to provide further support as available.
The Company originates consumer loans utilizing common underwriting criteria specified in policy. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis.
Underwriting standards for 1-4 family, home equity lines and loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.
The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank
’s policies and procedures.
Non-Accrual and Past Due Loans.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Non-accrual loans, segregated by class of loans, were as f
ollows:
(in thousands)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate- construction
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial real estate- mortgages
|
|
|
0
|
|
|
|
0
|
|
Land
|
|
|
993
|
|
|
|
2,715
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
302
|
|
|
|
306
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
16
|
|
|
|
16
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
Total non-accrual loans
|
|
$
|
1,311
|
|
|
$
|
3,037
|
|
Excluded from the above non-accrual loan table
is the $33,000 carrying value of one Purchased Credit Impaired loan acquired in the MLB Acquisition
.
Had non-accrual loans
performed in accordance with their original contract terms, we would have recognized additional interest income of approximately $27,000 and $95,000 in the three and nine month periods ended September 30, 2017, respectively, as compared to $38,000 and $118,000 in the same periods of 2016.
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of
September 30, 2017 (in thousands):
September 30, 2017
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
Greater
Than 90
Days
Past Due
|
|
|
Total
Past
Due
|
|
|
Current
|
|
|
Purchased
Credit
Impaired
Loans
|
|
|
Total
|
|
|
Greater
Than 90
Days
Past Due
and Still
Accruing
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
20,254
|
|
|
$
|
0
|
|
|
$
|
20,254
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
25
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25
|
|
|
|
417,228
|
|
|
|
0
|
|
|
|
417,253
|
|
|
|
0
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
993
|
|
|
|
993
|
|
|
|
7,470
|
|
|
|
33
|
|
|
|
8,496
|
|
|
|
0
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
56,670
|
|
|
|
0
|
|
|
|
56,670
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
302
|
|
|
|
302
|
|
|
|
65,142
|
|
|
|
0
|
|
|
|
65,444
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
607
|
|
|
|
0
|
|
|
|
607
|
|
|
|
0
|
|
Consumer residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
37,836
|
|
|
|
0
|
|
|
|
37,836
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30,049
|
|
|
|
0
|
|
|
|
30,049
|
|
|
|
0
|
|
Total
|
|
$
|
25
|
|
|
$
|
0
|
|
|
$
|
1,295
|
|
|
$
|
1,320
|
|
|
$
|
635,256
|
|
|
$
|
33
|
|
|
$
|
636,609
|
|
|
$
|
0
|
|
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December
31, 2016 (in thousands):
December 31, 2016
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
Greater
Than 90
Days
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Purchased
Credit
Impaired
Loans
|
|
|
Total
|
|
|
Greater
Than 90
Days Past
Due and
Still
Accruing
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
23,378
|
|
|
$
|
0
|
|
|
|
23,378
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
389,495
|
|
|
|
0
|
|
|
|
389,495
|
|
|
|
0
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
2,715
|
|
|
|
2,715
|
|
|
|
7,075
|
|
|
|
33
|
|
|
|
9,823
|
|
|
|
0
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
56,159
|
|
|
|
0
|
|
|
|
56,159
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
302
|
|
|
|
302
|
|
|
|
63,899
|
|
|
|
0
|
|
|
|
64,201
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
767
|
|
|
|
0
|
|
|
|
767
|
|
|
|
0
|
|
Consumer residential
|
|
|
0
|
|
|
|
0
|
|
|
|
16
|
|
|
|
16
|
|
|
|
38,656
|
|
|
|
0
|
|
|
|
38,672
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
28,454
|
|
|
|
0
|
|
|
|
28,454
|
|
|
|
0
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,033
|
|
|
$
|
3,033
|
|
|
$
|
607,883
|
|
|
$
|
33
|
|
|
|
610,949
|
|
|
$
|
0
|
|
Impaired Loans.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the three and nine months ended September 30, 2017 and 2016.
Impaired loans as of
September 30, 2017 and December 31, 2016 are set forth in the following tables. PCI loans are excluded from the tables below, as they have not experienced post acquisition declines in cash flows expected to be collected.
(in thousands)
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment
With No
Allowance
|
|
|
Recorded
Investment
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Land
|
|
|
1,309
|
|
|
|
0
|
|
|
|
993
|
|
|
|
993
|
|
|
|
680
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and Industrial
|
|
|
351
|
|
|
|
302
|
|
|
|
0
|
|
|
|
302
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
16
|
|
|
|
16
|
|
|
|
0
|
|
|
|
16
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
1,676
|
|
|
$
|
318
|
|
|
$
|
993
|
|
|
$
|
1,311
|
|
|
$
|
680
|
|
(in thousands)
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment
With No
Allowance
|
|
|
Recorded
Investment
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Land
|
|
|
3,131
|
|
|
|
0
|
|
|
|
2,715
|
|
|
|
2,715
|
|
|
|
680
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and Industrial
|
|
|
353
|
|
|
|
306
|
|
|
|
0
|
|
|
|
306
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
16
|
|
|
|
16
|
|
|
|
0
|
|
|
|
16
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
3,500
|
|
|
$
|
322
|
|
|
$
|
2,715
|
|
|
$
|
3,037
|
|
|
$
|
680
|
|
Average recorded investment in impaired loans outstanding as of
September 30, 2017 and 2016 is set forth in the following table.
|
|
Average Recorded Investment for the
|
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
Nine Months
Ended
|
|
(in thousands)
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Land
|
|
|
1,518
|
|
|
|
2,324
|
|
|
|
2,018
|
|
|
|
2,439
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and Industrial
|
|
|
302
|
|
|
|
312
|
|
|
|
304
|
|
|
|
316
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
75
|
|
|
|
0
|
|
|
|
96
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
1,895
|
|
|
$
|
2,636
|
|
|
$
|
2,418
|
|
|
$
|
2,755
|
|
Troubled Debt Restructurings
–
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
At
September 30, 2017, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $1,311,000. At December 31, 2016, there were 6 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,037,000. At September 30, 2017 and December 31, 2016 there were no unfunded commitments on loans classified as a troubled debt restructures.
We have allocated $680,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2017 and December 31, 2016.
The
modification of the terms of such loans typically includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded.
During the
three and nine months ended September 30, 2017, no loans were modified as troubled debt restructurings, compared to one loan with a recorded investment of $292,000 that was modified as a troubled debt restructuring by extending the maturity date during the nine month period ended September 30, 2016. This troubled debt restructuring did not increase the allowance for loan losses as a result of loan modifications. There were no charge-offs as a result of the loan modification, as the contractual balances outstanding were determined to be collectible.
There were no loans modified as troubled debt restructurings within
the previous twelve months and for which there was a payment default during the three and nine month periods ended September 30, 2017 and 2016. A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.
Loan Risk Grades
–
Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.
We grade loans using the following letter system:
1 Exceptional Loan
2 Quality Loan
3 A Better Than Acceptable Loan
3 B Acceptable Loan
3 C Marginally Acceptable Loan
4 (W) Watch Acceptable Loan
5 Other Loans Especially Mentioned
6 Substandard Loan
7 Doubtful Loan
8 Loss
1.
Exceptional Loan
- Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:
-A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.
-Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.
-Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined cash collateral must be equal to, or greater than, 110% of the loan amount.
2.
Quality Loan
- Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include:
-Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.
-Consistent strong earnings.
-A solid equity base.
3A.
Better than Acceptable Loan
- In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is the stronger third of the pass category, but is not strong enough to be a grade 2 and is characterized by:
-Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.
-Long term experienced management with depth and defined management succession.
-The loan has no exceptions to policy.
-Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.
-Very liquid balance sheet that may have cash available to pay off our loan completely.
-Little to no debt on balance sheet.
3B.
Acceptable Loan
- 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:
-Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.
-Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.
3C.
Marginally Acceptable
- 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:
Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral. Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.
4W
Watch Acceptable
- Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted projections or prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified in a Watch credit is short-term in nature. Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.
5
Other Loans Especially Mentioned (Special Mention)
- A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:
-The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.
-Questions exist regarding the condition of and/or control over collateral.
-Economic or market conditions may unfavorably affect the obligor in the future.
-A declining trend in the obligor
’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.
6
Substandard Loan
- A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.
7
Doubtful Loan
- An extension of credit classified “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.
A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a
‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.
8
Loss
- Extensions of credit classified “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.
As of
September 30, 2017 and December 31, 2016, there are no loans that are classified with a risk grade of
8- Loss.
The following table presents weighted average risk grades of our loan portfolio:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Weighted Average
Risk Grade
|
|
|
Weighted Average
Risk Grade
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate - construction
|
|
|
3.00
|
|
|
|
3.07
|
|
Commercial real estate - mortgages
|
|
|
3.07
|
|
|
|
3.08
|
|
Land
|
|
|
3.98
|
|
|
|
4.39
|
|
Farmland
|
|
|
3.22
|
|
|
|
3.09
|
|
Commercial and industrial
|
|
|
3.59
|
|
|
|
2.70
|
|
Consumer
|
|
|
2.15
|
|
|
|
2.28
|
|
Consumer residential
|
|
|
3.01
|
|
|
|
3.03
|
|
Agriculture
|
|
|
3.20
|
|
|
|
3.08
|
|
Total gross loans
|
|
|
3.15
|
|
|
|
3.06
|
|
The following table presents risk grade totals by class of loans as of
September 30, 2017 and December 31, 2016. Risk grades 1 through 4 have been aggregated in the “Pass” line.
(in thousands)
|
|
Commercial R.E.
Construction
|
|
|
Commercial R.E.
Mortgages
|
|
|
Land (1)
|
|
|
Farmland
|
|
|
Commercial and Industrial
|
|
|
Consumer
|
|
|
Consumer Residential
|
|
|
Agriculture
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
20,254
|
|
|
$
|
416,289
|
|
|
$
|
7,041
|
|
|
$
|
56,670
|
|
|
$
|
60,335
|
|
|
$
|
579
|
|
|
$
|
37,773
|
|
|
$
|
30,049
|
|
|
$
|
628,990
|
|
Special mention
|
|
|
-
|
|
|
|
258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,920
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,178
|
|
Substandard
|
|
|
-
|
|
|
|
706
|
|
|
|
1,175
|
|
|
|
-
|
|
|
|
1,189
|
|
|
|
28
|
|
|
|
63
|
|
|
|
-
|
|
|
|
3,161
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
Total loans
|
|
$
|
20,254
|
|
|
$
|
417,253
|
|
|
$
|
8,496
|
|
|
$
|
56,670
|
|
|
$
|
65,444
|
|
|
$
|
607
|
|
|
$
|
37,836
|
|
|
$
|
30,049
|
|
|
$
|
636,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
22,560
|
|
|
$
|
388,365
|
|
|
$
|
6,637
|
|
|
$
|
56,159
|
|
|
$
|
62,770
|
|
|
$
|
738
|
|
|
$
|
38,300
|
|
|
$
|
28,454
|
|
|
$
|
603,983
|
|
Special mention
|
|
|
818
|
|
|
|
1,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,070
|
|
Substandard
|
|
|
-
|
|
|
|
67
|
|
|
|
2,906
|
|
|
|
|
|
|
|
1,242
|
|
|
|
29
|
|
|
|
372
|
|
|
|
-
|
|
|
|
4,616
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
Total loans
|
|
$
|
23,378
|
|
|
$
|
389,495
|
|
|
$
|
9,823
|
|
|
$
|
56,159
|
|
|
$
|
64,201
|
|
|
$
|
767
|
|
|
$
|
38,672
|
|
|
$
|
28,454
|
|
|
$
|
610,949
|
|
(1)
|
Included in the above table is Purchased Credit Impaired loans recorded at their fair value of $33,000 as of September 30, 2017 and December 31, 2016,
which were acquired in the MLB Acquisition.
|
Allowance for Loan Losses.
The allowance for loan losses is a reserve established by the Company through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance reflects management
’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company
’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company; and (iv) unallocated allowance which represents the excess allowance not allocated to specific loans pools.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i)
the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 5 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company
’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.
General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company. In general, such valuation allowances are determined by evaluating, among other things: (i)
the experience, ability and effectiveness of the Bank’s lending management and staff; (ii) the effectiveness of the Bank’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.
Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.
Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.
The following table details activity in the allowance for loan losses by portfolio segment for the three
and nine months ended September 30, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
(in thousands)
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
6,247
|
|
|
$
|
746
|
|
|
$
|
30
|
|
|
$
|
321
|
|
|
$
|
453
|
|
|
$
|
57
|
|
|
$
|
7,854
|
|
Charge-offs
|
|
|
0
|
|
|
|
0
|
|
|
|
(9
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(9
|
)
|
Recoveries
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
(Reversal of) provision for loan losses
|
|
|
3
|
|
|
|
15
|
|
|
|
0
|
|
|
|
(7
|
)
|
|
|
100
|
|
|
|
(41
|
)
|
|
|
70
|
|
Ending balance
|
|
$
|
6,250
|
|
|
$
|
761
|
|
|
$
|
23
|
|
|
$
|
314
|
|
|
$
|
553
|
|
|
$
|
16
|
|
|
$
|
7,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,185
|
|
|
$
|
697
|
|
|
$
|
51
|
|
|
$
|
325
|
|
|
$
|
504
|
|
|
$
|
70
|
|
|
$
|
7,832
|
|
Charge-offs
|
|
|
0
|
|
|
|
0
|
|
|
|
(26
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(26
|
)
|
Recoveries
|
|
|
0
|
|
|
|
0
|
|
|
|
5
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
(Reversal of) provision for loan losses
|
|
|
65
|
|
|
|
64
|
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
49
|
|
|
|
(54
|
)
|
|
|
105
|
|
Ending balance
|
|
$
|
6,250
|
|
|
$
|
761
|
|
|
$
|
23
|
|
|
$
|
314
|
|
|
$
|
553
|
|
|
$
|
16
|
|
|
$
|
7,917
|
|
(in thousands)
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
6,133
|
|
|
$
|
671
|
|
|
$
|
55
|
|
|
$
|
387
|
|
|
$
|
431
|
|
|
$
|
3
|
|
|
$
|
7,680
|
|
Charge-offs
|
|
|
0
|
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5
|
)
|
Recoveries
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
(Reversal of) provision for loan losses
|
|
|
(62
|
)
|
|
|
60
|
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
63
|
|
|
|
41
|
|
|
|
90
|
|
Ending balance
|
|
$
|
6,071
|
|
|
$
|
731
|
|
|
$
|
48
|
|
|
$
|
379
|
|
|
$
|
494
|
|
|
$
|
44
|
|
|
$
|
7,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,920
|
|
|
$
|
627
|
|
|
$
|
38
|
|
|
$
|
426
|
|
|
$
|
309
|
|
|
$
|
36
|
|
|
$
|
7,356
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
Recoveries
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
(Reversal of) provision for loan losses
|
|
|
148
|
|
|
|
104
|
|
|
|
17
|
|
|
|
(47
|
)
|
|
|
185
|
|
|
|
8
|
|
|
|
415
|
|
Ending balance
|
|
$
|
6,071
|
|
|
$
|
731
|
|
|
$
|
48
|
|
|
$
|
379
|
|
|
$
|
494
|
|
|
$
|
44
|
|
|
$
|
7,767
|
|
T
he following table details the allowance for loan losses and ending gross loan balances as of September 30, 2017, December 31, 2016 and September 30, 2016 summarized by collective and individual evaluation methods of impairment.
(in thousands)
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses for loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
680
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
680
|
|
Collectively evaluated for impairment
|
|
|
5,570
|
|
|
|
761
|
|
|
|
23
|
|
|
|
314
|
|
|
|
553
|
|
|
|
16
|
|
|
|
7,237
|
|
|
|
$
|
6,250
|
|
|
$
|
761
|
|
|
$
|
23
|
|
|
$
|
314
|
|
|
$
|
553
|
|
|
$
|
16
|
|
|
$
|
7,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending gross loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
993
|
|
|
$
|
303
|
|
|
$
|
0
|
|
|
$
|
15
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,311
|
|
Individually evaluated purchased credit impaired loans
|
|
|
33
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
Collectively evaluated for impairment
|
|
|
501,647
|
|
|
|
65,141
|
|
|
|
607
|
|
|
|
37,821
|
|
|
|
30,049
|
|
|
|
0
|
|
|
|
635,265
|
|
|
|
$
|
502,673
|
|
|
$
|
65,444
|
|
|
$
|
607
|
|
|
$
|
37,836
|
|
|
$
|
30,049
|
|
|
$
|
0
|
|
|
$
|
636,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses for loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
680
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
680
|
|
Collectively evaluated for impairment
|
|
|
5,505
|
|
|
|
697
|
|
|
|
51
|
|
|
|
325
|
|
|
|
504
|
|
|
|
70
|
|
|
|
7,152
|
|
|
|
$
|
6,185
|
|
|
$
|
697
|
|
|
$
|
51
|
|
|
$
|
325
|
|
|
$
|
504
|
|
|
$
|
70
|
|
|
$
|
7,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending gross loans balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,715
|
|
|
$
|
306
|
|
|
$
|
0
|
|
|
$
|
16
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,037
|
|
Individually evaluated purchased credit impaired loans
|
|
|
33
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
Collectively evaluated for impairment
|
|
|
476,107
|
|
|
|
63,895
|
|
|
|
767
|
|
|
|
38,656
|
|
|
|
28,454
|
|
|
|
0
|
|
|
|
607,879
|
|
|
|
$
|
478,855
|
|
|
$
|
64,201
|
|
|
$
|
767
|
|
|
$
|
38,672
|
|
|
$
|
28,454
|
|
|
$
|
0
|
|
|
$
|
610,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses for loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
680
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
680
|
|
Collectively evaluated for impairment
|
|
|
5,391
|
|
|
|
731
|
|
|
|
48
|
|
|
|
379
|
|
|
|
494
|
|
|
|
44
|
|
|
|
7,087
|
|
|
|
$
|
6,071
|
|
|
$
|
731
|
|
|
$
|
48
|
|
|
$
|
379
|
|
|
$
|
494
|
|
|
$
|
44
|
|
|
$
|
7,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending gross loans balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,305
|
|
|
$
|
309
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,614
|
|
Individually evaluated purchased credit impaired loans
|
|
|
33
|
|
|
|
499
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
532
|
|
Collectively evaluated for impairment
|
|
|
466,899
|
|
|
|
67,265
|
|
|
|
736
|
|
|
|
36,756
|
|
|
|
27,767
|
|
|
|
0
|
|
|
|
599,423
|
|
|
|
$
|
469,237
|
|
|
$
|
68,073
|
|
|
$
|
736
|
|
|
$
|
36,756
|
|
|
$
|
27,767
|
|
|
$
|
0
|
|
|
$
|
602,569
|
|
Changes in the reserve for off-balance-sheet commitments were as follows:
|
|
THREE MONTHS ENDED SEPTEMBER
30,
|
|
|
NINE MONTHS ENDED
SEPTEMBER
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
302
|
|
|
$
|
257
|
|
|
$
|
284
|
|
|
$
|
238
|
|
Provision (Recovery) to Operations for Off Balance Sheet Commitments
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
14
|
|
|
|
(25
|
)
|
Balance, end of period
|
|
$
|
298
|
|
|
$
|
263
|
|
|
$
|
298
|
|
|
$
|
263
|
|
The method for calculating the reserve for off-balance-sheet loan commitments is based on a reserve percentage which is less than other outstanding loan types because they are at a lower risk level.
This reserve percentage, based on many factors including historical losses and existing economic conditions, is evaluated by management periodically and is applied to the total undisbursed loan commitment balance to calculate the reserve for off-balance-sheet commitments. Reserves for off-balance-sheet commitments are recorded in interest payable and other liabilities on the condensed consolidated balance sheets.
At
September 30, 2017 and December 31, 2016, loans carried at $636,609,000 and $610,949,000, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.
NOTE
5
– OTHER REAL ESTATE OWNED
As of
September 30, 2017
, the Company owned two properties classified as other real estate totaling $253
,000, as compared to three properties totaling $1,210,000 as of December 31, 2016. One of the properties owned at September 30, 2017 and December 31, 2016, was a residential land property that was written down to a zero balance because the public utilities have not been obtainable rendering these land lots unmarketable at this time. Each of the OREO properties were acquired through loan foreclosures. During the nine months ended September 30, 2017, there was one sale of an OREO property resulting in a gain on sale of $211,000, and there were no OREO property acquisitions. The Company acquired one property through a loan foreclosure during the three and nine months ended September 30, 2016 with a balance of $253,000. There was one sale during the nine months ended September 30, 2016 that accounted for the disposition of two OREO properties resulting in a loss of $88,000.
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of carrying amount of the loan or fair value of the property at the date of foreclosure less selling costs.
Subsequent to foreclosure, valuations are periodically performed and any subject revisions in the estimate of fair value are reported as adjustment to the carrying value of the real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses.
NOTE
6
–
OTHER POST-RETIREMENT BENEFIT PLANS
During January
2008, the Bank awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be provided with a fixed annual retirement benefit for ten to twenty years after retirement. The Bank is also responsible for certain pre-retirement death benefits under the Plan. In connection with the implementation of the Plan, the Bank purchased single premium life insurance policies on the life of each of the officers covered under the Plan. The Bank is the owner and partial beneficiary of these life insurance policies. The assets of the Plan, under Internal Revenue Service regulations, are owned by the Bank and are available to satisfy the Company’s general creditors.
In
August 2001, the Board of Directors of the Bank authorized Director Retirement Plans (“DRP”) with each director. The Bank awarded a director retirement plan to two of its directors in January 2008
, to three of its directors in March 2014, and to its newest director in 2016
. Under the DRP, the participants will be provided with a fixed annual retirement benefit for ten years after retirement. The Bank is also responsible for certain pre-retirement death benefits under the DRP. In connection with the implementation of the DRP, the Bank purchased single premium life insurance policies on the life of each director covered under the DRP. The Bank is the owner and partial beneficiary of these life insurance policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Bank and are available to satisfy the Bank’s general creditors.
Future co
mpensation under both plans is earned for services rendered through retirement. The Bank accrues for the salary continuation liability based on anticipated years of service and vesting schedules provided under the plans. The Bank’s current benefit liability is determined based on vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which average approximately 1
0 years. The salary continuation liability as of September 30, 2017 and December 31, 2016 was $2,960
,000 and $2,762,000, respectively, and is reported in interest payable and other liabilities on the condensed consolidated balance sheets.
During
January 2008, the Bank purchased $4.7 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with certain officers and directors. During March 2014, the Bank purchased an additional $1.0 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with its three newest directors. During September 2016, the Bank purchased an additional $4.0 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with certain officers and directors. In connection with the implementation of the split-dollar agreements, the Bank purchased single premium life insurance policies on the life of each of the officers and directors covered by the split-dollar life insurance agreements. The Bank is the owner of the policies and the partial beneficiary in an amount equal to the cash surrender value of the policies.
The combined cash surrender value of all Bank-owned life insu
rance policies recorded in interest receivable and other assets on the condensed consolidated balance sheets were $18,389
,000 and $18,004,000 at September 30, 2017 and December 31, 2016, respectively.
NOTE
7
— FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair values of
financial instruments —
The consolidated financial statements include various estimated fair value information as of September 30, 2017 and December 31, 2016. Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.
Fair value measurements defines fair value, establishes a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:
Level 1:
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2:
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
In certain cases, the inputs used to measure fair value may fall into different le
vels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between levels during the nine month periods ended September 30, 2017 or 2016.
Following is a description of valuation methodologies used for assets and liabilities in the tables below:
Cash and cash equivalents
–
The carrying amounts of cash and cash equivalents approximate their fair value and are considered a level 1 valuation.
Restricted Equity Securities-
The carrying amounts of the stock the Company’s owns in FRB and FHLB approximate their fair value and are considered a level 2 valuation.
Loans receivable
— For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (e.g., real estate construction and mortgage, commercial, and installment loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The allowance for loan losses is considered to be a reasonable estimate of loan discount due to credit risks. The Company’s fair value model takes into account many inputs including current market rates on new loans, the U.S. treasury yield curve, LIBOR yield curve, rate floors, rate ceilings, remaining maturity, and average life based on specific loan type. Loans are considered to be a level 3 valuation.
Deposit liabilities
— The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. The fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is considered a level 3 valuation.
Interest receivable and payable -
The carrying amounts of accrued interest approximate their fair value and are considered to be a level 2 valuation.
Off-balance-sheet instruments
— Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The Company considers the Bank’s off balance sheet instruments to be a level 3 valuation
.
The estimated fair values of the Company
’s financial instruments not measured at fair value at September 30, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
Hierarchy
|
|
(in thousands)
|
|
Carrying
|
|
|
Fair
|
|
|
Valuation
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
139,628
|
|
|
$
|
139,628
|
|
|
|
1
|
|
Restricted equity securities
|
|
|
4,135
|
|
|
|
4,135
|
|
|
|
2
|
|
Loans, net
|
|
|
626,911
|
|
|
|
633,841
|
|
|
|
3
|
|
Interest receivable
|
|
|
2,730
|
|
|
|
2,730
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(901,716
|
)
|
|
|
(802,610
|
)
|
|
|
3
|
|
Interest payable
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and standby letters of credit
|
|
|
|
|
|
|
(1,165
|
)
|
|
|
3
|
|
The estimated fair values of the Company
’s financial instruments not measured at fair value at December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Hierarchy
|
|
(in thousands)
|
|
Carrying
|
|
|
Fair
|
|
|
Valuation
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
190,810
|
|
|
$
|
190,810
|
|
|
|
1
|
|
Restricted equity securities
|
|
|
3,795
|
|
|
|
3,795
|
|
|
|
2
|
|
Loans, net
|
|
|
601,104
|
|
|
|
611,553
|
|
|
|
3
|
|
Interest receivable
|
|
|
2,831
|
|
|
|
2,831
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(914,093
|
)
|
|
|
(811,519
|
)
|
|
|
3
|
|
Interest payable
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and standby letters of credit
|
|
|
|
|
|
|
(1,107
|
)
|
|
|
3
|
|
The following table presents the carrying value of
recurring and nonrecurring financial instruments that were measured at fair value and that were still held in the condensed consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of September 30, 2017 and December 31, 2016
.
|
|
Fair
Value Measurements at
September 30, 2017
Using
|
|
(in thousands)
|
|
September 30, 2017
|
|
|
Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
27,209
|
|
|
$
|
0
|
|
|
$
|
27,209
|
|
|
$
|
0
|
|
Collateralized mortgage obligations
|
|
|
3,940
|
|
|
|
0
|
|
|
|
3,940
|
|
|
|
0
|
|
Municipalities
|
|
|
90,600
|
|
|
|
0
|
|
|
|
90,600
|
|
|
|
0
|
|
SBA p
ools
|
|
|
12,407
|
|
|
|
0
|
|
|
|
12,407
|
|
|
|
0
|
|
Corporate d
ebt
|
|
|
18,732
|
|
|
|
0
|
|
|
|
18,732
|
|
|
|
0
|
|
Asset backed securities
|
|
|
24,853
|
|
|
|
0
|
|
|
|
24,853
|
|
|
|
0
|
|
Mutual
fund
|
|
|
3,116
|
|
|
|
3,116
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
313
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
313
|
|
Commercial and industrial
|
|
|
302
|
|
|
|
0
|
|
|
|
0
|
|
|
|
302
|
|
Other real estate owned
|
|
|
253
|
|
|
|
0
|
|
|
|
0
|
|
|
|
253
|
|
|
|
Fair
Value Measurements at December 31, 2016 Using
|
|
(in thousands)
|
|
December
31,
2016
|
|
|
Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
28,286
|
|
|
$
|
0
|
|
|
$
|
28,286
|
|
|
$
|
0
|
|
Collateralized mortgage obligations
|
|
|
4,109
|
|
|
|
0
|
|
|
|
4,109
|
|
|
|
0
|
|
Municipalities
|
|
|
78,329
|
|
|
|
0
|
|
|
|
78,329
|
|
|
|
0
|
|
SBA pools
|
|
|
7,168
|
|
|
|
0
|
|
|
|
7,168
|
|
|
|
0
|
|
Corporate debt
|
|
|
20,563
|
|
|
|
0
|
|
|
|
20,563
|
|
|
|
0
|
|
Asset backed securities
|
|
|
18,819
|
|
|
|
0
|
|
|
|
18,819
|
|
|
|
0
|
|
Mutual fund
|
|
|
3,059
|
|
|
|
3,059
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,746
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,746
|
|
Commercial and industrial
|
|
|
302
|
|
|
|
0
|
|
|
|
0
|
|
|
|
302
|
|
Other real estate owned
|
|
$
|
1,210
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,210
|
|
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Available-for-sale securities
-
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based 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 the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets where significant inputs are unobservable.
Impaired loans
- ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Topic 310,
Accounting by Creditors for Impairment of a Loan
. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 3. Likewise, when an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3.
Other Real Estate Owned
- Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically thereafter charging any additional write-downs or valuation allowances to the appropriate expense accounts. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. OREO is classified within Level 3 of the hierarchy.
Net
realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis. No fair value adjustments were made to OREO properties during the three months ended September 30, 2017.
There have been no significant changes in the valuation techniques during the period ended
September 30, 2017.
NOTE
8
– EARNINGS PER SHARE
Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each year. The following table shows: (1) weighted
average basic shares, (2) effect of dilutive securities related to stock options and non-vested restricted stock, and (3) weighted average shares of common stock and common stock equivalents. Net income available to common stockholders is calculated as net income reduced by dividends accumulated on preferred stock, if any. Basic EPS are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average diluted shares, which
reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive shares included in year-to-date diluted EPS is a weighted average of the dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the two class method the difference in EPS is not significant for these participating securities.
The Company
’s calculation of basic and diluted earnings per share (“EPS”) for the three and nine month periods ended September 30, 2017 and 2016 are reflected in the table below.
|
|
THREE
MONTHS ENDED
|
|
(In
thousands)
|
|
SEPTEMBER
30,
|
|
|
|
2017
|
|
|
2016
|
|
BASIC EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,468
|
|
|
$
|
1,930
|
|
Weighted average shares outstanding
|
|
|
8,065
|
|
|
|
8,031
|
|
Net income per common share
|
|
$
|
0.31
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,468
|
|
|
$
|
1,930
|
|
Weighted average shares outstanding
|
|
|
8,065
|
|
|
|
8,031
|
|
Effect of dilutive stock options
|
|
|
5
|
|
|
|
1
|
|
Effect of dilutive non-vested restricted shares
|
|
|
13
|
|
|
|
31
|
|
Weighted average shares of common stock and common
stock equivalents
|
|
|
8,083
|
|
|
|
8,063
|
|
Net income per diluted common share
|
|
$
|
0.31
|
|
|
$
|
0.24
|
|
|
|
NINE MONTHS ENDED
|
|
(In
thousands)
|
|
SEPTEMBER
30,
|
|
|
|
2017
|
|
|
2016
|
|
BASIC EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,505
|
|
|
$
|
5,343
|
|
Weighted average
shares outstanding
|
|
|
8,056
|
|
|
|
8,023
|
|
Net income per common share
|
|
$
|
0.93
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,505
|
|
|
$
|
5,343
|
|
Weighted average shares outstanding
|
|
|
8,056
|
|
|
|
8,023
|
|
Effect of dilutive stock options
|
|
|
18
|
|
|
|
35
|
|
Effect of dilutive non-vested restricted shares
|
|
|
4
|
|
|
|
1
|
|
Weighted average shares of common stock and common stock equivalents
|
|
|
8,078
|
|
|
|
8,059
|
|
Net income per diluted common share
|
|
$
|
0.93
|
|
|
$
|
0.66
|
|
During the three
and nine month periods ended September 30, 2017, there were no anti-dilutive options to purchase shares of common stock, as compared to anti-dilutive weighted average stock options of 12,261 and 22,446 outstanding during the three and nine month periods of 2016, respectively, with prices ranging from $9.95 to $15.
00. These options were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.
There were no anti-dilutive non-vested restricted
stock grants for the three and nine months ended September 30, 2017 and 2016.