N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation.
First South
Bancorp, Inc. (the "Company") was formed for the purpose of issuing common stock and owning 100% of the stock of First
South Bank (the "Bank") and operating through the Bank a commercial banking business. The Bank has one significant operating
segment, providing commercial and retail banking services to its markets located in the state of North Carolina. The Bank also
provides a full menu of leasing services through its wholly owned subsidiary, First South Leasing, LLC. In addition, under its
First South Wealth Management division, the Bank makes securities brokerage services available through an affiliation with an independent
broker/dealer. The Bank operates through its main office in Washington, North Carolina, and has 28 full-service branch offices
located throughout eastern and central North Carolina.
The accompanying unaudited consolidated financial
statements are prepared in pursuant to the instructions for Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete
financial statements. In the opinion of management, all adjustments necessary for fair presentation of the financial position and
results of operations for the periods presented are included, none of which are other than normal recurring accruals. The financial
statements of the Company and the Bank are presented on a consolidated basis. The results of operations for the three and nine
months ended September 30, 2017, are not necessarily indicative of the results of operations that may be expected through November
1, 2017, the date of the Company’s merger with Carolina Financial Corporation described below. The accompanying unaudited
consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and
related notes appearing in the 2016 Annual Report previously filed on Form 10-K.
On November 1, 2017, the Company completed
the previously announced merger with Carolina Financial Corporation (“CARO”), whereby the Company merged with and into
CARO (the “Merger”), with CARO as the surviving corporation in the Merger. Immediately following the consummation of
the Merger, First South Bank, a wholly owned subsidiary of the Registrant, merged with and into CresCom Bank, a wholly owned subsidiary
of CARO (the “Bank Merger”), with CresCom Bank as the surviving bank in the Bank Merger. The Merger and the Bank Merger
were effected by the transactions contemplated in that certain Agreement and Plan of Merger and Reorganization (the “Merger
Agreement”) dated as of June 9, 2017, by and between the Company and CARO. Subject to the terms and conditions of the Merger
Agreement, at the effective time of the Merger, the Company’s stockholders had the right to receive 0.5064 shares of CARO
common stock for each share of the Company’s common stock. Cash will be paid in lieu of fractional shares.
2. Earnings Per Share.
Basic and diluted
earnings per share for the three and nine months ended September 30, 2017 and 2016 are based on weighted average shares of common
stock outstanding. Diluted earnings per share include the potentially dilutive effect of stock-based compensation plans. For both
the three and nine months ended September 30, 2017 there were 29,250 stock options, respectively, compared to 30,441 and 26,931
stock options, respectively, for the three and nine months ended September 30, 2016, that were anti-dilutive, because the exercise
and grant prices exceeded the average market price of the Company’s common stock. The anti-dilutive shares are excluded from
the diluted earnings per share calculation for the three and nine months ended September 30, 2017 and 2016.
3.
Comprehensive Income and Accumulated Other Comprehensive Income.
Comprehensive income includes net income and changes in other
comprehensive income. The components of other comprehensive income primarily include net changes in unrealized gains and losses
on available-for-sale securities, and the reclassification of net gains and losses on available-for-sale securities recognized
in income during the respective reporting periods.
The following table presents changes
in
accumulated other comprehensive income (“AOCI”), net of taxes for the nine months ended September 30, 2017 and 2016:
|
|
Unrealized Holding Gains
on Investment
Securities
Available-For-Sale
|
|
|
Unrealized Holding
Gain (Loss) on
Cash
Flow Hedging Activities
|
|
|
Total Accumulated
Other Comprehensive
Income
|
|
|
|
(In thousands)
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,433
|
|
|
$
|
77
|
|
|
$
|
1,510
|
|
Other comprehensive income before reclassifications
|
|
|
1,440
|
|
|
|
(35
|
)
|
|
|
1,405
|
|
Amounts reclassified from AOCI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net current period other comprehensive income
|
|
|
1,440
|
|
|
|
(35
|
)
|
|
|
1,405
|
|
Balance at September 30, 2017
|
|
$
|
2,873
|
|
|
$
|
42
|
|
|
$
|
2,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
2,695
|
|
|
$
|
(247
|
)
|
|
$
|
2,448
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
2,328
|
|
|
|
(94
|
)
|
|
|
2,234
|
|
Amounts reclassified from AOCI
|
|
|
(333
|
)
|
|
|
-
|
|
|
|
(333
|
)
|
Net current period other comprehensive income (loss)
|
|
|
1,995
|
|
|
|
(94
|
)
|
|
|
1,901
|
|
Balance at September 30, 2016
|
|
$
|
4,690
|
|
|
$
|
(341
|
)
|
|
$
|
4,349
|
|
4. Investment Securities.
The following
is a summary of the investment securities portfolio by major category, with the amortized cost and fair value and gross unrealized
gains and losses of each category at September 30, 2017 and December 31, 2016:
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
23,467
|
|
|
$
|
395
|
|
|
$
|
25
|
|
|
$
|
23,837
|
|
Mortgage-backed securities
|
|
|
80,348
|
|
|
|
2,411
|
|
|
|
29
|
|
|
|
82,730
|
|
Municipal securities
|
|
|
55,386
|
|
|
|
1,755
|
|
|
|
21
|
|
|
|
57,120
|
|
Corporate bonds
|
|
|
26,883
|
|
|
|
135
|
|
|
|
132
|
|
|
|
26,886
|
|
Total
|
|
$
|
186,084
|
|
|
$
|
4,696
|
|
|
$
|
207
|
|
|
$
|
190,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
16,797
|
|
|
$
|
245
|
|
|
$
|
47
|
|
|
$
|
16,995
|
|
Mortgage-backed securities
|
|
|
93,124
|
|
|
|
2,155
|
|
|
|
163
|
|
|
|
95,116
|
|
Municipal securities
|
|
|
53,465
|
|
|
|
536
|
|
|
|
319
|
|
|
|
53,682
|
|
Corporate bonds
|
|
|
26,983
|
|
|
|
60
|
|
|
|
230
|
|
|
|
26,813
|
|
Total
|
|
$
|
190,369
|
|
|
$
|
2,996
|
|
|
$
|
759
|
|
|
$
|
192,606
|
|
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
506
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
508
|
|
Total
|
|
$
|
506
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
510
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
511
|
|
Total
|
|
$
|
510
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
511
|
|
The following table presents a summary of realized gains and losses
from the sale of available-for-sale investment securities:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Proceeds from Sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains on sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
594
|
|
Gross realized losses on sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(127
|
)
|
Total realized gains, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
467
|
|
4. Investment Securities (Continued)
The following table summarizes gross unrealized
losses on investment securities, fair value and length of time the securities were in a continuous unrealized loss position at
September 30, 2017 and December 31, 2016. The Company deems these unrealized losses to be temporary and recoverable prior to or
at maturity. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient
for a market price recovery or until maturity.
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
6,726
|
|
|
$
|
25
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,726
|
|
|
$
|
25
|
|
Mortgage-backed securities
|
|
|
12,482
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,482
|
|
|
|
29
|
|
Municipal securities
|
|
|
1,128
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,128
|
|
|
|
21
|
|
Corporate bonds
|
|
|
3,998
|
|
|
|
1
|
|
|
|
7,868
|
|
|
|
131
|
|
|
|
11,866
|
|
|
|
132
|
|
Total
|
|
$
|
24,334
|
|
|
$
|
76
|
|
|
$
|
7,868
|
|
|
$
|
131
|
|
|
$
|
32,202
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
6,766
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,766
|
|
|
$
|
47
|
|
Mortgage-backed securities
|
|
|
27,586
|
|
|
|
163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,586
|
|
|
|
163
|
|
Municipal securities
|
|
|
24,156
|
|
|
|
319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,156
|
|
|
|
319
|
|
Corporate bonds
|
|
|
13,751
|
|
|
|
26
|
|
|
|
7,795
|
|
|
|
204
|
|
|
|
21,546
|
|
|
|
230
|
|
Total
|
|
$
|
72,259
|
|
|
$
|
555
|
|
|
$
|
7,795
|
|
|
$
|
204
|
|
|
$
|
80,054
|
|
|
$
|
759
|
|
The following table summarizes the amortized
cost and fair values of the investment securities portfolio at September 30, 2017, by contractual maturity. 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.
|
|
Less Than
|
|
|
One to
|
|
|
Five to
|
|
|
Over
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
|
(In thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
23,467
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value
|
|
|
-
|
|
|
|
23,837
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
2,275
|
|
|
|
57,853
|
|
|
|
2,987
|
|
|
|
17,233
|
|
Fair value
|
|
|
2,319
|
|
|
|
58,932
|
|
|
|
3,109
|
|
|
|
18,370
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
4,861
|
|
|
|
13,615
|
|
|
|
35,469
|
|
|
|
1,441
|
|
Fair value
|
|
|
4,881
|
|
|
|
13,951
|
|
|
|
36,805
|
|
|
|
1,483
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
7,003
|
|
|
|
11,880
|
|
|
|
8,000
|
|
|
|
-
|
|
Fair value
|
|
|
7,006
|
|
|
|
11,957
|
|
|
|
7,923
|
|
|
|
-
|
|
Total Amortized cost
|
|
$
|
14,139
|
|
|
$
|
106,815
|
|
|
$
|
46,456
|
|
|
$
|
18,674
|
|
Total Fair value
|
|
$
|
14,206
|
|
|
$
|
108,677
|
|
|
$
|
47,837
|
|
|
$
|
19,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
506
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value
|
|
|
-
|
|
|
|
508
|
|
|
|
-
|
|
|
|
-
|
|
Total Amortized cost
|
|
$
|
-
|
|
|
$
|
506
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total Fair value
|
|
$
|
-
|
|
|
$
|
508
|
|
|
$
|
-
|
|
|
$
|
-
|
|
United States government agency and mortgage-backed
securities with an amortized cost of $78.2 million were pledged as collateral for public deposits at September 30, 2017, compared
to $32.6 million at December 31, 2016. In addition, a government agency bond with an amortized cost of $506,000 and $510,000 was
pledged as collateral on an interest rate swap transaction at September 30, 2017 and December 31, 2016, respectively.
4. Investment Securities (Continued)
Prior to purchasing any security, the Bank
ensures the security is investment grade. For a security to be investment grade it must: (1) have a low risk of default by the
obligor, and (2) the Bank must expect the full and timely repayment of principal and interest over the expected life. Under the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), certain investments are deemed
investment grade. These include: U.S. Treasury securities, Federal Agency securities, Revenue Bonds, and Unlimited-Tax General
Obligation Municipals. Other securities undergo a pre-purchase analysis to ensure they are investment grade.
To determine if a security is investment grade,
if available, management utilizes the ratings of the Nationally Recognized Statistical Rating Organizations (“NRSRO”).
However, they are not the sole basis of determining if a security is investment grade. In addition, on a pre-purchase basis, at
least one of the following criteria pertaining to the obligor is acquired and reviewed as part of the Bank’s credit analysis:
Data from debt offerings (prospectus/offering circular); data from regulatory filings- Securities and Exchange Commission (“SEC”)
Forms 10-K, 10-Q, 8-K, etc.; data available from the obligor’s website (annual reports, press releases); data obtained from
a third party (bond broker, analyst); NRSRO report on the initial offering and/or subsequent reviews of the issuer; or other pertinent
available financial information. There have been no instances where the NRSRO’s credit rating has significantly differed
from that of the Bank’s credit analysis.
At September 30, 2017, the investment securities
portfolio included 50 taxable and tax-exempt debt instruments issued by various states, counties, cities, municipalities and school
districts. The following table is a summary, listed by state, of the Company’s investment in the obligations of state and
political subdivisions:
|
|
September 30, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Obligations of state and political subdivisions:
|
|
|
|
|
|
|
|
|
General obligation bonds:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
5,172
|
|
|
$
|
5,421
|
|
Washington
|
|
|
3,349
|
|
|
|
3,412
|
|
Pennsylvania
|
|
|
2,771
|
|
|
|
2,780
|
|
Indiana
|
|
|
2,369
|
|
|
|
2,404
|
|
Texas
|
|
|
2,262
|
|
|
|
2,260
|
|
Florida
|
|
|
2,217
|
|
|
|
2,277
|
|
Alabama
|
|
|
1,808
|
|
|
|
1,844
|
|
Utah
|
|
|
1,777
|
|
|
|
1,800
|
|
Nevada
|
|
|
1,313
|
|
|
|
1,344
|
|
Missouri
|
|
|
1,299
|
|
|
|
1,423
|
|
Other (11 states)
|
|
|
8,646
|
|
|
|
8,919
|
|
Total general obligation bonds
|
|
|
32,983
|
|
|
|
33,884
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
New York
|
|
|
7,121
|
|
|
|
7,457
|
|
North Carolina
|
|
|
4,178
|
|
|
|
4,287
|
|
Mississippi
|
|
|
2,297
|
|
|
|
2,390
|
|
Oklahoma
|
|
|
2,232
|
|
|
|
2,334
|
|
Pennsylvania
|
|
|
1,958
|
|
|
|
1,974
|
|
Other (4 states)
|
|
|
4,617
|
|
|
|
4,794
|
|
Total revenue bonds
|
|
|
22,403
|
|
|
|
23,236
|
|
Total obligations of state and political subdivisions
|
|
$
|
55,386
|
|
|
$
|
57,120
|
|
The largest
exposure in general obligation bonds was one bond issued by the Ambridge Area School District, Pennsylvania, with a total amortized
cost basis and total fair value of $2.4 million at September 30, 2017.
4. Investment Securities (Continued)
The following table is a summary of the revenue
sources related to the Company’s investment in revenue bonds:
|
|
September 30, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Revenue bonds by revenue source:
|
|
|
|
|
|
|
|
|
University and college
|
|
$
|
8,507
|
|
|
$
|
8,923
|
|
Public improvements
|
|
|
6,055
|
|
|
|
6,292
|
|
Pension funding
|
|
|
1,958
|
|
|
|
1,974
|
|
Refunding bonds
|
|
|
1,617
|
|
|
|
1,651
|
|
Other
|
|
|
4,266
|
|
|
|
4,396
|
|
Total revenue bonds
|
|
$
|
22,403
|
|
|
$
|
23,236
|
|
The largest single exposure in revenue bonds
is an issue from the Dormitory Authority of the State of New York (“DASNY”). DASNY was created in 1944 to finance and
build dormitories for state teachers’ colleges. Its mission has expanded over time and in 1995 DASNY became the largest public
authority issuer of tax-exempt bonds in the country. The debt is secured by a dedication of 25% of the New York State personal
income tax. As of September 30, 2017, this issue had an amortized cost of $2.8 million and fair value of $3.0 million.
5. Loans Held for Sale.
The Bank originates
residential mortgage loans for sale in the secondary market. Pursuant to Accounting Standards Codification (“ASC”)
825,
Financial Instruments
, at September 30, 2017 and December 31, 2016, the Bank marked these mortgage loans to market.
Mortgage loans held for sale at September 30, 2017 and December 31, 2016, had estimated fair market values of $3.8 million and
$5.1 million, respectively. The Bank originates mortgage loans for sale that are approved by secondary investors. Their terms are
set by secondary investors, and they are transferred within 120 days after the Bank funds the loans. The Bank issues rate lock
commitments to borrowers, and depending on market conditions, may enter into forward contracts with secondary market investors
to minimize interest rate risk related to mortgage loan forward sales commitments. The Bank uses forward contracts to minimize
interest rate risk related to mortgage loan forward sales commitments to economically hedge a percentage of the locked-in pipeline.
The Bank receives origination fees from borrowers and servicing release premiums from investors that are recognized in income when
loans are sold. The following table summarizes forward contract positions of the Bank at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Forward Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan Forward Sales Commitments
|
|
$
|
83
|
|
|
$
|
5,622
|
|
|
$
|
65
|
|
|
$
|
6,036
|
|
6. Loans Held for Investment.
Loans
held for investment at September 30, 2017 and December 31, 2016 are listed below:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans Held for Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
70,693
|
|
|
|
9.0
|
%
|
|
$
|
67,264
|
|
|
|
9.6
|
%
|
Residential construction
|
|
|
6,740
|
|
|
|
0.9
|
|
|
|
7,875
|
|
|
|
1.1
|
|
Residential lots and raw land
|
|
|
130
|
|
|
|
0.0
|
|
|
|
154
|
|
|
|
0.0
|
|
Total mortgage loans
|
|
|
77,563
|
|
|
|
9.9
|
|
|
|
75,293
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
420,131
|
|
|
|
53.7
|
|
|
|
378,173
|
|
|
|
53.9
|
|
Commercial construction
|
|
|
55,915
|
|
|
|
7.2
|
|
|
|
56,118
|
|
|
|
8.0
|
|
Commercial lots and raw land
|
|
|
30,700
|
|
|
|
3.9
|
|
|
|
33,434
|
|
|
|
4.8
|
|
Commercial and Industrial
|
|
|
88,893
|
|
|
|
11.4
|
|
|
|
67,980
|
|
|
|
9.7
|
|
Lease receivables
|
|
|
23,311
|
|
|
|
3.0
|
|
|
|
21,236
|
|
|
|
3.0
|
|
Total commercial loans and leases
|
|
|
618,950
|
|
|
|
79.2
|
|
|
|
556,941
|
|
|
|
79.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
|
21,332
|
|
|
|
2.7
|
|
|
|
16,967
|
|
|
|
2.4
|
|
Consumer construction
|
|
|
444
|
|
|
|
0.1
|
|
|
|
105
|
|
|
|
0.0
|
|
Consumer lots and raw land
|
|
|
9,235
|
|
|
|
1.2
|
|
|
|
8,975
|
|
|
|
1.3
|
|
Home equity lines of credit
|
|
|
40,537
|
|
|
|
5.2
|
|
|
|
36,815
|
|
|
|
5.3
|
|
Consumer other
|
|
|
13,403
|
|
|
|
1.7
|
|
|
|
6,347
|
|
|
|
0.9
|
|
Total consumer loans
|
|
|
84,951
|
|
|
|
10.9
|
|
|
|
69,209
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans held for investment
|
|
|
781,464
|
|
|
|
100.0
|
%
|
|
|
701,443
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less deferred loan origination fees, net
|
|
|
750
|
|
|
|
|
|
|
|
801
|
|
|
|
|
|
Less allowance for loan and lease losses
|
|
|
9,562
|
|
|
|
|
|
|
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans held for investment
|
|
$
|
771,152
|
|
|
|
|
|
|
$
|
691,969
|
|
|
|
|
|
The Bank has pledged eligible loans as collateral
for actual or potential borrowings from the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank of Richmond
(“FRB”). At September 30, 2017, the Bank pledged $300.3 million and $164.4 million of loans to the FHLB and FRB, respectively.
See Note 13. Borrowed Money below, for additional information.
6. Loans Held for Investment (Continued)
The following tables detail nonaccrual loans
held for investment, including troubled debt restructured (“TDR”) loans accounted for on a nonaccrual status, segregated
by class of loans, at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans held for investment:
|
|
|
|
|
|
|
|
|
Non-TDR loans accounted for on a non-accrual status:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
627
|
|
|
$
|
773
|
|
Residential lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
929
|
|
|
|
482
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
72
|
|
Lease receivables
|
|
|
-
|
|
|
|
-
|
|
Consumer real estate
|
|
|
230
|
|
|
|
94
|
|
Consumer lots and raw land
|
|
|
23
|
|
|
|
80
|
|
Home equity lines of credit
|
|
|
107
|
|
|
|
166
|
|
Consumer other
|
|
|
-
|
|
|
|
-
|
|
Total non-TDR loans accounted for on a nonaccrual status
|
|
|
1,916
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
TDR loans accounted for on a nonaccrual status:
|
|
|
|
|
|
|
|
|
Past Due TDRs:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
161
|
|
Commercial real estate
|
|
|
-
|
|
|
|
652
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
Consumer real estate
|
|
|
-
|
|
|
|
149
|
|
Total Past Due TDRs
|
|
|
-
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
Current TDRs:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
163
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
170
|
|
|
|
170
|
|
Consumer real estate
|
|
|
136
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
83
|
|
|
|
89
|
|
Total Current TDRs
|
|
|
389
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
Total TDR loans accounted for on a nonaccrual status
|
|
|
389
|
|
|
|
1,384
|
|
Total non-performing loans
|
|
$
|
2,305
|
|
|
|
3,051
|
|
Percentage of total loans held for investment, net
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
Loans over 90 days past due, still accruing
|
|
$
|
-
|
|
|
$
|
-
|
|
Other real estate owned
|
|
|
2,184
|
|
|
|
3,229
|
|
Total non-performing assets
|
|
$
|
4,489
|
|
|
$
|
6,280
|
|
Cumulative interest income not recorded on
loans accounted for on a nonaccrual status was $96,071 and $115,318 at September 30, 2017 and December 31, 2016, respectively.
See “Note 8. Troubled Debt Restructurings”
below for additional information.
6. Loans Held for Investment (Continued)
The following table presents an age analysis
of past due loans held for investment, segregated by class of loans as of September 30, 2017 and December 31, 2016:
|
|
30-59
|
|
|
60-89
|
|
|
90 Days
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
90 Days or
|
|
|
|
Days
|
|
|
Days
|
|
|
or More
|
|
|
Past
|
|
|
|
|
|
Financing
|
|
|
More and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Due
|
|
|
Current
|
|
|
Receivables
|
|
|
Accruing
|
|
|
|
(In thousands)
|
|
Past due loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
-
|
|
|
$
|
280
|
|
|
$
|
324
|
|
|
$
|
604
|
|
|
$
|
70,089
|
|
|
$
|
70,693
|
|
|
$
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,740
|
|
|
|
6,740
|
|
|
|
-
|
|
Residential lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
130
|
|
|
|
-
|
|
Commercial real estate
|
|
|
63
|
|
|
|
28
|
|
|
|
467
|
|
|
|
558
|
|
|
|
419,573
|
|
|
|
420,131
|
|
|
|
-
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,915
|
|
|
|
55,915
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
496
|
|
|
|
-
|
|
|
|
-
|
|
|
|
496
|
|
|
|
30,204
|
|
|
|
30,700
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,893
|
|
|
|
88,893
|
|
|
|
-
|
|
Lease receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,311
|
|
|
|
23,311
|
|
|
|
-
|
|
Consumer real estate
|
|
|
235
|
|
|
|
2
|
|
|
|
125
|
|
|
|
362
|
|
|
|
20,970
|
|
|
|
21,332
|
|
|
|
-
|
|
Consumer construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
444
|
|
|
|
444
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
35
|
|
|
|
25
|
|
|
|
-
|
|
|
|
60
|
|
|
|
9,175
|
|
|
|
9,235
|
|
|
|
-
|
|
Home equity lines of credit
|
|
|
218
|
|
|
|
-
|
|
|
|
11
|
|
|
|
229
|
|
|
|
40,308
|
|
|
|
40,537
|
|
|
|
-
|
|
Consumer other
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
13,380
|
|
|
|
13,403
|
|
|
|
-
|
|
Total
|
|
$
|
1,070
|
|
|
$
|
335
|
|
|
$
|
927
|
|
|
$
|
2,332
|
|
|
$
|
779,132
|
|
|
$
|
781,464
|
|
|
$
|
-
|
|
|
|
30-59
|
|
|
60-89
|
|
|
90 Days
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
90 Days or
|
|
|
|
Days
|
|
|
Days
|
|
|
or More
|
|
|
Past
|
|
|
|
|
|
Financing
|
|
|
More and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Due
|
|
|
Current
|
|
|
Receivables
|
|
|
Accruing
|
|
|
|
(In thousands)
|
|
Past due loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
1,048
|
|
|
$
|
176
|
|
|
$
|
565
|
|
|
$
|
1,789
|
|
|
$
|
65,475
|
|
|
$
|
67,264
|
|
|
$
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,875
|
|
|
|
7,875
|
|
|
|
-
|
|
Residential lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
|
|
154
|
|
|
|
-
|
|
Commercial real estate
|
|
|
726
|
|
|
|
4
|
|
|
|
1,022
|
|
|
|
1,752
|
|
|
|
376,421
|
|
|
|
378,173
|
|
|
|
-
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,118
|
|
|
|
56,118
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,434
|
|
|
|
33,434
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
72
|
|
|
|
67,908
|
|
|
|
67,980
|
|
|
|
-
|
|
Lease receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,236
|
|
|
|
21,236
|
|
|
|
-
|
|
Consumer real estate
|
|
|
-
|
|
|
|
42
|
|
|
|
206
|
|
|
|
248
|
|
|
|
16,719
|
|
|
|
16,967
|
|
|
|
-
|
|
Consumer construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
105
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
-
|
|
|
|
8
|
|
|
|
81
|
|
|
|
89
|
|
|
|
8,886
|
|
|
|
8,975
|
|
|
|
-
|
|
Home equity lines of credit
|
|
|
121
|
|
|
|
33
|
|
|
|
98
|
|
|
|
252
|
|
|
|
36,563
|
|
|
|
36,815
|
|
|
|
-
|
|
Consumer other
|
|
|
7
|
|
|
|
2
|
|
|
|
-
|
|
|
|
9
|
|
|
|
6,338
|
|
|
|
6,347
|
|
|
|
-
|
|
Total
|
|
$
|
1,902
|
|
|
$
|
265
|
|
|
$
|
2,044
|
|
|
$
|
4,211
|
|
|
$
|
697,232
|
|
|
$
|
701,443
|
|
|
$
|
-
|
|
6. Loans Held for Investment (Continued)
The following table presents information on
loans that were considered impaired as of September 30, 2017 and December 31, 2016. Impaired loans include loans modified as a
TDR, whether on accrual or non-accrual status. At September 30, 2017, impaired loans included $826,000 of TDRs, compared to $1.9
million at December 31, 2016.
|
|
|
|
|
Contractual
|
|
|
|
|
|
YTD Average
|
|
|
Interest Income
|
|
|
|
Recorded
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Recognized on
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Impaired Loans
|
|
|
|
(In thousands)
|
|
Impaired Loans September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
270
|
|
|
$
|
270
|
|
|
$
|
-
|
|
|
$
|
471
|
|
|
$
|
10
|
|
Commercial real estate
|
|
|
3,729
|
|
|
|
3,801
|
|
|
|
-
|
|
|
|
5,490
|
|
|
|
151
|
|
Commercial lots and raw land
|
|
|
882
|
|
|
|
882
|
|
|
|
-
|
|
|
|
1,429
|
|
|
|
35
|
|
Commercial and industrial
|
|
|
88
|
|
|
|
89
|
|
|
|
-
|
|
|
|
95
|
|
|
|
3
|
|
Consumer real estate
|
|
|
240
|
|
|
|
259
|
|
|
|
-
|
|
|
|
212
|
|
|
|
12
|
|
Consumer lots and raw land
|
|
|
83
|
|
|
|
90
|
|
|
|
-
|
|
|
|
105
|
|
|
|
4
|
|
Home equity lines of credit
|
|
|
23
|
|
|
|
25
|
|
|
|
-
|
|
|
|
37
|
|
|
|
2
|
|
Consumer other
|
|
|
35
|
|
|
|
35
|
|
|
|
-
|
|
|
|
37
|
|
|
|
1
|
|
Subtotal:
|
|
|
5,350
|
|
|
|
5,451
|
|
|
|
-
|
|
|
|
7,876
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
97
|
|
|
|
97
|
|
|
|
1
|
|
|
|
236
|
|
|
|
4
|
|
Commercial and industrial
|
|
|
440
|
|
|
|
444
|
|
|
|
420
|
|
|
|
274
|
|
|
|
94
|
|
Consumer real estate
|
|
|
105
|
|
|
|
105
|
|
|
|
33
|
|
|
|
26
|
|
|
|
2
|
|
Consumer lots and raw land
|
|
|
586
|
|
|
|
586
|
|
|
|
102
|
|
|
|
603
|
|
|
|
20
|
|
Home equity lines of credit
|
|
|
53
|
|
|
|
58
|
|
|
|
36
|
|
|
|
47
|
|
|
|
4
|
|
Subtotal
|
|
|
1,281
|
|
|
|
1,290
|
|
|
|
592
|
|
|
|
1,186
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
270
|
|
|
|
270
|
|
|
|
-
|
|
|
|
471
|
|
|
|
10
|
|
Commercial
|
|
|
5,236
|
|
|
|
5,313
|
|
|
|
421
|
|
|
|
7,524
|
|
|
|
287
|
|
Consumer
|
|
|
1,125
|
|
|
|
1,158
|
|
|
|
171
|
|
|
|
1,067
|
|
|
|
45
|
|
Grand Total
|
|
$
|
6,631
|
|
|
$
|
6,741
|
|
|
$
|
592
|
|
|
$
|
9,062
|
|
|
$
|
342
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
YTD Average
|
|
|
Interest Income
|
|
|
|
Recorded
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Recognized on
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Impaired Loans
|
|
|
|
(In thousands)
|
|
Impaired Loans December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
597
|
|
|
$
|
730
|
|
|
$
|
-
|
|
|
$
|
804
|
|
|
$
|
32
|
|
Commercial real estate
|
|
|
6,581
|
|
|
|
6,645
|
|
|
|
-
|
|
|
|
7,742
|
|
|
|
408
|
|
Commercial lots and raw land
|
|
|
2,185
|
|
|
|
2,185
|
|
|
|
-
|
|
|
|
2,376
|
|
|
|
121
|
|
Commercial and industrial
|
|
|
102
|
|
|
|
102
|
|
|
|
-
|
|
|
|
59
|
|
|
|
5
|
|
Consumer real estate
|
|
|
221
|
|
|
|
232
|
|
|
|
-
|
|
|
|
257
|
|
|
|
8
|
|
Consumer lots and raw land
|
|
|
129
|
|
|
|
135
|
|
|
|
-
|
|
|
|
86
|
|
|
|
10
|
|
Home equity lines of credit
|
|
|
71
|
|
|
|
73
|
|
|
|
-
|
|
|
|
50
|
|
|
|
3
|
|
Consumer other
|
|
|
38
|
|
|
|
38
|
|
|
|
-
|
|
|
|
40
|
|
|
|
2
|
|
Subtotal:
|
|
|
9,924
|
|
|
|
10,140
|
|
|
|
-
|
|
|
|
11,414
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
287
|
|
|
|
287
|
|
|
|
-
|
|
|
|
579
|
|
|
|
15
|
|
Commercial and industrial
|
|
|
242
|
|
|
|
678
|
|
|
|
226
|
|
|
|
48
|
|
|
|
35
|
|
Consumer real estate
|
|
|
647
|
|
|
|
647
|
|
|
|
144
|
|
|
|
687
|
|
|
|
34
|
|
Consumer lots and raw land
|
|
|
23
|
|
|
|
25
|
|
|
|
23
|
|
|
|
18
|
|
|
|
3
|
|
Subtotal
|
|
|
1,199
|
|
|
|
1,637
|
|
|
|
393
|
|
|
|
1,332
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
597
|
|
|
|
730
|
|
|
|
-
|
|
|
|
804
|
|
|
|
32
|
|
Commercial
|
|
|
9,397
|
|
|
|
9,897
|
|
|
|
226
|
|
|
|
10,804
|
|
|
|
584
|
|
Consumer
|
|
|
1,129
|
|
|
|
1,150
|
|
|
|
167
|
|
|
|
1,138
|
|
|
|
60
|
|
Grand Total
|
|
$
|
11,123
|
|
|
$
|
11,777
|
|
|
$
|
393
|
|
|
$
|
12,746
|
|
|
$
|
676
|
|
6. Loans Held for Investment (Continued)
Credit Quality Indicators
. The Bank
assigns a risk grade to each loan in the portfolio as part of the on-going monitoring of the credit quality of the loan portfolio.
Commercial loans are graded on a scale of 1
to 9 as follows:
•
|
Risk Grade 1 (Excellent) - Loans in this category are considered to be of the highest quality.
|
•
|
Risk Grade 2 (Above Average) - Loans are supported by above average financial strength and stability.
|
•
|
Risk Grade 3 (Average) - Credits in this group are supported by upper tier industry-average financial strength and stability.
|
•
|
Risk Grade 4 (Acceptable) - Credits in this group are supported by lower end industry-average financial strength and stability.
|
•
|
Risk Grade 5 (Watch) - An asset in this category is one that has been identified by the lender, or credit administration as a loan that has shown some degree of deterioration from its original status.
|
•
|
Risk Grade 6 (Special Mention) - An asset in this category is currently protected by collateral but has potential weaknesses that deserve management’s close attention.
|
•
|
Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the debtor(s) or of the collateral pledged, if any.
|
•
|
Risk Grade 8 (Doubtful) - A loan graded in this category has all the weaknesses inherent in one graded Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.
|
•
|
Risk Grade 9 (Loss) - A loan graded as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted.
|
Consumer loans are graded on a scale of 1 to
9 as follows:
•
|
Risk Grades 1 - 5 (Pass) - Loans in this category generally show little to no signs of weakness or have adequate mitigating factors that minimize the risk of loss.
|
•
|
Risk Grade 6 (Special Mention) - An asset in this category is currently protected by collateral but has potential weaknesses that deserve management’s close attention.
|
•
|
Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the debtor(s) or of the collateral pledged, if any.
|
•
|
Risk Grade 8 (Doubtful) - A loan graded in this category has all the weaknesses inherent in one graded Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.
|
•
|
Risk Grade 9 (Loss) - A loan graded as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted.
|
Mortgage loans are graded on a scale of 1 to
9 as follows:
•
|
Risk Grades 1 - 4 (Pass) - Loans in this category generally show little to no signs of weakness or have adequate mitigating factors that minimize the risk of loss.
|
•
|
Risk Grade 5 (Pass -Watch) – Watch loans have shown credit quality changes from the original status.
|
•
|
Risk Grade 6 (Special Mention) – Special Mention loans are currently protected by collateral but have potential weaknesses that deserve management’s close attention.
|
•
|
Risk Grade 7 (Substandard) - Substandard loans are inadequately protected by the sound net worth and paying capacity of the borrower(s).
|
•
|
Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.
|
•
|
Risk Grade 9 (Loss) - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
|
6. Loans Held for Investment (Continued)
The following table presents information on
risk ratings of the commercial, consumer, mortgage and lease receivable portfolios, segregated by loan class as of September 30,
2017 and December 31, 2016:
September 30, 2017
|
Commercial Credit Exposure by Assigned Risk Grade
|
|
Commercial
Real Estate
|
|
|
Commercial
Construction
|
|
|
Commercial Lots
and Raw Land
|
|
|
Commercial and
Industrial
|
|
|
|
(In thousands)
|
|
1-Excellent
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
2-Above Average
|
|
|
2,641
|
|
|
|
-
|
|
|
|
784
|
|
|
|
381
|
|
3-Average
|
|
|
124,840
|
|
|
|
11,570
|
|
|
|
2,431
|
|
|
|
22,628
|
|
4-Acceptable
|
|
|
267,753
|
|
|
|
44,170
|
|
|
|
20,492
|
|
|
|
56,293
|
|
5-Watch
|
|
|
17,130
|
|
|
|
69
|
|
|
|
5,412
|
|
|
|
7,529
|
|
6-Special Mention
|
|
|
5,965
|
|
|
|
-
|
|
|
|
1,581
|
|
|
|
1,883
|
|
7-Substandard
|
|
|
1,802
|
|
|
|
106
|
|
|
|
-
|
|
|
|
170
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
420,131
|
|
|
$
|
55,915
|
|
|
$
|
30,700
|
|
|
$
|
88,893
|
|
September 30, 2017
|
Consumer Credit Exposure by Assigned
Risk Grade
|
|
Consumer Real
Estate
|
|
|
Consumer
Construction
|
|
|
Consumer Lots
and Raw Land
|
|
|
Home Equity
Line of Credit
|
|
|
Consumer
Other
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
20,884
|
|
|
$
|
444
|
|
|
$
|
8,909
|
|
|
$
|
40,308
|
|
|
$
|
13,367
|
|
6-Special Mention
|
|
|
116
|
|
|
|
-
|
|
|
|
194
|
|
|
|
39
|
|
|
|
1
|
|
7-Substandard
|
|
|
332
|
|
|
|
-
|
|
|
|
132
|
|
|
|
190
|
|
|
|
35
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
21,332
|
|
|
$
|
444
|
|
|
$
|
9,235
|
|
|
$
|
40,537
|
|
|
$
|
13,403
|
|
September 30, 2017
|
Mortgage and Lease Receivable Credit Exposure by
Assigned Risk Grade
|
|
Residential Real
Estate
|
|
|
Residential
Construction
|
|
|
Residential Lots
and Raw Land
|
|
|
Lease Receivable
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
69,327
|
|
|
$
|
6,740
|
|
|
$
|
130
|
|
|
$
|
22,865
|
|
6-Special Mention
|
|
|
739
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355
|
|
7-Substandard
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
70,693
|
|
|
$
|
6,740
|
|
|
$
|
130
|
|
|
$
|
23,311
|
|
6. Loans Held for Investment (Continued)
December 31, 2016
|
Commercial Credit Exposure by Assigned Risk Grade
|
|
Commercial
Real Estate
|
|
|
Commercial
Construction
|
|
|
Commercial Lots
and Raw Land
|
|
|
Commercial and
Industrial
|
|
|
|
(In thousands)
|
|
1-Excellent
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72
|
|
2-Above Average
|
|
|
2,567
|
|
|
|
-
|
|
|
|
203
|
|
|
|
520
|
|
3-Average
|
|
|
112,489
|
|
|
|
13,986
|
|
|
|
2,237
|
|
|
|
14,331
|
|
4-Acceptable
|
|
|
237,473
|
|
|
|
40,819
|
|
|
|
22,042
|
|
|
|
48,305
|
|
5-Watch
|
|
|
17,869
|
|
|
|
1,184
|
|
|
|
7,027
|
|
|
|
1,890
|
|
6-Special Mention
|
|
|
3,424
|
|
|
|
129
|
|
|
|
1,384
|
|
|
|
672
|
|
7-Substandard
|
|
|
4,351
|
|
|
|
-
|
|
|
|
541
|
|
|
|
2,190
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
378,173
|
|
|
$
|
56,118
|
|
|
$
|
33,434
|
|
|
$
|
67,980
|
|
December 31, 2016
|
Consumer Credit Exposure by Assigned
Risk Grade
|
|
Consumer Real
Estate
|
|
|
Consumer
Construction
|
|
|
Consumer Lots
and Raw Land
|
|
|
Home Equity
Line of Credit
|
|
|
Consumer
Other
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
16,472
|
|
|
$
|
105
|
|
|
$
|
8,595
|
|
|
$
|
36,474
|
|
|
$
|
6,345
|
|
6-Special Mention
|
|
|
252
|
|
|
|
-
|
|
|
|
211
|
|
|
|
84
|
|
|
|
2
|
|
7-Substandard
|
|
|
243
|
|
|
|
-
|
|
|
|
169
|
|
|
|
257
|
|
|
|
-
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
16,967
|
|
|
$
|
105
|
|
|
$
|
8,975
|
|
|
$
|
36,815
|
|
|
$
|
6,347
|
|
December 31, 2016
|
Mortgage and Lease Receivable Credit Exposure by
Assigned Risk Grade
|
|
Residential Real
Estate
|
|
|
Residential
Construction
|
|
|
Residential Lots
and Raw Land
|
|
|
Lease Receivable
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
65,406
|
|
|
$
|
7,875
|
|
|
$
|
154
|
|
|
$
|
21,236
|
|
6-Special Mention
|
|
|
761
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
7-Substandard
|
|
|
1,097
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
67,264
|
|
|
$
|
7,875
|
|
|
$
|
154
|
|
|
$
|
21,236
|
|
7. Allowance for Loan and Lease Losses
.
The following table presents a roll forward summary of activity in the allowance for loan and lease losses (“ALLL”),
by loan category, for the nine months ended September 30, 2017 and 2016:
|
|
September 30, 2017
|
|
|
|
Beginning
|
|
|
Charge-
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Total
|
|
|
|
Balance
|
|
|
Offs
|
|
|
Recoveries
|
|
|
Provisions
|
|
|
Balance
|
|
|
Loans
|
|
|
|
(In thousands)
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
695
|
|
|
$
|
(33
|
)
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
678
|
|
|
$
|
70,423
|
|
Residential construction
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
72
|
|
|
|
6,740
|
|
Residential lots and raw land
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
130
|
|
Commercial real estate
|
|
|
4,562
|
|
|
|
(4
|
)
|
|
|
23
|
|
|
|
361
|
|
|
|
4,942
|
|
|
|
416,305
|
|
Commercial construction
|
|
|
689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41
|
)
|
|
|
648
|
|
|
|
55,915
|
|
Commercial lots and raw land
|
|
|
365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
327
|
|
|
|
29,818
|
|
Commercial and industrial
|
|
|
840
|
|
|
|
(20
|
)
|
|
|
3
|
|
|
|
182
|
|
|
|
1,005
|
|
|
|
88,365
|
|
Lease receivables
|
|
|
226
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
16
|
|
|
|
237
|
|
|
|
23,311
|
|
Consumer real estate
|
|
|
186
|
|
|
|
-
|
|
|
|
7
|
|
|
|
36
|
|
|
|
229
|
|
|
|
20,987
|
|
Consumer construction
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
5
|
|
|
|
444
|
|
Consumer lots and raw land
|
|
|
134
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(29
|
)
|
|
|
107
|
|
|
|
8,566
|
|
Home equity lines of credit
|
|
|
414
|
|
|
|
(5
|
)
|
|
|
22
|
|
|
|
(4
|
)
|
|
|
427
|
|
|
|
40,461
|
|
Consumer other
|
|
|
77
|
|
|
|
(8
|
)
|
|
|
26
|
|
|
|
197
|
|
|
|
292
|
|
|
|
13,368
|
|
Total
|
|
|
8,280
|
|
|
|
(75
|
)
|
|
|
83
|
|
|
|
682
|
|
|
|
8,970
|
|
|
|
774,833
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
270
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3,826
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
89
|
|
|
|
(89
|
)
|
|
|
-
|
|
|
|
882
|
|
Commercial and industrial
|
|
|
226
|
|
|
|
(67
|
)
|
|
|
-
|
|
|
|
261
|
|
|
|
420
|
|
|
|
528
|
|
Consumer real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
33
|
|
|
|
345
|
|
Consumer lots and raw land
|
|
|
144
|
|
|
|
(26
|
)
|
|
|
15
|
|
|
|
(31
|
)
|
|
|
102
|
|
|
|
669
|
|
Home equity lines of credit
|
|
|
23
|
|
|
|
-
|
|
|
|
4
|
|
|
|
9
|
|
|
|
36
|
|
|
|
76
|
|
Consumer other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
Total
|
|
|
393
|
|
|
|
(93
|
)
|
|
|
124
|
|
|
|
168
|
|
|
|
592
|
|
|
|
6,631
|
|
Grand Total
|
|
$
|
8,673
|
|
|
$
|
(168
|
)
|
|
$
|
207
|
|
|
$
|
850
|
|
|
$
|
9,562
|
|
|
$
|
781,464
|
|
7. Allowance for Loan and Lease Losses (Continued)
|
|
September 30, 2016
|
|
|
|
Beginning
|
|
|
Charge-
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Total
|
|
|
|
Balance
|
|
|
Offs
|
|
|
Recoveries
|
|
|
Provisions
|
|
|
Balance
|
|
|
Loans
|
|
|
|
(In thousands)
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
730
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
732
|
|
|
$
|
67,799
|
|
Residential construction
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
74
|
|
|
|
6,372
|
|
Residential lots and raw land
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
160
|
|
Commercial real estate
|
|
|
4,065
|
|
|
|
(33
|
)
|
|
|
22
|
|
|
|
465
|
|
|
|
4,519
|
|
|
|
364,320
|
|
Commercial construction
|
|
|
518
|
|
|
|
-
|
|
|
|
70
|
|
|
|
91
|
|
|
|
679
|
|
|
|
54,854
|
|
Commercial lots and raw land
|
|
|
303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
355
|
|
|
|
30,151
|
|
Commercial and industrial
|
|
|
641
|
|
|
|
(2
|
)
|
|
|
4
|
|
|
|
126
|
|
|
|
769
|
|
|
|
59,683
|
|
Lease receivables
|
|
|
196
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
224
|
|
|
|
20,452
|
|
Consumer real estate
|
|
|
198
|
|
|
|
(6
|
)
|
|
|
11
|
|
|
|
(5
|
)
|
|
|
198
|
|
|
|
17,323
|
|
Consumer construction
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
3
|
|
|
|
252
|
|
Consumer lots and raw land
|
|
|
125
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
4
|
|
|
|
125
|
|
|
|
8,557
|
|
Home equity lines of credit
|
|
|
351
|
|
|
|
(13
|
)
|
|
|
1
|
|
|
|
65
|
|
|
|
404
|
|
|
|
34,921
|
|
Consumer other
|
|
|
71
|
|
|
|
(40
|
)
|
|
|
21
|
|
|
|
23
|
|
|
|
75
|
|
|
|
6,484
|
|
Total
|
|
|
7,249
|
|
|
|
(98
|
)
|
|
|
129
|
|
|
|
879
|
|
|
|
8,159
|
|
|
|
671,328
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
774
|
|
Commercial real estate
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
3
|
|
|
|
224
|
|
|
|
159
|
|
|
|
7,509
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(365
|
)
|
|
|
-
|
|
|
|
2,325
|
|
Commercial and industrial
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
68
|
|
Consumer real estate
|
|
|
30
|
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
30
|
|
|
|
24
|
|
|
|
399
|
|
Consumer lots and raw land
|
|
|
209
|
|
|
|
(73
|
)
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
133
|
|
|
|
785
|
|
Home equity lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
19
|
|
|
|
23
|
|
|
|
53
|
|
Consumer other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
Total
|
|
|
618
|
|
|
|
(179
|
)
|
|
|
10
|
|
|
|
(110
|
)
|
|
|
339
|
|
|
|
11,952
|
|
Grand Total
|
|
$
|
7,867
|
|
|
$
|
(277
|
)
|
|
$
|
139
|
|
|
$
|
769
|
|
|
$
|
8,498
|
|
|
$
|
683,280
|
|
8. Troubled Debt Restructurings.
The
following table details performing TDR loans at September 30, 2017 and December 31, 2016, segregated by class of financing receivables:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(Dollars in thousands)
|
|
Performing TDRs accounted for on accrual status:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
351
|
|
|
|
461
|
|
Consumer real estate
|
|
|
33
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
53
|
|
|
|
95
|
|
Total
|
|
$
|
437
|
|
|
$
|
556
|
|
Percentage of total loans, net
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
8. Troubled Debt Restructurings (Continued)
The following table presents a roll forward
of performing TDR loans for the nine months ended September 30, 2017 and 2016:
|
|
Beginning
Balance
|
|
|
Additions (1)
|
|
|
Charge-offs (2)
|
|
|
Other (3)
|
|
|
Ending Balance
|
|
|
|
(In thousands)
|
|
Performing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial
|
|
|
461
|
|
|
|
252
|
|
|
|
-
|
|
|
|
(362
|
)
|
|
|
351
|
|
Consumer
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
86
|
|
Total
|
|
$
|
556
|
|
|
$
|
252
|
|
|
$
|
-
|
|
|
$
|
(371
|
)
|
|
$
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial
|
|
|
770
|
|
|
|
92
|
|
|
|
-
|
|
|
|
(394
|
)
|
|
|
468
|
|
Consumer
|
|
|
107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
98
|
|
Total
|
|
$
|
877
|
|
|
$
|
92
|
|
|
$
|
-
|
|
|
$
|
(403
|
)
|
|
$
|
566
|
|
The following table presents a roll forward
of non-performing TDR loans for the nine months ended September 30, 2017 and 2016:
|
|
Beginning
Balance
|
|
|
Additions (1)
|
|
|
Charge-offs (2)
|
|
|
Other (4)
|
|
|
Ending Balance
|
|
|
|
(In thousands)
|
|
Non-Performing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
324
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(324
|
)
|
|
$
|
-
|
|
Commercial
|
|
|
822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(652
|
)
|
|
|
170
|
|
Consumer
|
|
|
238
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
219
|
|
Total
|
|
$
|
1,384
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(995
|
)
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
809
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
(308
|
)
|
|
$
|
499
|
|
Commercial
|
|
|
534
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(235
|
)
|
|
|
299
|
|
Consumer
|
|
|
159
|
|
|
|
92
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
242
|
|
Total
|
|
$
|
1,502
|
|
|
$
|
92
|
|
|
$
|
(2
|
)
|
|
$
|
(552
|
)
|
|
$
|
1,040
|
|
|
1.
|
Includes new TDRs and increases to existing TDRs.
|
|
2.
|
Post modification charge-offs.
|
|
3.
|
Includes principal payments, paydowns and performing loans previously restructured at market rates
that are no longer reported as TDRs.
|
|
4.
|
Includes principal payments, paydowns and loans previously designated as non-performing that are
currently performing in compliance with their modified terms.
|
The Bank performs restructurings on certain
troubled loan workouts, whereby existing loans are restructured into a multiple note structure (i.e., Note A and Note B structure).
The Bank separates a portion of the current outstanding debt into a new legally enforceable note (“Note A”) that is
reasonably assured of repayment and performance according to prudently modified terms. The portion of the debt that is not reasonably
assured of repayment (“Note B”) is adversely classified and charged-off as appropriate. The following table provides
information on multiple note restructures for certain commercial real estate loan workouts as of September 30, 2017 and 2016:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
(In thousands)
|
|
Note A Structure
|
|
|
|
|
|
|
|
|
Commercial real estate (1)
|
|
$
|
334
|
|
|
$
|
352
|
|
Note B Structure
|
|
|
|
|
|
|
|
|
Commercial real estate (2)
|
|
$
|
207
|
|
|
$
|
207
|
|
Reduction of interest income (3)
|
|
$
|
7
|
|
|
$
|
8
|
|
|
(1)
|
If Note A was on nonaccrual status, it may be placed back on accrual status based on sustained
historical payment performance of generally nine months.
|
|
(2)
|
Note B is immediately charged-off upon restructuring; however, payment in full is due at maturity
of the note.
|
|
(3)
|
Reflects amount of interest income reduction during the nine months ended September 30, 2017 and
2016, as a result of multiple note restructures.
|
8. Troubled Debt Restructurings (Continued)
The benefit of this workout strategy is for
Note A note to remain or become a performing asset for which the borrower has the willingness and ability to meet the restructured
payment terms and conditions. In addition, this workout strategy reduces the prospects of further write downs and charge offs,
and also reduces the prospects of a potential foreclosure. Following this restructuring, the Note A credit classification generally
improves to an unclassified risk grade after a period of sustained payments.
The general terms of the new loans restructured
under the Note A and Note B structure differ as follows:
|
·
|
Note A
: First lien position; fixed
or adjustable current market interest rate; fixed month term to maturity; payments – interest only to maturity, or full principal
and interest to maturity. Note A is underwritten in accordance with the Bank’s customary underwriting standards and is generally
on an accrual basis.
|
|
·
|
Note B
: Second lien position; fixed
or adjustable below current market interest rate; fixed month term to maturity; payments – due in full at maturity. Note
B is underwritten in accordance with the Bank’s customary underwriting standards, except for the below market interest rate
and payment terms, is on a nonaccrual basis and is charged off.
|
9. Other Real Estate Owned.
The following
table reflects the changes in other real estate owned (“OREO”) during the nine months ended September 30, 2017 and
2016:
|
|
Beginning
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Additions
|
|
|
Sales, net
|
|
|
Adjustments
|
|
|
Balance
|
|
|
|
(In thousands)
|
|
Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
$
|
3,229
|
|
|
$
|
440
|
|
|
$
|
(1,293
|
)
|
|
$
|
(192
|
)
|
|
$
|
2,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
$
|
6,125
|
|
|
$
|
464
|
|
|
$
|
(1,668
|
)
|
|
$
|
(111
|
)
|
|
$
|
4,810
|
|
Fair value adjustments are recorded in order
to adjust the carrying values of OREO properties to estimated fair market values. In most cases, estimated fair market values are
derived from an initial appraisal, an updated appraisal or other forms of internal evaluations. In certain instances when a listing
agreement is renewed for a lesser amount, carrying values will be adjusted to the lesser fair value amount. Additionally, in certain
instances when an offer to purchase is received near the end of a quarterly accounting period for less than the carrying value,
and the sale does not close until the next accounting period, the carrying value will be adjusted to the lesser fair value amount.
At September 30, 2017, OREO consisted of residential and commercial properties, developed lots and raw land.
10. Premises and Equipment.
The following
table presents premises and equipment at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
$
|
2,807,558
|
|
|
$
|
2,817,308
|
|
Office buildings and improvements
|
|
|
10,232,652
|
|
|
|
9,667,612
|
|
Furniture, fixtures and equipment
|
|
|
9,704,526
|
|
|
|
9,877,872
|
|
Vehicles
|
|
|
623,039
|
|
|
|
621,238
|
|
Projects/work in process
|
|
|
543,844
|
|
|
|
571,784
|
|
|
|
|
23,911,619
|
|
|
|
23,555,814
|
|
Less accumulated depreciation
|
|
|
13,112,576
|
|
|
|
12,264,218
|
|
Total
|
|
$
|
10,799,043
|
|
|
$
|
11,291,596
|
|
The Bank leases certain branch facilities and
equipment under separate agreements that expire at various dates through October 30, 2027. Rental expense of $331,985 and $997,401
during the three and nine months ended September 30, 2017, and $344,166 and $1,032,125 during the three and nine months ended September
30, 2016, respectively, is included in premises and equipment expense on the accompanying consolidated statements of operations.
Future rental expenses under these leases as
of September 30, 2017 are as follows:
2017
|
|
$
|
331,421
|
|
2018
|
|
|
1,120,227
|
|
2019
|
|
|
860,528
|
|
2020
|
|
|
640,102
|
|
2021
|
|
|
541,209
|
|
Thereafter
|
|
|
1,553,207
|
|
Total
|
|
$
|
5,046,694
|
|
11. Goodwill and Other Intangibles.
The following table presents
activity for goodwill and other intangible assets for the nine months ended September 30, 2017 and 2016:
|
|
Goodwill
|
|
|
Identifiable Intangibles
|
|
|
Total
|
|
Nine Months Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
4,218,576
|
|
|
$
|
1,611,187
|
|
|
$
|
5,829,763
|
|
Amortization
|
|
|
-
|
|
|
|
(181,258
|
)
|
|
|
(181,258
|
)
|
Balance at September 30, 2017
|
|
$
|
4,218,576
|
|
|
$
|
1,429,929
|
|
|
$
|
5,648,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
4,218,576
|
|
|
$
|
1,895,514
|
|
|
$
|
6,114,090
|
|
Amortization
|
|
|
-
|
|
|
|
(213,245
|
)
|
|
|
(213,245
|
)
|
Balance at September 30, 2016
|
|
$
|
4,218,576
|
|
|
$
|
1,682,269
|
|
|
$
|
5,900,845
|
|
The following table presents a rollforward
of the gross carrying amount, new acquisitions, accumulated amortization and net book value for the Company’s core deposit
intangible (“CDI”), related to the acquisition of branch offices from Bank of America, N.A. on December 12, 2014. The
CDI is the only identifiable intangible asset subject to amortization at September 30, 2017 and December 31, 2016, respectively:
|
|
Identifiable Intangibles
|
|
Net book value at December 31, 2015
|
|
$
|
1,895,514
|
|
Accumulated amortization
|
|
|
(284,327
|
)
|
Net book value at December 31, 2016
|
|
|
1,611,187
|
|
Accumulated amortization
|
|
|
(181,258
|
)
|
Net book value at September 30, 2017
|
|
$
|
1,429,929
|
|
The following table presents estimated future
amortization expense of the CDI. At September 30, 2017, the remaining life of the CDI was 7.25 years.
2017
|
|
$
|
60,419
|
|
2018
|
|
|
223,002
|
|
2019
|
|
|
223,002
|
|
2020
|
|
|
223,002
|
|
2021
|
|
|
223,002
|
|
Thereafter
|
|
|
477,502
|
|
Total
|
|
$
|
1,429,929
|
|
12. Deposits.
The following table presents
the distribution of the Company’s deposit accounts as of September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(In thousands)
|
|
Demand accounts:
|
|
|
|
|
|
|
|
|
Non-interest bearing checking
|
|
$
|
212,521
|
|
|
$
|
196,917
|
|
Interest bearing checking
|
|
|
231,529
|
|
|
|
189,401
|
|
Money market
|
|
|
92,366
|
|
|
|
82,698
|
|
Savings accounts
|
|
|
146,933
|
|
|
|
145,032
|
|
Certificate accounts
|
|
|
261,939
|
|
|
|
256,552
|
|
Total deposits
|
|
$
|
945,288
|
|
|
$
|
870,600
|
|
At September 30, 2017, the scheduled maturities of certificate accounts
were as follows:
|
|
$250,000 or
Less
|
|
|
More than
$250,000
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Three months or less
|
|
$
|
54,899
|
|
|
$
|
10,302
|
|
|
$
|
65,201
|
|
Over three months through one year
|
|
|
77,480
|
|
|
|
20,437
|
|
|
|
97,917
|
|
Over one year through three years
|
|
|
52,179
|
|
|
|
25,259
|
|
|
|
77,438
|
|
Over three years
|
|
|
15,463
|
|
|
|
5,920
|
|
|
|
21,383
|
|
Total time deposits
|
|
$
|
200,021
|
|
|
$
|
61,918
|
|
|
$
|
261,939
|
|
The aggregate amount of time deposits with
balances of $250,000 or more was $61.9 million and $39.2 million at September 30, 2017 and December 31, 2016, respectively.
13. Borrowed Money.
The Bank had $16.5
million of FHLB borrowings outstanding at September 30, 2017, compared to $17.0 million at December 31, 2016. The Bank pledges
its stock in the FHLB and certain loans as collateral for actual or potential FHLB advances. At September 30, 2017 and December
31, 2016, the Bank had $265.0 million and $246.2 million, respectively, of credit available with the FHLB. At September 30, 2017,
the Bank had lendable collateral value with the FHLB totaling $222.9 million. Additional collateral would be required in order
to access total borrowings up to the credit availability limit.
The following table details the Bank’s
FHLB advances outstanding and the related maturity dates and interest rates at September 30, 2017:
Maturity Date
|
|
Interest Rate
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 22, 2018
|
|
|
1.330
|
%
|
|
$
|
1,000
|
|
June 25, 2018
|
|
|
0.870
|
%
|
|
|
1,000
|
|
June 25, 2018
|
|
|
1.360
|
%
|
|
|
2,000
|
|
June 29, 2018
|
|
|
1.340
|
%
|
|
|
1,000
|
|
December 21, 2018
|
|
|
1.470
|
%
|
|
|
2,500
|
|
June 24, 2019
|
|
|
1.048
|
%
|
|
|
1,000
|
|
July 8, 2019
|
|
|
1.620
|
%
|
|
|
2,000
|
|
June 22, 2020
|
|
|
1.720
|
%
|
|
|
3,000
|
|
June 29, 2020
|
|
|
1.980
|
%
|
|
|
2,000
|
|
July 6, 2020
|
|
|
1.890
|
%
|
|
|
1,000
|
|
|
|
|
|
|
|
$
|
16,500
|
|
14. Junior Subordinated Debentures.
The
Company has sponsored a trust, First South Preferred Trust I (the “Trust”), of which 100% of its common equity is owned
by the Company. The Trust was formed for the purpose of issuing Company-obligated trust preferred securities (the “Trust
Preferred Securities”) to third-party investors and investing the proceeds from the sale of the Trust Preferred Securities
solely in junior subordinated debt securities of the Company (the “Debentures”). The Debentures held by the Trust are
the sole assets of the Trust. Distributions on the Trust Preferred Securities issued by the Trust are payable quarterly at a rate
equal to the interest rate being earned by the Trust on the Debentures held by the Trust. The Trust Preferred Securities are subject
to mandatory redemption, in whole or in part, upon repayment of the Debentures. The Company has entered into an agreement which
fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Debentures held
by the Trust are redeemable, in whole or in part, by the Company after September 30, 2008. Subject to certain limitations, the
Junior Subordinated Debentures qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.
In July of 2013, the banking regulators issued
the final Basel III capital rules. Under these rules, bank holding companies with less than $15 billion in consolidated total assets
as of December 31, 2009, that issued trust preferred securities prior to May 19, 2010, are permanently grandfathered as Tier 1
or Tier 2 capital.
Consolidated debt obligations as of September
30, 2017 related to the Trust holding solely Debentures of the Company follows:
LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033
|
|
$
|
10,000,000
|
|
LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033
|
|
|
310,000
|
|
Total junior subordinated debentures owed to unconsolidated subsidiary trust
|
|
$
|
10,310,000
|
|
The Trust Preferred Securities bear interest
at three-month LIBOR plus 2.95%, payable quarterly. The Company has swapped the interest rate on the Debentures to a fixed rate
of 4.97%, with a maturity date of December 30, 2024. This strategy was executed to provide the Company with protection to a rising
rate environment. See Note 19 below for additional information.
15. Regulatory Capital.
The Company
and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial condition and results of operations. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures
of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s
capital amounts and ratios are not significantly different from those of the Bank. At September 30, 2017 and December 31, 2016,
the Company’s and the Bank’s Tier 1 and total capital ratios and their Tier 1 leverage ratios exceeded minimum requirements.
15. Regulatory Capital (Continued)
As of September 30, 2017, the Bank’s
regulatory capital position is categorized as well capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since September 30, 2017, that management believes have changed the Bank's well capitalized category.
Beginning in 2015, the Bank became subject to the Basel III Capital Rules. As a result, certain items in the risk-based capital
calculation have changed and the Common Equity Tier 1 Risk-Based Capital Ratio (“CET1”) is now being measured and monitored.
For the Bank’s capital structure, the CET1 Capital Ratio and the Tier 1 Risk-Based Capital Ratio are identical.
Basel III limits capital distributions and
certain discretionary bonus payments if a banking organization does not hold a capital conservation buffer consisting of 2.50%
of CET1 capital, Tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based
capital requirements. The capital conservation buffer began to be phased in beginning January 1, 2016, at 0.625% of risk-weighted
assets, and increases each year until fully implemented at 2.50% on January 1, 2019. The CET1 capital conservation buffer for 2017
is 1.25% and the Bank’s buffer as of September 30, 2017 was 4.57%. When fully phased in on January 1, 2019, Basel III will
require (i) a minimum ratio of CET1 capital to risk-weighted assets of at least 4.50%, plus the capital conservation buffer, (ii)
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer, (iii) a minimum
ratio of total capital to risk-weighted assets of at least 8.00%, plus the capital conservation buffer and (iv) a minimum leverage
ratio of 4.00%. The Bank’s actual regulatory capital amounts and ratios as of September 30, 2017 and December 31, 2016 are
as follows:
|
|
9/30/2017
|
|
|
12/31/2016
|
|
Regulatory Capital Amounts and Ratios
|
|
Amount
|
|
|
Ratio (1)
|
|
|
Amount
|
|
|
Ratio (2)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Total risk-based capital (1)
|
|
$
|
104,381
|
|
|
|
12.947
|
%
|
|
$
|
96,502
|
|
|
|
13.009
|
%
|
Tier 1 risk-based capital (1)
|
|
|
94,535
|
|
|
|
11.725
|
%
|
|
|
87,517
|
|
|
|
11.798
|
%
|
Common equity Tier 1 risk-based capital (1)
|
|
|
94,535
|
|
|
|
11.725
|
%
|
|
|
87,517
|
|
|
|
11.798
|
%
|
Tier 1 leverage capital
|
|
|
94,535
|
|
|
|
8.956
|
%
|
|
|
87,517
|
|
|
|
8.894
|
%
|
(1) Includes 1.25% phase in for capital conservation buffer.
(2) Includes 0.625% phase in for capital conservation buffer.
16. Stock-Based Compensation.
The Company
had two stock-based compensation plans at September 30, 2017. The shares outstanding are for grants under the Company’s 1997
Stock Option Plan (the “1997 Plan”) and the 2008 Equity Incentive Plan (the “2008 Plan”). In connection
with the Merger discussed in Note 1 above, the vesting date on all remaining nonvested stock option shares and restricted stock
awards was accelerated to September 30, 2017.
The 1997 Plan matured on April 8, 2008 and
no additional options may be granted under the 1997 Plan. At September 30, 2017, the 1997 Plan had 18,250 vested unexercised stock
option shares. At September 30, 2017, the 2008 Plan included 119,100 vested unexercised stock option shares, and 804,650 shares
available to be granted.
Stock Option Grants
.
Options
granted under the 2008 Plan are granted at the closing price of the Company’s common stock on the NASDAQ Stock Market on
the date of grant. Stock options expire ten years from the date of grant and vest over service periods ranging from one year to
five years. The Company settles stock option exercises with authorized unissued shares. The fair value of each stock option grant
is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S.
Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon
previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on
the yield at the time of the option grant.
A summary of option activity under the Plans
during the nine month periods ended September 30, 2017 and 2016 is presented below:
|
|
Options
Outstanding
|
|
|
Price
|
|
|
Aggregate
Intrinsic Value
|
|
Period Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
147,750
|
|
|
$
|
9.91
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(1,300
|
)
|
|
|
8.08
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(9,100
|
)
|
|
|
9.42
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
137,350
|
|
|
|
9.96
|
|
|
$
|
1,246,056
|
|
Vested and Exercisable at September 30, 2017
|
|
|
137,350
|
|
|
$
|
9.96
|
|
|
$
|
1,246,056
|
|
Period Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
165,750
|
|
|
$
|
10.76
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(4,550
|
)
|
|
|
20.90
|
|
|
|
|
|
Expired
|
|
|
(5,750
|
)
|
|
|
27.71
|
|
|
|
|
|
Exercised
|
|
|
(6,450
|
)
|
|
|
5.84
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
149,000
|
|
|
|
10.01
|
|
|
$
|
348,910
|
|
Vested and Exercisable at September 30, 2016
|
|
|
112,850
|
|
|
$
|
11.00
|
|
|
$
|
240,059
|
|
16. Stock-Based Compensation (Continued)
The following table summarizes other information
about the Company’s outstanding options and exercisable options as of September 30, 2017, including weighted-average remaining
contractual term expressed in years (Life) and weighted average exercise price (Price):
|
|
Outstanding
|
|
|
Exercisable
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$4.00 – 10.00
|
|
|
84,100
|
|
|
|
5.11
|
|
|
$
|
6.00
|
|
|
|
84,100
|
|
|
$
|
6.00
|
|
$10.01 – 17.00
|
|
|
24,000
|
|
|
|
1.95
|
|
|
|
10.77
|
|
|
|
24,000
|
|
|
|
10.77
|
|
$17.01 – 30.00
|
|
|
29,250
|
|
|
|
0.51
|
|
|
|
20.65
|
|
|
|
29,250
|
|
|
|
20.65
|
|
|
|
|
137,350
|
|
|
|
3.58
|
|
|
$
|
9.96
|
|
|
|
137,350
|
|
|
$
|
9.96
|
|
A summary of nonvested option shares and vesting
changes during the nine months ended September 30, 2017 and 2016 is presented below:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Period Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at beginning of period
|
|
|
32,150
|
|
|
$
|
7.09
|
|
|
|
53,300
|
|
|
$
|
6.67
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(1,300
|
)
|
|
|
8.08
|
|
|
|
(950
|
)
|
|
|
7.39
|
|
Vested
|
|
|
(30,850
|
)
|
|
|
7.05
|
|
|
|
(16,150
|
)
|
|
|
6.03
|
|
Nonvested at end of period
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
36,200
|
|
|
$
|
6.94
|
|
Total compensation expense
charged to income for stock options was $65,473 and $84,470, respectively, for the three and nine months ended September 30, 2017,
compared to compensation expense of $10,019 and $33,582, respectively, for the three and nine months ended September 30, 2016.
Compensation expense charged to income for stock options for the three and nine months ended September 30, 2017 included $56,973,
respectively, of expense attributable to the accelerated vesting of all remaining granted unexercised shares.
Restricted Stock Awards
.
The Company measures the fair value of restricted shares based on the price of its common stock on the grant date and compensation
expense is recorded over the vesting period. There were no restricted stock awards granted during the nine months ended September
30, 2017. During the nine months ended September 30, 2016, 3,000 restricted stock awards were granted with a four year vesting
period, and 2,200 restricted stock awards were granted with a five year vesting period. Total compensation expense recognized for
restricted stock awards for the three and nine months ended September 30, 2017 was $43,250 and $62,298, respectively, compared
to $9,470 and $28,036, respectively, for the three and nine months ended September 30, 2016. Compensation expense charged to income
for restricted stock awards for the three and nine months ended September 30, 2017 included $33,727, respectively, of expense attributable
to the accelerated vesting of all remaining awarded nonvested shares.
A summary of nonvested restricted stock awards
and vesting changes during the nine months ended September 30, 2017 and 2016 is presented below:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Period Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at beginning of period
|
|
|
11,750
|
|
|
$
|
8.27
|
|
|
|
10,425
|
|
|
$
|
8.36
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
5,200
|
|
|
|
8.15
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
|
|
8.15
|
|
Vested
|
|
|
(11,750
|
)
|
|
|
8.27
|
|
|
|
(3,475
|
)
|
|
|
8.36
|
|
Nonvested at end of period
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
11,950
|
|
|
$
|
8.27
|
|
16. Stock-Based Compensation (Continued)
The following table reflects the combined impact
of fair value compensation cost recognition for stock options and restricted stock awards on income before income taxes, net income,
basic earnings per share and diluted earnings per share for the three and six month periods ended September 30, 2017 and 2016:
|
|
Three Months
Ended
9/30/17
|
|
|
Three Months
Ended
9/30/16
|
|
|
Nine months
Ended
9/30/17
|
|
|
Nine months
Ended
9/30/16
|
|
Decrease in net income before income taxes
|
|
$
|
108,723
|
|
|
$
|
19,489
|
|
|
$
|
146,768
|
|
|
$
|
61,618
|
|
Decrease in net income
|
|
$
|
108,723
|
|
|
$
|
19,489
|
|
|
$
|
146,768
|
|
|
$
|
61,618
|
|
Decrease in basic earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Decrease in diluted earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
17. Fair Value Measurement.
Fair value
is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. A fair value hierarchy prioritizes the inputs of valuation techniques used
to measure fair value of nonfinancial assets and liabilities. The inputs are evaluated and an overall level for the fair value
measurement is determined. This overall level is an indication of the market observability of the fair value measurement. In order
to determine the fair value, the Bank must determine the unit of account, highest and best use, principal market, and market participants.
These determinations allow the Bank to define the inputs for fair value and level of hierarchy. Outlined below is the application
of the fair value hierarchy to the Bank’s financial assets that are carried at fair value.
Level 1: Inputs to the valuation methodology
are quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access at the measurement
date. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever
available. The type of assets carried at Level 1 fair value generally includes investments such as U.S. Treasury and U.S. government
agency securities.
Level 2: Inputs to the valuation methodology
include quoted prices for similar assets or liabilities in active markets. Price quotations can vary substantially either over
time or among market makers. The type of assets carried at Level 2 fair value generally includes securities and mortgage-backed
securities issued by Government Sponsored Enterprises (“GSEs”), municipal bonds, corporate debt securities, mortgage
loans held for sale and bank-owned life insurance.
Level 3: Inputs to the valuation methodology
are unobservable to the extent that observable inputs are not available. Unobservable inputs are developed based on the best information
available in the circumstances and might include the Bank’s own assumptions. The Bank considers information about market
participant assumptions that is reasonably available without undue cost and effort. The type of assets carried at Level 3 fair
value generally include investments backed by non-traditional mortgage loans or certain state or local housing agency obligations,
of which the Bank has no such assets or liabilities. Level 3 also includes impaired loans and other real estate owned.
Quoted market price for similar assets in active
markets is the valuation technique for determining fair value of securities available-for-sale and held-to-maturity. Unrealized
gains on available-for-sale securities are included in the “accumulated other comprehensive income” component of the
Stockholders’ Equity section of the Consolidated Statements of Financial Condition. The estimated fair value of loans held
for sale is based on commitments from investors within the secondary market for loans with similar characteristics. The Bank does
not record loans held for investment at fair value on a recurring basis. However, when a loan is considered impaired, an impairment
write down is taken based on the loan’s estimated fair value. The fair value of impaired loans is estimated using one of
several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those loans not requiring a write down represent loans for which the fair value of the expected repayments or collateral
exceed the recorded investments in such loans, and are not included below.
17. Fair Value Measurement (Continued)
Assets measured at fair value on a recurring basis as of September
30, 2017 and December 31, 2016:
|
|
Fair Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
|
|
|
Significant
Observable Inputs-
Outputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(In thousands)
|
|
Description
|
|
September 30, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
23,837
|
|
|
$
|
23,837
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
82,730
|
|
|
|
-
|
|
|
|
82,730
|
|
|
|
-
|
|
Municipal securities
|
|
|
57,120
|
|
|
|
-
|
|
|
|
57,120
|
|
|
|
-
|
|
Corporate bonds
|
|
|
26,886
|
|
|
|
-
|
|
|
|
26,886
|
|
|
|
-
|
|
Mortgage loans held for sale
|
|
|
3,815
|
|
|
|
-
|
|
|
|
3,815
|
|
|
|
-
|
|
Bank-owned life insurance
|
|
|
18,483
|
|
|
|
-
|
|
|
|
18,483
|
|
|
|
-
|
|
Interest rate swap
|
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
Total September 30, 2016
|
|
$
|
212,937
|
|
|
$
|
23,837
|
|
|
$
|
189,100
|
|
|
$
|
-
|
|
Description
|
|
December 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
16,995
|
|
|
$
|
16,995
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
95,116
|
|
|
|
-
|
|
|
|
95,116
|
|
|
|
-
|
|
Municipal securities
|
|
|
53,682
|
|
|
|
-
|
|
|
|
53,682
|
|
|
|
-
|
|
Corporate bonds
|
|
|
26,813
|
|
|
|
-
|
|
|
|
26,813
|
|
|
|
-
|
|
Mortgage loans held for sale
|
|
|
5,099
|
|
|
|
-
|
|
|
|
5,099
|
|
|
|
-
|
|
Bank-owned life insurance
|
|
|
18,080
|
|
|
|
-
|
|
|
|
18,080
|
|
|
|
-
|
|
Interest rate swap
|
|
|
121
|
|
|
|
-
|
|
|
|
121
|
|
|
|
-
|
|
Total December 31, 2016
|
|
$
|
215,906
|
|
|
$
|
16,995
|
|
|
$
|
198,911
|
|
|
$
|
-
|
|
Assets measured at fair value on a non-recurring basis as of September
30, 2017 and December 31, 2016:
|
|
Fair Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
|
|
|
Significant
Observable Inputs-
Outputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(In thousands)
|
|
Description
|
|
September 30, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Impaired loans, net
|
|
$
|
6,039
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,039
|
|
Other real estate owned
|
|
|
2,184
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,184
|
|
Total September 30, 2016
|
|
$
|
8,223
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,223
|
|
Description
|
|
December 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Impaired loans, net
|
|
$
|
10,730
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,730
|
|
Other real estate owned
|
|
|
3,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,229
|
|
Total December 31, 2016
|
|
$
|
13,959
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,959
|
|
Impaired loans at September 30, 2017 and December
31, 2016 include $5.4 million and $9.9 million, respectively, of loans identified as impaired, even though an impairment analysis
calculated pursuant to ASC 310-10-35 resulted in no allowance.
Impaired loans where a write down is taken
based on fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Bank records the impaired loan as non-recurring Level 3.
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 Bank classifies the impaired loan as non-recurring Level 3.
17. Fair Value Measurement (Continued)
OREO is recorded at fair value upon transfer
of a loan to foreclosed assets, based on the appraised market value of the property. OREO is reviewed quarterly and values are
adjusted as determined appropriate. Fair value is based upon independent market prices, appraised values of the collateral or management’s
estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of
the collateral is impaired below the appraised value and there is no observable market price, the Bank classifies the foreclosed
asset as non-recurring Level 3. Fair value adjustments of $15,220 and $192,139, respectively, were made to OREO during the three
and nine months ended September 30, 2017, compared to $1,000 and $111,170, respectively, made during the three and nine months
ended September 30, 2016.
No liabilities were measured at fair value
on a recurring or non-recurring basis as of September 30, 2017 or December 31, 2016.
18. Fair Value of Financial Instruments.
The following table
represents the recorded carrying values, estimated fair values and fair value hierarchy within which the fair value measurements
of the Company’s financial instruments are categorized at September 30, 2017 and December 31, 2016:
|
|
Level in
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair Value
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
|
Hierarchy
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
Level 1
|
|
$
|
19,923
|
|
|
$
|
19,923
|
|
|
$
|
22,855
|
|
|
$
|
22,855
|
|
Interest-bearing deposits in other banks
|
|
Level 1
|
|
|
36,904
|
|
|
|
36,904
|
|
|
|
23,321
|
|
|
|
23,321
|
|
Securities available for sale
|
|
Level 1
|
|
|
23,837
|
|
|
|
23,837
|
|
|
|
16,995
|
|
|
|
16,995
|
|
Securities available for sale
|
|
Level 2
|
|
|
166,736
|
|
|
|
166,736
|
|
|
|
175,611
|
|
|
|
175,611
|
|
Securities held to maturity
|
|
Level 2
|
|
|
508
|
|
|
|
506
|
|
|
|
511
|
|
|
|
510
|
|
Loans held for sale
|
|
Level 2
|
|
|
3,815
|
|
|
|
3,815
|
|
|
|
5,099
|
|
|
|
5,099
|
|
Loans and leases HFI, net, less impaired loans
|
|
Level 2
|
|
|
764,002
|
|
|
|
765,113
|
|
|
|
678,911
|
|
|
|
681,239
|
|
Stock in FHLB of Atlanta
|
|
Level 2
|
|
|
1,593
|
|
|
|
1,593
|
|
|
|
1,574
|
|
|
|
1,574
|
|
Accrued interest receivable
|
|
Level 2
|
|
|
3,596
|
|
|
|
3,596
|
|
|
|
3,526
|
|
|
|
3,526
|
|
Interest rate swap
|
|
Level 2
|
|
|
66
|
|
|
|
66
|
|
|
|
121
|
|
|
|
121
|
|
Bank-owned life insurance
|
|
Level 2
|
|
|
18,483
|
|
|
|
18,483
|
|
|
|
18,080
|
|
|
|
18,080
|
|
Impaired loans HFI, net of related allowance
|
|
Level 3
|
|
|
6,039
|
|
|
|
6,039
|
|
|
|
10,730
|
|
|
|
10,730
|
|
Mortgage servicing rights
|
|
Level 3
|
|
|
2,925
|
|
|
|
2,171
|
|
|
|
3,128
|
|
|
|
2,149
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Level 2
|
|
$
|
943,880
|
|
|
$
|
945,288
|
|
|
$
|
869,591
|
|
|
$
|
870,600
|
|
Junior subordinated debentures
|
|
Level 2
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
Fair values of financial assets and liabilities
have been estimated using data which management considers as the best available, and estimation methodologies deemed suitable for
the pertinent category of financial instrument. With regard to financial instruments with off-balance sheet risk, it is not practicable
to estimate the fair value of future financing commitments. The estimation methodologies used by the Bank are as follows:
Financial assets
:
Cash and Due from Banks and Interest –Bearing
Deposits in Other Banks
: The carrying amounts for cash and due from banks and interest bearing deposits in other banks are
equal to their fair value. Fair value hierarchy Input level 1.
Investment Securities Available for Sale
and Held to Maturity
: The estimated fair value of investment securities is provided in Note 4 of the Notes to Consolidated
Financial Statements. These are based on quoted market prices, when available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities. Fair value hierarchy Input levels 1 and 2.
Loans Held for Sale.
The estimated fair
value of loans held for sale is based on commitments from investors within the secondary market for loans with similar characteristics.
Fair value hierarchy Input level 2.
Loans and Leases Held for Investment, net,
less Impaired Loans
: Fair values are estimated for portfolios of loans and leases held for investment with similar financial
characteristics. Loans and leases are segregated by collateral type and by fixed and variable interest rate terms. The fair value
of each category is determined by discounting scheduled future cash flows using current interest rates offered on loans or leases
with similar characteristics. Fair value hierarchy Input level 2.
Stock in Federal Home Loan Bank of Atlanta
:
The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the FHLB. Fair value hierarchy
Input level 2.
Accrued Interest Receivable
: The carrying
amount of accrued interest receivable approximates fair value because of the short maturities of these instruments. Fair value
hierarchy Input level 2.
18. Fair Value of Financial Instruments (Continued)
Interest Rate Swap
: The Company has
entered into a pay-fixed receive-floating swap to hedge our $10.0 million of floating rate Trust Preferred debt. The primary objective
of the swap is to minimize future interest rate risk. See Note 19 below for additional information. Fair value hierarchy Input
level 2.
Bank-Owned Life Insurance
: The carrying
value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value, as determined
by the issuer. Fair value hierarchy Input level 2.
Impaired Loans Held for Investment, Net
:
Fair values for impaired loans and leases are estimated based on discounted cash flows or underlying collateral values, where applicable.
Fair value hierarchy Input Level 3.
Mortgage Servicing Rights (“MSRs”)
:
The fair value of MSRs is estimated for those loans sold with servicing retained. The loans are stratified into pools by product
type and within product type by interest rate and maturity. The fair value of the MSR is based upon the present value of estimated
future cash flows using current market assumptions for prepayments, servicing costs and other factors. Fair value hierarchy Input
level 3.
Financial liabilities
:
Deposits
: The fair value of demand deposits
is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently
offered for similar instruments with similar remaining maturities. Fair value hierarchy Input level 2.
Junior Subordinated Debentures
: The
carrying amount of junior subordinated debentures approximates fair value of similar instruments with similar characteristics and
remaining maturities. Fair value hierarchy Input level 2.
19. Interest Rate Hedging
. The Company
has executed certain strategies targeted at hedging the impact of rising interest rates on its future earnings. The Company has
entered into a pay-fixed receive-floating swap to hedge our $10.0 million of floating rate Trust Preferred debt. The primary objective
of the swap is to minimize future interest rate risk. During 2016, the Company restructured the terms of the swap to lower the
fixed rate cost and extend its maturity. As a result, the restructured rate is 4.97% and the maturity date of the swap is December
30, 2024.
20. Compensated Absences.
The Company
has not accrued compensated absences because the amount cannot be reasonably estimated.
21. Subsequent Events.
On November 1,
2017, the Company completed the previously announced merger with CARO, whereby the Company merged with and into CARO (the Merger),
with CARO as the surviving corporation in the Merger. Immediately following the consummation of the Merger, First South Bank, a
wholly owned subsidiary of the Company, merged with and into CresCom Bank, a wholly owned subsidiary of CARO (the Bank Merger),
with CresCom Bank as the surviving bank in the Bank Merger. See “Explanatory Note” and Note 1. “Basis of Presentation”
above for additional information.
We have evaluated subsequent events occurring
after September 30, 2017, and concluded that no material transactions, other than the Merger transaction noted above, occurred
that provided additional evidence about conditions that existed at or after September 30, 2017, that required adjustments to or
disclosure in the Consolidated Financial Statements.
22. Recent Accounting Pronouncements.
Pursuant
to the Merger transaction noted above, the Company ceased to exist effective as of November 1, 2017. Consequently, after November
1, 2017 the Company is no longer subject to the Accounting Standards Updates issued by the Financial Accounting Standards Board.