NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(UNAUDITED)
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements include the accounts of Fidelity Southern Corporation (“FSC” or “Fidelity”) and its wholly-owned subsidiaries. FSC owns
100%
of Fidelity Bank (the “Bank”) and LionMark Insurance Company, an insurance agency offering consumer credit related insurance products. FSC also owns
three
subsidiaries established to issue trust preferred securities, which are not consolidated for financial reporting purposes in accordance with current accounting guidance, as FSC is not the primary beneficiary. The “Company” or “our,” as used herein, includes FSC and its consolidated subsidiaries, unless the context otherwise requires.
These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) followed within the financial services industry for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses; the calculations of, amortization of, and the potential impairment of capitalized servicing rights; the valuation of loans held-for-sale and certain derivatives; the valuation of real estate or other assets acquired in connection with foreclosures or in satisfaction of loans; estimates used for fair value acquisition accounting, goodwill impairment testing and valuation of deferred income taxes. In addition, the actual lives of certain amortizable assets and income items are estimates subject to change. The Company principally operates in
one
business segment, which is community banking.
In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.
Operating results for the
six
-month period ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
, filed with the Securities and Exchange Commission (“SEC”).
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in the
2017
Annual Report on Form 10-K filed with the SEC. There were no new accounting policies or changes to existing policies adopted during the first
six
months of
2018
which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.
Contingencies
Due to the nature of their activities, the Company and its subsidiaries are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of
June 30, 2018
. Although the ultimate outcome of all claims and lawsuits outstanding as of
June 30, 2018
cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.
Tax Cuts and Jobs Act
Public Law No. 115-97, known as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted on December 22, 2017 and reduced the U.S. Federal corporate tax rate from 35% to 21% effective January 1, 2018. Additionally, on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for provisions of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the provisions of the Tax Act, the Company completed the remeasurement of its net deferred tax liability at December 31, 2017 which reduced income tax expense by
$4.9 million
for the fourth quarter of 2017. For
the three and six months ended June 30, 2018
, no further adjustments were recorded related to the remeasurement of the Company's net deferred tax liability balance as a result of the Tax Act. The final impact of the Tax Act may differ from estimates used to calculate the remeasurement of its net deferred tax liability balance as a result of changes in management’s interpretations and assumptions, as well as new guidance that may be issued by the Internal Revenue Service.
Recently Adopted Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2018-05, “
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118
). This ASU was effective upon issuance. The adoption of this ASU did not have a significant impact on the Company's Consolidated Financial Statements.
In March 2018, the FASB issued ASU No. 2018-04, “
Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273
. For public business entities, the Update was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this ASU did not have a significant impact on the Company's Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-03, “
Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2018-03"
). This guidance amended ASU No. 2016-01, “
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
” (“ASU 2016-01”) on recognizing and measuring financial instruments to clarify certain aspects of the guidance originally issued in January 2016. The amendments in this Update were effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018 with early adoption permitted, including adoption in any interim period, for public business entities. The adoption of this Update effective January 1, 2018 did not have a significant impact on the Company's Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02, “
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” ("ASU 2018-02
"), that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that passed U.S. Congress in December 2017. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The Company elected to early adopt this guidance effective January 1, 2018. The adoption of ASU 2018-02 resulted in a reclassification of stranded tax effects of
$80,000
to accumulated other comprehensive income (loss) from retained earnings.
In May 2017, the FASB issued ASU No. 2017-09, “
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU 2017-09
”) that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this ASU were effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption was permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued and should be applied prospectively to an award modified on or after the adoption date. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, “
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
,” (“ASU 2017-07”) that will change how employers who sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. The guidance was effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption was permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, early adoption must be within the first interim period if an employer issues interim financial statements. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
,” (“ASU 2017-04”) which simplifies the accounting for goodwill impairment by removing Step 2 of the
goodwill impairment test. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and is required to be applied prospectively, with early adoption permitted for any impairment tests performed on testing dates after January 1, 2017. The early adoption of this ASU in the fourth quarter of 2017 did not have a significant impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-03, “
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323)
,” (“ASU 2017-03”). ASU 2017-03 amends the Codification for SEC staff announcements made at two Emerging Issues Task Force (EITF) meetings. That Topic required registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. The Company adopted this guidance in the fourth quarter of 2016. The adoption of this ASU did not have a significant impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, “
Business Combinations (Topic 805) - Clarifying the Definition of a Business
,” (“ASU 2017-01”) which provides clarification on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance was effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods with early adoption permitted. The amendments in this ASU should be applied prospectively on or after the effective date and no disclosures are required at transition. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In December 2016, the FASB issued ASU No. 2016-20, “
Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers
.” ASU 2016-20 updates the new revenue standard by clarifying issues that had arisen from ASU No. 2014-09 but does not change the core principle of the new standard. In August 2015, the FASB issued ASU No. 2015-14, “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
” which deferred the effective date of ASU No. 2014-09, “
Revenue from Contracts with Customers
,” (“ASU 2014-09”) by one year to annual reporting periods beginning after December 15, 2017, and interim reporting periods therein. The FASB had previously issued ASU 2014-09 in May 2014. The Company adopted the guidance on January 1, 2018 utilizing the modified retrospective approach. The Company did not record a cumulative effect adjustment to opening retained earnings as the adoption of ASU 2014-09 did not have a significant impact on the Company's Consolidated Financial Statements. The Company also completed its evaluation of the expanded disclosure requirements for disaggregation of revenue and other information regarding material contracts and began presenting the required disclosures in its Consolidated Financial Statements for the quarter ended March 31, 2018. See
Note 11. Revenue Recognition
for more information.
In November 2016, the FASB issued ASU No. 2016-18, “
Statement of Cash Flows (Topic 230) - Restricted Cash
,” (“ASU 2016-18”). The ASU is to be applied retrospectively and was effective for the Company beginning in fiscal year 2018, including interim periods therein with early adoption was permitted, including adoption in an interim period, with retrospective application. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, “
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
,” (“ASU 2016-16”) that addresses the income tax consequences of intra-entity transfers of assets other than inventory. This standard was effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption was permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
,” (“ASU 2016-15”) intended to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The amendments in this ASU are to be applied retrospectively and were effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption was permitted, including adoption in an interim period, with adoption of all of the guidance in the same period. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2017, the FASB issued ASU No. 2017-12, “
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
,” (“ASU 2017-12”) that is intended to improve and simplify rules relevant to hedge accounting. This ASU refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. ASU 2017-12 is intended to improve transparency and accounting through a focus on: (1) measurement and hedging strategies; (2) presentation and disclosure; and (3) easing the administrative burden that hedge accounting can create for an entity. Entities will (a) measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged; (b) consider only how changes in the benchmark interest rate affect a decision to settle a pre-payable instrument before its scheduled maturity when calculating the fair value of the hedged item; and (c) measure the fair value of the hedged item using the benchmark rate component of the contracted coupon cash flows determined at inception.
The amendments in this ASU shall take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements based on its current hedging strategies. However, the Company is currently evaluating this ASU to determine whether its provisions will enhance its risk management strategies.
In March 2017, the FASB issued ASU No. 2017-08, “
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
,” (“ASU 2017-08”) that amends the amortization period for certain purchased callable debt securities held at a premium. The guidance is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. These amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. In addition, in the period of adoption, disclosures should be provided about a change in accounting principle. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13 which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) securities. For AFS securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. All other things being equal, higher credit losses will result in lower regulatory capital ratios for the Company. The ASU also simplifies the accounting model for purchased credit-impaired securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application for all organizations will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has established a working group which includes representatives from various internal departments with the expertise needed to implement the guidance. The working group has assigned key tasks to complete and established a timeline to be followed. The team is meeting regularly to review progress on the assigned tasks and to share current information on industry practices. Members of the working group are also attending conferences and meetings with peer banks to keep current on evolving interpretations of the guidance. As part of its implementation plan, the Company has allocated staff and put resources in place to evaluate the appropriate model options and is collecting, reviewing, and validating historical loan data for use in these models. The Company is implementing a software package supported by a third-party vendor to automate the calculation of the allowance for loan losses under the new methodology. Management is continuing to evaluate the impact that the guidance will have on the Company’s Consolidated Financial Statements and its regulatory capital ratios through its effective date.
In February 2016, the FASB issued ASU No. 2016-02, "
Leases
" which requires the recognition of assets and liabilities arising from most lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which means applying the new balance sheet presentation and income statement classification guidance from the beginning of the earliest comparative period presented in the year of adoption. As of June 30, 2018, the Company’s total outstanding lease obligations, all of which are classified as operating leases, was
$20.4 million
, or
0.42%
of total assets. The Company is currently evaluating these lease obligations, as well as any embedded leases contained in its contractual outsourcing arrangements, as potential lease assets and liabilities as defined by the guidance as well as assessing the impact on its regulatory capital ratios. For regulated banking institutions such as the Company, the recognition of right-of-use assets on the balance sheet may impact the calculation of regulatory capital ratios by increasing the assets in the denominator of the risk-based capital ratios (risk-weighted assets) and leverage capital ratio (adjusted asset). All other things being equal, a higher denominator will result in lower regulatory capital ratios for the Company. The Company is implementing a software package supported by a third-party vendor to automate the calculation of the right of use asset and the corresponding lease liability. The Company anticipates that the adoption of ASU 2016-02 will not have a significant impact on its Consolidated Financial Statements or its regulatory capital ratios, but will likely require changes to its systems, controls and processes. The Company is continuing to evaluate the full impact of this ASU on the Company’s Consolidated Financial Statements.
Other proposed accounting standards that have recently been issued by the FASB or other standard-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
2. Investment Securities
Management’s primary objective in managing the investment securities portfolio includes maintaining a portfolio of high quality investments with competitive returns while providing for pledging and liquidity needs within overall asset and liability management parameters. The Company is required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. As such, management regularly evaluates the investment portfolio for cash flows, the level of loan production and sales, current interest rate risk strategies and the potential future direction of market interest rate changes. Individual investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.
The following table summarizes the amortized cost and fair value of debt securities and the related gross unrealized gains and losses at
June 30, 2018
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored enterprises
|
|
$
|
22,163
|
|
|
$
|
37
|
|
|
$
|
(368
|
)
|
|
$
|
21,832
|
|
|
Municipal securities
|
|
8,286
|
|
|
223
|
|
|
(56
|
)
|
|
8,453
|
|
|
SBA pool securities
|
|
12,008
|
|
|
—
|
|
|
(406
|
)
|
|
11,602
|
|
|
Residential mortgage-backed securities
|
|
85,028
|
|
|
459
|
|
|
(440
|
)
|
|
85,047
|
|
|
Commercial mortgage-backed securities
|
|
22,101
|
|
|
—
|
|
|
(880
|
)
|
|
21,221
|
|
|
Total available-for-sale
|
|
$
|
149,586
|
|
|
$
|
719
|
|
|
$
|
(2,150
|
)
|
|
$
|
148,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
8,550
|
|
|
$
|
—
|
|
|
$
|
(245
|
)
|
|
$
|
8,305
|
|
|
Residential mortgage-backed securities
|
|
8,481
|
|
|
66
|
|
|
(372
|
)
|
|
8,175
|
|
|
Commercial mortgage-backed securities
|
|
3,953
|
|
|
—
|
|
|
—
|
|
|
3,953
|
|
|
Total held-to-maturity
|
|
$
|
20,984
|
|
|
$
|
66
|
|
|
$
|
(617
|
)
|
|
$
|
20,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored enterprises
|
|
$
|
22,182
|
|
|
$
|
141
|
|
|
$
|
(98
|
)
|
|
$
|
22,225
|
|
|
Municipal securities
|
|
9,318
|
|
|
340
|
|
|
(23
|
)
|
|
9,635
|
|
|
SBA pool securities
|
|
13,031
|
|
|
6
|
|
|
(127
|
)
|
|
12,910
|
|
|
Residential mortgage-backed securities
|
|
50,251
|
|
|
803
|
|
|
(76
|
)
|
|
50,978
|
|
|
Commercial mortgage-backed securities
|
|
24,721
|
|
|
6
|
|
|
(354
|
)
|
|
24,373
|
|
|
Total available-for-sale
|
|
$
|
119,503
|
|
|
$
|
1,296
|
|
|
$
|
(678
|
)
|
|
$
|
120,121
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
8,588
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
8,641
|
|
|
Residential mortgage-backed securities
|
|
9,100
|
|
|
99
|
|
|
(156
|
)
|
|
9,043
|
|
|
Commercial mortgage-backed securities
|
|
4,001
|
|
|
—
|
|
|
—
|
|
|
4,001
|
|
|
Total held-to-maturity
|
|
$
|
21,689
|
|
|
$
|
152
|
|
|
$
|
(156
|
)
|
|
$
|
21,685
|
|
The Company held
33
and
19
investment securities available-for-sale that were in an unrealized loss position at
June 30, 2018
, and
December 31, 2017
, respectively. There were
eight
and
six
investment securities held-to-maturity that were in an unrealized loss position at
June 30, 2018
, and
December 31, 2017
, respectively.
The following table reflects the gross unrealized losses and fair values of the investment securities with unrealized losses, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
(in thousands)
|
|
Fair
Value
|
|
Gross Unrealized
Losses
|
|
Fair
Value
|
|
Gross Unrealized
Losses
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored enterprises
|
|
$
|
19,699
|
|
|
$
|
(368
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Municipal securities
|
|
$
|
1,797
|
|
|
$
|
(14
|
)
|
|
$
|
1,022
|
|
|
$
|
(42
|
)
|
|
SBA pool securities
|
|
7,124
|
|
|
(185
|
)
|
|
4,478
|
|
|
(221
|
)
|
|
Residential mortgage-backed securities
|
|
41,360
|
|
|
(271
|
)
|
|
4,703
|
|
|
(169
|
)
|
|
Commercial mortgage-backed securities
|
|
9,741
|
|
|
(323
|
)
|
|
11,480
|
|
|
(557
|
)
|
|
Total available-for-sale
|
|
$
|
79,721
|
|
|
$
|
(1,161
|
)
|
|
$
|
21,683
|
|
|
$
|
(989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
8,305
|
|
|
$
|
(245
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Residential mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,013
|
|
|
$
|
(372
|
)
|
|
Total held-to-maturity
|
|
$
|
8,305
|
|
|
$
|
(245
|
)
|
|
$
|
7,013
|
|
|
$
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
(in thousands)
|
|
Fair
Value
|
|
Gross Unrealized
Losses
|
|
Fair
Value
|
|
Gross Unrealized
Losses
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored enterprises
|
|
$
|
14,974
|
|
|
$
|
(98
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Municipal securities
|
|
—
|
|
|
—
|
|
|
1,050
|
|
|
(23
|
)
|
|
SBA pool securities
|
|
3,285
|
|
|
(42
|
)
|
|
4,979
|
|
|
(85
|
)
|
|
Residential mortgage-backed securities
|
|
1,835
|
|
|
(8
|
)
|
|
5,383
|
|
|
(68
|
)
|
|
Commercial mortgage-backed securities
|
|
10,051
|
|
|
(89
|
)
|
|
12,360
|
|
|
(265
|
)
|
|
Total available-for-sale
|
|
$
|
30,145
|
|
|
$
|
(237
|
)
|
|
$
|
23,772
|
|
|
$
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
—
|
|
|
—
|
|
|
7,652
|
|
|
(156
|
)
|
|
Total held-to-maturity
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,652
|
|
|
$
|
(156
|
)
|
At
June 30, 2018
and
December 31, 2017
, the unrealized losses on investment securities were unrelated to credit losses. Management does not intend to sell the temporarily impaired securities and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost, which may be maturity. The unrealized loss position has increased during 2017 and 2018, primarily in the mortgage-backed securities and SBA pool securities categories, and is the result of the increase in interest rates.
As part of the Company’s evaluation of its intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, the Company considers its investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position.
Accordingly, as of
June 30, 2018
, management has reviewed its portfolio for other-than-temporary-impairment and believes the impairment detailed in the table above is temporary, and
no
other-than-temporary impairment loss has been recognized in the Company’s Consolidated Statements of Comprehensive Income. Management continues to monitor all of its securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of these securities may be sold or are other than temporarily impaired, which would require a charge to earnings in such periods.
The amortized cost and fair value of investment securities at
June 30, 2018
, and
December 31, 2017
, are categorized in the following table by remaining contractual maturity. The amortized cost and fair value of securities not due at a single maturity (i.e., mortgage-backed securities) are shown separately and are calculated based on estimated average remaining life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored enterprises
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
$
|
21,160
|
|
|
$
|
20,802
|
|
|
$
|
21,179
|
|
|
$
|
21,160
|
|
|
Due after five years through ten years
|
|
1,003
|
|
|
1,030
|
|
|
1,003
|
|
|
1,065
|
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
1,494
|
|
|
1,455
|
|
|
1,503
|
|
|
1,488
|
|
|
Due after five years through ten years
|
|
1,747
|
|
|
1,822
|
|
|
2,753
|
|
|
2,877
|
|
|
Due after ten years
|
|
5,045
|
|
|
5,176
|
|
|
5,062
|
|
|
5,270
|
|
|
SBA pool securities
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
7,309
|
|
|
7,124
|
|
|
7,967
|
|
|
7,931
|
|
|
Due after ten years
|
|
4,699
|
|
|
4,478
|
|
|
5,064
|
|
|
4,979
|
|
|
Residential mortgage-backed securities
|
|
85,028
|
|
|
85,047
|
|
|
50,251
|
|
|
50,978
|
|
|
Commercial mortgage-backed securities
|
|
22,101
|
|
|
21,221
|
|
|
24,721
|
|
|
24,373
|
|
|
Total available-for-sale
|
|
$
|
149,586
|
|
|
$
|
148,155
|
|
|
$
|
119,503
|
|
|
$
|
120,121
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
$
|
1,588
|
|
|
$
|
1,571
|
|
|
$
|
1,588
|
|
|
$
|
1,641
|
|
|
Due after ten years
|
|
6,962
|
|
|
6,734
|
|
|
7,000
|
|
|
7,000
|
|
|
Residential mortgage-backed securities
|
|
8,481
|
|
|
8,175
|
|
|
9,100
|
|
|
9,043
|
|
|
Commercial mortgage-backed securities
|
|
3,953
|
|
|
3,953
|
|
|
4,001
|
|
|
4,001
|
|
|
Total held-to-maturity
|
|
$
|
20,984
|
|
|
$
|
20,433
|
|
|
$
|
21,689
|
|
|
$
|
21,685
|
|
There were
three
investment securities available-for-sale called, matured, or paid off during the
six
months ended
June 30, 2018
, and
10
investment securities called, matured, or paid off during the
six
months ended
June 30, 2017
. There were
no
gross gains or losses for the investment securities that were called, matured, or paid off during the
six
months ended
June 30, 2018
, or
2017
.
There were
no
transfers from investment securities available-for-sale to investment securities held-to-maturity during
the six months ended June 30, 2018, or 2017
.
The following table summarizes the investment securities that were pledged as collateral at
June 30, 2018
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Public deposits
|
|
$
|
88,083
|
|
|
$
|
60,415
|
|
|
Securities sold under repurchase agreements
|
|
22,999
|
|
|
19,485
|
|
|
Total pledged securities
|
|
$
|
111,082
|
|
|
$
|
79,900
|
|
3. Loans Held-for-Sale
Residential mortgage loans held-for-sale are carried at fair value and SBA and indirect automobile loans held-for-sale are carried at the lower of cost or fair value. The following table summarizes loans held-for-sale at
June 30, 2018
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Residential mortgage
|
|
$
|
399,630
|
|
|
$
|
269,140
|
|
|
SBA
|
|
20,056
|
|
|
13,615
|
|
|
Indirect automobile
|
|
25,000
|
|
|
75,000
|
|
|
Total loans held-for-sale
|
|
$
|
444,686
|
|
|
$
|
357,755
|
|
During each of
the six months ended June 30, 2018
, and
2017
, the Company transferred loans with unpaid principal balances of
$2.0 million
to the held for investment residential mortgage portfolio.
The Company had residential mortgage loans held-for-sale with unpaid principal balances of
$256.3 million
and
$154.2 million
pledged to the FHLB at
June 30, 2018
, and
December 31, 2017
, respectively.
4. Loans
Loans outstanding, by class, are summarized in the following table at carrying value and include net unamortized costs of
$34.3 million
and
$35.9 million
at
June 30, 2018
, and
December 31, 2017
, respectively. Acquired loans represent previously acquired loans including
$2.3 million
in loans covered under Loss Share Agreements with the FDIC at
December 31, 2017
. On June 27, 2018, the Bank entered into an agreement with the Federal Deposit Insurance Corporation (the "FDIC") to terminate the loss share agreements entered into with the FDIC in 2011 and 2012. Fidelity made a cash payment, previously accrued, of approximately
$632,000
to the FDIC as consideration for the early termination of the agreements. As a result, at
June 30, 2018
there were
no
loans covered by Loss Share Agreements.
Legacy loans represent existing portfolio loans originated by the Bank prior to each acquisition, additional loans originated subsequent to each acquisition and Government National Mortgage Association ("GNMA") optional repurchase loans (collectively, “legacy loans”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Loans
|
|
|
|
(in thousands)
|
|
Legacy
|
|
Acquired
|
|
Total
|
|
Commercial
|
|
$
|
819,266
|
|
|
$
|
118,937
|
|
|
$
|
938,203
|
|
|
SBA
|
|
139,440
|
|
|
7,068
|
|
|
146,508
|
|
|
Total commercial loans
|
|
958,706
|
|
|
126,005
|
|
|
1,084,711
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
266,990
|
|
|
2,340
|
|
|
269,330
|
|
|
|
|
|
|
|
|
|
|
Indirect automobile
|
|
1,698,879
|
|
|
—
|
|
|
1,698,879
|
|
|
Installment loans and personal lines of credit
|
|
30,612
|
|
|
1,195
|
|
|
31,807
|
|
|
Total consumer loans
|
|
1,729,491
|
|
|
1,195
|
|
|
1,730,686
|
|
|
Residential mortgage
|
|
533,869
|
|
|
21,767
|
|
|
555,636
|
|
|
Home equity lines of credit
|
|
138,527
|
|
|
13,996
|
|
|
152,523
|
|
|
Total mortgage loans
|
|
672,396
|
|
|
35,763
|
|
|
708,159
|
|
|
Total loans
|
|
$
|
3,627,583
|
|
|
$
|
165,303
|
|
|
$
|
3,792,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Loans
|
|
|
|
(in thousands)
|
|
Legacy
|
|
Acquired
|
|
Total
|
|
Commercial
|
|
$
|
675,544
|
|
|
$
|
135,655
|
|
|
$
|
811,199
|
|
|
SBA
|
|
133,186
|
|
|
8,022
|
|
|
141,208
|
|
|
Total commercial loans
|
|
808,730
|
|
|
143,677
|
|
|
952,407
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
243,112
|
|
|
5,205
|
|
|
248,317
|
|
|
|
|
|
|
|
|
|
|
Indirect automobile
|
|
1,716,156
|
|
|
—
|
|
|
1,716,156
|
|
|
Installment loans and personal lines of credit
|
|
24,158
|
|
|
1,837
|
|
|
25,995
|
|
|
Total consumer loans
|
|
1,740,314
|
|
|
1,837
|
|
|
1,742,151
|
|
|
Residential mortgage
|
|
461,194
|
|
|
28,527
|
|
|
489,721
|
|
|
Home equity lines of credit
|
|
131,049
|
|
|
17,321
|
|
|
148,370
|
|
|
Total mortgage loans
|
|
592,243
|
|
|
45,848
|
|
|
638,091
|
|
|
Total loans
|
|
$
|
3,384,399
|
|
|
$
|
196,567
|
|
|
$
|
3,580,966
|
|
The Company has extended loans to certain officers and directors. The Company does not believe these loans involve more than the normal risk of collectability or present other unfavorable features when originated. None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at
June 30, 2018
, or
December 31, 2017
.
Nonaccrual Loans
The accrual of interest income is generally discontinued when a loan becomes 90 days past due. Past due status is based on the contractual terms of the loan agreement. A loan may be placed on nonaccrual status sooner if reasonable doubt exists as to the full, timely collection of principal or interest. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest income. If a borrower on a residential mortgage loan previously sold makes no payment for three consecutive months, the Company, as servicer, may exercise its option to repurchase the delinquent loan from its securitized loan pool in an amount equal to 100% of the loan’s remaining principal balance less the principal payments advanced to the pool prior to the buyback, in which case no previously accrued interest would be reversed since the loan was previously sold. Interest advanced to the pool prior to the buyback is capitalized for future reimbursement as part of the government guarantee. Subsequent interest collected on nonaccrual loans is recorded as a principal reduction. Nonaccrual loans are returned to accrual status when all contractually due principal and interest amounts are brought current and the future payments are reasonably assured.
Loans in nonaccrual status are presented by class of loans in the following table. The Company has repurchased certain Government National Mortgage Association (“GNMA”) government-guaranteed loans, which are accounted for in nonaccrual status. The Company’s loss exposure on government-guaranteed loans is mitigated by the government guarantee in whole or in part. Purchased credit impaired (“PCI”) loans are considered to be performing due to the application of the accretion method and are excluded from the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Commercial
|
|
$
|
11,801
|
|
|
$
|
11,314
|
|
|
SBA
|
|
8,404
|
|
|
2,503
|
|
|
Total commercial loans
|
|
20,205
|
|
|
13,817
|
|
|
|
|
|
|
|
|
Construction
|
|
252
|
|
|
4,520
|
|
|
|
|
|
|
|
|
Indirect automobile
|
|
1,526
|
|
|
1,912
|
|
|
Installment loans and personal lines of credit
|
|
419
|
|
|
440
|
|
|
Total consumer loans
|
|
1,945
|
|
|
2,352
|
|
|
Residential mortgage
|
|
31,917
|
|
|
23,169
|
|
|
Home equity lines of credit
|
|
3,708
|
|
|
3,154
|
|
|
Total mortgage loans
|
|
35,625
|
|
|
26,323
|
|
|
Total nonaccrual loans
|
|
$
|
58,027
|
|
|
$
|
47,012
|
|
If such nonaccrual loans had been on a full accrual basis, interest income on these loans for
the three months ended June 30, 2018, and 2017
, would have been
$645,000
and
$494,000
, respectively. For
the six months ended June 30, 2018, and 2017
, the interest income on these loans would have been
$1.2 million
and
$876,000
, respectively. The amount of repurchased GNMA
government-guaranteed loans, primarily residential mortgage loans, included in the table above was
$27.2 million
and
$19.5 million
at
June 30, 2018
, and
December 31, 2017
, respectively.
Accruing loans delinquent
30
-
89
days, 90 days or more, and troubled debt restructured loans (“TDRs”) accruing interest, including PCI loans, presented by class of loans at
June 30, 2018
, and
December 31, 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
|
Accruing
Delinquent
30-89 Days
|
|
Accruing
Delinquent
90 Days or More
|
|
TDRs
Accruing
|
|
Accruing
Delinquent
30-89 Days
|
|
Accruing
Delinquent
90 Days or More
|
|
TDRs
Accruing
|
|
Commercial
|
|
$
|
1,351
|
|
|
$
|
7,362
|
|
|
$
|
8,176
|
|
|
$
|
3,821
|
|
|
$
|
5,722
|
|
|
$
|
8,468
|
|
|
SBA
|
|
890
|
|
|
105
|
|
|
1,439
|
|
|
5,560
|
|
|
70
|
|
|
3,800
|
|
|
Construction
|
|
—
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
Indirect automobile
|
|
2,407
|
|
|
—
|
|
|
1,997
|
|
|
3,971
|
|
|
87
|
|
|
1,960
|
|
|
Installment and personal lines of credit
|
|
185
|
|
|
—
|
|
|
27
|
|
|
449
|
|
|
—
|
|
|
33
|
|
|
Residential mortgage
|
|
1,452
|
|
|
752
|
|
|
323
|
|
|
7,447
|
|
|
268
|
|
|
495
|
|
|
Home equity lines of credit
|
|
229
|
|
|
13
|
|
|
128
|
|
|
831
|
|
|
64
|
|
|
51
|
|
|
Total
|
|
$
|
6,514
|
|
|
$
|
8,278
|
|
|
$
|
12,090
|
|
|
$
|
22,079
|
|
|
$
|
6,313
|
|
|
$
|
14,807
|
|
TDR Loans
During
the three months ended June 30, 2018
, loans in the amount of
$3.4 million
were restructured and were modified for term, and
no
loans were modified for interest. The modified loans were mortgage, indirect automobile and home equity lines of credit. During
the six months ended June 30, 2018
, the amount of loans that were modified for term was
$4.5 million
, which were mortgage, indirect automobile and home equity loans. There were
no
loans modified for interest rate. During
the three months ended June 30, 2017
,
$4.4 million
of loans were modified for term and
$2.6 million
for interest, all of which were commercial loans. During the
the six months ended June 30, 2017
,
$4.4 million
loans were modified for term and
$2.8 million
were modified for interest, all of which were commercial loans. Modified PCI loans are not removed from their accounting pool and accounted for as TDRs, even if those loans would otherwise be deemed TDRs.
During
the three months ended June 30, 2018, and 2017
, the amount of loans which were restructured in the past twelve months and subsequently redefaulted was
$2.3 million
and
$194,000
, respectively. The defaulted loans were commercial, mortgage indirect, and home equity lines of credit. During
the six months ended June 30, 2018, and 2017
,
$2.6 million
and
$198,000
respectively, of loans were restructured and subsequently defaulted, which was comprised of commercial, mortgage, indirect, and HELOCs. The Company defines subsequently redefaulted as a payment default within 12 months of the restructuring date.
The Company had total TDRs with a balance of
$23.5 million
and
$20.7 million
at
June 30, 2018
, and
December 31, 2017
, respectively. There were
no
net charge-offs of TDR loans for
the three and six months ended June 30, 2018
and net charge-offs of
$17,000
and
$60,000
for
the three and six months ended June 30, 2017
. Net charge-offs on such loans are factored into the rolling historical loss rate, which is used in the calculation of the allowance for loan losses.
The Company was not committed to lend additional amounts to customers with outstanding loans classified as TDRs as of
June 30, 2018
or
December 31, 2017
.
Pledged Loans
Presented in the following table is the unpaid principal balance of loans held for investment that were pledged to the Federal Home Loan Bank of Atlanta (“FHLB of Atlanta”) as collateral for borrowings under a blanket lien arrangement at
June 30, 2018
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Commercial
|
|
$
|
305,162
|
|
|
$
|
242,695
|
|
|
Home equity lines of credit
|
|
108,505
|
|
|
94,526
|
|
|
Residential mortgage
|
|
391,109
|
|
|
351,591
|
|
|
Total
|
|
$
|
804,776
|
|
|
$
|
688,812
|
|
Indirect automobile loans with an unpaid principal balance of approximately
$330.0 million
at
June 30, 2018
, and
December 31, 2017
, respectively, were pledged to the Federal Reserve Bank of Atlanta (“FRB”) as collateral for potential Discount Window borrowings under a blanket lien arrangement.
Impaired Loans
The following tables present by class the unpaid principal balance, recorded investment and related allowance for impaired legacy loans and acquired non PCI loans at
June 30, 2018
, and
December 31, 2017
. Legacy impaired loans include all TDRs and all other nonaccrual loans, excluding nonaccrual loans below the Company’s specific review threshold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
|
Unpaid
Principal
Balance
|
|
Recorded
Investment
(1)
|
|
Related
Allowance
|
|
Unpaid
Principal
Balance
|
|
Recorded
Investment
(1)
|
|
Related
Allowance
|
|
Impaired Loans with Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
18,507
|
|
|
$
|
16,570
|
|
|
$
|
795
|
|
|
$
|
11,877
|
|
|
$
|
11,824
|
|
|
$
|
839
|
|
|
SBA
|
|
5,190
|
|
|
3,832
|
|
|
226
|
|
|
6,634
|
|
|
5,664
|
|
|
294
|
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Installment and personal lines of credit
|
|
329
|
|
|
273
|
|
|
210
|
|
|
343
|
|
|
290
|
|
|
219
|
|
|
Residential mortgage
|
|
4,505
|
|
|
4,886
|
|
|
680
|
|
|
4,838
|
|
|
4,799
|
|
|
616
|
|
|
Home equity lines of credit
|
|
1,180
|
|
|
1,049
|
|
|
474
|
|
|
831
|
|
|
745
|
|
|
633
|
|
|
Loans
|
|
$
|
29,711
|
|
|
$
|
26,610
|
|
|
$
|
2,385
|
|
|
$
|
24,523
|
|
|
$
|
23,322
|
|
|
$
|
2,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
|
Unpaid
Principal
Balance
|
|
Recorded
Investment
(1)
|
|
Unpaid
Principal
Balance
|
|
Recorded
Investment
(1)
|
|
Impaired Loans with No Allowance
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,001
|
|
|
$
|
7,002
|
|
|
$
|
14,839
|
|
|
$
|
12,509
|
|
|
SBA
|
|
8,095
|
|
|
6,315
|
|
|
1,815
|
|
|
1,133
|
|
|
Construction
|
|
987
|
|
|
252
|
|
|
5,995
|
|
|
4,520
|
|
|
Installment and personal lines of credit
|
|
1,445
|
|
|
163
|
|
|
1,445
|
|
|
163
|
|
|
Residential mortgage
|
|
30,990
|
|
|
29,696
|
|
|
21,955
|
|
|
21,398
|
|
|
Home equity lines of credit
|
|
2,572
|
|
|
2,412
|
|
|
2,452
|
|
|
2,318
|
|
|
Loans
|
|
$
|
52,090
|
|
|
$
|
45,840
|
|
|
$
|
48,501
|
|
|
$
|
42,041
|
|
(
1)
The primary difference between the unpaid principal balance and recorded investment represents charge-offs previously taken; it excludes accrued interest receivable due to materiality. Related allowance is calculated on the recorded investment, not the unpaid principal balance.
Included in impaired loans with no allowance are
$27.2 million
and
$19.5 million
in government-guaranteed residential mortgage loans at
June 30, 2018
, and
December 31, 2017
, respectively. These loans are collateralized by first mortgages on the underlying real estate collateral and are individually reviewed for a specific allowance.
The average recorded investment in impaired loans and interest income recognized for
the three and six months ended June 30, 2018, and 2017
, by class, are summarized in the table below. Impaired loans include legacy impaired loans, all TDRs and all other nonaccrual loans including GNMA optional repurchase loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
Average
Recorded Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded Investment
|
|
Interest
Income
Recognized
|
|
Commercial
|
|
$
|
23,749
|
|
|
$
|
120
|
|
|
$
|
23,477
|
|
|
$
|
247
|
|
|
SBA
|
|
8,879
|
|
|
161
|
|
|
8,665
|
|
|
89
|
|
|
Construction
|
|
1,614
|
|
|
—
|
|
|
6,072
|
|
|
—
|
|
|
Indirect automobile
|
|
3,099
|
|
|
92
|
|
|
2,425
|
|
|
57
|
|
|
Installment and personal lines of credit
|
|
437
|
|
|
55
|
|
|
451
|
|
|
45
|
|
|
Residential mortgage
|
|
34,487
|
|
|
240
|
|
|
14,920
|
|
|
59
|
|
|
Home equity lines of credit
|
|
3,554
|
|
|
8
|
|
|
2,364
|
|
|
23
|
|
|
Total
|
|
$
|
75,819
|
|
|
$
|
676
|
|
|
$
|
58,374
|
|
|
$
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
Average
Recorded Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded Investment
|
|
Interest
Income
Recognized
|
|
Commercial
|
|
$
|
24,016
|
|
|
$
|
271
|
|
|
$
|
21,816
|
|
|
$
|
386
|
|
|
SBA
|
|
7,654
|
|
|
257
|
|
|
8,857
|
|
|
190
|
|
|
Construction
|
|
3,019
|
|
|
7
|
|
|
6,173
|
|
|
1
|
|
|
Indirect automobile
|
|
3,179
|
|
|
156
|
|
|
2,331
|
|
|
109
|
|
|
Installment and personal lines of credit
|
|
442
|
|
|
101
|
|
|
423
|
|
|
79
|
|
|
Residential mortgage
|
|
32,902
|
|
|
448
|
|
|
14,341
|
|
|
107
|
|
|
Home equity lines of credit
|
|
3,517
|
|
|
27
|
|
|
2,158
|
|
|
39
|
|
|
Total
|
|
$
|
74,729
|
|
|
$
|
1,267
|
|
|
$
|
56,099
|
|
|
$
|
911
|
|
Credit Quality Indicators
The Company uses an asset quality ratings system to assign a numeric indicator of the credit quality and level of existing credit risk inherent in a loan ranging from 1 to 8, where a higher rating represents higher risk. Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with the Company’s internal loan policy. These ratings are adjusted periodically as the Company becomes aware of changes in the credit quality of the underlying loans through its ongoing monitoring of the credit quality of the loan portfolio.
Indirect automobile loans typically receive a risk rating only when being downgraded to an adverse rating which typically occurs when payments of principal and interest are greater than 90 days past due. The Company uses a number of factors, including FICO scoring, to help evaluate the likelihood consumer borrowers will pay their credit obligations as agreed. The weighted-average FICO score for the indirect automobile portfolio was
763
and
762
at
June 30, 2018
, and
December 31, 2017
, respectively.
The following are definitions of the Company's loan rating categories:
•
Pass
– Pass loans include loans rated satisfactory with high, good, average or acceptable business and credit risk.
•
Special Mention
– A special mention loan has potential weaknesses that deserve management’s close attention.
•
Substandard
– A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset has a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.
•
Doubtful
– Doubtful loans have all the weaknesses inherent in assets 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.
•
Loss
– Loss loans are considered uncollectable and of such little value that their continuance as recorded assets is not warranted.
The following tables present the recorded investment in loans, by loan class and risk rating category, as of
June 30, 2018
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
Asset Rating
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Indirect
Automobile
|
|
Installment and Personal Lines of Credit
|
|
Residential
Mortgage
|
|
Home Equity
Lines of Credit
|
|
Total
|
|
Pass
|
|
$
|
888,538
|
|
|
$
|
132,540
|
|
|
$
|
254,293
|
|
|
$
|
—
|
|
|
$
|
31,195
|
|
|
$
|
518,104
|
|
|
$
|
147,894
|
|
|
$
|
1,972,564
|
|
|
Special Mention
|
|
18,885
|
|
|
3,529
|
|
|
14,731
|
|
|
—
|
|
|
108
|
|
|
1,013
|
|
|
619
|
|
|
38,885
|
|
|
Substandard
|
|
30,780
|
|
|
10,439
|
|
|
306
|
|
|
5,130
|
|
|
504
|
|
|
36,519
|
|
|
4,010
|
|
|
87,688
|
|
|
|
|
938,203
|
|
|
146,508
|
|
|
269,330
|
|
|
5,130
|
|
|
31,807
|
|
|
555,636
|
|
|
152,523
|
|
|
2,099,137
|
|
|
Ungraded Performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,693,749
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,693,749
|
|
|
Total
|
|
$
|
938,203
|
|
|
$
|
146,508
|
|
|
$
|
269,330
|
|
|
$
|
1,698,879
|
|
|
$
|
31,807
|
|
|
$
|
555,636
|
|
|
$
|
152,523
|
|
|
$
|
3,792,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2017
|
|
Asset Rating
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Indirect
Automobile
|
|
Installment and Personal Lines of Credit
|
|
Residential
Mortgage
|
|
Home Equity
Lines of Credit
|
|
Total
|
|
Pass
|
|
$
|
758,271
|
|
|
$
|
129,629
|
|
|
$
|
235,987
|
|
|
$
|
—
|
|
|
$
|
25,229
|
|
|
$
|
461,650
|
|
|
$
|
145,082
|
|
|
$
|
1,755,848
|
|
|
Special Mention
|
|
21,264
|
|
|
6,847
|
|
|
7,699
|
|
|
—
|
|
|
231
|
|
|
—
|
|
|
—
|
|
|
36,041
|
|
|
Substandard
|
|
31,664
|
|
|
4,732
|
|
|
4,631
|
|
|
4,972
|
|
|
535
|
|
|
28,071
|
|
|
3,288
|
|
|
77,893
|
|
|
|
|
811,199
|
|
|
141,208
|
|
|
248,317
|
|
|
4,972
|
|
|
25,995
|
|
|
489,721
|
|
|
148,370
|
|
|
1,869,782
|
|
|
Ungraded Performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,711,184
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,711,184
|
|
|
Total
|
|
$
|
811,199
|
|
|
$
|
141,208
|
|
|
$
|
248,317
|
|
|
$
|
1,716,156
|
|
|
$
|
25,995
|
|
|
$
|
489,721
|
|
|
$
|
148,370
|
|
|
$
|
3,580,966
|
|
Acquired Loans
The carrying amount and outstanding balance at
June 30, 2018
, of the PCI loans from acquisitions prior to 2018 was
$23.8 million
and
$31.7 million
, respectively, and
$26.6 million
and
$35.3 million
, respectively, at
December 31, 2017
. There were no loans acquired during the six months ended June 30, 2018.
Changes in the accretable yield, or income expected to be collected on PCI loans, for
the six months ended June 30, 2018, and 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Beginning balance
|
|
$
|
3,005
|
|
|
$
|
4,403
|
|
|
Accretion of income
|
|
(947
|
)
|
|
(1,376
|
)
|
|
Other activity, net
(1)
|
|
880
|
|
|
—
|
|
|
Ending balance
|
|
$
|
2,938
|
|
|
$
|
3,027
|
|
(1)
Includes changes in cash flows expected to be collected due to changes in timing of liquidation events, prepayment assumptions, etc.
5. Allowance for Loan Losses
A summary of changes in the allowance for loan losses (“ALL”) by loan portfolio type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Consumer
|
|
Mortgage
|
|
Unallocated
|
|
Total
|
|
Beginning balance
|
|
$
|
9,737
|
|
|
$
|
1,980
|
|
|
$
|
2,600
|
|
|
$
|
10,359
|
|
|
$
|
6,264
|
|
|
$
|
—
|
|
|
$
|
30,940
|
|
|
Charge-offs
|
|
(613
|
)
|
|
(134
|
)
|
|
(38
|
)
|
|
(1,386
|
)
|
|
(402
|
)
|
|
—
|
|
|
(2,573
|
)
|
|
Recoveries
|
|
207
|
|
|
26
|
|
|
210
|
|
|
524
|
|
|
3
|
|
|
—
|
|
|
970
|
|
|
Net (charge-offs) / recoveries
|
|
(406
|
)
|
|
(108
|
)
|
|
172
|
|
|
(862
|
)
|
|
(399
|
)
|
|
—
|
|
|
(1,603
|
)
|
|
Provision for loan losses
|
|
867
|
|
|
227
|
|
|
(87
|
)
|
|
211
|
|
|
1,068
|
|
|
—
|
|
|
2,286
|
|
|
Ending balance
|
|
$
|
10,198
|
|
|
$
|
2,099
|
|
|
$
|
2,685
|
|
|
$
|
9,708
|
|
|
$
|
6,933
|
|
|
$
|
—
|
|
|
$
|
31,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Consumer
|
|
Mortgage
|
|
Unallocated
|
|
Total
|
|
Beginning balance
|
|
$
|
9,449
|
|
|
$
|
2,128
|
|
|
$
|
2,322
|
|
|
$
|
9,935
|
|
|
$
|
5,810
|
|
|
$
|
811
|
|
|
$
|
30,455
|
|
|
Charge-offs
|
|
(123
|
)
|
|
—
|
|
|
—
|
|
|
(1,700
|
)
|
|
—
|
|
|
—
|
|
|
(1,823
|
)
|
|
Recoveries
|
|
300
|
|
|
7
|
|
|
383
|
|
|
341
|
|
|
12
|
|
|
—
|
|
|
1,043
|
|
|
Net recoveries / (charge-offs)
|
|
177
|
|
|
7
|
|
|
383
|
|
|
(1,359
|
)
|
|
12
|
|
|
—
|
|
|
(780
|
)
|
|
Provision for loan losses
(1)
|
|
345
|
|
|
(186
|
)
|
|
(341
|
)
|
|
1,689
|
|
|
(132
|
)
|
|
(625
|
)
|
|
750
|
|
|
Ending balance
|
|
$
|
9,971
|
|
|
$
|
1,949
|
|
|
$
|
2,364
|
|
|
$
|
10,265
|
|
|
$
|
5,690
|
|
|
$
|
186
|
|
|
$
|
30,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Consumer
|
|
Mortgage
|
|
Unallocated
|
|
Total
|
|
Beginning balance
|
|
$
|
7,846
|
|
|
$
|
1,968
|
|
|
$
|
2,396
|
|
|
$
|
10,758
|
|
|
$
|
5,928
|
|
|
$
|
876
|
|
|
$
|
29,772
|
|
|
Charge-offs
|
|
(612
|
)
|
|
(240
|
)
|
|
(38
|
)
|
|
(2,820
|
)
|
|
(442
|
)
|
|
—
|
|
|
(4,152
|
)
|
|
Recoveries
|
|
132
|
|
|
30
|
|
|
574
|
|
|
833
|
|
|
18
|
|
|
—
|
|
|
1,587
|
|
|
Net (charge-offs) / recoveries
|
|
(480
|
)
|
|
(210
|
)
|
|
536
|
|
|
(1,987
|
)
|
|
(424
|
)
|
|
—
|
|
|
(2,565
|
)
|
|
Provision for loan losses
|
|
2,832
|
|
|
341
|
|
|
(247
|
)
|
|
937
|
|
|
1,429
|
|
|
(876
|
)
|
|
4,416
|
|
|
Ending balance
|
|
$
|
10,198
|
|
|
$
|
2,099
|
|
|
$
|
2,685
|
|
|
$
|
9,708
|
|
|
$
|
6,933
|
|
|
$
|
—
|
|
|
$
|
31,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Consumer
|
|
Mortgage
|
|
Unallocated
|
|
Total
|
|
Beginning balance
|
|
$
|
9,331
|
|
|
$
|
1,978
|
|
|
$
|
2,176
|
|
|
$
|
9,812
|
|
|
$
|
5,755
|
|
|
$
|
779
|
|
|
$
|
29,831
|
|
|
Charge-offs
|
|
(255
|
)
|
|
(85
|
)
|
|
—
|
|
|
(3,535
|
)
|
|
(41
|
)
|
|
—
|
|
|
(3,916
|
)
|
|
Recoveries
|
|
460
|
|
|
51
|
|
|
589
|
|
|
632
|
|
|
38
|
|
|
—
|
|
|
1,770
|
|
|
Net recoveries / (charge-offs)
|
|
205
|
|
|
(34
|
)
|
|
589
|
|
|
(2,903
|
)
|
|
(3
|
)
|
|
—
|
|
|
(2,146
|
)
|
|
Decrease in FDIC indemnification asset
|
|
(110
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(110
|
)
|
|
Provision for loan losses
(1)
|
|
545
|
|
|
5
|
|
|
(401
|
)
|
|
3,356
|
|
|
(62
|
)
|
|
(593
|
)
|
|
2,850
|
|
|
Ending balance
|
|
$
|
9,971
|
|
|
$
|
1,949
|
|
|
$
|
2,364
|
|
|
$
|
10,265
|
|
|
$
|
5,690
|
|
|
$
|
186
|
|
|
$
|
30,425
|
|
(1)
Net of benefit attributable to FDIC indemnification asset
The following tables present, by loan portfolio type, the balance in the ALL disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Consumer
|
|
Mortgage
|
|
Unallocated
|
|
Total
|
|
Individually evaluated
|
|
$
|
795
|
|
|
$
|
226
|
|
|
$
|
—
|
|
|
$
|
210
|
|
|
$
|
1,154
|
|
|
$
|
—
|
|
|
$
|
2,385
|
|
|
Collectively evaluated
|
|
9,330
|
|
|
1,873
|
|
|
2,660
|
|
|
9,498
|
|
|
5,743
|
|
|
—
|
|
|
29,104
|
|
|
Acquired with deteriorated credit quality
|
|
73
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
134
|
|
|
Total ALL
|
|
$
|
10,198
|
|
|
$
|
2,099
|
|
|
$
|
2,685
|
|
|
$
|
9,708
|
|
|
$
|
6,933
|
|
|
$
|
—
|
|
|
$
|
31,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
|
$
|
23,571
|
|
|
$
|
10,148
|
|
|
$
|
252
|
|
|
$
|
436
|
|
|
$
|
38,043
|
|
|
$
|
—
|
|
|
$
|
72,450
|
|
|
Collectively evaluated
|
|
896,070
|
|
|
135,929
|
|
|
268,730
|
|
|
1,730,239
|
|
|
665,634
|
|
|
—
|
|
|
3,696,602
|
|
|
Acquired with deteriorated credit quality
|
|
18,562
|
|
|
431
|
|
|
348
|
|
|
11
|
|
|
4,482
|
|
|
—
|
|
|
23,834
|
|
|
Total loans
|
|
$
|
938,203
|
|
|
$
|
146,508
|
|
|
$
|
269,330
|
|
|
$
|
1,730,686
|
|
|
$
|
708,159
|
|
|
$
|
—
|
|
|
$
|
3,792,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Commercial
|
|
SBA
|
|
Construction
|
|
Consumer
|
|
Mortgage
|
|
Unallocated
|
|
Total
|
|
Individually evaluated
|
|
$
|
839
|
|
|
$
|
294
|
|
|
$
|
—
|
|
|
$
|
219
|
|
|
$
|
1,249
|
|
|
$
|
—
|
|
|
$
|
2,601
|
|
|
Collectively evaluated
|
|
6,935
|
|
|
1,674
|
|
|
2,371
|
|
|
10,539
|
|
|
4,567
|
|
|
876
|
|
|
26,962
|
|
|
Acquired with deteriorated credit quality
|
|
72
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
112
|
|
|
—
|
|
|
209
|
|
|
Total ALL
|
|
$
|
7,846
|
|
|
$
|
1,968
|
|
|
$
|
2,396
|
|
|
$
|
10,758
|
|
|
$
|
5,928
|
|
|
$
|
876
|
|
|
$
|
29,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
|
$
|
24,333
|
|
|
$
|
6,797
|
|
|
$
|
4,520
|
|
|
$
|
453
|
|
|
$
|
29,260
|
|
|
$
|
—
|
|
|
$
|
65,363
|
|
|
Collectively evaluated
|
|
766,143
|
|
|
133,955
|
|
|
243,344
|
|
|
1,741,635
|
|
|
603,895
|
|
|
—
|
|
|
3,488,972
|
|
|
Acquired with deteriorated credit quality
|
|
20,723
|
|
|
456
|
|
|
453
|
|
|
63
|
|
|
4,936
|
|
|
—
|
|
|
26,631
|
|
|
Total loans
|
|
$
|
811,199
|
|
|
$
|
141,208
|
|
|
$
|
248,317
|
|
|
$
|
1,742,151
|
|
|
$
|
638,091
|
|
|
$
|
—
|
|
|
$
|
3,580,966
|
|
The determination of the overall allowance for credit losses has two components, the allowance for originated loans and the allowance for acquired loans. At
December 31, 2017
, the allowance for originated loans consisted of specific, general and unallocated components. Beginning in 2018, the unallocated component of the allowance for originated loans was reallocated.
The ALL for acquired loans is evaluated at each reporting date subsequent to acquisition. Total loans include acquired loans of
$165.3 million
and
$196.6 million
at
June 30, 2018
, and
December 31, 2017
, respectively, which were recorded at fair value when acquired. For acquired performing loans, an allowance is determined for each loan pool using a methodology similar to that used for originated loans and then compared to the remaining fair value discount for that pool. For PCI loans, decreases in cash flows expected to be collected is generally recognized by recording an allowance for loan losses. Subsequent increases in cash flows result in a reversal of the allowance for loan losses to the extent of prior charges, or in the prospective recognition of interest income.
6. Other Real Estate
The following table segregates the other real estate (“ORE”) by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Commercial
|
|
$
|
1,197
|
|
|
$
|
1,422
|
|
|
Residential
|
|
132
|
|
|
258
|
|
|
Undeveloped property
|
|
5,505
|
|
|
5,941
|
|
|
Total ORE, net
|
|
$
|
6,834
|
|
|
$
|
7,621
|
|
The following table summarizes the changes in ORE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Beginning balance
|
|
$
|
7,668
|
|
|
$
|
11,284
|
|
|
$
|
7,621
|
|
|
$
|
14,814
|
|
|
Transfers of loans to ORE
|
|
—
|
|
|
706
|
|
|
132
|
|
|
1,700
|
|
|
Sales
|
|
(600
|
)
|
|
(2,554
|
)
|
|
(600
|
)
|
|
(6,239
|
)
|
|
Write-downs
|
|
(234
|
)
|
|
(54
|
)
|
|
(319
|
)
|
|
(893
|
)
|
|
Ending balance
|
|
$
|
6,834
|
|
|
$
|
9,382
|
|
|
$
|
6,834
|
|
|
$
|
9,382
|
|
At
June 30, 2018
, and
December 31, 2017
, the recorded investment of residential mortgage loans formally in the process of foreclosure proceedings was approximately
$3.7 million
and
$3.0 million
, respectively. Of these amounts,
$2.9 million
and
$2.1 million
, respectively, are residential mortgage loans where the Company has the intent to convey the property to the respective government agency guaranteeing the loan. Upon foreclosure, a separate other receivable in the amount expected to be recovered from the guarantee will be recognized and reported as part of other assets in the accompanying Consolidated Balance Sheets.
7. Fair Value of Financial Instruments
Valuation Methodologies and Fair Value Hierarchy
The primary financial instruments that the Company carries at fair value include investment securities available-for-sale, derivative financial instruments used to hedge the value of its mortgage pipeline and mortgage loans held for sale portfolio including Interest Rate Lock Commitments (“IRLCs”), and residential mortgage loans held-for-sale.
Debt securities issued by U.S. Government corporations and agencies, debt securities issued by U.S. states and political subdivisions, and agency residential and commercial mortgage-backed securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent third party pricing service. We have processes in place to evaluate such third party pricing services to ensure information obtained and valuation techniques are appropriate. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.
The fair value of mortgage loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The fair value measurements consider observable data that may include market trade pricing from brokers and investors and the mortgage-backed security markets. As such, the Company classifies these loans as Level 2.
The Company classifies IRLCs on residential mortgage loans held-for-sale, which are derivatives under GAAP, on a gross basis within other assets or other liabilities. The fair value of these commitments, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. These “pull-through” rates are based on both the Company’s historical data and the current interest rate environment and reflect the Company’s best estimate of the likelihood that a commitment will ultimately result in a closed loan. The loan servicing value is also included in the fair value of IRLCs. Because these inputs are not transparent in market trades, IRLCs are considered to be Level 3 assets.
Derivative financial instruments are primarily transacted in the secondary mortgage and institutional dealer markets and priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For purposes of valuation adjustments to its derivative positions, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit if applicable. To date, no material losses due to a counterparty’s inability to pay any net uncollateralized position have occurred. Derivative financial instruments are considered to be Level 3.
The credit risk associated with the underlying cash flows of an instrument carried at fair value was a consideration in estimating the fair value of certain financial instruments. Credit risk was considered in the valuation through a variety of inputs, as applicable, including, the actual default and loss severity of the collateral, and level of subordination. The assumption used to estimate credit risk applied relevant information that a market participant would likely use in valuing an instrument. Because mortgage loans held-for-sale are generally sold within several weeks of origination, they are unlikely to demonstrate any of the credit weaknesses discussed above and as a result, the amount of any credit related adjustments to fair value during
the three and six months ended June 30, 2018, and 2017
, was insignificant.
Recurring Fair Value Measurements
The following tables present certain information regarding the financial assets measured at fair value on a recurring basis by level within the fair value hierarchy based on the inputs used to estimate the fair value at the measurement date. There were no transfers between Levels 1, 2, and 3, during
the three and six months ended June 30, 2018, and 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
(in thousands)
|
|
Total Fair Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Investment securities available-for-sale
|
|
$
|
148,155
|
|
|
$
|
—
|
|
|
$
|
148,155
|
|
|
$
|
—
|
|
|
Mortgage loans held-for-sale
|
|
399,630
|
|
|
—
|
|
|
399,630
|
|
|
—
|
|
|
Other assets
(1)
|
|
7,126
|
|
|
—
|
|
|
—
|
|
|
7,126
|
|
|
Other liabilities
(1)
|
|
(2,138
|
)
|
|
—
|
|
|
—
|
|
|
(2,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
(in thousands)
|
|
Total Fair Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Investment securities available-for-sale
|
|
$
|
120,121
|
|
|
$
|
—
|
|
|
$
|
120,121
|
|
|
$
|
—
|
|
|
Mortgage loans held-for-sale
|
|
269,140
|
|
|
—
|
|
|
269,140
|
|
|
—
|
|
|
Other assets
(1)
|
|
4,168
|
|
|
—
|
|
|
—
|
|
|
4,168
|
|
|
Other liabilities
(1)
|
|
(691
|
)
|
|
—
|
|
|
—
|
|
|
(691
|
)
|
(1)
Includes mortgage-related IRLCs and derivative financial instruments to hedge interest rate risk. IRLCs are recorded on a gross basis.
The following table presents a reconciliation of all other assets and other liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during
the three and six months ended June 30, 2018, and 2017
. The changes in the fair value of economic hedges were recorded in noninterest income from mortgage banking activities in the Consolidated Statements of Comprehensive Income and are designed to partially offset the change in fair value of the derivative financial instruments referenced in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
Other
Assets
(1)
|
|
Other
Liabilities
(1)
|
|
Other
Assets
(1)
|
|
Other
Liabilities
(1)
|
|
Beginning balance
|
|
$
|
7,580
|
|
|
$
|
(1,641
|
)
|
|
$
|
8,025
|
|
|
$
|
(2,349
|
)
|
|
Total gains / (losses) included in earnings:
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
7,126
|
|
|
(2,138
|
)
|
|
7,181
|
|
|
(560
|
)
|
|
Settlements and closed loans
|
|
(7,611
|
)
|
|
1,641
|
|
|
(8,145
|
)
|
|
2,349
|
|
|
Expirations
|
|
31
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
Ending balance
|
|
$
|
7,126
|
|
|
$
|
(2,138
|
)
|
|
$
|
7,181
|
|
|
$
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Six Months Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
Other
Assets
(1)
|
|
Other
Liabilities
(1)
|
|
Other
Assets
(1)
|
|
Other
Liabilities
(1)
|
|
Beginning balance
|
|
$
|
4,168
|
|
|
$
|
(691
|
)
|
|
$
|
7,111
|
|
|
$
|
(1,065
|
)
|
|
Total gains / (losses) included in earnings:
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
14,706
|
|
|
(3,779
|
)
|
|
15,206
|
|
|
(2,909
|
)
|
|
Settlements and closed loans
|
|
(11,779
|
)
|
|
2,332
|
|
|
(15,383
|
)
|
|
3,414
|
|
|
Expirations
|
|
31
|
|
|
—
|
|
|
247
|
|
|
—
|
|
|
Ending balance
|
|
$
|
7,126
|
|
|
$
|
(2,138
|
)
|
|
$
|
7,181
|
|
|
$
|
(560
|
)
|
(1)
Includes mortgage-related IRLCs and derivative financial instruments entered to hedge interest rate risk
Nonrecurring Fair Value Measurements
Certain financial assets held by the Company are not included in the tables above, but are measured at fair value on a nonrecurring basis. The following tables present the assets that had changes in their recorded fair value and still held at the end of the reporting period by level within the fair value hierarchy based on the inputs used to estimate the fair value at the measurement date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
(in thousands)
|
|
Total Fair Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans
|
|
$
|
20,136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,136
|
|
|
ORE, net
|
|
479
|
|
|
—
|
|
|
—
|
|
|
479
|
|
|
Residential mortgage servicing rights
|
|
45,055
|
|
|
—
|
|
|
—
|
|
|
45,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
(in thousands)
|
|
Total Fair Value
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans
|
|
$
|
23,257
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,257
|
|
|
ORE, net
|
|
4,993
|
|
|
—
|
|
|
—
|
|
|
4,993
|
|
|
Residential mortgage servicing rights
|
|
57,895
|
|
|
—
|
|
|
—
|
|
|
57,895
|
|
|
SBA servicing rights
|
|
1,027
|
|
|
—
|
|
|
—
|
|
|
1,027
|
|
Quantitative Information about Level 3 Fair Value Measurements
The following table shows the valuation technique and range, including weighted average, of the significant unobservable inputs and assumptions used in the fair value measurement of the Company’s Level 3 assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range/Weighted
Average at
June 30, 2018
|
|
Range/Weighted
Average at
December 31, 2017
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
20,136
|
|
|
$
|
23,257
|
|
|
Appraised value
less
estimated
selling costs
|
|
Estimated
selling costs
|
|
0% - 10.00%
10.00%
|
|
0% - 10.00%
10.00%
|
|
Other real estate
|
|
479
|
|
|
4,993
|
|
|
Discounted appraisals
less
estimated
selling costs
|
|
Estimated
selling costs
|
|
0% - 10.00%
9.57%
|
|
0% - 10.00%
9.61%
|
|
Residential mortgage servicing rights
|
|
45,055
|
|
|
57,895
|
|
|
Discounted
cash flows
|
|
Discount rate
|
|
10.14% - 11.63%
10.46%
|
|
9.64% - 11.13%
9.95%
|
|
|
|
|
|
|
|
|
|
Modeled prepayment
speeds
|
|
6.51% - 12.71%
6.78%
|
|
7.60% - 15.75%
8.19%
|
|
SBA servicing rights
|
|
—
|
|
|
1,027
|
|
|
Discounted
cash flows
|
|
Discount rate
|
|
N/A
|
|
13.12%
|
|
|
|
|
|
|
|
|
|
Modeled prepayment
speeds
|
|
N/A
|
|
11.33%
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
6,193
|
|
|
3,439
|
|
|
Pricing
model
|
|
Modeled pull-through
ratio
|
|
84.91%
|
|
84.50%
|
|
Forward commitments
|
|
(1,205
|
)
|
|
38
|
|
|
Investor
pricing
|
|
Pricing spreads
|
|
99.31% - 105.21%
101.99%
|
|
90.00% - 104.94%
102.64%
|
The tables above exclude the initial measurement of assets and liabilities that were acquired as part of acquisitions accounted for as business combinations. These assets and liabilities were recorded at their fair value upon acquisition and were not remeasured during the periods presented unless specifically required by GAAP. Acquisition date fair values represent either Level 2 fair value measurements (investment securities, ORE, property, equipment and borrowings) or Level 3 fair value measurements (loans, deposits and core deposit intangible asset).
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value less estimated selling costs. A loan is considered impaired if it is probable that the Company will be unable to collect all amounts contractually due according to the terms of the loan agreement. Measuring the impairment of loans using the present value of expected future cash flows, discounted at the loan’s effective interest rate, is not considered a fair value measurement. For collateral-dependent loans, fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may include real estate or business assets, including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on appraisals prepared by qualified licensed appraisers ordered by the Company’s internal appraisal department, which is independent of the Company’s lending function. If significant, the value of business equipment is based on an appraisal by qualified licensed appraisers ordered by the Company; otherwise, the equipment’s net book value on the business’s financial statements is the basis for the value of business equipment. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.
Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to ORE, which becomes the new carrying value of the ORE. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based on independent market prices, appraised values of the collateral, sales agreements, or management’s estimation of the value of the collateral using market data including recent sales activity for similar assets in the property’s market. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the property. Management continues to evaluate the appropriateness of appraised values on at least an annual basis.
Mortgage and SBA servicing rights are initially recorded at fair value when loans are sold with servicing retained. These assets are then amortized in proportion to and over the period of estimated net servicing income. On at least a quarterly basis, these servicing assets are assessed for impairment based on fair value. Management uses a model operated and maintained by an independent third party to assist in determining fair value which stratifies the servicing portfolio into homogeneous subsets with unique behavior characteristics. The model then converts those characteristics into income and expense streams, adjusts those streams for estimated prepayments, present values the adjusted streams, and combines the present values into a total. If the cost basis of any loan stratification tranche is higher than the present value of the tranche, an impairment is recorded. Management periodically obtains an independent review of the valuation assumptions to validate the fair value estimate and the reasonableness of the assumptions used in measuring fair value. See Note 10 for additional disclosures related to assumptions used in the fair value calculation for mortgage and SBA servicing rights.
Management makes certain estimates and assumptions related to costs to service varying types of loans and pools of loans, prepayment speeds, the projected lives of loans and pools of loans sold servicing retained, and discount factors used in calculating the present values of servicing fees projected to be received. Management periodically obtains an independent review of the valuation assumptions to validate the fair value estimate and the reasonableness of the assumptions used in measuring fair value.
No less frequently than quarterly, management reviews the status of mortgage loans held-for-sale for which the fair value option has been elected. Management also evaluates pools of servicing assets at least quarterly to determine if there is any impairment to those assets due to such factors as earlier than estimated repayments or significant prepayments. Any impairment identified in these servicing assets results in reductions in their carrying values through a valuation allowance and a corresponding decrease in servicing income.
The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the pull-through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLCs is positive (negative) if the prevailing interest rate is lower (higher) than the IRLCs rate. Therefore, an increase in the pull-through ratio (i.e., higher percentage of loans are estimated to close) will result in the fair value of the IRLCs increasing if in a gain position, or decreasing if in a loss position. The pull-through ratio is largely dependent on the processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull-through ratio is estimated based on calculations provided by the secondary marketing department using historical data. The estimated pull-through ratio is periodically reviewed by the Company’s Secondary Marketing Department of the Mortgage Banking Division for reasonableness.
Forward commitments are instruments that are used to hedge the value of the IRLCs and mortgage loans held-for-sale. The Company takes investor commitments to sell a loan or pool of newly originated loans to an investor for an agreed upon price for delivery in the future. This type of forward commitment is also known as a mandatory commitment. Generally, the fair value of a forward commitment is negative (positive) if the prevailing interest rate is lower (higher) than the current commitment interest rate. The value of these commitments is ultimately determined by the investor that sold the commitment and represents a significant unobservable input used in the fair value measurement of the Company’s forward commitments.
Fair Value Option
The Company records mortgage loans held-for-sale at fair value. The Company chose to fair value these mortgage loans held-for-sale to align results with the underlying economic changes in value of the loans and related hedge instruments. Interest income on residential mortgage loans held-for-sale is recorded on an accrual basis in the Consolidated Statements of Comprehensive Income under the heading “Interest Income: Loans, including fees.”
The servicing value is included in the fair value of the mortgage loans held-for-sale and initially recognized at the time the Company enters into IRLCs with borrowers. The mark-to-market adjustments related to loans held-for-sale and the associated economic hedges are reported as part of noninterest income from mortgage banking activities in the consolidated statements of comprehensive income.
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held-for-sale for which the fair value option (“FVO”) has been elected as of
June 30, 2018
, and
December 31, 2017
. There were no
loans held-for-sale that were
90
days or more past due or in nonaccrual status at
June 30, 2018
or
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Aggregate Fair Value
June 30, 2018
|
|
Aggregate Unpaid
Principal Balance at June 30, 2018
|
|
Aggregate Fair Value Over
Unpaid Principal
|
|
Residential mortgage loans held-for-sale
|
|
$
|
399,630
|
|
|
$
|
389,859
|
|
|
$
|
9,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Aggregate Fair Value
December 31, 2017
|
|
Aggregate Unpaid
Principal Balance at December 31, 2017
|
|
Aggregate Fair Value Over
Unpaid Principal
|
|
Residential mortgage loans held-for-sale
|
|
$
|
269,140
|
|
|
$
|
262,315
|
|
|
$
|
6,825
|
|
Net fair value gains related to mortgage banking activities for items measured at fair value pursuant to election of FVO for
the three months ended June 30, 2018, and 2017
, were
$3.1 million
and
$1.4 million
, respectively, and
$2.9 million
and
$4.7 million
for the
the six months ended June 30, 2018, and 2017
, respectively.
Fair Value of Financial Instruments
The estimated fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. In cases where quoted market prices for the Company’s various financial instruments are not available, fair values are based on settlements using present value or other valuation techniques. Those techniques are significantly affected by the imprecision in estimating unobservable inputs and the assumptions used, including the discount rate and estimates of future cash flows. While the Company believes its valuation methods are appropriate, the derived fair value estimates cannot be substantiated by comparison to independent markets, and, in many cases, could not be realized in immediate settlement of the instruments. In that regard, the aggregate fair value amounts presented in the tables below do not represent the underlying value of the Company.
The following tables include the carrying amount and estimated fair value, as well as the level within the fair value hierarchy, of the Company’s financial instruments. The fair value estimates presented are based upon relevant information available to management as of
June 30, 2018
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2018
|
|
(in thousands)
|
|
Carrying
Amount
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Fair
Value
|
|
Financial instruments (assets):
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
157,586
|
|
|
$
|
157,586
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
157,586
|
|
|
Investment securities available-for-sale
|
|
148,155
|
|
|
—
|
|
|
148,155
|
|
|
—
|
|
|
148,155
|
|
|
Investment securities held-to-maturity
|
|
20,984
|
|
|
—
|
|
|
16,480
|
|
|
3,953
|
|
|
20,433
|
|
|
Total loans, net
(1)
|
|
4,205,949
|
|
|
—
|
|
|
399,630
|
|
|
3,534,532
|
|
|
3,934,162
|
|
|
Financial instruments (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
1,225,657
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,225,657
|
|
|
$
|
1,225,657
|
|
|
Interest-bearing deposits
|
|
2,843,973
|
|
|
—
|
|
|
—
|
|
|
2,842,108
|
|
|
2,842,108
|
|
|
Short-term borrowings
|
|
237,886
|
|
|
—
|
|
|
237,886
|
|
|
—
|
|
|
237,886
|
|
|
Subordinated debt
|
|
120,620
|
|
|
—
|
|
|
112,226
|
|
|
—
|
|
|
112,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
(in thousands)
|
|
Carrying
Amount
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Fair
Value
|
|
Financial instruments (assets):
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
186,302
|
|
|
$
|
186,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
186,302
|
|
|
Investment securities available-for-sale
|
|
120,121
|
|
|
—
|
|
|
120,121
|
|
|
—
|
|
|
120,121
|
|
|
Investment securities held-to-maturity
|
|
21,689
|
|
|
—
|
|
|
17,684
|
|
|
4,001
|
|
|
21,685
|
|
|
Total loans, net
(1)
|
|
3,908,949
|
|
|
—
|
|
|
269,140
|
|
|
3,466,839
|
|
|
3,735,979
|
|
|
Financial instruments (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
1,125,598
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,125,598
|
|
|
$
|
1,125,598
|
|
|
Interest-bearing deposits
|
|
2,741,602
|
|
|
—
|
|
|
—
|
|
|
2,739,204
|
|
|
2,739,204
|
|
|
Short-term borrowings
|
|
150,580
|
|
|
—
|
|
|
150,580
|
|
|
—
|
|
|
150,580
|
|
|
Subordinated debt
|
|
120,587
|
|
|
—
|
|
|
114,402
|
|
|
—
|
|
|
114,402
|
|
(1)
Includes
$399,630
and
$269,140
in residential mortgage loans held-for-sale at
June 30, 2018
, and
December 31, 2017
, respectively, for which the Company has elected FVO.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents reasonably approximates the fair values of those assets. For investment securities, fair value equals quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or dealer quotes.
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the remaining maturities using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans along with a market risk premium and liquidity discount.
Fair value for significant nonperforming loans is estimated taking into consideration recent external appraisals of the underlying collateral for loans that are collateral dependent. If appraisals are not available or if the loan is not collateral dependent, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.
The fair value of deposits with no stated maturities, such as noninterest-bearing demand deposits, savings, interest-bearing demand, and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows based on the discount rates currently offered for deposits of similar remaining maturities.
The fair value of the Company’s borrowings is estimated based on the quoted market price for the same or similar issued or on the current rates offered for debt of the same remaining maturities.
For off-balance sheet instruments, fair values are based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing for loan commitments and letters of credit. Fees related to these instruments were immaterial at
June 30, 2018
, and
December 31, 2017
, and the carrying amounts represent a reasonable approximation of their fair values. Loan commitments, letters and lines of credit, and similar obligations typically have variable interest rates and clauses that deny funding if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the foregoing schedule.
8. Derivative Financial Instruments
The Company uses derivative financial instruments to hedge the value of its mortgage pipeline and its mortgage loans held for sale. These instruments are not designated as hedges and are not speculative in nature.
(Losses)/gains
of
$(950,000)
and
$945,000
were recorded for
the three months ended June 30, 2018, and 2017
, respectively, and gains of
$1.5 million
and
$575,000
were recorded for
the six months ended June 30, 2018, and 2017
, respectively, for all mortgage-related derivatives, and are included in the Consolidated Statements of Comprehensive Income as part of noninterest income from mortgage banking activities.
Derivatives contracts are used to help offset changes in fair value and are written in amounts referred to as notional amounts. Notional amounts provide a basis for calculating payments between counterparties but do not represent amounts to be exchanged between the parties, and are not a measure of financial risk. The notional amounts of the Company’s derivative positions at
June 30, 2018
, and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract or Notional Amount as of
|
|
(in thousands)
|
June 30,
2018
|
|
December 31,
2017
|
|
Forward rate commitments
|
$
|
637,605
|
|
|
$
|
430,389
|
|
|
Interest rate lock commitments
|
301,525
|
|
|
172,293
|
|
|
Total derivatives contracts
|
$
|
939,130
|
|
|
$
|
602,682
|
|
The Company’s derivative contracts are not subject to master netting arrangements.
9. Earnings Per Common Share
Earnings per common share (“EPS”) were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
(in thousands, except per share data )
|
|
2018
|
|
2017
|
|
Net income
|
|
$
|
9,390
|
|
|
$
|
8,892
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
(1)
|
|
27,093
|
|
|
26,433
|
|
|
Effect of dilutive stock options
(2)
|
|
129
|
|
|
114
|
|
|
Weighted average common shares outstanding – diluted
|
|
27,222
|
|
|
26,547
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.34
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
($ in thousands, except per share data)
|
|
2018
|
|
2017
|
|
Net income
|
|
$
|
21,157
|
|
|
$
|
19,419
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
(1)
|
|
27,053
|
|
|
26,384
|
|
|
Effect of dilutive stock options
(2)
|
|
112
|
|
|
128
|
|
|
Weighted average common shares outstanding – diluted
|
|
27,165
|
|
|
26,512
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
Basic
|
|
$
|
0.78
|
|
|
$
|
0.74
|
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
(1)
Includes participating securities related to unvested restricted stock awards, net of forfeitures during the period, if any
(2)
Effect of dilutive stock options includes the dilutive effect of additional potential common shares issuable under contracts outstanding during each respective period
As of
June 30, 2018
, and
2017
, there were
529,999
and
562,500
common stock options, respectively, that were excluded as potentially dilutive. These shares were not included in the computation of diluted EPS because they were anti-dilutive in the period (i.e., the options’ exercise price was greater than the average market price of the common shares).
10. Certain Transfers of Financial Assets
Servicing rights
The Company sells certain residential mortgage loans, SBA loans and indirect automobile loans to third parties. All such transfers are accounted for as sales and the continuing involvement in the loans sold is limited to certain servicing responsibilities. Loan servicing rights are initially recorded at fair value and subsequently recorded at the lower of cost or fair value and are amortized over the remaining service life of the loans, with consideration given to prepayment assumptions. The carrying value of the loan servicing rights assets is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Loan servicing rights
|
|
|
|
|
|
Residential mortgage
|
|
$
|
114,781
|
|
|
$
|
100,679
|
|
|
SBA
|
|
4,658
|
|
|
4,818
|
|
|
Indirect automobile
|
|
6,265
|
|
|
7,118
|
|
|
Total servicing rights
|
|
$
|
125,704
|
|
|
$
|
112,615
|
|
Residential Mortgage Loans
The Company typically sells certain first-lien residential mortgage loans to third party investors, primarily Fannie Mae, Ginnie Mae, and Freddie Mac. The Company retains the related mortgage servicing rights (“MSRs”) and receives servicing fees on certain of these loans. During
the three months ended June 30, 2018, and 2017
, the Company sold
$681.8 million
and
$573.8 million
in residential mortgage loans, respectively, with servicing retained. During each of
the six months ended June 30, 2018, and 2017
, the Company sold
$1.1 billion
in residential mortgage loans with servicing retained.
The net gain on loan sales, MSRs amortization and recoveries/impairment, and ongoing servicing fees on the portfolio of loans serviced for others are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from mortgage banking activities. During
the three months ended June 30, 2018, and 2017
, the Company recorded gains on sales of residential mortgage loans of
$20.3 million
and
$21.4 million
, respectively. During
the six months ended June 30, 2018, and 2017
, the Company recorded gains on sales of residential mortgage loans of
$37.9 million
and
$40.0 million
, respectively.
During
the three months ended June 30, 2018, and 2017
, the Company recorded servicing fee income of
$6.2 million
and
$5.4 million
, respectively. During
the six months ended June 30, 2018, and 2017
, the Company recorded servicing fee income of
$12.4 million
and
$10.7 million
, respectively. Servicing fee income includes servicing fees, late fees and ancillary fees earned for each period.
The table below is an analysis of the activity in the Company’s MSRs and impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Residential mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
Beginning carrying value, net
|
|
$
|
107,943
|
|
|
$
|
91,387
|
|
|
$
|
100,679
|
|
|
$
|
86,131
|
|
|
Additions
|
|
9,485
|
|
|
7,331
|
|
|
15,631
|
|
|
13,756
|
|
|
Amortization
|
|
(3,331
|
)
|
|
(3,332
|
)
|
|
(6,757
|
)
|
|
(6,490
|
)
|
|
Recoveries / (impairment), net
(1)
|
|
684
|
|
|
(636
|
)
|
|
5,228
|
|
|
1,353
|
|
|
Ending carrying value, net
|
|
$
|
114,781
|
|
|
$
|
94,750
|
|
|
$
|
114,781
|
|
|
$
|
94,750
|
|
(1)
Principally reflects changes in market interest rates and prepayment speeds, both of which affect future cash flow projections
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Residential mortgage servicing impairment
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,274
|
|
|
$
|
7,163
|
|
|
$
|
9,818
|
|
|
$
|
9,152
|
|
|
Additions
|
|
75
|
|
|
2,304
|
|
|
75
|
|
|
2,361
|
|
|
Recoveries
|
|
(759
|
)
|
|
(1,668
|
)
|
|
(5,303
|
)
|
|
(3,714
|
)
|
|
Ending balance
|
|
$
|
4,590
|
|
|
$
|
7,799
|
|
|
$
|
4,590
|
|
|
$
|
7,799
|
|
The fair value of MSRs, key metrics, and the sensitivity of the fair value to adverse changes in model inputs and/or assumptions are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Residential Mortgage Servicing Rights
|
|
|
|
|
|
Fair Value
|
|
$
|
121,112
|
|
|
$
|
103,725
|
|
|
Composition of residential loans serviced for others:
|
|
|
|
|
|
Fixed-rate
|
|
99.57
|
%
|
|
99.55
|
%
|
|
Adjustable-rate
|
|
0.43
|
%
|
|
0.45
|
%
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
|
Remaining term (years)
|
|
25.7
|
|
|
25.7
|
|
|
Modeled prepayment speed
|
|
6.78
|
%
|
|
8.19
|
%
|
|
Decline in fair value due to a 10% adverse change
|
|
$
|
(3,550
|
)
|
|
$
|
(3,497
|
)
|
|
Decline in fair value due to a 20% adverse change
|
|
(6,952
|
)
|
|
(6,796
|
)
|
|
Weighted average discount rate
|
|
10.46
|
%
|
|
9.95
|
%
|
|
Decline in fair value due to a 10% adverse change
|
|
$
|
(5,535
|
)
|
|
$
|
(4,299
|
)
|
|
Decline in fair value due to a 20% adverse change
|
|
(10,638
|
)
|
|
(8,223
|
)
|
As demonstrated in the table above, the Company’s methodology is highly sensitive to changes in model inputs and/or assumptions. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the fair value of the MSRs is calculated without changing any other input or assumptions. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
Information about the asset quality of residential mortgage loans serviced by the Company is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans serviced
|
|
June 30, 2018
|
|
Net Charge-offs
for the Six
Months Ended
June 30, 2018
|
|
|
|
Unpaid
Principal
Balance
|
|
Delinquent (days)
|
|
|
(in thousands)
|
|
|
30 to 89
|
|
90+
|
|
|
Serviced for others
|
|
$
|
9,450,326
|
|
|
$
|
17,573
|
|
|
$
|
16,463
|
|
|
$
|
—
|
|
|
Held-for-sale
(1)
|
|
389,859
|
|
|
371
|
|
|
—
|
|
|
—
|
|
|
Held-for-investment
(2)
|
|
556,801
|
|
|
2,522
|
|
|
21,705
|
|
|
—
|
|
|
Total residential mortgage loans serviced
|
|
$
|
10,396,986
|
|
|
$
|
20,466
|
|
|
$
|
38,168
|
|
|
$
|
—
|
|
(1)
There were
no
loans held-for-sale that were 90+ days past due recorded under the fair value option for mortgage loans held-for-sale. There were
no
applicable discounts for loans held-for-sale that were 30-89 days past due.
(2)
Delinquent loans held-for-investment include repurchased loans covered by government agency guarantees that were 30-89 days past due and 90+ days past due of
$1,147
and
$17,663
, respectively.
Loans serviced for others are not included in the Consolidated Balance Sheets as they are not assets of the Company.
Mortgage Recourse Liability
During the last five years ended
June 30, 2018
, the Company has sold approximately
49,000
loans with a principal balance of approximately
$12.2 billion
. Purchasers generally have recourse to return a sold loan to the Company under limited circumstances. As seller, the Company has made various representations and warranties related to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance with origination criteria established by the purchasers. In the event of a breach of these representations and warranties, the Company is obligated to repurchase loans with identified defects and/or to indemnify the purchasers. Some of these conditions include underwriting errors or omissions, fraud or material misstatements, and invalid collateral values. The contractual obligation arises only when the breach of representations and warranties is discovered and repurchase/indemnification is demanded. Generally, the maximum amount the Company would be required to pay would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers, plus accrued interest, return of the premium received at the time of the loan sale, and reimbursement of certain expenses. To date, the claims to the Company from the purchasers to be paid upon repurchase or paid because of indemnification have been insignificant. In addition, the Company’s loan sale contracts define a condition in which the borrower defaults during a short period of time as an early payment default (“EPD”). In the event of an EPD, the Company
may be required to return the premium paid for the loan, pay certain administrative fees, and may be required to repurchase the loan or indemnify the purchaser unless an EPD waiver is obtained. The Company also makes a number of representations and warranties that it will service the originated loans in accordance with investor servicing guidelines and standards.
Management recognizes the potential risk from costs related to breaches of representations and warranties made in connection with residential loan sales and subsequent required repurchases, indemnifications, and EPD claims. As a result, the Company has established a liability to cover potential costs related to these events based on historical experience, adjusted for any risk factors not captured in the historical losses, current business volume, and known claims outstanding. The recourse liability totaled
$1.4 million
at
June 30, 2018
, and
December 31, 2017
, respectively, and management believes this amount is adequate for potential exposure related to loan sale indemnification, repurchase loans, and EPD claims. There is a significant degree of judgment involved in estimating the recourse liability as the estimation process is inherently uncertain and subject to imprecision. Management will continue to monitor the adequacy of the reserve level and may decide that further additions to the reserve are appropriate in the future. However, there can be no assurance that the current balance of this reserve will prove sufficient to cover actual future losses.
It should be noted that the Company’s historical loan sale activity began to increase at a time when underwriting requirements were strengthened from prior years and limited documentation conventional loans (i.e., non-government insured) were no longer eligible for purchase in the secondary market. Accordingly, the population of conventional loans the Company has sold has been underwritten based on fully documented information. While this does not eliminate all risk of repurchase or indemnification costs, management believes it significantly mitigates that risk.
SBA Loans
The Company customarily executes certain transfers of selected government loans to commercial borrowers, primarily SBA loans, with third parties in the secondary market. These loans, which are typically partially guaranteed by the SBA or otherwise credit enhanced, are generally secured by business property such as real estate, inventory, equipment, and accounts receivable. During
the three months ended June 30, 2018, and 2017
, the Company sold
$10.8 million
and
$9.6 million
in government loans, respectively, with servicing retained. During
the six months ended June 30, 2018, and 2017
, the Company sold
$21.5 million
and
$23.7 million
in government loans, respectively, with servicing retained.
The Company retains the loan servicing rights and receives ongoing servicing fees on the portfolio of loans serviced for others. The net gain on SBA loan sales, amortization and recoveries/impairment of servicing rights, and ongoing servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from SBA lending activities. During
the three months ended June 30, 2018, and 2017
, the Company recorded gains on sales of SBA loans of
$707,000
and
$63,000
, respectively. During
the six months ended June 30, 2018, and 2017
, the Company recorded gains on sales of SBA loans of
$1.3 million
and
$1.2 million
, respectively.
During
the three months ended June 30, 2018, and 2017
, the Company recorded servicing fee income of
$512,000
and
$633,000
, respectively. During
the six months ended June 30, 2018, and 2017
, the Company recorded servicing fee income of
$1.1 million
and
$1.3 million
, respectively. Servicing fee income includes servicing fees, late fees and ancillary fees earned for each period.
The table below is an analysis of the activity in the Company’s SBA loan servicing rights and impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
SBA loan servicing rights
|
|
|
|
|
|
|
|
|
|
Beginning carrying value, net
|
|
$
|
4,737
|
|
|
$
|
5,662
|
|
|
$
|
4,818
|
|
|
$
|
5,707
|
|
|
Additions
|
|
274
|
|
|
270
|
|
|
544
|
|
|
662
|
|
|
Amortization
|
|
(353
|
)
|
|
(577
|
)
|
|
(835
|
)
|
|
(994
|
)
|
|
Recoveries / (impairment), net
(1)
|
|
—
|
|
|
(43
|
)
|
|
131
|
|
|
(63
|
)
|
|
Ending carrying value, net
|
|
$
|
4,658
|
|
|
$
|
5,312
|
|
|
$
|
4,658
|
|
|
$
|
5,312
|
|
(1)
Principally reflects changes in market interest rates and prepayment speeds, both of which affect future cash flow projections
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
SBA servicing rights impairment
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3
|
|
|
$
|
20
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
Additions
|
|
—
|
|
|
43
|
|
|
—
|
|
|
63
|
|
|
Recoveries
|
|
—
|
|
|
—
|
|
|
(131
|
)
|
|
—
|
|
|
Ending balance
|
|
$
|
3
|
|
|
$
|
63
|
|
|
$
|
3
|
|
|
$
|
63
|
|
The fair value of the SBA loan servicing rights, key metrics, and the sensitivity of the fair value to adverse changes in the model inputs and/or assumptions are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
SBA loan servicing rights
|
|
|
|
|
|
Fair Value
|
|
$
|
4,895
|
|
|
$
|
5,275
|
|
|
Composition of loans serviced for others:
|
|
|
|
|
|
Fixed-rate
|
|
—
|
%
|
|
—
|
%
|
|
Adjustable-rate
|
|
100.00
|
%
|
|
100.00
|
%
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
|
Remaining term (years)
|
|
18.6
|
|
|
18.9
|
|
|
Modeled prepayment speed
|
|
12.40
|
%
|
|
11.33
|
%
|
|
Decline in fair value due to a 10% adverse change
|
|
$
|
(182
|
)
|
|
$
|
(181
|
)
|
|
Decline in fair value due to a 20% adverse change
|
|
(351
|
)
|
|
(351
|
)
|
|
Weighted average discount rate
|
|
13.63
|
%
|
|
13.13
|
%
|
|
Decline in fair value due to a 10% adverse change
|
|
$
|
(188
|
)
|
|
$
|
(199
|
)
|
|
Decline in fair value due to a 20% adverse change
|
|
(364
|
)
|
|
(384
|
)
|
As demonstrated in the table above, the Company’s methodology is highly sensitive to changes in model inputs and/or assumptions. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the value of the SBA loan servicing rights is calculated without changing any other input or assumption. In reality, changes in one factor may magnify or counteract the effect of the change.
Information about the asset quality of SBA loans serviced by the Company is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans serviced
|
|
June 30, 2018
|
|
Net Charge-offs
for the Six Months Ended
June 30, 2018
|
|
|
|
Unpaid
Principal
Balance
|
|
|
|
|
|
|
|
|
|
Delinquent (days)
|
|
|
(in thousands)
|
|
|
30 to 89
|
|
90+
|
|
|
Serviced for others
|
|
$
|
245,795
|
|
|
$
|
2,441
|
|
|
$
|
1,859
|
|
|
$
|
—
|
|
|
Held-for-sale
|
|
20,056
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Held-for-investment
|
|
145,686
|
|
|
1,150
|
|
|
7,964
|
|
|
210
|
|
|
Total SBA loans serviced
|
|
$
|
411,537
|
|
|
$
|
3,591
|
|
|
$
|
9,823
|
|
|
$
|
210
|
|
Loans serviced for others are not included in the Consolidated Balance Sheets as they are not assets of the Company.
Indirect Automobile Loans
The Company purchases, on a nonrecourse basis, consumer installment contracts secured by new and used vehicles purchased by consumers from franchised motor vehicle dealers and select independent dealers. A portion of the indirect automobile loans is sold with servicing retained and the Company receives ongoing servicing fees on the portfolio of loans serviced for others. During
the three months ended June 30, 2018, and 2017
, the Company sold
$29.3 million
and
$152.0 million
in indirect automobile loans,
respectively, with servicing retained. During
the six months ended June 30, 2018, and 2017
, the Company sold
$115.3 million
and
$344.4 million
in indirect automobile loans, respectively, with servicing retained.
The gain on loan sales, amortization of servicing rights, and ongoing servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from indirect lending activities. During
the three months ended June 30, 2018, and 2017
, the Company recorded gains on sales of indirect automobile loans of
$218,000
and
$2.1 million
, respectively. During
the six months ended June 30, 2018, and 2017
, the Company recorded gains on sales of indirect automobile loans of
$1.2 million
and
$5.3 million
, respectively.
During
the three months ended June 30, 2018, and 2017
, the Company recorded servicing fee income of
$1.9 million
, and
$2.4 million
, respectively. During
the six months ended June 30, 2018, and 2017
, the Company recorded servicing fee income of
$3.8 million
, and
$4.5 million
, respectively. Servicing fee income includes servicing fees, late fees and ancillary fees earned for each period.
The table below is an analysis of the activity in the Company’s indirect automobile loan servicing rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Indirect automobile loan servicing rights
|
|
|
|
|
|
|
|
|
|
Beginning carrying value
|
|
$
|
6,873
|
|
|
$
|
7,990
|
|
|
$
|
7,118
|
|
|
$
|
7,457
|
|
|
Additions
|
|
196
|
|
|
1,021
|
|
|
765
|
|
|
2,424
|
|
|
Amortization
|
|
(804
|
)
|
|
(857
|
)
|
|
(1,618
|
)
|
|
(1,727
|
)
|
|
Ending carrying value
|
|
$
|
6,265
|
|
|
$
|
8,154
|
|
|
$
|
6,265
|
|
|
$
|
8,154
|
|
The Company has not recorded impairment on its indirect automobile loan servicing rights.
The fair value of the indirect automobile loan servicing rights, key metrics, and the sensitivity of the fair value to adverse changes in model inputs and/or assumptions are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Indirect automobile loan servicing rights
|
|
|
|
|
|
Fair value
|
|
$
|
6,395
|
|
|
$
|
7,436
|
|
|
Composition of loans serviced for others:
|
|
|
|
|
|
Fixed-rate
|
|
100.00
|
%
|
|
100.00
|
%
|
|
Adjustable-rate
|
|
—
|
%
|
|
—
|
%
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
|
Remaining term (years)
|
|
4.4
|
|
|
4.5
|
|
|
Modeled prepayment speed
|
|
20.59
|
%
|
|
20.59
|
%
|
|
Decline in fair value due to a 10% adverse change
|
|
$
|
(162
|
)
|
|
$
|
(192
|
)
|
|
Decline in fair value due to a 20% adverse change
|
|
(317
|
)
|
|
(377
|
)
|
|
Weighted average discount rate
|
|
8.07
|
%
|
|
7.18
|
%
|
|
Decline in fair value due to a 10% adverse change
|
|
$
|
(65
|
)
|
|
$
|
(69
|
)
|
|
Decline in fair value due to a 20% adverse change
|
|
(129
|
)
|
|
(137
|
)
|
As demonstrated in the table above, the Company’s methodology is highly sensitive to changes in model inputs and/or assumptions. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the fair value of the indirect automobile loan servicing rights is calculated without changing any other input or assumption. In reality, changes in one factor may magnify or counteract the effect of the change.
Information about the asset quality of the indirect automobile loans serviced by the Company is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Net Charge-offs
for the Six
Months Ended
June 30, 2018
|
|
Indirect automobile loans serviced
|
|
Unpaid
Principal
Balance
|
|
|
|
|
|
|
|
|
|
Delinquent (days)
|
|
|
(in thousands)
|
|
|
30 to 89
|
|
90+
|
|
|
Serviced for others
|
|
$
|
932,915
|
|
|
$
|
2,119
|
|
|
$
|
1,810
|
|
|
$
|
2,198
|
|
|
Held-for-sale
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Held-for-investment
|
|
1,698,879
|
|
|
3,396
|
|
|
1,221
|
|
|
2,011
|
|
|
Total indirect automobile loans serviced
|
|
$
|
2,656,794
|
|
|
$
|
5,515
|
|
|
$
|
3,031
|
|
|
$
|
4,209
|
|
Loans serviced for others are not included in the Consolidated Balance Sheets as they are not assets of the Company.
11. Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09, “
Revenue from Contracts with Customers” (Topic 606)
and all subsequent ASUs that modified Topic 606. As stated in
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
, the implementation of the new guidance did not have a material impact on the measurement or recognition of revenue. The Company did not record a cumulative effect adjustment to opening retained earnings. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with our servicing rights activities, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts fees is mainly composed of maintenance fees, service fees, stop payment fees, and non-sufficient funds ("NSF") fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Debit Card Fees, Credit Card Fees, and Merchant Fees
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily derived from interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company's card-holder uses a non-Company ATM or a non-Company card-holder uses the Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and/or credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Trust and Wealth Management
Trust and wealth management income is primarily
comprised of fees earned from personal trust administration, estate settlement, investment management, employee benefit plan administration, custody, United States tax code sections 1031/1033 exchanges ("Sections 1031/1033 exchanges") and escrow accounts. Personal trust administration, investment management, employee benefit plan administration and custody fees are generally earned/accrued monthly with billings typically done monthly, and are based on the assets/trust under management or administration and services with certain annual minimum fees provided as outlined in the applicable fee schedule. Sections 1031/1033 exchanges and escrow accounts fees are based on a contractual agreement. The Company’s fiduciary obligations are generally satisfied over time and the resulting fees are recognized monthly, based upon the monthly average market value of the assets under management and the applicable fee rate. Payment is typically received in the following month. The Company does not earn performance-based incentives.
Insurance Commissions
The Company earns insurance commissions through LionMark Insurance Company, Inc., a wholly owned subsidiary that markets credit loss protection insurance products on an agency basis. The contract between the Company and the Agent is primarily for vendor single interest coverage (“VSI insurance”) and does not involve goods or services that are distinct in nature. The performance obligation is essentially completed upon the sale of the individual VSI insurance contracts.
Gain or Loss of ORE
The Company recognizes the sale of ORE, along with any associated gain or loss, when control of the property transfers to the buyer. Generally, the standard includes the following indicators that control of a promised asset has been transferred:
|
|
|
|
▪
|
The seller has a present right to payment for the asset.
|
|
|
|
|
▪
|
The buyer has legal title of the asset.
|
|
|
|
|
▪
|
The seller has transferred physical possession of the asset.
|
|
|
|
|
▪
|
The buyer has the significant risks and rewards of ownership of the asset.
|
|
|
|
|
▪
|
The buyer has accepted the asset.
|
The Company at times may finance an ORE sale and will need to apply
judgment
in evaluating, at contract inception, whether the contract conditions are met, including whether it is
probable
that the Company shall collect substantially all of the entitled consideration by assessing both the buyer’s
intent
and
ability
(i.e., capacity) to pay substantially all the amount to which the Company is entitled. The Company enhanced its ORE internal business operating procedures to ensure that such financed ORE sale gain or loss is recognized once all the new standard requirements are met.
The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for
the three and six months ended June 30, 2018, and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
In-scope of Topic 606:
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
1,468
|
|
|
$
|
1,481
|
|
|
$
|
2,940
|
|
|
$
|
2,936
|
|
|
Other fees and charges
|
|
2,235
|
|
|
1,880
|
|
|
4,270
|
|
|
3,671
|
|
|
Trust and wealth management
|
|
574
|
|
|
239
|
|
|
1,106
|
|
|
529
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
Insurance commissions
|
|
27
|
|
|
104
|
|
|
425
|
|
|
404
|
|
|
Gain on ORE
|
|
42
|
|
|
76
|
|
|
42
|
|
|
377
|
|
|
Total other
|
|
$
|
69
|
|
|
$
|
180
|
|
|
$
|
467
|
|
|
$
|
781
|
|
|
Noninterest income (in-scope of Topic 606)
|
|
4,346
|
|
|
3,780
|
|
|
8,783
|
|
|
7,917
|
|
|
Noninterest income (out-of-scope of Topic 606)
|
|
32,631
|
|
|
31,276
|
|
|
65,327
|
|
|
64,509
|
|
|
Total noninterest income
|
|
$
|
36,977
|
|
|
$
|
35,056
|
|
|
$
|
74,110
|
|
|
$
|
72,426
|
|
Contract Balances
Typically, a contract asset balance occurs when an entity performs a service for a customer before the customer payment of consideration, creating a contract receivable, or before payment is due, creating a contract asset. On the other hand, a contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment of consideration from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees, and insurance commissions based on the terms and conditions of the associated contracts. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of
June 30, 2018
, and
December 31, 2017
, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company did not capitalize any contract acquisition costs upon adoption of Topic 606.
12. Subsequent Event
Subsequent to June 30, 2018, the Company became aware of events that will result in a nontaxable gain of approximately
$2.6 million
in cash surrender value death benefits to be recorded during the third quarter of 2018.