Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
☒
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
For
the quarterly period ended September 30, 2016
or
◻
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
For
the transition period from
to .
Commission
file number: 001-37802
PARAGON
COMMERCIAL CORPORATION
(Exact name of
registrant as specified in its charter)
North
Carolina
|
56-2278662
|
(State or other
jurisdiction of incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
|
|
3535
Glenwood Avenue
Raleigh,
North Carolina
|
27612
|
(Address of
principal executive offices)
|
(Zip
Code)
|
(919)
788-7770
(Registrant’s
telephone number, including area code)
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90
days. YES ☒ NO ◻
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such
files). YES ☒ NO ◻
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
|
|
◻
|
Accelerated Filer
|
|
◻
|
|
|
||||
Non-accelerated
Filer
|
|
☒ (Do
not check if smaller reporting company)
|
Smaller Reporting Company
|
|
◻
|
Indicate by check
mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). YES ◻ NO ☒
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date.
As of November 2,
2016, there were approximately 5,450,042 shares of the
registrant’s common stock outstanding.
PARAGON
COMMERCIAL CORPORATION
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
TABLE
OF CONTENTS
|
|
|
Page
No.
|
Part
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets (Unaudited) as of September 30, 2016 and December
31, 2015
|
|
1
|
|
|
|
|
|
Consolidated
Statements of Income (Unaudited) for the Three and Nine Months
Ended September 30, 2016 and 2015
|
|
2
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Unaudited) for the Three and
Nine Months Ended September 30, 2016 and 2015
|
|
3
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited) for the
Nine Months Ended September 30, 2016 and 2015
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 2016 and 2015
|
|
5
|
|
|
|
|
|
Notes to
Consolidated Financial Statements (Unaudited)
|
|
6
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
35
|
|
|
|
|
Item
3.
|
Quantitative and
Qualitative Disclosures about Market Risk
|
|
62
|
|
|
|
|
Item
4.
|
Controls and
Procedures
|
|
64
|
|
|
|
|
PART
2.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
64
|
|
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|
Item
1A.
|
Risk
Factors
|
|
64
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|
|
|
|
Item
2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
|
64
|
|
|
|
|
Item
3.
|
Defaults Upon
Senior Securities
|
|
64
|
|
|
|
|
Item
4.
|
Mine Safety
Disclosures
|
|
64
|
|
|
|
|
Item
5.
|
Other
Information
|
|
64
|
|
|
|
|
Item
6.
|
Exhibits
|
|
65
|
|
|
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|
|
SIGNATURES
|
|
66
|
|
Part
I.
Financial Information
Item
1.
Financial Statements
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2016 and December 31, 2015
(Balance Sheet as of December 31, 2015 is derived from Audited
Financial Statements)
(in thousands, except share data)
|
2016
|
2015
|
Assets
|
|
|
Cash
and due from banks:
|
|
|
Interest-earning
|
$59,080
|
$30,993
|
Noninterest-earning
|
14,626
|
24,537
|
Investment
securities - available-for-sale, at fair value
|
178,606
|
168,896
|
Federal
Home Loan Bank stock, at cost
|
5,425
|
8,061
|
Loans
- net of unearned income and deferred fees
|
1,165,345
|
1,016,156
|
Allowance
for loan losses
|
(7,925)
|
(7,641)
|
Net
loans
|
1,157,420
|
1,008,515
|
Accrued
interest receivable
|
4,022
|
3,795
|
Bank
premises and equipment, net
|
15,858
|
16,433
|
Bank
owned life insurance
|
28,943
|
28,274
|
Other
real estate owned
|
5,183
|
5,453
|
Deferred
tax assets
|
3,361
|
4,118
|
Other
assets
|
6,335
|
6,836
|
Total
assets
|
$1,478,859
|
$1,305,911
|
|
|
|
Liabilities and stockholders' equity
|
|
|
Deposits:
|
|
|
Noninterest-bearing
demand
|
$188,398
|
$158,974
|
Interest-bearing
checking and money market
|
767,124
|
504,092
|
Time
deposits
|
243,563
|
319,781
|
Total
deposits
|
1,199,085
|
982,847
|
Repurchase
agreements and federal funds purchased
|
19,796
|
30,580
|
Federal
Home Loan Bank advances
|
100,000
|
165,000
|
Other
borrowings
|
-
|
4,800
|
Subordinated
debentures
|
18,558
|
18,558
|
Other
liabilities
|
6,398
|
6,468
|
Total
liabilities
|
1,343,837
|
1,208,253
|
Stockholders'
equity:
|
|
|
Common
stock, $0.008 par value; 20,000,000 shares
|
44
|
37
|
authorized;
5,450,042 and 4,581,334 issued and
|
|
|
outstanding
as of September 30, 2016 and December 31, 2015
|
|
|
Additional
paid-in-capital
|
80,015
|
53,147
|
Accumulated
other comprehensive loss
|
(165)
|
(886)
|
Retained
earnings
|
55,128
|
45,360
|
Total
stockholders' equity
|
135,022
|
97,658
|
Total
liabilities and stockholders' equity
|
$1,478,859
|
$1,305,911
|
See accompanying notes to these unaudited consolidated financial
statements.
-1-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three and Nine Months Ended September 30, 2016 and
2015
|
Three months
|
Nine months
|
||
|
ended September 30,
|
ended September 30,
|
||
(in thousands, except per share data)
|
2016
|
2015
|
2016
|
2015
|
Interest income
|
|
|
|
|
Loans
and fees on loans
|
$12,544
|
$11,223
|
$35,574
|
$32,189
|
Investment
securities and FHLB stock
|
1,214
|
1,249
|
3,802
|
3,548
|
Federal
funds and other
|
97
|
38
|
218
|
104
|
Total
interest income
|
13,855
|
12,510
|
39,594
|
35,841
|
Interest expense
|
|
|
|
|
Interest-bearing
checking and money market
|
966
|
727
|
2,659
|
1,987
|
Time
deposits
|
588
|
799
|
1,711
|
2,609
|
Borrowings
and repurchase agreements
|
534
|
328
|
1,605
|
924
|
Total
interest expense
|
2,088
|
1,854
|
5,975
|
5,520
|
Net
interest income
|
11,767
|
10,656
|
33,619
|
30,321
|
Provision for loan losses
|
391
|
-
|
391
|
750
|
Net
interest income after provision for loan losses
|
11,376
|
10,656
|
33,228
|
29,571
|
Non-interest income
|
|
|
|
|
Increase
in cash surrender value of bank owned life insurance
|
220
|
225
|
669
|
632
|
Net
gain on sale of securities
|
-
|
145
|
85
|
568
|
Service
charges and fees
|
65
|
58
|
179
|
163
|
Mortgage
origination fees and gains on sale of loans
|
59
|
44
|
124
|
156
|
Net
loss on sale or impairment of foreclosed assets
|
-
|
(9)
|
(257)
|
(472)
|
Other
fees and income
|
94
|
81
|
285
|
305
|
Total
non-interest income
|
438
|
544
|
1,085
|
1,352
|
Non-interest expense
|
|
|
|
|
Salaries
and employee benefits
|
3,912
|
3,378
|
11,521
|
9,714
|
Furniture,
equipment and software costs
|
456
|
482
|
1,450
|
1,383
|
Occupancy
|
362
|
366
|
1,048
|
1,203
|
Data
processing
|
270
|
267
|
845
|
846
|
Director
related fees and expenses
|
219
|
253
|
690
|
670
|
Professional
fees
|
208
|
159
|
627
|
614
|
FDIC
and other supervisory assessments
|
220
|
231
|
632
|
710
|
Advertising
and public relations
|
239
|
116
|
661
|
537
|
Unreimbursed
loan costs and foreclosure related expenses
|
172
|
281
|
383
|
750
|
Other
|
720
|
647
|
2,009
|
2,033
|
Total
non-interest expense
|
6,778
|
6,180
|
19,866
|
18,460
|
Income
before income taxes
|
5,036
|
5,020
|
14,447
|
12,463
|
Income tax expense
|
1,581
|
1,707
|
4,679
|
4,192
|
Net
income
|
$3,455
|
$3,313
|
$9,768
|
$8,271
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
Basic
|
$0.64
|
$0.73
|
$2.02
|
$1.84
|
|
|
|
|
|
Diluted
|
$0.64
|
$0.73
|
$2.00
|
$1.82
|
See accompanying notes to these unaudited consolidated financial
statements.
-2-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (Unaudited)
Three and Nine Months Ended September 30, 2016 and
2015
|
Three months
|
Nine months
|
||
|
ended September 30,
|
ended September 30,
|
||
(in thousands)
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
Net
income
|
$3,455
|
$3,313
|
$9,768
|
$8,271
|
|
|
|
|
|
Other
comprehensive income (loss) items:
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
Unrealized
gains (losses)
|
(1,058)
|
876
|
2,856
|
(366)
|
Reclassification
of gains recognized in net income
|
-
|
(145)
|
(85)
|
(568)
|
Other
comprehensive income (loss)
|
(1,058)
|
731
|
2,771
|
(934)
|
Deferred
tax expense (benefit)
|
(405)
|
280
|
1,057
|
(357)
|
Other
comprehensive income (loss), net of tax
|
(653)
|
451
|
1,714
|
(577)
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
Unrealized
gains (losses)
|
544
|
(1,483)
|
(1,592)
|
(2,753)
|
Other
comprehensive income (loss)
|
544
|
(1,483)
|
(1,592)
|
(2,753)
|
Deferred
tax expense (benefit)
|
204
|
(568)
|
(599)
|
(1,054)
|
Other
comprehensive income (loss), net of tax
|
340
|
(915)
|
(993)
|
(1,699)
|
|
|
|
|
|
Total
other comprehensive income (loss), net of tax
|
(313)
|
(464)
|
721
|
(2,276)
|
|
|
|
|
|
Comprehensive
income
|
$3,142
|
$2,849
|
$10,489
|
$5,995
|
See accompanying notes to these unaudited consolidated financial
statements.
-3-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Nine Months Ended September 30, 2016 and 2015
|
|
|
|
AccumulatedOther
|
|
|
|
|
Additional
|
Comprehensive
|
|
Total
|
|
|
Common Stock
|
Paid-in
|
Income
|
Retained
|
Stockholders'
|
|
(in thousands, except share data)
|
Shares
|
Amount
|
Capital
|
(Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2015
|
4,581,334
|
$37
|
$53,147
|
$(886)
|
$45,360
|
$97,658
|
|
|
|
|
|
|
|
Net income
|
-
|
-
|
-
|
-
|
9,768
|
9,768
|
Unrealized gain on securities, net of
|
|
|
|
|
|
|
tax expense of $1,057
|
-
|
-
|
-
|
1,714
|
-
|
1,714
|
Unrealized loss on cash flow hedges,
|
|
|
|
|
|
|
net of tax benefit of $599
|
-
|
-
|
-
|
(993)
|
-
|
(993)
|
Issuance of stock for public offering
|
845,588
|
6
|
26,392
|
|
|
26,398
|
Issuance of restricted stock awards
|
17,793
|
1
|
-
|
-
|
-
|
1
|
Restricted stock expense recognized
|
-
|
-
|
319
|
-
|
-
|
319
|
Issuance of stock for employee stock
|
|
|
|
|
|
|
purchase plan
|
5,327
|
-
|
157
|
-
|
-
|
157
|
Balance at September 30, 2016
|
5,450,042
|
$44
|
$80,015
|
$(165)
|
$55,128
|
$135,022
|
|
|
|
|
AccumulatedOther
|
|
|
|
|
Additional
|
Comprehensive
|
|
Total
|
|
|
Common Stock
|
Paid-in
|
Income
|
Retained
|
Stockholders'
|
|
(in thousands, except share data)
|
Shares
|
Amount
|
Capital
|
(Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2014
|
4,530,000
|
$36
|
$52,358
|
$1,142
|
$34,126
|
$87,662
|
|
|
|
|
|
|
|
Net income
|
-
|
-
|
-
|
-
|
8,271
|
8,271
|
Unrealized gain on securities, net of
|
|
|
|
|
|
|
tax benefit of $357
|
-
|
-
|
-
|
(577)
|
-
|
(577)
|
Unrealized loss on cash flow hedges,
|
|
|
|
|
|
|
net of tax benefit of $1,054
|
-
|
-
|
-
|
(1,699)
|
-
|
(1,699)
|
Exercise of stock options
|
10,000
|
-
|
176
|
-
|
-
|
176
|
Issuance of restricted stock awards
|
30,656
|
1
|
-
|
-
|
-
|
1
|
Restricted stock expense recognized
|
-
|
-
|
278
|
-
|
-
|
278
|
Issuance of stock for employee stock
|
|
|
|
|
|
|
purchase plan
|
9,778
|
-
|
181
|
-
|
-
|
181
|
Balance at September 30, 2015
|
4,580,434
|
$37
|
$52,993
|
$(1,134)
|
$42,397
|
$94,293
|
See accompanying notes to these unaudited consolidated financial
statements.
-4-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2016 and 2015
(in thousands)
|
2016
|
2015
|
Cash
flows from operating activities:
|
|
|
Net
income
|
$9,768
|
$8,271
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
operating
activities:
|
|
|
Depreciation
and amortization
|
1,072
|
1,045
|
Provision
for loan losses
|
391
|
750
|
Net
loss on sale or impairment of foreclosed assets
|
257
|
472
|
Increase
in cash surrender value of life insurance
|
(669)
|
(631)
|
Accretion
of premiums/discounts on securities, net
|
567
|
685
|
Net
gain on sale of securities
|
(85)
|
(568)
|
Loss
on sale of property and equipment
|
-
|
(1)
|
Deferred
tax expense
|
299
|
1,195
|
Restricted
stock expense
|
320
|
279
|
Changes
in assets and liabilities:
|
|
|
Accrued
interest receivable and other assets
|
(1,318)
|
97
|
Accrued
interest payable and other liabilities
|
(70)
|
505
|
Net
cash provided by operating activities
|
10,532
|
12,099
|
Cash
flows from investing activities:
|
|
|
Net
decrease in Federal Home Loan Bank stock
|
2,636
|
(630)
|
Purchase
of securities available for sale
|
(39,434)
|
(55,832)
|
Proceeds
from maturities and paydowns of securities available for
sale
|
16,299
|
13,299
|
Proceeds
from sales of securities available for sale
|
15,714
|
52,644
|
Net
increase in loans
|
(149,296)
|
(133,128)
|
Proceeds
from sale of foreclosed real estate
|
13
|
4,876
|
Additions
to bank premises and equipment
|
(497)
|
(511)
|
Other
investing activites, net
|
-
|
(74)
|
Net
cash used in investing activities
|
(154,565)
|
(119,356)
|
Cash
flows from financing activities:
|
|
|
Net
increase in demand and money market deposit accounts
|
292,456
|
168,972
|
Net
decrease in time deposits
|
(76,218)
|
3,168
|
Net
decrease in repurchase agreements
|
(10,784)
|
(1,504)
|
Net
increase in FHLB and other borrowings
|
(69,800)
|
18,166
|
Net
proceeds from sale of common stock
|
26,398
|
-
|
Exercise
of stock options
|
-
|
176
|
Issuance
of common stock for employee stock purchase plan
|
157
|
181
|
Net
cash provided by financing activities
|
162,209
|
189,159
|
Net
change in cash and cash equivalents
|
18,176
|
81,902
|
Cash
and cash equivalents at beginning of year
|
55,530
|
36,395
|
|
|
|
Cash
and cash equivalents at end of year
|
$73,706
|
$118,297
|
See accompanying notes to these unaudited consolidated financial
statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND OPERATIONS
On April 2, 2001,
Paragon Commercial Corporation (the “Company”) was
incorporated for the purpose of serving as a holding company for
Paragon Commercial Bank (the “Bank”). The Company
currently has no operations and conducts no business on its own
other than owning the Bank and two statutory business trusts,
Paragon Commercial Capital Trust I and II.
The Bank was
incorporated on May 4, 1999 and began banking operations on May 10,
1999. The Bank is engaged in general commercial banking in Wake and
Mecklenburg Counties, NC, operating under the banking laws of North
Carolina and the rules and regulations of the Federal Deposit
Insurance Corporation and the North Carolina Commissioner of Banks.
The Bank undergoes periodic examinations by those regulatory
authorities. In addition, the Company undergoes periodic
examinations by the Federal Reserve.
The Company formed
Paragon Commercial Capital Trust I (“Trust I”) during
2004 in order to facilitate the issuance of trust preferred
securities. Trust I is a statutory business trust formed
under the laws of the state of Delaware, of which all common
securities are owned by the Company. The Company formed Paragon
Commercial Capital Trust II (“Trust II”) during 2006 to
serve the same purpose. The junior subordinated debentures issued
by the Company to the trusts are classified as debt and the
Company’s equity interest in the trusts are included in other
assets.
The trust preferred
securities presently qualify as Tier 1 regulatory capital and are
reported in Federal Reserve regulatory reports as minority
interests in unconsolidated subsidiaries. The junior subordinated
debentures do not qualify as Tier 1 regulatory
capital.
In June 2016, the
Company completed its initial public offering in which it issued
and sold 845,588 shares of common stock at a public offering price
of $34.00 per share. The Company received net proceeds of $26.4
million after deducting underwriting discounts and commissions of
approximately $1.7 million and other offering expenses of
approximately $615,000.
In addition to its
headquarters and operations center in Raleigh, North Carolina, the
Bank has locations in Charlotte and Cary, North
Carolina.
NOTE 2 – BASIS OF PRESENTATION
The accompanying
unaudited consolidated financial statements include the accounts
and transactions of Paragon Commercial Corporation and Paragon
Commercial Bank. All significant intercompany transactions and
balances are eliminated in consolidation. Paragon
Commercial Capital Trusts I and II are not consolidated
subsidiaries of the Company.
The consolidated
financial information included herein as of and for the three and
nine month periods ended September 30, 2016 and 2015 is unaudited.
Accordingly, it does not include all of the information and
footnotes required by U.S. generally accepted accounting principles
(“GAAP”) for complete financial statements. However,
such information reflects all adjustments which are, in the opinion
of management, necessary for a fair statement of the financial
condition and results of operations for the interim periods. The
December 31, 2015 consolidated balance sheet was derived from the
Company’s December 31, 2015 audited consolidated financial
statements as of and for the periods ended December 31,
2015. These unaudited interim consolidated financial
statements as of and for the three and nine month periods ended
September 30, 2016 and 2015 should be read in conjunction with the
audited consolidated financial statements as of and for the periods
ended December 31, 2015.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – BASIS OF PRESENTATION (Continued)
The accounting
policies followed by the Company and other relevant information is
contained in the notes to the audited consolidated financial
statements as of and for the periods ended December 31,
2015.
Earnings Per Common Share
Basic and diluted
net income per common share have been computed by dividing net
income for each period by the weighted average number of shares of
common stock outstanding during each period. Diluted net
income per common share reflects the potential dilution that could
occur if outstanding stock options were exercised.
Basic and diluted
net income per common share have been computed based upon net
income as presented in the accompanying unaudited consolidated
statements of income divided by the weighted average number of
common shares outstanding or assumed to be outstanding as
summarized below:
|
Three months
|
Nine months
|
||
|
ended September 30,
|
ended September 30,
|
||
|
2016
|
2015
|
2016
|
2015
|
Shares
used in the computation of earnings per share:
|
|
|
|
|
Weighted
average number of shares outstanding - basic
|
5,406,867
|
4,520,749
|
4,846,574
|
4,502,293
|
Dilutive
effect of restricted shares
|
32,729
|
45,214
|
35,867
|
47,796
|
Weighted
average number of shares outstanding - diluted
|
5,439,596
|
4,565,963
|
4,882,441
|
4,550,089
|
Weighted average
anti-dilutive stock options and unvested restricted shares excluded
from the computation of diluted earnings per share are as
follows:
|
Three months
|
Nine months
|
||
|
ended September 30,
|
ended September 30,
|
||
|
2016
|
2015
|
2016
|
2015
|
Anti-dilutive
stock options
|
80,500
|
91,000
|
80,500
|
91,000
|
Unvested
restricted shares
|
38,445
|
52,284
|
38,445
|
52,284
|
Comprehensive Income
The Company reports
as comprehensive income all changes in stockholders' equity during
the year from sources other than stockholders. Other comprehensive
income refers to all components (revenues, expenses, gains, and
losses) of comprehensive income that are excluded from net
income.
The Company’s
only two components of other comprehensive income are
unrealized gains and losses on investment securities
available-for-sale, net of income taxes and unrealized gains and
losses on cash flow hedges, net of income taxes. Information
concerning the Company’s accumulated other comprehensive
income for the nine months ended September 30, 2016 and for the
year ended December 31, 2015, respectively is as
follows:
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – BASIS OF PRESENTATION (Continued)
|
September 30,
|
December 31,
|
(in thousands)
|
2016
|
2015
|
Unrealized
gains on securities available-for-sale
|
$4,149
|
$1,378
|
Deferred
tax expense
|
(1,587)
|
(530)
|
Other
comprehensive income, net of tax
|
2,562
|
848
|
Unrealized
losses on cash flow hedges
|
(4,371)
|
(2,779)
|
Deferred
tax benefit
|
1,644
|
1,045
|
Other
comprehensive loss, net of tax
|
(2,727)
|
(1,734)
|
Total
other accumulated comprehensive income (loss)
|
$(165)
|
$(886)
|
The accumulated
balances related to each component of other accumulated
comprehensive income (loss) are as follows:
|
Unrealized
|
Unrealized
|
|
|
Gains and
|
Gains and
|
|
|
Losses on
|
Losses on
|
|
|
Available-for
|
Cash Flow
|
|
Sale Securities
|
Hedges
|
Total
|
|
Balance
as of December 31, 2015
|
$848
|
$(1,734)
|
$(886)
|
Other
comprehensive income (loss) before reclassification
|
1,799
|
(993)
|
806
|
Amounts
reclassified from accumulated other
|
|
|
|
comprehensive
income
|
(85)
|
-
|
(85)
|
Net
current-period other comprehensive income (loss)
|
1,714
|
(993)
|
721
|
Balance
as of September 30, 2016
|
$2,562
|
$(2,727)
|
$(165)
|
|
|
|
|
Balance
as of December 31, 2014
|
$1,645
|
$(503)
|
$1,142
|
Other
comprehensive loss before reclassification
|
(9)
|
(1,699)
|
(1,708)
|
Amounts
reclassified from accumulated other
|
|
|
|
comprehensive
income
|
(568)
|
-
|
(568)
|
Net
current-period other comprehensive loss
|
(577)
|
(1,699)
|
(2,276)
|
Balance
as of September 30, 2015
|
$1,068
|
$(2,202)
|
$(1,134)
|
Recent Accounting Pronouncements
In February 2015,
the Financial Accounting Standards Board (“FASB”)
issued guidance which amends the consolidation requirements and
significantly changes the consolidation analysis required under
GAAP. Although the amendments are expected to result in the
deconsolidation of many entities, the Company will need to
reevaluate all its previous consolidation conclusions. The
amendments will be effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015, with
early adoption permitted (including during an interim period),
provided that the guidance is applied as of the beginning of the
annual period containing the adoption date. The Company does not
expect these amendments to have a material effect on its financial
statements.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – BASIS OF PRESENTATION (Continued)
In April 2015, the
FASB issued guidance that will require debt issuance costs related
to a recognized debt liability to be presented in the balance sheet
as a direct deduction from the carrying amount of that debt
liability. This update affects disclosures related to debt issuance
costs but does not affect existing recognition and measurement
guidance for these items. The amendments will be effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015, with early adoption permitted.
The Company does not expect these amendments to have a material
effect on its financial statements.
In May 2014, the
FASB issued guidance to change the recognition of revenue from
contracts with customers. The core principle of the new guidance is
that an entity should recognize revenue to reflect the transfer of
goods and services to customers in an amount equal to the
consideration the entity receives or expects to receive. The
guidance will be effective for the Company for reporting periods
beginning after December 15, 2017. The Company will apply the
guidance using a full retrospective approach. The Company does not
expect these amendments to have a material effect on its financial
statements.
In August 2015, the
FASB deferred the effective date of Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers.
As a result of the deferral, the guidance in ASU 2014-09 will be
effective for the Company for reporting periods beginning after
December 15, 2017. The Company will apply the guidance using a full
retrospective approach. The Company does not expect these
amendments to have a material effect on its financial
statements.
In August 2015, the
FASB issued amendments to the Interest topic of the Accounting
Standards Codification (the “ASC”) to clarify the SEC
staff’s position on presenting and measuring debt issuance
costs incurred in connection with line-of-credit arrangements. The
amendments were effective upon issuance. The Company does not
expect these amendments to have a material effect on its financial
statements.
In January 2016,
the FASB amended the Financial Instruments topic of the ASC to
address certain aspects of recognition, measurement, presentation,
and disclosure of financial instruments. The amendments will be
effective for fiscal years beginning after December
15,
2017, including
interim periods within those fiscal years. The Company
will apply the guidance by means of a cumulative-effect adjustment
to the balance sheet as of the beginning of the fiscal year of
adoption. The amendments related to equity securities without
readily determinable fair values will be applied prospectively to
equity investments that exist as of the date of adoption of the
amendments. The Company does not expect these amendments to have a
material effect on its financial statements.
In February 2016,
the FASB amended the Leases topic of the Accounting Standards
Codification to revise certain aspects of recognition, measurement,
presentation, and disclosure of leasing transactions. The
amendments will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years. The Company is currently evaluating the effect
that implementation of the new standard will have on its financial
statements.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – BASIS OF PRESENTATION (Continued)
In March 2016, the
FASB amended the Derivatives and Hedging topic of the Accounting
Standards Codification to clarify that a change in the counterparty
to a derivative instrument that has been designated as the hedging
instrument does not, in and of itself, require dedesignation of
that hedging relationship provided that all other hedge accounting
criteria continue to be met. The amendments will be effective for
financial statements issued for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal
years. The Company will apply the guidance prospectively to each
period presented. The Company does not expect these
amendments to have a material effect on its financial
statements.
In March 2016, the
FASB amended the Revenue from Contracts with Customers topic of the
Accounting Standards Codification to clarify the implementation
guidance on principal versus agent considerations and address how
an entity should assess whether it is the principal or the agent in
contracts that include three or more parties. The amendments will
be effective for the Company for reporting periods beginning after
December 15, 2017. The Company does not expect these amendments to
have a material effect on its financial statements.
In March 2016, the
FASB issued guidance to simplify several aspects of the accounting
for share-based payment award transactions including the income tax
consequences, the classification of awards as either equity or
liabilities, and the classification on the statement of cash
flows. Additionally, the guidance simplifies two areas
specific to entities other than public business entities allowing
them apply a practical expedient to estimate the expected term for
all awards with performance or service conditions that have certain
characteristics and also allowing them to make a one-time election
to switch from measuring all liability-classified awards at fair
value to measuring them at intrinsic value. The
amendments will be effective for the Company for annual periods
beginning after December 15, 2016 and interim periods within those
annual periods. The Company does not expect these amendments to
have a material effect on its financial statements.
In June 2016, the
FASB issued guidance to change the accounting for credit losses and
modify the impairment model for certain debt securities. The
amendments will be effective for the Company for reporting periods
beginning after December 15, 2019. The Company is currently
evaluating the effect that implementation of the new standard will
have on its financial position, results of operations, and cash
flows.
In August 2016, the
FASB amended the Statement of Cash Flows topic of the Accounting
Standards Codification to clarify how certain cash receipts and
cash payments are presented and classified in the statement of cash
flows. The amendments will be effective for the Company for fiscal
years beginning after December 15, 2017 including interim periods
within those fiscal years. The Company does not expect these
amendments to have a material effect on its financial
statements.
Other accounting
standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact
on the Company’s financial position, results of operations or
cash flows.
Reclassifications
Certain amounts in
the 2015 financial statements have been reclassified to conform to
the 2016 presentation. The reclassifications had no effect on total
assets, net income or stockholders' equity as previously
reported.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a
summary of the securities portfolio by major classification at
September 30, 2016 and
December 31, 2015.
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
(in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
September 30, 2016
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$17,673
|
$503
|
$-
|
$18,176
|
Collateralized
mortgage obligations
|
45,802
|
740
|
-
|
46,542
|
Mortgage-backed
securities
|
46,999
|
829
|
-
|
47,828
|
Municipal
bonds
|
61,304
|
2,286
|
-
|
63,590
|
Other
|
2,679
|
19
|
228
|
2,470
|
|
$174,457
|
$4,377
|
$228
|
$178,606
|
December 31,
2015
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$19,778
|
$196
|
$73
|
$19,901
|
Collateralized
mortgage obligations
|
60,826
|
321
|
206
|
60,941
|
Mortgage-backed
securities
|
31,074
|
326
|
90
|
31,310
|
Municipal
bonds
|
53,163
|
1,346
|
75
|
54,434
|
Other
|
2,677
|
10
|
377
|
2,310
|
|
$167,518
|
$2,199
|
$821
|
$168,896
|
The fair values of
securities available-for-sale at September 30, 2016 by contractual
maturity are shown below. Actual expected maturities may differ
from contractual maturities because issuers may have the right to
call or prepay obligations.
|
|
After One
|
After Five
|
|
No Stated
|
|
|
Within
|
Within
|
Within
|
After
|
Maturity
|
|
(in thousands)
|
1 Year
|
Five Years
|
Ten Years
|
Ten Years
|
Date
|
Total
|
U.S.
Agency obligations
|
$-
|
$-
|
$-
|
$18,176
|
$-
|
$18,176
|
Collateralized
mortgage obligations
|
-
|
-
|
-
|
46,542
|
-
|
46,542
|
Mortgage-backed
securities
|
-
|
-
|
13,666
|
34,162
|
-
|
47,828
|
Municipal
bonds
|
-
|
1,812
|
6,342
|
55,436
|
-
|
63,590
|
Other
|
-
|
-
|
500
|
-
|
1,970
|
2,470
|
|
$-
|
$1,812
|
$20,508
|
$154,316
|
$1,970
|
$178,606
|
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - INVESTMENT SECURITIES (Continued)
The following
tables show gross unrealized losses and fair values of investment
securities, aggregated by investment category and length of time
that the individual securities have been in a continuous unrealized
loss position on September 30, 2016 and December 31,
2015.
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
|||
(in thousands)
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
September 30, 2016
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Securities
available-for-sale:
|
|
|
|
|
|
|
U.S.
Agency obligations
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Collateralized
mortgage obligations
|
-
|
-
|
-
|
-
|
-
|
-
|
Mortgage-backed
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
Municipal
bonds
|
-
|
-
|
-
|
-
|
-
|
-
|
Other
|
1,925
|
228
|
-
|
-
|
1,925
|
228
|
Total
temporarily impaired
|
|
|
|
|
|
|
securities
|
$1,925
|
$228
|
$-
|
$-
|
$1,925
|
$228
|
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
|||
(in thousands)
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
December 31, 2015
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Securities
available-for-sale:
|
|
|
|
|
|
|
U.S.
Agency obligations
|
$3,007
|
$-
|
$3,178
|
$73
|
$6,185
|
$73
|
Collateralized
mortgage obligations
|
26,086
|
159
|
2,983
|
47
|
29,069
|
206
|
Mortgage-backed
securities
|
18,575
|
90
|
-
|
-
|
18,575
|
90
|
Municipal
bonds
|
3,896
|
6
|
7,990
|
69
|
11,886
|
75
|
Other
|
1,774
|
377
|
-
|
-
|
1,774
|
377
|
Total
temporarily impaired
|
|
|
|
|
|
|
securities
|
$53,338
|
$632
|
$14,151
|
$189
|
$67,489
|
$821
|
The table below
summarizes the number of investment securities in an unrealized
loss position:
|
September 30,
|
December 31,
|
Available-for-sale:
|
2016
|
2015
|
U.S.
Agency obligations
|
-
|
3
|
Collateralized
mortgage obligations
|
-
|
7
|
Mortgage-backed
securities
|
-
|
6
|
Municipal
bonds
|
-
|
22
|
Other
|
1
|
1
|
|
1
|
39
|
The unrealized
losses primarily relate to debt securities that have incurred fair
value reductions due to higher market interest rates since the
securities were purchased. The unrealized losses are not
likely to reverse unless and until market interest rates decline to
the levels that existed when the securities were purchased. Since
none of the unrealized losses on the debt securities in 2016 or
2015 relate to the marketability of the securities or the
issuer’s ability to honor redemption obligations and since
management has the intent to hold these securities until maturity
and believes it is more likely than not that the Company will not
have to sell any such securities before a recovery of cost given
the current liquidity position, none of those debt securities are
deemed to be other than temporarily impaired.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - INVESTMENT SECURITIES (Continued)
The following table
summarizes securities gains for the periods
presented:
|
Three months
|
Nine months
|
||
|
ended September 30,
|
ended September 30,
|
||
(in thousands)
|
2016
|
2015
|
2016
|
2015
|
Gross
gains on sales of securities available for sale
|
$-
|
$158
|
$136
|
$585
|
Gross
losses on sales of securities available for sale
|
-
|
(13)
|
(51)
|
(17)
|
Total
securities gains
|
$-
|
$145
|
$85
|
$568
|
Securities with a
fair value of $52.2 million and $78.4 million were pledged as of
September 30, 2016 and December 31, 2015, respectively, to secure
repurchase agreements, lines of credit and other
borrowings.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Following is a
summary of loans at September 30, 2016 and December 31,
2015:
(in thousands)
|
September 30,
2016
|
December 31,
2015
|
Construction
and land development
|
$74,605
|
$64,702
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential
|
356,833
|
307,722
|
Owner
occupied
|
178,631
|
147,017
|
Multifamily,
nonresidential and junior liens
|
96,643
|
79,170
|
Total
commercial real estate
|
632,107
|
533,909
|
Consumer
real estate:
|
|
|
Home
equity lines
|
86,361
|
78,943
|
Secured
by 1-4 family residential, secured by first deeds of
trust
|
190,913
|
167,053
|
Secured
by 1-4 family residential, secured by second deeds of
trust
|
4,358
|
3,711
|
Total
consumer real estate
|
281,632
|
249,707
|
Commercial
and industrial loans (except those secured by real
estate)
|
164,913
|
153,669
|
Consumer
and other
|
11,558
|
13,539
|
Total
loans
|
1,164,815
|
1,015,526
|
Deferred
loan (fees) costs
|
530
|
630
|
Allowance
for loan losses
|
(7,925)
|
(7,641)
|
Net
loans
|
$1,157,420
|
$1,008,515
|
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
A further breakdown
of the make-up of the construction and development and commercial
real estate portfolio at September 30, 2016 and December 31, 2015
is as follows:
(in thousands)
|
September 30,
2016
|
December 31,
2015
|
Construction
and land development:
|
|
|
Land
|
$15,650
|
$16,026
|
Residential
|
31,370
|
29,864
|
Commercial
|
27,585
|
18,812
|
Total
construction and land development
|
$74,605
|
$64,702
|
|
|
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential:
|
|
|
Office
|
$102,065
|
$92,991
|
Industrial
|
41,710
|
38,518
|
Hotel/motel
|
21,453
|
18,935
|
Retail
|
161,447
|
135,200
|
Special
purpose/Other
|
30,158
|
22,078
|
|
356,833
|
307,722
|
Owner
occupied :
|
|
|
Office
|
59,358
|
51,775
|
Industrial
|
43,027
|
40,337
|
Retail
|
26,216
|
12,157
|
Special
purpose/Other
|
50,030
|
42,748
|
|
178,631
|
147,017
|
|
|
|
Multifamily,
nonresidential and junior liens
|
96,643
|
79,170
|
Total
commercial real estate
|
$632,107
|
$533,909
|
Loans are primarily
made in the Research Triangle and Charlotte areas of North
Carolina. Real estate loans can be affected by the condition of the
local real estate market. Commercial and installment loans can be
affected by the local economic conditions.
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
Changes in the
allowance for loan losses for the three and nine months ended
September 30, 2016 and 2015 were as follows:
|
|
|
|
Commercial
|
|
|
|
|
|
|
& Industrial
|
|
|
|
Construction
|
|
Consumer
|
Loans Not
|
|
|
|
and Land
|
Commercial
|
Real
|
Secured By
|
Consumer
|
Total
|
(in thousands)
|
Development
|
Real Estate
|
Estate
|
Real Estate
|
& Other
|
Loans
|
Three months ended September 30, 2016
|
|
|
|
|
|
|
Beginning
balance
|
$406
|
$3,278
|
$1,887
|
$2,307
|
$108
|
$7,986
|
Provision
for loan losses
|
(64)
|
128
|
204
|
147
|
(24)
|
391
|
Loans
charged off
|
-
|
-
|
-
|
(682)
|
-
|
(682)
|
Recoveries
|
58
|
3
|
1
|
168
|
-
|
230
|
Net
(chargeoffs) recoveries
|
58
|
3
|
1
|
(514)
|
-
|
(452)
|
Ending
balance
|
$400
|
$3,409
|
$2,092
|
$1,940
|
$84
|
$7,925
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016
|
|
|
|
|
|
|
Beginning
balance
|
$509
|
$3,156
|
$2,046
|
$1,786
|
$144
|
$7,641
|
Provision
for loan losses
|
(404)
|
194
|
39
|
632
|
(70)
|
391
|
Loans
charged off
|
-
|
-
|
-
|
(682)
|
(1)
|
(683)
|
Recoveries
|
295
|
59
|
7
|
204
|
11
|
576
|
Net
(chargeoffs) recoveries
|
295
|
59
|
7
|
(478)
|
10
|
(107)
|
Ending
balance
|
$400
|
$3,409
|
$2,092
|
$1,940
|
$84
|
$7,925
|
|
|
|
|
|
|
|
Three months ended September 30, 2015
|
|
|
|
|
|
|
Beginning
balance
|
$801
|
$2,086
|
$2,237
|
$2,388
|
$57
|
$7,569
|
Provision
for loan losses
|
(230)
|
624
|
125
|
(520)
|
1
|
-
|
Loans
charged off
|
(14)
|
-
|
-
|
-
|
-
|
(14)
|
Recoveries
|
10
|
11
|
42
|
-
|
-
|
63
|
Net
(chargeoffs) recoveries
|
(4)
|
11
|
42
|
-
|
-
|
49
|
Ending
balance
|
$567
|
$2,721
|
$2,404
|
$1,868
|
$58
|
$7,618
|
|
|
|
|
|
|
|
Nine months ended September 30, 2015
|
|
|
|
|
|
|
Beginning
balance
|
$960
|
$2,510
|
$1,594
|
$1,662
|
$143
|
$6,869
|
Provision
for loan losses
|
(442)
|
476
|
768
|
33
|
(85)
|
750
|
Loans
charged off
|
(14)
|
(276)
|
-
|
-
|
-
|
(290)
|
Recoveries
|
63
|
11
|
42
|
173
|
-
|
289
|
Net
(chargeoffs) recoveries
|
49
|
(265)
|
42
|
173
|
-
|
(1)
|
Ending
balance
|
$567
|
$2,721
|
$2,404
|
$1,868
|
$58
|
$7,618
|
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
The balance in the
allowance for loan losses and the recorded investment in loans by
portfolio segment are based on the impairment method as of
September 30, 2016 and December 31, 2015 and were as
follows:
|
|
|
|
Commercial
|
|
|
|
|
|
|
& Industrial
|
|
|
|
Construction
|
|
Consumer
|
Loans Not
|
|
|
|
and Land
|
Commercial
|
Real
|
Secured By
|
Consumer
|
Total
|
(in thousands)
|
Development
|
Real Estate
|
Estate
|
Real Estate
|
& Other
|
Loans
|
September 30, 2016
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$1
|
$6
|
$233
|
$516
|
$-
|
$756
|
Collectively
evaluated for impairment
|
399
|
3,403
|
1,859
|
1,424
|
84
|
7,169
|
Total
ending allowance
|
$400
|
$3,409
|
$2,092
|
$1,940
|
$84
|
$7,925
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$128
|
$860
|
$946
|
$1,516
|
$-
|
$3,450
|
Collectively
evaluated for impairment
|
74,477
|
631,247
|
280,686
|
163,397
|
11,558
|
1,161,365
|
Total
ending loans
|
$74,605
|
$632,107
|
$281,632
|
$164,913
|
$11,558
|
$1,164,815
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$4
|
$72
|
$115
|
$297
|
$21
|
$509
|
Collectively
evaluated for impairment
|
505
|
3,084
|
1,931
|
1,489
|
123
|
7,132
|
Total
ending allowance
|
$509
|
$3,156
|
$2,046
|
$1,786
|
$144
|
$7,641
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$238
|
$2,619
|
$411
|
$602
|
$21
|
$3,891
|
Collectively
evaluated for impairment
|
64,464
|
531,290
|
249,296
|
153,067
|
13,518
|
1,011,635
|
Total
ending loans
|
$64,702
|
$533,909
|
$249,707
|
$153,669
|
$13,539
|
$1,015,526
|
Loans are charged
down or off as soon as the Company determines that the full
principal balance due under any loan becomes
uncollectible. The amount of the charge is determined as
follows:
• If
unsecured, the loan must be charged off in full.
•
If secured, the
outstanding principal balance of the loan should be charged down to
the net realizable value of the collateral.
Loans are
considered uncollectible when:
•
No regularly
scheduled payment has been made within four months unless fully
secured and in the process of collection.
•
The collateral
value is insufficient to cover the outstanding indebtedness and it
is unlikely the borrower will have the ability to pay the debt in a
timely manner.
•
The loan is
unsecured, the borrower files for bankruptcy protection and there
is no other (guarantor, etc.) support from an entity outside of the
bankruptcy proceedings.
Impaired loans
totaled $3.5 million and $3.9 million at September 30, 2016 and
December 31, 2015, respectively. Included in the $3.5 million at
September 30, 2016 is $1.1 million of loans classified as troubled
debt restructurings (“TDRs”). Included in the $3.9
million at December 31, 2015 is $2.8 million of loans classified as
TDRs. A modification of a loan’s terms constitutes a TDR if
the creditor grants a concession to the borrower for economic or
legal reasons related to the borrower’s financial
difficulties that it would not otherwise consider. All TDRs are
considered impaired.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
The following table
provides information on performing and nonperforming TDRs as of
September 30, 2016 and December 31, 2015:
|
September 30,
|
December 31,
|
(in thousands)
|
2016
|
2015
|
Performing
TDRs:
|
|
|
Commercial
real estate
|
$533
|
$2,220
|
Consumer
real estate
|
339
|
346
|
Commercial
and industrial loans
|
-
|
47
|
Total
performing TDRs
|
872
|
2,613
|
|
|
|
Nonperforming
TDRs:
|
|
|
Construction
and land development
|
128
|
104
|
Consumer
real estate
|
60
|
65
|
Consumer
and other
|
-
|
21
|
Total
nonperformingTDRs
|
188
|
190
|
Total
TDRs
|
$1,060
|
$2,803
|
During the first
nine months of 2016, there were five new loans totaling $1.3
million identified as TDRs. There were no loans
considered as TDRs in 2015 that subsequently defaulted in
2016. Of the five new loans identified as a TDR, three
were to the same borrower in the amount of $1.1 million within the
commercial and industrial (“C&I”) portfolio. The
designation of TDR to this same borrower was given due to the Bank
extending the maturity date of the three loans during a forbearance
agreement; the market would not support terms for this type of loan
and was classified as a TDR. The borrower subsequently
defaulted on the revised terms. The Bank has since liquidated these
loans and they are no longer included in the TDR
total. Another loan in the amount of $127,000 that
is a real estate construction and land development loan was coded a
TDR due to renewal of interest only terms; these are not terms that
would be provided in the market hence the TDR designation. The last
loan was for $37,000 is a C&I loan and was coded a TDR due to
change in interest rate and repayment terms that would not be
provided in the market. The borrower subsequently defaulted on the
revised loans and the Bank charged the balance of the loan to the
loan loss reserve. That loan is no longer included in
the Bank’s TDR total.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
In order to
quantify the value of any impairment, the Company evaluates loans
individually. At September 30, 2016, the Company had
$3.5 million of impaired loans. The detail of loans
evaluated for impairment as of September 30, 2016 is presented
below:
|
|
Unpaid
|
|
|
|
Contractual
|
|
(in thousands) |
Recorded
|
Principal
|
Allocated
|
September 30, 2016
|
Investment
|
Balance
|
Allowance
|
Loans
without a specific valuation allowance:
|
|
|
|
Construction
and land development
|
$127
|
$166
|
$-
|
Commercial
real estate
|
534
|
536
|
-
|
Commercial
and industrial loans
|
91
|
356
|
-
|
Loans
with a specific valuation allowance:
|
|
|
|
Construction
and land development
|
1
|
29
|
1
|
Commercial
real estate
|
326
|
327
|
6
|
Consumer
real estate
|
946
|
975
|
233
|
Commercial
and industrial loans
|
1,425
|
1,457
|
516
|
Total
|
$3,450
|
$3,846
|
$756
|
At December 31,
2015, the Company had $3.9 million of impaired
loans. The detail of loans evaluated for impairment as
of December 31, 2015 is presented below:
|
|
Unpaid
|
|
|
|
Contractual
|
|
(in thousands) |
Recorded
|
Principal
|
Allocated
|
December 31, 2015
|
Investment
|
Balance
|
Allowance
|
Loans
without a specific valuation allowance:
|
|
|
|
Construction
and land development
|
$234
|
$397
|
$-
|
Commercial
real estate
|
2,220
|
2,319
|
-
|
Loans
with a specific valuation allowance:
|
|
|
|
Construction
and land development
|
4
|
29
|
4
|
Commercial
real estate
|
399
|
480
|
72
|
Consumer
real estate
|
411
|
474
|
115
|
Commercial
and industrial loans (except
|
|
|
|
those
secured by real estate)
|
602
|
895
|
297
|
Consumer
and other
|
21
|
26
|
21
|
Total
|
$3,891
|
$4,620
|
$509
|
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
The average
recorded investment balance of impaired loans for the three- and
nine-month periods ending September 30, 2016 and 2015 are as
follows:
|
Three months ended September 30,
|
|||
|
2016
|
|
2015
|
|
|
Average
|
Interest
|
Average
|
Interest
|
(in thousands)
|
Balance
|
Income
|
Balance
|
Income
|
Construction
and land development
|
$130
|
$-
|
$252
|
$-
|
Commercial
real estate
|
867
|
10
|
4,030
|
48
|
Consumer
real estate
|
947
|
7
|
820
|
7
|
Commercial
and industrial loans
|
2,149
|
18
|
657
|
10
|
Consumer
and other
|
-
|
-
|
23
|
-
|
|
$4,093
|
$35
|
$5,782
|
$65
|
|
Nine months ended September 30,
|
|||
|
2016
|
|
2015
|
|
|
Average
|
Interest
|
Average
|
Interest
|
(in thousands)
|
Balance
|
Income
|
Balance
|
Income
|
Construction
and land development
|
$229
|
$-
|
$330
|
$1
|
Commercial
real estate
|
2,398
|
37
|
9,170
|
139
|
Consumer
real estate
|
951
|
15
|
825
|
21
|
Commercial
and industrial loans
|
2,802
|
48
|
739
|
32
|
Consumer
and other
|
20
|
-
|
24
|
-
|
|
$6,400
|
$100
|
$11,088
|
$193
|
When the Company
cannot reasonably expect full and timely repayment of its loan, the
loan is placed on nonaccrual status. The Company will continue to
track the contractual interest for purposes of customer reporting
and any potential litigation or later collection of the loan but
accrual of interest for the Company’s financial statement
purposes is to be discontinued. Subsequent payments of
interest can be recognized as income on a cash basis provided that
full collection of principal is expected. Otherwise, all
payments received are to be applied to principal only. At the time
of nonaccrual, past due or accrued interest is reversed from
income.
Loans over 90 days
past due will automatically be placed on nonaccrual
status. Loans that are less delinquent may also be
placed on nonaccrual status if full collection of principal and
interest is unlikely.
The following table
presents the recorded investment in nonaccrual loans by portfolio
segment as of September 30, 2016 and December 31,
2015:
|
Nonaccrual
|
|
|
September 30,
|
December 31,
|
(in thousands)
|
2016
|
2015
|
Construction
and land development
|
$128
|
$238
|
Consumer
real estate
|
604
|
65
|
Commercial
and industrial loans
|
216
|
189
|
Consumer
and other
|
-
|
21
|
Total
|
$948
|
$513
|
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
There were no loans
90 days or more past due and accruing interest at September 30,
2016 or December 31, 2015.
The following table
presents the aging of the recorded investment in past due loans as
of September 30, 2016 and December 31, 2015 by portfolio
segment:
|
|
|
Greater
|
|
|
|
|
|
30 - 59
|
60 - 89
|
than 90
|
|
|
|
|
|
Days
|
Days
|
Days
|
|
Total
|
|
|
(in thousands)
|
Past
|
Past
|
Past
|
Non-
|
Past
|
|
Total
|
September 30, 2016
|
Due
|
Due
|
Due
|
Accrual
|
Due
|
Current
|
Loans
|
Construction
and land development
|
$-
|
$-
|
$-
|
$128
|
$128
|
$74,477
|
$74,605
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
632,107
|
632,107
|
Consumer
real estate
|
194
|
-
|
-
|
604
|
798
|
280,834
|
281,632
|
Commercial
and industrial loans
|
305
|
-
|
-
|
216
|
521
|
164,392
|
164,913
|
Consumer
and other
|
-
|
-
|
-
|
-
|
-
|
11,558
|
11,558
|
Total
|
$499
|
$-
|
$-
|
$948
|
$1,447
|
$1,163,368
|
$1,164,815
|
|
|
|
Greater
|
|
|
|
|
|
30 - 59
|
60 - 89
|
than 90
|
|
|
|
|
|
Days
|
Days
|
Days
|
|
Total
|
|
|
(in thousands)
|
Past
|
Past
|
Past
|
Non-
|
Past
|
|
Total
|
December 31, 2015
|
Due
|
Due
|
Due
|
Accrual
|
Due
|
Current
|
Loans
|
Construction
and land development
|
$-
|
$-
|
$-
|
$238
|
$238
|
$64,464
|
$64,702
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
533,909
|
533,909
|
Consumer
real estate
|
-
|
-
|
-
|
65
|
65
|
249,642
|
249,707
|
Commercial
and industrial loans
|
-
|
-
|
-
|
189
|
189
|
153,480
|
153,669
|
Consumer
and other
|
-
|
-
|
-
|
21
|
21
|
13,518
|
13,539
|
Total
|
$-
|
$-
|
$-
|
$513
|
$513
|
$1,015,013
|
$1,015,526
|
Credit
Quality Indicators
The Company
utilizes a nine point grading system in order to evaluate the level
of inherent risk in the loan portfolio as part of its allowance for
loan losses methodology. Loans collectively evaluated for
impairment are grouped by loan type and, in the case of commercial
and construction loans, by risk rating. Each loan type is assigned
an allowance factor based on risk grade, historical loss
experience, economic conditions, overall portfolio quality
including delinquency rates and commercial real estate loan
concentrations (as applicable). As risk grades increase, additional
reserves are applied stated in basis points in order to account for
the added inherent risk.
-20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
The Company
categorizes all business and commercial purpose loans into risk
categories based on relevant information about the ability of
borrowers to service their debt such as: current financial
information, historical payment experience, credit documentation,
public information, and current economic trends, among other
factors. The Company analyzes loans individually by setting the
risk grade at the inception of a loan through the approval
process. A certain percentage of loan dollars is
reviewed each year by a third party loan review
function. The risk rating process is inherently
subjective and based upon management’s evaluation of the
specific facts and circumstances for individual borrowers. As such,
the assigned risk ratings are subject to change based upon changes
in borrower status and changes in the external environment
affecting the borrower. The Company uses the following definitions
for risk ratings:
·
Risk Grade 2 – Modest - Loans to
borrowers of significantly better than average financial strength
or loans secured by readily marketable
securities. Earnings performance is consistent and
primary and secondary sources of repayment are well established.
The borrower exhibits excellent asset quality and liquidity
with very strong debt servicing capacity and coverage.
Company management has depth, is experienced and well
regarded in the industry.
·
Risk Grade 3 – Average - Loans in
this category are to borrowers of satisfactory financial strength.
Earnings performance is consistent. Primary and secondary sources
of repayment are well defined and adequate to retire the debt in a
timely and orderly fashion. These borrowers would generally exhibit
satisfactory asset quality and liquidity. They have moderate
leverage and experienced management in key positions.
·
Risk Grade 4 – Acceptable - Loans
in this category are to borrowers involving more than average risk
which contain certain characteristics that require some supervision
and attention by the lender. Asset quality is acceptable, but
debt capacity is modest. Little excess liquidity is available. The
borrower may be fully leveraged and unable to sustain major
setbacks. Covenants are structured to ensure adequate
protection. Management may have limited experience and depth. This
category includes loans which are highly leveraged transactions due
to regulatory constraints and also includes loans involving
reasonable exceptions to policy.
·
Risk Grade 5 - Acceptable with Care - A
loan in this category is sound and collectible but contains
considerable risk. Although asset quality remains acceptable,
the borrower has a smaller and/or less diverse asset base, very
little liquidity and limited debt capacity. Earnings performance is
inconsistent and the borrower is not strong enough to sustain major
setbacks. The borrower may be highly leveraged and below
average size or a lower-tier competitor. There might be
limited management experience and depth. These loans may be
to a well-conceived start-up venture but repayment is still
dependent upon a successful operation. This category includes
loans with significant documentation or policy exceptions, improper
loan structure, or inadequate loan servicing procedures and may
also include a loan in which strong reliance for a secondary
repayment source is placed on a guarantor who exhibits the ability
and willingness to repay or loans which are highly leveraged
transactions due to the obligor’s financial status.
-21-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
·
Risk Grade 6 - Special Mention or Critical
- Loans in this category have potential weaknesses which
may, if not checked or corrected, weaken the asset or inadequately
protect the Company’s credit position at some future
date. These may also include loans of marginal quality
and liquidity that if not corrected may jeopardize the liquidation
of the debt and the Company’s credit
position. These loans require close supervision and must
be monitored to ensure there is not a pattern of deterioration in
the credit that may lead to further downgrade. These
characteristics include but are not limited to:
o
Repayment
performance has not been demonstrated to prudent
standards;
o
Repayment
performance is inconsistent and highly sensitive to business and
operating cycle swings;
o
Fatal documentation
errors and;
·
Risk Grade 7 – Substandard - A
substandard loan is inadequately protected by the current sound net
worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans classified as substandard have a
well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the
deficiencies are not corrected.
·
Risk Grade 8 – Doubtful - Loans
classified doubtful have all the weaknesses inherent in loans
classified substandard, plus 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. However, these loans are not yet rated
as loss because certain events may occur which would salvage the
debt. Among these events are:
o
Injection of
capital;
o
Alternative
financing;
o
Liquidation of
assets or the pledging of additional
collateral.
The ability of the
borrower to service the debt is extremely weak, overdue status is
constant, the debt has been placed on nonaccrual status and no
definite repayment schedule exists. Doubtful is a temporary grade
where a loss is expected but is presently not quantified with any
degree of accuracy. Once the loss position is determined, the
amount is charged off. There were no loans rated as doubtful as
of September 30, 2016 or December 31, 2015.
·
Risk Grade 9 – Loss - Loans
classified Loss are considered uncollectable and of such little
value that their continuance as bankable assets is not warranted.
This classification does not mean that the asset has absolutely no
recovery or salvage value but rather that it is not practical or
desirable to defer writing off the worthless loan even though
partial recovery may be affected in the future. Probable loss
portions of doubtful assets should be charged against the allowance
for loan losses. Loans may reside in this classification for
administrative purposes for a period not to exceed the earlier of
thirty days or calendar quarter-end. There were no loans
rated as loss as of September 30, 2016 or December 31,
2015.
-22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
(Continued)
As of September 30,
2016 and December 31, 2015 and based on the most recent analysis
performed, the risk category of unimpaired loans by class of loans
is as follows:
|
Risk Grade
|
|
||||||
(in thousands)
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
Total
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$-
|
$676
|
$714
|
$21,173
|
$51,708
|
$205
|
$-
|
$74,476
|
Commercial
real estate
|
-
|
560
|
219,780
|
302,865
|
104,621
|
3,415
|
-
|
631,241
|
Consumer
real estate
|
52
|
19,926
|
128,522
|
96,324
|
34,574
|
1,292
|
-
|
280,690
|
Commercial
and industrial loans
|
2,263
|
1,340
|
29,806
|
100,638
|
28,700
|
652
|
-
|
163,399
|
Consumer
and other
|
1,161
|
485
|
1,113
|
7,836
|
964
|
-
|
-
|
11,559
|
Total
|
$3,476
|
$22,987
|
$379,935
|
$528,836
|
$220,567
|
$5,564
|
$-
|
$1,161,365
|
|
Risk Grade
|
|
||||||
(in thousands)
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
Total
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$26
|
$200
|
$2,545
|
$14,318
|
$47,133
|
$242
|
$-
|
$64,464
|
Commercial
real estate
|
-
|
619
|
195,935
|
243,771
|
87,492
|
3,473
|
-
|
531,290
|
Consumer
real estate
|
53
|
10,933
|
111,123
|
92,127
|
34,346
|
714
|
-
|
249,296
|
Commercial
and industrial loans
|
2,168
|
1,909
|
24,675
|
96,900
|
26,802
|
612
|
-
|
153,066
|
Consumer
and other
|
980
|
1,069
|
960
|
8,392
|
1,936
|
182
|
-
|
13,519
|
Total
|
$3,227
|
$14,730
|
$335,238
|
$455,508
|
$197,709
|
$5,223
|
$-
|
$1,011,635
|
Loans with a
carrying value of $810.5 million and $689.0 million were pledged as
of September 30, 2016 and December 31, 2015, respectively, to
secure lines of credit with the Federal Reserve and the Federal
Home Loan Bank.
NOTE 5 - OFF-BALANCE SHEET RISK
The Company is a
party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of
financial instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to
extend credit are agreements to lend to a customer as long as there
is no violation of conditions established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company, upon extension of
credit is based on management’s credit evaluation of the
borrower. Collateral obtained varies but may include real estate,
stocks, bonds, and certificates of deposit.
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - OFF-BALANCE SHEET RISK (Continued)
A summary of the
contract amounts of the Company’s exposure to off-balance
sheet credit risk as of September 30, 2016 and December 31, 2015 is
as follows:
|
September 30,
|
December 31,
|
(in thousands)
|
2016
|
2015
|
Financial
instruments whose contract amounts
|
|
|
represent
credit risk:
|
|
|
Undisbursed
lines of credit
|
$202,012
|
$163,572
|
Standby
letters of credit
|
3,899
|
3,188
|
Total
|
$205,911
|
$166,760
|
NOTE 6 - DERIVATIVES AND FINANCIAL INSTRUMENTS
To mitigate
exposure to variability in expected future cash flows resulting
from changes in interest rates, in May 2013 the Company entered
into two forward swap arrangements (the “Swaps”)
whereby the Company would pay fixed rates on two short-term
borrowings at some point in the future for a determined period of
time. For both agreements, the Company would renew
advances with the Federal Home Loan Bank (“FHLB”) for
3-month terms as a primary funding source and pay the prevailing
3-month rate. The first swap, a “2-5 Swap”,
was a $20 million agreement whereby 2 years from the May 2013
execution date, the Company would begin to swap out the 3-month
FHLB advance pricing at that date for a fixed rate of 1.964% for a
period of 5 years. The second swap, a “3-5
Swap”, was similar in terms except that it was a $30 million
agreement whereby 3 years from the May 2013 execution date, the
Company would begin to swap out the 3-month FHLB advance pricing at
that date for a fixed rate of 2.464% for a period of 5
years.
The Company
designated the forward-starting interest rate swaps (the hedging
instruments) as cash flow hedges of the risk of changes
attributable to the benchmark 3-Month LIBOR interest rate risk for
the forecasted issuances of FHLB advances arising from a rollover
strategy. The Company intended to sequentially issue a
series of 3-month fixed rate debt as part of a planned roll-over of
short-term debt for the next seven to eight years.
In September 2014,
as a result of continued increasing fixed rate exposure, the
Company determined that an additional strategy was needed and, as a
result, exited from the Swaps for a deferred gain of $372,000. In
their place, the Company purchased three interest rate caps with a
strike price of 3-month LIBOR at 0.50% and a five-year
term. The instruments hedged were $100 million of
FHLB borrowings maturing quarterly on the same reset
dates. The Company executed three separate agreements
between $30 million and $35 million maturing between August 2019
and October 2019.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - DERIVATIVES AND FINANCIAL INSTRUMENTS
(Continued)
The following table
reflects the cash flow hedges included in the consolidated balance
sheets as of September 30, 2016 and December 31, 2015:
|
September 30, 2016
|
December 31, 2015
|
||
|
Notational
|
Fair
|
Notational
|
Fair
|
(in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
Included
in other assets:
|
|
|
|
|
Cap
1 - maturing August 2019
|
$35,000
|
$590
|
$35,000
|
$1,334
|
Cap
2 - maturing September 2019
|
35,000
|
603
|
35,000
|
1,360
|
Cap
3 - maturing October 2019
|
30,000
|
529
|
30,000
|
1,216
|
|
$100,000
|
$1,722
|
$100,000
|
$3,910
|
Remaining
amortization of the premium on the interest rate caps is as
follows:
(in
thousands)
|
|
2016
(remaining quarter)
|
$315
|
2017
|
1,779
|
2018
|
2,247
|
2019
|
1,752
|
|
$6,093
|
The Company
recorded $257,000 and $45,000 for the three-month periods ended
September 30, 2016 and 2015, respectively, in amortization
associated with the interest rate caps. The Company
recorded $598,000 and $64,000 for the nine-month periods ended
September 30, 2016 and 2015, respectively, in amortization
associated with the interest rate caps. Those expenses
are reflected in the consolidated statements of income as a
component of borrowings and repurchase agreements interest
expense.
Remaining
amortization of the gain associated with the exit of the Swaps is
as follows:
(in thousands)
|
|
2016
(remaining quarter)
|
$19
|
2017
|
74
|
2018
|
74
|
Thereafter
|
147
|
|
$314
|
The Company
realized $19,000 and $38,000 in gains on the Swaps during the
three- and nine-month periods ended September 30, 2016,
respectively, shown as a reduction of borrowings and repurchase
agreements interest expense.
The Company
anticipates little to no ineffectiveness in this hedging
relationship as long as the terms are matched at each forecasted
debt issuance. The Company notes that the actual
interest cost incurred at each rollover will be a function of
market rates at that time. However the Company is only
hedging the benchmark interest rate risk in each
rollover.
The Company does
not use derivatives for trading or speculative
purposes.
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7- FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is a
market-based measurement and is defined as the price that would be
received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement
date. The transaction to sell the asset or transfer the liability
is a hypothetical transaction at the measurement date, considered
from the perspective of a market participant that holds the asset
or owes the liability. In general, the transaction price will equal
the exit price and, therefore, represent the fair value of the
asset or liability at initial recognition. In determining whether a
transaction price represents the fair value of the asset or
liability at initial recognition, each reporting entity is required
to consider factors specific to the transaction and the asset or
liability, the principal or most advantageous market for the asset
or liability, and market participants with whom the entity would
transact in the market.
Outlined below is
the application of the fair value hierarchy applied to the
Company’s financial assets that are carried at fair
value.
Level 1 – Inputs to the valuation
methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the
asset or liability occur with sufficient frequency and volume to
provide pricing information on an ongoing basis. As of September
30, 2016, the types of financial assets and liabilities the Company
carried at fair value hierarchy Level 1 included marketable equity
securities with readily available market values.
Level 2 – Inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for
the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument. As of
September 30, 2016, the types of financial assets and liabilities
the Company carried at fair value hierarchy Level 2 included agency
bonds, collateralized mortgage obligations, mortgage backed
securities, municipal bonds and derivatives.
Level 3 – Inputs to the valuation
methodology are unobservable and significant to the fair value
measurement. Unobservable inputs are supported by little or no
market activity or by the entity’s own assumptions. As of
September 30, 2016, the Company valued certain financial assets
including one corporate subordinated debenture, measured on both a
recurring and a non-recurring basis, at fair value hierarchy Level
3.
The Company
utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs.
Fair Value on a Recurring
Basis
The Company
measures certain assets at fair value on a recurring basis, as
described below.
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Investment Securities Available-for-Sale
Investment
securities available-for-sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted
prices, if available. If quoted prices are not available, fair
values are measured using independent pricing models or other
model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active
exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active
over-the-counter markets and money market funds. Level 2
securities include U.S. agency securities, mortgage-backed
securities issued by government sponsored entities, municipal bonds
and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid
markets.
Derivative Assets and Liabilities
Derivative
instruments held or issued by the Company for risk management
purposes are traded in over-the-counter markets where quoted market
prices are not readily available. For those derivatives, the
Company measures fair value using models that use primarily market
observable inputs, such as yield curves and option volatilities,
and include the value associated with counterparty credit risk. The
Company classifies derivative instruments held or issued for risk
management purposes as Level 2. As of September 30, 2016 and
December 31, 2015, the Company’s derivative instruments
consist solely of interest rate caps.
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Below is a table
that presents information about assets measured at fair value on a
recurring basis at September 30, 2016 and December 31,
2015:
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(in thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
Description
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
September 30, 2016
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$18,176
|
$-
|
$18,176
|
$-
|
Collateralized
mortgage obligations
|
46,542
|
-
|
46,542
|
-
|
Mortgage-backed
securities
|
47,828
|
-
|
47,828
|
-
|
Municipal
bonds
|
63,590
|
-
|
63,590
|
|
Other
|
2,470
|
1,970
|
-
|
500
|
|
178,606
|
1,970
|
176,136
|
500
|
Interest
rate caps
|
1,722
|
-
|
1,722
|
-
|
Total
assets at fair value
|
$180,328
|
$1,970
|
$177,858
|
$500
|
December 31, 2015
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$19,901
|
$-
|
$19,901
|
$-
|
Collateralized
mortgage obligations
|
60,941
|
-
|
60,941
|
-
|
Mortgage-backed
securities
|
31,310
|
-
|
31,310
|
-
|
Municipal
bonds
|
54,434
|
-
|
54,434
|
|
Other
|
2,310
|
1,810
|
-
|
500
|
|
168,896
|
1,810
|
166,586
|
500
|
Interest
rate caps
|
3,910
|
-
|
3,910
|
-
|
Total
assets at fair value
|
$172,806
|
$1,810
|
$170,496
|
$500
|
The table below
summarizes the Company’s activity in investment securities
measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the nine months ended September
30, 2016.
|
Level 3
|
|
Investment
|
(in thousands)
|
Securities
|
Balance
at December 31, 2015
|
$500
|
Purchases
|
-
|
Balance
at September 30, 2016
|
$500
|
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Fair Value on a
Nonrecurring Basis
The Company
measures certain assets at fair value on a nonrecurring basis, as
described below.
Impaired Loans
The Company does
not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for
loan losses is established. Loans for which it is probable that
payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired,
management measures the impairment. The fair value of impaired
loans is estimated using one of several methods, including
collateral value, market value of similar debt, enterprise value,
liquidation value and discounted cash flows. Those impaired loans
not requiring an allowance represent loans for which the fair value
of the expected repayments or collateral exceed the recorded
investments in such loans. Impaired loans require classification in
the fair value hierarchy. When the fair value of the collateral is
based on an observable market price or a current appraised value,
the Company records the impaired loan as nonrecurring Level 2. When
current appraised value is not available or management determines
the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the
Company records the impaired loan as nonrecurring Level 3. Impaired
loans totaled $3.5 million and $3.9 million at September 30, 2016
and December 31, 2015,
respectively.
Other Real Estate Owned
Other real estate
owned, which includes foreclosed assets, is adjusted to fair value
upon transfer of loans and premises to other real estate.
Subsequently, other real estate owned is carried at the lower of
carrying value or fair value.
At the date of
transfer, losses are charged to the allowance for credit
losses. Subsequent write-downs are charged to expense in
the period they are incurred.
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Below is a table
that presents information about assets measured at fair value on a
nonrecurring basis at September 30, 2016 and December 31,
2015:
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(in thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
September 30, 2016
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Impaired
loans
|
$2,694
|
$-
|
$-
|
$2,694
|
Other
real estate owned
|
5,183
|
-
|
-
|
5,183
|
Total
|
$7,877
|
$-
|
$-
|
$7,877
|
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(in thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
December 31, 2015
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Impaired
loans
|
$3,382
|
$-
|
$-
|
$3,382
|
Other
real estate owned
|
5,453
|
-
|
-
|
5,453
|
Total
|
$8,835
|
$-
|
$-
|
$8,835
|
For Level 3 assets
and liabilities measured at fair value on a recurring or
nonrecurring basis as of September 30, 2016 and December 31, 2015,
the significant unobservable inputs used in the fair value
measurements were as follows:
|
|
|
|
|
|
|
September 30, 2016 and December 31,
2015
|
||||
|
|
|
|
|
|
|
Valuation
|
|
Significant
|
|
Significant
|
|
|
|
|
|
|
|
Technique
|
|
Observable Inputs
|
|
unobservable Inputs
|
Impaired loans
|
|
Appraisal value
|
|
Appraisals and/or sales of
|
|
Appraisals discounted 5% to 10% for
|
|||||
|
|
|
|
|
|
|
|
|
comparable properties
|
|
sales commissions and other holding costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
Appraisal value/
|
|
Appraisals and/or sales of
|
|
Appraisals discounted 5% to 10% for
|
||||||
|
|
|
|
|
|
|
Comparison sale/
|
|
comparable properties
|
|
sales commissions and other holding costs
|
|
|
|
|
|
|
|
Other estimates
|
|
|
|
|
The Company
provides certain disclosure of fair value information about
financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
In that regard, 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 instrument. Accordingly, certain
financial instruments and all nonfinancial instruments are excluded
from disclosure. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the
Company.
The following
methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Due from Banks
The carrying
amounts for cash and due from banks approximate fair value because
of the short maturities of those instruments.
Federal Home Loan Bank Stock
The carrying value
of Federal Home Loan Bank stock approximates fair value based on
the redemption provisions of such Federal Home Loan Bank
stock.
Bank-owned life insurance
The carrying value
of bank-owned life insurance approximates fair value because this
investment is carried at cash surrender value, as determined by the
insurer.
Loans
The fair value of
loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining
maturities.
Deposits
The fair value of
demand deposits is the amount payable on demand at the reporting
date. The fair value of time deposits is estimated by discounting
expected cash flows using the rates currently offered for
instruments of similar remaining maturities.
Accrued Interest
The carrying amount
is a reasonable estimate of fair value.
Short-Term Borrowings and Long-Term Debt
The fair values are
based on discounting expected cash flows using the current interest
rates for debt with the same or similar remaining maturities and
collateral requirements.
Financial Instruments with Off-Balance Sheet Risk
With regard to
financial instruments with off-balance sheet risk, it is not
practicable to estimate the fair value of future financing
commitments.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The following table
presents the estimated fair values and carrying amounts of the
Company’s financial instruments, none of which are held for
trading purposes, at September 30, 2016 and December 31,
2015:
|
Saptember 30, 2016
|
||||
|
Carrying
|
Fair Value
|
|||
(in thousands)
|
Amount
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Financial
assets:
|
|
|
|
|
|
Cash
and due from banks
|
$73,706
|
$73,706
|
$73,706
|
$-
|
$-
|
Investment
securities available-for-
|
|
|
|
|
|
sale
|
178,606
|
178,606
|
1,969
|
176,137
|
500
|
Loans,
net
|
1,157,420
|
1,158,081
|
-
|
1,155,387
|
2,694
|
Accrued
interest receivable
|
4,022
|
4,022
|
4,022
|
-
|
-
|
Federal
Home Loan Bank stock
|
5,425
|
5,425
|
-
|
-
|
5,425
|
Bank-owned
life insurance
|
28,943
|
28,943
|
-
|
28,943
|
-
|
Interest
rate caps
|
1,722
|
1,722
|
-
|
1,722
|
-
|
Financial
liabilities:
|
|
|
|
|
|
Non-maturing
deposits
|
955,522
|
955,522
|
-
|
955,522
|
-
|
Time
deposits
|
243,563
|
244,160
|
-
|
244,160
|
-
|
Accrued
interest payable
|
259
|
259
|
259
|
-
|
-
|
Repurchase
agreements and
|
|
|
|
|
|
federal
funds purchased
|
19,796
|
19,796
|
-
|
19,796
|
-
|
FHLB
Advances and other borrowings
|
100,000
|
100,012
|
-
|
100,012
|
-
|
Subordinated
debt
|
18,558
|
14,203
|
-
|
14,203
|
-
|
|
December 31, 2015
|
||||
|
Carrying
|
Fair Value
|
|||
(in thousands)
|
Amount
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Financial
assets:
|
|
|
|
|
|
Cash
and due from banks
|
$55,530
|
$55,530
|
$55,530
|
$-
|
$-
|
Investment
securities available-for-
|
|
|
|
|
|
sale
|
168,896
|
168,896
|
1,810
|
166,586
|
500
|
Loans,
net
|
1,008,515
|
1,013,415
|
-
|
1,010,033
|
3,382
|
Accrued
interest receivable
|
3,795
|
3,795
|
3,795
|
-
|
-
|
Federal
Home Loan Bank stock
|
8,061
|
8,061
|
-
|
-
|
8,061
|
Bank-owned
life insurance
|
28,274
|
28,274
|
-
|
28,274
|
-
|
Interest
rate caps
|
3,910
|
3,910
|
-
|
3,910
|
-
|
Financial
liabilities:
|
|
|
|
|
|
Non-maturing
deposits
|
663,066
|
663,066
|
-
|
663,066
|
-
|
Time
deposits
|
319,781
|
320,246
|
-
|
320,246
|
-
|
Accrued
interest payable
|
356
|
356
|
356
|
-
|
-
|
Repurchase
agreements and
|
|
|
|
|
|
federal
funds purchased
|
30,580
|
30,580
|
-
|
30,580
|
-
|
FHLB
Advances and other borrowings
|
169,800
|
169,800
|
-
|
169,800
|
-
|
Subordinated
debt
|
18,558
|
15,591
|
-
|
15,591
|
-
|
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 – SUPPLEMENTAL CASH FLOW DISCLOSURE
|
For the nine-months
|
|
|
ended September 30,
|
|
(in thousands)
|
2016
|
2015
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
Interest
paid
|
$6,072
|
$5,576
|
|
|
|
Income
taxes paid
|
$4,485
|
$3,185
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activites:
|
|
|
|
|
|
Change
in fair value of securities available-for-sale, net of
taxes
|
$2,771
|
$(934)
|
|
|
|
Change
in fair value of cash flow hedges, net of taxes
|
$(1,592)
|
$(2,753)
|
|
|
|
Transfer
from loans to foreclosed real estate
|
$-
|
$3,300
|
NOTE 9 – Holding Company Line
In the third
quarter of 2016, the Company entered into a $20.0 million secured
holding company line of credit with an unaffiliated
institution. The terms of the note include interest at
prime plus 0.50% and will expire in September 2017. The
line is secured by 100% of the stock of the Bank owned by the
Company. The Company has not drawn on the note and has
no balance at September 30, 2016.
NOTE 10 – Issuances of Common Stock
During the second
quarter of 2016, the Company issued 19,145 shares of common stock
to certain employees under its long-term stock-based incentive
compensation plan. During the third quarter of 2016,
there were 1,352 shares of common stock previously issued to
certain employees under its long-term stock-based incentive
compensation plan which were forfeited.
In addition, during
the third quarter of 2016, the Company issued 1,528 shares to
employees under its employee stock purchase plan.
On June 21, 2016,
the Company sold a total of 845,588 shares of common stock in our
initial public offering at an initial public offering price of
$34.00 per share. The Company received net proceeds as a
result of the offering of $26.4 million. Of the net
proceeds, $3.8 million was deployed to repay the remaining balance
on corporate borrowings with the remainder deposited into the Bank
for utilization in strategic growth and initiatives.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 – Subsequent Events
Subsequent events
are events or transactions that occur after the balance sheet date
but before financial statements are issued. Recognized subsequent
events are events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet,
including the estimates inherent in the process of preparing
financial statements. Nonrecognized subsequent events are events
that provide evidence about conditions that did not exist at the
date of the balance sheet but arose after that
date. Management has reviewed events occurring through
the date the financial statements were available to be issued and
no subsequent events occurred requiring accrual or
disclosure.
-34-
Item
2 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Paragon Commercial
Corporation (the “Company” or “Paragon”) is
a bank holding company incorporated under the laws of North
Carolina and headquartered in Raleigh, North Carolina. The Company
conducts its business operations primarily through its wholly owned
subsidiary, Paragon Bank (the “Bank”), a full-service,
state-chartered community bank with 3 locations in Raleigh,
Charlotte and Cary, North Carolina. Paragon Bank provides banking
services to businesses and consumers across the
Carolinas.
Because the Company
has no material operations and conducts no business on its own
other than owning its subsidiary, the discussion contained in this
management’s discussion and analysis concerns primarily the
business of Paragon Bank. For ease of reading and because the
financial statements are presented on a consolidated basis, Paragon
Commercial Corporation and Paragon Bank are collectively referred
to herein as “the Company,” “we”,
“our”, or “us”, unless otherwise
noted.
Management’s
discussion and analysis is intended to assist readers in
understanding and evaluating the financial condition and
consolidated results of operations of the Company. This discussion
and analysis includes descriptions of significant transactions,
trends and other factors affecting the Company’s operating
results for the three and nine month periods ended September 30,
2016, and 2015, as well as the financial condition of the Company
as of September 30, 2016 and December 31, 2015. This discussion and
analysis should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes included
in this report and the consolidated financial statements and
accompanying notes included in our final prospectus filed pursuant
to Rule 424(b) under the Securities Act of 1933 with the Securities
and Exchange Commission (the “SEC”) on June 17,
2016.
Forward-Looking
Information
This periodic
report on Form 10-Q contains certain “forward-looking
statements” that represent management’s judgments
concerning the future and are subject to risks and uncertainties
that could cause the Company’s actual operating results and
financial position to differ materially from those projected in the
forward-looking statements. Such forward-looking statements can be
identified by the use of forward-looking terminology such as
“may,” “will,” “anticipate,”
“should,” “would,” “project,”
“future,” “strategy,”
“believe,” “contemplate,”
“expect,” “estimate,”
“continue,” “intend,” “seeks,”
or other similar words and expressions of the future. Risks and
other factors that could influence the estimates include risks
associated with any change in management, strategic direction,
business plan, or operations, local economic conditions affecting
retail and commercial real estate, disruptions in the credit
markets, particularly in light of continued economic uncertainty in
the European Union and continued political unrest and instability
in the Middle East; changes in interest rates, adverse developments
in the real estate market affecting the value and marketability of
collateral securing loans made by the Bank, the failure of
assumptions underlying loan loss and other reserves, competition
and the risk of new and changing regulation, including, but not
limited to recent proposals that would change capital standards and
asset risk-weighting for financial institutions. Additional factors
that could cause actual results to differ materially are discussed
in the Company’s filings with the SEC. The forward-looking
statements in this document speak only as of the date hereof, and
the Company does not assume any obligation to update such
forward-looking statements, except as may otherwise be required by
law.
-35-
GAAP
Reconciliation and Management Explanation of Non-GAAP Financial
Measures
Some of the
financial measures included in this report are not measures of
financial performance recognized by GAAP. These non-GAAP financial
measures are “tangible stockholders’ equity,”
“tangible book value per share,” “tangible
average equity to tangible average assets,” and
“efficiency ratio.” Our management uses these non-GAAP
financial measures in its analysis of our performance and because
of market expectations of use of these ratios to evaluate the
Company. Management believes each of these non-GAAP
financial measures provides useful information about our financial
condition and results of operation. As noted below, the efficiency
ratio shows the amount of revenue generated for each dollar spent
and provides investors with a measure of our productivity. We also
believe the presentation of tangible stockholders’ equity,
tangible book value per share, tangible equity to risk-weighted
assets and tangible average equity to tangible average assets would
provide investors with a clear picture of our assets and equity.
However, because the Company has not consummated any merger
transactions and does not use any derivatives that might give rise
to an intangible asset, there is no difference in tangible equity
or assets and GAAP equity or assets.
•
“Efficiency
ratio” is defined as total non-interest expense divided by
adjusted operating revenue. Adjusted operating revenue is equal to
net interest income (taxable equivalent) plus non-interest income,
adjusted to exclude the impacts of gains and losses on the sale of
securities and gains and losses on the sale or write-down of
foreclosed real estate. We believe the efficiency ratio is
important as an indicator of productivity because it shows the
amount of revenue generated by our core operations for each dollar
spent. While the efficiency ratio is a measure of productivity, its
value reflects the attributes of the business model we
employ.
|
Three-Month Periods
|
Nine-Month Periods
|
||
|
Ended September 30,
|
Ended September 30,
|
||
(Dollars in
thousands)
|
2016
|
2015
|
2016
|
2015
|
Efficiency Ratio
|
|
|
|
|
Non-interest
expense
|
$6,778
|
$6,180
|
$19,866
|
$18,460
|
|
|
|
|
|
Net
interest taxable equivalent income
|
$12,026
|
$10,853
|
$33,878
|
$30,518
|
Non-interest
income
|
438
|
544
|
1,085
|
1,352
|
Less
gain on investment securities
|
-
|
(145)
|
(85)
|
(568)
|
Plus
loss on sale or writedown of foreclosed real estate
|
-
|
9
|
257
|
472
|
Adjusted
operating revenue
|
$12,464
|
$11,261
|
$35,135
|
$31,774
|
|
|
|
|
|
Efficiency
ratio
|
54.38%
|
54.88%
|
56.54%
|
58.10%
|
Executive
Overview of Recent Financial Performance
·
The Company
completed its initial public offering (“IPO”) which
raised gross proceeds of $28.7 million and enhanced
capital. The shares of the Company’s common stock
began trading on the Nasdaq Capital Market as of June 16,
2016.
·
Net income
available to common stockholders totaled $3.5 million, a 4.3%
improvement from $3.3 million in the third quarter
(“Q3”) of 2015. On a per share basis, income
decreased from $0.73 per diluted common share in Q3 2015 to $0.64
per diluted common share in the third quarter (“Q3”) of
2016 as a result of the new shares issued in conjunction with the
IPO.
-36-
·
Return on average
assets equaled 0.95% in Q3 2016 compared to 0.99% in Q3 2015 while
return on average equity equaled 10.35% in Q3 2016 compared to
14.17% for the same period in 2015.
·
The efficiency
ratio, which represents operating expenses to total operating
revenues, improved to 54.38% in Q3 2016 from 54.88% in Q3
2015.
·
The Company had net
charged-off loans of $452,000 in Q3 2016, compared to net
recoveries of charged-off loans of $49,000 in Q3
2015.
·
Annualized net loan
growth was 22% in Q3 2016, resulting from net loan originations
during the quarter of $60.0 million.
Analysis
of Results of Operations
Third Quarter 2016 compared to Third Quarter 2015
During the
three-month period ended September 30, 2016, the Company had net
income of $3.5 million compared to net income of $3.3 million for
the same period in 2015. Both basic and diluted net income per
share for the quarter ended September 30, 2016 were $0.64, compared
with basic and diluted net income per share of $0.73 for the same
period in 2015. On a quarter over quarter basis, net income was
impacted in 2016 by the Company recording a $391,000 loan loss
provision in the third quarter of 2016. It was the first
loan loss provision recorded by the Company since the second
quarter of 2015. Net income was also impacted by the
additional shares issued in 2016 as a result of the
IPO.
Year-to-Date 2016 compared to Year-to-Date 2015
During the
nine-month period ended September 30, 2016, the Company had net
income of $9.8 million compared to net income of $8.3 million for
the same period in 2015. Basic and diluted net income per share for
the nine months ended September 30, 2016 were $2.02 and $2.00,
respectively, compared with basic and diluted net income per share
of $1.84 and $1.82, respectively, for the same period in
2015.
As discussed in
greater detail below, the improvements in the results of operations
in the third quarter and first nine months of 2016, compared to the
respective periods of 2015, reflect the benefit of balance sheet
growth period over period as well as continued overall credit
improvement.
Net
Interest Income
Third Quarter 2016 compared to Third Quarter 2015
Like most financial
institutions, the primary component of earnings for the Company is
net interest income. Net interest income is the difference between
interest income, principally from loans and investment securities
portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result
from changes in volume, spread and margin. For this purpose, volume
refers to the average dollar level of interest-earning assets and
interest-bearing liabilities, spread refers to the difference
between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities, and margin refers to
net interest income divided by average interest-earning assets.
Margin is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities, as well
as by the levels on non-interest bearing liabilities and
capital.
-37-
Net interest income
increased by $1.1 million to $11.8 million for the three months
ended September 30, 2016 from $10.7 million in the same period in
2015. The Company’s total interest income was
impacted by an increase in interest earning assets. Average total
interest-earning assets were $1.38 billion in the third quarter of
2016 compared with $1.24 billion in the same period in
2015. The yield on those assets was 4.07% in the third
quarter of 2016 compared to 4.06% for the same period in
2015. The improvement in yield was primarily the result
of a shift in asset composition from lower yielding short-term
investments and cash into loans. Meanwhile, average
interest-bearing liabilities increased by $50.9 million from $1.07
billion for the three months ended September 30, 2015 to $1.12
billion for the same period ended September 30, 2016. The
Company’s cost of these funds increased by 5 basis points
year over year to 0.74% from 0.69% in the third quarter of
2015. The primary cause for the increase was the
escalating cost of the amortization of the interest rate
cap. During the three-month period ended September 30,
2016, the Company’s net interest margin was 3.47% and net
interest spread was 3.33%. In the third quarter of 2015,
net interest margin was 3.47% and net interest spread was
3.37%.
The following table
summarizes the major components of net interest income and the
related yields and costs for the quarterly periods
presented.
-38-
|
For the
Three Months Ended September 30,
|
|||||
|
2016
|
2015
|
||||
|
Average
|
|
Average
|
Average
|
|
Average
|
(Dollars
in thousands)
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Loans,
net of allowance (1)
|
$1,135,448
|
$12,544
|
4.40%
|
$999,857
|
$11,223
|
4.45%
|
Investment
securities (2)
|
186,060
|
1,473
|
3.15%
|
174,653
|
1,446
|
3.28%
|
Other
interest-earning assets
|
56,573
|
97
|
0.68%
|
66,130
|
38
|
0.23%
|
Total interest-earning assets
|
1,378,081
|
14,114
|
4.07%
|
1,240,640
|
12,707
|
4.06%
|
Other
assets
|
74,443
|
|
|
101,471
|
|
|
Total assets
|
$1,452,524
|
|
|
$1,342,111
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$186,369
|
167
|
0.36%
|
$129,297
|
165
|
0.51%
|
Money
markets
|
491,805
|
799
|
0.65%
|
333,957
|
562
|
0.67%
|
Time
deposits less than $100,000
|
11,208
|
29
|
1.04%
|
22,458
|
105
|
1.86%
|
Time
deposits greater than or
|
|
|
|
|
|
|
equal
to $100,000
|
243,150
|
559
|
0.91%
|
367,251
|
694
|
0.75%
|
Borrowings
|
185,211
|
534
|
1.15%
|
213,845
|
328
|
0.61%
|
Total interest-bearing liabilities
|
1,117,743
|
2,088
|
0.74%
|
1,066,808
|
1,854
|
0.69%
|
Noninterest-bearing
deposits
|
190,745
|
|
|
157,435
|
|
|
Other
liabilities
|
10,558
|
|
|
24,370
|
|
|
Stockholders
equity
|
133,478
|
|
|
93,498
|
|
|
Total liabilities and stockholders
|
|
|
|
|
|
|
equity
|
$1,452,524
|
|
|
$1,342,111
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate
|
|
|
|
|
|
|
spread (taxable-equivalent basis) (3)
|
|
$12,026
|
3.33%
|
|
$10,853
|
3.37%
|
|
|
|
|
|
|
|
Net interest margin (taxable-
|
|
|
|
|
|
|
equivalent basis) (4)
|
|
|
3.47%
|
|
|
3.47%
|
|
|
|
|
|
|
|
Ratio of interest-bearing assets to
|
|
|
|
|
|
|
interest-bearing liabilities
|
123.29%
|
|
|
116.29%
|
|
|
|
|
|
|
|
|
|
Reported net interest income
|
|
|
|
|
|
|
Net
interest income (taxable-equivalent
|
|
|
|
|
|
|
basis)
|
|
$12,026
|
|
|
$10,853
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
259
|
|
|
197
|
|
Net
interest income
|
|
$11,767
|
|
|
$10,656
|
|
(1) Loans include
nonaccrual loans.
(2) Yields related
to investment securities exempt from income taxes are stated on a
taxable-equivalent basis assuming a federal income tax rate of 30.0
percent. The taxable-equivalent adjustment was $259,000
and $197,000 for the 2016 and 2015 periods,
respectively.
(3) Net interest
spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest
margin represents annualized net interest income divided by average
interest-earning assets.
Changes in interest
income and interest expense can result from variances in both
volume and rates. The following table presents the relative impact
on tax-equivalent net interest income to changes in the average
outstanding balances of interest-earning assets and
interest-bearing liabilities and the rates earned and paid on such
assets and liabilities.
-39-
|
Three Months Ended
|
||
|
September 30, 2016 vs. 2015
|
||
|
Increase (Decrease) Due to
|
||
(in thousands)
|
Volume
|
Rate
|
Total
|
Interest
income
|
|
|
|
Loans,
net of allowance
|
$1,518
|
$(197)
|
$1,321
|
Investment
securities
|
94
|
(67)
|
27
|
Other
interest-earning assets
|
(5)
|
64
|
59
|
Total
interest income (taxable-
|
|
|
|
equivalent
basis)
|
1,607
|
(200)
|
1,407
|
|
|
|
|
Interest
expense
|
|
|
|
Deposits:
|
|
|
|
Interest-bearing
checking accounts
|
73
|
(71)
|
2
|
Money
markets
|
265
|
(28)
|
237
|
Time
deposits less than $100,000
|
(53)
|
(23)
|
(76)
|
Time
deposits greater than or
|
|
|
|
equal
to $100,000
|
(234)
|
99
|
(135)
|
Borrowings
|
(44)
|
250
|
206
|
Total
interest expense
|
7
|
227
|
234
|
|
|
|
|
Net
interest income increase/
|
|
|
|
(decrease)(taxable
equivalent basis)
|
$1,600
|
$(427)
|
1,173
|
|
|
|
|
Less:
|
|
|
|
Taxable-equivalent
adjustment
|
|
|
62
|
Net
interest income increase/
|
|
|
|
(decrease)
|
|
|
$1,111
|
Year-to-Date 2016 compared to Year-to-Date 2015
Net interest income
increased by $3.8 million to $39.6 million for the nine months
ended September 30, 2016 from $35.8 million in the same period in
2015. The Company’s total interest income was
impacted by an increase in interest earning assets. Average total
interest-earning assets were $1.31 billion for the nine-month
period ended September 30, 2016 compared with $1.18 billion in the
same period in 2015. The yield on those assets was 4.12%
in 2016 compared to 4.11% for the same period in
2015. The improvement in yield was primarily the result
of a shift in asset composition from lower yielding short-term
investments and cash into loans. Meanwhile, average
interest-bearing liabilities increased by $56.6 million from $1.03
billion for the year-to-date period ended September 30, 2015 to $
1.08 billion for the same period ended September 30, 2016. The
Company’s cost of these funds increased by 2 basis points
year over year to 0.74% from 0.72%. During the
nine-month period ended September 30, 2016, the Company’s net
interest margin was 3.51% and net interest spread was
3.38%. For the same period in 2015, net interest margin
was 3.49% and net interest spread was 3.39%.
The following table
summarizes the major components of net interest income and the
related yields and costs for the quarterly periods
presented.
-40-
|
For the Nine Months Ended September 30,
|
|||||
|
2016
|
2015
|
||||
|
Average
|
|
Average
|
Average
|
|
Average
|
(Dollars in thousands)
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Loans,
net of allowance (1)
|
$1,075,390
|
$35,574
|
4.42%
|
$958,662
|
$32,189
|
4.49%
|
Investment
securities (2)
|
185,721
|
4,554
|
3.28%
|
165,882
|
4,097
|
3.30%
|
Other
interest-earning assets
|
46,832
|
218
|
0.62%
|
58,645
|
104
|
0.24%
|
Total interest-earning assets
|
1,307,943
|
40,346
|
4.12%
|
1,183,189
|
36,390
|
4.11%
|
Other
assets
|
81,939
|
|
|
91,623
|
|
|
Total assets
|
$1,389,882
|
|
|
$1,274,812
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$165,655
|
515
|
0.42%
|
$123,377
|
454
|
0.49%
|
Money
markets
|
432,362
|
2,144
|
0.66%
|
301,604
|
1,533
|
0.68%
|
Time
deposits less than $100,000
|
11,496
|
89
|
1.04%
|
28,859
|
369
|
1.71%
|
Time
deposits greater than or
|
|
|
|
|
|
|
equal
to $100,000
|
255,407
|
1,622
|
0.85%
|
343,462
|
2,240
|
0.87%
|
Borrowings
|
219,461
|
1,605
|
0.98%
|
230,458
|
924
|
0.54%
|
Total interest-bearing liabilities
|
1,084,381
|
5,975
|
0.74%
|
1,027,759
|
5,520
|
0.72%
|
Noninterest-bearing
deposits
|
180,623
|
|
|
145,181
|
|
|
Other
liabilities
|
12,790
|
|
|
10,847
|
|
|
Stockholders
equity
|
112,088
|
|
|
91,025
|
|
|
Total liabilities and stockholders
|
|
|
|
|
|
|
equity
|
$1,389,882
|
|
|
$1,274,812
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate
|
|
|
|
|
|
|
spread (taxable-equivalent basis) (3)
|
|
$34,371
|
3.38%
|
|
$30,870
|
3.39%
|
|
|
|
|
|
|
|
Net interest margin (taxable-
|
|
|
|
|
|
|
equivalent basis) (4)
|
|
|
3.51%
|
|
|
3.49%
|
|
|
|
|
|
|
|
Ratio of interest-bearing assets to
|
|
|
|
|
|
|
interest-bearing liabilities
|
120.62%
|
|
|
115.12%
|
|
|
|
|
|
|
|
|
|
Reported net interest income
|
|
|
|
|
|
|
Net
interest income (taxable-equivalent
|
|
|
|
|
|
|
basis)
|
|
$34,371
|
|
|
$30,870
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
752
|
|
|
549
|
|
Net
interest income
|
|
$33,619
|
|
|
$30,321
|
|
(1) Loans include
nonaccrual loans.
(2) Yields related
to investment securities exempt from income taxes are stated on a
taxable-equivalent basis assuming a federal income tax rate of 30.0
percent. The taxable-equivalent adjustment was $752,000
and $549,000 for the 2016 and 2015 periods,
respectively.
(3) Net interest
spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest
margin represents annualized net interest income divided by average
interest-earning assets.
Changes in interest
income and interest expense can result from variances in both
volume and rates. The following table presents the relative impact
on tax-equivalent net interest income to changes in the average
outstanding balances of interest-earning assets and
interest-bearing liabilities and the rates earned and paid on such
assets and liabilities.
-41-
|
Nine Months Ended
|
||
|
September 30, 2016 vs. 2015
|
||
|
Increase (Decrease) Due to
|
||
(in thousands)
|
Volume
|
Rate
|
Total
|
Interest
income
|
|
|
|
Loans,
net of allowance
|
$3,923
|
$(538)
|
$3,385
|
Investment
securities
|
490
|
(33)
|
457
|
Other
interest-earning assets
|
(21)
|
135
|
114
|
Total
interest income (taxable-
|
|
|
|
equivalent
basis)
|
4,392
|
(436)
|
3,956
|
|
|
|
|
Interest
expense
|
|
|
|
Deposits:
|
|
|
|
Interest-bearing
checking accounts
|
156
|
(95)
|
61
|
Money
markets
|
665
|
(54)
|
611
|
Time
deposits less than $100,000
|
(222)
|
(58)
|
(280)
|
Time
deposits greater than or
|
|
|
|
equal
to $100,000
|
(575)
|
(43)
|
(618)
|
Borrowings
|
(44)
|
725
|
681
|
Total
interest expense
|
(20)
|
475
|
455
|
|
|
|
|
Net
interest income increase/
|
|
|
|
(decrease)(taxable
equivalent basis)
|
$4,412
|
$(911)
|
3,501
|
|
|
|
|
Less:
|
|
|
|
Taxable-equivalent
adjustment
|
|
|
203
|
Net
interest income increase/
|
|
|
|
(decrease)
|
|
|
$3,298
|
Provision
for Loan Losses
Third Quarter 2016 compared to Third Quarter 2015
Provisions for loan
losses are charged to income to bring the allowance for loan losses
to a level deemed appropriate by management. In
evaluating the allowance for loan losses, management considers
factors that include growth, composition and industry
diversification of the portfolio, historical loan loss experience,
current delinquency levels, adverse situations that may affect a
borrower’s ability to repay, estimated value of any
underlying collateral, prevailing economic conditions and other
relevant factors.
In determining the
loss history to be applied to its ASC 450 loan pools within the
allowance for loan losses, the Company uses net charge-off history
for the most recent five consecutive years. Since each
of the five past years contain a declining amount of charge-offs
coupled with a large number of recoveries, the impact of the
Company’s improvement in historical credit quality has
resulted in a continually declining balance of reserves as a
percentage of the loan portfolio. However, the Company
has added qualitative factors to the reserve to account for
concerns over future trends in the economy, interest rates and
other factors. Currently, qualitative factors account
for 74% of the reserve.
-42-
The following table
summarizes the changes in the allowance for loan losses for the
three months ended September 30, 2016 and 2015:
(in thousands)
|
|
Three months ended September 30, 2016
|
|
Beginning
balance
|
$7,986
|
Provision
for loan losses
|
391
|
Loans
charged off
|
(682)
|
Recoveries
|
230
|
Net
chargeoffs
|
(452)
|
Ending
balance
|
$7,925
|
|
|
Three months ended September 30, 2015
|
|
Beginning
balance
|
$7,569
|
Provision
for loan losses
|
-
|
Loans
charged off
|
(14)
|
Recoveries
|
63
|
Net
recoveries
|
49
|
Ending
balance
|
$7,618
|
The Company
recorded a provision of $391,000 in the third quarter of
2016. It did not record a provision for loan losses in
the third quarter of 2015. The increase in the provision
for 2016 was the result of continued growth in the Company’s
loan portfolio along with net charge-offs during the period of
$452,000.
Year-to-Date 2016 compared to Year-to-Date 2015
The following table
summarizes the changes in the allowance for loan losses for the
nine months ended September 30, 2016 and 2015:
(in
thousands)
|
|
Nine months ended September 30, 2016
|
|
Beginning
balance
|
$7,641
|
Provision
for loan losses
|
391
|
Loans
charged off
|
(683)
|
Recoveries
|
576
|
Net
chargeoffs
|
(107)
|
Ending
balance
|
$7,925
|
|
|
Nine months ended September 30, 2015
|
|
Beginning
balance
|
$6,869
|
Provision
for loan losses
|
750
|
Loans
charged off
|
(290)
|
Recoveries
|
289
|
Net
chargeoffs
|
(1)
|
Ending
balance
|
$7,618
|
-43-
The Company
recorded a provision for loan losses of $391,000 in the first nine
months of 2016 compared to a provision of $750,000 recorded during
the same period in 2015. The decrease in the provision
for 2016 was the result of continued credit improvement in the
Bank’s loan portfolio.
Non-Interest
Income
The following table
provides a summary of non-interest income for the periods
presented.
|
Three months
|
Nine
months
|
||
|
ended September 30,
|
ended September 30,
|
||
(in thousands)
|
2016
|
2015
|
2016
|
2015
|
Non-interest income
|
|
|
|
|
Increase
in cash surrender value of bank owned
|
|
|
|
|
life
insurance
|
$220
|
$225
|
$669
|
$632
|
Net
gain on sale of securities
|
-
|
145
|
85
|
568
|
Service
charges and fees
|
65
|
58
|
179
|
163
|
Mortgage
origination fees and gains on sale of loans
|
59
|
44
|
124
|
156
|
Net
loss on sale or impairment of foreclosed assets
|
-
|
(9)
|
(257)
|
(472)
|
Other
fees and income
|
94
|
81
|
285
|
305
|
Total
non-interest income
|
$438
|
$544
|
$1,085
|
$1,352
|
Third Quarter 2016 compared to Third Quarter 2015
Non-interest income
for the quarter ended September 30, 2016 was $438,000, a decrease
of $106,000 from $544,000 for the same period in
2015. The primary reason for the decrease was a $145,000
gain on sale of investments due to sale of securities in
2015. There were no such securities sold for gains in
2016.
Year-to-Date 2016 compared to Year-to-Date 2015
Non-interest income
for the nine months ended September 30, 2016 was $1.1 million, a
decrease of $267,000 from $1.4 million for the same period in
2015. The primary reason for the decrease was a decrease
of $483,000 in the amount of gains on sale of held-for-sale
investment securities. This was partially offset by a
decrease in losses on sale or write-down of other real estate,
which is included in non-interest income
totals. Net losses in this category in the first
nine months of 2016 were $257,000 compared to $472,000 for the same
period in 2015.
Non-Interest
Expenses
The following table
provides a summary of non-interest expenses for the periods
presented.
-44-
|
Three months
|
Nine months
|
||
|
ended September 30,
|
ended September 30,
|
||
(in thousands)
|
2016
|
2015
|
2016
|
2015
|
Non-interest expense
|
|
|
|
|
Salaries
and employee benefits
|
$3,912
|
$3,378
|
$11,521
|
$9,714
|
Furniture,
equipment and software costs
|
456
|
482
|
1,450
|
1,383
|
Occupancy
|
362
|
366
|
1,048
|
1,203
|
Data
processing
|
270
|
267
|
845
|
846
|
Director
related fees and expenses
|
219
|
253
|
690
|
670
|
Professional
fees
|
208
|
159
|
627
|
614
|
FDIC
and other supervisory assessments
|
220
|
231
|
632
|
710
|
Advertising
and public relations
|
239
|
116
|
661
|
537
|
Unreimbursed
loan costs and foreclosure related expenses
|
172
|
281
|
383
|
750
|
Other
|
720
|
647
|
2,009
|
2,033
|
Total
non-interest expense
|
$6,778
|
$6,180
|
$19,866
|
$18,460
|
Third Quarter 2016 compared to Third Quarter 2015
Non-interest
expenses increased period over period by $598,000, or 9.7%, to $6.8
million for the three-month period ended September 30, 2016, from
$6.2 million for the same period in 2015. The following are
highlights of the significant changes in non-interest expenses in
the third quarter of 2016 compared to the third quarter of
2015.
·
Personnel expenses
increased $534,000 to $3.9 million due primarily to the addition of
more personnel to handle the rapid growth of the
Company.
·
Advertising and
public relations costs increased $123,000 from $116,000 to $239,000
primarily due to timing differences between quarters in several
large bank sponsorships.
·
Unreimbursed loan
costs and foreclosure related expenses decreased $109,000 primarily
due to a decrease in expenses on foreclosed properties associated
with fewer foreclosed properties being held by the
Company.
Year-to-Date 2016 compared to Year-to-Date 2015
Non-interest
expenses increased period over period by $1.4 million, or 7.6%, to
$19.9 million for the nine-month period ended September 30, 2016,
from $18.5 million for the same period in 2015. The following are
highlights of the significant changes in non-interest expenses in
the first nine months of 2016 compared to the same period in
2015.
·
Personnel expenses
increased $1.8 million to $11.5 million due primarily to the
addition of more personnel to handle the rapid growth of the
Company and due to annual salary increases.
·
Occupancy decreased
$155,000 from the same nine month period in 2015. The
2015 figure included a one-time adjustment for accrual of future
commitments of lease payments for leased space in the Charlotte
office which was no longer being used.
·
Unreimbursed loan
costs and foreclosure related expenses decreased $367,000 primarily
due to a decrease in expenses on foreclosed properties associated
with fewer foreclosed properties being held.
Provision
for Income Taxes
Income tax expense
was $1.6 million in the third quarter of 2016 and $1.7 million in
the third quarter of 2015. The Company’s effective
tax rate for the third quarter of 2016 was 31.39%, compared to
34.00% for the same period in 2015. The decrease in
effective tax rate was primarily due to a one-time adjustment made
in the third quarter of 2016 as a result of the 2015 tax return
being filed.
-45-
For the nine-month
period ended September 30, 2016, income tax expense was $4.7
million compared to $4.2 million for the same period in
2015. The Company’s effective tax rate for the
nine-month period ended September 30, 2016 was 32.39%, compared to
33.64% for the same period in 2015.
In 2016, the North
Carolina state corporate income tax rate decreased from 5% to
4%. The North Carolina state corporate income tax rate
is scheduled to decrease to 3% in 2017. The impact of
the reduced benefit for the deferred tax assets was reflected in
the third quarter 2016 tax expense.
-46-
Analysis
of Financial Condition
Overview
Total assets at
September 30, 2016 were $1.48 billion, an increase of $172.9
million or 13.2% over the balance as of December 31, 2015 of $1.31
billion. Interest earning assets at September 30, 2016
totaled $1.40 billion and consisted of $1.16 billion in net loans,
$178.6 million in investment securities, $5.4 million in Federal
Home Loan Bank of Atlanta stock, and $69.1 million in overnight
investments and interest-bearing deposits in other
banks. Interest earning assets at December 31, 2015
totaled $1.21 billion and consisted of $1.01 billion in net loans,
$168.9 million in investment securities, $8.1 million in Federal
Home Loan Bank of Atlanta stock, and $31.0 million in overnight
investments and interest-bearing deposits in other banks. Total
deposits and stockholders’ equity at September 30, 2016 were
$1.20 billion and $135.0 million, respectively. Total
deposits and stockholders’ equity at December 31, 2015 were
$982.8 million and $97.7 million, respectively.
Investment Securities
The Company's
investment portfolio plays a major role in the management of
liquidity and interest rate sensitivity and, therefore, is managed
in the context of the overall balance sheet. In general, the
primary goals of the investment portfolio are: (i) to provide a
sufficient margin of liquid assets to meet unanticipated deposit
and loan fluctuations and overall funds management objectives; (ii)
to provide eligible securities to secure public funds as prescribed
by law and other borrowings; (iii) to provide structures and terms
to enable proper interest rate risk management; and (iv) to earn
the maximum return on funds invested that is commensurate with
meeting the requirements of (i), (ii) and (iii). The Company
invests in securities as allowable under bank regulations and its
investment policy. These securities include U.S. Agency
obligations, U.S. government-sponsored entities, including
collateralized mortgage obligations and mortgage-backed securities,
bank eligible obligations of state or political subdivisions, and
limited types of permissible corporate debt and equity
securities.
Investment
securities as of September 30, 2016 and December 31, 2015 were
$178.6 million and $168.9 million, respectively. The
Company’s investment portfolio at September 30, 2016 and
December 31, 2015, consisted of U.S. government agency obligations,
collateralized mortgage obligations, mortgage-backed securities,
municipal bonds and other equity investments, and had a weighted
average taxable equivalent yield of 2.81% and 2.90% at September
30, 2016 and December 31, 2015, respectively. The
Company also held an investment of $5.4 million and $8.1 million in
Federal Home Loan Bank stock as of September 30, 2016 and December
31, 2015 with a weighted average yield of 4.64% and 4.53% for those
periods. The FHLB stock is recorded at cost and is classified
separately from investment securities on the consolidated balance
sheets.
The investment
portfolio increased $9.7 million during the first nine months of
2016, the net result of $39.4 million in purchases, $15.7 million
in sales, $16.3 million of maturities and prepayments and a
decrease of $2.8 million in the market value of securities held
available for sale.
The securities in
an unrealized loss position as of September 30, 2016 continue to
perform and are expected to perform through maturity, and the
issuers have not experienced significant adverse events that would
call into question their ability to repay these debt obligations
according to contractual terms.
-47-
The following is a
summary of the securities portfolio by major classification at
September 30, 2016 and December 31, 2015.
|
September 30, 2016
|
December 31, 2015
|
||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
(in thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$17,673
|
$18,176
|
$19,778
|
$19,901
|
Collateralized
mortgage obligations
|
45,802
|
46,542
|
60,826
|
60,941
|
Mortgage-backed
securities
|
46,999
|
47,828
|
31,074
|
31,310
|
Municipal
bonds
|
61,304
|
63,590
|
53,163
|
54,434
|
Other
|
2,679
|
2,470
|
2,677
|
2,310
|
|
$174,457
|
$178,606
|
$167,518
|
$168,896
|
The following table
summarizes the securities portfolio by major classification as of
September 30, 2016 and December 31, 2015:
|
September 30, 2016
|
December
31, 2015
|
||||
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Average Tax
|
|
|
Average Tax
|
|
Amortized
|
Fair
|
Equivalent
|
Amortized
|
Fair
|
Equivalent
|
(Dollars in thousands)
|
Cost
|
Value
|
Yield (1)
|
Cost
|
Value
|
Yield (1)
|
U.S.
government agency obligations
|
|
|
|
|
|
|
Due
within one year
|
$-
|
$-
|
-
|
$-
|
$-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after ten years
|
17,673
|
18,176
|
2.61%
|
19,778
|
19,901
|
2.59%
|
|
17,673
|
18,176
|
2.61%
|
19,778
|
19,901
|
2.59%
|
Collateralized
mortgage obligations
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after ten years
|
45,802
|
46,542
|
2.17%
|
60,826
|
60,941
|
2.34%
|
|
45,802
|
46,542
|
2.17%
|
60,826
|
60,941
|
2.34%
|
Mortgage-backed
securities
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
13,159
|
13,666
|
2.75%
|
13,361
|
13,591
|
2.74%
|
Due
after ten years
|
33,840
|
34,162
|
2.09%
|
17,713
|
17,719
|
2.61%
|
|
46,999
|
47,828
|
2.27%
|
31,074
|
31,310
|
2.67%
|
Municipal
bonds
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
1,735
|
1,812
|
3.23%
|
1,740
|
1,786
|
3.23%
|
Due
after five but within ten years
|
6,085
|
6,342
|
3.22%
|
4,325
|
4,412
|
3.06%
|
Due
after ten years
|
53,484
|
55,436
|
3.93%
|
47,098
|
48,236
|
3.99%
|
|
61,304
|
63,590
|
3.84%
|
53,163
|
54,434
|
3.89%
|
Other
investments
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
500
|
500
|
6.50%
|
500
|
500
|
6.50%
|
Due
after ten years (2)
|
2,179
|
1,970
|
0.00%
|
2,177
|
1,810
|
0.00%
|
|
2,679
|
2,470
|
1.21%
|
2,677
|
2,310
|
1.21%
|
Total
securities available for sale
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
1,735
|
1,812
|
3.23%
|
1,740
|
1,786
|
3.23%
|
Due
after five but within ten years
|
19,744
|
20,508
|
2.99%
|
18,186
|
18,503
|
2.82%
|
Due
after ten years (2)
|
152,978
|
156,286
|
2.79%
|
147,592
|
148,607
|
2.91%
|
|
$174,457
|
$178,606
|
2.81%
|
$167,518
|
$168,896
|
2.90%
|
(1)
The marginal tax
rate used to calculate tax equivalent yield was
30.0%.
(2)
Includes
investments with no stated maturity date
-48-
As of September 30,
2016, the weighted average life of the Company's debt securities
was 5.2 years, and the weighted average effective duration was 4.6
years.
Loans
Receivable
The Company serves
the credit needs of commercial and private banking clients in its
markets through a range of commercial and consumer loan products.
The goal of the Company's lending function is to help clients reach
their goals. This is accomplished through loan products that best
fit the needs of each client and are profitable to the Company. The
lending process combines a thorough knowledge of each client and
the local market with the high standards of the Company’s
credit culture. Underwriting criteria governing the level of
assumed risk and a sharp focus on maintaining a well-balanced loan
portfolio play a critical role in the process.
Strict attention is
placed on balancing loan quality and profitability with loan
growth. The Company has established concentration limits by
borrower, product type, loan structure, and industry. Commercial
loans are generally secured by business assets and real estate,
supported by personal guarantees as needed. Loans to private
banking clients are primarily secured with personal assets and real
estate.
The loan portfolio
at September 30, 2016 totaled $1.16 billion and was composed of
$74.6 million in construction and land development loans, $632.1
million in commercial real estate loans, $281.6 million in consumer
real estate loans, $164.9 million in commercial and industrial
loans, and $11.6 million in consumer and other
loans. Also included in loans outstanding is $530,000 in
net deferred loan costs.
The loan portfolio
at December 31, 2015 totaled $1.02 billion and was composed of
$64.7 million in construction and land development loans, $533.9
million in commercial real estate loans, $249.7 million in consumer
real estate loans, $153.7 million in commercial and industrial
loans, and $13.5 million in consumer and other
loans. Also included in loans outstanding is $630,000 in
net deferred loan costs.
-49-
|
At September 30,
|
At December 31,
|
||
|
2016
|
2015
|
||
|
|
% of
|
|
% of
|
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction
and land development
|
$74,605
|
6.4%
|
$64,702
|
6.4%
|
Commercial
real estate:
|
|
|
|
|
Non-farm,
non-residential
|
356,833
|
30.6%
|
307,722
|
30.3%
|
Owner
occupied
|
178,631
|
15.3%
|
147,017
|
14.5%
|
Multifamily,
nonresidential and junior liens
|
96,643
|
8.3%
|
79,170
|
7.8%
|
Total
commercial real estate
|
632,107
|
54.2%
|
533,909
|
52.5%
|
Consumer
real estate:
|
|
|
|
|
Home
equity lines
|
86,361
|
7.4%
|
78,943
|
7.8%
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
first
deeds of trust
|
190,913
|
16.4%
|
167,053
|
16.4%
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
4,358
|
0.4%
|
3,711
|
0.4%
|
Total
consumer real estate
|
281,632
|
24.2%
|
249,707
|
24.6%
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
164,913
|
14.2%
|
153,669
|
15.1%
|
Consumer
and other
|
11,558
|
1.0%
|
13,539
|
1.3%
|
Less:
|
|
|
|
|
Deferred
loan origination (fees) costs
|
530
|
0.0%
|
630
|
0.1%
|
Total
loans
|
1,165,345
|
100%
|
1,016,156
|
100%
|
Allowance
for loan losses
|
(7,925)
|
|
(7,641)
|
|
Total
net loans
|
$1,157,420
|
|
$1,008,515
|
|
During the nine
months ended September 30, 2016, loans receivable increased by
$149.2 million, or 14.7%, to $1.17 billion as of period
end. The increase in loans during the quarter is
primarily attributable to new loan origination driven by the demand
in the Company’s market areas.
During 2015, loans
receivable increased by $147.8 million, or 17.0%, to $1.02 billion
as of December 31, 2015. The increase in loans during
the year is also primarily attributable to new loan origination
driven by the demand in the Company’s market
areas.
Maturities
and Sensitivities of Loans to Interest Rates
The following table
presents the maturity distribution of the Company’s loans at
September 30, 2016. The table also presents the portion
of loans that have fixed interest rates or variable interest rates
that fluctuate over the life of the loans in accordance with
changes in an interest rate index such as the prime
rate:
-50-
|
At September 30, 2016
|
|||
|
|
Due after one
|
|
|
|
Due within
|
year but within
|
Due after
|
|
(in thousands)
|
one year
|
five years
|
five years
|
Total
|
Fixed rate loans (1):
|
|
|
|
|
Construction
and land development
|
$16,625
|
$20,983
|
$4,748
|
$42,356
|
Commercial
real estate
|
18,131
|
198,694
|
63,234
|
280,059
|
Commercial
real estate owner occupied
|
4,097
|
97,096
|
68,360
|
169,553
|
Multifamily,
nonresidential and junior liens
|
2,872
|
36,502
|
24,355
|
63,729
|
Home
equity lines
|
-
|
741
|
-
|
741
|
Secured
by 1-4 family residential, secured by first
|
|
|
|
|
deeds
of trust
|
8,895
|
64,238
|
110,245
|
183,378
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
148
|
2,155
|
1,194
|
3,497
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
3,371
|
62,332
|
16,666
|
82,369
|
Consumer
and other
|
1,205
|
2,209
|
367
|
3,781
|
Total
at fixed rates
|
55,344
|
484,950
|
289,169
|
829,463
|
Variable rate loans (1):
|
|
|
|
|
Construction
and land development
|
13,557
|
18,416
|
148
|
32,121
|
Commercial
real estate
|
7,011
|
49,008
|
20,755
|
76,774
|
Commercial
real estate owner occupied
|
2,569
|
3,147
|
3,362
|
9,078
|
Multifamily,
nonresidential and junior liens
|
2,911
|
14,886
|
15,117
|
32,914
|
Home
equity lines
|
2,873
|
10,464
|
72,283
|
85,620
|
Secured
by 1-4 family residential, secured by first
|
|
|
|
-
|
deeds
of trust
|
1,715
|
3,971
|
1,307
|
6,993
|
Secured
by 1-4 family residential, secured by
|
|
|
|
-
|
second
deeds of trust
|
38
|
415
|
346
|
799
|
Commercial
and industrial loans (except those
|
|
|
|
-
|
secured
by real estate)
|
59,926
|
22,118
|
284
|
82,328
|
Consumer
and other
|
978
|
6,671
|
128
|
7,777
|
Total
at variable rates
|
91,578
|
129,096
|
113,730
|
334,404
|
Subtotal
|
146,922
|
614,046
|
402,899
|
1,163,867
|
Non-accrual
loans (2)
|
208
|
740
|
-
|
948
|
Gross
Loans
|
$147,130
|
$614,786
|
$402,899
|
1,164,815
|
Deferred
origination costs
|
|
|
|
530
|
Total
loans
|
|
|
|
$1,165,345
|
(1)
Loan maturities are
presented based on the final contractual maturity of each loan and
do not reflect contractual principal payments prior to maturity on
amortizing loans.
(2)
Includes nonaccrual
restructured loans.
The Company may
renew loans at maturity when requested by a customer whose
financial strength appears to support such renewal or when such
renewal appears to be in the Company’s best
interest. In such instances, the Company generally
requires payment of accrued interest and may require a principal
reduction or modify other terms of the loan at the time of
renewal.
-51-
Past
Due Loans and Nonperforming Assets
Loans are reported
as past due when the contractual amounts due with respect to
principal and interest are not received by the contractual due
date. Loans are generally classified as nonaccrual if they are past
due for a period of 90 days or more, unless such loans are well
secured and in the process of collection. If a loan or a portion of
a loan is classified as doubtful or as partially charged off, the
loan is generally classified as nonaccrual. Loans that are on a
current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or
interest is in doubt. Loans may be returned to accrual status when
all principal and interest amounts contractually due are reasonably
assured of repayment within an acceptable period of time, and there
is a sustained period of repayment performance of interest and
principal by the borrower in accordance with the contractual
terms.
While a loan is
classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled
amortizations where the payment is generally applied to the oldest
payment due. When the future collectability of the recorded loan
balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially
charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance
at the contractual interest rate. Receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Assets acquired as
a result of foreclosure are recorded at estimated fair value in
other real estate (or foreclosed assets). Any excess of cost over
estimated fair value at the time of foreclosure is charged to the
allowance for loan losses. Valuations are periodically performed on
these properties, and any subsequent write-downs are charged to
earnings. Routine maintenance and other holding costs are included
in non-interest expense. Loans are classified as troubled debt
restructurings (“TDR”) by the Company when certain
modifications are made to the loan terms and concessions are
granted to the borrowers due to financial difficulty experienced by
those borrowers. The Company grants concessions by (1) reduction of
the stated interest rate for the remaining original life of the
debt or (2) extension of the maturity date at a stated interest
rate lower than the current market rate for new debt with similar
risk. The Company does not generally grant concessions through
forgiveness of principal or accrued interest. The Company’s
policy with respect to accrual of interest on loans restructured in
a TDR follows relevant supervisory guidance. That is, if a borrower
has demonstrated performance under the previous loan terms and
shows capacity to perform under the restructured loan terms,
continued accrual of interest at the restructured interest rate is
likely. If a borrower was materially delinquent on payments prior
to the restructuring but shows the capacity to meet the
restructured loan terms, the loan will likely continue as
nonaccrual until there is demonstrated performance under new terms.
Lastly, if the borrower does not perform under the restructured
terms, the loan is placed on nonaccrual status. The Company closely
monitors these loans and ceases accruing interest on them if
management believes that the borrowers may not continue performing
based on the restructured note terms.
The following
tables present an age analysis of past due loans, segregated by
class of loans as of September 30, 2016 and December 31,
2015:
-52-
|
30+
|
Non-
|
Total
|
|
|
|
Days
|
Accrual
|
Past
|
|
Total
|
(in thousands)
|
Past Due
|
Loans
|
Due
|
Current
|
Loans
|
At September 30, 2016
|
|
|
|
|
|
Construction
and land development
|
$-
|
$128
|
$128
|
$74,477
|
$74,605
|
Non-farm,
non-residential
|
-
|
-
|
-
|
356,833
|
356,833
|
Owner
occupied
|
-
|
-
|
-
|
178,631
|
178,631
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
96,643
|
96,643
|
Home
equity lines
|
194
|
-
|
194
|
86,167
|
86,361
|
Secured
by 1-4 family residential, secured
|
|
|
|
|
|
by
first deeds of trust
|
-
|
542
|
542
|
190,371
|
190,913
|
Secured
by 1-4 family residential,
|
|
|
|
|
|
secured
by second deeds of trust
|
-
|
62
|
62
|
4,296
|
4,358
|
Commercial
and industrial loans (except
|
|
|
|
|
|
those
secured by real estate)
|
305
|
216
|
521
|
164,392
|
164,913
|
Consumer
and other
|
-
|
-
|
-
|
11,558
|
11,558
|
|
$499
|
$948
|
$1,447
|
$1,163,368
|
$1,164,815
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
Construction
and land development
|
$-
|
$238
|
$238
|
$64,464
|
$64,702
|
Non-farm,
non-residential
|
-
|
-
|
-
|
453,407
|
307,722
|
Owner
occupied
|
-
|
-
|
-
|
1,332
|
147,017
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
79,170
|
79,170
|
Home
equity lines
|
-
|
-
|
-
|
78,943
|
78,943
|
Secured
by 1-4 family residential, secured
|
|
|
|
|
|
by
first deeds of trust
|
-
|
-
|
-
|
167,053
|
167,053
|
Secured
by 1-4 family residential,
|
|
|
|
|
|
secured
by second deeds of trust
|
-
|
65
|
65
|
3,646
|
3,711
|
Commercial
and industrial loans (except
|
|
|
|
|
|
those
secured by real estate)
|
-
|
189
|
189
|
153,480
|
153,669
|
Consumer
and other
|
-
|
21
|
21
|
13,518
|
13,539
|
|
$-
|
$513
|
$513
|
$1,015,013
|
$1,015,526
|
The table below
sets forth, for the periods indicated, information about the
Company’s nonaccrual loans, loans past due 90 days or more
and still accruing interest, total non-performing loans (nonaccrual
loans plus nonaccrual restructured loans), and total non-performing
assets.
-53-
|
At September 30,
|
At December 31,
|
(Dollars in thousands)
|
2016
|
2015
|
Non-accrual
loans
|
$760
|
$323
|
Restructured
loans (1)
|
188
|
190
|
Total
nonperforming loans
|
948
|
513
|
Foreclosed
real estate
|
5,183
|
5,453
|
Total
nonperforming assets
|
$6,131
|
$5,966
|
|
|
|
Accruing
loans past due 90 days or more
|
$-
|
$-
|
Allowance
for loan losses
|
7,925
|
7,641
|
|
|
|
Nonperforming
loans to period end loans
|
0.08%
|
0.05%
|
Allowance
for loan losses to period end
|
|
|
loans
|
0.68%
|
0.75%
|
Allowance
for loan losses to
|
|
|
nonperforming
loans
|
835.97%
|
1489.47%
|
Allowance
for loan losses to
|
|
|
nonperforming
assets
|
129.26%
|
128.08%
|
Nonperforming
assets to total assets
|
0.41%
|
0.46%
|
(1)
Restructured
loans are also on nonaccrual status.
In addition to the
above, as of September 30, 2016 the Company had $2.6 million in
loans that were considered to be impaired for reasons other than
their past due, accrual or restructured status. In
total, there were $3.5 million in loans that were considered to be
impaired at period end. As of December 31, 2015, the
Company had $3.4 million in loans that were considered to be
impaired for reasons other than their past due, accrual or
restructured status. In total, there were $3.9 million
in loans that were considered to be impaired at December 31,
2015.
Allowance
for Loan Losses
The allowance for
loan losses is a reserve established through provisions for loan
losses charged to expense and represents management’s best
estimate of probable loans losses that have been incurred within
the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated losses and risk
inherent in the loan portfolio. The Company’s allowance for
loan loss methodology is based on historical loss experience by
type of credit and internal risk grade, specific homogeneous risk
pools and specific loss allocations, with adjustments for current
events and conditions. The Company’s process for determining
the appropriate level of reserves is designed to account for
changes in credit quality as they occur. The provision for loan
losses reflects loan quality trends, including the levels of and
trends related to past due loans and economic conditions at the
local and national levels. It also considers the quality
and risk characteristics of the Company’s loan origination
and servicing policies and practices. Included in the allowance are
specific reserves on loans that are considered to be impaired,
which are identified and measured in accordance with ASC
310.
The following table
presents the Company’s allowance for loan losses allocated to
each category of the Company’s loan portfolio and each
category of the loan portfolio as a percentage of total loans, at
September 30, 2016 and at December 31, 2015.
-54-
|
At September 30,
|
At December 31,
|
||
|
2016
|
2015
|
||
|
|
% of
|
|
% of
|
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction
and land development
|
$400
|
6.4%
|
$509
|
6.4%
|
Commercial
real estate
|
3,409
|
54.2%
|
3,156
|
52.6%
|
Consumer
real estate
|
2,092
|
24.2%
|
2,046
|
24.6%
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
1,940
|
14.2%
|
1,786
|
15.1%
|
Consumer
and other
|
84
|
1.0%
|
144
|
1.3%
|
Total
|
$7,925
|
100.0%
|
$7,641
|
100.0%
|
The allowance for
loan losses as a percentage of gross loans outstanding decreased by
0.07% during the first nine months of 2016 to 0.68% of gross loans
at September 30, 2016. The change in the allowance during the
period resulted from net charge-offs of $107,000 and $149.2 million
of loan growth offset by loan loss provisions of
$391,000. General reserves totaled $7.2 million or 0.62%
of gross loans outstanding as of September 30, 2016, an percentage
decrease from year-end 2015 when they totaled $7.1 million or 0.70%
of loans outstanding. At September 30, 2016, specific
reserves on impaired loans constituted $756,000 or 0.06% of gross
loans outstanding compared to $509,000 or 0.05% of loans
outstanding as of December 31, 2015.
The following table
presents information regarding changes in the allowance for loan
losses in detail for the years indicated:
-55-
|
Three months ended
|
Nine months ended
|
||
|
September 30,
|
September 30,
|
||
(in thousands)
|
2016
|
2015
|
2016
|
2015
|
Allowance
for loan losses at beginning of the period
|
$7,986
|
$7,569
|
$7,641
|
$6,869
|
Provision
for loan losses
|
391
|
-
|
391
|
750
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
Construction
and land development
|
-
|
(14)
|
-
|
(14)
|
Commercial
real estate
|
-
|
-
|
-
|
(276)
|
Consumer
real estate
|
-
|
-
|
-
|
-
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
(682)
|
-
|
(682)
|
-
|
Consumer
and other
|
-
|
-
|
(1)
|
-
|
Total
charge-offs
|
(682)
|
(14)
|
(683)
|
(290)
|
Recoveries
of loans previously charged off:
|
|
|
|
|
Construction
and land development
|
58
|
10
|
295
|
63
|
Commercial
real estate
|
3
|
11
|
59
|
11
|
Consumer
real estate
|
1
|
42
|
7
|
42
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
168
|
-
|
204
|
173
|
Consumer
and other
|
-
|
-
|
11
|
-
|
Total
recoveries
|
230
|
63
|
576
|
289
|
Net
recoveries (charge-offs)
|
(452)
|
49
|
(107)
|
(1)
|
Allowance
for loan losses at end of the period
|
$7,925
|
$7,618
|
$7,925
|
$7,618
|
|
|
|
|
|
Ratio
of net charge-offs during the period
|
|
|
|
|
to
average loans outstanding during
|
|
|
|
|
the
period
|
-0.16%
|
0.02%
|
-0.01%
|
0.00%
|
While the Company
believes that it uses the best information available to establish
the allowance for loan losses, future adjustments to the allowance
may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions
used in making determinations regarding the allowance.
Management believes
the level of the allowance for loan losses as of September 30, 2016
and December 31, 2015 is appropriate in light of the risk inherent
within the Company’s loan portfolio.
Other
Assets
At September 30,
2016, non-earning assets totaled $78.3 million, a decrease of $11.1
million from $89.4 million at December 31,
2015. Non-earning assets at September 30, 2016 consisted
of: cash and due from banks of $14.6 million, premises and
equipment totaling $15.9 million, foreclosed real estate totaling
$5.2 million, accrued interest receivable of $4.0 million, bank
owned life insurance, or BOLI, of $28.7 million, net deferred taxes
of $3.4 million and other assets totaling $6.3
million.
At December 31,
2015, non-earning assets totaled $89.4
million. Non-earning assets at December 31, 2015
consisted of: cash and due from banks of $24.5 million, premises
and equipment totaling $16.4 million, foreclosed real estate
totaling $5.5 million, accrued interest receivable of $3.8 million,
bank owned life insurance of $28.3 million and other assets
totaling $6.8 million, with net deferred taxes of $4.1
million.
-56-
As of September 30,
2016, the Company had an investment in bank owned life insurance of
$28.9 million, which increased $669,000 from December 31, 2015. The
increase in BOLI was due to an increase in cash surrender
value. Since the income on this investment is included
in non-interest income, the asset is not included in the
Company’s calculation of earning assets.
Deposits
Deposits gathered
from clients represent the primary source of funding for the
Company’s lending activities. Commercial and private banking
deposit services include non-interest and interest bearing checking
accounts, money market accounts, and to a limited extent, IRAs and
CDs. Interest rates for each account type are set by the Company
within the context of marketplace factors, current deposit needs,
and a keen awareness of maintaining a strong margin.
The Company's
primary focus is on establishing long-term client relationships to
attract core deposits. However, the Company may use non-reciprocal
brokered and other wholesale deposits to supplement local funding
sources. As of September 30, 2016, non-reciprocal brokered deposits
represented 8.0 percent of total deposits.
Total deposits at
September 30, 2016 were $1.20 billion and consisted of $188.4
million in non-interest-bearing demand deposits, $767.1 million in
interest-bearing checking and money market accounts, and $243.6
million in time deposits. Total deposits increased by $216.2
million from $982.8 million as of December 31,
2015. Non-interest-bearing demand deposits increased by
$29.4 million from $159.0 million as of December 31,
2015. Interest-bearing and money market accounts
increased by $263.0 million from $504.1 million as of December 31,
2015. Time deposits decreased by $76.2 million during the
nine-month period ended September 30, 2016 from $319.8 million as
of December 31, 2015. The increase in deposits was
primarily due to a focus on growing core customer deposits and
demand in the markets in which the Company operates.
The table below
provides a summary of the Company’s deposit portfolio by
deposit type.
|
As of
|
|
|
September 30,
|
December 31,
|
Composition of Deposit Portfolio
|
2016
|
2015
|
Non-interest
bearing
|
15.7%
|
16.2%
|
Interest-bearing
checking accounts
|
19.5%
|
21.5%
|
Money
markets
|
44.5%
|
29.8%
|
Time
deposits
|
20.3%
|
32.5%
|
Total
|
100.0%
|
100.0%
|
The following table
shows historical information regarding the average balances
outstanding and average interest rates for each major category of
deposits:
-57-
|
For the Three Month Period Ended September 30,
|
|||||
|
2016
|
2015
|
||||
|
Average
|
% of
|
Average
|
Average
|
% of
|
Average
|
(Dollars in thousands)
|
Amount
|
Total
|
Rate
|
Amount
|
Total
|
Rate
|
Interest-bearing
checking accounts
|
$186,369
|
16.6%
|
0.36%
|
$129,297
|
12.8%
|
0.51%
|
Money
markets
|
491,805
|
43.8%
|
0.65%
|
333,957
|
33.1%
|
0.67%
|
Time
deposits
|
254,358
|
22.6%
|
0.92%
|
389,709
|
38.6%
|
0.81%
|
Total
interest-bearing deposits
|
932,532
|
83.0%
|
0.66%
|
852,963
|
84.4%
|
0.71%
|
Noninterest-bearing
deposits
|
190,745
|
17.0%
|
-
|
157,435
|
15.6%
|
-
|
Total
deposits
|
$1,123,277
|
100.0%
|
0.55%
|
$1,010,398
|
100.0%
|
0.60%
|
|
For the Nine Month Period Ended September 30,
|
|||||
|
2016
|
2015
|
||||
|
Average
|
% of
|
Average
|
Average
|
% of
|
Average
|
(Dollars in thousands)
|
Amount
|
Total
|
Rate
|
Amount
|
Total
|
Rate
|
Interest-bearing
checking accounts
|
$165,655
|
15.8%
|
0.42%
|
$123,377
|
13.1%
|
0.49%
|
Money
markets
|
432,362
|
41.4%
|
0.66%
|
301,604
|
32.0%
|
0.68%
|
Time
deposits
|
266,903
|
25.5%
|
0.86%
|
372,321
|
39.5%
|
0.94%
|
Total
interest-bearing deposits
|
864,920
|
82.7%
|
0.67%
|
797,302
|
84.6%
|
0.77%
|
Noninterest-bearing
deposits
|
180,623
|
17.3%
|
-
|
145,181
|
15.4%
|
-
|
Total
deposits
|
$1,045,543
|
100.0%
|
0.56%
|
$942,483
|
100.0%
|
0.65%
|
The overall mix of
deposits has shifted to a higher percentage of non-interest demand
deposits and interest-bearing demand with reductions in the
percentage of deposits held in time deposit accounts. The Company
believes its deposit product offerings are properly structured to
attract and retain core low-cost deposit relationships. The average
cost of deposits was 0.55% in the third quarter of 2016 compared to
0.60% in the third quarter of 2015 due to changes in deposit mix
and lower deposit interest rates. The average cost of
deposits was 0.56% for the nine-month period ended September 30,
2016 compared to 0.65% in the nine month period ended September 30,
2015 due to changes in deposit mix and lower deposit interest
rates.
Short-Term
and Long-Term Debt
The Company uses
short-term borrowings and long-term debt to provide both funding
and, to a lesser extent, regulatory capital. As of
September 30, 2016, the Company had $100.0 million in short-term
debt, which consisted solely of FHLB advances compared to an
outstanding balance of $165.0 million at year-end
2015. In addition, the Company had $4.8 million
outstanding on an amortizing $10.0 million holding company loan at
December 31, 2015 which was repaid in June 2016 with a portion of
the proceeds of the Company’s initial public
offering. The decrease in short-term debt was due to the
Company’s rapid deposit growth during the first nine months
of 2016.
The Company had
issued and outstanding $18.6 million in junior subordinated
debentures as of September 30, 2016 and December 31,
2015. These junior subordinated debentures were issued
to Paragon Commercial Capital Trust I and Paragon Commercial
Capital Trust II in connection with the issuance of trust preferred
securities on May 18, 2004 and May 30, 2006,
respectively. Additional information regarding the
junior subordinated debentures can be found in Note 7 of the
Company’s 2015 audited consolidated financial
statements.
In the third
quarter of 2016, the Company entered into a $20.0 million secured
holding company line of credit with an unaffiliated
institution. The terms of the note include interest at
prime plus 0.50% and will expire in September 2017. The
line is secured by 100% of the stock of the Bank owned by the
Company. The Company has not drawn on the note and has
no balance at September 30, 2016.
-58-
Stockholders’
Equity
Total
stockholders’ equity at September 30, 2016 was $135.0
million, an increase of $37.4 million from $97.7 million as of
December 31, 2015. The change in stockholders’ equity
principally represents the proceeds of $26.4 million, net of issue
costs, from an initial public offering closed in June 2016,
combined with net income to common stockholders for the nine months
ended September 30, 2016 of $9.8 million. Other changes
in stockholders’ equity included $319,000 in stock-based
compensation and other comprehensive income of $721,000 related to
net increasing values in the Company’s available for sale
investment securities portfolio and its cash flow
hedges.
Liquidity
Market and public
confidence in the Company’s financial strength and in the
strength of financial institutions in general will largely
determine the Company’s access to appropriate levels of
liquidity. This confidence depends significantly on the
Company’s ability to maintain sound asset quality and
appropriate levels of capital resources. The term
“liquidity” refers to the Company’s ability to
generate adequate amounts of cash to meet current needs for funding
loan originations, deposit withdrawals, maturities of borrowings
and operating expenses. Investment portfolio principal
payments and maturities, loan principal payments, deposit growth,
brokered deposit sources, available borrowings from the FHLB, and
various federal funds lines from correspondent banks are the
primary sources of liquidity for the Bank. Management
measures the Bank’s liquidity position by giving
consideration to both on- and off-balance sheet sources of, and
demands for, funds on a daily and weekly basis.
Liquid assets
(consisting of cash and due from banks, interest-earning deposits
with other banks, federal funds sold and investment securities
classified as available for sale) represented 17.1% and 17.2% of
total assets at September 30, 2016 and December 31, 2015,
respectively.
The Bank has seen a
net reduction in wholesale funding, maintaining liquidity
sufficient to fund new loan demand and to reduce part of its
wholesale funding. When the need arises, the Bank has
the ability to sell securities classified as available for sale,
sell loan participations to other banks, or to borrow funds as
necessary. The Bank has established credit lines with
other financial institutions to purchase up to $102.5 million in
federal funds but had no such borrowings outstanding at September
30, 2016 or at December 31, 2015. Also, as a member of
the Federal Home Loan Bank of Atlanta, the Bank may obtain advances
of up to 30% of assets, subject to our available collateral. The
Bank had an available borrowing line at September 30, 2016 of
$363.6 million at the FHLB, secured by qualifying
loans. As of that date, the Bank had $100.0
million outstanding on the line and available borrowing capacity of
$263.6 million. In addition, the Bank may borrow up to
$140.1 million at the Federal Reserve discount window and has
pledged loans for that purpose. As another source of short-term
borrowings, the Bank also utilizes securities sold under agreements
to repurchase. At September 30, 2016, borrowings of
securities sold under agreements to repurchase were $19.8
million.
At September 30,
2016, the Bank had undisbursed lines of credit of $202.0 million,
and letters of credit of $3.9 million. The Bank believes
that its combined aggregate liquidity position from all sources is
sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals in the near term.
-59-
Total deposits were
$1.2 billion and $982.8 million at September 30, 2016 and December
31, 2015, respectively. Time deposits, which are the only deposit
accounts that have stated maturity dates, are generally considered
to be rate sensitive. Time deposits represented 20.3%
and 32.5% of total deposits at September 30, 2016 and December 31,
2015, respectively. Other than brokered time deposits,
management believes most other time deposits are
relationship-oriented. While competitive rates will need to be paid
to retain these deposits at their maturities, there are other
subjective factors that will determine their continued
retention.
Management believes
that current sources of funds provide adequate liquidity for the
Company’s current cash flow needs. The Bank’s parent
company maintains minimal cash balances. Management believes that
the current cash balances plus taxes receivable will provide
adequate liquidity for the Company’s current cash flow
needs.
Contractual
Obligations
The following table
presents the Company's significant fixed and determinable
contractual obligations by payment date. The payment amounts
represent those amounts contractually due to the recipient. The
table excludes liabilities recorded where management cannot
reasonably estimate the timing of any payments that may be required
in connection with these liabilities.
|
September 30, 2016
|
||||
|
1 Year
|
Over 1 to
|
Over 3 to
|
More Than
|
|
(in thousands)
|
or Less
|
3 Years
|
5 Years
|
5 Years
|
Total
|
Time
deposits
|
$158,525
|
$79,003
|
$6,035
|
$-
|
$243,563
|
Short
term borrowings
|
100,000
|
-
|
-
|
-
|
100,000
|
Subordinated
debentures
|
-
|
-
|
-
|
18,558
|
18,558
|
Operating
leases
|
701
|
1,302
|
355
|
4,036
|
6,394
|
Total
contractual obligations
|
$259,226
|
$80,305
|
$6,390
|
$22,594
|
$368,515
|
Capital
Our management
seeks to maintain adequate capital to support anticipated asset
growth, operating needs and unexpected risks, and to ensure that
the Company and the Bank are in compliance with all current and
anticipated regulatory capital guidelines. Our primary sources of
new capital include retained earnings and proceeds from the sale
and issuance of capital stock or other securities.
In 2013, the
Federal Reserve and the FDIC adopted final rules that implemented
the Basel III changes to the international regulatory capital
framework, referred to as the “Basel III Rules.” The
Basel III Rules apply to both depository institutions and their
holding companies. The Basel III Rules, which became effective for
both the Company and the Bank in 2015, include risk-based and
leverage capital ratio requirements which refined the definition of
what constitutes “capital” for purposes of calculating
those ratios. The minimum capital level requirements applicable to
the Company and the Bank under the Basel III Rules are: (i) a
common equity Tier 1 risk-based capital ratio of 4.5 percent; (ii)
a Tier 1 risk-based capital ratio of 6 percent; (iii) a total
risk-based capital ratio of 8 percent; and (iv) a Tier 1 leverage
ratio of 4 percent for all institutions. Common equity Tier 1
capital consists of retained earnings and common stock instruments,
subject to certain adjustments.
The Basel III Rules
also establish a “capital conservation buffer” of 2.5
percent above the new regulatory minimum risk-based capital
requirements. The conservation buffer, when added to the capital
requirements, result in the following minimum ratios: (i) a common
equity Tier 1 risk-based capital ratio of 7.0 percent, (ii) a Tier
1 risk-based capital ratio of 8.5 percent, and (iii) a total
risk-based capital ratio of 10.5 percent. The new capital
conservation buffer requirement is to be phased in beginning in
January 2016 at 0.625 percent of risk-weighted assets and will
increase by that amount each year until fully implemented in
January 2019. An institution will be subject to limitations on
certain activities including payment of dividends, share
repurchases and discretionary bonuses to executive officers if its
capital level is below the buffer amount.
-60-
The Basel III Rules
also revised the prompt corrective action framework, which is
designed to place restrictions on insured depository institutions,
including the Bank, if their capital levels do not meet certain
thresholds. The prompt corrective action rules were modified to
include a common equity Tier 1 capital component and to increase
certain other capital requirements for the various thresholds. For
example, under the proposed prompt corrective action rules, insured
depository institutions will be required to meet the following
capital levels in order to qualify as “well
capitalized:” (i) a common equity Tier 1 risk-based capital
ratio of 6.5 percent; (ii) a Tier 1 risk-based capital ratio of 8
percent; (iii) a total risk-based capital ratio of 10 percent; and
(iv) a Tier 1 leverage ratio of 5 percent. The Basel III Rules also
set forth certain changes in the methods of calculating certain
risk-weighted assets, which in turn affect the calculation of risk
based ratios.
If the Bank fails
to meet the requirements for a “well capitalized” bank,
it could increase the regulatory scrutiny on the Bank and the
Company. In addition, the Bank would not be able to renew or accept
brokered deposits without prior regulatory approval and the Bank
would not be able to offer interest rates on its deposit accounts
that are significantly higher than the average rates in the
Bank’s market area. As a result, it would be more difficult
to attract new deposits and retain or increase existing,
non-brokered deposits. If the Bank is prohibited from renewing or
accepting brokered deposits and is unable to attract new deposits,
our liquidity and our ability to fund our loan portfolio may be
adversely affected. In addition, we would be required to pay higher
insurance premiums to the FDIC, which would reduce our
earnings.
On May 18, 2004,
the Company privately issued trust preferred securities having an
aggregate liquidation amount of $10.0 million through Paragon
Commercial Capital Trust I. On May 30, 2006, we
privately issued additional floating rate trust preferred
securities having an aggregate liquidation amount of $8.0 million
through Paragon Commercial Capital Trust II. The
proceeds provided additional capital for the expansion of the Bank.
Under the current applicable regulatory guidelines, all of the
trust preferred securities qualify as Tier 1 capital.
On June 21, 2016
the Company issued 845,588 shares of its common stock in an initial
public offering. Of the $26.4 million in net proceeds,
$3.8 million were used to pay down existing debt at the holding
company, $20.5 million were contributed to the Bank as additional
capital and the remaining $2.1 million was retained at the holding
company level to service existing debt at the holding company
level.
Regulatory capital
ratios for the Bank exceeded minimum federal regulatory guidelines
for a well-capitalized depository institution as of September 30,
2016 and December 31, 2015. Management expects that the Company and
the Bank will continue to be in compliance with applicable
regulatory capital requirements, although there can be no assurance
that additional capital will not be required in the
future. The Company’s and the Bank’s
capital ratios as of September 30, 2016 are presented in the table
below.
-61-
|
|
|
Minimum Requirements To Be:
|
|||
|
|
|
"Adequately Capitalized"
|
"Well Capitalized" (2)
|
||
|
|
|
for Capital Adequacy
|
Under Prompt Corrective
|
||
|
Actual
|
Purposes
|
|
Action Provisions
|
||
(Dollars in thousands)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
September 30, 2016
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Common
equity Tier 1
|
$135,078
|
11.035%
|
$55,083
|
4.500%
|
N/A
|
N/A
|
Total
risk-based capital ratio
|
161,003
|
13.153%
|
97,925
|
8.000%
|
N/A
|
N/A
|
Tier
1 risk-based capital ratio
|
153,078
|
12.506%
|
73,444
|
6.000%
|
N/A
|
N/A
|
Tier
1 leverage ratio
|
153,078
|
10.378%
|
59,000
|
4.000%
|
N/A
|
N/A
|
Tangible
equity to tangible assets ratio
|
135,078
|
9.134%
|
N/A
|
N/A
|
N/A
|
N/A
|
Tangible
equity to risk-weighted assets ratio
|
135,078
|
11.035%
|
N/A
|
N/A
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Common
equity Tier 1
|
$150,214
|
12.279%
|
$55,050
|
4.500%
|
$79,517
|
6.500%
|
Total
risk-based capital ratio
|
158,139
|
12.927%
|
97,867
|
8.000%
|
122,334
|
10.000%
|
Tier
1 risk-based capital ratio
|
150,214
|
12.279%
|
73,400
|
6.000%
|
97,867
|
8.000%
|
Tier
1 leverage ratio
|
150,214
|
10.416%
|
63,944
|
4.000%
|
72,110
|
5.000%
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Common
equity Tier 1
|
$97,853
|
8.92%
|
$49,384
|
4.50%
|
N/A
|
N/A
|
Total
risk-based capital ratio
|
123,028
|
11.21%
|
87,794
|
8.00%
|
N/A
|
N/A
|
Tier
1 risk-based capital ratio
|
115,387
|
10.51%
|
65,845
|
6.00%
|
N/A
|
N/A
|
Tier
1 leverage ratio
|
115,387
|
8.66%
|
53,274
|
4.00%
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Common
equity Tier 1
|
$119,454
|
10.90%
|
$50,425
|
4.50%
|
$71,253
|
6.50%
|
Total
risk-based capital ratio
|
127,095
|
11.59%
|
87,696
|
8.00%
|
109,621
|
10.00%
|
Tier
1 risk-based capital ratio
|
119,454
|
10.90%
|
65,772
|
6.00%
|
87,696
|
8.00%
|
Tier
1 leverage ratio
|
119,454
|
9.15%
|
52,193
|
4.00%
|
65,241
|
5.00%
|
1)
Total capital ratio
is defined as Tier 1 capital plus Tier 2 capital divided
by total risk-weighted assets. The Tier 1 Capital ratio is
defined as Tier 1 capital divided by total risk-weighted
assets. Common equity Tier 1 is defined as Tier 1 capital excluding
qualifying trust preferred securities divided by total risk
weighted assets. The leverage ratio is defined as Tier 1
capital divided by the most recent quarter’s average total
assets.
2)
Prompt corrective
action provisions are not applicable at the bank holding company
level.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Management and the board of directors are
responsible for managing interest rate risk and employing risk
management policies that monitor and limit this exposure. Interest
rate risk is measured using net interest income simulations and
market value of portfolio equity analyses. These analyses use
various assumptions, including the nature and timing of interest
rate changes, yield curve shape, prepayments on loans and
securities, deposit decay rates, pricing decisions on loans and
deposits, and reinvestment/replacement of asset and liability cash
flows.
-62-
The principal
objective of the Company's asset and liability management function
is to evaluate the interest rate risk within the balance sheet and
pursue a controlled assumption of interest rate risk while
maximizing earnings and preserving adequate levels of liquidity and
capital. The asset and liability management function is under the
guidance of the Management Asset/Liability Committee
(“Management ALCO”) with direction of the Board of
Directors Asset/Liability Committee (“Board
ALCO”). Management ALCO meets monthly to review,
among other things, funding uses and sources, the sensitivity of
the Company's assets and liabilities to interest rate changes,
local and national market conditions and rates. Board ALCO meets
quarterly and also reviews the liquidity, capital, deposit mix,
loan mix and investment positions of the Company. In addition,
Board ALCO reviews modeling performed by a third party of the
impact on net interest income and economic value of equity of rate
changes in various scenarios as well as the impact of strategies
put into place to mitigate interest rate
risk. Instantaneous parallel rate shift scenarios are
modeled and utilized to evaluate risk and establish exposure limits
for acceptable changes in net interest margin. These scenarios,
known as rate shocks, simulate an instantaneous change in interest
rates and use various assumptions, including, but not limited to,
prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment and replacement of
asset and liability cash flows.
We also analyze the
economic value of equity as a secondary measure of interest rate
risk. This is a complementary measure to net interest income where
the calculated value is the result of the market value of assets
less the market value of liabilities. The economic value of equity
is a longer term view of interest rate risk because it measures the
present value of the future cash flows. The impact of changes in
interest rates on this calculation is analyzed for the risk to our
future earnings and is used in conjunction with the analyses on net
interest income.
Our interest rate
risk model indicated that the Company was liability sensitive in
terms of interest rate sensitivity at August 31, 2016. Since
December 31, 2015, we have slightly increased our liability
sensitivity as a result of moving our balance sheet mix toward more
fixed rate loans, even after shortening the duration of the
investment portfolio. The table below illustrates the impact in
year one of an immediate and sustained 200 basis point increase and
a 100 basis point decrease in interest rates on net interest income
based on the interest rate risk model at August 31, 2016, May 31,
2016, and February 29, 2016:
Hypothetical
|
% change in projected
|
||
shift in interest
|
net interest income
|
||
rates (in bps)
|
August 31, 2016
|
May 31, 2016
|
February 29, 2016
|
200
|
-3.72%
|
-3.22%
|
-4.24%
|
(100)
|
0.03%
|
0.13%
|
0.33%
|
Many assumptions
are used to calculate the impact of interest rate fluctuations.
Actual results may be significantly different than our projections
due to several factors, including the timing and frequency of rate
changes, market conditions and the shape of the yield curve. The
computations of interest rate risk shown above do not include
actions that management may undertake to manage the risks in
response to anticipated changes in interest rates and actual
results may also differ due to any actions taken in response to the
changing rates.
-63-
Item
4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s
management, with the participation of the Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures as defined in
Rules 13a-15(b) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as of September 30, 2016.
Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective
to provide reasonable assurance that information required to be
disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules
and forms, and to provide reasonable assurance that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
There were no
changes in the Company’s internal controls over financial
reporting during the period covered by this Quarterly Report that
have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial
reporting.
Part
II. Other Information
Item
1. Legal Proceedings
In the ordinary
course of operations, the Company is party to various legal
proceedings. The Company is not involved in, nor has it terminated
during the three or nine months ended September 30, 2016, any
pending legal proceedings other than routine, nonmaterial
proceedings occurring in the ordinary course of
business.
Item
1A. Risk Factors
There have been no
material changes to the risk factors that we have previously
disclosed in the Company’s Registration Statement on Form S-1
(File No. 333-211627), as amended, filed with the SEC.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None
-64-
Item 6. Exhibits
and Financial Statement Schedules.
Exhibit
No.
|
|
Description
|
|
|
|
31.1
|
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of
Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
101
|
|
Interactive data
files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets (Unaudited) as of September 30, 2016 and December
31, 2015; (ii) Consolidated Statements of Income (Unaudited) for
the Three and Nine Months Ended September 30, 2016 and 2015; (iii)
Consolidated Statements of Comprehensive Income (Unaudited) for the
Three and Nine Months Ended September 30, 2016 and 2015; (iv)
Consolidated Statements of Stockholders’ Equity (Unaudited)
for the Nine Months Ended September 30, 2016 and 2015; (v)
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 2016 and 2015; and (vi) Notes to
Consolidated Financial Statements (Unaudited)
|
-65-
Signatures
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
|
PARAGON
COMMERCIAL CORPORATION
|
|
|
|
|
|
|
Date:
November 7, 2016 |
By:
|
/s/
Steven
E. Crouse
|
|
|
|
Steven E.
Crouse
|
|
|
|
Executive Vice
President and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
-66-
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
|
|
|
31.1
|
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of
Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
101
|
|
Interactive data
files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets (Unaudited) as of September 30, 2016 and December
31, 2015; (ii) Consolidated Statements of Income (Unaudited) for
the Three and Nine Months Ended September 30, 2016 and 2015; (iii)
Consolidated Statements of Comprehensive Income (Unaudited) for the
Three and Nine Months Ended September 30, 2016 and 2015; (iv)
Consolidated Statements of Stockholders’ Equity (Unaudited)
for the Nine Months Ended September 30, 2016 and 2015; (v)
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 2016 and 2015; and (vi) Notes to
Consolidated Financial Statements (Unaudited)
|
-67-