Attached files
EXHIBIT 13.1
The
Annual Report to Security Holders will be included as Appendix A to
the Proxy Statement for the 2017 Annual Meeting of Stockholders and
appears below.
A-1
APPENDIX A
ANNUAL REPORT
OF
PARAGON COMMERCIAL CORPORATION
A-2
PARAGON COMMERCIAL CORPORATION
General Description of Business
Paragon
Commercial Corporation. (the "Company"), was formed in 2001 to
serve as the holding company for Paragon Commercial Bank (the
"Bank"). The Company is a bank holding company registered with the
Board of Governors of the Federal Reserve System (the "Federal
Reserve") under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). The Company's principal source of income is dividends
declared and paid by the Bank on its capital stock, if any. The
Company has no operations and conducts no business of its own other
than owning the Bank and two statutory business trusts, Paragon
Commercial Capital Trust I and II. Accordingly, the discussion of
the business which follows concerns the business conducted by the
Bank, unless otherwise indicated.
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.
At
December 31, 2016, the Company had total assets of $1.5 billion,
net loans of $ 1.18 billion, deposits of $1.17 billion, total
securities of $197.4 million, and stockholders' equity of $136.1
million.
The
Bank has a diversified loan portfolio, with no foreign loans and
few agricultural loans. Real estate loans are predominately fixed
rate commercial property loans. Commercial loans are predominately
variable rate loans and are spread throughout a variety of
industries with no one particular industry or group of related
industries accounting for a significant portion of the commercial
loan portfolio. The majority of the Bank's deposit and loan
customers are individuals and small to medium-sized businesses
located in the Bank's market area. Additional discussion of the
Bank's loan portfolio and sources of funds for loans can be found
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages A-10 through A-38 of this Annual
Report.
The
operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by
related monetary and fiscal policies of depository institution
regulatory agencies, including the Federal Reserve, FDIC and the
Commissioner.
The
Company's fiscal year ends December 31. This Annual Report is also
being used as the Bank's Annual Disclosure Statement under FDIC
Regulations. This Annual Report has not been reviewed or confirmed
for accuracy or relevance by the FDIC.
At
December 31, 2016, the Company employed 144 full-time employees and
8 part-time employees, which equated to 148 full-time equivalent
employees.
Special Note Regarding Forward-Looking Statements
Paragon Commercial Corporation (the “Company”) may from
time to time make written or oral “forward-looking
statements,” including statements contained in the
Company’s filings with the Securities and Exchange
Commission, in its reports to stockholders and in other
communications by the Company, which are made in good faith by the
Company pursuant to the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995.
A-3
These forward-looking statements involve risks and uncertainties,
such as statements of the Company’s plans, objectives,
expectations, estimates and intentions that are subject to change
based on various important factors (some of which are beyond the
Company’s control). The following factors, among others,
could cause the Company’s financial performance and other
actual results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which
the Company conducts operations; the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest
rate policies of the Board of Governors of the Federal Reserve
System, inflation, interest rates, market and monetary
fluctuations; changes in real estate values and the real estate
market; loss of deposits and loan demand to other financial
institutions; the timely development of and acceptance of new
products and services of the Company and the perceived overall
value of these products and services by users, including the
features, pricing and quality compared to competitors’
products and services; the willingness of users to substitute
competitors’ products and services for the Company’s
products and services; the success of the Company in gaining
regulatory approval of its products and services, when required;
the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in
consumer spending and saving habits; increases in compensation and
employee expenses; unanticipated results in pending legal
proceedings; other factors described in Item 1A. Risk Factors in
the Company's Form 10-K for the fiscal year ended December 31,
2016; and the success of the Company in managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or
on behalf of the Company.
A-4
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The
table below sets forth selected historical consolidated financial
data and other information as of the dates and for the periods
presented. The selected historical consolidated financial data as
of and for the years ended December 31, 2016 and 2015 has been
derived from the Company’s audited consolidated financial
statements included elsewhere in this Annual Report and the
selected historical consolidated financial data as of and for the
years ended December 31, 2014, 2013 and 2012 from audited
consolidated financial statements for those years, which are not
included in this Annual Report. The Company’s historical
results are not necessarily indicative of the results that may be
expected in the future.
The
selected historical consolidated financial information should be
read in conjunction with and is qualified in its entirety
by:
●
the Company’s
audited consolidated financial statements as of and for the years
ended December 31, 2016 and 2015 and related notes included
elsewhere in this Annual Report and
●
the section in this
Annual Report entitled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and the section in the Company’s Form 10-K for the fiscal
year ended December 31, 2016 entitled “Risk
Factors.”
The
performance, asset quality and capital ratios included herein are
unaudited and derived from our audited financial statements as of
and for the years presented. Average balances have been calculated
using daily averages.
A-5
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
|
|||||
|
Years Ended December 31,
|
||||
(Dollars
in thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
OPERATING DATA:
|
|
|
|
|
|
Interest
income
|
$54,167
|
$48,435
|
$42,783
|
$40,601
|
$38,888
|
Interest
expense
|
8,129
|
7,384
|
8,678
|
10,518
|
14,414
|
Net
interest income
|
46,038
|
41,051
|
34,105
|
30,083
|
24,474
|
Provision
for loan losses
|
591
|
750
|
538
|
156
|
929
|
Net
interest income after provision for loan losses
|
45,447
|
40,301
|
33,567
|
29,927
|
23,545
|
Non-interest
income
|
1,294
|
1,454
|
704
|
(2,075)
|
(706)
|
Non-interest
expense
|
26,874
|
24,760
|
21,909
|
20,174
|
17,909
|
Income
before income taxes
|
19,867
|
16,995
|
12,362
|
7,678
|
4,930
|
Income
tax expense
|
6,477
|
5,761
|
4,403
|
2,754
|
1,756
|
Net
income
|
$13,390
|
$11,234
|
$7,959
|
$4,924
|
$3,174
|
|
|
|
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
Cash
and due from banks
|
$43,005
|
$55,530
|
$36,395
|
$45,137
|
$18,378
|
Investment
securities - available for sale, at fair value
|
197,441
|
168,896
|
183,675
|
147,196
|
147,974
|
Loans-net
|
1,183,371
|
1,008,515
|
861,536
|
760,453
|
712,018
|
Premises
and equipment, net
|
15,642
|
16,433
|
17,071
|
15,268
|
13,779
|
Bank
owned life insurance
|
34,190
|
28,274
|
27,421
|
26,622
|
25,775
|
Federal
Home Loan Bank stock, at cost
|
8,400
|
8,061
|
7,006
|
6,323
|
6,396
|
Other
real estate owned and repossessed property
|
4,740
|
5,453
|
14,991
|
18,174
|
18,756
|
Other
assets
|
16,978
|
14,749
|
17,160
|
16,598
|
14,594
|
Total
assets
|
$1,503,767
|
$1,305,911
|
$1,165,255
|
$1,035,771
|
$957,670
|
|
|
|
|
|
|
Deposits
|
$1,172,255
|
$982,847
|
$883,640
|
$770,152
|
$700,301
|
Repurchase
agreements and federal funds purchased
|
20,174
|
30,580
|
27,482
|
28,012
|
26,303
|
Borrowings
|
150,000
|
169,800
|
142,256
|
124,616
|
120,000
|
Subordinated
debentures
|
18,558
|
18,558
|
18,558
|
30,338
|
30,338
|
Other
liabilities
|
6,679
|
6,468
|
5,657
|
5,050
|
4,743
|
Total
liabilities
|
1,367,666
|
1,208,253
|
1,077,593
|
958,168
|
881,685
|
Stockholders'
equity
|
136,101
|
97,658
|
87,662
|
77,603
|
75,985
|
Total
liabilities and stockholders' equity
|
$1,503,767
|
$1,305,911
|
$1,165,255
|
$1,035,771
|
$957,670
|
A-6
|
Years Ended December 31,
|
||||
(Dollars
in thousands, except share data)
|
2016
|
2015
|
2014
|
2013
|
2012
|
SELECTED AVERAGE BALANCES:
|
|
|
|
|
|
Total
assets (1)
|
$1,414,631
|
$1,280,913
|
$1,104,079
|
$998,519
|
$967,790
|
Investment
securities - at book value
|
187,404
|
168,650
|
164,420
|
149,834
|
170,733
|
Loans
|
1,102,740
|
970,153
|
807,025
|
741,208
|
685,030
|
Deposits
|
1,076,424
|
959,515
|
834,529
|
744,057
|
733,814
|
Stockholders'
equity (1)
|
117,988
|
92,073
|
82,546
|
76,407
|
73,767
|
|
|
|
|
|
|
PERFORMANCE RATIOS:
|
|
|
|
|
|
Return
on average assets
|
0.95%
|
0.87%
|
0.72%
|
0.49%
|
0.33%
|
Return
on average equity
|
11.35%
|
12.20%
|
9.64%
|
6.44%
|
4.30%
|
Average
earning assets to average total assets
|
94.07%
|
92.26%
|
90.78%
|
92.13%
|
91.75%
|
Average
loans to deposits
|
102.44%
|
101.11%
|
96.70%
|
99.62%
|
93.35%
|
Average
tangible common equity ratio
|
8.34%
|
7.10%
|
7.48%
|
7.65%
|
7.62%
|
Average
yield on loans (2)
|
4.43%
|
4.48%
|
4.71%
|
4.97%
|
5.65%
|
Average
cost of deposits (2)
|
0.56%
|
0.63%
|
0.90%
|
1.13%
|
1.91%
|
Tax
equivalent net interest margin (2)
|
3.54%
|
3.51%
|
3.48%
|
3.30%
|
2.76%
|
Efficiency
ratio (3)
|
54.92%
|
56.64%
|
60.16%
|
62.99%
|
68.58%
|
Overhead
to average assets
|
1.90%
|
1.91%
|
1.98%
|
2.02%
|
1.85%
|
Full-time
equivalent employees at year end
|
148
|
139
|
127
|
106
|
88
|
|
|
|
|
|
|
ASSET QUALITY RATIOS:
|
|
|
|
|
|
Nonperforming
loans and foreclosed assets
|
$5,708
|
$5,966
|
$15,411
|
$19,763
|
$34,861
|
Nonperforming
assets to total assets - period end
|
0.38%
|
0.46%
|
1.32%
|
1.91%
|
3.64%
|
Nonperforming
loans
|
$968
|
$513
|
$420
|
$1,589
|
$16,105
|
Nonperforming
loans to total loans - period end
|
0.08%
|
0.05%
|
0.05%
|
0.21%
|
2.23%
|
Accruing
loans past due 30 days or more
|
-
|
-
|
256
|
849
|
10,617
|
Accruing
loans past due 30 days or more to total loans
|
0.00%
|
0.00%
|
0.03%
|
0.11%
|
1.47%
|
Net
(recoveries) charge-offs
|
$323
|
$(22)
|
$608
|
$3,565
|
$3,850
|
Net
(recoveries) charge-offs to average loans
|
0.03%
|
0.00%
|
0.08%
|
0.48%
|
0.56%
|
Allowance
for loan losses as a percentage of total loans
|
0.66%
|
0.75%
|
0.79%
|
0.90%
|
1.43%
|
Allowance
for loan losses as a percentage
|
|
|
|
|
|
of nonperforming loans
|
817.05%
|
1489.47%
|
1635.48%
|
436.69%
|
64.25%
|
|
|
|
|
|
|
SHARE DATA:
|
|
|
|
|
|
Book
value per common share (4)
|
$24.97
|
$21.32
|
$19.35
|
$17.49
|
$17.20
|
Basic
earnings per share
|
$2.69
|
$2.49
|
$1.79
|
$1.11
|
$0.72
|
Diluted
earnings per share
|
$2.68
|
$2.47
|
$1.77
|
$1.11
|
$0.72
|
Period
end common shares outstanding
|
5,450,713
|
4,581,334
|
4,530,000
|
4,436,500
|
4,418,500
|
Average
diluted common shares outstanding
|
5,004,751
|
4,547,906
|
4,495,013
|
4,433,875
|
4,416,000
|
A-7
Notes to Selected Historical Consolidated Financial
Data
(1)
Average assets and
average equity for a year are calculated by dividing the sum of the
Company’s total asset balance or total stockholders’
equity balance, as the case may be, as of the close of business on
each day in the relevant year and dividing by the number of days in
the year.
(2)
Average yield on
loans is calculated by dividing loan interest income by average
loans. Average cost of deposits is calculated by dividing deposit
expense by average total deposits. Net interest margin represents
net interest income divided by average interest-earning
assets.
(3)
This measure is not
a measure recognized under United States generally accepted
accounting principles, or GAAP, and is therefore considered to be a
non-GAAP financial measure. Please see “GAAP Reconciliation
and Management Explanation of Non-GAAP Financial Measures” on
page A-8 for a reconciliation of this measure to the most directly
comparable GAAP measure.
(4)
Book value per
share equals total stockholders’ equity as of the date
presented divided by the number of shares of common stock
outstanding as of the date presented. The number of shares of
common stock outstanding as of December 31, 2016, 2015, 2014,
2013, and 2012 has been presented above.
GAAP Reconciliation and Management Explanation of Non-GAAP
Financial Measures
Some of
the financial measures included in the Company’s selected
historical consolidated financial data and elsewhere in this Annual
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.” The
Company’s management uses these non-GAAP financial measures
in its analysis of its 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 the Company’s 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 the Company’s
productivity. Management also believes the presentation of tangible
stockholders’ equity, tangible book value per share, and
tangible average equity to tangible average assets would provide
investors with a clear picture of the Company’s 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 noninterest expense divided by
adjusted operating revenue. Adjusted operating revenue is equal to
net interest income (taxable equivalent) plus noninterest 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 because management believes the timing of
the recognition of those items to be discretionary. Management
believes the efficiency ratio is important as an indicator of
productivity because it shows the amount of revenue generated by
the Company’s operations for each dollar spent. While the
efficiency ratio is a measure of productivity, its value reflects
the attributes of the business model the Company
employs.
A-8
|
Years Ended December 31,
|
||||
(Dollars
in thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
Efficiency Ratio
|
|
|
|
|
|
Non-interest
expense
|
$26,874
|
$24,760
|
$21,909
|
$20,174
|
$17,909
|
|
|
|
|
|
|
Net
interest taxable equivalent income
|
$47,048
|
$42,042
|
$34,897
|
$30,368
|
$24,474
|
Non-interest
income
|
1,294
|
1,454
|
704
|
(2,075)
|
(706)
|
Less
gain (loss) on investment securities
|
106
|
542
|
87
|
88
|
9
|
Less
loss on sale or writedown of foreclosed real estate
|
(700)
|
(759)
|
(903)
|
(3,824)
|
(2,356)
|
Adjusted operating revenue
|
$48,936
|
$43,713
|
$36,417
|
$32,029
|
$26,115
|
|
|
|
|
|
|
Efficiency
ratio
|
54.92%
|
56.64%
|
60.16%
|
62.99%
|
68.58%
|
A-9
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
financial information contained in “Selected Historical
Consolidated Financial Data” and our consolidated financial
statements and the accompanying notes included elsewhere in this
report. This discussion and analysis contains forward-looking
statements that are subject to certain risks and uncertainties and
are based on certain assumptions that we believe are reasonable but
may prove to be inaccurate. Certain risks, uncertainties and other
factors, including those set forth under “Special Note
Regarding Forward-Looking Statements” and elsewhere in this
report, and under “Risk Factors” in our Form 10-K for
the fiscal year ended December 31, 2016, may cause actual results
to differ materially from those projected results discussed in the
forward-looking statements appearing in this discussion and
analysis. We assume no obligation to update any of these
forward-looking statements.
Introduction
Management's
discussion and analysis of financial condition and results of
operations of the Company, for the years ended December 31, 2016,
2015 and 2014. The Company is a registered bank holding company
operating under the supervision of the Federal Reserve Board (the
"Federal Reserve") and the parent company of Paragon Commercial
Bank (the "Bank"). The Bank is a North Carolina-chartered bank,
with offices in Mecklenburg and Wake counties, operating under the
banking laws of North Carolina and the rules and regulations of the
Federal Deposit Insurance Corporation (the "FDIC").
Overview
Our
business consists principally of attracting deposits from the
general public and investing these funds in commercial loans, real
estate mortgage loans, real estate construction loans and consumer
loans. Our profitability depends primarily on our net interest
income, which is the difference between the income we receive on
our loan and investment securities portfolios and our cost of
funds, which consists of interest paid on deposits and borrowed
funds. Net interest income also is impacted by the relative amounts
of our interest-earning assets and interest-bearing liabilities.
When interest-earning assets approximate or exceed interest-bearing
liabilities, a positive interest rate spread will generate net
interest income. Our profitability is also affected by the level of
other income and operating expenses. Other income consists
primarily of the increase in cash surrender value of bank owned
life insurance (“BOLI”), miscellaneous fees related to
our loans and deposits, and mortgage banking. Operating expenses
consist of compensation and benefits, occupancy and equipment
related expenses, data processing, professional fees and other
expenses.
Our
operations are influenced significantly by local economic
conditions and by policies of financial institution regulatory
authorities. The earnings on our assets are influenced by the
effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve,
inflation, interest rates, market and monetary fluctuations.
Lending activities are affected by the demand for commercial and
other types of loans, which in turn is affected by the interest
rates at which such financing may be offered. Our cost of funds is
influenced by interest rates on competing investments and by rates
offered on similar investments by competing financial institutions
in our market area, as well as general market interest rates. These
factors can cause fluctuations in our net interest income and other
income. In addition, local economic conditions can impact the
credit risk of our loan portfolio, in that (1) local employers may
be required to eliminate employment positions of individual
borrowers, and (2) small businesses and commercial borrowers may
experience a downturn in their operating performance and become
unable to make timely payments on their loans. Management evaluates
these factors in estimating the allowance for loan losses and
changes in these economic factors could result in increases or
decreases to the provision for loan losses.
A-10
The
U.S. economy started to slow during the first half of 2016. Despite
this, the unemployment rate has fallen to its lowest level since
2007. National and international events will have an impact on
economic activity throughout 2017. The Federal Reserve raised the
target Fed Funds rate to 0.75% in 2016. The Federal Reserve board
has indicated a strong desire to “normalize” (raise)
rates in 2017. The pace and extent of those potential actions will
be dependent on future economic performance. Growth in the
Company’s market areas slowed from the first half of 2016 to
the second half but was still ahead of the overall U.S. growth
pace. Cary has a housing growth rate of 9.1%. Raleigh’s GDP
growth is at 7%. Unemployment for the area is at 4.2%. Management
believes the Company’s specific market areas in the Wake and
Mecklenburg county areas will continue to experience above average
economic growth in 2017.
Although we are
unable to control the external factors that influence our business,
by maintaining high levels of balance sheet liquidity, managing our
interest rate exposures and by actively monitoring asset quality,
we seek to minimize the potentially adverse risks of unforeseen and
unfavorable economic trends.
Our
business emphasis has been and continues to be to operate as a
well-capitalized, profitable and niche-oriented financial
institution dedicated to providing extraordinary client
experiences. We are committed to meeting the financial needs of the
communities we serve. We expect growth to be achieved in our local
markets. While we would be willing to consider growth by
acquisition in certain circumstances, we do not consider the
acquisition of another company to be necessary for our continued
ability to provide a reasonable return to our stockholders. We
believe that we can be more effective in serving our clients than
many of our competitors because of our ability to quickly and
effectively respond to their needs. Our ability to provide these
services is enhanced by the stability and experience of our
talented and trusted staff.
The
Company does not have specific plans for additional offices in 2017
but will continue to look for growth opportunities in nearby
markets and may expand if considered a worthwhile
opportunity.
Summary of Significant and Critical Accounting
Policies
The
consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries, the Bank and
Trusts, along with the Bank's wholly owned subsidiaries, PCB
Trustee, Inc. and Mayberry Real Estate Holdings, LLC. (collectively
called the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The
Company's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and
financial condition. Many of the Company's accounting policies
require significant judgment regarding valuation of assets and
liabilities and/or significant interpretation of specific
accounting guidance. The following is a summary of some of the more
subjective and complex accounting policies of the Company. A more
complete description of the Company's significant accounting
policies can be found in Note 2 of the Notes to Consolidated
Financial Statements in the Company's 2016 Annual Report to
Stockholders.
The
allowance for loan losses reflects management's assessment and
estimate of the risks associated with extending credit and its
evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review
asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks
and loan losses.
A-11
Many of
the Company's assets and liabilities are recorded using various
techniques that require significant judgment as to recoverability.
The collectability of loans is reflected through the Company's
estimate of the allowance for loan losses. The Company performs
periodic and systematic detailed reviews of its lending portfolio
to assess overall collectability. In addition, certain assets and
liabilities are reflected at their estimated fair value in the
consolidated financial statements. Such amounts are based on either
quoted market prices or estimated values derived from dealer quotes
used by the Company, market comparisons or internally generated
modeling techniques. The Company's internal models generally
involve present value of cash flow techniques. The various
techniques are discussed in greater detail elsewhere in this
management's discussion and analysis and the Notes to Consolidated
Financial Statements.
There
are other complex accounting standards that require the Company to
employ significant judgment in interpreting and applying certain of
the principles prescribed by those standards. These judgments
include, but are not limited to, the determination of whether a
financial instrument or other contract meets the definition of a
derivative in accordance with U.S. Generally Accepted Accounting
Principles ("GAAP").
The
disclosure requirements for derivatives and hedging activities are
intended to provide users of financial statements with an enhanced
understanding of: (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged
items are accounted for and (c) how derivative instruments and
related hedged items affect an entity's financial position,
financial performance, and cash flows. The disclosure requirements
include qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about the fair value
of, and gains and losses, on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative instruments.
The
Company has an overall interest rate risk management strategy that
has incorporated the use of derivative instruments to minimize
significant unplanned fluctuations in earnings that are caused by
interest rate volatility. By using derivative instruments, the
Company is exposed to credit and market risk. If the counterparty
fails to perform, credit risk is equal to the extent of the
fair-value gain in the derivative. The Company minimizes the credit
risk in derivative instruments by entering into transactions with
high-quality counterparties that are reviewed periodically by the
Company. The Company had three interest rate caps with a combined
notational amount of $100 million outstanding as of December 31,
2016 and 2015. See the Notes to Consolidated Financial Statements
for additional information on these caps.
Management of the
Company has made a number of estimates and assumptions relating to
reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the accompanying
consolidated financial statements in conformity with GAAP. Actual
results could differ from those estimates.
Results
of Operations
Summary
The Company operates in two very attractive, growing markets,
the Triangle and Charlotte regions of North Carolina. In order to
take advantage of these markets, the Company has expanded its staff
of business development and support professionals. Management has
expanded its sales force by adding client development officers
(“CDOs”) focusing on private banking
relationships with owners of
companies, corporate executives and individuals who desire a higher
level of professional and personal attention.
A-12
As
a result of the Company’s growth in personnel and renewed
emphasis on private banking, over the last five years it has
experienced a double-digit compound growth rate in loans and
significant improvement in net income. Since 2012, the annual
compound growth rate in loans was 13.3% and in consolidated net
income was 43.3%. The Company reported net income available to
common stockholders of $13.4 million and diluted earnings per share
of $2.68 for the year ended December 31, 2016, compared to net
income available to common stockholders of $11.2 million and
diluted earnings per share of $2.47 for the prior year,
representing increases of 19.2% and 8.5%, respectively. The 2016
diluted earnings per share were impacted by a share issuance as a
result of the Company’s initial public offering. The reported
numbers for 2015 were an increase of 41.1% and 39.5% respectively
over the $8.0 in net income and $1.77 diluted earnings per share
recorded in 2014.
The
return on average assets in 2016 was 0.95%, compared to 0.87% in
2015 and 0.72% in 2014. The return on average stockholders' equity
was 11.35% in 2016 compared to 12.20 % in 2015 and 9.64% in
2014.
Net Interest Income
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 of non-interest bearing liabilities and
capital.
Net
interest income increased by $4.9 million to $46.0 million for the
year ended December 31, 2016 from $41.1 million in 2015. Net
interest income increased by $6.9 million for the year ended
December 31, 2015 from $34.1 million for the year ended December
31, 2014. The Company experienced
strong growth in net interest income as a result of significant
growth in both loans and deposits during 2016, 2015 and
2014. Average total interest-earning assets were $1.33
billion in 2016 compared with $1.20 billion in 2015 and $1.00
billion in 2014. The yield on those assets increased by 2 basis
points from 4.13% in 2015 to 4.15% in 2016. However, the 2015 yield
on earning assets was down 22 basis points from 4.35% in 2014 as a
result of competitive loan pricing pressures. The average loan balance for 2016 was $1.10
billion compared to $970.2 million for the year ended December 31,
2015 and $807.0 million for the year ended December 31, 2014. In
all three instances, this loan growth was funded by the
Company’s continued ability to generate strong growth from
new relationships in its market areas.
During 2016, the Company also continued to
experience favorable funding of its interest-earning assets with
75.9% of the Company’s average deposits for 2016 coming from
non-maturity deposits compared to 61.7% and 50.9% for the years
ended December 31, 2015 and 2014, respectively. Overall,
average interest-bearing liabilities increased by $64.4 million
from $1.03 billion for the year ended December 31, 2015 to $1.10
billion for the year ended December 31, 2016. Average
interest-bearing liabilities for the year ended December 31, 2015
increased by $133.1 million from $900.5 million for the year ended
December 31, 2014 The Bank’s cost of these funds increased by
3 basis points in 2016 to 0.74% from 0.71% in 2015. The 2015 cost
of funds was 25 basis points lower than the 0.96% cost of funds in
2014.
A-13
In
2016, the Bank’s net interest margin was 3.54% and net
interest spread was 3.41%. In 2015, net interest margin was 3.51%
and net interest spread was 3.42%. In 2014, net interest margin was
3.48% and net interest spread was 3.38%.
The
following table sets forth, for the periods indicated, information
with regard to average balances of assets and liabilities, as well
as the total dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing
liabilities, resultant yields or costs, net interest income, net
interest spread, net interest margin and ratio of average
interest-earning assets to average interest-bearing liabilities.
Non-accrual loans have been included in determining average
loans.
|
For the Years Ended December 31,
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
Average
|
|
Average
|
Average
|
|
Average
|
Average
|
|
Average
|
(Dollars in thousands)
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Loans, net of
allowance
|
$1,102,740
|
$48,835
|
4.43%
|
$970,153
|
$43,500
|
4.48%
|
$807,025
|
$37,999
|
4.71%
|
Investment
securities
|
187,404
|
6,076
|
3.24%
|
168,650
|
5,777
|
3.43%
|
164,420
|
5,490
|
3.34%
|
Other
interest-earnings assets
|
40,669
|
266
|
0.65%
|
57,845
|
149
|
0.26%
|
30,639
|
86
|
0.28%
|
Total interest-earning assets
|
1,330,813
|
55,177
|
4.15%
|
1,196,648
|
49,426
|
4.13%
|
1,002,084
|
43,575
|
4.35%
|
Other
assets
|
83,818
|
|
|
84,265
|
|
|
86,091
|
|
|
Total assets
|
$1,414,631
|
|
|
$1,280,913
|
|
|
$1,088,175
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$174,440
|
703
|
0.40%
|
$126,661
|
389
|
0.31%
|
$97,969
|
307
|
0.31%
|
Money
markets
|
455,510
|
3,020
|
0.66%
|
315,169
|
2,367
|
0.75%
|
225,251
|
1,837
|
0.82%
|
Time
deposits
|
258,968
|
2,271
|
0.88%
|
367,107
|
3,313
|
0.90%
|
410,143
|
5,371
|
1.31%
|
Borrowings
|
209,020
|
2,135
|
1.02%
|
224,600
|
1,315
|
0.59%
|
167,115
|
1,163
|
0.70%
|
Total interest-bearing liabilities
|
1,097,938
|
8,129
|
0.74%
|
1,033,537
|
7,384
|
0.71%
|
900,478
|
8,678
|
0.96%
|
Noninterest-bearing
deposits
|
187,506
|
|
|
150,578
|
|
|
101,166
|
|
|
Other
liabilities
|
11,199
|
|
|
4,725
|
|
|
3,985
|
|
|
Shareholders
equity
|
117,988
|
|
|
92,073
|
|
|
82,546
|
|
|
Total liabilities and shareholders
|
|
|
|
|
|
|
|
|
|
equity
|
$1,414,631
|
|
|
$1,280,913
|
|
|
$1,088,175
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate
|
|
|
|
|
|
|
|
|
|
spread (taxable-equivalent basis)
|
|
$47,048
|
3.41%
|
|
$42,042
|
3.42%
|
|
$34,897
|
3.38%
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (taxable-
|
|
|
|
|
|
|
|
|
|
equivalent basis)
|
|
|
3.54%
|
|
|
3.51%
|
|
|
3.48%
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-bearing assets to
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
121.21%
|
|
|
115.78%
|
|
|
111.28%
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net interest income
|
|
|
|
|
|
|
|
|
|
Net interest
income (taxable-equivalent
|
|
|
|
|
|
|
|
|
|
basis)
|
|
$47,048
|
|
|
$42,042
|
|
|
$34,897
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
1,010
|
|
|
991
|
|
|
792
|
|
Net interest
income
|
|
$46,038
|
|
|
$41,051
|
|
|
$34,105
|
|
A-14
Rate/Volume
Analysis
The
following table analyzes the dollar amount of changes in interest
income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. The table
distinguishes between (i) changes attributable to volume (changes
in volume multiplied by the prior period’s rate), (ii)
changes attributable to rate (changes in rate multiplied by the
prior period’s volume), and (iii) net change (the sum of the
previous columns). The change attributable to both rate and volume
(changes in rate multiplied by changes in volume) has been
allocated equally to both the changes attributable to volume and
the changes attributable to rate.
|
Year Ended
|
Year Ended
|
||||
|
December 31 2016 vs. 2015
|
December 31 2015 vs. 2014
|
||||
|
Increase (Decrease) Due to
|
Increase (Decrease) Due to
|
||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
Interest
income
|
|
|
|
|
|
|
Loans,
net of allowance
|
$5,945
|
$(610)
|
$5,335
|
$7,681
|
$(2,180)
|
$5,501
|
Investment
securities
|
642
|
(343)
|
299
|
141
|
146
|
287
|
Other
interest-earnings assets
|
(44)
|
161
|
117
|
76
|
(13)
|
63
|
Total
interest income (taxable-
|
|
|
|
|
|
|
equivalent
basis)
|
6,543
|
(792)
|
5,751
|
7,898
|
(2,047)
|
5,851
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
147
|
167
|
314
|
90
|
(8)
|
82
|
Money
markets
|
1,054
|
(401)
|
653
|
733
|
(203)
|
530
|
Time
deposits
|
(1,028)
|
(14)
|
(1,042)
|
(251)
|
(1,807)
|
(2,058)
|
Borrowings
|
(91)
|
911
|
820
|
400
|
(248)
|
152
|
Total
interest expense
|
82
|
663
|
745
|
972
|
(2,266)
|
(1,294)
|
|
|
|
|
|
|
|
Net
interest income (Increase/
|
|
|
|
|
|
|
(decrease)(taxable
equivalent basis)
|
$6,461
|
$(1,455)
|
5,006
|
$6,926
|
$219
|
7,145
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
|
19
|
|
|
199
|
|
|
|
|
|
|
|
Net
interest income increase
|
|
|
$4,987
|
|
|
$6,946
|
Provision for Loan Losses
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 Accounting
Standards Codification (“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
percent of the loan portfolio.
A-15
The
provision for loan losses for the year ended December 31, 2016 was
$591,000, as compared to $750,000 for the year ended December 31,
2015 and $538,000 for the year ended December 31, 2014. The
provisions for loan losses for the years ended December 31, 2016,
2015 and 2014 resulted from, and were considered appropriate as
part of, management's assessment and estimate of the risks in the
total loan portfolio and determination of the total allowance for
loan losses. The primary factor contributing to the increase in the
allowance for loan losses at December 31, 2016 to $7.9 million from
$7.6 million at December 31, 2015 and $6.9 million in 2014 was the
Company’s loan growth. The impact of growth was offset in
part by the continuing positive trends in indicators of potential
losses on loans, primarily non-accrual loans and the reduction in
net charge-offs since 2012. The table below presents historical
asset quality data for the five most recently completed fiscal
years.
|
|
|
|
|
|
Net
charge-offs/(recoveries) as a percent
|
||||
|
Net
Charge-offs
|
of
average loans outstanding
|
||||||||
|
Years
Ended December 31,
|
Years
Ended December 31,
|
||||||||
|
2016
|
2015
|
2014
|
2013
|
2012
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Construction
and Land Development
|
$(303)
|
$(59)
|
$744
|
$2,125
|
$1,934
|
-0.43%
|
-0.09%
|
1.06%
|
2.43%
|
1.54%
|
Commercial
Real Estate
|
(71)
|
256
|
(39)
|
369
|
1,098
|
-0.01%
|
0.05%
|
-0.01%
|
0.09%
|
0.30%
|
Consumer Real
Estate
|
(7)
|
(44)
|
50
|
704
|
51
|
0.00%
|
-0.02%
|
0.03%
|
0.52%
|
0.05%
|
|
(381)
|
153
|
755
|
3,198
|
3,083
|
|
|
|
|
|
Commercial
& Industrial Loans Not
|
|
|
|
|
|
|
|
|
|
|
Secured by
Real Estate
|
714
|
(175)
|
(147)
|
367
|
670
|
0.45%
|
-0.13%
|
-0.14%
|
0.45%
|
0.82%
|
Consumer &
Other
|
(10)
|
-
|
-
|
-
|
97
|
-0.08%
|
0.00%
|
0.00%
|
0.00%
|
1.57%
|
Total
loans
|
$323
|
$(22)
|
$608
|
$3,565
|
$3,850
|
0.03%
|
0.00%
|
0.08%
|
0.48%
|
0.56%
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses for the period
|
$591
|
$750
|
$538
|
$156
|
$929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses at end of period
|
$7,909
|
$7,641
|
$6,869
|
$6,939
|
$10,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at
end of period
|
$1,191,280
|
$1,016,156
|
$868,405
|
$767,392
|
$722,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans at end of period
|
$968
|
$513
|
$420
|
$1,589
|
$16,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses as a percent of
|
|
|
|
|
|
|
|
|
|
|
total loans
outstanding at end of period
|
0.66%
|
0.75%
|
0.79%
|
0.90%
|
1.43%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans as a percent of
|
|
|
|
|
|
|
|
|
|
|
total loans
outstanding at end of period
|
0.08%
|
0.05%
|
0.05%
|
0.21%
|
2.23%
|
|
|
|
|
|
For
more information on changes in the allowance for loan losses, refer
to Note 4 of the audited consolidated financial
statements.
Non-Interest Income
Non-interest
income for the year ended December 31, 2016 was $1.3 million, down
$160,000 from 2015. The primary reason for the decrease was a
decline in gains in the available for sale securities portfolio of
$436,000 from $542,000 in 2015 to $106,000 for 2016. This was
partially offset by a decrease of $59,000 in the amount of losses
on sale or write-down of other real estate, which is included in
non-interest income totals. Net losses in this category for 2016
were $700,000 compared to $759,000 for 2015.
Non-interest income
for the year ended December 31, 2015 was $1.5 million, up $750,000
from 2014. The primary reason for the increase was gains in the
available for sale securities portfolio of $455,000 from the
$87,000 earned in 2014. In addition, the Company had a decrease of
$144,000 in the amount of losses on sale or write-down of other
real estate. Net losses in this category in 2015 were $144,000 less
than the $903,000 recorded in 2014.
A-16
The
following table presents a summary of non-interest income for the
years ended December 31, 2016, 2015 and 2014:
(in thousands)
|
2016
|
2015
|
2014
|
Non-interest income
|
|
|
|
Increase
in cash surrender value of bank owned life insurance
|
$916
|
$853
|
$799
|
Net
gain on sale of securities
|
106
|
542
|
87
|
Service
charges and fees
|
243
|
219
|
207
|
Mortgage
origination fees and gains on sale of loans
|
172
|
197
|
112
|
Net
loss on sale or impairment of foreclosed assets
|
(700)
|
(759)
|
(903)
|
Other
fees and income
|
557
|
402
|
402
|
Total
non-interest income
|
$1,294
|
$1,454
|
$704
|
Non-Interest Expenses
The growth of the Company’s loan portfolio
has been accompanied by increased non-interest expenses.
Non-interest expenses increased $2.1 million, or 8.0%, to $26.9
million for the year ended December 31, 2016, from $24.8 million
for the same period in 2015. The following are highlights of the
significant changes in non-interest expenses from 2015 to
2016.
●
Personnel expenses
increased $2.3 million to $15.6 million due primarily to the
addition of more personnel to handle the growth of the
Company.
●
Furniture,
equipment and software costs increased $132,000 from $1.9 million
in 2015 to $2.0 million in 2016 as the Company added additional
resources to support new employees.
●
Occupancy
costs declined by $106,000 from $1.5 million in 2015 to $1.4
million in 2016. During 2015, the Company recorded a liability of
$160,000 which reflected the amounts the Company will have to
subsidize a subtenant in its old Charlotte facility no longer in
use. There were no similar one-time expenses in 2016.
●
Professional fees
increased $319,000 to $1.1 million from $737,000 in 2015 due
largely to increased audit and legal fees associated with the
Company’s new public reporting status and some costs
associated with recruiting new employees.
●
Unreimbursed loan
costs and foreclosure related expenses decreased $346,000 primarily
due to a decrease in expenses on foreclosed properties associated
with fewer foreclosed properties being held.
Non-interest
expenses increased by $2.9 million, or 13.0%, to $24.8 million for
the year ended December 31, 2015, from $21.9 million for the same
period in 2014. The following are highlights of the significant
changes in non-interest expenses from 2014 to 2015.
●
Personnel expenses
increased $1.5 million to $13.3 million due primarily to the
addition of more personnel to handle the growth of the
Company.
●
Occupancy expenses
increased $548,000 to $1.5 million and furniture and equipment
costs increased $538,000 to $1.9 million as the Company had a full
year of costs associated with a new branch in Cary, NC and an
operations center in Raleigh, NC. In addition, the Company recorded
a liability of $160,000 which reflects the amounts the Company will
have to subsidize a subtenant in its old Charlotte facility no
longer in use.
A-17
●
Professional fees
decreased $382,000 to $737,000 from $1.1 million in 2014 due
largely to hiring staff internally to perform more internal audit
functions rather than outsourcing such functions.
●
Unreimbursed loan
costs and foreclosure related expenses increased $378,000 primarily
due to increased property tax expenses on foreclosed
properties.
●
Other operating
expense increased by $382,000 or 18.1%.
The
following table presents a summary of non-interest expense for the
years ended December 31, 2016, 2015 and 2014:
(in thousands)
|
2016
|
2015
|
2014
|
Non-interest expense
|
|
|
|
Salaries
and employee benefits
|
$15,604
|
$13,331
|
$11,826
|
Furniture,
equipment and software costs
|
2,010
|
1,878
|
1,340
|
Occupancy
|
1,441
|
1,547
|
999
|
Data
processing
|
1,115
|
1,103
|
1,229
|
Professional
fees
|
1,056
|
737
|
1,119
|
Director
related fees and expenses
|
883
|
921
|
978
|
Advertising
and public relations
|
871
|
934
|
876
|
FDIC
and other supervisory assessments
|
703
|
939
|
932
|
Unreimbursed
loan costs and foreclosure related expenses
|
528
|
874
|
496
|
Other
|
2,663
|
2,496
|
2,114
|
Total
non-interest expense
|
$26,874
|
$24,760
|
$21,909
|
Provision for Income Taxes
The
Company reported income tax expense of $6.5 million, $5.8 million
and $4.4 million for the years ended December 31, 2016, 2015 and
2014, respectively. The Company’s effective tax rate for 2016
was 32.8%, compared to 33.9% for 2015 and 35.6% for 2014. In 2016,
the North Carolina state corporate income tax rate decreased from
5% to 4%. In 2015, the North Carolina state corporate income tax
rate decreased from 6% to 5%. For further discussion pertaining to
the Company’s tax position, please see Note 11 of the audited
consolidated financial statements.
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. 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) comprised 12.1%, 17.2%
and 18.9% of total assets at December 31, 2016, 2015 and 2014,
respectively.
A-18
The
Bank has seen a net reduction in wholesale funding, while
maintaining liquidity sufficient to fund new loan demand. 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 December
31, 2016 or 2015. Also, as a member of the Federal Home Loan Bank
of Atlanta (“FHLB”), the Bank may obtain advances of up
to 25% of assets, subject to our available collateral. The Bank had
an available borrowing line at December 31, 2016 of $369.8 million
at the FHLB, secured by qualifying loans. As of that date, the Bank
had $150.0 million outstanding on the line and available borrowing
capacity of $219.8 million. In addition, the Bank may borrow up to
$157.2 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 December 31, 2016, securities sold under
agreements to repurchase were $20.2 million.
At
December 31, 2016, the Bank’s outstanding commitments to
extend credit totaled $220.7 million and consisted of undisbursed
lines of credit of $216.8 million, and letters of credit of $3.9
million. At December 31, 2015, the Bank’s outstanding
commitments to extend credit totaled $166.7 million and consisted
of undisbursed lines of credit of $163.5 million, and letters of
credit of $3.2 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.
Total
deposits were $1.17 billion and $982.8 million December 31, 2016
and 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 18.7% and 32.5% of
total deposits at December 31, 2016 and 2015, respectively. Time
deposits of $250,000 or more represented 4.55% and 5.20%,
respectively, of the total deposits at December 31, 2016 and 2015.
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.
Based upon prior experience, management anticipates that a
substantial portion of outstanding certificates of deposit will
renew upon maturity.
As
disclosed in the Company's Consolidated Statements of Cash Flows
included herein, net cash provided by operating activities was
approximately $13.5 million during 2016. Net cash used in investing
activities was $211.8 million during 2016 and net cash provided by
financing activities was $185.8 million during 2016.
Management
believes that current sources of funds provide adequate liquidity
for the Bank’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.
A-19
Asset/Liability Management
The
analysis of an institution’s interest rate gap (the
difference between the re-pricing of interest-earning assets and
interest-bearing liabilities during a given period of time) is a
standard tool for the measurement of exposure to interest rate
risk. The following tables set forth the amounts of
interest-earning assets and interest-bearing liabilities
outstanding at December 31, 2016 and 2015 which are projected to
re-price or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which
re-price or mature within a particular period were determined in
accordance with the contractual terms of the assets or liabilities.
Loans with adjustable rates are shown as being due at the end of
the next upcoming adjustment period. Money market deposit accounts
and negotiable order of withdrawal or other transaction accounts
are assumed to be subject to immediate re-pricing and depositor
availability and have been placed in the shortest period. In making
the gap computations, none of the assumptions sometimes made
regarding prepayment rates and deposit decay rates have been used
for any interest-earning assets or interest-bearing liabilities. In
addition, the table does not reflect scheduled principal payments
that will be received throughout the life of the loans. The
interest rate sensitivity of the Company’s assets and
liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual
experience differs from that indicated by such
assumptions.
|
Terms to Re-pricing at December 31, 2016
|
||||
|
|
More Than
|
More Than
|
|
|
|
1 Year
|
1 Year to
|
3 Years to
|
More Than
|
|
(in thousands)
|
or Less
|
3 Years
|
5 Years
|
5 Years
|
Total
|
Interest-earning
assets:
|
|
|
|
|
|
Loans
|
$359,018
|
$175,396
|
$362,910
|
$293,438
|
$1,190,762
|
Securities,
available for sale
|
-
|
737
|
8,615
|
188,089
|
197,441
|
Interest-earning
deposits in other banks
|
38,384
|
-
|
-
|
-
|
38,384
|
Stock
in the Federal Home Loan Bank of
|
|
|
|
|
|
Atlanta
|
8,400
|
-
|
-
|
-
|
8,400
|
Total
interest-earning assets:
|
$405,802
|
$176,133
|
$371,525
|
$481,527
|
$1,434,987
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$229,647
|
$-
|
$-
|
$-
|
$229,647
|
Money
markets
|
512,399
|
-
|
-
|
-
|
512,399
|
Time
deposits
|
145,224
|
67,868
|
5,915
|
-
|
219,007
|
Repurchase
agreements and federal funds
|
20,174
|
-
|
-
|
-
|
20,174
|
Short
term debt
|
150,000
|
-
|
-
|
-
|
150,000
|
Long
term debt
|
-
|
-
|
-
|
18,558
|
18,558
|
Total
interest-bearing liabilities:
|
$1,057,444
|
$67,868
|
$5,915
|
$18,558
|
$1,149,785
|
|
|
|
|
|
|
Interest
sensitivity gap per period
|
$(651,642)
|
$108,265
|
$365,610
|
$462,969
|
$285,202
|
|
|
|
|
|
|
Cumulative
interest sensitivity gap
|
$(651,642)
|
$(543,377)
|
$(177,767)
|
$285,202
|
$285,202
|
|
|
|
|
|
|
Cumulative
gap as a percentage of
|
|
|
|
|
|
total
interest-earning assets
|
-45.41%
|
-37.87%
|
-12.39%
|
19.87%
|
19.87%
|
|
|
|
|
|
|
Cumulative
interest-earning assets as
|
|
|
|
|
|
a
percentage of interest-bearing liabilities
|
38.38%
|
51.71%
|
84.29%
|
124.80%
|
124.80%
|
A-20
|
Terms to Re-pricing at December 31, 2015
|
||||
|
|
More Than
|
More Than
|
|
|
|
1 Year
|
1 Year to
|
3 Years to
|
More Than
|
|
(in thousands)
|
or Less
|
3 Years
|
5 Years
|
5 Years
|
Total
|
Interest-earning
assets:
|
|
|
|
|
|
Loans
|
$329,747
|
$151,167
|
$293,643
|
$241,599
|
$1,016,156
|
Securities,
available for sale
|
1,810
|
-
|
1,786
|
165,300
|
168,896
|
Interest-earning
deposits in other banks
|
30,993
|
-
|
-
|
-
|
30,993
|
Stock
in the Federal Home Loan Bank of
|
|
|
|
|
|
Atlanta
|
8,061
|
-
|
-
|
-
|
8,061
|
Total
interest-earning assets:
|
$370,611
|
$151,167
|
$295,429
|
$406,899
|
$1,224,106
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$136,701
|
$-
|
$-
|
$-
|
$136,701
|
Money
markets
|
367,391
|
-
|
-
|
-
|
367,391
|
Time
deposits
|
257,883
|
57,170
|
4,728
|
-
|
319,781
|
Repurchase
agreements and federal funds
|
30,580
|
-
|
-
|
-
|
30,580
|
Short
term debt
|
165,000
|
-
|
-
|
-
|
165,000
|
Long
term debt
|
-
|
4,800
|
-
|
18,558
|
23,358
|
Total
interest-bearing liabilities:
|
$957,555
|
$61,970
|
$4,728
|
$18,558
|
$1,042,811
|
|
|
|
|
|
|
Interest
sensitivity gap per period
|
$(586,944)
|
$89,197
|
$290,701
|
$388,341
|
$181,295
|
|
|
|
|
|
|
Cumulative
interest sensitivity gap
|
$(586,944)
|
$(497,747)
|
$(207,046)
|
$181,295
|
$181,295
|
|
|
|
|
|
|
Cumulative
gap as a percentage of
|
|
|
|
|
|
total
interest-earning assets
|
-47.95%
|
-40.66%
|
-16.91%
|
14.81%
|
14.81%
|
|
|
|
|
|
|
Cumulative
interest-earning assets as
|
|
|
|
|
|
a
percentage of interest-bearing liabilities
|
38.70%
|
51.18%
|
79.79%
|
117.39%
|
117.39%
|
Analysis of Financial Condition
Overview
Total
assets at December 31, 2016 were $1.50 billion, an increase of
$197.9 million or 15.2% over the balance as of December 31, 2015 of
$1.31 billion. Interest earning assets at December 31, 2016 totaled
$1.43 billion and consisted of $1.18 billion in net loans, $197.4
million in investment securities, $8.4 million in Federal Home Loan
Bank of Atlanta stock, and $38.4 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 December 31, 2016 were $1.17 billion
and $136.1 million, respectively. Total deposits and
stockholders’ equity at December 31, 2015 were $982.8 million
and $97.7 million, respectively.
A-21
Investment Securities
Investment
securities as of December 31, 2016 and December 31, 2015 were
$197.4 million and $168.9 million, respectively. The
Company’s investment portfolio at December 31, 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 yields of 2.83% and 2.90% at December
31, 2016 and December 31, 2015, respectively. The Company also held
an investment of $8.4 million and $8.1 million in Federal Home Loan
Bank Stock as of December 31, 2016 and December 31, 2015,
respectively, with a weighted average yield of 4.64% and 4.53% for
those respective periods. The investment portfolio increased $28.5
million in 2016, the net result of $75.4 million in purchases,
$20.4 million in sales, $24.7 million of maturities and prepayments
and a decrease of $3.2 million in the market value of securities
held available for sale. The investment portfolio decreased $14.8
million in 2015, the net result of $60.3 million in purchases,
$55.0 million in sales, $20.3 million of maturities and prepayments
and a decrease of $322,000 in the market value of securities held
available for sale.
The
following is a summary of the fair values of the securities
portfolio by major classification at December 31, 2016, 2015 and
2014.
(In thousands)
|
2016
|
2015
|
2014
|
Available-for-sale:
|
|
|
|
U.S.
Agency obligations
|
$16,943
|
$19,901
|
$31,842
|
Collateralized
mortgage obligations
|
42,497
|
60,941
|
70,056
|
Mortgage-backed
securities
|
73,873
|
31,310
|
34,548
|
Municipal
bonds
|
60,677
|
54,434
|
45,180
|
Other
|
3,451
|
2,310
|
2,049
|
|
$197,441
|
$168,896
|
$183,675
|
A-22
The
following table summarizes the securities portfolio by major
classification as of December 31, 2016 and December 31,
2015:
|
December 31, 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
|
17,062
|
16,943
|
2.61%
|
19,778
|
19,901
|
2.59%
|
|
17,062
|
16,943
|
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
|
42,439
|
42,497
|
2.43%
|
60,826
|
60,941
|
2.34%
|
|
42,439
|
42,497
|
2.43%
|
60,826
|
60,941
|
2.34%
|
Mortgage-backed
securities
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
7,492
|
7,581
|
2.54%
|
-
|
-
|
-
|
Due
after five but within ten years
|
5,237
|
5,341
|
3.07%
|
13,361
|
13,591
|
2.74%
|
Due
after ten years
|
62,409
|
60,951
|
2.13%
|
17,713
|
17,719
|
2.61%
|
|
75,138
|
73,873
|
2.24%
|
31,074
|
31,310
|
2.67%
|
Municipal
bonds
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
1,734
|
1,771
|
3.23%
|
1,740
|
1,786
|
3.23%
|
Due
after five but within ten years
|
6,078
|
6,087
|
3.22%
|
4,325
|
4,412
|
3.06%
|
Due
after ten years
|
53,089
|
52,819
|
4.02%
|
47,098
|
48,236
|
3.99%
|
|
60,901
|
60,677
|
3.92%
|
53,163
|
54,434
|
3.89%
|
Other
equity investments
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
1,500 1,500
|
1,500
|
6.77%
|
500
|
500
|
6.50%
|
Due
after ten years
|
2,176
|
1,951
|
0.00%
|
2,177
|
1,810
|
0.00%
|
|
3,676
|
3,451
|
2.76%
|
2,677
|
2,310
|
1.21%
|
Total
securities available for sale
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
9,226
|
9,352
|
19.36%
|
1,740
|
1,786
|
3.23%
|
Due
after five but within ten years
|
12,815
|
12,928
|
2.82%
|
18,186
|
18,503
|
2.82%
|
Due
after ten years
|
177,175
|
175,161
|
2.91%
|
147,592
|
148,607
|
2.91%
|
|
$199,216
|
$197,441
|
2.83%
|
$167,518
|
$168,896
|
2.90%
|
_________________________
(1)
The
marginal tax rate used to calculate tax equivalent yield was
30.0%.
As of
December 31, 2015, the Company had an investment in a
mortgage-backed security with an amortized cost and a fair value of
$9.9 million, or about 10.1% of stockholders’ equity. As of
December 31, 2016, there were no securities with amortized cost or
fair value exceeding 10% of stockholders’
equity.
A-23
Loans Receivable
The
loan portfolio is the largest category of the Company's earning
assets and is composed of commercial loans, real estate mortgage
loans, real estate construction loans and consumer loans. The Bank
makes loans and extensions of credit primarily within Wake and
Mecklenburg counties in North Carolina.
Although the Bank
has a diversified loan portfolio, a substantial portion of the loan
portfolio is collateralized by real estate, the value of which is
dependent upon the real estate market. Real estate mortgage loans
include both commercial and residential mortgage
loans.
The
loan portfolio at December 31, 2016 totaled $1.19 billion and was
composed of $79.7 million in construction and land development
loans, $641.7 million in commercial real estate loans, $287.1
million in consumer real estate loans, $170.7 million in commercial
and industrial loans, and $11.5 million in consumer and other
loans. Also included in loans outstanding at December 31, 2016 is
$518,000 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 at December 31, 2016 is
$630,000 in net deferred loan costs.
The
following table describes the Company’s loan portfolio
composition by category:
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||
|
|
%
of
|
|
%
of
|
|
%
of
|
|
%
of
|
|
%
of
|
|
|
Total
|
|
Total
|
|
Total
|
|
Total
|
|
Total
|
(Dollars
in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction and land
development
|
$79,738
|
6.7%
|
$64,702
|
6.4%
|
$62,817
|
7.2%
|
$81,316
|
10.6%
|
$99,685
|
13.8%
|
Commercial real
estate:
|
|
|
|
|
|
|
|
|
|
|
Non-farm,
non-residential
|
365,569
|
30.7%
|
307,722
|
30.3%
|
283,112
|
32.6%
|
289,181
|
37.7%
|
264,616
|
36.6%
|
Owner-occupieed
|
186,892
|
15.7%
|
147,017
|
14.5%
|
125,017
|
14.4%
|
84,198
|
11.0%
|
76,295
|
10.6%
|
Multifamily,
nonresidential and junior liens
|
89,191
|
7.5%
|
79,170
|
7.8%
|
78,024
|
9.0%
|
63,965
|
8.3%
|
62,998
|
8.7%
|
Total commercial real
estate
|
641,652
|
53.9%
|
533,909
|
52.5%
|
486,153
|
56.0%
|
437,344
|
57.0%
|
403,909
|
55.9%
|
Consumer real
estate:
|
|
|
|
|
|
|
|
|
|
|
Home equity
lines
|
87,489
|
7.3%
|
78,943
|
7.8%
|
46,782
|
5.4%
|
21,117
|
2.8%
|
13,271
|
1.8%
|
Secured by 1-4 family
residential, secured by
|
|
|
|
|
|
|
|
|
|
|
first deeds of
trust
|
195,343
|
16.4%
|
167,053
|
16.4%
|
143,793
|
16.6%
|
118,686
|
15.5%
|
100,628
|
13.9%
|
Secured by 1-4 family
residential, secured by
|
|
|
|
|
|
|
|
|
|
|
second deeds of
trust
|
4,289
|
0.4%
|
3,711
|
0.4%
|
4,940
|
0.6%
|
5,774
|
0.8%
|
6,294
|
0.9%
|
Total consumer real
estate
|
287,121
|
24.1%
|
249,707
|
24.6%
|
195,515
|
22.5%
|
145,577
|
19.0%
|
120,193
|
16.6%
|
Commercial and
industrial loans (except those
|
|
|
|
|
|
|
|
|
|
|
secured by real
estate)
|
170,709
|
14.3%
|
153,669
|
15.1%
|
118,204
|
13.6%
|
94,964
|
12.4%
|
81,516
|
11.3%
|
Consumer and
other
|
11,542
|
1.0%
|
13,539
|
1.3%
|
5,722
|
0.7%
|
8,505
|
1.1%
|
17,229
|
2.4%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Deferred loan
origination fees (costs)
|
518
|
0.0%
|
630
|
0.1%
|
(6)
|
0.0%
|
(314)
|
0.0%
|
(166)
|
0.0%
|
Total
loans
|
1,191,280
|
100.0%
|
1,016,156
|
100.0%
|
868,405
|
100.0%
|
767,392
|
100.0%
|
722,366
|
100.0%
|
Allowance for
loan losses
|
(7,909)
|
|
(7,641)
|
|
(6,869)
|
|
(6,939)
|
|
(10,348)
|
|
Total net
loans
|
$1,183,371
|
|
$1,008,515
|
|
$861,536
|
|
$760,453
|
|
$712,018
|
|
During
2016, loans receivable increased by $175.1 million, or 17.2%, to
$1.19 billion as of December 31, 2016. The increase in loans during
the year is primarily attributable to new loan origination driven
by demand in the Company’s market areas.
A-24
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 demand in the Company’s market areas.
The
majority of the Company’s loan portfolio consists of real
estate loans. This category, which includes both commercial and
consumer loan balances, increased from 83.5% of the loan portfolio
at December 31, 2015 to 84.7% at December 31, 2016. The increase
was primarily due to strong demand in the real estate market in the
Company’s marketing areas. During 2015, real estate loans as
a percent of the total loan portfolio decreased from 85.9% as of to
83.5%. The decrease in the real estate loans as a percent of the
total was primarily the result of an internal focus in the current
year on expanding the Bank’s commercial lending area. From
December 31, 2015 to December 31, 2016 there was a $15.0 million
increase in construction and land development loans, a $107.7
million increase in commercial real estate loans and a $37.4
million increase in consumer real estate loans. From December 31,
2014 to December 31, 2015, there was a $1.9 million increase in
construction and land development loans, a $46.7 million increase
in commercial real estate loans and a $54.2 million increase in
consumer real estate loans.
Maturities and Sensitivities of Loans to Interest
Rates
The
following table presents the maturity distribution of the
Company’s loans at December 31, 2016 and December 31, 2015.
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:
|
At December 31, 2016
|
At December 31, 2015
|
||||||
|
|
Due after one
|
|
|
|
Due after one
|
|
|
|
Due within
|
year but within
|
Due after
|
|
Due within
|
year but within
|
Due after
|
|
(In thousands)
|
one year
|
five years
|
five years
|
Total
|
one year
|
five years
|
five years
|
Total
|
Fixed rate loans:
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$23,417
|
$4,474
|
$22,240
|
$50,131
|
$8,199
|
$14,735
|
$581
|
$23,515
|
Non-farm,
non-residential
|
27,159
|
54,573
|
196,323
|
278,055
|
8,409
|
162,981
|
50,017
|
221,407
|
Owner-occupieed
|
3,954
|
43,574
|
129,681
|
177,209
|
1,965
|
88,638
|
45,093
|
135,696
|
Multifamily,
nonresidential and junior liens
|
1,860
|
10,598
|
43,541
|
55,999
|
1,179
|
20,413
|
27,524
|
49,116
|
Home equity
lines
|
-
|
648
|
-
|
648
|
451
|
161
|
-
|
612
|
Secured by 1-4
family residential, secured by first
|
|
|
|
|
|
|
|
|
deeds of
trust
|
10,084
|
18,950
|
160,094
|
189,128
|
5,878
|
54,540
|
97,498
|
157,916
|
Secured by 1-4
family residential, secured by
|
|
|
|
|
|
|
|
|
second deeds
of trust
|
65
|
499
|
2,600
|
3,164
|
591
|
1,263
|
858
|
2,712
|
Commercial and
industrial loans (except those
|
|
|
|
|
|
|
|
|
secured by
real estate)
|
4,157
|
22,057
|
64,220
|
90,434
|
2,462
|
62,146
|
14,565
|
79,173
|
Consumer and
other
|
1,010
|
1,231
|
1,490
|
3,731
|
180
|
3,685
|
-
|
3,865
|
Total at fixed
rates
|
71,706
|
156,604
|
620,189
|
848,499
|
29,314
|
408,562
|
236,136
|
674,012
|
Variable rate loans:
|
|
|
|
|
|
|
|
|
Construction
and land development
|
15,103
|
7,063
|
7,316
|
29,482
|
28,926
|
11,793
|
230
|
40,949
|
Non-farm,
non-residential
|
11,656
|
30,338
|
45,520
|
87,514
|
10,002
|
55,761
|
19,219
|
84,982
|
Owner-occupieed
|
2,533
|
1,392
|
5,758
|
9,683
|
2,754
|
4,476
|
4,092
|
11,322
|
Multifamily,
nonresidential and junior liens
|
2,887
|
4,282
|
26,023
|
33,192
|
3,437
|
15,104
|
11,513
|
30,054
|
Home equity
lines
|
3,063
|
9,158
|
74,426
|
86,647
|
3,923
|
8,278
|
66,130
|
78,331
|
Secured by 1-4
family residential, secured by first
|
|
|
|
|
|
|
|
|
deeds of
trust
|
1,556
|
1,604
|
2,524
|
5,684
|
3,538
|
4,347
|
1,252
|
9,137
|
Secured by 1-4
family residential, secured by
|
|
|
|
|
|
|
|
|
second deeds
of trust
|
40
|
413
|
614
|
1,067
|
514
|
420
|
-
|
934
|
Commercial and
industrial loans (except those
|
|
|
|
|
|
|
|
|
secured by
real estate)
|
57,804
|
17,651
|
4,760
|
80,215
|
60,335
|
15,003
|
301
|
75,639
|
Consumer and
other
|
1,230
|
5,028
|
1,553
|
7,811
|
1,958
|
7,586
|
109
|
9,653
|
Total at
variable rates
|
95,872
|
76,929
|
168,494
|
341,295
|
115,387
|
122,768
|
102,846
|
341,001
|
Subtotal
|
167,578
|
233,533
|
788,683
|
1,189,794
|
144,701
|
531,330
|
338,982
|
1,015,013
|
Non-accrual
loans (1)
|
184
|
591
|
194
|
968
|
303
|
210
|
-
|
513
|
Gross
Loans
|
$167,762
|
$234,124
|
$788,877
|
1,190,762
|
$145,004
|
$531,540
|
$338,982
|
1,015,526
|
Deferred
origination costs
|
|
|
|
518
|
|
|
|
630
|
Total
loans
|
|
|
|
$1,191,280
|
|
|
|
$1,016,156
|
_________________________
(1)
Includes
nonaccrual restructured loans.
A-25
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.
Allowance
for Loan Losses
The
allowance for loan losses reflects management's assessment and
estimate of the risks associated with extending credit and its
evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review
asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks
and loan losses. In assessing the adequacy of the allowance, size,
quality and risk of loans in the portfolio are reviewed. Other
factors considered are:
●
Changes in
international, national, regional and local
conditions.
●
Changes in the
nature and volume of the Bank’s loan portfolio and terms of
loans.
●
Changes in the
volume and severity of past due loans and other similar
conditions.
●
Changes in interest
rates.
●
The existence and
effect of any concentrations of credit in the Bank’s loan
portfolio as well as any changes in the levels of such
concentrations.
●
The effect of other
external factors, such as competition and legal and regulatory
requirements on the level of estimated credit losses in the
Bank’s existing portfolio.
●
Pace of the
Bank’s loan growth.
●
And other factors
which management believes affect the allowance for potential credit
losses.
Management uses
several measures to assess and monitor the credit risks in the loan
portfolio, including a loan grading system that begins upon loan
origination and continues until the loan is collected or
collectability becomes doubtful. Upon loan origination, the Bank's
originating loan officer evaluates the quality of the loan and
assigns one of nine risk grades. The loan officer monitors the
loan's performance and credit quality and makes changes to the
credit grade as conditions warrant. When originated or renewed, all
loans over a certain dollar amount receive in-depth reviews and
risk assessments by the Bank's Credit Administration. Any issues
regarding the risk assessments are addressed by the Bank's senior
credit administrators and factored into management's decision to
originate or renew the loan. The Bank's Board of Directors reviews,
on a quarterly basis, an analysis of the Bank's reserves relative
to the range of reserves estimated by the Bank's Credit
Administration.
As an
additional measure, the Bank periodically engages an independent
third party to review the underwriting, documentation and risk
grading analyses. The third party's evaluation and report is shared
with management and the Bank's Board of Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
A-26
Management uses the
information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management's judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management's
assessment of loan portfolio quality, the value of collateral, and
other macroeconomic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The
allowance for loan losses is comprised of three components:
specific reserves, general reserves and unallocated reserves. After
a loan has been identified as impaired, management measures
impairment. When the measure of the impaired loan is less than the
recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are
determined on an individual loan basis based on management's
current evaluation of the Bank's loss exposure for each credit,
given the appraised value of any underlying collateral. Loans for
which specific reserves are provided are excluded from the general
allowance calculations as described below.
The
general allowance reflects reserves established under GAAP for
collective loan impairment. These reserves are based upon
historical net charge-offs using the greater of the last two,
three, four or five years' loss experience. This charge-off
experience may be adjusted to reflect the effects of current
conditions. The Bank considers information derived from its loan
risk ratings and external data related to industry and general
economic trends in establishing reserves.
The
unallocated allowance is determined through management's assessment
of probable losses that are in the portfolio but are not adequately
captured by the other two components of the allowance, including
consideration of current economic and business conditions and
regulatory requirements. The unallocated allowance also reflects
management's acknowledgement of the imprecision and subjectivity
that underlie the modeling of credit risk. Due to the subjectivity
involved in determining the overall allowance, including the
unallocated portion, the unallocated portion may fluctuate from
period to period based on management's evaluation of the factors
affecting the assumptions used in calculating the
allowance.
There
were no significant changes in the estimation methods or
fundamental assumptions used in the evaluation of the allowance for
loan losses for the year ended December 31, 2016 as compared to the
year ended December 31, 2015. Revisions, estimates and assumptions
may be made in any period in which the supporting factors indicate
that loss levels may vary from the previous estimates.
Various
regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses.
Such agencies may require adjustments to the allowance based on
their judgments of information available to them at the time of
their examinations. Management believes it has established the
allowance for credit losses pursuant to GAAP, and has taken into
account the views of its regulators and the current economic
environment. Management considers the allowance for loan losses
adequate to cover the estimated losses inherent in the Bank's loan
portfolio as of the date of the financial statements. Although
management uses the best information available to make evaluations,
significant future additions to the allowance may be necessary
based on changes in economic and other conditions, thus adversely
affecting the operating results of the Company.
A-27
Net
charge-offs for 2016 were $323,000. In 2015, the Company had net
recoveries of $22,000. The ratio of net charge-offs to average
total loans was 0.03% in 2016, 0.00% in 2015 and 0.07% in 2014. The
Bank strives to proactively work with its customers to identify
potential problems. If found, the Bank works to quickly recognize
identifiable losses and to establish a plan, with the borrower, if
possible, to have the loans paid off.
The
allowance for loan losses was $7.9 million or 0.66% of total loans
outstanding at December 31, 2016. For December 31, 2015 and 2014,
the allowance for loan losses amounted to $7.6 million or 0.75% of
total loans outstanding and $6.7 million, or 0.79% of total loans
outstanding, respectively.
The
allowance for loan losses as a percentage of gross loans
outstanding decreased by 0.09% during 2016 to 0.66% of gross loans
at December 31, 2016. The change in the allowance during 2016
reflected the impact of growth in the loan portfolio outpacing the
loan loss provisions recorded as a result of improved credit
quality. General reserves totaled $7.4
million or 0.62% of gross loans outstanding as of December 31,
2016, an increase from year-end 2015 when they totaled $7.1 million
or 0.70% of loans outstanding. At December 31, 2016, specific
reserves on impaired loans constituted $509,000 or 0.04% of gross
loans outstanding compared to $509,000 or 0.05% of loans
outstanding as of December 31, 2015.
The
allowance for loan losses as a percentage of gross loans
outstanding decreased by 0.04% during 2015 to 0.75% of gross loans
at December 31, 2015. The change in the allowance during 2015
resulted from net recoveries of
$22,000 and a provision of $750,000. General reserves totaled $6.2
million or 0.71% of loans outstanding at December 31, 2014. At
December 31, 2014, specific reserves on impaired loans constituted
$680,000 or 0.08% of loans outstanding.
The
following table presents the percentage of loans assigned to each
risk grade at December 31, 2016 and 2015.
|
Percentage of Loans
|
|
|
By Risk Grade
|
|
Risk Grade
|
2016
|
2015
|
Risk
Grade 1 (Minimal)
|
0.28%
|
0.35%
|
Risk
Grade 2 (Modest)
|
1.94%
|
0.93%
|
Risk
Grade 3 (Average)
|
32.63%
|
30.18%
|
Risk
Grade 4 (Acceptable)
|
46.03%
|
46.92%
|
Risk
Grade 5 (Acceptable with Care)
|
17.24%
|
20.68%
|
Risk
Grade 6 (Special Mention or Critical)
|
1.71%
|
0.71%
|
Risk
Grade 7 (Substandard)
|
0.17%
|
0.23%
|
Risk
Grade 8 (Doubtful)
|
0.00%
|
0.00%
|
Risk
Grade 9 (Loss)
|
0.00%
|
0.00%
|
A-28
The
following table presents information regarding changes in the
allowance for loan losses in detail for the years
indicated:
(in thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
Allowance
for loan losses at beginning of the period
|
$7,641
|
$6,869
|
$6,939
|
$10,348
|
$13,269
|
Provision
for loan losses
|
591
|
750
|
538
|
156
|
929
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
Construction
and land development
|
-
|
(14)
|
(898)
|
(2,676)
|
(2,997)
|
Commercial
real estate
|
(27)
|
(275)
|
(1)
|
(761)
|
(1,222)
|
Consumer
real estate
|
-
|
-
|
(64)
|
(738)
|
(52)
|
Commercial
and industrial loans (except those
|
|
|
|
|
|
secured
by real estate)
|
(927)
|
-
|
(99)
|
(494)
|
(743)
|
Consumer
and other
|
-
|
-
|
-
|
-
|
(98)
|
Total
charge-offs
|
(954)
|
(289)
|
(1,062)
|
(4,669)
|
(5,112)
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
Construction
and land development
|
303
|
73
|
154
|
551
|
1,063
|
Commercial
real estate
|
98
|
19
|
40
|
392
|
124
|
Consumer
real estate
|
7
|
44
|
14
|
34
|
1
|
Commercial
and industrial loans (except those
|
|
|
|
|
|
secured
by real estate)
|
213
|
175
|
246
|
127
|
73
|
Consumer
and other
|
10
|
-
|
-
|
-
|
1
|
Total
recoveries
|
631
|
311
|
454
|
1,104
|
1,262
|
Net
recoveries (charge-offs)
|
(323)
|
22
|
(608)
|
(3,565)
|
(3,850)
|
Allowance
for loan losses at end of the period
|
$7,909
|
$7,641
|
$6,869
|
$6,939
|
$10,348
|
|
|
|
|
|
|
Ratio
of net charge-offs during the period
|
|
|
|
|
|
to
average loans outstanding during
|
|
|
|
|
|
the
period
|
0.03%
|
0.00%
|
0.07%
|
0.48%
|
0.55%
|
|
|
|
|
|
|
Average
loans
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percent of loans
|
|
|
|
|
|
outstanding
at end of year
|
0.66%
|
0.75%
|
0.79%
|
0.90%
|
1.43%
|
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 December 31 for the years indicated.
|
At
December 31,
|
|||||||||
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||
|
|
%
of
|
|
%
of
|
|
%
of
|
|
%
of
|
|
%
of
|
|
|
Total
|
|
Total
|
|
Total
|
|
Total
|
|
Total
|
(Dollars
in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction and land
development
|
$486
|
6.7%
|
$509
|
6.4%
|
$960
|
7.2%
|
$2,021
|
10.6%
|
$3,746
|
13.8%
|
Commercial real
estate
|
3,719
|
53.9%
|
3,156
|
52.5%
|
2,510
|
56.0%
|
1,184
|
57.0%
|
2,463
|
55.9%
|
Consumer real
estate
|
1,900
|
24.1%
|
2,046
|
24.6%
|
1,594
|
22.5%
|
1,540
|
19.0%
|
1,466
|
16.6%
|
Commercial and
industrial loans
|
|
|
|
|
|
|
|
|
|
|
(except those
secured by real estate)
|
1,728
|
14.3%
|
1,786
|
15.1%
|
1,662
|
13.6%
|
2,150
|
12.4%
|
2,573
|
11.3%
|
Consumer and
other
|
76
|
1.0%
|
144
|
1.4%
|
143
|
0.7%
|
44
|
1.0%
|
100
|
2.4%
|
Total
allocated
|
7,909
|
100.0%
|
7,641
|
100.0%
|
6,869
|
100.0%
|
6,939
|
100.0%
|
10,348
|
100.0%
|
Unallocated
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
$7,909
|
|
$7,641
|
|
$6,869
|
|
$6,939
|
|
$10,348
|
|
A-29
Past Due Loans and Nonperforming Assets
The
Company had no loans that were 30 days or more past due at December
31, 2016 or 2015. Non-accrual loans increased to $968,000 at
December 31, 2016 from $513,000 at December 31, 2015. As of
December 31, 2016, the Company had six loans totaling $1.3 million
that were considered to be troubled debt restructurings, or
“TDR”s, of which three loans totaling $1.2 million were
still accruing interest. As of December 31, 2015, the Company had
eight loans totaling $2.8 million that were considered to be
troubled debt restructurings, of which four loans totaling $2.6
million were still accruing interest. There were no loans that were
over 90 days past due and still accruing interest at December 31,
2016 or 2015.
Management monitors
the Company’s loan portfolio to ensure that loans are
properly classified as to risk grade. Should economic conditions
deteriorate, the inability of distressed customers to service their
existing debt could cause higher levels of non-performing
loans.
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 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.
A-30
The
following tables present an age analysis of past due loans,
segregated by class of loans as of December 31, 2016 and December
31, 2015:
|
At December 31, 2016
|
At December 31, 2015
|
||||||||
|
30+
|
Non-
|
Total
|
|
|
30+
|
Non-
|
Total
|
|
|
|
Days
|
Accrual
|
Past
|
|
Total
|
Days
|
Accrual
|
Past
|
|
Total
|
(in thousands)
|
Past Due
|
Loans
|
Due
|
Current
|
Loans
|
Past Due
|
Loans
|
Due
|
Current
|
Loans
|
Construction
and land development
|
$-
|
$125
|
$125
|
$79,613
|
$79,739
|
$-
|
$238
|
$238
|
$64,464
|
$64,702
|
Non-farm,
non-residential
|
-
|
-
|
-
|
365,569
|
365,569
|
-
|
-
|
-
|
306,390
|
306,390
|
Owner-occupieed
|
-
|
-
|
-
|
186,892
|
186,892
|
-
|
-
|
-
|
147,017
|
147,017
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
89,191
|
89,191
|
-
|
-
|
-
|
79,170
|
79,170
|
Home equity
lines
|
-
|
194
|
194
|
87,295
|
87,489
|
-
|
-
|
-
|
78,943
|
78,943
|
Secured by 1-4
family residential, secured
|
|
|
|
|
|
|
|
|
|
|
by first deeds
of trust
|
-
|
531
|
531
|
194,812
|
195,343
|
-
|
-
|
-
|
167,053
|
167,053
|
Secured by 1-4
family residential,
|
|
|
|
|
|
|
|
|
|
|
secured by
second deeds of trust
|
-
|
58
|
58
|
4,231
|
4,289
|
-
|
65
|
65
|
3,646
|
3,711
|
Commercial and
industrial loans (except
|
|
|
|
|
|
|
|
|
|
|
those secured
by real estate)
|
-
|
60
|
60
|
170,649
|
170,709
|
-
|
189
|
189
|
154,812
|
155,001
|
Consumer and
other
|
-
|
-
|
-
|
11,542
|
11,542
|
-
|
21
|
21
|
13,518
|
13,539
|
|
$-
|
$968
|
$968
|
$1,189,794
|
$1,190,763
|
$-
|
$513
|
$513
|
$1,015,013
|
$1,015,526
|
The
table below sets forth, for the periods indicated, information
about the Company’s non-accrual loans, loans past due 90 days
or more and still accruing interest, total non-performing loans
(non-accrual loans plus nonaccrual restructured loans), and total
non-performing assets.
|
At December 31,
|
||||
(Dollars in thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
Non-accrual
loans
|
$785
|
$323
|
$219
|
$1,148
|
$12,949
|
Restructured
loans (1)
|
183
|
190
|
201
|
441
|
3,156
|
Total
nonperforming loans
|
968
|
513
|
420
|
1,589
|
16,105
|
Foreclosed
real estate
|
4,740
|
5,453
|
14,777
|
18,174
|
18,756
|
Repossessed
assets
|
-
|
-
|
214
|
-
|
-
|
Total
nonperforming assets
|
$5,708
|
$5,966
|
$15,411
|
$19,763
|
$34,861
|
|
|
|
|
|
|
Accruing
loans past due 90 days or more
|
$-
|
$-
|
$-
|
$-
|
$-
|
Allowance
for loan losses
|
7,909
|
7,641
|
6,869
|
6,939
|
10,348
|
|
|
|
|
|
|
Nonperforming
loans to period end loans
|
0.08%
|
0.05%
|
0.05%
|
0.21%
|
2.23%
|
Allowance
for loan losses to period end
|
|
|
|
|
|
loans
|
0.66%
|
0.75%
|
0.79%
|
0.90%
|
1.43%
|
Allowance
for loan losses to
|
|
|
|
|
|
nonperforming
loans
|
817.01%
|
1489.47%
|
1635.48%
|
436.69%
|
64.25%
|
Allowance
for loan losses to
|
|
|
|
|
|
nonperforming
assets
|
138.55%
|
128.08%
|
44.57%
|
35.11%
|
29.68%
|
Nonperforming
assets to total assets
|
0.38%
|
0.46%
|
1.32%
|
1.91%
|
3.64%
|
(1)
Restructured
loans are also on nonaccrual status.
In
addition to the above, as of December 31, 2016 the Company had $2.7
million in loans that were considered to be impaired for reasons
other than their past due, accrual or restructured status. In
total, there were $3.2 million in loans that were considered to be
impaired at December 31, 2016. 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. Impaired loans have been
evaluated by management in accordance with ASC 310 and $509,000 has
been included in the allowance for loan losses as of December 31,
2016 and 2015 for these loans. All troubled debt restructurings and
other non-performing loans are included within impaired loans as of
December 31, 2016 and 2015.
A-31
Other Assets
At
December 31, 2016, non-earning assets totaled $76.1 million, a
decrease of $13.3 million from $89.4 million at December 31, 2015.
Non-earning assets at December 31, 2016 consisted of: cash and due
from banks of $4.6 million, premises and equipment totaling $15.6
million, foreclosed real estate totaling $4.7 million, accrued
interest receivable of $4.4 million, bank owned life insurance, or
BOLI, of $34.2 million and other assets totaling $7.8 million, with
net deferred taxes of $4.8 million.
At
December 31, 2015, non-earning assets totaled $89.4 million, a
decrease of $4.2 million from $93.6 million at December 31, 2014.
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.
As of
December 31, 2016, the Company had an investment in bank owned life
insurance of $34.2 million, an increase of $5.9 million from the
December 31, 2015 balance of $28.3 million. Of the increase, $5.0
million can be attributable to a purchase of additional insurance
while the remaining $916,000 reflected an increase in cash
surrender value. BOLI increased during 2015 by $853,000 year over
year from the same period in 2014. 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 December 31, 2016,
non-reciprocal brokered deposits represented 6.6 percent of total
deposits.
Total
deposits at December 31, 2016 were $1.17 billion and consisted of
$211.2 million in non-interest-bearing demand deposits, $742.0
million in interest-bearing checking and money market accounts, and
$219.0 million in time deposits. Total deposits increased by $189.4
million from $982.8 million as of December 31, 2015.
Non-interest-bearing demand deposits increased by $52.2 million
from $159.0 million as of December 31, 2015. Interest-bearing and
money market accounts increased by $238.0 million from $504.1
million as of December 31, 2015. Time deposits decreased by $100.8
million during 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 Bank
operates.
Total
deposits increased in 2015 by $99.2 million from $883.6 million as
of December 31, 2014. Non-interest-bearing demand deposits
increased by $40.1 million from $118.9 million as of December 31,
2014. Interest-bearing and money market accounts increased by
$128.3 million from $375.8 million as of December 31, 2014. Time
deposits decreased by $69.1 million during 2015 from $388.9 million
as of December 31, 2014. The increase in deposits in 2015 was also
primarily due to a focus on growing core customer deposits during
the year and demand in the markets in which the Bank
operates.
A-32
The
table below provides a summary of the Company’s deposit
portfolio by deposit type.
|
As of December 31,
|
|
Composition of Deposit Portfolio
|
2016
|
2015
|
Non-interest
bearing
|
18.0%
|
16.2%
|
Interest-bearing
checking accounts
|
19.7%
|
21.5%
|
Money
markets
|
43.7%
|
29.8%
|
Time
deposits
|
18.6%
|
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:
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
(Dollars in thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
Interest-bearing
checking accounts
|
$174,440
|
0.40%
|
$126,661
|
0.31%
|
$97,969
|
0.31%
|
$76,740
|
0.49%
|
$57,897
|
0.51%
|
Money
markets
|
455,510
|
0.66%
|
315,169
|
0.75%
|
225,251
|
0.82%
|
151,320
|
0.73%
|
145,321
|
0.72%
|
Time
deposits
|
258,968
|
0.88%
|
367,107
|
0.90%
|
410,143
|
1.31%
|
442,400
|
1.57%
|
471,570
|
1.83%
|
Total
interest-bearing deposits
|
888,918
|
0.67%
|
808,937
|
0.75%
|
733,363
|
1.02%
|
670,460
|
1.25%
|
674,788
|
1.48%
|
Noninterest-bearing
deposits
|
187,506
|
-
|
150,578
|
-
|
101,166
|
-
|
73,597
|
-
|
59,027
|
-
|
Total
deposits
|
$1,076,424
|
0.56%
|
$959,515
|
0.63%
|
$834,529
|
0.90%
|
$744,057
|
1.13%
|
$733,815
|
1.36%
|
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 0.56% in 2016
compared to 0.63% in 2015 due to changes in deposit mix and lower
deposit interest rates.
The
following table shows the maturities of time deposits greater than
or equal to $250,000 as of December 31, 2016:
(in thousands)
|
2016
|
Three
months or less
|
$517
|
Over
three through six months
|
41,791
|
Over
six months through twelve months
|
4,474
|
Over
twelve months
|
6,512
|
|
$53,294
|
Short Term and Long Term Debt
As of
December 31, 2016, the Company had $150.0 million in short-term
debt, which consisted solely of FHLB advances. This compared to an
outstanding balance of $165.0 million in FHLB advances at year-end
2015. The decrease was due to the Company using deposit growth in
excess of loan growth during the year to pay down
debt.
A-33
As of
December 31, 2015, the Company had $165.0 million in short-term
debt, which consisted solely of FHLB advances compared to an
outstanding balance of $135.0 million at year-end 2014. In
addition, the Company had $4.8 million outstanding on its $10.0
million holding company loan. That balance at December 31, 2014 was
$7.3 million. The increase in short-term debt was used to fund, in
part, growth in the Bank’s loan portfolio during the year
ended December 31, 2015.
The
Company had issued and outstanding $18.6 million in junior
subordinated debentures as of December 31, 2016, December 31, 2015
and 2014. These junior subordinated debentures were issued to
Paragon Commercial Trust I and Paragon Commercial Trust II in
connection with the Company’s 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 audited consolidated
financial statements on page A-66.
The
Bank had no borrowings from the Federal Reserve at December 31,
2016 and 2015. Federal Reserve borrowings are collateralized by a
blanket assignment on all qualifying loans that the Bank owns which
are not pledged to the FHLB. At December 31, 2016, the carrying
value of loans pledged as collateral totaled approximately $351.0
million.
Securities sold
under agreements to repurchase were $20.2 million at December 31,
2016, as compared to $30.6 million at December 31, 2015. This
decrease is primarily due to a customer transferring $13.0 million
from securities sold under agreements to repurchase to a
non-interest bearing demand deposit account in April
2016.
Derivatives
As of
December 31, 2016, December 31, 2015 and 2014, the Company had
three interest rate caps with a strike price of 3-month LIBOR at
.50% and a five-year term. The instruments hedged were $100 million
of Federal Home Loan Bank borrowings maturing quarterly on the same
reset dates. The Company executed the caps in three separate
agreements between $30 million and $35 million maturing between
August 2019 and October 2019. The remaining unamortized premium on
the caps was $5.8 million as of December 31, 2016 and $6.7 million
as of December 31, 2015.
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.
A-34
|
December 31, 2016
|
||||
|
1 Year
|
Over 1 to
|
Over 3 to
|
More Than
|
|
(in thousands)
|
or Less
|
3 Years
|
5 Years
|
5 Years
|
Total
|
Contractual Cash Obligations
|
|
|
|
|
|
Time
deposits
|
$145,224
|
$67,868
|
$5,915
|
$-
|
$219,007
|
Short
term borrowings
|
150,000
|
-
|
-
|
-
|
150,000
|
Subordinated
debentures
|
-
|
-
|
-
|
18,558
|
18,558
|
Operating
leases
|
733
|
1,194
|
316
|
3,997
|
6,240
|
Total
contractual obligations
|
$295,957
|
$69,062
|
$6,231
|
$22,555
|
$393,805
|
|
|
|
|
|
|
Other Commitments
|
|
|
|
|
|
Commitments
to extend credit
|
$86,079
|
$29,441
|
$19,893
|
$81,356
|
$216,769
|
Standby
letters of credit
|
3,398
|
438
|
68
|
-
|
3,904
|
Total
other commitments
|
$89,477
|
$29,879
|
$19,961
|
$81,356
|
$220,673
|
Capital
The
Company 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. The Company’s
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 being 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.
A-35
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, its liquidity and its ability to fund its loan
portfolio may be adversely affected. In addition, the Bank would be
required to pay higher insurance premiums to the FDIC, which would
reduce its 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, the Company
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 was used to pay down existing debt at the holding
company, $20.5 million was 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 December 31,
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.
Total
stockholders’ equity at December 31, 2016 was $136.1 million,
an increase of $39.4 million from $97.7 million as of December 31,
2015. In addition to the proceeds from its initial public offering,
other changes in stockholders’ equity included $13.4 million
in net income, $427,000 in stock based compensation and other
comprehensive loss of $1.9 million related to declining values in
the Company’s available for sale investment security
portfolio and its cash flow hedges.
Total
stockholders’ equity at December 31, 2015 increased $10.0
million from $87.7 million as of December 31, 2014. Changes in
stockholders’ equity included $11.2 million in net income,
$411,000 in stock based compensation, proceeds of $176,000 from
stock option exercises, proceeds of $202,000 from the issuance of
shares of the Company’s common stock under the
Company’s Employee Stock Purchase Plan, or ESPP, and other
comprehensive loss of $2.0 million related to declining values in
the Company’s available for sale investment security
portfolio and its cash flow hedges.
A-36
Quarterly Financial Data
The
Company's unaudited consolidated quarterly operating results for
the years ended December 31, 2016 and 2015 are presented in table
below
Dollars in thousands, except per
share amounts
|
2016
|
2015
|
||||||
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
Total
interest income
|
$12,467
|
$13,272
|
$13,855
|
$14,573
|
$11,320
|
$12,011
|
$12,510
|
$12,594
|
Total
interest expense
|
1,916
|
1,971
|
2,088
|
2,154
|
1,868
|
1,798
|
1,854
|
1,864
|
Net interest income
|
10,551
|
11,301
|
11,767
|
12,419
|
9,452
|
10,213
|
10,656
|
10,730
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
-
|
-
|
391
|
200
|
571
|
179
|
-
|
-
|
Other
income
|
266
|
381
|
438
|
209
|
484
|
324
|
544
|
102
|
Other
expense
|
6,600
|
6,488
|
6,778
|
7,008
|
5,880
|
6,400
|
6,180
|
6,300
|
Income before income taxes
|
4,217
|
5,194
|
5,036
|
5,420
|
3,485
|
3,958
|
5,020
|
4,532
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
1,379
|
1,719
|
1,581
|
1,798
|
1,177
|
1,308
|
1,707
|
1,569
|
Net earnings
|
$2,838
|
$3,475
|
$3,455
|
$3,622
|
$2,308
|
$2,650
|
$3,313
|
$2,963
|
|
|
|
|
|
|
|
|
|
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
Basic net earnings per share
|
$0.62
|
$0.76
|
$0.64
|
$0.67
|
$0.52
|
$0.59
|
$0.73
|
$0.65
|
Diluted net earnings per share
|
$0.62
|
$0.75
|
$0.64
|
$0.67
|
$0.51
|
$0.59
|
$0.73
|
$0.65
|
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.
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.
A-37
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 November 30,
2016. Since November 30, 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 November 30, 2016, May 31,
2016, and November 30, 2015:
Hypothetical
|
Estimated Resulting Theoretical Net Interest Income
|
|||||
shift in interest
|
November 30, 2016
|
May 31, 2016
|
November 30, 2015
|
|
|
|
rates (in bps)
|
Amount
|
% Change
|
Amount
|
% Change
|
Amount
|
% Change
|
(dollars in thousands)
|
|
|
|
|
|
|
200
|
$46,524
|
-4.27%
|
$42,285
|
-3.22%
|
$40,572
|
-2.39%
|
0
|
48,598
|
0.00%
|
43,690
|
0.00%
|
41,564
|
0.00%
|
(100)
|
48,693
|
0.20%
|
43,748
|
0.13%
|
41,878
|
0.75%
|
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.
As part of the asset/liability management strategy to manage
primary market risk exposures expected to be in effect in future
reporting periods, management has emphasized the origination of
shorter duration loans as well as variable rate loans to
limit our exposure to increasing rates. Our strategy with respect to liabilities has
been to limit our exposure to increasing rates by increasing
funding from transaction accounts,
particularly non-interest or low interest bearing non-maturing
deposit accounts which are less sensitive to changes in interest
rates. In response to this strategy, non-maturing deposit accounts
have grown $290.2 million or 43.8% during 2016, and
totaled 81.3% of total deposits at December 31, 2016
compared to 67.5% at December 31, 2015. We decreased time
deposits by $100.8 million or 31.5% during the year ended December
31, 2016. We intend to continue to focus on our strategy of
increasing non-interest or low-cost interest bearing non-maturing
deposit accounts.
A-38
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
December 31, 2016, 2015 and 2014
TABLE OF CONTENTS
|
|
Page No.
|
Report of Independent Registered Public Accounting
Firm
|
|
A-40
|
|
|
|
Consolidated Balance Sheets
|
|
A-41
|
|
|
|
Consolidated Statements of Income
|
|
A-42
|
|
|
|
Consolidated Statements of Comprehensive Income
|
|
A-43
|
|
|
|
Consolidated Statements of Changes in Stockholders’
Equity
|
|
A-44
|
|
|
|
Consolidated Statements of Cash Flows
|
|
A-45
|
|
|
|
Notes to Consolidated Financial Statements
|
|
A-46
|
A-39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors
Paragon Commercial Corporation and Subsidiary
Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of
Paragon Commercial Corporation and Subsidiary (the
“Company”) as of December 31, 2016 and 2015, and the
related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2016. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting under Public Company Accounting Oversight
Board (PCAOB) standards. Our audits included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting under
PCAOB standards. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Paragon Commercial Corporation and subsidiary as of
December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the years in the three-year period
ended December 31, 2016, in conformity with generally accepted
accounting principles in the United States of America.
/s/ Elliott Davis Decosimo, PLLC
Raleigh, North Carolina
March 21, 2017
A-40
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
As of December 31,
2016 and December 31, 2015
(in thousands, except share data)
|
2016
|
2015
|
Assets
|
|
|
Cash
and due from banks:
|
|
|
Interest-earning
|
$38,384
|
$30,993
|
Noninterest-earning
|
4,621
|
24,537
|
Investment
securities - available-for-sale, at fair value
|
197,441
|
168,896
|
Federal
Home Loan Bank stock, at cost
|
8,400
|
8,061
|
Loans
- net of unearned income and deferred fees
|
1,191,280
|
1,016,156
|
Allowance
for loan losses
|
(7,909)
|
(7,641)
|
Net
loans
|
1,183,371
|
1,008,515
|
Accrued
interest receivable
|
4,368
|
3,795
|
Bank
premises and equipment, net
|
15,642
|
16,433
|
Bank
owned life insurance
|
34,190
|
28,274
|
Other
real estate owned
|
4,740
|
5,453
|
Deferred
tax assets
|
4,841
|
4,118
|
Other
assets
|
7,769
|
6,836
|
Total
assets
|
$1,503,767
|
$1,305,911
|
Liabilities and stockholders' equity
|
|
|
Deposits:
|
|
|
Noninterest-bearing
demand
|
$211,202
|
$158,974
|
Interest-bearing
checking and money market
|
742,046
|
504,092
|
Time
deposits
|
219,007
|
319,781
|
Total
deposits
|
1,172,255
|
982,847
|
Repurchase
agreements and federal funds purchased
|
20,174
|
30,580
|
Federal
Home Loan Bank advances
|
150,000
|
165,000
|
Other
borrowings
|
-
|
4,800
|
Subordinated
debentures
|
18,558
|
18,558
|
Other
liabilities
|
6,679
|
6,468
|
Total
liabilities
|
1,367,666
|
1,208,253
|
Stockholders'
equity:
|
|
|
Common
stock, $0.008 par value; 20,000,000 shares
|
44
|
37
|
authorized;
5,450,713 and 4,581,334 issued and
|
|
|
outstanding
as of December 31, 2016 and 2015
|
|
|
Additional
paid-in-capital
|
80,147
|
53,147
|
Accumulated
other comprehensive loss
|
(2,840)
|
(886)
|
Retained
earnings
|
58,750
|
45,360
|
Total
stockholders' equity
|
136,101
|
97,658
|
Total
liabilities and stockholders' equity
|
$1,503,767
|
$1,305,911
|
See accompanying notes to these consolidated financial
statements.
A-41
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
For the Years Ended
December 31 2016, 2015, and 2014
(in thousands, except per share data)
|
2016
|
2015
|
2014
|
Interest income
|
|
|
|
Loans
and fees on loans
|
$48,835
|
$43,500
|
$37,999
|
Investment
securities and FHLB stock
|
5,066
|
4,786
|
4,698
|
Federal
funds and other
|
266
|
149
|
86
|
Total
interest income
|
54,167
|
48,435
|
42,783
|
Interest expense
|
|
|
|
Interest-bearing
checking and money market
|
3,723
|
2,756
|
2,144
|
Time
deposits
|
2,271
|
3,313
|
5,371
|
Borrowings
and repurchase agreements
|
2,135
|
1,315
|
1,163
|
Total
interest expense
|
8,129
|
7,384
|
8,678
|
Net
interest income
|
46,038
|
41,051
|
34,105
|
Provision for loan losses
|
591
|
750
|
538
|
Net
interest income after provision for loan losses
|
45,447
|
40,301
|
33,567
|
Non-interest income
|
|
|
|
Increase
in cash surrender value of bank owned life insurance
|
916
|
853
|
799
|
Net
gain on sale of securities
|
106
|
542
|
87
|
Service
charges and fees
|
243
|
219
|
207
|
Mortgage
origination fees and gains on sale of loans
|
172
|
197
|
112
|
Net
loss on sale or impairment of foreclosed assets
|
(700)
|
(759)
|
(903)
|
Other
fees and income
|
557
|
402
|
402
|
Total
non-interest income
|
1,294
|
1,454
|
704
|
Non-interest expense
|
|
|
|
Salaries
and employee benefits
|
15,604
|
13,331
|
11,826
|
Furniture,
equipment and software costs
|
2,010
|
1,878
|
1,340
|
Occupancy
|
1,441
|
1,547
|
999
|
Data
processing
|
1,115
|
1,103
|
1,229
|
Professional
fees
|
1,056
|
737
|
1,119
|
Director
related fees and expenses
|
883
|
921
|
978
|
Advertising
and public relations
|
871
|
934
|
876
|
FDIC
and other supervisory assessments
|
703
|
939
|
932
|
Unreimbursed
loan costs and foreclosure related expenses
|
528
|
874
|
496
|
Other
|
2,663
|
2,496
|
2,114
|
Total
non-interest expense
|
26,874
|
24,760
|
21,909
|
Income
before income taxes
|
19,867
|
16,995
|
12,362
|
Income tax expense
|
6,477
|
5,761
|
4,403
|
Net
income
|
$13,390
|
$11,234
|
$7,959
|
|
|
|
|
Net income per common share
|
|
|
|
Basic
|
$2.69
|
$2.49
|
$1.79
|
|
$-
|
$-
|
$-
|
Diluted
|
$2.68
|
$2.47
|
$1.77
|
See accompanying notes to these consolidated financial
statements.
A-42
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE
INCOME
For the Years Ended
December 31, 2016, 2015, and 2014
(in thousands)
|
2016
|
2015
|
2014
|
|
|
|
|
Net
income
|
$13,390
|
$11,234
|
$7,959
|
|
|
|
|
Other
comprehensive income (loss) items:
|
|
|
|
Securities
available for sale:
|
|
|
|
Unrealized
gains (losses)
|
(3,047)
|
(743)
|
5,965
|
Reclassification
of gains recognized in net income
|
(106)
|
(542)
|
(87)
|
Other
comprehensive income (loss)
|
(3,153)
|
(1,285)
|
5,878
|
Deferred
tax expense (benefit)
|
(1,208)
|
(488)
|
2,288
|
Other
comprehensive income (loss), net of tax
|
(1,945)
|
(797)
|
3,590
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
Unrealized
losses
|
(13)
|
(1,965)
|
(3,099)
|
Other
comprehensive loss
|
(13)
|
(1,965)
|
(3,099)
|
Deferred
tax benefit
|
(4)
|
(734)
|
(1,213)
|
Other
comprehensive loss, net of tax
|
(9)
|
(1,231)
|
(1,886)
|
|
|
|
|
Total
other comprehensive income (loss), net of tax
|
(1,954)
|
(2,028)
|
1,704
|
|
|
|
|
Comprehensive
income
|
$11,436
|
$9,206
|
$9,663
|
See accompanying notes to these consolidated financial
statements.
A-43
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the years ended
December 31, 2016, 2015, and 2014
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common Stock
|
|
|
Additional
|
Other
|
|
Total
|
|||
|
Class A
|
Class B
|
Common Stock
|
Paid-in
|
Comprehensive
|
Retained
|
Stockholders'
|
|||
(In thousands, except share data)
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income (Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2013
|
34,608
|
$34
|
884
|
$1
|
-
|
$-
|
$51,963
|
$(562)
|
$26,167
|
$77,603
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
7,959
|
7,959
|
Unrealized
gain on securities, net of
|
|
|
|
|
|
|
|
|
|
|
tax expense of
$2,288
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,590
|
-
|
3,590
|
Unrealized
loss on cash flow hedges,
|
|
|
|
|
|
|
|
|
|
|
net of tax
benefit of $1,213
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,886)
|
-
|
(1,886)
|
Compensation
expense recognized
|
-
|
-
|
-
|
-
|
-
|
-
|
23
|
-
|
-
|
23
|
Exercise of
stock options
|
-
|
-
|
-
|
-
|
6,000
|
-
|
59
|
-
|
-
|
59
|
Issuance of
restricted stock awards
|
550
|
1
|
-
|
-
|
18,750
|
-
|
313
|
-
|
-
|
314
|
Reclassification
of shares
|
(35,158)
|
(35)
|
(884)
|
(1)
|
36,042
|
36
|
-
|
-
|
-
|
-
|
125 for 1
stock split
|
-
|
-
|
-
|
-
|
4,469,208
|
-
|
-
|
-
|
-
|
-
|
Balance at December 31, 2014
|
-
|
$-
|
-
|
$-
|
4,530,000
|
$36
|
$52,358
|
$1,142
|
$34,126
|
$87,662
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
11,234
|
11,234
|
Unrealized
loss on securities, net of
|
|
|
|
|
|
|
|
|
|
|
tax benefit of
$488
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(797)
|
-
|
(797)
|
Unrealized
loss on cash flow hedges,
|
|
|
|
|
|
|
|
|
|
|
net of tax
benefit of $734
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,231)
|
-
|
(1,231)
|
Exercise of
stock options
|
-
|
-
|
-
|
-
|
10,000
|
-
|
176
|
-
|
-
|
176
|
Issuance of
shares for employee
|
|
|
|
|
|
|
|
|
|
|
stock purchase
plan
|
|
|
|
|
10,678
|
1
|
202
|
-
|
-
|
203
|
Issuance of
restricted stock awards
|
-
|
-
|
-
|
-
|
30,656
|
-
|
411
|
-
|
-
|
411
|
Balance at December 31, 2015
|
-
|
$-
|
-
|
$-
|
4,581,334
|
$37
|
$53,147
|
$(886)
|
$45,360
|
$97,658
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
|
-
|
-
|
-
|
13,390
|
13,390
|
Unrealized
loss on securities, net of
|
|
|
|
|
|
|
|
|
|
-
|
tax benefit of
$1,221
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,945)
|
-
|
(1,945)
|
Unrealized
loss on cash flow hedges,
|
|
|
|
|
|
|
|
|
|
-
|
net of tax
benefit of $4
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(9)
|
-
|
(9)
|
Issuance of
stock for public offering
|
-
|
-
|
-
|
-
|
845,588
|
7
|
26,392
|
-
|
-
|
26,399
|
Issuance of
shares for employee
|
|
|
|
|
|
|
|
|
|
|
stock purchase
plan
|
-
|
-
|
-
|
-
|
5,998
|
-
|
181
|
-
|
-
|
181
|
Issuance of
restricted stock awards
|
-
|
-
|
-
|
-
|
17,793
|
-
|
427
|
-
|
-
|
427
|
Balance at December 31, 2016
|
-
|
$-
|
$-
|
$-
|
5,450,713
|
$44
|
$80,147
|
$(2,840)
|
$58,750
|
$136,101
|
See accompanying notes to these consolidated financial
statements.
A-44
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2016, 2015 and 2014
(in thousands)
|
2016
|
2015
|
2014
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$13,390
|
$11,234
|
$7,959
|
Adjustments to reconcile net income to net cash provided
by
|
|
|
|
operating activities:
|
|
|
|
Depreciation and amortization
|
1,432
|
1,408
|
1,087
|
Provision for loan losses
|
591
|
750
|
538
|
Net loss on sale or impairment of foreclosed assets
|
700
|
759
|
903
|
Increase in cash surrender value of life insurance
|
(916)
|
(853)
|
(799)
|
Amortization of premiums/discounts on securities, net
|
(1,232)
|
(964)
|
(833)
|
Net gain on sale of securities
|
(106)
|
(542)
|
(87)
|
Net gain on disposition of premises and equipment
|
(5)
|
(4)
|
-
|
Deferred tax expense
|
490
|
2,030
|
2,477
|
Stock based compensation
|
427
|
411
|
336
|
Changes in assets and liabilities:
|
|
|
|
Accrued interest receivable and other assets
|
(1,518)
|
(363)
|
(7,212)
|
Accrued interest payable and other liabilities
|
211
|
811
|
608
|
Net cash provided by operating activities
|
13,464
|
14,677
|
4,977
|
Cash flows from investing activities:
|
|
|
|
Net decrease in Federal Home Loan Bank stock
|
(339)
|
(1,055)
|
(683)
|
Purchase of securities available for sale
|
(75,412)
|
(60,282)
|
(75,536)
|
Proceeds from maturities and paydowns of securities available for
sale
|
24,655
|
20,264
|
17,389
|
Proceeds from sales of securities available for sale
|
20,396
|
55,019
|
28,466
|
Net increase in loans
|
(175,447)
|
(151,213)
|
(102,725)
|
Proceeds from sale of foreclosed real estate
|
13
|
12,336
|
3,383
|
Purchase of bank owned life insurance
|
(5,000)
|
-
|
-
|
Proceeds from sale of property and equipment
|
5
|
24
|
-
|
Additions to bank premises and equipment
|
(641)
|
(790)
|
(2,890)
|
Other investing activites, net
|
-
|
(73)
|
-
|
Net cash used in investing activities
|
(211,770)
|
(125,770)
|
(132,596)
|
Cash flows from financing activities:
|
|
|
|
Net increase in demand and money market deposit
accounts
|
290,182
|
168,338
|
133,626
|
Net decrease in time deposits
|
(100,774)
|
(69,131)
|
(20,138)
|
Net increase (decrease) in repurchase agreements
|
(10,406)
|
3,098
|
(530)
|
Net increase (decrease) in FHLB and other borrowings
|
(19,800)
|
27,544
|
17,640
|
Net proceeds from sale of common stock
|
26,398
|
-
|
(11,780)
|
Exercise of stock options
|
-
|
176
|
59
|
Issuance of common stock for employee stock purchase
plan
|
181
|
203
|
-
|
Net cash provided by financing activities
|
185,781
|
130,228
|
118,877
|
Net change in cash and cash equivalents
|
(12,525)
|
19,135
|
(8,742)
|
Cash and cash equivalents at beginning of year
|
55,530
|
36,395
|
45,137
|
|
|
|
|
Cash and cash equivalents at end of year
|
$43,005
|
$55,530
|
$36,395
|
See accompanying notes to these consolidated financial
statements.
A-45
NOTE 1 - ORGANIZATION AND OPERATIONS
On June
29, 2001, Paragon Commercial Corporation (the
“Company”) became the 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 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.
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 in Raleigh, North Carolina, the Bank
has locations in Charlotte and Cary, North Carolina.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
accompanying 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.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
loan losses, other than temporary impairment on investment
securities, fair value of other real estate owned, realization of
deferred tax assets and the fair value of financial
instruments.
A-46
Cash and Cash Equivalents
Cash
and cash equivalents include demand and time deposits (with
original maturities of 90 days or less) at other institutions,
federal funds sold and other short-term investments. Generally,
federal funds are purchased and sold for one-day periods. At times,
the Company places deposits with high credit quality financial
institutions in amounts which may be in excess of federally insured
limits. Depository institutions are required to maintain reserve
and clearing balances with the Federal Reserve Bank
(“FRB”). Accordingly, the Company has amounts
restricted for this purpose of $25,000 and $19.4 million included
in cash and due from banks on the consolidated balance sheets as of
December 31, 2016 and 2015, respectively.
Investment Securities
Debt
securities that the Company has the positive intent and ability to
hold to maturity are classified as “held-to-maturity”
securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of
selling in the near term are classified as “trading”
securities and reported at fair value with unrealized gains and
losses included in earnings. Available-for-sale securities are
reported at fair value and consist of debt or equity securities not
classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses on
available-for-sale securities are reported as a net amount in other
comprehensive income net of income taxes. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method. Premiums and discounts are
recognized in interest income using the effective interest method
over the period to maturity.
At each
reporting date, the Company evaluates each investment security in a
loss position for other-than-temporary impairment. The review
includes an analysis of the facts and circumstances of each
individual investment such as (1) the length of time and the extent
to which the fair value has been below cost, (2) changes in the
earnings performance, credit rating, asset quality, or business
prospects of the issuer, (3) the ability of the issuer to make
principal and interest payments, (4) changes in the regulatory,
economic, or technological environment of the issuer, and (5)
changes in the general market condition of either the geographic
area or industry in which the issuer operates.
Regardless
of these factors, if the Company has developed a plan to sell the
security or it is likely that the Company will be forced to sell
the security in the near future, then the impairment is considered
other-than-temporary and the carrying value of the security is
permanently written down to the current fair value with the
difference between the new carrying value and the amortized cost
charged to earnings. If the Company does not intend to sell the
security and it is not more likely than not that the Company will
be required to sell the security before recovery of its amortized
cost basis less any current period credit loss, the
other-than-temporary impairment is separated into the following:
(1) the amount representing the credit loss and (2) the amount
related to all other factors. The amount of the total
other-than-temporary impairment related to the credit loss is
recognized in earnings, and the amount of the total
other-than-temporary impairment related to other factors is
recognized in other comprehensive income, net of applicable
taxes.
A-47
Loans
Loans
that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their
outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans
and unamortized premiums or discounts on purchased loans. Loan
origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan. The accrual of interest on impaired loans is
discontinued when, in management’s opinion, the borrower may
be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed
and any subsequent payments received are applied only to the
outstanding principal balance.
Allowance for Loan Losses
The
allowance for loan losses (“ALL”) is established as
losses are estimated to have occurred through a provision for loan
losses charged to earnings. The provision for loan losses is based
upon management’s best estimate of the amount needed to
provide for losses that are inherent in the portfolio. Loan losses
are charged against the allowance when management believes the
uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the ALL.
The
Company conducts an analysis of the loan portfolio on a regular
basis. This analysis is used in assessing the sufficiency of the
allowance for loan losses and in the determination of the necessary
provision for loan losses. The review process generally begins with
the identification of problem loans to be reviewed on an individual
basis for impairment. When a loan has been identified as impaired,
a specific reserve may be established based on the Company’s
calculation of the loss embedded in the individual loan. In
addition to specific reserves on impaired loans, the Company has a
nine-point grading system for each non-homogeneous loan in the
portfolio to reflect the risk characteristic of the loan. The loans
identified and measured for impairment are segregated from
risk-rated loans within the portfolio. Loans are then grouped by
loan type and by risk rating. Each loan type is assigned an
allowance factor based on historical loss experience, economic
conditions and overall portfolio quality including delinquency
rates and concentrations. The ALL is an accounting estimate and as
such there is uncertainty associated with the estimate due to the
level of subjectivity and judgment inherent in performing the
calculation. Management’s evaluation of the ALL also includes
considerations of existing general economic and business conditions
affecting the key lending areas of the Company, credit quality
trends, collateral values, loan volumes and concentrations,
seasoning of the loan portfolio, specific industry conditions
within portfolio segments, recent loss experience in particular
segments of the portfolio, duration of the current business cycle,
regulatory examination results and findings of the Company's
outsourced loan review consultants. The total of specific reserves
required for impaired classified loans and the calculated reserves
comprise the allowance for loan losses.
A-48
Allowance for Loan Losses (Continued)
A loan
is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect
the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. Factors considered
by management in determining whether a loan is impaired include
payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Additionally,
management’s policy is generally to evaluate only those loans
greater than $500,000 for impairment. Loans that experience
insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record,
and the amount of the shortfall in relation to the principal and
interest owed. Impairment is measured on a loan-by-loan basis by
either the present value of expected future cash flows discounted
at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
While
management utilizes its best judgment and information available,
the ultimate adequacy of the allowance is dependent upon a variety
of factors beyond the Company’s control, including the
performance of the Company’s loan portfolio, the economy,
changes in interest rates and the view of the regulatory
authorities toward loan classifications.
Other Real Estate Owned
Other
real estate owned acquired through, or in lieu of, loan foreclosure
is initially recorded at fair value less selling costs,
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried
at the lower of cost or net realizable value. Net realizable
value is equivalent to fair market value less costs to sell the
assets. Revenue and expenses from holding the properties and
adjustments to the cost basis are included in
earnings.
Bank Premises and Equipment
Bank
premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets
which are 3 - 10 years for furniture and equipment and 40 years for
buildings. Leasehold improvements are amortized over the terms of
the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Repairs and maintenance costs
are charged to earnings as incurred, and additions and improvements
to premises and equipment are capitalized. Upon sale or retirement,
the cost and related accumulated depreciation are removed from the
accounts and any gains or losses are reflected in current
earnings.
Federal Home Loan Bank Stock
As a
requirement for membership, the Company invests in stock of the
Federal Home Loan Bank of Atlanta (“FHLB”). This
investment is carried at cost. Due to the redemption provisions of
the FHLB stock, the Company estimated that fair value approximates
cost.
A-49
Bank Owned Life Insurance
The
Company has purchased life insurance policies on certain key
employees. These policies are recorded at their cash surrender
value, or the amount that can be realized. Income from these
policies and changes in the net cash surrender value are recorded
in noninterest income.
Derivative Instruments and Hedging Activities
The
Company records all derivatives on the balance sheet at fair
value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the
resulting designation. Derivatives used to hedge the exposure to
changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate
risk, are considered fair value hedges. Derivatives used to hedge
the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow
hedges.
For
derivatives designated as cash flow hedges, the effective portion
of changes in the fair value of the derivative is initially
reported in other comprehensive income (outside of earnings) and
subsequently reclassified to earnings when the hedged transaction
affects earnings, and the ineffective portion of the change in the
fair value of the derivative is recognized directly in earnings.
The Company engages a third party expert to assess the
effectiveness of each hedging relationship by comparing the changes
in cash flows of the derivative hedging instrument with the changes
in cash flows of the designated hedged transactions.
The
Company’s objective in using derivatives is to add stability
to net interest income and to manage its exposure to adverse
changes in interest rates. To accomplish this objective, the
Company uses interest rate caps and swaps as part of its cash flow
hedging strategy.
Income Taxes
Deferred
tax assets and liabilities are recognized for the estimated future
tax benefits or consequences attributable to differences between
the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes. Deferred tax assets are also
recognized for operating loss carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for
the year in which the temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that the tax
benefits will not be realized.
At
December 31, 2016, the Company had $4.8 million in net
deferred tax assets. A valuation allowance is provided when it is
more-likely-than-not that some portion of the deferred tax asset
will not be realized. All available evidence, both positive and
negative, was considered to determine whether, based on the weight
of that evidence, impairment should be recognized. Our forecast
process includes qualitative and quantitative elements that may be
subject to significant change. If our forecast of taxable income
within the carryforward periods available under applicable law and
prudent tax planning strategies are not sufficient to cover the
amount of net deferred tax assets, such assets may be impaired.
Based on the Company’s analysis of both positive and negative
evidence, management concluded there were no valuation allowances
required with respect to the deferred tax assets at
December 31, 2016 and 2015.
A-50
Stock Compensation Plans
The
Company has historically maintained a stock-based compensation
plan. The plan provides for the grant of stock options for a fixed
number of shares with an exercise price equal to the fair value of
the shares on the date of grant. The plan also provides for the
grant of a fixed number of restricted shares with a grant price
equal to the fair value of the shares on the date of
grant.
Earnings Per Common Share
In May
2014, the Company’s stockholders approved and the Company
executed a reclassification of its then-outstanding Class A common
stock and Class B common stock into a single class of common stock
on the basis of one share of common stock for each share of Class A
common stock and Class B common stock so reclassified. In June
2014, the Company amended its articles of incorporation to effect a
125-for-1 forward split of each share of common stock then issued
and outstanding.
Basic
and diluted net income per common share have been computed based
upon net income as presented in the accompanying consolidated
statements of income divided by the weighted average number of
common shares outstanding or assumed to be outstanding as
summarized below. Diluted net income per common share reflects the
potential dilution that could occur if outstanding stock options
were exercised.
|
2016
|
2015
|
2014
|
Shares
used in the computation of earnings per share:
|
|
|
|
Weighted
average number of shares outstanding - basic
|
4,968,970
|
4,509,884
|
4,456,002
|
Dilutive
effect of restricted shares
|
35,781
|
38,022
|
39,011
|
Weighted
average number of shares outstanding - diluted
|
5,004,751
|
4,547,906
|
4,495,013
|
As of
December 31, 2016, 2015 and 2014, because the exercise price was in
excess of the average current trading price, none of the
Company’s outstanding stock options were used in the
calculation of diluted earnings per share (“EPS”). The
dilutive effect of stock options and unvested restricted shares are
the only common stock equivalents for purposes of calculating
diluted earnings per common share.
Weighted
average anti-dilutive stock options and unvested restricted shares
excluded from the computation of diluted earnings per share are as
follows:
|
For the Year
|
||
|
Ended December 31,
|
||
|
2016
|
2015
|
2014
|
Anti-dilutive
stock options
|
61,125
|
81,500
|
101,000
|
Unvested
restricted shares
|
60,324
|
40,936
|
48,958
|
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.
A-51
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 (loss) for the years ended December 31, 2016, 2015 and 2014
are as follows:
(in thousands)
|
2016
|
2015
|
2014
|
Unrealized
gains (losses) on securities available-for-sale
|
$(1,775)
|
$1,378
|
$2,663
|
Deferred
tax (expense) benefit
|
678
|
(530)
|
(1,018)
|
Other
comprehensive income (loss), net of tax
|
(1,097)
|
848
|
1,645
|
Unrealized
losses on cash flow hedges
|
(2,792)
|
(2,779)
|
(814)
|
Deferred
tax benefit
|
1,049
|
1,045
|
311
|
Other
comprehensive loss, net of tax
|
(1,743)
|
(1,734)
|
(503)
|
Total
other accumulated comprehensive income (loss)
|
$(2,840)
|
$(886)
|
$1,142
|
The
accumulated balances related to each component of other accumulated
comprehensive income (loss), net of tax are as
follows:
|
|
Unpaid
|
|
|
Unrealized
|
Unrealized
|
|
|
Gains and
|
Gains and
|
|
|
Losses on
|
Losses on
|
|
|
Available-for
|
Cash Flow
|
|
(in
thousands)
|
Sale Securities
|
Hedges
|
Total
|
Balance
as of December 31, 2015
|
$848
|
$(1,734)
|
$(886)
|
Other
comprehensive loss before reclassification
|
(1,839)
|
(9)
|
(1,848)
|
Amounts
reclassified from accumulated other
|
|
|
|
comprehensive
income
|
(106)
|
-
|
(106)
|
Net
current-period other comprehensive loss
|
(1,945)
|
(9)
|
(1,954)
|
Balance
as of December 31, 2016
|
$(1,097)
|
$(1,743)
|
$(2,840)
|
|
|
|
|
Balance
as of December 31, 2014
|
$1,645
|
$(503)
|
$1,142
|
Other
comprehensive loss before reclassification
|
(255)
|
(1,231)
|
(1,486)
|
Amounts
reclassified from accumulated other
|
|
|
|
comprehensive
income
|
(542)
|
-
|
(542)
|
Net
current-period other comprehensive loss
|
(797)
|
(1,231)
|
(2,028)
|
Balance
as of December 31, 2015
|
$848
|
$(1,734)
|
$(886)
|
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“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.
A-52
In
January 2016, the FASB amended the Financial Instruments topic of
the Accounting Standards Codification (“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. While the Company does own equity securities,
management 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 ASC 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.
In
March 2016, the FASB amended the Derivatives and Hedging topic of
the ASC 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 ASC 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. 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
October 2016, the FASB amended the Income Taxes topic of the ASC to
modify the accounting for intra-entity transfers of assets other
than inventory. 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.
A-53
In
October 2016, the FASB amended the Consolidation topic of the ASC
to revise the consolidation guidance on how a reporting entity that
is the single decision maker of a variable interest entity (VIE)
should treat indirect interests in the entity held through related
parties that are under common control with the reporting entity
when determining whether it is the primary beneficiary of that VIE.
The amendments will be effective for the Company for fiscal years
beginning after December 15, 2016 including interim periods within
those fiscal years. The Company does not expect these amendments to
have a material effect on its financial statements.
In
December 2016, the FASB issued amendments to clarify the ASC,
correct unintended application of guidance, and make minor
improvements to the ASC that are not expected to have a significant
effect on current accounting practice or create a significant
administrative cost to most entities. The amendments were effective
upon issuance (December 14, 2016) for amendments that do not have
transition guidance. Amendments that are subject to transition
guidance will be effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2016. Early
adoption is permitted. The Company does not expect these amendments
to have a material effect on its financial statements
In
December 2016, the FASB issued technical corrections and
improvements to the Revenue from Contracts with Customers Topic.
These corrections make a limited number of revisions to several
pieces of the revenue recognition standard issued in 2014. The
effective date and transition requirements for the technical
corrections 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.
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.
A-54
NOTE 3 - INVESTMENT SECURITIES
The
following is a summary of the securities portfolio by major
classification at December 31, 2016 and December 31,
2015.
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
(in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
December 31, 2016
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$17,062
|
$44
|
$163
|
$16,943
|
Collateralized
mortgage obligations
|
42,439
|
300
|
242
|
42,497
|
Mortgage-backed
securities
|
75,138
|
213
|
1,478
|
73,873
|
Municipal
bonds
|
60,901
|
474
|
698
|
60,677
|
Other
|
3,676
|
29
|
254
|
3,451
|
|
$199,216
|
$1,060
|
$2,835
|
$197,441
|
|
|
|
|
|
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 December 31, 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
|
$-
|
$-
|
$-
|
$16,943
|
$-
|
$16,943
|
Collateralized mortgage obligations
|
-
|
-
|
-
|
42,497
|
-
|
42,497
|
Mortgage-backed securities
|
-
|
7,581
|
5,341
|
60,951
|
-
|
73,873
|
Municipal bonds
|
-
|
1,771
|
6,087
|
52,819
|
-
|
60,677
|
Other
|
-
|
-
|
1,500
|
-
|
1,951
|
3,451
|
|
$-
|
$9,352
|
$12,928
|
$173,210
|
$1,951
|
$197,441
|
A-55
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 December 31, 2016 and
2015.
|
Less
Than 12 Months
|
12
Months or Greater
|
Total
|
|||
(in thousands)
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
December 31, 2016
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Securities
available-for-sale:
|
|
|
|
|
|
|
U.S. Agency obligations
|
$10,334
|
$163
|
$-
|
$-
|
$10,334
|
$163
|
Collateralized mortgage obligations
|
18,124
|
242
|
-
|
-
|
18,124
|
242
|
Mortgage-backed securities
|
58,825
|
1,478
|
-
|
-
|
58,825
|
1,478
|
Municipal bonds
|
33,110
|
698
|
-
|
-
|
33,110
|
698
|
Other
|
1,897
|
254
|
-
|
-
|
1,897
|
254
|
Total temporarily impaired securities |
$122,290
|
$2,835
|
$-
|
$-
|
$122,290
|
$2,835
|
|
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:
Available-for-sale:
|
December 31,
|
|
(in thousands)
|
2016
|
2015
|
U.S.
Agency obligations
|
5
|
3
|
Collateralized
mortgage obligations
|
6
|
7
|
Mortgage-backed
securities
|
13
|
6
|
Municipal
bonds
|
53
|
22
|
Other
|
1
|
1
|
|
78
|
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.
A-56
The
following table summarizes securities gains and losses for the
periods presented:
|
Year ended December 31,
|
||
(in thousands)
|
2016
|
2015
|
2014
|
Gross
gains on sales of securities available for sale
|
$193
|
$590
|
$208
|
Gross
losses on sales of securities available for sale
|
(299)
|
(48)
|
(121)
|
Total
securities gains
|
$(106)
|
$542
|
$87
|
Securities
with a fair value of $75.8 million and $78.4 million were pledged
as of December 31, 2016 and 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 December 31, 2016 and 2015:
|
December 31,
|
|
(in thousands)
|
2016
|
2015
|
Construction
and land development
|
$79,738
|
$64,702
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential
|
365,569
|
307,722
|
Owner
occupied
|
186,892
|
147,017
|
Multifamily,
nonresidential and junior liens
|
89,191
|
79,170
|
Total
commercial real estate
|
641,652
|
533,909
|
Consumer
real estate:
|
|
|
Home
equity lines
|
87,489
|
78,943
|
Secured
by 1-4 family residential, secured by first deeds of
trust
|
195,343
|
167,053
|
Secured
by 1-4 family residential, secured by second deeds of
trust
|
4,289
|
3,711
|
Total
consumer real estate
|
287,121
|
249,707
|
Commercial
and industrial loans (except those secured by real
estate)
|
170,709
|
153,669
|
Consumer
and other
|
11,542
|
13,539
|
Total
loans
|
1,190,762
|
1,015,526
|
Deferred
loan (fees) costs
|
518
|
630
|
Allowance
for loan losses
|
(7,909)
|
(7,641)
|
Net
loans
|
$1,183,371
|
$1,008,515
|
A-57
A
further breakdown of the make-up of the construction and
development and commercial real estate portfolios at December 31,
2016 and 2015 is as follows:
|
December 31,
|
|
(in thousands)
|
2016
|
2015
|
Construction
and land development:
|
|
|
Land
|
$12,595
|
$16,026
|
Residential
|
36,253
|
29,864
|
Commercial
|
30,890
|
18,812
|
Total
construction and land development
|
$79,738
|
$64,702
|
|
|
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential:
|
|
|
Office
|
$108,228
|
$92,991
|
Industrial
|
36,264
|
38,518
|
Hotel/motel
|
28,453
|
18,935
|
Retail
|
165,434
|
135,200
|
Special
purpose/Other
|
27,190
|
22,078
|
|
365,569
|
307,722
|
Owner
occupied :
|
|
|
Office
|
60,500
|
51,775
|
Industrial
|
46,876
|
40,337
|
Retail
|
31,085
|
12,157
|
Special
purpose/Other
|
48,431
|
42,748
|
|
186,892
|
147,017
|
|
|
|
Multifamily,
nonresidential and junior liens
|
89,191
|
79,170
|
Total
commercial real estate
|
$641,652
|
$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.
A-58
Changes
in the allowance for loan losses for the years ended December 31,
2016, 2015 and 2014 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
|
2016
|
|
|
|
|
|
|
Balance
at beginning of the year
|
$509
|
$3,156
|
$2,046
|
$1,786
|
$144
|
$7,641
|
Provision
for loan losses
|
(326)
|
492
|
(153)
|
656
|
(78)
|
591
|
Loans
charged off
|
-
|
(27)
|
-
|
(927)
|
-
|
(954)
|
Recoveries
|
303
|
98
|
7
|
213
|
10
|
631
|
Net
(chargeoffs) recoveries
|
303
|
71
|
7
|
(714)
|
10
|
(323)
|
Balance
at end of the year
|
$486
|
$3,719
|
$1,900
|
$1,728
|
$76
|
$7,909
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
Balance
at beginning of the year
|
$960
|
$2,510
|
$1,594
|
$1,662
|
$143
|
$6,869
|
Provision
for loan losses
|
(510)
|
902
|
408
|
(51)
|
1
|
750
|
Loans
charged off
|
(14)
|
(275)
|
-
|
-
|
-
|
(289)
|
Recoveries
|
73
|
19
|
44
|
175
|
-
|
311
|
Net
(chargeoffs) recoveries
|
59
|
(256)
|
44
|
175
|
-
|
22
|
Balance
at end of the year
|
$509
|
$3,156
|
$2,046
|
$1,786
|
$144
|
$7,641
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
Balance
at beginning of the year
|
$2,021
|
$1,184
|
$1,540
|
$2,150
|
$44
|
$6,939
|
Provision
for loan losses
|
(317)
|
1,287
|
104
|
(635)
|
99
|
538
|
Loans
charged off
|
(898)
|
(1)
|
(64)
|
(99)
|
-
|
(1,062)
|
Recoveries
|
154
|
40
|
14
|
246
|
-
|
454
|
Net
(chargeoffs) recoveries
|
(744)
|
39
|
(50)
|
147
|
-
|
(608)
|
Balance
at end of the year
|
$960
|
$2,510
|
$1,594
|
$1,662
|
$143
|
$6,869
|
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 December 31, 2016 and 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
|
December 31, 2016
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$-
|
$-
|
$223
|
$286
|
$-
|
$509
|
Collectively
evaluated for impairment
|
486
|
3,719
|
1,677
|
1,442
|
76
|
7,400
|
Total
ending allowance
|
$486
|
$3,719
|
$1,900
|
$1,728
|
$76
|
$7,909
|
|
||||||
Loans:
|
|
|||||
Individually
evaluated for impairment
|
$125
|
$836
|
$1,121
|
$1,139
|
$-
|
$3,221
|
Collectively
evaluated for impairment
|
79,613
|
640,816
|
286,000
|
169,570
|
11,542
|
1,187,541
|
Total
ending loans
|
$79,738
|
$641,652
|
$287,121
|
$170,709
|
$11,542
|
$1,190,762
|
|
||||||
|
|
|
|
|
|
|
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
|
A-59
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 $3.2 million and $3.9 million at December 31, 2016
and 2015, respectively. Included in the $3.2 million at December
31, 2016 is $1.3 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.
The
following table provides information on performing and
nonperforming TDRs as of December 31, 2016 and 2015:
|
December 31,
|
|
(in thousands)
|
2016
|
2015
|
Performing
TDRs:
|
|
|
Commercial
real estate
|
$520
|
$2,220
|
Consumer
real estate
|
338
|
346
|
Commercial
and industrial loans
|
297
|
47
|
Total
performing TDRs
|
1,155
|
2,613
|
|
|
|
Nonperforming
TDRs:
|
|
|
Construction
and land development
|
125
|
104
|
Consumer
real estate
|
58
|
65
|
Consumer
and other
|
-
|
21
|
Total
nonperformingTDRs
|
183
|
190
|
Total
TDRs
|
$1,338
|
$2,803
|
As of
December 31, 2016 there were six loans totaling $1.3 million
identified as TDRs, including two loans totaling $422,000 which
were added during 2016. Three loans totaling $1.4 million
considered TDRs as of December 31, 2015 were subsequently paid in
full, and one loan for $46,000 went into default and was
subsequently charged off in 2016. Of the two new loans
considered TDRs during 2016, the largest was a $297,000 C&I
loan due to changes in payment terms in response to the
borrower’s short term cash flow shortage. The other
loan for $125,000 is a real estate development loan that was
modified to extend the term of the loan in response to slow
sales. Payments are current on both loans that were
classified as TDRs in 2016.
A-60
Interest
is not typically accrued on loans where impairment exists. For
loans classified as TDRs, the Company further evaluates the loans
as performing or non-performing. If, at the time of restructure, it
is determined that no impairment exists, the loan will be
classified as performing. Interest income recognized on performing
TDRs was $71,000 and $161,000 for the years ended December 31, 2016
and 2015, respectively.
In
order to quantify the value of any impairment, the Company
evaluates loans individually. At December 31, 2016, the Company had
$3.2 million of impaired loans. The detail of loans evaluated for
impairment as of December 31, 2016 is presented below:
|
|
|
Unpaid
|
|
|
|
|
Contractual
|
|
(in
thousands)
|
|
Recorded
|
Principal
|
Allocated
|
December 31, 2016
|
|
Investment
|
Balance
|
Allowance
|
Loans without a specific valuation allowance:
|
|
|
|
|
Construction
and land development
|
$125
|
$195
|
$-
|
|
Commercial
real estate
|
836
|
836
|
-
|
|
Loans
with a specific valuation allowance:
|
|
|
|
|
Consumer
real estate
|
1,121
|
1,152
|
223
|
|
Commercial
and industrial loans (except
|
|
|
|
|
those
secured by real estate)
|
1,139
|
1,382
|
286
|
|
Total
|
$3,221
|
$3,565
|
$509
|
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
|
A-61
The
average recorded investment balance of impaired loans during 2016
and 2015 is as follows:
|
2016
|
2015
|
||
|
Average
|
Interest
|
Average
|
Interest
|
(in thousands)
|
Balance
|
Income
|
Balance
|
Income
|
Construction
and land development
|
$156
|
$-
|
$285
|
$1
|
Commercial
real estate
|
1,244
|
46
|
5,241
|
181
|
Consumer
real estate
|
629
|
26
|
728
|
26
|
Commercial
and industrial loans
|
1,594
|
62
|
642
|
24
|
Consumer
and other
|
9
|
-
|
23
|
-
|
|
$3,632
|
$134
|
$6,919
|
$232
|
When
the Company cannot reasonably expect full and timely repayment of a
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 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 December 31, 2016 and
2015:
|
Nonaccrual
|
|
(in thousands)
|
2016
|
2015
|
Construction
and land development
|
$125
|
$238
|
Consumer
real estate
|
783
|
65
|
Commercial
and industrial loans
|
60
|
189
|
Consumer
and other
|
-
|
21
|
Total
|
$968
|
$513
|
There
were no loans 90 days or more past due and accruing interest at
December 31, 2016 and 2015. If interest had been earned on
non-accrual loans, such income would have approximated $46,000 and
$28,000 for the years ended December 31, 2016 and 2015,
respectively.
A-62
The
following table presents the aging of the recorded investment in
past due loans as of December 31, 2016 and 2015 by portfolio
segment:
|
|
|
Greater
|
|
|
|
|
|
30 - 59
|
60 - 89
|
than 90
|
|
|
|
|
|
Days
|
Days
|
Days
|
|
Total
|
|
|
(in thousands)
|
Past
|
Past
|
Past
|
Non-
|
Past
|
|
Total
|
December 31, 2016
|
Due
|
Due
|
Due
|
Accrual
|
Due
|
Current
|
Loans
|
Construction
and land development
|
$
|
$
|
$
|
$125
|
$125
|
$79,613
|
$79,738
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
641,652
|
641,652
|
Consumer
real estate
|
-
|
-
|
-
|
783
|
783
|
286,338
|
287,121
|
Commercial
and industrial loans
|
-
|
-
|
-
|
60
|
60
|
170,649
|
170,709
|
Consumer
and other
|
-
|
-
|
-
|
-
|
-
|
11,542
|
11,542
|
Total
|
$
|
$
|
$
|
$968
|
$968
|
$1,189,794
|
$1,190,762
|
|
|
|
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 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 in order to account for the added inherent
risk.
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:
A-63
●
Risk Grade 1 – Minimal -
Credits in this category are virtually
risk-free and are well-collateralized by cash-equivalent
instruments. The repayment program is well-defined and achievable.
Repayment sources are numerous.
●
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.
●
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;
o
Performing
as agreed without documented capacity or collateral
protection.
●
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.
A-64
●
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 December 31, 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 December 31,
2016 or December 31, 2015.
As of
December 31, 2016 and 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
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$
|
$1,005
|
$911
|
$22,901
|
$54,601
|
$195
|
$125
|
$79,738
|
Commercial
real estate
|
-
|
539
|
223,459
|
311,711
|
87,443
|
18,500
|
-
|
641,652
|
Consumer
real estate
|
50
|
19,247
|
130,748
|
102,137
|
33,013
|
1,143
|
783
|
287,121
|
Commercial
and industrial loans
|
2,133
|
1,525
|
32,304
|
104,019
|
29,035
|
556
|
1,137
|
170,709
|
Consumer
and other
|
1,160
|
730
|
1,086
|
7,392
|
1,174
|
-
|
-
|
11,542
|
Total
|
$3,343
|
$23,046
|
$388,508
|
$548,160
|
$205,266
|
$20,394
|
$2,045
|
$1,190,762
|
|
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 $997.6 million and $689.0 million were
pledged as of December 31, 2016 and 2015, respectively, to secure
lines of credit with the Federal Reserve and the Federal Home Loan
Bank.
A-65
NOTE 5 - BANK PREMISES AND EQUIPMENT
Following
is a summary of bank premises and equipment at December 31, 2016
and 2015:
(In thousands)
|
2016
|
2015
|
Building
|
$16,226
|
$16,181
|
Furniture
and equipment
|
7,113
|
6,532
|
Leasehold
improvements
|
352
|
350
|
Less
accumulated depreciation
|
|
|
and amortization
|
(8,049)
|
(6,630)
|
|
$15,642
|
$16,433
|
Depreciation
and amortization expense amounting to $1.4 million, $1.4 million
and $1.1 million, respectively for the years ended December 31,
2016, 2015 and 2014 are included in occupancy and equipment
expenses.
NOTE 6 - DEPOSITS
At
December 31, 2016, the scheduled maturities of time deposits are as
follows:
(In thousands)
|
|
2017
|
$145,223
|
2018
|
40,170
|
2019
|
27,698
|
2020
|
1,802
|
2021
and after
|
4,114
|
|
$219,007
|
At
December 31, 2016 and 2015, time deposits in denominations of
$250,000 or more were $53.3 million and $34.1 million,
respectively. Interest expense on time deposits of $250,000 or more
aggregated to $584,000 in 2016 and $400,000 in 2015.
NOTE 7 - BORROWINGS
Repurchase Agreements and Federal Funds Purchased
Securities
sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from
the transaction date. Securities sold under agreements to
repurchase are reflected at the amount of cash received in
connection with the transaction. The Company may be required to
provide additional collateral based on the fair value of the
underlying securities.
A-66
Following
is an analysis of short-term borrowed funds at December 31, 2016
and 2015:
|
|
|
|
|
Maximum
|
|
End of
Period
|
Daily
Average Balance
|
Outstanding
|
||
(Dollars in thousands)
|
|
Weighted
|
|
Interest
|
At
Any
|
December 31, 2016
|
Balance
|
Avg
Rate
|
Balance
|
Rate
|
Month
End
|
Repurchase
agreements
|
$20,174
|
0.19%
|
$27,068
|
0.21%
|
$51,750
|
|
$20,174
|
0.19%
|
$27,068
|
0.21%
|
|
|
|
|
|
|
Maximum
|
|
End of
Period
|
Daily
Average Balance
|
Outstanding
|
||
(Dollars in thousands)
|
|
Weighted
|
|
Interest
|
At
Any
|
December 31, 2015
|
Balance
|
Avg
Rate
|
Balance
|
Rate
|
Month
End
|
Fed
funds purchased
|
$-
|
0.00%
|
$99
|
0.54%
|
$-
|
Repurchase
agreements
|
30,580
|
0.19%
|
33,080
|
0.19%
|
48,080
|
|
$30,580
|
0.19%
|
$33,179
|
0.19%
|
|
Interest
expense on securities sold under agreements to repurchase totaled
$56,000 in 2016 and $64,000 in 2015.
Interest
on federal funds purchased was $1,500 in 2015. There were no
federal funds outstanding at any point during 2016.
Repurchase
agreements are collateralized by mortgage-backed securities with
carrying values and fair values of $25.8 million at December 31,
2016.
At
December 31, 2016, the Company had available lines of credit of
approximately $152.5 million at various financial institutions for
borrowing on a short-term basis (“fed funds lines”).
The Company had $102.5 million of fed funds lines with the
Bank’s correspondent banks that were unsecured. However,
since the Company had no outstanding balances during the year on
the secured portion, it had no collateral pledged at December 31,
2016 for these lines.
Federal Home Loan Bank Advances
At
December 31, 2016, the Company had an available credit line at the
FHLB of up to % 25% of assets contingent upon adequate
collateralization. These lines are subject to annual renewal and
are at varying interest rates. Advances from the FHLB had a
weighted average rate of 0.66% and 0.41% and total outstanding
balances averaged $161.3 million and $166.9 million for the years
ended December 31, 2016 and 2015, respectively. Included in amounts
due to the FHLB as of December 31, 2016 were five term borrowings
totaling $150.0 million. The term borrowings were all short-term
notes maturing by March 2017 with rates varying from 0.49% to
0.80%.
The
line of credit and all other advances were collateralized by
certain 1 – 4 family mortgages, multifamily first mortgage
loans, home equity lines and qualifying commercial loans totaling
$646.7 million at December 31, 2016. The line offers a borrowing
capacity of $369.8 million at December 31, 2016.
A-67
Holding Company Line of Credit
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 outstanding balance at December
31, 2016.
In
2015, the Company had a $10.0 million holding company loan with an
unaffiliated institution secured by the stock of the Bank. The loan
had an outstanding balance of $4.8 million at December 31, 2015.
During 2016, the loan was repaid in full using some of the proceeds
from the Company’s Initial Public Offering. The balance is
included in other borrowings as of December 31, 2015 on the
Consolidated Balance Sheets. The loan accrued interest at prime
plus 0.75% and would have matured in November 2017.
Subordinated Debentures
In
2004, the Company issued $10.3 million of junior subordinated
debentures to Paragon Commercial Capital Trust I in exchange for
the proceeds of trust preferred securities issued by the Trust. The
junior subordinated debentures accrue interest quarterly at an
annual rate, reset quarterly, equal to LIBOR plus 2.65%. The
debentures are redeemable in whole or in part, on any October 23,
January 23, April 23, or July 23. Redemption is mandatory at July
23, 2034.
In
2006, the Company issued $8.2 million of junior subordinated
debentures to Paragon Commercial Capital Trust II in exchange for
the proceeds of trust preferred securities issued by the Trust. The
junior subordinated debentures accrue interest quarterly at an
annual rate, reset quarterly, equal to LIBOR plus 1.70%. The
debentures are redeemable on June 20, 2011 or afterwards, in whole
or in part, on any March 30, June 30, September 30, or December 30.
Redemption is mandatory at June 30, 2036.
The
junior subordinated debentures are included in debt and the
Company’s equity interest in the trusts are included in other
assets. The Company guarantees the trust preferred securities
through the combined operation of the junior subordinated
debentures and other related documents. The Company’s
obligation under the guarantee is unsecured and subordinate to
senior and subordinated indebtedness of the Company.
The
trust preferred securities presently qualify as Tier 1 regulatory
capital and are reported in Federal Reserve regulatory reports as a
minority interest in a consolidated subsidiary. The junior
subordinated debentures do not qualify as Tier 1 regulatory
capital. On March 1, 2005, the Board of Governors of the Federal
Reserve issued a final rule stating that trust preferred securities
will continue to be included in Tier 1 capital, subject to stricter
quantitative and qualitative standards. For Bank Holding Companies,
trust preferred securities will continue to be included in Tier 1
capital up to 25% of core capital elements (including trust
preferred securities) net of goodwill less any associated deferred
tax liability.
A-68
NOTE 8 - LEASES
The
Company purchased a building in Raleigh in 2005 and relocated its
headquarters in March 2007. The acquired building resides on land
subject to a land lease which renews every five years with the next
renewal in 2018. The assumed life of the lease for the land is the
expected life of the building. In addition the Bank has entered
into non-cancelable operating leases for its Charlotte office
expiring in February 2019, its Cary office expiring in June 2019
and its operations center expiring in November 2019. Future minimum
lease payments under these leases for the years ending December 31
are as follows:
(In thousands)
|
|
2017
|
$733
|
2018
|
760
|
2019
|
434
|
2020
|
158
|
2021
|
158
|
Thereafter
|
3,997
|
Total
|
$6,240
|
Total
rent expense for the years ended December 31, 2016 and 2015
amounted to $344,000 and $534,000 respectively.
NOTE 9- RELATED PARTY TRANSACTIONS
Principal
stockholders, directors, and executive officers of the Company,
together with the companies they control, are considered to be
related parties. In the ordinary course of business, the Company
has engaged in various related party transactions during the year,
ranging from extending credit, accepting deposits as well as
exchanges of service transactions.
Federal
banking regulations require that any such extensions of credit not
be offered on terms more favorable than would be offered to
non-related party borrowers of similar
creditworthiness.
The
Company has granted loans to certain directors and executive
officers of the Company and their related interests. Such loans are
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other borrowers and, in management’s
opinion, do not involve more than the normal risk of
collectability. All loans to directors and executive officers or
their interests are submitted to the Board of Directors for
approval.
A-69
The
following table summarizes the aggregate activity in such loans for
the periods indicated:
(In thousands)
|
|
Loans
to directors and officers
|
|
as a group at December 31, 2015
|
$5,543
|
Disbursements
during 2016
|
1,847
|
Amounts
collected during 2016
|
(1,948)
|
Loans
to directors and officers
|
|
as
a group at December 31, 2016
|
$5,442
|
As of
December 31, 2016, none of these loans are past due, on non-accrual
status or have been restructured to provide a reduction or deferral
of interest or principal because of deterioration in the financial
position of the borrower. As of December 31, 2016, there were no
loans to a related party that were considered classified
loans.
In the
normal course of business, certain directors and executive officers
of the Company,
including
their immediate families and companies in which they have an
interest, may be deposit customers.
In
addition, the Company engages in certain activities with related
parties for sponsorships, donations, and other services during the
normal course of business.
The
Company entered into an agreement for accounting, data processing,
and administrative services with a stockholder corporation that
owned approximately 18% of the Company’s common stock at
December 31, 2016 and 2015. The agreement expired in 2015 and was
not renewed but from time to time, the stockholder provides
additional services. Expenses related to this agreement totaled
$9,300 and $378,000 during the years ended December 31, 2016 and
2015, respectively. In addition, a member of the Bank’s Board
of Directors has controlling interest of a company which provides
property management services for the Company for its Wake County
locations. Expenses related to this agreement totaled $57,000 and
$47,000 during the years ended December 31, 2016 and 2015,
respectively.
NOTE 10 - EMPLOYEE BENEFIT PLANS
401(k) Retirement Plan
The
Company has adopted a 401(k) retirement plan that covers all
eligible employees. The Company’s contribution is limited to
6% of each employee’s salary. Matching contributions are
funded when accrued. The Company matches the first 6% of employee
contributions. Matching expenses totaled $641,000 and $589,000 for
the years ended December 31, 2016 and 2015,
respectively.
A-70
Employee Stock Purchase Plan
On
September 23, 2003, the Board of Directors adopted, subject to
stockholder approval, the 2003 Employee Stock Purchase Plan (the
“2003 ESPP”). A split adjusted aggregate of 200,000
shares of common stock of the Company has been reserved for
issuance by the Company upon exercise of options to be granted from
time to time under the 2003 ESPP.
On
November 18, 2014, the Plan was amended to comply with Section 423
of the Internal Revenue Code of 1986. Under this plan, eligible
employees have the option to withhold post-tax dollars from their
payroll to be placed in an account for purchases of the
Company’s shares or to buy their allotted shares outright. In
order for employees to be eligible to participate, they must have
been employed by the Company for three consecutive months prior to
the annual share allocation date. The Plan allows for employees to
purchase shares at 95% of fair market value. The number of shares
that could be purchased in any calendar year by any individual was
limited to shares with a fair market value of $25,000.
During
2016, 5,998 shares were issued for an aggregate amount for
$181,000. During 2015, 10,678 shares were issued for an aggregate
amount for $202,000.
Supplemental Retirement Plan
In May
2004, the Company established a non-qualifying supplemental
retirement plan for the benefit of certain key executives (the
“2004 Plan”). Under the 2004 Plan, the participants
will receive a fixed retirement benefit over a 20 year period
following that participant’s retirement. The 2004 Plan also
provides for payment of death or disability benefits in the event a
participating officer becomes permanently disabled or dies prior to
attainment of retirement age. Benefits vested over a ten year
period beginning at 2004 Plan inception and are now fully vested.
The discount rate used to compute the liability for the expected
benefits was 6%.
In July
2007, the Company established another non-qualifying supplemental
retirement plan for the benefit of certain other key employees (the
“2007 Plan”). The terms of the plan were the same as
those for the 2004 Plan. In addition, at the same time, the Company
established a deferred compensation plan for certain key executives
(the “Deferred Compensation Plan”). Terms of the
Deferred Compensation Plan were the same as those of the 2004 Plan
and the 2007 Plan except that in addition to a service requirement,
certain financial objectives had to be met.
In
2012, the Company amended the Deferred Compensation Plan to remove
the financial objectives for the remaining participants. In 2014,
the Deferred Compensation Plan was merged into the 2007 Plan and
all benefits became fully vested.
For the
year ended December 31, 2016 and 2015, the Company recognized an
expense of $258,000 and $397,000, respectively, related to each of
these plans. The accrued liability related to these plans was
approximately $3.0 million and $2.7 million as of December 31,
2016 and 2015, respectively, and is included in Other liabilities
on the Consolidated Balance Sheet.
At
December 31, 2016, the Company had $34.2 million in cash surrender
value invested in bank-owned life insurance policies
(“BOLI”). Income earned on these policies may be used,
at the Company’s sole discretion, to fund the benefits
payable under the Plans.
A-71
Stock-Based Compensation Plans
Under
the 2006 Omnibus Stock Ownership and Long Term Incentive Plan (the
"Omnibus Plan"), as amended, an aggregate of 312,500 split adjusted
shares of the common stock of the Company, subject to adjustment,
were reserved for issuance under the terms of the Omnibus Plan
pursuant to the grant of incentive stock options, non-qualified
stock options, restricted stock grants, long-term incentive
compensation units and stock appreciation rights. The Omnibus Plan
expired in 2016 pursuant to its terms.
Options
granted under the Omnibus Plan become exercisable in accordance
with the vesting schedule specified in the stock option agreements.
All unexercised options expire ten years after the date of
grant.
During
2016, the Company expensed $427,000 for restricted stock for
directors and employees. For 2015, $411,000 was expensed for the
same purpose. There was no expense associated with the unexercised
stock options in 2016 or 2015.
As of
December 31, 2016, there was no unrecognized compensation expense
related to the Omnibus Plan. Unrecognized stock-based compensation
expense associated with restricted stock at December 31, 2016 is as
follows:
(In thousands)
|
|
2017
|
$425
|
2018
|
278
|
2019
|
40
|
Total
|
$743
|
Stock Options
A split
adjusted summary of the transactions for the Company’s
stock-based compensation plans as of and for the years ended
December 31, 2016 and 2015, including the weighted average exercise
price (“WAEP”) is as follows:
|
2016
|
2015
|
||
|
Shares
|
WAEP
|
Shares
|
WAEP
|
Outstanding
at beginning of year
|
81,500
|
$46.46
|
101,000
|
$43.00
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
(10,000)
|
17.60
|
Expired
and forfeited
|
(20,375)
|
48.96
|
(9,500)
|
40.00
|
Outstanding
at end of year
|
61,125
|
$45.63
|
81,500
|
$46.46
|
|
|
|
|
|
Options
exercisable at year-end
|
61,125
|
$45.63
|
81,500
|
$46.46
|
There
were no unvested shares as of December 31, 2016 or
2015.
A-72
The
following table summarizes information about the Company’s
stock options at December 31, 2016:
|
|
|
Weighted
|
|
|
|
Weighted
|
Average
|
|
|
|
Average
|
Remaining
|
|
|
Number
|
Exercise
|
Contractual
|
Number
|
Exercise Price
|
Outstanding
|
Price
|
Life in Years
|
Exercisable
|
$42.00
- $44.00
|
29,250
|
$43.11
|
1.24
|
29,250
|
$44.01
- $46.00
|
-
|
-
|
0.00
|
-
|
$46.01
- $48.00
|
31,875
|
47.95
|
0.22
|
31,875
|
|
61,125
|
$45.63
|
0.71
|
61,125
|
There
were no options granted during 2016 or 2015.
At
December 31, 2016 the aggregate intrinsic value of options
outstanding and exercisable was $18,000. At December 31, 2015,
there was no aggregate intrinsic value of options outstanding and
exercisable. The aggregate intrinsic value of options exercised
during 2015 was $49,000. There was no aggregate intrinsic value of
options exercised during 2016.
Restricted Stock
Restricted
stock is issued to the grantee but provides no voting or dividend
rights and is restricted from transfer until vested, at which time
all restrictions are removed. The terms of the restricted stock
awards granted to employees during 2016 and 2015 are 100% cliff
vesting for a period of three years from the date of the grant. The
terms of the restricted stock awards granted to directors during
2015 are a vesting period three years from the date of the grant
with immediate vesting upon retirement of the director. There were
no restricted stock awards to the directors in 2016.
The
following table lists the various restricted stock awards under the
Omnibus Plan for the years ended December 31, 2016 and
2015:
|
Number of
|
|
|
Shares
|
Fair
|
|
Granted
|
Value
|
2016
|
|
|
April
1, 2016 - Employees
|
19,145
|
$26.95
|
|
|
|
2015
|
|
|
April
1, 2015 - Employees
|
14,156
|
$20.00
|
September
15, 2015 - Directors
|
16,500
|
23.75
|
The
fair value of the restricted stock awards granted to employees and
directors for the years ended December 31, 2016 and 2015 was
estimated to be equal to the closing stock price on the grant date.
The value of the restricted stock is being amortized on a
straight-line basis over the implied service periods.
A-73
The
following table summarizes restricted stock award activity for the
years ended December 31, 2016 and 2015:
|
2016
|
2015
|
||
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
|
Grant-Date
|
|
Grant-Date
|
|
|
Fair Value
|
|
Fair Value
|
|
Shares
|
Per Share
|
Shares
|
Per Share
|
Outstanding
at beginning of year
|
77,531
|
$8.50
|
75,000
|
$8.50
|
Granted
|
19,145
|
26.95
|
30,656
|
22.02
|
Vested
|
(33,625)
|
10.58
|
(28,125)
|
8.00
|
Expired
or forfeited
|
(1,352)
|
25.16
|
-
|
-
|
Outstanding
at end of year
|
61,699
|
$19.67
|
77,531
|
$8.50
|
The
following table summarizes the shares available for future grants
under the Omnibus Plan for the years ended December 31, 2016 and
2015:
|
2016
|
2015
|
||||
|
|
|
Available
|
|
|
Available
|
|
Stock
|
Restricted
|
for Future
|
Stock
|
Restricted
|
for Future
|
|
Options
|
Stock
|
Grants
|
Options
|
Stock
|
Grants
|
Outstanding
at beginning of year
|
|
|
178,344
|
|
|
199,500
|
Granted
|
-
|
(19,145)
|
(19,145)
|
-
|
(30,656)
|
(30,656)
|
Expired
and forfeited
|
20,375
|
1,352
|
21,727
|
9,500
|
-
|
9,500
|
Expiration
of plan
|
|
|
(180,926)
|
|
|
-
|
Outstanding
at end of year
|
|
|
-
|
|
|
178,344
|
NOTE 11 - INCOME TAXES
Allocation
of federal and state income tax expense between current and
deferred portions for the years ended December 31, 2016 and 2015
are as follows:
(In thousands)
|
2016
|
2015
|
Federal
|
$5,178
|
$2,845
|
State
|
812
|
886
|
Total
current
|
5,990
|
3,731
|
Deferred
|
|
|
Federal
|
451
|
1,925
|
State
|
36
|
105
|
Total
deferred
|
487
|
2,030
|
|
$6,477
|
$5,761
|
A-74
A
reconciliation of income tax benefit computed at the statutory
federal income tax rate to income tax expense included in the
Consolidated Statements of Income is as follows:
(In thousands)
|
2016
|
2015
|
Expense
computed at statutory rate of 35%
|
$6,953
|
$5,768
|
Effect
of state income taxes, net of federal benefit
|
536
|
654
|
Tax
exempt income
|
(867)
|
(712)
|
Other
|
(145)
|
51
|
|
$6,477
|
$5,761
|
The
components of the net deferred tax assets as of December 31, 2016
and 2015 are as follows:
(In thousands)
|
2016
|
2015
|
Deferred
tax assets:
|
|
|
Allowance
for loan losses
|
$2,922
|
$2,873
|
Recorded
impairment of assets
|
1,119
|
982
|
Deferred
compensation
|
1,291
|
1,015
|
Net
unrealized loss on cash flow hedges
|
1,050
|
1,045
|
Net
unrealized loss on available for sale securities
|
679
|
-
|
Other
|
579
|
1,600
|
Total
deferred tax assets
|
7,640
|
7,515
|
|
|
|
Deferred
tax liabilities:
|
|
|
Premises
and equipment
|
(908)
|
(1,050)
|
Deferred
loan costs
|
(1,525)
|
(1,396)
|
Prepaid
expenses
|
(166)
|
(203)
|
Net
unrealized gain on available for sale securities
|
-
|
(526)
|
Other
|
(200)
|
(222)
|
Total
deferred tax liabilities
|
(2,799)
|
(3,397)
|
Net
deferred tax assets
|
$4,841
|
$4,118
|
No
valuation allowances were required relating to deferred tax assets
at December 31, 2016 or 2015 as the Company believes that
realization of the net deferred tax asset is more likely than
not.
As of
December 31, 2016 and 2015, there were no uncertain tax positions.
The amount of uncertain tax positions may increase or decrease in
the future for various reasons including adding amounts for current
tax positions, expiration of open tax returns due to statutes of
limitations, changes in management’s judgment about the level
of uncertainty, status of regulatory examinations, litigation and
legislative activity and the addition or elimination of uncertain
tax positions. The Company’s policy is to report interest and
penalties, if any, related to uncertain tax positions in income tax
expense in the Consolidated Statements of Income. With few
exceptions, the Company is no longer subject to U.S. federal, state
and local, or non-U.S. income tax examinations by tax authorities
for years before 2013.
A-75
NOTE 12 - OTHER NON-INTEREST EXPENSE
The
major components of other non-interest expense for the years ended
December 31, 2016 and 2015 are as follows:
(In thousands)
|
2016
|
2015
|
Telephone
and data lines
|
$553
|
$431
|
Postage,
printing and office supplies
|
325
|
307
|
Franchise
and other taxes
|
276
|
286
|
Insurance
|
168
|
214
|
Travel-related
expenses
|
187
|
210
|
Correspondent
bank fees
|
125
|
168
|
Charitable
contributions
|
88
|
130
|
Other
|
941
|
750
|
Total
|
$2,663
|
$2,496
|
NOTE 13 - REGULATORY MATTERS
Banks
and bank holding companies are subject to various regulatory
capital requirements administered by state and federal banking
agencies. Capital adequacy guidelines and, additionally for banks,
prompt corrective action regulations, involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by
regulators about components, risk weighting and other
factors.
The
Basel III Capital Rules, a comprehensive capital framework for U.S.
banking organizations, became effective for the Company and the
Bank on January 1, 2015 (subject to a phase-in period for certain
provisions). Quantitative measures established by the Basel III
Capital Rules to ensure capital adequacy require the maintenance of
minimum amounts and ratios (set forth in the table below) of Common
Equity Tier 1 capital, Tier 1 capital and Total capital (as defined
in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital to adjusted quarterly average assets (as
defined).
The
Company and the Bank’s Common Equity Tier 1 capital includes
common stock and related paid-in capital and retained earnings. In
connection with the adoption of the Basel III Capital Rules, the
Company elected to opt-out of the requirement to include most
components of accumulated other comprehensive income in Common
Equity Tier 1. Common Equity Tier 1 for both the Company and the
Bank is reduced by deferred tax assets that are subject to
transition provisions.
Tier 1
capital includes Common Equity Tier 1 capital and additional Tier 1
capital. For the Company, additional Tier 1 capital at December 31,
2016 includes $18.0 million of trust preferred securities issued by
our unconsolidated subsidiary trusts. Under the Basel III Capital
Rules, trust preferred securities only qualify as Tier 1 capital
instruments for banks under $15 billion in total
assets.
Total
capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital
for both the Company and the Bank includes the permissible portion
of the allowance for loan losses.
A-76
Prior
to January 1, 2015, under the capital rules then in effect, the
Company’s and the Bank’s Tier 1 capital included total
stockholders’ equity excluding accumulated other
comprehensive income, net of associated deferred tax liabilities.
Tier 1 capital for the Company included $18.0 million of trust
preferred securities issued by our unconsolidated subsidiary
trusts.
The
Common Equity Tier 1, Tier 1 and Total capital ratios are
calculated by dividing the respective capital amounts by
risk-weighted assets. Risk-weighted assets are calculated based on
regulatory requirements and include total assets, with certain
exclusions, allocated by risk weight category, and certain
off-balance-sheet items, among other things. The leverage ratio is
calculated by dividing Tier 1 capital by adjusted quarterly average
total assets, which exclude goodwill and other intangible assets,
among other things.
When
fully phased in on January 1, 2019, the Basel III Capital Rules
will require the Company and the Bank to maintain (i) a minimum
ratio of Common Equity Tier 1 capital to risk-weighted assets of at
least 4.5%, plus a 2.5% “capital conservation buffer”
(which is added to the 4.5% Common Equity Tier 1 capital ratio as
that buffer is phased in, effectively resulting in a minimum ratio
of Common Equity Tier 1 capital to risk-weighted assets of at least
7.0% upon full implementation), (ii) a minimum ratio of Tier 1
capital to risk-weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier 1 capital
ratio as that buffer is phased in, effectively resulting in a
minimum Tier 1 capital ratio of 8.5% upon full implementation),
(iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier
2) to risk-weighted assets of at least 8.0%, plus the capital
conservation buffer (which is added to the 8.0% total capital ratio
as that buffer is phased in, effectively resulting in a minimum
total capital ratio of 10.5% upon full implementation) and (iv) a
minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1
capital to average quarterly assets.
The
implementation of the capital conservation buffer began on January
1, 2016 at the 0.625% level and is phased in over a three-year
period (increasing by that amount on each subsequent January 1,
until it reaches 2.5% on January 1, 2019). The Basel III Capital
Rules also provide for a “countercyclical capital
buffer” that is applicable to only certain covered
institutions and does not have any current applicability to the
Company or the Bank. The capital conservation buffer is designed to
absorb losses during periods of economic stress and, as detailed
above, effectively increases the minimum required risk-weighted
capital ratios. Banking institutions with a ratio of Common Equity
Tier 1 capital to risk-weighted assets below the effective minimum
(4.5% plus the capital conservation buffer and, if applicable, the
countercyclical capital buffer) will face constraints on dividends,
equity repurchases and compensation based on the amount of the
shortfall.
A-77
The
following table presents actual and required capital ratios as of
December 31, 2016 and 2015 for the Company and the Bank under the
Basel III Capital Rules. The minimum required capital amounts
presented include the minimum required capital levels as of
December 31, 2016 and 2015 based on the phase-in provisions of the
Basel III Capital. Capital levels required to be considered well
capitalized are based upon prompt corrective action regulations, as
amended to reflect the changes under the Basel III Capital
Rules.
|
|
|
Minimum Requirements To Be:
|
|||
|
Actual
|
Adequately Capitalized
|
Well Capitalized (2)
|
|||
(Dollars in thousands)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
2016
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Total
Capital
|
$164,740
|
$13.21%
|
$99,778
|
$8.00%
|
N/A
|
N/A
|
Tier I
Capital
|
156,831
|
12.57%
|
74,833
|
6.00%
|
N/A
|
N/A
|
Common
equity Tier I Capital
|
138,831
|
11.13%
|
56,125
|
4.50%
|
N/A
|
N/A
|
Leverage
|
156,831
|
10.05%
|
62,434
|
4.00%
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Total
Capital
|
$161,925
|
12.99%
|
$99,713
|
8.00%
|
$124,641
|
10.00%
|
Tier I
Capital
|
154,016
|
12.36%
|
74,785
|
6.00%
|
99,713
|
8.00%
|
Common
equity Tier I Capital
|
154,016
|
12.36%
|
56,089
|
4.50%
|
81,017
|
6.50%
|
Leverage
|
154,016
|
10.37%
|
59,405
|
4.00%
|
74,256
|
5.00%
|
|
|
|
|
|
|
|
|
|
|
Minimum Requirements To Be:
|
|||
|
Actual
|
Adequately Capitalized
|
Well Capitalized (2)
|
|||
(Dollars in thousands)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
2015
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Total
Capital
|
$123,028
|
$11.21%
|
$87,794
|
$8.00%
|
N/A
|
N/A
|
Tier I
Capital
|
115,387
|
10.51%
|
65,845
|
6.00%
|
N/A
|
N/A
|
Common
equity Tier I Capital
|
97,853
|
8.92%
|
49,384
|
4.50%
|
N/A
|
N/A
|
Leverage
|
115,387
|
8.66%
|
53,274
|
4.00%
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Total
Capital
|
$127,095
|
$11.59%
|
$87,696
|
8.00%
|
$109,621
|
10.00%
|
Tier I
Capital
|
119,454
|
10.90%
|
65,772
|
6.00%
|
87,696
|
8.00%
|
Common
equity Tier I Capital
|
119,454
|
10.90%
|
50,425
|
4.50%
|
71,253
|
6.50%
|
Leverage
|
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.
Management
believes that, as of December 31, 2016, the Bank was “well
capitalized” based on the ratios presented
above.
A-78
The
Company and the Bank are subject to the regulatory capital
requirements administered by the Federal Reserve Board and, for the
Bank, the Federal Deposit Insurance Corporation
(“FDIC”) and the North Carolina Commissioner of Banks.
Regulatory authorities can initiate certain mandatory actions if
the Company or the Bank fails to meet the minimum capital
requirements, which could have a direct material effect on our
financial statements.
Management
believes, as of December 31, 2016, that the Company and the Bank
meet all capital adequacy requirements to which they are
subject.
In the
ordinary course of business, the Company is dependent upon
dividends from the Bank to provide funds for the payment of
dividends to trust preferred stockholders and to provide for other
cash requirements. Banking regulations may limit the amount of
dividends that may be paid. Approval by regulatory authorities is
required if the effect of dividends declared would cause the
regulatory capital of the Bank to fall below specified minimum
levels. Approval is also required if dividends declared exceed the
net profits for that year combined with the retained net profits
for the preceding two years. Under the foregoing dividend
restrictions and while maintaining its “well
capitalized” status, at December 31, 2016, the Bank could pay
aggregate dividends of up to $32.5 million to the Company without
prior regulatory approval.
NOTE 14 - 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.
A-79
A
summary of the contract amounts of the Company’s exposure to
off-balance sheet credit risk as of December 31, 2016 and 2015 is
as follows:
(in thousands)
|
2016
|
2015
|
Financial
instruments whose contract amounts
|
|
|
represent
credit risk:
|
|
|
Undisbursed
lines of credit
|
$216,769
|
$163,572
|
Standby
letters of credit
|
3,904
|
3,188
|
Total
|
$220,673
|
$166,760
|
NOTE 15 - 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. 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 interest rate cap
agreements, each between $30 million and $35 million maturing
between August 2019 and October 2019.
The
following table reflects the cash flow hedges included in the
Consolidated Balance Sheets as of December 31, 2016 and
2015:
|
2016
|
2015
|
||
|
Notational
|
Fair
|
Notational
|
Fair
|
(in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
Included
in other assets:
|
|
|
|
|
Cap
1 - maturing August 2019
|
$35,000
|
$1,011
|
$35,000
|
$1,334
|
Cap
2 - maturing September 2019
|
35,000
|
1,045
|
35,000
|
1,360
|
Cap
3 - maturing October 2019
|
30,000
|
929
|
30,000
|
1,216
|
|
$100,000
|
$2,985
|
$100,000
|
$3,910
|
Remaining amortization of the premium on the interest
rate caps is as follows:
(in thousands)
|
|
2017
|
$1,779
|
2018
|
2,247
|
2019
|
1,751
|
|
$5,777
|
The
Company recorded $912,000 and $154,000 for the year ended December
31, 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.
A-80
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
remaining amortization of the deferred gain associated with the
exit of the Swaps is as follows:
(in thousands)
|
|
2017
|
$74
|
2018
|
74
|
Thereafter
|
148
|
|
$296
|
The
Company does not use derivatives for trading or speculative
purposes.
NOTE 16- 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 December 31, 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 December 31, 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 December 31, 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.
A-81
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.
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 December 31, 2016 and 2015,
the Company’s derivative instruments consist solely of
interest rate caps.
A-82
Below
is a table that presents information about assets measured at fair
value on a recurring basis at December 31, 2016 and
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)
|
December 31, 2016
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$16,943
|
$-
|
$16,943
|
$-
|
Collateralized
mortgage obligations
|
42,497
|
-
|
42,497
|
-
|
Mortgage-backed
securities
|
73,873
|
-
|
73,873
|
-
|
Municipal
bonds
|
60,677
|
-
|
60,677
|
|
Other
|
3,451
|
1,951
|
-
|
1,500
|
|
197,441
|
1,951
|
193,990
|
1,500
|
Interest
rate caps
|
2,985
|
-
|
2,985
|
-
|
Total
assets at fair value
|
$200,426
|
$1,951
|
$196,975
|
$1,500
|
|
|
|
|
|
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 year ended
December 31, 2016.
|
Level 3
|
|
Investment
|
(in thousands)
|
Securities
|
Balance
at December 31, 2015
|
$500
|
Purchases
|
1,000
|
Balance
at December 31, 2016
|
$1,500
|
There
are no liabilities measured at fair value on a recurring basis as
of December 31, 2016 or 2015.
A-83
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 $3.2 million and $3.9 million at December 31, 2016
and 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.
A-84
Below
is a table that presents information about assets measured at fair
value on a nonrecurring basis at December 31, 2016 and
2015:
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
(in thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
December 31, 2016
|
|
|
|
|
Impaired
loans
|
$2,712
|
$-
|
$-
|
$2,712
|
Other
real estate owned
|
4,740
|
-
|
-
|
4,740
|
Total
|
$7,452
|
$-
|
$-
|
$7,452
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
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 December 31, 2016 and 2015,
the significant unobservable inputs used in the fair value
measurements were as follows:
|
|
|
|
|
|
|
December 31, 2016 and 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
|
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.
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:
A-85
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.
A-86
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 December 31, 2016 and
2015:
|
December 31, 2016
|
||||
|
Carrying
|
Fair Value
|
|||
(in thousands)
|
Amount
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Financial
assets:
|
|
|
|
|
|
Cash
and due from banks
|
$43,005
|
$43,005
|
$43,005
|
$
|
$
|
Investment
securities available-for-
|
|
|
|
|
|
sale
|
197,441
|
197,441
|
1,951
|
193,990
|
1,500
|
Loans,
net
|
1,183,371
|
1,184,621
|
-
|
1,181,909
|
2,712
|
Accrued
interest receivable
|
4,368
|
4,368
|
4,368
|
-
|
-
|
Federal
Home Loan Bank stock
|
8,400
|
8,400
|
-
|
-
|
8,400
|
Bank-owned
life insurance
|
34,190
|
34,190
|
-
|
34,190
|
-
|
Interest
rate caps
|
2,985
|
2,985
|
-
|
2,985
|
-
|
Financial
liabilities:
|
|
|
|
|
|
Non-maturing
deposits
|
953,248
|
953,248
|
-
|
953,248
|
-
|
Time
deposits
|
219,007
|
219,038
|
-
|
219,038
|
-
|
Accrued
interest payable
|
294
|
294
|
294
|
-
|
-
|
Repurchase
agreements and
|
|
|
|
|
|
federal
funds purchased
|
20,174
|
20,174
|
-
|
20,174
|
-
|
FHLB
Advances and other borrowings
|
150,000
|
149,997
|
-
|
149,997
|
-
|
Subordinated
debt
|
18,558
|
14,197
|
-
|
14,197
|
-
|
|
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
|
-
|
A-87
NOTE 17 - PARENT COMPANY FINANCIAL DATA
Following
are the condensed financial statements of Paragon Commercial
Corporation as of and for the years ended December 31, 2016 and
2015:
Condensed Balance Sheets
(In thousands)
|
2016
|
2015
|
Assets
|
|
|
Cash
and due from banks
|
$2,161
|
$224
|
Investment
in Paragon Commercial Bank
|
151,316
|
119,716
|
Investment
in unconsolidated subsidiaries
|
558
|
558
|
Other
assets
|
697
|
584
|
Total
Assets
|
$154,732
|
$121,082
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
Subordinated
debentures
|
$18,558
|
$18,558
|
Other
borrowings
|
-
|
4,800
|
Accrued
interest payable and other liabilities
|
73
|
66
|
Total
Liabilities
|
18,631
|
23,424
|
|
|
|
Stockholders'
Equity:
|
|
|
Common
stock
|
44
|
37
|
Additional
paid-in-capital
|
80,147
|
53,147
|
Accumulated
other comprehensive loss
|
(2,840)
|
(886)
|
Retained
earnings
|
58,750
|
45,360
|
Total
Stockholders' Equity
|
136,101
|
97,658
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$154,732
|
$121,082
|
Condensed Statements of Income
(In thousands)
|
2016
|
2015
|
Equity
in undistributed earnings of subsidiary
|
$14,166
|
$11,958
|
Interest
expense
|
(629)
|
(715)
|
Other
operating income
|
34
|
24
|
Other
operating expenses
|
(580)
|
(402)
|
Income
tax benefit
|
399
|
369
|
Net
income
|
$13,390
|
$11,234
|
A-88
Condensed Statements of Cash Flows
(In thousands)
|
2016
|
2015
|
Cash
flows from operating activities:
|
|
|
Net
income
|
$13,390
|
$11,234
|
Adjustments
to reconcile net income to net cash provided by (used
in)
|
|
|
operating
activities:
|
|
|
Equity
in earnings of subsidiary
|
(14,166)
|
(11,958)
|
Stock
based compensation
|
427
|
411
|
Net
gain on sale of securities
|
-
|
(1)
|
Deferred
tax expense
|
(3)
|
9
|
Changes
in assets and liabilities:
|
|
|
Increase
in other assets
|
(97)
|
(6)
|
Increase
(decrease) in other liabilities
|
7
|
(6)
|
Net
cash used in operating activities
|
(442)
|
(317)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Investment
in subsidiaries and trusts
|
(20,500)
|
-
|
Proceeds
from sale of securities available for sale
|
-
|
5
|
Dividends
received from subsidiary
|
1,100
|
2,200
|
Net
cash provided by investing activities
|
(19,400)
|
2,205
|
|
|
|
Cash
flows from financing activities:
|
|
|
Repayment
of long term debt
|
(4,800)
|
(2,456)
|
Net
proceeds from sale of common stock
|
26,398
|
|
Proceeds
from employee stock purchase plan
|
181
|
203
|
Proceeds
from exercise of stock options
|
-
|
176
|
Net
cash used in financing activities
|
21,779
|
(2,077)
|
Net
decrease in cash and cash equivalents
|
1,937
|
(189)
|
Cash
and cash equivalents, beginning of year
|
224
|
413
|
Cash
and cash equivalents, end of year
|
$2,161
|
$224
|
A-89
NOTE 18 – SUPPLEMENTAL CASH FLOW DISCLOSURE
(in thousands)
|
2016
|
2015
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
Interest
paid
|
$8,191
|
$7,433
|
|
|
|
Income
taxes paid
|
$6,035
|
$4,320
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing Activites:
|
|
|
|
|
|
Change
in fair value of securities available-for-sale, net of
taxes
|
$(3,153)
|
$(797)
|
|
|
|
Change
in fair value of cash flow hedges, net of taxes
|
$(13)
|
$(1,231)
|
|
|
|
Transfer
from loans to foreclosed real estate
|
$ -
|
$3,484
|
NOTE 19 – ISSUANCES OF COMMON STOCK
During
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 2016, the Company issued 5,998 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.
NOTE 20 – 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.
A-90
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following table provides selected quarterly financial data for 2016
and 2015:
|
Fourth
|
Third
|
Second
|
First
|
(in thousands, except per share amounts)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
2016
|
|
|
|
|
Interest
income
|
$14,573
|
$13,855
|
$13,272
|
$12,467
|
Net
interest income
|
12,419
|
11,767
|
11,301
|
10,551
|
Provision
for loan losses
|
200
|
391
|
-
|
-
|
Noninterest
income
|
209
|
438
|
381
|
266
|
Noninterest
expense
|
7,008
|
6,778
|
6,488
|
6,600
|
Income
before income taxes
|
5,420
|
5,036
|
5,194
|
4,217
|
Net
income
|
$3,622
|
$3,455
|
$3,475
|
$2,838
|
|
|
|
|
|
Net
income per share, diluted
|
$0.67
|
$0.64
|
$0.76
|
$0.62
|
Net
income per share, basic
|
0.67
|
0.64
|
0.75
|
0.62
|
|
|
|
|
|
2015
|
|
|
|
|
Interest
income
|
$12,594
|
$12,510
|
$12,011
|
$11,320
|
Net
interest income
|
10,730
|
10,656
|
10,213
|
9,452
|
Provision
for loan losses
|
-
|
-
|
179
|
571
|
Noninterest
income
|
102
|
544
|
324
|
484
|
Noninterest
expense
|
6,300
|
6,180
|
6,400
|
5,880
|
Income
before income taxes
|
4,532
|
5,020
|
3,958
|
3,485
|
Net
income
|
$2,963
|
$3,313
|
$2,650
|
$2,308
|
|
|
|
|
|
Net
income per share, diluted
|
$0.65
|
$0.73
|
$0.59
|
$0.52
|
Net
income per share, basic
|
0.65
|
0.73
|
0.59
|
0.51
|
A-91
Market Information for Common Stock
The
Companyís common stock is listed on the NASDAQ Capital Market,
under the symbol “PBNC.”
The
closing market price for the Company's common stock was
$53.85 on March 20,
2017.
The
following table presents certain market information for the last
two fiscal years. Over-the-counter quotations reflect inter-dealer
prices, without retail mark-up, mark down or commission and may not
necessarily represent actual transactions.
|
Low
|
High
|
Fiscal
Year Ending December 31, 2016
|
|
|
Fourth
Quarter
|
$35.99
|
$44.30
|
Third
Quarter
|
34.50
|
39.99
|
Second
Quarter
|
26.97*
|
36.00
|
First
Quarter
|
26.25*
|
27.39*
|
|
|
|
Fiscal
Year Ending December 31, 2015
|
|
|
Fourth
Quarter
|
$24.20*
|
$28.50*
|
Third
Quarter
|
21.00*
|
25.00*
|
Second Quarter
beginning April 16, 2015
|
22.50*
|
25.00*
|
|
|
|
*
Based on high and
low reported sales prices for our common stock from April 16, 2015
(the date our common stock began trading on the OTCQX Marketplace)
through the listing on Nasdaq on June 16, 2016. These reported
sales prices represent trades that were either quoted on the OTCQX
Marketplace or reported to the Companyís stock transfer agent,
and do not include retail markups, markdowns or commissions, and do
not necessarily reflect actual transactions.
Dividend Policy
The
Company anticipates that future earnings, if any, will be retained
to finance the Companyís growth and that we will not pay cash
dividends for the foreseeable future.
The
Company is organized under the North Carolina Business Corporation
Act, which prohibits the payment of a dividend if, after giving it
effect, the Company would not be able to pay its debts as they
become due in the usual course of business or its total assets
would be less than the sum of its total liabilities plus the amount
that would be needed, if the Company were to be dissolved, to
satisfy the preferential rights upon dissolution of any preferred
stock holders. In addition, because the Company is a bank holding
company, the Federal Reserve may impose restrictions on cash
dividends paid by it. The Federal Reserve has issued a policy
statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserveís view that a
bank holding company should pay cash dividends only to the extent
that the holding companyís net income for the past four
quarters, net of any dividends previously paid during that period,
is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with the bank holding
companyís capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be
inappropriate for a bank holding company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore,
under the prompt corrective action regulations adopted by the
Federal Reserve, the Federal Reserve may prohibit a bank holding
company from paying any dividends if any of the holding
companyís bank subsidiaries are classified as
undercapitalized.
A-92
The
Companyís ability to pay dividends is largely dependent upon
the amount of cash dividends that the Bank pays to the Company,
which distributions are restricted under North Carolina banking
laws and regulations. The Bank may make distributions only to the
extent that the Bank remains adequately capitalized. In addition,
regulatory authorities may limit payment of dividends by any bank
when it is determined that such a limitation is in the public
interest and is necessary to ensure financial soundness of the
bank. The Office of the North Carolina Commissioner of Banks and
the FDIC also are authorized to prohibit the payment of dividends
by a bank under certain circumstances. Such requirements and
policies may limit the Companyís ability to obtain dividends
from the Bank for its cash needs, including payment of dividends to
stockholders and the payment of operating expenses. For additional
information on these limitations, please see “Supervision and
Regulation” under Item 1. Business.
Any
determination to pay future dividends to stockholders will be
dependent upon the Companyís operational results, financial
condition, capital requirements, business projections, general
business conditions, statutory and regulatory restrictions and
other factors deemed appropriate by the Companyís board of
directors.
Holders of Record
As of
March 20, 2017, the
Company had 281 stockholders of record, not
including the number of persons or entities whose stock is held in
nominee or street name through various brokerage firms
or
banks.
Stock Performance Graph
The
following shall not be deemed “filed” for purposes of
Section 18 of the Exchange Act, or incorporated by reference into
any of our other filings under the Exchange Act or the Securities
Act of 1933, as amended, except to the extent we specifically
incorporate it by reference into such filing.
The
following table and graph compare the cumulative total shareholder
return on our common stock for the period beginning at the close of
trading on June 16, 2016 (the end of the first day of trading of
our common stock on the NASDAQ Global Market) through the close of
trading on each of June 30, 2016, September 30, 2016, and December
30, 2016, with the cumulative total return of the S&P 500 Total
Return Index and the NASDAQ Bank Index, and assumes the
reinvestment of dividends, if any. The historical stock price
performance for our common stock shown on the graph below is not
necessarily indicative of future stock performance.
|
June
16, 2016
|
June
30, 2016
|
September 30,
2016
|
December 30,
2016
|
Paragon Commercial
Corporation
|
$100.00
|
$101.16
|
$104.86
|
$126.36
|
S&P
500
|
100.00
|
101.05
|
104.94
|
108.96
|
NASDAQ
Bank
|
100.00
|
100.22
|
109.97
|
141.22
|
A-93