Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
☑ |
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
For
the quarterly period ended March 31, 2017
or
☐ |
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
For
the transition period from
to .
Commission
file number: 001-37802
PARAGON
COMMERCIAL CORPORATION
(Exact name of
registrant as specified in its charter)
North
Carolina
|
56-2278662
|
(State or other
jurisdiction of incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
3535
Glenwood Avenue
Raleigh,
North Carolina
|
27612
|
(Address of
principal executive offices)
|
(Zip
Code)
|
(919)
788-7770
(Registrant’s
telephone number, including area code)
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. YES ☑
NO ◻
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such
files). YES ☑
NO ◻
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large Accelerated
Filer
|
☐
|
Accelerated
Filer
|
☐ | |||||
Non-accelerated
Filer
|
☑
|
Smaller Reporting
Company
|
☐ | |||||
(Do
not check if smaller reporting company)
|
Emerging Growth
Company
|
☑
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act ☑
Indicate by check
mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). YES ◻ NO
☑
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date.
As of May 9, 2017,
there were approximately 5,455,965 shares of the registrant’s
common stock outstanding.
PARAGON
COMMERCIAL CORPORATION
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2017
TABLE
OF CONTENTS
Part
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets (Unaudited) as of March 31, 2017 and December 31,
2016
|
|
1
|
|
|
|
|
|
Consolidated
Statements of Income (Unaudited) for the Three Months Ended March
31, 2017 and 2016
|
|
2
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Unaudited) for the Three Months
Ended March 31, 2017 and 2016
|
|
3
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited) for the
Three Months Ended March 31, 2017 and 2016
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) for the Three Months Ended
March 31, 2017 and 2016
|
|
5
|
|
|
|
|
|
Notes to
Consolidated Financial Statements (Unaudited)
|
|
6
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
30
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|
|
|
|
Item
3.
|
Quantitative and
Qualitative Disclosures About Market Risk
|
|
52
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|
|
|
|
Item
4.
|
Controls and
Procedures
|
|
53
|
|
|
|
|
PART
2.
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OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
54
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
54
|
|
|
|
|
Item
2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
|
56
|
|
|
|
|
Item
3.
|
Defaults Upon
Senior Securities
|
|
56
|
|
|
|
|
Item
4.
|
Mine Safety
Disclosures
|
|
56
|
|
|
|
|
Item
5.
|
Other
Information
|
|
56
|
|
|
|
|
Item
6.
|
Exhibits
|
|
56
|
|
|
|
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SIGNATURES
|
|
57
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Part
I. Financial Information
Item
1. Financial Statements
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, 2017 and December 31, 2016
(Balance Sheet as of December 31, 2016 is derived from Audited
Financial Statements)
(in thousands, except share data)
|
2017
|
2016
|
Assets
|
|
|
Cash
and due from banks:
|
|
|
Interest-earning
|
$52,006
|
$38,384
|
Noninterest-earning
|
4,472
|
4,621
|
Investment
securities - available-for-sale, at fair value
|
194,008
|
197,441
|
Federal
Home Loan Bank stock, at cost
|
5,603
|
8,400
|
Loans
- net of unearned income and deferred fees
|
1,230,953
|
1,191,280
|
Allowance
for loan losses
|
(8,125)
|
(7,909)
|
Net
loans
|
1,222,828
|
1,183,371
|
Accrued
interest receivable
|
4,403
|
4,368
|
Bank
premises and equipment, net
|
15,420
|
15,642
|
Bank
owned life insurance
|
34,448
|
34,190
|
Other
real estate owned
|
4,740
|
4,740
|
Deferred
tax assets
|
4,734
|
4,841
|
Other
assets
|
7,365
|
7,769
|
Total
assets
|
$1,550,027
|
$1,503,767
|
|
|
|
Liabilities and stockholders' equity
|
|
|
Deposits:
|
|
|
Noninterest-bearing
demand
|
$222,904
|
$211,202
|
Interest-bearing
checking and money market
|
848,705
|
742,046
|
Time
deposits
|
193,249
|
219,007
|
Total
deposits
|
1,264,858
|
1,172,255
|
Repurchase
agreements and federal funds purchased
|
19,529
|
20,174
|
Borrowings
|
100,000
|
150,000
|
Subordinated
debentures
|
18,558
|
18,558
|
Other
liabilities
|
6,937
|
6,679
|
Total
liabilities
|
1,409,882
|
1,367,666
|
Stockholders'
equity:
|
|
|
Common
stock, $0.008 par value; 20,000,000 shares
|
|
|
authorized;
5,452,088 and 5,450,713 issued and outstanding
|
|
|
as
of March 31, 2017 and December 31, 2016, respectively
|
44
|
44
|
Additional
paid-in-capital
|
80,323
|
80,147
|
Accumulated
other comprehensive loss
|
(2,326)
|
(2,840)
|
Retained
earnings
|
62,104
|
58,750
|
Total
stockholders' equity
|
140,145
|
136,101
|
Total
liabilities and stockholders' equity
|
$1,550,027
|
$1,503,767
|
See accompanying notes to these unaudited consolidated financial
statements.
1
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended March 31, 2017 and 2016
(in thousands, except per share data)
|
2017
|
2016
|
Interest income
|
|
|
Loans
and fees on loans
|
$13,070
|
$11,190
|
Investment
securities and FHLB stock
|
1,403
|
1,219
|
Federal
funds and other
|
159
|
58
|
Total
interest income
|
14,632
|
12,467
|
Interest expense
|
|
|
Interest-bearing
checking and money market
|
1,074
|
857
|
Time
deposits
|
511
|
567
|
Borrowings
and repurchase agreements
|
728
|
492
|
Total
interest expense
|
2,313
|
1,916
|
Net
interest income
|
12,319
|
10,551
|
Provision for loan losses
|
159
|
-
|
Net
interest income after provision for loan losses
|
12,160
|
10,551
|
Non-interest income
|
|
|
Increase
in cash surrender value of bank owned life insurance
|
258
|
223
|
Service
charges and fees
|
62
|
58
|
Mortgage
origination fees and gains on sale of loans
|
51
|
32
|
Net
gain on sale of securities
|
-
|
85
|
Net
loss on sale or impairment of foreclosed assets
|
-
|
(212)
|
Other
fees and income
|
132
|
80
|
Total
non-interest income
|
503
|
266
|
Non-interest expense
|
|
|
Salaries
and employee benefits
|
4,462
|
3,867
|
Data
processing
|
530
|
384
|
Furniture,
equipment and software costs
|
502
|
458
|
Occupancy
|
359
|
344
|
Director
related fees and expenses
|
224
|
252
|
Advertising
and public relations
|
221
|
188
|
Professional
fees
|
203
|
237
|
Unreimbursed
loan costs and foreclosure related expenses
|
174
|
69
|
FDIC
and other supervisory assessments
|
166
|
195
|
Other
|
771
|
606
|
Total
non-interest expense
|
7,612
|
6,600
|
Income
before income taxes
|
5,051
|
4,217
|
Income tax expense
|
1,697
|
1,379
|
Net
income
|
$3,354
|
$2,838
|
|
|
|
Net income per common share
|
|
|
Basic
|
$0.62
|
$0.62
|
|
|
|
Diluted
|
$0.62
|
$0.62
|
See accompanying notes to these unaudited consolidated financial
statements.
2
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (Unaudited)
Three Months Ended March 31, 2017 and 2016
(in thousands)
|
2017
|
2016
|
|
|
|
Net
income
|
$3,354
|
$2,838
|
|
|
|
Other
comprehensive income (loss) items:
|
|
|
Securities
available for sale:
|
|
|
Unrealized
gains
|
453
|
995
|
Reclassification
of gains recognized in net income
|
-
|
(85)
|
Other
comprehensive income
|
453
|
910
|
Deferred
tax expense
|
172
|
347
|
Other
comprehensive income, net of tax
|
281
|
563
|
|
|
|
Cash
flow hedges:
|
|
|
Unrealized
gains (losses)
|
372
|
(1,561)
|
Other
comprehensive income (loss)
|
372
|
(1,561)
|
Deferred
tax expense (benefit)
|
139
|
(586)
|
Other
comprehensive income (loss), net of tax
|
233
|
(975)
|
|
|
|
Total
other comprehensive income (loss), net of tax
|
514
|
(412)
|
|
|
|
Comprehensive
income
|
$3,868
|
$2,426
|
See accompanying notes to these unaudited consolidated financial
statements.
3
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Three Months Ended March 31, 2017 and 2016
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
|
|
|
Additional
|
Comprehensive
|
|
Total
|
|
|
Common Stock
|
Paid-in
|
Income
|
Retained
|
Stockholders'
|
|
(In thousands, except share data)
|
Shares
|
Amount
|
Capital
|
(Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2016
|
5,450,713
|
$44
|
$80,147
|
$(2,840)
|
$58,750
|
$136,101
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
3,354
|
3,354
|
|
|
|
|
|
|
|
Unrealized gain on securities, net of
|
|
|
|
|
|
|
tax
expense of $172
|
-
|
-
|
-
|
281
|
-
|
281
|
|
|
|
|
|
|
|
Unrealized gain on cash flow hedges,
|
|
|
|
|
|
|
net
of tax expense of $139
|
-
|
-
|
-
|
233
|
-
|
233
|
|
|
|
|
|
|
|
Exercise
of stock options
|
1,375
|
-
|
64
|
-
|
-
|
64
|
|
|
|
|
|
|
|
Restricted
stock expense recognized
|
-
|
-
|
112
|
-
|
-
|
112
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
5,452,088
|
$44
|
$80,323
|
$(2,326)
|
$62,104
|
$140,145
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
|
|
Common Stock
|
Additional
|
Comprehensive
|
|
Total
|
|
|
Common Stock
|
Paid-in
|
Income
|
Retained
|
Stockholders'
|
|
(In thousands, except share data)
|
Shares
|
Amount
|
Capital
|
(Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2015
|
4,581,334
|
$37
|
$53,147
|
$(886)
|
$45,360
|
$97,658
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
2,838
|
2,838
|
|
|
|
|
|
|
|
Unrealized
gain on securities, net of
|
|
|
|
|
|
|
tax
expense of $347
|
-
|
-
|
-
|
563
|
-
|
563
|
|
|
|
|
|
|
|
Unrealized
loss on cash flow hedges,
|
|
|
|
|
|
|
net
of tax benefit of $586
|
-
|
-
|
-
|
(975)
|
-
|
(975)
|
|
|
|
|
|
|
|
Restricted
stock expense recognized
|
-
|
-
|
88
|
-
|
-
|
88
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
4,581,334
|
$37
|
$53,235
|
$(1,298)
|
$48,198
|
$100,172
|
See accompanying notes to these unaudited consolidated financial
statements.
4
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 2017 and 2016
(in thousands)
|
2017
|
2016
|
Cash
flows from operating activities:
|
|
|
Net
income
|
$3,354
|
$2,838
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
operating
activities:
|
|
|
Depreciation
and amortization
|
359
|
352
|
Provision
for loan losses
|
159
|
-
|
Net
loss on sale or impairment of foreclosed assets
|
-
|
212
|
Increase
in cash surrender value of life insurance
|
(258)
|
(223)
|
Accretion
of premiums/discounts on securities, net
|
(281)
|
271
|
Net
gain on sale of securities
|
-
|
(85)
|
Deferred
tax expense
|
(204)
|
53
|
Restricted
stock expense
|
112
|
88
|
Changes
in assets and liabilities:
|
|
|
Accrued
interest receivable and other assets
|
741
|
201
|
Accrued
interest payable and other liabilities
|
258
|
(2,321)
|
Net
cash provided by operating activities
|
4,240
|
1,386
|
Cash
flows from investing activities:
|
|
|
Net
decrease in Federal Home Loan Bank stock
|
2,797
|
829
|
Purchase
of securities available for sale
|
(1,276)
|
(33,085)
|
Proceeds
from maturities and paydowns of securities available for
sale
|
5,443
|
4,834
|
Proceeds
from sales of securities available for sale
|
-
|
15,714
|
Net
increase in loans
|
(39,616)
|
(28,535)
|
Proceeds
from sale of foreclosed real estate
|
-
|
13
|
Additions
to bank premises and equipment
|
(137)
|
(200)
|
Net
cash used in investing activities
|
(32,789)
|
(40,430)
|
Cash
flows from financing activities:
|
|
|
Net
increase in demand and money market deposit accounts
|
118,361
|
127,689
|
Net
decrease in time deposits
|
(25,758)
|
(63,403)
|
Net
decrease in repurchase agreements
|
(645)
|
(6,086)
|
Net
decrease in FHLB and other borrowings
|
(50,000)
|
(23,127)
|
Exercise
of stock options
|
64
|
-
|
Net
cash provided by financing activities
|
42,022
|
35,073
|
Net
change in cash and cash equivalents
|
13,473
|
(3,971)
|
Cash
and cash equivalents at beginning of year
|
43,005
|
55,530
|
|
|
|
Cash
and cash equivalents at end of year
|
$56,478
|
$51,559
|
See accompanying notes to these unaudited consolidated financial
statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND OPERATIONS
On April 2, 2001,
Paragon Commercial Corporation (the “Company”) was
incorporated for the purpose of serving as a holding company for
Paragon Commercial Bank (the “Bank”). The Company
currently has no operations and conducts no business on its own
other than owning the Bank and two statutory business trusts,
Paragon Commercial Capital Trust I and II.
The Bank was
incorporated on May 4, 1999 and began banking operations on May 10,
1999. The Bank is engaged in general commercial banking in Wake and
Mecklenburg Counties, NC, operating under the banking laws of North
Carolina and the rules and regulations of the Federal Deposit
Insurance Corporation and the North Carolina Commissioner of Banks.
The Bank undergoes periodic examinations by those regulatory
authorities. In addition, the Company undergoes periodic
examinations by the Federal Reserve.
The Company formed
Paragon Commercial Capital Trust I (“Trust I”) during
2004 in order to facilitate the issuance of trust preferred
securities. Trust I is a statutory business trust formed
under the laws of the state of Delaware, of which all common
securities are owned by the Company. The Company formed Paragon
Commercial Capital Trust II (“Trust II”) during 2006 to
serve the same purpose. The junior subordinated debentures issued
by the Company to the trusts are classified as debt and the
Company’s equity interest in the trusts are included in other
assets.
The trust preferred
securities presently qualify as Tier 1 regulatory capital and are
reported in Federal Reserve regulatory reports as minority
interests in unconsolidated subsidiaries. The junior subordinated
debentures do not qualify as Tier 1 regulatory
capital.
In June 2016, the
Company completed its initial public offering in which it issued
and sold 845,588 shares of common stock at a public offering price
of $34.00 per share. The Company received net proceeds of $26.4
million after deducting underwriting discounts and commissions of
approximately $1.7 million and other offering expenses of
approximately $615,000.
In addition to its
headquarters and operations center in Raleigh, North Carolina, the
Bank has locations in Charlotte and Cary, North
Carolina.
NOTE 2 – BASIS OF PRESENTATION
The accompanying
unaudited consolidated financial statements include the accounts
and transactions of Paragon Commercial Corporation and Paragon
Commercial Bank. All significant intercompany transactions and
balances are eliminated in consolidation. Paragon
Commercial Capital Trusts I and II are not consolidated
subsidiaries of the Company.
The consolidated
financial information included herein as of and for the three-month
periods ended March 31, 2017 and 2016 is unaudited. Accordingly, it
does not include all of the information and notes required by U.S.
generally accepted accounting principles (“GAAP”) for
complete financial statements. However, such information reflects
all adjustments which are, in the opinion of management, necessary
for a fair statement of the financial condition and results of
operations for the interim periods. The December 31, 2016
consolidated balance sheet was derived from the Company’s
December 31, 2016 audited consolidated financial statements as of
and for the periods ended December 31, 2016. These
unaudited interim consolidated financial statements as of and for
the three-month periods ended March 31, 2017 and 2016 should be
read in conjunction with the audited consolidated financial
statements as of and for the periods ended December 31, 2016
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016 as filed with the Securities Exchange
Commission on March 21, 2017. There have been no
significant change in the accounting policies as disclosed in the
Company’s Form 10-K.
6
Earnings Per Common Share
Basic and diluted
net income per common share have been computed by dividing net
income for each period by the weighted average number of shares of
common stock outstanding during each period. Diluted net
income per common share reflects the potential dilution that could
occur if outstanding stock options were exercised.
Basic and diluted
net income per common share have been computed based upon net
income as presented in the accompanying unaudited consolidated
statements of income divided by the weighted average number of
common shares outstanding or assumed to be outstanding as
summarized below:
|
Three months
|
|
|
ended
March 31,
|
|
|
2017
|
2016
|
Shares
used in the computation of earnings per share:
|
|
|
Weighted
average number of shares outstanding - basic
|
5,391,169
|
4,545,505
|
Dilutive
effect of restricted shares
|
18,674
|
28,950
|
Weighted
average number of shares outstanding - diluted
|
5,409,843
|
4,574,455
|
Weighted average
anti-dilutive stock options and unvested restricted shares excluded
from the computation of diluted earnings per share are as
follows:
|
Three months
|
|
|
ended March 31,
|
|
|
2017
|
2016
|
Anti-dilutive
stock options
|
-
|
81,500
|
Unvested
restricted shares
|
58,949
|
32,006
|
Comprehensive Income
The Company reports
as comprehensive income all changes in stockholders' equity during
the year from sources other than stockholders. Other comprehensive
income refers to all components (revenues, expenses, gains, and
losses) of comprehensive income that are excluded from net
income.
The Company’s
only two components of other comprehensive income are
unrealized gains and losses on investment securities
available-for-sale, net of income taxes and unrealized gains and
losses on cash flow hedges, net of income taxes. Information
concerning the Company’s accumulated other comprehensive
income as of March 31, 2017 and as of the year ended December 31,
2016, respectively is as follows:
7
|
March 31,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Unrealized
gains on securities available-for-sale
|
$(1,322)
|
$(1,775)
|
Deferred
tax expense
|
506
|
678
|
Other
comprehensive income, net of tax
|
(816)
|
(1,097)
|
Unrealized
losses on cash flow hedges
|
(2,420)
|
(2,792)
|
Deferred
tax benefit
|
910
|
1,049
|
Other
comprehensive loss, net of tax
|
(1,510)
|
(1,743)
|
Total
other accumulated comprehensive income (loss)
|
$(2,326)
|
$(2,840)
|
The accumulated
balances related to each component of other accumulated
comprehensive income (loss) are as follows:
|
|
Unpaid
|
|
|
Unrealized
|
Unrealized
|
|
|
Gains and
|
Gains and
|
|
|
Losses on
|
Losses on
|
|
|
Available-for
|
Cash Flow
|
|
Sale Securities
|
Hedges
|
Total
|
|
Balance
as of December 31, 2016
|
$(1,097)
|
$(1,743)
|
$(2,840)
|
Other
comprehensive income (loss) before reclassification
|
281
|
233
|
514
|
Amounts
reclassified from accumulated other
|
|
|
|
comprehensive
income
|
-
|
-
|
-
|
Net
current-period other comprehensive income (loss)
|
281
|
233
|
514
|
Balance
as of March 31, 2017
|
$(816)
|
$(1,510)
|
$(2,326)
|
|
|
|
|
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)
|
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.
8
In January 2016,
the FASB amended the Financial Instruments topic of the Accounting
Standards Codification (the “ASC”) to address certain
aspects of recognition, measurement, presentation, and disclosure
of financial instruments. The amendments will be effective for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company will
apply the guidance by means of a cumulative-effect adjustment to
the balance sheet as of the beginning of the fiscal year of
adoption. The amendments related to equity securities without
readily determinable fair values will be applied prospectively to
equity investments that exist as of the date of adoption of the
amendments. 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 designation of that hedging
relationship provided that all other hedge accounting criteria
continue to be met. The amendments became effective as of January
1, 2017. The amendments did not have a material effect
on the Company’s 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. Additionally, the guidance simplifies two areas
specific to entities other than public business entities allowing
them apply a practical expedient to estimate the expected term for
all awards with performance or service conditions that have certain
characteristics and also allowing them to make a one-time election
to switch from measuring all liability-classified awards at fair
value to measuring them at intrinsic value. The
amendments will be effective for the Company for annual periods
beginning after December 15, 2016 and interim periods within those
annual periods. The Company does not expect these amendments to
have a material effect on its financial statements.
In June 2016, the
FASB issued guidance to change the accounting for credit losses and
modify the impairment model for certain debt securities. The
amendments will be effective for the Company for reporting periods
beginning after December 15, 2019. The Company is currently
evaluating the effect that implementation of the new standard will
have on its financial position, results of operations, and cash
flows.
In August 2016, the
FASB amended the Statement of Cash Flows topic of the ASC to
clarify how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The amendments will
be effective for the Company for fiscal years beginning after
December 15, 2017 including interim periods within those fiscal
years. The Company does not expect these amendments to have a
material effect on its financial statements.
9
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.
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.
In January 2017,
the FASB issued guidance to clarify the definition of a business
with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The amendment
to the Business Combinations Topic is intended to address concerns
that the existing definition of a business has been applied too
broadly and has resulted in many transactions being recorded as
business acquisitions that in substance are more akin to asset
acquisitions. The guidance will be effective for the Company for
reporting periods beginning after December 15,
2017. Early adoption is permitted. The Company does not
expect these amendments to have a material effect on its financial
statements.
In January 2017,
the FASB updated the Accounting Changes and Error Corrections and
the Investments—Equity Method and Joint Ventures Topics of
the ASC. The ASU incorporates into the ASC recent SEC guidance
about disclosing, under SEC SAB Topic 11.M, the effect on financial
statements of adopting the revenue, leases, and credit losses
standards. The ASU was effective upon issuance. The amendments did
not have a material effect on the Company’s financial
statements.
In February 2017,
the FASB amended the Other Income Topic of the ASC to clarify the
scope of the guidance on nonfinancial asset derecognition as well
as the accounting for partial sales of nonfinancial assets. The
amendments conform the derecognition guidance on nonfinancial
assets with the model for transactions in the new revenue standard.
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 2017, the
FASB amended the requirements in the
Receivables—Nonrefundable Fees and Other Costs Topic of the
ASC related to the amortization period for certain purchased
callable debt securities held at a premium. The amendments shorten
the amortization period for the premium to the earliest call date.
The amendments will be effective for the Company for interim and
annual periods beginning after December 15, 2018. Early adoption is
permitted. 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.
10
Reclassifications
Certain amounts in
the 2016 financial statements have been reclassified to conform to
the 2017 presentation. The reclassifications had no effect on total
assets, net income or stockholders' equity as previously
reported.
NOTE 3 - INVESTMENT SECURITIES
The following is a
summary of the securities portfolio by major classification at
March 31, 2017 and
December 31, 2016:
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
(in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
March 31, 2017
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$16,451
|
$69
|
$101
|
$16,419
|
Collateralized
mortgage obligations
|
40,230
|
283
|
245
|
40,268
|
Mortgage-backed
securities
|
74,170
|
254
|
1,496
|
72,928
|
Municipal
bonds
|
60,803
|
566
|
632
|
60,737
|
Other
|
3,676
|
24
|
44
|
3,656
|
|
$195,330
|
$1,196
|
$2,518
|
$194,008
|
|
|
Gross
|
Gross
|
|
|
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
|
The fair values of
securities available-for-sale at March 31, 2017 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
|
$-
|
$-
|
$-
|
$16,419
|
$-
|
$16,419
|
Collateralized
mortgage obligations
|
-
|
-
|
-
|
40,268
|
-
|
40,268
|
Mortgage-backed
securities
|
-
|
7,528
|
8,031
|
57,369
|
-
|
72,928
|
Municipal
bonds
|
-
|
2,239
|
6,191
|
52,307
|
-
|
60,737
|
Other
|
-
|
-
|
1,500
|
-
|
2,156
|
3,656
|
|
$-
|
$9,767
|
$15,722
|
$166,363
|
$2,156
|
$194,008
|
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 as of March 31, 2017 and December 31,
2016:
11
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
|||
(in thousands)
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
March 31, 2017
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Securities
available-for-sale:
|
|
|
|
|
|
|
U.S.
Agency obligations
|
$10,030
|
$101
|
$-
|
$-
|
$10,030
|
$101
|
Collateralized
mortgage obligations
|
17,296
|
245
|
-
|
-
|
17,296
|
245
|
Mortgage-backed
securities
|
57,067
|
1,496
|
-
|
-
|
57,067
|
1,496
|
Municipal
bonds
|
31,191
|
632
|
-
|
-
|
31,191
|
632
|
Other
|
2,107
|
44
|
-
|
-
|
2,107
|
44
|
Total
temporarily impaired
|
|
|
|
|
|
|
securities
|
$117,691
|
$2,518
|
$-
|
$-
|
$117,691
|
$2,518
|
|
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
|
The table below
summarizes the number of investment securities in an unrealized
loss position:
|
March 31,
|
December 31,
|
Available-for-sale:
|
2017
|
2016
|
U.S.
Agency obligations
|
5
|
5
|
Collateralized
mortgage obligations
|
6
|
6
|
Mortgage-backed
securities
|
13
|
13
|
Municipal
bonds
|
49
|
53
|
Other
|
1
|
1
|
|
74
|
78
|
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 2017 or
2016 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.
The following table
summarizes securities gains for the periods
presented:
12
|
Three months
|
|
|
ended March 31,
|
|
(in thousands)
|
2017
|
2016
|
Gross
gains on sales of securities available for sale
|
$-
|
$136
|
Gross
losses on sales of securities available for sale
|
-
|
(51)
|
Securities with a
fair value of $73.2 million and $75.8 million were pledged as of
March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31,
2016:
|
March 31,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Construction
and land development
|
$78,552
|
$79,738
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential
|
391,795
|
365,569
|
Owner
occupied
|
193,291
|
186,892
|
Multifamily,
nonresidential and junior liens
|
91,368
|
89,191
|
Total
commercial real estate
|
676,454
|
641,652
|
Consumer
real estate:
|
|
|
Home
equity lines
|
86,550
|
87,489
|
Secured
by 1-4 family residential, secured by first deeds of
trust
|
208,504
|
195,343
|
Secured
by 1-4 family residential, secured by second deeds of
trust
|
4,247
|
4,289
|
Total
consumer real estate
|
299,301
|
287,121
|
Commercial
and industrial loans (except those secured by real
estate)
|
162,580
|
170,709
|
Consumer
and other
|
13,580
|
11,542
|
Total
loans
|
1,230,467
|
1,190,762
|
Deferred
loan (fees) costs
|
486
|
518
|
Allowance
for loan losses
|
(8,125)
|
(7,909)
|
Net
loans
|
$1,222,828
|
$1,183,371
|
A further breakdown
of the make-up of the construction and development and commercial
real estate portfolio at March 31, 2017 and December 31, 2016 is as
follows:
13
|
March 31,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Construction
and land development:
|
|
|
Land
|
$12,604
|
$12,595
|
Residential
|
34,144
|
36,253
|
Commercial
|
31,804
|
30,890
|
Total
construction and land development
|
$78,552
|
$79,738
|
|
|
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential:
|
|
|
Office
|
$121,702
|
$108,228
|
Industrial
|
36,963
|
36,264
|
Hotel/motel
|
28,166
|
28,453
|
Retail
|
177,198
|
165,434
|
Special
purpose/Other
|
27,766
|
27,190
|
Total
commercial real estate
|
391,795
|
365,569
|
Owner
occupied :
|
|
|
Office
|
62,607
|
60,500
|
Industrial
|
49,478
|
46,876
|
Retail
|
31,491
|
31,085
|
Special
purpose/Other
|
49,715
|
48,431
|
Total
owner occupied
|
193,291
|
186,892
|
|
|
|
Multifamily,
nonresidential and junior liens
|
91,368
|
89,191
|
Total
commercial real estate
|
$676,454
|
$641,652
|
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.
Changes in the
allowance for loan losses for the three months ended March 31, 2017
and 2016 were as follows:
14
|
|
|
|
Commercial
|
|
|
|
|
|
|
& Industrial
|
|
|
|
Construction
|
|
Consumer
|
Loans Not
|
|
|
|
and Land
|
Commercial
|
Real
|
Secured By
|
Consumer
|
Total
|
(in thousands)
|
Development
|
Real Estate
|
Estate
|
Real Estate
|
& Other
|
Loans
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
Beginning
balance
|
$486
|
$3,719
|
$1,901
|
$1,727
|
$76
|
$7,909
|
Provision
for loan losses
|
(5)
|
221
|
38
|
(114)
|
19
|
159
|
Loans
charged off
|
-
|
-
|
-
|
(10)
|
(13)
|
(23)
|
Recoveries
|
9
|
28
|
-
|
43
|
-
|
80
|
Net
(chargeoffs) recoveries
|
9
|
28
|
-
|
33
|
(13)
|
57
|
Ending
balance
|
$490
|
$3,968
|
$1,939
|
$1,646
|
$82
|
$8,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
|
|
|
|
|
Beginning
balance
|
$509
|
$3,156
|
$2,046
|
$1,786
|
$144
|
$7,641
|
Provision
for loan losses
|
(215)
|
(121)
|
(77)
|
(7)
|
420
|
-
|
Loans
charged off
|
-
|
-
|
-
|
-
|
-
|
-
|
Recoveries
|
229
|
37
|
3
|
11
|
10
|
290
|
Net
(chargeoffs) recoveries
|
229
|
37
|
3
|
11
|
10
|
290
|
Ending
balance
|
$523
|
$3,072
|
$1,972
|
$1,790
|
$574
|
$7,931
|
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 March
31, 2017 and December 31, 2016 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
|
March 31, 2017
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$-
|
$-
|
$112
|
$287
|
$-
|
$399
|
Collectively
evaluated for impairment
|
490
|
3,968
|
1,827
|
1,359
|
82
|
7,726
|
Total
ending allowance
|
$490
|
$3,968
|
$1,939
|
$1,646
|
$82
|
$8,125
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$121
|
$829
|
$714
|
$1,053
|
$-
|
$2,717
|
Collectively
evaluated for impairment
|
78,431
|
675,625
|
298,587
|
161,527
|
13,580
|
1,227,750
|
Total
ending loans
|
$78,552
|
$676,454
|
$299,301
|
$162,580
|
$13,580
|
$1,230,467
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$-
|
$-
|
$223
|
$286
|
$-
|
$509
|
Collectively
evaluated for impairment
|
486
|
3,719
|
1,678
|
1,441
|
76
|
7,400
|
Total
ending allowance
|
$486
|
$3,719
|
$1,901
|
$1,727
|
$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
|
15
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 three 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 $2.7 million and $3.2 million at March 31, 2017 and
December 31, 2016, respectively. Included in the $2.7 million at
March 31, 2017 are $1.5 million of loans classified as troubled
debt restructurings (“TDRs”). Included in the $3.2
million at December 31, 2016 are $1.3 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
March 31, 2017 and December 31, 2016:
|
March 31,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Performing
TDRs:
|
|
|
Commercial
real estate
|
$519
|
$520
|
Consumer
real estate
|
335
|
338
|
Commercial
and industrial loans
|
297
|
297
|
Total
performing TDRs
|
1,151
|
1,155
|
|
|
|
Nonperforming
TDRs:
|
|
|
Construction
and land development
|
121
|
125
|
Consumer
real estate
|
191
|
58
|
Total
nonperformingTDRs
|
312
|
183
|
Total
TDRs
|
$1,463
|
$1,338
|
During the first
three months of 2017, one new consumer real estate loan of $133,000
was identified as a TDR. This loan was considered a TDR
due to restructuring of the payment terms in response to a downturn
in the business. The loan is current under its
restructured payment terms.
Of the six loans
that were identified as TDRs as of December 31, 2016 all six remain
TDRs as of March 31, 2017. None have gone into default
and all are current under their restructured payment
terms.
In order to
quantify the value of any impairment, the Company evaluates loans
individually. At March 31, 2017, the Company had $2.7
million of impaired loans. The detail of loans evaluated
for impairment as of March 31, 2017 is presented
below:
16
|
|
Unpaid
|
|
|
|
Contractual
|
|
|
Recorded
|
Principal
|
Allocated
|
March 31, 2017
|
Investment
|
Balance
|
Allowance
|
Loans
without a specific valuation allowance:
|
|
|
|
Construction
and land development
|
$121
|
$195
|
$-
|
Commercial
real estate
|
829
|
830
|
-
|
Loans
with a specific valuation allowance:
|
|
|
|
Consumer
real estate
|
714
|
769
|
112
|
Commercial
and industrial loans (except
|
|
|
|
those
secured by real estate)
|
1,053
|
1,084
|
287
|
Total
|
$2,717
|
$2,878
|
$399
|
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
|
|
|
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
|
The average
recorded investment balance of impaired loans for the three-month
period ending March 31, 2017 and 2016 are as follows:
|
Three months ended March 31,
|
|||
|
2017
|
2016
|
||
|
Average
|
Interest
|
Average
|
Interest
|
(in thousands)
|
Balance
|
Income
|
Balance
|
Income
|
Construction
and land development
|
$124
|
$-
|
$232
|
$-
|
Commercial
real estate
|
832
|
37
|
2,152
|
57
|
Consumer
real estate
|
730
|
24
|
408
|
17
|
Commercial
and industrial loans
|
1,079
|
42
|
565
|
23
|
Consumer
and other
|
-
|
-
|
21
|
-
|
|
$2,765
|
$103
|
$3,378
|
$97
|
When the Company
cannot reasonably expect full and timely repayment of its loan, the
loan is placed on nonaccrual status. The Company will continue to
track the contractual interest for purposes of customer reporting
and any potential litigation or later collection of the loan but
accrual of interest for the Company’s financial statement
purposes is to be discontinued. Subsequent payments of
interest can be recognized as income on a cash basis provided that
full collection of principal is expected. Otherwise, all
payments received are to be applied to principal only. At the time
of nonaccrual, past due or accrued interest is reversed from
income.
17
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 March 31, 2017 and December 31, 2016:
|
Nonaccrual
|
|
|
March 31,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Construction
and land development
|
$121
|
$125
|
Commercial
real estate
|
-
|
783
|
Consumer
real estate
|
379
|
-
|
Commercial
and industrial loans
|
-
|
60
|
Total
|
$500
|
$968
|
There were no loans
90 days or more past due and accruing interest at March 31, 2017 or
December 31, 2016.
The following table
presents the aging of the recorded investment in past due loans as
of March 31, 2017 and December 31, 2016 by portfolio
segment:
(in
thousands)
March 31, 2017
|
30-59 Days Past Due
|
60-89 Days Past Due
|
Greater than 90 Days Past
Due
|
Non-Accrual
|
Total Past Due
|
Current
|
Total Loans
|
Construction
and land development
|
$-
|
$-
|
$-
|
$121
|
$121
|
$78,431
|
$78,552
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
676,454
|
676,454
|
Consumer
real estate
|
693
|
-
|
-
|
379
|
1,072
|
298,229
|
299,301
|
Commercial
and industrial loans
|
-
|
59
|
-
|
-
|
59
|
162,521
|
162,580
|
Consumer
and other
|
-
|
-
|
-
|
-
|
-
|
13,580
|
13,580
|
Total
|
$693
|
$59
|
$-
|
$500
|
$1,252
|
$1,229,215
|
$1,230,467
|
(in
thousands)
December 31, 2016
|
30-59
Days Past Due
|
60-89
Days Past Due
|
Greater
than 90 Days Past Due
|
Non-Accrual
|
Total
Past Due
|
Current
|
Total
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
|
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 levels of concentrations
(as applicable). As risk grades increase, additional reserves are
applied stated in basis points in order to account for the added
inherent risk.
18
The Company
categorizes all loans into risk categories based on relevant
information about the ability of borrowers to service their debt
such as: current financial information, historical payment
experience, credit documentation, public information, and current
economic trends, among other factors. The Company analyzes loans
individually by setting the risk grade at the inception of a loan
through the approval process. A certain percentage of
loan dollars is reviewed each year by a third party loan review
function. The risk rating process is inherently
subjective and based upon management’s evaluation of the
specific facts and circumstances for individual borrowers. As such,
the assigned risk ratings are subject to change based upon changes
in borrower status and changes in the external environment
affecting the borrower. The Company uses the following definitions
for risk ratings:
●
Risk Grade 2 – Modest - Loans to
borrowers of significantly better than average financial strength
or loans secured by readily marketable
securities. Earnings performance is consistent and
primary and secondary sources of repayment are well established.
The borrower exhibits excellent asset quality and liquidity
with very strong debt servicing capacity and coverage.
Company management has depth, is experienced and
well-regarded in the industry.
●
Risk Grade 3 – Average - Loans in
this category are to borrowers of satisfactory financial strength.
Earnings performance is consistent. Primary and secondary sources
of repayment are well-defined and adequate to retire the debt in a
timely and orderly fashion. These borrowers would generally exhibit
satisfactory asset quality and liquidity. They have moderate
leverage and experienced management in key positions.
●
Risk Grade 4 – Acceptable - Loans
in this category are to borrowers involving more than average risk
which contain certain characteristics that require some supervision
and attention by the lender. Asset quality is acceptable, but
debt capacity is modest. Little excess liquidity is available. The
borrower may be fully leveraged and unable to sustain major
setbacks. Covenants are structured to ensure adequate
protection. Management may have limited experience and depth. This
category includes loans which are highly leveraged transactions due
to regulatory constraints and also includes loans involving
reasonable exceptions to policy.
●
Risk Grade 5 - Acceptable with Care - A
loan in this category is sound and collectible but contains
considerable risk. Although asset quality remains acceptable,
the borrower has a smaller and/or less diverse asset base, very
little liquidity and limited debt capacity. Earnings performance is
inconsistent and the borrower is not strong enough to sustain major
setbacks. The borrower may be highly leveraged and below
average size or a lower-tier competitor. There might be
limited management experience and depth. These loans may be
to a well-conceived start-up venture but repayment is still
dependent upon a successful operation. This category includes
loans with significant documentation or policy exceptions, improper
loan structure, or inadequate loan servicing procedures and may
also include a loan in which strong reliance for a secondary
repayment source is placed on a guarantor who exhibits the ability
and willingness to repay or loans which are highly leveraged
transactions due to the obligor’s financial status.
●
Risk Grade 6 - Special Mention or Critical
- Loans in this category have potential weaknesses which
may, if not checked or corrected, weaken the asset or inadequately
protect the Company’s credit position at some future
date. These may also include loans of marginal quality
and liquidity that if not corrected may jeopardize the liquidation
of the debt and the Company’s credit
position. These loans require close supervision and must
be monitored to ensure there is not a pattern of deterioration in
the credit that may lead to further downgrade. These
characteristics include but are not limited to:
o
Repayment
performance has not been demonstrated to prudent
standards;
o
Repayment
performance is inconsistent and highly sensitive to business and
operating cycle swings;
o
Fatal documentation
errors and;
●
Risk Grade 7 – Substandard - A
substandard loan is inadequately protected by the current sound net
worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans classified as substandard have a
well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the
deficiencies are not corrected.
●
Risk Grade 8 – Doubtful - Loans
classified doubtful have all the weaknesses inherent in loans
classified substandard, plus the added characteristic that the
weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions, and values highly
questionable and improbable. However, these loans are not yet rated
as loss because certain events may occur which would salvage the
debt. Among these events are:
o
Injection of
capital;
o
Alternative
financing;
o
Liquidation of
assets or the pledging of additional
collateral.
The ability of the
borrower to service the debt is extremely weak, overdue status is
constant, the debt has been placed on nonaccrual status and no
definite repayment schedule exists. Doubtful is a temporary grade
where a loss is expected but is presently not quantified with any
degree of accuracy. Once the loss position is determined, the
amount is charged off. There were no loans rated as doubtful as
of March 31, 2017 or December 31, 2016.
●
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 effected 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 March 31, 2017 or December 31,
2016.
19
As of March 31,
2017 and December 31, 2016 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
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$-
|
$329
|
$1,316
|
$25,306
|
$51,296
|
$184
|
$121
|
$78,552
|
Commercial
real estate
|
-
|
182
|
234,298
|
333,565
|
90,141
|
18,268
|
-
|
676,454
|
Consumer
real estate
|
49
|
21,852
|
141,064
|
102,594
|
32,223
|
1,140
|
379
|
299,301
|
Commercial
and industrial loans
|
2,957
|
1,300
|
27,306
|
100,121
|
28,746
|
103
|
2,047
|
162,580
|
Consumer
and other
|
1,165
|
3,470
|
1,270
|
6,586
|
1,089
|
-
|
-
|
13,580
|
Total
|
$4,171
|
$27,133
|
$405,254
|
$568,172
|
$203,495
|
$19,695
|
$2,547
|
$1,230,467
|
|
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
|
Loans with a
carrying value of $1.02 billion and $997.6 million were pledged as
of March 31, 2017 and December 31, 2016, respectively, to secure
lines of credit with the Federal Reserve and the Federal Home Loan
Bank.
NOTE 5 - OFF-BALANCE SHEET RISK
The Company is a
party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of
financial instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to
extend credit are agreements to lend to a customer as long as there
is no violation of conditions established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company, upon extension of
credit is based on management’s credit evaluation of the
borrower. Collateral obtained varies but may include real estate,
stocks, bonds, and certificates of deposit.
A summary of the
contract amounts of the Company’s exposure to off-balance
sheet credit risk as of March 31, 2017 and December 31, 2016 is as
follows:
|
March 31,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Financial
instruments whose contract amounts
|
|
|
represent
credit risk:
|
|
|
Undisbursed
lines of credit
|
$241,791
|
$216,769
|
Standby
letters of credit
|
4,902
|
3,904
|
Total
|
$246,693
|
$220,673
|
20
NOTE 6 - DERIVATIVES AND FINANCIAL INSTRUMENTS
To mitigate
exposure to variability in expected future cash flows resulting
from changes in interest rates, in May 2013 the Company entered
into two forward swap arrangements (the “Swaps”)
whereby the Company would pay fixed rates on two short-term
borrowings at some point in the future for a determined period of
time. For both agreements, the Company would renew
advances with the Federal Home Loan Bank (“FHLB”) for
3-month terms as a primary funding source and pay the prevailing
3-month rate. The first swap, a “2-5 Swap”,
was a $20 million agreement whereby 2 years from the May 2013
execution date, the Company would begin to swap out the 3-month
FHLB advance pricing at that date for a fixed rate of 1.964% for a
period of 5 years. The second swap, a “3-5
Swap”, was similar in terms except that it was a $30 million
agreement whereby 3 years from the May 2013 execution date, the
Company would begin to swap out the 3-month FHLB advance pricing at
that date for a fixed rate of 2.464% for a period of 5
years.
The Company
designated the forward-starting interest rate swaps (the hedging
instruments) as cash flow hedges of the risk of changes
attributable to the benchmark 3-Month LIBOR interest rate risk for
the forecasted issuances of FHLB advances arising from a rollover
strategy. The Company intended to sequentially issue a
series of 3-month fixed rate debt as part of a planned roll-over of
short-term debt for the next seven to eight years.
In September 2014,
as a result of continued increasing fixed rate exposure, the
Company determined that an additional strategy was needed and, as a
result, exited from the Swaps for a deferred gain of $372,000. In
their place, the Company purchased three interest rate caps with a
strike price of 3-month LIBOR at 0.50% and a five-year
term. The instruments hedged were $100 million of
FHLB borrowings maturing quarterly on the same reset
dates. The Company executed three separate agreements
with notational amounts 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 March 31, 2017 and December 31, 2016:
|
March 31, 2017
|
December 31, 2016
|
||
|
Notational
|
Fair
|
Notational
|
Fair
|
(in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
Included
in other assets:
|
|
|
|
|
Cap
1 - maturing August 2019
|
$35,000
|
$1,007
|
$35,000
|
$1,011
|
Cap
2 - maturing September 2019
|
35,000
|
1,035
|
35,000
|
1,045
|
Cap
3 - maturing October 2019
|
30,000
|
944
|
30,000
|
929
|
|
$100,000
|
$2,986
|
$100,000
|
$2,985
|
Remaining
amortization of the premium on the interest rate caps is as
follows:
(in thousands)
|
|
2017
|
1,407
|
2018
|
2,247
|
2019
|
1,752
|
|
$5,406
|
The Company
recorded $369,000 and $143,000 for the three-month periods ended
March 31, 2017 and 2016, 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.
21
Remaining
amortization of the gain associated with the exit of the Swaps is
as follows:
(in thousands)
|
|
2017
|
55
|
2018
|
74
|
Thereafter
|
148
|
|
$277
|
The Company
realized $19,000 and $8,000 in gains on the Swaps during the
three-month periods ended March 31, 2017 and 2016, respectively,
shown as a reduction of borrowings and repurchase agreements
interest expense.
The Company
anticipates little to no ineffectiveness in this hedging
relationship as long as the terms are matched at each forecasted
debt issuance. The Company notes that the actual
interest cost incurred at each rollover will be a function of
market rates at that time. However, the Company is only
hedging the benchmark interest rate risk in each
rollover.
The Company does
not use derivatives for trading or speculative
purposes.
NOTE 7- FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is a
market-based measurement and is defined as the price that would be
received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement
date. The transaction to sell the asset or transfer the liability
is a hypothetical transaction at the measurement date, considered
from the perspective of a market participant that holds the asset
or owes the liability. In general, the transaction price will equal
the exit price and, therefore, represent the fair value of the
asset or liability at initial recognition. In determining whether a
transaction price represents the fair value of the asset or
liability at initial recognition, each reporting entity is required
to consider factors specific to the transaction and the asset or
liability, the principal or most advantageous market for the asset
or liability, and market participants with whom the entity would
transact in the market.
Outlined below is
the application of the fair value hierarchy applied to the
Company’s financial assets that are carried at fair
value.
Level 1 – Inputs to the valuation
methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the
asset or liability occur with sufficient frequency and volume to
provide pricing information on an ongoing basis. As of March 31,
2017, 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
March 31, 2017, 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
March 31, 2017, the Company valued certain financial assets
including one corporate subordinated debenture, measured on both a
recurring and a non-recurring basis, at fair value hierarchy Level
3.
The Company
utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs.
Fair Value on a Recurring
Basis
The Company
measures certain assets at fair value on a recurring basis, as
described below.
22
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 March 31, 2017 and December
31, 2016, the Company’s derivative instruments consist solely
of interest rate caps.
Below is a table
that presents information about assets measured at fair value on a
recurring basis at March 31, 2017 and December 31,
2016:
|
|
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)
|
March 31, 2017
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$16,419
|
$-
|
$16,419
|
$-
|
Collateralized
mortgage obligations
|
40,268
|
-
|
40,268
|
-
|
Mortgage-backed
securities
|
72,928
|
-
|
72,928
|
-
|
Municipal
bonds
|
60,737
|
-
|
60,737
|
|
Other
|
3,656
|
2,156
|
-
|
1,500
|
|
194,008
|
2,156
|
190,352
|
1,500
|
Interest
rate caps
|
2,986
|
-
|
2,986
|
-
|
Total
assets at fair value
|
$196,994
|
$2,156
|
$193,338
|
$1,500
|
|
|
|
|
|
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
|
23
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 three months ended March 31,
2017.
|
Level 3
|
|
Investment
|
(in thousands)
|
Securities
|
Balance
at December 31, 2016
|
$1,500
|
Purchases
|
-
|
Balance
at March 31, 2017
|
$1,500
|
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
the 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 $2.7 million and $3.2 million at March 31,
2017 and December 31, 2016,
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 loan
losses. Subsequent write-downs are charged to expense in
the period they are incurred.
24
Below is a table
that presents information about assets measured at fair value on a
nonrecurring basis at March 31, 2017 and December 31,
2016:
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(in thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
March 31, 2017
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Impaired
loans
|
$2,318
|
$-
|
$-
|
$2,318
|
Other
real estate owned
|
4,740
|
-
|
-
|
4,740
|
Total
|
$7,058
|
$-
|
$-
|
$7,058
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Impaired
loans
|
$2,712
|
$-
|
$-
|
$2,712
|
Other
real estate owned
|
4,740
|
-
|
-
|
4,740
|
Total
|
$7,452
|
$-
|
$-
|
$7,452
|
For Level 3 assets
and liabilities measured at fair value on a recurring or
nonrecurring basis as of March 31, 2017 and December 31, 2016, the
significant unobservable inputs used in the fair value measurements
were as follows:
|
|
March 31, 2017 and December 31, 2016
|
||||
|
|
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
|
25
The Company
provides certain disclosures 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:
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.
26
Accrued Interest
The carrying amount
is a reasonable estimate of fair value.
FHLB Advances and Other Borrowings
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.
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 March 31, 2017 and December 31,
2016:
|
March 31, 2017
|
||||
|
Carrying
|
Fair Value
|
|||
(in thousands)
|
Amount
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Financial assets:
|
|
|
|
|
|
Cash and due from banks
|
$56,478
|
$56,478
|
$56,478
|
$-
|
$-
|
Investment securities available-for-
|
|
|
|
|
|
sale
|
194,008
|
194,008
|
2,156
|
190,352
|
1,500
|
Loans, net
|
1,222,828
|
1,224,002
|
-
|
1,221,684
|
2,318
|
Accrued interest receivable
|
4,403
|
4,403
|
4,403
|
-
|
-
|
Federal Home Loan Bank stock
|
5,603
|
5,603
|
-
|
-
|
5,603
|
Bank-owned life insurance
|
34,448
|
34,448
|
-
|
34,448
|
-
|
Interest rate caps
|
2,986
|
2,986
|
-
|
2,986
|
-
|
Financial liabilities:
|
|
|
|
|
|
Non-maturing deposits
|
1,071,609
|
1,071,609
|
-
|
1,071,609
|
-
|
Time deposits
|
193,249
|
193,425
|
-
|
193,425
|
-
|
Accrued interest payable
|
256
|
256
|
256
|
-
|
-
|
Repurchase agreements and
|
|
|
|
|
|
federal funds purchased
|
19,529
|
19,529
|
-
|
19,529
|
-
|
FHLB Advances and other borrowings
|
100,000
|
100,012
|
-
|
100,012
|
-
|
Subordinated debt
|
18,558
|
14,197
|
-
|
14,197
|
-
|
27
|
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
|
-
|
NOTE 8 – SUPPLEMENTAL CASH FLOW DISCLOSURE
|
For the three-months
|
|
|
ended March 31,
|
|
(in thousands)
|
2017
|
2016
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
Interest
paid
|
$2,351
|
$1,939
|
|
|
|
Income
taxes paid
|
$-
|
$1,035
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing Activites:
|
|
|
|
|
|
Change
in fair value of securities available-for-sale, net of
taxes
|
$281
|
$563
|
|
|
|
Change
in fair value of cash flow hedges, net of taxes
|
$233
|
$(975)
|
28
NOTE 9 – 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 balance at March 31, 2017.
NOTE 10 – Issuances of Common Stock
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 11 – Subsequent Events
On April 26, 2017,
the Company and the Bank entered into an Agreement and Plan of
Reorganization (the “Merger Agreement”) with TowneBank
and TB Acquisition, LLC (“TB Acquisition”). Pursuant to
the terms of the Merger Agreement, the Company will merge with and
into TB Acquisition (the “Merger”) and the Bank will
subsequently merge with and into TowneBank (the “Bank
Merger” and, together with the Merger, the
“Transaction”). TB Acquisition will be the surviving
entity in the Merger and TowneBank will be the surviving entity in
the Bank Merger. Under the terms of the Merger Agreement, the
Company’s stockholders will be entitled to receive 1.7250
shares of TowneBank common stock for each share of the
Company’s common stock. The Company and TowneBank anticipate
that the Transaction will close in the fourth quarter of 2017,
subject to customary closing conditions, including stockholder and
regulatory approvals. The Merger Agreement was approved by the
boards of directors of the Company, the Bank, and
TowneBank.
29
Item
2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Paragon Commercial
Corporation (the “Company” or “Paragon”) is
a bank holding company incorporated under the laws of North
Carolina and headquartered in Raleigh, North Carolina. The Company
conducts its business operations primarily through its wholly owned
subsidiary, Paragon Bank (the “Bank”), a full-service,
state-chartered community bank with 3 locations in Raleigh,
Charlotte and Cary, North Carolina. Paragon Bank provides banking
services to businesses and consumers across the
Carolinas.
Because the Company
has no material operations and conducts no business on its own
other than owning its subsidiary, the discussion contained in this
management’s discussion and analysis concerns primarily the
business of Paragon Bank. For ease of reading and because the
financial statements are presented on a consolidated basis, Paragon
Commercial Corporation and Paragon Bank are collectively referred
to herein as “the Company,” “we”,
“our”, or “us”, unless otherwise
noted.
Management’s
discussion and analysis is intended to assist readers in
understanding and evaluating the financial condition and
consolidated results of operations of the Company. This discussion
and analysis includes descriptions of significant transactions,
trends and other factors affecting the Company’s operating
results as of March 31, 2017 as compared to December 31, 2016 and
for the three-month periods ended March 31, 2017 and March 31,
2016. This discussion and analysis should be read in conjunction
with the unaudited consolidated financial statements included in
this report and the audited consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2016.
Risks
and Cautionary Statement Regarding Forward-Looking
Statements
This periodic
report on Form 10-Q contains certain “forward-looking
statements” that represent management’s judgments
concerning the future and are subject to risks and uncertainties
that could cause the Company’s actual operating results and
financial position to differ materially from those projected in the
forward-looking statements. These statements are included
throughout this report and relate to, among other things our
business strategy, goals, and expectations concerning our market
position, future operations, margins, profitability, liquidity, and
capital resources. Additional statements regarding the proposed
merger with TowneBank relate to, among other things, the timing of
the proposed merger and whether the proposed merger will occur; the
benefits, results and effects of the proposed merger; and the
combined company's plans, objectives, expectations, costs, and the
effect on earnings per share. Such forward-looking statements can
be identified by the use of forward-looking terminology such as
“may,” “will,” “anticipate,”
“should,” “would,” “project,”
“future,” “strategy,”
“believe,” “contemplate,”
“expect,” “estimate,”
“continue,” “intend,” “seeks,”
or other similar words and expressions of the future.
Risks and other
factors that could cause actual results to differ materially from
those expected include the following:
●
costs and
difficulties related to the proposed merger, including, among other
things, the integration of our business with TowneBank, the
inability to retain key personnel, competitive response to the
proposed merger, or potential adverse reactions to changes in
business or employee relationships could be more significant than
we anticipate, resulting in higher costs or reduced
benefits;
30
●
failure of the
merger to be completed on the proposed terms and schedule, or at
all;
●
business
uncertainties and contractual restrictions during the pendency of
the merger and management distraction;
●
risks associated
with any change in management, strategic direction, business plan,
or operations;
●
local economic
conditions affecting retail and commercial real
estate;
●
disruptions in the
credit markets;
●
changes in interest
rates;
●
adverse
developments in the real estate market affecting the value and
marketability of collateral securing loans made by the
Company;
●
the failure of
assumptions underlying loan loss and other reserves;
and
●
competition and the
risk of new and changing regulation.
Additional factors
that could cause actual results to differ materially are discussed
in the Risk Factors section of this report and in the
Company’s other filings with the SEC. The forward-looking
statements in this report speak only as of the date hereof, and the
Company does not assume any obligation to update such
forward-looking statements, except as may otherwise be required by
law.
GAAP
Reconciliation and Management Explanation of Non-GAAP Financial
Measures
Some of the
financial measures included in this report are not measures of
financial performance recognized by generally accepted accounting
principles in the United State of America (“GAAP”).
These non-GAAP financial measures are “tangible
stockholders’ equity,” “tangible book value per
share,” “tangible average equity to tangible average
assets,” and “efficiency ratio.” Our management
uses these non-GAAP financial measures in its analysis of our
performance and because of market expectations of use of these
ratios to evaluate the Company. Management believes each
of these non-GAAP financial measures provides useful information
about our financial condition and results of operation. As noted
below, the efficiency ratio shows the amount of revenue generated
for each dollar spent and provides investors with a measure of our
productivity. We also believe the presentation of tangible
stockholders’ equity, tangible book value per share, tangible
equity to risk-weighted assets and tangible average equity to
tangible average assets would provide investors with a clear
picture of our assets and equity. However, because the Company has
not consummated any merger transactions and does not use any
derivatives that might give rise to an intangible asset, there is
no difference in tangible equity or assets and GAAP equity or
assets.
●
“Efficiency
ratio” is defined as total non-interest expense divided by
adjusted operating revenue. Adjusted operating revenue is equal to
net interest income (taxable equivalent) plus non-interest income,
adjusted to exclude the impacts of gains and losses on the sale of
securities and gains and losses on the sale or write-down of
foreclosed real estate. We believe the efficiency ratio is
important as an indicator of productivity because it shows the
amount of revenue generated by our core operations for each dollar
spent. While the efficiency ratio is a measure of productivity, its
value reflects the attributes of the business model we
employ.
31
|
Three-Month Periods
|
|
|
Ended March 31,
|
|
(Dollars
in thousands)
|
2017
|
2016
|
Efficiency Ratio
|
|
|
Non-interest
expense
|
$7,612
|
$6,600
|
|
|
|
Net
interest taxable equivalent income
|
$12,649
|
$10,853
|
Non-interest
income
|
503
|
266
|
Less:
gain on investment securities
|
-
|
(85)
|
Plus:
loss on sale or writedown of foreclosed real estate
|
-
|
212
|
Adjusted
operating revenue
|
$13,152
|
$11,246
|
|
|
|
Efficiency
ratio
|
57.88%
|
58.69%
|
Executive
Overview of Recent Financial Performance
●
Net income
available to common stockholders totaled $3.4 million, an 18.2%
improvement from $2.8 million in the first quarter
(“Q1”) of 2016. On a per share basis, net
income was unchanged at $0.62 per diluted common share in Q1
of 2017 and 2016.
●
Return on average
assets equaled 0.86 % in Q1 2017 and 2016 while return on average
equity equaled 9.72 % in Q1 2017 compared to 11.46% for the same
period in 2016.
●
The efficiency
ratio, which represents operating expenses to total operating
revenues, improved to 57.88% in Q1 2017 from 58.69% in Q1
2016.
●
The Company had net
recoveries of charged-off loans of $57,000 in Q1 2017, compared to
net recoveries of charged-off loans of $290,000 in Q1
2016.
●
Annualized net loan
growth was 13.3% in Q1 2017, resulting from net loan originations
during the quarter of $39.7 million.
Proposed Merger
with TowneBank
On April 26, 2017,
the Company and the Bank entered into an Agreement and Plan of
Reorganization (the “Merger Agreement”) with TowneBank
and TB Acquisition, LLC (“TB Acquisition”). Pursuant to
the terms of the Merger Agreement, the Company will merge with and
into TB Acquisition (the “Merger”) and the Bank will
subsequently merge with and into TowneBank (the “Bank
Merger” and, together with the Merger, the
“Transaction”). TB Acquisition will be the surviving
entity in the Merger and TowneBank will be the surviving entity in
the Bank Merger. The Company and TowneBank anticipate that the
Transaction will close in the fourth quarter of 2017, subject to
customary closing conditions, including stockholder and regulatory
approvals. Under the terms of the Merger Agreement, the
Company’s stockholders will be entitled to receive 1.7250
shares of TowneBank common stock for each share of the
Company’s common stock.
32
Analysis
of Results of Operations
First Quarter 2017 compared to First Quarter 2016
During the
three-month period ended March 31, 2017, the Company had net income
of $ 3.4 million compared to net income of $2.8 million for the
same period in 2016. Both basic and diluted net income per share
for the quarter ended March 31, 2017 were $0.62, unchanged for the
same period in 2016. On a quarter-over-quarter basis, net income
was impacted in 2017 primarily by an increase in net interest
income, which grew $1.8 million year over year. In
addition, the Company recorded a $159,000 loan loss provision in
the first quarter of 2017 compared to no provision booked for the
three months ended March 31, 2016. The increase in provision is
primarily attributable to growth in the loan
portfolio. Net income was negatively impacted by an
increase in personnel expenses of $595,000 due to 15% personnel
growth. Earnings were also negatively impacted by an increase of
$146,000 in data processing expenses as a result of a several
nonrecurring projects during the quarter and the increased cost as
a result of growth in accounts.
As discussed in
greater detail below, the improvements in the results of operations
in the first three months of 2017 compared to the same period of
2016 primarily reflects the benefit of balance sheet growth period
over period.
Net
Interest Income
First Quarter 2017 compared to First Quarter 2016
Like most financial
institutions, the primary component of earnings for the Company is
net interest income. Net interest income is the difference between
interest income, principally from loans and investment securities
portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result
from changes in volume, spread and margin. For this purpose, volume
refers to the average dollar level of interest-earning assets and
interest-bearing liabilities, spread refers to the difference
between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities, and margin refers to
net interest income divided by average interest-earning assets.
Margin is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities, as well
as by the levels on non-interest bearing liabilities and
capital.
Net interest income
increased by $1.8 million to $12.3 million for the three months
ended March 31, 2017 from $10.6 million in the same period in
2016. The Company’s total interest income was
impacted by an increase in interest earning assets. Average total
interest-earning assets were $1.49 billion in the first quarter of
2017 compared with $1.23 billion in the same period in
2016. The yield on those assets was 4.07% in the first
quarter of 2017 compared to 4.17% for the same period in
2016. The decline in yield was primarily the result of
higher average balances on lower yielding cash as a result of the
volatility of several large deposit customers. Average
earning cash increased from $35.4 million in the first quarter of
2016 to $75.7 million for the same quarter in
2017. Meanwhile, average interest-bearing liabilities
increased by $143,000 from $1.05 billion for the three months ended
March 31, 2016 to $1.20 billion for the same period ended March 31,
2017. Due to Federal Reserve Bank rate increases in December 2016
and March 2017, the Company’s cost of these funds increased
by 5 basis points year over year to 0.78% from 0.73% in the first
quarter of 2016. Additional cause for the increase was
the escalating cost of the amortization of the interest rate
cap. During the three-month period ended March 31, 2017,
the Company’s net interest margin was 3.44% and net interest
spread was 3.28%. In the first quarter of 2016, net
interest margin was 3.54% and net interest spread was
3.43%.
33
The following table
summarizes the major components of net interest income and the
related yields and costs for the quarterly periods
presented.
|
For the Three Months Ended March 31,
|
|||||
|
2017
|
2016
|
||||
|
Average
|
|
Average
|
Average
|
|
Average
|
(Dollars in thousands)
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Loans,
net of allowance (1)
|
$1,209,314
|
$13,070
|
4.38%
|
$1,019,396
|
$11,190
|
4.41%
|
Investment
securities (2)
|
207,155
|
1,733
|
3.39%
|
177,846
|
1,521
|
3.44%
|
Other
interest-earning assets
|
75,712
|
159
|
0.85%
|
35,477
|
58
|
0.66%
|
Total interest-earning assets
|
1,492,181
|
14,962
|
4.07%
|
1,232,719
|
12,769
|
4.17%
|
Other
assets
|
65,649
|
|
|
90,715
|
|
|
Total assets
|
$1,557,830
|
|
|
$1,323,434
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$204,486
|
195
|
0.39%
|
$140,388
|
140
|
0.40%
|
Money
markets
|
529,718
|
879
|
0.67%
|
402,430
|
717
|
0.72%
|
Time
deposits less than $100,000
|
11,445
|
30
|
1.06%
|
223,622
|
376
|
0.68%
|
Time
deposits greater than or
|
|
|
|
|
|
|
equal
to $100,000
|
200,119
|
481
|
0.97%
|
68,650
|
191
|
1.12%
|
Borrowings
|
250,301
|
728
|
1.18%
|
218,739
|
492
|
0.90%
|
Total interest-bearing liabilities
|
1,196,069
|
2,313
|
0.78%
|
1,053,829
|
1,916
|
0.73%
|
Noninterest-bearing
deposits
|
219,242
|
|
|
159,129
|
|
|
Other
liabilities
|
4,514
|
|
|
11,430
|
|
|
Stockholders
equity
|
138,005
|
|
|
99,046
|
|
|
Total liabilities and stockholders
|
|
|
|
|
|
|
equity
|
$1,557,830
|
|
|
$1,323,434
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate
|
|
|
|
|
|
|
spread (taxable-equivalent basis) (3)
|
|
$12,649
|
3.29%
|
|
$10,853
|
3.43%
|
|
|
|
|
|
|
|
Net interest margin (taxable-
|
|
|
|
|
|
|
equivalent basis) (4)
|
|
|
3.44%
|
|
|
3.54%
|
|
|
|
|
|
|
|
Ratio of interest-bearing assets to
|
|
|
|
|
|
|
interest-bearing liabilities
|
124.76%
|
|
|
116.98%
|
|
|
|
|
|
|
|
|
|
Reported net interest income
|
|
|
|
|
|
|
Net
interest income (taxable-equivalent
|
|
|
|
|
|
|
basis)
|
|
$12,649
|
|
|
$10,853
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
330
|
|
|
302
|
|
Net
interest income
|
|
12,319
|
|
|
10,551
|
|
(1) Loans include
nonaccrual loans.
(2) Yields related
to investment securities exempt from income taxes are stated on a
taxable-equivalent basis assuming a federal income tax rate of 30.0
percent. The taxable-equivalent adjustment was $330,000
and $302,000 for the 2017 and 2016 periods,
respectively.
(3) Net interest
spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest
margin represents annualized net interest income divided by average
interest-earning assets.
34
Changes in interest
income and interest expense can result from variances in both
volume and rates. The following table presents the relative impact
on tax-equivalent net interest income to changes in the average
outstanding balances of interest-earning assets and
interest-bearing liabilities and the rates earned and paid on such
assets and liabilities.
|
Three Months Ended
|
Three Months Ended
|
||||
|
March 31, 2017 vs. 2016
|
March 31, 2016 vs. 2015
|
||||
|
Increase (Decrease) Due to
|
Increase (Decrease) Due to
|
||||
(in thousands)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
Interest
income
|
|
|
|
|
|
|
Loans,
net of allowance
|
$2,067
|
$(187)
|
$1,880
|
$1,300
|
$(177)
|
$1,123
|
Investment
securities
|
249
|
(37)
|
212
|
115
|
(52)
|
63
|
Other
interest-earning assets
|
65
|
36
|
101
|
(7)
|
39
|
32
|
Total
interest income (taxable-
|
|
|
|
|
|
|
equivalent
basis)
|
2,381
|
(188)
|
2,193
|
1,408
|
(190)
|
1,218
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
63
|
(8)
|
55
|
33
|
(34)
|
(1)
|
Money
markets
|
225
|
(63)
|
162
|
214
|
29
|
243
|
Time
deposits less than $100,000
|
(354)
|
8
|
(346)
|
(68)
|
(259)
|
(327)
|
Time
deposits greater than or
|
|
|
|
|
|
|
equal
to $100,000
|
363
|
(73)
|
290
|
(101)
|
31
|
(70)
|
Borrowings
|
70
|
166
|
236
|
(14)
|
217
|
203
|
Total
interest expense
|
367
|
30
|
397
|
64
|
(16)
|
48
|
|
|
|
|
|
|
|
Net
interest income increase/
|
|
|
|
|
|
|
(decrease)(taxable
equivalent basis)
|
$2,014
|
$(218)
|
1,796
|
$1,344
|
$(174)
|
1,170
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
|
28
|
|
|
71
|
|
|
|
|
|
|
|
Net
interest income increase
|
|
|
$1,768
|
|
|
$1,099
|
Provision
for Loan Losses
First Quarter 2017 compared to First Quarter 2016
Provisions for loan
losses are charged to income to bring the allowance for loan losses
to a level deemed appropriate by management. In
evaluating the allowance for loan losses, management considers
factors that include growth, composition and industry
diversification of the portfolio, historical loan loss experience,
current delinquency levels, adverse situations that may affect a
borrower’s ability to repay, estimated value of any
underlying collateral, prevailing economic conditions and other
relevant factors.
In determining the
loss history to be applied to its ASC 450 loan pools within the
allowance for loan losses, the Company uses net charge-off history
for the most recent five consecutive years. Since each
of the past five years contain a declining amount of charge-offs
coupled with a large number of recoveries, the impact of the
Company’s improvement in historical credit quality has
resulted in a continually declining balance of reserves as a
percentage of the loan portfolio. However, the Company
has added qualitative factors to the reserve to account for
concerns over future trends in the economy, interest rates and
other factors.
35
The following table
summarizes the changes in the allowance for loan losses for the
three months ended March 31, 2017 and 2016:
(in thousands)
|
|
Three months ended March 31, 2017
|
|
Beginning
balance
|
$7,909
|
Provision
for loan losses
|
159
|
Loans
charged off
|
(23)
|
Recoveries
|
80
|
Net
recoveries
|
57
|
Ending
balance
|
$8,125
|
|
|
Three months ended March 31, 2016
|
|
Beginning
balance
|
$7,641
|
Provision
for loan losses
|
-
|
Loans
charged off
|
-
|
Recoveries
|
290
|
Net
chargeoffs
|
290
|
Ending
balance
|
$7,931
|
The Company
recorded a provision of $159,000 in the first quarter of
2017. It did not record a provision for loan losses in
the first quarter of 2016. The increase in the provision
for 2017 was the result of continued growth in the Company’s
loan portfolio
Non-Interest
Income
The following table
provides a summary of non-interest income for the periods
presented.
|
Three months
|
|
|
ended March 31,
|
|
(in thousands)
|
2017
|
2016
|
Non-interest income
|
|
|
Increase
in cash surrender value of bank owned
|
|
|
life
insurance
|
$258
|
$223
|
Net
gain on sale of securities
|
-
|
85
|
Service
charges and fees
|
62
|
58
|
Mortgage
origination fees and gains on sale of loans
|
51
|
32
|
Net
loss on sale or impairment of foreclosed assets
|
-
|
(212)
|
Other
fees and income
|
132
|
80
|
Total
non-interest income
|
$503
|
$266
|
First Quarter 2017 compared to First Quarter 2016
Non-interest income
for the quarter ended March 31, 2017 was $503,000, an increase of
$237,000 from $266,000 for the same period in 2016. The
primary reason for the increase was a $212,000 write-down on sale
of foreclosed real estate in 2016 with no such corresponding losses
in 2017. The 2016 loss was offset by securities gains of
$85,000 in the first quarter of 2016 with no such gains recorded in
2017.
36
Non-Interest
Expenses
The following table
provides a summary of non-interest expenses for the periods
presented.
|
Three months
|
|
|
ended March 31,
|
|
(in thousands)
|
2017
|
2016
|
Non-interest expense
|
|
|
Salaries
and employee benefits
|
$4,462
|
$3,867
|
Data
processing
|
530
|
384
|
Furniture,
equipment and software costs
|
502
|
458
|
Occupancy
|
359
|
344
|
Director
related fees and expenses
|
224
|
252
|
Advertising
and public relations
|
221
|
188
|
Professional
fees
|
203
|
237
|
Unreimbursed
loan costs and foreclosure related expenses
|
174
|
69
|
FDIC
and other supervisory assessments
|
166
|
195
|
Other
|
771
|
606
|
Total
non-interest expense
|
$7,612
|
$6,600
|
First Quarter 2017 compared to First Quarter 2016
Non-interest
expenses increased period over period by $1.0 million or 15.3%, to
$7.6 million for the three-month period ended March 31, 2017, from
$6.6 million for the same period in 2016. The following are
highlights of the significant changes in non-interest expenses in
the first quarter of 2017 compared to the first quarter of
2016.
●
Personnel expenses
increased $595,000 to $4.5 million due primarily to the addition of
more personnel to handle the rapid growth of the
Company.
●
Data processing
expenses increased $146,000 to $530,000 as a result of several
nonrecurring projects during the quarter and the increased cost as
a result of growth in accounts.
●
Other expenses
increased $165,000 to $771,000 primarily due to an increase of
$35,000 in charitable contributions to nonprofits due to timing
issues and expenses associated with a recently announced merger as
disclosed in Note 11 of the Notes to Unconsolidated Financial
Statements included in Part I, Item 1 of this
report.
Provision
for Income Taxes
Income tax expense
was $1.7 million in the first quarter of 2017 and $1.4 million in
the first quarter of 2016. The Company’s effective
tax rate for the first quarter of 2017 was 33.60%, compared to
32.70% for the same period in 2016. The increase in
effective tax rate was primarily due to a larger portion of the
quarter over quarter growth coming from taxable instruments such as
loans compared to nontaxable instruments.
37
Analysis
of Financial Condition
Overview
Total assets at
March 31, 2017 were $1.55 billion, an increase of $46.3 million or
3.08% over the balance as of December 31, 2016 of $1.50
billion. Interest-earning assets at March 31, 2017
totaled $1.47 billion and consisted of $1.23 billion in net loans,
$194.0 million in investment securities, $5.6 million in Federal
Home Loan Bank of Atlanta stock, and $52.0 million in overnight
investments and interest-bearing deposits in other
banks.
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.
Total deposits and
stockholders’ equity at March 31, 2017 were $1.26 billion and
$140.1 million, respectively. Total deposits and
stockholders’ equity at December 31, 2016 were $1.17 billion
and $136.1 million, respectively.
Investment Securities
The Company's
investment portfolio plays a major role in the management of
liquidity and interest rate sensitivity and, therefore, is managed
in the context of the overall balance sheet. In general, the
primary goals of the investment portfolio are: (i) to provide a
sufficient margin of liquid assets to meet unanticipated deposit
and loan fluctuations and overall funds management objectives; (ii)
to provide eligible securities to secure public funds as prescribed
by law and other borrowings; (iii) to provide structures and terms
to enable proper interest rate risk management; and (iv) to earn
the maximum return on funds invested that is commensurate with
meeting the requirements of (i), (ii) and (iii). The Company
invests in securities as allowable under bank regulations and its
investment policy. These securities include U.S. Agency
obligations, U.S. government-sponsored entities, including
collateralized mortgage obligations and mortgage-backed securities,
bank-eligible obligations of state or political subdivisions, and
limited types of permissible corporate debt and equity
securities.
Investment
securities as of March 31, 2017 and December 31, 2016 were $194.0
million and $197.4 million, respectively. The
Company’s investment portfolio at March 31, 2017 and December
31, 2016, consisted of U.S. government agency obligations,
collateralized mortgage obligations, mortgage-backed securities,
municipal bonds and other equity investments, and had a weighted
average taxable equivalent yield of 2.85% and 2.83% at March 31,
2017 and December 31, 2016, respectively. The Company
also held an investment of 5.6 million and $8.4 million in Federal
Home Loan Bank stock as of March 31, 2017 and December 31, 2016
with a weighted average yield of 4.64% for both periods. The FHLB
stock is recorded at cost and is classified separately from
investment securities on the consolidated balance
sheets.
The investment
portfolio decreased $3.4 million during the first three months of
2017, the net result of $1.3 million in purchases, $5.4 million of
maturities and prepayments and a decrease of $453,000 in the market
value of securities held available for sale.
The securities in
an unrealized loss position as of March 31, 2017 continue to
perform and are expected to perform through
maturity. The issuers of these securities have not
experienced significant adverse events that would call into
question their ability to repay these debt obligations according to
contractual terms.
38
The following is a
summary of the securities portfolio by major classification at
March 31, 2017 and December 31, 2016.
|
March 31, 2017
|
December 31, 2016
|
||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
(in thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$16,451
|
$16,419
|
$17,062
|
$16,943
|
Collateralized
mortgage obligations
|
40,230
|
40,268
|
42,439
|
42,497
|
Mortgage-backed
securities
|
74,170
|
72,928
|
75,138
|
73,873
|
Municipal
bonds
|
60,803
|
60,737
|
60,901
|
60,677
|
Other
|
3,676
|
3,656
|
3,676
|
3,451
|
|
$195,330
|
$194,008
|
$199,216
|
$197,441
|
The following table
summarizes the securities portfolio by major classification as of
March 31, 2017 and December 31, 2016:
|
March 31, 2017
|
December 31, 2016
|
||||
|
|
|
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
after ten years
|
$16,451
|
$16,419
|
2.61%
|
$17,062
|
$16,943
|
2.61%
|
|
16,451
|
16,419
|
0.00%
|
17,062
|
16,943
|
2.61%
|
Collateralized
mortgage obligations
|
|
|
|
|
|
|
Due
after ten years
|
40,230
|
40,268
|
2.41%
|
42,439
|
42,497
|
2.43%
|
|
40,230
|
40,268
|
0.00%
|
42,439
|
42,497
|
2.43%
|
Mortgage-backed
securities
|
|
|
|
|
|
|
Due
after one but within five years
|
7,442
|
7,528
|
2.54%
|
7,492
|
7,581
|
2.54%
|
Due
after five but within ten years
|
7,909
|
8,031
|
2.68%
|
5,237
|
5,341
|
3.07%
|
Due
after ten years
|
58,819
|
57,369
|
2.34%
|
62,409
|
60,951
|
2.13%
|
|
74,170
|
72,928
|
0.00%
|
75,138
|
73,873
|
2.24%
|
Municipal
bonds
|
|
|
|
|
|
|
Due
after one but within five years
|
2,189
|
2,239
|
3.09%
|
1,734
|
1,771
|
3.23%
|
Due
after five but within ten years
|
6,139
|
6,191
|
3.32%
|
6,078
|
6,087
|
3.22%
|
Due
after ten years
|
52,475
|
52,307
|
4.03%
|
53,089
|
52,819
|
4.02%
|
|
60,803
|
60,737
|
0.00%
|
60,901
|
60,677
|
3.92%
|
Other
investments
|
|
|
|
|
|
|
Due
after five but within ten years
|
1,500
|
1,500
|
6.77%
|
1,500
|
1,500
|
6.77%
|
Due
after ten years (2)
|
2,176
|
2,156
|
0.00%
|
2,176
|
1,951
|
0.00%
|
|
3,676
|
3,656
|
2.76%
|
3,676
|
3,451
|
2.76%
|
Total
securities available for sale
|
|
|
|
|
|
|
Due
after one but within five years
|
9,631
|
9,767
|
2.66%
|
9,226
|
9,352
|
2.67%
|
Due
after five but within ten years
|
15,548
|
15,722
|
2.67%
|
12,815
|
12,928
|
2.82%
|
Due
after ten years (2)
|
170,151
|
168,519
|
2.75%
|
177,175
|
175,161
|
2.91%
|
|
$195,330
|
$194,008
|
2.85%
|
$199,216
|
$197,441
|
2.85%
|
(1)
The marginal tax
rate used to calculate tax equivalent yield was
30.0%.
(2)
Includes
investments with no stated maturity date
39
As of March 31,
2017, the weighted average life of the Company's debt securities
was 5.6 years, and the weighted average effective duration was 4.4
years.
Loans
Receivable
The Company serves
the credit needs of commercial and private banking clients in its
markets through a range of commercial and consumer loan products.
The goal of the Company's lending function is to help clients reach
their goals. This is accomplished through loan products that best
fit the needs of each client and are profitable to the Company. The
lending process combines a thorough knowledge of each client and
the local market with the high standards of the Company’s
credit culture. Underwriting criteria governing the level of
assumed risk and a sharp focus on maintaining a well-balanced loan
portfolio play a critical role in the process.
Strict attention is
placed on balancing loan quality and profitability with loan
growth. The Company has established concentration limits by
borrower, product type, loan structure, and industry. Commercial
loans are generally secured by business assets and real estate,
supported by personal guarantees as needed. Loans to private
banking clients are primarily secured with personal assets and real
estate.
The loan portfolio
at March 31, 2017 totaled $1.23 billion and was composed of $78.6
million in construction and land development loans, $676.5 million
in commercial real estate loans, $299.3 million in consumer real
estate loans, $162.6 million in commercial and industrial loans,
and $13.6 million in consumer and other loans. Also
included in loans outstanding is $486,000 in net deferred loan
costs.
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.
|
At March 31,
|
At December 31,
|
||
|
2017
|
2016
|
||
|
|
% of
|
|
% of
|
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction and land development
|
$78,552
|
6.4%
|
$79,738
|
6.7%
|
Commercial real estate:
|
|
|
|
|
Non-farm, non-residential
|
391,795
|
31.8%
|
365,569
|
30.7%
|
Owner occupied
|
193,291
|
15.7%
|
186,892
|
15.7%
|
Multifamily, nonresidential and junior liens
|
91,368
|
7.4%
|
89,191
|
7.5%
|
Total commercial real estate
|
676,454
|
55.0%
|
641,652
|
53.9%
|
Consumer real estate:
|
|
|
|
|
Home equity lines
|
86,550
|
7.0%
|
87,489
|
7.3%
|
Secured by 1-4 family residential, secured by
|
|
|
|
|
first deeds of trust
|
208,504
|
16.9%
|
195,343
|
16.4%
|
Secured by 1-4 family residential, secured by
|
|
|
|
|
second deeds of trust
|
4,247
|
0.3%
|
4,289
|
0.4%
|
Total consumer real estate
|
299,301
|
24.3%
|
287,121
|
24.1%
|
Commercial and industrial loans (except those
|
|
|
|
|
secured by real estate)
|
162,580
|
13.2%
|
170,709
|
14.3%
|
Consumer and other
|
13,580
|
1.1%
|
11,542
|
1.0%
|
Less:
|
|
|
|
|
Deferred loan origination (fees) costs
|
486
|
0.0%
|
518
|
0.0%
|
Total loans
|
1,230,953
|
100%
|
1,191,280
|
100%
|
Allowance for loan losses
|
(8,125)
|
|
(7,909)
|
|
Total net loans
|
$1,222,828
|
|
$1,183,371
|
|
|
|
|
|
|
40
During the three
months ended March 31, 2017, loans receivable increased by $39.7
million, or 3.3%, to $1.23 billion as of period end. The
increase in loans during the quarter is primarily attributable to
new loan origination driven by the demand in the Company’s
market areas.
Maturities
and Sensitivities of Loans to Interest Rates
The following table
presents the maturity distribution of the Company’s loans at
March 31, 2017. 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 March 31, 2017
|
|||
|
|
Due after one
|
|
|
|
Due within
|
year but within
|
Due after
|
|
(in thousands)
|
one year
|
five years
|
five years
|
Total
|
Fixed rate loans (1):
|
|
|
|
|
Construction
and land development
|
$18,635
|
$15,800
|
$7,393
|
$41,828
|
Commercial
real estate
|
28,371
|
197,775
|
71,081
|
297,227
|
Commercial
real estate owner occupied
|
6,397
|
108,077
|
68,901
|
183,375
|
Multifamily,
nonresidential and junior liens
|
1,932
|
42,448
|
14,299
|
58,679
|
Home
equity lines
|
-
|
635
|
-
|
635
|
Secured
by 1-4 family residential, secured by first
|
|
|
|
|
deeds
of trust
|
6,498
|
69,082
|
126,585
|
202,165
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
143
|
2,537
|
445
|
3,125
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
6,930
|
58,825
|
19,855
|
85,610
|
Consumer
and other
|
807
|
2,162
|
7
|
2,976
|
Total
at fixed rates
|
69,713
|
497,341
|
308,566
|
875,620
|
Variable rate loans (1):
|
|
|
|
|
Construction
and land development
|
17,922
|
14,339
|
4,341
|
36,602
|
Commercial
real estate
|
15,603
|
48,009
|
30,958
|
94,570
|
Commercial
real estate owner occupied
|
2,475
|
3,442
|
3,999
|
9,916
|
Multifamily,
nonresidential and junior liens
|
1
|
23,192
|
9,495
|
32,688
|
Home
equity lines
|
3,838
|
11,598
|
70,290
|
85,726
|
Secured
by 1-4 family residential, secured by first
|
|
|
|
|
deeds
of trust
|
2,872
|
2,104
|
1,229
|
6,205
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
40
|
698
|
328
|
1,066
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
53,713
|
20,058
|
3,199
|
76,970
|
Consumer
and other
|
4,819
|
5,712
|
73
|
10,604
|
Total
at variable rates
|
101,283
|
129,152
|
123,912
|
354,347
|
Subtotal
|
170,996
|
626,493
|
432,478
|
1,229,967
|
Non-accrual
loans (2)
|
57
|
255
|
188
|
500
|
Gross
Loans
|
$171,053
|
$626,748
|
$432,666
|
1,230,467
|
Deferred
origination costs
|
|
|
|
486
|
Total
loans
|
|
|
|
$1,230,953
|
(1)
Loan maturities are
presented based on the final contractual maturity of each loan and
do not reflect contractual principal payments prior to maturity on
amortizing loans.
(2)
Includes nonaccrual
restructured loans.
41
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.
Past
Due Loans and Nonperforming Assets
Loans are reported
as past due when the contractual amounts due with respect to
principal and interest are not received by the contractual due
date. Loans are generally classified as nonaccrual if they are past
due for a period of 90 days or more, unless such loans are well
secured and in the process of collection. If a loan or a portion of
a loan is classified as doubtful or as partially charged off, the
loan is generally classified as nonaccrual. Loans that are on a
current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or
interest is in doubt. Loans may be returned to accrual status when
all principal and interest amounts contractually due are reasonably
assured of repayment within an acceptable period of time, and there
is a sustained period of repayment performance of interest and
principal by the borrower in accordance with the contractual
terms.
While a loan is
classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled
amortizations where the payment is generally applied to the oldest
payment due. When the future collectability of the recorded loan
balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially
charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance
at the contractual interest rate. Receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Assets acquired as
a result of foreclosure are recorded at estimated fair value in
other real estate (or foreclosed assets). Any excess of cost over
estimated fair value at the time of foreclosure is charged to the
allowance for loan losses. Valuations are periodically performed on
these properties, and any subsequent write-downs are charged to
earnings. Routine maintenance and other holding costs are included
in non-interest expense. Loans are classified as troubled debt
restructurings (“TDR”) by the Company when certain
modifications are made to the loan terms and concessions are
granted to the borrowers due to financial difficulty experienced by
those borrowers. The Company grants concessions by (1) reduction of
the stated interest rate for the remaining original life of the
debt or (2) extension of the maturity date at a stated interest
rate lower than the current market rate for new debt with similar
risk. The Company does not generally grant concessions through
forgiveness of principal or accrued interest. The Company’s
policy with respect to accrual of interest on loans restructured in
a TDR follows relevant supervisory guidance. That is, if a borrower
has demonstrated performance under the previous loan terms and
shows capacity to perform under the restructured loan terms,
continued accrual of interest at the restructured interest rate is
likely. If a borrower was materially delinquent on payments prior
to the restructuring but shows the capacity to meet the
restructured loan terms, the loan will likely continue as
nonaccrual until there is demonstrated performance under new terms.
Lastly, if the borrower does not perform under the restructured
terms, the loan is placed on nonaccrual status. The Company closely
monitors these loans and ceases accruing interest on them if
management believes that the borrowers may not continue performing
based on the restructured note terms.
42
The following
tables present an age analysis of past due loans, segregated by
class of loans as of March 31, 2017 and December 31,
2016:
|
30+ Days Past Due
|
Non-Accrual Loans
|
Total Past Due
|
Current
|
Total Loans
|
At March 31, 2017
|
|
|
|
|
|
Construction
and land development
|
$-
|
$121
|
$121
|
$78,431
|
$78,552
|
Non-farm,
non-residential
|
-
|
-
|
-
|
391,795
|
391,795
|
Owner
occupied
|
-
|
-
|
-
|
193,291
|
193,291
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
91,368
|
91,368
|
Home
equity lines
|
50
|
188
|
238
|
86,312
|
86,550
|
Secured
by 1-4 family residential, secured
|
|
|
|
|
|
by
first deeds of trust
|
643
|
134
|
777
|
207,727
|
208,504
|
Secured
by 1-4 family residential,
|
|
|
|
|
|
secured
by second deeds of trust
|
-
|
57
|
57
|
4,190
|
4,247
|
Commercial
and industrial loans (except
|
|
|
|
|
|
those
secured by real estate)
|
59
|
-
|
59
|
162,521
|
162,580
|
Consumer
and other
|
-
|
-
|
-
|
13,580
|
13,580
|
|
$752
|
$500
|
$1,252
|
$1,229,215
|
$1,230,467
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
Construction
and land development
|
$-
|
$125
|
$125
|
$79,613
|
$79,738
|
Non-farm,
non-residential
|
-
|
-
|
-
|
365,569
|
365,569
|
Owner
occupied
|
-
|
-
|
-
|
186,892
|
186,892
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
89,191
|
89,191
|
Home
equity lines
|
-
|
194
|
194
|
87,295
|
87,489
|
Secured
by 1-4 family residential, secured
|
|
|
|
|
|
by
first deeds of trust
|
-
|
531
|
531
|
194,812
|
195,343
|
Secured
by 1-4 family residential,
|
|
|
|
|
|
secured
by second deeds of trust
|
-
|
58
|
58
|
4,231
|
4,289
|
Commercial
and industrial loans (except
|
|
|
|
|
|
those
secured by real estate)
|
-
|
60
|
60
|
170,649
|
170,709
|
Consumer
and other
|
-
|
-
|
-
|
11,542
|
11,542
|
|
$-
|
$968
|
$968
|
$1,189,794
|
$1,190,762
|
43
The table below
sets forth, for the periods indicated, information about the
Company’s nonaccrual loans, loans past due 90 days or more
and still accruing interest, total non-performing loans (nonaccrual
loans plus nonaccrual restructured loans), and total non-performing
assets.
|
At March 31,
|
At December 31,
|
(Dollars in thousands)
|
2017
|
2016
|
Non-accrual
loans
|
$189
|
$785
|
Restructured
loans (1)
|
311
|
183
|
Total
nonperforming loans
|
500
|
968
|
Foreclosed
real estate
|
4,740
|
4,740
|
Total
nonperforming assets
|
$5,240
|
$5,708
|
|
|
|
Accruing
loans past due 90 days or more
|
$-
|
$-
|
Allowance
for loan losses
|
8,125
|
7,909
|
|
|
|
Nonperforming
loans to period end loans
|
0.04%
|
0.08%
|
Allowance
for loan losses to period end
|
|
|
loans
|
0.66%
|
0.66%
|
Allowance
for loan losses to
|
|
|
nonperforming
loans
|
1625.00%
|
817.05%
|
Allowance
for loan losses to
|
|
|
nonperforming
assets
|
155.06%
|
138.56%
|
Nonperforming
assets to total assets
|
0.34%
|
0.38%
|
(1)
Restructured
loans are also on nonaccrual status.
In addition to the
above, as of March 31, 2017 the Company had $ 801,000 in loans that
were considered to be impaired for reasons other than their past
due, accrual or restructured status. In total, there
were $2.7 million in loans that were considered to be impaired at
March 31, 2017. As of December 31, 2016, the Company had
$3.2 million in loans that were considered to be
impaired. Of that, $2.7 million in loans were considered
to be impaired for reasons other than past due, accrual or
restructured status.
Allowance
for Loan Losses
The allowance for
loan losses is a reserve established through provisions for loan
losses charged to expense and represents management’s best
estimate of probable loans losses that have been incurred within
the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated losses and risk
inherent in the loan portfolio. The Company’s allowance for
loan loss methodology is based on historical loss experience by
type of credit and internal risk grade, specific homogeneous risk
pools and specific loss allocations, with adjustments for current
events and conditions. The Company’s process for determining
the appropriate level of reserves is designed to account for
changes in credit quality as they occur. The provision for loan
losses reflects loan quality trends, including the levels of and
trends related to past due loans and economic conditions at the
local and national levels. It also considers the quality
and risk characteristics of the Company’s loan origination
and servicing policies and practices. Included in the allowance are
specific reserves on loans that are considered to be impaired,
which are identified and measured in accordance with ASC
310.
44
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
March 31, 2017 and at December 31, 2016.
|
At March 31,
|
At December 31,
|
||
|
2017
|
2016
|
||
|
|
% of
|
|
% of
|
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction and land development
|
$490
|
6.4%
|
$486
|
6.7%
|
Commercial real estate
|
3,968
|
55.0%
|
3,719
|
53.9%
|
Consumer real estate
|
1,939
|
24.3%
|
1,900
|
24.1%
|
Commercial and industrial loans (except those
|
|
|
|
|
secured by real estate)
|
1,646
|
13.2%
|
1,728
|
14.3%
|
Consumer and other
|
82
|
1.1%
|
76
|
1.0%
|
Total
|
$8,125
|
100.0%
|
$7,909
|
100.0%
|
The allowance for
loan losses as a percentage of gross loans outstanding was 0.66%
for both March 31, 2017 and December 31, 2016.
The change in the
allowance during the period resulted from net recoveries of $57,000
and loan loss provisions of $159,000 commensurate with $39.7
million of loan growth. General reserves totaled $7.7
million or 0.63% of gross loans outstanding as of March 31, 2017, a
0.01% increase from December 31, 2016 when they totaled $7.9
million or 0.62% of loans outstanding. At March 31, 2017, specific
reserves on impaired loans constituted $399,000 or 0.03% of gross
loans outstanding compared to $509,000 or 0.04% of loans
outstanding as of December 31, 2016.
The following table
presents information regarding changes in the allowance for loan
losses in detail for the periods indicated:
|
Three months ended
|
|
|
March 31,
|
|
(in thousands)
|
2017
|
2016
|
Allowance
for loan losses at beginning of the period
|
$7,909
|
$7,641
|
Provision
for loan losses
|
159
|
-
|
Loans
charged off:
|
|
|
Commercial
and industrial loans (except those
|
|
|
secured
by real estate)
|
(10)
|
-
|
Consumer
and other
|
(13)
|
-
|
Total
charge-offs
|
(23)
|
-
|
Recoveries
of loans previously charged off:
|
|
|
Construction
and land development
|
9
|
229
|
Commercial
real estate
|
28
|
37
|
Consumer
real estate
|
-
|
3
|
Commercial
and industrial loans (except those
|
|
|
secured
by real estate)
|
43
|
11
|
Consumer
and other
|
-
|
10
|
Total
recoveries
|
80
|
290
|
Net
recoveries (charge-offs)
|
57
|
290
|
Allowance
for loan losses at end of the period
|
$8,125
|
$7,931
|
|
|
|
Ratio
of net charge-offs during the period
|
|
|
to
average loans outstanding during
|
|
|
the
period
|
0.00%
|
0.03%
|
45
While the Company
believes that it uses the best information available to establish
the allowance for loan losses, future adjustments to the allowance
may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions
used in making determinations regarding the allowance.
Management believes
the level of the allowance for loan losses as of March 31, 2017 and
December 31, 2016 is appropriate in light of the risk inherent
within the Company’s loan portfolio.
Other
Assets
At March 31, 2017,
non-earning assets totaled $75.6 million, a decrease of $ 589,000
from $76.2 million at December 31, 2016. Non-earning
assets at March 31, 2017 consisted of: cash and due from banks of
$4.5 million, premises and equipment totaling $15.4 million,
foreclosed real estate totaling $4.7 million, accrued interest
receivable of $4.4 million, bank-owned life insurance, or BOLI, of
$34.4 million and other assets totaling $7.4 million, with net
deferred taxes of $4.7 million.
As of March
31, 2017, the Company had an investment in bank-owned life
insurance of $34.4 million, which increased $258,000 from December
31, 2016. The increase in BOLI was due to an increase in cash
surrender value. Since the income on this investment is
included in non-interest income, the asset is not included in the
Company’s calculation of earning assets.
Deposits
Deposits gathered
from clients represent the primary source of funding for the
Company’s lending activities. Commercial and private banking
deposit services include non-interest and interest bearing checking
accounts, money market accounts, and to a limited extent, IRAs and
CDs. Interest rates for each account type are set by the Company
within the context of marketplace factors, current deposit needs,
and a keen awareness of maintaining a strong margin.
The Company's
primary focus is on establishing long-term client relationships to
attract core deposits. However, the Company may use non-reciprocal
brokered and other wholesale deposits to supplement local funding
sources. As of March 31, 2017, non-reciprocal brokered deposits
represented 4.3% of total deposits.
Total deposits at
March 31, 2017 were $1.26 billion and consisted of $222.9 million
in non-interest-bearing demand deposits, $848.7 million in
interest-bearing checking and money market accounts, and $193.2
million in time deposits. Total deposits increased by $92.6 million
from $1.17 billion as of December 31,
2016. Non-interest-bearing demand deposits increased by
$11.7 million from $211.2 million as of December 31,
2016. Interest-bearing and money market accounts
increased by $106.7 million from $742.0 million as of December 31,
2016. Time deposits decreased by $25.8 million during the
three-month period ended March 31, 2017 from $219.0 million as of
December 31, 2016. The increase in deposits was
primarily due to a focus on growing core customer deposits and
demand in the markets in which the Company operates.
The table below
provides a summary of the Company’s deposit portfolio by
deposit type.
46
|
As of
|
|
|
March 31,
|
December 31,
|
Composition
of Deposit Portfolio
|
2017
|
2016
|
Non-interest
bearing
|
17.6%
|
18.0%
|
Interest-bearing
checking accounts
|
23.8%
|
19.7%
|
Money
markets
|
43.3%
|
43.7%
|
Time
deposits
|
15.3%
|
18.6%
|
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:
|
For the Three Month Period Ended March 31,
|
|||||
|
2017
|
2016
|
||||
|
Average
|
% of
|
Average
|
Average
|
% of
|
Average
|
(Dollars in thousands)
|
Amount
|
Total
|
Rate
|
Amount
|
Total
|
Rate
|
Interest-bearing
checking accounts
|
$204,486
|
17.6%
|
0.39%
|
$140,388
|
14.1%
|
0.40%
|
Money
markets
|
529,718
|
45.5%
|
0.67%
|
402,430
|
40.5%
|
0.72%
|
Time
deposits
|
211,564
|
18.2%
|
0.98%
|
292,272
|
29.4%
|
0.78%
|
Total
interest-bearing deposits
|
945,768
|
81.2%
|
0.68%
|
835,090
|
84.0%
|
0.69%
|
Noninterest-bearing
deposits
|
219,242
|
18.8%
|
-
|
159,129
|
16.0%
|
-
|
Total
deposits
|
$1,165,010
|
100.0%
|
0.55%
|
$994,219
|
100.0%
|
0.58%
|
The overall mix of
deposits has shifted to a higher percentage of non-interest demand
deposits and interest-bearing demand with reductions in the
percentage of deposits held in time deposit accounts. The Company
believes its deposit product offerings are properly structured to
attract and retain core low-cost deposit relationships. The average
cost of deposits was 0.55% in the first quarter of 2017 compared to
0.58% in the first quarter of 2016 due to changes in deposit mix
and lower deposit interest rates.
Short-Term
and Long-Term Debt
The Company uses
short-term borrowings and long-term debt to provide both funding
and, to a lesser extent, regulatory capital. As of March
31, 2017, the Company had $100.0 million in short-term debt, which
consisted solely of FHLB advances compared to an outstanding
balance of $150.0 million at December 31, 2016.
The
Company had issued and outstanding $18.6 million in junior
subordinated debentures as of March 31, 2017 and December 31, 2016.
These junior subordinated debentures were issued to Paragon
Commercial Capital Trust I and Paragon Commercial Capital Trust II
in connection with the issuance of trust preferred securities on
May 18, 2004 and May 30, 2006, respectively which were included in
the Company’s annual report and filed as Exhibit 13.1 to the
Form 10-K for the fiscal year ended December 31, 2016.
In the third
quarter of 2016, the Company entered into a $20.0 million secured
holding company line of credit with an unaffiliated
institution. The terms of the note include interest at
prime plus 0.50% and will expire in September 2017. The
line is secured by 100% of the stock of the Bank owned by the
Company. The Company has not drawn on the note and has
no balance at March 31, 2017.
47
Stockholders’
Equity
Total
stockholders’ equity at March 31, 2017 was $140.1 million, an
increase of $4.0 million from $136.1 million as of December 31,
2016. The change in stockholders’ equity principally
represents net income to common stockholders for the three months
ended March 31, 2017 of $3.4 million. Other changes in
stockholders’ equity included $112,000 in stock-based
compensation and other comprehensive income of $514,000 related to
net increasing values in the Company’s available for sale
investment securities portfolio and its cash flow
hedges.
Liquidity
Market and public
confidence in the Company’s financial strength and in the
strength of financial institutions in general will largely
determine the Company’s access to appropriate levels of
liquidity. This confidence depends significantly on the
Company’s ability to maintain sound asset quality and
appropriate levels of capital resources. The term
“liquidity” refers to the Company’s ability to
generate adequate amounts of cash to meet current needs for funding
loan originations, deposit withdrawals, maturities of borrowings
and operating expenses. Investment portfolio principal
payments and maturities, loan principal payments, deposit growth,
brokered deposit sources, available borrowings from the FHLB, and
various federal funds lines from correspondent banks are the
primary sources of liquidity for the Bank. Management
measures the Bank’s liquidity position by giving
consideration to both on- and off-balance sheet sources of, and
demands for, funds on a daily and weekly basis.
Liquid assets
(consisting of cash and due from banks, interest-earning deposits
with other banks, federal funds sold and investment securities
classified as available for sale) represented 11.75% and 12.10% of
total assets at March 31, 2017 and December 31, 2016,
respectively.
The Bank has seen a
net reduction in wholesale funding, maintaining liquidity
sufficient to fund new loan demand and to reduce part of its
wholesale funding. When the need arises, the Bank has
the ability to sell securities classified as available for sale,
sell loan participations to other banks, or to borrow funds as
necessary. The Bank has established credit lines with
other financial institutions to purchase up to $102.5 million in
federal funds but had no such borrowings outstanding at March 31,
2017 or at December 31, 2016. Also, as a member of the
Federal Home Loan Bank of Atlanta, the Bank may obtain advances of
up to 30% of assets, subject to our available collateral. The Bank
had an available borrowing line at March 31, 2017 of $451.1 million
at the FHLB, secured by qualifying loans. As of
that date, the Bank had $100.0 million outstanding on the line and
available borrowing capacity of $351.1 million. In
addition, the Bank may borrow up to $140.2 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 March 31, 2017,
borrowings of securities sold under agreements to repurchase were
$19.5 million.
At March 31, 2017,
the Bank had undisbursed lines of credit of $241.8 million, and
letters of credit of $4.9 million. The Bank believes
that its combined aggregate liquidity position from all sources is
sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals in the near term.
Total deposits were
$1.26 billion and $1.17 billion at March 31, 2017 and December 31,
2016, respectively. Time deposits, which are the only deposit
accounts that have stated maturity dates, are generally considered
to be rate sensitive. Time deposits represented 15.3%
and 18.6% of total deposits at March 31, 2017 and December 31,
2016, respectively. Other than brokered time deposits,
management believes most other time deposits are
relationship-oriented. While competitive rates will need to be paid
to retain these deposits at their maturities, there are other
subjective factors that will determine their continued
retention.
48
Management believes
that current sources of funds provide adequate liquidity for the
Company’s current cash flow needs. The Bank’s parent
company maintains minimal cash balances. Management believes that
the current cash balances plus taxes receivable will provide
adequate liquidity for the Company’s current cash flow
needs.
Contractual
Obligations
The following table
presents the Company's significant fixed and determinable
contractual obligations by payment date. The payment amounts
represent those amounts contractually due to the recipient. The
table excludes liabilities recorded where management cannot
reasonably estimate the timing of any payments that may be required
in connection with these liabilities.
|
March 31, 2017
|
||||
|
1 Year
|
Over 1 to
|
Over 3 to
|
More Than
|
|
(in thousands)
|
or Less
|
3 Years
|
5 Years
|
5 Years
|
Total
|
Time
deposits
|
$145,408
|
$42,435
|
$5,406
|
$-
|
$193,249
|
Short
term borrowings
|
100,000
|
-
|
-
|
-
|
100,000
|
Subordinated
debentures
|
-
|
-
|
-
|
18,558
|
18,558
|
Operating
leases
|
747
|
1,045
|
316
|
3,957
|
6,065
|
Total
contractual obligations
|
$246,155
|
$43,480
|
$5,722
|
$22,515
|
$317,872
|
Capital
Our management
seeks to maintain adequate capital to support anticipated asset
growth, operating needs and unexpected risks, and to ensure that
the Company and the Bank are in compliance with all current and
anticipated regulatory capital guidelines. Our primary sources of
new capital include retained earnings and proceeds from the sale
and issuance of capital stock or other securities.
In 2013, the
Federal Reserve and the FDIC adopted final rules that implemented
the Basel III changes to the international regulatory capital
framework, referred to as the “Basel III Rules.” The
Basel III Rules apply to both depository institutions and their
holding companies. The Basel III Rules, which became effective for
both the Company and the Bank in 2015, include risk-based and
leverage capital ratio requirements which refined the definition of
what constitutes “capital” for purposes of calculating
those ratios. The minimum capital level requirements applicable to
the Company and the Bank under the Basel III Rules are: (i) a
common equity Tier 1 risk-based capital ratio of 4.5 percent; (ii)
a Tier 1 risk-based capital ratio of 6 percent; (iii) a total
risk-based capital ratio of 8 percent; and (iv) a Tier 1 leverage
ratio of 4 percent for all institutions. Common equity Tier 1
capital consists of retained earnings and common stock instruments,
subject to certain adjustments.
The Basel III Rules
also establish a “capital conservation buffer” of 2.5
percent above the new regulatory minimum risk-based capital
requirements. The conservation buffer, when added to the capital
requirements, result in the following minimum ratios: (i) a common
equity Tier 1 risk-based capital ratio of 7.0 percent, (ii) a Tier
1 risk-based capital ratio of 8.5 percent, and (iii) a total
risk-based capital ratio of 10.5 percent. The new capital
conservation buffer requirement is to be phased in beginning in
January 2016 at 0.625 percent of risk-weighted assets and will
increase by that amount each year until fully implemented in
January 2019. An institution will be subject to limitations on
certain activities including payment of dividends, share
repurchases and discretionary bonuses to executive officers if its
capital level is below the buffer amount.
49
The Basel III Rules
also revised the prompt corrective action framework, which is
designed to place restrictions on insured depository institutions,
including the Bank, if their capital levels do not meet certain
thresholds. The prompt corrective action rules were modified to
include a common equity Tier 1 capital component and to increase
certain other capital requirements for the various thresholds. For
example, under the proposed prompt corrective action rules, insured
depository institutions will be required to meet the following
capital levels in order to qualify as “well
capitalized:” (i) a common equity Tier 1 risk-based capital
ratio of 6.5 percent; (ii) a Tier 1 risk-based capital ratio of 8
percent; (iii) a total risk-based capital ratio of 10 percent; and
(iv) a Tier 1 leverage ratio of 5 percent. The Basel III Rules also
set forth certain changes in the methods of calculating certain
risk-weighted assets, which in turn affect the calculation of risk
based ratios.
If the Bank fails
to meet the requirements for a “well capitalized” bank,
it could increase the regulatory scrutiny on the Bank and the
Company. In addition, the Bank would not be able to renew or accept
brokered deposits without prior regulatory approval and the Bank
would not be able to offer interest rates on its deposit accounts
that are significantly higher than the average rates in the
Bank’s market area. As a result, it would be more difficult
to attract new deposits and retain or increase existing,
non-brokered deposits. If the Bank is prohibited from renewing or
accepting brokered deposits and is unable to attract new deposits,
our liquidity and our ability to fund our loan portfolio may be
adversely affected. In addition, we would be required to pay higher
insurance premiums to the FDIC, which would reduce our
earnings.
On May 18, 2004,
the Company privately issued trust preferred securities having an
aggregate liquidation amount of $10.0 million through Paragon
Commercial Capital Trust I. On May 30, 2006, we
privately issued additional floating rate trust preferred
securities having an aggregate liquidation amount of $8.0 million
through Paragon Commercial Capital Trust II. The
proceeds provided additional capital for the expansion of the Bank.
Under the current applicable regulatory guidelines, all of the
trust preferred securities qualify as Tier 1 capital.
On June 21, 2016
the Company issued 845,588 shares of its common stock in an initial
public offering. Of the $26.4 million in net proceeds,
$3.8 million were used to pay down existing debt at the holding
company, $20.5 million were contributed to the Bank as additional
capital and the remaining $2.1 million was retained at the holding
company level to service existing debt at the holding company
level.
Regulatory capital
ratios for the Bank exceeded minimum federal regulatory guidelines
for a well-capitalized depository institution as of March 31, 2017
and December 31, 2016. Management expects that the Company and the
Bank will continue to be in compliance with applicable regulatory
capital requirements, although there can be no assurance that
additional capital will not be required in the
future. The Company’s and the Bank’s
capital ratios as of March 31, 2017 are presented in the table
below.
50
|
|
|
Minimum Requirements To Be:
|
|||
|
|
|
"Adequately Capitalized"
|
"Well Capitalized" (2)
|
||
|
|
|
for Capital Adequacy
|
Under Prompt Corrective
|
||
|
Actual
|
Purposes
|
Action Provisions
|
|||
(Dollars in thousands)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
March 31, 2017
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Common
equity Tier 1
|
$168,607
|
12.94%
|
$104,271
|
8.00%
|
N/A
|
N/A
|
Total
risk-based capital ratio
|
160,482
|
12.31%
|
78,203
|
6.00%
|
N/A
|
N/A
|
Tier
1 risk-based capital ratio
|
142,482
|
10.93%
|
58,652
|
4.50%
|
N/A
|
N/A
|
Tier
1 leverage ratio
|
160,482
|
10.68%
|
60,084
|
4.00%
|
N/A
|
N/A
|
Tangible
average equity to tangible
|
|
|
|
|
|
|
average
assets ratio (3)
|
138,005
|
8.86%
|
N/A
|
N/A
|
N/A
|
N/A
|
Tangible
equity to risk-weighted
|
|
|
|
|
|
|
assets
ratio (3)
|
142,482
|
10.93%
|
N/A
|
N/A
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Common
equity Tier 1
|
$165,868
|
12.73%
|
$104,232
|
8.00%
|
$130,920
|
10.00%
|
Total
risk-based capital ratio
|
157,743
|
12.11%
|
78,174
|
6.00%
|
104,232
|
8.00%
|
Tier
1 risk-based capital ratio
|
157,743
|
12.11%
|
58,631
|
4.50%
|
84,689
|
6.50%
|
Tier
1 leverage ratio
|
157,743
|
10.13%
|
62,301
|
4.00%
|
77,876
|
5.00%
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Common
equity Tier 1
|
$164,740
|
13.21%
|
$99,778
|
8.00%
|
N/A
|
N/A
|
Total
risk-based capital ratio
|
156,831
|
12.57%
|
74,833
|
6.00%
|
N/A
|
N/A
|
Tier
1 risk-based capital ratio
|
138,831
|
11.13%
|
56,125
|
4.50%
|
N/A
|
N/A
|
Tier
1 leverage ratio
|
156,831
|
10.05%
|
62,434
|
4.00%
|
N/A
|
N/A
|
Tangible
average equity to tangible
|
|
|
|
|
|
|
average
assets ratio (3)
|
135,656
|
9.11%
|
N/A
|
N/A
|
N/A
|
N/A
|
Tangible
equity to risk-weighted
|
|
|
|
|
|
|
assets
ratio (3)
|
138,831
|
11.13%
|
N/A
|
N/A
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Common
equity Tier 1
|
$161,925
|
12.99%
|
$99,713
|
8.00%
|
$124,641
|
10.00%
|
Total
risk-based capital ratio
|
154,016
|
12.36%
|
74,785
|
6.00%
|
99,713
|
8.00%
|
Tier
1 risk-based capital ratio
|
154,016
|
12.36%
|
56,089
|
4.50%
|
81,017
|
6.50%
|
Tier
1 leverage ratio
|
154,016
|
10.37%
|
59,405
|
4.00%
|
74,256
|
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.
3)
Non-GAAP
ratio
51
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Management and the board of directors are
responsible for managing interest rate risk and employing risk
management policies that monitor and limit this exposure. Interest
rate risk is measured using net interest income simulations and
market value of portfolio equity analyses. These analyses use
various assumptions, including the nature and timing of interest
rate changes, yield curve shape, prepayments on loans and
securities, deposit decay rates, pricing decisions on loans and
deposits, and reinvestment/replacement of asset and liability cash
flows.
The principal
objective of the Company's asset and liability management function
is to evaluate the interest rate risk within the balance sheet and
pursue a controlled assumption of interest rate risk while
maximizing earnings and preserving adequate levels of liquidity and
capital. The asset and liability management function is under the
guidance of the Management Asset/Liability Committee
(“Management ALCO”) with direction of the Board of
Directors Asset/Liability Committee (“Board
ALCO”). Management ALCO meets monthly to review,
among other things, funding uses and sources, the sensitivity of
the Company's assets and liabilities to interest rate changes,
local and national market conditions and rates. Board ALCO meets
quarterly and also reviews the liquidity, capital, deposit mix,
loan mix and investment positions of the Company. In addition,
Board ALCO reviews modeling performed by a third party of the
impact on net interest income and economic value of equity of rate
changes in various scenarios as well as the impact of strategies
put into place to mitigate interest rate
risk. Instantaneous parallel rate shift scenarios are
modeled and utilized to evaluate risk and establish exposure limits
for acceptable changes in net interest margin. These scenarios,
known as rate shocks, simulate an instantaneous change in interest
rates and use various assumptions, including, but not limited to,
prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment and replacement of
asset and liability cash flows.
We also analyze the
economic value of equity as a secondary measure of interest rate
risk. This is a complementary measure to net interest income where
the calculated value is the result of the market value of assets
less the market value of liabilities. The economic value of equity
is a longer term view of interest rate risk because it measures the
present value of the future cash flows. The impact of changes in
interest rates on this calculation is analyzed for the risk to our
future earnings and is used in conjunction with the analyses on net
interest income.
Our interest rate
risk model indicated that the Company was liability sensitive in
terms of interest rate sensitivity at February 28, 2017. Since
December 31, 2016, we have slightly improved our liability
sensitivity as a result of increasing the short-term cash portion
of our balance sheet mix and 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 February 28, 2017,
November 30, 2016, and August 31, 2016:
Hypothetical
|
Estimated Resulting Theoretical Net Interest
Income
|
|||||
shift in interest
|
February 28, 2017
|
November 30, 2016
|
August 31,2016
|
|||
rates (in bps)
|
Amount
|
% Change
|
Amount
|
% Change
|
Amount
|
% Change
|
(dollars in thousands)
|
|
|
|
|
|
|
200
|
$48,570
|
-3.31%
|
$46,525
|
-4.26%
|
$44,744
|
-3.72%
|
0
|
50,231
|
0.00%
|
48,597
|
0.00%
|
46,473
|
0.00%
|
(100)
|
49,881
|
-0.70%
|
48,693
|
0.20%
|
46,487
|
0.03%
|
52
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.
Item
4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s
management, with the participation of the Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures as defined in
Rules 13a-15(b) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as of March 31, 2017. Based
on that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by
the Company in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and
to provide reasonable assurance that information required to be
disclosed by the Company in such reports is accumulated and
communicated to the Company’s management, including its
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
There were no
changes in the Company’s internal controls over financial
reporting during the period covered by this Quarterly Report that
have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial
reporting.
53
Part
II. Other Information
Item
1. Legal Proceedings
In the
ordinary course of operations, the Company is party to various
legal proceedings. The Company is not involved in, nor has it
terminated during the three-months ended March 31, 2017, any
pending legal proceedings other than routine, nonmaterial
proceedings occurring in the ordinary course of
business.
Item 1A. Risk Factors
In addition to the other information
set forth in this report, you should carefully consider the factors
discussed in Part I, “Item 1A. Risk Factors” in our
Annual Report on Form 10-K for the year ended December 31, 2016,
which could materially affect our business, financial condition or
future results.
The
risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties
unknown to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition
and/or operating results. Additionally, there are or will be
important factors related to the proposed merger with TowneBank
that could cause actual results to differ materially from
anticipated results. We believe that these factors include, but are
not limited to, those listed below. Capitalized terms used but not
otherwise defined in this “Risk Factors” section have
the meanings ascribed to them in other sections of this
report.
Regulatory approvals may not be received, may take longer than
expected, or may impose conditions that are not presently
anticipated or that could have an adverse effect on the combined
company following the Transaction.
Before
the Transaction may be completed, the Company, the Bank, and
TowneBank must obtain approvals from the FDIC, the Bureau of
Financial Institutions of the Virginia State Corporation Commission
and the North Carolina Commissioner of Banks. Other approvals,
waivers or consents from regulators may also be required. In
determining whether to grant these approvals the regulators
consider a variety of factors, including the regulatory standing of
each party. An adverse development in any party’s regulatory
standing or other factors could result in an inability to obtain or
a delay in receiving their approval. These regulators may impose
conditions on the completion of the Transaction or require changes
to the terms of the Transaction. Such conditions or changes could
delay or prevent completion of the Transaction or impose additional
costs on or limit the revenues of the combined company following
the Transaction, any of which might have an adverse effect on the
combined company following the Transaction.
Combining the companies may be more difficult, costly, or
time-consuming than expected.
The
Company and TowneBank have operated and, until the completion of
the Transaction, will continue to operate independently. The
success of the Transaction, including anticipated benefits and cost
savings, will depend, in part, on TowneBank’s ability to
successfully combine and integrate the businesses of TowneBank and
the Company in a manner that permits growth opportunities and does
not materially disrupt the existing customer relations nor result
in decreased revenues due to loss of customers. It is possible that
the integration process could result in the loss of key employees,
the disruption of either company’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies
that could adversely affect the combined company’s ability to
maintain relationships with clients, customers, depositors and
employees or to achieve the anticipated benefits and cost savings
of the Transaction. The loss of key employees could adversely
affect the Company’s ability to successfully conduct its
business, which could have an adverse effect on the Company’s
financial results and the value of the Company’s common
stock. If TowneBank experiences difficulties with the integration
process, the anticipated benefits of the Transaction may not be
realized fully or at all, or may take longer to realize than
expected. As with any merger of financial institutions, there also
may be business disruptions thatcause TowneBank and/or the Company
to lose customers or cause customers to remove their accounts from
TowneBank and/or the Company and move their business to competing
financial institutions. Integration efforts will also divert
management attention and resources. In addition, the actual cost
savings of the Transaction could be less than
anticipated.
The Transaction is subject to certain closing conditions that, if
not satisfied or waived, will result in the Transaction not being
completed. Termination of the Merger Agreement could negatively
impact the Company.
The
Transaction is subject to customary conditions to closing,
including the receipt of required regulatory approvals and adoption
of the Merger Agreement by the Company’s stockholders. If any
condition to the Transaction is not satisfied or waived, to the
extent permitted by law, including the absence of any unduly
burdensome condition in the regulatory approvals, the Transaction
will not be completed. In addition, either TowneBank or the Company
may terminate the Merger Agreement under certain circumstances even
if the Merger Agreement is adopted by the Company’s
stockholders, including but not limited to, if the Transaction has
not been completed on or before March 31, 2018.
If the
Merger Agreement is terminated, there may be various consequences.
For example, the Company’s businesses may have been impacted
adversely by the failure to pursue other beneficial opportunities
due to the focus of management on the Transaction, without
realizing any of the anticipated benefits of completing the
Transaction. Additionally, if the Merger Agreement is terminated,
the market price of the Company’s common stock could decline
to the extent that the current market prices reflect a market
assumption that the Transaction will be completed.
54
The Company will be subject to business uncertainties and
contractual restrictions while the Transaction is
pending.
The
Merger Agreement restricts the Company from operating its business
other than in the ordinary course and prohibits the Company from
taking specified actions without TowneBank’s consent until
the Transaction occurs. These restrictions may prevent the Company
from pursuing attractive business opportunities that may arise
prior to the completion of the Transaction. In addition,
uncertainty about the effect of the Transaction on employees and
customers may have an adverse effect on the Company. These
uncertainties may impair the Company’s ability to attract,
retain and motivate key personnel until the Transaction is
completed, and could cause customers and others that deal with the
Company to seek to change existing business relationships with the
Company. Retention of certain employees by the Company may be
challenging while the Transaction is pending, as certain employees
may experience uncertainty about their future roles with the
Company. If key employees depart because of issues relating to the
uncertainty and difficulty of integration or a desire not to remain
with the Company, the Company’s business could be
harmed.
The
uncertainty caused by the pending Transaction could cause the
Company’s clients and business associates to seek to change
their existing business relationships with the Company. These
uncertainties may impair the Company’s ability to attract,
retain and grow its client base until the Transaction is
complete.
The market value of the merger consideration that the
Company’s stockholders will receive as a result of the
Transaction may fluctuate.
If the
Transaction is completed, each share of the Company’s common
stock will be converted into the right to receive 1.7250 shares of
TowneBank common stock, and cash in lieu of any fractional
shares. The market
value of the merger consideration may vary from the closing price
of TowneBank common stock on the date the Transaction was
announced, on the date that the proxy statement/prospectus is
mailed to the Company’s stockholders, on the date of the
meeting of the Company’s stockholders, on the date the
Transaction is consummated, and thereafter. Stock price changes may
result from a variety of factors, including general market and
economic conditions, changes in the respective businesses,
operations and prospects, and the regulatory situation of TowneBank
and the Company. Many of these factors are beyond the control of
the Company. Any change in the market price of TowneBank common
stock prior to completion of the Transaction will affect the amount
of and the market value of the merger consideration that the
Company’s stockholders will receive upon completion of the
Transaction. Accordingly, at the time of the stockholders meeting,
the Company’s stockholders will not know or be able to
calculate the amount or the market value of the merger
consideration they would receive upon completion of the
Transaction.
Further, the
results of operations of the combined company following the
Transaction and the market price of the combined company’s
shares of common stock may be affected by factors different from
those currently affecting the independent results of operations of
TowneBank and the Company.
If the Transaction is not completed, the Company will have incurred
substantial expenses without realizing the expected benefits of the
Transaction.
The
Company has incurred and will incur substantial expenses in
connection with the negotiation and completion of the transactions
contemplated by the Merger Agreement. If the Transaction is not
completed, the Company would have to recognize these expenses
without realizing the expected benefits of the
Transaction.
The Merger Agreement limits the Company’s ability to pursue
an alternative acquisition proposal and could require the Company
to pay a termination fee of $12 million under certain circumstances
relating to alternative acquisition proposals.
The
Merger Agreement prohibits the Company from soliciting, initiating
or knowingly encouraging certain alternative acquisition proposals
with any third party, subject to exceptions set forth in the Merger
Agreement. The Merger Agreement also provides for the payment by
the Company to TowneBank of a termination fee in the amount of $12
million in the event that the Company or TowneBank terminates the
Merger Agreement for certain specified reasons. These provisions
might discourage a potential competing acquirer that might have an
interest in acquiring all or a significant part of the Company from
considering or proposing such an acquisition.
55
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None
Item 6. Exhibits
and Financial Statement Schedules.
ExhibitNo.
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan
of Reorganization, dated April 26, 2017, by and among TowneBank, TB
Acquisition, LLC, Paragon Commercial Corporation and Paragon
Commercial Bank (incorporated by reference to Exhibit 2.1 to
Paragon Commercial Corporation’s Current Report on Form 8-K
filed on May 1, 2017)
|
|
|
|
|
Amendment to
Paragon Commercial Bank Salary Continuation Agreement for Matthew
C. Davis, dated as of April 26, 2017 (amending the Paragon
Commercial Bank Amended and Restated Salary Continuation Agreement
dated December 29, 2016 and the Paragon Commercial Salary
Continuation Agreement dated December 29, 2016)
|
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
101
|
|
Interactive data
files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets (Unaudited) as of March 31, 2017 and December 31,
2016; (ii) Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 2017 and 2016; (iii) Consolidated
Statements of Comprehensive Income (Unaudited) for the Three Months
Ended March 31, 2017 and 2016; (iv) Consolidated Statements of
Stockholders’ Equity (Unaudited) for the Three Months Ended
March 31, 2017 and 2016; (v) Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended March 31, 2017 and 2016; and
(vi) Notes to Consolidated Financial Statements
(Unaudited)
|
56
Signatures
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
|
PARAGON
COMMERCIAL CORPORATION
|
|
|
|
|
|
|
Date: May
9, 2017
|
By:
|
/s/
Steven
E. Crouse
|
|
|
|
Steven E. Crouse |
|
|
|
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
|
57
EXHIBIT
INDEX
ExhibitNo.
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan
of Reorganization, dated April 26, 2017, by and among TowneBank, TB
Acquisition, LLC, Paragon Commercial Corporation and Paragon
Commercial Bank (incorporated by reference to Exhibit 2.1 to
Paragon Commercial Corporation’s Current Report on Form 8-K
filed on May 1, 2017)
|
|
|
|
|
Amendment to
Paragon Commercial Bank Salary Continuation Agreement for Matthew
C. Davis, dated as of April 26, 2017 (amending the Paragon
Commercial Bank Amended and Restated Salary Continuation Agreement
dated December 29, 2016 and the Paragon Commercial Salary
Continuation Agreement dated December 29, 2016)
|
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
101
|
|
Interactive data
files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets (Unaudited) as of March 31, 2017 and December 31,
2016; (ii) Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 2017 and 2016; (iii) Consolidated
Statements of Comprehensive Income (Unaudited) for the Three Months
Ended March 31, 2017 and 2016; (iv) Consolidated Statements of
Stockholders’ Equity (Unaudited) for the Three Months Ended
March 31, 2017 and 2016; (v) Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended March 31, 2017 and 2016; and
(vi) Notes to Consolidated Financial Statements
(Unaudited)
|
58