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EX-32.01 - Entegra Financial Corp.e17267_ex32-01.htm
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EX-31.01 - Entegra Financial Corp.e17267_ex31-01.htm

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

Commission File Number: 001-35302

Entegra Financial Corp.

(Exact name of Registrant as specified in its Charter)

   
North Carolina 45-2460660
(State of Incorporation) (I.R.S. Employer Identification No.)
   
14 One Center Court,  
Franklin, North Carolina 28734
(Address of principal executive offices) (Zip Code)

(828) 524-7000

(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 x   No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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   o Accelerated filer   x Non-accelerated filer   o Smaller reporting company  o Emerging growth company   x

 

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. o

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o   No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On May 9, 2017, 6,455,145 shares of the issuer’s common stock (no par value), were issued and outstanding.

 
 

 ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

 

FORM 10-Q

TABLE OF CONTENTS

 

    Page No.
     
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) 3
  Consolidated Balance Sheets – March 31, 2017 and December 31, 2016 (Audited) 3
  Consolidated Statements of Income – Three Months Ended March 31, 2017 and 2016 4
  Consolidated Statements of Comprehensive Income – Three Months Ended  March 31, 2017 and 2016 5
  Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2017 and 2016 6
  Consolidated Statements of Cash Flows – Three Months Ended March 31, 2017 and 2016 7
  Notes to Consolidated Financial Statements 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45
Item 3. Quantitative and Qualitative Disclosures about Market Risk 68
Item 4. Controls and Procedures 70
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 71
Item 1A. Risk Factors 71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  71
Item 3. Defaults Upon Senior Securities 71
Item 4. Mine Safety Disclosures 71
Item 5. Other Information 71
Item 6. Exhibits 72
  Signatures 74

2
 

Item 1. Financial Statements

 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

   March 31,   December 31, 
   2017   2016 
   (Unaudited)   (Audited) 
Assets          
           
Cash and due from banks  $14,565   $10,709 
Interest-earning deposits   69,652    32,585 
Cash and cash equivalents   84,217    43,294 
           
Investments - trading   5,499    5,211 
Investments - available for sale   431,737    398,291 
Other investments, at cost   12,208    15,261 
Loans held for sale   2,309    4,584 
Loans receivable   759,150    744,361 
Allowance for loan losses   (9,498)   (9,305)
Fixed assets, net   21,245    20,209 
Real estate owned   4,090    4,226 
Interest receivable   5,287    5,012 
Bank owned life insurance   31,528    31,347 
Net deferred tax asset   18,259    18,985 
Loan servicing rights   2,638    2,603 
Goodwill   7,144    2,065 
Core deposit intangible   2,569    979 
Other assets   5,923    5,754 
           
Total assets  $1,384,305   $1,292,877 
           
Liabilities and Shareholders’ Equity          
           
Liabilities:          
Deposits  $987,991   $830,013 
Federal Home Loan Bank advances   223,500    298,500 
Junior subordinated notes   14,433    14,433 
Other borrowings   2,905    2,725 
Post employment benefits   10,209    10,211 
Accrued interest payable   566    254 
Other liabilities   9,697    3,673 
Total liabilities   1,249,301    1,159,809 
           
Commitments and contingencies (Note 13)          
           
Shareholders’ Equity:          
Preferred stock - no par value, 10,000,000 shares authorized; none issued and outstanding        
Common stock -  no par value, 50,000,000 shares authorized; 6,455,145 and 6,467,550 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively        
Common stock held by Rabbi Trust, at cost; 14,000 shares at March 31, 2017 and December 31, 2016   (279)   (279)
Additional paid in capital   62,584    62,664 
Retained earnings   77,439    76,139 
Accumulated other comprehensive loss   (4,740)   (5,456)
Total shareholders’ equity   135,004    133,068 
           
Total liabilities and shareholders’ equity  $1,384,305   $1,292,877 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3
 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

   Three Months Ended March 31, 
   2017   2016 
   (Unaudited)   (Unaudited) 
Interest income:          
Interest and fees on loans  $8,476   $7,206 
Interest on tax exempt loans   89    45 
Taxable securities   1,759    1,458 
Tax-exempt securities   731    143 
Interest-earning deposits   116    36 
Other   172    105 
Total interest income   11,343    8,993 
           
Interest expense:          
Deposits   1,028    942 
Federal Home Loan Bank advances   530    275 
Junior subordinated notes   137    126 
Other borrowings   30    26 
Total interest expense   1,725    1,369 
           
Net interest income   9,618    7,624 
           
Provision for loan losses   315     
Net interest income after provision for loan losses   9,303    7,624 
           
Noninterest income:          
Servicing income, net   95    116 
Mortgage banking   220    140 
Gain on sale of SBA loans   142    334 
Gain on sale of investments, net   7    269 
Trading securities gains   207    74 
Other than temporary impairment on available-for-sale securities   (700)    
Service charges on deposit accounts   391    394 
Interchange fees   410    342 
Bank owned life insurance   181    107 
Other   130    99 
Total noninterest income   1,083    1,875 
           
Noninterest expenses:          
Compensation and employee benefits   4,836    4,010 
Net occupancy   951    817 
Federal deposit insurance   104    176 
Professional and advisory   274    212 
Data processing   401    351 
Marketing and advertising   248    200 
Merger-related expenses   448    145 
Net cost of operation of real estate owned   134    286 
Other   1,211    1,082 
Total noninterest expenses   8,607    7,279 
           
Income before taxes   1,779    2,220 
           
Income tax expense   479    854 
           
Net income  $1,300   $1,366 
           
Earnings per common share:          
Basic  $0.20   $0.21 
Diluted  $0.20   $0.21 
           
Weighted average common shares outstanding:          
Basic   6,464,861    6,517,753 
Diluted   6,521,298    6,517,955 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4
 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

   Three Months Ended March 31, 
   2017   2016 
         
Net income  $1,300   $1,366 
           
Other comprehensive income:          
Change in unrealized holding gains and losses on securities available for sale   921    3,455 
Reclassification adjustment for securities gains realized in net income   (7)   (269)
Reclassification adjustment for other than temporary impairment realized in net income   79     
Amortization of unrealized loss on securities transferred to held to maturity       431 
Change in deferred tax valuation allowance attributable to unrealized gains and losses on investment securities available for sale   54    201 
Change in unrealized holding gains on cash flow hedge   39     
Reclassification adjustment for cash flow effectiveness   18     
Other comprehensive income, before tax   1,104    3,818 
Income tax effect related to items of other comprehensive income   (388)   (1,361)
Other comprehensive income, after tax   716    2,457 
           
Comprehensive income  $2,016   $3,823 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5
 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three Months Ended March 31, 2017 and 2016

 

(Dollars in thousands)

 

   Common Stock                     
   Shares   Amount   Additional
Paid in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Income (Loss)
   Common
Stock
held by Rabbi
Trust
   Total 
Balance, December 31, 2015   6,546,375   $   $63,722   $69,763   $(1,736)  $(279)  $131,469 
                                    
Net income               1,366            1,366 
Other comprehensive income, net of tax                   2,457        2,457 
Stock compensation expense           208                208 
Repurchase of common stock   (74,003)        (1,263)               (1,263)
Balance, March 31, 2016   6,472,372   $   $62,667   $71,129   $721   $(279)  $134,238 
                                    
Balance, December 31, 2016   6,467,550   $   $62,664   $76,139   $(5,456)  $(279)  $133,068 
                                    
Net income               1,300            1,300 
Other comprehensive income, net of tax                   716        716 
Stock compensation expense           229                229 
Vesting of restricted stock units, net of 368 shares surrendered   595        (8)               (8)
Repurchase of common stock   (13,000)        (301)               (301)
Balance, March 31, 2017   6,455,145   $   $62,584   $77,439   $(4,740)  $(279)  $135,004 

 

The accompanying notes are an integral part of the consolidated financial statements

 

6
 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

   For the Three Months Ended March 31, 
   2017   2016 
Cash flows from operating activities:          
Net income  $1,300   $1,366 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   231    314 
Security amortization, net   1,117    483 
Trading account income   (207)   (74)
Provision for loan losses   315     
Provision for real estate owned   78    342 
Share-based compensation expense   229    208 
Deferred income tax expense   393    831 
Net decrease in deferred loan fees   (165)   (150)
Gain on sales of securities available-for-sale   (7)   (269)
Other than temporary impairment on securities available-for-sale   700     
Income on bank owned life insurance, net   (181)   (107)
Mortgage banking income, net   (220)   (140)
Gain on sales of SBA loans   (142)   (334)
Net realized gain on sale of real estate owned       (144)
Loans originated for sale   (10,848)   (2,932)
Proceeds from sale of loans originated for sale   12,342    6,520 
Net change in operating assets and liabilities:          
Interest receivable   (275)   (262)
Loan servicing rights   (35)   (54)
Other assets   (110)   287 
Postemployment benefits   (2)   29 
Accrued interest payable   (5)   37 
Other liabilities   3    (22)
Net cash provided by operating activities  $4,511   $5,929 

 

The accompanying notes are an integral part of the consolidated financial statements

 

7
 

 ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued

(Dollars in thousands)

 

   For the Three Months Ended March 31, 
   2017   2016 
Cash flows from investing activities:          
Activity for investment securities:          
Purchases  $(53,493)  $(53,998)
Maturities/calls and principal repayments   8,523    15,000 
Sales   17,324    34,717 
Net increase in loans   (14,426)   (9,144)
Net cash received in branch acquisition   146,750     
Proceeds from sale of real estate owned   215    249 
Purchase of fixed assets   (253)   (144)
Purchase of other investments, at cost       (540)
Redemptions of other investments, at cost   3,053     
Net cash provided by (used in) investing activities  $107,693   $(13,860)
           
Cash flows from financing activities:          
Net increase in deposits  $3,359   $3,667 
Net increase in escrow deposits   561    428 
Proceeds from FHLB advances   340,000    125,000 
Repayment of FHLB advances   (415,000)   (115,000)
Proceeds from other borrowings   108    349 
Purchase of common stock   (309)   (1,263)
Net cash provided by (used in) financing activities  $(71,281)  $13,181 
           
Increase in cash and cash equivalents   40,923    5,250 
           
Cash and cash equivalents, beginning of period  $43,294   $40,650 
           
Cash and cash equivalents, end of period  $84,217   $45,900 
           
           
Supplemental disclosures of cash flow information:          
Cash paid during the year for:          
Interest on deposits and other borrowings  $1,730   $1,332 
           
Acquisitions:          
Assets acquired  $3,997   $40,407 
Liabilities assumed   154,505    39,920 
Net assets/liabilities  $150,508   $487 
           
Noncash investing and financing activities:          
Real estate acquired in satisfaction of loans  $220   $508 
Purchased investments to be settled   6,617    6,373 

  

The accompanying notes are an integral part of the consolidated financial statements

 

8
 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

 

Organization

 

Entegra Financial Corp. (the “Company”) was incorporated on May 31, 2011 and became the holding company for Entegra Bank (the “Bank”) on September 30, 2014 upon the completion of Macon Bancorp’s merger with and into the Company, pursuant to which Macon Bancorp converted from the mutual to stock form of organization. The Company’s primary operation is its investment in the Bank. The Company also owns 100% of the common stock of Macon Capital Trust I (the “Trust”), a Delaware statutory trust formed in 2003 to facilitate the issuance of trust preferred securities. The Bank is a North Carolina state-chartered commercial bank and has a wholly owned subsidiary, Entegra Services, Inc., which was inactive as of March 31, 2017. The consolidated financials are presented in these financial statements.

The Bank operates as a community-focused retail bank, originating primarily real estate based mortgage, consumer and commercial loans and accepting deposits from consumers and small businesses.

Estimates

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed real estate, management obtains independent appraisals for significant properties.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, the Bank, and its wholly owned subsidiary. The accounts of the Trust are not consolidated with the Company. In consolidation all significant intercompany accounts and transactions have been eliminated.

 

Reclassification

 

Certain amounts in the prior years’ financial statements may have been reclassified to conform to the current year’s presentation. The reclassifications had no significant effect on our results of operations or financial condition as previously reported.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the SEC on March 15, 2017. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

Acquisition Activities

 

The Company accounts for business combinations under the acquisition method of accounting. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including identifiable intangible assets. If the fair value of net assets purchased exceeds the fair value of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. Fair values are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

 

9
 

The determination of the fair value of loans acquired takes into account credit quality deterioration and probability of loss; therefore, the related allowance for loan losses is not carried forward.
All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit liabilities and the related depositor relationship intangible assets may be exchanged in observable exchange transactions. As a result, the depositor relationship intangible asset is considered identifiable, because the separability criterion has been met.

Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet including the estimates inherent in the process of preparing financial statements. Unrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. The Company has reviewed events occurring through the issuance date of the Consolidated Financial Statements and no subsequent events have occurred requiring accrual or disclosure in these financial statements other than as described in Note 16.

Recent Accounting Standards Updates

 

In March 2017, the Financial Accounting Standards Board (FASB) issued amendments to Accounting Standards Update (“ASU”) 2017-08 Receivables –Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. Under current generally accepted accounting principles (GAAP), premiums are generally amortized as an adjustment of yield over the contractual life of the instrument. The amendments in the Update shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. The standard becomes effective for public entities beginning after December 15, 2018. As early adoption of ASU 2017-08 was permitted, the Company adopted the standard in the first quarter of 2017. The election to adopt ASU 2017-08 early required any adjustments to be made as of January 1, 2017, the beginning of the annual period that includes the interim period of adoption. ASU 2017-08 had no material impact to the Company’s financial statements.

 

In March 2017, the FASB issued amendments to ASU 2017-07 Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension cost and Net Periodic Postretirement Benefit Cost. This Update was issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost in the income statement. The standard becomes effective for public entities beginning after December 15, 2017. The Company does not expect this Update to have a material effect on its financial statements.

 

In January 2017, the FASB issued amendments to ASU 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update was issued to simplify how an entity is required to test goodwill impairment. Under amendments to this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard becomes effective for U.S, Securities and Exchange Commission (SEC) filers beginning after December 15, 2019. The Company does not expect this Update to have a material effect on its financial statements

 

In January 2017, the FASB issued amendments to ASU 2017-01 Business Combinations (Topic 80): Clarifying the Definition of a Business. This Update was issued 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 of assets or businesses. The standard becomes effective for public entities beginning after December 15, 2017. The Company does not expect this Update 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
 

NOTE 2. ACQUISITIONS

 

 

The Company has determined that the acquisition described below constitutes a business combination as defined in Accounting Standards Codification (ASC) Topic 805, Business Combinations. Accordingly, as of the date of the acquisitions, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements. Fair value is established by discounting the expected future cash flows with a market discount rate for like maturity and risk instruments. The estimation of expected future cash flows requires significant assumptions about appropriate discount rates, expected future cash flows, market conditions and other future events. Actual results could differ materially. The Company made the determinations of fair value using the best information available at the time; however, the assumptions used are subject to change and, if changed, could have a material effect on the Company’s financial position and results of operations.

 

On February 24, 2017, the Bank completed its acquisition of two branches from Stearns Bank, N.A. (“Stearns”). In accordance with the Purchase and Assumption Agreement, dated October 19, 2016, by and between the Bank and Stearns (the “P&A Agreement”), the Bank acquired approximately $154.2 million of deposits, the bank facilities, and certain other assets. In consideration of the purchased assets and assumed liabilities, the Bank paid (1) the book value, or approximately $1.0 million, for the branch facilities and certain assets, and (2) a deposit premium of $5.7 million, equal to 3.65% of the average daily deposits for the 30- day period ending the tenth (10th) business day prior to the acquisition.

The following table summarizes the assets acquired and liabilities assumed at the date of acquisition and their initial fair values:

(Dollars in thousands)  As Recorded
by Stearns
   Fair Value
Adjustments
   As Recorded
by the Company
 
Assets               
Cash and cash equivalents  $1,258   $   $1,258 
Loans   7       7 
Premises and equipment   950    132    1,082 
Core deposit intangible       1,650   1,650 
Other assets            
Total assets acquired   2,215    1,782    3,997 
                
Liabilities               
Deposits:               
Noninterest-bearing demand  $16,032   $    16,032 
Interest-bearing demand   40,525        40,525 
Money market   15,368        15,368 
Savings   7,717        7,717 
Time deposits   73,480    1,062   74,542 
Total deposits   153,122    1,062    154,184 
Other liabilities   321        321 
Total liabilities assumed   153,443    1,062    154,505 
Excess of liabilities assumed over assets acquired  $151,228   $720   $150,508 
Cash received to settle the acquisition            $145,492 
Goodwill            $5,016 

Fair values are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available. In particular, the fair value of collateral dependent loans and real estate owned (REO) may change to the extent that the Company receives updated appraisals indicating changes in valuation assumptions at acquisition.

 

Pro forma disclosures are not significant and not meaningful.

 

11
 

NOTE 3. INVESTMENT SECURITIES

 

 

The following table presents the holdings of our trading account as of March 31, 2017 and December 31, 2016:

 

   March 31,   December 31, 
   2017   2016 
   (Dollars in thousands) 
         
Trading account  $5,499   $5,211 

 

The trading account is held in a Rabbi Trust and seeks to generate returns that will offset the change in liabilities related to market risk of certain deferred compensation agreements. There were $0.2 million and $0.1 million of realized gains for the three months ended March 31, 2017 and 2016, respectively.

 

The Company’s held-to-maturity (HTM) investment portfolio was transferred to available-for-sale (AFS) during the third quarter of 2016 in order to provide the Company more flexibility managing its investment portfolio. As a result of the transfer, the Company is prohibited from classifying any investment securities as HTM for two years from the date of the transfer.

 

On April 28, 2017, the Louisiana Office of Financial Institutions closed First NBC Bank and appointed the FDIC as receiver. The Bank owns $0.7 million par value of subordinated debt issued by the holding company of First NBC Bank with an unrealized loss of $79,000 prior to the impairment. The Company concluded the investment to be fully impaired. As such, the financial information as of and for the three months ended March 31, 2017 includes other than temporary impairment of $0.7 million before tax. 

 

The amortized cost and estimated fair values of AFS securities as of March 31, 2017 and December 31, 2016 are summarized as follows:

 

   March 31, 2017 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
                 
U.S. government agencies  $3,323   $14   $   $3,337 
Municipal securities   155,294    333    (5,242)   150,385 
Mortgage-backed securities                    
U.S. government agencies   160,586    100    (1,887)   158,799 
SBA securities   36,671    14    (280)   36,405 
Agency collateralized mortgage obligations   15,055    30    (155)   14,930 
Non-agency collateralized mortgage obligations   44,363        (836)   43,527 
U.S. Treasury securities   2,501    14    (3)   2,512 
Corporate bonds   21,143    254    (162)   21,235 
Mutual funds   619        (12)   607 
   $439,555   $759   $(8,577)  $431,737 

12
 

   December 31, 2016 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
                 
U.S. government agencies  $12,076   $31   $   $12,107 
Municipal securities   152,208    337    (5,774)   146,771 
Mortgage-backed securities                    
U.S. government agencies   128,820    107    (2,161)   126,766 
SBA securities   30,002    13    (303)   29,712 
Agency collateralized mortgage obligations   17,049    14    (173)   16,890 
Non-agency collateralized mortgage obligations   45,475    2    (908)   44,569 
U.S. Treasury securities   2,501    15    (2)   2,514 
Corporate bonds   18,354    171    (167)   18,358 
Mutual funds   616        (12)   604 
   $407,101   $690   $(9,500)  $398,291 

 

Information pertaining to securities with gross unrealized losses at March 31, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

   March 31, 2017 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (Dollars in thousands) 
Available-for-Sale:                              
Municipal securities  $119,549   $5,228   $330   $14   $119,879   $5,242 
Mortgage-backed securities                              
U.S. government agencies   117,333    1,769    6,263    118    123,596    1,887 
SBA   7,067    38    20,035    242    27,102    280 
Agency collateralized mortgage obligations   4,575    107    1,002    48    5,577    155 
Non-agency collateralized mortgage obligations   40,140    803    4,275    33    44,415    836 
U.S. Treasury securities   998    3            998    3 
Corporate debt securities   5,705    162            5,705    162 
Mutual funds   607    12            607    12 
   $295,974   $8,122   $31,905   $455   $327,879   $8,577 

13
 
   December 31, 2016 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
   (Dollars in thousands) 
Available-for-Sale:                              
Municipal securities  $122,468   $5,759   $331   $15   $122,799   $5,774 
Mortgage-backed securities                              
U.S. government agencies   101,382    2,068    5,102    93    106,484    2,161 
SBA   15,199    145    11,434    158    26,633    303 
Agency collateralized mortgage obligations   13,135    127    1,058    46    14,193    173 
Non-agency collateralized mortgage obligations   40,378    908            40,378    908 
U.S. Treasury securities   1,000    2            1,000    2 
Corporate debt securities   6,741    167            6,741    167 
Mutual funds   616    12            616    12 
   $300,919   $9,188   $17,925   $312   $318,844   $9,500 

Information pertaining to the number of securities with unrealized losses is detailed in the table below. The Company believes all unrealized losses as of March 31, 2017 and December 31, 2016 represent temporary impairment. The unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

14
 

   March 31, 2017 
   Less Than
12 Months
   More Than
12 Months
   Total 
Municipal securities   113    1    114 
Mortgage-backed securities               
U.S. government agencies   80    4    84 
SBA   6    13    19 
Agency collateralized mortgage obligations   3    1    4 
Non-agency collateralized mortgage obligations   19    3    22 
U.S. Treasury securities   1        1 
Corporate debt securities   5        5 
Mutual funds   1        1 
    228    22    250 
     
   December 31, 2016 
   Less Than
12 Months
   More Than
12 Months
   Total 
Municipal securities   129    1    130 
Mortgage-backed securities               
U.S. government agencies   66    5    71 
SBA   11    8    19 
Agency collateralized mortgage obligations   7    1    8 
Non-agency collateralized mortgage obligations   18        18 
U.S. Treasury securities   1        1 
Corporate debt securities   8        8 
    240    15    255 

 

At March 31, 2017, the Company held 250 investment securities that were in an unrealized loss position of which 22 had been in unrealized loss positions for over twelve months. Market changes in interest rates and credit spreads may result in temporary unrealized losses as market prices of securities fluctuate. The Company reviews its investment portfolio on a quarterly basis for indications of other than temporary impairment. The severity and duration of impairment and the likelihood of potential recovery of impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value. When reviewing the securities in loss positions, pricing is reviewed for deterioration, bond ratings are reviewed for downgrades, and credit enhancement levels are reviewed for erosion. The Company determined all unrealized losses to be temporary as of March 31, 2017.

At March 31, 2017, there was no intent to sell any of the securities in an unrealized loss position, and it is more likely than not the Company will not be required to sell these securities.

 

For the three months ended March 31, 2017 and 2016 the Company received proceeds from sales of securities classified as AFS and corresponding gross realized gains and losses as follows:

 

   Three Months Ended March 31, 
   2017   2016 
   (Dollars in thousands) 
         
Gross proceeds  $17,324   $34,717 
Gross realized gains   7    287 
Gross realized losses       18 

 

The Company had securities pledged against deposits and borrowings of approximately $184.3 million and $237.1 million at March 31, 2017 and December 31, 2016, respectively.

 

The amortized cost and estimated fair value of investments in debt securities at March 31, 2017, by contractual maturity, is shown below. Mortgage-backed securities have not been scheduled because expected maturities will differ from contractual maturities when borrowers have the right to prepay the obligations.

15
 

   Available-for-Sale 
   Amortized
Cost
   Fair
Value
 
   (Dollars in thousands) 
         
Less than 1 year  $1,329   $1,317 
Over 1 year through 5 years   16,683    16,696 
After 5 years through 10 years   27,109    27,110 
Over 10 years   137,759    132,953 
    182,880    178,076 
Mortgage-backed securities   256,675    253,661 
           
Total  $439,555   $431,737 

 

NOTE 4. LOANS RECEIVABLE

 

 

Loans receivable as of March 31, 2017 and December 31, 2016 are summarized as follows:

 

   March 31,   December 31, 
   2017   2016 
   (Dollars in thousands) 
         
Real estate mortgage loans:          
One-to four family residential  $282,620   $278,437 
Commercial real estate   296,224    292,879 
Home equity loans and lines of credit   48,340    50,334 
Residential construction   18,858    18,531 
Other construction and land   68,383    60,605 
Total real estate loans   714,425    700,786 
           
Commercial and industrial   42,619    41,306 
Consumer   4,997    4,594 
         Total commercial and consumer   47,616    45,900 
           
Loans receivable, gross   762,041    746,686 
           
Less:  Net deferred loan fees   (1,578)   (923)
 Fair value discount   (786)   (857)
          Unamortized premium   556    605 
          Unamortized discount   (1,083)   (1,150)
     .       
Loans receivable, net of deferred fees  $759,150   $744,361 

16
 

The Bank had $149.2 million and $144.3 million of loans pledged as collateral to secure funding with the Federal Home Loan Bank of Atlanta (“FHLB”) at March 31, 2017 and December 31, 2016, respectively. The Bank also had $90.6 million and $89.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2017 and December 31, 2016, respectively.

 

Included in loans receivable and other borrowings at March 31, 2017 are $2.9 million in participated loans that did not qualify for sale accounting. Interest expense on the other borrowings accrues at the same rate as the interest income recognized on the loans receivable, resulting in no effect to net income.

The following tables present the activity related to the discount on individually purchased loans for the three month periods ended March 31, 2017 and 2016:

   For the Three Months Ended 
   March 31, 
(Dollars in thousands)  2017   2016 
         
Discount on purchased loans, beginning of period  $1,150   $1,438 
Accretion   (67)   (77)
Discount on purchased loans, end of period  $1,083   $1,361 

The following table presents the activity related to the fair value discount on loans from business combinations for the three month periods ended March 31, 2017 and 2016:

   For the Three Months Ended 
   March 31, 
(Dollars in thousands)  2017   2016 
         
Fair value discount, beginning of period  $857   $72 
Accretion   (71)   (5)
Fair value discount, end of period  $786   $67 
17
 

NOTE 5. ALLOWANCE FOR LOAN LOSSES

 

 

The following tables present, by portfolio segment, the changes in the allowance for loan losses:

 

   Three Months Ended March 31, 2017 
   One-to four
Family
Residential
   Commercial
Real Estate
   Home Equity
and Lines
of Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 
   (Dollars in thousands) 
                                 
Beginning balance  $2,812   $3,979   $677   $185   $848   $599   $205   $9,305 
Provision   308    112    (12)   31    197    (118)   (203)   315 
Charge-offs   (4)   (88)           (228)       (15)   (335)
Recoveries   5    77            55    8    68    213 
Ending balance  $3,121   $4,080   $665   $216   $872   $489   $55   $9,498 
     
   Three Months Ended March 31, 2016 
   One-to four
Family
Residential
   Commercial
Real Estate
   Home Equity
and Lines
of Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 
   (Dollars in thousands) 
                                 
Beginning balance  $2,455   $3,221   $1,097   $278   $1,400   $603   $407   $9,461 
Provision   293    587    (214)   (135)   17    (185)   (363)    
Charge-offs   (46)       (37)       (317)       (10)   (410)
Recoveries   23        113        77    118    116    447 
Ending balance  $2,725   $3,808   $959   $143   $1,177   $536   $150   $9,498 

 

The following tables present, by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the net investment in loans:

 

   March 31, 2017 
   One-to four
Family
Residential
   Commercial
Real Estate
   Home Equity
and Lines
of Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 
   (Dollars in thousands) 
Allowance for loan losses                                        
Individually evaluated for impairment  $173   $93   $2   $   $61   $28   $   $357 
Collectively evaluated for impairment   2,948    3,987    663    216    811    461    55    9,141 
   $3,121   $4,080   $665   $216   $872   $489   $55   $9,498 
                                         
Loans Receivable                                        
Individually evaluated for impairment  $4,200   $7,333   $313   $   $1,339   $304   $   $13,489 
Collectively evaluated for impairment   277,089    287,422    48,107    18,783    66,600    42,593    5,067    745,661 
   $281,289   $294,755   $48,420   $18,783   $67,939   $42,897   $5,067   $759,150 

18
 

   December 31, 2016 
   One-to four
Family Residential
   Commercial
Real Estate
   Home Equity
and Lines
of Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 
   (Dollars in thousands) 
Allowance for loan losses                                        
Individually evaluated for impairment  $201   $178   $2   $   $175   $28   $   $584 
Collectively evaluated for impairment   2,611    3,801    675    185    673    571    205    8,721 
   $2,812   $3,979   $677   $185   $848   $599   $205   $9,305 
                                         
Loans Receivable                                        
Individually evaluated for impairment  $3,769   $7,601   $313   $   $1,682   $306   $   $13,671 
Collectively evaluated for impairment   273,169    284,502    50,087    18,439    58,444    41,397    4,652    730,690 
   $276,938   $292,103   $50,400   $18,439   $60,126   $41,703   $4,652   $744,361 

 

Portfolio Quality Indicators

 

The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.

 

The Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:

 

·Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated.
·Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted. This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral.
·Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms.
·Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable.
·Loss (9) – Collectability is unlikely resulting in immediate charge-off.

 

Description of segment and class risks

 

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant.

 

One-to-four family residential

 

We centrally underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. Loans to be sold to secondary market investors must also adhere to investor guidelines. We also evaluate the value and marketability of that collateral. Common risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.

19
 

Commercial real estate

 

Commercial mortgage loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans are highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.

 

Home equity and lines of credit

 

Home equity loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.

 

Residential construction and other construction and land

 

Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial construction and land development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.

 

Commercial

 

We centrally underwrite each of our commercial loans based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral.

 

Consumer

 

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

20
 

The following tables present the recorded investment in gross loans by loan grade:

 

March 31, 2017
                                 
Loan Grade  One-to Four-
Family
Residential
   Commercial
Real Estate
   Home
Equity and
Lines of
Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 
   (Dollars in thousands) 
                                 
1  $   $10,101   $   $   $   $715   $   $10,816 
2   1,193    4,246                1,188        6,627 
3   28,516    23,033    1,913        3,308    3,511        60,281 
4   79,966    150,536    3,350    9,497    29,228    21,320    28    293,925 
5   24,924    85,508    2,321    3,122    18,103    12,146    308    146,432 
6   2,327    10,648            2,466    270        15,711 
7   2,395    7,358    1        208    444        10,406 
   $139,321   $291,430   $7,585   $12,619   $53,313   $39,594   $336   $544,198 
                                         
Ungraded Loan Exposure:                                     
                                         
Performing  $140,849   $3,325   $40,722   $5,952   $14,353   $3,303   $4,731   $213,235 
Nonperforming   1,119        113    212    273            1,717 
Subtotal  $141,968   $3,325   $40,835   $6,164   $14,626   $3,303   $4,731   $214,952 
                                         
Total  $281,289   $294,755   $48,420   $18,783   $67,939   $42,897   $5,067   $759,150 

21
 

December 31, 2016
                                 
Loan Grade  One-to Four-
Family
Residential
   Commercial
Real Estate
   Home
Equity and
Lines of
Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 
   (Dollars in thousands) 
                                 
1  $   $10,203   $   $   $   $431   $   $10,634 
2       4,287                1,465        5,752 
3   27,975    24,626    1,814    586    2,164    2,803        59,968 
4   75,246    130,857    3,363    10,646    22,293    21,942    51    264,398 
5   26,306    95,408    3,476    2,347    17,930    11,344    324    157,135 
6   2,587    11,501        284    2,470    270        17,112 
7   1,713    6,686            869    421        9,689 
   $133,827   $283,568   $8,653   $13,863   $45,726   $38,676   $375   $524,688 
                                         
Ungraded Loan Exposure:                                 
                                         
Performing  $142,222   $8,535   $41,497   $4,576   $14,149   $3,027   $4,230   $218,236 
Nonperforming   889        250        251        47    1,437 
Subtotal  $143,111   $8,535   $41,747   $4,576   $14,400   $3,027   $4,277   $219,673 
                                         
Total  $276,938   $292,103   $50,400   $18,439   $60,126   $41,703   $4,652   $744,361 

22
 

Delinquency Analysis of Loans by Class

 

The following tables include an aging analysis of the recorded investment of past-due financing receivables by class. The Company does not accrue interest on loans greater than 90 days past due.

 

   March 31, 2017 
   30-59
Days Past
Due
   60-89
Days Past
Due
   90 Days
and Over
Past Due
   Total
Past Due
   Current   Total
Loans
Receivable
 
   (Dollars in thousands) 
                         
One-to four-family residential  $5,522   $417   $1,035   $6,974   $274,315   $281,289 
Commercial real estate   1,740        2,483    4,223    290,532    294,755 
Home equity and lines of credit   478    29    94    601    47,819    48,420 
Residential construction   300        212    512    18,271    18,783 
Other construction and land   4,081    41    141    4,263    63,676    67,939 
Commercial   343        34    377    42,520    42,897 
Consumer   6            6    5,061    5,067 
Total  $12,470   $487   $3,999   $16,956   $742,194   $759,150 
                         
   December 31, 2016 
   30-59
Days Past
Due
   60-89
Days Past
Due
   90 Days
and Over
Past Due
   Total
Past Due
   Current   Total
Loans
Receivable
 
   (Dollars in thousands) 
                         
One-to four-family residential  $4,917   $1,108   $427   $6,452   $270,486   $276,938 
Commercial real estate   1,382    1,800    1,638    4,820    287,283    292,103 
Home equity and lines of credit   126    44    231    401    49,999    50,400 
Residential construction   180            180    18,259    18,439 
Other construction and land   468        794    1,262    58,864    60,126 
Commercial   368            368    41,335    41,703 
Consumer   62    1        63    4,589    4,652 
Total  $7,503   $2,953   $3,090   $13,546   $730,815   $744,361 

23
 

Impaired Loans

 

The following table presents investments in loans considered to be impaired and related information on those impaired loans as of March 31, 2017 and December 31, 2016.

 

   March 31, 2017   December 31, 2016 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
 
   (Dollars in thousands) 
Loans without a valuation allowance                              
One-to four-family residential  $3,067   $3,167   $   $2,625   $2,723   $ 
Commercial real estate   5,124    7,302        5,526    7,710     
Home equity and lines of credit   213    328        213    328     
Residential construction                        
Other construction and land   593    689        771    911     
Commercial                        
   $8,997   $11,486   $   $9,135   $11,672   $ 
                               
Loans with a valuation allowance                              
One-to four-family residential  $1,133   $1,133   $172   $1,144   $1,144   $201 
Commercial real estate   2,209    2,209    93    2,075    2,075    178 
Home equity and lines of credit   100    100    2    100    100    2 
Residential construction                        
Other construction and land   746    746    61    911    911    175 
Commercial   304    304    28    306    306    28 
   $4,492   $4,492   $356   $4,536   $4,536   $584 
                               
Total                              
One-to four-family residential  $4,200   $4,300   $172   $3,769   $3,867   $201 
Commercial real estate   7,333    9,511    93    7,601    9,785    178 
Home equity and lines of credit   313    428    2    313    428    2 
Residential construction                        
Other construction and land   1,339    1,435    61    1,682    1,822    175 
Commercial   304    304    28    306    306    28 
   $13,489   $15,978   $356   $13,671   $16,208   $584 

24
 

The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated:

 

   Three Months Ended March 31, 
   2017   2016 
   Average
Investment in
Impaired
Loans
   Interest
Income
Recognized
   Average
Investment in
Impaired
Loans
   Interest
Income
Recognized
 
   (Dollars in thousands) 
Loans without a valuation allowance                    
One-to four-family residential  $3,178   $32   $3,832   $36 
Commercial real estate   7,317    31    5,811    46 
Home equity and lines of credit   328    11    213    2 
Other construction and land   691    5    797    8 
   $11,514   $79   $10,653   $92 
                     
Loans with a valuation allowance                    
One-to four-family residential  $1,139   $13   $2,182   $24 
Commercial real estate   2,220    21    2,927    27 
Home equity and lines of credit   100    1    100    1 
Other construction and land   788    9    1,180    10 
Commercial   304    5    316    5 
   $4,551   $49   $6,705   $67 
                     
Total                    
One-to four-family residential  $4,317   $45   $6,014   $60 
Commercial real estate   9,537    52    8,738    73 
Home equity and lines of credit   428    12    313    3 
Other construction and land   1,479    14    1,977    18 
Commercial   304    5    316    5 
   $16,065   $128   $17,358   $159 

 

Nonperforming Loans

 

The following table summarizes the balances of nonperforming loans as of March 31, 2017 and December 31, 2016. Certain loans classified as Troubled Debt Restructurings (“TDRs”) and impaired loans may be on non-accrual status even though they are not contractually delinquent.

  

   March 31, 2017   December 31, 2016 
   (Dollars in thousands) 
         
One-to four-family residential  $1,885   $1,125 
Commercial real estate   4,548    3,536 
Home equity loans and lines of credit   113    250 
Residential construction   212     
Other construction and land   426    1,042 
Commercial   66    41 
Consumer       47 
Non-performing loans  $7,250   $6,041 

25
 

Troubled Debt Restructurings (TDR)

 

The following tables summarize TDR loans as of the dates indicated:

 

   March 31, 2017 
   Performing   Nonperforming   Total 
   TDR’s   TDR’s   TDR’s 
   (Dollars in thousands) 
             
One-to-four family residential  $3,530   $210   $3,740 
Commercial real estate   4,600    2,397    6,997 
Home equity and lines of credit   313        313 
Other construction and land   1,136    222    1,358 
Commercial   304        304 
                
   $9,883   $2,829   $12,712 

  

   December 31, 2016 
   Performing   Nonperforming   Total 
   TDR’s   TDR’s   TDR’s 
   (Dollars in thousands) 
             
One-to-four family residential  $3,560   $210   $3,770 
Commercial real estate   4,327    2,366    6,693 
Home equity and lines of credit   313        313 
Other construction and land   1,377    206    1,583 
Commercial   305        305 
                
   $9,882   $2,782   $12,664 

26
 

There were no loan modifications that were deemed TDRs at the time of the modification during the three month periods ended March 31, 2017 or 2016.

 

There were no TDR’s that defaulted during the three month periods ending March 31, 2017 and 2016 and which were modified as TDR’s within the previous 12 months.

NOTE 6. GOODWILL AND OTHER INTANGIBLES

 

 

The Company had $7.1 million and $2.1 million of goodwill as of March 31, 2017 and December 31, 2016, respectively. The following is a summary of changes in the carrying amounts of goodwill:

 

   March 31,   December 31, 
   2017   2016 
   Dollars in thousands 
Balance at beginning of period  $2,065   $711 
Additions:          
Prior acquisitions measurement period adjustments   63     
Goodwill from current year acquisitions   5,016    1,354 
Balance at end of period  $7,144   $2,065 

 

The Company’s other intangible assets consist of core deposit intangibles related to acquired core deposits. The following is a summary of gross carrying amounts and accumulated amortization of core deposit intangibles:

 

   March 31,   December 31, 
   2017   2016 
   Dollars in thousands 
Gross balance at beginning of period  $1,120   $590 
Additions from acquisitions   1,650    530 
Gross balance at end of period   2,770    1,120 
Less accumulated amortization   (201)   (141)
Core deposit intangible, net  $2,569   $979 

 

Core deposit intangibles are amortized using the straight-line method over their estimated useful lives of seven years. Estimated amortization expense for core deposit intangibles for each of the next five years is approximately $0.4 million per year.

27
 

NOTE 7. DEPOSITS

 

 

The following table summarizes deposit balances and interest expense by type of deposit as of and for the three months ended March 31, 2017 and 2016 and the year ended December 31, 2016. 

 

   As of and for the   As of and for the Year Ended 
   Three Months Ended March 31,   December 31, 
   2017   2016   2016 
(Dollars in thousands)  Balance   Interest
Expense
   Balance   Interest
Expense
   Balance   Interest
Expense
 
Noninterest-bearing demand  $153,740   $   $118,228   $   $139,136   $ 
Interest-bearing demand   173,433    40    105,374    27    122,271    160 
Money Market   257,466    219    193,775    148    239,387    770 
Savings   48,218    12    35,915    10    40,014    49 
Time Deposits   355,134    757    267,420    757    289,205    2,985 
   $987,991   $1,028   $720,712   $942   $830,013   $3,964 

28
 

NOTE 8. BORROWINGS

 

 

The scheduled maturities and respective weighted average rates of outstanding FHLB advances are as follows for the dates indicated:

 

   March 31, 2017   December 31, 2016 
Year of
Maturity
  Balance   Weighted
Average
Rate
   Balance   Weighted
Average
Rate
 
   (Dollars in thousands) 
2017  $193,500    0.82%  $273,500    0.64%
2018   30,000    1.19%   25,000    1.17%
   $223,500    0.87  $298,500    0.68

 

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

 

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to business and operational risks through management of its core business activities. The Company manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and borrowings and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts or payments principally related to loans and borrowings.

 

The table below presents the fair value of the Company’s derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheet (in thousands).

 

      Fair Value 
   Balance Sheet Location  March 31,
2017
   December 31,
2016
 
Designated as hedges:           
Cash flow hedge of borrowings - interest rate swap  Other assets  $533   $476 
Total     $533   $476 
              
Not designated as hedges:             
Mortgage banking - loan commitment  Other assets  $67   $41 
Mortgage banking - forward sales commitment  Other assets   8    19 
Total     $75   $60 
              
Mortgage banking - loan commitment  Other liabilities  $18   $ 
Mortgage banking - forward sales commitment  Other liabilities   11   $ 
Total     $29   $ 

 

Derivative contracts that are not accounted for as hedging instruments under ASC 815, Derivatives and Hedging, are related to the Company’s mortgage loan origination activities. Between the time that the Company enters into an interest-rate lock commitment to originate a mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, the Company is subject to the risk of variability in market prices. The Company also enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. This activity is on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate mortgage loans and forward loan sales commitments are freestanding derivative instruments. The underlying loans are accounted for under the lower of cost or fair value method and are not reflected in the table above. Fair value adjustment on these derivative instruments are recorded within mortgage banking income in the Consolidated Statement of Income.

29
 

The Company’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. The structure of the swap agreements is described in the table below (dollars in thousands): 

 

               
Underlyings  Designation  Notional   Payment Provision  Life of Swap
Contract
 
Junior Subordinated Debt  Cash Flow Hedge  $14,000   Pay 0.958%/Receive 3 month LIBOR   4 yrs 
FHLB Variable Rate Advance  Cash Flow Hedge  $15,000   Pay 1.054%/Receive 3 month LIBOR   2 yrs 
FHLB Variable Rate Advance  Cash Flow Hedge  $20,500   Pay 1.354%/Receive 3 month LIBOR   2 yrs

  

The swap contracts involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments without exchange of the underlying notional amounts.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffectiveness of the cash flow hedge is recognized through earnings. There was no ineffectiveness during the three months ended March 31, 2017 or 2016.

 

The table below presents the effect of the Company’s cash flow hedge on the Consolidated Statement of Income (in thousands).

 

   Amount of Gain (Loss) Recognized in
Other Comprehensive Income on
Derivative (Effective Portion)
   Gain (Loss) Reclassified from Accumulated Other
Comprehensive Income into Income (Effective Portion)
              For the three months ended
March 31,
 
   March 31,
2017
   December 31,
2016
   Location  2017   2016 
Interest rate swap  $336   $476   Interest Expense  $18   $ 

 

The Company is exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements and counterparty limits. The agreements contain collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

 

The Company has agreements with its derivative counterparties that contain a provision in which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. Furthermore, certain agreements covering the Company’s derivative instruments contain provisions that require the Company to maintain its status as a well / adequately capitalized institution. These provisions enable the counterparties to the derivative instruments to request immediate payment or require the Company to post additional collateral.

30
 

NOTE 10. INCOME TAXES

 

 

The components of net deferred taxes as of March 31, 2017 and December 31, 2016 are summarized as follows:

 

   March 31,   December 31, 
   2017   2016 
   (Dollars in thousands) 
Deferred tax assets:          
Federal net operating loss  $8,406   $8,560 
Allowance for loan losses   3,327    3,245 
Deferred compensation and post employment benefits   3,355    3,365 
State net operating loss   519    557 
Valuation reserve for other real estate   509    693 
Non-accrual interest   359    375 
Loan basis differences   220    238 
Unrealized losses on securities   2,692    3,079 
Deposit premium   124    155 
Other   1,452    1,380 
Gross deferred tax assets   20,963    21,647 
           
Deferred tax liabilities:          
Fixed assets   237    263 
Loan servicing rights   975    962 
Deferred loan costs   1,027    1,002 
Prepaid expenses   48    57 
Core deposit intangible   146    158 
Other   271    220 
Total deferred tax liabilities   2,704    2,662 
           
Net deferred tax asset  $18,259   $18,985 

 

As of March 31, 2017 and December 31, 2016, $0.1 million and $0.2 million, respectively, in valuation allowance related to net deferred tax assets on investment securities remains in accumulated other comprehensive income. This valuation allowance will be recognized as tax expense on a security-by-security basis upon the sale or maturity of the individual securities. The tax expense is expected to be recognized over the remaining life of the securities of approximately 1 year.

 

The following table summarizes the amount and expiration dates of the Company’s unused net operating losses:

 

   As of March 31, 2017
(Dollars in thousands)  Amount   Expiration Dates
Federal  $23,976   2027-2034
North Carolina  $27,166   2024-2028

31
 

NOTE 11. EARNINGS PER SHARE

 

 

The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock:

 

   Three Months Ended March 31, 
(Dollars in thousands, except per share amounts)  2017   2016 
Numerator:          
Net income  $1,300   $1,366 
Denominator:          
Weighted-average common shares outstanding - basic   6,464,861    6,517,753 
Effect of dilutive shares   56,437    202 
Weighted-average common shares outstanding - diluted   6,521,298    6,517,955 
           
Earnings per share - basic  $0.20   $0.21 
Earnings per share - diluted  $0.20   $0.21 

 

At March 31, 2017, the Company had 5,000 potentially dilutive shares of common stock that were excluded from diluted earnings per share. These potentially dilutive shares of common stock are issuable upon exercise of stock options granted to employees with a weighted average exercise price of $21.05.

 

At March 31, 2016, the Company had the following potentially dilutive stock options and restricted stock units which were excluded from diluted earnings per share: 371,000 shares of common stock issuable upon exercise of stock options granted to employees and directors with a weighted average exercise price of $18.53; and 157,100 shares of common stock issuable upon completion of vesting of restricted stock units.

32
 

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

The following table summarizes the components of accumulated other comprehensive income and changes in those components as of and for the three months ended March 31, 2017 and 2016.

 

   Three Months Ended March 31, 2017 
   Available
for Sale
Securities
   Held to
Maturity
Securities
Transferred
from AFS
   Deferred Tax
Valuation
Allowance
on AFS
   Cash
Flow Hedge
   Total 
   (Dollars in thousands) 
Balance, beginning of period  $(5,554)  $   $(202)  $300   $(5,456)
                          
Change in deferred tax valuation allowance attributable to net unrealized losses on investment securities available for sale           54        54 
Change in net unrealized holding losses on securities available for sale   921                921 
Reclassification adjustment for net securities gains realized in net income   (7)               (7)
Reclassification adjustment for other than temporary impairment of securities available for sale   79                79 
Change in unrealized holding gains on cash flow hedge                   39    39 
Reclassification adjustment for cash flow effectiveness                  18    18 
Income tax benefit   (367)           (21)   (388)
                          
Balance, end of period  $(4,928)  $   $(148)  $336   $(4,740)
                     
   Three Months Ended March 31, 2016 
   (Dollars in thousands) 
Balance, beginning of period  $(594)  $(563)  $(579)  $   $(1,736)
                          
Change in deferred tax valuation allowance attributable to net unrealized losses on investment securities available for sale           201        201 
Change in net unrealized holding losses on securities available for sale   3,455                3,455 
Reclassification adjustment for net securities gains realized in net income   (269)               (269)
Transfer of net unrealized loss from available for sale to held to maturity                    
Amortization of unrealized gains and losses on securities transferred to held to maturity       431            431 
Income tax benefit   (1,198)   (163)           (1,361)
                          
Balance, end of period  $1,394   $(295)  $(378)  $   $721 

33
 

The following table shows the line items in the Consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income:

            
   Three Months Ended March 31    
(Dollars in thousands)  2017   2016   Income Statement Line Item Affected
Available-for-sale securities             
Gains recognized  $7   $269   Gain on sale of investments, net of loss
Other than temporary impairment   (79)      Other than temporary impairment on AFS securities
Income tax effect   27    (99)  Income tax expense
Reclassified out of AOCI, net of tax   (45)   170   Net income
              
Held-to-maturity securities             
Amortization of unrealized losses       (431)  Interest income - taxable securities
Income tax effect       163   Income tax expense
Reclassified out of AOCI, net of tax       (268)  Net income
              
Cash flow hedge             
Interest expense - effective portion   (17)      Interest expense - FHLB advances
Interest expense - effective portion   (1)      Interest expense - Junior subordinated notes
Income tax effect   7       Income tax expense
Reclassified out of AOCI, net of tax   (11)      Net income
              
Deferred tax valuation allowance             
Recognition of reversal of valuation allowance   (54)   (201)  Income tax expense
              
Total reclassified out of AOCI, net of tax  $(110)  $(299)  Net income

 

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

 

To accommodate the financial needs of its customers, the Company makes commitments under various terms to lend funds. These commitments include revolving credit agreements, term loan commitments and short-term borrowing agreements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many 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. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held includes first and second mortgages on one-to-four family dwellings, accounts receivable, inventory, and commercial real estate. Certain lines of credit are unsecured.

34
 

The following summarizes the Company’s approximate commitments to extend credit:

 

   March 31, 2017 
   (Dollars in thousands) 
Lines of credit  $109,286 
Standby letters of credit   805 
      
   $110,091 

 

As of March 31, 2017, the Company had outstanding commitments to originate loans as follows:

 

   March 31, 2017 
   Amount   Range of Rates 
   (Dollar in thousands) 
         
Fixed  $26,953    3.25% to 6.38% 
Variable   20,148    2.75% to 6.50% 
           
   $47,101      

 

The allowance for unfunded commitments was $0.1 million at March 31, 2017 and December 31, 2016.

 

The Company is exposed to loss as a result of its obligation for representations and warranties on loans sold to Fannie Mae and maintained a reserve of $0.3 million as of March 31, 2017 and December 31, 2016.

 

In the normal course of business, the Company is periodically involved in litigation. In the opinion of the Company’s management, none of this litigation is expected to have a material adverse effect on the accompanying consolidated financial statements.

 

NOTE 14. FAIR VALUE DISCLOSURES

 

 

We use fair value measurements when recording and disclosing certain financial assets and liabilities. AFS securities, loan servicing rights and mortgage derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and real estate owned.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which is developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimate of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

35
 

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

·Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
·Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
·Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Company’s entire holdings of a particular financial instrument. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

 

Investment Securities

 

We obtain fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

 

Included in securities are investments in an exchange traded bond fund and U.S. Treasury bonds which are valued by reference to quoted market prices and considered a Level 1 security.

 

Also included in securities are corporate bonds which are valued using significant unobservable inputs and are classified as Level 2 or Level 3 based on market information available during the period.

 

Trading securities represent investments in exchange traded mutual funds which are valued by reference to quoted market prices and considered a Level 1 security.

 

Loan Servicing Rights

 

Loan servicing rights are carried at fair value as determined by a third party valuation firm. The valuation model utilizes a discounted cash flow analysis using discount rates and prepayment speed assumptions used by market participants. The Company classifies loan servicing rights fair value measurements as Level 3.

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Derivative Instruments

 

Derivative instruments include interest rate lock commitments, forward sale commitments, and interest rate swaps. Interest rate lock commitments and forward sale commitments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. The Company classifies these instruments as Level 3.

 

Interest rate swaps are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. The Company classifies interest rate swaps as Level 2.

  

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

 

Loans Held for Sale

 

Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. Loans held for sale carried at fair value are classified as Level 2.

 

Impaired Loans

 

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured using the present value of expected future cash flows are not deemed to be measured at fair value.

 

Real Estate Owned

 

Real estate owned, obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. Real estate owned carried at fair value is classified as Level 3.

 

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.

 

Following is a description of valuation methodologies used for the disclosure of the fair value of financial instruments not carried at fair value:

 

Cash and Cash Equivalents

 

The carrying amount of such instruments is deemed to be a reasonable estimate of fair value.

37
 

Loans

 

The fair value of variable rate performing loans is based on carrying values adjusted for credit risk. The fair value of fixed rate performing loans is estimated using discounted cash flow analyses, utilizing interest rates currently being offered for loans with similar terms, adjusted for credit risk. The fair value of nonperforming loans is based on their carrying values less any specific reserve. A prepayment assumption is used to estimate the portion of loans that will be repaid prior to their scheduled maturity. No adjustment has been made for the illiquidity in the market for loans as there is no active market for many of the Company’s loans on which to reasonably base this estimate.

 

Bank Owned Life Insurance

 

Fair values approximate net cash surrender values.

 

Other Investments, at cost

 

No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. Accordingly, the carrying amount is deemed to be a reasonable estimate of fair value.

 

Small Business Investment Company Holdings

 

No ready market exists for our Small Business Investment Company (“SBIC”) holdings and it has no quoted market value. Accordingly, the carrying amount is deemed to be a reasonable estimate of fair value.

 

Deposits

 

The fair values disclosed for demand deposits are equal to the amounts payable on demand at the reporting date. The fair value of certificates of deposit are estimated by discounting the amounts payable at the certificate rates using the rates currently offered for deposits of similar remaining maturities.

 

Advances from the FHLB

 

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.

 

Junior Subordinated Notes

 

The carrying amount approximates fair value because the debt is variable rate tied to LIBOR.

 

Other Borrowings

 

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities.

 

Accrued Interest Receivable and Payable

 

Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

 

Loan Commitments

 

Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

 

38
 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis:

 

   March 31, 2017 
   Level 1   Level 2   Level 3   Total 
   (Dollars in thousands) 
Trading account assets  $5,499   $   $   $5,499 
Securities available for sale:                    
          U.S. government agencies       3,337        3,337 
          Municipal securities       150,385        150,385 
          Mortgage-backed securities       253,661        253,661 
          U.S. Treasury securities   2,512            2,512 
          Corporate bonds       20,179    1,056    21,235 
          Mutual funds   607            607 
    8,618    427,562    1,056    437,236 
                     
Loan servicing rights           2,638    2,638 
Derivative assets       533        533 
Forward sales commitments           8    8 
Interest rate lock commitments           67    67 
                     
          Total assets  $8,618   $428,095   $3,769   $440,482 
                     
                     
Forward sales commitments  $   $   $11   $11 
Interest rate lock commitments           18    18 
                     
Total liabilities  $   $   $29   $29 

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   December 31, 2016 
   Level 1   Level 2   Level 3   Total 
   (Dollars in thousands) 
Trading account assets  $5,211   $   $   $5,211 
Securities available for sale:                    
          U.S. government agencies       12,107        12,107 
          Municipal securities       146,771        146,771 
          Mortgage-backed securities       217,937        217,937 
          U.S. Treasury securities   2,514            2,514 
          Corporate bonds       16,214    2,144    18,358 
          Mutual funds   604            604 
    8,329    393,029    2,144    403,502 
                     
Loan servicing rights           2,603    2,603 
Derivative assets       476        476 
Forward sales commitments           19    19 
Interest rate lock commitments           41    41 
Total assets  $8,329   $393,505   $4,807   $406,641 

 

There were no liabilities measured at fair value on a recurring basis as of December 31, 2016.

 

The following table presents the changes in assets and liabilities measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value:

 

   Three Months Ended March 31, 
   2017   2016 
   (Dollars in thousands) 
Balance at beginning of period  $4,807   $2,390 
           
Corporate bonds          
Fair value adjustment   (2)    
Transfer to Level 2   (1,086)     
           
Loan servicing right activity, included in servicing income, net          
Capitalization from loans sold   151    128 
Fair value adjustment   (116)   (74)
           
Mortgage derivative gains(losses) included in other income   (14)   34 
           
Balance at end of period  $3,740   $2,478 

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

 

The table below presents information about certain assets and liabilities measured at fair value on a nonrecurring basis. There were no loans held for sale carried at fair value at either March 31, 2017 or December 31, 2016.

 

   March 31, 2017 
   Level 1   Level 2   Level 3   Total 
   (Dollars in thousands) 
Collateral dependent impaired loans:                    
One-to four family residential  $   $   $2,609   $2,609 
Commercial real estate           5,608    5,608 
Home equity loans and lines of credit           213    213 
Other construction and land           593    593 
                     
Real estate owned:                    
One-to-four family residential           1,353    1,353 
Commercial real estate           864    864 
Other construction and land           1,873    1,873 
                     
Total assets  $   $   $13,113   $13,113 
                 
   December 31, 2016 
   Level 1   Level 2   Level 3   Total 
   (Dollars in thousands) 
Collateral dependent impaired loans:                    
One-to-four family residential  $   $   $2,205   $2,205 
Commercial real estate           6,329    6,329 
Home equity loans and lines of credit           213    213 
Other construction and land           809    809 
                     
Real estate owned:                    
One-to-four family residential           1,336    1,336 
Commercial real estate           722    722 
Other construction and land           2,168    2,168 
                     
Total assets  $   $   $13,782   $13,782 

 

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2017 or December 31, 2016.

 

Impaired loans totaling $4.5 million at March 31, 2017 and $4.6 million at December 31, 2016, were measured using the present value of expected future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.

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The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2017.

 

    Valuation Technique   Unobservable Input   General Range
             
Impaired loans   Discounted Appraisals   Collateral discounts and estimated selling cost   0 – 30%
Real estate owned   Discounted Appraisals   Collateral discounts and estimated selling cost   0 – 30%
Corporate bonds   Discounted Cash Flows   Recent trade pricing   0-8%
Loan servicing rights   Discounted Cash Flows   Prepayment speed   5 - 35%
        Discount rate   12% - 14%

 

The approximate carrying and estimated fair value of financial instruments are summarized below:

 

   Carrying   Fair Value Measurements at March 31, 2017 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Assets:                         
Cash and equivalents  $84,217   $84,217   $84,217   $   $ 
Trading securities   5,499    5,499    5,499         
Securities available for sale   431,737    431,737    3,119    427,562    1,056 
Loans held for sale   2,309    2,492        2,492     
Loans receivable, net   759,150    753,182            753,182 
Other investments, at cost   12,208    12,208        12,208     
Interest receivable   5,287    5,287        5,287     
Bank owned life  insurance   31,528    31,528        31,528     
Loan servicing rights   2,638    2,638            2,638 
Forward sales commitments   8    8            8 
Interest rate lock commitments   67    67            67 
Derivative asset   533    533        533     
SBIC investments   2,670    2,670            2,670 
                          
Liabilities:                         
Demand deposits  $632,857    632,857   $   $632,857   $ 
Time deposits   355,134    351,214            351,214 
Federal Home Loan Bank advances   223,500    233,687        233,687     
Junior subordinated debentures   14,433    14,433        14,433     
Other borrowings   2,905    2,929        2,929     
Accrued interest payable   566    566        566     
Forward sales commitments   11    11            11 
Interest rate lock commitments   18    18            18 

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   Carrying   Fair Value Measurements at December 31, 2016 
(Dollars in thousands)  Amount   Total   Level 1   Level 2   Level 3 
Assets:                         
Cash and equivalents  $43,294   $43,294   $43,294   $   $ 
Trading securities   5,211    5,211    5,211         
Securities available for sale   398,291    398,291    3,118    393,029    2,144 
Loans held for sale   4,584    5,093        5,093     
Loans receivable, net   744,361    741,612            741,612 
Other investments, at cost   15,261    15,261        15,261     
Interest receivable   5,012    5,012        5,012     
Bank owned life  insurance   31,347    31,347        31,347     
Loan servicing rights   2,603    2,603            2,603 
Forward sales commitments   19    19            19 
Interest rate lock commitments   41    41            41 
Derivative asset   476    476        476     
SBIC investments   1,666    1,666            1,666 
                          
Liabilities:                         
Demand deposits  $540,808    540,808   $   $540,808   $ 
Time deposits   289,205    286,611            286,611 
Federal Home Loan Bank advances   298,500    298,667        298,667     
Junior subordinated debentures   14,433    14,433        14,433     
Other borrowings   2,725    2,907        2,907     
Accrued interest payable   254    254        254     

 

NOTE 15. SHARE REPURCHASES

 

 

On January 28, 2016, the Company announced that the Board of Directors had authorized the repurchase of up to 327,318 shares of the Company’s common stock. On February 24, 2017, the Company announced the extension of the stock repurchase program through February 23, 2018.

 

The following table summarizes repurchase activity through March 31, 2017:

 

Period  Total Number of
Shares Purchased
   Average Price
Paid per Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
 
January 1, 2017 to January 31, 2017      $        222,750 
February 1, 2017 to February 28, 2017      $        222,750 
March 1, 2017 to March 31, 2017   13,000   $23.12    13,000    209,750 
Total year-to-date 2017   13,000   $23.12    13,000    209,750 

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NOTE 16. SUBSEQUENT EVENTS

 

  

On April 28, 2017, the Louisiana Office of Financial Institutions closed First NBC Bank and appointed the FDIC as receiver. The Bank owns $0.7 million of subordinated debt issued by the holding company of First NBC Bank. The Company concluded the investment to be fully impaired. As such, the financial information as of and for the three months ended March 31, 2017 includes other than temporary impairment of $0.7 million before tax.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

  statements of our goals, intentions and expectations;

  statements regarding our business plans, prospects, growth and operating strategies;

  statements regarding the asset quality of our loan and investment portfolios; and

  estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company is under no duty to and does not undertake any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

·The value of our deferred tax asset could be significantly reduced if corporate tax rates in the U.S. decline or as a result of other changes in the U.S. corporate tax system;
·We may not be able to utilize all of our deferred tax asset;
·Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience an ownership change as defined in the Code;
·We may not be able to implement aspects of our growth strategy;
·Future expansion involves risks;
·New bank office facilities and other facilities may not be profitable;
·Acquisition of assets and assumption of liabilities may expose us to intangible asset risk, which could impact our results of operations and financial condition;
·The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand;
·Our return on equity may be low until we are able to leverage the capital we received from the stock offering;
·We may need additional access to capital, which we may be unable to obtain on attractive terms or at all;
·Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely affected;
·Our commercial real estate loans generally carry greater credit risk than one-to-four family residential mortgage loans;
·Our concentration of construction financing may expose us to a greater risk of loss and hurt our earnings and profitability;
·Repayment of our commercial business loans is primarily dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value;
·Our level of home equity loans and lines of credit lending may expose us to increased credit risk;
·We continue to hold and acquire other real estate, which has led to operating expenses and vulnerability to additional declines in real property values;
·A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business;
·Concentration of collateral in our primary market area may increase the risk of increased non-performing assets;
·Income from secondary mortgage market operations is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our earnings;
45
 
·We rely on the mortgage secondary market for some of our liquidity;
·Future changes in interest rates could reduce our profits;
·Strong competition within our market areas may limit our growth and profitability;
·Our stock-based benefit plan will increase our costs, which will reduce our income;
·The implementation of stock-based benefit plans may dilute your ownership interest;
·We are subject to extensive regulation and oversight, and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory action;
·Financial reform legislation enacted by Congress and resulting regulations have increased and are expected to continue to increase our costs of operations;
·We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations;
·We are subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares;
·We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services;
·The fair value of our investments could decline;
·Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows;
·Changes in accounting standards could affect reported earnings;
·We are subject to environmental liability risk associated with our lending activities;
·A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses;
·We are party to various lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained;
·Our stock price may be volatile, which could result in losses to our shareholders and litigation against us;
·The trading volume in our common stock is lower than that of other larger companies; future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline;
·There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock;
·We may issue additional debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in the event of liquidation, which could negatively affect the value of our common stock;
·Negative public opinion surrounding our company and the financial institutions industry generally could damage our reputation and adversely impact our earnings;
·Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business; and
·Other risks and uncertainties detailed in this Quarterly Report on Form 10-Q and, from time to time, in our other filings with the SEC.

 

For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K.

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Critical Accounting Policies and Estimates

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2017 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

The Jumpstart Our Business Startups Act (“JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of March 31, 2017 and December 31, 2016, there was not a significant difference in the presentation of our financial statements as compared to other public companies as a result of this transition guidance.

 

Overview

Entegra Financial Corp. was incorporated on May 31, 2011 to be the holding company for Entegra Bank (the “Bank”) upon the completion of Macon Bancorp’s merger with and into Entegra Financial Corp., pursuant to which Macon Bancorp converted from the mutual to stock form of organization. Prior to the completion of the conversion, Entegra Financial Corp. did not engage in any significant activities other than organizational activities. On September 30, 2014, the mutual to stock conversion was completed and the Bank became the wholly owned subsidiary of Entegra Financial Corp. Also on September 30, 2014, Entegra Financial Corp. completed the initial public offering of its common stock. In this Discussion and Analysis section, terms such as “we,” “us,” “our” and the “Company” refer to Entegra Financial Corp.

We provide a full range of financial services through offices located throughout the western North Carolina counties of Buncombe, Cherokee, Haywood, Henderson, Jackson, Macon, Polk, and Transylvania, the Upstate South Carolina counties of Anderson, Greenville, Pickens, and Spartanburg and the northern Georgia county of Jasper. We provide full service retail and commercial banking products as well as wealth management services through a third party.

We earn revenue primarily from interest on loans and securities, and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provisions for loan losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

Our results of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

 

Recent Events

 

On April 28, 2017, the Louisiana Office of Financial Institutions closed First NBC Bank and appointed the FDIC as receiver. The Bank owns $0.7 million of subordinated debt issued by the holding company of First NBC Bank. The Company concluded the investment to be fully impaired. As such, the financial information as of and for the three months ended March 31, 2017 includes other than temporary impairment of $0.7 million before tax. 

 

Strategic Plan

 

We continue to execute on our strategic plan which involves the following key components:

 

·Building a franchise that will provide above-average shareholder returns;
·Seeking acquisition opportunities that have reasonable earn-back periods and are accretive to return on equity while minimizing book value dilution;
·Building long-term franchise value by diversifying into high growth markets geographically contiguous to our current markets;
·Building deposits in rural markets;
·Maximizing our capital leverage through organic and acquired asset growth; and
·Rational use of share repurchases to supplement shareholder returns and return excess capital to shareholders, but not at the expense of building long-term value.

 

The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this report and in our Annual Report on Form 10-K.

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Earnings Summary

Net income for the three months ended March 31, 2017 was $1.3 million compared to $1.4 million for the same period in 2016. The decrease in net income for the quarter was primarily the result of decreases in noninterest income of $0.8 million, increases in noninterest expenses of $1.3 and a provision for loan losses of $0.3 million during the 2017 period partially offset by an increase in net interest income of $2.0 million.

The increase in net interest income for the period was primarily the result of increases in interest and fee income on loans of $1.3 million, interest on securities of $0.9 million, and interest on interest-bearing deposits of $0.1 million. These increases in interest income were partially offset by increases in interest expense on deposits and Federal Home Loan Bank (FHLB) advances of $0.1 million and $0.2 million, respectively.

 

Noninterest income decreased due primarily to other than temporary impairment of AFS securities totaling $0.7 million, reduced gains on sales of investments and Small Business Administration (SBA) loans partially offset by increases in mortgage banking income, interchange fees, bank-owned life insurance (BOLI) and trading securities income.

 

The increase in noninterest expense was primarily related to increased compensation and employee benefits of $0.8 million, and merger-related expenses of $0.3 million as the Company successfully grew its branch network during 2016 and 2017.

 

The provision for loan losses was $0.3 million for the quarter ended March 31, 2017, compared to no provision for loan losses for the same period in 2016. The Company continues to experience a minimal level of net charge-offs and modest levels of non-performing loans.

 

Non-GAAP Financial Measures

 

Statements included in this Management’s Discussion and Analysis include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. This Management’s Discussion and Analysis and the accompanying tables discuss financial measures, such as core net interest income, core noninterest expense, and core net income, which are non-GAAP measures. We believe that such non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Company’s operating results from period to period in a meaningful manner. Non-GAAP measures should not be considered as an alternative to any measure of performance as promulgated under GAAP. Investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company’s results or financial condition as reported under GAAP.

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We analyze our noninterest expense and net income on a non-GAAP basis as detailed in the table below:

 

   Three Months Ended March 31, 
   2017   2016 
   (Dollars in thousands) 
         
Core Noninterest Expense          
Noninterest expense (GAAP)  $8,607   $7,279 
Merger-related expenses   (448)   (145)
Core noninterest expense (Non-GAAP)  $8,159   $7,134 
           
Core Net Income          
Net income (GAAP)  $1,300   $1,366 
Gain on sale of investments   (5)   (175)
Other than temporary impairment of investment securities available for sale   441     
Merger-related expenses   291    94 
Core net income (Non-GAAP)  $2,027   $1,285 
           
Core Diluted Earnings Per Share          
Diluted earnings per share (GAAP)  $0.20   $0.21 
Gain on sale of investments        
Other than temporary impairment of investment securities available for sale   0.07     
Merger-related expenses   0.04    0.01 
Core diluted earnings per share (Non-GAAP)  $0.31   $0.21 
           
Core Return on Average Assets          
Return on Average Assets (GAAP)   0.39%   0.53%
Gain on sale of investments   0.00%   0.00%
Other than temporary impairment of investment securities available for sale   0.13%    
Merger-related expenses   0.09%   0.04%
Core Return on Average Assets (Non-GAAP)   0.61%   0.56%
           
Core Return on Average Equity          
Return on Average Equity (GAAP)   3.87%   4.10%
Gain on sale of investments   -0.01%   0.00%
Other than temporary impairment of investment securities available for sale   1.31%    
Merger-related expenses   0.87%   0.28%
Core Return on Average Equity (Non-GAAP)   6.04%   4.38%
           
Core Efficiency Ratio          
Efficiency ratio (GAAP)   80.43%   76.63%
Gain on sale of investments   0.07%   2.19%
Other than temporary impairment of investment securities available for sale   -6.15%   2.19%
Merger-related expenses   -4.19%   -1.53%
Core Efficiency Ratio (Non-GAAP)   70.16%   79.48%
         
   As Of 
   March 31,
2017
   December 31,
2016
 
   (Dollars in thousands,
except share data)
 
Tangible Book Value Per Share          
Book Value (GAAP)  $135,004   $133,068 
Goodwill and intangibles   (9,713)   (3,044)
Book Value (Tangible)  $125,291   $130,024 
Outstanding shares   6,455,145    6,467,550 
Tangible Book Value Per Share  $19.41   $20.10 

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Financial Condition at March 31, 2017 and December 31, 2016

 

Total assets increased $91.4 million, or 7.1%, to $1.38 billion at March 31, 2017 from $1.29 billion at December 31, 2016. This increase in assets was comprised primarily of loans, which increased $14.8 million, or 2.0%, and investment securities, which increased $33.4 million, or 8.4%. The increases in loans and investments were funded by cash from the deposits assumed in February 2017. On February 24, 2017, the Bank completed its acquisition of two branches from Stearns Bank, N.A. (Stearns). Deposits assumed in the branch acquisition totaled $79.6 million of core deposits and $74.5 million of certificates of deposits. Core deposits remained relatively unchanged at 64% of the Company’s deposit portfolio at March 31, 2017 compared to 65% at December 31, 2016.

Total liabilities increased $89.5 million, or 7.7%, to $1.25 billion at March 31, 2017 from $1.16 billion at December 31, 2016, due primarily to the $158.0 million increase in deposits and trade date settlements of $6.5 million partially offset by the $75.0 million decrease in FHLB advances.

Total equity increased $1.9 million, or 1.5%, to $135.0 million at March 31, 2017 from $133.1 million at December 31, 2016. This increase was the result of $1.3 million of net income, $0.2 million of stock-based compensation expense, and a $0.7 million improvement in other comprehensive income partially offset by $0.3 million of share repurchases.

Cash and Cash Equivalents

Total cash and cash equivalents increased $40.9 million, or 94.5%, to $84.2 million at March 31, 2017 from $43.3 million at December 31, 2016 primarily as a result of cash received in the settlement of the branch acquisition.

Investment Securities

The Company funded a trading account which is held in a Rabbi Trust to generate returns that seek to offset changes in liabilities related to the market risk of certain deferred compensation agreements.

 

The following table presents the holdings of our trading account as of March 31, 2017 and December 31, 2016: 

 

   March 31,
2017
   December 31,
2016
 
   (Dollars in thousands) 
         
Exchange traded mutual funds  $5,499   $5,211 
   $5,499   $5,211 

 

The remainder of our investment securities portfolio is classified as “available-for-sale” (AFS) and is carried at fair value. The Company’s held-to-maturity (HTM) investment portfolio was transferred to AFS during the third quarter of 2016 in order to provide the Company more flexibility managing its investment portfolio. As a result of the transfer, the Company is prohibited from classifying any investment securities as HTM for two years from the date of the transfer.

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The following table shows the amortized cost and fair value for our AFS investment portfolio at the dates indicated.

   At March 31,   At December 31, 
   2017   2016 
   Amortized
Cost
   Fair
value
   Amortized
Cost
   Fair
value
 
   (Dollars in thousands) 
Investment securities available-for-sale:                    
U.S. Government and agency securities:                    
U.S. Government and agency obligations  $3,323   $3,337   $12,076   $12,107 
U.S. Treasury Notes & Bonds   2,501    2,512    2,501    2,514 
Municipal obligations   155,294    150,385    152,208    146,771 
Mortgage-backed securities:                    
U.S. Government agency   160,586    158,799    128,820    126,766 
SBA securities   36,671    36,405    30,002    29,712 
Agency collateralized mortgage obligations   15,055    14,930    17,049    16,890 
Non-agency collateralized mortgage obligations   44,363    43,527    45,475    44,569 
Corporate Bonds   21,143    21,235    18,354    18,358 
Mutual funds   619    607    616    604 
                     
Total securities available-for-sale  $439,555   $431,737   $407,101   $398,291 

AFS investment securities increased $33.4 million, or 8.4%, to $431.7 million at March 31, 2017 from $398.3 million at December 31, 2016. We continue to grow our investment portfolio as we seek to better leverage our capital and invest excess cash.

We recorded other than temporary impairment of $0.7 million on our investment in one corporate subordinated debt AFS security as of March 31, 2017. See discussion in Note 16 of the accompanying unaudited financial statements.

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Loans

The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated. Other construction and land loans include residential acquisition and development loans, commercial undeveloped land and one-to-four family improved and unimproved lots. Commercial real estate includes non-residential owner occupied and non-owner occupied real estate, multi-family, and owner-occupied investment property. Commercial business loans include unsecured commercial loans and commercial loans secured by business assets.

 

   At March 31,   At December 31, 
   2017   2016 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
Real estate loans:                    
One- to four-family residential  $282,620    37.1%  $278,437    37.3
Commercial   296,224    38.8    292,879    39.2 
Home equity loans and lines of credit   48,340    6.3    50,334    6.7 
Residential construction   18,858    2.5    18,531    2.5 
Other construction and land   68,383    9.0    60,605    8.1 
Commercial   42,619    5.6    41,306    5.5 
Consumer   4,997    0.7    4,594    0.7 
Total loans, gross  $762,041    100.0%  $746,686    100.0%
                     
Less:                    
Deferred loan fees, net   (1,578)        (923)     
Fair value discount   (786)        (857)     
Unamortized premium   556         605      
Unamortized discount   (1,083)        (1,150)     
                     
Total loans, net  $759,150        $744,361      
                     
Percentage of total assets   54.8%        57.6%     

 

Net loans increased $14.8 million, or 2.0%, to $759.2 million at March 31, 2017 from $744.4 million at December 31, 2016. During 2017, we have continued to experience an improvement in loan demand and we maintain a favorable pipeline going into the second quarter. We believe that economic conditions in our primary market areas are favorable and present opportunities for continued growth.

Delinquent Loans

 

When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower will be referred to the Bank’s Credit Administration staff to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.

 

The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.

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If a loan is modified in a TDR, the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt.

 

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. We have no loans past due 90 days and over that are still accruing interest as of March 31, 2017 or December 31, 2016.

 

   Delinquent loans 
   30-59 Days   60-89 Days   90 Days and over   Total 
   (Dollars in thousands) 
At March 31, 2017                
Real estate loans:                    
One- to four-family residential  $5,522   $417   $1,035   $6,974 
Commercial   1,740        2,483    4,223 
Home equity loans and lines of credit   478    29    94    601 
Residential construction   300        212    512 
Other construction and land   4,081    41    141    4,263 
Commercial   343        34    377 
Consumer   6            6 
Total loans  $12,470   $487   $3,999   $16,956 
% of total loans, net   1.64%   0.06%   0.53%   2.23%
                     
At December 31, 2016                    
Real estate loans:                    
One- to four-family residential  $4,931   $1,116   $554   $6,601 
Commercial   1,383    1,800    1,681    4,864 
Home equity loans and lines of credit   126    44    233    403 
One- to four-family residential construction   180            180 
Other construction and land   467        919    1,386 
Commercial   368            368 
Consumer   62    1        63 
Total loans  $7,517   $2,961   $3,387   $13,865 
% of total loans, net   1.01%   0.40%   0.45%   1.86%

 

Delinquent loans increased $3.1 million, or 22.3%, to $17.0 million at March 31, 2017 from $13.9 million at December 31, 2016. The increase in delinquencies was due primarily to one $3.0 million loan which was classified as delinquent during the period ending March 31, 2017 but subsequently was returned to current status.

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Non-Performing Assets

Non-performing loans include all loans past due 90 days and over, certain impaired loans (some of which may be contractually current), and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Non-performing assets include non-performing loans and real estate owned (REO). The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

 

   March 31,   December 31, 
   2017   2016 
   (Dollars in thousands) 
Non-accrual loans:          
Real estate loans:          
One- to four-family residential  $1,885   $1,125 
Commercial   4,548    3,536 
Home equity loans and lines of credit   113    250 
Residential construction   212     
Other construction and land   426    1,042 
Commercial   66    41 
Consumer       47 
           
Total non-performing loans   7,250    6,041 
           
REO:          
One- to four-family residential   1,353    1,336 
Commercial real estate   864    722 
Other construction and land   1,873    2,168 
           
Total foreclosed real estate   4,090    4,226 
           
Total non-performing assets  $11,340   $10,267 
           
Troubled debt restructurings still accruing  $9,883   $9,882 
           
Ratios:          
Non-performing loans to total loans   0.96%   0.81%
Non-performing assets to total assets   0.82%   0.79%

 

Non-performing loans increased $1.3 million, or 20.0%, to $7.3 million at March 31, 2017 from $6.0 million at December 31, 2016. The increase in non-performing loans was primarily attributable to one credit relationship totaling $0.9 million, for which a loss is not expected.

REO decreased $0.1 million, or 3.2%, to $4.1 million at March 31, 2017 from $4.2 million at December 31, 2016.

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Classification of Loans

The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as “doubtful” or “loss” are charged off immediately.

   At March 31,   At December 31, 
   2017   2016 
   (Dollars in thousands) 
         
Classified loans:          
Substandard  $10,406   $12,353 
Doubtful        
Loss        
           
Total classified loans:   10,406    12,353 
As a % of total loans, net   1.37%   1.65%
           
Special mention   15,711    17,158 
           
Total criticized loans  $26,117   $29,511 
As a % of total loans, net   3.44%   3.95%

Total classified loans decreased $1.9 million, or 15.8%, to $10.4 million at March 31, 2017 from $12.4 million at December 31, 2016. Total criticized loans decreased $3.4 million, or 11.5%, to $26.1 million at March 31, 2017 from $29.5 million at December 31, 2016. Management continues to dedicate significant resources to monitoring and resolving classified and criticized loans.

 

Allowance for Loan Losses

 

The allowance for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers’ abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.

 

A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan. We individually evaluate loans classified as “substandard” or nonaccrual and greater than $350,000 for impairment. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property (less an estimate of selling costs if foreclosure or sale of the property is anticipated). If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment.

The allowance for homogenous loans consists of a base loss reserve and a qualitative reserve. The base loss reserve utilizes an average loss rate for the last 16 quarters. The loss rates for the base loss reserve are segmented into 13 loan categories and contain loss rates ranging from approximately 0.5% to 1.0%.

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The qualitative reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external factors:

 

    Non-accrual and classified loans

    Collateral values

    Loan concentrations

    Economic conditions – including unemployment rates, home sales and prices, and a regional economic index.

 

Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends. These factors are subject to further adjustment as economic and other conditions change.

The following table sets forth activity in our allowance for loan losses at the dates and for the periods indicated.

   As of or for the Three Months
Ended March 31,
 
   2017   2016 
   (Dollars in thousands) 
Balance at beginning of period  $9,305   $9,461 
           
Charge-offs:        
Real Estate:          
One- to four-family residential   4    46 
Commercial   88     
Home equity loans and lines of credit       37 
Residential construction        
Other construction and land   228    317 
Commercial        
Consumer   15    10 
Total charge-offs   335    410 
           
Recoveries:          
Real Estate:          
One- to four-family residential   5    23 
Commercial   77     
Home equity loans and lines of credit       113 
Residential construction        
Other construction and land   55    77 
Commercial   8    118 
Consumer   68    116 
Total recoveries   213    447 
           
Net charge-offs (recoveries)   122    (37)
           
Provision for loan losses   315     
           
Balance at end of period  $9,498   $9,498 
           
Ratios:          
Net charge-offs to average loans outstanding   0.07%   (0.02)%
Allowance to non-performing loans at period end   131.01%   105.74%
Allowance to total loans at period end   1.25%   1.50%


We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. Our coverage ratio of non-performing loans remained strong at 131.01% at March 31, 2017 compared to 156.03% at December 31, 2016 and 105.74% at March 31, 2016.

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REO

The table below summarizes the balances and activity in REO at the dates and for the periods indicated.

   March 31,   December 31, 
   2017   2016 
   (Dollars in thousands) 
         
One- to four-family residential  $1,353   $1,336 
Commercial real estate   864    722 
Residential construction        
Other construction and land   1,873    2,168 
Total  $4,090   $4,226 
     
   Three Months Ended March 31, 
   2017   2016 
   (Dollars in thousands) 
Balance, beginning of period  $4,226   $5,369 
Additions   237    508 
Disposals   (295)   (105)
Writedowns   (78)   (342)
Balance, end of period  $4,090   $5,430 

 

Real estate owned decreased $0.1 million to $4.1 million at March 31, 2017 from $4.2 million at December 31, 2016. We have experienced a significant decrease in the number and dollar amount of additions to REO, and have had moderate success in liquidating REO. Our policy continues to be to aggressively market REO for sale, including recording write-downs when necessary.

Net Deferred Tax Assets

 

Deferred income tax assets and liabilities are determined using the asset and liability method and are reported net in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rate and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on management’s judgment as to whether realization is more likely than not. In determining the need for a valuation allowance, we considered the following sources of taxable income:

 

·Future reversals of existing taxable temporary differences;
·Future taxable income exclusive of reversing temporary differences and carry forwards;
·Taxable income in prior carryback years; and
·Tax planning strategies that would, if necessary, be implemented.

 

Net deferred tax assets decreased $0.7 million, or 3.8%, to $18.3 million at March 31, 2017 compared to $19.0 million at December 31, 2016. The decrease in net deferred tax assets is mainly attributable to reductions in our federal and state net operating losses and improvement in the net unrealized holding gains/losses on our investment securities.

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Deposits

The following table presents deposits by category and percentage of total deposits as of the dates indicated.

   As of   As of 
   March 31, 2017   December 31, 2016 
   Balance   Percent   Balance   Percent 
   (Dollars in thousands) 
Deposit type:                    
Noninterest-bearing demand accounts  $153,740    15.6%  $139,136    16.8%
Interest-bearing demand accounts   173,433    17.6    122,271    14.7 
Money market accounts   257,466    26.1    239,387    28.8 
Savings accounts   48,218    4.9    40,014    4.8 
Time deposits   355,134    35.9    289,205    34.8 
                     
Total deposits  $987,991    100.0%  $830,013    100.0%

Core deposits increased $89.0 million, or 16.5%, to $629.8 million at March 31, 2017 from $540.8 million at December 31, 2016, including $79.6 million of core deposits assumed in the Stearns branch acquisition. Excluding $74.5 million of certificates of deposit assumed from Stearns, certificates of deposit decreased $8.6 million, or 3.0%, to $280.6 million at March 31, 2017 compared to $289.2 million at December 31, 2016. Core deposits remained relatively unchanged at 64% of the Company’s deposit portfolio compared to 65% at December 31, 2016.

 

FHLB Advances

FHLB advances decreased $75.0 million to $223.5 million at March 31, 2017 compared to $298.5 million at December 31, 2016. Funds received from the Stearns branch acquisition were used to pay off certain short-term advances as they matured. The advances had a weighted average rate of 0.87% as of March 31, 2017 compared to 0.68% at December 31, 2016. To manage our exposure to interest rate movement, we entered into two interest rate swaps during 2016. The swap contracts involve the payment of fixed-rate amounts to a counterparty in exchange for our receipt of variable-rate payments over the two year lives of the contracts. The effective interest rates of the swap were 0.89% and 1.16% at March 31, 2017.

Junior Subordinated Notes

We had $14.4 million in junior subordinated notes outstanding at March 31, 2017 and December 31, 2016 payable to an unconsolidated subsidiary. These notes accrue interest at 2.80% above the 90-day LIBOR, adjusted quarterly. To add stability to net interest revenue and manage our exposure to interest rate movement, we entered into an interest rate swap in June 2016. The swap contract involves the payment of fixed-rate amounts to a counterparty in exchange for our receipt of variable-rate payments over the four year life of the contract. The effective interest rate was 3.76% at March 31, 2017 and December 31, 2016.

Equity

Total equity increased $1.9 million, or 1.5%, to $135.0 million at March 31, 2017 from $133.1 million at December 31, 2016. This increase was primarily attributable to $1.3 million of net income, $0.2 million of stock-based compensation expense, and a $0.7 million improvement in other comprehensive income partially offset by $0.3 million of share repurchases.

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Comparison of Operating Results for the Three Months Ended March 31, 2017 and March 31, 2016.

General. Net income for the three months ended March 31, 2017 was $1.3 million compared to $1.4 million for the same period in 2016. The decrease in net income for the recent quarter was primarily the result decreases in noninterest income of $0.8 million as the result of other than temporary impairment, increases in noninterest expenses of $1.3 million and a provision for loan losses of $0.3 million during the 2017 period partially offset by an increase in net interest income of $2.0 million.

Net Interest Income. Net interest income increased $2.0 million for the three months ended March 31, 2017 compared to the same period in 2016. The increase in net interest income for the period was primarily the result of increases in interest and fee income on loans of $1.3 million, interest on securities of $0.9 million, and interest on interest-bearing deposits of $0.1 million. These increases in interest income were partially offset by increases in interest expense on deposits and FHLB advances of $0.1 million and $0.2 million, respectively.

The tax-equivalent net interest margin increased to 3.30% for the quarter ended March 31, 2017 compared to 3.22% for the same period in 2016. The increase in margin was primarily the result of increased yields on taxable investments and loans and decreased rates on deposits.

The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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   For the three Months Ended March 31, 
   2017   2016 
   Average
Outstanding
Balance
   Interest   Yield/
Rate
   Average
Outstanding
Balance
   Interest   Yield/
Rate
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans, including loans held for sale  $743,154   $8,476    4.63%  $633,048   $7,206    4.57%
Loans, tax exempt (1)   14,908    137    3.72%   6,543    68    4.27%
Investments - taxable   296,317    1,759    2.37%   260,619    1,458    2.24%
Investment tax exempt (1)   111,432    1,125    4.04%   17,713    217    4.58%
Interest earning deposits   57,888    116    0.81%   33,468    36    0.43%
Other investments, at cost   13,865    172    5.03%   8,951    105    4.71%
                               
Total interest-earning assets   1,237,564    11,785    3.86%   960,342    9,090    3.80%
                               
Noninterest-earning assets   97,048              75,923           
                               
Total assets  $1,334,612             $1,036,265           
                               
Interest-bearing liabilities:                              
Savings accounts  $43,012   $12    0.11%  $35,619   $10    0.11%
Time deposits   328,605    757    0.93%   272,753    757    1.11%
Money market accounts   246,621    219    0.36%   189,334    148    0.31%
Interest bearing transaction accounts   135,263    40    0.12%   102,706    27    0.11%
Total interest bearing deposits   753,501    1,028    0.55%   600,412    942    0.63%
                               
FHLB advances   274,889    530    0.78%   156,247    275    0.71%
Junior subordinated debentures   14,433    137    3.85%   14,433    126    3.50%
Other borrowings   2,788    30    4.36%   2,218    26    4.70%
                               
Total interest-bearing liabilities   1,045,611    1,725    0.67%   773,310    1,369    0.71%
                               
Noninterest-bearing deposits   140,563              116,440           
                               
Other non interest bearing liabilities   13,935              13,225           
                               
Total liabilities   1,200,109              902,975           
Total equity   134,503              133,290           
                               
Total liabilities and equity  $1,334,612             $1,036,265           
                               
Tax-equivalent net interest income       $10,060             $7,721      
                               
                               
Net interest-earning assets (2)  $191,953             $187,032           
                               
Average interest-earning assets to interest-bearing liabilities   1.18%             1.24%          
                               
Tax-equivalent net interest rate spread (3)             3.19%             3.09%
Tax-equivalent net interest margin (4)             3.30%             3.22%

 

(1) Tax exempt loans and investments are calculated giving effect to a 35% federal tax rate.

(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(3) Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

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The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to change in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on changes due to rate and the changes due to volume.

   For the Three Months Ended March 31, 2017
Compared to the Three Months Ended March 31, 2016
 
   Increase (decrease) due to: 
   Volume   Rate   Total 
   (Dollars in thousands) 
Interest-earning assets:               
Loans, including loans held for sale (1)  $1,174   $96   $1,270 
Loans, tax exempt (2)   79    (10)   69 
Investment - taxable   214    87    301 
Investments - tax exempt (2)   934    (26)   908 
Interest-earning deposits   36    44    80 
Other investments, at cost   59    8    67 
                
Total interest-earning assets   2,496    199    2,695 
                
Interest-bearing liabilities:               
Savings accounts  $2   $0   $2 
Time deposits   132    (132)   0 
Money market accounts   47    24    71 
Interest bearing transaction accounts   9    4    13 
FHLB advances   223    32    255 
Junior subordinated debentures       11    11 
Other borrowings   6    (2)   4 
                
Total interest-bearing liabilities   419    (63)   356 
                
Change in tax-equivalent net interest income  $2,077   $262   $2,339 

          

(1) Non-accrual loans are included in the above analysis.    

(2) Interest income on tax exempt loans and investments are adjusted for based on a 35% federal tax rate

Net interest income before provision for loan losses increased to $9.6 million for the three months ended March 31, 2017, compared to $7.6 million for the same period in 2016. As indicated in the table above, an increase in net interest income of $2.0 million attributable to an improvement in volume was supplemented by a $0.3 million improvement in net interest income earned attributable to a reduction in rates.

 

The increase in tax-equivalent net interest income of $2.0 million related to volume was primarily the result of higher average loan balances which increased $118.5 million, primarily as the result of the Old Town Bank acquisition in 2016, and investment balances which increased $129.4 million for the three months ended March 31, 2017 as compared to the same period in 2016. The increase in average loan and investment balances was partially offset by higher average deposit and FHLB advance balances which increased $153.0 million and $118.6 million, respectively, over the same periods. While the average deposit growth was primarily attributable to the Stearns branch acquisition, the increase in average FHLB advances was a result of a leverage strategy to fund investment purchases.

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The increase in tax-equivalent net interest income of $0.3 million related to rate was primarily the result of increased yields on taxable loans and investments and decreased time deposit rates partially offset by decreased tax exempt investment yields. The decrease in average tax exempt investment yields was offset by the impact of lower average time deposit yields which decreased 18 basis points to 0.93% in the quarter ended March 31, 2017 as compared to 1.11% in the three months ending March 31, 2016.

Our tax-equivalent net interest rate spread increased by 10 basis points to 3.19% for the three months ended March 31, 2017 compared to 3.09% for the three months ended March 31, 2016, and our tax-equivalent net interest margin increased eight basis points to 3.30% for the three months ended March 31, 2017, compared to 3.22% for the three months ended March 31, 2016. The increases in our interest rate spread and margin were primarily a result of decreased rates on time deposits and increases in loan yields.

Provision for Loan Losses. We recorded a provision for loan losses for the three months ended March 31, 2017 of $0.3 million compared to no provision for loan losses for the same period in 2016 due to loan growth. We are experiencing continued stabilization in asset quality, low charge off amounts, and a continued decline in the overall loss rates used in our allowance for loan losses model.

Noninterest Income. The following table summarizes the components of noninterest income and the corresponding change between the three month periods ended March 31, 2017 and 2016: 

   Three Months Ended March 31, 
   2017   2016   Change 
   (Dollars in thousands) 
Servicing income, net  $95   $116   $(21)
Mortgage banking   220    140    80 
Gain on sale of SBA loans   142    334    (192)
Gain on sale of investments, net   7    269    (262)
Other than temporary impairment on AFS investment securities   (700)       (700)
Service charges on deposit accounts   391    394    (3)
Interchange fees   410    342    68 
Bank owned life insurance   181    107    74 
Other   337    173    164 
                
Total  $1,083   $1,875   $(792)

 

The $0.1 million increase in mortgage banking income is primarily due to increased volume.

 

Gains on sales of SBA loans decreased $0.2 million as a result of a fewer SBA loans being sold during the 2017 period. We continue to focus on our SBA lending efforts.

Net gains on sales of investments decreased $0.3 million for the three months ended March 31, 2017 compared to the same period in 2016 due an increase in interest rates which provided unfavorable market conditions for sales.

We recorded $0.7 million of other than temporary impairment during the three months ended March 31, 2017 as a result of information received April 28, 2017. See Note 16 in the accompanying unaudited financial statements for further discussion.

Interchange fees increased $0.1 million as a result of increased core deposit accounts and the acquisition of approximately $88.7 million in deposits from Old Town Bank in April 2016.

BOLI income increased $0.1 million for the three months ended March 31, 2017 compared to the same period in 2016 due to the purchase of $10.0 million of additional policies in the third quarter of 2016.

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Other noninterest income increased $0.2 million for the three months ended March 31, 2017, compared to the same period in 2016 primarily as a result of increases in trading securities revenue. 

Noninterest Expense. The following table summarizes the components of noninterest expense and the corresponding change between the three months ended March 31, 2017 and 2016:

   Three Months Ended March 31, 
   2017   2016   Change 
   (Dollars in thousands) 
             
Compensation and employee benefits  $4,836   $4,010   $826 
Net occupancy   951    817    134 
Federal deposit insurance   104    176    (72)
Professional and advisory   274    212    62 
Data processing   401    351    50 
Marketing and advertising   248    200    48 
Merger-related expenses   448    145    303 
Net cost of operation of REO   134    286    (152)
Other   1,211    1,082    129 
                
Total noninterest expenses  $8,607   $7,279   $1,328 

Compensation and employee benefits increased $0.8 million, or 20.6%, for the three months ended March 31, 2017 as compared to the same period in 2016. This additional expense is related to increases in our number of employees primarily as a result our acquisition of Old Town Bank and Stearns branch acquisitions, annual raises, employee benefits, incentives and commissions.

Net occupancy increased $0.1 million, or 16.4%, for the three months ended March 31, 2017 as compared to the same period in 2016 primarily as the result of our acquisition of Old Town Bank and Stearns branch acquisitions.

Professional and advisory expenses increased $0.1 million for the three months ended March 31, 2017 compared to the same period in 2016 primarily as the result of increased fees for tax related services and fees related to public filing requirements.

Merger-related expenses increased $0.3 million for the three months ended March 31, 2017 compared to the same period in 2016 primarily as a result of the Stearns branch acquisition.

Other noninterest expense increased $0.1 million for the three months ended March 31, 2017 compared to the same period in 2016 primarily as the result of increased debit card and interchange expenses of $0.1 million from increased transaction activity due to our acquisition of Old Town Bank and Stearns branch acquisitions.

Income Taxes. We recorded $0.5 million of income tax expense for the three months ended March 31, 2017 compared to tax expense of $0.9 million for the same period in 2016. Our effective tax rate of 26.9% for the three months ended March 31, 2017 improved from 38.5% for the same period in 2016 primarily as the result of increased tax-exempt income related to municipal bond investments and BOLI income.

We continue to utilize unused net operating losses for federal and state income tax purposes and do not have a material current tax liability or receivable.

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Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB, proceeds from the sale of loans originated for sale, and principal repayments and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2017.

 

We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in FHLB and FRB interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At March 31, 2017, cash and cash equivalents totaled $84.2 million. Included in this total was $66.4 million held at FRB and $2.4 million held at the FHLB in interest-earning accounts.

 

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements. The following summarizes the most significant sources and uses of liquidity during the three months ended March 31, 2017 and 2016:

 

   Three Months Ended March 31, 
   2017   2016 
   (Dollars in thousands) 
Operating activities:          
Loans originated for sale  $(10,848)  $(2,932)
Proceeds from loans originated for sale   12,342    6,520 
           
Investing activities:          
Purchases of investments  $(53,493)  $(53,998)
Maturities and principal repayments of investments   8,523    15,000 
Sales of investments   17,324    34,717 
Net increase in loans   (14,426)   (8,795)
Net cash received in branch acquisition   146,750    (13,367)
Redemptions of other investments, at cost   3,053     
           
Financing activities:          
Net increase (decrease) in deposits  $3,359   $3,667 
Proceeds from FHLB advances   340,000    125 
Repayment of FHLB advances   (415,000)   (115,000)

 

At March 31, 2017, we had $47.1 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $110.1 million in unused lines of credit.

 

Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit. Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large portion of our retail certificates of deposit with maturities of one year or less as of March 31, 2017.

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In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows.

 

Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have borrowing agreements with the FHLB and the FRB discount window. The following summarizes our borrowing capacity as of March 31, 2017:

 

   Total   Used   Unused 
(Dollars in thousands)  Capacity   Capacity   Capacity 
             
FHLB  $237,298   $223,500   $13,798 
Unpledged Marketable Securities   431,737    191,526    240,211 
Fed funds lines   15,000        15,000 
FRB   46,054        46,054 
   $730,089   $415,026   $315,063 

 

In addition to the amounts noted in the table above, we have the ability to pledge additional loans and increase our borrowing capacity with the FHLB.

 

In July 2013, the Federal Reserve and the FDIC issued final rules to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019.

 

The final rule also includes changes in what constitutes regulatory capital, some of which are subject to a transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital, subject to a transition period. Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized gains and losses on AFS debt and equity securities), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in the Bank’s Tier 1 capital.

 

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based guidelines and framework under prompt corrective action provisions include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.

 

When Basel III is fully phased in on January 1, 2019, the Company and the Bank will be required to maintain a 2.5% capital conservation buffer which is designed to absorb losses during periods of economic distress. This capital conservation buffer is comprised entirely of Common Equity Tier 1 Capital and is in addition to minimum risk-weighted asset ratios.

 

The tables below summarize capital ratios and related information in accordance with Basel III as measured at March 31, 2017 and December 31, 2016.

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The following table summarizes the required and actual capital ratios of the Bank as of the dates indicated:

 

   Actual   For Capital Adequacy Purposes   To Be Well-
Capitalized Under
Prompt Corrective
Action Provisions
 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
As of March 31, 2017:                        
Tier 1 Leverage Capital  $133,354    10.09%  $52,863    >4%   $66,079    >5% 
Common Equity Tier 1 Capital  $133,354    15.06%  $50,899    >5.75%   $57,538    >6.5% 
Tier 1 Risk-based Capital  $133,354    15.06%  $64,177    >7.25%   $70,816    >8% 
Total Risk-based Capital  $142,953    16.15%  $81,881    >9.25%   $88,520    >10% 
                               
As of December 31, 2016:                              
Tier 1 Leverage Capital  $138,402    11.06%  $50,034    >4%   $62,542    >5% 
Common Equity Tier 1 Capital  $138,402    16.33%  $38,150    >5.125%   $55,106    >6.5% 
Tier 1 Risk-based Capital  $138,402    16.33%  $50,867    >6.625%   $67,823    >8% 
Total Risk-based Capital  $147,807    17.43%  $67,823    >8.625%   $84,778    >10% 

 

As of March 31, 2017, includes capital conservation buffer of 1.25%. On a fully phased in basis, effective January 1, 2019, under Basel III, minimum capital ratios to be considered “adequately capitalized” including the capital conservation buffer of 2.5% will be as follows: Tier 1 Leverage Capital – 4.0%; Common Equity Tier 1 Capital – 7.0%; Tier 1 Risk-based Capital – 8.5%; and Total Risk-based Capital – 10.5%.

 

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The following table summarized the required and actual capital ratios of the Company as of the dates indicated:

 

   Actual   For Capital Adequacy
Purposes
 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio 
As of March 31, 2017:                    
Tier I Leverage Capital  $136,519    10.32%  $52,894    >4% 
Common Equity Tier 1 Capital  $123,804    13.97%  $50,948    >5.75% 
Tier I Risk-based Capital  $136,519    15.41%  $64,238    >7.25% 
Total Risk Based Capital  $146,118    16.49%  $81,959    >9.25% 
                     
As of December 31, 2016:                    
Tier I Leverage Capital  $141,013    11.28%  $50,220    >4% 
Common Equity Tier 1 Capital  $130,079    15.33%  $38,188    >5.125% 
Tier I Risk-based Capital  $141,013    16.62%  $50,918    >6.625% 
Total Risk Based Capital  $150,418    17.72%  $67,891    >8.625% 

 

As of March 31, 2017, includes capital conservation buffer of 1.25%. On a fully phased in basis, effective January 1, 2019, under Basel III, minimum capital ratios to be considered “adequately capitalized” including the capital conservation buffer of 2.5% will be as follows: Tier 1 Leverage Capital – 4.0%; Common Equity Tier 1 Capital – 7.0%; Tier 1 Risk-based Capital – 8.5%; and Total Risk-based Capital – 10.5%.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

One of the most significant forms of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest –sensitive income and expense levels. Interest rate changes affect economic value of equity (“EVE”) by changing the net present value of a bank’s future cash flows, and the cash flows themselves as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive risk can threaten a bank’s earnings, capital, liquidity and solvency. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The Board of Directors of the Bank have established an Asset/Liability Management Committee (“ALCO”), which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board. Our ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and simulations in order to avoid unacceptable earnings and market value fluctuations due to changes in interest rates.

 

One of the primary ways we manage interest rate risk is by selling the majority of our long-term fixed rate mortgages into the secondary markets, and obtaining commitments to sell at locked-in interest rates prior to issuing a loan commitment. From a funding perspective, we expect to satisfy the majority of our future requirements with retail deposit growth, including checking and savings accounts, money market accounts and certificates of deposit generated within our primary markets. If our funding needs exceed our deposits, we will utilize our excess funding capacity with the FHLB and the FRB.

 

We have taken the following steps to reduce our interest rate risk:

 

increased our personal and business checking accounts and our money market accounts, which are less rate-sensitive than certificates of deposit and which provide us with a stable, low-cost source of funds;

 

limited the fixed rate period on loans within our portfolio;

 

utilized our securities portfolio for positioning based on projected interest rate environments;

 

priced certificates of deposit to encourage customers to extend to longer terms;

 

engaged in interest rate swap agreements;

 

utilized FHLB advances for positioning.

 

We have not conducted speculative hedging activities, such as engaging in futures or options.

 

Economic Value of Equity (EVE)

 

EVE is the difference between the present value of an institution’s assets and liabilities (the institution’s EVE) that would change in the event of a range of assumed changes in market interest rates. EVE is used to monitor interest rate risk beyond the 12 month time horizon of income simulations. The simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability and off-balance sheet contract using the current interest rate yield curve with instantaneous increases or decreases of 100 to 400 basis points in 100 basis point increments. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

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Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs, or loan repayments and deposit decay, respond to changes in market interest rates. In this regard, the EVE information presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE information provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

 

Net Interest Income

 

In addition to an EVE analysis, we analyze the impact of changing rates on our net interest income. Using our balance sheet as of a given date, we analyze the repricing components of individual assets, and adjusting for changes in interest rates at 100 basis point increments, we analyze the impact on our net interest income. Changes to our net interest income are shown in the following table based on immediate changes to interest rates in 100 basis point increments.

 

The table below reflects the impact of an immediate increase in interest rates in 100 basis point increments on Pretax Net Interest Income (NII) and Economic Value of Equity (EVE).

 

   March 31, 2017   December 31, 2016 
Change in Interest Rates
(basis points)
  % Change in Pretax Net
Interest Income
   % Change in Economic
Value of Equity
   % Change in Pretax Net
Interest Income
   % Change in Economic
Value of Equity
 
+400   (0.6)   (7.3)   (9.2)   (15.2)
+300   (0.1)   (5.8)   (6.6)   (11.7)
+200   0.2    (4.2)   (4.2)   (7.9)
+100   0.1    (2.8)   (2.1)   (4.7)
 -                
-100   (2.2)   6.7    (1.7)   8.7 

 

The results from the rate shock analysis on NII are consistent with having a slightly asset sensitive balance sheet. Having an asset sensitive balance sheet means assets will reprice at a faster pace than liabilities during the short-term horizon. The implications of an asset sensitive balance sheet will differ depending upon the change in market rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, the interest rate on assets will decrease at a faster pace than liabilities. This situation generally results in a decrease in NII and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, the interest rate on assets will increase at a faster pace than liabilities. This situation generally results in an increase in NII and operating income. As indicated in the table above, a 200 basis point increase in rates would result in a 0.2% increase in NII as of March 31, 2017 as compared to a 4.2% decrease in NII as of December 31, 2016, suggesting that there is a slight benefit for the Company to net interest income in rising interest rates The Company generally seeks to remain neutral to the impact of changes in interest rates by maximizing current earnings while balancing the risk of changes in interest rates.

The results from the rate shock analysis on EVE are consistent with a balance sheet whose assets have a longer maturity than its liabilities. Like most financial institutions, we generally invest in longer maturity assets as compared to our liabilities in order to earn a higher return on our assets than we pay on our liabilities. This is because interest rates generally increase as the time to maturity increases, assuming a normal, upward sloping yield curve. In a rising interest rate environment, this results in a negative EVE because higher interest rates will reduce the present value of longer term assets more than it will reduce the present value of shorter term liabilities, resulting in a negative impact on equity. As noted in the table above, our exposure to higher interest rates from an EVE or present value perspective has decreased from December 31, 2016 to March 31, 2017. For example, as indicated in the table above, a 200 basis point increase in rates would result in a 4.2% decrease in EVE as of March 31, 2017 as compared to a 7.9% decrease in EVE as of December 31, 2016.

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Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2017. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of March 31, 2017, the end of the period covered by this Quarterly Report on Form 10-Q, the Company maintained effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not involved in any material pending legal proceedings. In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended March 31, 2017.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors that we have previously disclosed in the “Risk Factors” section in our 2016 Annual Report on Form 10-K as filed with the SEC on March 15, 2017.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 28, 2016, the Company announced that the Board of Directors had authorized the repurchase of up to 327,318 shares of the Company’s common stock. On February 24, 2017, the Company announced the extension of the stock repurchase program through February 23, 2018.

 

The table below sets forth information regarding the Company’s common stock repurchases during the three months ended March 3017:

 

Period  Total Number of Shares
Purchased
   Average Price Paid
per Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
 
January 1, 2017 to January 31, 2017      $        222,750 
February 1, 2017 to February 28, 2017      $        222,750 
March 1, 2017 to March 31, 2017   13,000   $23.12    13,000    209,750 
Total year-to-date 2017   13,000   $23.12    13,000    209,750 

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Mine Safety Disclosures

 

Not Applicable

 

Item 5. Other Information

None

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Item 6. Exhibits

 

Exhibit
No.
 Description
   
2 Plan of Conversion, incorporated by reference to Exhibit 2 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
   
3.1 Articles of Incorporation of Entegra Financial Corp., as amended and restated, incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
   
3.2 Bylaws of Entegra Financial Corp., as amended and restated, incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
   
3.3 Articles of Amendment of Entegra Financial Corp., incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed with the SEC on November 16, 2015 (SEC File No. 001-35302)
   
4 Form of Common Stock Certificate of Entegra Financial Corp., incorporated by reference to Exhibit 4 of the Registration Statement on Form S-1/A, filed with the SEC on June 27, 2014 (SEC File No. 333-194641).
   
10.1 Employment and Change of Control Agreement, dated as of October 9, 2014, by and among Entegra Financial Corp., Macon Bank, Inc., and Roger D. Plemens, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on October 15, 2014 (SEC File No. 001-35302)*
   
10.2 Employment and Change of Control Agreement, dated as of November 1, 2014, by and among Entegra Financial Corp., Macon Bank, Inc., and Ryan M. Scaggs, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on November 6, 2014 (SEC File No. 001-35302)*
   
10.3 Employment and Change of Control Agreement, dated as of November 1, 2014, by and among Entegra Financial Corp., Macon Bank, Inc., and David A. Bright, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K, filed with the SEC on November 6, 2014 (SEC File No. 001-35302)*
   
10.4 Form of Macon Bank, Inc. Severance and Non-Competition Agreement between Macon Bank, Inc. and each of (i) Carolyn H. Huscusson, (ii) Bobby D. Sanders, II, (iii) Laura W. Clark, and (iv) Marcia J. Ringle, incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).*
   
10.5 Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated as of December 30, 2003 incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
   
10.6 Guarantee Agreement, regarding Trust Preferred Securities, dated as of December 30, 2003 incorporated by reference to Exhibit 10.7 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
   
10.7 Junior Subordinated Indenture, regarding Trust Preferred Securities, dated as of December 30, 2003 incorporated by reference to Exhibit 10.8 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).

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10.8 Salary Continuation Agreement between Macon Bank, Inc. and Carolyn H. Huscusson, dated November 6, 2007, incorporated by reference to Exhibit 10.11 of the Registration Statement on Form S-1/A, filed with the SEC on May 14, 2014 (SEC File No. 333-194641).*
   
10.9 Salary Continuation Agreement between Macon Bank, Inc. and Roger D. Plemens, dated June 23, 2003, incorporated by reference to Exhibit 10.12 of the Registration Statement on Form S-1/A, filed with the SEC on May 14, 2014 (SEC File No. 333-194641).*
   
10.10 Entegra Financial Corp. 2015 Long-Term Stock Incentive Plan incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on May 21, 2015. (SEC File No. 001-35302).*
   
10.11 Tax Benefits Preservation Plan, dated as of November 16, 2015, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed with the SEC on November 16, 2015 (SEC File No. 001-35302)
   
10.12 Macon Bank, Inc. Long-Term Capital Appreciation Plan, as amended and restated, dated December 15, 2004, incorporated by reference to Exhibit 10.12 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016. (SEC File No. 001-35302).
   
10.13 First Amendment to the Macon Bank, Inc. Amended and Restated Long-Term Capital Appreciation Plan, dated December 10, 2008, incorporated by reference to Exhibit 10.13 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016. (SEC File No. 001-35302).
   
10.14 Second Amendment to the Macon Bank, Inc. Amended and Restated Long-Term Capital Appreciation Plan, dated March 16, 2011, incorporated by reference to Exhibit 10.14 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016. (SEC File No. 001-35302).
   
10.15 Third Amendment to the Macon Bank, Inc. Amended and Restated Long-Term Capital Appreciation Plan, dated February 26, 2015, incorporated by reference to Exhibit 10.15 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016. (SEC File No. 001-35302).
   
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 Financial Statements filed in XBRL format.
   
* Management contract or compensatory plan, contract or arrangement.
73
 

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. 

       
Date:  May 10, 2017 Entegra Financial Corp.  
(Registrant)    
     
  By:  /s/ David A. Bright  
  Name: David A. Bright  
  Title:  Chief Financial Officer  
  (Authorized Officer)  

74
 

  EXHIBIT INDEX
   
Exhibit No.   

Description

   
31.01 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.02 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.01

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101 Financial Statements filed in XBRL format.
75