Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|
For the quarterly period ended June 30, 2017
or
☐
|
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|
For the transition period from
to .
Commission file number: 001-37802
PARAGON COMMERCIAL CORPORATION
(Exact
name of registrant as specified in its charter)
North Carolina
|
56-2278662
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification No.)
|
|
|
3535 Glenwood Avenue
Raleigh, North Carolina
|
27612
|
(Address of principal executive offices)
|
(Zip Code)
|
(919) 788-7770
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90
days. YES ☒ NO ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files). YES ☒ NO ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of
“large accelerated filer”, “accelerated
filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
Non-accelerated
filer
|
☒(Do not check if a smaller reporting
company)
|
Smaller reporting company
|
☐
|
|
|
Emerging
growth company
|
☒
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act ☒
Indicate
by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). YES ☐ NO ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
As of
August 8, 2017, there were approximately 5,459,982 shares of the
registrant’s common stock outstanding.
PARAGON COMMERCIAL CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
TABLE OF CONTENTS
|
|
Page
No.
|
Part I.
|
FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheets (Unaudited) as of June 30, 2017 and December 31,
2016
|
1
|
|
|
|
|
Consolidated
Statements of Income (Unaudited) for the Three and Six Months Ended
June 30, 2017 and 2016
|
2
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Unaudited) for the Three and
Six Months Ended June 30, 2017 and 2016
|
3
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited) for the
Six Months Ended June 30, 2017 and 2016
|
4
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) for the Six Months Ended June
30, 2017 and 2016
|
5
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
59
|
|
|
|
Item
4.
|
Controls
and Procedures
|
60
|
|
|
|
PART
2.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
60
|
|
|
|
Item
1A.
|
Risk
Factors
|
60
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
63
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
63
|
|
|
|
Item
4.
|
Mine
Safety Disclosures
|
63
|
|
|
|
Item
5.
|
Other
Information
|
63
|
|
|
|
Item
6.
|
Exhibits
|
64
|
|
|
|
|
SIGNATURES
|
65
|
|
|
|
|
Part
I.
Financial
Information
Item
1.
Financial
Statements
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS (Unaudited)
June 30, 2017 and
December 31, 2016
(Balance Sheet as of December 31, 2016 is derived from Audited
Financial Statements)
(In thousands, except share data)
|
2017
|
2016
|
Assets
|
|
|
Cash
and due from banks:
|
|
|
Interest-earning
|
$13,380
|
$38,384
|
Noninterest-earning
|
4,184
|
4,621
|
Investment
securities - available-for-sale, at fair value
|
203,544
|
197,441
|
Federal
Home Loan Bank stock, at cost
|
12,828
|
8,400
|
Loans
- net of unearned income and deferred fees
|
1,339,860
|
1,191,280
|
Allowance
for loan losses
|
(8,921)
|
(7,909)
|
Net
loans
|
1,330,939
|
1,183,371
|
Accrued
interest receivable
|
4,690
|
4,368
|
Bank
premises and equipment, net
|
15,233
|
15,642
|
Bank
owned life insurance
|
34,703
|
34,190
|
Other
real estate owned
|
4,690
|
4,740
|
Deferred
tax assets
|
3,882
|
4,841
|
Other
assets
|
7,494
|
7,769
|
Total
assets
|
$1,635,567
|
$1,503,767
|
|
|
|
Liabilities and stockholders' equity
|
|
|
Deposits:
|
|
|
Noninterest-bearing
demand
|
$200,944
|
$211,202
|
Interest-bearing
checking and money market
|
794,255
|
742,046
|
Time
deposits
|
179,531
|
219,007
|
Total
deposits
|
1,174,730
|
1,172,255
|
Repurchase
agreements and federal funds purchased
|
21,256
|
20,174
|
Federal
Home Loan Bank advances
|
270,000
|
150,000
|
Other
liabilities
|
5,730
|
6,679
|
Total
liabilities
|
1,490,274
|
1,367,666
|
Stockholders'
equity:
|
|
|
Common
stock, $0.008 par value; 20,000,000 shares
|
44
|
44
|
authorized;
5,458,528 and 5,450,713 issued and
|
|
|
outstanding
as of June 30, 2017 and December 31, 2016
|
|
|
Additional
paid-in-capital
|
80,721
|
80,147
|
Accumulated
other comprehensive loss
|
(859)
|
(2,840)
|
Retained
earnings
|
65,387
|
58,750
|
Total
stockholders' equity
|
145,293
|
136,101
|
Total
liabilities and stockholders' equity
|
$1,635,567
|
$1,503,767
|
See accompanying notes to these unaudited consolidated financial
statements.
-1-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
For the Three and
Six Months Ended June 30, 2017 and 2016
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
(In thousands, except per share data)
|
2017
|
2016
|
2017
|
2016
|
Interest income
|
|
|
|
|
Loans
and fees on loans
|
$14,014
|
$11,840
|
$27,084
|
$23,030
|
Investment
securities and FHLB stock
|
1,465
|
1,369
|
2,868
|
2,588
|
Federal
funds and other
|
71
|
63
|
230
|
121
|
Total
Interest income
|
15,550
|
13,272
|
30,182
|
25,739
|
Interest expense
|
|
|
|
|
Interest-bearing
checking and money market
|
1,127
|
836
|
2,201
|
1,693
|
Time
deposits
|
458
|
556
|
969
|
1,123
|
Borrowings
and repurchase agreements
|
947
|
579
|
1,675
|
1,071
|
Total
interest expense
|
2,532
|
1,971
|
4,845
|
3,887
|
Net
interest income
|
13,018
|
11,301
|
25,337
|
21,852
|
Provision for loan losses
|
650
|
-
|
809
|
-
|
Net
interest income after provision for loan losses
|
12,368
|
11,301
|
24,528
|
21,852
|
Non-interest income
|
|
|
|
|
Increase
in cash surrender value of bank owned life insurance
|
255
|
226
|
513
|
449
|
Net
gain on sale of securities
|
-
|
-
|
-
|
85
|
Service
charges and fees
|
68
|
56
|
130
|
114
|
Mortgage
origination fees and gains on sale of loans
|
26
|
33
|
77
|
65
|
Net
loss on sale or impairment of foreclosed assets
|
(22)
|
(45)
|
(22)
|
(257)
|
Other
fees and income
|
167
|
111
|
299
|
191
|
Total
non-interest income
|
494
|
381
|
997
|
647
|
Non-interest expense
|
|
|
|
|
Salaries
and employee benefits
|
4,310
|
3,742
|
8,772
|
7,609
|
Furniture,
equipment and software costs
|
451
|
390
|
953
|
882
|
Occupancy
|
373
|
342
|
732
|
686
|
Data
processing
|
580
|
524
|
1,110
|
820
|
Director
related fees and expenses
|
253
|
219
|
477
|
471
|
Professional
fees
|
244
|
182
|
447
|
419
|
FDIC
and other supervisory assessments
|
201
|
217
|
367
|
412
|
Advertising
and public relations
|
297
|
234
|
518
|
422
|
Unreimbursed
loan costs and foreclosure related expenses
|
104
|
142
|
278
|
211
|
Merger
related costs
|
368
|
-
|
368
|
-
|
Other
|
676
|
496
|
1,447
|
1,156
|
Total
non-interest expense
|
7,857
|
6,488
|
15,469
|
13,088
|
Income
before income taxes
|
5,005
|
5,194
|
10,056
|
9,411
|
Income tax expense
|
1,722
|
1,719
|
3,419
|
3,098
|
Net
income
|
$3,283
|
$3,475
|
$6,637
|
$6,313
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
Basic
|
$0.61
|
$0.76
|
$1.23
|
$1.38
|
|
$-
|
$-
|
$-
|
$-
|
Diluted
|
$0.61
|
$0.75
|
$1.23
|
$1.37
|
See accompanying notes to these unaudited consolidated financial
statements.
-2-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVEINCOME
(Unaudited)
Three and Six
Months Ended June 30, 2017 and 2016
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
Net
income
|
$3,283
|
$3,475
|
$6,637
|
$6,313
|
|
|
|
|
|
Other
comprehensive income items:
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
Unrealized
gains
|
2,436
|
2,920
|
2,889
|
3,914
|
Reclassification
of gains recognized in net income
|
-
|
-
|
-
|
(85)
|
Other
comprehensive income
|
2,436
|
2,920
|
2,889
|
3,829
|
Deferred
tax expense
|
940
|
1,116
|
1,112
|
1,462
|
Other
comprehensive income, net of tax
|
1,496
|
1,804
|
1,777
|
2,367
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
Unrealized
gains (losses)
|
(21)
|
(575)
|
351
|
(2,136)
|
Other
comprehensive income (loss)
|
(21)
|
(575)
|
351
|
(2,136)
|
Deferred
tax (benefit) expense
|
8
|
(217)
|
147
|
(803)
|
Other
comprehensive income (loss), net of tax
|
(29)
|
(358)
|
204
|
(1,333)
|
|
|
|
|
|
Total
other comprehensive income, net of tax
|
1,467
|
1,446
|
1,981
|
1,034
|
|
|
|
|
|
Comprehensive
income
|
$4,750
|
$4,921
|
$8,618
|
$7,347
|
See accompanying notes to these unaudited consolidated financial
statements.
-3-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Six
Months Ended June 30, 2017 and 2016
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
Other
|
|
Total
|
|
Common
Stock
|
Paid-in
|
Comprehensive
|
Retained
|
Stockholders'
|
|
(In
thousands, except share data)
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2016
|
5,450,713
|
$44
|
$80,147
|
$(2,840)
|
$58,750
|
$136,101
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
6,637
|
6,637
|
Unrealized
gain on securities, net of
|
|
|
|
|
|
|
tax
expense of $1,112
|
-
|
-
|
-
|
1,777
|
-
|
1,777
|
Unrealized
gain on cash flow hedges,
|
|
|
|
|
|
|
net
of tax expense of $147
|
-
|
-
|
-
|
204
|
-
|
204
|
Restricted
stock expense recognized
|
-
|
-
|
240
|
-
|
-
|
240
|
Stock
options exercised
|
6,313
|
-
|
270
|
-
|
-
|
270
|
Issuance
of stock for employee stock
|
|
|
|
|
|
|
purchase
plan
|
1,502
|
-
|
64
|
-
|
-
|
64
|
Balance at June 30, 2017
|
5,458,528
|
$44
|
$80,721
|
$(859)
|
$65,387
|
$145,293
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
Other
|
|
Total
|
|
Common Stock
|
Paid-in
|
Comprehensive
|
Retained
|
Stockholders'
|
|
(In thousands, except share data)
|
Shares
|
Amount
|
Capital
|
Income (Loss)
|
Earnings
|
Equity
|
Balance at December 31, 2015
|
4,581,334
|
$37
|
$53,147
|
$(886)
|
$45,360
|
$97,658
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
6,313
|
6,313
|
Unrealized gain on securities, net of
|
|
|
|
|
|
|
tax
expense of $1,462
|
-
|
-
|
-
|
2,367
|
-
|
2,367
|
Unrealized loss on cash flow hedges,
|
|
|
|
|
|
|
net
of tax benefit of $803
|
-
|
-
|
-
|
(1,333)
|
-
|
(1,333)
|
Restricted
stock expense recognized
|
-
|
-
|
205
|
-
|
-
|
205
|
Issuance
of stock for public offering
|
845,588
|
6
|
26,388
|
-
|
-
|
26,394
|
Issuance
of restricted stock awards
|
19,145
|
-
|
-
|
-
|
-
|
-
|
Issuance of stock for employee stock
|
|
|
|
|
|
|
purchase
plan
|
3,799
|
-
|
105
|
-
|
-
|
105
|
Balance at June 30, 2016
|
5,449,866
|
$43
|
$79,845
|
$148
|
$51,673
|
$131,709
|
See accompanying notes to these unaudited consolidated financial
statements.
-4-
PARAGON COMMERCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2017 and 2016
(In thousands)
|
2017
|
2016
|
Cash
flows from operating activities:
|
|
|
Net
income
|
$6,637
|
$6,313
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
operating
activities:
|
|
|
Depreciation
and amortization
|
704
|
711
|
Provision
for loan losses
|
809
|
-
|
Net
loss on sale or impairment of foreclosed assets
|
22
|
257
|
Increase
in cash surrender value of life insurance
|
(513)
|
(449)
|
Accretion
of premiums/discounts on securities, net
|
569
|
567
|
Net
gain on sale of securities
|
-
|
(85)
|
Loss
on disposal of property and equipment
|
1
|
-
|
Deferred
tax expense (benefit)
|
(289)
|
196
|
Restricted
stock expense
|
240
|
205
|
Changes
in assets and liabilities:
|
|
|
Accrued
interest receivable and other assets
|
304
|
(135)
|
Accrued
interest payable and other liabilities
|
(949)
|
(293)
|
Net
cash provided by operating activities
|
7,535
|
7,287
|
Cash
flows from investing activities:
|
|
|
Net
decrease in Federal Home Loan Bank stock
|
(4,428)
|
(552)
|
Purchase
of securities available for sale
|
(13,526)
|
(39,434)
|
Proceeds
from maturities and paydowns of securities available for
sale
|
9,732
|
9,639
|
Proceeds
from sales of securities available for sale
|
-
|
15,714
|
Net
increase in loans
|
(148,377)
|
(88,843)
|
Proceeds
from sale of foreclosed real estate
|
28
|
13
|
Additions
to bank premises and equipment
|
(296)
|
(402)
|
Net
cash used in investing activities
|
(156,867)
|
(103,865)
|
Cash
flows from financing activities:
|
|
|
Net
increase in demand and money market deposit accounts
|
41,951
|
170,958
|
Net
decrease in time deposits
|
(39,476)
|
(53,604)
|
Net
increase (decrease) in repurchase agreements
|
1,082
|
(7,890)
|
Net
increase in FHLB and other borrowings
|
120,000
|
5,200
|
Net
proceeds from sale of common stock
|
-
|
26,394
|
Issuance
of common stock for employee stock purchase
|
|
|
plan
and stock options
|
334
|
105
|
Net
cash provided by financing activities
|
123,891
|
141,163
|
Net
change in cash and cash equivalents
|
(25,441)
|
44,585
|
Cash
and cash equivalents at beginning of year
|
43,005
|
55,530
|
|
|
|
Cash
and cash equivalents at end of year
|
$17,564
|
$100,115
|
See accompanying notes to these unaudited consolidated financial
statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND OPERATIONS
On
April 2, 2001, Paragon Commercial Corporation (the
“Company”) was incorporated for the purpose of serving
as a holding company for Paragon Commercial Bank (the
“Bank”). The Company currently has no operations and
conducts no business on its own other than owning the Bank and two
statutory business trusts, Paragon Commercial Capital Trust I and
II.
The
Bank was incorporated on May 4, 1999 and began banking operations
on May 10, 1999. The Bank is engaged in general commercial banking
in Wake and Mecklenburg Counties, North Carolina, operating under
the banking laws of North Carolina and the rules and regulations of
the Federal Deposit Insurance Corporation and the North Carolina
Commissioner of Banks. The Bank undergoes periodic examinations by
those regulatory authorities. In addition, the Company undergoes
periodic examinations by the Federal Reserve.
The
Company formed Paragon Commercial Capital Trust I (“Trust
I”) during 2004 in order to facilitate the issuance of trust
preferred securities. Trust I is a statutory business trust formed
under the laws of the state of Delaware, of which all common
securities are owned by the Company. The Company formed Paragon
Commercial Capital Trust II (“Trust II”) during 2006 to
serve the same purpose. The junior subordinated debentures issued
by the Company to the trusts are classified as debt and the
Company’s equity interest in the trusts are included in other
assets.
The
trust preferred securities presently qualify as Tier 1 regulatory
capital and are reported in Federal Reserve regulatory reports as
minority interests in unconsolidated subsidiaries. The junior
subordinated debentures do not qualify as Tier 1 regulatory
capital.
In June
2016, the Company completed its initial public offering in which it
issued and sold 845,588 shares of common stock at a public offering
price of $34.00 per share. The Company received net proceeds of
$26.4 million after deducting underwriting discounts and
commissions of approximately $1.7 million and other offering
expenses of approximately $615,000.
In
addition to its headquarters and operations center in Raleigh,
North Carolina, the Bank has locations in Charlotte and Cary, North
Carolina.
NOTE 2 – BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements include
the accounts and transactions of Paragon Commercial Corporation and
Paragon Commercial Bank. All significant intercompany transactions
and balances are eliminated in consolidation. Paragon Commercial
Capital Trusts I and II are not consolidated subsidiaries of the
Company.
The
consolidated financial information included herein as of and for
the three and six month periods ended June 30, 2017 and 2016 is
unaudited. Accordingly, it does not include all of the information
and footnotes required by U.S. GAAP for complete financial
statements. However, such information reflects all adjustments
which are, in the opinion of management, necessary for a fair
statement of the financial condition and results of operations for
the interim periods. The December 31, 2016 consolidated balance
sheet was derived from the Company’s December 31, 2016
audited consolidated financial statements as of and for the periods
ended December 31, 2016. These unaudited interim consolidated
financial statements as of and for the three and six month periods
ended June 30, 2017 and 2016 should be read in conjunction with the
audited consolidated financial statements as of and for the periods
ended December 31, 2016 included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2016
filed with the Securities and Exchange Commission on March 21,
2017, as amended on April 28, 2017. The results of operations for
the three and six months ended June 30, 2017 are not necessarily
indicative of the results to be expected for the full year ending
December 31, 2017 or any other future period.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
accounting policies followed by the Company and other relevant
information is contained in the notes to the audited consolidated
financial statements as of and for the periods ended December 31,
2016, which are included within the Company’s Annual Report
on Form 10-K as of and for the year ended December 31,
2016.
Earnings Per Common Share
Basic
and diluted net income per common share have been computed by
dividing net income for each period by the weighted average number
of shares of common stock outstanding during each period. Diluted
net income per common share reflects the potential dilution that
could occur if outstanding stock options were
exercised.
Basic
and diluted net income per common share have been computed based
upon net income as presented in the accompanying unaudited
consolidated statements of income divided by the weighted average
number of common shares outstanding or assumed to be outstanding as
summarized below:
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Shares
used in the computation of earnings per share:
|
|
|
|
|
Weighted
average number of shares outstanding - basic
|
5,398,530
|
4,581,193
|
5,394,870
|
4,563,349
|
Dilutive
effect of restricted shares
|
14,740
|
43,133
|
14,176
|
44,184
|
Weighted
average number of shares outstanding - diluted
|
5,413,270
|
4,624,326
|
5,409,046
|
4,607,533
|
Weighted
average anti-dilutive stock options and unvested restricted shares
excluded from the computation of diluted earnings per share are as
follows:
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Anti-dilutive
stock options
|
-
|
80,500
|
-
|
80,500
|
Unvested
restricted shares
|
56,733
|
45,338
|
56,733
|
45,338
|
Comprehensive
Income
The Company reports as comprehensive income all changes in
stockholders' equity during the year from sources other than
stockholders. Other comprehensive income refers to all components
(revenues, expenses, gains, and losses) of comprehensive income
that are excluded from net income.
The
Company’s only two components of other comprehensive income
are unrealized gains and losses on investment securities
available-for-sale, net of income taxes and unrealized gains and
losses on cash flow hedges, net of income taxes. Information
concerning the Company’s accumulated other comprehensive
income for the six-month period ended June 30, 2017 and for the
year ended December 31, 2016, respectively is as
follows:
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
June 30,
|
December 31,
|
(In thousands)
|
2017
|
2016
|
Unrealized
gains (losses) on securities available-for-sale
|
$1,113
|
$(1,775)
|
Deferred
tax (benefit) expense
|
(433)
|
678
|
Other
comprehensive income (loss), net of tax
|
680
|
(1,097)
|
Unrealized
losses on cash flow hedges
|
(2,441)
|
(2,792)
|
Deferred tax benefit
|
902
|
1,049
|
Other
comprehensive loss, net of tax
|
(1,539)
|
(1,743)
|
Total
other comprehensive loss
|
$(859)
|
$(2,840)
|
The
accumulated balances related to each component of other
comprehensive income (loss) are as follows:
|
|
Unpaid
|
|
|
Unrealized
|
Unrealized
|
|
|
Gains and
|
Gains and
|
|
|
Losses on
|
Losses on
|
|
|
Available-for
|
Cash Flow
|
|
(in
thousands)
|
Sale Securities
|
Hedges
|
Total
|
Balance
as of December 31, 2016
|
$(1,097)
|
$(1,743)
|
$(2,840)
|
Other
comprehensive income before reclassification
|
1,777
|
204
|
1,981
|
Net
current-period other comprehensive income
|
1,777
|
204
|
1,981
|
Balance
as of June 30, 2017
|
$680
|
$(1,539)
|
$(859)
|
|
|
|
|
Balance
as of December 31, 2015
|
$848
|
$(1,734)
|
$(886)
|
Other
comprehensive income (loss) before reclassification
|
2,452
|
(1,333)
|
1,119
|
Amounts
reclassified from accumulated other
|
|
|
|
comprehensive
income
|
(85)
|
-
|
(85)
|
Net
current-period other comprehensive income (loss)
|
2,367
|
(1,333)
|
1,034
|
Balance
as of June 30, 2016
|
$3,215
|
$(3,067)
|
$148
|
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (the
“FASB”) issued guidance to change the recognition of
revenue from contracts with customers. The core principle of the
new guidance is that an entity should recognize revenue to reflect
the transfer of goods and services to customers in an amount equal
to the consideration the entity receives or expects to receive. The
guidance will be effective for the Company for reporting periods
beginning after December 15, 2017. The Company will apply the
guidance using a full retrospective approach. The Company does not
expect these amendments to have a material effect on its financial
statements.
In
August 2015, the FASB deferred the effective date of ASU 2014-09,
Revenue from Contracts with Customers. As a result of the deferral,
the guidance in ASU 2014-09 will be effective for the Company for
reporting periods beginning after December 15, 2017. The Company
will apply the guidance using a full retrospective approach. The
Company does not expect these amendments to have a material effect
on its financial statements.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
January 2016, the FASB amended the Financial Instruments topic of
the ASC to address certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. The
amendments will be effective for fiscal years beginning after
December 15,
2017,
including interim periods within those fiscal years. The Company
will apply the guidance by means of a cumulative-effect adjustment
to the balance sheet as of the beginning of the fiscal year of
adoption. The amendments related to equity securities without
readily determinable fair values will be applied prospectively to
equity investments that exist as of the date of adoption of the
amendments. The Company does not expect these amendments to have a
material effect on its financial statements.
In
February 2016, the FASB amended the Leases topic of the Accounting
Standards Codification to revise certain aspects of recognition,
measurement, presentation, and disclosure of leasing transactions.
The amendments will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years. The Company is currently evaluating the effect that
implementation of the new standard will have on its financial
statements.
In
March 2016, the FASB amended the Derivatives and Hedging topic of
the Accounting Standards Codification to clarify that a change in
the counterparty to a derivative instrument that has been
designated as the hedging instrument does not, in and of itself,
require designation of that hedging relationship provided that all
other hedge accounting criteria continue to be met. The amendments
became effective January 1, 2017. The amendments did not have a
material effect on the Company's financial statements.
In
March 2016, the FASB amended the Revenue from Contracts with
Customers topic of the Accounting Standards Codification to clarify
the implementation guidance on principal versus agent
considerations and address how an entity should assess whether it
is the principal or the agent in contracts that include three or
more parties. The amendments will be effective for the Company for
reporting periods beginning after December 15, 2017. The Company
does not expect these amendments to have a material effect on its
financial statements.
In
March 2016, the FASB issued guidance to simplify several aspects of
the accounting for share-based payment award transactions including
the income tax consequences, the classification of awards as either
equity or liabilities, and the classification on the statement of
cash flows. Additionally, the guidance simplifies two areas
specific to entities other than public business entities allowing
them apply a practical expedient to estimate the expected term for
all awards with performance or service conditions that have certain
characteristics and also allowing them to make a one-time election
to switch from measuring all liability-classified awards at fair
value to measuring them at intrinsic value. The amendments became
effective as of January 1, 2017. The amendments did
not have a material effect on the Company's financial
statements.
In June
2016, the FASB issued guidance to change the accounting for credit
losses and modify the impairment model for certain debt securities.
The amendments will be effective for the Company for reporting
periods beginning after December 15, 2019. The Company is currently
evaluating the effect that implementation of the new standard will
have on its financial position, results of operations, and cash
flows.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
August 2016, the FASB amended the Statement of Cash Flows topic of
the Accounting Standards Codification to clarify how certain cash
receipts and cash payments are presented and classified in the
statement of cash flows. The amendments will be effective for the
Company for fiscal years beginning after December 15, 2017
including interim periods within those fiscal years. Early adoption
is permitted. The Company does not expect these amendments to have
a material effect on its financial statements.
In
December 2016, the FASB issued technical corrections and
improvements to the Revenue from Contracts with Customers Topic.
These corrections make a limited number of revisions to several
pieces of the revenue recognition standard issued in 2014. The
effective date and transition requirements for the technical
corrections will be effective for the Company for reporting periods
beginning after December 15, 2017. The Company will apply the
guidance using a modified retrospective approach. The Company does
not expect these amendments to have a material effect on its
financial statements.
In
March 2017, the FASB amended the requirements in the
Receivables—Nonrefundable Fees and Other Costs Topic of the
Accounting Standards Codification related to the amortization
period for certain purchased callable debt securities held at a
premium. The amendments shorten the amortization period for the
premium to the earliest call date. The amendments will be effective
for the Company for interim and annual periods beginning after
December 15, 2018. Early adoption is permitted. The Company does
not expect these amendments to have a material effect on its
financial statements.
In May
2017, the FASB amended the requirements in the
Compensation—Stock Compensation Topic of the Accounting
Standards Codification related to changes to the terms or
conditions of a share-based payment award. The amendments provide
guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification
accounting. The amendments will be effective for the Company for
annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. The Company does not expect
these amendments to have a material effect on its financial
statements.
Other
accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies are not expected to have a
material impact on the Company’s financial position, results
of operations or cash flows.
Reclassifications
Certain
amounts in the 2016 financial statements have been reclassified to
conform to the 2017 presentation. The reclassifications had no
effect on total assets, net income or stockholders' equity as
previously reported.
NOTE 3 – MERGERS AND ACQUISITIONS
Proposed Merger with TowneBank
On
April 26, 2017, the Company entered into an Agreement and Plan of
Reorganization (the “Merger Agreement”) with TowneBank
and TB Acquisition, LLC (“TB Acquisition”). Pursuant to
the terms of the Merger Agreement, the Company will merge with and
into TB Acquisition (the “Merger”) and the Bank will
subsequently merge with and into TowneBank (the “Bank
Merger” and, together with the Merger, the
“Transaction”). TB Acquisition will be the surviving
entity in the Merger and TowneBank will be the surviving entity in
the Bank Merger.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Under
the terms of the Merger Agreement, the Company’s stockholders
will be entitled to receive 1.7250 shares (the “Exchange
Ratio”) of TowneBank common stock for each share of the
Company’s common stock. Based on TowneBank’s closing
price of $34.35 as of April 26, 2017, the day the Transaction was
announced, the estimated aggregate purchase price was $323.4
million. The Transaction is expected to close in the first quarter
of 2018, subject to stockholder and regulatory approval and other
customary closing conditions.
NOTE 4 - INVESTMENT SECURITIES
The
following is a summary of the securities portfolio by major
classification at June 30, 2017 and December 31, 2016.
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
(In thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
June 30, 2017
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$15,715
|
$192
|
$52
|
$15,855
|
Collateralized
mortgage obligations
|
40,833
|
322
|
128
|
41,027
|
Mortgage-backed
securities
|
75,777
|
360
|
768
|
75,369
|
Municipal
bonds
|
66,429
|
1,424
|
56
|
67,797
|
Other
|
3,677
|
62
|
243
|
3,496
|
|
$202,431
|
$2,360
|
$1,247
|
$203,544
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$17,062
|
$44
|
$163
|
$16,943
|
Collateralized
mortgage obligations
|
42,439
|
300
|
242
|
42,497
|
Mortgage-backed
securities
|
75,138
|
213
|
1,478
|
73,873
|
Municipal
bonds
|
60,901
|
474
|
698
|
60,677
|
Other
|
3,676
|
29
|
254
|
3,451
|
|
$199,216
|
$1,060
|
$2,835
|
$197,441
|
The
fair values of securities available-for-sale at June 30, 2017 by
contractual maturity are shown below. Actual expected maturities
may differ from contractual maturities because issuers may have the
right to call or prepay obligations.
|
|
After One
|
After Five
|
|
No Stated
|
|
|
Within
|
Within
|
Within
|
After
|
Maturity
|
|
(In thousands)
|
1 Year
|
Five Years
|
Ten Years
|
Ten Years
|
Date
|
Total
|
U.S. Agency obligations
|
$-
|
$-
|
$-
|
$15,855
|
$-
|
$15,855
|
Collateralized mortgage obligations
|
-
|
-
|
-
|
41,027
|
-
|
41,027
|
Mortgage-backed securities
|
-
|
7,545
|
7,619
|
60,205
|
-
|
75,369
|
Municipal bonds
|
-
|
2,249
|
8,898
|
56,650
|
-
|
67,797
|
Other
|
-
|
-
|
1,527
|
-
|
1,969
|
3,496
|
|
$-
|
$9,794
|
$18,044
|
$173,737
|
$1,969
|
$203,544
|
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following tables show gross unrealized losses and fair values of
investment securities, aggregated by investment category and length
of time that the individual securities have been in a continuous
unrealized loss position at June 30, 2017 and December 31,
2016.
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
|||
(In thousands)
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
June 30, 2017
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Securities
available-for-sale:
|
|
|
|
|
|
|
U.S. Agency obligations
|
$2,623
|
$52
|
$-
|
$-
|
$2,623
|
$52
|
Collateralized mortgage obligations
|
17,381
|
128
|
-
|
-
|
17,381
|
128
|
Mortgage-backed securities
|
46,180
|
768
|
-
|
-
|
46,180
|
768
|
Municipal bonds
|
7,116
|
56
|
-
|
-
|
7,116
|
56
|
Other
|
-
|
-
|
1,909
|
242
|
1,909
|
242
|
Total
temporarily impaired
|
|
|
|
|
|
|
securities
|
$73,300
|
$1,004
|
$1,909
|
$242
|
$75,209
|
$1,246
|
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
|
||
(In thousands)
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
December 31, 2016
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Securities
available-for-sale:
|
|
|
|
|
|
|
U.S.
Agency obligations
|
$10,334
|
$163
|
$-
|
$-
|
$10,334
|
$163
|
Collateralized
mortgage obligations
|
18,124
|
242
|
-
|
-
|
18,124
|
242
|
Mortgage-backed
securities
|
58,825
|
1,478
|
-
|
-
|
58,825
|
1,478
|
Municipal
bonds
|
33,110
|
698
|
-
|
-
|
33,110
|
698
|
Other
|
1,897
|
254
|
-
|
-
|
1,897
|
254
|
Total
temporarily impaired
|
|
|
|
|
|
|
securities
|
$122,290
|
$2,835
|
$-
|
$-
|
$122,290
|
$2,835
|
The
table below summarizes the number of investment securities in an
unrealized loss position:
|
June 30,
|
December 31,
|
Available-for-sale:
|
2017
|
2016
|
U.S.
Agency obligations
|
2
|
5
|
Collateralized
mortgage obligations
|
6
|
6
|
Mortgage-backed
securities
|
12
|
13
|
Municipal
bonds
|
12
|
53
|
Other
|
1
|
1
|
|
33
|
78
|
The
unrealized losses primarily relate to debt securities that have
incurred fair value reductions due to higher market interest rates
since the securities were purchased. The unrealized losses
are not likely to reverse unless and until market interest rates
decline to the levels that existed when the securities were
purchased. Since none of the unrealized losses on the debt
securities in 2017 or 2016 relate to the marketability of the
securities or the issuer’s ability to honor redemption
obligations and since management has the intent to hold these
securities until maturity and believes it is more likely than not
that the Company will not have to sell any such securities before a
recovery of cost given the current liquidity position, none of
those debt securities are deemed to be other than temporarily
impaired.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table summarizes securities gains for the periods
presented:
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Gross
gains on sales of securities available for sale
|
$-
|
$-
|
$-
|
$136
|
Gross
losses on sales of securities available for sale
|
-
|
-
|
-
|
(51)
|
Total
securities gains
|
$-
|
$-
|
$-
|
$85
|
Securities
with a fair value of $71.0 million and $75.8 million were pledged
as of June 30, 2017 and December 31, 2016, respectively, to secure
repurchase agreements, lines of credit and other
borrowings.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Following
is a summary of loans at June 30, 2017 and December 31,
2016:
|
June 30,
|
December 31,
|
(In thousands)
|
2017
|
2016
|
Construction
and land development
|
$70,661
|
$79,738
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential
|
433,486
|
365,569
|
Owner
occupied
|
202,982
|
186,892
|
Multifamily,
nonresidential and junior liens
|
106,106
|
89,191
|
Total
commercial real estate
|
742,574
|
641,652
|
Consumer
real estate:
|
|
|
Home
equity lines
|
87,229
|
87,489
|
Secured
by 1-4 family residential, secured by first deeds of
trust
|
231,903
|
195,343
|
Secured
by 1-4 family residential, secured by second deeds of
trust
|
4,712
|
4,289
|
Total
consumer real estate
|
323,844
|
287,121
|
Commercial
and industrial loans (except those secured by real
estate)
|
181,643
|
170,709
|
Consumer
and other
|
20,840
|
11,542
|
Total
loans
|
1,339,562
|
1,190,762
|
Deferred
loan costs
|
298
|
518
|
Allowance
for loan losses
|
(8,921)
|
(7,909)
|
Net
loans
|
$1,330,939
|
$1,183,371
|
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
further breakdown of the make-up of the construction and land
development and commercial real estate portfolio at June 30, 2017
and December 31, 2016 is as follows:
|
June 30,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Construction
and land development:
|
|
|
Land
|
$12,115
|
$12,595
|
Residential
|
29,684
|
36,253
|
Commercial
|
28,862
|
30,890
|
Total
construction and land development
|
$70,661
|
$79,738
|
|
|
|
Commercial
real estate:
|
|
|
Non-farm,
non-residential:
|
|
|
Office
|
$137,771
|
$108,228
|
Industrial
|
33,240
|
36,264
|
Hotel/motel
|
32,054
|
28,453
|
Retail
|
193,781
|
165,434
|
Special
purpose/Other
|
36,640
|
27,190
|
Total commercial real estate
|
433,486
|
365,569
|
Owner
occupied :
|
|
|
Office
|
66,448
|
60,500
|
Industrial
|
52,698
|
46,876
|
Retail
|
30,965
|
31,085
|
Special
purpose/Other
|
52,871
|
48,431
|
Total owner occupied
|
202,982
|
186,892
|
|
|
|
Multifamily,
nonresidential and junior liens
|
106,106
|
89,191
|
Total
commercial real estate
|
$742,574
|
$641,652
|
Loans
are primarily made in the Research Triangle and Charlotte areas of
North Carolina. Real estate loans can be affected by the condition
of the local real estate market. Commercial and installment loans
can be affected by the local economic conditions.
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Changes
in the allowance for loan losses for the three and six months ended
June 30, 2017 and 2016 were as follows:
|
|
|
|
Commercial
|
|
|
|
|
|
|
& Industrial
|
|
|
|
Construction
|
|
Consumer
|
Loans Not
|
|
|
|
and Land
|
Commercial
|
Real
|
Secured By
|
Consumer
|
Total
|
(In thousands)
|
Development
|
Real Estate
|
Estate
|
Real Estate
|
& Other
|
Loans
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
Beginning
balance
|
$490
|
$3,968
|
$1,939
|
$1,646
|
$82
|
$8,125
|
Provision
for loan losses
|
(225)
|
273
|
87
|
481
|
34
|
650
|
Loans
charged off
|
-
|
-
|
-
|
-
|
-
|
-
|
Recoveries
|
138
|
-
|
-
|
8
|
-
|
146
|
Net
(chargeoffs) recoveries
|
138
|
-
|
-
|
8
|
-
|
146
|
Ending
balance
|
$403
|
$4,241
|
$2,026
|
$2,135
|
$116
|
$8,921
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
Beginning
balance
|
$486
|
$3,719
|
$1,900
|
$1,728
|
$76
|
$7,909
|
Provision
for loan losses
|
(230)
|
494
|
126
|
366
|
53
|
809
|
Loans
charged off
|
-
|
-
|
-
|
(10)
|
(13)
|
(23)
|
Recoveries
|
147
|
28
|
-
|
51
|
-
|
226
|
Net
(chargeoffs) recoveries
|
147
|
28
|
-
|
41
|
(13)
|
203
|
Ending
balance
|
$403
|
$4,241
|
$2,026
|
$2,135
|
$116
|
$8,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
Beginning
balance
|
$523
|
$3,072
|
$1,972
|
$1,790
|
$574
|
$7,931
|
Provision
for loan losses
|
(125)
|
187
|
(88)
|
492
|
(466)
|
-
|
Loans
charged off
|
-
|
-
|
-
|
-
|
(1)
|
(1)
|
Recoveries
|
8
|
19
|
3
|
25
|
1
|
56
|
Net
recoveries
|
8
|
19
|
3
|
25
|
-
|
55
|
Ending
balance
|
$406
|
$3,278
|
$1,887
|
$2,307
|
$108
|
$7,986
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
Beginning
balance
|
$509
|
$3,156
|
$2,046
|
$1,786
|
$144
|
$7,641
|
Provision
for loan losses
|
(340)
|
66
|
(165)
|
485
|
(46)
|
-
|
Loans
charged off
|
-
|
-
|
-
|
-
|
(1)
|
(1)
|
Recoveries
|
237
|
56
|
6
|
36
|
11
|
346
|
Net
recoveries
|
237
|
56
|
6
|
36
|
10
|
345
|
Ending
balance
|
$406
|
$3,278
|
$1,887
|
$2,307
|
$108
|
$7,986
|
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
balance in the allowance for loan losses and the recorded
investment in loans by portfolio segment are based on the
impairment method as of June 30, 2017 and December 31, 2016 and
were as follows:
|
|
|
|
Commercial
|
|
|
|
|
|
|
& Industrial
|
|
|
|
Construction
|
|
Consumer
|
Loans Not
|
|
|
|
and Land
|
Commercial
|
Real
|
Secured By
|
Consumer
|
Total
|
(in thousands)
|
Development
|
Real Estate
|
Estate
|
Real Estate
|
& Other
|
Loans
|
June 30, 2017
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$-
|
$-
|
$45
|
$781
|
$-
|
$826
|
Collectively
evaluated for impairment
|
403
|
4,241
|
1,981
|
1,354
|
116
|
8,095
|
Total
ending allowance
|
$403
|
$4,241
|
$2,026
|
$2,135
|
$116
|
$8,921
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$118
|
$307
|
$374
|
$2,077
|
$-
|
$2,876
|
Collectively
evaluated for impairment
|
70,543
|
742,267
|
323,470
|
179,566
|
20,840
|
1,336,686
|
Total
ending loans
|
$70,661
|
$742,574
|
$323,844
|
$181,643
|
$20,840
|
$1,339,562
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$-
|
$-
|
$223
|
$286
|
$-
|
$509
|
Collectively
evaluated for impairment
|
486
|
3,719
|
1,677
|
1,442
|
76
|
7,400
|
Total
ending allowance
|
$486
|
$3,719
|
$1,900
|
$1,728
|
$76
|
$7,909
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
$125
|
$836
|
$1,121
|
$1,139
|
$-
|
$3,221
|
Collectively
evaluated for impairment
|
79,613
|
640,816
|
286,000
|
169,570
|
11,542
|
1,187,541
|
Total
ending loans
|
$79,738
|
$641,652
|
$287,121
|
$170,709
|
$11,542
|
$1,190,762
|
Loans
are charged down or off as soon as the Company determines that the
full principal balance due under any loan becomes uncollectible.
The amount of the charge is determined as follows:
●
If unsecured, the
loan must be charged off in full.
●
If secured, the
outstanding principal balance of the loan should be charged down to
the net realizable value of the collateral.
Loans
are considered uncollectible when:
●
No regularly
scheduled payment has been made within four months unless fully
secured and in the process of collection.
●
The collateral
value is insufficient to cover the outstanding indebtedness and it
is unlikely the borrower will have the ability to pay the debt in a
timely manner.
●
The loan is
unsecured, the borrower files for bankruptcy protection and there
is no other (guarantor, etc.) support from an entity outside of the
bankruptcy proceedings.
Impaired
loans totaled $2.9 million and $3.2 million at June 30, 2017 and
December 31, 2016, respectively. Included in the $2.9 million at
June 30, 2017 is $600,000 of loans classified as troubled debt
restructurings (“TDRs”). Included in the $3.2 million
at December 31, 2016 is $1.3 million of loans classified as TDRs. A
modification of a loan’s terms constitutes a TDR if the
creditor grants a concession to the borrower for economic or legal
reasons related to the borrower’s financial difficulties that
it would not otherwise consider. All TDRs are considered
impaired.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table provides information on performing and
nonperforming TDRs as of June 30, 2017 and December 31,
2016:
|
June 30,
|
December 31,
|
(In thousands)
|
2017
|
2016
|
Performing
TDRs:
|
|
|
Commercial
real estate
|
$296
|
$520
|
Consumer
real estate
|
-
|
338
|
Commercial
and industrial loans
|
-
|
297
|
Total
performing TDRs
|
296
|
1,155
|
|
|
|
Nonperforming
TDRs:
|
|
|
Construction
and land development
|
118
|
125
|
Consumer
real estate
|
186
|
58
|
Total
nonperformingTDRs
|
304
|
183
|
Total
TDRs
|
$600
|
$1,338
|
During
the first six months of 2017, two of the six loans that were
designated TDRs as of December 31, 2016 totaling $389,000 were paid
off. The largest of these for $388,000 was a residential real
estate loan. Another commercial real estate loan totaling
$125,000 was refinanced and is no longer considered a TDR as the
loan was refinanced at market terms. The remaining three
loans are all performing as agreed.
The
Bank added one new TDR loan in February, a $130,000 business loan
secured by residential property due to a restructure of the loan
payment terms in response to borrower’s financial
difficulties. That loan continues to perform as agreed since
restructure.
In
order to quantify the value of any impairment, the Company
evaluates loans individually. At June 30, 2017, the Company had
$2.9 million of impaired loans. The detail of loans evaluated for
impairment as of June 30, 2017 is presented below:
|
|
|
Unpaid
|
|
|
|
|
Contractual
|
|
(in
thousands)
|
|
Recorded
|
Principal
|
Allocated
|
June 30, 2017
|
|
Investment
|
Balance
|
Allowance
|
Loans
without a specific valuation allowance:
|
|
|
|
|
Construction
and land development
|
$118
|
$165
|
$
|
|
Commercial
real estate
|
307
|
307
|
-
|
|
Loans
with a specific valuation allowance:
|
|
|
|
|
Consumer
real estate
|
374
|
432
|
45
|
|
Commercial
and industrial loans
|
2,077
|
2,108
|
781
|
|
Total
|
$2,876
|
$3,012
|
$826
|
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At
December 31, 2016, the Company had $3.2 million of impaired loans.
The detail of loans evaluated for impairment as of December 31,
2016 is presented below:
|
|
|
Unpaid
|
|
|
|
|
Contractual
|
|
(in
thousands)
|
|
Recorded
|
Principal
|
Allocated
|
December 31, 2016
|
|
Investment
|
Balance
|
Allowance
|
Loans without a specific valuation allowance:
|
|
|
|
|
Construction
and land development
|
$125
|
$195
|
$
|
|
Commercial
real estate
|
836
|
836
|
-
|
|
Loans
with a specific valuation allowance:
|
|
|
|
|
Consumer
real estate
|
1,121
|
1,152
|
223
|
|
Commercial
and industrial loans (except
|
|
|
|
|
those
secured by real estate)
|
1,139
|
1,382
|
286
|
|
Total
|
$3,221
|
$3,565
|
$509
|
The
average recorded investment balance of impaired loans for the
three- and six-month periods ending June 30, 2017 and 2016 are as
follows:
|
Three months ended June 30,
|
|||
|
2017
|
2016
|
||
|
Average
|
Interest
|
Average
|
Interest
|
|
Balance
|
Income
|
Balance
|
Income
|
Construction
and land development
|
$119
|
$-
|
$133
|
$-
|
Commercial
real estate
|
307
|
3
|
1,113
|
13
|
Consumer
real estate
|
491
|
3
|
404
|
4
|
Commercial
and industrial loans
|
1,929
|
22
|
2,671
|
17
|
Consumer
and other
|
-
|
-
|
13
|
-
|
Total
securities gains
|
$2,846
|
$28
|
$4,334
|
$34
|
|
Six months ended June 30,
|
|||
|
2017
|
2016
|
||
|
Average
|
Interest
|
Average
|
Interest
|
|
Balance
|
Income
|
Balance
|
Income
|
Construction
and land development
|
$121
|
$-
|
$182
|
$-
|
Commercial
real estate
|
570
|
13
|
1,633
|
37
|
Consumer
real estate
|
611
|
9
|
406
|
9
|
Commercial
and industrial loans
|
1,504
|
32
|
1,618
|
47
|
Consumer
and other
|
-
|
-
|
17
|
-
|
Total
securities gains
|
$2,806
|
$54
|
$3,856
|
$93
|
When
the Company cannot reasonably expect full and timely repayment of
principal and interest of its loan, the loan is placed on
nonaccrual status. The Company will continue to track the
contractual interest for purposes of customer reporting and any
potential litigation or later collection of the loan but accrual of
interest for the Company’s financial statement purposes is to
be discontinued. Subsequent payments of interest can be recognized
as income on a cash basis provided that full collection of
principal is expected. Otherwise, all payments received are to be
applied to principal only. At the time of nonaccrual, past due or
accrued interest is reversed from income.
Loans
over 90 days past due will be placed on nonaccrual status. Loans
that are less delinquent may also be placed on nonaccrual status if
full collection of principal and interest is unlikely.
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table presents the recorded investment in nonaccrual
loans by portfolio segment as of June 30, 2017 and December 31,
2016:
|
Nonaccrual
|
|
|
June 30,
|
December 31,
|
(in thousands)
|
2017
|
2016
|
Construction
and land development
|
$118
|
$125
|
Commercial
real state
|
-
|
783
|
Consumer
real estate
|
374
|
-
|
Commercial
and industrial loans
|
-
|
60
|
Total
|
$492
|
$968
|
There
were no loans 90 days or more past due and accruing interest at
June 30, 2017 or December 31, 2016.
The
following table presents the aging of the recorded investment in
past due loans as of June 30, 2017 and December 31, 2016 by
portfolio segment:
|
|
|
Greater
|
|
|
|
|
|
30 - 59
|
60 - 89
|
than 90
|
|
|
|
|
|
Days
|
Days
|
Days
|
|
Total
|
|
|
(in thousands)
|
Past
|
Past
|
Past
|
Non-
|
Past
|
|
Total
|
June 30, 2017
|
Due
|
Due
|
Due
|
Accrual
|
Due
|
Current
|
Loans
|
Construction
and land development
|
$-
|
$-
|
$-
|
$118
|
$118
|
$70,543
|
$70,661
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
742,574
|
742,574
|
Consumer
real estate
|
-
|
-
|
-
|
374
|
374
|
323,470
|
323,844
|
Commercial
and industrial loans
|
-
|
-
|
-
|
-
|
-
|
181,643
|
181,643
|
Consumer
and other
|
-
|
-
|
-
|
-
|
-
|
20,840
|
20,840
|
Total
|
$-
|
$-
|
$-
|
$492
|
$492
|
$1,339,070
|
$1,339,562
|
|
|
|
Greater
|
|
|
|
|
|
30 - 59
|
60 - 89
|
than 90
|
|
|
|
|
|
Days
|
Days
|
Days
|
|
Total
|
|
|
(in thousands)
|
Past
|
Past
|
Past
|
Non-
|
Past
|
|
Total
|
December 31, 2016
|
Due
|
Due
|
Due
|
Accrual
|
Due
|
Current
|
Loans
|
Construction
and land development
|
$-
|
$-
|
$-
|
$125
|
$125
|
$79,613
|
$79,738
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
641,652
|
641,652
|
Consumer
real estate
|
-
|
-
|
-
|
783
|
783
|
286,338
|
287,121
|
Commercial
and industrial loans
|
-
|
-
|
-
|
60
|
60
|
170,649
|
170,709
|
Consumer
and other
|
-
|
-
|
-
|
-
|
-
|
11,542
|
11,542
|
Total
|
$-
|
$-
|
$-
|
$968
|
$968
|
$1,189,794
|
$1,190,762
|
Credit Quality Indicators
The
Company utilizes a nine-point grading system in order to evaluate
the level of inherent risk in the loan portfolio as part of its
allowance for loan losses methodology. Loans collectively evaluated
for impairment are grouped by loan type and, in the case of
commercial and construction loans, by risk rating. Each loan type
is assigned an allowance factor based on risk grade, historical
loss experience, economic conditions, overall portfolio quality
including delinquency rates and commercial real estate loan
concentrations (as applicable). As risk grades increase, additional
reserves are applied stated in basis points in order to account for
the added inherent risk.
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company categorizes all business and commercial purpose loans into
risk categories based on relevant information about the ability of
borrowers to service their debt such as: current financial
information, historical payment experience, credit documentation,
public information, and current economic trends, among other
factors. The Company analyzes loans individually by setting the
risk grade at the inception of a loan through the approval process.
A certain percentage of loan dollars is reviewed each year by a
third party loan review function. The risk rating process is
inherently subjective and based upon management’s evaluation
of the specific facts and circumstances for individual borrowers.
As such, the assigned risk ratings are subject to change based upon
changes in borrower status and changes in the external environment
affecting the borrower. The Company uses the following definitions
for risk ratings:
●
Risk Grade 1 – Minimal -
Credits in this category are virtually
risk-free and are well-collateralized by cash-equivalent
instruments. The repayment program is well-defined and achievable.
Repayment sources are numerous.
●
Risk Grade 2 –
Modest - Loans to borrowers of
significantly better than average financial strength or loans
secured by readily marketable securities. Earnings performance is
consistent and primary and secondary sources of repayment are well
established. The borrower exhibits excellent asset quality
and liquidity with very strong debt servicing capacity and
coverage. Company management has depth, is experienced and
well regarded in the industry.
●
Risk Grade 3 –
Average - Loans in this
category are to borrowers of satisfactory financial strength.
Earnings performance is consistent. Primary and secondary sources
of repayment are well defined and adequate to retire the debt in a
timely and orderly fashion. These borrowers would generally exhibit
satisfactory asset quality and liquidity. They have moderate
leverage and experienced management in key
positions.
●
Risk Grade 4 –
Acceptable - Loans in this
category are to borrowers involving more than average risk which
contain certain characteristics that require some supervision and
attention by the lender. Asset quality is acceptable, but
debt capacity is modest. Little excess liquidity is available. The
borrower may be fully leveraged and unable to sustain major
setbacks. Covenants are structured to ensure adequate
protection. Management may have limited experience and depth. This
category includes loans which are highly leveraged transactions due
to regulatory constraints and also includes loans involving
reasonable exceptions to policy.
●
Risk Grade 5 - Acceptable with
Care - A loan in this category
is sound and collectible but contains considerable risk.
Although asset quality remains acceptable, the borrower has a
smaller and/or less diverse asset base, very little liquidity and
limited debt capacity. Earnings performance is inconsistent and the
borrower is not strong enough to sustain major setbacks. The
borrower may be highly leveraged and below average size or a
lower-tier competitor. There might be limited management
experience and depth. These loans may be to a well-conceived
start-up venture but repayment is still dependent upon a successful
operation. This category includes loans with significant
documentation or policy exceptions, improper loan structure, or
inadequate loan servicing procedures and may also include a loan in
which strong reliance for a secondary repayment source is placed on
a guarantor who exhibits the ability and willingness to repay or
loans which are highly leveraged transactions due to the
obligor’s financial status.
●
Risk Grade 6 - Special Mention
or Critical - Loans in this
category have potential weaknesses which may, if not checked or
corrected, weaken the asset or inadequately protect the
Company’s credit position at some future date. These may also
include loans of marginal quality and liquidity that if not
corrected may jeopardize the liquidation of the debt and the
Company’s credit position. These loans require close
supervision and must be monitored to ensure there is not a pattern
of deterioration in the credit that may lead to further downgrade.
These characteristics include but are not limited
to:
-20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
o
Repayment
performance has not been demonstrated to prudent
standards;
o
Repayment
performance is inconsistent and highly sensitive to business and
operating cycle swings;
o
Fatal
documentation errors and;
o
Performing
as agreed without documented capacity or collateral
protection.
●
Risk Grade 7 –
Substandard - A substandard
loan is inadequately protected by the current sound net worth and
paying capacity of the obligor or of the collateral pledged, if
any. Loans classified as substandard have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not
corrected.
●
Risk Grade 8 – Doubtful
- Loans classified doubtful
have all the weaknesses inherent in loans classified substandard,
plus the added characteristic that the weaknesses make collection
or liquidation in full on the basis of currently existing facts,
conditions, and values highly questionable and improbable. However,
these loans are not yet rated as loss because certain events may
occur which would salvage the debt. Among these events
are:
o
Injection
of capital;
o
Alternative
financing;
o
Liquidation
of assets or the pledging of additional collateral.
The ability of the borrower to service the debt is
extremely weak, overdue status is constant, the debt has been
placed on nonaccrual status and no definite repayment schedule
exists. Doubtful is a temporary grade where a loss is expected but
is presently not quantified with any degree of accuracy. Once the
loss position is determined, the amount is charged off.
There were no loans rated as doubtful
as of June 30, 2017 or December 31, 2016.
●
Risk Grade 9 –
Loss - Loans classified Loss are considered uncollectable
and of such little value that their continuance as bankable assets
is not warranted. This classification does not mean that the asset
has absolutely no recovery or salvage value but rather that it is
not practical or desirable to defer writing off the worthless loan
even though partial recovery may be affected in the future.
Probable loss portions of doubtful
assets should be charged against the allowance for loan losses.
Loans may reside in this classification for administrative purposes
for a period not to exceed the earlier of thirty days or calendar
quarter-end. There were no loans rated as loss as of June 30, 2017
or December 31, 2016.
-21-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of
June 30, 2017 and December 31, 2016 and based on the most recent
analysis performed, the risk category of loans by class of loans is
as follows:
|
Risk Grade
|
|
||||||
(in thousands)
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
Total
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$-
|
$417
|
$1,189
|
$26,200
|
$42,695
|
$42
|
$118
|
$70,661
|
Commercial
real estate
|
-
|
210
|
270,566
|
362,522
|
92,486
|
16,790
|
-
|
742,574
|
Consumer
real estate
|
48
|
27,908
|
149,905
|
107,810
|
36,662
|
1,137
|
374
|
323,844
|
Commercial
and industrial loans
|
6,899
|
1,123
|
25,252
|
110,526
|
35,541
|
229
|
2,073
|
181,643
|
Consumer
and other
|
782
|
3,466
|
2,363
|
13,061
|
1,168
|
-
|
-
|
20,840
|
Total
|
$7,729
|
$33,124
|
$449,275
|
$620,119
|
$208,552
|
$18,198
|
$2,565
|
$1,339,562
|
|
Risk Grade
|
|
||||||
(in thousands)
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
Total
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$-
|
$1,005
|
$911
|
$22,901
|
$54,601
|
$195
|
$125
|
$79,738
|
Commercial
real estate
|
-
|
539
|
223,549
|
311,711
|
87,443
|
18,500
|
-
|
641,652
|
Consumer
real estate
|
50
|
19,247
|
130,748
|
102,137
|
33,013
|
1,143
|
783
|
287,121
|
Commercial
and industrial loans
|
2,133
|
1,525
|
32,304
|
104,019
|
29,035
|
556
|
1,137
|
170,709
|
Consumer
and other
|
1,160
|
730
|
1,086
|
7,392
|
1,174
|
-
|
-
|
11,542
|
Total
|
$3,343
|
$23,046
|
$388,598
|
$548,160
|
$205,266
|
$20,394
|
$2,045
|
$1,190,762
|
NOTE 6 - OFF-BALANCE SHEET RISK
The
Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of
financial instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company, upon extension of
credit is based on management’s credit evaluation of the
borrower. Collateral obtained varies but may include real estate,
stocks, bonds, and certificates of deposit.
-22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
summary of the contract amounts of the Company’s exposure to
off-balance sheet credit risk as of June 30, 2017 and December 31,
2016 is as follows:
|
June 30,
|
December 31,
|
(In thousands)
|
2017
|
2016
|
Financial
instruments whose contract amounts
|
|
|
represent
credit risk:
|
|
|
Undisbursed
lines of credit
|
$251,049
|
$216,769
|
Standby
letters of credit
|
5,048
|
3,904
|
Total
|
$256,097
|
$220,673
|
NOTE 7 - DERIVATIVES AND FINANCIAL INSTRUMENTS
To
mitigate exposure to variability in expected future cash flows
resulting from changes in interest rates, in May 2013 the Company
entered into two forward swap arrangements (the
“Swaps”) whereby the Company would pay fixed rates on
two short-term borrowings at some point in the future for a
determined period of time. For both agreements, the Company would
renew advances with the Federal Home Loan Bank (“FHLB”)
for 3-month terms as a primary funding source and pay the
prevailing 3-month rate. The first swap, a “2-5 Swap”,
was a $20 million agreement whereby 2 years from the May 2013
execution date, the Company would begin to swap out the 3-month
FHLB advance pricing at that date for a fixed rate of 1.964% for a
period of 5 years. The second swap, a “3-5 Swap”, was
similar in terms except that it was a $30 million agreement whereby
3 years from the May 2013 execution date, the Company would begin
to swap out the 3-month FHLB advance pricing at that date for a
fixed rate of 2.464% for a period of 5 years.
The
Company designated the forward-starting interest rate swaps (the
hedging instruments) as cash flow hedges of the risk of changes
attributable to the benchmark 3-Month LIBOR interest rate risk for
the forecasted issuances of FHLB advances arising from a rollover
strategy. The Company intended to sequentially issue a series of
3-month fixed rate debt as part of a planned roll-over of
short-term debt for the next seven to eight years.
In
September 2014, as a result of continued increasing fixed rate
exposure, the Company determined that an additional strategy was
needed and, as a result, exited from the Swaps for a deferred gain
of $372,000. In their place, the Company purchased three interest
rate caps with a strike price of 3-month LIBOR at 0.50% and a
five-year term. The instruments hedged were $100 million of FHLB
borrowings maturing quarterly on the same reset dates. The Company
executed three separate agreements between $30 million and $35
million maturing between August 2019 and October 2019.
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table reflects the cash flow hedges included in the
consolidated balance sheets as of June 30, 2017 and December 31,
2016:
|
June 30, 2017
|
December 31, 2016
|
||
|
Notational
|
Fair
|
Notational
|
Fair
|
(In thousands)
|
Amount
|
Value
|
Amount
|
Value
|
Included
in other assets:
|
|
|
|
|
Cap
1 - maturing August 2019
|
$35,000
|
$856
|
$35,000
|
$1,011
|
Cap
2 - maturing September 2019
|
35,000
|
872
|
35,000
|
1,045
|
Cap
3 - maturing October 2019
|
30,000
|
812
|
30,000
|
929
|
|
$100,000
|
$2,540
|
$100,000
|
$2,985
|
Remaining
amortization of the premium on the interest rate caps is as
follows:
(In thousands)
|
|
2017
|
$982
|
2018
|
2,247
|
2019
|
1,752
|
|
$4,981
|
The
Company recorded $421,000 and $198,000 for the three-month periods
ended June 30, 2017 and 2016, respectively, in amortization
associated with the interest rate caps. The Company recorded
$791,000 and $341,000 for the six-month periods ended June 30, 2017
and 2016, respectively, in amortization associated with the
interest rate caps. Those expenses are reflected in the
consolidated statements of income as a component of borrowings and
repurchase agreements interest expense.
Remaining
amortization of the gain associated with the exit of the swaps is
as follows:
(In thousands)
|
|
2017
|
$37
|
2018
|
74
|
Thereafter
|
147
|
|
$258
|
The
Company realized $12,000 and $31,000 in gains on the Swaps during
the three- and six-month periods ended June 30, 2017, respectively,
shown as a reduction of borrowings and repurchase agreements
interest expense. These were the first returns from the
Swaps.
The
Company anticipates little to no ineffectiveness in this hedging
relationship as long as the terms are matched at each forecasted
debt issuance. The Company notes that the actual interest cost
incurred at each rollover will be a function of market rates at
that time. However, the Company is only hedging the benchmark
interest rate risk in each rollover.
The
Company does not use derivatives for trading or speculative
purposes.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair
value is a market-based measurement and is defined as the price
that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at
the measurement date. The transaction to sell the asset or transfer
the liability is a hypothetical transaction at the measurement
date, considered from the perspective of a market participant that
holds the asset or owes the liability. In general, the transaction
price will equal the exit price and, therefore, represent the fair
value of the asset or liability at initial recognition. In
determining whether a transaction price represents the fair value
of the asset or liability at initial recognition, each reporting
entity is required to consider factors specific to the transaction
and the asset or liability, the principal or most advantageous
market for the asset or liability, and market participants with
whom the entity would transact in the market.
Outlined
below is the application of the fair value hierarchy applied to the
Company’s financial assets that are carried at fair
value.
Level 1 – Inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or liabilities
in active markets. An active market for the asset or liability is a
market in which the transactions for the asset or liability occur
with sufficient frequency and volume to provide pricing information
on an ongoing basis. As of June 30, 2017, the types of financial
assets and liabilities the Company carried at fair value hierarchy
Level 1 included marketable equity securities with readily
available market values.
Level 2 – Inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the
financial instrument. As of June 30, 2017, the types of financial
assets and liabilities the Company carried at fair value hierarchy
Level 2 included agency bonds, collateralized mortgage obligations,
mortgage backed securities, municipal bonds and
derivatives.
Level 3 – Inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
Unobservable inputs are supported by little or no market activity
or by the entity’s own assumptions. As of June 30, 2017, the
Company valued certain financial assets including one corporate
subordinated debenture, measured on both a recurring and a
non-recurring basis, at fair value hierarchy Level 3.
The
Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable
inputs.
Fair Value on a Recurring Basis
The
Company measures certain assets at fair value on a recurring basis,
as described below.
Investment Securities Available-for-Sale
Investment
securities available-for-sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted
prices, if available. If quoted prices are not available, fair
values are measured using independent pricing models or other
model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active
exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active
over-the-counter markets and money market funds. Level 2 securities
include U.S. agencies, mortgage-backed securities issued by
government sponsored entities, municipal bonds and corporate debt
securities. Securities classified as Level 3 include asset-backed
securities in less liquid markets.
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Derivative Assets and Liabilities
Derivative
instruments held or issued by the Company for risk management
purposes are traded in over-the-counter markets where quoted market
prices are not readily available. For those derivatives, the
Company measures fair value using models that use primarily market
observable inputs, such as yield curves and option volatilities,
and include the value associated with counterparty credit risk. The
Company classifies derivative instruments held or issued for risk
management purposes as Level 2. As of June 30, 2017 and December
31, 2016, the Company’s derivative instruments consist solely
of interest rate caps.
Below
is a table that presents information about assets measured at fair
value on a recurring basis at June 30, 2017 and December 31,
2016:
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(In thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
Description
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
June 30, 2017
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$15,855
|
$-
|
$15,855
|
$-
|
Collateralized
mortgage obligations
|
41,027
|
-
|
41,027
|
-
|
Mortgage-backed
securities
|
75,369
|
-
|
75,369
|
-
|
Municipal
bonds
|
67,797
|
-
|
67,797
|
-
|
Other
|
3,496
|
1,969
|
-
|
1,527
|
|
203,544
|
1,969
|
200,048
|
1,527
|
Interest
rate caps
|
2,540
|
-
|
2,540
|
-
|
Total
assets at fair value
|
$206,084
|
$1,969
|
$202,588
|
$1,527
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$16,943
|
$-
|
$16,943
|
$-
|
Collateralized
mortgage obligations
|
42,497
|
-
|
42,497
|
-
|
Mortgage-backed
securities
|
73,873
|
-
|
73,873
|
-
|
Municipal
bonds
|
60,677
|
-
|
60,677
|
-
|
Other
|
3,451
|
1,951
|
-
|
1,500
|
|
197,441
|
1,951
|
193,990
|
1,500
|
Interest
rate caps
|
2,985
|
-
|
2,985
|
-
|
Total
assets at fair value
|
$200,426
|
$1,951
|
$196,975
|
$1,500
|
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
table below summarizes the Company’s activity in investment
securities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the six months ended
June 30, 2017.
|
Level 3
|
|
Investment
|
(In thousands)
|
Securities
|
Balance
at December 31, 2016
|
$1,500
|
Purchases
|
-
|
Unrealized
gain
|
27
|
Balance
at June 30, 2017
|
$1,527
|
Fair Value on a Nonrecurring Basis
The
Company measures certain assets at fair value on a nonrecurring
basis, as described below.
Impaired Loans
The
Company does not record loans at fair value on a recurring basis.
However, from time to time, a loan is considered impaired and an
allowance for loan losses is established. Loans for which it is
probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are
considered impaired. Once a loan is identified as individually
impaired, management measures the impairment. The fair value of
impaired loans is estimated using one of several methods, including
collateral value, market value of similar debt, enterprise value,
liquidation value and discounted cash flows. Those impaired loans
not requiring an allowance represent loans for which the fair value
of the expected repayments or collateral exceed the recorded
investments in such loans. Impaired loans require classification in
the fair value hierarchy. When the fair value of the collateral is
based on an observable market price or a current appraised value,
the Company records the impaired loan as nonrecurring Level 2. When
current appraised value is not available or management determines
the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the
Company records the impaired loan as nonrecurring Level 3. Impaired
loans totaled $2.9 million and $3.2 million at June 30, 2017 and
December 31, 2016, respectively.
Other Real Estate Owned
Other
real estate owned, which includes foreclosed assets, is adjusted to
fair value upon transfer of loans and premises to other real
estate. Subsequently, other real estate owned is carried at the
lower of carrying value or fair value.
At the
date of transfer, losses are charged to the allowance for credit
losses. Subsequent write-downs are charged to expense in the period
they are incurred.
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Below
is a table that presents information about assets measured at fair
value on a nonrecurring basis at June 30, 2017 and December 31,
2016:
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(In thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
June 30, 2017
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Impaired
loans
|
$2,050
|
$-
|
$-
|
$2,050
|
Other
real estate owned
|
4,690
|
-
|
-
|
4,690
|
Total
|
$6,740
|
$-
|
$-
|
$6,740
|
|
|
Fair Value Measurements Using
|
||
|
|
Quoted Prices
|
Significant
|
|
|
|
in Active
|
Other
|
Significant
|
|
|
Markets for
|
Observable
|
Unobservable
|
(In thousands)
|
Total
|
Identical Assets
|
Inputs
|
Inputs
|
December 31, 2016
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Impaired
loans
|
$2,712
|
$-
|
$-
|
$2,712
|
Other
real estate owned
|
4,740
|
-
|
-
|
4,740
|
Total
|
$7,452
|
$-
|
$-
|
$7,452
|
For
Level 3 assets and liabilities measured at fair value on a
recurring or nonrecurring basis as of June 30, 2017 and December
31, 2016, the significant unobservable inputs used in the fair
value measurements were as follows:
|
June 30, 2017 and December 31,
2016
|
||||
|
Valuation
|
|
Significant
|
|
Significant
|
|
Technique
|
|
Observable Inputs
|
|
unobservable Inputs
|
Impaired
loans
|
Appraisal value
|
|
Appraisals and/or sales of comparable
properties
|
|
Appraisals discounted 5% to 10% for sales
commissions and other holding costs
|
|
|
|
|
|
|
Other
real estate owned
|
Appraisal value/
Comparison sale/ Other estimates |
|
Appraisals and/or sales of comparable
properties
|
|
Appraisals discounted 5% to 10% for sales
commissions and other holding costs
|
The
Company provides certain disclosure of fair value information about
financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows.
In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Accordingly,
certain financial instruments and all nonfinancial instruments are
excluded from disclosure. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial
instruments:
Cash and Due from Banks
The
carrying amounts for cash and due from banks approximate fair value
because of the short maturities of those instruments.
Federal Home Loan Bank Stock
The
carrying value of Federal Home Loan Bank stock approximates fair
value based on the redemption provisions of such Federal Home Loan
Bank stock.
Bank-owned life insurance
The
carrying value of bank-owned life insurance approximates fair value
because this investment is carried at cash surrender value, as
determined by the insurer.
Loans
The
fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
The
fair value of demand deposits is the amount payable on demand at
the reporting date. The fair value of time deposits is estimated by
discounting expected cash flows using the rates currently offered
for instruments of similar remaining maturities.
Accrued Interest
The
carrying amount is a reasonable estimate of fair value.
Short-Term Borrowings and Long-Term Debt
The
fair values are based on discounting expected cash flows using the
current interest rates for debt with the same or similar remaining
maturities and collateral requirements.
Financial Instruments with Off-Balance Sheet Risk
With
regard to financial instruments with off-balance sheet risk, it is
not practicable to estimate the fair value of future financing
commitments.
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table presents the estimated fair values and carrying
amounts of the Company’s financial instruments, none of which
are held for trading purposes, at June 30, 2017 and December 31,
2016:
|
June 30, 2017
|
||||
|
Carrying
|
Fair
Value
|
|||
(in thousands)
|
Amount
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Financial
assets:
|
|
|
|
|
|
Cash
and due from banks
|
$17,564
|
$17,564
|
$17,564
|
$-
|
$-
|
Investment
securities available-for-
|
|
|
|
|
|
sale
|
203,544
|
203,544
|
1,969
|
200,048
|
1,527
|
Loans,
net
|
1,330,939
|
1,331,557
|
-
|
1,329,507
|
2,050
|
Accrued
interest receivable
|
4,690
|
4,690
|
4,690
|
-
|
-
|
Federal
Home Loan Bank stock
|
12,828
|
12,828
|
-
|
-
|
12,828
|
Bank-owned
life insurance
|
34,703
|
34,703
|
-
|
34,703
|
-
|
Interest
rate caps
|
2,540
|
2,540
|
-
|
2,540
|
-
|
Financial
liabilities:
|
|
|
|
|
|
Non-maturing
deposits
|
995,199
|
995,199
|
-
|
995,199
|
-
|
Time
deposits
|
179,531
|
179,731
|
-
|
179,731
|
-
|
Accrued
interest payable
|
451
|
451
|
451
|
-
|
-
|
Repurchase
agreements and
|
|
|
|
|
|
federal
funds purchased
|
21,256
|
21,256
|
-
|
21,256
|
-
|
FHLB
Advances and other borrowings
|
270,000
|
270,005
|
-
|
270,005
|
-
|
Subordinated
debt
|
18,558
|
14,302
|
-
|
14,302
|
-
|
|
|
|
|
|
|
|
December 31, 2016
|
||||
|
Carrying
|
Fair Value
|
|||
(in thousands)
|
Amount
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Financial
assets:
|
|
|
|
|
|
Cash
and due from banks
|
$43,005
|
$43,005
|
$43,005
|
$-
|
$-
|
Investment
securities available-for-
|
|
|
|
|
|
sale
|
197,441
|
197,441
|
1,951
|
193,990
|
1,500
|
Loans,
net
|
1,183,371
|
1,184,621
|
-
|
1,181,909
|
2,712
|
Accrued
interest receivable
|
4,368
|
4,368
|
4,368
|
-
|
-
|
Federal
Home Loan Bank stock
|
8,400
|
8,400
|
-
|
-
|
8,400
|
Bank-owned
life insurance
|
34,190
|
34,190
|
-
|
34,190
|
-
|
Interest
rate caps
|
2,985
|
2,985
|
-
|
2,985
|
-
|
Financial
liabilities:
|
|
|
|
|
|
Non-maturing
deposits
|
953,248
|
953,248
|
-
|
953,248
|
-
|
Time
deposits
|
219,007
|
219,038
|
-
|
219,038
|
-
|
Accrued
interest payable
|
294
|
294
|
294
|
-
|
-
|
Repurchase
agreements and
|
|
|
|
|
|
federal
funds purchased
|
20,174
|
20,174
|
-
|
20,174
|
-
|
FHLB
Advances and other borrowings
|
150,000
|
149,997
|
-
|
149,997
|
-
|
Subordinated
debt
|
18,558
|
14,197
|
-
|
14,197
|
-
|
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 – SUPPLEMENTAL CASH FLOW DISCLOSURE
|
For the six-months
|
|
|
ended June 30,
|
|
(In thousands)
|
2017
|
2016
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
Interest
paid
|
$4,678
|
$3,907
|
|
|
|
Income
taxes paid
|
$3,770
|
$2,635
|
|
|
|
Supplemental
Schedule of Noncash Investing and Financing Activites:
|
|
|
|
|
|
Change
in fair value of securities available-for-sale, net of
taxes
|
$1,777
|
$2,367
|
|
|
|
Change
in fair value of cash flow hedges, net of taxes
|
$204
|
$(1,333)
|
NOTE 10 – SUBSEQUENT EVENTS
Subsequent
events are events or transactions that occur after the balance
sheet date but before financial statements are issued. Recognized
subsequent events are events or transactions that provide
additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the process
of preparing financial statements.
Nonrecognized
subsequent events are events that provide evidence about conditions
that did not exist at the date of the balance sheet but arose after
that date. Management has reviewed events occurring through the
date the financial statements were available to be issued and no
subsequent events occurred requiring accrual or
disclosure.
-31-
Item
2
-
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Paragon
Commercial Corporation (the “Company” or
“Paragon”) is a bank holding company incorporated under
the laws of North Carolina and headquartered in Raleigh, North
Carolina. The Company conducts its business operations primarily
through its wholly owned subsidiary, Paragon Bank (the
“Bank”), a full-service, state-chartered community bank
with 3 locations in Raleigh, Charlotte and Cary, North Carolina.
Paragon Bank provides banking services to businesses and consumers
across the Carolinas.
Because
the Company has no material operations and conducts no business on
its own other than owning its subsidiaries, the discussion
contained in this management’s discussion and analysis
concerns primarily the business of Paragon Bank. For ease of
reading and because the financial statements are presented on a
consolidated basis, Paragon Commercial Corporation and Paragon Bank
are collectively referred to herein as “the Company,”
“we”, “our”, or “us”, unless
otherwise noted.
Management’s discussion and analysis is
intended to assist readers in understanding and evaluating the
financial condition and consolidated results of operations of the
Company. This discussion and analysis includes descriptions of
significant transactions, trends and other factors affecting the
Company’s operating results for the three- and six-month
periods ended June 30, 2017, and 2016, as well as the financial
condition of the Company as of June 30, 2017 and December 31, 2016.
This discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements included in this report
and the audited consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 filed with the Securities and
Exchange Commission on March 21, 2017, as amended on April 28,
2017. The results of operations for the three and six months ended
June 30, 2017 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2017 or any other
future period.
Forward-Looking Information
This
periodic report on Form 10-Q contains certain
“forward-looking statements” that represent
management’s judgments concerning the future and are subject
to risks and uncertainties that could cause the Company’s
actual operating results and financial position to differ
materially from those projected in the forward-looking statements.
These statements are included throughout this report and relate to,
among other things our business strategy, goals, and expectations
concerning our market position, future operations, margins,
profitability, liquidity, and capital resources. Additional
statements regarding the proposed merger with TowneBank relate to,
among other things, the timing of the proposed merger and whether
the proposed merger will occur; the benefits, results and effects
of the proposed merger; and the combined company's plans,
objectives, expectations, costs, and the effect on earnings per
share. Such forward-looking statements can be identified by the use
of forward-looking terminology such as “may,”
“will,” “anticipate,” “should,”
“would,” “project,” “future,”
“strategy,” “believe,”
“contemplate,” “expect,”
“estimate,” “continue,”
“intend,” “seeks,” or other similar words
and expressions of the future.
-32-
Risks
and other factors that could cause actual results to differ
materially from those expected include the following:
●
costs and difficulties related to the proposed merger, including,
among other things, the integration of our business with TowneBank,
the inability to retain key personnel, competitive response to the
proposed merger, or potential adverse reactions to changes in
business or employee relationships could be more significant than
we anticipate, resulting in higher costs or reduced
benefits;
●
failure of the merger to be completed on the proposed terms and
schedule, or at all;
●
business uncertainties and contractual restrictions during the
pendency of the merger and management distraction;
●
risks associated with any change in management, strategic
direction, business plan, or operations;
●
local economic conditions affecting retail and commercial real
estate;
●
disruptions in the credit markets;
●
changes in interest rates;
●
adverse developments in the real estate market affecting the value
and marketability of collateral securing loans made by the
Company;
●
the failure of assumptions underlying loan loss and other reserves;
and
●
competition and the risk of new and changing
regulation.
Additional factors
that could cause actual results to differ materially are discussed
in the Risk Factors section of this report and in the
Company’s other filings with the SEC. The forward-looking
statements in this report speak only as of the date hereof, and the
Company does not assume any obligation to update such
forward-looking statements, except as may otherwise be required by
law.
GAAP Reconciliation and Management Explanation of Non-GAAP
Financial Measures
Some
of the financial measures included in this report are not measures
of financial performance recognized by GAAP. These non-GAAP
financial measures are “tangible stockholders’
equity,” “tangible book value per share,”
“tangible average equity to tangible average assets,”
and “efficiency ratio.” Our management uses these
non-GAAP financial measures in its analysis of our performance and
because of market expectations of use of these ratios to evaluate
the Company. Management believes each of these non-GAAP financial
measures provides useful information about our financial condition
and results of operation. As noted below, the efficiency ratio
shows the amount of revenue generated for each dollar spent and
provides investors with a measure of our productivity. We also
believe the presentation of tangible stockholders’ equity,
tangible book value per share, tangible equity to risk-weighted
assets and tangible average equity to tangible average assets would
provide investors with a clear picture of our assets and equity.
However, because the Company has not consummated any merger
transactions and does not use any derivatives that might give rise
to an intangible asset, there is no difference in tangible equity
or assets and GAAP equity or assets.
●
“Efficiency
ratio” is defined as total non-interest expense less merger
related costs divided by adjusted operating revenue. Adjusted
operating revenue is equal to net interest income (taxable
equivalent) plus non-interest income, adjusted to exclude the
impacts of gains and losses on the sale of securities and gains and
losses on the sale or write-down of foreclosed real estate. We
believe the efficiency ratio is important as an indicator of
productivity because it shows the amount of revenue generated by
our core operations for each dollar spent. While the efficiency
ratio is a measure of productivity, its value reflects the
attributes of the business model we employ.
-33-
|
Three-Month Periods
|
Six-Month Periods
|
||
|
Ended June 30,
|
Ended June 30,
|
||
(Dollars in
thousands)
|
2017
|
2016
|
2017
|
2016
|
Efficiency Ratio
|
|
|
|
|
Non-interest
expense
|
$7,857
|
$6,488
|
$15,469
|
$13,088
|
Merger
related expenses
|
368
|
-
|
368
|
-
|
|
$7,489
|
$6,488
|
$15,101
|
$13,088
|
|
|
|
|
|
Net
interest taxable equivalent income
|
$13,351
|
$11,560
|
$25,979
|
$22,346
|
Non-interest
income
|
494
|
381
|
997
|
647
|
Less
gain on investment securities
|
-
|
-
|
-
|
(85)
|
Plus
loss on sale or writedown of foreclosed real estate
|
22
|
45
|
22
|
257
|
Adjusted operating revenue
|
$13,867
|
$11,986
|
$26,998
|
$23,165
|
|
|
|
|
|
Efficiency
ratio
|
54.01%
|
54.13%
|
57.30%
|
56.50%
|
Executive Overview of Recent Financial Performance
●
Net
income available to common stockholders totaled $3.3 million, or
$0.61 per diluted common share, in the second quarter
(“Q2”) of 2017, which was a decrease year over year
from $3.5 million, or $0.75 per diluted share, in Q2
2016.
●
Return
on average assets equaled 0.83% in Q2 2017 compared to 1.00% in Q2
2016 while return on average equity equaled 9.19% in Q2 2017
compared to 13.41% for the same period in 2016.
●
The
efficiency ratio, which represents operating expenses to total
operating revenues, improved to 54.01% in Q2 2017 from 54.13% in Q2
2016.
●
The
Company had net recoveries of charged-off loans of $146,000 in Q2
2017, compared to $55,000 in Q2 2016.
●
Annualized
net loan growth was 36% in Q2 2017, resulting from net loan
originations during the quarter of $108.9 million.
Proposed Merger with TowneBank
On
April 26, 2017, the Company entered into an Agreement and Plan of
Reorganization (the “Merger Agreement”) with TowneBank
and TB Acquisition, LLC (“TB Acquisition”). Pursuant to
the terms of the Merger Agreement, the Company will merge with and
into TB Acquisition (the “Merger”) and the Bank will
subsequently merge with and into TowneBank (the “Bank
Merger” and, together with the Merger, the
“Transaction”). TB Acquisition will be the surviving
entity in the Merger and TowneBank will be the surviving entity in
the Bank Merger.
-34-
Under
the terms of the Merger Agreement, the Company’s stockholders
will be entitled to receive 1.7250 shares (the “Exchange
Ratio”) of TowneBank common stock for each share of the
Company’s common stock. Based on TowneBank’s closing
price of $34.35 as of April 26, 2017, the day the Transaction was
announced, the estimated aggregate purchase price was $323.4
million. The Transaction is expected to close in the first quarter
of 2018, subject to stockholder and regulatory approval and other
customary closing conditions.
Analysis of Results of Operations
Second Quarter 2017 compared to Second Quarter 2016
During
the three-month period ended June 30, 2017, the Company had net
income of $3.3 million compared to net income of $3.5 million for
the same period in 2016. Basic and diluted net income per share for
the quarter ended June 30, 2017 were $0.61 and $0.61, respectively,
compared with basic and diluted net income per share of $0.76 and
$0.75 for the same period in 2016. Income during the second quarter
of 2017 was negatively impacted by merger related costs of $368,000
as well as $650,000 in additional loan loss provisions related to
strong loan growth. The second quarter of 2016 had no merger
related costs or loan loss provisions.
Year-to-Date 2017 compared to Year-to-Date 2016
During
the six-month period ended June 30, 2017, the Company had net
income of $6.6 million compared to net income of $6.3 million for
the same period in 2016. Basic and diluted net income per share for
the six-months ended June 30, 2017 were $1.23 and $1.23,
respectively, compared with basic and diluted net income per share
of $1.38 and $1.37 for the same period in 2016. Income during the
six-month period ended 2017 was also negatively impacted by merger
related costs of $368,000 as well as $809,000 in additional loan
loss provisions related to strong loan growth. The same period in
2016 had no merger related costs or loan loss
provisions.
As
discussed in greater detail below, the improvements in the results
of operations in the second quarter and first six months of 2017,
compared to the respective periods of 2016, reflect the benefit of
balance sheet growth period over period as well as continued credit
improvement.
Net Interest Income
Second Quarter 2017 compared to Second Quarter 2016
Like
most financial institutions, the primary component of earnings for
the Company is net interest income. Net interest income is the
difference between interest income, principally from loans and
investment securities portfolios, and interest expense, principally
on customer deposits and borrowings. Changes in net interest income
result from changes in volume, spread and margin. For this purpose,
volume refers to the average dollar level of interest-earning
assets and interest-bearing liabilities, spread refers to the
difference between the average yield on interest-earning assets and
the average cost of interest-bearing liabilities, and margin refers
to net interest income divided by average interest-earning assets.
Margin is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities, as well
as by the levels on non-interest bearing liabilities and
capital.
Net
interest income increased by $1.7 million to $13.0 million for the
three months ended June 30, 2017. The Company’s total
interest income was impacted by an increase in interest earning
assets. Average total interest-earning assets were $1.53 billion in
the second quarter of 2017 compared with $1.31 billion in the same
period in 2016. The yield on those assets was 4.17% in the second
quarter of 2017 compared to 4.15% for the same period in 2016. The
improvement in yield was primarily the result of a shift in asset
composition from lower yielding short-term investments and cash
into loans. Meanwhile, average interest-bearing liabilities
increased by $139 million from $1.08 billion for the three months
ended June 30, 2016 to $1.22 billion for the same period ended June
30, 2017. The Company’s cost of these funds increased by 10
basis points year over year to 0.83% from 0.73% in the second
quarter of 2016 primarily as a result of the Federal
Reserve’s increase in rates impacting the cost of the
Company’s borrowings at the FHLB. During the three-month
period ended June 30, 2017, the Company’s net interest margin
was 3.51% and net interest spread was 3.34%. In the second quarter
of 2016, net interest margin was 3.55% and net interest spread was
3.42%.
-35-
The
following table summarizes the major components of net interest
income and the related yields and costs for the quarterly periods
presented.
|
For the Three Months Ended June 30,
|
|||||
|
2017
|
2016
|
||||
|
Average
|
|
Average
|
Average
|
|
Average
|
(Dollars in thousands)
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Loans,
net of allowance (1)
|
$1,272,604
|
$14,014
|
4.42%
|
$1,071,325
|
$11,840
|
4.44%
|
Investment
securities (2)
|
213,205
|
1,798
|
3.38%
|
193,231
|
1,628
|
3.39%
|
Other
interest-earning assets
|
41,666
|
71
|
0.68%
|
45,954
|
63
|
0.55%
|
Total interest-earning assets
|
1,527,475
|
15,883
|
4.17%
|
1,310,510
|
13,531
|
4.15%
|
Other
assets
|
59,091
|
|
|
83,212
|
|
|
Total assets
|
$1,586,566
|
|
|
$1,393,722
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$244,569
|
238
|
0.39%
|
$170,209
|
170
|
0.40%
|
Money
markets
|
537,884
|
889
|
0.66%
|
402,851
|
666
|
0.66%
|
Time
deposits less than $100,000
|
11,303
|
30
|
1.08%
|
11,635
|
30
|
1.05%
|
Time
deposits greater than or
|
|
|
|
|
|
|
equal
to $100,000
|
177,991
|
428
|
0.96%
|
242,444
|
526
|
0.87%
|
Borrowings
|
249,010
|
947
|
1.53%
|
254,540
|
579
|
0.91%
|
Total interest-bearing liabilities
|
1,220,757
|
2,532
|
0.83%
|
1,081,679
|
1,971
|
0.73%
|
Noninterest-bearing
deposits
|
225,725
|
|
|
191,994
|
|
|
Other
liabilities
|
(2,748)
|
|
|
16,367
|
|
|
Stockholders'
equity
|
142,832
|
|
|
103,682
|
|
|
Total liabilities and stockholders'
|
|
|
|
|
|
|
equity
|
$1,586,566
|
|
|
$1,393,722
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate
|
|
|
|
|
|
|
spread (taxable-equivalent basis) (3)
|
|
$13,351
|
3.34%
|
|
$11,560
|
3.42%
|
|
|
|
|
|
|
|
Net interest margin (taxable-
|
|
|
|
|
|
|
equivalent basis) (4)
|
|
|
3.51%
|
|
|
3.55%
|
|
|
|
|
|
|
|
Ratio of interest-bearing assets to
|
|
|
|
|
|
|
interest-bearing liabilities
|
125.13%
|
|
|
121.16%
|
|
|
|
|
|
|
|
|
|
Reported net interest income
|
|
|
|
|
|
|
Net
interest income (taxable-equivalent
|
|
|
|
|
|
|
basis)
|
|
$13,351
|
|
|
$11,560
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
333
|
|
|
259
|
|
Net
interest income
|
|
$13,018
|
|
|
$11,301
|
|
(1)
Loans include nonaccrual loans.
(2)
Yields related to investment securities exempt from income taxes
are stated on a taxable-equivalent basis assuming a federal income
tax rate of 30.0 percent. The taxable-equivalent adjustment was
$333,000 and $259,000 for the 2017 and 2016 periods,
respectively.
(3) Net
interest spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net
interest margin represents annualized net interest income divided
by average interest-earning assets.
-36-
Changes
in interest income and interest expense can result from variances
in both volume and rates. The following table presents the relative
impact on tax-equivalent net interest income to changes in the
average outstanding balances of interest-earning assets and
interest-bearing liabilities and the rates earned and paid on such
assets and liabilities.
|
Three Months Ended
|
||
|
June 30, 2017 vs. 2016
|
||
|
Increase (Decrease) Due to
|
||
(Dollars in thousands)
|
Volume
|
Rate
|
Total
|
Interest
income
|
|
|
|
Loans,
net of allowance
|
$2,231
|
$(57)
|
$2,174
|
Investment
securities
|
169
|
1
|
170
|
Other
interest-earnings assets
|
(6)
|
14
|
8
|
Total
interest income (taxable-
|
|
|
|
equivalent
basis)
|
2,394
|
(42)
|
2,352
|
|
|
|
|
Interest
expense
|
|
|
|
Deposits:
|
|
|
|
Interest-bearing
checking accounts
|
74
|
(6)
|
68
|
Money
markets
|
224
|
(1)
|
223
|
Time
deposits less than $100,000
|
(1)
|
1
|
-
|
Time
deposits greater than or
|
|
|
|
equal
to $100,000
|
(140)
|
42
|
(98)
|
Borrowings
|
(13)
|
381
|
368
|
Total
interest expense
|
144
|
417
|
561
|
|
|
|
|
Net
interest income increase/
|
|
|
|
(decrease)(taxable
equivalent basis)
|
$2,250
|
$(459)
|
1,791
|
|
|
|
|
Less:
|
|
|
|
Taxable-equivalent
adjustment
|
|
|
74
|
Net
interest income increase
|
|
|
$1,717
|
Year-to-Date 2017 compared to Year-to-Date 2016
Net
interest income increased by $3.5 million to $25.3 million for the
six months ended June 30, 2017. The Company’s total interest
income was impacted by an increase in interest earning assets.
Average total interest-earning assets were $1.51 billion for the
six-month period ended June 30, 2017 compared with $1.27 billion in
the same period in 2016. The yield on those assets was 4.12% in
2017 compared to 4.14% for the same period in 2016. The slight
decline in yield was primarily the result of a 3 basis point
decrease in average loan yield as a result of competitive pricing
pressure. Meanwhile, average interest-bearing liabilities increased
by $140.5 million from $1.07 billion for the year-to-date period
ended June 30, 2016 to $1.21 billion for the same period ended June
30, 2017. The Company’s cost of these funds increased from
0.73% for the year-to-date period ended June 30, 2016 to 0.81% for
the same period ended June 30, 2017. The increase was primarily as
a result of the Federal Reserve’s increase in rates impacting
the cost of the Company’s borrowings at the FHLB. During the
six-month period ended June 30, 2017, the Company’s net
interest margin was 3.47% and net interest spread was 3.31%. For
the same period in 2016, net interest margin was 3.53% and net
interest spread was 3.41%.
-37-
The
following table summarizes the major components of net interest
income and the related yields and costs for the quarterly periods
presented.
|
For the Six Months Ended June 30,
|
|||||
|
2017
|
2016
|
||||
|
Average
|
|
Average
|
Average
|
|
Average
|
(Dollars in thousands)
|
Amount
|
Interest
|
Rate
|
Amount
|
Interest
|
Rate
|
Loans,
net of allowance (1)
|
$1,240,959
|
$27,084
|
4.40%
|
$1,045,361
|
$23,020
|
4.43%
|
Investment
securities (2)
|
210,180
|
3,510
|
3.37%
|
185,556
|
3,082
|
3.34%
|
Other
interest-earnings assets
|
58,689
|
230
|
0.79%
|
41,958
|
121
|
0.58%
|
Total interest-earning assets
|
1,509,828
|
30,824
|
4.12%
|
1,272,875
|
26,233
|
4.14%
|
Other
assets
|
56,356
|
|
|
85,685
|
|
|
Total assets
|
$1,566,184
|
|
|
$1,358,560
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Interest-bearing
checking accounts
|
$224,528
|
425
|
0.38%
|
$155,299
|
348
|
0.45%
|
Money
markets
|
533,715
|
1,776
|
0.67%
|
402,641
|
1,345
|
0.67%
|
Time
deposits less than $100,000
|
11,374
|
60
|
1.07%
|
11,639
|
60
|
1.03%
|
Time
deposits greater than or
|
|
|
|
|
|
|
equal
to $100,000
|
189,055
|
909
|
0.97%
|
261,536
|
1,063
|
0.82%
|
Borrowings
|
249,655
|
1,675
|
1.35%
|
236,674
|
1,071
|
0.91%
|
Total interest-bearing liabilities
|
1,208,327
|
4,845
|
0.81%
|
1,067,789
|
3,887
|
0.73%
|
Noninterest-bearing
deposits
|
219,242
|
|
|
175,562
|
|
|
Other
liabilities
|
(1,784)
|
|
|
13,823
|
|
|
Stockholders'
equity
|
140,399
|
|
|
101,386
|
|
|
Total liabilities and stockholders'
|
|
|
|
|
|
|
equity
|
$1,566,184
|
|
|
$1,358,560
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate
|
|
|
|
|
|
|
spread (taxable-equivalent basis) (3)
|
|
$25,979
|
3.31%
|
|
$22,346
|
3.41%
|
|
|
|
|
|
|
|
Net interest margin (taxable-
|
|
|
|
|
|
|
equivalent basis) (4)
|
|
|
3.47%
|
|
|
3.53%
|
|
|
|
|
|
|
|
Ratio of interest-bearing assets to
|
|
|
|
|
|
|
interest-bearing liabilities
|
124.95%
|
|
|
119.21%
|
|
|
|
|
|
|
|
|
|
Reported net interest income
|
|
|
|
|
|
|
Net
interest income (taxable-equivalent
|
|
|
|
|
|
|
basis)
|
|
$25,979
|
|
|
$22,346
|
|
Less:
|
|
|
|
|
|
|
Taxable-equivalent
adjustment
|
|
642
|
|
|
494
|
|
Net
interest income
|
|
$25,337
|
|
|
$21,852
|
|
(1)
Loans include nonaccrual loans.
(2)
Yields related to investment securities exempt from income taxes
are stated on a taxable-equivalent basis assuming a federal income
tax rate of 30.0 percent. The taxable-equivalent adjustment was
$642,000 and $494,000 for the 2017 and 2016 periods,
respectively.
(3) Net
interest spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net
interest margin represents annualized net interest income divided
by average interest-earning assets.
-38-
Changes
in interest income and interest expense can result from variances
in both volume and rates. The following table presents the relative
impact on tax-equivalent net interest income to changes in the
average outstanding balances of interest-earning assets and
interest-bearing liabilities and the rates earned and paid on such
assets and liabilities.
|
Six Months Ended
|
||
|
June 30, 2017 vs. 2016
|
||
|
Increase (Decrease) Due to
|
||
(Dollars in thousands)
|
Volume
|
Rate
|
Total
|
Interest
income
|
|
|
|
Loans,
net of allowance
|
$4,297
|
$(243)
|
$4,054
|
Investment
securities
|
408
|
20
|
428
|
Other
interest-earning assets
|
48
|
61
|
109
|
Total
interest income (taxable-
|
|
|
|
equivalent
basis)
|
4,753
|
(162)
|
4,591
|
|
|
|
|
Interest
expense
|
|
|
|
Deposits:
|
|
|
|
Interest-bearing
checking accounts
|
155
|
(78)
|
77
|
Money
markets
|
437
|
(6)
|
431
|
Time
deposits less than $100,000
|
(1)
|
1
|
-
|
Time
deposits greater than or
|
|
|
|
equal
to $100,000
|
(294)
|
140
|
(154)
|
Borrowings
|
59
|
545
|
604
|
Total
interest expense
|
356
|
602
|
958
|
|
|
|
|
Net
interest income increase/
|
|
|
|
(decrease)(taxable
equivalent basis)
|
$4,397
|
$(764)
|
3,633
|
|
|
|
|
Less:
|
|
|
|
Taxable-equivalent
adjustment
|
|
|
148
|
Net
interest income increase/
|
|
|
|
(decrease)
|
|
|
$3,485
|
Provision for Loan Losses
Second Quarter 2017 compared to Second Quarter 2016
Provisions for loan
losses are charged to income to bring the allowance for loan losses
to a level deemed appropriate by management. In evaluating the
allowance for loan losses, management considers factors that
include growth, composition and industry diversification of the
portfolio, historical loan loss experience, current delinquency
levels, adverse situations that may affect a borrower’s
ability to repay, estimated value of any underlying collateral,
prevailing economic conditions and other relevant
factors.
In
determining the loss history to be applied to its ASC 450 loan
pools within the allowance for loan losses, the Company uses net
charge-off history for the most recent five consecutive years.
Since each of the five past years contain a declining amount of
charge-offs coupled with a large number of recoveries, the impact
of the Company’s improvement in historical credit quality has
resulted in a continually declining balance of reserves as a
percentage of the loan portfolio.
-39-
The
following table summarizes the changes in the allowance for loan
losses for the three months ended June 30, 2017 and
2016:
(In thousands)
|
|
Three months ended June 30, 2017
|
|
Beginning
balance
|
$8,125
|
Provision
for loan losses
|
650
|
Loans
charged off
|
-
|
Recoveries
|
146
|
Net
recoveries
|
146
|
Ending
balance
|
$8,921
|
|
|
Three months ended June 30, 2016
|
|
Beginning
balance
|
$7,931
|
Provision
for loan losses
|
-
|
Loans
charged off
|
(1)
|
Recoveries
|
56
|
Net
chargeoffs
|
55
|
Ending
balance
|
$7,986
|
The
Company recorded $650,000 in provision for loan losses in the
second quarter of 2017 but did not record a provision for loan
losses during the same period in 2016. The increase in the
provision for 2017 was the result of rapid loan growth along with
additions to impaired loans during the quarter.
Year-to-Date 2017 compared to Year-to-Date 2016
The
following table summarizes the changes in the allowance for loan
losses for the six months ended June 30, 2017 and
2016:
(In thousands)
|
|
Six months ended June 30, 2017
|
|
Beginning
balance
|
$7,909
|
Provision
for loan losses
|
809
|
Loans
charged off
|
(23)
|
Recoveries
|
226
|
Net
recoveries
|
203
|
Ending
balance
|
$8,921
|
|
|
Six months ended June 30, 2016
|
|
Beginning
balance
|
$7,641
|
Provision
for loan losses
|
-
|
Loans
charged off
|
(1)
|
Recoveries
|
346
|
Net
chargeoffs
|
345
|
Ending
balance
|
$7,986
|
-40-
The
Company recorded $809,000 in provision for loan losses in the first
six months of 2017 but did not record a provision for loan losses
during the same period in 2016. The increase in the provision for
2017 was primarily the result of rapid loan growth in
2017.
Non-Interest Income
The
following table provides a summary of non-interest income for the
periods presented.
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
(In thousands, except per share data)
|
2017
|
2016
|
2017
|
2016
|
Non-interest income
|
|
|
|
|
Increase
in cash surrender value of bank owned
|
|
|
|
|
life
insurance
|
$255
|
$226
|
$513
|
$449
|
Net
gain on sale of securities
|
-
|
-
|
-
|
85
|
Service
charges and fees
|
68
|
56
|
130
|
114
|
Mortgage
origination fees and gains on sale of loans
|
26
|
33
|
77
|
65
|
Net
loss on sale or impairment of foreclosed assets
|
(22)
|
(45)
|
(22)
|
(257)
|
Other
fees and income
|
167
|
111
|
299
|
191
|
Total
non-interest income
|
$494
|
$381
|
$997
|
$647
|
Second Quarter 2017 compared to Second Quarter 2016
Non-interest income
for the quarter ended June 30, 2017 was $494,000, an increase of
$113,000 from $381,000 for the same period in 2016. The primary
reason for the increase was an increase of $83,000 in income
distributions from a minority partnership investment.
-41-
Year-to-Date 2017 compared to Year-to-Date 2016
Non-interest income
for the six months ended June 30, 2017 was $997,000, an increase of
$350,000 from $647,000 for the same period in 2016. The primary
reason for the increase was a decrease of $257,000 in the amount of
losses on sale or write-down of other real estate. This was
partially offset by a decrease of $85,000 on gains of sales of
securities taken during 2016.
Non-Interest Expenses
The
following table provides a summary of non-interest expenses for the
periods presented.
|
Three months
|
Six months
|
||
|
ended June 30,
|
ended June 30,
|
||
(In thousands, except per share data)
|
2017
|
2016
|
2017
|
2016
|
Non-interest expense
|
|
|
|
|
Salaries
and employee benefits
|
$4,310
|
$3,742
|
$8,772
|
$7,609
|
Furniture,
equipment and software costs
|
451
|
390
|
953
|
882
|
Occupancy
|
373
|
342
|
732
|
686
|
Data
processing
|
580
|
524
|
1,110
|
820
|
Director
related fees and expenses
|
253
|
219
|
477
|
471
|
Professional
fees
|
244
|
182
|
447
|
419
|
FDIC
and other supervisory assessments
|
201
|
217
|
367
|
412
|
Advertising
and public relations
|
297
|
234
|
518
|
422
|
Unreimbursed
loan costs and foreclosure related expenses
|
104
|
142
|
278
|
211
|
Merger
related expenses
|
368
|
-
|
368
|
-
|
Other
|
676
|
496
|
1,447
|
1,156
|
Total
non-interest expense
|
$7,857
|
$6,488
|
$15,469
|
$13,088
|
Second Quarter 2017 compared to Second Quarter 2016
Non-interest
expenses increased period over period by $1.4 million, or 21.1%, to
$7.9 million for the three-month period ended June 30, 2017, from
$6.5 million for the same period in 2016. The following are
highlights of the significant changes in non-interest expenses in
the second quarter of 2017 compared to the second quarter of
2016.
●
Personnel expenses
increased $568,000 to $4.3 million due primarily to the addition of
more personnel to handle the growth of the Company.
●
The Company had
merger related expenses of $368,000 in the second quarter of 2017
as a result of the April 26th announcement of the
proposed merger with TowneBank.
●
Advertising fees
increased $63,000 to $297,000 from $234,000 in the second quarter
of 2017 due largely to costs associated with advertisement
placements within more magazine related content in 2017 that were
not incurred in the second quarter of 2016.
Year-to-Date 2017 compared to Year-to-Date 2016
Non-interest
expenses increased period over period by $2.4 million, or 18.2%, to
$15.5 million for the six-month period ended June 30, 2017, from
$13.1 million for the same period in 2016. The following are
highlights of the significant changes in non-interest expenses in
the first six months of 2017 compared to the same period in
2016.
●
Personnel expenses
increased $1.2 million to $8.8 million due primarily to the
addition of more personnel to handle the rapid growth of the
Company.
-42-
●
The Company had
merger related expenses of $368,000 in the second quarter of 2017
as a result of the April 26th announcement of the
proposed merger with TowneBank.
●
Data Processing
charges increased by $290,000 primarily due to an increase in core
processing related expenses associated with the growth of the
Company.
Provision for Income Taxes
Income
tax expense was $1.7 million in the second quarter of 2017 and
2016. The Company’s effective tax rate for the second quarter
of 2017 was 34.4%, compared to 33.10% for the same period in 2016.
The increase in effective tax rate was primarily due to a larger
portion of the quarter over quarter growth coming from taxable
instruments such as loans compared to nontaxable instruments and to
nondeductible merger related costs incurred in the second quarter
of 2017.
For the
six-month period ended June 30, 2017, income tax expense was $3.4
million compared to $3.1 million for the same period in 2016. The
Company’s effective tax rate for the six-month period ended
June 30, 2017 was 34.00%, compared to 32.92% for the same period in
2016. The increase in effective tax rate was primarily due to a
larger portion of the year over year growth coming from taxable
instruments such as loans compared to nontaxable instruments and to
nondeductible merger related costs incurred in the second quarter
of 2017.
In
2017, the North Carolina state corporate income tax rate decreased
from 4% to 3%.
Analysis of Financial Condition
Overview
Total
assets at June 30, 2017 were $1.64 billion, an increase of $131.8
million or 8.8% over the balance as of December 31, 2016 of $1.50
billion. Interest earning assets at June 30, 2017 totaled $1.56
billion and consisted of $1.33 billion in net loans, $203.5 million
in investment securities, $12.8 million in Federal Home Loan Bank
of Atlanta stock, and $13.4 million in overnight investments and
interest-bearing deposits in other banks. Interest earning assets
at December 31, 2016 totaled $1.43 billion and consisted of $1.18
billion in net loans, $168.9 million in investment securities, $8.1
million in Federal Home Loan Bank of Atlanta stock, and $31.0
million in overnight investments and interest-bearing deposits in
other banks. Total deposits and stockholders’ equity at June
30, 2017 were $1.17 billion and $145.3 million, respectively. Total
deposits and stockholders’ equity at December 31, 2016 were
$1.17 billion and $136.1 million, respectively.
Investment Securities
The
Company's investment portfolio plays a major role in the management
of liquidity and interest rate sensitivity and, therefore, is
managed in the context of the overall balance sheet. In general,
the primary goals of the investment portfolio are: (i) to provide a
sufficient margin of liquid assets to meet unanticipated deposit
and loan fluctuations and overall funds management objectives; (ii)
to provide eligible securities to secure public funds as prescribed
by law and other borrowings; (iii) to provide structures and terms
to enable proper interest rate risk management; and (iv) to earn
the maximum return on funds invested that is commensurate with
meeting the requirements of (i), (ii) and (iii). The Company
invests in securities as allowable under bank regulations and its
investment policy. These securities include U.S. Agency
obligations, U.S. government-sponsored entities, including
collateralized mortgage obligations and mortgage-backed securities,
bank eligible obligations of state or political subdivisions, and
limited types of permissible corporate debt and equity
securities.
-43-
Investment
securities as of June 30, 2017 and December 31, 2016 were $203.5
million and $197.4 million, respectively. The Company’s
investment portfolio at June 30, 2017 and December 31, 2016,
consisted of U.S. government agency obligations, collateralized
mortgage obligations, mortgage-backed securities, municipal bonds
and other equity investments, and had a weighted average taxable
equivalent yield of 2.92% and 2.83% at June 30, 2017 and December
31, 2016, respectively. The Company also held an investment of
$12.8 million and $8.4 million in Federal Home Loan Bank Stock as
of June 30, 2017 and December 31, 2016 with a weighted average
yield of 4.87% and 4.64% for those periods. The FHLB stock is
recorded at cost and is classified separately from investment
securities on the consolidated balance sheets.
The
investment portfolio increased $6.1 million during the first six
months of 2017, the net result of $13.5 million in purchases, $9.7
million of maturities and prepayments and an increase of $2.9
million in the market value of securities held available for
sale.
The
securities in an unrealized loss position as of June 30, 2017
continue to perform and are expected to perform through maturity,
and the issuers have not experienced significant adverse events
that would call into question their ability to repay these debt
obligations according to contractual terms.
The following is a summary of the securities
portfolio by major classification at June 30, 2017 and December 31,
2016.
|
June 30, 2017
|
December 31, 2016
|
||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
(In thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Available-for-sale:
|
|
|
|
|
U.S.
Agency obligations
|
$15,715
|
$15,855
|
$17,062
|
$16,943
|
Collateralized
mortgage obligations
|
40,833
|
41,027
|
42,439
|
42,497
|
Mortgage-backed
securities
|
75,777
|
75,369
|
75,138
|
73,873
|
Municipal
bonds
|
66,429
|
67,797
|
60,901
|
60,677
|
Other
|
3,676
|
3,496
|
3,676
|
3,451
|
|
$202,430
|
$203,544
|
$199,216
|
$197,441
|
-44-
The
following table summarizes the securities portfolio by major
classification as of June 30, 2017 and December 31,
2016:
|
June 30, 2017
|
December 31, 2016
|
||||
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Average Tax
|
|
|
Average Tax
|
|
Amortized
|
Fair
|
Equivalent
|
Amortized
|
Fair
|
Equivalent
|
(Dollars in thousands)
|
Cost
|
Value
|
Yield (1)
|
Cost
|
Value
|
Yield (1)
|
U.S.
government agency obligations
|
|
|
|
|
|
|
Due
within one year
|
$-
|
$-
|
-
|
$-
|
$-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after ten years
|
15,715
|
15,855
|
2.62%
|
17,062
|
16,943
|
2.61%
|
|
15,715
|
15,855
|
2.62%
|
17,062
|
16,943
|
2.61%
|
Collateralized
mortgage obligations
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after ten years
|
40,833
|
41,027
|
2.36%
|
42,439
|
42,497
|
2.43%
|
|
40,833
|
41,027
|
2.36%
|
42,439
|
42,497
|
2.43%
|
Mortgage-backed
securities
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
7,393
|
7,545
|
2.54%
|
7,492
|
7,581
|
2.54%
|
Due
after five but within ten years
|
7,480
|
7,619
|
2.75%
|
5,237
|
5,341
|
3.07%
|
Due
after ten years
|
60,904
|
60,205
|
2.34%
|
62,409
|
60,951
|
2.13%
|
|
75,777
|
75,369
|
2.40%
|
75,138
|
73,873
|
2.24%
|
Municipal
bonds
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
2,187
|
2,249
|
3.09%
|
1,734
|
1,771
|
3.23%
|
Due
after five but within ten years
|
8,685
|
8,897
|
3.52%
|
6,078
|
6,087
|
3.22%
|
Due
after ten years
|
55,557
|
56,651
|
4.04%
|
53,089
|
52,819
|
4.02%
|
|
66,429
|
67,797
|
3.94%
|
60,901
|
60,677
|
3.92%
|
Other
investments
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after five but within ten years
|
1,500
|
1,527
|
6.64%
|
1,500
|
1,500
|
6.77%
|
Due
after ten years (2)
|
2,176
|
1,969
|
0.00%
|
2,176
|
1,951
|
0.00%
|
|
3,676
|
3,496
|
2.76%
|
3,676
|
3,451
|
2.76%
|
Total
securities available for sale
|
|
|
|
|
|
|
Due
within one year
|
-
|
-
|
-
|
-
|
-
|
-
|
Due
after one but within five years
|
9,580
|
9,794
|
2.66%
|
9,226
|
9,352
|
2.67%
|
Due
after five but within ten years
|
17,665
|
18,043
|
3.47%
|
12,815
|
12,928
|
2.82%
|
Due
after ten years (2)
|
175,185
|
175,707
|
2.88%
|
177,175
|
175,161
|
2.91%
|
|
$202,430
|
$203,544
|
2.92%
|
$199,216
|
$197,441
|
2.85%
|
(1)
The marginal tax
rate used to calculate tax equivalent yield was 30.0%.
(2)
Includes
investments with no stated maturity date
As of
June 30, 2017, the weighted average life of the Company's debt
securities was 5.0 years, and the weighted average effective
duration was 3.7 years.
-45-
Loans Receivable
The
Company serves the credit needs of commercial and private banking
clients in its markets through a range of commercial and consumer
loan products. The goal of the Company's lending function is to
help clients reach their goals. This is accomplished through loan
products that best fit the needs of each client and are profitable
to the Company. The lending process combines a thorough knowledge
of each client and the local market with the high standards of the
Company’s credit culture. Underwriting criteria governing the
level of assumed risk and a sharp focus on maintaining a
well-balanced loan portfolio play a critical role in the
process.
Strict
attention is placed on balancing loan quality and profitability
with loan growth. The Company has established concentration limits
by borrower, product type, loan structure, and industry. Commercial
loans are generally secured by business assets and real estate,
supported by personal guarantees as needed. Loans to private
banking clients are primarily secured with personal assets and real
estate.
The
loan portfolio at June 30, 2017 totaled $1.34 billion and was
composed of $70.7 million in construction and land development
loans, $742.6 million in commercial real estate loans, $323.8
million in consumer real estate loans, $181.6 million in commercial
and industrial loans, and $20.8 million in consumer and other
loans. Also included in loans outstanding is $298,000 in net
deferred loan costs.
The
loan portfolio at December 31, 2016 totaled $1.19 billion and was
composed of $79.7 million in construction and land development
loans, $641.7 million in commercial real estate loans, $287.1
million in consumer real estate loans, $170.7 million in commercial
and industrial loans, and $11.5 million in consumer and other
loans. Also included in loans outstanding is $518,000 in net
deferred loan costs.
-46-
The
following table describes the Company’s loan portfolio
composition by category:
|
At June 30,
|
At December 31,
|
||
|
2017
|
2016
|
||
|
|
% of
|
|
% of
|
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction
and land development
|
$70,661
|
5.3%
|
$79,738
|
6.7%
|
Commercial
real estate:
|
|
|
|
|
Non-farm,
non-residential
|
433,486
|
32.4%
|
365,569
|
30.7%
|
Owner
occupied
|
202,982
|
15.1%
|
186,892
|
15.7%
|
Multifamily,
nonresidential and junior liens
|
106,106
|
7.9%
|
89,191
|
7.5%
|
Total
commercial real estate
|
742,574
|
55.4%
|
641,652
|
53.9%
|
Consumer
real estate:
|
|
|
|
|
Home
equity lines
|
87,229
|
6.5%
|
87,489
|
7.3%
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
first
deeds of trust
|
231,903
|
17.3%
|
195,343
|
16.4%
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
4,712
|
0.4%
|
4,289
|
0.4%
|
Total
consumer real estate
|
323,844
|
24.2%
|
287,121
|
24.1%
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
181,643
|
13.6%
|
170,709
|
14.3%
|
Consumer
and other
|
20,840
|
1.6%
|
11,542
|
1.0%
|
Less:
|
|
|
|
|
Deferred
loan origination (fees) costs
|
298
|
0.0%
|
518
|
0.0%
|
Total
loans
|
1,339,860
|
100%
|
1,191,280
|
100%
|
Allowance
for loan losses
|
(8,921)
|
|
(7,909)
|
|
Total
net loans
|
$1,330,939
|
|
$1,183,371
|
|
During
the six months ended June 30, 2017, loans receivable increased by
$148.6 million, or 12.5%, to $1.34 billion as of period end. The
increase in loans during the quarter is primarily attributable to
new loan origination driven by the demand in the Company’s
market areas.
During
2016, loans receivable increased by $175.1 million, or 17.2%, to
$1.19 billion as of December 31, 2016. The increase in loans during
the year is also primarily attributable to new loan origination
driven by the demand in the Company’s market
areas.
-47-
Maturities and Sensitivities of Loans to Interest
Rates
The
following table presents the maturity distribution of the
Company’s loans at June 30, 2017. The table also presents the
portion of loans that have fixed interest rates or variable
interest rates that fluctuate over the life of the loans in
accordance with changes in an interest rate index such as the prime
rate:
|
At June 30, 2017
|
|||
|
|
Due after one
|
|
|
|
Due within
|
year but within
|
Due after
|
|
(in thousands)
|
one year
|
five years
|
five years
|
Total
|
Fixed rate loans (1):
|
|
|
|
|
Construction
and land development
|
$15,341
|
$17,056
|
$4,065
|
$36,462
|
Commercial
real estate
|
28,281
|
218,910
|
85,151
|
332,342
|
Commercial
real estate owner occupied
|
11,529
|
102,259
|
75,705
|
189,493
|
Multifamily,
nonresidential and junior liens
|
3,497
|
39,802
|
21,808
|
65,107
|
Home
equity lines
|
-
|
625
|
-
|
625
|
Secured
by 1-4 family residential, secured by first
|
|
|
|
|
deeds
of trust
|
7,719
|
76,395
|
141,664
|
225,778
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
139
|
2,597
|
716
|
3,452
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
12,236
|
68,397
|
20,126
|
100,759
|
Consumer
and other
|
1,223
|
8,526
|
59
|
9,808
|
Total
at fixed rates
|
79,965
|
534,567
|
349,294
|
963,826
|
Variable rate loans (1):
|
|
|
|
|
Construction
and land development
|
15,453
|
13,591
|
5,037
|
34,081
|
Commercial
real estate
|
19,340
|
42,974
|
38,830
|
101,144
|
Commercial
real estate owner occupied
|
2,430
|
3,395
|
7,664
|
13,489
|
Multifamily,
nonresidential and junior liens
|
866
|
22,527
|
17,606
|
40,999
|
Home
equity lines
|
4,070
|
13,325
|
69,021
|
86,416
|
Secured
by 1-4 family residential, secured by first
|
|
|
|
|
deeds
of trust
|
2,912
|
2,211
|
872
|
5,995
|
Secured
by 1-4 family residential, secured by
|
|
|
|
|
second
deeds of trust
|
420
|
465
|
319
|
1,204
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
55,987
|
21,616
|
3,281
|
80,884
|
Consumer
and other
|
4,523
|
6,371
|
138
|
11,032
|
Total
at variable rates
|
106,001
|
126,475
|
142,768
|
375,244
|
Subtotal
|
185,966
|
661,042
|
492,062
|
1,339,070
|
Non-accrual
loans (2)
|
56
|
248
|
188
|
492
|
Gross
Loans
|
$186,022
|
$661,290
|
$492,250
|
1,339,562
|
Deferred
origination costs
|
|
|
|
298
|
Total
loans
|
|
|
|
$1,339,860
|
(1)
Loan maturities are
presented based on the final contractual maturity of each loan and
do not reflect contractual principal payments prior to maturity on
amortizing loans.
(2)
Includes nonaccrual
restructured loans.
The
Company may renew loans at maturity when requested by a customer
whose financial strength appears to support such renewal or when
such renewal appears to be in the Company’s best interest. In
such instances, the Company generally requires payment of accrued
interest and may require a principal reduction or modify other
terms of the loan at the time of renewal.
-48-
Past Due Loans and Nonperforming Assets
Loans
are reported as past due when the contractual amounts due with
respect to principal and interest are not received by the
contractual due date. Loans are generally classified as nonaccrual
if they are past due for a period of 90 days or more, unless such
loans are well secured and in the process of collection. If a loan
or a portion of a loan is classified as doubtful or as partially
charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days
may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt. Loans may be returned to
accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of
repayment performance of interest and principal by the borrower in
accordance with the contractual terms.
While a
loan is classified as nonaccrual and the future collectability of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled
amortizations where the payment is generally applied to the oldest
payment due. When the future collectability of the recorded loan
balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially
charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance
at the contractual interest rate. Receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Assets
acquired as a result of foreclosure are recorded at estimated fair
value in other real estate (or foreclosed assets). Any excess of
cost over estimated fair value at the time of foreclosure is
charged to the allowance for loan losses. Valuations are
periodically performed on these properties, and any subsequent
write-downs are charged to earnings. Routine maintenance and other
holding costs are included in non-interest expense. Loans are
classified as troubled debt restructurings (“TDR”) by
the Company when certain modifications are made to the loan terms
and concessions are granted to the borrowers due to financial
difficulty experienced by those borrowers. The Company grants
concessions by (1) reduction of the stated interest rate for the
remaining original life of the debt or (2) extension of the
maturity date at a stated interest rate lower than the current
market rate for new debt with similar risk. The Company does not
generally grant concessions through forgiveness of principal or
accrued interest. The Company’s policy with respect to
accrual of interest on loans restructured in a TDR follows relevant
supervisory guidance. That is, if a borrower has demonstrated
performance under the previous loan terms and shows capacity to
perform under the restructured loan terms, continued accrual of
interest at the restructured interest rate is likely. If a borrower
was materially delinquent on payments prior to the restructuring
but shows the capacity to meet the restructured loan terms, the
loan will likely continue as nonaccrual until there is demonstrated
performance under new terms. Lastly, if the borrower does not
perform under the restructured terms, the loan is placed on
nonaccrual status. The Company closely monitors these loans and
ceases accruing interest on them if management believes that the
borrowers may not continue performing based on the restructured
note terms.
-49-
The
following tables present an age analysis of past due loans,
segregated by class of loans as of June 30, 2017 and December 31,
2016:
|
30+
|
Non-
|
Total
|
|
|
|
Days
|
Accrual
|
Past
|
|
Total
|
(in thousands)
|
Past Due
|
Loans
|
Due
|
Current
|
Loans
|
At June 30, 2017
|
|
|
|
|
|
Construction
and land development
|
$-
|
$118
|
$118
|
$70,543
|
$70,661
|
Non-farm,
non-residential
|
-
|
-
|
-
|
433,486
|
433,486
|
Owner
occupied
|
-
|
-
|
-
|
202,982
|
202,982
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
106,106
|
106,106
|
Home
equity lines
|
-
|
188
|
188
|
87,041
|
87,229
|
Secured
by 1-4 family residential, secured
|
|
|
|
|
|
by
first deeds of trust
|
-
|
130
|
130
|
231,773
|
231,903
|
Secured
by 1-4 family residential,
|
|
|
|
|
|
secured
by second deeds of trust
|
-
|
56
|
56
|
4,656
|
4,712
|
Commercial
and industrial loans (except
|
|
|
|
|
|
those
secured by real estate)
|
-
|
-
|
-
|
181,643
|
181,643
|
Consumer
and other
|
-
|
-
|
-
|
20,840
|
20,840
|
|
$-
|
$492
|
$492
|
$1,339,070
|
$1,339,562
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
Construction
and land development
|
$-
|
$125
|
$125
|
$79,613
|
$79,738
|
Non-farm,
non-residential
|
-
|
-
|
-
|
365,569
|
365,569
|
Owner
occupied
|
-
|
-
|
-
|
186,892
|
186,892
|
Multifamily,
nonresidential and junior liens
|
-
|
-
|
-
|
89,191
|
89,191
|
Home
equity lines
|
-
|
194
|
194
|
87,295
|
87,489
|
Secured
by 1-4 family residential, secured
|
|
|
|
|
|
by
first deeds of trust
|
-
|
531
|
531
|
194,812
|
195,343
|
Secured
by 1-4 family residential,
|
|
|
|
|
|
secured
by second deeds of trust
|
-
|
58
|
58
|
4,231
|
4,289
|
Commercial
and industrial loans (except
|
|
|
|
|
|
those
secured by real estate)
|
-
|
60
|
60
|
170,649
|
170,709
|
Consumer
and other
|
-
|
-
|
-
|
11,542
|
11,542
|
|
$-
|
$968
|
$968
|
$1,189,794
|
$1,190,762
|
-50-
The
table below sets forth, for the periods indicated, information
about the Company’s nonaccrual loans, loans past due 90 days
or more and still accruing interest, total non-performing loans
(nonaccrual loans plus nonaccrual restructured loans), and total
non-performing assets.
|
At
June 30,
|
At
December 31,
|
(Dollars in thousands)
|
2017
|
2016
|
Non-accrual
loans
|
$188
|
$785
|
Restructured
loans (1)
|
304
|
183
|
Total
nonperforming loans
|
492
|
968
|
Foreclosed
real estate
|
4,690
|
4,740
|
Total
nonperforming assets
|
$5,182
|
$5,708
|
|
|
|
Accruing
loans past due 90 days or more
|
$-
|
$-
|
Allowance
for loan losses
|
8,921
|
7,909
|
|
|
|
Nonperforming
loans to period end loans
|
0.04%
|
0.08%
|
Allowance
for loan losses to period end
|
|
|
loans
|
0.67%
|
0.66%
|
Allowance
for loan losses to
|
|
|
nonperforming
loans
|
1813.21%
|
817.05%
|
Allowance
for loan losses to
|
|
|
nonperforming
assets
|
172.15%
|
138.56%
|
Nonperforming
assets to total assets
|
0.32%
|
0.38%
|
(1)
Restructured
loans are also on nonaccrual status.
In
addition to the above, as of June 30, 2017 the Company had $2.6
million in loans that were considered to be impaired for reasons
other than their past due, accrual or restructured status. In
total, there were $2.9 million in loans that were considered to be
impaired as of June 30, 2017. As of December 31, 2016, the Company
had $2.7 million in loans that were considered to be impaired for
reasons other than their past due, accrual or restructured status.
In total, there were $3.2 million in loans that were considered to
be impaired at December 31, 2016.
Allowance for Loan Losses
The
allowance for loan losses is a reserve established through
provisions for loan losses charged to expense and represents
management’s best estimate of probable loans losses that have
been incurred within the existing portfolio of loans. The
allowance, in the judgment of management, is necessary to reserve
for estimated losses and risk inherent in the loan portfolio. The
Company’s allowance for loan loss methodology is based on
historical loss experience by type of credit and internal risk
grade, specific homogeneous risk pools and specific loss
allocations, with adjustments for current events and conditions.
The Company’s process for determining the appropriate level
of reserves is designed to account for changes in credit quality as
they occur. The provision for loan losses reflects loan quality
trends, including the levels of and trends related to past due
loans and economic conditions at the local and national levels. It
also considers the quality and risk characteristics of the
Company’s loan origination and servicing policies and
practices. Included in the allowance are specific reserves on loans
that are considered to be impaired, which are identified and
measured in accordance with ASC 310.
-51-
The
following table presents the Company’s allowance for loan
losses allocated to each category of the Company’s loan
portfolio and each category of the loan portfolio as a percentage
of total loans, at June 30, 2017 and at December 31,
2016.
|
At June 30,
|
At December 31,
|
||
|
2017
|
2016
|
||
|
|
% of
|
|
% of
|
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Construction
and land development
|
$403
|
5.3%
|
$486
|
6.7%
|
Commercial
real estate
|
4,241
|
55.3%
|
3,719
|
53.9%
|
Consumer
real estate
|
2,026
|
24.2%
|
1,900
|
24.1%
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
2,135
|
13.6%
|
1,728
|
14.3%
|
Consumer
and other
|
116
|
1.6%
|
76
|
1.0%
|
Total
|
$8,921
|
100.0%
|
$7,909
|
100.0%
|
The
allowance for loan losses as a percentage of gross loans
outstanding was 0.67% for June 30, 2017 and 0.66% for December 31,
2016. The change in the allowance during the period resulted
from net recoveries of $203,000 and
loan loss provisions of $809,000 commensurate with $148.6 million
of loan growth. General reserves totaled $8.1 million or 0.60% of
gross loans outstanding as of June 30, 2017, a 0.02% decrease from
December 31, 2016 when they totaled $7.9 million or 0.62% of loans
outstanding. At June 30, 2017, specific reserves on impaired loans
constituted $826,000 or 0.06% of gross loans outstanding compared
to $509,000 or 0.04% of loans outstanding as of December 31,
2016.
The
following table presents information regarding changes in the
allowance for loan losses in detail for the years
indicated:
|
Three months ended June 30,
|
Six months ended June 30,
|
||
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Allowance
for loan losses at beginning of the period
|
$8,125
|
$7,931
|
$7,909
|
$7,641
|
Provision
for loan losses
|
650
|
-
|
809
|
-
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
-
|
-
|
(10)
|
-
|
Consumer
and other
|
-
|
(1)
|
(13)
|
(1)
|
Total
charge-offs
|
-
|
(1)
|
(23)
|
(1)
|
Recoveries
of loans previously charged off:
|
|
|
|
|
Construction
and land development
|
138
|
8
|
147
|
237
|
Commercial
real estate
|
-
|
19
|
28
|
56
|
Consumer
real estate
|
-
|
3
|
-
|
6
|
Commercial
and industrial loans (except those
|
|
|
|
|
secured
by real estate)
|
8
|
25
|
51
|
36
|
Consumer
and other
|
-
|
1
|
-
|
11
|
Total
recoveries
|
146
|
56
|
226
|
346
|
Net
recoveries
|
146
|
55
|
203
|
345
|
Allowance
for loan losses at end of the period
|
$8,921
|
$7,986
|
$8,921
|
$7,986
|
|
|
|
|
|
Ratio
of net recoveries during the period
|
|
|
|
|
to
average loans outstanding during
|
|
|
|
|
the
period
|
0.01%
|
0.01%
|
0.02%
|
0.03%
|
-52-
While
the Company believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the
allowance may be necessary and results of operations could be
adversely affected if circumstances differ substantially from the
assumptions used in making determinations regarding the
allowance.
Management believes
the level of the allowance for loan losses as of June 30, 2017 and
December 31, 2016 is appropriate in light of the risk inherent
within the Company’s loan portfolio.
Other Assets
At June
30, 2017, non-earning assets totaled $74.8 million, a decrease of
$1.3 million from $76.1 million at December 31, 2016. Non-earning
assets at June 30, 2017 consisted of: cash and due from banks of
$4.2 million, premises and equipment totaling $15.2 million,
foreclosed real estate totaling $4.7 million, accrued interest
receivable of $4.7 million, bank owned life insurance, or BOLI, of
$34.7 million and other assets totaling $7.5 million, with net
deferred taxes of $3.9 million.
At
December 31, 2016, non-earning assets totaled $76.1 million.
Non-earning assets at December 31, 2016 consisted of: cash and due
from banks of $4.6 million, premises and equipment totaling $15.6
million, foreclosed real estate totaling $4.7 million, accrued
interest receivable of $4.4 million, bank owned life insurance of
$34.2 million and other assets totaling $7.8 million, with net
deferred taxes of $4.8 million.
As of
June 30, 2017, the Company had an investment in bank owned life
insurance of $34.7 million, which increased $513,000 from December
31, 2016. The increase in BOLI was due to an increase in cash
surrender value. Since the income on this investment is included in
non-interest income, the asset is not included in the
Company’s calculation of earning assets.
Deposits
Deposits gathered
from clients represent the primary source of funding for the
Company’s lending activities. Commercial and private banking
deposit services include non-interest and interest bearing checking
accounts, money market accounts, and to a limited extent, IRAs and
CDs. Interest rates for each account type are set by the Company
within the context of marketplace factors, current deposit needs,
and a keen awareness of maintaining a strong margin.
Total
deposits at June 30, 2017 were $1.17 billion and consisted of
$200.9 million in non-interest-bearing demand deposits, $794.3
million in interest-bearing checking and money market accounts, and
$179.5 million in time deposits. Total deposits increased by $2.48
million from $1.17 billion as of December 31, 2016.
Non-interest-bearing demand deposits decreased by $10.3 million
from $211.2 million as of December 31, 2016. Interest-bearing and
money market accounts increased by $52.2 million from $742.0
million as of December 31, 2016. Time deposits decreased by $39.5
million during the six-month period ended June 30, 2017 from $219.0
million as of December 31, 2016. The increase in deposits was
primarily due to a focus on growing core customer deposits and
demand in the markets in which the Bank operates.
-53-
The
table below provides a summary of the Company’s deposit
portfolio by deposit type.
|
As of
|
|
|
June 30,
|
December 31,
|
Composition of Deposit Portfolio
|
2017
|
2016
|
Non-interest
bearing
|
17.1%
|
18.0%
|
Interest-bearing
checking accounts
|
23.7%
|
19.7%
|
Money
markets
|
43.9%
|
43.7%
|
Time
deposits
|
15.3%
|
18.6%
|
Total
|
100.0%
|
100.0%
|
The
following table shows historical information regarding the average
balances outstanding and average interest rates for each major
category of deposits:
|
For the Three Month Period Ended June 30,
|
|||||
|
2017
|
2016
|
||||
|
Average
|
% of
|
Average
|
Average
|
% of
|
Average
|
(Dollars in thousands)
|
Amount
|
Total
|
Rate
|
Amount
|
Total
|
Rate
|
Interest-bearing
checking accounts
|
$244,569
|
20.4%
|
0.39%
|
$170,209
|
16.7%
|
0.40%
|
Money
markets
|
537,884
|
44.9%
|
0.66%
|
402,851
|
39.5%
|
0.66%
|
Time
deposits
|
189,294
|
15.8%
|
0.97%
|
254,079
|
24.9%
|
0.88%
|
Total
interest-bearing deposits
|
971,747
|
81.1%
|
0.65%
|
827,139
|
81.2%
|
0.67%
|
Noninterest-bearing
deposits
|
225,725
|
18.9%
|
-
|
191,994
|
18.8%
|
-
|
Total
deposits
|
$1,197,472
|
100.0%
|
0.53%
|
$1,019,133
|
100.0%
|
0.55%
|
|
For the Six Month Period Ended June 30,
|
|||||
|
2017
|
2016
|
||||
|
Average
|
% of
|
Average
|
Average
|
% of
|
Average
|
(Dollars in thousands)
|
Amount
|
Total
|
Rate
|
Amount
|
Total
|
Rate
|
Interest-bearing
checking accounts
|
$224,528
|
19.1%
|
0.38%
|
$155,299
|
15.4%
|
0.45%
|
Money
markets
|
533,715
|
45.3%
|
0.67%
|
402,641
|
40.0%
|
0.67%
|
Time
deposits
|
200,429
|
17.0%
|
0.98%
|
273,175
|
27.1%
|
0.83%
|
Total
interest-bearing deposits
|
958,672
|
81.4%
|
0.67%
|
831,115
|
82.6%
|
0.68%
|
Noninterest-bearing
deposits
|
219,242
|
18.6%
|
-
|
175,562
|
17.4%
|
-
|
Total
deposits
|
$1,177,914
|
100.0%
|
0.54%
|
$1,006,677
|
100.0%
|
0.56%
|
The
overall mix of deposits has shifted to a higher percentage of
non-interest demand deposits and interest-bearing demand with
reductions in the percentage of deposits held in time deposit
accounts. The Company believes its deposit product offerings are
properly structured to attract and retain core low-cost deposit
relationships. The average cost of deposits was 0.53% in the second
quarter of 2017 compared to 0.55% in the second quarter of 2016 due
to changes in deposit mix. The average cost of deposits was 0.53%
for the six-month period ended June 30, 2017 compared to 0.56% in
the second quarter of 2016 due to changes in deposit
mix.
-54-
Short-Term and Long-Term Debt
The
Company uses short-term borrowings and long-term debt to provide
both funding and, to a lesser extent, regulatory capital. As of
June 30, 2017, the Company had $270.0 million in short-term debt,
which consisted solely of FHLB advances compared to an outstanding
balance of $150.0 million at year-end 2016. The increase in
short-term debt was due to the Company’s rapid loan growth
during the first six months of 2017.
The
Company had outstanding $18.6 million in junior subordinated
debentures as of June 30, 2017 and December 31, 2016. These junior
subordinated debentures were issued to Paragon Commercial Trust I
and Paragon Commercial Trust II in connection with the issuance of
trust preferred securities on May 18, 2004 and May 30, 2006,
respectively. Additional information regarding the junior
subordinated debentures can be found in Note 7 of the
Company’s 2016 audited consolidated financial statements,
which are included within the Company’s Annual Report on Form
10-K as of and for the year ended December 31, 2016.
Stockholders’ Equity
Total
stockholders’ equity at June 30, 2017 was $145.3 million, an
increase of $9.2 million from $136.1 million as of December 31,
2016. The change in stockholders’ equity principally
represents net income to common stockholders for the six months
ended June 30, 2016 of $6.6 million and other comprehensive income
of $2.0 million related to net increasing values in the
Company’s available for sale investment securities portfolio
and its cash flow hedges.
Liquidity
Market
and public confidence in the Company’s financial strength and
in the strength of financial institutions in general will largely
determine the Company’s access to appropriate levels of
liquidity. This confidence depends significantly on the
Company’s ability to maintain sound asset quality and
appropriate levels of capital resources. The term
“liquidity” refers to the Company’s ability to
generate adequate amounts of cash to meet current needs for funding
loan originations, deposit withdrawals, maturities of borrowings
and operating expenses. Investment portfolio principal payments and
maturities, loan principal payments, deposit growth, brokered
deposit sources, available borrowings from the FHLB, and various
federal funds lines from correspondent banks are the primary
sources of liquidity for the Bank. Management measures the
Bank’s liquidity position by giving consideration to both on-
and off-balance sheet sources of, and demands for, funds on a daily
and weekly basis.
Liquid
assets (consisting of cash and due from banks, interest-earning
deposits with other banks, federal funds sold and investment
securities classified as available for sale) represented 10.5% and
12.1% of total assets at June 30, 2017 and December 31, 2016,
respectively.
The
Bank has seen a net reduction in wholesale funding, maintaining
liquidity sufficient to fund new loan demand and to reduce part of
its wholesale funding. When the need arises, the Bank has the
ability to sell securities classified as available for sale, sell
loan participations to other banks, or to borrow funds as
necessary. The Bank has established credit lines with other
financial institutions to purchase up to $102.5 million in federal
funds and had no borrowings as of June 30, 2017 or December 31,
2016. Also, as a member of the Federal Home Loan Bank of Atlanta,
the Bank may obtain advances of up to 30% of assets, subject to our
available collateral. The Bank had an available borrowing line at
June 30, 2017 of $465.0 million at the FHLB, secured by qualifying
loans. As of that date, the Bank had $270.0 million outstanding on
the line and available borrowing capacity of $195.0 million. In
addition, the Bank may borrow up to $151.0 million at the Federal
Reserve discount window and has pledged loans for that
purpose. As another
source of short-term borrowings, the Bank also utilizes securities
sold under agreements to repurchase. At June 30, 2017, borrowings
of securities sold under agreements to repurchase were $21.3
million.
-55-
At June
30, 2017, the Bank had undisbursed lines of credit of $251.0
million, and letters of credit of $5.0 million. The Bank believes
that its combined aggregate liquidity position from all sources is
sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals in the near term.
Total
deposits were $1.17 billion as of June 30, 2017 and December 31,
2016. Time deposits, which are the only deposit accounts that have
stated maturity dates, are generally considered to be rate
sensitive. Time deposits represented 15.3% and 18.6% of total
deposits at June 30, 2017 and December 31, 2016, respectively.
Other than brokered time deposits, management believes most other
time deposits are relationship-oriented. While competitive rates
will need to be paid to retain these deposits at their maturities,
there are other subjective factors that will determine their
continued retention.
Management believes
that current sources of funds provide adequate liquidity for the
Company’s current cash flow needs. The Bank’s parent
company maintains minimal cash balances. Management believes that
the current cash balances plus taxes receivable will provide
adequate liquidity for the Company’s current cash flow
needs.
Contractual Obligations
During
the second quarter of 2017, the Company amended its original lease
on its Cary location. The new lease added another 2,600 square feet
of additional space on the second floor of the building at 5000
Valleystone Drive, Cary, NC. The lease term is 66
months.
The
following table presents the Company's significant fixed and
determinable contractual obligations by payment date. The payment
amounts represent those amounts contractually due to the recipient.
The table excludes liabilities recorded where management cannot
reasonably estimate the timing of any payments that may be required
in connection with these liabilities.
|
June 30,
2017
|
||||
|
1
Year
|
Over 1
to
|
Over 3
to
|
More
Than
|
|
(In
thousands)
|
or
Less
|
3
Years
|
5
Years
|
5
Years
|
Total
|
Time
deposits
|
$123,639
|
$51,499
|
$4,393
|
$-
|
$179,531
|
Short
term borrowings
|
270
|
-
|
-
|
-
|
270
|
Subordinated
debentures
|
-
|
-
|
-
|
18,558
|
18,558
|
Operating
leases
|
781
|
1,060
|
548
|
4,017
|
6,406
|
Total
contractual obligations
|
$124,690
|
$52,559
|
$4,941
|
$22,575
|
$204,765
|
Capital
Our
management seeks to maintain adequate capital to support
anticipated asset growth, operating needs and unexpected risks, and
to ensure that the Company and the Bank are in compliance with all
current and anticipated regulatory capital guidelines. Our primary
sources of new capital include retained earnings and proceeds from
the sale and issuance of capital stock or other
securities.
On July
2, 2013, the Federal Reserve, and on July 9, 2013, the FDIC,
adopted a final rule that implemented the Basel III changes to the
international regulatory capital framework, referred to as the
“Basel III Rules.” The Basel III Rules apply to both
depository institutions and their holding companies. The Basel III
Rules, which became effective for both the Company and the Bank on
January 1, 2015, include new risk-based and leverage capital ratio
requirements which refined the definition of what constitutes
“capital” for purposes of calculating those ratios. The
minimum capital level requirements applicable to the Company and
the Bank under the Basel III Rules are: (i) a common equity Tier 1
risk-based capital ratio of 4.5 percent; (ii) a Tier 1 risk-based
capital ratio of 6 percent; (iii) a total risk-based capital ratio
of 8 percent; and (iv) a Tier 1 leverage ratio of 4 percent for all
institutions. Common equity Tier 1 capital consists of retained
earnings and common stock instruments, subject to certain
adjustments.
-56-
The
Basel III Rules also establish a “capital conservation
buffer” of 2.5 percent above the new regulatory minimum
risk-based capital requirements. The conservation buffer, when
added to the capital requirements, result in the following minimum
ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0
percent, (ii) a Tier 1 risk-based capital ratio of 8.5 percent, and
(iii) a total risk-based capital ratio of 10.5 percent. The new
capital conservation buffer requirement is to be phased in
beginning in January 2016 at 0.625 percent of risk-weighted assets
and will increase by that amount each year until fully implemented
in January 2019. An institution will be subject to limitations on
certain activities including payment of dividends, share
repurchases and discretionary bonuses to executive officers if its
capital level is below the buffer amount.
The
Basel III Rules also revised the prompt corrective action
framework, which is designed to place restrictions on insured
depository institutions, including the Bank, if their capital
levels do not meet certain thresholds. The prompt corrective action
rules were modified to include a common equity Tier 1 capital
component and to increase certain other capital requirements for
the various thresholds. For example, under the proposed prompt
corrective action rules, insured depository institutions will be
required to meet the following capital levels in order to qualify
as “well capitalized:” (i) a common equity Tier 1
risk-based capital ratio of 6.5 percent; (ii) a Tier 1 risk-based
capital ratio of 8 percent; (iii) a total risk-based capital ratio
of 10 percent; and (iv) a Tier 1 leverage ratio of 5 percent. The
Basel III Rules also set forth certain changes in the methods of
calculating certain risk-weighted assets, which in turn affect the
calculation of risk based ratios.
If the
Bank fails to meet the requirements for a “well
capitalized” bank, it could increase the regulatory scrutiny
on the Bank and the Company. In addition, the Bank would not be
able to renew or accept brokered deposits without prior regulatory
approval and the Bank would not be able to offer interest rates on
its deposit accounts that are significantly higher than the average
rates in the Bank’s market area. As a result, it would be
more difficult to attract new deposits and retain or increase
existing, non-brokered deposits. If the Bank is prohibited from
renewing or accepting brokered deposits and is unable to attract
new deposits, our liquidity and our ability to fund our loan
portfolio may be adversely affected. In addition, we would be
required to pay higher insurance premiums to the FDIC, which would
reduce our earnings.
On May
18, 2004, the Company privately issued trust preferred securities
having an aggregate liquidation amount of $10.0 million through
Paragon Commercial Capital Trust I. On May 30, 2006, we privately
issued additional floating rate trust preferred securities having
an aggregate liquidation amount of $8.0 million through Paragon
Commercial Capital Trust II. The proceeds provided additional
capital for the expansion of the Bank. Under the current applicable
regulatory guidelines, all of the trust preferred securities
qualify as Tier 1 capital.
On June
21, 2016 the Company issued 845,588 shares of its common stock in
an initial public offering. Of the $26.4 million in net proceeds,
$3.8 million were used to pay down existing debt at the holding
company, $20.5 million were contributed to the Bank as additional
capital and the remaining $2.1 million was retained at the holding
company level to service existing debt at the holding company
level.
-57-
Regulatory capital
ratios for the Bank exceeded minimum federal regulatory guidelines
for a well-capitalized depository institution as of June 30, 2017
and December 31, 2016. Management expects that the Company and the
Bank will continue to be in compliance with applicable regulatory
capital requirements, although there can be no assurance that
additional capital will not be required in the future. The
Company’s and the Bank’s capital ratios as of June 30,
2017 are presented in the table below.
|
|
|
Minimum Requirements To Be:
|
|||
|
|
|
"Adequately Capitalized"
|
"Well Capitalized" (2)
|
||
|
|
|
for Capital Adequacy
|
Under Prompt Corrective
|
||
|
Actual
|
|
Purposes
|
|
Actions Provisions
|
|
(Dollars in thousands)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
Amount
|
Ratio (1)
|
June 30, 2017
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Total
risk-based capital ratio
|
$172,973
|
12.36%
|
$111,969
|
8.000%
|
N/A
|
N/A
|
Tier
1 risk-based capital ratio
|
164,052
|
11.72%
|
83,977
|
6.000%
|
N/A
|
N/A
|
Common
equity Tier 1
|
146,052
|
10.44%
|
62,983
|
4.500%
|
N/A
|
N/A
|
Tier
1 leverage ratio
|
164,052
|
10.34%
|
63,476
|
4.000%
|
N/A
|
N/A
|
Tangible
equity to tangible assets ratio
|
146,052
|
9.21%
|
N/A
|
N/A
|
N/A
|
N/A
|
Tangible
equity to risk-weighted assets ratio
|
146,052
|
10.44%
|
N/A
|
N/A
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Total
risk-based capital ratio
|
$170,424
|
12.18%
|
$111,908
|
8.000%
|
$139,884
|
10.000%
|
Tier
1 risk-based capital ratio
|
161,503
|
11.55%
|
83,931
|
6.000%
|
111,908
|
8.000%
|
Common
equity Tier 1
|
161,503
|
11.55%
|
62,948
|
4.500%
|
90,925
|
6.500%
|
Tier
1 leverage ratio
|
161,503
|
10.14%
|
63,716
|
4.000%
|
79,645
|
5.000%
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
Total
risk-based capital ratio
|
$164,740
|
13.21%
|
$99,778
|
8.00%
|
N/A
|
N/A
|
Tier
1 risk-based capital ratio
|
156,831
|
12.57%
|
74,833
|
6.00%
|
N/A
|
N/A
|
Common
equity Tier 1
|
138,831
|
11.13%
|
56,125
|
4.50%
|
N/A
|
N/A
|
Tier
1 leverage ratio
|
156,831
|
10.05%
|
62,434
|
4.00%
|
N/A
|
N/A
|
Tangible
equity to tangible assets ratio
|
138,831
|
9.23%
|
N/A
|
N/A
|
N/A
|
N/A
|
Tangible
equity to risk-weighted assets ratio
|
138,831
|
11.31%
|
N/A
|
N/A
|
N/A
|
N/A
|
|
|
|
|
|
|
|
The Bank
|
|
|
|
|
|
|
Total
risk-based capital ratio
|
$161,925
|
12.99%
|
$99,713
|
8.00%
|
$124,641
|
10.00%
|
Tier
1 risk-based capital ratio
|
154,016
|
12.36%
|
74,785
|
6.00%
|
99,713
|
8.00%
|
Common
equity Tier 1
|
154,016
|
12.36%
|
56,089
|
4.50%
|
81,017
|
6.50%
|
Tier
1 leverage ratio
|
154,016
|
10.37%
|
59,405
|
4.00%
|
74,256
|
5.00%
|
1)
Total capital ratio
is defined as Tier 1 capital plus Tier 2 capital divided
by total risk-weighted assets. The Tier 1 Capital ratio is
defined as Tier 1 capital divided by total risk-weighted
assets. Common equity Tier 1 is defined as Tier 1 capital excluding
qualifying trust preferred securities divided by total risk
weighted assets. The leverage ratio is defined as Tier 1
capital divided by the most recent quarter’s average total
assets.
2)
Prompt corrective
action provisions are not applicable at the bank holding company
level.
-58-
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Management and the
board of directors are responsible for managing interest rate risk
and employing risk management policies that monitor and limit this
exposure. Interest rate risk is measured using net interest income
simulations and market value of portfolio equity analyses. These
analyses use various assumptions, including the nature and timing
of interest rate changes, yield curve shape, prepayments on loans
and securities, deposit decay rates, pricing decisions on loans and
deposits, and reinvestment/replacement of asset and liability cash
flows.
The
principal objective of the Company's asset and liability management
function is to evaluate the interest rate risk within the balance
sheet and pursue a controlled assumption of interest rate risk
while maximizing earnings and preserving adequate levels of
liquidity and capital. The asset and liability management function
is under the guidance of the Management Asset Liability Committee
(“Management ALCO”) with direction of the Board of
Directors Asset/Liability Committee (“Board ALCO”).
Management ALCO meets monthly to review, among other things,
funding uses and sources, the sensitivity of the Company's assets
and liabilities to interest rate changes, local and national market
conditions and rates. Board ALCO meets quarterly and also reviews
the liquidity, capital, deposit mix, loan mix and investment
positions of the Company. In addition, Board ALCO reviews modeling
performed by a third party of the impact on net interest income and
economic value of equity of rate changes in various scenarios as
well as the impact of strategies put into place to mitigate
interest rate risk. Instantaneous parallel rate shift scenarios are
modeled and utilized to evaluate risk and establish exposure limits
for acceptable changes in net interest margin. These scenarios,
known as rate shocks, simulate an instantaneous change in interest
rates and use various assumptions, including, but not limited to,
prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment and replacement of
asset and liability cash flows.
We also
analyze the economic value of equity as a secondary measure of
interest rate risk. This is a complementary measure to net interest
income where the calculated value is the result of the market value
of assets less the market value of liabilities. The economic value
of equity is a longer term view of interest rate risk because it
measures the present value of the future cash flows. The impact of
changes in interest rates on this calculation is analyzed for the
risk to our future earnings and is used in conjunction with the
analyses on net interest income.
Our
interest rate risk model indicated that the Company was liability
sensitive in terms of interest rate sensitivity at May 31, 2017.
Since December 31, 2016, we have slightly decreased our liability
sensitivity as a result of shortening the duration of the fixed
rate loan and investment portfolios. The table below illustrates
the impact in year one of an immediate and sustained 200 basis
point increase and a 100 basis point decrease in interest rates on
net interest income based on the interest rate risk model at May
31, 2017, November 30, 2016, and August 31, 2016:
Hypothetical
|
Estimated Resulting Theoretical Net Interest Income
|
|||||
shift in interest
|
May 31, 2017
|
February 28, 2017
|
November 30, 2016
|
|||
rates (in bps)
|
Amount
|
% Change
|
Amount
|
% Change
|
Amount
|
% Change
|
(dollars in thousands)
|
|
|
|
|
|
|
200
|
$51,743
|
-3.16%
|
$48,570
|
-3.31%
|
$46,525
|
-4.26%
|
0
|
53,429
|
0.00%
|
50,231
|
0.00%
|
48,597
|
0.00%
|
(100)
|
52,907
|
-0.98%
|
49,881
|
-0.70%
|
48,693
|
0.20%
|
Many
assumptions are used to calculate the impact of interest rate
fluctuations. Actual results may be significantly different than
our projections due to several factors, including the timing and
frequency of rate changes, market conditions and the shape of the
yield curve. The computations of interest rate risk shown above do
not include actions that management may undertake to manage the
risks in response to anticipated changes in interest rates and
actual results may also differ due to any actions taken in response
to the changing rates.
-59-
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The
Company’s management, with the participation of the Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and
procedures as defined in Rules 13a-15(b) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as of June 30, 2017. Based on that evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures were
effective to provide reasonable assurance that information required
to be disclosed by the Company in the reports filed or submitted by
it under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules
and forms, and to provide reasonable assurance that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal controls over
financial reporting during the period covered by this Quarterly
Report that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial
reporting.
Part II. Other Information
Item 1. Legal Proceedings
In the
ordinary course of operations, the Company is party to various
legal proceedings. The Company is not involved in, nor has it
terminated during the three or six months ended June 30, 2017,
any pending legal proceedings other than routine, nonmaterial
proceedings occurring in the ordinary course of
business.
Item 1A. Risk Factors
In
addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I,
“Item 1A. Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2016, which could materially
affect our business, financial condition or future
results.
The
risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties
unknown to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition
and/or operating results. Additionally, there are or will be
important factors related to the proposed merger with TowneBank
that could cause actual results to differ materially from
anticipated results. We believe that these factors include, but are
not limited to, those listed below. Capitalized terms used but not
otherwise defined in this “Risk Factors” section have
the meanings ascribed to them in other sections of this
report.
Regulatory
approvals may not be received, may take longer than expected, or
may impose conditions that are not presently anticipated or that
could have an adverse effect on the combined company following the
Transaction.
-60-
Before
the Transaction may be completed, the Company, the Bank, and
TowneBank must obtain approvals from the FDIC, the Bureau of
Financial Institutions of the Virginia State Corporation Commission
and the North Carolina Commissioner of Banks. Other approvals,
waivers or consents from regulators may also be required. In
determining whether to grant these approvals the regulators
consider a variety of factors, including the regulatory standing of
each party. An adverse development in any party’s regulatory
standing or other factors could result in an inability to obtain or
a delay in receiving their approval. These regulators may impose
conditions on the completion of the Transaction or require changes
to the terms of the Transaction. Such conditions or changes could
delay or prevent completion of the Transaction or impose additional
costs on or limit the revenues of the combined company following
the Transaction, any of which might have an adverse effect on the
combined company following the Transaction.
Combining
the companies may be more difficult, costly, or time-consuming than
expected.
The
Company and TowneBank have operated and, until the completion of
the Transaction, will continue to operate independently. The
success of the Transaction, including anticipated benefits and cost
savings, will depend, in part, on TowneBank’s ability to
successfully combine and integrate the businesses of TowneBank and
the Company in a manner that permits growth opportunities and does
not materially disrupt the existing customer relations nor result
in decreased revenues due to loss of customers. It is possible that
the integration process could result in the loss of key employees,
the disruption of either company’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies
that could adversely affect the combined company’s ability to
maintain relationships with clients, customers, depositors and
employees or to achieve the anticipated benefits and cost savings
of the Transaction. The loss of key employees could adversely
affect the Company’s ability to successfully conduct its
business, which could have an adverse effect on the Company’s
financial results and the value of the Company’s common
stock. If TowneBank experiences difficulties with the integration
process, the anticipated benefits of the Transaction may not be
realized fully or at all, or may take longer to realize than
expected. As with any merger of financial institutions, there also
may be business disruptions that cause TowneBank and/or the Company
to lose customers or cause customers to remove their accounts from
TowneBank and/or the Company and move their business to competing
financial institutions. Integration efforts will also divert
management attention and resources. In addition, the actual cost
savings of the Transaction could be less than
anticipated.
The
Transaction is subject to certain closing conditions that, if not
satisfied or waived, will result in the Transaction not being
completed. Termination of the Merger Agreement could negatively
impact the Company.
The
Transaction is subject to customary conditions to closing,
including the receipt of required regulatory approvals and adoption
of the Merger Agreement by the Company’s stockholders. If any
condition to the Transaction is not satisfied or waived, to the
extent permitted by law, including the absence of any unduly
burdensome condition in the regulatory approvals, the Transaction
will not be completed. In addition, either TowneBank or the Company
may terminate the Merger Agreement under certain circumstances even
if the Merger Agreement is adopted by the Company’s
stockholders, including but not limited to, if the Transaction has
not been completed on or before March 31, 2018.
-61-
If the
Merger Agreement is terminated, there may be various consequences.
For example, the Company’s businesses may have been impacted
adversely by the failure to pursue other beneficial opportunities
due to the focus of management on the Transaction, without
realizing any of the anticipated benefits of completing the
Transaction. Additionally, if the Merger Agreement is terminated,
the market price of the Company’s common stock could decline
to the extent that the current market prices reflect a market
assumption that the Transaction will be completed.
The
Company will be subject to business uncertainties and contractual
restrictions while the Transaction is pending.
The
Merger Agreement restricts the Company from operating its business
other than in the ordinary course and prohibits the Company from
taking specified actions without TowneBank’s consent until
the Transaction occurs. These restrictions may prevent the Company
from pursuing attractive business opportunities that may arise
prior to the completion of the Transaction. In addition,
uncertainty about the effect of the Transaction on employees and
customers may have an adverse effect on the Company. These
uncertainties may impair the Company’s ability to attract,
retain and motivate key personnel until the Transaction is
completed, and could cause customers and others that deal with the
Company to seek to change existing business relationships with the
Company. Retention of certain employees by the Company may be
challenging while the Transaction is pending, as certain employees
may experience uncertainty about their future roles with the
Company. If key employees depart because of issues relating to the
uncertainty and difficulty of integration or a desire not to remain
with the Company, the Company’s business could be
harmed.
The
uncertainty caused by the pending Transaction could cause the
Company’s clients and business associates to seek to change
their existing business relationships with the Company. These
uncertainties may impair the Company’s ability to attract,
retain and grow its client base until the Transaction is
complete.
The
market value of the merger consideration that the Company’s
stockholders will receive as a result of the Transaction may
fluctuate.
If the
Transaction is completed, each share of the Company’s common
stock will be converted into the right to receive 1.7250 shares of
TowneBank common stock, and cash in lieu of any fractional shares.
The market value of the merger consideration may vary from the
closing price of TowneBank common stock on the date the Transaction
was announced, on the date that the proxy statement/prospectus is
mailed to the Company’s stockholders, on the date of the
meeting of the Company’s stockholders, on the date the
Transaction is consummated, and thereafter. Stock price changes may
result from a variety of factors, including general market and
economic conditions, changes in the respective businesses,
operations and prospects, and the regulatory situation of TowneBank
and the Company. Many of these factors are beyond the control of
the Company. Any change in the market price of TowneBank common
stock prior to completion of the Transaction will affect the amount
of and the market value of the merger consideration that the
Company’s stockholders will receive upon completion of the
Transaction. Accordingly, at the time of the stockholders meeting,
the Company’s stockholders will not know or be able to
calculate the amount or the market value of the merger
consideration they would receive upon completion of the
Transaction.
Further, the
results of operations of the combined company following the
Transaction and the market price of the combined company’s
shares of common stock may be affected by factors different from
those currently affecting the independent results of operations of
TowneBank and the Company.
-62-
If
the Transaction is not completed, the Company will have incurred
substantial expenses without realizing the expected benefits of the
Transaction.
The
Company has incurred and will incur substantial expenses in
connection with the negotiation and completion of the transactions
contemplated by the Merger Agreement. If the Transaction is not
completed, the Company would have to recognize these expenses
without realizing the expected benefits of the
Transaction.
The
Merger Agreement limits the Company’s ability to pursue an
alternative acquisition proposal and could require the Company to
pay a termination fee of $12 million under certain circumstances
relating to alternative acquisition proposals.
The
Merger Agreement prohibits the Company from soliciting, initiating
or knowingly encouraging certain alternative acquisition proposals
with any third party, subject to exceptions set forth in the Merger
Agreement. The Merger Agreement also provides for the payment by
the Company to TowneBank of a termination fee in the amount of $12
million in the event that the Company or TowneBank terminates the
Merger Agreement for certain specified reasons. These provisions
might discourage a potential competing acquirer that might have an
interest in acquiring all or a significant part of the Company from
considering or proposing such an acquisition.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not
applicable.
Item 5. Other Information
None
-63-
Item 6. Exhibits
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Reorganization, dated April 26, 2017, by and among
TowneBank, TB Acquisition, LLC, Paragon Commercial Corporation and
Paragon Commercial Bank (incorporated by reference to Exhibit 2.1
to Paragon Commercial Corporation’s Current Report on Form
8-K filed on May 1, 2017)
|
|
|
|
10.1
|
|
Amendment
to Paragon Commercial Bank Salary Continuation Agreement for
Matthew C. Davis, dated as of April 26, 2017 (amending the Paragon
Commercial Bank Amended and Restated Salary Continuation Agreement
dated December 29, 2016 and the Paragon Commercial Salary
Continuation Agreement dated December 29, 2016) (incorporated by
reference to Exhibit 10.1 to Paragon Commercial Corporation’s
Quarterly Report on Form 10-Q filed on May 9, 2017)
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
101
|
|
Interactive data
files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets (Unaudited) as of June 30, 2017 and December 31,
2016; (ii) Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2017 and 2016; (iii)
Consolidated Statements of Comprehensive Income (Unaudited) for the
Three and Six Months Ended June 30, 2017 and 2016; (iv)
Consolidated Statements of Stockholders’ Equity (Unaudited)
for the Six Months Ended June 30, 2017 and 2016; (v) Consolidated
Statements of Cash Flows (Unaudited) for the Six Months Ended June
30, 2017 and 2016; and (vi) Notes to Consolidated Financial
Statements (Unaudited)
|
-64-
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized
|
PARAGON
COMMERCIAL CORPORATION
|
|
|
|
|
|
|
Date: August
8, 2017
|
By:
|
/s/
Steven
E. Crouse
|
|
|
|
Steven E.
Crouse
|
|
|
|
Executive Vice
President and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
-65-
EXHIBIT INDEX
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Reorganization, dated April 26, 2017, by and among
TowneBank, TB Acquisition, LLC, Paragon Commercial Corporation and
Paragon Commercial Bank (incorporated by reference to Exhibit 2.1
to Paragon Commercial Corporation’s Current Report on Form
8-K filed on May 1, 2017)
|
|
|
|
10.1
|
|
Amendment
to Paragon Commercial Bank Salary Continuation Agreement for
Matthew C. Davis, dated as of April 26, 2017 (amending the Paragon
Commercial Bank Amended and Restated Salary Continuation Agreement
dated December 29, 2016 and the Paragon Commercial Salary
Continuation Agreement dated December 29, 2016) (incorporated by
reference to Exhibit 10.1 to Paragon Commercial Corporation’s
Quarterly Report on Form 10-Q filed on May 9, 2017)
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Certification of
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
101
|
|
Interactive data
files pursuant to Rule 405 of Regulation S-T: (i) Consolidated
Balance Sheets (Unaudited) as of June 30, 2017 and December 31,
2016; (ii) Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2017 and 2016; (iii)
Consolidated Statements of Comprehensive Income (Unaudited) for the
Three and Six Months Ended June 30, 2017 and 2016; (iv)
Consolidated Statements of Stockholders’ Equity (Unaudited)
for the Six Months Ended June 30, 2017 and 2016; (v) Consolidated
Statements of Cash Flows (Unaudited) for the Six Months Ended June
30, 2017 and 2016; and (vi) Notes to Consolidated Financial
Statements (Unaudited)
|
-66-