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EX-32.2 - EXHIBIT 32.2 - HCBF Holding Company, Inc.t1702361_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - HCBF Holding Company, Inc.t1702361_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - HCBF Holding Company, Inc.t1702361_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - HCBF Holding Company, Inc.t1702361_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY 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: 333-217395

 

HCBF HOLDING COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

Florida   27-2326440
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

200 S. Indian River Drive, Suite 101, Fort Pierce, Florida   34950
(Address of principal executive office)   (Zip Code)

 

(772) 4092270

(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 x

 

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 x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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 pursuant to Section 13(a) of The Exchange Act. ¨

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
    (Do not check if smaller reporting company) Emerging growth company x

 

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

 

At July 31, 2017, 22,186,415 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 

 

 

 

HCBF HOLDING COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2017

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 4
   
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION 4
   
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 42
   
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 55
   
ITEM 4: CONTROLS AND PROCEDURES 57
   
PART II. OTHER INFORMATION 57
   
ITEM 1. LEGAL PROCEEDINGS 57
   
ITEM 1A. RISK FACTORS 57
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 58
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 58
   
ITEM 4. MINE SAFETY DISCLOSURE 58
   
ITEM 5. OTHER INFORMATION 58
   
ITEM 6. EXHIBITS 58

 

 2 

 

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements.

 

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, the risk factors identified in our Registration Statement on Form S-4, filed with the SEC on April 20, 2017, as subsequently amended, under the caption “Risk Factors,” as well as:

 

·our ability to integrate the business and operations of the companies and banks that we have acquired;
·our ability to successfully manage interest rate risk, liquidity risk, and other risks inherent to our industry;
·legislative or regulatory changes, including the Dodd-Frank Act, Basel III, and the ability to repay and qualified mortgage standards;
·the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products;
·the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss provision and deferred tax asset valuation;
·the frequency and magnitude of foreclosure of our loans;
·the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
·the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
·our ability to declare and pay dividends, the payment of which is now subject to our compliance with heightened capital requirements;
·changes in the securities and real estate markets;
·changes in monetary and fiscal policies of the U.S. Government;
·inflation, interest rate, market and monetary fluctuations;
·the effects of harsh weather conditions, including hurricanes, and man-made disasters;
·our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;
·the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
·increased competition and its effect on pricing;
·technological changes;
·negative publicity and the impact on our reputation;
·changes in consumer spending and saving habits;
·growth and profitability of our noninterest income;
·changes in accounting principles, policies, practices or guidelines;
·the lack of a trading market for our common stock;
·the concentration of ownership of our common stock;
·anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;
·other risks described from time to time in our filings with the Securities and Exchange Commission; and
·our ability to manage the risks involved in the foregoing.

 

However, other factors besides those discussed in our final prospectus filed with the Securities and Exchange Commission, or SEC, on June 21, 2017 related to our Registration Statement on Form S-4, as amended (File No. 333-217395), or referenced by, this Form 10-Q also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

 

 3 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL INFORMATION

 

HCBF HOLDING COMPANY, INC.

Consolidated Balance Sheets (unaudited)

(Dollar amounts in thousands, except share data)

 

Assets  June 30, 2017   December 31, 2016 
         
Cash and due from financial institutions  $32,752   $33,957 
Interest-earning deposits in other financial institutions   30,234    10,601 
Cash and cash equivalents   62,986    44,558 
           
Securities available for sale, at fair value   433,047    346,634 
Securities held to maturity (fair value of $175,517 and $176,286 at June 30, 2017 and December 31, 2016, respectively)   176,882    178,232 
Loans held for sale   6,441    8,384 
Loans (net of allowance of $7,120 and $7,260 at June 30, 2017 and December 31, 2016, respectively)   1,057,361    1,027,211 
Covered loans (net of allowance for loan losses of $0 and $378 at June 30, 2017 and December 31, 2016, respectively)   -    31,089 
Federal Home Loan Bank Stock, at cost   4,849    4,584 
Premises and equipment, net   50,187    51,442 
Real estate owned, net   8,665    9,018 
Goodwill   12,286    12,286 
Other intangible assets   11,405    12,548 
Bank owned life insurance   38,578    38,054 
Deferred tax asset   13,288    15,022 
FDIC indemnification asset   -    526 
Accrued interest receivable and other assets   10,418    10,302 
           
Total assets  $1,886,393   $1,789,890 

 

 4 

 

HCBF HOLDING COMPANY, INC.

Consolidated Balance Sheets (unaudited)

(Dollar amounts in thousands, except share data)

 

Liabilities and Stockholders’ Equity  June 30, 2017   December 31, 2016 
         
Deposits          
Non-interest bearing  $478,527   $444,745 
Interest bearing   1,082,571    1,034,063 
Total deposits   1,561,098    1,478,808 
Federal Home Loan Bank advances   76,446    71,622 
Junior subordinated debenture   5,992    5,943 
Capital lease obligation   743    769 
Official checks   6,075    5,248 
Accrued interest payable and other liabilities   12,749    9,807 
Total liabilities   1,663,103    1,572,197 
           
Commitments and contingencies (Note 6)          
           
Stockholders’ equity:          
Preferred stock, noncumulative, $.001 par value, 5,000,000 shares authorized, none issued or outstanding   -    - 
Common stock voting, $.001 par value, 40,000,000 shares authorized, 18,827,833 and 18,827,303 shares issued and outstanding   19    19 
Common stock nonvoting, $.001 par value, 10,000,000 shares authorized, 1,224,997 and 1,224,997 shares issued and outstanding outstanding   1    1 
Additional paid-in capital   202,611    202,369 
Retained earnings   23,204    18,772 
Accumulated other comprehensive (loss)   (2,545)   (3,468)
Total stockholders’ equity   223,290    217,693 
           
Total liabilities and stockholders’ equity  $1,886,393   $1,789,890 

 

See accompanying notes

 

 5 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Income (unaudited)

(Dollar amounts in thousands, except share data)

 

   Three months ended   Six months ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
Interest and dividend income:                    
Loans, including fees  $13,885   $13,823   $27,671   $27,744 
Securities   3,222    2,319    5,875    4,639 
Interest earning deposits and other   156    111    258    240 
Total interest income   17,263    16,253    33,804    32,623 
                     
Interest expense:                    
Deposits   1,342    1,113    2,588    2,199 
Federal Home Loan Bank advances   213    227    364    462 
Subordinated debentures and other   91    58    180    113 
Total interest expense   1,646    1,398    3,132    2,774 
Net interest income   15,617    14,855    30,672    29,849 
                     
Provision for loan losses   1,646    330    1,563    1,494 
Net interest income after provision for loan losses   13,971    14,525    29,109    28,355 
                     
Noninterest income:                    
Service charges on deposit accounts   767    576    1,564    1,209 
ATM and interchange income   775    723    1,557    1,437 
Net gain on sale of loans   958    981    1,761    1,648 
Net gains on sale of securities available for sale   14    5    14    5 
Bank owned life insurance income   258    226    524    426 
FDIC indemnification asset amortization, net   (137)   (116)   (311)   (217)
Purchased credit impaired loan recoveries   166    422    467    441 
Other   378    127    682    533 
Total noninterest income   3,179    2,944    6,258    5,482 
                     
Noninterest expense:                    
Salaries and employee benefits   7,183    7,059    14,567    14,336 
Occupancy and equipment   1,952    2,131    3,887    4,306 
Data processing   1,420    1,581    2,878    3,029 
Regulatory assessments   202    401    430    787 
Professional Fees   420    363    981    730 
Office expenses and supplies   310    352    649    806 
Foreclosed assets, net   821    277    804    588 
Advertising   163    174    335    402 
Amortization of intangibles   567    571    1,143    1,323 
Acquisition and conversion costs   233    83    380    189 
Other   982    1,015    2,340    1,894 
Total non-interest expense   14,253    14,007    28,394    28,390 
                     
Income before taxes   2,897    3,462    6,973    5,447 
Income tax expense   1,060    1,505    2,541    2,225 
Net income  $1,837   $1,957   $4,432   $3,222 
                     
Earnings per share                    
Basic  $0.09   $0.10   $0.22   $0.16 
Diluted  $0.09   $0.09   $0.22   $0.16 

 

 6 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Comprehensive Income (unaudited)

(Dollar amounts in thousands, except share data)

 

   Three months ended   Six months ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
                 
Net Income  $1,837   $1,957   $4,432   $3,222 
                     
Other comprehensive income (Loss) :                    
Unrealized gain (loss) arising during the period   1,307    1,571    1,374    4,434 
Amortization of unrealized loss on securities                    
Transferred to held to maturity   47    79    106    154 
Provision for income tax benefit   (510)   (621)   (557)   (1,726)
Total other comprehensive income (loss)   844    1,029    923    2,862 
                     
Comprehensive income  $2,681   $2,986   $5,355   $6,084 

 

See accompanying notes

 

 7 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For six months ended June 30, 2017 and June 30, 2016 (unaudited)

(Dollar amounts in thousands, except share data)

 

  

Common Stock

Voting

  

Common Stock

Nonvoting

  

Additional

Paid-in

   Retained   Accumulated
Other
Comprehensive
     
   Shares   Amt   Shares   Amt   Capital   Earnings   (Loss)   Total 
Balance at January 1, 2016   18,827,303   $19    1,224,997   $1   $201,817   $12,517   $(1,914)  $212,440 
Net income   -    -    -    -    -    3,222    -    3,222 
Other comprehensive loss   -    -    -    -    -    -    2,861    2,861 
Stock-based compensation   -    -    -    -    300    -    -    300 
Balance at June 30, 2016   18,827,303   $19    1,224,997   $1   $202,117   $15,739   $947   $218,823 
Balance at January 1. 2017   18,827,833   $19    1,224,997   $1   $202,369   $18,772   $(3,468)  $217,693 
Net Income   -    -    -    -    -    4,432    -    4,432 
Other comprehensive income   -    -    -    -    -    -    923    923 
Stock-based compensation   -    -    -    -    242    -    -    242 
Balance at June 30, 2017   18,827,833   $19    1,224,997   $1   $202,611   $23,204   $(2,545)  $223,290 

 

See accompanying notes

 

 8 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts in thousands, except share data)

 

   Six months ended 
   June 30, 2017   June 30, 2016 
Cash flows from operating activities:          
Net income  $4,432   $3,222 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,563    1,494 
Depreciation and amortization of premises and equipment   1,388    1,394 
Net accretion of purchase accounting adjustments   (884)   (2,005)
Net amortization of investment securities   2,418    2,755 
Net deferred loan origination fees   (154)   36 
Gain on sale of securities available for sale   (14)   (5)
Origination of loans held for sale   (42,771)   (36,953)
Proceeds from sales of loans held for sale   45,420    37,290 
Gain on loans held for sale   (1,761)   (1,648)
(Gain)Loss on disposal of real estate owned   (190)   214 
Provision for real estate owned   708    568 
FDIC indemnification expense, net   311    (499)
Stock based compensation expense   242    300 
Increase in cash surrender value of bank owned life insurance   (524)   (426)
Deferred income tax expense   1,177    (481)
Net change in:          
Accrued interest receivable and other assets   111    (1,197)
Accrued interest payable and other liabilities   3,705    1,941 
Net cash from operating activities   15,177    6,000 
           
Cash flows from investing activities:          
Available for sale securities:          
Purchases   (119,784)   (93,302)
Maturities, prepayments, and calls   34,649    48,657 
Sales   1,619    32,207 
Held to maturity securities:          
Purchases   (10,280)   (40,589)
Maturities, prepayments, and calls   7,809    10,715 
Loan origination and repayments, net   (362)   (14,639)
Purchases of premises and equipment, net   (133)   (777)
Changes in FHLB stock, net   (264)   20 
Proceeds from sale of real estate owned   2,577    2,101 
Purchase of bank owned life insurance   -    (10,000)
Cash received from FDIC loss sharing agreement   83    544 
 Net cash used in investing activities   (84,086)   (65,063)
           
Cash flows from financing activities:          
Net change in deposits   82,383    36,613 
Proceeds from Federal Home Loan Bank advances and other debt   53,000    183,000 
Repayments on Federal Home Loan Bank advances and other debt   (48,046)   (183,125)
Proceeds from exercised stock options   -    - 
Net proceeds from financing activities   87,337    36,488 
           
Net change in cash and cash equivalents   18,428    (22,575)
Beginning cash and cash equivalents   44,558    80,737 
           
Ending cash and cash equivalents  $62,986   $58,162 

 

(Continued)

 

 9 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Cash Flows

(Dollar amounts in thousands, except share data)

 

   Six months ended 
   June 30, 2017   June 30, 2016 
Supplemental cash flow information:          
Interest paid  $3,340   $3,156 
Income taxes paid   3,050    1,250 
           
Supplemental noncash disclosures:          
Transfers from loans held for sale to loans held for investment   1,055    - 
Transfers from loans to real estate owned   2,743    976 
Transfer from premises and equipment to real estate owned   -    1,209 
Loans provided for sales of real estate owned   -    461 

 

See accompanying notes

 

 10 

 

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION

 

Nature of Operations and basis of Consolidation

 

The consolidated financial statements include HCBF Holding Company, Inc. (the “Holding Company”) and its wholly owned subsidiary, Harbor Community Bank (the “Bank”), together referred to as the “Company.” Intercompany transactions and balances are eliminated in consolidation.

 

The Company provides financial services through its offices in Florida. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. The Company engages in mortgage banking activities and, as such, acquires and sells one-to-four family residential mortgage loans and small business administration loans (SBA). These loans are generally sold without servicing rights retained. The Company originates and services residential mortgage loans in Florida.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in the annual report for the year ended December 31, 2016. In the Company’s opinion, all adjustments necessary for a fair presentation of the results for interim periods have been made. The results of operations for the three months ended June 30, 2017 and the six months ended June 30, 2017 are not necessarily indicative of the results expected for the full year.

 

Accounting policy change - Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired.

 

During the first quarter of 2017, the Company modified its accounting policy for allowance for loan losses. In determining impairment for specifically identified impaired loans, the company began to segregate small, homogeneous loans with relationship balances under $250 thousand. The rationale for the accounting policy change was to streamline and improve the timeliness of the loan impairment valuation process for small balance loans that the Company deems to be insignificant to its operations. These small balance loans are now evaluated for impairment on a pooled basis and are not included in impairment disclosures. The change in accounting policy did not have a material effect on allowance for loan losses during the first quarter of 2017.

 

Adoption of New Accounting Standards and Newly Issued Not Yet Effective Accounting Standards

 

The following table provides a description of recently adopted or newly issued not yet effective accounting standards that could have a material effect on our financial statements:

 

ASU 2014-09, Revenue From Contracts With Customers (Topic 606) and ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

 

In May 2014 the FASB amended existing guidance related to revenue from contracts with customers.

 

 11 

 

NOTE 1 - Continued

 

This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing” and ASU 2016-12 “Narrow-Scope Improvements and Practical Expedients.” The company is studying the provisions of ASU 2014-09 and its related updates. However, the Company does not expect this new standard to have a significant impact on the Company’s Consolidated Financial Statements. The Company’s primary sources of revenues are derived from interest on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company expects to adopt ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach with a cumulative effect of initial application along with supplementary disclosures.

 

ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial assets and Financial Liabilities

 

In January 2016, the FASB amended existing guidance relating to the recognition and measurement of financial assets and financial liabilities. The amendment: 1) Requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. These amendments should be applied by means of a cumulative effect adjustment to the balance sheet as of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date. The company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

ASU 2016-02, Leases

 

In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. These amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e. January 1, 2019 for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company leases certain property and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the Company’s Consolidated Balance Sheet. The Company is currently evaluating this new accounting standard to determine the dollar impact on the consolidated financial statements.

 

 12 

 

NOTE 1 – Continued

 

ASU 2016-13, Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investment in leases recognized by a lessor. The transition will be applied as follows: (1) for debt securities with other-than-temporary impairment (OTTI), the guidance will be applied prospectively (2) existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. These assets will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance and (3) for all other assets within the scope of CECL, a cumulative effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018.

 

The Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements. To date, certain members of senior management have attended educational conferences relating to CECL. In the second half of 2017, the Company expects to establish a management committee to begin to develop of a detailed framework on the design and internal controls necessary for the implementation of CECL.

 

 13 

 

NOTE 2 - SECURITIES

 

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at June 30, 2017 and December 31, 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

 

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

   Fair
Value
 
June 30, 2017                    
Available for sale                    
Asset backed securities  $17,126   $-   $(210)  $16,916 
Small business administration securities   44,120    168    (129)   44,159 
Collateralized mortgage obligations   71,080    106    (565)   70,621 
Mortgage-backed securities   303,977    125    (2,751)   301,351 
Total available for sale  $436,303   $399   $(3,655)  $433,047 
                     
Held to Maturity                    
Agency notes and bonds  $1,907   $54   $-   $1,961 
Municipal securities   4,385    91    -    4,476 
Collateralized mortgage obligations   72,209    131    (816)   71,524 
Mortgage-backed securities   98,381    281    (1,106)   97,556 
Total held to maturity  $176,882   $557   $(1,922)  $175,517 

 

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

   Fair
Value
 
December 31, 2016                    
Available for sale                    
Agency notes and bonds  $1,594   $20   $-   $1,614 
Asset backed securities   17,579    -    (699)   16,880 
Small business administration securities   48,724    175    (103)   48,796 
Collateralized mortgage obligations   44,817    25    (480)   44,362 
Mortgage-backed securities   238,550    74    (3,642)   234,982 
Total available for sale  $351,264   $294   $(4,924)  $346,634 
                     
Held to Maturity                    
Agency notes and bonds  $1,900   $39   $-   $1,939 
Municipal securities   4,397    80    (2)   4,475 
Collateralized mortgage obligations   78,465    90    (1,037)   77,518 
Mortgage-backed securities   93,470    108    (1,224)   92,354 
Total held to maturity  $178,232   $317   $(2,263)  $176,286 

 

 14 

 

NOTE 2 - Continued

 

During 2014, the company transferred $58.8 million of securities from available for sale classification to held to maturity classification. At time of transfer, the securities had unrealized losses of $1.2 million, net of deferred taxes. The losses are amortized on the company’s books over the remaining life of the securities using the level yield method. The unamortized losses net of deferred taxes are recorded in equity as a reduction of accumulated other comprehensive income. The unamortized losses on transferred securities net of deferred taxes was $515 thousand and $581 thousand at June 30, 2017 and December 31, 2016, respectively. The amount of pre-tax loss amortization was $106 thousand for six months ended June 30, 2017 and $154 thousand for six months ended June 30, 2016. The amortization of unrealized holding losses reported in equity will offset the effect of the amortization of the discount.

 

The proceeds from sales and calls of securities and the associated gains and losses are listed below:

 

   Six months ended 
   June 30, 2017   June 30, 2016 
Proceeds  $1,619   $32,206 
Gross gains  $14   $69 
Gross losses  $-   $64 

 

The tax provision related to these net realized gains and losses were $5 thousand and $2 thousand for six months ended June 30, 2017 and June 30, 2016, respectively.

 

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

   Available for Sale   Held to Maturity 
June 30, 2017 

Amortized

Cost

  

Fair

Value

  

Amortized

Cost

  

Fair

Value

 
Within one year  $-   $-   $-   $- 
One to five years   -    -    1,998    2,014 
Five to ten years   -    -    3,501    3,602 
Beyond ten years   -    -    793    821 
Asset-backed securities   17,126    16,916    -    - 
Small business administration securities   44,120    44,159    -    - 
Collateralized mortgage obligations   71,080    70,621    72,209    71,524 
Mortgage-backed securities   303,977    301,351    98,381    97,556 
   $436,303   $433,047   $176,882   $175,517 

 

Securities pledged at June 30, 2017 and December 31, 2016 had a carrying amount of $236 million and $208 million, respectively. These securities were pledged to secure public deposits, Federal Home Loan Bank advances, Federal Reserve discount window borrowings and other purposes.

 

 15 

 

NOTE 2 - Continued

 

The following table summarizes securities with unrealized losses at June 30, 2017 and December 31, 2016, aggregated by major security type and length of time in a continuous unrealized loss position:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
June 30, 2017                              
Available for sale                              
Asset backed securities  $2,309   $(4)  $14,607   $(206)  $16,916   $(210)
Small Business Administration securities   5,027    (29)   12,354    (100)   17,381    (129)
Collateralized mortgage obligations   38,155    (448)   12,616    (117)   50,771    (565)
Mortgage backed securities   255,274    (2,662)   7,757    (89)   263,031    (2,751)
Total available for sale  $300,765   $(3,143)  $47,334   $(512)  $348,099   $(3,655)
                               
Held to maturity                              
Collateralized mortgage obligations  $46,318   $(770)  $6,328   $(46)  $52,646   $(816)
Mortgage backed securities   58,184    (1,106)   -    -    58,184    (1,106)
Total held to maturity  $104,502   $(1,876)  $6,328   $(46)  $110,830   $(1,922)

 

 16 

 

NOTE 2 - Continued

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
December 31, 2016                              
Available for sale                              
Asset backed securities  $-   $-   $16,879   $(699)  $16,879   $(699)
Small Business Administration securities   5,480    (13)   21,430    (90)   26,910    (103)
Collateralized mortgage obligations   32,390    (324)   9,486    (156)   41,876    (480)
Mortgage backed securities   216,756    (3,442)   8,540    (200)   225,296    (3,642)
Total available for sale  $254,626   $(3,779)  $56,335   $(1,145)  $310,961   $(4,924)
                               
Held to maturity                              
Municipal securities  $611   $(2)  $-   $-   $611   $(2)
Collateralized mortgage obligations   62,878    (999)   4,462    (38)   67,340    (1,037)
Mortgage backed securities   77,179    (1,224)   -    -    77,179    (1,224)
Total held to maturity  $140,668   $(2,225)  $4,462   $(38)  $145,130   $(2,263)

 

At June 30, 2017, the Company’s security portfolio consisted of 214 securities, 128 of which were in an unrealized loss position, including 25 securities with an unrealized loss position of 12 months or longer. The majority of unrealized losses are related to the Company’s collateralized mortgage obligations, mortgage backed securities, and asset-backed securities, as discussed below:

 

Collateralized Mortgage Obligations

 

At June 30, 2017, the Company’s collateralized mortgage obligations were issued by U.S. government sponsored entities and agencies, Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie Mae and Freddie Mac are institutions that the government has affirmed its commitment to support. The underlying collateral of these mortgage instruments are 30-year, 20-year and15-year fixed rate mortgage-backed securities. Because the decline in fair value is attributable to changes in interest rates, spreads and liquidity, and not credit quality, and because the Company does not have the intent to sell these collateralized mortgage obligations and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2017.

 

Mortgage-Backed Securities

 

At June 30, 2017, all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies: Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie Mae and Freddie Mac are institutions that the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates, spreads and liquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2017.

 

 17 

 

NOTE 2 - Continued

 

Asset Backed Securities

 

At June 30, 2017, the Company’s asset backed securities consisted of four pools of U.S. government guaranteed student loans. The U.S. government guarantee secures up to 97% of the principal balance. The student loans are pooled and held in trusts. Three of the four trusts are rated AAA by the national rating agencies. During 2016, one of the trusts experienced a rating down grade from AAA to BBB due to student loan payment deferments. The payment deferments called into question whether the security could be fully paid-off at scheduled maturity. The trustee is seeking unanimous approval from bondholders to extend the scheduled maturity. The company believes that if the trust receives approval to extend the scheduled maturity, the trust will return to an AAA rating, but there is no guarantee this will occur. The company believes that the rating down grade did not have a material effect on the trading price of the security as the security appreciated in value during 2016.

 

The decline in fair value is attributable to changes in interest rates, spreads and liquidity, and not credit quality. It is unlikely that the Company will be required to sell these securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2017 and December 31, 2016.

 

NOTE 3 - LOANS

 

Loans at period-end were as follows:

 

   June 30, 2017   December 31, 2016 
   Non covered
Loans
  

Covered

Loans

   Total   Non covered
Loans
  

Covered

Loans

   Total 
Commercial real estate  $466,383   $-   $466,383   $435,188   $27,483   $462,671 
Residential real estate   363,195    -    363,195    362,729    246    362,975 
Land and construction   104,553    -    104,553    95,202    1,178    96,380 
Total real estate   934,131    -    934,131    893,119    28,907    922,026 
Commercial   90,861    -    90,861    97,188    2,568    99,756 
Consumer and other   40,073    -    40,073    44,894    -    44,894 
Total non-real estate   130,934    -    130,934    142,082    2,568    144,650 
Subtotal   1,065,065    -    1,065,065    1,035,201    31,475    1,066,676 
Less:                              
Net deferred fees   584    -    584    730    8    738 
Allowance for loan losses   7,120    -    7,120    7,260    378    7,638 
Loans, net  $1,057,361   $-   $1,057,361   $1,027,211   $31,089   $1,058,300 

 

 18 

 

NOTE 3 - Continued

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the periods presented:

 

   Real Estate Mortgage Loans     
  

Commercial
Real

Estate

  

Residential
Real

Estate

  

Land

and
Construction

   Commercial  

Consumer
and

other

Loans

   Total 
Three months ended June 30, 2017                              
Allowance for loan losses - loans:                              
Beginning Balance  $2,699   $1,534   $310   $1,575   $230   $6,348 
Provision for loan losses   949    (127)   45    902    81    1,850 
Loans charged-off   (612)   (23)   (92)   (379)   (109)   (1,215)
Recoveries   33    49    109    (79)   25    137 
Ending allowance balance – loans  $3,069   $1,433   $372   $2,019   $227   $7,120 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $166   $-   $26   $5   $-   $197 
Provision for loan losses   (166)   -    (26)   (12)   -    (204)
Loans charged-off   -    -    -    -    -    - 
Recoveries   -    -    -    7    -    7 
Ending allowance balance – covered loans  $-   $-   $-   $-   $-   $- 
Total ending allowance balance  $3,069   $1,433   $372   $2,019   $227   $7,120 

 

 19 

 

NOTE 3 - Continued

 

   Real Estate Mortgage Loans     
  

Commercial
Real

Estate

  

Residential
Real

Estate

  

Land

and
Construction

   Commercial  

Consumer
and

other

Loans

   Total 
Three months ended June 30, 2016                              
Allowance for loan losses - loans:                              
Beginning Balance  $1,550   $1,385   $465   $305   $163   $3,868 
Provision for loan losses   (673)   (1,239)   923    1,234    146    391 
Loans charged-off   (300)   (4)   (24)   (114)   (79)   (521)
Recoveries   3    65    16    36    33    153 
Ending allowance balance – loans  $580   $207   $1,380   $1,461   $263   $3,891 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $723   $2   $99   $12   $-   $836 
Provision for loan losses   (778)   -    730    17    (29)   (60)
Loans charged-off   -    -    -    (45)   -    (45)
Recoveries   1    -    -    16    -    17 
Ending allowance balance – covered loans  $(54)  $2   $829   $-   $(29)  $748 
Total ending allowance balance  $526   $209   $2,209   $1,461   $234   $4,639 

 

 20 

 

NOTE 3 - Continued

 

   Real Estate Mortgage Loans     
  

Commercial
Real

Estate

  

Residential
Real

Estate

  

Land

and
Construction

   Commercial  

Consumer
and

other

Loans

   Total 
Six months ended June 30, 2017                              
Allowance for loan losses - loans:                              
Beginning Balance  $3,106   $1,990   $318   $1,648   $198   $7,260 
Provision for loan losses   944    (366)   32    995    219    1,824 
Loans charged-off   (1,021)   (314)   (106)   (675)   (236)   (2,352)
Recoveries   40    123    128    51    46    388 
Ending allowance balance – loans  $3,069   $1,433   $372   $2,019   $227   $7,120 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $210   $-   $26   $142   $-   $378 
Provision for loan losses   (210)   -    (26)   (24)   -    (260)
Loans charged-off   -    -    -    (132)   -    (132)
Recoveries   -    -    -    14    -    14 
Ending allowance balance – covered loans  $-   $-   $-   $-   $-   $- 
Total ending allowance balance  $3,069   $1,433   $372   $2,019   $227   $7,120 
                               
Six months ended June 30, 2016                              
Allowance for loan losses - loans:                              
Beginning Balance  $595   $802   $201   $212   $641   $2,451 
Provision for loan losses   276    (677)   1,167    1,350    (121)   1,995 
Loans charged-off   (300)   (3)   (25)   (156)   (313)   (797)
Recoveries   9    85    37    55    56    242 
Ending allowance balance – loans  $580   $207   $1,380   $1,461   $263   $3,891 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $890   $-   $251   $136   $-   $1,277 
Provision for loan losses   (945)   2    578    (107)   (29)   (501)
Loans charged-off   -    -    -    (45)   -    (45)
Recoveries   1    -    -    16    -    17 
Ending allowance balance – covered loans  $(54)  $2   $829   $-   $(29)  $748 
Total ending allowance balance  $526   $209   $2,209   $1,461   $234   $4,639 

 

 21 

 

NOTE 3- Continued

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017 and December 31, 2016:

 

   Real Estate Mortgage Loans     
  

Commercial

Real

Estate

  

Residential
Real

Estate

  

Land

and
Construction

   Commercial  

Consumer and

Other

Loans

   Total 
June 30, 2017                              
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment  $829   $119   $10   $1,484   $-   $2,442 
Collectively evaluated for impairment   1,815    908    328    437    227    3,715 
Acquired with deteriorated credit quality   425    406    34    98    -    963 
Total ending allowance balance  $3,069   $1,433   $372   $2,019   $227   $7,120 
                               
Loans – recorded  investment:                              
Loans individually evaluated for impairment  $14,978   $5,106   $886   $3,382   $-   $24,352 
Loans  collectively evaluated for impairment   435,122    352,709    102,183    87,329    40,073    1,017,416 
Loans  acquired with deteriorated credit quality   16,283    5,380    1,484    150    -    23,297 
Total ending loans recorded investment  $466,383   $363,195   $104,553   $90,861   $40,073   $1,065,065 

 

   Real Estate Mortgage Loans     
  

Commercial

Real

Estate

  

Residential
Real

Estate

  

Land

and
Construction

   Commercial  

Consumer and

Other

Loans

   Total 
December 31, 2016                              
Allowance for loan  losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment  $1,509   $615   $52   $1,268   $3   $3,447 
Collectively evaluated for impairment   1,322    874    265    425    195    3,081 
Acquired with deteriorated credit quality   485    501    27    97    -    1,110 
Total ending allowance balance  $3,316   $1,990   $344   $1,790   $198   $7,638 
                               
Loans – recorded  investment:                              
Loans individually evaluated for impairment  $19,109   $10,542   $1,519   $4,582   $4   $35,756 
Loans  collectively evaluated for impairment   427,369    346,554    93,401    94,958    44,890    1,007,172 
Loans  acquired with deteriorated credit quality   16,193    5,879    1,460    216    -    23,748 
Total ending loans recorded  investment  $462,671   $362,975   $96,380   $99,756   $44,894   $1,066,676 

 

 22 

 

NOTE 3- Continued

 

The following tables present information related to impaired loans by class of loans as of June 30, 2017 and December 31, 2016:

 

   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
 
June 30, 2017               
With no related allowance recorded:               
Commercial real estate  $11,716   $7,712   $- 
Residential real estate   5,764    4,678    - 
Land and construction   1,230    826    - 
Commercial   491    257    - 
Subtotal – excluding PCI   19,201    13,473    - 
PCI loans   15,716    11,067    - 
Subtotal – including PCI   34,917    24,540    - 
                
With an allowance recorded:               
Commercial real estate  $7,626   $7,267   $829 
Residential real estate   434    427    119 
Land and construction   60    60    10 
Commercial   3,160    3,125    1,484 
Subtotal – excluding PCI   11,280    10,879    2,442 
PCI loans   20,171    12,230    963 
Subtotal – including PCI   31,451    23,109    3,405 
                
Total – excluding PCI  $30,481   $24,352   $2,442 
Total – including PCI  $66,368   $47,649   $3,405 

 

 23 

 

NOTE 3- Continued

 

   Unpaid
Principal
 Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
 
December 31, 2016               
With no related allowance recorded:               
Commercial real estate  $7,864   $4,106   $- 
Residential real estate   7,101    5,758    - 
Land and construction   1,307    770    - 
Commercial   967    934    - 
Subtotal – excluding PCI   17,239    11,568    - 
PCI loans   21,622    9,271    - 
Subtotal – including PCI   38,861    20,839    - 
                
With an allowance recorded:               
Commercial real estate  $15,542   $15,003   $1,509 
Residential real estate   5,392    4,784    615 
Land and construction   756    749    52 
Commercial   3,766    3,649    1,268 
Consumer and other loans   3    3    3 
Subtotal – excluding PCI   25,459    24,188    3,447 
PCI loans   26,807    14,477    1,110 
Subtotal – including PCI   52,266    38,665    4,557 
                
Total – excluding PCI  $42,698   $35,756   $3,447 
Total – including PCI  $91,127   $59,504   $4,557 

 

 24 

 

NOTE 3- Continued

 

The following tables present information regarding impaired loans excluding PCI loans.

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Three months ended June 30, 2017          
Commercial real estate  $16,195   $57 
Residential real estate   5,378    11 
Land and construction   891    8 
Commercial   3,636    9 
Total  $26,100   $85 

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Three months ended June 30, 2016          
Commercial real estate  $14,306   $88 
Residential real estate   8,933    25 
Land and construction   1,495    7 
Commercial   1,858    9 
Total  $26,592   $129 

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Six months ended June 30, 2017          
Commercial real estate  $17,267   $121 
Residential real estate   5,650    23 
Land and construction   1,168    14 
Commercial   3,762    22 
Total  $27,847   $180 

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Six months ended June 30, 2016          
Commercial real estate  $12,735   $161 
Residential real estate   8,824    50 
Land and construction   1,466    14 
Commercial   1,916    17 
Total  $24,941   $242 

 

 25 

 

NOTE 3- Continued

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net.

 

Non-accrual loans and loans past due 90 days or more and still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Impaired loans include commercial loans that are individually evaluated for impairment and deemed impaired (i.e., individually classified impaired loans) as well as TDRs for all loan portfolio segments. The sum of non-accrual loans and loans past due 90 days or more still on accrual will differ from the total impaired loan amount.

 

The following tables present the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans, as of June 30, 2017 and December 31, 2016:

 

   Non- Accrual   Loans past due 90 days or more
still accruing
 
  

June 30,

2017

   December 31,
2016
  

June 30,

2017

   December 31,
2016
 
Commercial real estate  $11,645   $13,000   $24   $330 
Residential real estate   10,179    9,742    48    488 
Land and construction   589    1,111    94    3,423 
Commercial   3,700    1,874    21    49 
Consumer and other loans   232    338    -    12 
Total – excluding PCI  $26,345   $26,065   $187   $4,302 
PCI loans   1,125    1,187    2,340    1,773 
Total – including PCI  $27,470   $27,252   $2,527   $6,075 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2017 and December 31, 2016 by class of loans:

 

  

30-59

Days

Past Due

   60-89
Days
Past Due
  

Greater

Than

89 Days

Past Due

   Total
Past Due
   Loans Not
Past Due
   Total 
June 30, 2017                              
Commercial real estate  $2,034   $1,041   $5,346   $8,421   $441,680   $450,101 
Residential real estate   5,596    1,386    5,370    12,352    345,462    357,814 
Land and construction   1,971    196    204    2,371    100,698    103,069 
Commercial   283    365    3,349    3,997    86,714    90,711 
Consumer and other loans   80    54    138    272    39,801    40,073 
Total – excluding PCI  $9,964   $3,042   $14,407   $27,413   $1,014,355   $1,041,768 
PCI loans   778    813    2,892    4,483    18,814    23,297 
Total – including PCI  $10,742   $3,855   $17,299   $31,896   $1,033,169   $1,065,065 

 

 26 

 

NOTE 3- Continued

 

  

30-59

Days

Past Due

   60-89
Days
Past Due
  

Greater

Than

89 Days

Past Due

   Total
Past Due
   Loans Not
Past Due
   Total 
December 31, 2016                              
Commercial real estate  $4,745   $409   $7,576   $12,730   $433,748   $446,478 
Residential real estate   6,448    2,148    4,967    13,563    343,533    357,096 
Land and construction   215    -    4,329    4,544    90,376    94,920 
Commercial   2,827    328    873    4,028    95,512    99,540 
Consumer and other loans   189    191    280    660    44,234    44,894 
Total – excluding PCI  $14,424   $3,076   $18,025   $35,525   $1,007,403   $1,042,928 
PCI loans   353    2,319    1,773    4,445    19,303    23,748 
Total – including PCI  $14,777   $5,395   $19,798   $39,970   $1,026,706   $1,066,676 

 

Troubled Debt Restructurings:

 

Under certain circumstances, it may be beneficial to modify or restructure the terms of a loan for the mutual benefit of the Company and the borrower. In cases where the borrower is experiencing financial difficulties, the Company may grant concessions to the borrower to avoid the cost of foreclosure of property or bankruptcy by the borrower. In these circumstances, the modification of loan terms where a concession is granted to the borrower is known as a troubled debt restructuring (TDR). Concessions granted to financially troubled borrowers could include forgiveness of interest, forgiveness of principal, below market interest rate concessions, and a change in loan amortization or repayment terms. In general, the Company does not forgive principal in loan modifications. Typically, the Company will lower borrower payment amounts through a temporary interest rate concession and/or extension of amortization or maturity terms.

 

At June 30, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $11.9 million and $13 million, respectively. The Company has allocated $384 thousand and $592 thousand of specific allowance for those loans at June 30, 2017 and December 31, 2016, respectively. The Company granted temporary TDR rate concessions with a range of 0.0% to 1.25% during three months ended June 30, 2017 and a range of 0.0% to 0.0% during three months ended June 30, 2016. During the three months ended June 30, 2017 and June 30, 2016, payment extensions from troubled debt restructurings ranged from 0 months to 36 months and 24 months to 36 months, respectively.

 

 27 

 

NOTE 3- Continued

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2017 and June 30, 2016:

 

   Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Three months ended June 30, 2017             
Troubled Debt Restructurings:             
Commercial real estate  1  $380   $380 
Residential real estate  1   129    129 
Consumer and other loans  2   154    154 
Total  4  $663   $663 

 

   Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Three months ended June 30, 2016             
Troubled Debt Restructurings:             
Commercial real estate  3  $1,637   $1,608 
Total  3  $1,637   $1,608 

 

The troubled debt restructurings described above decreased the allowance for loan losses by $124 thousand and decreased the allowance for loan losses by $28 thousand at June 30, 2017 and June 30, 2016, respectively. These restructurings did not result in any charge-offs during the three-month period ended June 30, 2017 and June 30, 2016 or the six month period ended June 30, 2017 and June 30, 2016.

 

 28 

 

NOTE 3- Continued

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2017 and June 30, 2016:

 

   Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Six months ended June 30, 2017             
Troubled Debt Restructurings:             
Commercial real estate  4  $1,605   $1,605 
Residential real estate  1   129    129 
Land and construction  2   154    154 
Consumer and other loans  2   21    21 
Total  9  $1,909   $1,909 

 

   Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Six months ended June 30, 2016             
Troubled Debt Restructurings:             
Commercial real estate  3  $1,637   $1,608 
Residential real estate  6   1,121    1,121 
Total  9  $2,758   $2,729 
              

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification as of June 30, 2017 and June 30, 2016:

 

   Three months ended
   June 30, 2017  June 30, 2016
   Number of
Loans
  Recorded
Investment
   Number of
Loans
  Recorded
Investment
 
Commercial real estate  -  $-   -  $- 
Residential real estate  1   129   -   - 
Land and construction  -   -   -   - 
Commercial  -   -   -   - 
Total  1  $129   -  $- 

 

 29 

 

NOTE 3- Continued

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification as of June 30, 2017 and June 30, 2016:

 

   Six months ended
   June 30, 2017  June 30, 2016
   Number of
Loans
  Recorded
Investment
   Number of
Loans
  Recorded
Investment
 
Commercial real estate  -  $-   -  $- 
Residential real estate  1   129   1   84 
Land and construction  -   -   2   550 
Commercial  1   165   -   - 
Total  2  $294   3  $634 

 

The troubled debt restructurings that subsequently defaulted described above decreased the allowance for loan losses by $31 thousand and increased the allowance for loan losses by $37 thousand during the six months ended June 30, 2017 and June 30, 2016, respectively.

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

Credit Quality Indicators

 

The Company categorizes 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 classifying the loans as to credit risk. This analysis is performed on an ongoing basis, but no less than annually for commercial loans with balances greater than $1 million. The Company uses the following definitions for risk ratings:

 

Pass. Loans classified as pass have satisfactory primary sources of repayment, with adequate secondary sources of repayment if necessary.

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified 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.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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.

 

 30 

 

NOTE 3- Continued

 

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

   Pass   Special
Mention
   Substandard   Doubtful   Total 
June 30, 2017                         
Commercial real estate  $436,205   $13,371   $16,807   $-   $466,383 
Residential real estate   347,803    3,715    11,677    -    363,195 
Land and construction   100,821    2,658    1,074    -    104,553 
Commercial   84,257    2,576    4,028    -    90,861 
Consumer and other loans   39,787    30    256    -    40,073 
Total  $1,008,873   $22,350   $33,842   $-   $1,065,065 
                          
December 31, 2016                         
Commercial real estate  $425,773   $16,545   $15,439   $4,914   $462,671 
Residential real estate   348,182    2,574    12,219    -    362,975 
Land and construction   91,213    3,590    1,577    -    96,380 
Commercial   91,293    3,670    3,614    1,179    99,756 
Consumer and other loans   44,523    51    320    -    44,894 
Total  $1,000,984   $26,430   $33,169   $6,093   $1,066,676 

 

Purchased Credit Impaired Loans

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. At June 30, 2017 and December 31, 2016, the carrying amount of those loans is as follows:

 

   June 30, 2017   December 31, 2016 
Commercial real estate  $16,283   $16,193 
Residential real estate   5,380    5,879 
Land and construction   1,484    1,460 
Commercial   150    216 
Recorded Investment  $23,297   $23,748 
Allowance for loan losses   963    1,110 
Carrying amount  $22,334   $22,638 

 

 31 

 

 

NOTE 3- Continued

 

Accretable yield, or income expected to be collected, is as follows:

 

   Three months ended   Six months ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
Balance at beginning of period  $13,974   $14,970   $14,164   $15,874 
New loan purchases   -    -    -    - 
Accretion of income   (754)   (906)   (1,539)   (1,911)
Reclassifications from nonaccretable difference   1,984    2,423    2,695    2,524 
Disposals   (118)   (952)   (234)   (952)
Balance at end of period  $15,086   $15,535   $15,086   $15,535 

 

For those purchased credit impaired loans disclosed above, the Company decreased the allowance for loan losses by $155 thousand and increased the allowance for loan losses by $200 thousand during the three-month period ending June 30, 2017 and 2016, respectively. The company decreased the allowance for loan losses by $147 thousand and increased the allowance for loan losses by $486 thousand during the six-month period ending June 30, 2017 and 2016, respectively.

 

There were no purchased credit impaired loans purchased during the three-month period ended, or six-month period ended, June 30, 2017 or June 30, 2016, for which it was probable at acquisition that all contractually required payments would not be collected.

 

Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected. During the three-month period and six-month period ended June 30, 2017 and June 30, 2016 there were no material purchased credit impaired loans where cash flows could not be reasonably estimated.

 

NOTE 4 - FAIR VALUE

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate fair value:

 

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). See below for additional discussion of Level 3 valuation methodologies and significant inputs. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model.

 

 32 

 

NOTE 4- Continued

 

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third - party pricing services.

 

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. A significant unobservable input in the income approach is the capitalization rate. At June 30, 2017 and December 31, 2016, the range of capitalization rates utilized to determine fair value of the underlying collateral ranged from 8.0% to 11.25% and from 7.0% to 11.25%, respectively. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

 

Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at the lower of charged down loan balance or fair value less costs to sell. This process may establish a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals that are periodically updated as management deems necessary. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. A significant unobservable input in the income approach is the capitalization rate. At June 30, 2017 and December 31, 2016, the range of capitalization rates utilized to determine fair value of the underlying collateral ranged from 8.5% to 9.45% and from 9.2% to 13%, respectively.

 

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. In rare cases, when significant valuation differences exist, management may choose a valuation that lies within a range of two recent independent appraisals.

 

Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

 

 33 

 

NOTE 4 –Continued

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

   Fair Value Measurement Using: 
   Quoted Prices in
Active Markets
for Identical
Assess
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
June 30, 2017                    
Financial Assets                    
Investment Securities available for sale                    
Asset backed securities  $-   $16,916   $-   $16,916 
Small Business administration securities   -    44,159    -    44,159 
Collateralized mortgage obligations   -    70,621    -    70,621 
Mortgage-backed securities   -    301,351    -    301,351 
Total investment securities available for sale  $-   $433,047   $-   $433,047 

 

   Fair Value Measurement Using: 
   Quoted Prices in
Active Markets for
Identical Assess
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
December 31, 2016                    
Financial Assets                    
Investment Securities available for sale                    
Agency notes and bonds  $-   $1,614   $-   $1,614 
Asset backed securities   -    16,880    -    16,880 
Small Business administration securities   -    48,796    -    48,796 
Collateralized mortgage obligations   -    44,362    -    44,362 
Mortgage-backed securities   -    234,982    -    234,982 
Total investment securities available for sale  $-   $346,634   $-   $346,634 

 

There were no transfers between Level 1 and Level 2 during the three months ended June 30, 2017 and the year ended 2016.

 

 34 

 

NOTE 4 –Continued

 

Assets measured at fair value with a related valuation allowance on a non-recurring basis are summarized below:

 

       Fair Value Measurements Using: 
   Carrying
Value
   Quoted Prices
in Active
Markets for
Identical
Assess
 (Level 1)
   Significant
Other
Observable
Inputs
 (Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
June 30, 2017                         
Impaired loans:                         
Commercial real estate  $7,214   $-   $-   $7,214   $7,214 
Residential real estate   308    -    -    308    308 
Land and construction   273    -    -    273    273 
Commercial   1,573    -    -    1,573    1,573 
                          
Commercial real estate owned, net  $3,691   $-   $-   $3,691   $3,691 
Land and construction real estate owned, net  $2,751   $-   $-   $2,751   $2,751 

 

       Fair Value Measurements Using: 
   Carrying
Value
   Quoted Prices
in Active
Markets for
Identical
Assess
 (Level 1)
   Significant
Other
Observable
Inputs
 (Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
December 31, 2016                         
Impaired loans:                         
Commercial real estate  $8,318   $-   $-   $8,318   $8,318 
Residential real estate   2,087    -    -    2,087    2,087 
Land and construction   730    -    -    730    730 
Commercial   21    -    -    21    21 
                          
Commercial real estate owned, net  $2,933   $-   $-   $2,933   $2,933 
Residential real estate owned, net  $2,583   $-   $-   $2,583   $2,583 

 

 35 

 

NOTE 4 –Continued

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at June 30, 2017 and December 31, 2016 are as follows:

 

   Carrying   Fair Value Measurements Using: 
   Value   (Level 1)   (Level 2)   (Level 3)   Total 
June 30, 2017                         
Financial Assets:                         
Cash and cash equivalents  $62,986   $62,986   $-   $-   $62,986 
Securities available for sale   433,047    -    433,047    -    433,047 
Securities held to maturity   176,882    -    175,517    -    175,517 
Federal Home Loan Bank stock   4,849    -    -    -    n/a 
Loans held for sale   6,441    -    6,552    -    6,552 
Loans, net   1,057,361    -    -    1,044,869    1,044,869 
Accrued interest receivable   4,683    -    -    4,683    4,683 
                          
Financial Liabilities:                         
Deposits – without stated maturities  $1,226,185   $1,226,185   $-   $-   $1,226,185 
Deposits – with stated maturities   334,913    -    336,131    -    336,131 
Federal Home Loan Bank advances   76,446    -    -    75,996    75,996 
Junior subordinated debentures   5,992    -    -    4,768    4,768 
Accrued interest payable   394    -    394         394 
                          

 

   Carrying   Fair Value Measurements Using: 
   Value   (Level 1)   (Level 2)   (Level 3)   Total 
December 31, 2016                         
Financial Assets:                         
Cash and cash equivalents  $44,558   $44,558   $-   $-   $44,558 
Securities available for sale   346,634    -    346,634    -    346,634 
Securities held to maturity   178,232    -    176,286    -    176,286 
Federal Home Loan Bank stock   4,584    -    -    -    n/a 
Loans held for sale   8,384    -    8,633    -    8,633 
Loans, net   1,058,300    -    -    1,037,142    1,037,142 
FDIC indemnification asset   526    -    -    -    n/a 
Accrued interest receivable   4,543    -    -    4,543    4,543 
                          
Financial Liabilities:                         
Deposits – without stated maturities  $1,126,649   $1,126,649   $-   $-   $1,126,649 
Deposits – with stated maturities   352,159    -    353,375    -    353,375 
Federal Home Loan Bank advances   71,622    -    -    71,569    71,569 
Junior subordinated debentures   5,943    -    -    4,874    4,874 
Accrued interest payable   424    -    424         424 

 

 36 

 

NOTE 4 –Continued

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

(a)Cash and Cash Equivalent

 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

(b)Securities available for sale and Securities held to maturity

 

The fair value of securities available for sale are determined by obtaining quoted prices on national recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical pricing technique used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

 

(c)FHLB Stock

 

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

(d)Loans held-for-sale

 

The fair value of loans held for sale is estimated based upon binding contracts from third party investors resulting in a level 2 classification.

 

(e)Loans

 

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

(f)FDIC indemnification asset

 

It is not practical to determine the fair value of the FDIC indemnification asset due to the lack of its transferability.

 

(g)Accrued interest receivable

 

The carrying value of accrued interest receivable approximates fair value and is classified as Level 3.

 

(h)Deposits

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed - term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

(i)Federal Home Loan Bank advances

 

The fair values of Federal Home Loan Bank advances are determined by using a discounted cash flow calculation that applies interest rates currently offered on Federal Home loan Bank advances with similar averages lives and characteristics resulting in a level 3 classification.

 

 37 

 

NOTE 4 –Continued

 

(j)Junior subordinated debentures

 

The fair values of the Company’s Junior Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

(k)Accrued Interest Payable

 

The carrying amounts of accrued interest payable approximate fair value and is classified as Level 2.

 

(l)Off-balance Sheet Instruments

 

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

NOTE 5 - REGULATORY CAPITAL MATTERS

 

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. These rules require a capital conservation buffer of up to 2.5% above each of CET1, tier 1, and total risk-based capital that must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. This capital conservation buffer requirement is being phased in over a four-year period starting on January 1, 2016 and was 0.625% in 2016 and 1.25% as of January 1, 2017. When fully implemented, a banking organization would need to maintain a CET1 capital ratio of at least 7%, a total Tier 1 capital ratio of at least 8.5% and a total risk-based capital ratio of at least 10.5%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2017 and December 31, 2016, the Company and Bank meet all capital adequacy requirements to which they are subject.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2017 and year-end 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

 38 

 

NOTE 5 –Continued

 

Actual and required capital amounts and ratios are presented below at June 30, 2017 and December 31, 2016. The ratios for capital adequacy purposes do not include capital conservation buffer requirements.

 

   Actual   Required for Capital
Adequacy Purposes
   To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
   Amount   Ratio   Amount   Percent   Amount   Percent 
June 30, 2017                              
Total Capital to risk weighted assets                              
Consolidated  $214,816    17.37%  $98,954    8.00%   N/A    N/A 
Bank   198,127    16.04    98,812    8.00   $123,515    10.00%
Tier 1 (Core) Capital to risk weighted assets                              
Consolidated   207,566    16.78    74,215    6.00    N/A    N/A 
Bank   190,877    15.45    74,109    6.00    98,812    8.00 
Common Tier 1 (CET 1)                              
Consolidated   202,287    16.35    55,662    4.50    N/A    N/A 
Bank   190,877    15.45    55,582    4.50    80,285    6.50 
Tier 1 (Core) Capital to average assets                              
Consolidated   207,565    11.13    74,590    4.00    N/A    N/A 
Bank   190,877    10.25    74,504    4.00    93,130    5.00 
                               

 

   Actual   Required for Capital
Adequacy Purposes
   To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
   Amount   Ratio   Amount   Percent   Amount   Percent 
December 31, 2016                              
Total Capital to risk weighted assets                              
Consolidated  $212,007    17.83%  $95,109    8.00%   N/A    N/A 
Bank   194,788    16.41    94,986    8.00   $118,733    10.00%
Tier 1 (Core) Capital to risk weighted assets                              
Consolidated   204,272    17.18    71,332    6.00    N/A    N/A 
Bank   187,054    15.75    71,240    6.00    94,986    8.00 
Common Tier 1 (CET 1)                              
Consolidated   199,643    16.79    53,499    4.50    N/A    N/A 
Bank   187,054    15.75    53,430    4.50    77,176    6.50 
Tier 1 (Core) Capital to average assets                              
Consolidated   204,272    11.52    70,929    4.00    N/A    N/A 
Bank   187,054    10.57    70,811    4.00    88,514    5.00 

 

 39 

 

NOTE 5 –Continued

 

Dividend Restrictions - The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the
current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2016, the Bank paid a dividend to the Holding Company of $13 million, which approximately represented the Bank’s 2014 and 2015 net income. At year-end 2016, the Bank could, without prior approval, declare dividends of any 2016 net profits retained to the date of the dividend declaration. At June 30, 2017, the Bank could without prior approval, declare dividends of 2016 net retained profits plus first half 2017 profits retained to the date of the dividend declaration.

 

NOTE 6 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

 

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies that are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

 

The contractual amounts of financial instruments with off-balance-sheet risk at period-end were as follows:

 

   June 30, 2017   December 31, 2016 
Commitments to make loans  $52,637   $25,698 
Unused lines of credit  $171,286   $150,553 
Standby letters of credit  $7,348   $5,003 

 

The following instruments are considered financial guarantees and are carried at fair value, which approximates $0 at period end June 30, 2017 and December 31, 2016.

 

   June 30, 2017   December 31, 2016 
   Contract
Amount
   Fair
Value
   Contract
Amount
   Fair
Value
 
Standby letters of credit  $7,348   $-   $5,003   $- 
Loans sold with recourse  $66,824   $-   $67,425   $- 

 

 40 

 

NOTE 7 – EARNINGS PER SHARE

 

   Three months ended   Six months ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
Basic                    
Net Income  $1,837   $1,957   $4,432   $3,222 
Average shares   20,052,830    20,052,300    20,052,830    20,052,300 
Basic earnings per share  $0.09   $0.10   $0.22   $0.16 
Diluted                    
Net Income  $1,837   $1,957   $4,432   $3,222 
Weighted average shares for basic earnings per share   20,052,830    20,052,300    20,052,830    20,052,300 
Add: dilutive effects of assumed exercises of stock options   547,081    553,501    547,208    548,981 
Average shares and dilutive potential shares   20,599,911    20,605,801    20,600,038    20,601,281 
Diluted earnings per share  $0.09   $0.09   $0.22   $0.16 

 

There were no anti-dilutive stock options for the three months ended June 30, 2017 and June 30, 2016. There were no anti-dilutive stock options for the six months ended June 30, 2017 and June 30, 2016.

 

NOTE 8 – SUBSEQUENT EVENTS

 

On July 28, 2017, HCBF completed its acquisition of JBI and its wholly owned subsidiary Jefferson Bank of Florida (Jefferson). The total consideration paid to JBI was $40.2 million. Total consideration included approximately (A) $7.6 million in cash to JBI common shareholders, (B) conversion of 2,184,162 common shares of JBI into 2,103,827 common shares (subject to final accounting) of HCBF for an assigned value of $30.5 million, and (C) cash paid to JBI stock option holders of $1.9 million. HCBF acquired approximately $315 million of JBI consolidated assets at closing as well as five (5) branch offices with approximately $230 million of deposits and two (2) loan production offices operating in the greater Tampa Bay area of Florida. Subject to completion of final valuation and accounting, the company expects to record approximately $13 million of goodwill from this transaction.

 

 41 

 

ITEM 2:           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(All dollar amounts presented herein are in thousands, except share data, or unless otherwise noted.)

 

COMPARISON OF BALANCE SHEETS AT JUNE 30, 2017 AND DECEMBER 31, 2016

 

Overview

 

Our total assets increased approximately $96.5 million or 5.4% from December 31, 2016 to June 30, 2017, which was the result of organic balance sheet growth. Our organic deposit growth of $82.3 million or 5.6% for the period was primarily focused in money market accounts and non-interest bearing demand accounts. Money market and noninterest bearing demand accounts grew by $45.7 million or 14.6% and $33.8 million or 7.6% for the period, respectively. The growth from deposits accounts was the primary source of funding for additional purchases of investment securities and additional interest bearing cash balances during the period. Available-for-sale investment securities increased by $86.4 million or 24.9%, while held-to-maturity investment securities declined by $1.4 million or 0.8% for the period. Interest-bearing cash balances in other financial institutions increased by $19.6 million or 185.2% for the period. Net loan balances generally remained flat with a decline of $939 thousand during the period. As a result, our loan-to-deposit ratio declined from 72.1% at December 31, 2016 to 68.2% at June 30, 2017.

 

The expense-sharing portion of our loss sharing agreement with the FDIC relating to our Putnam State Bank acquisition in June 2012 expired on June 30, 2017. The company will no longer receive reimbursement for losses on covered assets from the FDIC. However, the company is obligated to reimburse the FDIC for 80% of any recoveries on covered assets that were previously submitted as claims. The recovery reimbursement period extends through June 30, 2020. As a result, the FDIC indemnification asset has been fully amortized as of June 30, 2017.

 

A detailed discussion and analysis of balance sheet changes for the period is shown below and on the following pages.

 

Interest earning deposits in other financial institutions

 

Interest earning deposits in other financial institutions represent overnight deposits at the Federal Reserve and other correspondent banks. These balances are an integral part of our day-to-day cash management and liquidity. During the six months ended June 30, 2017, these balances increased by $19.6 million or 185.2%. The higher balances at June 30, 2017 are available to cover seasonal day-to-day deposit balance volatility.

 

Investment securities available for sale

 

Securities available for sale, consisting of primarily U.S. government and US government sponsored enterprises mortgage-backed securities were $433.0 million at June 30, 2017 representing 23.0% of total assets. Securities available for sale at December 31, 2016 were $346.6 million, representing 19.4% of total assets. The increase during the period represents investment of funds generated from deposit growth. We use securities available for sale primarily for liquidity purposes, to fund new loan growth, to provide flexibility to respond to changing interest rate environments, and secondarily, for investment yield. Our available for sale securities are carried at fair value.

 

Investment securities held to maturity

 

At June 30, 2017, we had $176.9 million, carried at amortized cost, of securities designated as held to maturity. This compares to $178.2 million, at amortized cost, as of December 31, 2016. The unrealized loss on securities held to maturity was $1.4 million and $1.9 million on June 30, 2017 and December 31, 2016 respectively. Securities designated as held to maturity generally have longer portfolio durations and are primarily held for investment yield, and secondarily, for cash flow provided from security repayments and prepayments.

 

Loans

 

Our loan portfolio is the most important component driving our net interest income and is a major contributor to our overall profitability. The loan portfolio is the largest component of our earning assets. At June 30, 2017, our net loan portfolio was $1.1 billion, which was 56.1% of assets compared to $1.1 billion and 59.1% of assets at December 31, 2016. The decrease in net loans during the six-month period ended June 30, 2017 was $939 thousand or 0.009%. The table below reflects loans by collateral type including and excluding purchased credit impaired (PCI) loans for the dates shown:

 

 42 

 

LOANS BY COLLATERAL TYPE

 

   June 30, 2017   December 31, 2016 
Loans excluding PCI Loans          
Commercial real estate  $450,100   $446,478 
Residential real estate   357,815    357,096 
Land and construction   103,069    94,920 
Commercial   90,711    99,540 
Consumer & Other Loans   40,073    44,894 
Subtotal   1,041,768    1,042,928 
Net unearned fees & costs   (584)   (738)
Total  loans excluding PCI  $1,041,184   $1,042,190 

 

   June 30, 2017   December 31, 2016 
PCI Loans (ACS Topic 310-30)          
Commercial real estate  $16,283   $16,193 
Residential real estate   5,380    5,879 
Land and construction   1,484    1,460 
Commercial   150    216 
Total PCI loans   23,297    23,748 
Total Loans   1,064,481    1,065,938 
Allowance for loan losses for non PCI Loans   (6,157)   (6,528)
Allowance for loan losses for PCI loans   (963)   (1,110)
Total  loans, net of allowance for loan losses  $1,057,361   $1,058,300 

 

Allowance for loan losses

 

We maintain the allowance for loan losses at a level sufficient to provide for probable credit losses inherent in the loan portfolio. Credit losses arise from the borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process including collateral risk, operational risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for loan losses.

 

The allowance for loan losses is increased by the provision for loan losses, which is a charge to current earnings. The allowance for loan losses is reduced by loan charge-offs, net of loan recoveries of prior loan charge-offs. Loans are charged off against the allowance when management has confirmed the loss and believes collection of principal is unlikely. The table below reflects that activity in allowance for loan losses, by loan type, for the periods shown.

 

 43 

 

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 

   Three months ended, June 30,   Six months ended, June 30, 
   2017   2016   2017   2016 
                 
Balance at Beginning of Period  $6,545   $4,704   $7,638   $3,728 
                     
Charge-Offs:                    
Commercial real estate   612    300    1,021    300 
Residential real estate   24    3    314    3 
Land and construction   92    24    106    25 
Commercial   379    159    808    201 
Consumer & Other Loans   109    79    236    312 
Total Charge-Offs   1,216    565    2,485    841 
                     
Recoveries:                    
Commercial real estate   33    4    40    10 
Residential real estate   49    65    123    85 
Land and construction   10    16    129    37 
Commercial   28    52    66    71 
Consumer & Other Loans   25    33    46    55 
Total Recoveries   145    170    404    258 
Net Charge-Offs   1,071    395    2,081    583 
Provision for Loan Losses   1,646    330    1,563    1,494 
Balance at End of Period  $7,120   $4,639   $7,120   $4,639 
                     
Ratio of Net Charge-Offs to Average Loans Outstanding   0.10%   0.04%   0.20%   0.06%
Allowance for Loan Losses as a Percent of Loans at End of Period   0.67%   0.72%   0.67%   0.72%
Allowance for Loan Losses as a Multiple of Net Charge-Offs   6.6x   11.7x   3.4x   8.0x

 

Our allowance for losses as a percentage of loans at period end was 0.67% at June 30, 2017 compared to 0.72% at December 31, 2016. The decline was primarily attributable to $2.1 million of net charge-offs of confirmed losses during the first half of 2017. These net charges-offs were primarily recorded as unconfirmed specific reserve losses in the allowance at December 31, 2016. The table below reflects the amount of the allowance for loan losses allocated to each loan type at the dates shown. The allocation of allowance to a particular loan type does not limit its ability to absorb losses in another loan type.

 

 44 

 

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

   June 30, 2017   December 31, 2016 
   Allowance
Amount
   Allowance Amount
to Total Loans
   Allowance
Amount
   Allowance Amount
to Total Loans
 
Commercial real estate  $3,068    0.29%  $3,316    0.31%
Residential real estate   1,433    0.13    1,990    0.19 
Land and construction   373    0.04    344    0.03 
Commercial   2,019    0.19    1,789    0.17 
Consumer & Other   227    0.02    198    0.02 
Not Allocated   -    -    -    - 
Total  $7,120    0.67%  $7,637    0.72%

 

Nonperforming loans and Nonperforming assets

 

Nonperforming loans exclude accreting PCI loans and include non-accrual loans and loans 90 days or more past due and still accruing. PCI loans are excluded from the nonperforming loan category due to the accretion of acquired loan discounts into income. Non-performing assets include non-accrual loans, loans 90 days or more past due and still accruing, and other real estate owned (OREO). At June 30, 2017, non-accrual loans and loans 90 days or more past due and still accruing totaled $30.0 million compared to $33.3 million at December 31, 2016, representing a decrease of $3.3 million or 10.0% for the six-month period. At June 30, 2017, OREO totaled $8.7 million compared to $9.0 million at December 31, 2016, representing a decrease of $353 thousand or 3.9% for the six-month period. Non-performing assets totaled $38.7 million at June 30, 2017 compared to $42.3 million at December 31, 2016, representing $3.7 million or 8.7% decrease for the six-month period. The table below reflects the activity of nonperforming assets, including non-accrual loans and OREO, for the periods shown.

 

NONPERFORMING ASSET ACTIVITY

 

   Three months ended, June 30,   Six months ended, June 30, 
   2017   2016   2017   2016 
NPA beginning balance  $42,273   $37,307   $42,345   $36,253 
Change in nonaccrual loans and accruing loans 90 days or more past due:                    
Beginning balance   33,828    25,552    33,327    23,158 
Additions   2,210    7,720    10,802    14,774 
Charge-Offs   (1,115)   (502)   (2,267)   (844)
Transferred to OREO   (1,326)   (739)   (2,743)   (976)
Paid Off/Payments   (2,689)   (1,859)   (4,119)   (4,790)
Restored to accrual   (911)   (3,260)   (5,003)   (4,410)
Ending balance   29,997    26,912    29,997    26,912 
                     
Change in OREO:                    
Beginning Balance   8,445    11,755    9,018    13,095 
Loans transferred to OREO   1,326    739    2,743    976 
Transfers from premises and equipment   -    1,209    -    1,209 
OREO acquired through acquisitions   -    -    -    - 
Net Change in valuation allowance   (661)   (288)   (708)   (568)
Sales   (445)   (592)   (2,388)   (1,889)
Ending Balance   8,665    12,823    8,665    12,823 
NPA Net Change   (3,611)   2,428    (3,683)   3,482 
NPA Ending Balance  $38,662   $39,735   $38,662   $39,735 

 

 45 

 

The table below shows nonaccrual loans and loans 90 days or more past due and still accruing by loan type as well as information on, past due balances, and non-performing loan ratios.

 

RISK ELEMENT ASSETS

 

   June 30, 2017   December 31, 2016 
         
Non-accruing Loans and accruing loans 90 days or more past due:          
Commercial real estate  $13,406   $14,350 
Residential real estate   11,246    11,447 
Land and construction   944    4,810 
Commercial   4,169    2,370 
Consumer & Other Loans   232    350 
Total Non-performing Loans (“NPLs”)   29,997    33,327 
Other Real Estate Owned   8,665    9,018 
Total Non-performing Assets (“NPAs”)  $38,662   $42,345 
           
Past Due Loans 30 – 89 days (accruing)  $11,466   $17,697 
Past Due Loans 90 days or more (accruing)  $2,527   $6,075 
Performing Troubled Debt Restructurings  $4,911   $4,667 
Non-Performing Loans/Loans   2.80%   3.11%
Non-performing Assets/Total Assets   2.05%   2.37%
Non-performing Assets/Loans Plus OREO   3.58%   3.92%
Allowance /Non-performing Loans   23.73%   22.92%

 

Bank Premises and equipment

 

Bank premises and equipment was $50.2 million at June 30, 2017 compared to $51.4 million at December 31, 2016, a decrease of $1.3 million or 2.4%. The primary component of the decrease was increased accumulated depreciation $1.4 million for the periods shown. The table below reflects a summary of the components of bank premises and equipment for the periods shown.

 

PREMISES AND EQUIPMENT

 

   June 30, 2017   December 31, 2016 
Land  $17,001   $17,001 
Buildings   32,138    32,079 
Furniture, fixtures and equipment   8,247    8,173 
Leasehold improvements   2,407    2,404 
Automobiles   148    158 
Subtotal   59,941    59,815 
Less accumulated depreciation   9,754    8,373 
Total  $50,187   $51,442 

 

Deposits

 

Total deposits at June 30, 2017 was $1.56 billion compared to $1.48 billion at December 31, 2016, representing an increase of $82.3 million or 5.6% for the period. The growth in deposits was primarily concentrated in noninterest bearing deposits and money market accounts during the period. Noninterest bearing deposits as a percentage of total deposits increased from 30% at December 31, 2016 to 31% at June 30, 2017.

 

 46 

 

We believe our deposit base is well diversified among the various deposit products as shown in the table below as of the dates presented.

 

   June 30, 2017   % of
total
   December 31, 2016   % of
total
 
Noninterest Bearing Deposits  $478,527    31%  $444,745    30%
NOW accounts   208,433    13%   204,951    14%
Money Market Accounts   357,917    23%   312,219    21%
Savings   181,307    12%   164,734    11%
Time Deposits   334,914    21%   352,159    24%
Total Deposits  $1,561,098    100%  $1,478,808    100%

 

We continue to focus on the value of our deposit franchise, which produces a strong base of core deposits with minimal reliance on wholesale funding.

 

Federal Home Loan Bank Advances

 

Federal Home loan Bank advances are a key source of liquidity and funding for our day-to-day operations and our long-term financing needs. We borrow funds from the Federal Home Loan Bank to cover intraday cash shortfalls, to cover temporary deposit outflows, to finance asset purchases such as loans and investments securities, and to provide long-term funding to help mitigate interest rate risk in a rising interest rate environment. At June 30, 2017, Federal Home Loan Bank Advances totaled $76.4 million compared to $71.6 million at December 31, 2016, representing an increase of $4.8 million or 6.7%.

 

Stockholders’ Equity

 

Stockholders’ equity totaled $223.3 million at June 30, 2017 compared to $217.7 million at December 31, 2016 for an increase of $5.6 million or 2.6%. Stockholders’ equity was favorably impacted by retained earnings of $4.4 million as well as a $923 thousand reduction in accumulated other comprehensive loss for the first half of 2017. The reduction of accumulated other comprehensive loss during the first half of 2017 was attributable to improved market values on our available for sale investment securities, net of tax.

 

We continue to maintain a strong capital position. The ratio of stockholders’ equity to total assets at June 30, 2017 and December 31, 2016 was 11.8% and 12.2%, respectively. Our regulatory Tier 1 leverage ratio was 11.13% and 11.52% at June 30, 2017 and December 31, 2016, respectively. Our regulatory total risk-weighted capital ratio and regulatory Tier 1 leverage ratio at June 30, 2017 was 17.37% and 16.78%, respectively. Our regulatory total risk-weighted capital ratio and regulatory Tier 1 leverage ratio at December 31, 2016 was 17.83 and 17.18%, respectively.

 

We did not pay a dividend to our stockholders during the first half of 2017 or 2016.

 

 47 

 

COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2017 AND 2016

 

Overview

 

We recognized net income of $1.8 million or $0.09 per share basic and $0.09 per share diluted for the three- month period ended June 30, 2017, compared to $2.0 million or $0.10 per share basic and $0.09 per share diluted for the same period in 2016. A condensed summary of the differences are listed in the table below.

 

CONDENSED SUMMARIZED OVERVIEW OF OPERATIONS

 

   Three months ended   Increase 
   June 30, 2017   June 30, 2016   (Decrease) 
Net Interest Income  $15,617   $14,855   $762 
Provision for loan losses   1,646    330    1,316 
Net interest income after loan loss provision   13,971    14,525    (554)
Noninterest income   3,179    2,944    235 
Noninterest expense   14,253    14,007    246 
Income before taxes   2,897    3,462    (565)
Income tax expense   1,060    1,505    (445)
Net Income  $1,837   $1,957   $(120)
                
Earnings per share - Basic  $0.09   $0.10   $(0.01)
Earnings per share - Diluted  $0.09   $0.09   $0.00 

 

The primary difference between the two quarters presented above relate to increased provision for loan losses for the June 30, 2017 quarter, partially offset by higher net interest income during the June 30, 2017 quarter. Income tax expense for the June 30, 2016 quarter included a one-time adjustment of $222 thousand to reflect adjustments from previous tax years. These items are discussed and analyzed in further detail below.

 

Net interest income and net interest margin

 

Net interest income increased $762 thousand or 5.1% to $15.6 million during the three-month period ended June 30, 2017 compared to $14.9 million for the same period in 2016. The $762 thousand increase was the result of a $1.0 million increase in interest income offset by $248 thousand increase in interest expense.

 

Interest earning assets averaged $1.7 billion during the three-month period ended June 30, 2017 as compared to $1.6 billion for the same period in 2016, for an increase of $127.2 million or 8.1%. The yield on average interest earning assets decreased 4 basis points to 4.11% during the three-month period ended June 30, 2017, compared to 4.15% for the same period in 2016. The higher average interest earning asset balances more than offset the lower interest earning assets yields to produce higher interest income during the three-month period ended June 30, 2017 compared to the same period in 2016.

 

Interest bearing liabilities averaged $1.2 billion during the three-month period ended June 30, 2017 as compared to $1.1 billion for the same period in 2016, for increase of $59.4 million or 5.3%. The yield on average interest bearing liabilities increased 6 basis points to 0.57% during the three-month period ended June 30, 2017, compared to 0.51% for the same period in 2016. The higher average interest earning liability balances and the higher interest bearing liabilities yields produced higher interest expense during the three-month period ended June 30, 2017 compared to the same period in 2016.

 

 48 

 

The table below summarizes the analysis of changes in interest income and interest expense for the three-month periods ended June 30, 2017 and June 30, 2016.

 

NET INTEREST INCOME AND INTERET MARGIN

 

   Three months ended 
   June 30, 2017   June 30, 2016 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
ASSETS                              
Loans, net of unearned income  $1,063,651   $13,885    5.29%  $996,696   $13,823    5.58%
Investment securities   602,119    3,222    2.17    546,893    2,319    1.71 
Interest earning deposits and other   35,802    156    1.77    30,785    111    1.45 
Total earning assets  $1,701,572   $17,263    4.11%  $1,574,374   $16,253    4.15%
Cash & Due from banks   30,769              31,255           
Allowance for loan losses   (6,772)             (4,717)          
Other assets   161,683              162,691           
TOTAL ASSETS  $1,887,252             $1,763,603           
                               
LIABILITIES                              
Interest Bearing Checking & NOW accounts  $217,836   $129    0.24%  $186,382   $65    0.14%
Money Market accounts   350,908    283    0.33    314,253    207    0.26 
Savings accounts   176,669    105    0.24    169,518    109    0.26 
Other Time Deposits   343,758    825    0.97    350,251    732    0.84 
Total interest bearing deposits  $1,089,171   $1,342    0.50%  $1,020,404   $1,113    0.44%
FHLB Advances   76,392    213    1.13    85,831    200    0.94 
Subordinated debentures and other   6,716    91    5.50    6,663    85    5.13 
Total interest bearing liabilities  $1,172,279   $1,646    0.57%  $1,112,898   $1,398    0.51%
Noninterest bearing deposits   474,488              414,279           
Other liabilities   17,574              19,234           
TOTAL LIABILITIES  $1,664,341             $1,546,411           
                               
STOCKHOLDERS’ EQUITY                              
TOTAL STOCKHOLDERS’ EQUITY   222,911              217,192           
                               
TOTAL LIABILITIES & EQUITY  $1,887,252             $1,763,603           
                               
Interest rate spread             3.55%             3.65%
Net interest income       $15,617             $14,855      
Net interest margin             3.72%             3.79%

 

Our net interest margin declined by 7 basis points to 3.72% for the three-month period ended June 30, 2017, compared to 3.79% for the same period in 2016. The primary reason for the decrease in net interest margin for the three-month period ending June 30, 2017 compared to the same period in 2016 was attributable to lower loan yields in the June 30, 2017 period as shown. Loan yields declined during the 2017 period primarily due to reduced discount accretion on acquired loans. Net loan discount accretion on acquired loans was $891 thousand for the three-month period ended 2017 compared to $1.3 million for the same period in 2016.

 

Provision for Loan Losses

 

The provision for loan losses increased $1.3 million to $1.6 million during the three-month period ended June 30, 2017 compared to provision expense of $330 thousand for the same period in 2016. The primary reason for the increased loan loss provision during the three-month period ended June 30, 2017 was attributable to specific loan impairments on three acquired loan relationships totaling approximately $1.3 million. The majority of the specific loan impairments in the second quarter of 2017 are unconfirmed losses and have not been charged off as of June 30, 2017.

 

 49 

 

Noninterest income

 

Our noninterest income increased by $235 thousand to $3.2 million or 8.0% for the three-month period ended June 30, 2017, compared to $2.9 million for the same period in 2016. The increase was the result of the following components reflected in the table below.

 

NONINTEREST INCOME

 

   Three months ended June 30,   Increase   %
Increase
 
   2017   2016   (Decrease)   (Decrease) 
Service charges on deposit accounts  $767   $576   $191    33.2%
ATM interchange income   775    723    52    7.2 
Net gain on sale of  loans   958    981    (23)   (2.3)
Net gains on sale of securities available for sale   14    5    9    180.0 
Bank owned life insurance income   258    226    32    14.2 
FDIC indemnification asset amortization, net   (137)   (116)   (21)   18.1 
Purchase credit impaired loans recoveries   166    422    (256)   (60.7)
Other   378    127    251    197.6 
Total Noninterest Income  $3,179   $2,944   $235    8.0%

 

Service charges on deposit accounts for the three-month period ended June 30, 2017 was $767 thousand, compared to $576 thousand for the same period in 2016 resulting in an increase of $191 thousand or 33.2%. The increase in services charges on deposit accounts was attributable to a new deposit fee pricing structure implemented in the fall of 2016. Other noninterest income for the three-month period ended June 30, 2017 was $378 thousand, compared to $127 thousand for the same period in 2016 resulting in an increase of $251 thousand or 197.6%. The increase in other noninterest income was primarily attributable to higher loan servicing fees, gain on sale of assets and merchant service income for the three-month period in 2017 compared to the same period in 2016.

 

Noninterest expense

 

Our noninterest expense increased by $246 thousand or 1.8% to $14.3 million for the three-month period ended June 30, 2017, compared to $14.0 million for the same period in 2016. The increase was the result of the following components reflected in the table below.

 

NONINTEREST EXPENSE

 

   Three months ended June 30,   Increase   %
Increase
 
   2017   2016   (Decrease)   (Decrease) 
Salaries and employee benefits  $7,183   $7,059   $124    1.8%
Occupancy and equipment   1,952    2,131    (179)   (8.4)
Data processing   1,420    1,581    (161)   (10.2)
Regulatory assessments   202    401    (199)   (49.6)
Professional fees   420    363    57    15.7 
Office expense and supplies   310    352    (42)   (11.9)
Foreclosed assets, net   821    277    544    196.4 
Advertising   163    174    (11)   (6.3)
Amortization of Intangibles   567    571    (4)   (0.7)
Acquisition and conversion costs   233    83    150    180.7 
Other   982    1,015    (33)   (3.3)
Total  Noninterest Expense  $14,253   $14,007   $246    1.8%

 

 50 

 

Occupancy and equipment declined by $179 thousand or 8.4% during the three-month period ended June 30, 2017 compared to the same period in 2016 primarily due to closure of three branch facilities in the second half of 2016. Regulatory assessments declined by $199 thousand or 49.6% in the three-month period ended June 30, 2017 compared to the same period in 2016 due to a reduction by the FDIC of deposit insurance rates beginning in July 2016. Foreclosed assets, net expense increased by $544 thousand or 196.4% in the three-month period ending June 30, 2017 compared to June 30, 2016. The increase was primarily due to higher write-downs on foreclosed properties in the three-month period ended June 30, 2017 compared to the same period in 2016.

 

Provision of Income Taxes

 

Our income tax expense for the three-month period ended June 30, 2017 was $1.06 million on pretax income of $2.9 million at an effective tax rate of 36.6% compared to $1.5 million on pretax income of $3.5 million at an effective tax rate of 43.5% for the same period in 2016. An immaterial out of period adjustment was made during the second quarter of 2016.

 

 51 

 

COMPARISON OF RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2017 AND 2016

 

Overview

 

During the first half of 2017, we recognized net income of $4.4 million or $0.22 per share basic and $0.22 per share diluted for the six-month period ended June 30, 2017, compared to $3.2 million or $0.16 per share basic and $0.16 per share diluted for the same period in 2016. A condensed summary of the differences are listed in the table below.

 

CONDENSED SUMMARIZED OVERVIEW OF OPERATIONS

 

   Six months ended   Increase 
   June 30, 2017   June 30, 2016   (Decrease) 
Net Interest Income  $30,672   $29,849   $823 
Provision for loan losses   1,563    1,494    69 
Net interest income after loan loss provision   29,109    28,355    754 
Noninterest income   6,258    5,482    776 
Noninterest expense   28,394    28,390    4 
Income before taxes   6,973    5,447    1,526 
Income tax expense   2,541    2,225    316 
Net Income  $4,432   $3,222   $1,210 
                
Earnings per share - Basic  $0.22   $0.16   $0.06 
Earnings per share - Diluted  $0.22   $0.16   $0.06 

 

The primary difference between the two periods presented above relate to increased net interest income and increased noninterest income in the first half of 2017 as compared to the first half of 2016. Income tax expense for the first half of 2016 included a one-time adjustment of $222 thousand to reflect adjustments from previous tax years. These items are discussed and analyzed in further detail below.

 

Net interest income and Net interest margin

 

Net interest income increased $823 thousand or 2.8% to $30.7 million during the six-month period ended June 30, 2017 compared to $29.8 million for the same period in 2016. The $823 thousand increase was the result of a $1.2 million increase in interest income offset by $358 thousand increase in interest expense.

 

Interest earning assets averaged $1.7 billion during the six-month period ended June 30, 2017 as compared to $1.6 billion for the same period in 2016, and increase of $103.2 million or 6.6%. The yield on average interest bearing assets decreased 10 basis points to 4.10% during the six-month period ended June 30, 2017, compared to 4.21% for the same period in 2016. The higher average interest earning asset balances more than offset the lower interest earning assets yields to produce higher interest income during the six-month period ended June 30, 2017 compared to the same period in 2016.

 

Interest-bearing liabilities averaged $1.1 billion during the six-month period ended June 30, 2017 as compared to $1.1 billion for the same period in 2016, and increase of $35.6 million or 3.2%. The yield on average interest bearing liabilities increased 5 basis points 0.55% during the six-month period ended June 30, 2017, compared to 0.50% for the same period in 2016. The higher average interest earning liability balances plus the higher interest bearing liabilities yields produced higher interest expense during the six-month period ended June 30, 2017 compared to the same period in 2016.

 

The table below summarizes the analysis of changes in interest income and interest expense for the six-month periods ended June 30, 2017 and 2016.

 

 52 

 

NET INTEREST INCOME AND INTEREST MARGIN

 

   Six months ended 
   June 30, 2017   June 30, 2016 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
ASSETS                              
Loans, net of unearned income  $1,064,075   $27,671    5.24%  $989,716   $27,744    5.64%
Investment securities   568,559    5,875    2.08    530,226    4,639    1.76 
Interest earning deposits and other   30,435    258    1.71    39,893    240    1.21 
Total earning assets  $1,663,069   $33,804    4.10%  $1,559,835   $32,623    4.21%
Cash & Due from banks   31,303              30,544           
Allowance for loan losses   (7,124)             (4,350)          
Other assets   162,434              160,411           
TOTAL ASSETS  $1,849,682             $1,746,440           
                               
LIABILITIES                              
Interest Bearing Checking & NOW accounts  $217,694   $237    0.22%  $181,887   $121    0.13%
Money Market accounts   335,440    497    0.30    321,029    432    0.27 
Savings accounts   173,623    205    0.24    164,309    196    0.24 
Other Time Deposits   347,189    1,649    0.96    351,845    1,450    0.83 
Total interest bearing deposits  $1,073,946   $2,588    0.49%  $1,019,070   $2,199    0.43%
FHLB Advances   67,364    364    1.09    86,721    462    0.94 
Subordinated debentures and other   6,710    180    5.41    6,654    113    5.14 
Total interest bearing liabilities  $1,148,020   $3,132    0.55%  $1,112,445   $2,774    0.50%
Noninterest bearing deposits   462,787              399,407           
Other liabilities   17,641