ITEM 2. MANAGEMENTS DISCU
SSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following
discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of Auburn National Bancorporation, Inc. (the Company) and its wholly owned subsidiary,
AuburnBank (the Bank). This discussion is intended to supplement and highlight information contained in the accompanying unaudited condensed consolidated financial statements and related notes for the quarters and six months ended
June 30, 2016 and 2015, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.
Special Notice Regarding Forward-Looking Statements
Certain of the statements made in this discussion and analysis and elsewhere, including information incorporated herein by reference to other documents, are
forward-looking statements within the meaning of, and subject to, the protections of Section 27A of the Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act).
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals,
expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance,
achievements, or financial condition of the Company to be materially different from future results, performance, achievements, or financial condition expressed or implied by such forward-looking statements. You should not expect us to update any
forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as may, will, anticipate, assume, should, indicate, would, believe,
contemplate, expect, estimate, continue, plan, point to, project, could, intend, target and other similar words and expressions
of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
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the effects of future economic, business, and market conditions and changes, domestic and foreign, including seasonality;
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governmental monetary and fiscal policies;
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legislative and regulatory changes, including changes in banking, securities, and tax laws, regulations and rules and their application by our regulators, including capital and liquidity requirements, and changes in the
scope and cost of FDIC insurance;
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changes in accounting policies, rules, and practices;
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the risks of changes in interest rates on the levels, composition, and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities, and the
risks and uncertainty of the amounts realizable and the timing of dispositions of assets by the FDIC where we may have a participation or other interest;
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changes in borrower credit risks and payment behaviors;
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changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;
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changes in the prices, values, and sales volumes of residential and commercial real estate;
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the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services;
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the failure of assumptions and estimates underlying the establishment of allowances for possible loan and other asset impairments, losses, and other estimates;
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29
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changes in technology or products that may be more difficult, costly, or less effective than anticipated;
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the effects of war, or other conflicts, acts of terrorism, or other catastrophic events that may affect general economic conditions;
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cyber attacks and data breaches that may compromise our systems or customers information;
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the failure of assumptions and estimates, as well as differences in, and changes to, economic, market, and credit conditions, including changes in borrowers credit risks and payment behaviors from those used in
our loan portfolio stress tests and other evaluations;
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the risk that our deferred tax assets could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock could
trigger a reduction in the amount of net operating loss carry-forwards that we may be able to utilize for income tax purposes; and
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the other factors and information in this report and other filings that we make with the SEC under the Exchange Act, including our Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent
quarterly and current reports. See Part II, Item 1A. RISK FACTORS.
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All written or oral forward-looking statements that are
made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after
the respective dates on which such statements otherwise are made.
Business
The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank holding company after it acquired its Alabama
predecessor, which was a bank holding company established in 1984. The Bank, the Companys principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907.
Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business primarily in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches in Auburn, Opelika, Notasulga, and
Valley, Alabama. In-store branches are located in the Kroger and Wal-Mart SuperCenter in Opelika. The Bank also operates a commercial loan production office in Phenix City, Alabama.
Summary of Results of Operations
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Quarter ended June 30,
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Six Months Ended June 30,
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(Dollars in thousands, except per share amounts)
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2016
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2015
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2016
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2015
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Net interest income (a)
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$
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6,014
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$
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6,126
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$
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12,033
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$
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11,984
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Less: tax-equivalent adjustment
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322
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338
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644
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673
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Net interest income (GAAP)
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5,692
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5,788
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11,389
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11,311
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Noninterest income
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993
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1,167
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1,827
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2,488
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Total revenue
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6,685
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6,955
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13,216
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13,799
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Provision for loan losses
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(600)
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Noninterest expense
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4,021
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4,029
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8,130
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8,343
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Income tax expense
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733
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776
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1,564
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1,444
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Net earnings
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$
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1,931
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$
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2,150
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$
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4,122
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$
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4,012
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Basic and diluted earnings per share
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$
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0.53
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$
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0.59
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$
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1.13
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$
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1.10
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(a) Tax-equivalent. See Table 1 - Explanation of Non-GAAP Financial Measures.
Financial Summary
The Companys net earnings were
$4.1 million for the first six months of 2016, compared to $4.0 million for the first six months of 2015. Basic and diluted earnings per share were $1.13 per share for the first six months of 2016, compared to $1.10 per share for the first six
months of 2015.
30
Net interest income (tax-equivalent) was $12.0 million for the first six months of 2016 and 2015. Net interest
income (tax-equivalent) for the first six months of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income
(tax-equivalent) increased 2% in the first six months of 2016 compared to the first six months of 2015. This increase was primarily due to a reduction in interest expense as the company lowered its deposit costs and repaid higher-cost wholesale
funding sources. Average loans were $432.2 million in the first six months of 2016, an increase of $30.9 million or 8%, from the first six months of 2015. Average deposits were $727.2 million in the first six months of 2016, an increase of $24.6
million or 3%, from the first six months of 2015.
The Company recorded a negative provision for loan losses of $0.6 million for the first six months of
2016, compared to no provision for loan losses for the first six months of 2015. Annualized net recoveries as a percent of average loans were 0.39% for the first six months of 2016 compared to 0.02% for the first six months of 2015. The Company
recognized a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan during the first six months of 2016.
Noninterest income was $1.8 million for the first six months of 2016, compared to $2.5 million in the first six months of 2015. The decrease was primarily due
to $0.3 million in non-taxable death benefits from bank-owned life insurance that were received in the first six months of 2015, compared to none in the first six months of 2016, and a decrease in mortgage lending income of $0.3 million as mortgage
loan production declined.
Noninterest expense was $8.1 million in the first six months of 2016, compared to $8.3 million in the first six months of 2015.
The decrease was primarily due to no prepayment penalties on long-term debt incurred in the first six months of 2016 compared to $0.4 million incurred in the first six months of 2015 when the Company repaid $5.0 million of long-term debt with an
interest rate of 3.59%. This decrease was partially offset by a $0.3 million increase in salaries and benefits due to routine annual increases.
Income tax
expense was $1.6 million for the first six months of 2016, compared to $1.4 million for the first six months of 2015. The Companys income tax expense for the first six months of 2016 reflects an effective income tax rate of 27.51%, compared to
26.47% for the first six months of 2015. The increase in the effective tax rate is primarily due to a decrease in tax preference items such as income from bank-owned life insurance. The Companys effective income tax rate is principally
impacted by tax-exempt earnings from the Companys investments in municipal securities and bank-owned life insurance.
In the first six months of
2016, the Company paid cash dividends of $1.6 million, or $0.45 per share. The Companys balance sheet remains well capitalized under current regulatory guidelines with a total risk-based capital ratio of 17.77% and a Tier 1
leverage ratio of 10.56% at June 30, 2016.
In the second quarter of 2016, net earnings were $1.9 million, or $0.53 per share, compared to $2.2 million,
or $0.59 per share, for the second quarter of 2015. Net interest income (tax-equivalent) was $6.0 million for the second quarter of 2016, compared to $6.1 million for the second quarter of 2015. Net interest income (tax-equivalent) for the second
quarter of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) increased 2% in the
second quarter of 2016 compared to the second quarter of 2015. The Company recorded no provision for loan losses in the second quarter of 2016 and 2015. Noninterest income was $1.0 million in the second quarter of 2016, compared to $1.2 million in
the second quarter of 2015. The decrease was primarily due to a decrease in mortgage lending income of $0.1 million as mortgage loan production declined. Noninterest expense was $4.0 million in the second quarter of 2016, unchanged compared to
second quarter 2015. Income tax expense was approximately $0.7 million for the second quarter of 2016 compared to $0.8 million for the second quarter of 2015. The Companys effective tax rate for the second quarter of 2016 was 27.57%, compared
to 26.52% in the second quarter of 2015. Despite the increase in the effective tax rate, income tax expense decreased due to a decrease in earnings before taxes.
31
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting principles and with general practices within
the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, our assessment of other-than-temporary impairment, recurring
and non-recurring fair value measurements, the valuation of other real estate owned, and the valuation of deferred tax assets, were critical to the determination of our financial position and results of operations. Other policies also require
subjective judgment and assumptions and may accordingly impact our financial position and results of operations.
Allowance for Loan Losses
The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon
managements evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrowers ability to repay (including the timing of
future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is
inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when
management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a confirming event has occurred, which serves to validate that full repayment pursuant to the terms of the loan is
unlikely.
The Company deems loans 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. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan
agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is
recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loans effective interest rate, or if the loan is collateral dependent, the impairment measurement is
based on the fair value of the collateral, less estimated disposal costs.
The level of allowance maintained is believed by management to be adequate to
absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.
In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The
Companys loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Companys loan review
process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in
the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.
As part
of the Companys quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer
installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.
The allocation of the allowance for loan
losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Companys internal system of credit risk ratings and historical loss data.
The Company calculates average losses for all loan segments using a rolling 20 quarter historical period. The estimated loan loss allocation rate for the Companys internal system of credit risk grades is based on its experience with
similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At June 30, 2016 and December 31, 2015,
and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.
32
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for managements
estimate of probable losses for several qualitative and environmental factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount
represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes,
prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the
allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.
Assessment for Other-Than-Temporary Impairment of Securities
On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on
which there is an unrealized loss is other-than-temporarily impaired. For equity securities with an unrealized loss, the Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to
hold the security for a period of time sufficient for a recovery in value; and recent events specific to the issuer or industry. Equity securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to
fair value with the write-down recorded as a realized loss in securities gains (losses).
For debt securities with an unrealized loss, an
other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost
basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more likely than not that it will be required to sell the debt security
before recovery, the other-than-temporary write-down is equal to the entire difference between the debt securitys amortized cost and its fair value. If the Company does not intend to sell the security or it is not more likely than not
that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss
component is recognized in earnings and is the difference between the securitys amortized cost basis and the present value of its expected future cash flows. The remaining difference between the securitys fair value and the present
value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.
Fair Value Determination
U.S. GAAP requires management
to value and disclose certain of the Companys assets and liabilities at fair value, including investments classified as available-for-sale and derivatives. ASC 820,
Fair Value Measurements and Disclosures
, which defines fair value,
establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. For more information regarding fair value measurements and disclosures, please refer to Note 8, Fair Value, of
the consolidated financial statements that accompany this report.
Fair values are based on active market prices of identical assets or liabilities when
available. Comparable assets or liabilities or a composite of comparable assets in active markets are used when identical assets or liabilities do not have readily available active market pricing. However, some of the Companys assets
or liabilities lack an available or comparable trading market characterized by frequent transactions between willing buyers and sellers. In these cases, fair value is estimated using pricing models that use discounted cash flows and other pricing
techniques. Pricing models and their underlying assumptions are based upon managements best estimates for appropriate discount rates, default rates, prepayments, market volatility, and other factors, taking into account current observable
market data and experience.
These assumptions may have a significant effect on the reported fair values of assets and liabilities and the related income
and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.
33
Other Real Estate Owned
Other real estate owned (OREO), consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of
cost or fair value, less estimated costs to sell at the date acquired, with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation adjustments are determined on a specific property
basis and are included as a component of other noninterest expense along with holding costs. Any gains or losses on disposal of OREO are also reflected in noninterest expense. Significant judgments and complex estimates are required in estimating
the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. As a result, the net proceeds realized from sales transactions could differ
significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other OREO.
Deferred Tax Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some
portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income over the last three years and projections for
future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at June 30, 2016. The amount of the deferred tax
assets considered realizable, however, could be reduced if estimates of future taxable income are reduced.
RESULTS OF OPERATIONS
Average Balance Sheet and Interest Rates
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Six Months Ended June 30,
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2016
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2015
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(Dollars in thousands)
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Average
Balance
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Yield/
Rate
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Average
Balance
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Yield/
Rate
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Loans and loans held for sale
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$ 433,504
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4.76%
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$ 404,106
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5.10%
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Securities - taxable
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162,980
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2.06%
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193,694
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2.07%
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Securities - tax-exempt
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67,271
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5.66%
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68,115
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5.86%
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Total securities
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230,251
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3.11%
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261,809
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3.06%
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Federal funds sold
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57,702
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0.50%
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60,789
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0.21%
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Interest bearing bank deposits
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57,023
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0.49%
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24,449
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0.23%
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Total interest-earning assets
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778,480
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3.65%
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751,153
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3.83%
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Deposits:
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|
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|
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NOW
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123,831
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0.31%
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|
|
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114,739
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|
|
|
0.31%
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Savings and money market
|
|
|
227,772
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|
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|
0.38%
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|
|
|
207,027
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|
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|
0.40%
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Certificates of deposits less than $100,000
|
|
|
82,794
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|
|
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0.97%
|
|
|
|
93,933
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|
|
|
1.06%
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Certificates of deposits and other time deposits of $100,000 or more
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|
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132,336
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|
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1.41%
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|
|
|
145,124
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|
1.45%
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|
|
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|
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Total interest-bearing deposits
|
|
|
566,733
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|
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0.69%
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|
|
|
560,823
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|
|
0.76%
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|
Short-term borrowings
|
|
|
2,836
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|
|
|
0.50%
|
|
|
|
4,167
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|
|
|
0.48%
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|
Long-term debt
|
|
|
7,217
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|
|
|
3.54%
|
|
|
|
9,372
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|
|
|
3.53%
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|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
576,786
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|
|
|
0.73%
|
|
|
|
574,362
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|
|
|
0.81%
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|
|
|
|
|
|
|
|
|
|
Net interest income and margin (tax-equivalent)
|
|
|
$ 12,033
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|
|
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3.11%
|
|
|
|
$ 11,984
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|
|
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3.22%
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|
|
|
|
|
|
|
|
|
|
34
Net Interest Income and Margin
Net interest income (tax-equivalent) was $12.0 million for the first six months of 2016 and 2015. Net interest income (tax-equivalent) for the first six
months of 2015 included $0.2 million in recoveries of interest related to payoffs received on two loans that were previously impaired. Excluding the impact of these interest recoveries, net interest income (tax-equivalent) increased 2% in the
first six months of 2016 compared to the first six months of 2015. This increase reflects managements ongoing efforts to increase earnings by shifting the Companys asset mix through loan growth, focusing on deposit pricing, and
repaying higher-cost wholesale funding.
The tax-equivalent yield on total interest-earning assets decreased by 18 basis points in the first six months of
2016 from the first six months of 2015 to 3.65%. This decrease was primarily due to declining yields on loans and increased pricing competition for quality loan opportunities in our markets, which has limited the Companys ability to increase
yields on new and renewed loans.
The cost of total interest-bearing liabilities decreased 8 basis points in the first six months of 2016 from the first
six months of 2015 to 0.73%. The net decrease was largely a result of the continued shift in our funding mix, as we increased our lower-cost interest bearing demand deposits (NOW accounts), and savings and money market accounts and concurrently
reduced balances of higher-cost certificates of deposits and long-term debt.
The Company continues to deploy various asset liability management
strategies to manage its risk to interest rate fluctuations. The Companys net interest margin could experience pressure due to lower reinvestment yields in the securities portfolio given the current interest rate environment, increased
competition for quality loan opportunities, and fewer opportunities to reduce our cost of funds due to the low level of deposit rates currently.
Provision for Loan Losses
The provision for loan losses
represents a charge to earnings necessary to provide an allowance for loan losses that management believes, based on its processes and estimates, should be adequate to provide for the probable losses on outstanding loans. The Company recorded a
negative provision for loan losses of $0.6 million in the first six months of 2016 as a result of a $1.2 million recovery from the payoff of a non-performing construction and land development loan. No provision for loan losses was made for the
first six months of 2015. Provision expense reflects the absolute level of loans, loan growth, the credit quality of the loan portfolio, and the amount of net charge-offs or recoveries.
Based upon its assessment of the loan portfolio, management adjusts the allowance for loan losses to an amount it believes should be appropriate to adequately
cover its estimate of probable losses in the loan portfolio. The Companys allowance for loan losses as a percentage of total loans was 1.05% at June 30, 2016, compared to 1.01% at December 31, 2015. While the policies and procedures used
to estimate the allowance for loan losses, as well as the resulting provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are based on estimates and
judgments and are therefore approximate and imprecise. Factors beyond our control (such as conditions in the local and national economy, local real estate markets, or industry) may have a material adverse effect on our asset quality and the adequacy
of our allowance for loan losses resulting in significant increases in the provision for loan losses.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
Service charges on deposit accounts
|
|
$
|
193
|
|
|
$
|
209
|
|
|
$
|
391
|
|
|
$
|
415
|
|
Mortgage lending income
|
|
|
315
|
|
|
|
457
|
|
|
|
494
|
|
|
|
791
|
|
Bank-owned life insurance
|
|
|
113
|
|
|
|
112
|
|
|
|
225
|
|
|
|
513
|
|
Securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Other
|
|
|
372
|
|
|
|
389
|
|
|
|
717
|
|
|
|
766
|
|
|
|
Total noninterest income
|
|
$
|
993
|
|
|
$
|
1,167
|
|
|
$
|
1,827
|
|
|
$
|
2,488
|
|
|
|
Service charges on deposit accounts decreased primarily due to a decline in insufficient funds charges, reflecting changes in
customer behavior and spending patterns.
35
The Companys income from mortgage lending was primarily attributable to the (1) origination and sale of new
mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees, and other fees associated with the origination of
loans, which are netted against the commission expense associated with these originations. The Companys normal practice is to originate mortgage loans for sale in the secondary market and to either sell or retain the associated mortgage
servicing rights (MSRs) when the loan is sold.
MSRs are recognized based on the fair value of the servicing right on the date the
corresponding mortgage loan is sold. Subsequent to the date of transfer, the Company has elected to measure its MSRs under the amortization method. Servicing fee income is reported net of any related amortization expense.
MSRs are also evaluated for impairment on a quarterly basis. Impairment is determined by grouping MSRs by common predominant characteristics, such as interest
rate and loan type. If the aggregate carrying amount of a particular group of MSRs exceeds the groups aggregate fair value, a valuation allowance for that group is established. The valuation allowance is adjusted as the fair value changes. An
increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.
The following table presents a breakdown of the Companys mortgage lending income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
Origination income
|
|
$
|
270
|
|
|
$
|
386
|
|
|
$
|
367
|
|
|
$
|
644
|
|
Servicing fees, net
|
|
|
46
|
|
|
|
22
|
|
|
|
128
|
|
|
|
108
|
|
(Increase) decrease in MSR valuation allowance
|
|
|
(1)
|
|
|
|
49
|
|
|
|
(1)
|
|
|
|
39
|
|
|
|
Total mortgage lending income
|
|
$
|
315
|
|
|
$
|
457
|
|
|
$
|
494
|
|
|
$
|
791
|
|
|
|
The decrease in mortgage lending income was primarily due to a decrease in the volume of mortgage loans originated and sold.
The decrease in volume is due to various factors, including the Companys efforts to comply with the new TILA-RESPA Integrated Disclosure (TRID) rules and a reduction in the number of mortgage originators. Until the Companys new loan
origination system is fully implemented and operational, management expects mortgage lending income and volume will decrease compared to prior periods. The Company is in the implementation phase of this new system.
Income from bank-owned life insurance decreased in the first six months of 2016, compared to the first six months of 2015 due to non-taxable death benefits
received in the prior year. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e. increases or decreases in the cash surrender value of the policies) on these policies is dependent
upon the returns the insurance carriers are able to earn on the underlying investments that support these policies. Earnings on these policies are generally not taxable.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
Salaries and benefits
|
|
$
|
2,446
|
|
|
$
|
2,291
|
|
|
$
|
4,851
|
|
|
$
|
4,559
|
|
Net occupancy and equipment
|
|
|
358
|
|
|
|
362
|
|
|
|
718
|
|
|
|
720
|
|
Professional fees
|
|
|
194
|
|
|
|
218
|
|
|
|
405
|
|
|
|
419
|
|
FDIC and other regulatory assessments
|
|
|
122
|
|
|
|
118
|
|
|
|
244
|
|
|
|
243
|
|
Other real estate owned, net
|
|
|
(43)
|
|
|
|
1
|
|
|
|
(23)
|
|
|
|
18
|
|
Prepayment penalty on long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
Other
|
|
|
944
|
|
|
|
1,039
|
|
|
|
1,935
|
|
|
|
2,022
|
|
|
|
Total noninterest expense
|
|
$
|
4,021
|
|
|
$
|
4,029
|
|
|
$
|
8,130
|
|
|
$
|
8,343
|
|
|
|
The increase in salaries and benefits expense reflected routine annual increases.
During the first six months of 2015, the Company repaid $5.0 million of long-term debt with an interest rate of 3.59% and incurred prepayment penalties of
$0.4 million.
36
Income Tax Expense
Income tax expense was $1.6 million for the first six months of 2016, compared to $1.4 million for the first six months of 2015. The Companys income tax
expense for the first six months of 2016 reflects an effective income tax rate of 27.51%, compared to 26.47% for the first six months of 2015. The increase in the effective tax rate is primarily due to a decrease in tax preference items such as
income from bank-owned life insurance. The Companys income tax expense is principally affected by tax exempt earnings on municipal securities investments and bank-owned life insurance.
BALANCE SHEET ANALYSIS
Securities
Securities available-for-sale were $217.0 million at June 30, 2016, a decrease of $24.7 million, or 10%, compared to $241.7 million at December 31, 2015. This
decline was primarily due to a decrease of $30.9 million in the amortized cost basis of securities available-for-sale from principal repayments, maturities and calls. This decrease was offset by securities purchases of $3.2 million and a $3.8
million change in net unrealized gains on securities available-for-sale, reflecting an increase in prices as long-term interest rates declined during the first six months of 2016.
The average tax-equivalent yields earned on total securities were 3.11% in the first six months of 2016 and 3.06% in the first six months of 2015.
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
(In thousands)
|
|
|
|
|
Second
Quarter
|
|
First
Quarter
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
|
Commercial and industrial
|
|
|
|
$
|
|
50,190
|
|
50,192
|
|
|
|
|
52,479
|
|
|
|
47,925
|
|
|
|
57,310
|
|
Construction and land development
|
|
|
|
|
|
49,346
|
|
45,953
|
|
|
|
|
43,694
|
|
|
|
41,592
|
|
|
|
38,854
|
|
Commercial real estate
|
|
|
|
|
|
208,825
|
|
209,320
|
|
|
|
|
203,853
|
|
|
|
201,449
|
|
|
|
184,124
|
|
Residential real estate
|
|
|
|
|
|
113,763
|
|
117,046
|
|
|
|
|
116,673
|
|
|
|
117,863
|
|
|
|
115,039
|
|
Consumer installment
|
|
|
|
|
|
9,125
|
|
9,769
|
|
|
|
|
10,220
|
|
|
|
14,362
|
|
|
|
13,632
|
|
|
|
Total loans
|
|
|
|
|
|
431,249
|
|
432,280
|
|
|
|
|
426,919
|
|
|
|
423,191
|
|
|
|
408,959
|
|
Less: unearned income
|
|
|
|
|
|
(555)
|
|
(517)
|
|
|
|
|
(509)
|
|
|
|
(619)
|
|
|
|
(464)
|
|
|
|
Loans, net of unearned income
|
|
|
$
|
|
|
430,694
|
|
431,763
|
|
|
|
|
426,410
|
|
|
|
422,572
|
|
|
|
408,495
|
|
|
|
Total loans, net of unearned income, were $430.7 million at June 30, 2016, compared to $426.4 million at December 31,
2015. Four loan categories represented the majority of the loan portfolio at June 30, 2016: commercial real estate (49%), residential real estate (26%), construction and land development (11%) and commercial and industrial (12%). Approximately 23%
of the Companys commercial real estate loans were classified as owner-occupied at June 30, 2016.
Within the residential real estate portfolio
segment, the Company had junior lien mortgages of approximately $14.7 million, or 3% of total loans, at June 30, 2016, compared to $16.4 million, or 4% of total loans, at December 31, 2015. For residential real estate mortgage loans with a
consumer purpose, $1.6 million required interest-only payments at June 30, 2016, compared to $0.9 million at December 31, 2015. The Companys residential real estate mortgage portfolio does not include any option ARM loans, subprime loans, or
any material amount of other high-risk consumer mortgage products.
The average yield earned on loans and loans held for sale was 4.76% in the first six
months of 2016 and 5.10% in the first six months of 2015.
The specific economic and credit risks associated with our loan portfolio include, but are not
limited to, the effects of current economic conditions on our borrowers cash flows, real estate market sales volumes, valuations, availability and cost of financing properties, real estate industry concentrations, deterioration in certain
credits, interest rate fluctuations, reduced collateral values or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of applicable laws and regulations.
37
The Company attempts to reduce these economic and credit risks by adhering to loan to value guidelines for
collateralized loans, investigating the creditworthiness of borrowers and monitoring borrowers financial position. Also, we have established and periodically review, lending policies and procedures. Banking regulations limit a banks
credit exposure by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital, if loans in excess of 10% of capital are fully secured. Under these regulations, we are prohibited from having secured loan relationships
in excess of approximately $18.1 million. Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus unfunded commitments) to a single borrower of $16.3 million. Our loan policy requires that the Loan Committee
of the Board of Directors approve any loan relationships that exceed this internal limit. At June 30, 2016, the Bank had no loan relationships exceeding these limits.
We periodically analyze our commercial loan portfolio to determine if a concentration of credit risk exists in any one or more industries. We use
classification systems broadly accepted by the financial services industry in order to categorize our commercial borrowers. Loan concentrations to borrowers in the following classes exceeded 25% of the Banks total risk-based capital at June
30, 2016 (and related balances at December 31, 2015).
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
|
Lessors of 1 to 4 family residential properties
|
|
$
|
45,686
|
|
|
$
|
46,664
|
|
Multi-family residential properties
|
|
|
43,279
|
|
|
|
45,264
|
|
Shopping centers
|
|
|
38,190
|
|
|
|
38,116
|
|
|
|
Allowance for Loan Losses
The Company maintains the allowance for loan losses at a level that management believes appropriate to adequately cover the Companys estimate of
probable losses inherent in the loan portfolio. At June 30, 2016 and December 31, 2015, the allowance for loan losses was $4.5 million and $4.3 million, respectively, which management believed to be adequate at each of the respective dates. The
judgments and estimates associated with the determination of the allowance for loan losses are described under Critical Accounting Policies.
A summary of the changes in the allowance for loan losses and certain asset quality ratios for the second quarter of 2016 and the previous four quarters is
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
(Dollars in thousands)
|
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
|
Balance at beginning of period
|
|
$
|
|
|
4,774
|
|
|
|
4,289
|
|
|
|
5,127
|
|
|
|
4,886
|
|
|
|
4,722
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
(866
|
)
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
(37
|
)
|
|
|
(118)
|
|
|
|
(3
|
)
|
|
|
(26
|
)
|
|
|
|
|
Consumer installment
|
|
|
|
|
(2
|
)
|
|
|
(26)
|
|
|
|
(14
|
)
|
|
|
(23
|
)
|
|
|
(5)
|
|
|
|
Total charge-offs
|
|
|
|
|
(316
|
)
|
|
|
(144)
|
|
|
|
(925
|
)
|
|
|
(49
|
)
|
|
|
(5)
|
|
Recoveries
|
|
|
|
|
70
|
|
|
|
1,229
|
|
|
|
87
|
|
|
|
90
|
|
|
|
169
|
|
|
|
Net (charge-offs) recoveries
|
|
|
|
|
(246
|
)
|
|
|
1,085
|
|
|
|
(838
|
)
|
|
|
41
|
|
|
|
164
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
(600)
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
4,528
|
|
|
|
4,774
|
|
|
|
4,289
|
|
|
|
5,127
|
|
|
|
4,886
|
|
|
|
as a % of loans
|
|
|
|
|
1.05
|
%
|
|
|
1.11
|
|
|
|
1.01
|
|
|
|
1.21
|
|
|
|
1.20
|
|
as a % of nonperforming loans
|
|
|
|
|
271
|
%
|
|
|
246
|
|
|
|
158
|
|
|
|
140
|
|
|
|
360
|
|
Net charge-offs (recoveries) as % of average loans (a)
|
|
|
|
|
0.23
|
%
|
|
|
(1.01)
|
|
|
|
0.79
|
|
|
|
(0.04
|
)
|
|
|
(0.16)
|
|
|
|
(a) Net charge-offs (recoveries) are annualized.
38
As described under Critical Accounting Policies, management assesses the adequacy of the allowance
prior to the end of each calendar quarter. The level of the allowance is based upon managements evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the
borrowers ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors.
This evaluation is inherently subjective as it requires various material estimates and judgments, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The
ratio of our allowance for loan losses to total loans outstanding was 1.05% at June 30, 2016, compared to 1.01% at December 31, 2015. In the future, the allowance to total loans outstanding ratio will increase or decrease to the extent the
factors that influence our quarterly allowance assessment in their entirety either improve or weaken. In addition, our regulators, as an integral part of their examination process, will periodically review the Companys allowance for loan
losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgement about information available to them at the time of their examinations.
Net recoveries were $839 thousand, or 0.39% of average loans in the first six months of 2016, compared to net recoveries of $50,000, or 0.02% of average loans
in the first six months of 2015. In the first six months of 2016, the Company recognized a recovery of $1.2 million from the payoff of one nonperforming construction and land development loan.
At June 30, 2016, the ratio of our allowance for loan losses as a percentage of nonperforming loans was 271%, compared to 158% at December 31,
2015. The increase was primarily due to a decrease in nonperforming loans of $1.0 million.
At June 30, 2016 and December 31, 2015, the
Companys recorded investment in loans considered impaired was $2.7 million and $3.4 million, respectively, with corresponding valuation allowances (included in the allowance for loan losses) of $0.1 million at each respective date.
Nonperforming Assets
At June 30, 2016 and December 31,
2015, respectively, the Company had $2.0 million and $3.0 million in nonperforming assets. The decrease was primarily due to the payoff of one nonperforming construction and land development loan with a recorded investment of $0.5 million
at December 31, 2015.
The table below provides information concerning total nonperforming assets and certain asset quality ratios for the second
quarter of 2016 and the previous four quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
Second
|
|
First
|
|
|
|
|
|
Fourth
|
|
|
Third
|
|
Second
|
(Dollars in thousands)
|
|
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
Quarter
|
|
Nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
|
1,669
|
|
1,938
|
|
|
|
|
|
|
2,714
|
|
|
3,650
|
|
1,359
|
Other real estate owned
|
|
|
|
300
|
|
397
|
|
|
|
|
|
|
252
|
|
|
278
|
|
499
|
|
Total nonperforming assets
|
|
$
|
|
1,969
|
|
2,335
|
|
|
|
|
|
|
2,966
|
|
|
3,928
|
|
1,858
|
|
as a % of loans and other real estate owned
|
|
|
|
0.46 %
|
|
0.54
|
|
|
|
|
|
|
0.70
|
|
|
0.93
|
|
0.45
|
as a % of total assets
|
|
|
|
0.23 %
|
|
0.28
|
|
|
|
|
|
|
0.36
|
|
|
0.48
|
|
0.23
|
Nonperforming loans as a % of total loans
|
|
|
|
0.39 %
|
|
0.45
|
|
|
|
|
|
|
0.64
|
|
|
0.86
|
|
0.33
|
Accruing loans 90 days or more past due
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
442
|
|
39
The table below provides information concerning the composition of nonaccrual loans for the second quarter of
2016 and the previous four quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
Second
|
|
First
|
|
|
|
Fourth
|
|
|
Third
|
|
Second
|
(In thousands)
|
|
|
|
Quarter
|
|
Quarter
|
|
|
|
Quarter
|
|
|
Quarter
|
|
Quarter
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
40
|
|
42
|
|
|
|
|
43
|
|
|
81
|
|
46
|
Construction and land development
|
|
|
|
55
|
|
66
|
|
|
|
|
583
|
|
|
594
|
|
602
|
Commercial real estate
|
|
|
|
1,564
|
|
1,734
|
|
|
|
|
1,750
|
|
|
2,790
|
|
684
|
Residential real estate
|
|
|
|
10
|
|
96
|
|
|
|
|
325
|
|
|
185
|
|
27
|
Consumer installment
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
$
|
|
1,669
|
|
1,938
|
|
|
|
|
2,714
|
|
|
3,650
|
|
1,359
|
|
The Company discontinues the accrual of interest income when (1) there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is 90 days or more past due, unless the loan is both well-secured and in the process of collection. At June 30, 2016
and December 31, 2015, respectively, the Company had $1.7 million and $2.7 million in loans on nonaccrual.
At June 30, 2016 and December 31, 2015, there
were no loans 90 days or more past due and still accruing.
The table below provides information concerning the composition of other real estate owned for
the second quarter of 2016 and the previous four quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
Second
|
|
First
|
|
|
|
Fourth
|
|
|
Third
|
|
Second
|
(In thousands)
|
|
|
|
Quarter
|
|
Quarter
|
|
|
|
Quarter
|
|
|
Quarter
|
|
Quarter
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed lots
|
|
$
|
|
252
|
|
252
|
|
|
|
|
252
|
|
|
252
|
|
252
|
Residential
|
|
|
|
48
|
|
145
|
|
|
|
|
|
|
|
26
|
|
247
|
|
Total other real estate owned
|
|
$
|
|
300
|
|
397
|
|
|
|
|
252
|
|
|
278
|
|
499
|
|
At June 30, 2016 and December 31, 2015, respectively, the Company held $0.3 million, respectively, in OREO, which we acquired
from borrowers.
Potential Problem Loans
Potential
problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower have caused management to have serious doubts about the borrowers ability to comply with present repayment
terms. This definition is believed to be substantially consistent with the standards established by the Federal Reserve, the Companys primary regulator, for loans classified as substandard, excluding nonaccrual loans. Potential
problem loans, which are not included in nonperforming assets, amounted to $5.5 million, or 1.3% of total loans at June 30, 2016, compared to $5.9 million, or 1.4% of total loans at December 31, 2015.
40
The table below provides information concerning the composition of potential problem loans for the second quarter
of 2016 and the previous four quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
Second
|
|
First
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
(In thousands)
|
|
|
|
Quarter
|
|
Quarter
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Potential problem loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
285
|
|
309
|
|
|
|
|
|
323
|
|
329
|
|
383
|
Construction and land development
|
|
|
|
365
|
|
477
|
|
|
|
|
|
593
|
|
578
|
|
627
|
Commercial real estate
|
|
|
|
911
|
|
783
|
|
|
|
|
|
491
|
|
501
|
|
503
|
Residential real estate
|
|
|
|
3,855
|
|
3,938
|
|
|
|
|
|
4,371
|
|
4,964
|
|
4,898
|
Consumer installment
|
|
|
|
84
|
|
110
|
|
|
|
|
|
114
|
|
128
|
|
167
|
|
Total potential problem loans
|
|
$
|
|
5,500
|
|
5,617
|
|
|
|
|
|
5,892
|
|
6,500
|
|
6,578
|
|
At June 30, 2016, approximately $0.1 million, or 2.0%, of total potential problem loans were past due at least 30 days, but
less than 90 days. At June 30, 2016, the remaining balance of potential problem loans were current or past due less than 30 days.
The following
table is a summary of the Companys performing loans that were past due at least 30 days, but less than 90 days, for the second quarter of 2016 and the previous four quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
Second
|
|
First
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
(In thousands)
|
|
|
|
Quarter
|
|
Quarter
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Performing loans past due 30 to 89 days:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
|
25
|
|
14
|
|
|
|
|
|
49
|
|
37
|
|
6
|
Construction and land development
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
12
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
Residential real estate
|
|
|
|
645
|
|
623
|
|
|
|
|
|
1,334
|
|
335
|
|
415
|
Consumer installment
|
|
|
|
51
|
|
28
|
|
|
|
|
|
28
|
|
20
|
|
23
|
|
Total
|
|
$
|
|
721
|
|
794
|
|
|
|
|
|
1,411
|
|
574
|
|
456
|
|
Deposits
Total deposits
were $747.5 million at June 30, 2016, compared to $723.6 million at December 31, 2015. Noninterest bearing deposits were $167.7 million, or 22.4% of total deposits, at June 30, 2016, compared to $156.8 million, or 21.7% of total deposits at
December 31, 2015.
The average rate paid on total interest-bearing deposits was 0.69% in the first six months of 2016 and 0.76% in the first six
months of 2015.
Other Borrowings
Other borrowings
consist of short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase with an original maturity less than one year. The Bank had available federal funds lines
totaling $41.0 million with none outstanding at June 30, 2016, and at December 31, 2015, respectively. Securities sold under agreements to repurchase totaled $2.6 million and $3.0 million at June 30, 2016 and December 31, 2015, respectively.
The average rate paid on short-term borrowings was 0.50% in the first six months of 2016 and 0.48% in the first six months of 2015.
41
Long-term debt includes FHLB advances with an original maturity greater than one year and subordinated debentures
related to trust preferred securities. The Bank had no long-term FHLB advances outstanding and $7.2 million in junior subordinated debentures related to trust preferred securities outstanding at June 30, 2016 and December 31, 2015,
respectively. The debentures mature on December 31, 2033 and have been redeemable since December 31, 2008.
The average rate paid on long-term debt was
3.54% in the first six months of 2016 and 3.53% in the first six months of 2015.
CAPITAL ADEQUACY
The Companys consolidated stockholders equity was $84.8 million and $79.9 million as of June 30, 2016 and December 31, 2015, respectively. The
change from December 31, 2015 was primarily driven by net earnings of $4.1 million and other comprehensive income due to the change in unrealized gains (losses) on securities available-for-sale, net-of-tax, of $2.4 million, partially offset by cash
dividends paid of $1.6 million.
On January 1, 2015, the Company and Bank became subject to the rules of the Basel III regulatory capital framework and
related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital
conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased-in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2016 is 0.625%. A banking
organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At June 30, 2016, the
ratios for the Company and Bank were sufficient to meet the fully phased-in conservation buffer.
The Companys tier 1 leverage ratio was 10.56%,
common equity tier 1 (CET1) risk-based capital ratio was 15.54%, tier 1 risk-based capital ratio was 16.87%, and total risk-based capital ratio was 17.77% at June 30, 2016. These ratios exceed the minimum regulatory capital percentages
of 5.0% for tier 1 leverage ratio, 6.5% for CET1 risk-based capital ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio to be considered well capitalized. The Companys capital conservation
buffer was 9.77% at June 30, 2016.
MARKET AND LIQUIDITY RISK MANAGEMENT
Managements objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of
established liquidity, loan, investment, borrowing, and capital policies. The Banks Asset Liability Management Committee (ALCO) is charged with the responsibility of monitoring these policies, which are designed to ensure an
acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.
Interest Rate Risk
Management
In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. ALCO measures
and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity
(EVE) model.
Earnings simulation
. Management believes that interest rate risk is best estimated by our earnings simulation
modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various
earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from
managements flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:
|
●
|
|
+/- 20% for a gradual change of 400 basis points
|
|
●
|
|
+/- 15% for a gradual change of 300 basis points
|
|
●
|
|
+/- 10% for a gradual change of 200 basis points
|
|
●
|
|
+/- 5% for a gradual change of 100 basis points
|
At June 30, 2016, our earnings simulation model indicated
that we were in compliance with the policy guidelines noted above.
42
Economic Value of Equity
. EVE measures the extent that the estimated economic values of our assets,
liabilities, and off-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In
contrast with our earnings simulation model, which evaluates interest rate risk over a 12 month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured
using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy
guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:
|
●
|
|
45% for an instantaneous change of +/- 400 basis points
|
|
●
|
|
35% for an instantaneous change of +/- 300 basis points
|
|
●
|
|
25% for an instantaneous change of +/- 200 basis points
|
|
●
|
|
15% for an instantaneous change of +/- 100 basis points
|
At June 30, 2016, our EVE model indicated that we
were in compliance with the policy guidelines noted above.
Each of the above analyses may not, on its own, be an accurate indicator of how our net
interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition,
the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates
on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors)
which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may
decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios
in seeking satisfactory, consistent levels of profitability within the framework of the Companys established liquidity, loan, investment, borrowing, and capital policies.
The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities, and as
a tool to manage interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (swaps) to facilitate customer transactions and
meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. At June 30, 2016 and December 31, 2015, the Company had no derivative contracts designated as part of a hedging relationship to assist in
managing its interest rate sensitivity.
Liquidity Risk Management
Liquidity is the Companys ability to convert assets into cash equivalents in order to meet daily cash flow requirements, primarily for deposit
withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to a decline in earnings
due to the cost of foregoing alternative higher-yielding investment opportunities.
Liquidity is managed at two levels. The first is the liquidity of the
Company. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Company and the Bank are separate legal entities with different funding needs and sources, and each are subject to regulatory
guidelines and requirements.
The primary source of funding and the primary source of liquidity for the Company include dividends received from the Bank,
and secondarily proceeds from the possible issuance of common stock or other securities. Primary uses of funds by the Company include dividends paid to stockholders, stock repurchases, and interest payments on junior subordinated debentures issued
by the Company in connection with trust preferred securities. The junior subordinated debentures are presented as long-term debt in the accompanying consolidated balance sheets and the related trust preferred securities are currently includible in
Tier 1 Capital for regulatory capital purposes.
43
Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of
securities, sales of securities, and the sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank may participate in
the FHLBs advance program to obtain funding for its growth. Advances include both fixed and variable terms and may be taken out with varying maturities. At June 30, 2016, the Bank had a remaining available line of credit with the FHLB of
$245.9 million. At June 30, 2016, the Bank also had $41.0 million of available federal funds lines with none outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.
Management believes that the Company and the Bank have adequate sources of liquidity to meet all known contractual obligations and unfunded commitments,
including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements,
Commitments and Contingencies
At June 30, 2016, the Bank had outstanding standby letters of credit of $7.0 million and unfunded loan commitments
outstanding of $53.0 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund
these outstanding commitments, the Bank could liquidate federal funds sold or a portion of securities available-for-sale, or draw on its available credit facilities.
Mortgage lending activities
Since 2009, we have
primarily sold residential mortgage loans in the secondary market to Fannie Mae while retaining the servicing of these loans. The sale agreements for these residential mortgage loans with Fannie Mae and other investors include various
representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the representations and warranties vary among investors, they typically cover ownership of the loan, validity of the lien
securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, among other matters.
As of June 30, 2016, the unpaid principal balance of residential mortgage loans, which we have originated and sold, but retained the servicing rights was
$349.6 million. Although these loans are generally sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred (make whole requests) if a loan review reveals a potential
breach of seller representations and warranties. Upon receipt of a repurchase or make whole request, we work with investors to arrive at a mutually agreeable resolution. Repurchase and make whole requests are typically reviewed on an individual
loan by loan basis to validate the claims made by the investor and to determine if a contractually required repurchase or make whole event has occurred. We seek to reduce and manage the risks of potential repurchases, make whole requests, or other
claims by mortgage loan investors through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
In the first six months of 2016, as a result of the representation and warranty provisions contained in the Companys sale agreements with Fannie Mae,
the Company was required to repurchase one loan with a principal balance of $198,000 that was current as to principal and interest at the time of repurchase. At June 30, 2016, the Company had no pending repurchase or make whole requests.
We service all residential mortgage loans originated and sold by us to Fannie Mae. As servicer, our primary duties are to: (1) collect payments due from
borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow
accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or take other actions to mitigate the potential losses to investors consistent with the agreements governing our rights
and duties as servicer.
The agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such
capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to
termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards are determined by servicing guides issued by Fannie Mae as well as
the contract provisions established between Fannie Mae and the Bank. Remedies could include repurchase of an affected loan.
44
Although repurchase and make whole requests related to representation and warranty provisions and servicing
activities have been limited to date, it is possible that requests to repurchase mortgage loans or reimburse investors for losses incurred (make whole requests) may increase in frequency if investors more aggressively pursue all means of recovering
losses on their purchased loans. As of June 30, 2016, we do not believe that this exposure is material due to the historical level of repurchase requests and loss trends, in addition to the fact that 99% of our residential mortgage loans
serviced for Fannie Mae were current as of such date. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates
in our investor portfolios.
Effects of Inflation and Changing Prices
The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with U.S. generally accepted
accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over
time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions
performance than the effects of general levels of inflation.
CURRENT ACCOUNTING DEVELOPMENTS
The following Accounting Standards Updates (Updates or ASUs) have been issued by the FASB but are not yet effective.
|
|
|
|
|
ASU 2014-09,
Revenue from Contracts with Customers;
|
|
|
|
|
ASU 2015-14,
Revenue from Contracts with Customers Deferral of the Effective Date;
|
|
|
|
|
ASU 2016-01,
Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
;
|
|
|
|
|
ASU 2016-02,
Leases; and
|
|
|
|
|
ASU 2016-13,
Financial Instruments Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.
|
Information about these pronouncements is described in more detail below.
ASU 2014-09,
Revenue from Contracts with Customers
, provides a comprehensive and converged standard on revenue recognition. The new guidance is
intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance also requires new qualitative and quantitative disclosures related to
revenue from contracts with customers. In August 2015, FASB issued ASU 2015-14,
Revenue from Contracts with Customers Deferral of the Effective Date,
which defers the effective date by one year. With the deferral, these changes
are effective for the Company in the first quarter of 2018 with retrospective application to each prior reporting period or with the cumulative effect of initially applying this Update at the date of initial application. Early adoption is not
permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
45
ASU 2016-01,
Financial Instruments Overall:
Recognition and Measurement of Financial
Assets and Financial Liabilities
, enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. Some of the amendments include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of
the 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; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) Require an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the
amendments of this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU will have on its consolidated financial
statements.
ASU 2016-02,
Leases,
requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A
lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for lease term. The new guidance is effective
for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the
beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): - Measurement of Credit Losses on Financial Instruments
, amends guidance on reporting
credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the new standard eliminates the probable initial recognition threshold in current GAAP and, instead, requires
an entity to reflect its current estimate of all expected credit losses using a broader range of information regarding past events, current conditions and forecasts assessing the collectability of cash flows. The allowance for credit losses is a
valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current
GAAP, however the new standard will require that credit losses be presented as an allowance rather than as a write-down. The new guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair
value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have
the contractual right to receive cash. For public business entities that are SEC filers, the new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019 early adoption is permitted beginning in
2019. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
46
Table 1 Explanation o
f Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. generally accepted accounting principles (GAAP), this quarterly report on Form 10-Q includes certain
designated net interest income amounts presented on a tax-equivalent basis, a non-GAAP financial measure, including the presentation and calculation of the efficiency ratio.
The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and
tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors understanding of its business and performance, these non-GAAP financial measures should not
be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
Second
|
|
First
|
|
|
|
|
Fourth
|
|
|
|
|
Third
|
|
|
Second
|
|
(In thousands)
|
|
|
|
Quarter
|
|
Quarter
|
|
|
|
|
Quarter
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Net interest income (GAAP)
|
|
$
|
|
5,692
|
|
|
5,697
|
|
|
|
|
|
5,737
|
|
|
|
|
|
5,670
|
|
|
|
5,788
|
|
Tax-equivalent adjustment
|
|
|
|
322
|
|
|
322
|
|
|
|
|
|
328
|
|
|
|
|
|
341
|
|
|
|
338
|
|
|
|
Net interest income (Tax-equivalent)
|
|
$
|
|
6,014
|
|
|
6,019
|
|
|
|
|
|
6,065
|
|
|
|
|
|
6,011
|
|
|
|
6,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Net interest income (GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
11,389
|
|
|
|
11,311
|
|
Tax-equivalent adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644
|
|
|
|
673
|
|
|
|
Net interest income (Tax-equivalent)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
12,033
|
|
|
|
11,984
|
|
|
|
47
Table 2 - Selected Qu
arterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
(Dollars in thousands, except per share amounts)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (a)
|
|
$
|
6,014
|
|
|
|
6,019
|
|
|
|
6,065
|
|
|
|
6,011
|
|
|
|
6,126
|
|
Less: tax-equivalent adjustment
|
|
|
322
|
|
|
|
322
|
|
|
|
328
|
|
|
|
341
|
|
|
|
338
|
|
|
|
Net interest income (GAAP)
|
|
|
5,692
|
|
|
|
5,697
|
|
|
|
5,737
|
|
|
|
5,670
|
|
|
|
5,788
|
|
Noninterest income
|
|
|
993
|
|
|
|
834
|
|
|
|
988
|
|
|
|
1,056
|
|
|
|
1,167
|
|
|
|
Total revenue
|
|
|
6,685
|
|
|
|
6,531
|
|
|
|
6,725
|
|
|
|
6,726
|
|
|
|
6,955
|
|
Provision for loan losses
|
|
|
|
|
|
|
(600)
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
Noninterest expense
|
|
|
4,021
|
|
|
|
4,109
|
|
|
|
4,137
|
|
|
|
3,892
|
|
|
|
4,029
|
|
Income tax expense
|
|
|
733
|
|
|
|
831
|
|
|
|
652
|
|
|
|
724
|
|
|
|
776
|
|
|
|
Net earnings
|
|
$
|
1,931
|
|
|
|
2,191
|
|
|
|
1,936
|
|
|
|
1,910
|
|
|
|
2,150
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings
|
|
$
|
0.53
|
|
|
|
0.60
|
|
|
|
0.53
|
|
|
|
0.52
|
|
|
|
0.59
|
|
Cash dividends declared
|
|
|
0.225
|
|
|
|
0.225
|
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
0.22
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
3,643,503
|
|
|
|
3,643,484
|
|
|
|
3,643,478
|
|
|
|
3,643,455
|
|
|
|
3,643,413
|
|
Shares outstanding
|
|
|
3,643,503
|
|
|
|
3,643,503
|
|
|
|
3,643,478
|
|
|
|
3,643,478
|
|
|
|
3,643,428
|
|
Book value
|
|
$
|
23.28
|
|
|
|
22.75
|
|
|
|
21.94
|
|
|
|
21.85
|
|
|
|
21.15
|
|
Common stock price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
29.85
|
|
|
|
30.49
|
|
|
|
30.39
|
|
|
|
27.80
|
|
|
|
25.75
|
|
Low
|
|
|
26.81
|
|
|
|
24.56
|
|
|
|
26.14
|
|
|
|
25.78
|
|
|
|
24.51
|
|
Period end
|
|
|
28.49
|
|
|
|
28.25
|
|
|
|
29.62
|
|
|
|
26.47
|
|
|
|
25.73
|
|
To earnings ratio
|
|
|
13.07
|
x
|
|
|
12.61
|
|
|
|
13.78
|
|
|
|
12.37
|
|
|
|
12.08
|
|
To book value
|
|
|
122
|
%
|
|
|
124
|
|
|
|
135
|
|
|
|
121
|
|
|
|
122
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
9.18
|
%
|
|
|
10.82
|
|
|
|
9.59
|
|
|
|
9.75
|
|
|
|
10.91
|
|
Return on average assets
|
|
|
0.93
|
%
|
|
|
1.07
|
|
|
|
0.95
|
|
|
|
0.95
|
|
|
|
1.09
|
|
Dividend payout ratio
|
|
|
42.45
|
%
|
|
|
37.50
|
|
|
|
41.51
|
|
|
|
42.31
|
|
|
|
37.29
|
|
Asset Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a % of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1.05
|
%
|
|
|
1.11
|
|
|
|
1.01
|
|
|
|
1.21
|
|
|
|
1.20
|
|
Nonperforming loans
|
|
|
271
|
%
|
|
|
246
|
|
|
|
158
|
|
|
|
140
|
|
|
|
360
|
|
Nonperforming assets as a % of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other real estate owned
|
|
|
0.46
|
%
|
|
|
0.54
|
|
|
|
0.70
|
|
|
|
0.93
|
|
|
|
0.45
|
|
Total assets
|
|
|
0.23
|
%
|
|
|
0.28
|
|
|
|
0.36
|
|
|
|
0.48
|
|
|
|
0.23
|
|
Nonperforming loans as a % of total loans
|
|
|
0.39
|
%
|
|
|
0.45
|
|
|
|
0.64
|
|
|
|
0.86
|
|
|
|
0.33
|
|
Net charge-offs (recoveries) as a % of average loans (c)
|
|
|
0.23
|
%
|
|
|
(1.01)
|
|
|
|
0.79
|
|
|
|
(0.04)
|
|
|
|
(0.16)
|
|
Capital Adequacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET 1 risk-based capital ratio
|
|
|
15.54
|
%
|
|
|
15.36
|
|
|
|
15.28
|
|
|
|
15.01
|
|
|
|
15.42
|
|
Tier 1 risk-based capital ratio
|
|
|
16.87
|
%
|
|
|
16.69
|
|
|
|
16.57
|
|
|
|
16.29
|
|
|
|
16.76
|
|
Total risk-based capital ratio
|
|
|
17.77
|
%
|
|
|
17.64
|
|
|
|
17.44
|
|
|
|
17.33
|
|
|
|
17.78
|
|
Tier 1 Leverage Ratio
|
|
|
10.56
|
%
|
|
|
10.47
|
|
|
|
10.35
|
|
|
|
10.37
|
|
|
|
10.39
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (a)
|
|
|
3.10
|
%
|
|
|
3.12
|
|
|
|
3.12
|
|
|
|
3.13
|
|
|
|
3.29
|
|
Effective income tax rate
|
|
|
27.52
|
%
|
|
|
27.50
|
|
|
|
25.19
|
|
|
|
27.49
|
|
|
|
26.52
|
|
Efficiency ratio (b)
|
|
|
57.39
|
%
|
|
|
59.96
|
|
|
|
58.66
|
|
|
|
55.07
|
|
|
|
55.24
|
|
Selected average balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
223,414
|
|
|
|
237,087
|
|
|
|
246,130
|
|
|
|
251,393
|
|
|
|
259,376
|
|
Loans, net of unearned income
|
|
|
434,934
|
|
|
|
429,528
|
|
|
|
426,192
|
|
|
|
416,210
|
|
|
|
402,482
|
|
Total assets
|
|
|
828,106
|
|
|
|
821,382
|
|
|
|
815,616
|
|
|
|
806,764
|
|
|
|
791,889
|
|
Total deposits
|
|
|
727,989
|
|
|
|
726,354
|
|
|
|
720,854
|
|
|
|
714,960
|
|
|
|
699,453
|
|
Long-term debt
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
Total stockholders equity
|
|
|
84,124
|
|
|
|
80,965
|
|
|
|
80,764
|
|
|
|
78,387
|
|
|
|
78,791
|
|
Selected period end balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
217,002
|
|
|
|
234,109
|
|
|
|
241,687
|
|
|
|
250,142
|
|
|
|
252,906
|
|
Loans, net of unearned income
|
|
|
430,694
|
|
|
|
431,763
|
|
|
|
426,410
|
|
|
|
422,572
|
|
|
|
408,495
|
|
Allowance for loan losses
|
|
|
4,528
|
|
|
|
4,774
|
|
|
|
4,289
|
|
|
|
5,127
|
|
|
|
4,886
|
|
Total assets
|
|
|
846,056
|
|
|
|
833,328
|
|
|
|
817,189
|
|
|
|
817,994
|
|
|
|
806,233
|
|
Total deposits
|
|
|
747,539
|
|
|
|
737,361
|
|
|
|
723,627
|
|
|
|
724,311
|
|
|
|
715,994
|
|
Long-term debt
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
Total stockholders equity
|
|
|
84,808
|
|
|
|
82,887
|
|
|
|
79,949
|
|
|
|
79,599
|
|
|
|
77,053
|
|
|
|
(a) Tax-equivalent. See Table 1 - Explanation of Non-GAAP Financial Measures.
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
(c) Net charge-offs (recoveries) are annualized.
48
Table 3 - Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(Dollars in thousands, except per share amounts)
|
|
|
|
2016
|
|
2015
|
|
Results of Operations
|
|
|
|
|
|
|
Net interest income (a)
|
|
$
|
|
12,033
|
|
11,984
|
Less: tax-equivalent adjustment
|
|
|
|
644
|
|
673
|
Net interest income (GAAP)
|
|
|
|
11,389
|
|
11,311
|
Noninterest income
|
|
|
|
1,827
|
|
2,488
|
Total revenue
|
|
|
|
13,216
|
|
13,799
|
Provision for loan losses
|
|
|
|
(600)
|
|
|
Noninterest expense
|
|
|
|
8,130
|
|
8,343
|
Income tax expense
|
|
|
|
1,564
|
|
1,444
|
Net earnings
|
|
$
|
|
4,122
|
|
4,012
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
Basic and diluted net earnings
|
|
$
|
|
1.13
|
|
1.10
|
Cash dividends declared
|
|
|
|
0.45
|
|
0.44
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
3,643,493
|
|
3,643,389
|
Shares outstanding, at period end
|
|
|
|
3,643,503
|
|
3,643,428
|
Book value
|
|
$
|
|
23.28
|
|
21.15
|
Common stock price
|
|
|
|
|
|
|
High
|
|
$
|
|
30.49
|
|
25.75
|
Low
|
|
|
|
24.56
|
|
23.15
|
Period end
|
|
|
|
28.49
|
|
25.73
|
To earnings ratio
|
|
|
|
13.07x
|
|
12.08
|
To book value
|
|
|
|
122%
|
|
122
|
Performance ratios:
|
|
|
|
|
|
|
Return on average equity
|
|
|
|
9.99%
|
|
10.31
|
Return on average assets
|
|
|
|
1.00%
|
|
1.01
|
Dividend payout ratio
|
|
|
|
39.82%
|
|
40.00
|
Asset Quality:
|
|
|
|
|
|
|
Allowance for loan losses as a % of:
|
|
|
|
|
|
|
Loans
|
|
|
|
1.05%
|
|
1.20
|
Nonperforming loans
|
|
|
|
271%
|
|
360
|
Nonperforming assets as a % of:
|
|
|
|
|
|
|
Loans and other real estate owned
|
|
|
|
0.46%
|
|
0.45
|
Total assets
|
|
|
|
0.23%
|
|
0.23
|
Nonperforming loans as a % of total loans
|
|
|
|
0.39%
|
|
0.33
|
Annualized net recoveries as a % of average loans
|
|
|
|
(0.39)%
|
|
(0.02)
|
Capital Adequacy:
|
|
|
|
|
|
|
CET 1 risk-based capital ratio
|
|
|
|
15.54%
|
|
15.42
|
Tier 1 risk-based capital ratio
|
|
|
|
16.87%
|
|
16.76
|
Total risk-based capital ratio
|
|
|
|
17.77%
|
|
17.78
|
Tier 1 Leverage Ratio
|
|
|
|
10.56%
|
|
10.39
|
Other financial data:
|
|
|
|
|
|
|
Net interest margin (a)
|
|
|
|
3.11%
|
|
3.22
|
Effective income tax rate
|
|
|
|
27.51%
|
|
26.47
|
Efficiency ratio (b)
|
|
|
|
58.66%
|
|
57.65
|
Selected average balances:
|
|
|
|
|
|
|
Securities
|
|
$
|
|
230,251
|
|
261,809
|
Loans, net of unearned income
|
|
|
|
432,231
|
|
401,327
|
Total assets
|
|
|
|
823,054
|
|
796,947
|
Total deposits
|
|
|
|
727,171
|
|
702,582
|
Long-term debt
|
|
|
|
7,217
|
|
9,372
|
Total stockholders equity
|
|
|
|
82,545
|
|
77,858
|
Selected period end balances:
|
|
|
|
|
|
|
Securities
|
|
$
|
|
217,002
|
|
252,906
|
Loans, net of unearned income
|
|
|
|
430,694
|
|
408,495
|
Allowance for loan losses
|
|
|
|
4,528
|
|
4,886
|
Total assets
|
|
|
|
846,056
|
|
806,233
|
Total deposits
|
|
|
|
747,539
|
|
715,994
|
Long-term debt
|
|
|
|
7,217
|
|
7,217
|
Total stockholders equity
|
|
|
|
84,808
|
|
77,053
|
(a) Tax-equivalent. See Table 1 - Explanation of Non-GAAP Financial Measures.
(b) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and tax-equivalent net interest income.
49
Table 4 - Avera
ge Balances and Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
(Dollars in thousands)
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (1)
|
|
|
|
$
|
|
|
436,462
|
|
|
$
|
5,172
|
|
|
|
4.77%
|
|
|
|
|
$
|
|
|
405,093
|
|
|
$
|
5,217
|
|
|
|
5.17%
|
|
Securities - taxable
|
|
|
|
|
|
|
155,835
|
|
|
|
775
|
|
|
|
2.00%
|
|
|
|
|
|
|
|
191,181
|
|
|
|
949
|
|
|
|
1.99%
|
|
Securities - tax-exempt (2)
|
|
|
|
|
|
|
67,580
|
|
|
|
945
|
|
|
|
5.62%
|
|
|
|
|
|
|
|
68,195
|
|
|
|
992
|
|
|
|
5.83%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
|
|
|
|
223,415
|
|
|
|
1,720
|
|
|
|
3.10%
|
|
|
|
|
|
|
|
259,376
|
|
|
|
1,941
|
|
|
|
3.00%
|
|
Federal funds sold
|
|
|
|
|
|
|
56,989
|
|
|
|
72
|
|
|
|
0.51%
|
|
|
|
|
|
|
|
47,215
|
|
|
|
28
|
|
|
|
0.24%
|
|
Interest bearing bank deposits
|
|
|
|
|
|
|
64,062
|
|
|
|
84
|
|
|
|
0.53%
|
|
|
|
|
|
|
|
35,370
|
|
|
|
23
|
|
|
|
0.26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
|
|
|
|
780,928
|
|
|
$
|
7,048
|
|
|
|
3.63%
|
|
|
|
|
|
|
|
747,054
|
|
|
$
|
7,209
|
|
|
|
3.87%
|
|
Cash and due from banks
|
|
|
|
|
|
|
12,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,083
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
34,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
|
|
828,106
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
791,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
|
|
$
|
|
|
125,512
|
|
|
$
|
97
|
|
|
|
0.31%
|
|
|
|
|
$
|
|
|
114,803
|
|
|
$
|
88
|
|
|
|
0.31%
|
|
Savings and money market
|
|
|
|
|
|
|
225,678
|
|
|
|
212
|
|
|
|
0.38%
|
|
|
|
|
|
|
|
202,309
|
|
|
|
183
|
|
|
|
0.36%
|
|
Certificates of deposits less than $100,000
|
|
|
|
|
|
|
81,582
|
|
|
|
201
|
|
|
|
0.99%
|
|
|
|
|
|
|
|
92,423
|
|
|
|
238
|
|
|
|
1.03%
|
|
Certificates of deposits and other time deposits of $100,000 or more
|
|
|
|
|
|
|
131,252
|
|
|
|
457
|
|
|
|
1.40%
|
|
|
|
|
|
|
|
142,526
|
|
|
|
511
|
|
|
|
1.44%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
|
|
|
|
564,024
|
|
|
|
967
|
|
|
|
0.69%
|
|
|
|
|
|
|
|
552,061
|
|
|
|
1,020
|
|
|
|
0.74%
|
|
Short-term borrowings
|
|
|
|
|
|
|
2,517
|
|
|
|
3
|
|
|
|
0.48%
|
|
|
|
|
|
|
|
3,678
|
|
|
|
4
|
|
|
|
0.44%
|
|
Long-term debt
|
|
|
|
|
|
|
7,217
|
|
|
|
64
|
|
|
|
3.57%
|
|
|
|
|
|
|
|
7,217
|
|
|
|
59
|
|
|
|
3.28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
|
|
|
|
573,758
|
|
|
$
|
1,034
|
|
|
|
0.72%
|
|
|
|
|
|
|
|
562,956
|
|
|
$
|
1,083
|
|
|
|
0.77%
|
|
Noninterest-bearing deposits
|
|
|
|
|
|
|
163,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,392
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
6,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,750
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
84,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
|
|
$
|
|
|
828,106
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
791,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and margin (tax-equivalent)
|
|
|
|
|
|
|
|
|
|
$
|
6,014
|
|
|
|
3.10%
|
|
|
|
|
|
|
|
|
|
|
$
|
6,126
|
|
|
|
3.29%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average loan balances are shown net of unearned income and loans on
nonaccrual status have been included in the computation of average balances.
(2) Yields on tax-exempt
securities have been computed on a tax-equivalent basis using an income tax rate of 34%.
50
Table 5 - Average Balances a
nd Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (1)
|
|
|
|
$
|
|
|
433,504
|
|
|
$
|
10,268
|
|
|
|
4.76%
|
|
|
|
|
$
|
|
|
404,106
|
|
|
$
|
10,223
|
|
|
|
5.10%
|
|
Securities - taxable
|
|
|
|
|
|
|
162,980
|
|
|
|
1,673
|
|
|
|
2.06%
|
|
|
|
|
|
|
|
193,694
|
|
|
|
1,989
|
|
|
|
2.07%
|
|
Securities - tax-exempt (2)
|
|
|
|
|
|
|
67,271
|
|
|
|
1,892
|
|
|
|
5.66%
|
|
|
|
|
|
|
|
68,115
|
|
|
|
1,978
|
|
|
|
5.86%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
|
|
|
|
230,251
|
|
|
|
3,565
|
|
|
|
3.11%
|
|
|
|
|
|
|
|
261,809
|
|
|
|
3,967
|
|
|
|
3.06%
|
|
Federal funds sold
|
|
|
|
|
|
|
57,702
|
|
|
|
143
|
|
|
|
0.50%
|
|
|
|
|
|
|
|
60,789
|
|
|
|
62
|
|
|
|
0.21%
|
|
Interest bearing bank deposits
|
|
|
|
|
|
|
57,023
|
|
|
|
139
|
|
|
|
0.49%
|
|
|
|
|
|
|
|
24,449
|
|
|
|
28
|
|
|
|
0.23%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
|
|
|
|
778,480
|
|
|
$
|
14,115
|
|
|
|
3.65%
|
|
|
|
|
|
|
|
751,153
|
|
|
$
|
14,280
|
|
|
|
3.83%
|
|
Cash and due from banks
|
|
|
|
|
|
|
12,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,439
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
31,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
|
|
823,054
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
796,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
|
|
$
|
|
|
123,831
|
|
|
$
|
191
|
|
|
|
0.31%
|
|
|
|
|
$
|
|
|
114,739
|
|
|
$
|
174
|
|
|
|
0.31%
|
|
Savings and money market
|
|
|
|
|
|
|
227,772
|
|
|
|
431
|
|
|
|
0.38%
|
|
|
|
|
|
|
|
207,027
|
|
|
|
409
|
|
|
|
0.40%
|
|
Certificates of deposits less than $100,000
|
|
|
|
|
|
|
82,794
|
|
|
|
401
|
|
|
|
0.97%
|
|
|
|
|
|
|
|
93,933
|
|
|
|
492
|
|
|
|
1.06%
|
|
Certificates of deposits and other time deposits of $100,000 or more
|
|
|
|
|
|
|
132,336
|
|
|
|
925
|
|
|
|
1.41%
|
|
|
|
|
|
|
|
145,124
|
|
|
|
1,047
|
|
|
|
1.45%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
|
|
|
|
566,733
|
|
|
|
1,948
|
|
|
|
0.69%
|
|
|
|
|
|
|
|
560,823
|
|
|
|
2,122
|
|
|
|
0.76%
|
|
Short-term borrowings
|
|
|
|
|
|
|
2,836
|
|
|
|
7
|
|
|
|
0.50%
|
|
|
|
|
|
|
|
4,167
|
|
|
|
10
|
|
|
|
0.48%
|
|
Long-term debt
|
|
|
|
|
|
|
7,217
|
|
|
|
127
|
|
|
|
3.54%
|
|
|
|
|
|
|
|
9,372
|
|
|
|
164
|
|
|
|
3.53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
|
|
|
|
576,786
|
|
|
$
|
2,082
|
|
|
|
0.73%
|
|
|
|
|
|
|
|
574,362
|
|
|
$
|
2,296
|
|
|
|
0.81%
|
|
Noninterest-bearing deposits
|
|
|
|
|
|
|
160,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,759
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
3,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,968
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
82,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
|
|
$
|
|
|
823,054
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
796,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and margin (tax-equivalent)
|
|
|
|
|
|
|
|
|
|
$
|
12,033
|
|
|
|
3.11%
|
|
|
|
|
|
|
|
|
|
|
$
|
11,984
|
|
|
|
3.22%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Average loan balances are shown net of unearned income and loans on nonaccrual status have been included in the computation of average balances.
|
|
(2)
|
|
Yields on tax-exempt securities have been computed on a tax-equivalent basis using an income tax rate of 34%.
|
|
51
Table 6 - Loan Portfo
lio Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
(In thousands)
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
50,190
|
|
|
|
50,192
|
|
|
|
52,479
|
|
|
|
47,925
|
|
|
|
57,310
|
|
Construction and land development
|
|
|
|
|
49,346
|
|
|
|
45,953
|
|
|
|
43,694
|
|
|
|
41,592
|
|
|
|
38,854
|
|
Commercial real estate
|
|
|
|
|
208,825
|
|
|
|
209,320
|
|
|
|
203,853
|
|
|
|
201,449
|
|
|
|
184,124
|
|
Residential real estate
|
|
|
|
|
113,763
|
|
|
|
117,046
|
|
|
|
116,673
|
|
|
|
117,863
|
|
|
|
115,039
|
|
Consumer installment
|
|
|
|
|
9,125
|
|
|
|
9,769
|
|
|
|
10,220
|
|
|
|
14,362
|
|
|
|
13,632
|
|
|
|
Total loans
|
|
|
|
|
431,249
|
|
|
|
432,280
|
|
|
|
426,919
|
|
|
|
423,191
|
|
|
|
408,959
|
|
Less: unearned income
|
|
|
|
|
(555)
|
|
|
|
(517)
|
|
|
|
(509)
|
|
|
|
(619)
|
|
|
|
(464)
|
|
|
|
Loans, net of unearned income
|
|
|
|
|
430,694
|
|
|
|
431,763
|
|
|
|
426,410
|
|
|
|
422,572
|
|
|
|
408,495
|
|
Less: allowance for loan losses
|
|
|
|
|
(4,528)
|
|
|
|
(4,774)
|
|
|
|
(4,289)
|
|
|
|
(5,127)
|
|
|
|
(4,886)
|
|
|
|
Loans, net
|
|
$
|
|
|
426,166
|
|
|
|
426,989
|
|
|
|
422,121
|
|
|
|
417,445
|
|
|
|
403,609
|
|
|
|
52
Table 7 - Allowance f
or Loan Losses and Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
Second
|
|
|
First
|
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
(Dollars in thousands)
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
|
|
4,774
|
|
|
|
4,289
|
|
|
|
|
|
5,127
|
|
|
|
4,886
|
|
|
|
4,722
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
(83)
|
|
|
|
|
|
|
|
|
|
(42)
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
(194)
|
|
|
|
|
|
|
|
|
|
(866)
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
(37)
|
|
|
|
(118)
|
|
|
|
|
|
(3)
|
|
|
|
(26)
|
|
|
|
|
|
Consumer installment
|
|
|
|
|
(2)
|
|
|
|
(26)
|
|
|
|
|
|
(14)
|
|
|
|
(23)
|
|
|
|
(5)
|
|
|
|
Total charge-offs
|
|
|
|
|
(316)
|
|
|
|
(144)
|
|
|
|
|
|
(925)
|
|
|
|
(49)
|
|
|
|
(5)
|
|
Recoveries
|
|
|
|
|
70
|
|
|
|
1,229
|
|
|
|
|
|
87
|
|
|
|
90
|
|
|
|
169
|
|
|
|
Net (charge-offs) recoveries
|
|
|
|
|
(246)
|
|
|
|
1,085
|
|
|
|
|
|
(838)
|
|
|
|
41
|
|
|
|
164
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
(600)
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
4,528
|
|
|
|
4,774
|
|
|
|
|
|
4,289
|
|
|
|
5,127
|
|
|
|
4,886
|
|
|
|
as a % of loans
|
|
|
|
|
1.05
|
%
|
|
|
1.11
|
|
|
|
|
|
1.01
|
|
|
|
1.21
|
|
|
|
1.20
|
|
as a % of nonperforming loans
|
|
|
|
|
271
|
%
|
|
|
246
|
|
|
|
|
|
158
|
|
|
|
140
|
|
|
|
360
|
|
Net charge-offs (recoveries) as % of avg. loans (a)
|
|
|
|
|
0.23
|
%
|
|
|
(1.01)
|
|
|
|
|
|
0.79
|
|
|
|
(0.04)
|
|
|
|
(0.16)
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
|
|
1,669
|
|
|
|
1,938
|
|
|
|
|
|
2,714
|
|
|
|
3,650
|
|
|
|
1,359
|
|
Other real estate owned
|
|
|
|
|
300
|
|
|
|
397
|
|
|
|
|
|
252
|
|
|
|
278
|
|
|
|
499
|
|
|
|
Total nonperforming assets
|
|
$
|
|
|
1,969
|
|
|
|
2,335
|
|
|
|
|
|
2,966
|
|
|
|
3,928
|
|
|
|
1,858
|
|
|
|
as a % of loans and other real estate owned
|
|
|
|
|
0.46
|
%
|
|
|
0.54
|
|
|
|
|
|
0.70
|
|
|
|
0.93
|
|
|
|
0.45
|
|
as a % of total assets
|
|
|
|
|
0.23
|
%
|
|
|
0.28
|
|
|
|
|
|
0.36
|
|
|
|
0.48
|
|
|
|
0.23
|
|
Nonperforming loans as a % of total loans
|
|
|
|
|
0.39
|
%
|
|
|
0.45
|
|
|
|
|
|
0.64
|
|
|
|
0.86
|
|
|
|
0.33
|
|
Accruing loans 90 days or more past due
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
442
|
|
|
|
(a) Net charge-offs (recoveries) are annualized.
53
Table 8 - Allocation o
f Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
First Quarter
|
|
|
|
|
Fourth Quarter
|
|
|
|
|
Third Quarter
|
|
|
|
|
Second Quarter
|
|
(Dollars in thousands)
|
|
|
|
Amount
|
|
|
%*
|
|
|
|
|
Amount
|
|
|
%*
|
|
|
|
|
Amount
|
|
|
%*
|
|
|
|
|
Amount
|
|
|
%*
|
|
|
|
|
Amount
|
|
|
%*
|
|
|
|
Commercial and industrial
|
|
$
|
|
|
506
|
|
|
|
11.6
|
|
|
$
|
|
|
517
|
|
|
|
11.6
|
|
|
$
|
|
|
523
|
|
|
|
12.3
|
|
|
$
|
|
|
504
|
|
|
|
11.3
|
|
|
$
|
|
|
681
|
|
|
|
14.0
|
|
Construction and land development
|
|
|
|
|
744
|
|
|
|
11.4
|
|
|
|
|
|
695
|
|
|
|
10.6
|
|
|
|
|
|
669
|
|
|
|
10.2
|
|
|
|
|
|
627
|
|
|
|
9.8
|
|
|
|
|
|
640
|
|
|
|
9.5
|
|
Commercial real estate
|
|
|
|
|
2,092
|
|
|
|
48.5
|
|
|
|
|
|
2,403
|
|
|
|
48.4
|
|
|
|
|
|
1,879
|
|
|
|
47.8
|
|
|
|
|
|
2,679
|
|
|
|
47.6
|
|
|
|
|
|
2,146
|
|
|
|
45.1
|
|
Residential real estate
|
|
|
|
|
1,061
|
|
|
|
26.4
|
|
|
|
|
|
1,026
|
|
|
|
27.1
|
|
|
|
|
|
1,059
|
|
|
|
27.3
|
|
|
|
|
|
1,103
|
|
|
|
27.9
|
|
|
|
|
|
1,180
|
|
|
|
28.1
|
|
Consumer installment
|
|
|
|
|
125
|
|
|
|
2.1
|
|
|
|
|
|
133
|
|
|
|
2.3
|
|
|
|
|
|
159
|
|
|
|
2.4
|
|
|
|
|
|
214
|
|
|
|
3.4
|
|
|
|
|
|
239
|
|
|
|
3.3
|
|
|
|
Total allowance for loan losses
|
|
$
|
|
|
4,528
|
|
|
|
|
|
|
$
|
|
|
4,774
|
|
|
|
|
|
|
$
|
|
|
4,289
|
|
|
|
|
|
|
$
|
|
|
5,127
|
|
|
|
|
|
|
$
|
|
|
4,886
|
|
|
|
|
|
|
|
* Loan balance in each category expressed as a percentage of total loans.
54
Table 9 - CDs and
Other Time Deposits of $100,000 or More
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2016
|
|
|
|
Maturity of:
|
|
|
|
|
3 months or less
|
|
$
|
13,182
|
|
Over 3 months through 6 months
|
|
|
22,381
|
|
Over 6 months through 12 months
|
|
|
23,446
|
|
Over 12 months
|
|
|
71,549
|
|
|
|
Total CDs and other time deposits of $100,000 or more
|
|
$
|
130,558
|
|
|
|
55