NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation.
First
South Bancorp, Inc. (the "Company") was formed for the purpose of issuing common stock and owning 100% of the stock
of First South Bank (the "Bank") and operating through the Bank a commercial banking business. The Bank has one significant
operating segment, providing commercial and retail banking services to its markets located in the state of North Carolina. The
Bank also provides a full menu of leasing services through its wholly owned subsidiary, First South Leasing, LLC. In addition,
under its First South Wealth Management division, the Bank makes securities brokerage services available through an affiliation
with an independent broker/dealer. The Bank operates through its main office in Washington, North Carolina, and has 28 full-service
branch offices located throughout eastern and central North Carolina.
The accompanying unaudited consolidated
financial statements are prepared in pursuant to the instructions for Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete
financial statements. In the opinion of management, all adjustments necessary for fair presentation of the financial position
and results of operations for the periods presented are included, none of which are other than normal recurring accruals. The
financial statements of the Company and the Bank are presented on a consolidated basis. The results of operations for the three
and six months ended June 30, 2017, are not necessarily indicative of the results of operations that may be expected for the year
ended December 31, 2017. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s
consolidated financial statements and related notes appearing in the 2016 Annual Report previously filed on Form 10-K.
On June 9, 2017, the Company entered into
an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Carolina Financial Corporation (“CARO”).
The Merger Agreement provides that, upon the terms and conditions set forth therein, the Company will merge with and into CARO
(the “Merger”), with CARO continuing as the surviving corporation. As soon as practicable following consummation of
the Merger, the Bank will merge with and into CARO’s wholly owned subsidiary, CresCom Bank ("CresCom"), with CresCom
continuing as the surviving entity (the “Bank Merger”). Subject to the terms and conditions of the Merger Agreement,
at the effective time of the Merger, the Company’s stockholders will have the right to receive 0.52 shares of CARO common
stock for each share of the Company’s common stock. Cash will be paid in lieu of fractional shares. The transaction is expected
to close in the fourth quarter of 2017, subject to shareholder and regulatory approval and other customary closing conditions.
2. Earnings Per Share.
Basic and
diluted earnings per share for the three and six months ended June 30, 2017 and 2016 are based on weighted average shares of common
stock outstanding. Diluted earnings per share include the potentially dilutive effect of stock-based compensation plans. For both
the three and six months ended June 30, 2017 there were 29,250 stock options, respectively, compared to 87,000 stock options,
respectively, for both the three and six months ended June 30, 2016, that were anti-dilutive, because the exercise and grant prices
exceeded the average market price of the Company’s common stock. The anti-dilutive shares are excluded from the diluted
earnings per share calculation for the three and six months ended June 30, 2017 and 2016.
3.
Comprehensive Income and
Accumulated Other Comprehensive Income
.
Comprehensive income includes net income and changes in other
comprehensive income. The components of other comprehensive income primarily include net changes in unrealized gains and losses
on available-for-sale securities, and the reclassification of net gains and losses on available-for-sale securities recognized
in income during the respective reporting periods.
The following table presents changes
in
accumulated other comprehensive income (“AOCI”), net of taxes for the six months ended June 30, 2017 and 2016:
|
|
Unrealized Holding Gains
on Investment Securities
Available-For-Sale
|
|
|
Unrealized Holding
Gain (Loss) on Cash
Flow Hedging Activities
|
|
|
Total Accumulated
Other Comprehensive
Income
|
|
|
|
(In
thousands)
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,433
|
|
|
$
|
77
|
|
|
$
|
1,510
|
|
Other comprehensive income before reclassifications
|
|
|
1,432
|
|
|
|
(36
|
)
|
|
|
1,396
|
|
Amounts reclassified from AOCI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net current period other comprehensive income
|
|
|
1,432
|
|
|
|
(36
|
)
|
|
|
1,396
|
|
Balance at June 30, 2017
|
|
$
|
2,865
|
|
|
$
|
41
|
|
|
$
|
2,906
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
2,695
|
|
|
$
|
(247
|
)
|
|
$
|
2,448
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
3,013
|
|
|
|
(117
|
)
|
|
|
2,896
|
|
Amounts reclassified from AOCI
|
|
|
(333
|
)
|
|
|
-
|
|
|
|
(333
|
)
|
Net current period other comprehensive income (loss)
|
|
|
2,680
|
|
|
|
(117
|
)
|
|
|
2,563
|
|
Balance at June 30, 2016
|
|
$
|
5,375
|
|
|
$
|
(364
|
)
|
|
$
|
5,011
|
|
4. Investment Securities.
The following
is a summary of the investment securities portfolio by major category, with the amortized cost and fair value and gross unrealized
gains and losses of each category at June 30, 2017 and December 31, 2016:
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Securities available-for-sale:
|
|
|
|
June 30, 2017
|
|
|
|
Government agencies
|
|
$
|
23,470
|
|
|
$
|
411
|
|
|
$
|
24
|
|
|
$
|
23,857
|
|
Mortgage-backed securities
|
|
|
85,037
|
|
|
|
2,467
|
|
|
|
21
|
|
|
|
87,483
|
|
Municipal securities
|
|
|
55,502
|
|
|
|
1,681
|
|
|
|
26
|
|
|
|
57,157
|
|
Corporate bonds
|
|
|
26,917
|
|
|
|
131
|
|
|
|
144
|
|
|
|
26,904
|
|
Total
|
|
$
|
190,926
|
|
|
$
|
4,690
|
|
|
$
|
215
|
|
|
$
|
195,401
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
16,797
|
|
|
$
|
245
|
|
|
$
|
47
|
|
|
$
|
16,995
|
|
Mortgage-backed securities
|
|
|
93,124
|
|
|
|
2,155
|
|
|
|
163
|
|
|
|
95,116
|
|
Municipal securities
|
|
|
53,465
|
|
|
|
536
|
|
|
|
319
|
|
|
|
53,682
|
|
Corporate bonds
|
|
|
26,983
|
|
|
|
60
|
|
|
|
230
|
|
|
|
26,813
|
|
Total
|
|
$
|
190,369
|
|
|
$
|
2,996
|
|
|
$
|
759
|
|
|
$
|
192,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
506
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
507
|
|
Total
|
|
$
|
506
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
510
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
511
|
|
Total
|
|
$
|
510
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
511
|
|
The following table presents a summary of realized gains and
losses from the sale of available-for-sale investment securities:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Proceeds from Sale
|
|
$
|
-
|
|
|
$
|
9,940
|
|
|
$
|
-
|
|
|
$
|
40,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains on sales
|
|
|
-
|
|
|
|
185
|
|
|
|
-
|
|
|
|
594
|
|
Gross realized losses on sales
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(127
|
)
|
Total realized gains, net
|
|
$
|
-
|
|
|
$
|
184
|
|
|
$
|
-
|
|
|
$
|
467
|
|
4. Investment Securities (Continued)
The following table summarizes gross unrealized
losses on investment securities, fair value and length of time the securities were in a continuous unrealized loss position at
June 30, 2017 and December 31, 2016. The Company deems these unrealized losses to be temporary and recoverable prior to or at
maturity. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient
for a market price recovery or until maturity.
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
June 30, 2017
|
|
|
|
|
Government agencies
|
|
$
|
6,727
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,727
|
|
|
$
|
24
|
|
Mortgage-backed securities
|
|
|
13,240
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,240
|
|
|
|
21
|
|
Municipal securities
|
|
|
1,126
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,126
|
|
|
|
26
|
|
Corporate bonds
|
|
|
3,994
|
|
|
|
4
|
|
|
|
7,859
|
|
|
|
140
|
|
|
|
11,853
|
|
|
|
144
|
|
Total
|
|
$
|
25,087
|
|
|
$
|
75
|
|
|
$
|
7,859
|
|
|
$
|
140
|
|
|
$
|
32,946
|
|
|
$
|
215
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
6,766
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,766
|
|
|
$
|
47
|
|
Mortgage-backed securities
|
|
|
27,586
|
|
|
|
163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,586
|
|
|
|
163
|
|
Municipal securities
|
|
|
24,156
|
|
|
|
319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,156
|
|
|
|
319
|
|
Corporate bonds
|
|
|
13,751
|
|
|
|
26
|
|
|
|
7,795
|
|
|
|
204
|
|
|
|
21,546
|
|
|
|
230
|
|
Total
|
|
$
|
72,259
|
|
|
$
|
555
|
|
|
$
|
7,795
|
|
|
$
|
204
|
|
|
$
|
80,054
|
|
|
$
|
759
|
|
The following table summarizes the amortized
cost and fair values of the investment securities portfolio at June 30, 2017, by contractual maturity. Expected maturities will
differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
Less Than
|
|
|
One to
|
|
|
Five to
|
|
|
Over
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
|
(In thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
23,470
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value
|
|
|
-
|
|
|
|
23,857
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
2,106
|
|
|
|
64,736
|
|
|
|
3,165
|
|
|
|
15,030
|
|
Fair value
|
|
|
2,131
|
|
|
|
66,076
|
|
|
|
3,282
|
|
|
|
15,994
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
4,844
|
|
|
|
13,686
|
|
|
|
35,542
|
|
|
|
1,430
|
|
Fair value
|
|
|
4,886
|
|
|
|
14,025
|
|
|
|
36,788
|
|
|
|
1,458
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
7,014
|
|
|
|
11,903
|
|
|
|
8,000
|
|
|
|
-
|
|
Fair value
|
|
|
7,015
|
|
|
|
11,973
|
|
|
|
7,916
|
|
|
|
-
|
|
Total Amortized cost
|
|
$
|
13,964
|
|
|
$
|
113,795
|
|
|
$
|
46,707
|
|
|
$
|
16,460
|
|
Total Fair value
|
|
$
|
14,032
|
|
|
$
|
115,931
|
|
|
$
|
47,986
|
|
|
$
|
17,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
-
|
|
|
$
|
506
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value
|
|
|
-
|
|
|
|
507
|
|
|
|
-
|
|
|
|
-
|
|
Total Amortized cost
|
|
$
|
-
|
|
|
$
|
506
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total Fair value
|
|
$
|
-
|
|
|
$
|
507
|
|
|
$
|
-
|
|
|
$
|
-
|
|
United States government agency and mortgage-backed
securities with an amortized cost of $60.5 million were pledged as collateral for public deposits at June 30, 2017, compared to
$32.6 million at December 31, 2016. In addition, a government agency bond with an amortized cost of $506,000 and $510,000 was
pledged as collateral on an interest rate swap transaction at June 30, 2017 and December 31, 2016, respectively.
4. Investment Securities (Continued)
Prior to purchasing any security, the
Bank ensures the security is investment grade. For a security to be investment grade it must: (1) have a low risk of default by
the obligor, and (2) the Bank must expect the full and timely repayment of principal and interest over the expected life. Under
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), certain investments
are deemed investment grade. These include: U.S. Treasury securities, Federal Agency securities, Revenue Bonds, and Unlimited-Tax
General Obligation Municipals. Other securities undergo a pre-purchase analysis to ensure they are investment grade.
To determine if a security is investment
grade, if available, management utilizes the ratings of the Nationally Recognized Statistical Rating Organizations (“NRSRO”).
However, they are not the sole basis of determining if a security is investment grade. In addition, on a pre-purchase basis, at
least one of the following criteria pertaining to the obligor is acquired and reviewed as part of the Bank’s credit analysis:
Data from debt offerings (prospectus/offering circular); data from regulatory filings- Securities and Exchange Commission (“SEC”)
Forms 10-K, 10-Q, 8-K, etc.; data available from the obligor’s website (annual reports, press releases); data obtained from
a third party (bond broker, analyst); NRSRO report on the initial offering and/or subsequent reviews of the issuer; or other pertinent
available financial information. There have been no instances where the NRSRO’s credit rating has significantly differed
from that of the Bank’s credit analysis.
At June 30, 2017, the investment securities
portfolio included 50 taxable and tax-exempt debt instruments issued by various states, counties, cities, municipalities and school
districts. The following table is a summary, listed by state, of the Company’s investment in the obligations of state and
political subdivisions:
|
|
June 30, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Obligations of state and political subdivisions:
|
|
|
|
|
|
|
|
|
General obligation bonds:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
5,144
|
|
|
$
|
5,341
|
|
Washington
|
|
|
3,361
|
|
|
|
3,424
|
|
Pennsylvania
|
|
|
2,771
|
|
|
|
2,785
|
|
Indiana
|
|
|
2,384
|
|
|
|
2,418
|
|
Texas
|
|
|
2,266
|
|
|
|
2,260
|
|
Florida
|
|
|
2,223
|
|
|
|
2,292
|
|
Alabama
|
|
|
1,813
|
|
|
|
1,844
|
|
Utah
|
|
|
1,781
|
|
|
|
1,807
|
|
Nevada
|
|
|
1,322
|
|
|
|
1,354
|
|
Missouri
|
|
|
1,301
|
|
|
|
1,429
|
|
Other (11 states)
|
|
|
8,676
|
|
|
|
8,947
|
|
Total general obligation bonds
|
|
|
33,042
|
|
|
|
33,901
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds:
|
|
|
|
|
|
|
|
|
New York
|
|
|
7,147
|
|
|
|
7,445
|
|
North Carolina
|
|
|
4,198
|
|
|
|
4,309
|
|
Mississippi
|
|
|
2,304
|
|
|
|
2,394
|
|
Oklahoma
|
|
|
2,239
|
|
|
|
2,340
|
|
Pennsylvania
|
|
|
1,939
|
|
|
|
1,970
|
|
Other (4 states)
|
|
|
4,633
|
|
|
|
4,798
|
|
Total revenue bonds
|
|
|
22,460
|
|
|
|
23,256
|
|
Total obligations of state and political subdivisions
|
|
$
|
55,502
|
|
|
$
|
57,157
|
|
The
largest exposure in general obligation bonds was one bond issued by Ambridge Area School District, Pennsylvania, with a total
amortized cost basis and total fair value of $2.4 million at June 30, 2017.
4. Investment Securities (Continued)
The following table is a summary of the
revenue sources related to the Company’s investment in revenue bonds:
|
|
June 30, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Revenue bonds by revenue source:
|
|
|
|
|
|
|
|
|
University and college
|
|
$
|
8,534
|
|
|
$
|
8,916
|
|
Public improvements
|
|
|
6,079
|
|
|
|
6,294
|
|
Pension funding
|
|
|
1,939
|
|
|
|
1,970
|
|
Refunding bonds
|
|
|
1,621
|
|
|
|
1,649
|
|
Other
|
|
|
4,287
|
|
|
|
4,427
|
|
Total revenue bonds
|
|
$
|
22,460
|
|
|
$
|
23,256
|
|
The largest single exposure in revenue
bonds is an issue from the Dormitory Authority of the State of New York (“DASNY”). DASNY was created in 1944 to finance
and build dormitories for state teachers’ colleges. Its mission has expanded over time and in 1995 DASNY became the largest
public authority issuer of tax-exempt bonds in the country. The debt is secured by a dedication of 25% of the New York State personal
income tax. As of June 30, 2017, this issue had an amortized cost of $2.8 million and fair value of $3.0 million.
5. Loans Held for Sale.
The Bank
originates residential mortgage loans for sale in the secondary market. Pursuant to Accounting Standards Codification (“ASC”)
825,
Financial Instruments
, at June 30, 2017 and December 31, 2016, the Bank marked these mortgage loans to market. Mortgage
loans held for sale at June 30, 2017 and December 31, 2016, had estimated fair market values of $6.4 million and $5.1 million,
respectively. The Bank originates mortgage loans for sale that are approved by secondary investors. Their terms are set by secondary
investors, and they are transferred within 120 days after the Bank funds the loans. The Bank issues rate lock commitments to borrowers,
and depending on market conditions, may enter into forward contracts with secondary market investors to minimize interest rate
risk related to mortgage loan forward sales commitments. The Bank uses forward contracts to minimize interest rate risk related
to mortgage loan forward sales commitments to economically hedge a percentage of the locked-in pipeline. The Bank receives origination
fees from borrowers and servicing release premiums from investors that are recognized in income when loans are sold. The following
table summarizes forward contract positions of the Bank at June 30, 2017 and December 31, 2016:
Forward Contracts
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Mortgage Loan Forward Sales Commitments
|
|
$
|
81
|
|
|
$
|
8,949
|
|
|
$
|
65
|
|
|
$
|
6,036
|
|
6. Loans Held for Investment.
Loans
held for investment at June 30, 2017 and December 31, 2016 are listed below:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans Held for Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
69,649
|
|
|
|
9.0
|
%
|
|
$
|
67,264
|
|
|
|
9.6
|
%
|
Residential construction
|
|
|
6,830
|
|
|
|
0.9
|
|
|
|
7,875
|
|
|
|
1.1
|
|
Residential lots and raw land
|
|
|
137
|
|
|
|
0.0
|
|
|
|
154
|
|
|
|
0.0
|
|
Total mortgage loans
|
|
|
76,616
|
|
|
|
9.9
|
|
|
|
75,293
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
421,302
|
|
|
|
54.2
|
|
|
|
378,173
|
|
|
|
53.9
|
|
Commercial construction
|
|
|
51,506
|
|
|
|
6.6
|
|
|
|
56,118
|
|
|
|
8.0
|
|
Commercial lots and raw land
|
|
|
31,195
|
|
|
|
4.0
|
|
|
|
33,434
|
|
|
|
4.8
|
|
Commercial and Industrial
|
|
|
90,375
|
|
|
|
11.6
|
|
|
|
67,980
|
|
|
|
9.7
|
|
Lease receivables
|
|
|
22,945
|
|
|
|
3.0
|
|
|
|
21,236
|
|
|
|
3.0
|
|
Total commercial loans and leases
|
|
|
617,323
|
|
|
|
79.4
|
|
|
|
556,941
|
|
|
|
79.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
|
20,419
|
|
|
|
2.6
|
|
|
|
16,967
|
|
|
|
2.4
|
|
Consumer construction
|
|
|
419
|
|
|
|
0.1
|
|
|
|
105
|
|
|
|
0.0
|
|
Consumer lots and raw land
|
|
|
8,867
|
|
|
|
1.1
|
|
|
|
8,975
|
|
|
|
1.3
|
|
Home equity lines of credit
|
|
|
39,738
|
|
|
|
5.1
|
|
|
|
36,815
|
|
|
|
5.3
|
|
Consumer other
|
|
|
13,992
|
|
|
|
1.8
|
|
|
|
6,347
|
|
|
|
0.9
|
|
Total consumer loans
|
|
|
83,435
|
|
|
|
10.7
|
|
|
|
69,209
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans held for investment
|
|
|
777,374
|
|
|
|
100.0
|
%
|
|
|
701,443
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less deferred loan origination fees, net
|
|
|
717
|
|
|
|
|
|
|
|
801
|
|
|
|
|
|
Less allowance for loan and lease losses
|
|
|
9,367
|
|
|
|
|
|
|
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans held for investment
|
|
$
|
767,290
|
|
|
|
|
|
|
$
|
691,969
|
|
|
|
|
|
The Bank has pledged eligible loans as
collateral for actual or potential borrowings from the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank
of Richmond (“FRB”). At June 30, 2017, the Bank pledged $283.8 million and $149.5 million of loans to the FHLB and
FRB, respectively. See Note 13. Borrowed Money below, for additional information.
6. Loans Held for Investment (Continued)
The following tables detail nonaccrual
loans held for investment, including troubled debt restructured (“TDR”) loans accounted for on a nonaccrual status,
segregated by class of loans, at June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans held for investment:
|
|
|
|
|
|
|
|
|
Non-TDR loans accounted for on a non-accrual status:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
821
|
|
|
$
|
773
|
|
Residential lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
915
|
|
|
|
482
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
72
|
|
Lease receivables
|
|
|
-
|
|
|
|
-
|
|
Consumer real estate
|
|
|
95
|
|
|
|
94
|
|
Consumer lots and raw land
|
|
|
25
|
|
|
|
80
|
|
Home equity lines of credit
|
|
|
128
|
|
|
|
166
|
|
Consumer other
|
|
|
-
|
|
|
|
-
|
|
Total non-TDR loans accounted for on a nonaccrual status
|
|
|
1,984
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
TDR loans accounted for on a nonaccrual status:
|
|
|
|
|
|
|
|
|
Past Due TDRs:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
161
|
|
Commercial real estate
|
|
|
-
|
|
|
|
652
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
Consumer real estate
|
|
|
-
|
|
|
|
149
|
|
Total Past Due TDRs
|
|
|
-
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
Current TDRs:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
155
|
|
|
|
163
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
170
|
|
|
|
170
|
|
Consumer real estate
|
|
|
139
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
85
|
|
|
|
89
|
|
Total Current TDRs
|
|
|
549
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
Total TDR loans accounted for on a nonaccrual status
|
|
|
549
|
|
|
|
1,384
|
|
Total non-performing loans
|
|
$
|
2,533
|
|
|
|
3,051
|
|
Percentage of total loans held for investment, net
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
Loans over 90 days past due, still accruing
|
|
$
|
-
|
|
|
$
|
-
|
|
Other real estate owned
|
|
|
2,438
|
|
|
|
3,229
|
|
Total non-performing assets
|
|
$
|
4,971
|
|
|
$
|
6,280
|
|
Cumulative interest income not recorded
on loans accounted for on a nonaccrual status was $114,100 and $115,318 at June 30, 2017 and December 31, 2016, respectively.
See “Note 8. Troubled Debt Restructurings”
below for additional information.
6. Loans Held for Investment (Continued)
The following table presents an age analysis
of past due loans held for investment, segregated by class of loans as of June 30, 2017 and December 31, 2016:
|
|
30-59
|
|
|
60-89
|
|
|
90 Days
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
90 Days or
|
|
|
|
Days
|
|
|
Days
|
|
|
or More
|
|
|
Past
|
|
|
|
|
|
Financing
|
|
|
More and
|
|
Past due loans held for investment:
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Due
|
|
|
Current
|
|
|
Receivables
|
|
|
Accruing
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
-
|
|
|
$
|
120
|
|
|
$
|
509
|
|
|
$
|
629
|
|
|
$
|
69,020
|
|
|
$
|
69,649
|
|
|
$
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,830
|
|
|
|
6,830
|
|
|
|
-
|
|
Residential lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137
|
|
|
|
137
|
|
|
|
-
|
|
Commercial real estate
|
|
|
98
|
|
|
|
-
|
|
|
|
768
|
|
|
|
866
|
|
|
|
420,436
|
|
|
|
421,302
|
|
|
|
-
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,506
|
|
|
|
51,506
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
227
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227
|
|
|
|
30,968
|
|
|
|
31,195
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
90,345
|
|
|
|
90,375
|
|
|
|
-
|
|
Lease receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,945
|
|
|
|
22,945
|
|
|
|
-
|
|
Consumer real estate
|
|
|
343
|
|
|
|
-
|
|
|
|
61
|
|
|
|
404
|
|
|
|
20,015
|
|
|
|
20,419
|
|
|
|
-
|
|
Consumer construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
419
|
|
|
|
419
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
33
|
|
|
|
8,834
|
|
|
|
8,867
|
|
|
|
-
|
|
Home equity lines of credit
|
|
|
226
|
|
|
|
46
|
|
|
|
44
|
|
|
|
316
|
|
|
|
39,422
|
|
|
|
39,738
|
|
|
|
-
|
|
Consumer other
|
|
|
14
|
|
|
|
27
|
|
|
|
-
|
|
|
|
41
|
|
|
|
13,951
|
|
|
|
13,992
|
|
|
|
-
|
|
Total
|
|
$
|
938
|
|
|
$
|
226
|
|
|
$
|
1,382
|
|
|
$
|
2,546
|
|
|
$
|
774,828
|
|
|
$
|
777,374
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
|
|
|
60-89
|
|
|
90 Days
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
90 Days or
|
|
|
|
Days
|
|
|
Days
|
|
|
or More
|
|
|
Past
|
|
|
|
|
|
Financing
|
|
|
More and
|
|
Past due loans held for investment:
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Due
|
|
|
Current
|
|
|
Receivables
|
|
|
Accruing
|
|
|
|
(In
thousands)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
1,048
|
|
|
$
|
176
|
|
|
$
|
565
|
|
|
$
|
1,789
|
|
|
$
|
65,475
|
|
|
$
|
67,264
|
|
|
$
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,875
|
|
|
|
7,875
|
|
|
|
-
|
|
Residential lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
|
|
154
|
|
|
|
-
|
|
Commercial real estate
|
|
|
726
|
|
|
|
4
|
|
|
|
1,022
|
|
|
|
1,752
|
|
|
|
376,421
|
|
|
|
378,173
|
|
|
|
-
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,118
|
|
|
|
56,118
|
|
|
|
-
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,434
|
|
|
|
33,434
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
72
|
|
|
|
67,908
|
|
|
|
67,980
|
|
|
|
-
|
|
Lease receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,236
|
|
|
|
21,236
|
|
|
|
-
|
|
Consumer real estate
|
|
|
-
|
|
|
|
42
|
|
|
|
206
|
|
|
|
248
|
|
|
|
16,719
|
|
|
|
16,967
|
|
|
|
-
|
|
Consumer construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
105
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
-
|
|
|
|
8
|
|
|
|
81
|
|
|
|
89
|
|
|
|
8,886
|
|
|
|
8,975
|
|
|
|
-
|
|
Home equity lines of credit
|
|
|
121
|
|
|
|
33
|
|
|
|
98
|
|
|
|
252
|
|
|
|
36,563
|
|
|
|
36,815
|
|
|
|
-
|
|
Consumer other
|
|
|
7
|
|
|
|
2
|
|
|
|
-
|
|
|
|
9
|
|
|
|
6,338
|
|
|
|
6,347
|
|
|
|
-
|
|
Total
|
|
$
|
1,902
|
|
|
$
|
265
|
|
|
$
|
2,044
|
|
|
$
|
4,211
|
|
|
$
|
697,232
|
|
|
$
|
701,443
|
|
|
$
|
-
|
|
6. Loans Held for Investment (Continued)
The following table presents information on
loans that were considered impaired as of June 30, 2017 and December 31, 2016. Impaired loans include loans modified as a TDR,
whether on accrual or non-accrual status. At June 30, 2017, impaired loans included $1.2 million of TDRs, compared to $1.9 million
at December 31, 2016.
|
|
|
|
|
Contractual
|
|
|
|
|
|
YTD Average
|
|
|
Interest Income
|
|
|
|
Recorded
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Recognized on
|
|
Impaired Loans June 30, 2017
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
425
|
|
|
$
|
511
|
|
|
$
|
-
|
|
|
$
|
538
|
|
|
$
|
13
|
|
Commercial real estate
|
|
|
5,904
|
|
|
|
5,947
|
|
|
|
-
|
|
|
|
6,078
|
|
|
|
159
|
|
Commercial lots and raw land
|
|
|
1,042
|
|
|
|
1,042
|
|
|
|
-
|
|
|
|
1,611
|
|
|
|
27
|
|
Commercial and industrial
|
|
|
92
|
|
|
|
92
|
|
|
|
-
|
|
|
|
97
|
|
|
|
2
|
|
Consumer real estate
|
|
|
208
|
|
|
|
224
|
|
|
|
-
|
|
|
|
202
|
|
|
|
8
|
|
Consumer lots and raw land
|
|
|
86
|
|
|
|
92
|
|
|
|
-
|
|
|
|
113
|
|
|
|
2
|
|
Home equity lines of credit
|
|
|
27
|
|
|
|
30
|
|
|
|
-
|
|
|
|
42
|
|
|
|
1
|
|
Consumer other
|
|
|
36
|
|
|
|
36
|
|
|
|
-
|
|
|
|
37
|
|
|
|
1
|
|
Subtotal:
|
|
|
7,820
|
|
|
|
7,974
|
|
|
|
-
|
|
|
|
8,718
|
|
|
|
213
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
278
|
|
|
|
278
|
|
|
|
-
|
|
|
|
282
|
|
|
|
7
|
|
Commercial and industrial
|
|
|
170
|
|
|
|
174
|
|
|
|
170
|
|
|
|
218
|
|
|
|
6
|
|
Consumer lots and raw land
|
|
|
589
|
|
|
|
589
|
|
|
|
103
|
|
|
|
609
|
|
|
|
12
|
|
Home equity lines of credit
|
|
|
55
|
|
|
|
58
|
|
|
|
36
|
|
|
|
45
|
|
|
|
2
|
|
Subtotal
|
|
|
1,092
|
|
|
|
1,099
|
|
|
|
309
|
|
|
|
1,154
|
|
|
|
27
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
425
|
|
|
|
511
|
|
|
|
-
|
|
|
|
538
|
|
|
|
13
|
|
Commercial
|
|
|
7,486
|
|
|
|
7,533
|
|
|
|
170
|
|
|
|
8,286
|
|
|
|
201
|
|
Consumer
|
|
|
1,001
|
|
|
|
1,029
|
|
|
|
139
|
|
|
|
1,048
|
|
|
|
26
|
|
Grand Total
|
|
$
|
8,912
|
|
|
$
|
9,073
|
|
|
$
|
309
|
|
|
$
|
9,872
|
|
|
$
|
240
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
YTD Average
|
|
|
Interest Income
|
|
|
|
Recorded
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Recognized on
|
|
Impaired Loans December 31, 2016
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
597
|
|
|
$
|
730
|
|
|
$
|
-
|
|
|
$
|
804
|
|
|
$
|
32
|
|
Commercial real estate
|
|
|
6,581
|
|
|
|
6,645
|
|
|
|
-
|
|
|
|
7,742
|
|
|
|
408
|
|
Commercial lots and raw land
|
|
|
2,185
|
|
|
|
2,185
|
|
|
|
-
|
|
|
|
2,376
|
|
|
|
121
|
|
Commercial and industrial
|
|
|
102
|
|
|
|
102
|
|
|
|
-
|
|
|
|
59
|
|
|
|
5
|
|
Consumer real estate
|
|
|
221
|
|
|
|
232
|
|
|
|
-
|
|
|
|
257
|
|
|
|
8
|
|
Consumer lots and raw land
|
|
|
129
|
|
|
|
135
|
|
|
|
-
|
|
|
|
86
|
|
|
|
10
|
|
Home equity lines of credit
|
|
|
71
|
|
|
|
73
|
|
|
|
-
|
|
|
|
50
|
|
|
|
3
|
|
Consumer other
|
|
|
38
|
|
|
|
38
|
|
|
|
-
|
|
|
|
40
|
|
|
|
2
|
|
Subtotal:
|
|
|
9,924
|
|
|
|
10,140
|
|
|
|
-
|
|
|
|
11,414
|
|
|
|
589
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
287
|
|
|
|
287
|
|
|
|
-
|
|
|
|
579
|
|
|
|
15
|
|
Commercial and industrial
|
|
|
242
|
|
|
|
678
|
|
|
|
226
|
|
|
|
48
|
|
|
|
35
|
|
Consumer real estate
|
|
|
647
|
|
|
|
647
|
|
|
|
144
|
|
|
|
687
|
|
|
|
34
|
|
Consumer lots and raw land
|
|
|
23
|
|
|
|
25
|
|
|
|
23
|
|
|
|
18
|
|
|
|
3
|
|
Subtotal
|
|
|
1,199
|
|
|
|
1,637
|
|
|
|
393
|
|
|
|
1,332
|
|
|
|
87
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
597
|
|
|
|
730
|
|
|
|
-
|
|
|
|
804
|
|
|
|
32
|
|
Commercial
|
|
|
9,397
|
|
|
|
9,897
|
|
|
|
226
|
|
|
|
10,804
|
|
|
|
584
|
|
Consumer
|
|
|
1,129
|
|
|
|
1,150
|
|
|
|
167
|
|
|
|
1,138
|
|
|
|
60
|
|
Grand Total
|
|
$
|
11,123
|
|
|
$
|
11,777
|
|
|
$
|
393
|
|
|
$
|
12,746
|
|
|
$
|
676
|
|
6. Loans Held for Investment (Continued)
Credit Quality Indicators
.
The
Bank assigns a risk grade to each loan in the portfolio as part of the on-going monitoring of the credit quality of the loan portfolio.
Commercial loans are graded on a scale of
1 to 9 as follows:
|
·
|
Risk
Grade 1 (Excellent) - Loans in this category are considered to be of the highest quality.
|
|
·
|
Risk
Grade 2 (Above Average) - Loans are supported by above average financial strength and
stability.
|
|
·
|
Risk
Grade 3 (Average) - Credits in this group are supported by upper tier industry-average
financial strength and stability.
|
|
·
|
Risk
Grade 4 (Acceptable) - Credits in this group are supported by lower end industry-average
financial strength and stability.
|
|
·
|
Risk
Grade 5 (Watch) - An asset in this category is one that has been identified by the lender,
or credit administration as a loan that has shown some degree of deterioration from its
original status.
|
|
·
|
Risk
Grade 6 (Special Mention) - An asset in this category is currently protected by collateral
but has potential weaknesses that deserve management’s close attention.
|
|
·
|
Risk
Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound
net worth and paying capacity of the debtor(s) or of the collateral pledged, if any.
|
|
·
|
Risk
Grade 8 (Doubtful) - A loan graded in this category has all the weaknesses inherent in
one graded Substandard with the added characteristic that the weaknesses make collection
or liquidation in full highly questionable and improbable.
|
|
·
|
Risk
Grade 9 (Loss) - A loan graded as Loss is considered uncollectible and of such little
value that continuance as a bankable asset is not warranted.
|
Consumer loans are graded on a scale of 1
to 9 as follows:
|
·
|
Risk
Grades 1 - 5 (Pass) - Loans in this category generally show little to no signs of weakness
or have adequate mitigating factors that minimize the risk of loss.
|
|
·
|
Risk
Grade 6 (Special Mention) - An asset in this category is currently protected by collateral
but has potential weaknesses that deserve management’s close attention.
|
|
·
|
Risk
Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound
net worth and paying capacity of the debtor(s) or of the collateral pledged, if any.
|
|
·
|
Risk
Grade 8 (Doubtful) - A loan graded in this category has all the weaknesses inherent in
one graded Substandard with the added characteristic that the weaknesses make collection
or liquidation in full highly questionable and improbable.
|
|
·
|
Risk
Grade 9 (Loss) - A loan graded as Loss is considered uncollectible and of such little
value that continuance as a bankable asset is not warranted.
|
Mortgage loans are graded on a scale of 1
to 9 as follows:
|
·
|
Risk
Grades 1 - 4 (Pass) - Loans in this category generally show little to no signs of weakness
or have adequate mitigating factors that minimize the risk of loss.
|
|
·
|
Risk
Grade 5 (Pass -Watch) – Watch loans have shown credit quality changes from the
original status.
|
|
·
|
Risk
Grade 6 (Special Mention) – Special Mention loans are currently protected by collateral
but have potential weaknesses that deserve management’s close attention.
|
|
·
|
Risk
Grade 7 (Substandard) - Substandard loans are inadequately protected by the sound net
worth and paying capacity of the borrower(s).
|
|
·
|
Risk
Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses make collection
or liquidation in full highly questionable and improbable.
|
|
·
|
Risk
Grade 9 (Loss) - Loans classified Loss are considered uncollectible and of such little
value that their continuance as bankable assets is not warranted.
|
6. Loans Held for Investment (Continued)
The following table presents information on
risk ratings of the commercial, consumer, mortgage and lease receivable portfolios, segregated by loan class as of June 30, 2017
and December 31, 2016:
June 30, 2017
|
Commercial Credit Exposure by Assigned Risk Grade
|
|
Commercial
Real Estate
|
|
|
Commercial
Construction
|
|
|
Commercial Lots
and Raw Land
|
|
|
Commercial and
Industrial
|
|
|
|
(In thousands)
|
|
1-Excellent
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
2-Above Average
|
|
|
2,678
|
|
|
|
-
|
|
|
|
787
|
|
|
|
286
|
|
3-Average
|
|
|
120,775
|
|
|
|
10,730
|
|
|
|
2,745
|
|
|
|
20,298
|
|
4-Acceptable
|
|
|
269,366
|
|
|
|
40,173
|
|
|
|
19,645
|
|
|
|
61,661
|
|
5-Watch
|
|
|
17,613
|
|
|
|
603
|
|
|
|
7,268
|
|
|
|
5,000
|
|
6-Special Mention
|
|
|
7,238
|
|
|
|
-
|
|
|
|
719
|
|
|
|
1,012
|
|
7-Substandard
|
|
|
3,632
|
|
|
|
-
|
|
|
|
31
|
|
|
|
2,109
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
421,302
|
|
|
$
|
51,506
|
|
|
$
|
31,195
|
|
|
$
|
90,375
|
|
June 30, 2017
|
Consumer Credit Exposure by Assigned
Risk Grade
|
|
Consumer
Real Estate
|
|
|
Consumer
Construction
|
|
|
Consumer Lots
and Raw Land
|
|
|
Home Equity
Line of Credit
|
|
|
Consumer
Other
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
20,067
|
|
|
$
|
419
|
|
|
$
|
8,559
|
|
|
$
|
39,499
|
|
|
$
|
13,954
|
|
6-Special Mention
|
|
|
118
|
|
|
|
-
|
|
|
|
197
|
|
|
|
41
|
|
|
|
1
|
|
7-Substandard
|
|
|
234
|
|
|
|
-
|
|
|
|
111
|
|
|
|
198
|
|
|
|
37
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
20,419
|
|
|
$
|
419
|
|
|
$
|
8,867
|
|
|
$
|
39,738
|
|
|
$
|
13,992
|
|
June 30, 2017
|
Mortgage and Lease Receivable Credit Exposure by
Assigned Risk Grade
|
|
Residential Real
Estate
|
|
|
Residential
Construction
|
|
|
Residential Lots
and Raw Land
|
|
|
Lease Receivable
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
67,927
|
|
|
$
|
6,830
|
|
|
$
|
137
|
|
|
$
|
22,848
|
|
6-Special Mention
|
|
|
747
|
|
|
|
-
|
|
|
|
-
|
|
|
|
97
|
|
7-Substandard
|
|
|
975
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
69,649
|
|
|
$
|
6,830
|
|
|
$
|
137
|
|
|
$
|
22,945
|
|
6. Loans Held for Investment (Continued)
December 31, 2016
|
Commercial Credit Exposure by Assigned Risk Grade
|
|
Commercial
Real Estate
|
|
|
Commercial
Construction
|
|
|
Commercial Lots
and Raw Land
|
|
|
Commercial and
Industrial
|
|
|
|
(In thousands)
|
|
1-Excellent
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72
|
|
2-Above Average
|
|
|
2,567
|
|
|
|
-
|
|
|
|
203
|
|
|
|
520
|
|
3-Average
|
|
|
112,489
|
|
|
|
13,986
|
|
|
|
2,237
|
|
|
|
14,331
|
|
4-Acceptable
|
|
|
237,473
|
|
|
|
40,819
|
|
|
|
22,042
|
|
|
|
48,305
|
|
5-Watch
|
|
|
17,869
|
|
|
|
1,184
|
|
|
|
7,027
|
|
|
|
1,890
|
|
6-Special Mention
|
|
|
3,424
|
|
|
|
129
|
|
|
|
1,384
|
|
|
|
672
|
|
7-Substandard
|
|
|
4,351
|
|
|
|
-
|
|
|
|
541
|
|
|
|
2,190
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
378,173
|
|
|
$
|
56,118
|
|
|
$
|
33,434
|
|
|
$
|
67,980
|
|
December 31, 2016
|
Consumer Credit Exposure by Assigned
Risk Grade
|
|
Consumer Real
Estate
|
|
|
Consumer
Construction
|
|
|
Consumer Lots
and Raw Land
|
|
|
Home Equity
Line of Credit
|
|
|
Consumer
Other
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
16,472
|
|
|
$
|
105
|
|
|
$
|
8,595
|
|
|
$
|
36,474
|
|
|
$
|
6,345
|
|
6-Special Mention
|
|
|
252
|
|
|
|
-
|
|
|
|
211
|
|
|
|
84
|
|
|
|
2
|
|
7-Substandard
|
|
|
243
|
|
|
|
-
|
|
|
|
169
|
|
|
|
257
|
|
|
|
-
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
16,967
|
|
|
$
|
105
|
|
|
$
|
8,975
|
|
|
$
|
36,815
|
|
|
$
|
6,347
|
|
December 31, 2016
|
Mortgage and Lease Receivable Credit Exposure by
Assigned Risk Grade
|
|
Residential Real
Estate
|
|
|
Residential
Construction
|
|
|
Residential Lots
and Raw Land
|
|
|
Lease Receivable
|
|
|
|
(In thousands)
|
|
Pass
|
|
$
|
65,406
|
|
|
$
|
7,875
|
|
|
$
|
154
|
|
|
$
|
21,236
|
|
6-Special Mention
|
|
|
761
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
7-Substandard
|
|
|
1,097
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
8-Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
9-Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
67,264
|
|
|
$
|
7,875
|
|
|
$
|
154
|
|
|
$
|
21,236
|
|
7. Allowance for Loan and Lease Losses
.
The following table presents a roll forward summary of activity in the allowance for loan and lease losses (“ALLL”),
by loan category, for the six months ended June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
|
Beginning
|
|
|
Charge-
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Total
|
|
|
|
Balance
|
|
|
Offs
|
|
|
Recoveries
|
|
|
Provisions
|
|
|
Balance
|
|
|
Loans
|
|
|
|
(In thousands)
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
695
|
|
|
$
|
(33
|
)
|
|
$
|
-
|
|
|
$
|
55
|
|
|
$
|
717
|
|
|
$
|
69,224
|
|
Residential construction
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
74
|
|
|
|
6,830
|
|
Residential lots and raw land
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
137
|
|
Commercial real estate
|
|
|
4,562
|
|
|
|
(4
|
)
|
|
|
17
|
|
|
|
396
|
|
|
|
4,971
|
|
|
|
415,120
|
|
Commercial construction
|
|
|
689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
605
|
|
|
|
51,506
|
|
Commercial lots and raw land
|
|
|
365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
337
|
|
|
|
30,153
|
|
Commercial and industrial
|
|
|
840
|
|
|
|
(20
|
)
|
|
|
2
|
|
|
|
259
|
|
|
|
1,081
|
|
|
|
90,113
|
|
Lease receivables
|
|
|
226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
237
|
|
|
|
22,945
|
|
Consumer real estate
|
|
|
186
|
|
|
|
-
|
|
|
|
1
|
|
|
|
61
|
|
|
|
248
|
|
|
|
20,211
|
|
Consumer construction
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
4
|
|
|
|
419
|
|
Consumer lots and raw land
|
|
|
134
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(39
|
)
|
|
|
97
|
|
|
|
8,192
|
|
Home equity lines of credit
|
|
|
414
|
|
|
|
(5
|
)
|
|
|
22
|
|
|
|
(5
|
)
|
|
|
426
|
|
|
|
39,656
|
|
Consumer other
|
|
|
77
|
|
|
|
(4
|
)
|
|
|
25
|
|
|
|
162
|
|
|
|
260
|
|
|
|
13,956
|
|
Total
|
|
|
8,280
|
|
|
|
(66
|
)
|
|
|
69
|
|
|
|
775
|
|
|
|
9,058
|
|
|
|
768,462
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
425
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,182
|
|
Commercial lots and raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
1,042
|
|
Commercial and industrial
|
|
|
226
|
|
|
|
(67
|
)
|
|
|
-
|
|
|
|
11
|
|
|
|
170
|
|
|
|
262
|
|
Consumer real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
208
|
|
Consumer lots and raw land
|
|
|
144
|
|
|
|
(26
|
)
|
|
|
15
|
|
|
|
(30
|
)
|
|
|
103
|
|
|
|
675
|
|
Home equity lines of credit
|
|
|
23
|
|
|
|
-
|
|
|
|
3
|
|
|
|
10
|
|
|
|
36
|
|
|
|
82
|
|
Consumer other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
Total
|
|
|
393
|
|
|
|
(93
|
)
|
|
|
34
|
|
|
|
(25
|
)
|
|
|
309
|
|
|
|
8,912
|
|
Grand Total
|
|
$
|
8,673
|
|
|
$
|
(159
|
)
|
|
$
|
103
|
|
|
$
|
750
|
|
|
$
|
9,367
|
|
|
$
|
777,374
|
|
7. Allowance for Loan and Lease Losses
(Continued)
|
|
June 30, 2016
|
|
|
|
Beginning
|
|
|
Charge-
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Total
|
|
|
|
Balance
|
|
|
Offs
|
|
|
Recoveries
|
|
|
Provisions
|
|
|
Balance
|
|
|
Loans
|
|
|
|
(In thousands)
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
730
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(45
|
)
|
|
$
|
685
|
|
|
$
|
66,480
|
|
Residential construction
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
69
|
|
|
|
6,103
|
|
Residential lots and raw land
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
165
|
|
Commercial real estate
|
|
|
4,065
|
|
|
|
-
|
|
|
|
16
|
|
|
|
217
|
|
|
|
4,298
|
|
|
|
355,006
|
|
Commercial construction
|
|
|
518
|
|
|
|
-
|
|
|
|
70
|
|
|
|
96
|
|
|
|
684
|
|
|
|
56,513
|
|
Commercial lots and raw land
|
|
|
303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
376
|
|
|
|
32,721
|
|
Commercial and industrial
|
|
|
641
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
88
|
|
|
|
730
|
|
|
|
57,021
|
|
Lease receivables
|
|
|
196
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
204
|
|
|
|
18,927
|
|
Consumer real estate
|
|
|
198
|
|
|
|
-
|
|
|
|
7
|
|
|
|
(17
|
)
|
|
|
188
|
|
|
|
16,567
|
|
Consumer construction
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
4
|
|
|
|
417
|
|
Consumer lots and raw land
|
|
|
125
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
|
8,568
|
|
Home equity lines of credit
|
|
|
351
|
|
|
|
-
|
|
|
|
1
|
|
|
|
21
|
|
|
|
373
|
|
|
|
32,791
|
|
Consumer other
|
|
|
71
|
|
|
|
(34
|
)
|
|
|
13
|
|
|
|
23
|
|
|
|
73
|
|
|
|
6,331
|
|
Total
|
|
|
7,249
|
|
|
|
(40
|
)
|
|
|
110
|
|
|
|
488
|
|
|
|
7,807
|
|
|
|
657,610
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
779
|
|
Commercial real estate
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
1
|
|
|
|
414
|
|
|
|
347
|
|
|
|
7,221
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
405
|
|
Commercial lots and raw land
|
|
|
365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(365
|
)
|
|
|
-
|
|
|
|
2,357
|
|
Commercial and industrial
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
5
|
|
|
|
40
|
|
Consumer real estate
|
|
|
30
|
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
371
|
|
Consumer lots and raw land
|
|
|
209
|
|
|
|
(50
|
)
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
156
|
|
|
|
765
|
|
Home equity lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
20
|
|
|
|
23
|
|
|
|
76
|
|
Consumer other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
Total
|
|
|
618
|
|
|
|
(156
|
)
|
|
|
7
|
|
|
|
62
|
|
|
|
531
|
|
|
|
12,054
|
|
Grand Total
|
|
$
|
7,867
|
|
|
$
|
(196
|
)
|
|
$
|
117
|
|
|
$
|
550
|
|
|
$
|
8,338
|
|
|
$
|
669,664
|
|
8. Troubled Debt Restructurings.
The
following table details performing TDR loans at June 30, 2017 and December 31, 2016, segregated by class of financing receivables:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(Dollars in thousands)
|
|
Performing TDRs accounted for on accrual status:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
609
|
|
|
|
461
|
|
Consumer real estate
|
|
|
35
|
|
|
|
-
|
|
Consumer lots and raw land
|
|
|
54
|
|
|
|
95
|
|
Total
|
|
$
|
698
|
|
|
$
|
556
|
|
Percentage of total loans, net
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
8. Troubled Debt Restructurings (Continued)
The following table presents a roll forward
of performing TDR loans for the six months ended June 30, 2017 and 2016:
Performing TDRs
|
|
Beginning
Balance
|
|
|
Additions (1)
|
|
|
Charge-offs (2)
|
|
|
Other (3)
|
|
|
Ending Balance
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial
|
|
|
461
|
|
|
|
252
|
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
609
|
|
Consumer
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
89
|
|
Total
|
|
$
|
556
|
|
|
$
|
252
|
|
|
$
|
-
|
|
|
$
|
(110
|
)
|
|
$
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial
|
|
|
770
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(385
|
)
|
|
|
385
|
|
Consumer
|
|
|
107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
101
|
|
Total
|
|
$
|
877
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(391
|
)
|
|
$
|
486
|
|
The following table presents a roll forward
of non-performing TDR loans for the six months ended June 30, 2017 and 2016:
Non-Performing TDRs
|
|
Beginning
Balance
|
|
|
Additions (1)
|
|
|
Charge-offs (2)
|
|
|
Other (4)
|
|
|
Ending Balance
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
324
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(169
|
)
|
|
$
|
155
|
|
Commercial
|
|
|
822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(652
|
)
|
|
|
170
|
|
Consumer
|
|
|
238
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
224
|
|
Total
|
|
$
|
1,384
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(835
|
)
|
|
$
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
$
|
809
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
(303
|
)
|
|
$
|
504
|
|
Commercial
|
|
|
534
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(234
|
)
|
|
|
300
|
|
Consumer
|
|
|
159
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
152
|
|
Total
|
|
$
|
1,502
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
(544
|
)
|
|
$
|
956
|
|
|
1.
|
Includes new TDRs and increases to
existing TDRs.
|
|
2.
|
Post modification charge-offs.
|
|
3.
|
Includes principal payments, paydowns
and performing loans previously restructured at market rates that are no longer reported
as TDRs.
|
|
4.
|
Includes principal payments, paydowns
and loans previously designated as non-performing that are currently performing in compliance
with their modified terms.
|
The Bank performs restructurings on certain
troubled loan workouts, whereby existing loans are restructured into a multiple note structure (i.e., Note A and Note B structure).
The Bank separates a portion of the current outstanding debt into a new legally enforceable note (“Note A”) that is
reasonably assured of repayment and performance according to prudently modified terms. The portion of the debt that is not reasonably
assured of repayment (“Note B”) is adversely classified and charged-off as appropriate. The following table provides
information on multiple note restructures for certain commercial real estate loan workouts as of June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
(In thousands)
|
|
Note A Structure
|
|
|
|
|
|
|
|
|
Commercial real estate (1)
|
|
$
|
338
|
|
|
$
|
263
|
|
Note B Structure
|
|
|
|
|
|
|
|
|
Commercial real estate (2)
|
|
$
|
206
|
|
|
$
|
174
|
|
Reduction of interest income (3)
|
|
$
|
5
|
|
|
$
|
5
|
|
|
(1)
|
If Note A was on nonaccrual status,
it may be placed back on accrual status based on sustained historical payment performance
of generally nine months.
|
|
(2)
|
Note B is immediately charged-off
upon restructuring; however, payment in full is due at maturity of the note.
|
|
(3)
|
Reflects amount of interest income
reduction during the six months ended June 30, 2017 and 2016, as a result of multiple
note restructures.
|
8. Troubled Debt Restructurings (Continued)
The benefit of this workout strategy is for
Note A note to remain or become a performing asset for which the borrower has the willingness and ability to meet the restructured
payment terms and conditions. In addition, this workout strategy reduces the prospects of further write downs and charge offs,
and also reduces the prospects of a potential foreclosure. Following this restructuring, the Note A credit classification generally
improves to an unclassified risk grade after a period of sustained payments.
The general terms of the new loans restructured
under the Note A and Note B structure differ as follows:
|
·
|
Note
A
: First lien position; fixed or adjustable current market interest rate; fixed month
term to maturity; payments – interest only to maturity, or full principal and interest
to maturity. Note A is underwritten in accordance with the Bank’s customary underwriting
standards and is generally on an accrual basis.
|
|
·
|
Note
B
: Second lien position; fixed or adjustable below current market interest rate;
fixed month term to maturity; payments – due in full at maturity. Note B is underwritten
in accordance with the Bank’s customary underwriting standards, except for the
below market interest rate and payment terms, is on a nonaccrual basis and is charged
off.
|
9. Other Real Estate Owned.
The following
table reflects the changes in other real estate owned (“OREO”) during the six months ended June 30, 2017 and 2016:
|
|
Beginning
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Ending
|
|
Six Months Ended:
|
|
Balance
|
|
|
Additions
|
|
|
Sales, net
|
|
|
Adjustments
|
|
|
Balance
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
|
$
|
3,229
|
|
|
$
|
266
|
|
|
$
|
(880
|
)
|
|
$
|
(177
|
)
|
|
$
|
2,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
6,125
|
|
|
$
|
464
|
|
|
$
|
(938
|
)
|
|
$
|
(110
|
)
|
|
$
|
5,541
|
|
Fair value adjustments are recorded in order
to adjust the carrying values of OREO properties to estimated fair market values. In most cases, estimated fair market values
are derived from an initial appraisal, an updated appraisal or other forms of internal evaluations. In certain instances when
a listing agreement is renewed for a lesser amount, carrying values will be adjusted to the lesser fair value amount. Additionally,
in certain instances when an offer to purchase is received near the end of a quarterly accounting period for less than the carrying
value, and the sale does not close until the next accounting period, the carrying value will be adjusted to the lesser fair value
amount. At June 30, 2017, OREO consisted of residential and commercial properties, developed lots and raw land.
10. Premises and Equipment.
The following
table presents premises and equipment at June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
$
|
2,807,558
|
|
|
$
|
2,817,308
|
|
Office buildings and improvements
|
|
|
10,195,264
|
|
|
|
9,667,612
|
|
Furniture, fixtures and equipment
|
|
|
9,901,636
|
|
|
|
9,877,872
|
|
Vehicles
|
|
|
623,038
|
|
|
|
621,238
|
|
Projects/work in process
|
|
|
510,760
|
|
|
|
571,784
|
|
|
|
|
24,038,256
|
|
|
|
23,555,814
|
|
Less accumulated depreciation
|
|
|
12,886,051
|
|
|
|
12,264,218
|
|
Total
|
|
$
|
11,152,205
|
|
|
$
|
11,291,596
|
|
The Bank leases certain branch facilities
and equipment under separate agreements that expire at various dates through October 30, 2027. Rental expense of $333,082 and
$665,416 during the three and six months ended June 30, 2017, and $339,099 and $687,959 during the three and six months ended
June 30, 2016, respectively, is included in premises and equipment expense on the accompanying consolidated statements of operations.
Future rental expenses under these leases
as of June 30, 2017 are as follows:
2017
|
|
$
|
661,076
|
|
2018
|
|
|
1,114,684
|
|
2019
|
|
|
854,960
|
|
2020
|
|
|
637,077
|
|
2021
|
|
|
541,209
|
|
Thereafter
|
|
|
1,553,207
|
|
Total
|
|
$
|
5,362,213
|
|
11. Goodwill and Other Intangibles.
The following table
presents activity for goodwill and other intangible assets for the six months ended June 30, 2017 and 2016:
Six Months Ended June 30, 2017:
|
|
Goodwill
|
|
|
Identifiable Intangibles
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
4,218,576
|
|
|
$
|
1,611,187
|
|
|
$
|
5,829,763
|
|
Amortization
|
|
|
-
|
|
|
|
(120,839
|
)
|
|
|
(120,839
|
)
|
Balance at June 30, 2017
|
|
$
|
4,218,576
|
|
|
$
|
1,490,348
|
|
|
$
|
5,708,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
4,218,576
|
|
|
$
|
1,895,514
|
|
|
$
|
6,114,090
|
|
Amortization
|
|
|
-
|
|
|
|
(142,164
|
)
|
|
|
(142,164
|
)
|
Balance at June 30, 2016
|
|
$
|
4,218,576
|
|
|
$
|
1,753,350
|
|
|
$
|
5,971,926
|
|
The following table presents a rollforward
of the gross carrying amount, new acquisitions, accumulated amortization and net book value for the Company’s core deposit
intangible (“CDI”), related to the acquisition of branch offices from Bank of America, N.A. on December 12, 2014.
The CDI is the only identifiable intangible asset subject to amortization at June 30, 2017 and December 31, 2016, respectively:
|
|
Identifiable Intangibles
|
|
Net book value at December 31, 2015
|
|
$
|
1,895,514
|
|
Accumulated amortization
|
|
|
(284,327
|
)
|
Net book value at December 31, 2016
|
|
|
1,611,187
|
|
Accumulated amortization
|
|
|
(120,839
|
)
|
Net book value at June 30, 2017
|
|
$
|
1,490,348
|
|
The following table presents estimated future
amortization expense of the CDI. At June 30, 2017, the remaining life of the CDI was 7.50 years.
2017
|
|
$
|
120,839
|
|
2018
|
|
|
223,002
|
|
2019
|
|
|
223,002
|
|
2020
|
|
|
223,002
|
|
2021
|
|
|
223,002
|
|
Thereafter
|
|
|
477,501
|
|
Total
|
|
$
|
1,490,348
|
|
12. Deposits.
The following table presents
the distribution of the Company’s deposit accounts as of June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(In thousands)
|
|
Demand accounts:
|
|
|
|
Non-interest bearing checking
|
|
$
|
208,672
|
|
|
$
|
196,917
|
|
Interest bearing checking
|
|
|
222,266
|
|
|
|
189,401
|
|
Money market
|
|
|
86,533
|
|
|
|
82,698
|
|
Savings accounts
|
|
|
149,721
|
|
|
|
145,032
|
|
Certificate accounts
|
|
|
264,342
|
|
|
|
256,552
|
|
Total deposits
|
|
$
|
931,534
|
|
|
$
|
870,600
|
|
At June 30, 2017, the scheduled maturities of certificate accounts
were as follows:
|
|
$250,000 or
Less
|
|
|
More than
$250,000
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Three months or less
|
|
$
|
33,113
|
|
|
$
|
3,706
|
|
|
$
|
36,819
|
|
Over three months through one year
|
|
|
107,926
|
|
|
|
14,323
|
|
|
|
122,249
|
|
Over one year through three years
|
|
|
53,263
|
|
|
|
25,636
|
|
|
|
78,899
|
|
Over three years
|
|
|
18,788
|
|
|
|
7,587
|
|
|
|
26,375
|
|
Total time deposits
|
|
$
|
213,090
|
|
|
$
|
51,252
|
|
|
$
|
264,342
|
|
The aggregate amount of time deposits with
balances of $250,000 or more was $51.3 million and $39.2 million at June 30, 2017 and December 31, 2016, respectively.
13. Borrowed Money.
The Bank had $22.5
million of FHLB borrowings outstanding at June 30, 2017, compared to $17.0 million at December 31, 2016. The Bank pledges its
stock in the FHLB and certain loans as collateral for actual or potential FHLB advances. At June 30, 2017 and December 31, 2016,
the Bank had $259.6 million and $246.2 million, respectively, of credit available with the FHLB. At June 30, 2017, the Bank had
lendable collateral value with the FHLB totaling $220.4 million. Additional collateral would be required in order to access total
borrowings up to the credit availability limit.
The following table details the Bank’s
FHLB advances outstanding and the related maturity dates and interest rates at June 30, 2017:
Maturity Date
|
|
Interest Rate
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 25, 2018
|
|
|
1.320
|
%
|
|
$
|
6,000
|
|
June 22, 2018
|
|
|
1.330
|
%
|
|
|
1,000
|
|
June 25, 2018
|
|
|
0.870
|
%
|
|
|
1,000
|
|
June 25, 2018
|
|
|
1.360
|
%
|
|
|
2,000
|
|
June 29, 2018
|
|
|
1.340
|
%
|
|
|
1,000
|
|
December 21, 2018
|
|
|
1.470
|
%
|
|
|
2,500
|
|
June 24, 2019
|
|
|
1.048
|
%
|
|
|
1,000
|
|
July 8, 2019
|
|
|
1.620
|
%
|
|
|
2,000
|
|
June 22, 2020
|
|
|
1.720
|
%
|
|
|
3,000
|
|
June 29, 2020
|
|
|
1.980
|
%
|
|
|
2,000
|
|
July 6, 2020
|
|
|
1.890
|
%
|
|
|
1,000
|
|
|
|
|
|
|
|
$
|
22,500
|
|
14. Junior Subordinated Debentures.
The
Company has sponsored a trust, First South Preferred Trust I (the “Trust”), of which 100% of its common equity is
owned by the Company. The Trust was formed for the purpose of issuing Company-obligated trust preferred securities (the “Trust
Preferred Securities”) to third-party investors and investing the proceeds from the sale of the Trust Preferred Securities
solely in junior subordinated debt securities of the Company (the “Debentures”). The Debentures held by the Trust
are the sole assets of the Trust. Distributions on the Trust Preferred Securities issued by the Trust are payable quarterly at
a rate equal to the interest rate being earned by the Trust on the Debentures held by the Trust. The Trust Preferred Securities
are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures. The Company has entered into an agreement
which fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Debentures
held by the Trust are redeemable, in whole or in part, by the Company after September 30, 2008. Subject to certain limitations,
the Junior Subordinated Debentures qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.
In July of 2013, the banking regulators issued
the final Basel III capital rules. Under these rules, bank holding companies with less than $15 billion in consolidated total
assets as of December 31, 2009, that issued trust preferred securities prior to May 19, 2010, are permanently grandfathered as
Tier 1 or Tier 2 capital.
Consolidated debt obligations as of June 30,
2017 related to the Trust holding solely Debentures of the Company follows:
LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033
|
|
$
|
10,000,000
|
|
LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033
|
|
|
310,000
|
|
Total junior subordinated debentures owed to unconsolidated subsidiary trust
|
|
$
|
10,310,000
|
|
The Trust Preferred Securities bear interest
at three-month LIBOR plus 2.95%,
payable quarterly. The Company has swapped the interest rate
on the Debentures to a fixed rate of 4.97%, with a maturity date of December 30, 2024. This strategy was executed to provide the
Company with protection to a rising rate environment. See Note 19 below for additional information.
15. Regulatory Capital.
The Company
and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial condition and results of operations. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures
of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s
capital amounts and ratios are not significantly different from those of the Bank. At June 30, 2017 and December 31, 2016, the
Company’s and the Bank’s Tier 1 and total capital ratios and their Tier 1 leverage ratios exceeded minimum requirements.
15. Regulatory Capital (Continued)
As of June 30, 2017, the Bank’s regulatory
capital position is categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions
or events since June 30, 2017, that management believes have changed the Bank's well capitalized category. Beginning in 2015, the
Bank became subject to the Basel III Capital Rules. As a result, certain items in the risk-based capital calculation have changed
and the Common Equity Tier 1 Risk-Based Capital Ratio (“CET1”) is now being measured and monitored. For the Bank’s
capital structure, the CET1 Capital Ratio and the Tier 1 Risk-Based Capital Ratio are identical.
Basel III limits capital distributions
and certain discretionary bonus payments if a banking organization does not hold a capital conservation buffer consisting of 2.50%
of CET1 capital, Tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based
capital requirements. The capital conservation buffer began to be phased in beginning January 1, 2016, at 0.625% of risk-weighted
assets, and increases each year until fully implemented at 2.50% on January 1, 2019. The CET1 capital conservation buffer for 2017
is 1.25% and the Bank’s buffer as of June 30, 2017 was 4.57%. When fully phased in on January 1, 2019, Basel III will require
(i) a minimum ratio of CET1 capital to risk-weighted assets of at least 4.50%, plus the capital conservation buffer, (ii) a minimum
ratio of Tier 1 capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer, (iii) a minimum ratio
of total capital to risk-weighted assets of at least 8.00%, plus the capital conservation buffer and (iv) a minimum leverage ratio
of 4.00%. The Bank’s actual regulatory capital amounts and ratios as of June 30, 2017 and December 31, 2016 are as follows:
Regulatory Capital Amounts and Ratios
|
|
6/30/2017
|
|
|
12/31/2016
|
|
|
|
Amount
|
|
|
Ratio (1)
|
|
|
Amount
|
|
|
Ratio (2)
|
|
|
|
(Dollars in thousands)
|
|
Total risk-based capital (1)
|
|
$
|
101,095
|
|
|
|
12.571
|
%
|
|
$
|
96,502
|
|
|
|
13.009
|
%
|
Tier 1 risk-based capital (1)
|
|
|
91,444
|
|
|
|
11.371
|
%
|
|
|
87,517
|
|
|
|
11.798
|
%
|
Common equity Tier 1 risk-based capital (1)
|
|
|
91,444
|
|
|
|
11.371
|
%
|
|
|
87,517
|
|
|
|
11.798
|
%
|
Tier 1 leverage capital
|
|
|
91,444
|
|
|
|
8.838
|
%
|
|
|
87,517
|
|
|
|
8.894
|
%
|
(1) Includes 1.25% phase in for capital conservation buffer.
(2) Includes 0.625% phase in for capital conservation buffer.
16. Stock-Based Compensation.
The
Company had two stock-based compensation plans at June 30, 2017. The shares outstanding are for grants under the Company’s
1997 Stock Option Plan (the “1997 Plan”) and the 2008 Equity Incentive Plan (the “2008 Plan”). The 1997
Plan matured on April 8, 2008 and no additional options may be granted under the 1997 Plan. At June 30, 2017, the 1997 Plan had
18,250 granted unexercised stock option shares. At June 30, 2017, the 2008 Plan included 124,700 granted unexercised stock option
shares, 7,165 granted nonvested restricted stock award shares and 804,150 shares available to be granted.
Stock Option Grants
.
Options
granted under the 2008 Plan are granted at the closing price of the Company’s common stock on the NASDAQ Stock Market on
the date of grant. Stock options expire ten years from the date of grant and vest over service periods ranging from one year to
five years. The Company settles stock option exercises with authorized unissued shares. The fair value of each stock option grant
is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S.
Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon
previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on
the yield at the time of the option grant. A summary of option activity under the Plans during the six month periods ended June
30, 2017 and 2016 is presented below:
|
|
Options
Outstanding
|
|
|
Price
|
|
|
Aggregate
Intrinsic Value
|
|
Period Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
147,750
|
|
|
$
|
9.91
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(800
|
)
|
|
|
8.13
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(4,000
|
)
|
|
|
7.57
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
142,950
|
|
|
|
9.98
|
|
|
$
|
1,057,875
|
|
Vested and Exercisable at June 30, 2017
|
|
|
124,750
|
|
|
$
|
10.33
|
|
|
$
|
894,894
|
|
Period Ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
165,750
|
|
|
$
|
10.76
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(3,000
|
)
|
|
|
27.87
|
|
|
|
|
|
Expired
|
|
|
(5,750
|
)
|
|
|
27.71
|
|
|
|
|
|
Exercised
|
|
|
(3,000
|
)
|
|
|
5.40
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
154,000
|
|
|
|
9.90
|
|
|
$
|
306,560
|
|
Vested and Exercisable at June 30, 2016
|
|
|
116,850
|
|
|
$
|
10.84
|
|
|
$
|
217,940
|
|
16. Stock-Based Compensation (Continued)
The following table summarizes additional
information about the Company’s outstanding options and exercisable options as of June 30, 2017, including weighted-average
remaining contractual term expressed in years (Life) and weighted average exercise price (Price):
|
|
Outstanding
|
|
|
Exercisable
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$4.00 – 10.00
|
|
|
86,700
|
|
|
|
5.41
|
|
|
$
|
6.06
|
|
|
|
68,500
|
|
|
$
|
5.66
|
|
$10.01 – 17.00
|
|
|
27,000
|
|
|
|
2.20
|
|
|
|
11.01
|
|
|
|
27,000
|
|
|
|
11.01
|
|
$17.01 – 30.00
|
|
|
29,250
|
|
|
|
0.76
|
|
|
|
20.65
|
|
|
|
29,250
|
|
|
|
20.65
|
|
|
|
|
142,950
|
|
|
|
3.85
|
|
|
$
|
9.98
|
|
|
|
124,750
|
|
|
$
|
10.33
|
|
A summary of nonvested option shares and
vesting changes during the six months ended June 30, 2017 and 2016 is presented below:
Period Ended:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Nonvested at beginning of period
|
|
|
32,150
|
|
|
$
|
7.09
|
|
|
|
53,300
|
|
|
$
|
6.67
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(800
|
)
|
|
|
8.13
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(13,150
|
)
|
|
|
6.34
|
|
|
|
(16,150
|
)
|
|
|
6.03
|
|
Nonvested at end of period
|
|
|
18,200
|
|
|
$
|
7.59
|
|
|
|
37,150
|
|
|
$
|
6.95
|
|
Total compensation expense
charged to income for stock options was $7,952 and $18,997, respectively, for the three and six months ended June 30, 2017, compared
to compensation expense of $11,783 and $23,563, respectively, for the three and six months ended June 30, 2016. As of June 30,
2017, total unrecognized compensation cost on granted unexercised shares was $67,249, and is expected to be recognized during the
next 2.75 years.
Restricted
Stock Awards
.
The Company measures the fair value
of restricted shares based on the price of its common stock on the grant date and compensation expense is recorded over the vesting
period. There were no restricted stock awards granted during the six months ended June 30, 2017. During the six months ended June
30, 2016, 3,000 restricted stock awards were granted with a four year vesting period, and 2,200 restricted stock awards were granted
with a five year vesting period. Total compensation expense recognized for restricted stock awards for the three and six months
ended June 30, 2017 was $9,524 and $19,048, respectively, compared to $9,687 and $18,566, respectively, for the three and six months
ended June 30, 2016. As of June 30, 2017, there was $43,251 of total unrecognized compensation cost related to nonvested restricted
stock granted under the 2008 Plan, which will be recognized over a remaining period of 3.75 years. A summary of nonvested restricted
stock awards and vesting changes during the six months ended June 30, 2017 and 2016 is presented below:
Period Ended:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Nonvested at beginning of period
|
|
|
11,750
|
|
|
$
|
8.27
|
|
|
|
10,425
|
|
|
$
|
8.36
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
5,200
|
|
|
|
8.15
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(4,585
|
)
|
|
|
8.31
|
|
|
|
(3,475
|
)
|
|
|
8.36
|
|
Nonvested at end of period
|
|
|
7,165
|
|
|
$
|
8.25
|
|
|
|
12,150
|
|
|
$
|
8.27
|
|
The following table reflects the combined
impact of fair value compensation cost recognition for stock options and restricted stock awards on income before income taxes,
net income, basic earnings per share and diluted earnings per share for the three and six month periods ended June 30, 2017 and
2016:
|
|
Three Months
Ended
6/30/17
|
|
|
Three Months
Ended
6/30/16
|
|
|
Six Months
Ended
6/30/17
|
|
|
Six Months
Ended
6/30/16
|
|
Decrease in net income before income taxes
|
|
$
|
17,476
|
|
|
$
|
21,470
|
|
|
$
|
38,045
|
|
|
$
|
42,129
|
|
Decrease in net income
|
|
$
|
17,476
|
|
|
$
|
21,470
|
|
|
$
|
38,045
|
|
|
$
|
42,129
|
|
Decrease in basic earnings per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Decrease in diluted earnings per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
17. Fair Value Measurement.
Fair
value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. A fair value hierarchy prioritizes the inputs of valuation techniques used
to measure fair value of nonfinancial assets and liabilities. The inputs are evaluated and an overall level for the fair value
measurement is determined. This overall level is an indication of the market observability of the fair value measurement. In order
to determine the fair value, the Bank must determine the unit of account, highest and best use, principal market, and market participants.
These determinations allow the Bank to define the inputs for fair value and level of hierarchy. Outlined below is the application
of the fair value hierarchy to the Bank’s financial assets that are carried at fair value.
Level 1: inputs to the valuation methodology
are quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access at the measurement
date. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever
available. The type of assets carried at Level 1 fair value generally includes investments such as U.S. Treasury and U.S. government
agency securities.
Level 2: inputs to the valuation methodology
include quoted prices for similar assets or liabilities in active markets and price quotations can vary substantially either over
time or among market makers. The type of assets carried at Level 2 fair value generally includes securities and mortgage-backed
securities issued by Government Sponsored Enterprises (“GSEs”), municipal bonds, corporate debt securities, mortgage
loans held for sale and bank-owned life insurance.
Level 3: inputs to the valuation methodology
are unobservable to the extent that observable inputs are not available. Unobservable inputs are developed based on the best information
available in the circumstances and might include the Bank’s own assumptions. The Bank considers information about market
participant assumptions that is reasonably available without undue cost and effort. The type of assets carried at Level 3 fair
value generally include investments backed by non-traditional mortgage loans or certain state or local housing agency obligations,
of which the Bank has no such assets or liabilities. Level 3 also includes impaired loans and other real estate owned.
Quoted market price for similar assets
in active markets is the valuation technique for determining fair value of securities available-for-sale and held-to-maturity.
Unrealized gains on available-for-sale securities are included in the “accumulated other comprehensive income” component
of the Stockholders’ Equity section of the Consolidated Statements of Financial Condition. The estimated fair value of loans
held for sale is based on commitments from investors within the secondary market for loans with similar characteristics. The Bank
does not record loans held for investment at fair value on a recurring basis. However, when a loan is considered impaired, an impairment
write down is taken based on the loan’s estimated fair value. The fair value of impaired loans is estimated using one of
several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those loans not requiring a write down represent loans for which the fair value of the expected repayments or collateral
exceed the recorded investments in such loans, and are not included below.
17. Fair Value Measurement (Continued)
Assets measured at fair value on a recurring basis as of June
30, 2017 and December 31, 2016:
|
|
Fair Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
|
|
|
Significant
Observable Inputs-
Outputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(In thousands)
|
|
Description
|
|
June 30, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
23,857
|
|
|
$
|
23,857
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
87,483
|
|
|
|
-
|
|
|
|
87,483
|
|
|
|
-
|
|
Municipal securities
|
|
|
57,157
|
|
|
|
-
|
|
|
|
57,157
|
|
|
|
-
|
|
Corporate bonds
|
|
|
26,904
|
|
|
|
-
|
|
|
|
26,904
|
|
|
|
-
|
|
Mortgage loans held for sale
|
|
|
6,381
|
|
|
|
-
|
|
|
|
6,381
|
|
|
|
-
|
|
Bank-owned life insurance
|
|
|
18,351
|
|
|
|
-
|
|
|
|
18,351
|
|
|
|
-
|
|
Interest rate swap
|
|
|
64
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
Total June 30, 2016
|
|
$
|
220,197
|
|
|
$
|
23,857
|
|
|
$
|
196,340
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
|
$
|
16,995
|
|
|
$
|
16,995
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
95,116
|
|
|
|
-
|
|
|
|
95,116
|
|
|
|
-
|
|
Municipal securities
|
|
|
53,682
|
|
|
|
-
|
|
|
|
53,682
|
|
|
|
-
|
|
Corporate bonds
|
|
|
26,813
|
|
|
|
-
|
|
|
|
26,813
|
|
|
|
-
|
|
Mortgage loans held for sale
|
|
|
5,099
|
|
|
|
-
|
|
|
|
5,099
|
|
|
|
-
|
|
Bank-owned life insurance
|
|
|
18,080
|
|
|
|
-
|
|
|
|
18,080
|
|
|
|
-
|
|
Interest rate swap
|
|
|
121
|
|
|
|
-
|
|
|
|
121
|
|
|
|
-
|
|
Total December 31, 2015
|
|
$
|
215,906
|
|
|
$
|
16,995
|
|
|
$
|
198,911
|
|
|
$
|
-
|
|
Assets measured at fair value on a non-recurring basis as of
June 30, 2017 and December 31, 2016:
|
|
Fair Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
|
|
|
Significant
Observable Inputs-
Outputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
(In thousands)
|
|
Description
|
|
June 30, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Impaired loans, net
|
|
$
|
8,603
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,603
|
|
Other real estate owned
|
|
|
2,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,438
|
|
Total June 30, 2016
|
|
$
|
11,041
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Impaired loans, net
|
|
$
|
10,730
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,730
|
|
Other real estate owned
|
|
|
3,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,229
|
|
Total December 31, 2015
|
|
$
|
13,959
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,959
|
|
Impaired loans at June 30, 2017 and December
31, 2016 include $7.8 million and $9.9 million, respectively, of loans identified as impaired, even though an impairment analysis
calculated pursuant to ASC 310-10-35 resulted in no allowance.
Impaired loans where a write down is taken
based on fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Bank records the impaired loan as non-recurring Level 3.
When an appraised value is not available or management determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Bank classifies the impaired loan as non-recurring Level 3.
17. Fair Value Measurement (Continued)
OREO is recorded at fair value upon transfer
of a loan to foreclosed assets, based on the appraised market value of the property. OREO is reviewed quarterly and values are
adjusted as determined appropriate. Fair value is based upon independent market prices, appraised values of the collateral or management’s
estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of
the collateral is impaired below the appraised value and there is no observable market price, the Bank classifies the foreclosed
asset as non-recurring Level 3. Fair value adjustments of $57,624 and $176,919, respectively, were made to OREO during the three
and six months ended June 30, 2017, compared to $102,880 and $110,170, respectively, made during the three and six months ended
June 30, 2016.
No liabilities were measured at fair value
on a recurring or non-recurring basis as of June 30, 2017 or December 31, 2016.
18. Fair Value of Financial Instruments.
The following
table represents the recorded carrying values, estimated fair values and fair value hierarchy within which the fair value measurements
of the Company’s financial instruments are categorized at June 30, 2017 and December 31, 2016:
|
|
Level in
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Fair Value
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
|
Hierarchy
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
Cash and due from banks
|
|
Level 1
|
|
$
|
23,049
|
|
|
$
|
23,049
|
|
|
$
|
22,855
|
|
|
$
|
22,855
|
|
Interest-bearing deposits in other banks
|
|
Level 1
|
|
|
17,023
|
|
|
|
17,023
|
|
|
|
23,321
|
|
|
|
23,321
|
|
Securities available for sale
|
|
Level 1
|
|
|
23,857
|
|
|
|
23,857
|
|
|
|
16,995
|
|
|
|
16,995
|
|
Securities available for sale
|
|
Level 2
|
|
|
171,544
|
|
|
|
171,544
|
|
|
|
175,611
|
|
|
|
175,611
|
|
Securities held to maturity
|
|
Level 2
|
|
|
507
|
|
|
|
506
|
|
|
|
511
|
|
|
|
510
|
|
Loans held for sale
|
|
Level 2
|
|
|
6,381
|
|
|
|
6,381
|
|
|
|
5,099
|
|
|
|
5,099
|
|
Loans and leases HFI, net, less impaired loans
|
|
Level 2
|
|
|
758,880
|
|
|
|
758,687
|
|
|
|
678,911
|
|
|
|
681,239
|
|
Stock in FHLB of Atlanta
|
|
Level 2
|
|
|
1,848
|
|
|
|
1,848
|
|
|
|
1,574
|
|
|
|
1,574
|
|
Accrued interest receivable
|
|
Level 2
|
|
|
3,448
|
|
|
|
3,448
|
|
|
|
3,526
|
|
|
|
3,526
|
|
Interest rate swap
|
|
Level 2
|
|
|
64
|
|
|
|
64
|
|
|
|
121
|
|
|
|
121
|
|
Bank-owned life insurance
|
|
Level 2
|
|
|
18,351
|
|
|
|
18,351
|
|
|
|
18,080
|
|
|
|
18,080
|
|
Impaired loans HFI, net of related allowance
|
|
Level 3
|
|
|
8,603
|
|
|
|
8,603
|
|
|
|
10,730
|
|
|
|
10,730
|
|
Mortgage servicing rights
|
|
Level 3
|
|
|
2,918
|
|
|
|
2,134
|
|
|
|
3,128
|
|
|
|
2,149
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Level 2
|
|
$
|
930,387
|
|
|
$
|
931,534
|
|
|
$
|
869,591
|
|
|
$
|
870,600
|
|
Junior subordinated debentures
|
|
Level 2
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
Fair values of financial assets and liabilities
have been estimated using data which management considers as the best available, and estimation methodologies deemed suitable for
the pertinent category of financial instrument. With regard to financial instruments with off-balance sheet risk, it is not practicable
to estimate the fair value of future financing commitments. The estimation methodologies used by the Bank are as follows:
Financial assets
:
Cash and Due from Banks and Interest
–Bearing Deposits in Other Banks
: The carrying amounts for cash and due from banks and interest bearing deposits in other
banks are equal to their fair value. Fair value hierarchy Input level 1.
Investment Securities Available for
Sale and Held to Maturity
: The estimated fair value of investment securities is provided in Note 4 of the Notes to Consolidated
Financial Statements. These are based on quoted market prices, when available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities. Fair value hierarchy Input levels 1 and 2.
Loans Held for Sale.
The estimated
fair value of loans held for sale is based on commitments from investors within the secondary market for loans with similar characteristics.
Fair value hierarchy Input level 2.
Loans and Leases Held for Investment,
net, less Impaired Loans
: Fair values are estimated for portfolios of loans and leases held for investment with similar financial
characteristics. Loans and leases are segregated by collateral type and by fixed and variable interest rate terms. The fair value
of each category is determined by discounting scheduled future cash flows using current interest rates offered on loans or leases
with similar characteristics. Fair value hierarchy Input level 2.
Stock in Federal Home Loan Bank of Atlanta
:
The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the FHLB. Fair value hierarchy
Input level 2.
Accrued Interest Receivable
: The
carrying amount of accrued interest receivable approximates fair value because of the short maturities of these instruments. Fair
value hierarchy Input level 2.
18. Fair Value of Financial Instruments (Continued)
Interest Rate Swap
: The Company
has entered into a pay-fixed receive-floating swap to hedge our $10.0 million of floating rate Trust Preferred debt. The primary
objective of the swap is to minimize future interest rate risk. See Note 19 below for additional information. Fair value hierarchy
Input level 2.
Bank-Owned Life Insurance
: The
carrying value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value,
as determined by the issuer. Fair value hierarchy Input level 2.
Impaired Loans Held for Investment,
Net
: Fair values for impaired loans and leases are estimated based on discounted cash flows or underlying collateral values,
where applicable. Fair value hierarchy Input Level 3.
Mortgage Servicing Rights (“MSRs”)
:
The fair value of MSRs is estimated for those loans sold with servicing retained. The loans are stratified into pools by product
type and within product type by interest rate and maturity. The fair value of the MSR is based upon the present value of estimated
future cash flows using current market assumptions for prepayments, servicing costs and other factors. Fair value hierarchy Input
level 3.
Financial liabilities
:
Deposits
: The fair value of demand deposits is the amount
payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered
for similar instruments with similar remaining maturities. Fair value hierarchy Input level 2.
Junior Subordinated Debentures
:
The carrying amount of junior subordinated debentures approximates fair value of similar instruments with similar characteristics
and remaining maturities. Fair value hierarchy Input level 2.
19. Interest Rate Hedging
. The Company
has executed certain strategies targeted at hedging the impact of rising interest rates on its future earnings. The Company has
entered into a pay-fixed receive-floating swap to hedge our $10.0 million of floating rate Trust Preferred debt. The primary objective
of the swap is to minimize future interest rate risk. During 2016, the Company restructured the terms of the swap to lower the
fixed rate cost and extend its maturity. As a result, the restructured rate is 4.97% and the maturity date of the swap is December
30, 2024.
20. Compensated Absences.
The Company has not accrued
compensated absences because the amount cannot be reasonably estimated.
21. Subsequent Events.
We have evaluated
subsequent events after June 30, 2017, and concluded that no material transactions occurred that provided additional evidence about
conditions that existed at or after June 30, 2017, that required adjustments to or disclosure in the Consolidated Financial Statements.
22. Recent Accounting Pronouncements.
The following are Accounting Standards Updates (“ASU”) recently issued by the Financial Accounting Standards Board
(the “FASB”) and their expected impact on the Company. Other accounting standards issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. This ASU was developed as a joint project with the International Accounting Standards
Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The
ASU’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.
ASU 2015-14, issued in August 2015, amended the effective date of this ASU to annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period. The Company will evaluate the impact this ASU may have
on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Liabilities
. The amendments in this ASU require all equity investments
to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under
equity method of accounting or those that result in consolidation of the investee). The amendments in this ASU also 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 in accordance
with the fair value option for financial instruments. In addition, the amendments in this ASU eliminate the requirement to disclose
the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement
to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost on the balance sheet for public business entities. For public entities, the amendments in
this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company will evaluate the impact this ASU may have on its consolidated financial statements.
22. Recent Accounting Pronouncements
(Continued)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
The amendments in this ASU create Topic 842, Leases, and supersede the leases requirements in Topic
840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees
and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty
of cash flows arising from a lease. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases
with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from
a lease by a lessee will depend on its classification as finance or operating lease. This ASU will require both types of leases
to be recognized on the balance sheet. For public entities, the amendments in this ASU are effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. The Company will evaluate the impact this ASU may
have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
The amendments in this ASU affect entities
with transactions included within the scope of Topic 606 (Revenue from Contracts with Customers). The scope of Topic 606 includes
entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary
activities) in exchange for consideration. The amendments in this ASU clarify the implementation guidance on principal versus
agent considerations. The effective date and transition requirements for this ASU are the same as the effective date of ASU 2014-09
above. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations and Licensing.
The amendments in this ASU affect entities with transactions included
within the scope of Topic 606. This ASU clarifies guidance related to identifying performance obligations and licensing implementation
guidance contained in the new revenue recognition standard. The ASU seeks to address areas in which diversity in practice potentially
could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and
on an ongoing basis. The effective date for this ASU is the same as the effective date and transition requirements in Topic 606
(and any other Topic amended by ASU 2014-09 above). The Company will evaluate the impact this ASU may have on its consolidated
financial statements.
In May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
. The amendments in this ASU address narrow-scope improvements to the
guidance on collectibility, noncash consideration, and completed contracts at transition. Additionally, the amendments in this
ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation
of sales taxes and other similar taxes collected from customers. The effective date and transition requirements for the amendments
in this ASU are the same as requirements of ASU 2014-09. ASU 2015-14, issued in August 2015, amended the effective date of ASU
2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
. The main objective of this ASU is to provide financial statement
users with more decision-useful information about expected credit losses on financial instruments and other commitments to extend
credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred
loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information to inform credit loss estimates. For public entities that are SEC
filers, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. Current GAAP is either unclear or does not include guidance on
certain cash flow issues included in the amendments in this ASU. The amendments are an improvement in GAAP because they provide
guidance for each of the noted issues, thereby reducing the current and potential future diversity in accounting practice. This
ASU addresses the following specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon
debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest
rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies
(BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately
identifiable cash flows and application of the predominance principle. For public business entities, the amendments in this ASU
are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company will
evaluate the impact this ASU may have on its consolidated financial statements.
22. Recent Accounting Pronouncements
(Continued)
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
. Topic 740, Income Taxes, prohibits the recognition of current and
deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations
of this guidance have developed in practice for transfers of certain intangible and tangible assets. This prohibition on recognition
is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. To more faithfully
represent the economics of intra-entity asset transfers, the amendments in this ASU require that entities recognize the income
tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this
ASU do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity
transfer of inventory. For public business entities, the amendments in this ASU are effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The Company will evaluate the impact this ASU may have on its
consolidated financial statements.
In November
2016, the FASB issued ASU 2016-18,
Restricted Cash.
Stakeholders indicated that diversity exists in the classification and
presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. This ASU addresses
that diversity and its amendments require that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU apply
to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.
For public business entities, the amendments in this ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The Company will evaluate the impact this ASU may have
on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business.
The amendments in this ASU clarify the definition of a business with the objective
of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of businesses. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not
met, it (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant
could replace the missing elements. For public business entities, the amendments in this ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The Company will evaluate the impact this ASU may have
on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323).
This
ASU adds and amends SEC paragraphs pursuant to SEC Staff Announcements at the September 2016 and November 2016 Emerging Issues
Task Force (EITF) meetings. The September announcement is about Disclosure of the Impact That Recently Issued Accounting Standards
Will Have on the Financial Statements of a Registrant When Such Standards are Adopted in a Future Period. The November announcement
made amendments to conform the SEC Observer Comment on Accounting for Tax Benefits Resulting from Investments in Qualified Affordable
Housing Projects to the guidance issued in ASU 2014-01. For public business entities, amendments to the Topics covered by this
ASU are effective for various fiscal years beginning after December 15, 2017, 2018 and 2019, respectively, and interim periods
within those fiscal years. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
. Topic 350,
Intangibles-Goodwill and Other
, currently requires an entity
to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair
value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for
that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds
the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. To address
concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this ASU remove the second step
of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a
reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public entities, the amendments
in this ASU are effective for annual goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company will
evaluate the impact this ASU may have on its consolidated financial statements.
22. Recent Accounting Pronouncements
(Continued)
In February 2017, the FASB issued ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
. The amendments
in this ASU clarify the scope of the nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that derecognition
of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with
customers) should be accounted for in accordance with derecognition and deconsolidation guidance in Subtopic 810-10. In addition,
this ASU eliminates the exception in the financial asset guidance for transfers of investments (including equity method investments)
in real estate entities and supersedes the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest
Subsection within Topic 845. This ASU also provides guidance on the accounting for what often are referred to as partial sales
of nonfinancial assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other
noncontrolled investee. The amendments in this ASU are effective at the same time as for ASU 2014-09 above. The Company will evaluate
the impact this ASU may have on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-06,
Employee Benefit Plan Master Trust Reporting
. The FASB is issuing this ASU to improve the usefulness of the information
reported to users of employee benefit plan financial statements. This ASU relates primarily to the reporting by an employee benefit
plan (a plan) for its interest in a master trust. A master trust is a trust for which a regulated financial institution (bank,
trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or
federal agency) serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by
a group of employers under common control are held. The amendments in this ASU are effective for fiscal years beginning after December
15, 2018. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. Topic 715,
Compensation-Retirement
Benefits
, requires an entity to present net periodic pension cost and net periodic postretirement benefit cost as a net amount
that may be capitalized as part of an asset where appropriate. Users have communicated that the service cost component generally
is analyzed differently from the other components of net periodic pension cost and net periodic postretirement benefit cost. To
improve the consistency, transparency, and usefulness of financial information for users, the amendments in this ASU require an
employer to report the service cost component in the same line item or items as other compensation costs arising from services
rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net
periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside
a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization,
when applicable. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim
periods within those annual periods. The Company will evaluate the impact this ASU may have on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08,
Premium Amortization on Purchased Callable Debt Securities
. This ASU amends guidance on the amortization period of premiums
on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain
purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable
debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call
date (that is, at a premium). The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The Company will evaluate the impact this ASU may have on its consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting
. This ASU is being issued to provide clarity
and reduce both (1) diversity in practice and (2) cost and complexity when applying Topic 718 to a change to the terms and conditions
of a share-based payment award. The amendments in this ASU affect any entity that changes the terms and conditions of a share-based
payment award. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. The Company will evaluate the impact this ASU may have on its consolidated financial statements.