ENTEGRA FINANCIAL
CORP. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(Dollars in
thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
17,662
|
|
|
$
|
15,409
|
|
Interest-earning deposits
|
|
|
126,534
|
|
|
|
53,710
|
|
Cash and cash equivalents
|
|
|
144,196
|
|
|
|
69,119
|
|
|
|
|
|
|
|
|
|
|
Investments - equity securities
|
|
|
6,947
|
|
|
|
6,178
|
|
Investments - available for sale
|
|
|
349,327
|
|
|
|
359,738
|
|
Other investments, at cost
|
|
|
11,652
|
|
|
|
12,039
|
|
Loans held for sale (includes $5,221 and $2,431 at fair value)
|
|
|
11,142
|
|
|
|
7,570
|
|
Loans receivable, net
|
|
|
1,076,581
|
|
|
|
1,076,069
|
|
Allowance for loan losses
|
|
|
(12,309
|
)
|
|
|
(11,985
|
)
|
Fixed assets, net
|
|
|
25,430
|
|
|
|
26,385
|
|
Real estate owned
|
|
|
3,088
|
|
|
|
2,493
|
|
Accrued interest receivable
|
|
|
6,163
|
|
|
|
6,443
|
|
Bank owned life insurance
|
|
|
32,461
|
|
|
|
32,886
|
|
Small Business Investment Company holdings, at cost
|
|
|
4,993
|
|
|
|
3,839
|
|
Net deferred tax asset
|
|
|
2,871
|
|
|
|
7,551
|
|
Loan servicing rights
|
|
|
2,520
|
|
|
|
2,837
|
|
Goodwill
|
|
|
23,903
|
|
|
|
23,903
|
|
Core deposit intangible
|
|
|
3,059
|
|
|
|
3,577
|
|
Other assets
|
|
|
11,999
|
|
|
|
7,799
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,704,023
|
|
|
$
|
1,636,441
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Core deposits
|
|
$
|
905,965
|
|
|
$
|
795,261
|
|
Retail certificates of deposit
|
|
|
303,601
|
|
|
|
349,971
|
|
Wholesale deposits
|
|
|
70,379
|
|
|
|
76,008
|
|
Federal Home Loan Bank advances
|
|
|
205,500
|
|
|
|
213,500
|
|
Junior subordinated notes
|
|
|
14,433
|
|
|
|
14,433
|
|
Other borrowings
|
|
|
4,463
|
|
|
|
9,299
|
|
Post employment benefits
|
|
|
9,205
|
|
|
|
9,305
|
|
Accrued interest payable
|
|
|
1,730
|
|
|
|
1,647
|
|
Other liabilities
|
|
|
5,771
|
|
|
|
4,145
|
|
Total liabilities
|
|
|
1,521,047
|
|
|
|
1,473,569
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - no par value, 10,000,000 shares authorized; none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Common stock - no par value, 50,000,000 shares authorized; 6,925,283 and 6,917,703 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
|
|
|
—
|
|
|
|
—
|
|
Common stock held by Rabbi Trust, at cost; 17,672 shares at September 30, 2019 and December 31, 2018
|
|
|
(379
|
)
|
|
|
(379
|
)
|
Additional paid in capital
|
|
|
74,816
|
|
|
|
74,051
|
|
Retained earnings
|
|
|
102,600
|
|
|
|
92,624
|
|
Accumulated other comprehensive gain (loss)
|
|
|
5,939
|
|
|
|
(3,424
|
)
|
Total shareholders’ equity
|
|
|
182,976
|
|
|
|
162,872
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,704,023
|
|
|
$
|
1,636,441
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
ENTEGRA FINANCIAL
CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in thousands, except per share data)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
13,444
|
|
|
$
|
12,621
|
|
|
$
|
39,598
|
|
|
$
|
36,981
|
|
Interest on tax exempt loans
|
|
|
102
|
|
|
|
106
|
|
|
|
314
|
|
|
|
290
|
|
Taxable securities
|
|
|
1,945
|
|
|
|
1,827
|
|
|
|
6,014
|
|
|
|
5,173
|
|
Tax-exempt securities
|
|
|
760
|
|
|
|
695
|
|
|
|
2,279
|
|
|
|
1,852
|
|
Interest-earning deposits
|
|
|
564
|
|
|
|
528
|
|
|
|
1,520
|
|
|
|
1,309
|
|
Other
|
|
|
181
|
|
|
|
201
|
|
|
|
559
|
|
|
|
544
|
|
Total interest and dividend income
|
|
|
16,996
|
|
|
|
15,978
|
|
|
|
50,284
|
|
|
|
46,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,633
|
|
|
|
2,331
|
|
|
|
9,963
|
|
|
|
5,540
|
|
Federal Home Loan Bank advances
|
|
|
1,315
|
|
|
|
1,091
|
|
|
|
4,094
|
|
|
|
2,841
|
|
Junior subordinated notes
|
|
|
142
|
|
|
|
141
|
|
|
|
423
|
|
|
|
421
|
|
Other borrowings
|
|
|
52
|
|
|
|
123
|
|
|
|
277
|
|
|
|
352
|
|
Total interest expense
|
|
|
5,142
|
|
|
|
3,686
|
|
|
|
14,757
|
|
|
|
9,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
11,854
|
|
|
|
12,292
|
|
|
|
35,527
|
|
|
|
36,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
336
|
|
|
|
246
|
|
|
|
1,054
|
|
Net interest income after provision for loan losses
|
|
|
11,854
|
|
|
|
11,956
|
|
|
|
35,281
|
|
|
|
35,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income, net
|
|
|
51
|
|
|
|
180
|
|
|
|
126
|
|
|
|
313
|
|
Mortgage banking
|
|
|
475
|
|
|
|
233
|
|
|
|
1,079
|
|
|
|
755
|
|
Gain on sale of SBA loans
|
|
|
290
|
|
|
|
257
|
|
|
|
387
|
|
|
|
547
|
|
Loss on sale of investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(520
|
)
|
Equity securities (losses) gains
|
|
|
(30
|
)
|
|
|
191
|
|
|
|
500
|
|
|
|
183
|
|
Service charges on deposit accounts
|
|
|
406
|
|
|
|
406
|
|
|
|
1,205
|
|
|
|
1,242
|
|
Interchange fees, net
|
|
|
305
|
|
|
|
276
|
|
|
|
849
|
|
|
|
795
|
|
Bank owned life insurance
|
|
|
189
|
|
|
|
195
|
|
|
|
554
|
|
|
|
589
|
|
Legal settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
1,750
|
|
|
|
—
|
|
Other
|
|
|
372
|
|
|
|
227
|
|
|
|
878
|
|
|
|
775
|
|
Total noninterest income
|
|
|
2,058
|
|
|
|
1,965
|
|
|
|
7,328
|
|
|
|
4,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
5,802
|
|
|
|
5,882
|
|
|
|
17,532
|
|
|
|
17,151
|
|
Net occupancy
|
|
|
1,052
|
|
|
|
1,128
|
|
|
|
3,256
|
|
|
|
3,342
|
|
Federal deposit insurance
|
|
|
(3
|
)
|
|
|
191
|
|
|
|
280
|
|
|
|
618
|
|
Professional and advisory
|
|
|
179
|
|
|
|
413
|
|
|
|
763
|
|
|
|
1,023
|
|
Data processing
|
|
|
526
|
|
|
|
532
|
|
|
|
1,529
|
|
|
|
1,607
|
|
Marketing and advertising
|
|
|
159
|
|
|
|
227
|
|
|
|
594
|
|
|
|
671
|
|
Merger-related expenses
|
|
|
295
|
|
|
|
96
|
|
|
|
3,229
|
|
|
|
564
|
|
Net cost of operation of real estate owned
|
|
|
46
|
|
|
|
59
|
|
|
|
76
|
|
|
|
202
|
|
Other
|
|
|
861
|
|
|
|
1,013
|
|
|
|
2,944
|
|
|
|
2,925
|
|
Total noninterest expenses
|
|
|
8,917
|
|
|
|
9,541
|
|
|
|
30,203
|
|
|
|
28,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
4,995
|
|
|
|
4,380
|
|
|
|
12,406
|
|
|
|
12,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
998
|
|
|
|
857
|
|
|
|
2,430
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,997
|
|
|
$
|
3,523
|
|
|
$
|
9,976
|
|
|
$
|
10,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
$
|
0.51
|
|
|
$
|
1.44
|
|
|
$
|
1.48
|
|
Diluted
|
|
$
|
0.56
|
|
|
$
|
0.50
|
|
|
$
|
1.42
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,923,114
|
|
|
|
6,891,672
|
|
|
|
6,920,880
|
|
|
|
6,889,130
|
|
Diluted
|
|
|
7,089,850
|
|
|
|
7,031,150
|
|
|
|
7,029,164
|
|
|
|
7,023,174
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
ENTEGRA FINANCIAL
CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in
thousands)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,997
|
|
|
$
|
3,523
|
|
|
$
|
9,976
|
|
|
$
|
10,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains and losses on securities available for sale
|
|
|
2,455
|
|
|
|
(2,318
|
)
|
|
|
12,889
|
|
|
|
(8,181
|
)
|
Reclassification adjustment for securities losses realized in net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
947
|
|
Change in unrealized holding gains and losses on cash flow hedge
|
|
|
(85
|
)
|
|
|
93
|
|
|
|
(531
|
)
|
|
|
303
|
|
Reclassification adjustment for cash flow hedge effectiveness
|
|
|
(49
|
)
|
|
|
(149
|
)
|
|
|
(172
|
)
|
|
|
(347
|
)
|
Other comprehensive income (loss), before tax
|
|
|
2,321
|
|
|
|
(2,374
|
)
|
|
|
12,186
|
|
|
|
(7,278
|
)
|
Income tax effect related to items of other comprehensive income (loss)
|
|
|
(532
|
)
|
|
|
538
|
|
|
|
(2,823
|
)
|
|
|
1,635
|
|
Other comprehensive income (loss), after tax
|
|
|
1,789
|
|
|
|
(1,836
|
)
|
|
|
9,363
|
|
|
|
(5,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
5,786
|
|
|
$
|
1,687
|
|
|
$
|
19,339
|
|
|
$
|
4,549
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
ENTEGRA FINANCIAL
CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Nine Months
Ended September 30, 2019 and 2018
(Unaudited)
(Dollars in
thousands)
|
|
Common Stock
|
|
|
Additional
Paid
in Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Common
Stock
held
by Rabbi
Trust
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
6,917,703
|
|
|
$
|
—
|
|
|
$
|
74,051
|
|
|
$
|
92,624
|
|
|
$
|
(3,424
|
)
|
|
$
|
(379
|
)
|
|
$
|
162,872
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,815
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,815
|
|
Other comprehensive income, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,969
|
|
|
|
—
|
|
|
|
3,969
|
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
Vesting of restricted stock
units, net of 931 shares surrendered
|
|
|
1,509
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
Balance at March 31, 2019
|
|
|
6,919,212
|
|
|
|
—
|
|
|
|
74,320
|
|
|
|
96,439
|
|
|
|
545
|
|
|
|
(379
|
)
|
|
|
170,925
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,164
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,164
|
|
Other comprehensive income, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,605
|
|
|
|
—
|
|
|
|
3,605
|
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
Stock options exercised, net of 342 surrendered
|
|
|
553
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Vesting of restricted stock
units, net of 801 shares surrendered
|
|
|
2,799
|
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
Balance at June 30, 2019
|
|
|
6,922,564
|
|
|
|
—
|
|
|
|
74,576
|
|
|
|
98,603
|
|
|
|
4,150
|
|
|
|
(379
|
)
|
|
|
176,950
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,997
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,997
|
|
Other comprehensive income, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,789
|
|
|
|
—
|
|
|
|
1,789
|
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
290
|
|
Vesting of restricted stock
units, net of 1,681 shares surrendered
|
|
|
2,719
|
|
|
|
—
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(50
|
)
|
Balance at September 30, 2019
|
|
|
6,925,283
|
|
|
$
|
—
|
|
|
$
|
74,816
|
|
|
$
|
102,600
|
|
|
$
|
5,939
|
|
|
$
|
(379
|
)
|
|
$
|
182,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
6,879,191
|
|
|
$
|
—
|
|
|
$
|
72,997
|
|
|
$
|
78,718
|
|
|
$
|
(23
|
)
|
|
$
|
(379
|
)
|
|
$
|
151,313
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,582
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,382
|
)
|
|
|
—
|
|
|
|
(3,382
|
)
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
257
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
257
|
|
Stock options exercised
|
|
|
8,081
|
|
|
|
—
|
|
|
|
117
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
117
|
|
Vesting of restricted stock units, net of 397 shares
surrendered
|
|
|
1,143
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
Cumulative effect of change in accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2018
|
|
|
6,888,415
|
|
|
|
—
|
|
|
|
73,360
|
|
|
|
82,291
|
|
|
|
(3,396
|
)
|
|
|
(379
|
)
|
|
|
151,876
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,087
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,087
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(425
|
)
|
|
|
—
|
|
|
|
(425
|
)
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
258
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
258
|
|
Vesting of restricted stock
units, net of 343 shares surrendered
|
|
|
3,257
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Balance at June 30, 2018
|
|
|
6,891,672
|
|
|
|
—
|
|
|
|
73,608
|
|
|
|
85,378
|
|
|
|
(3,821
|
)
|
|
|
(379
|
)
|
|
|
154,786
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,523
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,836
|
)
|
|
|
—
|
|
|
|
(1,836
|
)
|
Stock compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
257
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
257
|
|
Balance at September 30, 2018
|
|
|
6,891,672
|
|
|
$
|
—
|
|
|
$
|
73,865
|
|
|
$
|
88,901
|
|
|
$
|
(5,657
|
)
|
|
$
|
(379
|
)
|
|
$
|
156,730
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
ENTEGRA FINANCIAL CORP. AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars
in thousands)
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,976
|
|
|
$
|
10,192
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
944
|
|
|
|
(255
|
)
|
Investment amortization, net
|
|
|
2,448
|
|
|
|
2,672
|
|
Equity securities income
|
|
|
(500
|
)
|
|
|
(183
|
)
|
Provision for loan losses
|
|
|
246
|
|
|
|
1,054
|
|
Provision for real estate owned
|
|
|
35
|
|
|
|
83
|
|
Share-based compensation expense
|
|
|
870
|
|
|
|
772
|
|
Deferred tax expense
|
|
|
1,815
|
|
|
|
1,796
|
|
Loss on sales of investments
|
|
|
—
|
|
|
|
520
|
|
Income on bank owned life insurance, net
|
|
|
(554
|
)
|
|
|
(589
|
)
|
Mortgage banking income, net
|
|
|
(1,079
|
)
|
|
|
(755
|
)
|
Gain on sales of SBA loans
|
|
|
(387
|
)
|
|
|
(547
|
)
|
Gain on sale of fixed assets
|
|
|
(10
|
)
|
|
|
—
|
|
Gain on sale of other investment
|
|
|
(113
|
)
|
|
|
—
|
|
Net realized gain on sale of real estate owned
|
|
|
(50
|
)
|
|
|
(16
|
)
|
Loans originated for sale
|
|
|
(35,059
|
)
|
|
|
(36,982
|
)
|
Proceeds from sale of loans originated for sale
|
|
|
31,242
|
|
|
|
38,159
|
|
Net change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
280
|
|
|
|
(753
|
)
|
Loan servicing rights
|
|
|
317
|
|
|
|
(15
|
)
|
Other assets
|
|
|
(3,168
|
)
|
|
|
(3,381
|
)
|
Postemployment benefits
|
|
|
(100
|
)
|
|
|
(287
|
)
|
Accrued interest payable
|
|
|
83
|
|
|
|
423
|
|
Other liabilities
|
|
|
1,180
|
|
|
|
(4,233
|
)
|
Net cash provided by operating activities
|
|
|
8,416
|
|
|
|
7,675
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Activity for investment securities available for sale:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
—
|
|
|
|
(107,204
|
)
|
Maturities/calls and principal repayments
|
|
|
20,852
|
|
|
|
32,832
|
|
Sales
|
|
|
—
|
|
|
|
54,174
|
|
Proceeds from sale of Visa Class B restricted shares
|
|
|
—
|
|
|
|
427
|
|
Net increase in loans
|
|
|
(847
|
)
|
|
|
(62,647
|
)
|
Proceeds from sale of real estate owned
|
|
|
272
|
|
|
|
410
|
|
Proceeds from settlement of BOLI policies
|
|
|
1,115
|
|
|
|
—
|
|
Proceeds from sale of fixed assets
|
|
|
100
|
|
|
|
—
|
|
Purchase of fixed assets
|
|
|
(107
|
)
|
|
|
(3,551
|
)
|
Purchase of Small Business Investment Company holdings, at cost
|
|
|
(1,154
|
)
|
|
|
(118
|
)
|
Proceeds from sale of other investment
|
|
|
122
|
|
|
|
—
|
|
Purchase of other investments, at cost
|
|
|
—
|
|
|
|
(78
|
)
|
Redemption of other investments, at cost
|
|
|
387
|
|
|
|
425
|
|
Net cash provided by (used in) investing activities
|
|
|
20,740
|
|
|
|
(85,330
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
56,705
|
|
|
|
92,614
|
|
Net increase in escrow deposits
|
|
|
2,157
|
|
|
|
1,970
|
|
Net (decrease) increase in other borrowings
|
|
|
(4,836
|
)
|
|
|
773
|
|
Proceeds from FHLB advances
|
|
|
195,000
|
|
|
|
255,500
|
|
Repayment of FHLB advances
|
|
|
(203,000
|
)
|
|
|
(265,500
|
)
|
Cash (paid for) received upon exercise of stock options
|
|
|
(10
|
)
|
|
|
117
|
|
Cash paid for shares surrendered upon vesting of restricted stock
|
|
|
(95
|
)
|
|
|
(21
|
)
|
Net cash provided by financing activities
|
|
|
45,921
|
|
|
|
85,453
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
75,077
|
|
|
|
7,798
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
69,119
|
|
|
|
109,467
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
144,196
|
|
|
$
|
117,265
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest on deposits and other borrowings
|
|
$
|
14,831
|
|
|
$
|
9,460
|
|
Income taxes
|
|
|
804
|
|
|
|
4,070
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Real estate acquired in satisfaction of mortgage loans
|
|
$
|
1,061
|
|
|
$
|
1,502
|
|
Loans originated for the disposition of real estate owned
|
|
|
209
|
|
|
|
774
|
|
Loan sales/investments to be settled
|
|
|
1,710
|
|
|
|
2,169
|
|
Reclassification for adoption of Accounting Standards Update 2016-01
|
|
|
—
|
|
|
|
617
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
ENTEGRA FINANCIAL
CORP. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Entegra Financial
Corp. (“we,” “us,” “our,” or the “Company”) was incorporated on May 31, 2011 and
became the holding company for Entegra Bank (the “Bank”) on September 30, 2014 upon the completion of Macon Bancorp’s
merger with and into the Company, pursuant to which Macon Bancorp converted from a mutual to stock form of organization. The Company’s
primary operation is its investment in the Bank. The Company also owns 100% of the common stock of Macon Capital Trust I (the
“Trust”), a Delaware statutory trust formed in 2003 to facilitate the issuance of trust preferred securities. The
Bank is a North Carolina state-chartered commercial bank and has a wholly owned subsidiary, Entegra Services, Inc. (“Entegra
Services”), which holds investment securities.
The Bank
operates as a community-focused retail bank, originating primarily real estate-based mortgage, consumer and commercial loans and
accepting deposits from consumers and small businesses.
Estimates
The preparation
of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material
estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance
for loan losses, the valuation of acquired loans, separately identifiable intangible assets associated with mergers and acquisitions,
the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of deferred
tax assets.
Principles
of Consolidation
The accompanying
consolidated financial statements include the accounts of the Company, the Bank, and Entegra Services. The accounts of the Trust
are not consolidated with the Company. In consolidation, all significant intercompany accounts and transactions have been eliminated.
Reclassification
Certain amounts
in the prior year’s financial statements may have been reclassified to conform to the current year’s presentation.
The reclassifications had no effect on our results of operations or financial condition as previously reported.
Basis of
Presentation
The accompanying
unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles,
or GAAP, for interim financial information and with the Securities and Exchange Commission’s (the “SEC”) instructions
for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read
in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 14, 2019
(as amended, the “2018 Form 10-K”). In the opinion of management, these interim consolidated financial statements
present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each
of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations
that may be expected for a full year or any future period.
Business
Combinations
The Company
accounts for business combinations under the acquisition method of accounting. Assets acquired and liabilities assumed are measured
and recorded at fair value at the date of acquisition, including identifiable intangible assets. If the fair value of net assets
purchased exceeds the fair value of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely,
if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. Fair
values are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative
to closing date fair values becomes available.
The determination of the fair value of loans acquired takes into account credit quality deterioration and probability of loss; therefore, the related allowance for loan losses is not carried forward.
All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit liabilities and the related depositor relationship intangible assets may be exchanged in observable exchange transactions. As a result, the depositor relationship intangible asset is considered identifiable, because the separability criterion has been met.
In addition, acquisition-related costs and restructuring costs are recognized as period expenses as incurred.
Merger with
First Citizens BancShares, Inc.
On April 23,
2019, Entegra entered into a definitive agreement to merge with and into BancShares (the “Merger Agreement”). Under
the terms of the Merger Agreement, each outstanding share of Entegra common stock would be converted into the right to receive
$30.18 in cash.
Previously on
January 15, 2019, Entegra had entered into a definitive agreement to merge with and into SmartFinancial, Inc. (“SmartFinancial”),
a Tennessee corporation. Under the terms of the SmartFinancial definitive agreement, each outstanding share of Entegra common
stock would be converted into the right to receive 1.215 shares of SmartFinancial common stock.
On April
18, 2019, Entegra notified SmartFinancial that it had received a proposal from BancShares and certain affiliates containing the
Merger Agreement described above and that the Entegra board of directors had concluded that such proposal constituted a Superior
Proposal (as defined in the SmartFinancial definitive agreement). On April 23, 2019, SmartFinancial delivered a notice to Entegra
waiving its rights to renegotiate its agreement with Entegra, subject to Entegra’s compliance with the SmartFinancial definitive
agreement and the payment of the termination fee due to SmartFinancial simultaneously with the termination of the SmartFinancial
definitive agreement.
On April
23, 2019, in connection with the termination by Entegra of the SmartFinancial definitive agreement, BancShares, on behalf of Entegra,
paid SmartFinancial a termination fee of $6.4 million as required by the terms of the SmartFinancial definitive agreement, and
the SmartFinancial definitive agreement was terminated.
Approval
of the proposed merger by Entegra’s shareholders has been received. Completion of the proposed merger remains subject to
the receipt of required regulatory approvals and the satisfaction or waiver of other customary conditions, and is expected to
occur during the fourth quarter of 2019.
Recent Accounting
Standards Updates
Accounting Standards
Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU 2016-02, among other things, requires
lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on
a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the
use of, a specified asset for the lease term. We adopted ASU 2016-02, along with several other subsequent codification updates
related to lease accounting, as of January 1, 2019. See Note 14 for additional information.
In September
2016, the Financial Accounting Standards Board (“FASB”) issued amendments to ASU 2016-13 Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in the update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected
to be collected thereby providing financial statement users with more decision-useful information about the expected credit losses
on financial instruments and other commitments to extend credit held by the reporting entity. The amendments will be effective
for the Company for reporting periods beginning after December 15, 2019. The Company has formed a cross-functional committee to
provide corporate governance over the implementation of this update, has evaluated data sources and made process updates to capture
additional relevant data, has identified a service provider to perform the calculation, and continues to attend seminars and forums
specific to this update. The Company also engaged the service provider to assist with the implementation of the standard. The
preliminary measurement of life of loan credit losses was completed in the first quarter of 2019 using December 31, 2018 data.
While we continue to evaluate the impact the new guidance will have on our financial position and results of operations, we currently
expect the new guidance may result in an increase to our allowance for credit losses given the change to estimated losses over
the contractual life of the loan portfolio. The amount of any change to our allowance will depend, in part, upon the composition
of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 2. INVESTMENT SECURITIES
The
following table presents the holdings of our equity securities as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
6,947
|
|
|
$
|
6,178
|
|
Equity
securities with a fair value of $6.3 million as of September 30, 2019 are held in a Rabbi Trust and seek to generate returns that
will fund the cost of certain deferred compensation agreements. Equity securities with a fair value of $0.6 million as of
September 30, 2019 are in a mutual fund that qualifies under the Community Reinvestment Act (“CRA”) as CRA activity.
There were losses of $30 thousand on equity securities and gains of $0.5 million for the three and nine months ended September
30, 2019, respectively. There were gains on equity securities of $0.2 million for both the three and nine months ended September
30, 2018.
The amortized
cost and estimated fair values of available-for-sale (“AFS”) investment securities as of September 30, 2019 and December
31, 2018 are summarized as follows:
|
|
September 30, 2019
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
$
|
33,423
|
|
|
$
|
184
|
|
|
$
|
(349
|
)
|
|
$
|
33,258
|
|
Municipal Securities
|
|
|
113,789
|
|
|
|
6,367
|
|
|
|
—
|
|
|
|
120,156
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
73,818
|
|
|
|
783
|
|
|
|
(767
|
)
|
|
|
73,834
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
21,428
|
|
|
|
382
|
|
|
|
(36
|
)
|
|
|
21,774
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
63,647
|
|
|
|
1,642
|
|
|
|
(25
|
)
|
|
|
65,264
|
|
Collateralized Loan Obligations
|
|
|
15,511
|
|
|
|
—
|
|
|
|
(290
|
)
|
|
|
15,221
|
|
Corporate bonds
|
|
|
19,412
|
|
|
|
437
|
|
|
|
(29
|
)
|
|
|
19,820
|
|
|
|
$
|
341,028
|
|
|
$
|
9,795
|
|
|
$
|
(1,496
|
)
|
|
$
|
349,327
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
$
|
34,068
|
|
|
$
|
74
|
|
|
$
|
(152
|
)
|
|
$
|
33,990
|
|
Municipal Securities
|
|
|
115,860
|
|
|
|
209
|
|
|
|
(1,667
|
)
|
|
|
114,402
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
86,664
|
|
|
|
98
|
|
|
|
(1,578
|
)
|
|
|
85,184
|
|
Collateralized Mortgage Obligation - Guaranteed
|
|
|
22,492
|
|
|
|
47
|
|
|
|
(650
|
)
|
|
|
21,889
|
|
Collateralized Mortgage Obligation - Non Guaranteed
|
|
|
69,774
|
|
|
|
125
|
|
|
|
(728
|
)
|
|
|
69,171
|
|
Collateralized Loan Obligations
|
|
|
15,534
|
|
|
|
1
|
|
|
|
(458
|
)
|
|
|
15,077
|
|
Corporate bonds
|
|
|
19,936
|
|
|
|
232
|
|
|
|
(143
|
)
|
|
|
20,025
|
|
|
|
$
|
364,328
|
|
|
$
|
786
|
|
|
$
|
(5,376
|
)
|
|
$
|
359,738
|
|
Information pertaining
to the fair value of AFS investment securities with gross unrealized losses, aggregated by investment category and length of time
that individual securities have been in a continuous loss position, follows:
|
|
September 30, 2019
|
|
|
|
Less Than 12 Months
|
|
|
More Than 12 Months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
$
|
19,818
|
|
|
$
|
226
|
|
|
$
|
6,912
|
|
|
$
|
123
|
|
|
$
|
26,730
|
|
|
$
|
349
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
901
|
|
|
|
6
|
|
|
|
37,332
|
|
|
|
761
|
|
|
|
38,233
|
|
|
|
767
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
1,799
|
|
|
|
8
|
|
|
|
1,797
|
|
|
|
28
|
|
|
|
3,596
|
|
|
|
36
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
3,003
|
|
|
|
12
|
|
|
|
2,748
|
|
|
|
13
|
|
|
|
5,751
|
|
|
|
25
|
|
Collateralized Loan Obligations
|
|
|
5,984
|
|
|
|
30
|
|
|
|
9,237
|
|
|
|
260
|
|
|
|
15,221
|
|
|
|
290
|
|
Corporate Bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
1,032
|
|
|
|
29
|
|
|
|
1,032
|
|
|
|
29
|
|
|
|
$
|
31,505
|
|
|
$
|
282
|
|
|
$
|
59,058
|
|
|
$
|
1,214
|
|
|
$
|
90,563
|
|
|
$
|
1,496
|
|
|
|
December 31, 2018
|
|
|
|
Less Than 12 Months
|
|
|
More Than 12 Months
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
$
|
23,423
|
|
|
$
|
152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,423
|
|
|
$
|
152
|
|
Municipal Securities
|
|
|
33,028
|
|
|
|
421
|
|
|
|
56,153
|
|
|
|
1,246
|
|
|
|
89,181
|
|
|
|
1,667
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
27,692
|
|
|
|
370
|
|
|
|
45,619
|
|
|
|
1,208
|
|
|
|
73,311
|
|
|
|
1,578
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
2,042
|
|
|
|
19
|
|
|
|
15,294
|
|
|
|
631
|
|
|
|
17,336
|
|
|
|
650
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
22,383
|
|
|
|
185
|
|
|
|
30,471
|
|
|
|
543
|
|
|
|
52,854
|
|
|
|
728
|
|
Collateralized loan obligations
|
|
|
11,618
|
|
|
|
404
|
|
|
|
1,449
|
|
|
|
54
|
|
|
|
13,067
|
|
|
|
458
|
|
Corporate bonds
|
|
|
2,492
|
|
|
|
45
|
|
|
|
3,345
|
|
|
|
98
|
|
|
|
5,837
|
|
|
|
143
|
|
|
|
$
|
122,678
|
|
|
$
|
1,596
|
|
|
$
|
152,331
|
|
|
$
|
3,780
|
|
|
$
|
275,009
|
|
|
$
|
5,376
|
|
Information pertaining
to the number of securities with unrealized losses is detailed in the table below. The Company believes all unrealized losses
as of September 30, 2019 and December 31, 2018 represent temporary impairment. The unrealized losses have resulted from temporary
changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely
that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.
|
|
September 30, 2019
|
|
|
|
Less Than
12
Months
|
|
|
More Than
12 Months
|
|
|
Total
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
|
13
|
|
|
|
5
|
|
|
|
18
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
1
|
|
|
|
39
|
|
|
|
40
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
Collateralized loan obligation
|
|
|
3
|
|
|
|
5
|
|
|
|
8
|
|
Corporate bonds
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
20
|
|
|
|
56
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Less Than
12 Months
|
|
|
More Than
12 Months
|
|
|
Total
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
Municipal Securities
|
|
|
31
|
|
|
|
52
|
|
|
|
83
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
21
|
|
|
|
43
|
|
|
|
64
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
1
|
|
|
|
8
|
|
|
|
9
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
12
|
|
|
|
22
|
|
|
|
34
|
|
Collateralized loan obligation
|
|
|
6
|
|
|
|
1
|
|
|
|
7
|
|
Corporate bonds
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
|
88
|
|
|
|
130
|
|
|
|
218
|
|
The Company received proceeds
from sales of investment securities classified as AFS and corresponding gross realized gains and losses as follows:
|
|
Three Months Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
|
|
|
|
|
|
|
|
AFS
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
—
|
|
|
$
|
54,174
|
|
Gross realized gains
|
|
|
—
|
|
|
|
77
|
|
Gross realized losses
|
|
|
—
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
Visa Class B Restricted Shares
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
|
—
|
|
|
|
427
|
|
Gross realized gains
|
|
|
—
|
|
|
|
427
|
|
Gross realized losses
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
—
|
|
|
$
|
54,601
|
|
Gross realized gains
|
|
|
—
|
|
|
|
504
|
|
Gross realized losses
|
|
|
—
|
|
|
|
1,024
|
|
There were no
investment security sales for the three or nine months ended September 30, 2019.
The Company
had securities pledged against deposits and borrowings of approximately $160.7 million and $155.8 million at September 30, 2019
and December 31, 2018, respectively.
The amortized
cost and estimated fair value of investments in debt securities at September 30, 2019, by contractual maturity, is shown below.
Mortgage-backed securities have not been scheduled because expected maturities will differ from contractual maturities when borrowers
have the right to prepay the obligations.
|
|
Available-for-Sale
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
1,990
|
|
|
$
|
1,996
|
|
Over 1 year through 5 years
|
|
|
6,952
|
|
|
|
6,107
|
|
After 5 years through 10 years
|
|
|
31,457
|
|
|
|
33,331
|
|
Over 10 years
|
|
|
141,736
|
|
|
|
147,021
|
|
|
|
|
182,135
|
|
|
|
188,455
|
|
Mortgage-backed securities
|
|
|
158,893
|
|
|
|
160,872
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
341,028
|
|
|
$
|
349,327
|
|
NOTE 3. LOANS RECEIVABLE
Loans receivable
as of September 30, 2019 and December 31, 2018 are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Real estate mortgage loans:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
336,098
|
|
|
$
|
325,560
|
|
Commercial real estate
|
|
|
482,831
|
|
|
|
498,106
|
|
Home equity loans and lines of credit
|
|
|
45,822
|
|
|
|
48,679
|
|
Residential construction
|
|
|
57,687
|
|
|
|
39,533
|
|
Other construction and land
|
|
|
101,988
|
|
|
|
104,645
|
|
Total real estate loans
|
|
|
1,024,426
|
|
|
|
1,016,523
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
45,652
|
|
|
|
54,410
|
|
Consumer
|
|
|
6,989
|
|
|
|
6,842
|
|
Total commercial and consumer
|
|
|
52,641
|
|
|
|
61,252
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross
|
|
|
1,077,067
|
|
|
|
1,077,775
|
|
|
|
|
|
|
|
|
|
|
Less: Net deferred loan fees
|
|
|
(1,030
|
)
|
|
|
(1,000
|
)
|
Acquired loans fair value discount
|
|
|
(697
|
)
|
|
|
(1,048
|
)
|
Hedged loans basis adjustment (See Note 8)
|
|
|
1,088
|
|
|
|
245
|
|
Unamortized premium
|
|
|
232
|
|
|
|
333
|
|
Unamortized discount
|
|
|
(79
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
Loans receivable, net of deferred fees
|
|
$
|
1,076,581
|
|
|
$
|
1,076,069
|
|
The Bank had
$279.9 million and $256.1 million of loans pledged as collateral to secure funding availability with the Federal Home Loan Bank
of Atlanta (“FHLB”) at September 30, 2019 and December 31, 2018, respectively. The Bank also had $124.0 million and
$114.4 million of loans pledged as collateral to secure funding availability with the Federal Reserve Bank (“FRB”)
Discount Window at September 30, 2019 and December 31, 2018, respectively.
Included
in loans receivable and other borrowings at September 30, 2019 are $4.5 million in participated loans that did not qualify for
sale accounting. Interest expense on the other borrowings accrues at the same rate as the interest income recognized on the loans
receivable, resulting in no effect to net income.
The following
tables present the activity related to the discount on individually purchased loans for the three and nine month periods ended
September 30, 2019 and 2018:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on purchased loans, beginning
of period
|
|
$
|
180
|
|
|
$
|
399
|
|
|
$
|
236
|
|
|
$
|
710
|
|
Accretion
|
|
|
(101
|
)
|
|
|
(67
|
)
|
|
|
(157
|
)
|
|
|
(378
|
)
|
Discount on purchased loans, end of period
|
|
$
|
79
|
|
|
$
|
332
|
|
|
$
|
79
|
|
|
$
|
332
|
|
The following table presents
the activity related to the fair value discount on loans from business combinations for the three and nine month periods ended
September 30, 2019 and 2018:
|
|
For the Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value discount, beginning of period
|
|
$
|
789
|
|
|
$
|
1,395
|
|
|
$
|
1,048
|
|
|
$
|
2,012
|
|
Accretion
|
|
|
(92
|
)
|
|
|
(193
|
)
|
|
|
(351
|
)
|
|
|
(810
|
)
|
Fair value discount, end of period
|
|
$
|
697
|
|
|
$
|
1,202
|
|
|
$
|
697
|
|
|
$
|
1,202
|
|
NOTE 4. ALLOWANCE FOR LOAN
LOSSES
The following
tables present, by portfolio segment, the changes in the allowance for loan losses for the periods indicated:
|
|
Three Months Ended September 30, 2019
|
|
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines
of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,979
|
|
|
$
|
5,264
|
|
|
$
|
521
|
|
|
$
|
567
|
|
|
$
|
1,143
|
|
|
$
|
596
|
|
|
$
|
124
|
|
|
$
|
12,194
|
|
Provision
|
|
|
(123
|
)
|
|
|
(118
|
)
|
|
|
18
|
|
|
|
86
|
|
|
|
89
|
|
|
|
120
|
|
|
|
(72
|
)
|
|
|
—
|
|
Charge-offs
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(49
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
(62
|
)
|
Recoveries
|
|
|
85
|
|
|
|
3
|
|
|
|
25
|
|
|
|
—
|
|
|
|
8
|
|
|
|
18
|
|
|
|
38
|
|
|
|
177
|
|
Ending balance
|
|
$
|
3,941
|
|
|
$
|
5,148
|
|
|
$
|
515
|
|
|
$
|
653
|
|
|
$
|
1,240
|
|
|
$
|
734
|
|
|
$
|
78
|
|
|
$
|
12,309
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,772
|
|
|
$
|
4,902
|
|
|
$
|
552
|
|
|
$
|
453
|
|
|
$
|
1,146
|
|
|
$
|
633
|
|
|
$
|
67
|
|
|
$
|
11,525
|
|
Provision
|
|
|
33
|
|
|
|
141
|
|
|
|
209
|
|
|
|
12
|
|
|
|
42
|
|
|
|
26
|
|
|
|
(127
|
)
|
|
|
336
|
|
Charge-offs
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(219
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
(17
|
)
|
|
|
(287
|
)
|
Recoveries
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
16
|
|
|
|
2
|
|
|
|
152
|
|
|
|
172
|
|
Ending balance
|
|
$
|
3,800
|
|
|
$
|
5,043
|
|
|
$
|
542
|
|
|
$
|
466
|
|
|
$
|
1,204
|
|
|
$
|
616
|
|
|
$
|
75
|
|
|
$
|
11,746
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,909
|
|
|
$
|
5,130
|
|
|
$
|
560
|
|
|
$
|
452
|
|
|
$
|
1,250
|
|
|
$
|
608
|
|
|
$
|
76
|
|
|
$
|
11,985
|
|
Provision
|
|
|
(69
|
)
|
|
|
52
|
|
|
|
62
|
|
|
|
201
|
|
|
|
(32
|
)
|
|
|
161
|
|
|
|
(129
|
)
|
|
|
246
|
|
Charge-offs
|
|
|
(4
|
)
|
|
|
(93
|
)
|
|
|
(258
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(59
|
)
|
|
|
(105
|
)
|
|
|
(520
|
)
|
Recoveries
|
|
|
105
|
|
|
|
59
|
|
|
|
151
|
|
|
|
—
|
|
|
|
23
|
|
|
|
24
|
|
|
|
236
|
|
|
|
598
|
|
Ending balance
|
|
$
|
3,941
|
|
|
$
|
5,148
|
|
|
$
|
515
|
|
|
$
|
653
|
|
|
$
|
1,240
|
|
|
$
|
734
|
|
|
$
|
78
|
|
|
$
|
12,309
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,018
|
|
|
$
|
4,364
|
|
|
$
|
616
|
|
|
$
|
303
|
|
|
$
|
1,025
|
|
|
$
|
503
|
|
|
$
|
58
|
|
|
$
|
10,887
|
|
Provision
|
|
|
(117
|
)
|
|
|
711
|
|
|
|
162
|
|
|
|
162
|
|
|
|
136
|
|
|
|
182
|
|
|
|
(182
|
)
|
|
|
1,054
|
|
Charge-offs
|
|
|
(116
|
)
|
|
|
(35
|
)
|
|
|
(260
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(79
|
)
|
|
|
(75
|
)
|
|
|
(565
|
)
|
Recoveries
|
|
|
15
|
|
|
|
3
|
|
|
|
24
|
|
|
|
1
|
|
|
|
43
|
|
|
|
10
|
|
|
|
274
|
|
|
|
370
|
|
Ending balance
|
|
$
|
3,800
|
|
|
$
|
5,043
|
|
|
$
|
542
|
|
|
$
|
466
|
|
|
$
|
1,204
|
|
|
$
|
616
|
|
|
$
|
75
|
|
|
$
|
11,746
|
|
The following tables present,
by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the net investment in loans
for the periods indicated:
|
|
September 30, 2019
|
|
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
|
$
|
39
|
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
226
|
|
|
$
|
—
|
|
|
$
|
350
|
|
Collectively evaluated for impairment
|
|
|
3,902
|
|
|
|
5,107
|
|
|
|
515
|
|
|
|
653
|
|
|
|
1,196
|
|
|
|
508
|
|
|
|
78
|
|
|
|
11,959
|
|
|
|
$
|
3,941
|
|
|
$
|
5,148
|
|
|
$
|
515
|
|
|
$
|
653
|
|
|
$
|
1,240
|
|
|
$
|
734
|
|
|
$
|
78
|
|
|
$
|
12,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,976
|
|
|
$
|
3,489
|
|
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
1,270
|
|
|
$
|
1,170
|
|
|
$
|
—
|
|
|
$
|
8,188
|
|
Collectively evaluated for impairment
|
|
|
334,715
|
|
|
|
478,013
|
|
|
|
45,708
|
|
|
|
57,629
|
|
|
|
100,501
|
|
|
|
44,738
|
|
|
|
7,089
|
|
|
|
1,068,393
|
|
|
|
$
|
336,691
|
|
|
$
|
481,502
|
|
|
$
|
45,991
|
|
|
$
|
57,629
|
|
|
$
|
101,771
|
|
|
$
|
45,908
|
|
|
$
|
7,089
|
|
|
$
|
1,076,581
|
|
|
|
December 31, 2018
|
|
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
79
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
54
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
167
|
|
Collectively evaluated for impairment
|
|
|
3,830
|
|
|
|
5,103
|
|
|
|
560
|
|
|
|
452
|
|
|
|
1,196
|
|
|
|
601
|
|
|
|
76
|
|
|
|
11,818
|
|
|
|
$
|
3,909
|
|
|
$
|
5,130
|
|
|
$
|
560
|
|
|
$
|
452
|
|
|
$
|
1,250
|
|
|
$
|
608
|
|
|
$
|
76
|
|
|
$
|
11,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,900
|
|
|
$
|
6,019
|
|
|
$
|
313
|
|
|
$
|
—
|
|
|
$
|
1,377
|
|
|
$
|
276
|
|
|
$
|
—
|
|
|
$
|
10,885
|
|
Collectively evaluated for impairment
|
|
|
322,255
|
|
|
|
490,530
|
|
|
|
48,512
|
|
|
|
39,488
|
|
|
|
103,087
|
|
|
|
54,367
|
|
|
|
6,945
|
|
|
|
1,065,184
|
|
|
|
$
|
325,155
|
|
|
$
|
496,549
|
|
|
$
|
48,825
|
|
|
$
|
39,488
|
|
|
$
|
104,464
|
|
|
$
|
54,643
|
|
|
$
|
6,945
|
|
|
$
|
1,076,069
|
|
Portfolio
Quality Indicators
The
Company’s loan portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations
of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly
graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management
analyzes the resulting information, as well as other external statistics and factors, to track loan performance.
The
Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:
|
·
|
Pass
(1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated.
|
|
·
|
Special
Mention (6) – Potential weakness or identifiable weakness present without appropriate
mitigating factors; however, loan continues to perform satisfactorily with no material
delinquency noted. This may include some deterioration in repayment capacity and/or
loan-to-value of securing collateral.
|
|
·
|
Substandard
(7) – Significant weakness that remains unmitigated, most likely due to diminished
repayment capacity, serious delinquency, and/or marginal performance based upon restructured
loan terms.
|
|
·
|
Doubtful
(8) – Significant weakness that remains unmitigated and collection in full is highly
questionable or improbable.
|
|
·
|
Loss
(9) – Collectability is unlikely resulting in immediate charge-off.
|
Description of Segment and Class
Risks
Each of our
portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit
quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar
among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined
are the most significant.
One-to-four
family residential
We centrally
underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved
lending policy and internal procedures based upon industry best practices and regulatory directives. Loans to be sold to secondary
market investors must also adhere to investor guidelines. We also evaluate the value and marketability of that collateral. Common
risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to
individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines
in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.
Commercial real estate
Commercial mortgage
loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan
origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are
significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with
the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as
inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.
Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary
risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce
adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having
to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans are highly dependent
on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable
margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.
Home equity
and lines of credit
Home equity
loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible
to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively
unsecured. Additional risks include lien perfection inaccuracies and disputes with first lien holders that may further weaken
our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines
in excess of the collateral value if there have been significant declines since origination.
Residential
construction and other construction and land
Residential
mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home
construction is completed, contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate
values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market
value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed
the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed
collateral with unrealized value and diminished marketability. Commercial construction and land
development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand
for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the
underlying collateral values and make repayment of the outstanding loans more difficult for our customers.
Commercial
We centrally
underwrite each of our commercial loans based primarily upon the customer’s ability to generate the required cash flow to
service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding
of our borrower’s businesses including the experience and background of the principals of such businesses. To the extent
that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets
including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of
strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or
guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of
commercial loans include risks that are not specific to individual transactions such as general economic conditions within our
markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand
for products and services, personal events such as death, disability or change in marital status, and reductions in the value
of our collateral.
Consumer
The consumer
loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational
vehicles, including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this
class is especially volatile due to potential rapid depreciation in values since the date of loan origination in excess of principal
repayment.
The following
tables present the recorded investment in gross loans by loan grade as of the dates indicated:
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Grade
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
2,778
|
|
|
$
|
9,441
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
715
|
|
|
$
|
713
|
|
|
$
|
116
|
|
|
$
|
13,963
|
|
2
|
|
|
—
|
|
|
|
10,253
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925
|
|
|
|
—
|
|
|
|
11,178
|
|
3
|
|
|
30,315
|
|
|
|
85,865
|
|
|
|
4,773
|
|
|
|
10,758
|
|
|
|
20,902
|
|
|
|
13,019
|
|
|
|
16
|
|
|
|
165,648
|
|
4
|
|
|
136,075
|
|
|
|
278,495
|
|
|
|
3,546
|
|
|
|
28,060
|
|
|
|
54,123
|
|
|
|
18,525
|
|
|
|
411
|
|
|
|
519,235
|
|
5
|
|
|
24,948
|
|
|
|
83,575
|
|
|
|
687
|
|
|
|
3,619
|
|
|
|
15,208
|
|
|
|
10,908
|
|
|
|
4
|
|
|
|
138,949
|
|
6
|
|
|
375
|
|
|
|
8,541
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,239
|
|
|
|
478
|
|
|
|
—
|
|
|
|
10,634
|
|
7
|
|
|
624
|
|
|
|
4,668
|
|
|
|
—
|
|
|
|
—
|
|
|
|
182
|
|
|
|
1,292
|
|
|
|
—
|
|
|
|
6,766
|
|
|
|
|
195,115
|
|
|
|
480,838
|
|
|
|
9,006
|
|
|
|
42,638
|
|
|
|
92,369
|
|
|
|
45,860
|
|
|
|
547
|
|
|
|
866,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ungraded Loan Exposure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
140,800
|
|
|
|
664
|
|
|
|
36,916
|
|
|
|
14,991
|
|
|
|
9,351
|
|
|
|
48
|
|
|
|
6,541
|
|
|
|
209,311
|
|
Nonperforming
|
|
|
776
|
|
|
|
—
|
|
|
|
69
|
|
|
|
—
|
|
|
|
51
|
|
|
|
—
|
|
|
|
1
|
|
|
|
897
|
|
Subtotal
|
|
|
141,576
|
|
|
|
664
|
|
|
|
36,985
|
|
|
|
14,991
|
|
|
|
9,402
|
|
|
|
48
|
|
|
|
6,542
|
|
|
|
210,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
336,691
|
|
|
$
|
481,502
|
|
|
$
|
45,991
|
|
|
$
|
57,629
|
|
|
$
|
101,771
|
|
|
$
|
45,908
|
|
|
$
|
7,089
|
|
|
$
|
1,076,581
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Grade
|
|
One-to-four
Family
Residential
|
|
|
Commercial
Real
Estate
|
|
|
Home Equity and
Lines of Credit
|
|
|
Residential
Construction
|
|
|
Other
Construction
and Land
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
—
|
|
|
$
|
7,569
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,264
|
|
|
$
|
7
|
|
|
$
|
8,840
|
|
2
|
|
|
—
|
|
|
|
7,860
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
|
7,880
|
|
3
|
|
|
31,623
|
|
|
|
87,756
|
|
|
|
5,212
|
|
|
|
9,365
|
|
|
|
12,111
|
|
|
|
15,685
|
|
|
|
264
|
|
|
|
162,016
|
|
4
|
|
|
121,688
|
|
|
|
280,630
|
|
|
|
4,014
|
|
|
|
18,358
|
|
|
|
61,646
|
|
|
|
22,374
|
|
|
|
245
|
|
|
|
508,955
|
|
5
|
|
|
24,738
|
|
|
|
88,698
|
|
|
|
615
|
|
|
|
3,404
|
|
|
|
17,630
|
|
|
|
12,307
|
|
|
|
5
|
|
|
|
147,397
|
|
6
|
|
|
321
|
|
|
|
7,867
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,303
|
|
|
|
495
|
|
|
|
—
|
|
|
|
9,987
|
|
7
|
|
|
674
|
|
|
|
5,725
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376
|
|
|
|
487
|
|
|
|
—
|
|
|
|
7,262
|
|
|
|
|
179,044
|
|
|
|
486,105
|
|
|
|
9,841
|
|
|
|
31,128
|
|
|
|
93,066
|
|
|
|
52,632
|
|
|
|
521
|
|
|
|
852,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ungraded Loan Exposure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
145,470
|
|
|
|
10,420
|
|
|
|
38,806
|
|
|
|
8,360
|
|
|
|
11,334
|
|
|
|
2,011
|
|
|
|
6,424
|
|
|
|
222,825
|
|
Nonperforming
|
|
|
641
|
|
|
|
24
|
|
|
|
178
|
|
|
|
—
|
|
|
|
64
|
|
|
|
—
|
|
|
|
—
|
|
|
|
907
|
|
Subtotal
|
|
|
146,111
|
|
|
|
10,444
|
|
|
|
38,984
|
|
|
|
8,360
|
|
|
|
11,398
|
|
|
|
2,011
|
|
|
|
6,424
|
|
|
|
223,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
325,155
|
|
|
$
|
496,549
|
|
|
$
|
48,825
|
|
|
$
|
39,488
|
|
|
$
|
104,464
|
|
|
$
|
54,643
|
|
|
$
|
6,945
|
|
|
$
|
1,076,069
|
|
Delinquency
Analysis of Loans by Class
The following
tables include an aging analysis of the recorded investment of past-due financing receivables by class. The Company does not accrue
interest on loans greater than 90 days past due.
|
|
September 30, 2019
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and
Over Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total Loans
Receivable
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
3,440
|
|
|
$
|
404
|
|
|
$
|
652
|
|
|
$
|
4,496
|
|
|
$
|
332,195
|
|
|
$
|
336,691
|
|
Commercial real estate
|
|
|
773
|
|
|
|
2,909
|
|
|
|
587
|
|
|
|
4,269
|
|
|
|
477,233
|
|
|
|
481,502
|
|
Home equity and lines of credit
|
|
|
264
|
|
|
|
—
|
|
|
|
69
|
|
|
|
333
|
|
|
|
45,658
|
|
|
|
45,991
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
57,628
|
|
|
|
57,629
|
|
Other construction and land
|
|
|
175
|
|
|
|
16
|
|
|
|
198
|
|
|
|
389
|
|
|
|
101,382
|
|
|
|
101,771
|
|
Commercial
|
|
|
15
|
|
|
|
6
|
|
|
|
969
|
|
|
|
990
|
|
|
|
44,918
|
|
|
|
45,908
|
|
Consumer
|
|
|
70
|
|
|
|
—
|
|
|
|
1
|
|
|
|
71
|
|
|
|
7,018
|
|
|
|
7,089
|
|
Total
|
|
$
|
4,737
|
|
|
$
|
3,335
|
|
|
$
|
2,477
|
|
|
$
|
10,549
|
|
|
$
|
1,066,032
|
|
|
$
|
1,076,581
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and Over
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total Loans
Receivable
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
3,562
|
|
|
$
|
1,317
|
|
|
$
|
84
|
|
|
$
|
4,963
|
|
|
$
|
320,192
|
|
|
$
|
325,155
|
|
Commercial real estate
|
|
|
2,615
|
|
|
|
—
|
|
|
|
1,782
|
|
|
|
4,397
|
|
|
|
492,152
|
|
|
|
496,549
|
|
Home equity and lines of credit
|
|
|
400
|
|
|
|
457
|
|
|
|
73
|
|
|
|
930
|
|
|
|
47,895
|
|
|
|
48,825
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
39,487
|
|
|
|
39,488
|
|
Other construction and land
|
|
|
613
|
|
|
|
32
|
|
|
|
64
|
|
|
|
709
|
|
|
|
103,755
|
|
|
|
104,464
|
|
Commercial
|
|
|
307
|
|
|
|
25
|
|
|
|
121
|
|
|
|
453
|
|
|
|
54,190
|
|
|
|
54,643
|
|
Consumer
|
|
|
27
|
|
|
|
4
|
|
|
|
—
|
|
|
|
31
|
|
|
|
6,914
|
|
|
|
6,945
|
|
Total
|
|
$
|
7,524
|
|
|
$
|
1,835
|
|
|
$
|
2,125
|
|
|
$
|
11,484
|
|
|
$
|
1,064,585
|
|
|
$
|
1,076,069
|
|
Impaired
Loans
The following
table presents investments in loans considered to be impaired and related information on those impaired loans as of September
30, 2019 and December 31, 2018.
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Recorded
Balance
|
|
|
Unpaid
Principal
Balance
|
|
|
Specific
Allowance
|
|
|
Recorded
Balance
|
|
|
Unpaid
Principal
Balance
|
|
|
Specific
Allowance
|
|
|
|
(Dollars in thousands)
|
|
Loans without a valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
1,440
|
|
|
$
|
1,593
|
|
|
$
|
—
|
|
|
$
|
845
|
|
|
$
|
923
|
|
|
$
|
—
|
|
Commercial real estate
|
|
|
1,896
|
|
|
|
4,279
|
|
|
|
—
|
|
|
|
3,835
|
|
|
|
6,207
|
|
|
|
—
|
|
Home equity and lines of credit
|
|
|
283
|
|
|
|
283
|
|
|
|
—
|
|
|
|
283
|
|
|
|
283
|
|
|
|
—
|
|
Other construction and land
|
|
|
537
|
|
|
|
676
|
|
|
|
—
|
|
|
|
365
|
|
|
|
366
|
|
|
|
—
|
|
|
|
$
|
4,156
|
|
|
$
|
6,831
|
|
|
$
|
—
|
|
|
$
|
5,328
|
|
|
$
|
7,779
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with a valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
536
|
|
|
$
|
536
|
|
|
$
|
39
|
|
|
$
|
2,055
|
|
|
$
|
2,055
|
|
|
$
|
79
|
|
Commercial real estate
|
|
|
1,593
|
|
|
|
1,593
|
|
|
|
41
|
|
|
|
2,184
|
|
|
|
2,184
|
|
|
|
27
|
|
Home equity and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
|
30
|
|
|
|
—
|
|
Other construction and land
|
|
|
733
|
|
|
|
733
|
|
|
|
44
|
|
|
|
1,012
|
|
|
|
1,012
|
|
|
|
54
|
|
Commercial
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
226
|
|
|
|
276
|
|
|
|
276
|
|
|
|
7
|
|
|
|
$
|
4,032
|
|
|
$
|
4,032
|
|
|
$
|
350
|
|
|
$
|
5,557
|
|
|
$
|
5,557
|
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
1,976
|
|
|
$
|
2,129
|
|
|
$
|
39
|
|
|
$
|
2,900
|
|
|
$
|
2,978
|
|
|
$
|
79
|
|
Commercial real estate
|
|
|
3,489
|
|
|
|
5,872
|
|
|
|
41
|
|
|
|
6,019
|
|
|
|
8,391
|
|
|
|
27
|
|
Home equity and lines of credit
|
|
|
283
|
|
|
|
283
|
|
|
|
—
|
|
|
|
313
|
|
|
|
313
|
|
|
|
—
|
|
Other construction and land
|
|
|
1,270
|
|
|
|
1,409
|
|
|
|
44
|
|
|
|
1,377
|
|
|
|
1,378
|
|
|
|
54
|
|
Commercial
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
226
|
|
|
|
276
|
|
|
|
276
|
|
|
|
7
|
|
|
|
$
|
8,188
|
|
|
$
|
10,863
|
|
|
$
|
350
|
|
|
$
|
10,885
|
|
|
$
|
13,336
|
|
|
$
|
167
|
|
The following
table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods
indicated:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Investment
in
Impaired Loans
|
|
|
Interest
Income
Recognized
|
|
|
Average
Investment in
Impaired Loans
|
|
|
Interest
Income
Recognized
|
|
|
Average
Investment in
Impaired Loans
|
|
|
Interest
Income
Recognized
|
|
|
Average
Investment
in
Impaired Loans
|
|
|
Interest
Income
Recognized
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Loans without a valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
1,597
|
|
|
$
|
20
|
|
|
$
|
2,247
|
|
|
$
|
23
|
|
|
$
|
1,607
|
|
|
$
|
62
|
|
|
$
|
2,264
|
|
|
$
|
69
|
|
Commercial real estate
|
|
|
4,280
|
|
|
|
20
|
|
|
|
4,790
|
|
|
|
32
|
|
|
|
4,286
|
|
|
|
62
|
|
|
|
5,920
|
|
|
|
97
|
|
Home equity and lines of credit
|
|
|
283
|
|
|
|
4
|
|
|
|
428
|
|
|
|
4
|
|
|
|
283
|
|
|
|
13
|
|
|
|
428
|
|
|
|
13
|
|
Other construction and land
|
|
|
677
|
|
|
|
6
|
|
|
|
692
|
|
|
|
6
|
|
|
|
681
|
|
|
|
18
|
|
|
|
695
|
|
|
|
16
|
|
|
|
$
|
6,837
|
|
|
$
|
50
|
|
|
$
|
8,157
|
|
|
$
|
65
|
|
|
$
|
6,857
|
|
|
$
|
155
|
|
|
$
|
9,307
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with a valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
540
|
|
|
$
|
8
|
|
|
$
|
825
|
|
|
$
|
11
|
|
|
$
|
545
|
|
|
$
|
24
|
|
|
$
|
831
|
|
|
$
|
32
|
|
Commercial real estate
|
|
|
1,598
|
|
|
|
22
|
|
|
|
2,172
|
|
|
|
22
|
|
|
|
1,610
|
|
|
|
66
|
|
|
|
2,184
|
|
|
|
68
|
|
Other construction and land
|
|
|
762
|
|
|
|
11
|
|
|
|
842
|
|
|
|
11
|
|
|
|
796
|
|
|
|
34
|
|
|
|
854
|
|
|
|
34
|
|
Commercial
|
|
|
1,158
|
|
|
|
5
|
|
|
|
281
|
|
|
|
5
|
|
|
|
1,166
|
|
|
|
16
|
|
|
|
285
|
|
|
|
17
|
|
|
|
$
|
4,058
|
|
|
$
|
46
|
|
|
$
|
4,120
|
|
|
$
|
49
|
|
|
$
|
4,117
|
|
|
$
|
140
|
|
|
$
|
4,154
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
2,137
|
|
|
$
|
28
|
|
|
$
|
3,072
|
|
|
$
|
34
|
|
|
$
|
2,152
|
|
|
$
|
86
|
|
|
$
|
3,095
|
|
|
$
|
101
|
|
Commercial real estate
|
|
|
5,878
|
|
|
|
42
|
|
|
|
6,962
|
|
|
|
54
|
|
|
|
5,896
|
|
|
|
128
|
|
|
|
8,104
|
|
|
|
165
|
|
Home equity and lines of credit
|
|
|
283
|
|
|
|
4
|
|
|
|
428
|
|
|
|
4
|
|
|
|
283
|
|
|
|
13
|
|
|
|
428
|
|
|
|
13
|
|
Other construction and land
|
|
|
1,439
|
|
|
|
17
|
|
|
|
1,534
|
|
|
|
17
|
|
|
|
1,477
|
|
|
|
52
|
|
|
|
1,549
|
|
|
|
50
|
|
Commercial
|
|
|
1,158
|
|
|
|
5
|
|
|
|
281
|
|
|
|
5
|
|
|
|
1,166
|
|
|
|
16
|
|
|
|
285
|
|
|
|
17
|
|
|
|
$
|
10,895
|
|
|
$
|
96
|
|
|
$
|
12,277
|
|
|
$
|
114
|
|
|
$
|
10,974
|
|
|
$
|
295
|
|
|
$
|
13,461
|
|
|
$
|
346
|
|
Nonperforming
Loans
The following
table summarizes the balances of non-performing loans as of September 30, 2019 and December 31, 2018. Certain loans classified
as troubled debt restructurings (“TDRs”) and impaired loans may be on non-accrual status even though they are not
contractually delinquent.
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
1,132
|
|
|
$
|
1,037
|
|
Commercial real estate
|
|
|
1,859
|
|
|
|
3,266
|
|
Home equity loans and lines of credit
|
|
|
69
|
|
|
|
178
|
|
Residential construction
|
|
|
1
|
|
|
|
—
|
|
Other construction and land
|
|
|
233
|
|
|
|
256
|
|
Commercial
|
|
|
975
|
|
|
|
120
|
|
Consumer
|
|
|
1
|
|
|
|
—
|
|
Non-performing loans
|
|
$
|
4,270
|
|
|
$
|
4,857
|
|
TDRs
The following
tables summarize TDR loans as of the dates indicated:
|
|
September 30, 2019
|
|
|
|
Performing
|
|
|
Nonperforming
|
|
|
Total
|
|
|
|
TDRs
|
|
|
TDRs
|
|
|
TDRs
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
1,617
|
|
|
$
|
—
|
|
|
$
|
1,617
|
|
Commercial real estate
|
|
|
2,332
|
|
|
|
1,152
|
|
|
|
3,484
|
|
Home equity and lines of credit
|
|
|
283
|
|
|
|
—
|
|
|
|
283
|
|
Other construction and land
|
|
|
1,087
|
|
|
|
182
|
|
|
|
1,269
|
|
Commercial
|
|
|
263
|
|
|
|
—
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,582
|
|
|
$
|
1,334
|
|
|
$
|
6,916
|
|
|
|
December 31, 2018
|
|
|
|
Performing
|
|
|
Nonperforming
|
|
|
Total
|
|
|
|
TDRs
|
|
|
TDRs
|
|
|
TDRs
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
2,154
|
|
|
$
|
361
|
|
|
$
|
2,515
|
|
Commercial real estate
|
|
|
3,690
|
|
|
|
1,462
|
|
|
|
5,152
|
|
Home equity and lines of credit
|
|
|
283
|
|
|
|
30
|
|
|
|
313
|
|
Other construction and land
|
|
|
1,185
|
|
|
|
192
|
|
|
|
1,377
|
|
Commercial
|
|
|
276
|
|
|
|
—
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,588
|
|
|
$
|
2,045
|
|
|
$
|
9,633
|
|
Loan modifications
that were deemed TDRs at the time of the modification during the periods presented are summarized in the table below:
|
|
Three Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2018
|
|
(Dollars in thousands)
|
|
Number of
Loans
|
|
|
Recorded
Investment
|
|
|
Number of
Loans
|
|
|
Recorded
Investment
|
|
Extended payment terms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
206
|
|
There were no loan modifications
that were deemed TDRs at the time of the modification during the three or nine month periods ended September 30, 2019.
There were no TDRs that defaulted
during the three month and nine month periods ending September 30, 2019 and 2018 and which were modified as TDRs within the previous
12 months.
NOTE 5. GOODWILL AND OTHER INTANGIBLES
The Company
had $23.9 million of goodwill as of September 30, 2019 and December 31, 2018.
The Company had $3.1 million and $3.6 million of core deposit intangibles as of September 30, 2019 and December 31, 2018, respectively.
The following is a summary of gross carrying amounts and accumulated amortization of core deposit intangibles:
|
|
As of and for the
Nine Months Ending
|
|
|
As of and for
the Year Ending
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Dollars in thousands
|
|
Gross balance at beginning of period
|
|
$
|
4,840
|
|
|
$
|
4,840
|
|
Additions from acquisitions
|
|
|
—
|
|
|
|
—
|
|
Gross balance at end of period
|
|
|
4,840
|
|
|
|
4,840
|
|
Less accumulated amortization
|
|
|
(1,781
|
)
|
|
|
(1,263
|
)
|
Core deposit intangible, net
|
|
$
|
3,059
|
|
|
$
|
3,577
|
|
Core deposit
intangibles are amortized using the straight-line method over their estimated useful lives of seven years. Estimated amortization
expense for core deposit intangibles is $0.7 million for 2019 and each of the next three years, $0.6 million in the fifth year,
and $0.3 million in the final year.
NOTE
6. DEPOSITS
The following
table summarizes deposit balances and interest expense by type of deposit as of and for the nine months ended September 30, 2019
and 2018 and the year ended December 31, 2018:
|
|
As of and for the
|
|
|
As of and for the Year Ended
|
|
|
|
Nine Months Ended September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Interest
Expense
|
|
|
Balance
|
|
|
Interest
Expense
|
|
|
Balance
|
|
|
Interest
Expense
|
|
Noninterest-bearing demand
|
|
$
|
211,356
|
|
|
$
|
—
|
|
|
$
|
199,224
|
|
|
$
|
—
|
|
|
$
|
184,404
|
|
|
$
|
—
|
|
Interest-bearing demand
|
|
|
186,201
|
|
|
|
273
|
|
|
|
206,967
|
|
|
|
282
|
|
|
|
209,085
|
|
|
|
374
|
|
Money Market
|
|
|
463,289
|
|
|
|
4,185
|
|
|
|
372,428
|
|
|
|
1,687
|
|
|
|
356,086
|
|
|
|
2,637
|
|
Savings
|
|
|
45,119
|
|
|
|
41
|
|
|
|
52,874
|
|
|
|
44
|
|
|
|
50,716
|
|
|
|
59
|
|
Time Deposits
|
|
|
373,980
|
|
|
|
5,464
|
|
|
|
424,539
|
|
|
|
3,527
|
|
|
|
420,949
|
|
|
|
5,048
|
|
|
|
$
|
1,279,945
|
|
|
$
|
9,963
|
|
|
$
|
1,256,032
|
|
|
$
|
5,540
|
|
|
$
|
1,221,240
|
|
|
$
|
8,118
|
|
The following
table indicates wholesale deposits included in the money market and time deposits amounts above:
|
|
September 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
Wholesale money market
|
|
$
|
—
|
|
|
$
|
49,595
|
|
|
$
|
5,030
|
|
Wholesale time deposits
|
|
|
70,379
|
|
|
|
71,880
|
|
|
|
70,978
|
|
|
|
$
|
70,379
|
|
|
$
|
121,475
|
|
|
$
|
76,008
|
|
NOTE 7. BORROWINGS
The
scheduled maturities and respective weighted average rates of outstanding FHLB advances are as follows for the dates indicated
(dollars in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Year of Maturity
|
|
Balance
|
|
|
Weighted
Average Rate
|
|
|
Balance
|
|
|
Weighted
Average Rate
|
|
2019
|
|
$
|
50,500
|
|
|
|
2.53
|
%
|
|
$
|
168,500
|
|
|
|
2.52
|
%
|
2020
|
|
|
150,000
|
|
|
|
2.34
|
%
|
|
|
45,000
|
|
|
|
2.80
|
%
|
2024
|
|
|
5,000
|
|
|
|
2.81
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
205,500
|
|
|
|
2.40
|
%
|
|
$
|
213,500
|
|
|
|
2.58
|
%
|
The Company
has a $15.0 million revolving credit loan facility with NexBank SSB. The loan facility, which is secured by Entegra Bank stock,
bears interest at LIBOR plus 350 basis points and is intended to be used for general corporate purposes. The Company had no balance
outstanding on the revolving credit loan facility as of September 30, 2019 and had drawn $5.0 million as of December 31, 2018.
The Company
also had other borrowings of $4.5 million and $4.3 million at September 30, 2019 and December 31, 2018, respectively, which is
comprised of participated loans that did not qualify for sale accounting. Interest expense on these other borrowings accrues at
the same rate as the interest income recognized on the loans receivable, resulting in no effect to net income.
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
AND HEDGING ACTIVITIES
Interest
Rate Swaps
Risk
Management Objective of Interest Rate Swaps
The Company
is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages
its exposures to a wide variety of business and operational risks through management of its core business activities. The Company
manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration
of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial
instruments to add stability to interest income or expense and to manage its exposure to movements in interest rates. The Company
does not use derivatives for trading or speculative purposes and only enters into transactions that have a qualifying hedging
relationship. The Company's hedging strategies involving interest rate derivatives are classified as either “Fair Value
Hedges” or “Cash Flow Hedges,” depending upon the rate characteristic of the hedged item.
Fair
Value Hedge: As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate
in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair
value of the derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair
value hedge.
Cash
Flow Hedge: Cash flows related to floating-rate assets and liabilities will fluctuate with changes in an underlying
rate index. When effectively hedged, the increases or decreases in cash flows related to the floating rate asset or liability
will generally be offset by changes in cash flows of the derivative instrument designated as a hedge. This strategy is referred
to as a cash flow hedge.
Credit
and Collateral Risks for Interest Rate Swaps
The Company
manages credit exposure on interest rate swap transactions by entering into a bilateral credit support agreement with each counterparty.
The credit support agreements allow for collateralization of exposures beyond specified minimum threshold amounts.
The Company’s
agreements with its interest rate swap counterparties contain a provision where if either party defaults on any of its indebtedness,
then it could also be declared in default on its derivative obligations. The agreements with derivative counterparties also include
provisions, that if not met, could result in the Company being declared in default. If the Company were to be declared in default,
the counterparty could terminate the derivative positions and the Company and the counterparty would be required to settle their
obligations under the agreements. At September 30, 2019, the Company had two derivatives in a total net liability position of
$1.8 million under these agreements and recognized the right to reclaim cash collateral of $1.8 million which was included in
the consolidated balance sheets in “Other assets.” The Company had one derivative in a net liability position of $0.2
million at December 31, 2018.
Mortgage
Derivatives
Risk
Management Objective of Mortgage Lending Activities
The Company
also maintains a risk management program to manage interest rate risk and pricing risk associated with its mortgage lending activities.
The risk management program includes the use of forward contracts and other derivatives that are recorded in the financial statements
at fair value and are used to offset changes in value of the mortgage inventory due to changes in market interest rates. As a
normal part of our operations, we enter into derivative contracts to economically hedge risks associated with overall price risk
related to interest rate lock commitments (”IRLCs”) and mortgage loans held-for-sale for which the fair value option
has been elected. Fair value changes occur as a result of interest rate movements as well as changes in the value of the associated
servicing. Derivative instruments used include forward sales commitments and IRLCs.
Credit
and Collateral Risks for Mortgage Lending Activities
The Company’s
underlying risks are primarily related to interest rates and forward sales commitments entered into as part of its mortgage banking
activities. Forward sales commitments are contracts for the delayed delivery or net settlement of an underlying instrument, such
as a mortgage loan, in which the seller agrees to deliver on a specified future date, either a specified instrument at a specified
price or yield or the net cash equivalent of an underlying instrument. These hedges are used to preserve the Company’s position
relative to future sales of mortgage loans to third parties in an effort to minimize the volatility of the expected gain on sale
from changes in interest rate and the associated pricing changes.
The table below
presents the fair value of the Company’s derivative financial instruments as of the dates indicated as well as their classification
on the consolidated balance sheets (in thousands).
|
|
Derivative Assets (1)
|
|
|
Derivative Liabilities (1)
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
97
|
|
|
$
|
354
|
|
|
$
|
1,760
|
|
|
$
|
462
|
|
Total
|
|
$
|
97
|
|
|
$
|
354
|
|
|
$
|
1,760
|
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage derivatives
|
|
$
|
79
|
|
|
$
|
34
|
|
|
$
|
16
|
|
|
$
|
22
|
|
Total
|
|
$
|
79
|
|
|
$
|
34
|
|
|
$
|
16
|
|
|
$
|
22
|
|
(1) All
derivative assets are located in “Other assets” on the consolidated balance sheets and all derivative liabilities
are located in “Other liabilities” on the consolidated balance sheets.
The table below
presents the effect of fair value and cash flow hedge accounting on the consolidated statements of income:
Derivatives
Designated as Hedging Instruments
|
|
Three months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
(dollars in thousands)
|
|
Interest
income
|
|
|
Interest
expense
|
|
|
Interest
income
|
|
|
Interest
expense
|
|
Total amounts of income and expense line items presented in the consolidated statements of income
|
|
$
|
16,996
|
|
|
$
|
5,142
|
|
|
$
|
15,978
|
|
|
$
|
3,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to fair value hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
|
120
|
|
|
|
—
|
|
|
|
(182
|
)
|
|
|
—
|
|
Derivatives designated as hedging instruments
|
|
|
(148
|
)
|
|
|
—
|
|
|
|
187
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from accumulated other comprehensive income into income
|
|
|
—
|
|
|
|
(49
|
)
|
|
|
—
|
|
|
|
(149
|
)
|
|
|
Nine months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
(dollars in thousands)
|
|
Interest
income
|
|
|
Interest
expense
|
|
|
Interest
income
|
|
|
Interest
expense
|
|
Total amounts of income and expense line items presented in the consolidated statements of income
|
|
$
|
50,284
|
|
|
$
|
14,757
|
|
|
$
|
46,149
|
|
|
$
|
9,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to fair value hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
|
843
|
|
|
|
—
|
|
|
|
(263
|
)
|
|
|
—
|
|
Derivatives designated as hedging instruments
|
|
|
(893
|
)
|
|
|
—
|
|
|
|
261
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from accumulated other comprehensive loss into income
|
|
|
—
|
|
|
|
(172
|
)
|
|
|
—
|
|
|
|
(347
|
)
|
Fair Value Hedges
The Company
uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps, designated as fair value
hedges, involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the
life of the agreements without the exchange of the underlying notional amount. The gain or loss on the derivative as well as the
offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company entered into
a pay-fixed/receive-variable interest rate swap with a notional amount of $25.0 million which was designated as a fair value hedge
associated with the Company’s fixed rate loan program.
As of September
30, 2019, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:
(dollars in thousands)
|
|
Carrying amount of the
hedged assets
|
|
|
Cumulative amount of fair
value hedging adjustment
included in the carrying
amount of the hedged assets
|
|
Line item in the balance sheet in which the hedged item is included
|
|
September 30,
2019
|
|
|
September 30,
2019
|
|
Loans receivable (1)
|
|
$
|
90,639
|
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
(1) These amounts include the amortized cost basis of the closed portfolio used to designate the hedging relationship in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2019, the amortized cost basis of the closed portfolio used in the the hedging relationship was $90.6 million, the cumulative basis adjustment associated with the hedging relationship was $1.1 million, and the amount of the designated hedged items was $25.0 million.
|
Cash Flow Hedges
Interest rate
swap contracts, designated as cash flow hedges, involve the payment of fixed-rate amounts to a counterparty in exchange for the
Company receiving variable-rate payments without exchange of the underlying notional amounts. The forward starting interest rate
swap begins exchanging cash flows in 2020 when the current interest rate swap agreement expires.
The structure
of the swap agreements designated as cash flow hedges is described in the table below (dollars in thousands):
Underlyings
|
|
Designation
|
|
Notional
|
|
|
Payment Provision
|
|
Life of Swap Contract
|
Junior Subordinated Debt
|
|
Cash Flow Hedge
|
|
$
|
14,000
|
|
|
Pay 0.958%/Receive 3 month LIBOR
|
|
4 yrs
|
Junior Subordinated Debt
|
|
Cash Flow Hedge
|
|
$
|
14,000
|
|
|
Pay 3.02%/Receive 3 month LIBOR
|
|
3 yrs
|
The table below presents the effect of the Company's derivatives in cash flow hedging relationships for the periods presented (dollars in thousands):
|
|
|
|
As of and for the
|
|
|
As of and for the
|
|
|
As of and for the
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Year Ended
December 31,
|
|
Interest rate swaps
|
|
Location
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
Amounts recognized in AOCI on derivatives
|
|
OCI
|
|
$
|
(85
|
)
|
|
$
|
93
|
|
|
$
|
(531
|
)
|
|
$
|
303
|
|
|
$
|
2
|
|
Amounts reclassified from AOCI into income
|
|
Interest expense
|
|
|
(49
|
)
|
|
|
(149
|
)
|
|
|
(172
|
)
|
|
|
(347
|
)
|
|
|
(431
|
)
|
Amounts recognized in consolidated statement of comprehensive income
|
|
|
|
$
|
(134
|
)
|
|
$
|
(56
|
)
|
|
$
|
(703
|
)
|
|
$
|
(44
|
)
|
|
$
|
(429
|
)
|
Derivatives Not Designated
as Hedging Instruments
Mortgage Derivatives
Mortgage derivative
fair value assets and liabilities are described above. At September 30, 2019 and December 31, 2018, the Company had the following
IRLCs and forward commitments for the future delivery of residential mortgage loans.
|
|
As of
September 30,
|
|
|
As of
December 31,
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
Mortgage derivatives
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
$
|
8,003
|
|
|
$
|
1,627
|
|
Forward sales commitment
|
|
|
12,750
|
|
|
|
3,500
|
|
The table below
presents the effect of the Company’s derivatives not designated as hedging instruments for the periods presented:
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Interest rate products
|
|
Location
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount of gain (loss) recognized in income on forward commitments
|
|
Noninterest income
|
|
$
|
(29
|
)
|
|
$
|
12
|
|
|
$
|
(124
|
)
|
|
$
|
(33
|
)
|
Amount of gain (loss) recognized in income on interest rate lock commitments
|
|
Noninterest income
|
|
|
(15
|
)
|
|
|
(46
|
)
|
|
|
30
|
|
|
|
(17
|
)
|
Amount of loss recognized in income on derivatives not designated as hedging instruments
|
|
|
|
$
|
(44
|
)
|
|
$
|
(34
|
)
|
|
$
|
(94
|
)
|
|
$
|
(50
|
)
|
NOTE 9. INCOME
TAXES
The components
of net deferred taxes as of September 30, 2019 and December 31, 2018 are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,817
|
|
|
$
|
2,703
|
|
Deferred compensation and post-employment benefits
|
|
|
1,820
|
|
|
|
1,854
|
|
Non-accrual interest
|
|
|
259
|
|
|
|
245
|
|
Valuation reserve for other real estate
|
|
|
253
|
|
|
|
191
|
|
North Carolina NOL carryover
|
|
|
91
|
|
|
|
293
|
|
Federal NOL carryover
|
|
|
—
|
|
|
|
1,231
|
|
AMT credit carryover
|
|
|
—
|
|
|
|
316
|
|
General federal business credit carryover
|
|
|
310
|
|
|
|
691
|
|
Unrealized losses on securities
|
|
|
344
|
|
|
|
1,061
|
|
Loan basis differences
|
|
|
42
|
|
|
|
50
|
|
Fixed assets
|
|
|
144
|
|
|
|
123
|
|
Core deposit intangible
|
|
|
186
|
|
|
|
129
|
|
Derivative instruments
|
|
|
121
|
|
|
|
—
|
|
Other
|
|
|
1,542
|
|
|
|
1,207
|
|
Total deferred tax assets
|
|
|
7,929
|
|
|
|
10,094
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Loan servicing rights
|
|
|
579
|
|
|
|
653
|
|
Goodwill
|
|
|
754
|
|
|
|
495
|
|
Core deposit intangible
|
|
|
61
|
|
|
|
74
|
|
Deferred loan costs
|
|
|
1,018
|
|
|
|
1,001
|
|
Prepaid expenses
|
|
|
14
|
|
|
|
14
|
|
Unrealized gains on securities
|
|
|
2,448
|
|
|
|
105
|
|
Derivative instruments
|
|
|
14
|
|
|
|
29
|
|
Investment in partnerships
|
|
|
170
|
|
|
|
155
|
|
Other
|
|
|
—
|
|
|
|
17
|
|
Total deferred tax liabilities
|
|
|
5,058
|
|
|
|
2,543
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,871
|
|
|
$
|
7,551
|
|
The following
table summarizes the amount and expiration dates of the Company’s unused net operating losses as of September 30, 2019:
(Dollars in thousands)
|
|
Amount
|
|
|
Expiration Dates
|
|
North Carolina
|
|
$
|
6,311
|
|
|
|
2026-2029
|
|
Federal General Business Credit Carryforwards
|
|
$
|
310
|
|
|
|
2038
|
|
NOTE 10. EARNINGS PER SHARE
The following is a reconciliation
of the numerator and denominator of basic and diluted net income per share of common stock as of the dates indicated:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(Dollars in thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,997
|
|
|
$
|
3,523
|
|
|
$
|
9,976
|
|
|
$
|
10,192
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
6,923,114
|
|
|
|
6,891,672
|
|
|
|
6,920,880
|
|
|
|
6,889,130
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
121,076
|
|
|
|
90,580
|
|
|
|
75,283
|
|
|
|
92,465
|
|
Restricted stock units
|
|
|
45,660
|
|
|
|
48,898
|
|
|
|
33,001
|
|
|
|
42,119
|
|
Weighted-average common shares outstanding - diluted
|
|
|
7,089,850
|
|
|
|
7,031,150
|
|
|
|
7,029,164
|
|
|
|
7,023,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.58
|
|
|
$
|
0.51
|
|
|
$
|
1.44
|
|
|
$
|
1.48
|
|
Earnings per share - diluted
|
|
$
|
0.56
|
|
|
$
|
0.50
|
|
|
$
|
1.42
|
|
|
$
|
1.45
|
|
The following
table presents stock options that are not deemed dilutive in calculating diluted earnings per share for the respective periods
in the table above:
|
|
Average Stock Price
|
|
|
Anti-dilutive Shares
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
$
|
29.93
|
|
|
$
|
28.25
|
|
|
$
|
27.08
|
|
|
$
|
28.44
|
|
|
|
11,900
|
|
|
|
30,438
|
|
|
|
44,900
|
|
|
|
23,721
|
|
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
The following
table summarizes the components of accumulated other comprehensive income (“AOCI”) and changes in those components
as of and for the three and nine months ended September 30, 2019 and 2018.
|
|
Three Months Ended
September 30, 2019
|
|
|
|
Available for
Sale
Securities
|
|
|
Cash Flow
Hedge
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
4,496
|
|
|
$
|
(346
|
)
|
|
$
|
4,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding gains on securities
available for sale
|
|
|
2,455
|
|
|
|
—
|
|
|
|
2,455
|
|
Change in unrealized holding losses on cash flow hedge
|
|
|
—
|
|
|
|
(85
|
)
|
|
|
(85
|
)
|
Reclassification adjustment for cash flow hedge effectiveness
|
|
|
—
|
|
|
|
(49
|
)
|
|
|
(49
|
)
|
Income tax effect
|
|
|
(560
|
)
|
|
|
28
|
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
6,391
|
|
|
$
|
(452
|
)
|
|
$
|
5,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(4,271
|
)
|
|
$
|
450
|
|
|
$
|
(3,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding losses on
securities available for sale
|
|
|
(2,318
|
)
|
|
|
—
|
|
|
|
(2,318
|
)
|
Change in unrealized holding gains on cash flow hedge
|
|
|
—
|
|
|
|
93
|
|
|
|
93
|
|
Reclassification adjustment for cash flow hedge effectiveness
|
|
|
—
|
|
|
|
(149
|
)
|
|
|
(149
|
)
|
Income tax effect
|
|
|
524
|
|
|
|
14
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
(6,065
|
)
|
|
$
|
408
|
|
|
$
|
(5,657
|
)
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
Available for
Sale
Securities
|
|
|
Cash Flow
Hedge
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
(3,528
|
)
|
|
$
|
104
|
|
|
$
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding losses on
securities available for sale
|
|
|
12,889
|
|
|
|
—
|
|
|
|
12,889
|
|
Change in unrealized holding gains on cash flow hedge
|
|
|
—
|
|
|
|
(531
|
)
|
|
|
(531
|
)
|
Reclassification adjustment for cash flow effectiveness
|
|
|
—
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
Income tax effect
|
|
|
(2,970
|
)
|
|
|
147
|
|
|
|
(2,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
6,391
|
|
|
$
|
(452
|
)
|
|
$
|
5,939
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
(455
|
)
|
|
$
|
432
|
|
|
$
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding losses on
securities available for sale
|
|
|
(8,181
|
)
|
|
|
—
|
|
|
|
(8,181
|
)
|
Reclassification adjustment for net securities gains
realized in net income
|
|
|
947
|
|
|
|
—
|
|
|
|
947
|
|
Change in unrealized holding gains on cash flow hedge
|
|
|
—
|
|
|
|
303
|
|
|
|
303
|
|
Reclassification adjustment for cash flow effectiveness
|
|
|
—
|
|
|
|
(347
|
)
|
|
|
(347
|
)
|
Cumulative effect of change in accounting principle
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
Income tax effect
|
|
|
1,615
|
|
|
|
20
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
(6,065
|
)
|
|
$
|
408
|
|
|
$
|
(5,657
|
)
|
The following
table shows the line items in the Consolidated Statements of Income affected by amounts reclassified from AOCI as of the dates
indicated:
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30,
|
|
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Income Statement Line Item Affected
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(947
|
)
|
|
Loss on sale of investments, net
|
Income tax effect
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
213
|
|
|
Income tax expense
|
Reclassified out of AOCI, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(734
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense- effective portion
|
|
|
—
|
|
|
|
99
|
|
|
|
—
|
|
|
|
223
|
|
|
Interest expense - FHLB advances
|
Interest expense- effective portion
|
|
|
49
|
|
|
|
50
|
|
|
|
172
|
|
|
|
124
|
|
|
Interest expense - Junior subordinated notes
|
Income tax effect
|
|
|
(11
|
)
|
|
|
(33
|
)
|
|
|
(39
|
)
|
|
|
(78
|
)
|
|
Income tax expense
|
Reclassified out of AOCI, net of tax
|
|
|
38
|
|
|
|
116
|
|
|
|
133
|
|
|
|
269
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassified out of AOCI, net of tax
|
|
$
|
38
|
|
|
$
|
116
|
|
|
$
|
133
|
|
|
$
|
(465
|
)
|
|
Net income
|
NOTE 12. COMMITMENTS AND CONTINGENCIES
To accommodate
the financial needs of its customers, the Company makes commitments under various terms to lend funds. These commitments include
revolving credit agreements, term loan commitments and short-term borrowing agreements. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company
evaluates each customer’s creditworthiness. The amount of collateral obtained, if it is deemed necessary by the Company
upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held includes first
and second mortgages on one-to-four family dwellings, accounts receivable, inventory, and commercial real estate. Certain lines
of credit are unsecured.
The following
summarizes the Company’s approximate commitments to extend credit:
|
|
September 30, 2019
|
|
|
|
(Dollars in thousands)
|
|
Lines of credit
|
|
$
|
159,801
|
|
Standby letters of credit
|
|
|
1,078
|
|
|
|
$
|
160,879
|
|
As of September
30, 2019, the Company had outstanding commitments to originate loans as follows:
|
|
September 30, 2019
|
|
|
|
Amount
|
|
|
Range of Rates
|
|
|
|
(Dollar in thousands)
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
20,965
|
|
|
|
3.13% to 6.99%
|
|
Variable
|
|
|
4,869
|
|
|
|
2.88% to 6.49%
|
|
|
|
$
|
25,834
|
|
|
|
|
|
The allowance
for unfunded commitments was $0.1 million at September 30, 2019 and December 31, 2018.
The
Company is exposed to loss as a result of its obligation for representations and warranties on loans sold to
Fannie
Mae and maintained a reserve of $0.3 million as of September 30, 2019 and December 31, 2018.
In
the normal course of business, the Company is periodically involved in litigation and other matters. In the opinion of the Company’s
management, none of the litigation and other matters are expected to have a material adverse effect on the accompanying consolidated
financial statements.
NOTE 13. FAIR VALUE
Overview
Fair value measurements
are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering
market participant assumptions in fair value measurements, ASC Topic 820, Fair Value Measurements and Disclosures (“ASC
820”), establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of
the hierarchy) and the reporting entity's own assumptions about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).
Fair Value
Hierarchy
Level 1
Valuation
is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company
has the ability to access at the measurement date.
Level 2
Valuation
is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated
inputs.
Level 3
Valuation
is generated from techniques that use at least one significant assumption not observable in the market. These unobservable assumptions
reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include
the use of option pricing models, discounted cash flow models and similar techniques.
In general,
fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is
based upon models that primarily use, as inputs, observable market-based parameters. In instances where the determination of the
fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment, and considers factors specific to the asset or liability. The Company evaluates fair value
measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer
between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances
that caused the transfer, which generally coincides with the Company's valuation process.
Fair Value
Option
ASC 820 allows
companies to report selected financial assets and liabilities at fair value using the fair value option. The changes in fair value
are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately
on the balance sheet. The Company made the election in September 2018 to record mortgage loans held-for-sale at fair value under
the fair value option, which allows for a more effective offset of the changes in fair values of the loans and the derivative
instruments used to hedge them without the burden of complying with the requirements for hedge accounting.
Financial Assets and Financial
Liabilities Measured on a Recurring Basis
The Company uses the following methods
and assumptions in estimating the fair value of its financial assets and financial liabilities on a recurring basis:
Investment Securities Available-for-Sale
We obtain fair
values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities.
The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are
classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid
and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and
conditions databases, as well as extensive quality control programs.
Included in
AFS investment securities are investments in an exchange traded bond fund and U.S. Treasury bonds, which are valued by reference
to quoted market prices and considered a Level 1 security.
Also included
in AFS investment securities are corporate bonds, which are valued using significant unobservable inputs and are classified as
Level 2 or Level 3 based on market information available during the period.
Equity Securities
Equity securities
represent investments in exchange traded mutual funds, which are valued by reference to quoted market prices and considered a
Level 1 security.
Mortgage Loans Held-for-Sale
Mortgage loans
held-for-sale are recorded at fair value on a recurring basis. The estimated fair value is determined using Level 3 inputs based
on observable data such as the existing forward commitment terms or the current market value of similar loans.
Loan Servicing Rights
Loan servicing
rights are carried at fair value as determined by a third party valuation firm. The valuation model utilizes a discounted cash
flow analysis using discount rates and prepayment speed assumptions used by market participants. The Company classifies loan servicing
rights fair value measurements as Level 3.
Derivative Instruments
Derivative instruments
include IRLCs, forward sale commitments, and interest rate swaps. IRLCs and forward sale commitments are valued based on the change
in the value of the underlying loan between the commitment date and the end of the period. The Company classifies these instruments
as Level 3.
Interest rate
swaps are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market
data. The Company classifies interest rate swaps as Level 2.
The
following tables present financial assets and financial liabilities measured at fair value on a recurring basis at the dates indicated,
segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
6,947
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,947
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
|
5,079
|
|
|
|
28,179
|
|
|
|
—
|
|
|
|
33,258
|
|
Municipal Securities
|
|
|
—
|
|
|
|
120,156
|
|
|
|
—
|
|
|
|
120,156
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
—
|
|
|
|
73,834
|
|
|
|
—
|
|
|
|
73,834
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
—
|
|
|
|
21,774
|
|
|
|
—
|
|
|
|
21,774
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
—
|
|
|
|
65,264
|
|
|
|
—
|
|
|
|
65,264
|
|
Collateralized Loan Obligations
|
|
|
—
|
|
|
|
15,221
|
|
|
|
|
|
|
|
15,221
|
|
Corporate bonds
|
|
|
—
|
|
|
|
19,326
|
|
|
|
494
|
|
|
|
19,820
|
|
Total securities available for sale
|
|
|
5,079
|
|
|
|
343,754
|
|
|
|
494
|
|
|
|
349,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
5,221
|
|
|
|
5,221
|
|
Loan servicing rights
|
|
|
—
|
|
|
|
—
|
|
|
|
2,520
|
|
|
|
2,520
|
|
Interest rate swaps
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
|
|
97
|
|
Mortgage derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring assets at fair value
|
|
$
|
12,026
|
|
|
$
|
343,851
|
|
|
$
|
8,314
|
|
|
$
|
364,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
1,760
|
|
|
$
|
—
|
|
|
$
|
1,760
|
|
Mortgage derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring liabilities at fair value
|
|
$
|
—
|
|
|
$
|
1,760
|
|
|
$
|
16
|
|
|
$
|
1,776
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
6,178
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,178
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
|
4,949
|
|
|
|
29,041
|
|
|
|
—
|
|
|
|
33,990
|
|
Municipal Securities
|
|
|
—
|
|
|
|
114,402
|
|
|
|
—
|
|
|
|
114,402
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
—
|
|
|
|
85,184
|
|
|
|
—
|
|
|
|
85,184
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
—
|
|
|
|
21,889
|
|
|
|
—
|
|
|
|
21,889
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
—
|
|
|
|
69,171
|
|
|
|
|
|
|
|
69,171
|
|
Collateralized Loan Obligations
|
|
|
|
|
|
|
15,077
|
|
|
|
—
|
|
|
|
15,077
|
|
Corporate bonds
|
|
|
—
|
|
|
|
19,532
|
|
|
|
493
|
|
|
|
20,025
|
|
Total securities available for sale
|
|
|
4,949
|
|
|
|
354,296
|
|
|
|
493
|
|
|
|
359,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
2,431
|
|
|
|
2,431
|
|
Loan servicing rights
|
|
|
—
|
|
|
|
—
|
|
|
|
2,837
|
|
|
|
2,837
|
|
Interest rate swaps
|
|
|
—
|
|
|
|
354
|
|
|
|
—
|
|
|
|
354
|
|
Mortgage derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring assets at fair value
|
|
$
|
11,127
|
|
|
$
|
354,650
|
|
|
$
|
5,795
|
|
|
$
|
371,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
462
|
|
|
$
|
—
|
|
|
$
|
462
|
|
Mortgage derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring liabilities at fair value
|
|
$
|
—
|
|
|
$
|
462
|
|
|
$
|
22
|
|
|
$
|
484
|
|
The following
table presents the changes in assets and liabilities measured at fair value on a recurring basis for which we have utilized Level
3 inputs to determine fair value:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
6,683
|
|
|
$
|
4,404
|
|
|
$
|
5,773
|
|
|
$
|
3,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
1,647
|
|
|
|
651
|
|
|
|
2,790
|
|
|
|
1,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing right activity, included in servicing income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization from loans sold
|
|
|
133
|
|
|
|
129
|
|
|
|
225
|
|
|
|
374
|
|
Fair value adjustment
|
|
|
(176
|
)
|
|
|
(43
|
)
|
|
|
(542
|
)
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage derivative gains(losses) included in other income
|
|
|
11
|
|
|
|
(34
|
)
|
|
|
51
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
8,298
|
|
|
$
|
5,107
|
|
|
$
|
8,298
|
|
|
$
|
5,107
|
|
Financial Assets Measured on a
Nonrecurring Basis
The Company
uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:
Small Business Administration
(“SBA”) Loans Held for Sale
SBA loans held
for sale are carried at the lower of cost or fair value. The fair value of SBA loans held for sale is based on what secondary
markets are currently offering for portfolios with similar characteristics and are classified as Level 2.
Impaired Loans
Impaired loans
are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated
using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may
be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the
borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured
using the present value of expected future cash flows are not deemed to be measured at fair value.
Real Estate Owned (“REO”)
REO obtained
in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost
to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value
less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded,
is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be
discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available
to us. REO carried at fair value is classified as Level 3.
Small
Business Investment Company (“SBIC”) Holdings
SBIC holdings
are carried at the lower of cost or cost less a valuation allowance. From time to time, impairment of SBIC is evident as a result
of underlying financial review and a valuation allowance is established. SBIC carried at cost less a valuation allowance is classified
as Level 3.
The following
table presents nonfinancial assets measured at fair value on a nonrecurring basis at the dates indicated, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,440
|
|
|
$
|
1,440
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
1,896
|
|
|
|
1,896
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
283
|
|
|
|
283
|
|
Other construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
537
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
349
|
|
|
|
349
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
1,485
|
|
|
|
1,485
|
|
Other construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
1,254
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,244
|
|
|
$
|
7,244
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
845
|
|
|
$
|
845
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
3,835
|
|
|
|
3,835
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
283
|
|
|
|
283
|
|
Other construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
365
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
228
|
|
|
|
228
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
949
|
|
|
|
949
|
|
Other construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
1,316
|
|
|
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,821
|
|
|
$
|
7,821
|
|
There were no liabilities measured
at fair value on a nonrecurring basis as of September 30, 2019 or December 31, 2018.
Impaired loans
totaling $4.0 million at September 30, 2019 and $5.6 million at December 31, 2018 were measured using the present value of expected
future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.
The following
table provides information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2019.
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
General
Range
|
|
|
|
|
|
|
|
Impaired loans
|
|
Discounted Appraisals
|
|
Collateral discounts
and estimated selling cost
|
|
0% - 30%
|
Real estate owned
|
|
Discounted Appraisals
|
|
Collateral discounts and estimated selling
cost
|
|
0% - 30%
|
Corporate bonds
|
|
Discounted Cash Flows
|
|
Recent trade pricing
|
|
100%
- 108%
|
Loan servicing rights
|
|
Discounted Cash Flows
|
|
Prepayment speed
|
|
11%
- 21%
|
|
|
|
|
Discount rate
|
|
10%
- 14%
|
Mortgage loans held for sale
|
|
External pricing model
|
|
Recent trade pricing
|
|
100%
- 106%
|
Mortgage derivatives
|
|
External pricing model
|
|
Pull-through rate
|
|
72%
- 100%
|
SBIC
|
|
Indicative value
provided by fund
|
|
Current operations
and financial condition
|
|
N/A
|
Fair Value of Financial Assets
and Financial Liabilities
The following
table includes the estimated fair value of the Company’s financial assets and financial liabilities at the dates indicated:
|
|
|
|
|
Fair Value Measurements at September 30, 2019
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
144,196
|
|
|
$
|
144,196
|
|
|
$
|
144,196
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
|
|
6,947
|
|
|
|
6,947
|
|
|
|
6,947
|
|
|
|
—
|
|
|
|
—
|
|
Securities available for sale
|
|
|
349,327
|
|
|
|
349,327
|
|
|
|
5,079
|
|
|
|
343,754
|
|
|
|
494
|
|
Loans held for sale
|
|
|
11,142
|
|
|
|
11,817
|
|
|
|
—
|
|
|
|
6,596
|
|
|
|
5,221
|
|
Loans receivable, net
|
|
|
1,076,581
|
|
|
|
1,048,805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,048,805
|
|
Other investments, at cost
|
|
|
11,652
|
|
|
|
11,652
|
|
|
|
—
|
|
|
|
11,652
|
|
|
|
—
|
|
Accrued interest receivable
|
|
|
6,163
|
|
|
|
6,163
|
|
|
|
—
|
|
|
|
6,163
|
|
|
|
—
|
|
BOLI
|
|
|
32,461
|
|
|
|
32,461
|
|
|
|
—
|
|
|
|
32,461
|
|
|
|
—
|
|
Loan servicing rights
|
|
|
2,520
|
|
|
|
2,520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,520
|
|
Mortgage derivatives
|
|
|
79
|
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
Interest rate swaps
|
|
|
97
|
|
|
|
97
|
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
SBIC investments
|
|
|
4,993
|
|
|
|
4,993
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
905,965
|
|
|
$
|
905,965
|
|
|
$
|
—
|
|
|
$
|
905,965
|
|
|
$
|
—
|
|
Time deposits
|
|
|
373,980
|
|
|
|
379,529
|
|
|
|
—
|
|
|
|
—
|
|
|
|
379,529
|
|
Federal Home Loan Bank advances
|
|
|
205,500
|
|
|
|
204,846
|
|
|
|
—
|
|
|
|
204,846
|
|
|
|
—
|
|
Junior subordinated debentures
|
|
|
14,433
|
|
|
|
13,292
|
|
|
|
—
|
|
|
|
13,292
|
|
|
|
—
|
|
Other borrowings
|
|
|
4,463
|
|
|
|
4,697
|
|
|
|
—
|
|
|
|
4,697
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
1,730
|
|
|
|
1,730
|
|
|
|
—
|
|
|
|
1,730
|
|
|
|
—
|
|
Mortgage derivatives
|
|
|
16
|
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
Interest rate swaps
|
|
|
1,760
|
|
|
|
1,760
|
|
|
|
—
|
|
|
|
1,760
|
|
|
|
—
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
69,119
|
|
|
$
|
69,119
|
|
|
$
|
69,119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
|
|
6,178
|
|
|
|
6,178
|
|
|
|
6,178
|
|
|
|
—
|
|
|
|
—
|
|
Securities available for sale
|
|
|
359,739
|
|
|
|
359,739
|
|
|
|
4,949
|
|
|
|
354,297
|
|
|
|
493
|
|
Loans held for sale
|
|
|
7,570
|
|
|
|
8,114
|
|
|
|
—
|
|
|
|
5,683
|
|
|
|
2,431
|
|
Loans receivable, net
|
|
|
1,076,069
|
|
|
|
1,046,136
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,046,136
|
|
Other investments, at cost
|
|
|
12,039
|
|
|
|
12,039
|
|
|
|
—
|
|
|
|
12,039
|
|
|
|
—
|
|
Accrued interest receivable
|
|
|
6,443
|
|
|
|
6,443
|
|
|
|
—
|
|
|
|
6,443
|
|
|
|
—
|
|
BOLI
|
|
|
32,886
|
|
|
|
32,886
|
|
|
|
—
|
|
|
|
32,886
|
|
|
|
—
|
|
Loan servicing rights
|
|
|
2,837
|
|
|
|
2,837
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,837
|
|
Mortgage derivatives
|
|
|
34
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
Interest rate swaps
|
|
|
354
|
|
|
|
354
|
|
|
|
—
|
|
|
|
354
|
|
|
|
—
|
|
SBIC investments
|
|
|
3,839
|
|
|
|
3,839
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
800,291
|
|
|
$
|
800,291
|
|
|
$
|
—
|
|
|
$
|
800,291
|
|
|
$
|
—
|
|
Time deposits
|
|
|
420,949
|
|
|
|
424,054
|
|
|
|
—
|
|
|
|
—
|
|
|
|
424,054
|
|
Federal Home Loan Bank advances
|
|
|
213,500
|
|
|
|
213,513
|
|
|
|
—
|
|
|
|
213,513
|
|
|
|
—
|
|
Junior subordinated debentures
|
|
|
14,433
|
|
|
|
12,440
|
|
|
|
—
|
|
|
|
12,440
|
|
|
|
—
|
|
Other borrowings
|
|
|
9,299
|
|
|
|
9,253
|
|
|
|
—
|
|
|
|
9,253
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
1,647
|
|
|
|
1,647
|
|
|
|
—
|
|
|
|
1,647
|
|
|
|
—
|
|
Mortgage derivatives
|
|
|
22
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
Interest rate swaps
|
|
|
462
|
|
|
|
462
|
|
|
|
—
|
|
|
|
462
|
|
|
|
—
|
|
NOTE
14. LEASES
As of
January 1, 2019, we adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases),
primarily ASU 2016-02 and subsequent updates. These updates require lessees to recognize a lease liability, measured on a
discounted basis, related to the lessee's obligation to make lease payments arising under a lease contract; and a right-of-use
asset related to the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted the
updates using a modified-retrospective transition approach and recognized a right-of-use lease asset and related lease liabilities
totaling $0.5 million as of January 1, 2019. At adoption, we elected to apply certain practical adoption expedients
provided under the updates whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii)
the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. As of September
30, 2019, the right-of-use lease asset, included in other assets, and related lease liabilities, included in other liabilities
totaled $0.4 million.
We lease
certain office facilities and office equipment under operating leases. The lease agreements have maturity dates ranging from March
2020 to May 2027, one of which includes an option for a five-year extension. The weighted average remaining life of the lease
term for these leases was 6.32 years as of September 30, 2019. We do not apply the recognition requirements of Topic 842
- Leases to short-term operating leases. A short-term operating lease has an original term of 12 months or less and does
not have a purchase option that is likely to be exercised. For non-short-term operating leases, we recognized lease right-of-use
assets and related lease liabilities on our balance sheet upon commencement of the lease in accordance with Topic 842 - Leases.
In recognizing lease right-of-use assets and related lease liabilities, we account for lease and non-lease components (such as
taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease
contracts. Lease payments over the expected term are discounted using our incremental borrowing rate referenced to the Federal
Home Loan Bank Secure Connect advance rates for borrowings of similar term. The weighted average discount rate for leases was
3.04% as of September 30, 2019. We also consider renewal and termination options in the determination of the term of the lease.
If it is reasonably certain that a renewal or termination option will be exercised, the effects of such options are included in
the determination of the expected lease term. Generally, we cannot be reasonably certain about whether or not we will renew a
lease until such time the lease is within the last two years of the existing lease term. When we are reasonably certain that a
renewal option will be exercised, we measure/remeasure the right-of-use asset and related lease liability using the lease payments
specified for the renewal period.
Maturities
of lease liabilities as of September 30, 2019 were as follows:
(Dollard in thousands)
|
|
Operating
Leases
|
|
2019
|
|
$
|
36
|
|
2020
|
|
|
69
|
|
2021
|
|
|
53
|
|
2022
|
|
|
53
|
|
2023
|
|
|
53
|
|
Thereafter
|
|
|
177
|
|
Total undiscounted lease payments
|
|
|
441
|
|
Discount effect of cash flows
|
|
|
(55
|
)
|
Total lease liability
|
|
$
|
386
|
|
The total operating lease costs were
$51,000 and $156,000 for the three months and nine months ended September 30, 2019, respectively.
Item 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements, which can be identified by the
use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,”
“plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.
These forward-looking statements include, but are not limited to:
|
•
|
|
statements
of our goals, intentions and expectations;
|
|
•
|
|
statements
regarding our business plans, prospects, growth and operating strategies;
|
|
•
|
|
statements
regarding the asset quality of our loan and investment portfolios; and
|
|
•
|
|
estimates
of our risks and future costs and benefits.
|
These
forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking
statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. These
forward-looking statements speak only as of the date they are made, and the Company is under no duty to and does not undertake
any obligation to update any forward-looking statements after the date of this Form 10-Q except as required by law.
The following factors, among
others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking
statements:
|
·
|
The
proposed merger with First Citizens BancShares, Inc. (“BancShares”) may distract
the management of the Company from its other responsibilities;
|
|
·
|
Failure
to complete the merger with BancShares could negatively impact our stock prices, future
business and financial results;
|
|
·
|
The
Company will be subject to business uncertainties and contractual restrictions while
the merger with BancShares is pending;
|
|
·
|
The
merger with BancShares could disrupt our current operations or affect our ability to
retain or recruit key employees;
|
|
·
|
We
may not be able to implement aspects of our growth strategy;
|
|
·
|
The
success of our growth strategy depends on our ability to identify and retain individuals
with experience and relationships in relevant markets;
|
|
·
|
We
may need additional access to capital, which we may be unable to obtain on attractive
terms or at all;
|
|
·
|
Our
estimate for losses in our loan portfolio may be inadequate, which would cause our results
of operations and financial condition to be adversely affected;
|
|
·
|
Our
commercial real estate loans generally carry greater credit risk than one-to-four family
residential mortgage loans;
|
|
·
|
Our
concentration of construction financing may expose us to a greater risk of loss and impair
our earnings and profitability;
|
|
·
|
Repayment
of our commercial business loans is primarily dependent on the cash flows of the borrower,
which may be unpredictable, and the collateral securing these loans may fluctuate in
value;
|
|
·
|
Our
level of home equity loans and lines of credit lending may expose us to increased credit
risk;
|
|
·
|
We
continue to hold and acquire other real estate, which has led to operating expenses and
vulnerability to additional declines in real property values;
|
|
·
|
A
significant portion of our loan portfolio is secured by real estate, and events that
negatively impact the real estate market could adversely affect business, results of
operations, financial condition and the value of our common stock;
|
|
·
|
Concentration
of collateral in our primary market area may increase the risk of increased non-performing
assets;
|
|
·
|
Income
from secondary mortgage market operations is volatile, and we may incur losses with respect
to our secondary mortgage market operations that could negatively affect our earnings;
|
|
·
|
We
rely on the mortgage secondary market for some of our liquidity;
|
|
·
|
Future
changes in interest rates could reduce our profits;
|
|
·
|
Strong
competition within our market areas may limit our growth and profitability;
|
|
·
|
Future
expansion involves risks;
|
|
·
|
New
bank office facilities and other facilities may not be profitable;
|
|
·
|
Acquisition
of assets and assumption of liabilities may expose us to intangible asset risk, which
could impact our results of operations and financial condition;
|
|
·
|
We
may not be able to compete with larger competitors for larger customers because our lending
limits are lower than our competitors;
|
|
·
|
We
depend on our executive management team to implement our business strategy and execute
successful operations and we could be harmed by the loss of their services;
|
|
·
|
The
fair value of our investments could decline;
|
|
·
|
Liquidity
risk could impair our ability to fund operations and jeopardize our financial condition,
results of operations and cash flows;
|
|
·
|
Changes
in accounting standards could affect reported earnings;
|
|
·
|
We
are subject to environmental liability risk associated with our lending activities;
|
|
·
|
A
failure in or breach of our operational or security systems or infrastructure, or those
of our third party vendors and other service providers or other third parties, including
as a result of cyber-attacks, could disrupt our businesses, result in the disclosure
or misuse of confidential or proprietary information, damage our reputation, increase
our costs, and cause losses;
|
|
·
|
We
are party to various lawsuits incidental to our business. Litigation is subject to many
uncertainties such that the expenses and ultimate exposure with respect to many of these
matters cannot be ascertained;
|
|
·
|
Our
stock-based benefit plan will increase our costs, which will reduce our income;
|
|
·
|
Negative
public opinion surrounding the Company and the financial institutions industry generally
could damage our reputation and adversely impact our earnings;
|
|
·
|
Severe
weather, natural disasters, acts of war or terrorism, and other external events could
significantly impact our business;
|
|
·
|
We
are subject to extensive regulation and oversight, and, depending upon the findings and
determinations of our regulatory authorities, we may be required to make adjustments
to our business, operations or financial position and could become subject to formal
or informal regulatory action;
|
|
·
|
Financial
reform legislation enacted by Congress and resulting regulations have increased and are
expected to continue to increase our costs of operations;
|
|
·
|
Imposition
of trade barriers and tariffs;
|
|
·
|
We
face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other
anti-money laundering statutes and regulations;
|
|
·
|
As
a regulated entity, we and the Bank must maintain certain required levels of regulatory
capital that may limit our and the Bank’s operations and potential growth;
|
|
·
|
Many
of our new activities and expansion plans require regulatory approvals, and failure to
obtain them may restrict our growth;
|
|
·
|
The
Federal Reserve may require the Company to commit capital resources to support the Bank;
|
|
·
|
Our
stock price may be volatile, which could result in losses to our shareholders and litigation
against us;
|
|
·
|
The
trading volume in our common stock is lower than that of other larger companies; future
sales of our stock by our shareholders or the perception that those sales could occur
may cause our stock price to decline;
|
|
·
|
There
may be future sales of our common stock or preferred stock or other dilution
of our equity, which may adversely affect the market price of our common stock;
|
|
·
|
The
implementation of stock-based benefit plans may dilute your ownership interest; and
|
|
·
|
We
may issue additional debt and equity securities or securities convertible into equity
securities, any of which may be senior to our common stock as to distributions and in
the event of liquidation, which could negatively affect the value of our common stock.
|
For additional
information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking
statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2018, as filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2019 (the “2018 Form
10-K”) “Risk Factors” in our definitive proxy statement, as filed with the SEC on June 25, 2019 and our other
filings with the SEC.
Critical Accounting Policies
and Estimates
Our critical
accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements
as of September 30, 2019 have remained unchanged from the disclosures presented in our 2018 Form 10-K. Refer to Note 1 of this
Form 10-Q for more information about our accounting policies and recent accounting updates.
Overview
Entegra
Financial Corp. was incorporated on May 31, 2011 to be the holding company for Entegra Bank (the “Bank”) upon the
completion of Macon Bancorp’s merger with and into Entegra Financial Corp., pursuant to which Macon Bancorp converted from
a mutual to stock form of organization. Prior to the completion of the conversion, Entegra Financial Corp. did not engage in any
significant activities other than organizational activities. On September 30, 2014, the mutual to stock conversion was completed
and the Bank became the wholly owned subsidiary of Entegra Financial Corp. Also on September 30, 2014, Entegra Financial Corp.
completed the initial public offering of its common stock. In this Management’s Discussion and Analysis of Financial Condition
and Results of Operations section (the “MD&A”), terms such as “we,” “us,” “our”
and the “Company” refer to Entegra Financial Corp.
We provide
a full range of financial services through offices located throughout the western North Carolina counties of Buncombe, Cherokee,
Haywood, Henderson, Jackson, Macon, Polk, and Transylvania, the Upstate South Carolina counties of Anderson, Greenville, Pickens,
and Spartanburg and the northern Georgia counties of Gwinnett, Hall and Pickens. We provide full service retail and commercial
banking products, as well as wealth management services through a third party.
We earn
revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. Offsetting
these revenues are the cost of deposits and other funding sources, provisions for loan losses and other operating costs such as
salaries and employee benefits, data processing, occupancy and tax expense.
Our results
of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as
well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes
in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.
The following
discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations
and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis
in conjunction with the financial statements and the related notes and the other statistical information included in this Form
10-Q and in our 2018 Form 10-K.
Merger with
First Citizens BancShares, Inc.
On April 23,
2019, Entegra entered into a definitive agreement to merge with and into BancShares (the “Merger Agreement”). Under
the terms of the Merger Agreement, each outstanding share of Entegra common stock would be converted into the right to receive
$30.18 in cash.
Previously on
January 15, 2019, Entegra had entered into a definitive agreement to merge with and into SmartFinancial, Inc. (“SmartFinancial”),
a Tennessee corporation. Under the terms of the SmartFinancial definitive agreement, each outstanding share of Entegra common
stock would be converted into the right to receive 1.215 shares of SmartFinancial common stock.
On April
18, 2019, Entegra notified SmartFinancial that it had received a proposal from BancShares and certain affiliates containing the
Merger Agreement described above and that the Entegra board of directors had concluded that such proposal constituted a Superior
Proposal (as defined in the SmartFinancial definitive agreement). On April 23, 2019, SmartFinancial delivered a notice to Entegra
waiving its rights to renegotiate its agreement with Entegra, subject to Entegra’s compliance with the SmartFinancial definitive
agreement and the payment of the termination fee due to SmartFinancial simultaneously with the termination of the SmartFinancial
definitive agreement.
On April
23, 2019, in connection with the termination by Entegra of the SmartFinancial definitive agreement, BancShares, on behalf of Entegra,
paid SmartFinancial a termination fee of $6.4 million as required by the terms of the SmartFinancial definitive agreement, and
the SmartFinancial definitive agreement was terminated.
Approval
of the proposed merger by Entegra’s shareholders has been received. Completion of the proposed merger remains subject to
the receipt of required regulatory approvals and the satisfaction or waiver of other customary conditions, and is expected to
occur during the fourth quarter of 2019.
Earnings
Summary
Net income
for the three and nine months ended September 30, 2019 was $4.0 million and $10.3 million, respectively, compared to $3.5 million
and $10.2 million for the same periods in 2018, respectively. The increase in net income for the three months ended September
30, 2019 was primarily the result of an increase in noninterest income of $0.1 million and a decrease in noninterest expense of
$0.6 million, partially offset by a decrease in net interest income of $0.4 million. The increase in net income for the nine months
ended September 30, 2019 was primarily the result of an increase in noninterest income of $2.6, partially offset by a decrease
in net interest income of $1.5 million and an increase in noninterest expenses of $2.1 million.
Net interest
income decreased $0.4 million, or 3.6%, to $11.9 million for the three months ended September 30, 2019, compared to $12.3 million
for the same period in 2018. Net interest income decreased $1.5 million, or 4.0%, to $35.5 million for the nine months ended September
30, 2019, compared to $37.0 million for the same period in 2018. The decrease in net interest income was primarily due to increased
costs of deposits and borrowings, partially offset by higher volumes in the loan portfolio, as well as an increase in the yields
earned on cash, taxable investments and taxable loans. Net interest margin was 3.08% for the three months ended September 30,
2019, compared to 3.26% for the same period in 2018, and 3.14% and 3.38% for the nine months ended September 30, 2019 and 2018,
respectively.
Noninterest
income increased $0.1 million, or 4.7%, to $2.1 million for the three months ended September 30, 2019, compared to $2.0 million
for the same period in 2018. Increases in mortgage banking and Small Business Investment Company holdings (“SBIC”)
earnings were partially offset by decreases in equity securities gains and reduced net servicing income.
Noninterest
income increased $2.6 million, or 56.6%, to $7.3 million for the nine months ended September 30, 2019, compared to $4.7 million
for the same period in 2018, primarily as the result of the settlement of a dispute with a former advisor for $1.75 million related
the acquisition of Chattahoochee Bank of Georgia and increases in mortgage banking, equity security gains, and SBIC earnings,
partially offset by decreases in net servicing income and gains on sale of SBA loans. There were no losses on the sale of investments
for the nine months ended September 30, 2019 compared to $0.5 million for the same period in 2018.
Noninterest
expense decreased $0.6 million, or 6.5%, to $8.9 million for the three months ended September 30, 2019, compared to $9.5
million for the same period in 2018. The decrease was primarily related to reduced professional and advisory expenses as a
result of the previously announced merger with BancShares. Compensation and employee benefits includes $0.4 million in
additional employee expenses related to an ongoing audit of certain calculations under the Company’s 401k plan for
years 2012-2018. These costs partially offset a reduction in compensation and employee benefits for the three months
ended September 30, 2019 compared to the same period in 2018 due to the pending merger with Bancshares. The decrease in
Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums was due primarily to the small bank
credits awarded when the FDIC deposit insurance fund reserve ratio reached 1.35%. These decreases were partially offset
by increased merger-related expenses. Noninterest expense increased $2.1 million, or 7.5%, to $30.2 million for the nine
months ended September 30, 2019, compared to $28.1 million for the same period in 2018. The increases were primarily related
to increased merger-related expenses, partially offset by reduced FDIC deposit insurance premiums, professional and
advisory expenses, and net cost of operation of real estate owned (“REO”).
Non-GAAP
Financial Measures
Statements included
in this MD&A include financial measures that do not conform to U.S. generally accepted accounting principles (“GAAP”)
and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial
measures. This MD&A and the accompanying tables discuss non-GAAP financial measures, such as core noninterest expense, core
net income, core return on average assets, core return on tangible average equity, and core efficiency ratio. We believe that
such non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Company’s
operating results from period to period in a meaningful manner. Non-GAAP measures should not be considered as an alternative to
any measure of performance as promulgated under GAAP, nor are they necessarily comparable to non-GAAP performance measures that
may be presented by other companies. Investors should consider the Company’s performance and financial condition as reported
under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures
have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the
Company’s results or financial condition as reported under GAAP.
We analyze our
noninterest expense and net income on a non-GAAP basis as detailed and as of the periods indicated in the table below:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense (GAAP)
|
|
$
|
8,917
|
|
|
$
|
9,541
|
|
|
$
|
30,203
|
|
|
$
|
28,103
|
|
Merger-related expenses
|
|
|
(295
|
)
|
|
|
(96
|
)
|
|
|
(3,229
|
)
|
|
|
(564
|
)
|
Adjusted noninterest expense (Non-GAAP)
|
|
$
|
8,622
|
|
|
$
|
9,445
|
|
|
$
|
26,974
|
|
|
$
|
27,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (GAAP)
|
|
$
|
3,997
|
|
|
$
|
3,523
|
|
|
$
|
9,976
|
|
|
$
|
10,192
|
|
Loss (gain) on sale of investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
411
|
|
Equity securities (gains) losses
|
|
|
24
|
|
|
|
(151
|
)
|
|
|
(395
|
)
|
|
|
(145
|
)
|
Legal settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,383
|
)
|
|
|
—
|
|
401k audit loss estimate
|
|
|
286
|
|
|
|
—
|
|
|
|
286
|
|
|
|
—
|
|
Merger-related expenses
|
|
|
233
|
|
|
|
76
|
|
|
|
2,551
|
|
|
|
446
|
|
Adjusted net income (Non-GAAP)
|
|
$
|
4,540
|
|
|
$
|
3,448
|
|
|
$
|
11,035
|
|
|
$
|
10,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (GAAP)
|
|
$
|
0.56
|
|
|
$
|
0.50
|
|
|
$
|
1.42
|
|
|
$
|
1.45
|
|
Loss (gain) on sale of investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.06
|
|
Equity securities (gains) losses
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
(0.06
|
)
|
|
|
(0.02
|
)
|
Legal settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.20
|
)
|
|
|
—
|
|
401k audit loss estimate
|
|
|
0.04
|
|
|
|
—
|
|
|
|
0.04
|
|
|
|
—
|
|
Merger-related expenses
|
|
|
0.03
|
|
|
|
0.01
|
|
|
|
0.37
|
|
|
|
0.06
|
|
Adjusted diluted earnings per share (Non-GAAP)
|
|
$
|
0.64
|
|
|
$
|
0.49
|
|
|
$
|
1.57
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Return on Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets (GAAP)
|
|
|
0.95
|
%
|
|
|
0.86
|
%
|
|
|
0.80
|
%
|
|
|
0.84
|
%
|
Loss (gain) on sale of investments
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.03
|
%
|
Equity securities (gains) losses
|
|
|
0.01
|
%
|
|
|
-0.04
|
%
|
|
|
-0.03
|
%
|
|
|
-0.01
|
%
|
Legal settlement
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-0.11
|
%
|
|
|
0.00
|
%
|
401k audit loss estimate
|
|
|
0.07
|
%
|
|
|
0.00
|
%
|
|
|
0.02
|
%
|
|
|
0.00
|
%
|
Merger-related expenses
|
|
|
0.06
|
%
|
|
|
0.02
|
%
|
|
|
0.20
|
%
|
|
|
0.04
|
%
|
Adjusted Return on Average Assets (Non-GAAP)
|
|
|
1.08
|
%
|
|
|
0.84
|
%
|
|
|
0.88
|
%
|
|
|
0.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Return on Tangible Average Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Equity (GAAP)
|
|
|
8.86
|
%
|
|
|
9.00
|
%
|
|
|
7.70
|
%
|
|
|
8.84
|
%
|
Loss (gain) on sale of investments
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.36
|
%
|
Equity securities (gains) losses
|
|
|
0.05
|
%
|
|
|
-0.47
|
%
|
|
|
-0.30
|
%
|
|
|
-0.17
|
%
|
Legal settlement
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-1.07
|
%
|
|
|
0.00
|
%
|
401k audit loss estimate
|
|
|
0.64
|
%
|
|
|
0.00
|
%
|
|
|
0.22
|
%
|
|
|
0.00
|
%
|
Merger-related expenses
|
|
|
0.52
|
%
|
|
|
0.19
|
%
|
|
|
1.97
|
%
|
|
|
0.39
|
%
|
Effect of goodwill and intangibles
|
|
|
1.77
|
%
|
|
|
1.98
|
%
|
|
|
1.59
|
%
|
|
|
2.13
|
%
|
Adjusted Return on Average Tangible Equity (Non-GAAP)
|
|
|
11.84
|
%
|
|
|
10.70
|
%
|
|
|
10.11
|
%
|
|
|
11.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Efficiency Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio (GAAP)
|
|
|
64.10
|
%
|
|
|
66.92
|
%
|
|
|
70.48
|
%
|
|
|
67.44
|
%
|
Gain (loss) on sale of investments
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-1.23
|
%
|
Equity securities gains (losses)
|
|
|
-0.14
|
%
|
|
|
0.90
|
%
|
|
|
0.82
|
%
|
|
|
0.28
|
%
|
Legal settlement
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
2.96
|
%
|
|
|
0.00
|
%
|
401k audit loss estimate
|
|
|
-2.56
|
%
|
|
|
0.00
|
%
|
|
|
-0.83
|
%
|
|
|
0.00
|
%
|
Merger-related expenses
|
|
|
-2.12
|
%
|
|
|
-0.67
|
%
|
|
|
-7.88
|
%
|
|
|
-0.94
|
%
|
Adjusted Efficiency Ratio (Non-GAAP)
|
|
|
59.29
|
%
|
|
|
67.15
|
%
|
|
|
65.55
|
%
|
|
|
65.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
Tangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,704,023
|
|
|
$
|
1,636,441
|
|
|
|
|
|
|
|
|
|
Goodwill and Intangibles
|
|
|
(26,962
|
)
|
|
|
(27,480
|
)
|
|
|
|
|
|
|
|
|
Tangible Assets
|
|
$
|
1,677,061
|
|
|
$
|
1,608,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Book Value Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value (GAAP)
|
|
$
|
182,976
|
|
|
$
|
162,872
|
|
|
|
|
|
|
|
|
|
Goodwill and intangibles
|
|
|
(26,962
|
)
|
|
|
(27,480
|
)
|
|
|
|
|
|
|
|
|
Book Value (Tangible)
|
|
$
|
156,014
|
|
|
$
|
135,392
|
|
|
|
|
|
|
|
|
|
Outstanding shares
|
|
|
6,925,283
|
|
|
|
6,917,703
|
|
|
|
|
|
|
|
|
|
Tangible Book Value Per Share
|
|
$
|
22.53
|
|
|
$
|
19.57
|
|
|
|
|
|
|
|
|
|
Financial
Condition at September 30, 2019 and December 31, 2018
Total
assets increased $67.6 million, or an annualized rate of 5.51%, to $1.70 billion at September 30, 2019 from $1.64 billion at December
31, 2018. This increase in assets was primarily due to increases in cash and cash equivalents of $75.1 million, from $69.1 million
at December 31, 2018 to $144.2 million at September 30, 2019, and loans held for sale, which increased $3.5 million, or an annualized
rate of 62.9%, to $11.1 million at September 30, 2019 from $7.6 million at December 31, 2018. Core deposits increased $110.7 million
to $906.0 million, or 13.9%, at September 30, 2019 from $795.3 million at December 31, 2018. Core deposits represented 71% of
the Company’s deposit portfolio at September 30, 2019 compared to 65% at December 31, 2018.
Total
liabilities increased $47.5 million to $1.52 billion at September 30, 2019 from $1.47 billion at December 31, 2018, due primarily
to the $58.7 million increase in deposits, partially offset by the $8.0 million decrease in Federal Home Loan Bank (“FHLB”)
borrowings and the $5.0 million decrease in other borrowings.
Total shareholders’
equity increased $20.1 million to $183.0 million at September 30, 2019, compared to $162.9 million at December 31, 2018. This
increase was primarily attributable to $10.0 million of net income and $9.9 million of after-tax increase in market value of investment
securities available for sale. Tangible book value per share, a non-GAAP measure, increased $2.96 to $22.53 at September 30, 2019
from $19.57 at December 31, 2018.
Investment
Securities
The following
table presents the holdings of our equity securities as of September 30, 2019 and December 31, 2018:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
6,947
|
|
|
$
|
6,178
|
|
Equity
securities with a fair value of $6.3 million as of September 30, 2019 are held in a Rabbi Trust and seek to generate returns that
will fund the cost of certain deferred compensation agreements. Equity securities with a fair value of $0.6 million as of
September 30, 2019 are in a mutual fund that qualifies under the Community Reinvestment Act (“CRA”) as CRA activity.
There were losses of $30 thousand on equity securities and gains of $0.5 million for the three and nine months ended September
30, 2019, respectively. There were gains on equity securities of $0.2 million for both the three and nine months ended September
30, 2018.
The following
table shows the amortized cost and fair value for our available-for-sale (“AFS”) investment securities portfolio as
of the dates indicated:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & Government Agencies
|
|
$
|
33,423
|
|
|
$
|
33,258
|
|
|
$
|
34,068
|
|
|
$
|
33,990
|
|
Municipal Securities
|
|
|
113,789
|
|
|
|
120,156
|
|
|
|
115,860
|
|
|
|
114,402
|
|
Mortgage-backed Securities - Guaranteed
|
|
|
73,818
|
|
|
|
73,834
|
|
|
|
86,664
|
|
|
|
85,184
|
|
Collateralized Mortgage Obligations - Guaranteed
|
|
|
21,428
|
|
|
|
21,774
|
|
|
|
22,492
|
|
|
|
21,889
|
|
Collateralized Mortgage Obligations - Non Guaranteed
|
|
|
63,647
|
|
|
|
65,264
|
|
|
|
69,774
|
|
|
|
69,171
|
|
Collateralized Loan Obligations
|
|
|
15,511
|
|
|
|
15,221
|
|
|
|
15,534
|
|
|
|
15,077
|
|
Corporate bonds
|
|
|
19,412
|
|
|
|
19,820
|
|
|
|
19,936
|
|
|
|
20,025
|
|
|
|
$
|
341,028
|
|
|
$
|
349,327
|
|
|
$
|
364,328
|
|
|
$
|
359,738
|
|
AFS investment securities decreased
$10.4 million to $349.3 million at September 30, 2019 from $359.7 million at December 31, 2018.
Loans
The following
table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated. Other
construction and land loans include residential acquisition and development loans, commercial undeveloped land and one-to-four
family improved and unimproved lots. Commercial real estate includes non-residential owner-occupied and non owner-occupied real
estate, multi-family, and owner-occupied investment property. Commercial business loans include unsecured commercial loans and
commercial loans secured by business assets.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
336,098
|
|
|
|
31.2
|
%
|
|
$
|
325,560
|
|
|
|
30.2
|
%
|
Commercial
|
|
|
482,831
|
|
|
|
44.8
|
|
|
|
498,106
|
|
|
|
46.2
|
|
Home equity loans and lines of credit
|
|
|
45,822
|
|
|
|
4.3
|
|
|
|
48,679
|
|
|
|
4.5
|
|
Residential construction
|
|
|
57,687
|
|
|
|
5.4
|
|
|
|
39,533
|
|
|
|
3.7
|
|
Other construction and land
|
|
|
101,988
|
|
|
|
9.5
|
|
|
|
104,645
|
|
|
|
9.7
|
|
Commercial
|
|
|
45,652
|
|
|
|
4.2
|
|
|
|
54,410
|
|
|
|
5.1
|
|
Consumer
|
|
|
6,989
|
|
|
|
0.6
|
|
|
|
6,842
|
|
|
|
0.6
|
|
Total loans, gross
|
|
$
|
1,077,067
|
|
|
|
100.0
|
%
|
|
$
|
1,077,775
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees, net
|
|
|
(1,030
|
)
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
Acquired loans fair value discount
|
|
|
(697
|
)
|
|
|
|
|
|
|
(1,048
|
)
|
|
|
|
|
Hedged loans basis adjustment
|
|
|
1,088
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
Unamortized premium
|
|
|
232
|
|
|
|
|
|
|
|
333
|
|
|
|
|
|
Unamortized discount
|
|
|
(79
|
)
|
|
|
|
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of deferred fees
|
|
$
|
1,076,581
|
|
|
|
|
|
|
$
|
1,076,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets
|
|
|
64.7
|
%
|
|
|
|
|
|
|
65.8
|
%
|
|
|
|
|
Net
loans increased $0.5 million to $1.077 billion at September 30, 2019 from $1.076 billion at December 31, 2018. Most of our
loan growth is concentrated in residential construction with an increase of $18.2 million, or 45.9% as compared to the relative
balance at December 31, 2018. We believe that economic conditions in our primary market areas are favorable and present opportunities
for continued growth.
Delinquent
Loans
When a loan
becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days
or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days
past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and
inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually
beneficial to the borrower and the Bank, the borrower will be referred to the Bank’s Credit Administration staff to explore
restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is
not a viable option, the Bank’s counsel is instructed to pursue foreclosure.
The accrual
of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs
first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that
are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction
to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may
be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of
the loan after the loan is returned to accrual status.
If a loan is
modified in a troubled debt restructuring (“TDR”), the loan is generally placed on non-accrual until there is a period
of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive
months, and the ultimate collectability of all amounts contractually due is not in doubt.
The following
table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. We have no loans
past due 90 days and over that are still accruing interest as of September 30, 2019 or December 31, 2018.
|
|
September 30, 2019
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and Over
Past Due
|
|
|
Total Delinquent
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
3,440
|
|
|
$
|
404
|
|
|
$
|
652
|
|
|
$
|
4,496
|
|
Commercial real estate
|
|
|
773
|
|
|
|
2,909
|
|
|
|
587
|
|
|
|
4,269
|
|
Home equity and lines of credit
|
|
|
264
|
|
|
|
—
|
|
|
|
69
|
|
|
|
333
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Other construction and land
|
|
|
175
|
|
|
|
16
|
|
|
|
198
|
|
|
|
389
|
|
Commercial
|
|
|
15
|
|
|
|
6
|
|
|
|
969
|
|
|
|
990
|
|
Consumer
|
|
|
70
|
|
|
|
—
|
|
|
|
1
|
|
|
|
71
|
|
Total delinquent loans
|
|
$
|
4,737
|
|
|
$
|
3,335
|
|
|
$
|
2,477
|
|
|
$
|
10,549
|
|
% of total loans, net
|
|
|
0.44
|
%
|
|
|
0.31
|
%
|
|
|
0.23
|
%
|
|
|
0.98
|
%
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and Over
Past Due
|
|
|
Total Past Due
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
3,562
|
|
|
$
|
1,317
|
|
|
$
|
84
|
|
|
$
|
4,963
|
|
Commercial real estate
|
|
|
2,615
|
|
|
|
—
|
|
|
|
1,782
|
|
|
|
4,397
|
|
Home equity and lines of credit
|
|
|
400
|
|
|
|
457
|
|
|
|
73
|
|
|
|
930
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Other construction and land
|
|
|
613
|
|
|
|
32
|
|
|
|
64
|
|
|
|
709
|
|
Commercial
|
|
|
307
|
|
|
|
25
|
|
|
|
121
|
|
|
|
453
|
|
Consumer
|
|
|
27
|
|
|
|
4
|
|
|
|
—
|
|
|
|
31
|
|
Total
|
|
$
|
7,524
|
|
|
$
|
1,835
|
|
|
$
|
2,125
|
|
|
$
|
11,484
|
|
% of total loans, net
|
|
|
0.70
|
%
|
|
|
0.17
|
%
|
|
|
0.20
|
%
|
|
|
1.07
|
%
|
Delinquent
loans decreased $1.0 million to $10.5 million at September 30, 2019 from $11.5 million at December 31, 2018. The decrease in delinquencies
was due primarily to collection efforts and the favorable resolution of several relationships.
Non-Performing
Assets
Non-performing
loans include all loans past due 90 days and over, certain impaired loans (some of which may be contractually current), and TDR
loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current).
Non-performing assets include non-performing loans and REO. The table below sets forth the amounts and categories of our non-performing
assets at the dates indicated.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
1,132
|
|
|
$
|
1,037
|
|
Commercial
|
|
|
1,859
|
|
|
|
3,266
|
|
Home equity loans and lines of credit
|
|
|
69
|
|
|
|
178
|
|
Residential construction
|
|
|
1
|
|
|
|
—
|
|
Other construction and land
|
|
|
233
|
|
|
|
256
|
|
Commercial
|
|
|
975
|
|
|
|
120
|
|
Consumer
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
4,270
|
|
|
|
4,857
|
|
|
|
|
|
|
|
|
|
|
REO:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
349
|
|
|
|
228
|
|
Commercial real estate
|
|
|
1,485
|
|
|
|
949
|
|
Other construction and land
|
|
|
1,254
|
|
|
|
1,316
|
|
|
|
|
|
|
|
|
|
|
Total foreclosed real estate
|
|
|
3,088
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
7,358
|
|
|
$
|
7,350
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings still accruing
|
|
$
|
5,582
|
|
|
$
|
7,588
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.40
|
%
|
|
|
0.45
|
%
|
Non-performing assets to total assets
|
|
|
0.43
|
%
|
|
|
0.45
|
%
|
Non-performing
loans to total loans was 0.40% at September 30, 2019 compared to 0.45% at December 31, 2018. Non-performing assets to total assets
declined to 0.43% at September 30, 2019 from 0.45% at December 31, 2018.
REO increased
$0.6 million, or 23.9%, to $3.1 million at September 30, 2019 from $2.5 million at December 31, 2018 primarily as a result of
the addition of a one-to-four residential property and two commercial real estate properties partially offset by the sale of a
one-to-four residential property.
Classification
of Loans
The following
table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified
as “doubtful” or “loss” are charged off immediately.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Classified loans:
|
|
|
|
|
|
|
|
|
Substandard
|
|
$
|
7,663
|
|
|
$
|
8,169
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total classified loans:
|
|
|
7,663
|
|
|
|
8,169
|
|
As a % of total loans, net
|
|
|
0.71
|
%
|
|
|
0.76
|
%
|
|
|
|
|
|
|
|
|
|
Special mention
|
|
|
10,634
|
|
|
|
9,987
|
|
|
|
|
|
|
|
|
|
|
Total criticized loans
|
|
$
|
18,297
|
|
|
$
|
18,156
|
|
As a % of total loans, net
|
|
|
1.70
|
%
|
|
|
1.81
|
%
|
Total classified
loans decreased $0.5 million to $7.7 million at September 30, 2019 from $8.2 million at December 31, 2018. Total criticized loans
to total loans decreased to 1.70% at September 30, 2019 from 1.81% at December 31, 2018. Management continues to dedicate resources
to monitoring and resolving classified and criticized loans.
Allowance
for Loan Losses
The allowance
for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance
for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability
of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect
our borrowers’ abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information
becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual
loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.
A loan
is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according
to the original contractual terms of the loan. We individually evaluate loans classified as “substandard” or nonaccrual
and greater than $350,000 for impairment. If the impaired loan is considered collateral dependent, a charge-off is taken based
upon the appraised value of the property less an estimate of selling costs if foreclosure or sale of the property is anticipated.
If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted
cash flows after consideration of modifications and the likelihood of future default and prepayment.
The allowance
for homogenous loans consists of a base loss reserve and a qualitative reserve. The base loss reserve utilizes an average loss
rate for the last 16 quarters. The loss rates for the base loss reserve are segmented into 13 loan categories and contain (recovery)/loss
rates ranging from approximately -0.3% to 0.5%.
The qualitative
reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external
factors:
|
•
|
|
non-accrual
and classified loans;
|
|
•
|
|
economic
conditions – including unemployment rates, home sales and prices, and a regional economic index; and
|
|
•
|
|
lender
risk – personnel changes.
|
Qualitative
reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends. These factors are subject
to further adjustment as economic and other conditions change.
The following
table sets forth activity in our allowance for loan losses at the dates and for the periods indicated:
|
|
As of or for the Three Months
Ended September 30,
|
|
|
As of or for the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
12,194
|
|
|
$
|
11,525
|
|
|
$
|
11,985
|
|
|
$
|
10,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
—
|
|
|
|
6
|
|
|
|
4
|
|
|
|
116
|
|
Commercial
|
|
|
1
|
|
|
|
—
|
|
|
|
93
|
|
|
|
35
|
|
Home equity loans and lines of credit
|
|
|
49
|
|
|
|
219
|
|
|
|
258
|
|
|
|
260
|
|
Residential construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
45
|
|
|
|
59
|
|
|
|
79
|
|
Consumer
|
|
|
11
|
|
|
|
17
|
|
|
|
105
|
|
|
|
75
|
|
Total charge-offs
|
|
|
61
|
|
|
|
287
|
|
|
|
520
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
85
|
|
|
|
1
|
|
|
|
105
|
|
|
|
15
|
|
Commercial
|
|
|
3
|
|
|
|
—
|
|
|
|
59
|
|
|
|
3
|
|
Home equity loans and lines of credit
|
|
|
25
|
|
|
|
—
|
|
|
|
151
|
|
|
|
24
|
|
Residential construction
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Other construction and land
|
|
|
8
|
|
|
|
16
|
|
|
|
23
|
|
|
|
43
|
|
Commercial
|
|
|
18
|
|
|
|
2
|
|
|
|
24
|
|
|
|
10
|
|
Consumer
|
|
|
37
|
|
|
|
152
|
|
|
|
236
|
|
|
|
274
|
|
Total recoveries
|
|
|
176
|
|
|
|
172
|
|
|
|
598
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
|
|
|
(115
|
)
|
|
|
115
|
|
|
|
(78
|
)
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
336
|
|
|
|
246
|
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
12,309
|
|
|
$
|
11,746
|
|
|
$
|
12,309
|
|
|
$
|
11,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) to average loans outstanding
|
|
|
(0.04
|
)%
|
|
|
0.04
|
%
|
|
|
(0.01
|
)%
|
|
|
0.02
|
%
|
Allowance to non-performing loans at period end
|
|
|
288.27
|
%
|
|
|
273.35
|
%
|
|
|
288.27
|
%
|
|
|
273.35
|
%
|
Allowance to total loans at period end
|
|
|
1.14
|
%
|
|
|
1.10
|
%
|
|
|
1.14
|
%
|
|
|
1.10
|
%
|
Our allowance as a percentage of total loans increased to 1.14% at September 30, 2019 from 1.10% at September 30, 2018, primarily
as the result of loan growth and provision related to acquired loans. The remaining fair value discount on acquired loans was
$0.6 million as of September 30, 2019.
We have continued
to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss
rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated
from the calculation as time passes. Our coverage ratio of non-performing loans increased to 288.27% at September 30, 2019, compared
to 246.76% at December 31, 2018 and 273.35% at September 30, 2018.
REO
The table
below summarizes the balances and activity in REO at the dates and for the periods indicated:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
349
|
|
|
$
|
288
|
|
Commercial real estate
|
|
|
1,485
|
|
|
|
544
|
|
Other construction and land
|
|
|
1,254
|
|
|
|
1,736
|
|
Total
|
|
$
|
3,088
|
|
|
$
|
2,568
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
2,959
|
|
|
$
|
2,874
|
|
|
$
|
2,493
|
|
|
$
|
2,568
|
|
Additions
|
|
|
349
|
|
|
|
—
|
|
|
|
1,061
|
|
|
|
749
|
|
Disposals
|
|
|
(185
|
)
|
|
|
(7
|
)
|
|
|
(431
|
)
|
|
|
(432
|
)
|
Writedowns
|
|
|
(35
|
)
|
|
|
(65
|
)
|
|
|
(35
|
)
|
|
|
(83
|
)
|
Balance, end of period
|
|
$
|
3,088
|
|
|
$
|
2,802
|
|
|
$
|
3,088
|
|
|
$
|
2,802
|
|
REO increased
$0.6 million, or 23.9%, to $3.1 million at September 30, 2019 from $2.6 million at December 31, 2018. Our policy continues to
be to aggressively market REO for sale, including recording write-downs when necessary.
Net Deferred
Tax Assets
Deferred income
tax assets and liabilities are determined using the asset and liability method and are reported net in the consolidated balance
sheets of this Form 10-Q. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences
between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rate and laws. When deferred tax
assets are recognized, they are subject to a valuation allowance based on management’s judgment as to whether realization
is more likely than not. In determining the need for a valuation allowance, we considered the following sources of taxable income:
|
·
|
future reversals of existing taxable temporary differences;
|
|
·
|
future taxable income exclusive of reversing temporary
differences and carry forwards;
|
|
·
|
taxable income in prior carryback years; and
|
|
·
|
tax planning strategies that would, if necessary, be implemented.
|
Net deferred
tax assets decreased $4.7 million to $2.9 million at September 30, 2019 compared to $7.6 million at December 31, 2018. The decrease
in net deferred tax assets is mainly attributable to decreases in the net unrealized holding losses on our investment securities
and reductions in our federal and state net operating losses.
Deposits
The following
table presents deposits by category and percentage of total deposits as of the dates indicated:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Balance
|
|
|
Percent
|
|
|
Balance
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand accounts
|
|
$
|
211,356
|
|
|
|
16.5
|
%
|
|
$
|
184,404
|
|
|
|
15.1
|
%
|
Interest-bearing demand accounts
|
|
|
186,201
|
|
|
|
14.5
|
|
|
|
209,085
|
|
|
|
17.1
|
|
Money market accounts - retail
|
|
|
463,289
|
|
|
|
36.2
|
|
|
|
351,056
|
|
|
|
28.7
|
|
Money market accounts - wholesale
|
|
|
—
|
|
|
|
—
|
|
|
|
5,030
|
|
|
|
0.4
|
|
Savings accounts
|
|
|
45,119
|
|
|
|
3.5
|
|
|
|
50,716
|
|
|
|
4.2
|
|
Time deposits - retail
|
|
|
303,601
|
|
|
|
23.7
|
|
|
|
349,971
|
|
|
|
28.7
|
|
Time deposits - wholesale
|
|
|
70,379
|
|
|
|
5.6
|
|
|
|
70,978
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,279,945
|
|
|
|
100.0
|
%
|
|
$
|
1,221,240
|
|
|
|
100.0
|
%
|
Core
deposits increased $110.7 million to $906.0 million at September 30, 2019 from $795.3 million at December 31, 2018. Retail certificates
of deposit decreased $46.4 million to $303.6 million at September 30, 2019 from $350.0 million at December 31, 2018. Wholesale
deposits decreased $5.6 million to $70.4 million at September 30, 2019 from $76.0 million at December 31, 2018. We continue to
focus on gathering core deposits, which increased to 71% of the Company’s deposit portfolio at September 30, 2019 from 65%
at December 31, 2018.
FHLB
Advances
FHLB
advances decreased $8.0 million to $205.5 million at September 30, 2019 from $213.5 million at December 31, 2019. FHLB advances
are secured by qualifying one-to-four family permanent and commercial real estate loans, by investment securities, and by a blanket
collateral agreement with the FHLB.
Other
Borrowings
On September
15, 2017, the Company established a $15.0 million revolving credit loan facility with NexBank SSB. The loan facility, which is
secured by Entegra Bank stock, bears interest at LIBOR plus 350 basis points and is intended to be used for general corporate
purposes. Unless extended, the loan will mature on September 15, 2020. The Company did not have an outstanding balance on the
revolving credit loan facility as of September 30, 2019.
The Company
also had other borrowings at September 30, 2019 of $4.5 million, which is comprised of participated loans that did not qualify
for sale accounting. Interest expense on the other borrowings accrues at the same rate as the interest income recognized on the
loans receivable, resulting in no effect to net income.
Junior
Subordinated Notes
We had
$14.4 million in junior subordinated notes outstanding at September 30, 2019 and December 31, 2018 payable to an unconsolidated
subsidiary. These notes accrue interest at 2.80% above the 90-day LIBOR, adjusted quarterly. To add stability to net interest
income and manage our exposure to interest rate movement, we entered into an interest rate swap in September 2016 on the junior
subordinated notes. We also entered into a forward starting interest rate swap on our junior subordinated date in September 2018
to begin in 2020 after the current interest rate swap terminates. The swap contracts involve the payment of fixed-rate amounts
to a counterparty in exchange for our receipt of variable-rate payments over the four year life of the current contract and three
additional years under the forward starting contract. The effective interest rate on the swapped notes was 3.76% at both September
30, 2019 and at December 31, 2018.
Equity
Total
shareholders’ equity increased $20.4 million to $183.3 million at September 30, 2019, compared to $162.9 million at December
31, 2018. This increase was primarily attributable to $10.3 million of net income and $9.9 million of after-tax increase in market
value of investment securities available for sale.
Comparison
of Operating Results for the Three Months Ended September 30, 2019 and September 30, 2018.
General.
Net income for the three months ended September 30, 2019 was $4.0 million, compared to $3.5 million for the same period
in 2018. The increase in net income for the three months ended September 30, 2019 was primarily the result of increases in noninterest
income of $0.1 million and decreased noninterest expenses of $0.6 million, partially offset by decreases in net interest income
of $0.4 million.
Net
Interest Income. Net interest income decreased $0.4 million, or 3.6%, to $11.9 million for the three months ended September
30, 2019, compared to $12.3 million for the same period in 2018. The decrease in net interest income was primarily due to increased
costs of deposits and borrowings, partially offset by higher volumes in the loan portfolio, as well as an increase in the yields
earned on cash, taxable investments and taxable loans. The tax-equivalent net interest margin was 3.08% for the three months ended
September 30, 2019, compared to 3.26% for the same period in 2018.
The following
table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from
average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing
liabilities, and the resulting annualized average tax-equivalent yields and cost for the periods indicated. All average balances
are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in
the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums
that are amortized or accreted to interest income or expense.
|
|
For the Three Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including loans held for sale
|
|
$
|
1,077,666
|
|
|
$
|
13,444
|
|
|
|
4.95
|
%
|
|
$
|
1,050,667
|
|
|
$
|
12,622
|
|
|
|
4.77
|
%
|
Loans, tax exempt(1)
|
|
|
16,011
|
|
|
|
129
|
|
|
|
3.20
|
%
|
|
|
16,757
|
|
|
|
134
|
|
|
|
3.18
|
%
|
Investments - taxable
|
|
|
245,460
|
|
|
|
1,945
|
|
|
|
3.17
|
%
|
|
|
248,077
|
|
|
|
1,827
|
|
|
|
2.95
|
%
|
Investment tax exempt(1)
|
|
|
108,245
|
|
|
|
962
|
|
|
|
3.55
|
%
|
|
|
94,019
|
|
|
|
880
|
|
|
|
3.74
|
%
|
Interest earning deposits
|
|
|
96,028
|
|
|
|
564
|
|
|
|
2.33
|
%
|
|
|
99,572
|
|
|
|
528
|
|
|
|
2.10
|
%
|
Other investments, at cost
|
|
|
11,709
|
|
|
|
181
|
|
|
|
6.13
|
%
|
|
|
12,039
|
|
|
|
201
|
|
|
|
6.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,555,119
|
|
|
|
17,225
|
|
|
|
4.39
|
%
|
|
|
1,521,131
|
|
|
|
16,192
|
|
|
|
4.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
122,447
|
|
|
|
|
|
|
|
|
|
|
|
123,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,677,566
|
|
|
|
|
|
|
|
|
|
|
$
|
1,644,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
46,982
|
|
|
$
|
14
|
|
|
|
0.12
|
%
|
|
$
|
53,287
|
|
|
$
|
15
|
|
|
|
0.11
|
%
|
Time deposits
|
|
|
384,364
|
|
|
|
1,906
|
|
|
|
1.97
|
%
|
|
|
423,419
|
|
|
|
1,404
|
|
|
|
1.32
|
%
|
Money market accounts
|
|
|
434,032
|
|
|
|
1,631
|
|
|
|
1.49
|
%
|
|
|
355,057
|
|
|
|
814
|
|
|
|
0.91
|
%
|
Interest bearing transaction accounts
|
|
|
186,935
|
|
|
|
82
|
|
|
|
0.17
|
%
|
|
|
205,732
|
|
|
|
98
|
|
|
|
0.19
|
%
|
Total interest bearing deposits
|
|
|
1,052,313
|
|
|
|
3,633
|
|
|
|
1.37
|
%
|
|
|
1,037,495
|
|
|
|
2,331
|
|
|
|
0.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
205,500
|
|
|
|
1,315
|
|
|
|
2.50
|
%
|
|
|
213,500
|
|
|
|
1,091
|
|
|
|
2.00
|
%
|
Junior subordinated debentures
|
|
|
14,433
|
|
|
|
142
|
|
|
|
3.85
|
%
|
|
|
14,433
|
|
|
|
141
|
|
|
|
3.82
|
%
|
Other borrowings
|
|
|
4,351
|
|
|
|
52
|
|
|
|
4.74
|
%
|
|
|
9,399
|
|
|
|
123
|
|
|
|
5.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,276,597
|
|
|
|
5,142
|
|
|
|
1.60
|
%
|
|
|
1,274,827
|
|
|
|
3,686
|
|
|
|
1.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
203,808
|
|
|
|
|
|
|
|
|
|
|
|
198,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non interest bearing liabilities
|
|
|
16,760
|
|
|
|
|
|
|
|
|
|
|
|
15,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,497,165
|
|
|
|
|
|
|
|
|
|
|
|
1,488,259
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
180,401
|
|
|
|
|
|
|
|
|
|
|
|
156,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,677,566
|
|
|
|
|
|
|
|
|
|
|
$
|
1,644,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent net interest income
|
|
|
|
|
|
$
|
12,083
|
|
|
|
|
|
|
|
|
|
|
$
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets(2)
|
|
$
|
278,522
|
|
|
|
|
|
|
|
|
|
|
$
|
246,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
121.82
|
%
|
|
|
|
|
|
|
|
|
|
|
119.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent net interest rate spread(3)
|
|
|
|
|
|
|
|
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
Tax-equivalent net interest margin(4)
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
(1) Tax exempt loans and investments are calculated giving effect to a 21% federal tax rate.
(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3) Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.
The following
table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects
attributable to change in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior
columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated
proportionately, based on changes due to rate and the changes due to volume.
|
|
For
the Three Months Ended
September 30, 2019
|
|
|
|
Compared
to the Three Months Ended
September 30, 2018
|
|
|
|
Increase
(decrease) due to:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(Dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including loans held for sale (1)
|
|
$
|
334
|
|
|
$
|
488
|
|
|
$
|
822
|
|
Loans,
tax exempt (2)
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
(5
|
)
|
Investment
- taxable
|
|
|
(19
|
)
|
|
|
137
|
|
|
|
118
|
|
Investments
- tax exempt (2)
|
|
|
128
|
|
|
|
(46
|
)
|
|
|
82
|
|
Interest-earning
deposits
|
|
|
(19
|
)
|
|
|
55
|
|
|
|
36
|
|
Other
investments, at cost
|
|
|
(5
|
)
|
|
|
(15
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
|
413
|
|
|
|
620
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
Time
deposits
|
|
|
(139
|
)
|
|
|
642
|
|
|
|
503
|
|
Money
market accounts
|
|
|
211
|
|
|
|
606
|
|
|
|
817
|
|
Interest
bearing transaction accounts
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
(16
|
)
|
FHLB
advances
|
|
|
(41
|
)
|
|
|
265
|
|
|
|
224
|
|
Junior
subordinated debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
borrowings
|
|
|
(61
|
)
|
|
|
(10
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
(40
|
)
|
|
|
1,496
|
|
|
|
1,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in tax-equivalent net interest income
|
|
$
|
453
|
|
|
$
|
(876
|
)
|
|
$
|
(423
|
)
|
(1)
Non-accrual loans are included in the above analysis.
(2)
Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate.
Net interest
income before provision for loan losses decreased to $11.9 million for the three months ended September 30, 2019, compared to
$12.3 million for the same period in 2018. As indicated in the table above, the decline in tax- equivalent net interest income
of $0.9 million attributable to an unfavorable movement in rates was partially offset by a $0.5 million improvement in volume.
The increase
in tax-equivalent net interest income of $0.5 million related to volume was primarily the result of higher average loan and tax
exempt investment balances which increased $27.0 million and $14.2 million, respectively, and lower average time deposits which
decreased $39.1 million for the three months ended September 30, 2019 compared to the same period in 2018. The increase in average
loan and tax exempt investment balances and lower time deposits was partially offset by increases of $79.0 million in money market
balances.
The decrease
in tax-equivalent net interest income of $0.9 million related to rate was primarily the result of increased costs on time deposits,
money markets, and FHLB advances. These increased costs were partially offset by increased yields on taxable loans and taxable
investments.
Our tax-equivalent
net interest rate spread decreased to 2.80% for the three months ended September 30, 2019, compared to 3.08% for the three months
ended September 30, 2018, and our tax-equivalent net interest margin was 3.08% for the three months ended September 30, 2019,
compared to 3.26% for the same period in 2018.
Provision
for Loan Losses. We recorded a provision for loan losses for the three months ended September 30, 2018 of $0.3 million
due to organic loan growth and acquired loans. There was no provision for loan losses recorded for the three months ended September
30, 2019. We are experiencing continued stabilization in asset quality, low charge off amounts, and a continued decline in the
historical loss rates used in our allowance for loan losses model.
Noninterest
Income. The following table summarizes the components of noninterest income and the corresponding change between the three
month periods ended September 30, 2019 and 2018:
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
Servicing income, net
|
|
$
|
51
|
|
|
$
|
180
|
|
|
$
|
(129
|
)
|
Mortgage banking
|
|
|
475
|
|
|
|
233
|
|
|
|
242
|
|
Gain on sale of SBA loans
|
|
|
290
|
|
|
|
257
|
|
|
|
33
|
|
Equity securities (losses) gains
|
|
|
(30
|
)
|
|
|
191
|
|
|
|
(221
|
)
|
Service charges on deposit accounts
|
|
|
406
|
|
|
|
406
|
|
|
|
—
|
|
Interchange fees, net
|
|
|
305
|
|
|
|
276
|
|
|
|
29
|
|
Bank owned life insurance
|
|
|
189
|
|
|
|
195
|
|
|
|
(6
|
)
|
Other
|
|
|
372
|
|
|
|
227
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,058
|
|
|
$
|
1,965
|
|
|
$
|
93
|
|
Servicing
income, net decreased $0.1 million for the three months ended September 30, 2019 compared to the same period in 2018 as a result
of a decrease in the valuation of loan servicing rights.
Mortgage
banking increased $0.2 million for the three months ended September 30, 2019 compared to the same period in 2018 due to increased
volume, including higher refinance volume.
Equity
securities gains decreased $0.2 million for the three months ended September 30, 2019 compared to the same period in 2018 due
to decreased market valuation.
Other
noninterest income increased $0.1 million for the three months ended September 30, 2019 compared to the same period in 2018 as
a result of increased SBIC earnings.
Noninterest
Expense. The following table summarizes the components of noninterest expense and the corresponding change between the
three months ended September 30, 2019 and 2018:
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
5,802
|
|
|
$
|
5,882
|
|
|
$
|
(80
|
)
|
Net occupancy
|
|
|
1,052
|
|
|
|
1,128
|
|
|
|
(76
|
)
|
Federal deposit insurance
|
|
|
(3
|
)
|
|
|
191
|
|
|
|
(194
|
)
|
Professional and advisory
|
|
|
179
|
|
|
|
413
|
|
|
|
(234
|
)
|
Data processing
|
|
|
526
|
|
|
|
532
|
|
|
|
(6
|
)
|
Marketing and advertising
|
|
|
159
|
|
|
|
227
|
|
|
|
(68
|
)
|
Merger-related expenses
|
|
|
295
|
|
|
|
96
|
|
|
|
199
|
|
Net cost of operation of REO
|
|
|
46
|
|
|
|
59
|
|
|
|
(13
|
)
|
Other
|
|
|
861
|
|
|
|
1,013
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses
|
|
$
|
8,917
|
|
|
$
|
9,541
|
|
|
$
|
(624
|
)
|
Compensation
and employee benefits decreased $0.1 million for the three months ended September 30, 2019 compared to the same period in
2018 due to staff attrition related to the previously announced pending merger with BancShares, partially offset by an
estimate of certain employee expenses related to an ongoing 401k audit of years 2012-2018.
Federal
deposit insurance expense decreased $0.2 million for the three months ended September 30, 2019 compared to the same period in
2018 due to assessment credits received related to the FDIC deposit insurance reserve excess.
Professional
and advisory expenses decreased $0.2 million as a result of non-renewal of ancillary contracts due to the previously announced
merger with BancShares.
Merger-related
expenses increased $0.2 million in the three months ended September 30, 2019 compared to the same period in 2018 due to expenses
related primarily to the proposed merger with BancShares.
Other
noninterest expenses decreased $0.2 million for the three months ended September 30, 2019 compared to the same period in 2018
due to reduced loan related expenses.
Income
Taxes. We recorded $1.0 million of income tax expense for the three months ended September 30, 2019 compared to $0.9 million
for the same period in 2018. Income tax expense for the three months ending September 30, 2019 and 2018 benefitted from tax-exempt
income related to municipal bond investment and bank owned life insurance (BOLI”) income resulting in effective tax rates
of 19.98% and 19.57%, respectively.
We continue
to have unutilized net operating losses for state income tax purposes and do not have a material current tax liability or receivable.
Comparison
of Operating Results for the Nine Months Ended September 30, 2019 and September 30, 2018.
General.
Net income for the nine months ended September 30, 2019 was $10.0 million, compared to $10.2 million for the same period
in 2018. The increase in net income for the nine months ended September 30, 2019 was primarily the result of an increase in noninterest
income of $2.6 million, partially offset by a decrease in net interest income of $1.5 million and an increase in noninterest expense
of $2.1 million.
Net
Interest Income. Net interest income decreased $1.5 million, or 4.0%, for the nine months ended September 30, 2019 compared
to the same period in 2018. The decrease in net interest income was primarily due to increased money market balances and costs
of deposits and borrowings partially offset by to higher volumes in the loan portfolio, as well as an increase in the yields taxable
investments and loans. The tax-equivalent net interest margin decreased to 3.14% for the nine months ended September 30, 2019
as compared to 3.38% for the same period in 2018.
The following
table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from
average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing
liabilities, and the resulting annualized average tax-equivalent yields and cost for the periods indicated. All average balances
are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in
the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums
that are amortized or accreted to interest income or expense.
|
|
For the Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including loans held for sale
|
|
$
|
1,075,358
|
|
|
$
|
39,598
|
|
|
|
4.92
|
%
|
|
$
|
1,030,421
|
|
|
$
|
36,981
|
|
|
|
4.80
|
%
|
Loans, tax exempt(1)
|
|
|
16,543
|
|
|
|
397
|
|
|
|
3.21
|
%
|
|
|
15,947
|
|
|
|
367
|
|
|
|
3.08
|
%
|
Investments - taxable
|
|
|
250,634
|
|
|
|
6,014
|
|
|
|
3.20
|
%
|
|
|
253,129
|
|
|
|
5,173
|
|
|
|
2.72
|
%
|
Investment tax exempt(1)
|
|
|
105,496
|
|
|
|
2,885
|
|
|
|
3.65
|
%
|
|
|
84,890
|
|
|
|
2,344
|
|
|
|
3.68
|
%
|
Interest earning deposits
|
|
|
81,638
|
|
|
|
1,520
|
|
|
|
2.49
|
%
|
|
|
91,400
|
|
|
|
1,309
|
|
|
|
1.91
|
%
|
Other investments, at cost
|
|
|
11,872
|
|
|
|
559
|
|
|
|
6.30
|
%
|
|
|
12,259
|
|
|
|
544
|
|
|
|
5.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,541,541
|
|
|
|
50,973
|
|
|
|
4.42
|
%
|
|
|
1,488,046
|
|
|
|
46,718
|
|
|
|
4.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
122,356
|
|
|
|
|
|
|
|
|
|
|
|
127,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,663,897
|
|
|
|
|
|
|
|
|
|
|
$
|
1,615,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
48,550
|
|
|
$
|
41
|
|
|
|
0.11
|
%
|
|
$
|
52,222
|
|
|
$
|
44
|
|
|
|
0.11
|
%
|
Time deposits
|
|
|
401,350
|
|
|
|
5,464
|
|
|
|
1.82
|
%
|
|
|
414,802
|
|
|
|
3,527
|
|
|
|
1.14
|
%
|
Money market accounts
|
|
|
404,303
|
|
|
|
4,185
|
|
|
|
1.38
|
%
|
|
|
335,722
|
|
|
|
1,687
|
|
|
|
0.67
|
%
|
Interest bearing transaction accounts
|
|
|
195,257
|
|
|
|
273
|
|
|
|
0.19
|
%
|
|
|
208,550
|
|
|
|
282
|
|
|
|
0.18
|
%
|
Total interest bearing deposits
|
|
|
1,049,460
|
|
|
|
9,963
|
|
|
|
1.27
|
%
|
|
|
1,011,296
|
|
|
|
5,540
|
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
208,856
|
|
|
|
4,094
|
|
|
|
2.58
|
%
|
|
|
219,178
|
|
|
|
2,841
|
|
|
|
1.71
|
%
|
Junior subordinated debentures
|
|
|
14,433
|
|
|
|
423
|
|
|
|
3.86
|
%
|
|
|
14,433
|
|
|
|
421
|
|
|
|
3.85
|
%
|
Other borrowings
|
|
|
6,994
|
|
|
|
277
|
|
|
|
5.30
|
%
|
|
|
9,113
|
|
|
|
352
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,279,743
|
|
|
|
14,757
|
|
|
|
1.54
|
%
|
|
|
1,254,020
|
|
|
|
9,154
|
|
|
|
0.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
195,899
|
|
|
|
|
|
|
|
|
|
|
|
190,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non interest bearing liabilities
|
|
|
15,470
|
|
|
|
|
|
|
|
|
|
|
|
16,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,491,112
|
|
|
|
|
|
|
|
|
|
|
|
1,461,641
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
172,785
|
|
|
|
|
|
|
|
|
|
|
|
153,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,663,897
|
|
|
|
|
|
|
|
|
|
|
$
|
1,615,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent net interest income
|
|
|
|
|
|
$
|
36,216
|
|
|
|
|
|
|
|
|
|
|
$
|
37,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets(2)
|
|
$
|
261,798
|
|
|
|
|
|
|
|
|
|
|
$
|
234,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
120.46
|
%
|
|
|
|
|
|
|
|
|
|
|
118.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent net interest rate spread(3)
|
|
|
|
|
|
|
|
|
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
3.22
|
%
|
Tax-equivalent net interest margin(4)
|
|
|
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
(1)
Tax exempt loans and investments are calculated giving effect to a 21% federal tax rate.
(2)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3)
Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning
assets and the cost of average interest-bearing liabilities.
(4)
Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.
The following table presents
the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable
to change in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For
purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately,
based on changes due to rate and the changes due to volume.
|
|
For the Nine Months Ended September 30, 2019
Compared to the Nine Months Ended
September 30, 2018
|
|
|
|
Increase (decrease) due to:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including loans held for sale (1)
|
|
$
|
1,639
|
|
|
$
|
978
|
|
|
$
|
2,617
|
|
Loans, tax exempt (2)
|
|
|
14
|
|
|
|
16
|
|
|
|
30
|
|
Investment - taxable
|
|
|
(52
|
)
|
|
|
893
|
|
|
|
841
|
|
Investments - tax exempt (2)
|
|
|
563
|
|
|
|
(22
|
)
|
|
|
541
|
|
Interest-earning deposits
|
|
|
(151
|
)
|
|
|
362
|
|
|
|
211
|
|
Other investments, at cost
|
|
|
(18
|
)
|
|
|
33
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,995
|
|
|
|
2,260
|
|
|
|
4,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
(3
|
)
|
|
$
|
0
|
|
|
$
|
(3
|
)
|
Time deposits
|
|
|
(118
|
)
|
|
|
2,055
|
|
|
|
1,937
|
|
Money market accounts
|
|
|
404
|
|
|
|
2,094
|
|
|
|
2,498
|
|
Interest bearing transaction accounts
|
|
|
(18
|
)
|
|
|
9
|
|
|
|
(9
|
)
|
FHLB advances
|
|
|
(136
|
)
|
|
|
1,389
|
|
|
|
1,253
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other borrowings
|
|
|
(84
|
)
|
|
|
11
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
45
|
|
|
$
|
5,558
|
|
|
$
|
5,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in tax-equivalent net interest income
|
|
$
|
1,950
|
|
|
|
(3,298
|
)
|
|
|
(1,348
|
)
|
Net interest
income before provision for loan losses decreased to $35.5 million for the nine months ended September 30, 2019, compared to $37.0
million for the same period in 2018. As indicated in the table above, the decline of $3.3 million in net interest income earned
attributable to an unfavorable movement in rates was partially offset by the increase in tax-equivalent net interest income of
$2.0 million attributable to an improvement in volume.
The increase
in tax-equivalent net interest income of $2.0 million related to volume was primarily the result of higher average loan and tax
exempt investment balances which increased $44.9 million and $20.6 million, respectively, and lower time deposits and FHLB advances
which decreased $13.5 million and $10.3 million, respectively, for the nine months ended September 30, 2019 compared to the same
period in 2018. The increase in average loan and tax exempt investment balances and lower time deposits and FHLB advances was
partially offset by decreases of $9.8 million in interest-earning deposits and increases of $68.6 million in money market balances.
The decrease
in tax-equivalent net interest income of $3.3 million related to rate was primarily the result of increased costs on time deposits,
money markets, and FHLB advances. These increased costs were partially offset by increased yields on taxable loans, taxable investments,
and interest-earning deposits.
Our tax-equivalent
net interest rate spread decreased to 2.88% for the nine months ended September 30, 2019, compared to 3.22% for the nine months
ended September 30, 2018, and our tax-equivalent net interest margin was 3.14% for the nine months ended September 30, 2019, compared
to 3.38% for the same period in 2018.
Provision
for Loan Losses. We recorded a provision for loan losses for the nine months ended September 30, 2019 of $0.2 million
due to organic loan growth and acquired loans compared to $1.1 million for the same period in 2018. We are experiencing continued
stabilization in asset quality, low charge off amounts, and a continued decline in the historical loss rates used in our allowance
for loan losses model.
Noninterest
Income. The following table summarizes the components of noninterest income and the corresponding change between the nine
month periods ended September 30, 2019 and 2018:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
Servicing income, net
|
|
$
|
126
|
|
|
$
|
313
|
|
|
$
|
(187
|
)
|
Mortgage banking
|
|
|
1,079
|
|
|
|
755
|
|
|
|
324
|
|
Gain on sale of SBA loans
|
|
|
387
|
|
|
|
547
|
|
|
|
(160
|
)
|
Loss on sale of investments, net
|
|
|
—
|
|
|
|
(520
|
)
|
|
|
520
|
|
Equity securities gains
|
|
|
500
|
|
|
|
183
|
|
|
|
317
|
|
Service charges on deposit accounts
|
|
|
1,205
|
|
|
|
1,242
|
|
|
|
(37
|
)
|
Interchange fees, net
|
|
|
849
|
|
|
|
795
|
|
|
|
54
|
|
Bank owned life insurance
|
|
|
554
|
|
|
|
589
|
|
|
|
(35
|
)
|
Legal settlement income
|
|
|
1,750
|
|
|
|
—
|
|
|
|
1,750
|
|
Other
|
|
|
878
|
|
|
|
775
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,328
|
|
|
$
|
4,679
|
|
|
$
|
2,649
|
|
Servicing
income, net decreased $0.2 million for the nine months ended September 30, 2019 compared to the same period in 2018 as a result
of a decrease in the valuation of loan servicing rights.
Mortgage
banking increased $0.3 million for the nine months ended September 30, 2019 compared to the same period in 2018 due to increased
volume, including refinances.
Gains
on sales of SBA loans decreased $0.2 million during the nine months ended September 30, 2019 as a result of decreased volume.
There
have been no sales of AFS investment securities during the nine months ended September 30, 2019.
Equity
securities gains increased $0.3 million for the nine months ended September 30, 2019, compared to the same period in 2018, due
to improvements in market valuation.
The legal
settlement income in the nine months ended September 30, 2019 relates to the settlement of a dispute with a former advisor related
the acquisition of Chattahoochee Bank of Georgia.
Noninterest
Expense. The following table summarizes the components of noninterest expense and the corresponding change between the
nine months ended September 30, 2019 and 2018:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
17,532
|
|
|
$
|
17,151
|
|
|
$
|
381
|
|
Net occupancy
|
|
|
3,256
|
|
|
|
3,342
|
|
|
|
(86
|
)
|
Federal deposit insurance
|
|
|
280
|
|
|
|
618
|
|
|
|
(338
|
)
|
Professional and advisory
|
|
|
763
|
|
|
|
1,023
|
|
|
|
(260
|
)
|
Data processing
|
|
|
1,529
|
|
|
|
1,607
|
|
|
|
(78
|
)
|
Marketing and advertising
|
|
|
594
|
|
|
|
671
|
|
|
|
(77
|
)
|
Merger-related expenses
|
|
|
3,229
|
|
|
|
564
|
|
|
|
2,665
|
|
Net cost of operation of REO
|
|
|
76
|
|
|
|
202
|
|
|
|
(126
|
)
|
Other
|
|
|
2,944
|
|
|
|
2,925
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses
|
|
$
|
30,203
|
|
|
$
|
28,103
|
|
|
$
|
2,100
|
|
Compensation
and employee benefits increased $0.4 million for the nine months ended September 30, 2019, as compared to 2018, primarily as a
result of an estimate of certain employee expenses related to an ongoing 401k audit for years 2012-2018.
Federal
deposit insurance decreased $0.3 million for the nine months ended September 30, 2019, as compared to 2018, due to an increase
in premium credits based on an increase in certain regulatory ratios and assessment credits received related to the FDIC deposit
insurance reserve excess.
Professional
and advisory expenses decreased $0.3 million as a result of non-renewal of ancillary contracts due to the previously announced
merger with BancShares.
Merger-related
expenses increased $2.7 million for the nine months ended September 30, 2019, as compared to 2018, due to expenses related to
the now-terminated merger with SmartFinancial and the currently proposed merger with BancShares.
Net cost
of operation of REO decreased $0.1 million for the nine months ended September 30, 2019, as compared to 2018, primarily as the
result of limited REO activity.
Income
Taxes. We recorded $2.4 million of income tax expense for the nine months ended September 30, 2019, compared to $2.3 million
for the same period in 2018. Income tax expense for the nine months ending September 30, 2019 and 2018 benefitted from tax-exempt
income related to municipal bond investments and BOLI income resulting in effective tax rates of 19.6% and 18.6%, respectively.
The increase in the effective tax rate is primarily attributable to higher disallowed interest expense deductions and state income
taxes.
We continue
to have unutilized net operating losses for state income tax purposes and do not have a material current tax liability or receivable.
Liquidity
and Capital Resources
Liquidity is
the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments,
advances from the FHLB, proceeds from the sale of loans originated for sale, and principal repayments and the sale of available-for-sale
securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability
Management Committee, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity
targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals
of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short-
and long-term liquidity needs as of September 30, 2019.
We regularly
monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows
and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability
management program. Excess liquid assets are invested generally in FHLB and Federal Reserve Bank of Richmond (“FRB”)
interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At September 30, 2019,
cash and cash equivalents totaled $114.2 million. Included in this total was $78.0 million held at the FRB, $8.1 million held
at the FHLB, and $40.4 million held at a correspondent bank in an interest-earning account.
Our cash flows
are derived from operating activities, investing activities and financing activities as reported in our consolidated statements
of cash flows included in our unaudited consolidated financial statements of this Form 10-Q. The following summarizes the most
significant sources and uses of liquidity during the nine months ended September 30, 2019 and 2018:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Loans originated for sale
|
|
$
|
(35,059
|
)
|
|
$
|
(36,982
|
)
|
Proceeds from loans originated for sale
|
|
|
31,242
|
|
|
|
38,159
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
$
|
—
|
|
|
$
|
(107,204
|
)
|
Maturities and principal repayments of investments
|
|
|
20,852
|
|
|
|
32,832
|
|
Sales of investments
|
|
|
—
|
|
|
|
54,174
|
|
Net increase in loans
|
|
|
(847
|
)
|
|
|
(62,647
|
)
|
Proceeds from settlement of BOLI policies
|
|
|
1,115
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
$
|
56,705
|
|
|
$
|
92,614
|
|
Net (decrease) increase in other borrowings
|
|
|
(4,836
|
)
|
|
|
773
|
|
Proceeds from FHLB advances
|
|
|
195,000
|
|
|
|
255,500
|
|
Repayment of FHLB advances
|
|
|
(203,000
|
)
|
|
|
(265,500
|
)
|
At September
30, 2019, we had $25.8 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we
had $159.8 million in unused lines of credit.
Depending on
market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates
of deposit.
In addition
to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings.
Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed
securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise
call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows.
Liquidity management
is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have borrowing
agreements with the FHLB and the FRB discount window, and a revolving credit line with NexBank SSB. The following summarizes our
borrowing capacity as of September 30, 2019:
|
|
Total
|
|
|
Used
|
|
|
Unused
|
|
(Dollars in thousands)
|
|
Capacity
|
|
|
Capacity
|
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan collateral capacity
|
|
$
|
220,646
|
|
|
|
|
|
|
|
|
|
Pledgeable marketable securities
|
|
|
49,010
|
|
|
|
|
|
|
|
|
|
FHLB totals
|
|
|
269,656
|
|
|
$
|
205,500
|
|
|
$
|
64,156
|
|
FRB
|
|
|
53,570
|
|
|
|
—
|
|
|
|
53,570
|
|
Fed funds lines
|
|
|
15,000
|
|
|
|
—
|
|
|
|
15,000
|
|
Holding Company revolving line of credit
|
|
|
15,000
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
$
|
353,226
|
|
|
$
|
205,500
|
|
|
$
|
147,726
|
|
In July 2013,
the Board of Governors of the Federal Reserve System and the FDIC issued final rules to revise their risk-based capital requirements
and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee
on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III
rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019.
Basel III also
includes changes in what constitutes regulatory capital, some of which are subject to a transition period. These changes include
the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of
Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated
subsidiaries over designated percentages of common stock are required to be deducted from capital, subject to a transition period.
Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized gains and
losses on available-for-sale debt and equity securities), subject to a transition period and a one-time opt-out election. The
Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in the Bank’s Tier
1 capital.
The Bank is
subject to various regulatory capital requirements, including risk-based capital measures. The risk-based guidelines and framework
under prompt corrective action provisions include both a definition of capital and a framework for calculating risk-weighted assets
by assigning balance sheet assets and off-balance sheet items to broad risk categories.
Basel III was
fully phased in on January 1, 2019. The Company and the Bank are now required to maintain a 2.5% capital conservation buffer which
is designed to absorb losses during periods of economic distress. This capital conservation buffer is comprised entirely of Common
Equity Tier 1 Capital and is in addition to minimum risk-weighted asset ratios.
The tables below
summarize capital ratios and related information in accordance with Basel III as measured at September 30, 2019 and December 31,
2018.
The following
table summarizes the required and actual capital ratios of the Bank as of the dates indicated:
|
|
Actual
|
|
|
For Capital Adequacy
Purposes (1)
|
|
|
To Be Well-
Capitalized
Under
Prompt Corrective
Action Provisions
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
$
|
159,604
|
|
|
|
9.71
|
%
|
|
$
|
65,752
|
|
|
|
>4%
|
|
|
$
|
82,190
|
|
|
|
>5%
|
|
Common Equity Tier 1 Capital
|
|
$
|
159,604
|
|
|
|
13.68
|
%
|
|
$
|
81,679
|
|
|
|
>7.0%
|
|
|
$
|
75,845
|
|
|
|
>6.5%
|
|
Tier 1 Risk-based Capital
|
|
$
|
159,604
|
|
|
|
13.68
|
%
|
|
$
|
99,182
|
|
|
|
>8.5%
|
|
|
$
|
93,348
|
|
|
|
>8%
|
|
Total Risk-based Capital
|
|
$
|
172,013
|
|
|
|
14.74
|
%
|
|
$
|
122,519
|
|
|
|
>10.5%
|
|
|
$
|
116,685
|
|
|
|
>10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
$
|
152,137
|
|
|
|
9.42
|
%
|
|
$
|
64,589
|
|
|
|
>4%
|
|
|
$
|
80,737
|
|
|
|
>5%
|
|
Common Equity Tier 1 Capital
|
|
$
|
152,137
|
|
|
|
12.92
|
%
|
|
$
|
75,046
|
|
|
|
>6.375%
|
|
|
$
|
76,517
|
|
|
|
>6.5%
|
|
Tier 1 Risk-based Capital
|
|
$
|
152,137
|
|
|
|
12.92
|
%
|
|
$
|
92,703
|
|
|
|
>7.875%
|
|
|
$
|
94,175
|
|
|
|
>8%
|
|
Total Risk-based Capital
|
|
$
|
164,222
|
|
|
|
13.95
|
%
|
|
$
|
116,247
|
|
|
|
>9.875%
|
|
|
$
|
117,719
|
|
|
|
>10%
|
|
(1) -
As of September 30, 2019 and December 31, 2018, includes capital conservation buffer of 2.5% and 1.875%, respectively.
The following table summarizes the required and actual consolidated capital ratios of the Company as of the dates indicated:
|
|
Actual
|
|
|
For Capital Adequacy
Purposes (1)
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Leverage Capital
|
|
$
|
164,995
|
|
|
|
10.03
|
%
|
|
$
|
65,815
|
|
|
|
>4%
|
|
Common Equity Tier 1 Capital
|
|
$
|
150,562
|
|
|
|
12.89
|
%
|
|
$
|
81,793
|
|
|
|
>7.0%
|
|
Tier I Risk-based Capital
|
|
$
|
164,995
|
|
|
|
14.12
|
%
|
|
$
|
99,321
|
|
|
|
>8.5%
|
|
Total Risk Based Capital
|
|
$
|
177,405
|
|
|
|
15.18
|
%
|
|
$
|
122,690
|
|
|
|
>10.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Leverage Capital
|
|
$
|
151,629
|
|
|
|
9.38
|
%
|
|
$
|
64,629
|
|
|
|
>4%
|
|
Common Equity Tier 1 Capital
|
|
$
|
137,196
|
|
|
|
11.65
|
%
|
|
$
|
75,106
|
|
|
|
>6.375%
|
|
Tier I Risk-based Capital
|
|
$
|
151,629
|
|
|
|
12.87
|
%
|
|
$
|
92,777
|
|
|
|
>7.875%
|
|
Total Risk Based Capital
|
|
$
|
163,714
|
|
|
|
13.90
|
%
|
|
$
|
116,340
|
|
|
|
>9.875%
|
|
(1) -
As of September 30, 2019 and December 31, 2018, includes capital conservation buffer of 2.5% and 1.875%, respectively.