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These terms and conditions govern your use of the website alphaminr.com and its related services.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x |
Quarterly report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2019 |
| o |
Transition report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
for the transition period from ____ to ____ |
Commission File No. 000-28344
| FIRST COMMUNITY CORPORATION | |
| (Exact name of registrant as specified in its charter) | |
| South Carolina | 57-1010751 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
5455 Sunset Boulevard, Lexington, South Carolina 29072
(Address of principal executive offices) (Zip Code)
(803) 951-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered |
| Common stock, par value $1.00 per share | FCCO | The Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x | |
| Non-accelerated filer o | Smaller reporting company x | |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On November 7, 2019, 7,422,474 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | 3 | |
| Item 1. | Financial Statements | 3 |
| Consolidated Balance Sheets | 3 | |
| Consolidated Statements of Income | 4 | |
| Consolidated Statements of Comprehensive Income | 6 | |
| Consolidated Statements of Changes in Shareholders’ Equity | 7 | |
| Consolidated Statements of Cash Flows | 9 | |
| Notes to Consolidated Financial Statements | 10 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 51 |
| Item 4. | Controls and Procedures | 51 |
| PART II – OTHER INFORMATION | 52 | |
| Item 1. | Legal Proceedings | 52 |
| Item 1A. | Risk Factors | 52 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 52 |
| Item 3. | Defaults Upon Senior Securities | 53 |
| Item 4. | Mine Safety Disclosures | 53 |
| Item 5. | Other Information | 53 |
| Item 6. | Exhibits | 53 |
| SIGNATURES | 54 | |
| EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER | ||
| EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER | ||
| EX-32 SECTION 1350 CERTIFICATIONS | ||
| 2 |
PART I – FINANCIAL INFORMATION
FIRST COMMUNITY CORPORATION
| September 30, | ||||||||
| (Dollars in thousands, except par value) | 2019 | December 31, | ||||||
| (Unaudited) | 2018 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 20,079 | $ | 14,328 | ||||
| Interest-bearing bank balances | 12,861 | 17,883 | ||||||
| Federal funds sold and securities purchased under agreements to resell | 295 | 57 | ||||||
| Investment securities - held-to-maturity | — | 16,174 | ||||||
| Investment securities - available-for-sale | 265,068 | 237,893 | ||||||
| Other investments, at cost | 1,992 | 1,955 | ||||||
| Loans held for sale | 10,775 | 3,223 | ||||||
| Loans | 735,074 | 718,462 | ||||||
| Less, allowance for loan losses | 6,560 | 6,263 | ||||||
| Net loans | 728,514 | 712,199 | ||||||
| Property, furniture and equipment - net | 36,077 | 34,987 | ||||||
| Right-of-use asset | 3,260 | — | ||||||
| Bank owned life insurance | 26,268 | 25,754 | ||||||
| Other real estate owned | 1,412 | 1,460 | ||||||
| Intangible assets | 1,609 | 2,006 | ||||||
| Goodwill | 14,637 | 14,637 | ||||||
| Other assets | 7,143 | 9,039 | ||||||
| Total assets | $ | 1,129,990 | $ | 1,091,595 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | 268,693 | $ | 244,686 | ||||
| Interest bearing | 680,134 | 680,837 | ||||||
| Total deposits | 948,827 | 925,523 | ||||||
| Securities sold under agreements to repurchase | 34,321 | 28,022 | ||||||
| Federal Home Loan Bank advances | 216 | 231 | ||||||
| Junior subordinated debt | 14,964 | 14,964 | ||||||
| Lease liability | 3,291 | — | ||||||
| Other liabilities | 9,591 | 10,358 | ||||||
| Total liabilities | 1,011,210 | 979,098 | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $1.00 per share, 10,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,408,879 at September 30, 2019 7,638,681 at December 31, 2018 | 7,409 | 7,639 | ||||||
| Common stock warrants issued | 13 | 31 | ||||||
| Nonvested restricted stock | (195 | ) | (149 | ) | ||||
| Additional paid in capital | 90,292 | 95,048 | ||||||
| Retained earnings | 18,024 | 12,262 | ||||||
| Accumulated other comprehensive income (loss) | 3,237 | (2,334 | ) | |||||
| Total shareholders’ equity | 118,780 | 112,497 | ||||||
| Total liabilities and shareholders’ equity | $ | 1,129,990 | $ | 1,091,595 | ||||
See Notes to Consolidated Financial Statements
| 3 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Nine | Nine | |||||||
| Months Ended | Months Ended | |||||||
| September 30, | September 30, | |||||||
| (Dollars in thousands, except per share amounts) | 2019 | 2018 | ||||||
| Interest income: | ||||||||
| Loans, including fees | $ | 26,492 | $ | 23,974 | ||||
| Taxable securities | 3,840 | 3,623 | ||||||
| Non-taxable securities | 1,084 | 1,232 | ||||||
| Federal funds sold and securities purchased under resale agreements | 410 | 290 | ||||||
| Other | 18 | 16 | ||||||
| Total interest income | 31,844 | 29,135 | ||||||
| Interest expense: | ||||||||
| Deposits | 3,401 | 2,001 | ||||||
| Federal funds sold and securities sold under agreement to repurchase | 303 | 197 | ||||||
| Other borrowed money | 651 | 581 | ||||||
| Total interest expense | 4,355 | 2,779 | ||||||
| Net interest income | 27,489 | 26,356 | ||||||
| Provision for loan losses | 139 | 252 | ||||||
| Net interest income after provision for loan losses | 27,350 | 26,104 | ||||||
| Non-interest income: | ||||||||
| Deposit service charges | 1,212 | 1,320 | ||||||
| Mortgage banking income | 3,333 | 3,126 | ||||||
| Investment advisory fees and non-deposit commissions | 1,436 | 1,207 | ||||||
| Gain (loss) on sale of securities | 135 | (10 | ) | |||||
| Gain (loss) on sale of other assets | (3 | ) | 8 | |||||
| Other | 2,695 | 2,733 | ||||||
| Total non-interest income | 8,808 | 8,384 | ||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | 15,845 | 14,537 | ||||||
| Occupancy | 2,005 | 1,808 | ||||||
| Equipment | 1,140 | 1,167 | ||||||
| Marketing and public relations | 764 | 460 | ||||||
| FDIC assessments | 135 | 258 | ||||||
| Other real estate expense | 78 | 86 | ||||||
| Amortization of intangibles | 397 | 427 | ||||||
| Other | 5,389 | 5,210 | ||||||
| Total non-interest expense | 25,753 | 23,953 | ||||||
| Net income before tax | 10,405 | 10,535 | ||||||
| Income taxes | 2,131 | 1,992 | ||||||
| Net income | $ | 8,274 | $ | 8,543 | ||||
| Basic earnings per common share | $ | 1.10 | $ | 1.13 | ||||
| Diluted earnings per common share | $ | 1.08 | $ | 1.11 | ||||
See Notes to Consolidated Financial Statements
| 4 |
FIRST
COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three | Three | |||||||
| Months Ended | Months Ended | |||||||
| September 30, | September 30, | |||||||
| (Dollars in thousands, except per share amounts) | 2019 | 2018 | ||||||
| Interest income: | ||||||||
| Loans, including fees | $ | 9,091 | $ | 8,277 | ||||
| Taxable securities | 1,259 | 1,250 | ||||||
| Non-taxable securities | 350 | 333 | ||||||
| Federal funds sold and securities purchased under resale agreements | 158 | 120 | ||||||
| Other | 6 | 5 | ||||||
| Total interest income | 10,864 | 9,985 | ||||||
| Interest expense: | ||||||||
| Deposits | 1,219 | 816 | ||||||
| Federal funds sold and securities sold under agreement to repurchase | 102 | 96 | ||||||
| Other borrowed money | 190 | 190 | ||||||
| Total interest expense | 1,511 | 1,102 | ||||||
| Net interest income | 9,353 | 8,883 | ||||||
| Provision for loan losses | 25 | 21 | ||||||
| Net interest income after provision for loan losses | 9,328 | 8,862 | ||||||
| Non-interest income: | ||||||||
| Deposit service charges | 421 | 434 | ||||||
| Mortgage banking income | 1,251 | 1,159 | ||||||
| Investment advisory fees and non-deposit commissions | 509 | 423 | ||||||
| Loss on sale of other assets | — | (29 | ) | |||||
| Other | 932 | 855 | ||||||
| Total non-interest income | 3,113 | 2,842 | ||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | 5,465 | 5,079 | ||||||
| Occupancy | 703 | 611 | ||||||
| Equipment | 365 | 388 | ||||||
| Marketing and public relations | 159 | 177 | ||||||
| FDIC assessments | — | 94 | ||||||
| Other real estate expense | 31 | 37 | ||||||
| Amortization of intangibles | 133 | 142 | ||||||
| Other | 1,934 | 1,606 | ||||||
| Total non-interest expense | 8,790 | 8,134 | ||||||
| Net income before tax | 3,651 | 3,570 | ||||||
| Income taxes | 753 | 737 | ||||||
| Net income | $ | 2,898 | $ | 2,833 | ||||
| Basic earnings per common share | $ | 0.39 | $ | 0.37 | ||||
| Diluted earnings per common share | $ | 0.39 | $ | 0.37 | ||||
See Notes to Consolidated Financial Statements
| 5 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| (Dollars in thousands) | Nine months ended September 30, | |||||||
| 2019 | 2018 | |||||||
| Net income | $ | 8,274 | $ | 8,543 | ||||
| Other comprehensive income: | ||||||||
| Unrealized gain (loss) during the period on available-for-sale securities, net of tax expense of $1,511 and tax benefit of $1,104, respectively | 5,677 | (4,140 | ) | |||||
| Less: Reclassification adjustment for loss (gain) included in net income, net of tax benefit of $29 and tax expense of $2, respectively | (106 | ) | 8 | |||||
| Other comprehensive income (loss) | 5,571 | (4,132 | ) | |||||
| Comprehensive income | $ | 13,845 | $ | 4,411 | ||||
| (Dollars in thousands) | Three months ended September 30, | |||||||
| 2019 | 2018 | |||||||
| Net income | $ | 2,898 | $ | 2,833 | ||||
| Other comprehensive income: | ||||||||
| Unrealized gain (loss) during the period on available-for-sale securities, net of tax expense of $271 and tax benefit of $280, respectively | 1,232 | (1,054 | ) | |||||
| Other comprehensive income (loss) | 1,232 | (1,054 | ) | |||||
| Comprehensive income | $ | 4,130 | $ | 1,779 | ||||
See Notes to Consolidated Financial Statements
| 6 |
FIRST
COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
| Accumulated | ||||||||||||||||||||||||||||||||
| Common | Common | Additional | Nonvested | Other | ||||||||||||||||||||||||||||
| Shares | Common | Stock | Paid-in | Restricted | Retained | Comprehensive | ||||||||||||||||||||||||||
| Issued | Stock | Warrants | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||
| Balance, December 31, 2018 | 7,639 | $ | 7,639 | $ | 31 | $ | 95,048 | $ | (149 | ) | $ | 12,262 | $ | (2,334 | ) | $ | 112,497 | |||||||||||||||
| Net Income | 2,495 | 2,495 | ||||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $601 | 2,305 | 2,305 | ||||||||||||||||||||||||||||||
| Issuance of restricted stock | 8 | 8 | 162 | (170 | ) | — | ||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | 33 | 33 | ||||||||||||||||||||||||||||||
| Shares retired | (8 | ) | (8 | ) | (148 | ) | (156 | ) | ||||||||||||||||||||||||
| Exercise of warrants | 21 | 21 | (14 | ) | (7 | ) | — | |||||||||||||||||||||||||
| Dividends: Common ($0.11 per share) | (840 | ) | (840 | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | 5 | 5 | 95 | 100 | ||||||||||||||||||||||||||||
| Balance March 31, 2019 | 7,665 | $ | 7,665 | $ | 17 | $ | 95,150 | $ | (286 | ) | $ | 13,917 | $ | (29 | ) | $ | 116,434 | |||||||||||||||
| Net Income | 2,881 | $ | 2,881 | |||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $610 | 2,034 | 2,034 | ||||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | 45 | 45 | ||||||||||||||||||||||||||||||
| Exercise of warrants | 2 | 2 | (2 | ) | — | |||||||||||||||||||||||||||
| Stock repurchase plan | (185 | ) | (185 | ) | (3,228 | ) | (3,413 | ) | ||||||||||||||||||||||||
| Shares issued-deferred compensation | 24 | 24 | 241 | 265 | ||||||||||||||||||||||||||||
| Dividends: Common ($0.11 per share) | (841 | ) | (841 | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | 5 | 5 | 79 | 84 | ||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 7,511 | $ | 7,511 | $ | 15 | $ | 92,242 | $ | (241 | ) | $ | 15,957 | $ | 2,005 | $ | 117,489 | ||||||||||||||||
| Net Income | 2,898 | $ | 2,898 | |||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $271 | 1,232 | 1,232 | ||||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | 46 | 46 | ||||||||||||||||||||||||||||||
| Exercise of warrants | 3 | 3 | (2 | ) | (1 | ) | — | |||||||||||||||||||||||||
| Stock repurchase plan | (115 | ) | (115 | ) | (2,110 | ) | (2,225 | ) | ||||||||||||||||||||||||
| Shares issued-deferred compensation | — | |||||||||||||||||||||||||||||||
| Dividends: Common ($0.11 per share) | (831 | ) | (831 | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | 10 | 10 | 161 | 171 | ||||||||||||||||||||||||||||
| Balance September 30, 2019 | 7,409 | $ | 7,409 | $ | 13 | $ | 90,292 | $ | (195 | ) | $ | 18,024 | $ | 3,237 | $ | 118,780 | ||||||||||||||||
See notes to Consolidated Financial Statements
| 7 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars and shares in thousands, except per share amounts)
| Accumulated | ||||||||||||||||||||||||||||||||
| Common | Common | Additional | Nonvested | Other | ||||||||||||||||||||||||||||
| Shares | Common | Stock | Paid-in | Restricted | Retained | Comprehensive | ||||||||||||||||||||||||||
| Issued | Stock | Warrants | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||
| Balance, December 31, 2017 | 7,588 | $ | 7,588 | $ | 46 | $ | 94,516 | $ | (109 | ) | $ | 4,066 | $ | (444 | ) | $ | 105,663 | |||||||||||||||
| Net Income | 2,709 | 2,709 | ||||||||||||||||||||||||||||||
| Other comprehensive loss net of tax of $587 | (2,192 | ) | (2,192 | ) | ||||||||||||||||||||||||||||
| Issuance of restricted stock | 11 | 11 | 233 | (244 | ) | — | ||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | 35 | 35 | ||||||||||||||||||||||||||||||
| Shares retired | (2 | ) | (2 | ) | (55 | ) | (57 | ) | ||||||||||||||||||||||||
| Dividends: Common ($0.10 per share) | (757 | ) | (757 | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | 3 | 3 | 79 | 82 | ||||||||||||||||||||||||||||
| Balance March 31, 2018 | 7,600 | $ | 7,600 | $ | 46 | $ | 94,773 | $ | (318 | ) | $ | 6,018 | $ | (2,636 | ) | $ | 105,483 | |||||||||||||||
| Net Income | 3,001 | $ | 3,001 | |||||||||||||||||||||||||||||
| Other comprehensive loss net of tax of $235 | (886 | ) | (886 | ) | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | 56 | 56 | ||||||||||||||||||||||||||||||
| Dividends: Common ($0.10 per share) | (756 | ) | (756 | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | 5 | 5 | 94 | 99 | ||||||||||||||||||||||||||||
| Balance, June 30, 2018 | 7,605 | $ | 7,605 | $ | 46 | $ | 94,867 | $ | (262 | ) | $ | 8,263 | $ | (3,522 | ) | $ | 106,997 | |||||||||||||||
| Net Income | 2,833 | $ | 2,833 | |||||||||||||||||||||||||||||
| Other comprehensive loss net of tax of $280 | (1,054 | ) | (1,054 | ) | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | 57 | 57 | ||||||||||||||||||||||||||||||
| Exercise of warrants | 20 | 20 | (12 | ) | (8 | ) | — | |||||||||||||||||||||||||
| Shares issued-deferred compensation | 1 | 1 | 18 | 19 | ||||||||||||||||||||||||||||
| Dividends: Common ($0.10 per share) | (760 | ) | (760 | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | 4 | 4 | 90 | 94 | ||||||||||||||||||||||||||||
| Balance September 30, 2018 | 7,630 | $ 7 ,630 | $ | 34 | $ | 94,967 | $ | (205 | ) | $ | 10,336 | $ | (4,576 | ) | $ | 108,186 | ||||||||||||||||
See notes to Consolidated Financial Statements
| 8 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine
months ended
September 30, |
||||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 8,274 | $ | 8,543 | ||||
| Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||
| Depreciation | 1,000 | 1,130 | ||||||
| Premium amortization | 1,658 | 1,873 | ||||||
| Provision for loan losses | 139 | 252 | ||||||
| Loss (gain) on sale of other real estate owned | 3 | (8 | ) | |||||
| Origination of loans held-for-sale | (97,878 | ) | (89,125 | ) | ||||
| Sale of loans held-for-sale | 90,326 | 88,690 | ||||||
| Amortization of intangibles | 397 | 427 | ||||||
| Accretion on acquired loans | (402 | ) | (288 | ) | ||||
| Writedown of land held for sale | — | 42 | ||||||
| (Gain) loss on sale of securities | (135 | ) | 10 | |||||
| Gain on sale of fixed assets | — | (123 | ) | |||||
| (Increase) decrease in other assets | (3,089 | ) | 518 | |||||
| Increase in other liabilities | 2,522 | 547 | ||||||
| Net cash (used) provided from operating activities | 2,815 | 12,488 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of investment securities available-for-sale | (81,977 | ) | (47,668 | ) | ||||
| Purchase of other investment securities | (37 | ) | — | |||||
| Maturity/call of investment securities available-for-sale | 32,199 | 33,703 | ||||||
| Proceeds from sale of securities available-for-sale | 44,398 | 19,946 | ||||||
| Proceeds from sale of securities held-to-maturity | — | 655 | ||||||
| Proceeds from sale of other securities | — | 434 | ||||||
| Increase in loans | (16,322 | ) | (49,603 | ) | ||||
| Proceeds from sale of other real estate owned | 45 | 367 | ||||||
| Proceeds from sale of fixed assets | 301 | 1,143 | ||||||
| Purchase of property and equipment | (2,391 | ) | (494 | ) | ||||
| Net cash used in investing activities | (23,784 | ) | (41,517 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Increase in deposit accounts | 23,338 | 33,472 | ||||||
| Increase in securities sold under agreements to repurchase | 6,299 | 13,956 | ||||||
| Advances from the Federal Home Loan Bank | 65,000 | 4,000 | ||||||
| Repayment of advances from Federal Home Loan Bank | (65,015 | ) | (14,014 | ) | ||||
| Shares retired | (158 | ) | (57 | ) | ||||
| Repurchase of Common Stock | (5,635 | ) | — | |||||
| Issuance of Deferred Compensation Shares | 265 | 19 | ||||||
| Dividends paid: Common Stock | (2,512 | ) | (2,273 | ) | ||||
| Dividend reinvestment plan | 354 | 275 | ||||||
| Net cash provided from financing activities | 21,936 | 35,378 | ||||||
| Net increase in cash and cash equivalents | 967 | 6,349 | ||||||
| Cash and cash equivalents at beginning of period | 32,268 | 30,591 | ||||||
| Cash and cash equivalents at end of period | $ | 33,235 | $ | 36,940 | ||||
| Supplemental disclosure: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 4,301 | $ | 2,627 | ||||
| Income taxes | $ | 2,060 | $ | 1,875 | ||||
| Non-cash investing and financing activities: | ||||||||
| Unrealized gain (loss) on securities | $ | 7,053 | $ | (4,132 | ) | |||
| Recognition of operating lease right of use asset | $ | 3,260 | $ | — | ||||
| Recognition of operating lease liability | $ | 3,291 | $ | — | ||||
| Transfer of loans to foreclosed property | $ | — | $ | 346 | ||||
| Transfer of investment securities held-to-maturity to available-for-sale | $ | 16,144 | $ | — | ||||
See Notes to Consolidated Financial Statements
| 9 |
Notes to Consolidated Financial Statements (Unaudited)
Note 1—Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated balance sheets, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the cash flows of First Community Corporation (the “Company”), present fairly in all material respects the Company’s financial position at September 30, 2019 and December 31, 2018, and the Company’s results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 should be referred to in connection with these unaudited interim financial statements.
Note 2—Earnings Per Common Share
The following reconciles the numerator and denominator of the basic and diluted earnings per common share computation:
(Dollars and shares in thousands, except per share amounts)
| Nine months | Three months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Numerator (Net income available to common shareholders | $ | 8,274 | $ | 8,543 | $ | 2,898 | $ | 2,833 | ||||||||
| Denominator | ||||||||||||||||
| Weighted average common shares outstanding for: | ||||||||||||||||
| Basic shares | 7,548 | 7,581 | 7,386 | 7,592 | ||||||||||||
| Dilutive securities: | ||||||||||||||||
| Deferred compensation | 40 | 65 | 39 | 61 | ||||||||||||
| Warrants/Restricted stock-Treasury stock method | 42 | 73 | 38 | 71 | ||||||||||||
| Diluted shares | 7,630 | 7,719 | 7,463 | 7,724 | ||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 1.10 | $ | 1.13 | $ | 0.39 | $ | 0.37 | ||||||||
| Diluted | $ | 1.08 | $ | 1.11 | $ | 0.39 | $ | 0.37 | ||||||||
| The average market price used in calculating assumed number of shares | $ | 19.06 | $ | 25.33 | $ | 18.95 | $ | 23.49 | ||||||||
| 10 |
Note 2—Earnings Per Common Share-continued
There were no options outstanding as of September 30, 2019 and September 30, 2018.
In the fourth quarter of 2011, we issued $2.5 million in 8.75% subordinated notes maturing December 16, 2019. On November 15, 2012, the subordinated notes were redeemed in full at par. Warrants for 107,500 shares of common stock at $5.90 per share were issued in connection with the issuance of the subordinated debt. There were 27,950 warrants outstanding at September 30, 2019. These warrants expire December 16, 2019 and are included in dilutive securities in the table above.
The Company has a total of 15,129 unvested restricted shares and 5,644 restricted units under the terms of its compensation plans and employment agreements as of September 30, 2019. The employee shares and units cliff vest over a three-year period; the non-employee director shares vest one year after issuance. The unrecognized compensation cost at September 30, 2019 for nonvested shares amounts to $194.8 thousand. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost is accrued over the vesting period and was $51.1 thousand at September 30, 2019.
In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned and are included in dilutive securities in the table above. At September 30, 2019 and December 31, 2018, there were 96,066 and 114,982 units in the plan, respectively. The accrued liability at September 30, 2019 and December 31, 2018 amounted to $1.1 million and $1.3 million, respectively, and is included in “Other liabilities” on the balance sheet.
Note 3—Investment Securities
The amortized cost and estimated fair values of investment securities are summarized below:
| AVAILABLE-FOR-SALE: | Gross | Gross | ||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| September 30, 2019 | ||||||||||||||||
| US Treasury securities | $ | 7,174 | $ | 24 | $ | 6 | $ | 7,192 | ||||||||
| Government Sponsored Enterprises | 1,105 | 18 | — | 1,123 | ||||||||||||
| Mortgage-backed securities | 166,558 | 2,090 | 607 | 168,041 | ||||||||||||
| Small Business Administration pools | 47,564 | 374 | 285 | 47,653 | ||||||||||||
| State and local government | 38,550 | 2,494 | 4 | 41,040 | ||||||||||||
| Other securities | 19 | — | — | 19 | ||||||||||||
| $ | 260,970 | $ | 5,000 | $ | 902 | $ | 265,068 | |||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| December 31, 2018 | ||||||||||||||||
| US Treasury securities | $ | 15,488 | $ | 9 | $ | 40 | $ | 15,457 | ||||||||
| Government Sponsored Enterprises | 1,096 | 6 | 2 | 1,100 | ||||||||||||
| Mortgage-backed securities | 117,862 | 73 | 2,460 | 115,475 | ||||||||||||
| Small Business Administration pools | 55,784 | 247 | 695 | 55,336 | ||||||||||||
| State and local government | 50,599 | 619 | 712 | 50,506 | ||||||||||||
| Other securities | 19 | — | — | 19 | ||||||||||||
| $ | 240,848 | $ | 954 | $ | 3,909 | $ | 237,893 | |||||||||
| 11 |
Note 3—Investment Securities-continued
| HELD-TO-MATURITY: | Gross | Gross | ||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| December 31, 2018 | ||||||||||||||||
| State and local government | $ | 16,174 | $ | 50 | $ | 40 | $ | 16,184 | ||||||||
| $ | 16,174 | $ | 50 | $ | 40 | $ | 16,184 | |||||||||
During the first quarter of 2019, the Company reclassified the portfolio of securities listed as held-to-maturity to available-for-sale. There were no investment securities listed as held-to-maturity as of September 30, 2019.
During the nine months ended September 30, 2019 and 2018, the Company received proceeds of $44.4 million and $19.9 million, respectively, from the sale of investment securities available-for-sale. For the nine months ended September 30, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $355.6 thousand and gross realized losses amounted to $219.6 thousand. For the nine months ended September 30, 2018, gross realized gains from the sale of investment securities available-for-sale amounted to $240.7 thousand and gross realized losses amounted to $246.5 thousand. For the three months ended September 30, 2019, there were no realized gains or losses from the sale of investment securities available-for-sale. For the three months ended September 30, 2018, there were no realized gains or losses from the sale of investment securities available-for-sale.
At September 30, 2019, other securities available-for-sale included the following at fair value: a mutual fund at $9.2 thousand, and foreign debt of $10.0 thousand. As required by Accounting Standards Update (“ASU”) 2016-01-Financial Instruments-Overall (Subtopic 825-10), the Company measured its equity investments at fair value with changes in the fair value recognized through net income. For the nine months ended September 30, 2019, a $2.1 thousand gain was recognized on a mutual fund. At December 31, 2018, corporate and other securities available-for-sale included the following at fair value: a mutual fund at $7.1 thousand, and foreign debt of $10.0 thousand. Other investments, at cost include Federal Home Loan Bank (“FHLB”) stock in the amount of $992 thousand and $955 thousand and corporate stock in the amount of $1.0 million and $1.0 million at September 30, 2019 and December 31, 2018, respectively.
| 12 |
Note 3—Investment Securities-continued
The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at September 30, 2019 and December 31, 2018.
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| September 30, 2019 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| US Treasury securities | $ | — | $ | — | $ | 1,507 | $ | 6 | $ | 1,507 | $ | 6 | ||||||||||||
| Government Sponsored Enterprise mortgage-backed securities | 36,200 | 436 | 13,094 | 171 | 49,294 | 607 | ||||||||||||||||||
| Small Business Administration pools | 9,011 | 103 | 13,533 | 182 | 22,544 | 285 | ||||||||||||||||||
| State and local government | 761 | 4 | — | — | 761 | 4 | ||||||||||||||||||
| $ | 47,674 | $ | 545 | $ | 26,441 | $ | 357 | $ | 74,115 | $ | 902 | |||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| December 31, 2018 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| US Treasury securities | $ | 8,355 | $ | 10 | $ | 1,488 | $ | 30 | $ | 9,843 | $ | 40 | ||||||||||||
| Government Sponsored Enterprise | — | — | 122 | 2 | 122 | 2 | ||||||||||||||||||
| Government Sponsored Enterprise mortgage-backed securities | 13,917 | 120 | 89,870 | 2,339 | 103,787 | 2,459 | ||||||||||||||||||
| Small Business Administration pools | 16,400 | 211 | 20,330 | 484 | 36,730 | 695 | ||||||||||||||||||
| State and local government | 9,517 | 52 | 15,598 | 660 | 25,115 | 712 | ||||||||||||||||||
| Corporate bonds and other | 7 | 1 | — | — | 7 | 1 | ||||||||||||||||||
| $ | 48,196 | $ | 394 | $ | 127,408 | $ | 3,515 | $ | 175,604 | $ | 3,909 | |||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| December 31, 2018 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Held-to-maturity securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| State and local government | $ | 2,843 | $ | 14 | $ | 4,899 | $ | 26 | $ | 7,742 | $ | 40 | ||||||||||||
| 13 |
Note 3—Investment Securities-continued
Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of $166.6 million and $117.9 million and approximate fair value of $168.0 million and $115.5 million at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, and December 31, 2018, all of the MBSs issued by GSEs were classified as “Available for Sale.” Unrealized losses on certain of these investments are not considered to be “other than temporary,” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSE. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2019.
Non-agency Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at September 30, 2019 with an amortized cost of $123.1 thousand and approximate fair value of $122.3 thousand. The Company held PLMBSs, including CMOs, at December 31, 2018 with an amortized cost of $199.9 thousand and approximate fair value of $204.1 thousand. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments.
State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2019.
The following sets forth the amortized cost and fair value of investment securities at September 30, 2019 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.
| September 30, 2019 | Available-for-sale | |||||||
| Amortized | Fair | |||||||
| (Dollars in thousands) | Cost | Value | ||||||
| Due in one year or less | $ | 10,823 | $ | 10,866 | ||||
| Due after one year through five years | 120,043 | 120,762 | ||||||
| Due after five years through ten years | 108,314 | 111,870 | ||||||
| Due after ten years | 21,790 | 21,570 | ||||||
| $ | 260,970 | $ | 265,068 | |||||
Note 4—Loans
Loans summarized by category as of September 30, 2019, December 31, 2018 and September 30, 2018 are as follows:
| September 30, | December 31, | September 30, | ||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2018 | |||||||||
| Commercial, financial and agricultural | $ | 55,169 | $ | 53,933 | $ | 50,940 | ||||||
| Real estate: | ||||||||||||
| Construction | 58,737 | 58,440 | 56,568 | |||||||||
| Mortgage-residential | 47,693 | 52,764 | 50,914 | |||||||||
| Mortgage-commercial | 534,554 | 513,833 | 498,650 | |||||||||
| Consumer: | ||||||||||||
| Home equity | 29,103 | 29,583 | 29,933 | |||||||||
| Other | 9,818 | 9,909 | 9,510 | |||||||||
| Total | $ | 735,074 | $ | 718,462 | $ | 696,515 | ||||||
| 14 |
Note 4—Loans-continued
The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the nine months ended September 30, 2019 and September 30, 2018 and for the year ended December 31, 2018 is as follows:
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
|
Beginning
balance
December 31, 2018 |
$ | 430 | $ | 89 | $ | 431 | $ | 4,318 | $ | 261 | $ | 88 | $ | 646 | $ | 6,263 | ||||||||||||||||
| Charge-offs | (8 | ) | — | (7 | ) | — | (1 | ) | (96 | ) | — | (112 | ) | |||||||||||||||||||
| Recoveries | — | — | — | 221 | 14 | 35 | — | 270 | ||||||||||||||||||||||||
| Provisions | 37 | 2 | (39 | ) | (3 | ) | (33 | ) | 68 | 107 | 139 | |||||||||||||||||||||
| Ending balance | ||||||||||||||||||||||||||||||||
| September 30, 2019 | $ | 459 | $ | 91 | $ | 385 | $ | 4,536 | $ | 241 | $ | 95 | $ | 753 | $ | 6,560 | ||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 4 | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 14 | ||||||||||||||||
| Collectively evaluated for impairment | 455 | 91 | 385 | 4,526 | 241 | 95 | 753 | 6,546 | ||||||||||||||||||||||||
|
September
30, 2019
Loans receivable: |
||||||||||||||||||||||||||||||||
| Ending balance-total | $ | 55,169 | $ | 58,737 | $ | 47,693 | $ | 534,554 | $ | 29,103 | $ | 9,818 | $ | — | $ | 735,074 | ||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | 4 | — | 538 | 3,541 | 72 | — | — | 4,155 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 55,165 | $ | 58,737 | $ | 47,155 | $ | 531,013 | $ | 29,031 | $ | 9,818 | $ | — | $ | 730,919 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Commercial |
Real
estate
Construction |
Real
estate
Mortgage Residential |
Real
estate
Mortgage Commercial |
Consumer
Home equity |
Consumer
Other |
Unallocated | Total | |||||||||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance | ||||||||||||||||||||||||||||||||
| December 31, 2017 | $ | 221 | $ | 101 | $ | 461 | $ | 3,077 | $ | 308 | $ | 35 | $ | 1,594 | $ | 5,797 | ||||||||||||||||
| Charge-offs | — | — | (1 | ) | — | — | (109 | ) | — | (110 | ) | |||||||||||||||||||||
| Recoveries | 14 | — | 3 | 219 | 6 | 31 | — | 273 | ||||||||||||||||||||||||
| Provisions | (46 | ) | 4 | 481 | (388 | ) | 732 | 108 | (639 | ) | 252 | |||||||||||||||||||||
| Ending balance | ||||||||||||||||||||||||||||||||
| September 30, 2018 | $ | 189 | $ | 105 | $ | 944 | $ | 2,908 | $ | 1,046 | $ | 65 | $ | 955 | $ | 6,212 | ||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | 1 | $ | 3 | $ | — | $ | — | $ | — | $ | 4 | ||||||||||||||||
| Collectively evaluated for impairment | 189 | 105 | 943 | 2,905 | 1,046 | 65 | 955 | 6,208 | ||||||||||||||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | 50,940 | $ | 56,568 | $ | 50,914 | $ | 498,650 | $ | 29,933 | $ | 9,510 | $ | — | $ | 696,515 | ||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | — | — | 237 | 4,466 | 31 | — | — | 4,734 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 50,940 | $ | 56,568 | $ | 50,677 | $ | 494,184 | $ | 29,902 | $ | 9,510 | $ | — | $ | 691,781 | ||||||||||||||||
| 15 |
Note 4—Loans-continued
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Commercial |
Real
estate
Construction |
Real
estate
Mortgage Residential |
Real
estate
Mortgage Commercial |
Consumer
Home equity |
Consumer
Other |
Unallocated | Total | |||||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance | ||||||||||||||||||||||||||||||||
| December 31, 2017 | $ | 221 | $ | 101 | $ | 461 | $ | 3,077 | $ | 308 | $ | 35 | $ | 1,594 | $ | 5,797 | ||||||||||||||||
| Charge-offs | — | — | (1 | ) | — | (23 | ) | (140 | ) | — | (164 | ) | ||||||||||||||||||||
| Recoveries | 3 | — | 4 | 210 | 6 | 61 | — | 284 | ||||||||||||||||||||||||
| Provisions | 206 | (12 | ) | (33 | ) | 1,031 | (30 | ) | 132 | (948 | ) | 346 | ||||||||||||||||||||
| Ending balance | ||||||||||||||||||||||||||||||||
| December 31, 2018 | $ | 430 | $ | 89 | $ | 431 | $ | 4,318 | $ | 261 | $ | 88 | $ | 646 | $ | 6,263 | ||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | 14 | $ | — | $ | — | $ | — | $ | 14 | ||||||||||||||||
| Collectively evaluated for impairment | 430 | 89 | 431 | 4,304 | 261 | 88 | 646 | 6,249 | ||||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | 53,933 | $ | 58,440 | $ | 52,764 | $ | 513,833 | $ | 29,583 | $ | 9,909 | $ | — | $ | 718,462 | ||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | — | — | 322 | 4,030 | 29 | — | — | 4,381 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 53,933 | $ | 58,440 | $ | 52,442 | $ | 509,803 | $ | 29,554 | $ | 9,909 | $ | — | $ | 714,081 | ||||||||||||||||
Related party loans and lines of credit are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the nine months ended September 30, 2019 and September 30, 2018:
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Beginning Balance January 1, | $ | 5,937 | $ | 5,938 | ||||
| New Loans | 111 | 2,406 | ||||||
| Less loan repayments | 1,804 | 1,999 | ||||||
| Ending Balance September 30, | $ | 4,244 | $ | 6,345 | ||||
The following table presents at September 30, 2019 and December 31, 2018 loans individually evaluated and considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings (“TDRs”).
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Total loans considered impaired | $ | 4,155 | $ | 4,381 | ||||
| Loans considered impaired for which there is a related allowance for loan loss: | ||||||||
| Outstanding loan balance | $ | 373 | $ | 453 | ||||
| Related allowance | $ | 14 | $ | 14 | ||||
| Loans considered impaired and previously written down to fair value | $ | 2,347 | $ | 3,928 | ||||
| Average impaired loans | $ | 4,354 | $ | 4,128 | ||||
| 16 |
Note 4—Loans-continued
The following tables are by loan category and present at September 30, 2019, September 30, 2018 and December 31, 2018 loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.
| (Dollars in thousands) | Nine months ended | Three months ended | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| September 30, 2019 | Recorded | Principal | Related | Recorded | income | Recorded | Income | |||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-residential | 538 | 603 | — | 594 | 16 | 537 | 12 | |||||||||||||||||||||
| Mortgage-commercial | 3,172 | 5,867 | — | 3,259 | 131 | 3,092 | 79 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 72 | 74 | — | 76 | 2 | 71 | 1 | |||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | 4 | 4 | 4 | 4 | — | 4 | — | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-residential | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-commercial | 369 | 369 | 10 | 421 | 19 | 326 | 6 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | 4 | $ | 4 | $ | 4 | $ | 4 | $ | — | $ | 4 | $ | — | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-residential | 538 | 603 | — | 594 | 16 | 537 | 12 | |||||||||||||||||||||
| Mortgage-commercial | 3,541 | 6,236 | 10 | 3,680 | 150 | 3,418 | 85 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 72 | 74 | — | 76 | 2 | 71 | 1 | |||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| $ | 4,155 | $ | 6,917 | $ | 14 | $ | 4,354 | $ | 168 | $ | 4,030 | $ | 98 | |||||||||||||||
| 17 |
Note 4—Loans-continued
| (Dollars in thousands) | Nine months ended | Three months ended | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| September 30, 2018 | Recorded | Principal | Related | Recorded | income | Recorded | Income | |||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-residential | 198 | 266 | — | 202 | 16 | 197 | 2 | |||||||||||||||||||||
| Mortgage-commercial | 3,363 | 6,158 | — | 3,753 | 219 | 3,627 | 75 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 31 | 32 | — | 35 | 1 | 31 | — | |||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | — | — | — | — | — | — | — | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-residential | 39 | 39 | 1 | 41 | 2 | 39 | 1 | |||||||||||||||||||||
| Mortgage-commercial | 1,103 | 1,103 | 3 | 1,129 | 59 | 1,103 | 19 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
| Mortgage-residential | 237 | 305 | 1 | 243 | 18 | 236 | 3 | |||||||||||||||||||||
| Mortgage-commercial | 4,466 | 7,261 | 3 | 4,882 | 278 | 4,730 | 94 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 31 | 32 | — | 35 | 1 | 31 | — | |||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| $ | 4,734 | $ | 7,598 | $ | 4 | $ | 5,160 | $ | 297 | $ | 4,997 | $ | 97 | |||||||||||||||
| 18 |
Note 4—Loans-continued
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2018 |
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
Average
Recorded Investment |
Interest
Income Recognized |
|||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | — | — | — | — | |||||||||||||||
| Mortgage-residential | 322 | 371 | — | 483 | 9 | |||||||||||||||
| Mortgage-commercial | 3,577 | 6,173 | — | 3,232 | 128 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | 29 | 30 | — | 33 | 2 | |||||||||||||||
| Other | — | — | — | — | — | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | — | — | — | — | — | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | — | — | — | — | |||||||||||||||
| Mortgage-residential | — | — | — | — | — | |||||||||||||||
| Mortgage-commercial | 453 | 453 | 14 | 380 | 21 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | — | — | — | — | — | |||||||||||||||
| Other | — | — | — | — | — | |||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | — | — | — | — | — | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | — | — | — | — | |||||||||||||||
| Mortgage-residential | 322 | 371 | — | 483 | 9 | |||||||||||||||
| Mortgage-commercial | 4,030 | 6,626 | 14 | 3,612 | 149 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | 29 | 30 | — | 33 | 2 | |||||||||||||||
| Other | — | — | — | — | — | |||||||||||||||
| $ | 4,381 | $ | 7,027 | $ | 14 | $ | 4,128 | $ | 160 | |||||||||||
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention . Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
| 19 |
Note 4—Loans-continued
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. As of September 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of September 30, 2019 and December 31, 2018, no loans were classified as doubtful.
| (Dollars in thousands) | ||||||||||||||||||||
| September 30, 2019 | Pass |
Special
Mention |
Substandard | Doubtful | Total | |||||||||||||||
| Commercial, financial & agricultural | $ | 54,975 | $ | 194 | $ | — | $ | — | $ | 55,169 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | 58,737 | — | — | — | 58,737 | |||||||||||||||
| Mortgage - residential | 46,404 | 522 | 767 | — | 47,693 | |||||||||||||||
| Mortgage - commercial | 527,551 | 3,401 | 3,602 | — | 534,554 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | 27,651 | 1,164 | 288 | — | 29,103 | |||||||||||||||
| Other | 9,778 | 40 | — | — | 9,818 | |||||||||||||||
| Total | $ | 725,096 | $ | 5,321 | $ | 4,657 | $ | — | $ | 735,074 | ||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2018 | Pass |
Special
Mention |
Substandard | Doubtful | Total | |||||||||||||||
| Commercial, financial & agricultural | $ | 53,709 | $ | 224 | $ | — | $ | — | $ | 53,933 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | 58,440 | — | — | — | 58,440 | |||||||||||||||
| Mortgage - residential | 51,286 | 633 | 845 | — | 52,764 | |||||||||||||||
| Mortgage - commercial | 505,493 | 5,176 | 3,164 | — | 513,833 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | 28,071 | 1,197 | 315 | — | 29,583 | |||||||||||||||
| Other | 9,907 | — | 2 | — | 9,909 | |||||||||||||||
| Total | $ | 706,906 | $ | 7,230 | $ | 4,326 | $ | — | $ | 718,462 | ||||||||||
At September 30, 2019 and December 31, 2018, non-accrual loans totaled $2.3 million and $2.5 million, respectively.
TDRs that are still accruing and included in impaired loans at September 30, 2019 and at December 31, 2018 amounted to $1.9 million and $2.0 million, respectively. TDRs in non-accrual status at September 30, 2019 and December 31, 2018 amounted to $1.1 million and $1.2 million, respectively.
Loans greater than 90 days delinquent and still accruing interest were $33.5 and $31.2 thousand at September 30, 2019 and December 31, 2018, respectively.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, ( Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality) , and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
| 20 |
Note 4—Loans-continued
A summary of changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2019 and September 30, 2018 follows:
| (Dollars in thousands) |
Three
Months
Ended September 30, 2019 |
Three
Months
Ended September 30, 2018 |
||||||
| Accretable yield, beginning of period | $ | 138 | $ | (2 | ) | |||
| Additions | — | — | ||||||
| Accretion | (7 | ) | (8 | ) | ||||
| Reclassification of nonaccretable difference due to improvement in expected cash flows | — | — | ||||||
| Other changes, net | — | — | ||||||
| Accretable yield, end of period | $ | 130 | $ | (10 | ) | |||
| (Dollars in thousands) |
Nine
Months
Ended September 30, 2019 |
Nine
Months
Ended September 30, 2018 |
||||||
| Accretable yield, beginning of period | $ | 153 | $ | 22 | ||||
| Additions | — | — | ||||||
| Accretion | (23 | ) | (32 | ) | ||||
| Reclassification of nonaccretable difference due to improvement in expected cash flows | — | — | ||||||
| Other changes, net | — | — | ||||||
| Accretable yield, end of period | $ | 130 | $ | (10 | ) | |||
At September 30, 2019 and December 31, 2018, the recorded investment in purchased impaired loans was $112 thousand and $112 thousand, respectively. The unpaid principal balance was $193 thousand and $205 thousand at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, these loans were all secured by commercial real estate.
| 21 |
Note 4—Loans-continued
The following tables are by loan category and present loans past due and on non-accrual status as of September 30, 2019 and December 31, 2018:
| (Dollars in thousands) | Greater than | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and | Total | |||||||||||||||||||||||||
| September 30, 2019 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | 33 | $ | 306 | $ | — | $ | 4 | $ | 343 | $ | 54,826 | $ | 55,169 | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | 58,737 | 58,737 | |||||||||||||||||||||
| Mortgage-residential | 138 | 184 | — | 538 | 860 | 46,833 | 47,693 | |||||||||||||||||||||
| Mortgage-commercial | 2,272 | 47 | — | 1,661 | 3,980 | 530,574 | 534,554 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 55 | 91 | 33 | 72 | 251 | 28,852 | 29,103 | |||||||||||||||||||||
| Other | 17 | 44 | — | — | 61 | 9,757 | 9,818 | |||||||||||||||||||||
| $ | 2,515 | $ | 672 | $ | 33 | $ | 2,275 | $ | 5,495 | $ | 729,579 | $ | 735,074 | |||||||||||||||
| (Dollars in thousands) | Greater than | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and | Total | |||||||||||||||||||||||||
| December 31, 2018 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | 18 | $ | 8 | $ | — | $ | — | $ | 26 | $ | 53,907 | $ | 53,933 | ||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | 58,440 | 58,440 | |||||||||||||||||||||
| Mortgage-residential | 110 | 163 | — | 284 | 557 | 52,207 | 52,764 | |||||||||||||||||||||
| Mortgage-commercial | 1,302 | — | — | 2,232 | 3,534 | 510,299 | 513,833 | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 146 | 11 | 31 | 29 | 217 | 29,366 | 29,583 | |||||||||||||||||||||
| Other | 14 | 55 | — | — | 69 | 9,840 | 9,909 | |||||||||||||||||||||
| $ | 1,590 | $ | 237 | $ | 31 | $ | 2,545 | $ | 4,403 | $ | 714,059 | $ | 718,462 | |||||||||||||||
The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. There were no loans determined to be TDRs that were restructured during the three and nine-month periods ended September 30, 2019 and September 30, 2018.
During the three and nine-month periods ended September 30, 2019 and September 30, 2018, there were no loans determined to be TDRs in the previous twelve months that had payment defaults. Defaulted loans are those loans that are greater than 89 days past due.
In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to their corresponding collateral value. All troubled TDR accruing loans that have a loan balance that exceeds the present value of cash flows will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Company will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.
| 22 |
Note 5—Recently Issued Accounting Pronouncements
In May 2014, the FASB issued guidance (ASU 2014-09) to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance was effective for the Company as of January 1, 2018. The Company evaluated the overall impact on affected revenue streams and any related contracts, including asset management fees, gains and losses on the sale of real estate, deposit related fees and interchange fees. Based on this evaluation, the Company determined that ASU 2014-09 did not materially change the method in which revenue from impacted revenue streams was previously being recognized. The Company applied the guidance using a modified retrospective approach. This approach requires the application of the new guidance to uncompleted contracts at the date of adoption. Periods prior to the date of adoption were not retrospectively revised as the impact on uncompleted contracts at the date of adoption was not material.
In January 2016, the FASB amended the Financial Instruments topic of the ASC (ASU 2016-01) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments were effective for the Company on January 1, 2018. The guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure of financial instruments. The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that exist as of the date of adoption of the amendments. ASU 2016-01 requires the use of exit price rather than entrance price in determining the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 6 - Fair Value of Financial Instruments for information regarding the change in the valuation of these loans. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements.
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition of leases. The Company evaluated the new guidance and its impact on the Company’s financial statements. Based on leases outstanding at December 31, 2018, the impact of adoption on January 1, 2019 was recording a right-of-use asset and lease liability of $2.9 million. See Note 9 “Leases” to the consolidated financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. On July 17, 2019, the FASB issued a proposal draft to extend the implementation date for certain smaller reporting companies to include SEC registrants classified as a Smaller Reporting Company. On October 16, 2019, the FASB voted to delay the implementation date for SEC registrants classified as a Smaller Reporting Company to fiscal years beginning after December 15, 2022. The FASB has directed its staff to draft an ASU that will change the implementation dates, which should be issued following a formal written ballot by the FASB, which is expected to take place in November 2019.
In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance was effective for the Company for reporting periods beginning after December 15, 2017. These amendments had no material effect on the Company’s financial statements.
| 23 |
Note 5—Recently Issued Accounting Pronouncements-continued
In January 2017, the FASB amended the Goodwill and Other Topic of the ASC to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the ASC related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.
In February 2018, the FASB amended the Income Statement—Reporting Comprehensive Income Topic of the Accounting Standards Codification. The amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.
In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, amendments were made to give entities another option for transition and to provide lessors with a practical expedient. The amendments became effective for reporting periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the ASC. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the ASC to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
| 24 |
Note 5—Recently Issued Accounting Pronouncements-continued
In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 6—Fair Value of Financial Instruments
The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| Level l |
Quoted prices in active markets for identical assets or liabilities.
|
| Level 2 |
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below.
Cash and Short Term Investments - The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.
| 25 |
Note 6—Fair Value of Financial Instruments-continued
Investment Securities - Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include MBSs issued both by government sponsored enterprises and PLMBSs. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.
Loans Held for Sale - The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.
Loans - The fair value of loans at September 30, 2019 and December 31, 2018 were measured using an exit price methodology, which includes an entry price notion that uses a discounted cash flow method to calculate the present future value of expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The exit price uses the entry price notion but also incorporates other assumptions such as market factors illiquidity risk and enhanced credit risk. These added assumptions are intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. In estimating the fair value, the Company’s portfolio is segmented using the six categories in Note 4 – Loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Prior to adoption of ASU 2016-01 loans other than impaired loans were classified as a Level 2 measurement, as of September 30, 2019 all loans are classified as a Level 3 measurement.
Other Real Estate Owned (“OREO”) - OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.
Accrued Interest Receivable - The fair value approximates the carrying value and is classified as Level 1.
Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.
Federal Home Loan Bank Advances - Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.
Short Term Borrowings - The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.
Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.
Accrued Interest Payable - The fair value approximates the carrying value and is classified as Level 1.
Commitments to Extend Credit - The fair value of these commitments is immaterial because their underlying interest rates approximate market.
| 26 |
Note 6—Fair Value of Financial Instruments-continued
The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of September 30, 2019 and December 31, 2018 are as follows:
| September 30, 2019 | ||||||||||||||||||||
| Fair Value | ||||||||||||||||||||
| (Dollars in thousands) |
Carrying
Amount |
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | 33,235 | $ | 33,235 | $ | 33,235 | $ | — | $ | — | ||||||||||
| Available-for-sale securities | 265,068 | 265,068 | 9 | 265,059 | — | |||||||||||||||
| Other investments, at cost | 1,992 | 1,992 | — | — | 1,992 | |||||||||||||||
| Loans held for sale | 10,775 | 10,775 | — | 10,775 | — | |||||||||||||||
| Net loans receivable | 728,514 | 723,160 | — | — | 723,160 | |||||||||||||||
| Accrued interest | 3,228 | 3,228 | 3,228 | — | — | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | 268,693 | $ | 268,693 | $ | — | $ | 268,693 | $ | — | ||||||||||
| Interest bearing demand deposits and money market accounts | 404,336 | 404,336 | — | 404,336 | — | |||||||||||||||
| Savings | 100,895 | 100,895 | — | 100,895 | — | |||||||||||||||
| Time deposits | 174,903 | 175,594 | — | 175,594 | — | |||||||||||||||
| Total deposits | 948,827 | 937,861 | — | 937,861 | — | |||||||||||||||
| Federal Home Loan Bank Advances | 216 | 216 | — | 216 | — | |||||||||||||||
| Short term borrowings | 34,321 | 34,321 | — | 34,321 | — | |||||||||||||||
| Junior subordinated debentures | 14,964 | 13,180 | — | 13,180 | — | |||||||||||||||
| Accrued interest payable | 1,059 | 1,059 | 1,059 | — | — | |||||||||||||||
| December 31, 2018 | ||||||||||||||||||||
| Fair Value | ||||||||||||||||||||
| (Dollars in thousands) |
Carrying
Amount |
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | 32,268 | $ | 32,268 | $ | 32,268 | $ | — | $ | — | ||||||||||
| Held-to-maturity securities | 16,174 | 16,184 | — | 16,184 | — | |||||||||||||||
| Available-for-sale securities | 237,893 | 237,893 | 1,642 | 235,560 | 691 | |||||||||||||||
| Other investments, at cost | 1,955 | 1,955 | — | — | 1,955 | |||||||||||||||
| Loans held for sale | 3,223 | 3,223 | — | 3,223 | — | |||||||||||||||
| Net loans receivable | 712,199 | 697,432 | — | — | 697,432 | |||||||||||||||
| Accrued interest | 3,579 | 3,579 | 3,579 | — | — | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | 244,686 | $ | 244,686 | $ | — | $ | 244,686 | $ | — | ||||||||||
| Interest bearing demand deposits and money market accounts | 393,473 | 393,473 | — | 393,473 | — | |||||||||||||||
| Savings | 108,368 | 108,368 | — | 108,368 | — | |||||||||||||||
| Time deposits | 178,996 | 177,797 | — | 177,797 | — | |||||||||||||||
| Total deposits | 925,523 | 925,849 | — | 925,849 | — | |||||||||||||||
| Federal Home Loan Bank Advances | 231 | 231 | — | 231 | — | |||||||||||||||
| Short term borrowings | 28,022 | 28,022 | — | 28,022 | — | |||||||||||||||
| Junior subordinated debentures | 14,964 | 14,178 | — | 14,178 | — | |||||||||||||||
| Accrued interest payable | 861 | 861 | 861 | — | — | |||||||||||||||
| 27 |
Note 6—Fair Value of Financial Instruments-continued
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2019 and December 31, 2018 that are measured on a recurring basis. There were no liabilities carried at fair value as of September 30, 2019 or December 31, 2018 that are measured on a recurring basis.
(Dollars in thousands)
| Description |
September
30,
2019 |
Quoted
Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
| Available for sale securities | ||||||||||||||||
| US Treasury Securities | $ | 7,192 | $ | — | $ | 7,192 | $ | — | ||||||||
| Government sponsored enterprises | 1,123 | — | 1,123 | — | ||||||||||||
| Mortgage-backed securities | 168,041 | — | 168,041 | — | ||||||||||||
| Small Business Administration pools | 47,653 | — | 47,653 | — | ||||||||||||
| State and local government | 41,040 | — | 41,040 | — | ||||||||||||
| Corporate and other securities | 19 | 9 | 10 | — | ||||||||||||
| 265,068 | 9 | 265,059 | — | |||||||||||||
| Loans held for sale | 10,775 | — | 10,775 | — | ||||||||||||
| Total | $ | 275,843 | $ | 9 | $ | 275,834 | $ | — | ||||||||
(Dollars in thousands)
| Description |
December
31,
2018 |
Quoted
Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
| Available for sale securities | ||||||||||||||||
| US Treasury Securities | $ | 15,457 | $ | — | $ | 15,457 | $ | — | ||||||||
| Government sponsored enterprises | 1,100 | — | 1,100 | — | ||||||||||||
| Mortgage-backed securities | 115,475 | — | 114,784 | 691 | ||||||||||||
| Small Business Administration securities | 55,336 | 1,633 | 53,703 | — | ||||||||||||
| State and local government | 50,506 | — | 50,506 | — | ||||||||||||
| Corporate and other securities | 19 | 9 | 10 | — | ||||||||||||
| 237,893 | 1,642 | 235,560 | 691 | |||||||||||||
| Loans held for sale | 3,223 | — | 3,223 | — | ||||||||||||
| Total | $ | 241,116 | $ | 1,642 | $ | 238,783 | $ | 691 | ||||||||
| 28 |
Note 6—Fair Value of Financial Instruments-continued
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2019 and December 31, 2018 that are measured on a non-recurring basis. There were no Level 3 financial instruments as of September 30, 2019 and September 30, 2018 measured on a recurring basis.
| (Dollars in thousands) | ||||||||||||||||
| Description |
September
30,
2019 |
Quoted
Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
| Impaired loans: | ||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | ||||||||
| Real estate: | ||||||||||||||||
| Mortgage-residential | 538 | — | — | 538 | ||||||||||||
| Mortgage-commercial | 3,531 | — | — | 3,531 | ||||||||||||
| Consumer: | ||||||||||||||||
| Home equity | 72 | — | — | 72 | ||||||||||||
| Other | — | — | — | — | ||||||||||||
| Total impaired | 4,141 | — | — | 4,141 | ||||||||||||
| Other real estate owned: | ||||||||||||||||
| Construction | 828 | — | — | 828 | ||||||||||||
| Mortgage-residential | 584 | — | — | 584 | ||||||||||||
| Total other real estate owned | 1,412 | — | — | 1,412 | ||||||||||||
| Total | $ | 5,553 | $ | — | $ | — | $ | 5,553 | ||||||||
| (Dollars in thousands) | ||||||||||||||||
| Description |
December
31,
2018 |
Quoted
Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||||||
| Impaired loans: | ||||||||||||||||
| Commercial & Industrial | $ | — | $ | — | $ | — | $ | — | ||||||||
| Real estate: | ||||||||||||||||
| Mortgage-residential | 322 | — | — | 322 | ||||||||||||
| Mortgage-commercial | 4,016 | — | — | 4,016 | ||||||||||||
| Consumer: | ||||||||||||||||
| Home equity | 29 | — | — | 29 | ||||||||||||
| Other | — | — | — | — | ||||||||||||
| Total impaired | 4,367 | — | — | 4,367 | ||||||||||||
| Other real estate owned: | ||||||||||||||||
| Construction | 828 | — | — | 828 | ||||||||||||
| Mortgage-residential | 632 | — | — | 632 | ||||||||||||
| Total other real estate owned | 1,460 | — | — | 1,460 | ||||||||||||
| Total | $ | 6,057 | $ | — | $ | — | $ | 6,057 | ||||||||
| 29 |
Note 6—Fair Value of Financial Instruments-continued
The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $4.1 million and $4.4 million as of September 30, 2019 and December 31, 2018, respectively.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
| (Dollars in thousands) |
Fair
Value
as of September 30, 2019 |
Valuation Technique |
Significant
Observable Inputs |
Significant
Unobservable Inputs |
||||||
| OREO | $ | 1,412 | Appraisal Value/Comparison Sales/Other estimates | Appraisals and or sales of comparable properties | Appraisals discounted 6% to 16% for sales commissions and other holding cost | |||||
| Impaired loans | $ | 4,141 | Appraisal Value | Appraisals and or sales of comparable properties | Appraisals discounted 6% to 16% for sales commissions and other holding cost | |||||
| (Dollars in thousands) |
Fair
Value
as of December 31, 2018 |
Valuation Technique |
Significant
Observable Inputs |
Significant
Unobservable Inputs |
||||||
| OREO | $ | 1,460 | Appraisal Value/Comparison Sales/Other estimates | Appraisals and or sales of comparable properties | Appraisals discounted 6% to 16% for sales commissions and other holding cost | |||||
| Impaired loans | $ | 4,367 | Appraisal Value | Appraisals and or sales of comparable properties | Appraisals discounted 6% to 16% for sales commissions and other holding cost | |||||
Note 7—Deposits
The Company’s total deposits are comprised of the following at the dates indicated:
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Non-interest bearing demand deposits | $ | 268,693 | $ | 244,686 | ||||
| Interest bearing demand deposits and money market accounts | 404,336 | 393,473 | ||||||
| Savings | 100,895 | 108,368 | ||||||
| Time deposits | 174,903 | 178,996 | ||||||
| Total deposits | $ | 948,827 | $ | 925,523 | ||||
As of September 30, 2019 and December 31, 2018, the Company had time deposits greater than $250,000 of $31.1 million and $27.8 million, respectively.
| 30 |
Note 8—Reportable Segments
The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. The Company has four reportable segments:
| · | Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers. |
| · | Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market. |
| · | Investment advisory and non-deposit: This segment provides investment advisory services and non-deposit products. |
| · | Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from First Community Bank (the “Bank”). |
| Nine months ended September 30, 2019 | Commercial | Investment | ||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Dividend and Interest Income | $ | 31,081 | $ | 745 | $ | — | $ | 6,077 | $ | (6,059 | ) | $ | 31,844 | |||||||||||
| Interest expense | 3,772 | — | — | 583 | — | 4,355 | ||||||||||||||||||
| Net interest income | $ | 27,309 | $ | 745 | $ | — | $ | 5,494 | $ | (6,059 | ) | $ | 27,489 | |||||||||||
| Provision for loan losses | 139 | — | — | — | — | 139 | ||||||||||||||||||
| Noninterest income | 4,039 | 3,333 | 1,436 | — | — | 8,808 | ||||||||||||||||||
| Noninterest expense | 21,416 | 2,754 | 1,302 | 281 | — | 25,753 | ||||||||||||||||||
| Net income before taxes | $ | 9,793 | $ | 1,324 | $ | 134 | $ | 5,213 | $ | (6,059 | ) | $ | 10,405 | |||||||||||
| Income tax provision (benefit) | 2,330 | — | — | (199 | ) | — | 2,131 | |||||||||||||||||
| Net income (loss) | $ | 7,463 | $ | 1,324 | $ | 134 | $ | 5,412 | $ | (6,059 | ) | $ | 8,274 | |||||||||||
| Nine months ended September 30, 2018 | Commercial | Investment | ||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Dividend and Interest Income | $ | 28,513 | $ | 622 | $ | — | $ | 2,779 | $ | (2,779 | ) | $ | 29,135 | |||||||||||
| Interest expense | 2,251 | — | — | 528 | — | 2,779 | ||||||||||||||||||
| Net interest income | $ | 26,262 | $ | 622 | $ | — | $ | 2,251 | $ | (2,779 | ) | $ | 26,356 | |||||||||||
| Provision for loan losses | 252 | — | — | — | — | 252 | ||||||||||||||||||
| Noninterest income | 4,051 | 3,126 | 1,207 | — | — | 8,384 | ||||||||||||||||||
| Noninterest expense | 20,105 | 2,515 | 1,047 | 286 | — | 23,953 | ||||||||||||||||||
| Net income before taxes | $ | 9,956 | $ | 1,233 | $ | 160 | $ | 1,965 | $ | (2,779 | ) | $ | 10,535 | |||||||||||
| Income tax provision (benefit) | 2,173 | — | — | (181 | ) | — | 1,992 | |||||||||||||||||
| Net income | $ | 7,783 | $ | 1,233 | $ | 160 | $ | 2,146 | $ | (2,779 | ) | $ | 8,543 | |||||||||||
| 31 |
Note 8—Reportable Segments-continued
| Three months ended September 30, 2019 | Commercial | Investment | ||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Dividend and Interest Income | $ | 10,600 | $ | 257 | $ | — | $ | 3,036 | $ | (3,029 | ) | 10,864 | ||||||||||||
| Interest expense | 1,322 | — | — | 189 | — | 1,511 | ||||||||||||||||||
| Net interest income | $ | 9,278 | $ | 257 | $ | — | $ | 2,847 | $ | (3,029 | ) | $ | 9,353 | |||||||||||
| Provision for loan losses | 25 | — | — | — | — | 25 | ||||||||||||||||||
| Noninterest income | 1,353 | 1,251 | 509 | — | — | 3,113 | ||||||||||||||||||
| Noninterest expense | 7,246 | 999 | 440 | 105 | — | 8,790 | ||||||||||||||||||
| Net income before taxes | $ | 3,360 | $ | 509 | $ | 69 | $ | 2,742 | $ | (3,029 | ) | $ | 3,651 | |||||||||||
| Income tax provision (benefit) | 813 | — | — | (60 | ) | — | 753 | |||||||||||||||||
| Net income | $ | 2,547 | $ | 509 | $ | 69 | $ | 2,802 | $ | (3,029 | ) | $ | 2,898 | |||||||||||
| Three months ended September 30, 2018 | Commercial | Investment | ||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Dividend and Interest Income | $ | 9,772 | $ | 213 | $ | — | $ | 947 | $ | (947 | ) | 9,985 | ||||||||||||
| Interest expense | 915 | — | — | 187 | — | 1,102 | ||||||||||||||||||
| Net interest income | $ | 8,857 | $ | 213 | $ | — | $ | 760 | $ | (947 | ) | $ | 8,883 | |||||||||||
| Provision for loan losses | 21 | — | — | — | — | 21 | ||||||||||||||||||
| Noninterest income | 1,260 | 1,159 | 423 | — | — | 2,842 | ||||||||||||||||||
| Noninterest expense | 6,796 | 937 | 324 | 77 | — | 8,134 | ||||||||||||||||||
| Net income before taxes | $ | 3,300 | $ | 435 | $ | 99 | $ | 683 | $ | (947 | ) | $ | 3,570 | |||||||||||
| Income tax provision (benefit) | 791 | — | — | (54 | ) | — | 737 | |||||||||||||||||
| Net income | $ | 2,509 | $ | 435 | $ | 99 | $ | 737 | $ | (947 | ) | $ | 2,833 | |||||||||||
| Commercial | Investment | |||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Total Assets as of September 30, 2019 | $ | 1,102,804 | $ | 23,638 | $ | 2 | $ | 127,864 | $ | (124,318 | ) | $ | 1,129,990 | |||||||||||
| Total Assets as of December 31, 2018 | $ | 1,074,838 | $ | 16,078 | $ | 9 | $ | 129,992 | $ | (129,322 | ) | $ | 1,091,595 | |||||||||||
| 32 |
Note 9—Leases
Effective January 1, 2019, the Company adopted ASC 842 “Leases”. Currently, the Company has operating leases on three of its facilities that are accounted for under this standard. As a result of this standard, the Company recognized a right-of-use asset and a lease liability of $3.3 million, respectively. During the nine-month period ended September 30, 2019, the Company made cash payments in the amount of $147.3 thousand for operating leases and the lease liability was reduced by $51.0 thousand. The lease expense recognized during the three and nine-month periods ended September 30, 2019 amounted to $62.1 thousand and $178.8 thousand, respectively. The following table is a maturity analysis of the operating lease liabilities. The weighted average remaining lease term as of September 30, 2019 is 16.76 years and the weighted average discount rate used is 4.41%.
| ( Dollars in thousands) | Liability | |||||||||||
| Year | Cash | Lease Expense | Reduction | |||||||||
| 2019 | $ | 208 | $ | 133 | $ | 24 | ||||||
| 2020 | 292 | 140 | 152 | |||||||||
| 2021 | 298 | 133 | 165 | |||||||||
| 2022 | 303 | 126 | 177 | |||||||||
| 2023 | 309 | 118 | 191 | |||||||||
| Thereafter | 3,481 | 900 | 2,582 | |||||||||
| Total | $ | 4,892 | $ | 1,550 | $ | 3,291 | ||||||
Note 10—Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
Management has reviewed events occurring through the date the financial statements were available to be issued and have determined that no additional subsequent events occurred requiring accrual or disclosure.
| 33 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Any Forward-Looking Statements
This report contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 14, 2019 and the following:
| · | credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, changes in customer payment behavior or other factors; |
| · | the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; |
| · | restrictions or conditions imposed by our regulators on our operations; |
| · | the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods; |
| · | examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets; |
| · | reduced earnings due to higher other-than-temporary impairment charges resulting from additional decline in the value of our securities portfolio, specifically as a result of increasing default rates, and loss severities on the underlying real estate collateral; |
| · | merger and merger integration risk, including potential customer loss, higher than expected costs, loss of key employees, and business disruption associated with completed combinations, and including the potential inability to identify and successfully negotiate, complete and integrate additional potential combinations with merger or acquisition partners or to realize the benefits and cost savings sought from, and acceptably limit unexpected liabilities associated with, any business combinations; |
| · | increases in competitive pressure in the banking and financial services industries; |
| · | changes in the interest rate environment which could reduce anticipated or actual margins; |
| · | changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry; | |
| · | risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others; |
| · | general economic conditions resulting in, among other things, a deterioration in credit quality; |
| · | changes occurring in business conditions and inflation; |
| · | changes in access to funding or increased regulatory requirements with regard to funding; |
| 34 |
| · | increased cybersecurity risk, including potential business disruptions or financial losses; |
| · | changes in deposit flows; |
| · | changes in technology; |
| · | our current and future products, services, applications and functionality and plans to promote them; |
| · | changes in monetary and tax policies; |
| · | changes in accounting standards, policies, estimates, practices and procedures; |
| · | our assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results; |
| · | the rate of delinquencies and amounts of loans charged-off; |
| · | the rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; |
| · | our ability to maintain appropriate levels of capital, including levels of capital required under the capital rules implementing Basel III; |
| · | our ability to attract and retain key personnel; |
| · | our ability to retain our existing clients, including our deposit relationships; |
| · | adverse changes in asset quality and resulting credit risk-related losses and expenses; |
| · | loss of consumer confidence and economic disruptions resulting from terrorist activities; |
| · | disruptions due to flooding, severe weather or other natural disasters; and |
| · | other risks and uncertainties detailed from time to time in our filings with the SEC. |
Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. 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. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.
All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
The following discussion describes our results of operations for the nine months and three months ended September 30, 2019 as compared to the nine months and three months ended September 30, 2018 and also analyzes our financial condition as of September 30, 2019 as compared to December 31, 2018. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
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There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.
In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of September 30, 2019 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 14, 2019.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses
We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value than the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
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If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has one reporting unit.
Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in merger or acquisition transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
Income Taxes and Deferred Tax Assets and Liabilities
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write downs of OREO properties, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. At September 30, 2019 and December 31, 2018, we were in a net deferred tax asset position.
Other-Than-Temporary Impairment
We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value (See Note 3 to the Consolidated Financial Statements).
Business Combinations, Method of Accounting for Loans Acquired
We account for acquisitions under FASB ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
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Comparison of Results of Operations for Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018
Net Income
Our net income for the nine months ended September 30, 2019 was $8.3 million or $1.08 diluted earnings per common share, as compared to $8.5 million or $1.11 diluted earnings per common share for the nine months ended September 30, 2018. Net interest income increased $1.1 million for the nine months ended September 30, 2019 as compared to the same period in 2018. This increase is primarily a result of a higher level of average earning assets in the first nine months of 2019 as compared to the same period in 2018 as well as a four basis point increase in the net interest margin. Net interest margin for the nine months ended September 30, 2019 was 3.65% as compared to 3.61% in the same period of 2018. The increase in net interest margin was offset by an increase in non-interest expense of $1.8 million in the nine months ending September 30 ,2019 as compared to the nine months ended September 30, 2018.
Net Interest Income
Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the nine months ended September 30, 2019 and 2018, along with average balances and the related interest income and interest expense amounts.
Net interest income was $27.5 million for the nine months ended September 30, 2019 as compared to $26.4 million for the nine months ended September 30, 2018. The $1.1 million increase in net interest income was attributable to an increase in average earning assets of $30.8 million as well as an increase of four basis points in the net interest margin between the two periods. Our net interest margin was 3.65% during the nine months ended September 30, 2019 as compared to 3.61% for the same period in 2018. The yield on earning assets increased by 24 basis points in the first nine months of 2019 as compared to the same period in 2018. Average loans comprised 72.6% of average earning assets in the first nine months of 2019 as compared to 69.4% in the same period of 2018. The yield on our loan portfolio increased 12 basis points in the nine-month period ended September 30, 2019 to 4.85% as compared to 4.73% during the same period in 2018. The yield on our investment portfolio for the nine-month period ended September 30, 2019 increased to 2.61% from 2.36% for the same period in 2018. Increases in the federal funds target rate in 2017 and 2018 increased the yields on certain variable rate products in both our loan and investment portfolio. In July and October of 2019, the Federal Reserve began lowering its target band for short-term interest rates by 25 basis point each time. Lower short-term interest rates along with a flat yield curve have more recently resulted in downward pressure on our net interest margin (See “Market Risk Management” below). The cost of interest-bearing liabilities during the first nine months of 2019 was 0.81% as compared to 0.52% in the same period in 2018. The continued focus and resulting shift in our deposit funding mix, as well as our current liquidity position, continue to assist us in controlling our overall cost of funds. As noted previously, recent decreases in the Federal Reserve Fed Fund target band may result in lower overall funding cost. Interest-bearing transaction accounts, money market accounts and savings deposits, which are typically our lower cost funds, represent 68.0% of our average interest-bearing liabilities during the first nine months of 2019 as compared to 67.1% in the same period in 2018.
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Provision and Allowance for Loan Losses
At September 30, 2019 and December 31, 2018, the allowance for loan losses was $6.6 million, or 0.89% of total loans (excluding loans held for sale), and $6.3 million, or 0.87% of total loans (excluding loans held for sale), respectively. Loans that were acquired in the acquisition of Cornerstone Bancorp (“Cornerstone”) in 2017 as well as in the acquisition of Savannah River Financial Corporation (“Savannah River”) in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At September 30, 2019 and December 31, 2018, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $384 thousand and $660 thousand, respectively. Our provision for loan losses was $139 thousand and $252 thousand for the nine months ended September 30, 2019 and 2018, respectively. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the experience ability and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, and concentrations of credit. Periodically, we adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses.
We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 – Loans). The annualized weighted average loss ratios over the last 36 months for all loan risk categories has been 0.01%. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. The U.S. economy has been in an extended period of recovery. The period at which we will reach full recovery or revert back to a slowing economy is not determinable. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, net charge-offs have averaged less than one basis point annualized. We believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle . The percentage of the unallocated portion of the allowance to the total allowance has declined over the last several years. Management does not believe it would be judicious to reduce the overall level of the allowance at this time.
Our Company has a significant portion of its loan portfolio with real estate as the underlying collateral. At September 30, 2019 and December 31, 2018, approximately 91.1% and 91.1%, respectively, of the loan portfolio had real estate collateral. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.
| 39 |
Non-performing assets were $3.7 million (0.33% of total assets) at September 30, 2019 as compared to $4.0 million (0.37% of total assets) at December 31, 2018. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), we continue to be concerned about the sustainability of the current economic environment and the effect that an overall economic decline could have on our customer base of local businesses and professionals. There were 32 loans totaling $2.3 million included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at September 30, 2019. The largest loan included in non-accrual status is in the amount of $701 thousand and is secured by a first mortgage on developed lots to be sold for residential use. The average balance of the remaining 31 loans is approximately $52 thousand, and the majority of these are secured by first mortgage liens. At the time the loans are placed in non-accrual status, we typically obtain an updated appraisal and, if the loan balance exceeds fair value, write the balance down to the fair value. At September 30, 2019, we had one loan in the amount of $33 thousand delinquent 90 days or more and still accruing interest. At September 30, 2019, we had loans totaling $3.2 million that were delinquent 30 days to 89 days representing 0.44% of total loans.
Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans. At September 30, 2019, there have been no loans identified as potential problem loans.
The following table summarizes the activity related to our allowance for loan losses for the periods indicated:
Allowance for Loan Losses
| (Dollars in thousands) |
Nine
Months Ended
September 30, |
|||||||
| 2019 | 2018 | |||||||
| Average loans (including loans held for sale) outstanding | $ | 731,033 | $ | 677,441 | ||||
| Loans (including loans held for sale) outstanding at period end | $ | 745,849 | $ | 696,515 | ||||
| Non-performing assets: | ||||||||
| Nonaccrual loans | $ | 2,275 | $ | 2,904 | ||||
| Loans 90 days past due still accruing | 33 | 29 | ||||||
| Repossessed-other | — | — | ||||||
| Foreclosed real estate and other assets | 1,412 | 1,921 | ||||||
| Total non-performing assets | $ | 3,720 | $ | 4,854 | ||||
| Beginning balance of allowance | $ | 6,263 | $ | 5,797 | ||||
| Loans charged-off: | ||||||||
| 1-4 family residential mortgage | 7 | 1 | ||||||
| Non-residential real estate | — | — | ||||||
| Home equity | 1 | — | ||||||
| Commercial | 8 | — | ||||||
| Installment & credit card | 96 | 109 | ||||||
| Total loans charged-off | 112 | 110 | ||||||
| Recoveries: | ||||||||
| 1-4 family residential mortgage | — | 3 | ||||||
| Non-residential real estate | 221 | 219 | ||||||
| Home equity | 14 | 6 | ||||||
| Commercial | — | 14 | ||||||
| Installment & credit card | 35 | 31 | ||||||
| Total recoveries | 270 | 273 | ||||||
| Net loan recoveries (charge offs) | 158 | (163 | ) | |||||
| Provision for loan losses | 139 | 252 | ||||||
| Balance at period end | $ | 6,560 | $ | 6,212 | ||||
| Net (recoveries) charge-offs to average loans | 0.00 | % | (0.02 | %) | ||||
| Allowance as percent of total loans | 0.88 | % | 0.89 | % | ||||
| Non-performing assets as % of total assets | 0.33 | % | 0.45 | % | ||||
| Allowance as % of non-performing loans | 284.23 | % | 127.98 | % | ||||
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The following allocation of the allowance to specific components is not necessarily indicative of future losses or future allocations. The entire allowance is available to absorb losses in the portfolio.
Composition of the Allowance for Loan Losses
| (Dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||
| Amount |
%
of loans in
Category |
Amount |
%
of loans in
Category |
|||||||||||||
| Commercial, Financial and Agricultural | $ | 459 | 7.5 | % | $ | 430 | 7.5 | % | ||||||||
| Real Estate - Construction | 91 | 8.0 | % | 89 | 8.1 | % | ||||||||||
| Real Estate Mortgage: | ||||||||||||||||
| Residential | 385 | 6.5 | % | 431 | 7.3 | % | ||||||||||
| Commercial | 4,536 | 72.7 | % | 4,318 | 71.6 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 241 | 4.0 | % | 261 | 4.1 | % | ||||||||||
| Other | 95 | 1.3 | % | 88 | 1.4 | % | ||||||||||
| Unallocated | 753 | N/A | 646 | N/A | ||||||||||||
| Total | $ | 6,560 | 100.0 | % | $ | 6,263 | 100.0 | % | ||||||||
Accrual of interest is discontinued on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in non-accrual status when it becomes 90 days or more past due. At the time a loan is placed in non-accrual status, all interest, which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
Non-interest Income and Non-interest Expense
Non-interest income during the first nine months of 2019 was $8.8 million as compared to $8.4 million during the same period in 2018. Deposit service charges decreased $108 thousand during the first nine months of 2019 as compared to the same period in 2018. Changes in the overdraft protection fee collection regulatory requirements continue to contribute to the decrease in overall deposit service charge fees. Mortgage banking income and investment advisory fees accounted for $207 thousand and $229 thousand, respectively, of the increase in the first nine months of 2019 as compared to the same period in 2018. Mortgage loan production including construction perm loans in the first nine months of 2019 amounted to $100.6 million as compared to $94.0 million during the same period of 2018. At September 30, 2019, we had $339.6 million in assets under management as compared to $306.8 million at September 30, 2018. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. During the first nine months of 2019, we sold investment securities for a net gain of $135 thousand as compared to a net loss on sale of investment securities of $10 thousand in the same period in 2018.
The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) |
Nine
months ended
September 30, |
|||||||
| 2019 | 2018 | |||||||
| ATM debit card income | $ | 1,524 | $ | 1,375 | ||||
| Income on bank owned life insurance | 515 | 519 | ||||||
| Rental income | 212 | 211 | ||||||
| Loan late charges | 84 | 72 | ||||||
| Safe deposit fees | 39 | 40 | ||||||
| Wire transfer fees | 60 | 61 | ||||||
| Other | 261 | 455 | ||||||
| Total | $ | 2,695 | $ | 2,733 | ||||
| 41 |
Total non-interest expense increased $1.8 million in the first nine months of 2019 to $25.8 million as compared to $24.0 million in the first nine months of 2018. Salary and benefit expense increased $1.3 million to $15.8 million in the first nine months of 2019 as compared to $14.5 million in the first nine months of 2018. This increase is primarily a result of the normal salary adjustments, as well as the addition of two new full-service offices opened in the first half of 2019. We opened a downtown Greenville, South Carolina office in February 2019. In June 2019, we opened a full-service office in Evans, Georgia. The hiring for positions in these offices takes place prior to opening and therefore the cost for staffing and benefits impacts substantially all of the first nine months of 2019. At September 30, 2019 and 2018, we had 242 and 233 full time equivalent employees, respectively. The increase in occupancy expense of $197 thousand in first nine months of 2019 as compared to same period in 2018 is primarily a result of the addition of the two new branch offices. Marketing and public relations expense increased to $764 thousand in the first nine months of 2019 from $460 thousand in the first nine months of 2018. The timing of a media campaign impacts the recognition of marketing expense, and it is expected that the overall 2019 annual media cost will not vary substantially from the annual cost incurred in 2018. Miscellaneous non-interest expense decreased $86 thousand in first nine months of 2019 as compared to the same period in 2018. The 2018 period includes the cost of purchasing South Carolina Rehabilitation tax credits for $165 thousand. The amount of the tax credit received and recorded for the same period in the 2018 was $205 thousand. There were no costs related to purchasing tax credits in the nine months ended September 30, 2019.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Nine months ended | |||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Data processing | $ | 2,008 | $ | 1,681 | ||||
| Supplies | 107 | 104 | ||||||
| Telephone | 323 | 324 | ||||||
| Courier | 107 | 113 | ||||||
| Correspondent services | 174 | 213 | ||||||
| Insurance | 185 | 198 | ||||||
| Postage | 37 | 43 | ||||||
| Legal and professional fees | 738 | 746 | ||||||
| Loss on limited partnership interest | 45 | 48 | ||||||
| Director fees | 255 | 284 | ||||||
| Shareholder expense | 126 | 136 | ||||||
| Dues | 108 | 113 | ||||||
| Subscriptions | 141 | 148 | ||||||
| Loan closing costs/fees | 250 | 187 | ||||||
| Miscellaneous | 785 | 872 | ||||||
| $ | 5,389 | $ | 5,210 | |||||
Income Tax Expense
Our effective tax rate was 20.5% and 18.9% in the first nine months of 2019 and 2018, respectively. As noted previously, the purchase of the South Carolina Rehabilitation tax credits reduced our state income tax expense by $205 thousand for the nine months ended September 30, 2018. As a result, of our current level of tax-exempt securities in our investment portfolio and our BOLI holdings, the effective tax rate is expected to be 20.5% to 21.0% throughout the remainder of 2019.
| 42 |
Comparison of Results of Operations for Three Months Ended September 30, 2019 to the Three Months Ended September 30, 2018
Net Income
Our net income for the three months ended September 30, 2019 was $2.9 million, or $0.39 diluted earnings per common share, as compared to $2.8 million, or $0.37 diluted earnings per common share, for the three months ended September 30, 2018. Net interest income increased $470 thousand for the three months ended September 30, 2019 as compared to the same period in 2018. Average earning assets increased by $29.6 million in the third quarter of 2019 as compared to the same period in 2018. The net interest margin increased to 3.62% during the second quarter of 2019 as compared to 3.55% during the second quarter of 2018.
Net Interest Income
Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the three-month periods ended September 30, 2019 and 2018, along with average balances and the related interest income and interest expense amounts.
Net interest income was $9.3 million and $8.9 million for the three months ended September 30, 2019 and 2018, respectively. Our net interest margin increased by seven basis points from 3.55% for the three months ended September 30, 2018 to 3.62% for the three months ended September 30, 2019. Included in the three-month period in 2019 is a recovery of $131 thousand in non-accrual interest on a loan that paid off during this period. Without that recovery our net interest margin would have been 3.57%. As a result of several increases in the target Fed Funds rate in 2018, we began to experience rate pressure on our deposit funding cost particularly in the last half of 2018 and early 2019. As noted in the nine-month discussion the Federal Reserve began lowering the targeted short-term funds rate, which may have the impact of putting downward pressure on our net-interest margin.
Non-interest Income and Non-interest Expense
Non-interest income during the third quarter of 2019 was $3.1 million as compared to $2.8 million during the same period in 2018. Mortgage banking income increased $92 thousand for the three months ended September 30, 2019 as compared to the same period in 2018. Mortgage loan production in the second quarter of 2019 was $37.9 million as compared to $32.4 million in the third quarter of 2018. In addition, we experienced an approximate 2% increase in our margin (income before tax/revenues) in this line of business in the third quarter of 2019 as compared to the same period in 2018. The margin is significantly impacted by the product types originated during each period. Investment advisory fees increased $86 thousand in the third quarter of 2019 as compared to the same period of 2018. Assets under management at September 30, 2019 amounted to $339.6 million as compared to $306.8 million at September 30,2018. ATM/Debit card fees increased approximately $66 thousand in the third quarter of 2019 as compared to the same period in 2018.
The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) |
Three
months ended
September 30, |
|||||||
| 2019 | 2018 | |||||||
| ATM debit card income | $ | 530 | $ | 464 | ||||
| Income on bank owned life insurance | 174 | 147 | ||||||
| Rental income | 72 | 70 | ||||||
| Loan late charges | 35 | 22 | ||||||
| Safe deposit fees | 12 | 12 | ||||||
| Wire transfer fees | 22 | 20 | ||||||
| Other | 87 | 116 | ||||||
| Total | $ | 932 | $ | 855 | ||||
| 43 |
Total non-interest expense increased $656 thousand in the third quarter of 2019 to $8.8 million as compared to $8.1 million in the third quarter of 2018. Salary and benefit expense increased $386 thousand to $5.5 million in the third quarter of 2019 as compared to $5.1 million in the third quarter of 2018. We opened two new full-service offices in the first half of 2019 and the additional staffing and benefit cost associated with these openings account for the majority of the increase. Occupancy expense increased $92 thousand between the two periods and the opening of the new offices resulted in substantially all of the increase. In the third quarter of 2019, the FDIC began distributing refunds for insurance assessments to certain community banks. The refund during the third quarter of 2019 eliminated our assessment for the period as compared to an assessment of $94 thousand in the third quarter of 2018. It is anticipated that these refunds will reduce our assessment for two and a half quarters. This assumes the targeted FDIC insurance fund ratio remains above a set percentage. Data processing fees increased $197 thousand in the third quarter of 2019 as compared to the same period of 2018 primarily due to an increased number of accounts serviced, increased debit card transaction volume, and additional electronic services provided.
Miscellaneous expense was $285 thousand in the third quarter of 2019 as compared to $164 thousand in the same period of 2018. In the third quarter of 2018, we received a $48 thousand refund of fees charged to us by our Investment Advisor. There was an increase in debit card and fraud losses of approximately $29 thousand in the third quarter of 2019.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Three months ended | |||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Data processing | $ | 732 | $ | 535 | ||||
| Supplies | 24 | 24 | ||||||
| Telephone | 112 | 102 | ||||||
| Courier | 39 | 38 | ||||||
| Correspondent services | 53 | 83 | ||||||
| Insurance | 64 | 71 | ||||||
| Postage | 14 | 14 | ||||||
| Legal and professional fees | 296 | 248 | ||||||
| Loss on limited partnership interest | 22 | 26 | ||||||
| Director fees | 72 | 87 | ||||||
| Shareholder expense | 48 | 32 | ||||||
| Dues | 38 | 41 | ||||||
| Subscriptions | 47 | 48 | ||||||
| Loan closing costs/fees | 89 | 93 | ||||||
| Other | 284 | 164 | ||||||
| $ | 1,934 | $ | 1,606 | |||||
Financial Position
Assets totaled $1.1 billion at September 30, 2019 and December 31, 2018. Loans (excluding loans held for sale) at September 30, 2019 were $735.1 million as compared to $718.5 million at December 31, 2018. As a result of significant loan pay offs or pay downs, the loan portfolio excluding loans held-for-sale increased only $16.6 million from December 31, 2018 to September 30, 2019. Total loan production was $99.1 million during the first nine months of 2019. Deposits increased $23.3 million to $948.8 million at September 30, 2019 as compared to $925.5 million at December 31, 2018. Pure deposits (deposits less non-IRA time deposits) represented 84.8% of total deposits as of September 30, 2019 as compared to 84.0% at December 31, 2018. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local markets. A slow-down in the national or local economic conditions as well as deterioration of asset quality within our Company could significantly impact our ability to continue to grow our loan portfolio.
| 44 |
The following table shows the composition of the loan portfolio by category at the dates indicated:
| (Dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Commercial, financial & agricultural | $ | 55,169 | 7.5 | % | $ | 53,933 | 7.5 | % | ||||||||
| Real estate: | ||||||||||||||||
| Construction | 58,737 | 8.0 | % | 58,440 | 8.1 | % | ||||||||||
| Mortgage – residential | 47,693 | 6.5 | % | 52,764 | 7.3 | % | ||||||||||
| Mortgage – commercial | 534,554 | 72.7 | % | 513,833 | 71.6 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 29,103 | 4.0 | % | 29,583 | 4.1 | % | ||||||||||
| Other | 9,818 | 1.3 | % | 9,909 | 1.4 | % | ||||||||||
| Total gross loans | 735,074 | 100.0 | % | 718,462 | 100.0 | % | ||||||||||
| Allowance for loan losses | (6,560 | ) | (6,263 | ) | ||||||||||||
| Total net loans | $ | 728,514 | $ | 712,199 | ||||||||||||
In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes and advances on home equity lines of credit, secured by real estate, regardless of the purpose of the loan. Advances on home equity lines of credit are included in consumer loans. We follow the common practice of financial institutions in our market areas of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components. We generally limit the loan-to-value ratio to 80%.
During the first quarter of 2019, we adopted the new lease accounting standard (ASC 842 “Leases”). As a result of this change in accounting for leases, we recorded a right-of-use asset of $2.9 million and lease liability of $2.9 million (see Note 9 “Leases” to the consolidated financial statements). During the third quarter we entered into another operating lease and recorded an additional $403 thousand right-of-use asset and lease liability of $406 thousand.
Market Risk Management
The effective management of market risk is essential to achieving our strategic financial objectives. Our most significant market risk is interest rate risk. We have established an Asset/Liability Management Committee (“ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.
A monitoring technique employed by the ALCO is the measurement of interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10% and 15% in a 100 and 200 basis point change in interest rates, respectively, over a twelve-month period. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.
We are currently asset sensitive within one year. However, neither the “gap” analysis nor asset/liability simulation modeling is a precise indicator of our interest sensitivity position due to the many factors that affect net interest income, including changes in the volume and mix of earning assets and interest-bearing liabilities.
Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the percentage change in net interest income at September 30, 2019 and December 31, 2018 over twelve months.
| 45 |
Net Interest Income Sensitivity
| Change in short-term interest rates |
Hypothetical
percentage change in net interest income |
|||||||
|
September
30,
2019 |
December
31,
2018 |
|||||||
| +200bp | -2.87 | % | -3.54 | % | ||||
| +100bp | -1.22 | % | -1.58 | % | ||||
| Flat | — | — | ||||||
| -100bp | -2.42 | % | -0.34 | % | ||||
| -200bp | -5.32 | % | -4.37 | % | ||||
The decrease in net interest income in a down 200 basis point environment primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they may not be repriced in proportion to the change in interest rates. At the current low interest rate levels, we believe that a downward shift of 200 basis points across the entire yield curve is unlikely. The modest decrease in a rising rate environment primarily relates to the historical beta assumptions in the modeling. We are currently not repricing deposits at these levels. We have been able to control deposit pricing in the current rising rate environment primarily as a result of our current liquidity levels as well as continued core deposit growth. The two-year impact of rising rates of 100 and 200 basis points, at our historical beta levels, reflects net interest income increasing by 1.8% and 3.2%, respectively.
We also perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At September 30, 2019, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 7.23% as compared to (1.56)% at December 31, 2018.
Liquidity and Capital Resources
We believe our liquidity remains adequate to meet operating and loan funding requirements. Interest-bearing bank balances, federal funds sold, and investment securities available-for-sale represent 24.6% of total assets at September 30, 2019. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long-term and short-term liquidity needs successfully. These needs include the ability to respond to short-term demand for funds caused by the withdrawal of deposits, maturity of repurchase agreements, extensions of credit and the payment of operating expenses. Other sources of liquidity, in addition to deposit gathering activities, include maturing loans and investments, purchase of federal funds from other financial institutions and selling securities under agreements to repurchase. We monitor closely the level of large certificates of deposits in amounts of $100 thousand or more as they tend to be more sensitive to interest rate changes and, thus, less reliable sources of funding for liquidity purposes. At September 30, 2019, the amount of time deposits of $100 thousand or more represented 9.3% of total deposits and the amount of time deposits of $250 thousand or more represented 3.3% of deposits. The majority of these deposits are issued to local customers, many of whom have other product relationships with the Bank.
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2019, we had issued commitments to extend credit of $127 million, including $40 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
Other than as described elsewhere in this report, we are not aware of any trends, events or uncertainties that we expect to result in a significant adverse effect on our liquidity position. However, no assurances can be given in this regard, as rapid growth, deterioration in loan quality, and poor earnings, or a combination of these factors, could change the liquidity position in a relatively short period of time.
| 46 |
We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months. Shareholders’ equity was 10.5% of total assets at September 30, 2019 and 10.3% at December 31, 2018. The Bank maintains federal funds purchased lines in the total amount of $20.0 million with two financial institutions, although these were not utilized in the first nine months of 2019. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long-term liquidity needs successfully.
Regulatory capital rules released by the federal bank regulatory agencies in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for certain bank holding companies and banks.
The regulatory capital rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the rules were fully phased in on January 1, 2019. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, we generally are not subject to the Federal Reserve capital requirements unless advised otherwise. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. These requirements are essentially the same as those that applied to us prior to the change in the definition of a small bank holding company.
When implemented, the final Basel III rules included certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to our Bank:
| · | a Common Equity Tier 1 risk-based capital ratio of 4.5%; |
| · | a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement); |
| · | a total risk-based capital ratio of 8% (unchanged from former requirements); and |
| · | a leverage ratio of 4% (also unchanged from the former requirement). |
Under the final Basel III rules, Tier 1 capital was redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We elected to opt out from the inclusion of AOCI in Common Equity Tier 1 capital.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, became fully effective on January 1, 2019, and consists of an additional amount of common equity equal to 2.5% of risk-weighted assets.
| 47 |
In general, the final Basel III rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.
As outlined above, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise because we qualify as a small bank holding company. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of September 30, 2019, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis. The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 10.1%, 13.4% and 14.2%, respectively, at September 30, 2019 as compared to 10.0%, 13.2%, and 14.0%, respectively, at December 31, 2018. The Bank’s Common Equity Tier 1 ratio at September 30, 2019 and December 31, 2018 was 13.4 and 13.2%, respectively. Under the Basel III rules, we anticipate that the Bank will remain a well-capitalized institution for at least the next 12 months.
On September 17, 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, including the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The final rule will become effective on January 1, 2020. The Company is currently evaluating the CBLR framework and potential advantages and disadvantages that it may present for the Company.
Since the Company is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary bank(s) by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.
In addition, since we are a legal entity separate and distinct from the Bank and do not conduct stand-alone operations, our ability to pay dividends depends on the ability of the Bank to pay dividends to us, which is also subject to regulatory restrictions. As a South Carolina-chartered bank, our Bank is subject to limitations on the dividend amount that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. The FDIC also has the authority under federal law to enjoin a bank from engaging in what, in its opinion, constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.
In May 2019, our Board of Directors approved a stock repurchase plan whereby we could repurchase up to 300,000 shares of our common stock. As of September 30, 2019, we have repurchased all 300,000 shares at an average stock price of $18.79 per share pursuant to this plan. After completion of the repurchase plan, the Bank continues to exceed all capital adequacy requirements under the rules on a fully phased-in basis. In September of 2019, our Board of Directors approved a new stock repurchase plan whereby we can repurchase up to 200,000 additional shares of our common stock. As of September 30, 2019, no shares from the new plan have been repurchased.
| 48 |
FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities
| Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | $ | 731,033 | $ | 26,492 | 4.85 | % | $ | 677,441 | $ | 23,974 | 4.73 | % | ||||||||||||
| Securities: | 252,357 | 4,924 | 2.61 | % | 275,216 | 4,855 | 2.36 | % | ||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 23,736 | 428 | 2.41 | % | 23,669 | 306 | 1.73 | % | ||||||||||||||||
| Total earning assets | 1,007,126 | 31,844 | 4.23 | % | 976,326 | 29,135 | 3.99 | % | ||||||||||||||||
| Cash and due from banks | 13,983 | 13,398 | ||||||||||||||||||||||
| Premises and equipment | 35,832 | 34,972 | ||||||||||||||||||||||
| Other assets | 53,773 | 53,099 | ||||||||||||||||||||||
| Allowance for loan losses | (6,372 | ) | (6,023 | ) | ||||||||||||||||||||
| Total assets | $ | 1,104,342 | $ | 1,071,772 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 204,300 | $ | 442 | 0.29 | % | $ | 191,528 | $ | 292 | 0.20 | % | ||||||||||||
| Money market accounts | 179,063 | 1,283 | 0.96 | % | 183,211 | 578 | 0.42 | % | ||||||||||||||||
| Savings deposits | 105,054 | 104 | 0.13 | % | 106,581 | 109 | 0.14 | % | ||||||||||||||||
| Time deposits | 177,415 | 1,572 | 1.18 | % | 190,877 | 1,022 | 0.72 | % | ||||||||||||||||
| Other borrowings | 52,861 | 954 | 2.41 | % | 45,194 | 778 | 2.30 | % | ||||||||||||||||
| Total interest-bearing liabilities | 718,693 | 4,355 | 0.81 | % | 717,391 | 2,779 | 0.52 | % | ||||||||||||||||
| Demand deposits | 258,124 | 239,981 | ||||||||||||||||||||||
| Other liabilities | 11,423 | 7,886 | ||||||||||||||||||||||
| Shareholders’ equity | 116,102 | 106,514 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,104,342 | $ | 1,071,772 | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.60 | % | 0.39 | % | ||||||||||||||||||||
| Net interest spread | 3.42 | % | 3.47 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 27,489 | 3.65 | % | $ | 26,356 | 3.61 | % | ||||||||||||||||
| Net interest income/margin FTE basis | $ | 283 | $ | 27,772 | 3.69 | % | $ | 346 | $ | 26,702 | 3.66 | % | ||||||||||||
| 49 |
FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities
| Three months ended September 30, 2019 | Three months ended September 30, 2018 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | $ | 740,152 | $ | 9,091 | 4.87 | % | $ | 696,157 | $ | 8,277 | 4.72 | % | ||||||||||||
| Securities: | 254,802 | 1,593 | 2.48 | % | 271,348 | 1,583 | 2.31 | % | ||||||||||||||||
| Federal funds sold and securities purchased | 27,248 | 164 | 2.37 | % | 25,139 | 125 | 1.97 | % | ||||||||||||||||
| Total earning assets | 1,022,202 | 10,848 | 4.21 | % | 992,644 | 9,985 | 3.99 | % | ||||||||||||||||
| Cash and due from banks | 14,578 | 13,192 | ||||||||||||||||||||||
| Premises and equipment | 36,197 | 34,576 | ||||||||||||||||||||||
| Other assets | 53,494 | 52,895 | ||||||||||||||||||||||
| Allowance for loan losses | (6,447 | ) | (6,154 | ) | ||||||||||||||||||||
| Total assets | $ | 1,120,024 | $ | 1,087,153 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 216,163 | $ | 159 | 0.29 | % | $ | 193,941 | $ | 154 | 0.32 | % | ||||||||||||
| Money market accounts | 180,758 | 461 | 1.01 | % | 185,928 | 240 | 0.51 | % | ||||||||||||||||
| Savings deposits | 99,693 | 32 | 0.13 | % | 106,677 | 35 | 0.13 | % | ||||||||||||||||
| Time deposits | 175,431 | 567 | 1.28 | % | 185,857 | 387 | 0.83 | % | ||||||||||||||||
| Other borrowings | 52,020 | 292 | 2.23 | % | 47,018 | 286 | 2.41 | % | ||||||||||||||||
| Total interest-bearing liabilities | 724,065 | 1,511 | 0.83 | % | 719,421 | 1,102 | 0.61 | % | ||||||||||||||||
| Demand deposits | 266,555 | 251,305 | ||||||||||||||||||||||
| Other liabilities | 12,174 | 8,535 | ||||||||||||||||||||||
| Shareholders’ equity | 117,230 | 107,892 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,120,024 | $ | 1,087,153 | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.61 | % | 0.45 | % | ||||||||||||||||||||
| Net interest spread | 3.38 | % | 3.38 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 9,337 | 3.62 | % | $ | 8,883 | 3.55 | % | ||||||||||||||||
| Net interest income/margin FTE basis | $ | 75 | $ | 9,412 | 3.65 | % | $ | 115 | $ | 8,998 | 3.60 | % | ||||||||||||
| 50 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 51 |
We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.
There have not been any material changes to the risk factors disclosed in our 2018 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| (a) | Not applicable |
| (b) | Not applicable |
| (c) | Issuer Purchases of Registered Equity Securities |
On September 18, 2019, we announced that our Board of Directors approved the repurchase of up to 200,000 additional shares of our common stock (the “New Repurchase Plan”), which are in addition to the shares repurchased under the repurchase program we announced in May 2019 for 300,000 shares of our common stock (the “Prior Repurchase Plan”). As mentioned above, the Company has completed the repurchase of all 300,000 shares covered by the Prior Repurchase Plan. There have been no repurchases under the New Repurchase Plan.
Under the New Repurchase Plan, the Company may repurchase shares from time to time by means of, among other means, open market purchases and in solicited and unsolicited privately negotiated transactions. The actual means and timing of any purchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management during a period of up to two years and will depend on a number of factors, including the market price of the Company’s common stock, share issuances under Company equity plans, general market and economic conditions, and applicable legal and regulatory requirements.
The Company’s management believes the New Repurchase Plan, depending upon market and business conditions, may, among other things, provide capital management opportunities for the Company. We are not obligated to repurchase any such shares under the New Repurchase Plan. The New Repurchase Plan may be discontinued, suspended or restarted at any time.
The following table reflects share repurchase activity during the third quarter of 2019 for the Prior Repurchase Plan announced in May of 2019. There have been no repurchases under the new Repurchase Plan.
| Period |
(a)
Total
Number of Shares (or Units) Purchased |
(b)
Average
Price Paid per Share (or Unit) |
(c)
Total Number
of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d)
Maximum Number
(or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| July 1-July 31 | 114,639 | $ | 19.40 | 300,000 | 200,000 | |||||||||||
| August 1-August 31 | — | — | — | — | ||||||||||||
| September 1-September 30 | — | — | — | — | ||||||||||||
| Total | 114,639 | $ | 19.40 | 300,000 | 200,000 | |||||||||||
| 52 |
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not Applicable.
None.
| Exhibit | Description | |
| 31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. | |
| 31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. | |
| 32 | Section 1350 Certifications | |
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements. |
| 53 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FIRST COMMUNITY CORPORATION | ||
| (REGISTRANT) | ||
| Date: November 7, 2019 | By: | /s/ Michael C. Crapps |
| Michael C. Crapps | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 7, 2019 | By: | /s/ Joseph G. Sawyer |
| Joseph G. Sawyer | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 54 |
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|