ITEM 1. FINANCIAL STATEMENTS
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
ASSETS:
|
|
|
|
|
Cash and due from banks
|
$
|
13,184,880
|
|
|
$
|
13,945,507
|
|
|
Interest bearing bank balances
|
59,694,005
|
|
|
58,637,565
|
|
|
Federal funds sold
|
13,918,719
|
|
|
1,296,438
|
|
|
Total cash and cash equivalents
|
86,797,604
|
|
|
73,879,510
|
|
|
Investment securities available-for-sale, at fair value
|
26,869,270
|
|
|
30,213,130
|
|
|
Mortgage loans held for sale, net at fair value
|
189,131,150
|
|
|
169,345,205
|
|
|
Loans held for investment, net of unearned income
|
850,054,301
|
|
|
829,269,305
|
|
|
Less: allowance for loan losses
|
(8,901,032
|
)
|
|
(8,887,199
|
)
|
|
Loans, net
|
841,153,269
|
|
|
820,382,106
|
|
|
Property and equipment, net
|
28,354,996
|
|
|
28,971,862
|
|
|
Restricted equity securities
|
3,672,350
|
|
|
3,881,200
|
|
|
Bank owned life insurance
|
10,795,735
|
|
|
10,634,814
|
|
|
Goodwill
|
775,000
|
|
|
775,000
|
|
|
Other assets
|
24,957,994
|
|
|
23,365,328
|
|
|
Total assets
|
$
|
1,212,507,368
|
|
|
$
|
1,161,448,155
|
|
|
LIABILITIES:
|
|
|
|
|
Deposits:
|
|
|
|
|
Demand deposits—non-interest bearing
|
$
|
296,512,383
|
|
|
$
|
280,079,558
|
|
|
Demand deposits—interest bearing
|
69,752,990
|
|
|
68,963,364
|
|
|
Savings deposits
|
18,409,890
|
|
|
19,516,673
|
|
|
Money market savings
|
363,938,741
|
|
|
364,893,441
|
|
|
Time deposits
|
314,797,222
|
|
|
265,640,562
|
|
|
Total deposits
|
1,063,411,226
|
|
|
999,093,598
|
|
|
Borrowings:
|
|
|
|
|
Trust preferred subordinated debt
|
10,000,000
|
|
|
10,000,000
|
|
|
Federal Home Loan Bank advances
|
—
|
|
|
16,000,000
|
|
|
Total borrowings
|
10,000,000
|
|
|
26,000,000
|
|
|
Other liabilities
|
18,055,588
|
|
|
18,632,147
|
|
|
Total liabilities
|
1,091,466,814
|
|
|
1,043,725,745
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
Common stock, $5 par value; 20,000,000 shares authorized; issued and outstanding - 11,877,309 shares (includes non-vested shares of 437,440) at March 31, 2016 and 11,880,909 shares (includes non-vested shares of 441,040) at December 31, 2015
|
57,199,345
|
|
|
57,199,345
|
|
|
Additional paid-in capital
|
17,457,044
|
|
|
17,241,281
|
|
|
Retained earnings
|
46,336,873
|
|
|
43,349,447
|
|
|
Accumulated other comprehensive loss
|
(54,070
|
)
|
|
(156,594
|
)
|
|
Total Monarch Financial Holdings, Inc. stockholders’ equity
|
120,939,192
|
|
|
117,633,479
|
|
|
Non-controlling interest
|
101,362
|
|
|
88,931
|
|
|
Total equity
|
121,040,554
|
|
|
117,722,410
|
|
|
Total liabilities and stockholders’ equity
|
$
|
1,212,507,368
|
|
|
$
|
1,161,448,155
|
|
The accompanying notes are an integral part of the consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Interest income:
|
|
|
|
|
|
Interest and fees on loans held for investment
|
|
$
|
10,689,745
|
|
|
$
|
9,840,336
|
|
|
Interest on mortgage loans held for sale
|
|
1,411,908
|
|
|
1,307,037
|
|
|
Interest on investment securities
|
|
110,358
|
|
|
88,915
|
|
|
Interest on federal funds sold
|
|
3,632
|
|
|
8,253
|
|
|
Dividends on equity securities
|
|
45,229
|
|
|
39,000
|
|
|
Interest on other bank accounts
|
|
156,954
|
|
|
102,029
|
|
|
Total interest income
|
|
12,417,826
|
|
|
11,385,570
|
|
|
Interest expense:
|
|
|
|
|
|
Interest on deposits
|
|
854,044
|
|
|
668,060
|
|
|
Interest on trust preferred subordinated debt
|
|
55,689
|
|
|
46,415
|
|
|
Interest on borrowings
|
|
2,386
|
|
|
22,606
|
|
|
Total interest expense
|
|
912,119
|
|
|
737,081
|
|
|
Net interest income
|
|
11,505,707
|
|
|
10,648,489
|
|
|
Provision for loan losses
|
|
—
|
|
|
250,000
|
|
|
Net interest income after provision for loan losses
|
|
11,505,707
|
|
|
10,398,489
|
|
|
Non-interest income:
|
|
|
|
|
|
Mortgage banking income
|
|
19,018,308
|
|
|
21,063,679
|
|
|
Service charges and fees
|
|
500,139
|
|
|
516,554
|
|
|
Title income
|
|
215,603
|
|
|
232,771
|
|
|
Investment and insurance income
|
|
478,576
|
|
|
344,126
|
|
|
(Loss) gain on disposition of property and equipment
|
|
(97
|
)
|
|
35,011
|
|
|
Other
|
|
116,905
|
|
|
74,022
|
|
|
Total non-interest income
|
|
20,329,434
|
|
|
22,266,163
|
|
|
Non-interest expenses:
|
|
|
|
|
|
Salaries and employee benefits
|
|
10,142,860
|
|
|
9,594,276
|
|
|
Commissions and incentives
|
|
7,730,892
|
|
|
9,445,138
|
|
|
Loan origination expense
|
|
1,793,662
|
|
|
2,458,663
|
|
|
Occupancy expense
|
|
2,273,481
|
|
|
2,288,508
|
|
|
Marketing expense
|
|
774,401
|
|
|
746,227
|
|
|
Data processing expense
|
|
613,954
|
|
|
629,750
|
|
|
Telephone
|
|
351,731
|
|
|
325,746
|
|
|
Professional fees
|
|
525,258
|
|
|
258,601
|
|
|
Foreclosed property expense
|
|
—
|
|
|
53,326
|
|
|
Other expenses
|
|
1,165,546
|
|
|
1,377,597
|
|
|
Total non-interest expenses
|
|
25,371,785
|
|
|
27,177,832
|
|
|
Income before income taxes
|
|
6,463,356
|
|
|
5,486,820
|
|
|
Income tax provision
|
|
(2,363,340
|
)
|
|
(1,993,340
|
)
|
|
Net income
|
|
4,100,016
|
|
|
3,493,480
|
|
|
Less: Net income attributable to non-controlling interests
|
|
(43,307
|
)
|
|
(32,273
|
)
|
|
Net income attributable to Monarch Financial Holdings, Inc.
|
|
$
|
4,056,709
|
|
|
$
|
3,461,207
|
|
|
Basic net income per share (1)
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
Diluted net income per share (1)
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
(1) Per share information has been restated in all periods to reflect the 11 for 10 stock dividend paid December 4, 2015.
The accompanying notes are an integral part of the consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
2015
|
|
Net Income
|
|
$
|
4,100,016
|
|
|
$
|
3,493,480
|
|
|
Other comprehensive income:
|
|
|
|
|
|
Change in unrealized gain on securities available for sale, net of income taxes
|
|
98,866
|
|
|
77,526
|
|
|
Change in unrealized gain on supplemental executive's retirement plan, net of income taxes
|
|
3,049
|
|
|
3,049
|
|
|
Change in unrealized gain on deferred compensation asset
|
|
609
|
|
|
7,238
|
|
|
Other comprehensive income
|
|
102,524
|
|
|
87,813
|
|
|
Total comprehensive income
|
|
4,202,540
|
|
|
3,581,293
|
|
|
Less: Comprehensive income attributable to non-controlling interests
|
|
(43,307
|
)
|
|
(32,273
|
)
|
|
Comprehensive income attributable to Monarch Financial Holdings, Inc.
|
|
$
|
4,159,233
|
|
|
$
|
3,549,020
|
|
|
|
|
|
|
|
|
Unrealized holding gain on securities available for sale
|
|
$
|
152,102
|
|
|
$
|
119,271
|
|
|
Income taxes
|
|
(53,236
|
)
|
|
(41,745
|
)
|
|
Net unrealized gain on securities available for sale
|
|
$
|
98,866
|
|
|
$
|
77,526
|
|
|
|
|
|
|
|
|
Unrealized gain on supplemental executive's retirement plan
|
|
$
|
4,691
|
|
|
$
|
4,691
|
|
|
Income taxes
|
|
(1,642
|
)
|
|
(1,642
|
)
|
|
Net unrealized gain on supplemental executive's retirement plan
|
|
$
|
3,049
|
|
|
$
|
3,049
|
|
|
|
|
|
|
|
|
Unrealized gain on deferred compensation asset
|
|
$
|
609
|
|
|
$
|
7,238
|
|
|
Income taxes
|
|
—
|
|
|
—
|
|
|
Net unrealized gain on deferred compensation asset
|
|
$
|
609
|
|
|
$
|
7,238
|
|
The accompanying notes are an integral part of the consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Non-controlling
Interest
|
|
Total
|
|
Shares
|
|
Amount
|
|
|
Balance—December 31, 2014
|
10,372,725
|
|
|
$
|
51,863,625
|
|
|
$
|
8,335,538
|
|
|
$
|
47,354,407
|
|
|
$
|
(102,237
|
)
|
|
$
|
85,984
|
|
|
$
|
107,537,317
|
|
|
Net income for the three months ended March 31, 2015
|
|
|
|
|
|
|
3,461,207
|
|
|
|
|
32,273
|
|
|
3,493,480
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
87,813
|
|
|
|
|
87,813
|
|
|
Stock-based compensation expense, net of forfeitures and income taxes
|
—
|
|
|
—
|
|
|
171,643
|
|
|
|
|
|
|
|
|
171,643
|
|
|
Stock options exercised
|
17,272
|
|
|
86,360
|
|
|
47,786
|
|
|
|
|
|
|
|
|
134,146
|
|
|
Cash dividend declared on common stock ($0.08 per share)
|
|
|
|
|
|
|
(858,261
|
)
|
|
|
|
|
|
(858,261
|
)
|
|
Distributions to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(28,877
|
)
|
|
(28,877
|
)
|
|
Balance - March 31, 2015
|
10,389,997
|
|
|
$
|
51,949,985
|
|
|
$
|
8,554,967
|
|
|
$
|
49,957,353
|
|
|
$
|
(14,424
|
)
|
|
$
|
89,380
|
|
|
$
|
110,537,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December 31, 2015
|
11,439,869
|
|
|
$
|
57,199,345
|
|
|
$
|
17,241,281
|
|
|
$
|
43,349,447
|
|
|
$
|
(156,594
|
)
|
|
$
|
88,931
|
|
|
$
|
117,722,410
|
|
|
Net income for the three months ended March 31, 2016
|
|
|
|
|
|
|
4,056,709
|
|
|
|
|
43,307
|
|
|
4,100,016
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
102,524
|
|
|
|
|
102,524
|
|
|
Stock-based compensation expense, net of forfeitures and income taxes
|
—
|
|
|
—
|
|
|
215,763
|
|
|
|
|
|
|
|
|
215,763
|
|
|
Cash dividend declared on common stock ($0.09 per share)
|
|
|
|
|
|
|
(1,069,283
|
)
|
|
|
|
|
|
(1,069,283
|
)
|
|
Distributions to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(30,876
|
)
|
|
(30,876
|
)
|
|
Balance - March 31, 2016
|
11,439,869
|
|
|
$
|
57,199,345
|
|
|
$
|
17,457,044
|
|
|
$
|
46,336,873
|
|
|
$
|
(54,070
|
)
|
|
$
|
101,362
|
|
|
$
|
121,040,554
|
|
The accompanying notes are an integral part of the consolidated financial statements.
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
MONARCH FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Operating activities:
|
|
|
|
|
Net income
|
$
|
4,100,016
|
|
|
$
|
3,493,480
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
Provision for loan losses
|
—
|
|
|
250,000
|
|
|
Depreciation
|
722,952
|
|
|
723,205
|
|
|
Accretion of discounts and amortization of premiums, net
|
1,549
|
|
|
684
|
|
|
Deferral of loan fees, net of deferred (costs)
|
18,023
|
|
|
147,656
|
|
|
Stock-based compensation
|
215,763
|
|
|
171,643
|
|
|
Appreciation of bank-owned life insurance
|
(39,989
|
)
|
|
(67,954
|
)
|
|
Net loss (gain) on disposition of property and equipment
|
97
|
|
|
(35,011
|
)
|
|
Net loss on sale of other real estate
|
—
|
|
|
38,879
|
|
|
Deferred income tax expense
|
2,363,340
|
|
|
334,565
|
|
|
Changes in:
|
|
|
|
|
Loans held for sale
|
(19,785,945
|
)
|
|
(12,208,390
|
)
|
|
Interest receivable
|
(62,752
|
)
|
|
(129,050
|
)
|
|
Other assets
|
(1,578,450
|
)
|
|
(3,310,447
|
)
|
|
Other liabilities
|
(2,944,471
|
)
|
|
554,788
|
|
|
Net cash used in operating activities
|
(16,989,867
|
)
|
|
(10,035,952
|
)
|
|
Investing activities:
|
|
|
|
|
Purchases of available-for-sale securities
|
—
|
|
|
(2,000,000
|
)
|
|
Proceeds from sales and maturities of available-for-sale securities
|
3,500,393
|
|
|
5,561,191
|
|
|
Proceeds from sale of other real estate
|
—
|
|
|
105,121
|
|
|
Purchase of bank owned life insurance and company owned life insurance
|
(120,932
|
)
|
|
(225,000
|
)
|
|
Purchases of premises and equipment
|
(108,633
|
)
|
|
(536,468
|
)
|
|
Redemption of restricted equity securities
|
208,850
|
|
|
389,600
|
|
|
Loan originations, net of principal repayments
|
(20,789,186
|
)
|
|
(15,216,358
|
)
|
|
Net cash used in investing activities
|
(17,309,508
|
)
|
|
(11,921,914
|
)
|
|
Financing activities:
|
|
|
|
|
Net increase in non-interest-bearing deposits
|
16,432,825
|
|
|
35,145,090
|
|
|
Net increase in interest-bearing deposits
|
47,884,803
|
|
|
82,580,062
|
|
|
Cash dividends paid on common stock
|
(1,069,283
|
)
|
|
(858,261
|
)
|
|
Net decrease in FHLB advances and federal funds purchased
|
(16,000,000
|
)
|
|
(10,024,998
|
)
|
|
Distributions to non-controlling interests
|
(30,876
|
)
|
|
(28,877
|
)
|
|
Proceeds from exercise of stock options
|
—
|
|
|
134,146
|
|
|
Net cash provided by financing activities
|
47,217,469
|
|
|
106,947,162
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS
|
12,918,094
|
|
|
84,989,296
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
73,879,510
|
|
|
65,428,974
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
86,797,604
|
|
|
$
|
150,418,270
|
|
|
SUPPLEMENTAL SCHEDULES AND CASH FLOW INFORMATION
|
|
|
|
|
Cash paid for:
|
|
|
|
|
Interest on deposits and other borrowings
|
$
|
945,414
|
|
|
$
|
716,831
|
|
|
Income taxes
|
$
|
—
|
|
|
$
|
1,239,900
|
|
|
Loans transferred to foreclosed real estate during the year
|
$
|
—
|
|
|
$
|
100,000
|
|
|
Unrealized gain on securities available for sale
|
$
|
152,102
|
|
|
$
|
119,271
|
|
|
Unrealized gain on supplemental executive's retirement plan
|
$
|
4,691
|
|
|
$
|
4,691
|
|
|
Unrealized gain on deferred compensation asset
|
$
|
609
|
|
|
$
|
7,238
|
|
The accompanying notes are an integral part of the consolidated financial statements.
MONARCH FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly Monarch Financial Holdings, Inc.’s financial position as of
March 31, 2016
; the consolidated statements of income for the
three
months ended
March 31, 2016
and 2015; the consolidated statements of comprehensive income for the
three
months ended
March 31, 2016
and 2015; the consolidated statements of changes in stockholders’ equity for the
three
months ended
March 31, 2016
and 2015; and the consolidated statements of cash flows for the
three
months ended
March 31, 2016
and 2015. These financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore, do not include all of the disclosures required by generally accepted accounting principles. The financial statements include the accounts of Monarch Financial Holdings, Inc. and its subsidiaries, and all significant inter-company accounts and transactions have been eliminated. Operating results for the
three
month period ended
March 31, 2016
are not necessarily indicative of the results that may be expected for the year ended
December 31, 2016
.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.
During March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within
those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.
During March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
NOTE 2. GENERAL
Monarch Financial Holdings, Inc. (the "Company" or "Monarch") is a Virginia-chartered, single bank holding company engaged in business and consumer banking, investment and insurance sales, and mortgage origination and brokerage. The Company was created on June 1, 2006 through a reorganization plan, under the laws of the Commonwealth of Virginia, in which Monarch Bank (the "Bank") became a wholly-owned subsidiary. Monarch Bank was incorporated on May 1, 1998, and opened for business on April 14, 1999. The Company's corporate office and main office are both located in the Greenbrier area of Chesapeake. In addition there are
nine
other Virginia banking offices – in the Great Bridge area in Chesapeake, the Lynnhaven area, the Town Center area, the Oceanfront area, the Kempsville area, and the Hilltop area in Virginia Beach, the Ghent area and in the downtown area in Norfolk, and the New Town area in Williamsburg. In North Carolina, our banking division operates as OBX Bank through
two
offices in Kitty Hawk and Nags Head. In July 2014, the Company closed its branch located in Suffolk, Virginia.
In August 2001, we formed Monarch Investment, LLC, to enable us to offer additional services to our clients. The Bank owns
100%
of Monarch Investment, LLC. In August 2012, the Company formed an affiliation with Raymond James Financial Services, Inc., a broker-dealer headquartered in St. Petersburg, Florida, and launched Monarch Bank Private Wealth ("MBPW"). MBPW is a division of Monarch Bank that offers private banking to high net worth individuals. In addition, through its affiliation with Raymond James Financial Services, Inc., MBPW is able to offer these same individuals financial planning, trust and investment services. Monarch Investment, LLC, continues to provide non-deposit investment services under the name of Monarch Investments.
In January 2003, Monarch Investment, LLC, purchased a non-controlling interest in Bankers Insurance, LLC, in a joint venture with the Virginia Bankers Association and many other community banks. Bankers Insurance, LLC, is a full service property/casualty and life/health insurance agency that ranks as one of the largest agencies in Virginia. Bankers Insurance, LLC, provides insurance to our customers and to the general public.
In February 2004, we formed Monarch Capital, LLC, for the purpose of engaging in the commercial real estate brokerage business. The Bank owns
100%
of Monarch Capital, LLC.
In May 2007, Monarch expanded banking operations into northeastern North Carolina with the opening of a banking office in the town of Kitty Hawk, under the name of OBX Bank (OBX). We opened a second office in the town of Nags Head in December 2009. OBX Bank, which operates as a division of Monarch, is led by a local management team and a local advisory board of directors.
In June 2007, we announced the expansion of mortgage operations through the acquisition of a team of experienced mortgage bankers, and the formation of a division operating as Monarch Mortgage ("MM"). MM originates and sells conventional, FHA,
VA and VHDA residential loans and offers additional mortgage products such as construction-permanent loans for the Bank’s loan portfolio. Monarch Mortgage's primary office is in Virginia Beach with additional offices in Abingdon, Alexandria, Chesapeake, Fairfax, Fredericksburg, Glen Allen, Midlothian, Norfolk, Newport News, Oakton, and Woodbridge, Virginia; Annapolis, Bel Air, Crofton, Dunkirk, Frederick, Greenbelt, Rockville, Towson and Waldorf, Maryland; Charlotte, Fayetteville, Indian Trail, Kitty Hawk, Mint Hill, Mooresville, Nags Head, Pittsboro, and Wilmington, North Carolina; and Greenwood, South Carolina.
In July 2007, Monarch Investment, LLC, purchased a
50.01%
ownership in Coastal Home Mortgage, LLC, from another bank. This joint venture provides residential loan services through Monarch Mortgage. The
49.99%
ownership is shared by
two
companies involved in commercial and residential construction in the Hampton Roads area.
In October 2007, Monarch Investment, LLC, formed a title insurance company, Real Estate Security Agency, LLC (RESA), along with TitleVentures, LLC. Monarch Investment, LLC, owns
75%
of RESA and TitleVentures, LLC, owns
25%
. RESA offers residential and commercial title insurance to the clients of Monarch Mortgage and Monarch Bank.
In March 2011, Monarch Investment, LLC formed Crossways Holdings, LLC in Chesapeake, Virginia. Crossways Holdings, LLC is a single member limited liability company, formed for the purpose of acquiring, maintaining, utilizing and disposing of assets for Monarch Bank.
In January 2015, Monarch Investment, LLC purchased a non-controlling interest in Atlantic Real Estate Capital, a commercial real estate brokerage business located in Richmond, Virginia.
Proposed Merger with TowneBank
On December 17, 2015, the Company and Bank entered into a definitive agreement with TowneBank (“Towne”), pursuant to which Towne will acquire all of the common stock of Monarch in a stock transaction valued at approximately
$221 million
, based on Towne’s closing price December 16, 2015. Upon completion of the transaction, Town is expected to have approximately
$7.3 billion
in assets,
$5.4 billion
in loans and
$5.8 billion
in deposits.
Under the terms of the agreement, which has been approved by the Board of Directors of both companies, Monarch shareholders will be entitled to receive
0.8830
shares of Towne common stock for each share of Monarch stock at the closing date. The transaction, which is subject to regulatory approval, the approval of the shareholders of Monarch and Towne, and other customary conditions, is expected to close in the second quarter of 2016.
NOTE 3. EARNINGS PER SHARE (“EPS”)
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Non-vested restricted stock is included in the weighted average number of shares for both the basic and diluted earnings computations. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
Net income available to common shareholders (numerator, basic)
|
$
|
4,056,709
|
|
|
$
|
3,461,207
|
|
|
Weighted average shares outstanding - basic (denominator)
|
11,880,553
|
|
|
11,801,379
|
|
|
Income per common share—basic
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
Net income (numerator, diluted)
|
$
|
4,056,709
|
|
|
3,461,207
|
|
|
Weighted average shares—diluted (denominator)
|
11,880,553
|
|
|
11,837,888
|
|
|
Income per common share—diluted
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
Dilutive effect-average number of common shares
|
—
|
|
|
36,509
|
|
There were
no
options to purchase common stock excluded from the computation of earnings per common share for the
three
months ended
March 31, 2016
or
March 31, 2015
.
No
options to purchase common stock remain outstanding at March 31, 2016.
Share and per share amounts for the quarter ended March 31, 2015 have been restated to include the 11 for 10 stock dividend announced October 22, 2015 and paid December 4, 2015.
NOTE 4. ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS)
The following table presents the changes in accumulated other comprehensive income (loss), by category, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Supplemental Executive's Retirement Plan
|
|
Unrealized Gains (Loss) on Securities
|
|
Unrealized Loss on Deferred Compensation Asset
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
December 31, 2015
|
|
$
|
(121,970
|
)
|
|
$
|
(34,589
|
)
|
|
$
|
(35
|
)
|
|
$
|
(156,594
|
)
|
|
Net change for the quarter ended March 31, 2016
|
|
3,049
|
|
|
98,866
|
|
|
609
|
|
|
102,524
|
|
|
Balance at March 31, 2016
|
|
$
|
(118,921
|
)
|
|
$
|
64,277
|
|
|
$
|
574
|
|
|
$
|
(54,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(134,167
|
)
|
|
$
|
31,721
|
|
|
$
|
209
|
|
|
$
|
(102,237
|
)
|
|
Net change for the quarter ended March 31, 2015
|
|
3,049
|
|
|
77,526
|
|
|
7,238
|
|
|
87,813
|
|
|
Balance at March 31, 2015
|
|
$
|
(131,118
|
)
|
|
$
|
109,247
|
|
|
$
|
7,447
|
|
|
$
|
(14,424
|
)
|
An unrealized gain of
$609
on the deferred compensation asset associated with the Company's Executive Benefits Plan was recorded in other comprehensive income in the first quarter of 2016. An unrealized gain of
$7,238
on the deferred compensation asset associated with the Company's Executive Benefits Plan was recorded in other comprehensive income in the first quarter of 2015. Expenses totaling
$3,049
related to the SERP were re-classed out of other comprehensive income into salaries and employee benefits expense in earnings during the first quarter of 2016 and 2015.
NOTE 5. INVESTMENT SECURITIES
Securities available-for-sale consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
U.S. government agency obligations
|
$
|
22,924,198
|
|
|
$
|
33,471
|
|
|
$
|
(38,317
|
)
|
|
$
|
22,919,352
|
|
|
Mortgage-backed securities
|
946,946
|
|
|
9,596
|
|
|
(1,703
|
)
|
|
954,839
|
|
|
Municipal securities
|
2,899,239
|
|
|
95,840
|
|
|
—
|
|
|
2,995,079
|
|
|
|
$
|
26,770,383
|
|
|
$
|
138,907
|
|
|
$
|
(40,020
|
)
|
|
$
|
26,869,270
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
U.S. government agency obligations
|
$
|
26,376,230
|
|
|
$
|
17,635
|
|
|
$
|
(157,620
|
)
|
|
$
|
26,236,245
|
|
|
Mortgage-backed securities
|
995,360
|
|
|
6,216
|
|
|
(3,187
|
)
|
|
998,389
|
|
|
Municipal securities
|
2,900,734
|
|
|
90,294
|
|
|
(12,532
|
)
|
|
2,978,496
|
|
|
|
$
|
30,272,324
|
|
|
$
|
114,145
|
|
|
$
|
(173,339
|
)
|
|
$
|
30,213,130
|
|
Monarch did not own any held-to-maturity securities at
March 31, 2016
or
December 31, 2015
.
The amortized cost and fair value of securities by contractual maturity date at
March 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
Amortized
Cost
|
|
Fair Value
|
|
Due in one year or less
|
$
|
600,000
|
|
|
$
|
600,962
|
|
|
Due from one to five years
|
23,938,786
|
|
|
23,942,736
|
|
|
Due from five to ten years
|
793,137
|
|
|
831,160
|
|
|
Due after ten years
|
1,438,460
|
|
|
1,494,412
|
|
|
Total
|
$
|
26,770,383
|
|
|
$
|
26,869,270
|
|
There were
twenty
investments in our securities portfolio with unrealized losses as of
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
U.S. government agency obligations
|
|
$
|
12,468,032
|
|
|
$
|
(31,968
|
)
|
|
$
|
2,993,651
|
|
|
$
|
(6,349
|
)
|
|
$
|
15,461,683
|
|
|
$
|
(38,317
|
)
|
|
Mortgage-backed securities
|
|
378,113
|
|
|
(1,703
|
)
|
|
—
|
|
|
—
|
|
|
378,113
|
|
|
(1,703
|
)
|
|
Municipal securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
12,846,145
|
|
|
$
|
(33,671
|
)
|
|
$
|
2,993,651
|
|
|
$
|
(6,349
|
)
|
|
$
|
15,839,796
|
|
|
$
|
(40,020
|
)
|
There were
twenty-eight
investments in our securities portfolio that had unrealized losses as of December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
U.S. government agency obligations
|
|
$
|
15,761,617
|
|
|
$
|
(134,401
|
)
|
|
$
|
2,976,782
|
|
|
$
|
(23,219
|
)
|
|
$
|
18,738,399
|
|
|
$
|
(157,620
|
)
|
|
Mortgage-backed securities
|
|
684,506
|
|
|
(3,187
|
)
|
|
—
|
|
|
—
|
|
|
684,506
|
|
|
(3,187
|
)
|
|
Municipal securities
|
|
498,715
|
|
|
(1,285
|
)
|
|
504,170
|
|
|
(11,247
|
)
|
|
1,002,885
|
|
|
(12,532
|
)
|
|
Total
|
|
$
|
16,944,838
|
|
|
$
|
(138,873
|
)
|
|
$
|
3,480,952
|
|
|
$
|
(34,466
|
)
|
|
$
|
20,425,790
|
|
|
$
|
(173,339
|
)
|
As of
March 31, 2016
,
six
investments have been in a continuous unrealized loss position for more than twelve months. They are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Count
|
|
Amortized Cost
|
|
Fair Value
|
|
U.S. government agency obligations
|
6
|
|
|
$
|
3,000,000
|
|
|
$
|
2,993,651
|
|
|
Total
|
6
|
|
|
$
|
3,000,000
|
|
|
$
|
2,993,651
|
|
At December 31, 2015,
seven
investments had been in a continuous unrealized loss position for more than twelve months. They were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Count
|
|
Amortized Cost
|
|
Fair Value
|
|
U.S. government agency obligations
|
6
|
|
|
$
|
3,000,000
|
|
|
$
|
2,976,782
|
|
|
Municipal securities
|
1
|
|
|
515,417
|
|
|
504,170
|
|
|
Total
|
7
|
|
|
$
|
3,515,417
|
|
|
$
|
3,480,952
|
|
There were
no
realized gains or losses recorded on available-for-sale investments during the first quarter of 2016. We recorded
$22,801
in realized gains on available-for-sale investments in 2015.
We have the ability to carry these investments to the final maturity of the instruments. Other-than-temporarily impaired (OTTI) guidance for investments states that an impairment is OTTI if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or, the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). An impaired security identified as OTTI should be separated and losses should be recognized in earnings.
We believe the unrealized losses in our portfolio are temporary impairments, caused by liquidity discounts and increases in the risk premiums required by market participants, rather than adverse changes in cash flows or fundamental weaknesses in the credit quality of the issuer or underlying assets as of
March 31, 2016
. There were
no
losses related to OTTI recognized in accumulated other comprehensive loss at either
March 31, 2016
or
December 31, 2015
.
NOTE 6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSS
The following table provides a breakdown, by class of our loans held for investment at
March 31, 2016
and
December 31, 2015
.
Loans held for Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Commercial
|
$
|
156,582,498
|
|
|
$
|
158,072,698
|
|
|
Real estate
|
|
|
|
|
Construction
|
209,408,683
|
|
|
190,422,992
|
|
|
Residential (1-4 family)
|
116,380,071
|
|
|
113,278,318
|
|
|
Home equity lines
|
58,221,283
|
|
|
59,097,607
|
|
|
Multifamily
|
9,503,347
|
|
|
11,590,641
|
|
|
Commercial
|
294,316,513
|
|
|
290,531,083
|
|
|
Real estate subtotal
|
687,829,897
|
|
|
664,920,641
|
|
|
Consumers
|
|
|
|
|
Consumer and installment loans
|
5,813,500
|
|
|
6,356,473
|
|
|
Overdraft protection loans
|
48,153
|
|
|
121,217
|
|
|
Loans to individuals subtotal
|
5,861,653
|
|
|
6,477,690
|
|
|
Total gross loans
|
850,274,048
|
|
|
829,471,029
|
|
|
Unamortized loan fees net of deferred costs
|
(219,747
|
)
|
|
(201,724
|
)
|
|
Loans held for investment, net of unearned income
|
850,054,301
|
|
|
829,269,305
|
|
|
Allowance for loan losses
|
(8,901,032
|
)
|
|
(8,887,199
|
)
|
|
Total net loans
|
$
|
841,153,269
|
|
|
$
|
820,382,106
|
|
We have certain lending policies and procedures in place designed to balance loan growth and income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, credit concentrations, policy exceptions, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Our loan portfolio is divided into
three
loan types; commercial, real estate and consumer. Some of these loan types are further broken down into segments. The commercial loan portfolio, which is not broken down further, includes commercial and industrial loans which are usually secured by the assets being financed or other business assets. The real estate portfolio is broken down into construction, residential 1-4 family, home equity lines, multifamily, and commercial real estate loan segments. The consumer loan portfolio is segmented into consumer and installment loans and overdraft protection loans.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand their business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined the borrower’s management possesses sound ethics and solid business acumen, we examine current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and normally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation or sale of the income producing property securing the loan, or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type. This diversity helps reduce our exposure to adverse economic events that could affect any single market or industry. Management monitors and evaluates commercial real estate loans based on purpose, collateral, geography, cash flow, loan to value, and risk grade criteria. As a general rule, we avoid financing special purpose projects unless other underwriting factors are present to help
mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At
March 31, 2016
approximately
43%
and at
December 31, 2015
approximately
40%
of the outstanding principal balance of our commercial real estate loans portfolio was secured by owner-occupied properties.
With respect to loans to developers and builders, secured by non-owner occupied properties we may originate from time to time, we generally require the borrower to have an existing relationship with the Company and a record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of considerable funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, supply and demand, government regulation of real property, general economic conditions and the availability of long-term financing.
We generally require multifamily real estate loan borrowers to have an existing relationship with the Company, a record of success and guarantor financial strength, commensurate with the project size. The underlying feasibility of a multifamily project is stress tested for sensitivity to both capitalization and interest rate changes. Each project is underwritten separately and additional underwriting standards are required for the guarantors, which include, but are not limited to, a maximum loan-to-value percentage, global cash flow analysis and contingent liability analysis. Sources of repayment for these types of loans may be rent rolls or sales of the developed property, either by unit or as a whole.
Consumer and residential loan originations utilize analytics to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This monitoring, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend, sensitivity analysis, shock analysis and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
We perform periodic reviews on various segments of our loan portfolio in addition to presenting our larger loan relationships for loan committee review. We utilize an independent company to perform a periodic review to evaluate and validate our credit risk program. Results of these reviews are presented to management and our board. Additionally, we are subject to annual examination by our regulators. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. This methodology begins with a look at the
three
loan types; commercial, real estate, and consumer. Loans within the commercial and real estate categories are evaluated on an individual or relationship basis and assigned a risk grade based on the characteristics of the loan or relationship. Loans within the consumer type are assigned risk grades and evaluated as a pool, unless specifically identified through delinquency or other signs of credit deterioration, at which time the identified loan would be individually evaluated.
We designate loans within our loans held for investment portfolio as either “pass” or “watch list” based on
nine
numerical risk grades which are assigned to the loans. A loan classified as "pass" is fundamentally sound with risk factors that are considered reasonable and acceptable. Loans classified as "watch list" fall into
two
categories; special mention and substandard. Special mention loans are the highest level of "watch list". These loans have the capacity to perform but contain certain characteristics that require continual supervision and attention from the lender. Loans classified as substandard typically have a well-defined weakness or weaknesses that could jeopardize the orderly liquidation of the debt, leaving the Bank with potential exposure to loss. The numeric designations in the "pass" category, from highest to lowest are: minimal, modest, average, acceptable, and acceptable with care. The "watch list" category from highest to lowest are: special mention, substandard, doubtful and loss.
|
|
|
|
|
|
“Pass”
|
“Watch List”
|
|
1 Minimal
|
6 Special mention
|
|
2 Modest
|
7 Substandard
|
|
3 Average
|
8 Doubtful
|
|
4 Acceptable
|
9 Loss
|
|
5 Acceptable with care
|
|
Special mention loans and substandard loans may or may not be classified as nonaccrual, based on current performance. A loan risk graded as doubtful is classified as nonaccrual. A loan risk graded as loss is generally charged-off when identified. There were
no
loans in our portfolio classified as doubtful or loss at
March 31, 2016
or
December 31, 2015
. Watch list graded loans or relationships are evaluated individually to determine if all, or a portion, of our investment in the borrower is at risk. If a risk is quantified, a specific loss allowance is assigned to the identified loan or relationship. We evaluate our investment in the borrower using either the present value of expected future cash flows, discounted at the historical effective interest rate of the loan, or for a collateral-dependent loan, the fair value of the underlying collateral.
We evaluate additional risk inherent in our satisfactory risk grade groups through a methodology that looks at these loans on a pool basis by loan segment which is further delineated by purpose. Each segment is assigned an expected loss factor based on a moving average “look-back” at our historical losses for that particular segment. At March 31, 2016 and December 31, 2015 the "look-back" period was twenty quarters. We believe this methodology provides an accurate evaluation of the potential risk in our portfolio because delineation by purpose establishes a direct correlation to areas of weakness and strength within the portfolio.
Additional metrics, in the form of environmental risk factors, may be applied to a specific class or risk grade of loans within the portfolio based on local or national trends, identifiable events or other economic factors. For the periods presented,
five
internal and
four
external environmental factors were applied to the general risk grade groups. The
five
internal factors are specific to Monarch with regard to lending policies and practices, nature, volume and term of various portfolios, experience level and depth of management, changes in loan quality and concentrations of credits. The four external environmental factors focus on legal and regulatory impacts, changes in economic conditions, competitive pressures and uncertainties surrounding pending governmental actions and their impact on areas within our footprint. The assumptions used to determine the allowance are reviewed to ensure their theoretical foundation, data integrity, computational processes, and reporting practices are appropriate and properly documented.
We utilize various sources in assessing the economic conditions in our target markets and areas of concentration. We track unemployment trends in both Hampton Roads and Virginia compared to the national average. We monitor trends in our industry and among our peers through reports such as the Uniform Bank Performance Report which are made available to us through the Federal Financial Institutions Examination Council. Additionally, we utilize various industry sources that include information published by CB Richard Ellis, an international firm specializing in commercial real estate reporting and Costar, a provider of commercial real estate information and analytics to monitor local, state and national trends.
We evaluate the adequacy of our allowance for loan losses quarterly. A degree of imprecision or uncertainty is inherent in our allowance estimates because it requires that we incorporate a range of probable outcomes which may change from period to period. It requires that we exercise judgment as to the risks inherent in our portfolios, economic uncertainties, historical loss and other subjective factors, including industry trends. No single statistic or measurement determines the adequacy of the allowance for loan loss. Changes in the allowance for loan loss and the related provision expense can materially affect net income.
The following table segregates our portfolio between pass and watch list loans, delineated by segments, within loan type for
March 31, 2016
and
December 31, 2015
. The "Weighted Average Risk Grade" looks at the dollar value per risk grade within a segment compared to the total value of that segment. All segments fall within the average to acceptable range.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
Watch List
|
|
|
|
Weighted Average Risk Grade
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Total
|
|
|
Commercial
|
$
|
155,809,274
|
|
|
$
|
616,174
|
|
|
$
|
157,050
|
|
|
$
|
156,582,498
|
|
|
3.25
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
208,218,113
|
|
|
837,448
|
|
|
353,122
|
|
|
209,408,683
|
|
|
3.17
|
|
|
Residential (1-4 family)
|
111,566,983
|
|
|
1,626,704
|
|
|
3,186,384
|
|
|
116,380,071
|
|
|
3.67
|
|
|
Home equity lines
|
56,846,979
|
|
|
—
|
|
|
1,374,304
|
|
|
58,221,283
|
|
|
4.14
|
|
|
Multifamily
|
9,503,347
|
|
|
—
|
|
|
—
|
|
|
9,503,347
|
|
|
3.31
|
|
|
Commercial
|
291,299,163
|
|
|
2,005,623
|
|
|
1,011,727
|
|
|
294,316,513
|
|
|
3.36
|
|
|
Real estate subtotal
|
677,434,585
|
|
|
4,469,775
|
|
|
5,925,537
|
|
|
687,829,897
|
|
|
3.42
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
5,750,898
|
|
|
—
|
|
|
62,602
|
|
|
5,813,500
|
|
|
4.03
|
|
|
Overdraft protection loans
|
48,153
|
|
|
—
|
|
|
—
|
|
|
48,153
|
|
|
4.26
|
|
|
Loans to individuals subtotal
|
5,799,051
|
|
|
—
|
|
|
62,602
|
|
|
5,861,653
|
|
|
4.03
|
|
|
Total gross loans
|
$
|
839,042,910
|
|
|
$
|
5,085,949
|
|
|
$
|
6,145,189
|
|
|
$
|
850,274,048
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
Watch List
|
|
|
|
Weighted Average Risk Grade
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Total
|
|
|
Commercial
|
$
|
157,818,177
|
|
|
$
|
233,073
|
|
|
$
|
21,448
|
|
|
$
|
158,072,698
|
|
|
3.24
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
189,254,940
|
|
|
710,758
|
|
|
457,294
|
|
|
190,422,992
|
|
|
3.18
|
|
|
Residential (1-4 family)
|
108,692,612
|
|
|
1,075,477
|
|
|
3,510,229
|
|
|
113,278,318
|
|
|
3.71
|
|
|
Home equity lines
|
57,657,772
|
|
|
—
|
|
|
1,439,835
|
|
|
59,097,607
|
|
|
4.15
|
|
|
Multifamily
|
11,590,641
|
|
|
—
|
|
|
—
|
|
|
11,590,641
|
|
|
3.56
|
|
|
Commercial
|
288,533,180
|
|
|
1,007,152
|
|
|
990,751
|
|
|
290,531,083
|
|
|
3.39
|
|
|
Real estate subtotal
|
655,729,145
|
|
|
2,793,387
|
|
|
6,398,109
|
|
|
664,920,641
|
|
|
3.46
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
6,291,430
|
|
|
—
|
|
|
65,043
|
|
|
6,356,473
|
|
|
4.03
|
|
|
Overdraft protection loans
|
118,690
|
|
|
—
|
|
|
2,527
|
|
|
121,217
|
|
|
4.76
|
|
|
Loans to individuals subtotal
|
6,410,120
|
|
|
—
|
|
|
67,570
|
|
|
6,477,690
|
|
|
4.04
|
|
|
Total gross loans
|
$
|
819,957,442
|
|
|
$
|
3,026,460
|
|
|
$
|
6,487,127
|
|
|
$
|
829,471,029
|
|
|
3.42
|
|
An aging of our loan portfolio by class as of
March 31, 2016
and
December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age Analysis of Past Due Loans
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater
Than
90 Days
|
|
Total
Past Due
|
|
Current
|
|
Recorded
Investment >
90 days and
Accruing
|
|
Recorded
Investment
Nonaccrual
Loans
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
26,963
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,963
|
|
|
$
|
156,555,535
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
209,408,683
|
|
|
—
|
|
|
—
|
|
|
Residential (1-4 family)
|
2,493,943
|
|
|
—
|
|
|
471,347
|
|
|
2,965,290
|
|
|
113,414,781
|
|
|
104,285
|
|
|
991,340
|
|
|
Home equity lines
|
357,282
|
|
|
350,502
|
|
|
249,987
|
|
|
957,771
|
|
|
57,263,512
|
|
|
—
|
|
|
481,562
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,503,347
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
—
|
|
|
—
|
|
|
370,757
|
|
|
370,757
|
|
|
293,945,756
|
|
|
—
|
|
|
370,757
|
|
|
Real estate subtotal
|
2,851,225
|
|
|
350,502
|
|
|
1,092,091
|
|
|
4,293,818
|
|
|
683,536,079
|
|
|
104,285
|
|
|
1,843,659
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
32,989
|
|
|
8,826
|
|
|
—
|
|
|
41,815
|
|
|
5,771,685
|
|
|
—
|
|
|
—
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,153
|
|
|
—
|
|
|
—
|
|
|
Loans to individuals subtotal
|
32,989
|
|
|
8,826
|
|
|
—
|
|
|
41,815
|
|
|
5,819,838
|
|
|
—
|
|
|
—
|
|
|
Total gross loans
|
$
|
2,911,177
|
|
|
$
|
359,328
|
|
|
$
|
1,092,091
|
|
|
$
|
4,362,596
|
|
|
$
|
845,911,452
|
|
|
$
|
104,285
|
|
|
$
|
1,843,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
99,291
|
|
|
$
|
—
|
|
|
$
|
21,448
|
|
|
$
|
120,739
|
|
|
$
|
157,951,959
|
|
|
$
|
—
|
|
|
$
|
21,448
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
—
|
|
|
101,677
|
|
|
—
|
|
|
101,677
|
|
|
190,321,315
|
|
|
—
|
|
|
101,677
|
|
|
Residential (1-4 family)
|
1,195,961
|
|
|
31,885
|
|
|
622,770
|
|
|
1,850,616
|
|
|
111,427,702
|
|
|
248,326
|
|
|
1,008,650
|
|
|
Home equity lines
|
316,425
|
|
|
—
|
|
|
249,987
|
|
|
566,412
|
|
|
58,531,195
|
|
|
—
|
|
|
483,859
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,590,641
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
—
|
|
|
153,349
|
|
|
220,775
|
|
|
374,124
|
|
|
290,156,959
|
|
|
—
|
|
|
374,125
|
|
|
Real estate subtotal
|
1,512,386
|
|
|
286,911
|
|
|
1,093,532
|
|
|
2,892,829
|
|
|
662,027,812
|
|
|
248,326
|
|
|
1,968,311
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
97,135
|
|
|
56,287
|
|
|
—
|
|
|
153,422
|
|
|
6,203,051
|
|
|
—
|
|
|
—
|
|
|
Overdraft protection loans
|
64
|
|
|
—
|
|
|
—
|
|
|
64
|
|
|
121,153
|
|
|
—
|
|
|
—
|
|
|
Loans to individuals subtotal
|
97,199
|
|
|
56,287
|
|
|
—
|
|
|
153,486
|
|
|
6,324,204
|
|
|
—
|
|
|
—
|
|
|
Total gross loans
|
$
|
1,708,876
|
|
|
$
|
343,198
|
|
|
$
|
1,114,980
|
|
|
$
|
3,167,054
|
|
|
$
|
826,303,975
|
|
|
$
|
248,326
|
|
|
$
|
1,989,759
|
|
At March 31, 2016, we had
nine
loans totaling
$3,073,874
classified as restructured loans:
two
commercial real estate loans totaling
$1,547,792
,
six
residential 1-4 family loans totaling
$1,463,480
, and
one
consumer loan for
$62,602
. At
March 31, 2016
,
three
of the residential 1-4 family loans totaling
$685,009
and
one
of the commercial real estate loans totaling
$218,208
included in our restructured loans are classified as nonaccrual. The remaining
five
loans are performing. We restructured
one
loan during the first quarter of 2016 and
zero
loans during the same period of 2015. We did not have any defaults on restructured loans within twelve months of restructuring during the quarter ended
March 31, 2016
or
2015
.
Additional information on loans restructured during the three months ended
March 31, 2016
is as follows:
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Type of Concession
|
|
Quarter Ended March 31, 2016
|
One
|
|
$98,787
|
|
$98,787
|
|
Rate and Term
|
|
Quarter Ended March 31, 2015
|
None
|
|
—
|
|
—
|
|
—
|
Troubled Debt Restructurings That Subsequently Defaulted
|
|
|
|
|
|
|
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Quarter Ended March 31, 2016
|
None
|
|
—
|
|
Quarter Ended March 31, 2015
|
None
|
|
—
|
A summary of the activity in the allowance for loan losses account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
Real Estate
|
|
March 31, 2016
|
|
Commercial
|
|
Construction
|
|
Residential
|
|
Home Equity
|
|
Multifamily
|
|
Commercial
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
855,813
|
|
|
$
|
1,797,301
|
|
|
$
|
1,876,528
|
|
|
$
|
1,654,545
|
|
|
$
|
52,158
|
|
|
$
|
2,177,890
|
|
|
Charge-offs
|
|
—
|
|
|
—
|
|
|
(16,919
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Recoveries
|
|
2,800
|
|
|
4,023
|
|
|
3,820
|
|
|
26,217
|
|
|
—
|
|
|
—
|
|
|
Provision
|
|
62,291
|
|
|
53,086
|
|
|
(9,819
|
)
|
|
(153,113
|
)
|
|
(9,393
|
)
|
|
7,633
|
|
|
Ending balance
|
|
$
|
920,904
|
|
|
$
|
1,854,410
|
|
|
$
|
1,853,610
|
|
|
$
|
1,527,649
|
|
|
$
|
42,765
|
|
|
$
|
2,185,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
49,051
|
|
|
$
|
25,291
|
|
|
$
|
585,786
|
|
|
$
|
633,148
|
|
|
$
|
—
|
|
|
$
|
640,384
|
|
|
Collectively evaluated for impairment
|
|
871,853
|
|
|
1,829,119
|
|
|
1,267,824
|
|
|
894,501
|
|
|
42,765
|
|
|
1,545,139
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
156,582,498
|
|
|
$
|
209,408,683
|
|
|
$
|
116,380,071
|
|
|
$
|
58,221,283
|
|
|
$
|
9,503,347
|
|
|
$
|
294,316,513
|
|
|
Ending balance: individually evaluated for impairment
|
|
157,051
|
|
|
1,042,070
|
|
|
3,555,423
|
|
|
1,374,304
|
|
|
—
|
|
|
2,914,022
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
156,425,447
|
|
|
$
|
208,366,613
|
|
|
$
|
112,824,648
|
|
|
$
|
56,846,979
|
|
|
$
|
9,503,347
|
|
|
$
|
291,402,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumers
|
|
|
|
|
|
|
|
Consumer and
Installment loans
|
|
Overdraft
Protection
|
|
Unallocated
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
96,025
|
|
|
$
|
3,037
|
|
|
$
|
373,902
|
|
|
$
|
8,887,199
|
|
|
Charge-offs
|
|
(3,581
|
)
|
|
(2,527
|
)
|
|
—
|
|
|
(23,027
|
)
|
|
Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,860
|
|
|
Provision
|
|
1,136
|
|
|
(304
|
)
|
|
48,483
|
|
|
—
|
|
|
Ending balance
|
|
$
|
93,580
|
|
|
$
|
206
|
|
|
$
|
422,385
|
|
|
$
|
8,901,032
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
62,602
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,996,262
|
|
|
Collectively evaluated for impairment
|
|
30,978
|
|
|
206
|
|
|
422,385
|
|
|
6,904,770
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,813,500
|
|
|
$
|
48,153
|
|
|
$
|
—
|
|
|
$
|
850,274,048
|
|
|
Ending balance: individually evaluated for impairment
|
|
62,602
|
|
|
—
|
|
|
—
|
|
|
9,105,472
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
5,750,898
|
|
|
$
|
48,153
|
|
|
$
|
—
|
|
|
$
|
841,168,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
December 31, 2015
|
|
Commercial
|
|
Construction
|
|
Residential
|
|
Home Equity
|
|
Multifamily
|
|
Commercial
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,157,867
|
|
|
$
|
1,678,022
|
|
|
$
|
2,456,418
|
|
|
$
|
1,911,634
|
|
|
$
|
85,056
|
|
|
$
|
1,458,664
|
|
|
Charge-offs
|
|
(207,059
|
)
|
|
(17,500
|
)
|
|
(658,953
|
)
|
|
(70,042
|
)
|
|
—
|
|
|
—
|
|
|
Recoveries
|
|
599,359
|
|
|
69,624
|
|
|
27,941
|
|
|
194,861
|
|
|
—
|
|
|
—
|
|
|
Provision
|
|
(694,354
|
)
|
|
67,155
|
|
|
51,122
|
|
|
(381,908
|
)
|
|
(32,898
|
)
|
|
719,226
|
|
|
Ending balance
|
|
$
|
855,813
|
|
|
$
|
1,797,301
|
|
|
$
|
1,876,528
|
|
|
$
|
1,654,545
|
|
|
$
|
52,158
|
|
|
$
|
2,177,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
21,448
|
|
|
$
|
112,963
|
|
|
$
|
568,424
|
|
|
$
|
688,596
|
|
|
$
|
—
|
|
|
$
|
644,162
|
|
|
Collectively evaluated for impairment
|
|
834,365
|
|
|
1,684,338
|
|
|
1,308,104
|
|
|
965,949
|
|
|
52,158
|
|
|
1,533,728
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
158,072,698
|
|
|
$
|
190,422,992
|
|
|
$
|
113,278,318
|
|
|
$
|
59,097,607
|
|
|
$
|
11,590,641
|
|
|
$
|
290,531,083
|
|
|
Ending balance: individually evaluated for impairment
|
|
21,448
|
|
|
1,148,363
|
|
|
3,743,313
|
|
|
1,439,835
|
|
|
—
|
|
|
2,901,513
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
158,051,250
|
|
|
189,274,629
|
|
|
$
|
109,535,005
|
|
|
$
|
57,657,772
|
|
|
$
|
11,590,641
|
|
|
$
|
287,629,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumers
|
|
|
|
|
|
|
|
Consumer and
Installment loans
|
|
Overdraft
Protection
|
|
Unallocated
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
104,661
|
|
|
$
|
260
|
|
|
$
|
96,255
|
|
|
$
|
8,948,837
|
|
|
Charge-offs
|
|
(1,869
|
)
|
|
—
|
|
|
—
|
|
|
(955,423
|
)
|
|
Recoveries
|
|
—
|
|
|
2,000
|
|
|
—
|
|
|
893,785
|
|
|
Provision
|
|
(6,767
|
)
|
|
777
|
|
|
277,647
|
|
|
—
|
|
|
Ending balance
|
|
$
|
96,025
|
|
|
$
|
3,037
|
|
|
$
|
373,902
|
|
|
$
|
8,887,199
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
65,043
|
|
|
$
|
2,527
|
|
|
—
|
|
|
$
|
2,103,163
|
|
|
Collectively evaluated for impairment
|
|
30,982
|
|
|
510
|
|
|
373,902
|
|
|
6,784,036
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,356,473
|
|
|
$
|
121,217
|
|
|
$
|
—
|
|
|
$
|
829,471,029
|
|
|
Ending balance: individually evaluated for impairment
|
|
65,043
|
|
|
2,527
|
|
|
—
|
|
|
9,322,042
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
6,291,430
|
|
|
$
|
118,690
|
|
|
$
|
—
|
|
|
$
|
820,148,987
|
|
A loan is considered impaired when, based on current information and events; it is probable a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. In addition to loans
90
days past due and still accruing, nonaccrual loans and restructured loans, all loans risk graded doubtful or substandard qualify, by definition, as impaired. Loans 90 days past due and accruing totaling
$104,285
and nonaccrual loans totaling
$1,843,659
are included in impaired loans at March 31, 2016. Loans 90 days past due and still accruing totaling
$248,326
and nonaccrual loans totaling
$1,989,759
are included in impaired loans at December 31, 2015.
There was
one
residential real estate property totaling
$14,886
in the process of foreclosure at March 31, 2016 and
one
residential real estate property totaling
$45,844
in process of foreclosure at December 31, 2015.
The following table sets forth our impaired loans at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
|
With No Related Allowance
|
|
|
Recorded
Investment
|
|
Unpaid Principal
Balance
|
|
Average Recorded
Investment
|
|
Interest Income
Recognized
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
Construction
|
926,779
|
|
|
926,779
|
|
|
928,999
|
|
|
15,241
|
|
|
Residential (1-4 family)
|
1,846,940
|
|
|
1,912,394
|
|
|
1,859,892
|
|
|
16,181
|
|
|
Home equity lines
|
428,009
|
|
|
446,348
|
|
|
428,211
|
|
|
1,295
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
913,458
|
|
|
918,844
|
|
|
919,299
|
|
|
11,057
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
4,115,186
|
|
|
$
|
4,204,365
|
|
|
$
|
4,136,401
|
|
|
$
|
43,774
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
Construction
|
930,955
|
|
|
930,955
|
|
|
947,162
|
|
|
64,402
|
|
|
Residential (1-4 family)
|
1,850,482
|
|
|
1,912,515
|
|
|
1,942,407
|
|
|
63,532
|
|
|
Home equity lines
|
445,092
|
|
|
461,134
|
|
|
456,349
|
|
|
6,862
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
894,603
|
|
|
899,189
|
|
|
921,147
|
|
|
50,773
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
4,121,132
|
|
|
$
|
4,203,793
|
|
|
$
|
4,267,065
|
|
|
$
|
185,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With Related Allowance
|
|
|
Recorded
Investment
|
|
Unpaid Principal
Balance
|
|
Related
Allowance
|
|
Average Recorded
Investment
|
|
Interest Income
Recognized
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
157,051
|
|
|
$
|
157,051
|
|
|
$
|
49,051
|
|
|
$
|
159,166
|
|
|
$
|
1,790
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
115,291
|
|
|
115,291
|
|
|
25,291
|
|
|
115,988
|
|
|
3,346
|
|
|
Residential (1-4 family)
|
1,708,483
|
|
|
1,857,841
|
|
|
585,786
|
|
|
1,723,975
|
|
|
12,149
|
|
|
Home equity lines
|
946,295
|
|
|
946,295
|
|
|
633,148
|
|
|
947,136
|
|
|
5,204
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
2,000,564
|
|
|
2,012,409
|
|
|
640,384
|
|
|
2,003,974
|
|
|
22,325
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
62,602
|
|
|
62,602
|
|
|
62,602
|
|
|
64,157
|
|
|
559
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
4,990,286
|
|
|
$
|
5,151,489
|
|
|
$
|
1,996,262
|
|
|
$
|
5,014,396
|
|
|
$
|
45,373
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
21,448
|
|
|
$
|
21,448
|
|
|
$
|
21,448
|
|
|
$
|
26,406
|
|
|
$
|
568
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
217,408
|
|
|
244,963
|
|
|
112,963
|
|
|
228,737
|
|
|
10,325
|
|
|
Residential (1-4 family)
|
1,892,831
|
|
|
2,032,255
|
|
|
568,424
|
|
|
1,909,161
|
|
|
66,605
|
|
|
Home equity lines
|
994,743
|
|
|
994,743
|
|
|
688,596
|
|
|
997,110
|
|
|
42,663
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
2,006,910
|
|
|
2,016,187
|
|
|
644,162
|
|
|
1,699,033
|
|
|
60,710
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
65,043
|
|
|
65,043
|
|
|
65,043
|
|
|
70,199
|
|
|
2,461
|
|
|
Overdraft protection loans
|
2,527
|
|
|
2,527
|
|
|
2,527
|
|
|
2,787
|
|
|
629
|
|
|
Total
|
$
|
5,200,910
|
|
|
$
|
5,377,166
|
|
|
$
|
2,103,163
|
|
|
$
|
4,933,433
|
|
|
$
|
183,961
|
|
NOTE 7. FAIR VALUE ACCOUNTING
Fair Value Hierarchy and Fair Value Measurement
We group our assets and liabilities that are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
|
|
•
|
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
|
|
|
|
|
•
|
Level 2 – Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
|
|
|
|
|
•
|
Level 3 – Valuations based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Valuations are determined using pricing models and discounted cash flow models and includes management judgment and estimation which may be significant.
|
The following table presents our assets and liabilities related to continuing operations, which are measured at fair value on a recurring basis for each of the fair value hierarchy levels, as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
Assets at March 31, 2016
|
|
|
|
|
|
|
|
|
Investment securities—available for sale
|
|
|
|
|
|
|
|
|
U.S. government agency obligations
|
$
|
22,919,352
|
|
|
$
|
—
|
|
|
$
|
22,919,352
|
|
|
$
|
—
|
|
|
Mortgage-backed securities
|
954,839
|
|
|
—
|
|
|
954,839
|
|
|
—
|
|
|
Municipal securities
|
2,995,079
|
|
|
—
|
|
|
2,995,079
|
|
|
—
|
|
|
Mortgage loans held for sale
|
189,131,150
|
|
|
—
|
|
|
189,131,150
|
|
|
—
|
|
|
Derivative financial asset
|
3,440,793
|
|
|
—
|
|
|
3,440,793
|
|
|
—
|
|
|
Derivative financial liability
|
$
|
1,545,380
|
|
|
$
|
—
|
|
|
$
|
1,545,380
|
|
|
$
|
—
|
|
|
Assets at December 31, 2015
|
|
|
|
|
|
|
|
|
Investment securities—available for sale
|
|
|
|
|
|
|
|
|
U.S. government agency obligations
|
$
|
26,236,245
|
|
|
$
|
—
|
|
|
$
|
26,236,245
|
|
|
$
|
—
|
|
|
Mortgage-backed securities
|
998,389
|
|
|
—
|
|
|
998,389
|
|
|
—
|
|
|
Municipal securities
|
2,978,496
|
|
|
—
|
|
|
2,978,496
|
|
|
—
|
|
|
Mortgage loans held for sale
|
169,345,205
|
|
|
—
|
|
|
169,345,205
|
|
|
—
|
|
|
Derivative financial asset
|
2,105,204
|
|
|
—
|
|
|
2,105,204
|
|
|
—
|
|
|
Derivative financial liability
|
$
|
368,577
|
|
|
$
|
—
|
|
|
$
|
368,577
|
|
|
$
|
—
|
|
The following table provides quantitative disclosures about the fair value measurements of our assets related to continuing operations which are measured at fair value on a nonrecurring basis as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
At March 31, 2016
|
|
|
|
|
|
|
|
|
Restructured and impaired loans, net
|
$
|
2,994,024
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,994,024
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
Restructured and impaired loans, net
|
$
|
3,097,747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,097,747
|
|
There were
no
residential real estate properties classified as other real estate at
March 31, 2016
,or December 31, 2015.
The following table displays quantitative information about Level 3 Fair Value Measurements for
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at March 31, 2016
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Weighted Average
|
|
Commercial
|
$
|
108,000
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
20
|
%
|
|
Real Estate
|
|
|
|
|
|
|
|
|
Construction
|
90,000
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
30
|
%
|
|
Residential (1-4 family)
|
1,122,697
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
17
|
%
|
|
Home equity lines
|
313,147
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
20
|
%
|
|
Multifamily
|
—
|
|
|
Market comparables
|
|
—
|
|
|
100
|
%
|
|
Commercial
|
1,360,180
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
30
|
%
|
|
Consumer
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
%
|
|
Total restructures and impaired loans
|
$
|
2,994,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2015
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Weighted Average
|
|
Commercial
|
$
|
—
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
100
|
%
|
|
Real Estate
|
|
|
|
|
|
|
|
|
Construction
|
104,445
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
35
|
%
|
|
Residential (1-4 family)
|
1,324,407
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
18
|
%
|
|
Home equity lines
|
306,147
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
20
|
%
|
|
Multifamily
|
—
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
100
|
%
|
|
Commercial
|
1,362,748
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
30
|
%
|
|
Consumer
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
Market comparables
|
|
Discount applied to market comparables (1)
|
|
100
|
%
|
|
Total restructures and impaired loans
|
$
|
3,097,747
|
|
|
|
|
|
|
|
(1) A discount percentage is applied based on age of independent appraisals, current market conditions, and experience within the local markets.
For the three months ended
March 31, 2016
, we recorded
$0
gains and losses on the sale of other real estate owned. For the three months ended
March 31, 2015
, we reported
no
gains and a loss of
$38,879
. Gains or losses on sale of other real estate owned are included in foreclosed property expense.
At the time a loan secured by real estate becomes real estate owned, we record the property at fair value net of estimated selling costs. Upon foreclosure and through liquidation, we evaluate the property’s fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income.
No
valuation adjustments related to other real estate owned were recorded in the
three
months ended
March 31, 2016
or 2015. Adjustments, when necessary, are included in foreclosed property expense.
Valuation Methods
The following notes summarize the significant assumptions used in estimating the fair value of financial instruments:
Short-term financial instruments
are valued at their carrying amounts and included in the Company’s balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach applies to
cash and cash equivalents
and
overnight borrowings
.
Investment securities – available-for-sale
are valued at quoted market prices, if available. For securities for which no quoted market price is available, we estimate the fair value on the basis of quotes for similar instruments or other available information. Investment securities classified as available-for-sale are reported at their estimated fair value with unrealized gains and losses
reported in accumulated other comprehensive income. To the extent that the cost basis of investment securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.
Mortgage loans held for sale
are recorded at their fair value when originated and reevaluated quarterly, based on our expected return from the secondary market.
Loans held for investment
are valued on the basis of estimated future receipts of principal and interest, which are discounted at various rates. Loan prepayments are assumed to occur at the same rate as in previous periods when interest rates were at levels similar to current levels. Future cash flows for homogeneous categories of consumer loans, such as motor vehicle loans, are estimated on a portfolio basis and discounted at current rates offered for similar loan terms to new borrowers with similar credit profiles.
The carrying amounts of
accrued interest
approximate fair value.
Interest rate lock commitments ("IRLC")
are recorded at fair value, which is based on estimated future receipts net of estimated future expenses when the underlying loan is sold on the secondary market, using observable Level 2 market inputs, reflecting current market inputs as of the measurement date.
Bank owned life insurance
represents insurance policies on officers of the Bank. The cash values of the policies are estimated using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates the fair value.
The fair value of
demand deposits and deposits with no defined maturity
is taken to be the amount payable on demand at the reporting date. The fair value of
fixed-maturity deposits
is estimated using rates currently offered for deposits of similar remaining maturities. The intangible value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed.
The fair value of Level 2
borrowings
is determined based on quoted prices from FHLB for borrowings with similar characteristics and maturities. The determination of the fair value of Level 3 borrowings is made using pricing models and discounted cash flow models, and includes management judgment and estimation, which may be significant.
Derivative financial instruments
are recorded at fair value using observable Level 2 market inputs related to:
•
Loans held for sale
forward sales commitments
are recorded at their fair value based on the estimated number of days remaining in the IRLC at the measurement date and expected return from the secondary market.
Forward mortgage loan sales commitments
are recorded at their fair value based on the gain or loss that would occur if the loan were paired off with an investor at measurement date. A derivative asset of
$3,440,793
and a derivative liability of
$1,545,380
related to loans held for sale were recorded at
March 31, 2016
. At
December 31, 2015
, a derivative asset of
$1,514,083
and a derivative liability of
$1,195,405
were recorded.
Real Estate Owned
is carried at the fair value less estimated selling costs. Upon foreclosure and through liquidation, we evaluate the property's fair value as compared to its carrying amount and record a valuation adjustment when the carrying amount exceeds fair value less selling costs. Any valuation adjustments at the time a loan becomes real estate owned is charged to the allowance for loan losses. Fair value is determined through an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). When evaluating fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraisal value (Level 3). Any subsequent valuation adjustments are applied to earnings in our consolidated statements of income. We did not record any losses due to valuation adjustments for the
three
months ended
March 31, 2016
or 2015. We recorded
no
losses due to valuation adjustments on real estate owned within foreclosed property expense in the year ended
December 31, 2015
.
Restructured and Impaired Loans
measurement is generally based on the present value of expected future cash flows discounted at the loan's effective interest rate, unless in the case of collateral-dependent loans, the observable market price, or the fair value of the collateral can be readily determined. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). When evaluating fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts
receivables collateral are based on financial statement balances or aging reports (Level 3). Restructured and impaired loans are periodically reevaluated to determine if additional adjustments to the carrying value are necessary.
It is not practicable to separately estimate the fair values for off-balance-sheet credit commitments, including standby letters of credit and guarantees written, due to the lack of cost-effective reliable measurement methods for these instruments.
Fair Value of Financial Instruments
The following table presents the carrying amounts and fair value of our financial instruments at
March 31, 2016
and
December 31, 2015
. GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. The carrying amounts in the table are included in the balance sheet under the indicated captions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2016, using
|
|
|
Carrying Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
86,797,604
|
|
|
$
|
86,797,604
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
86,797,604
|
|
|
Investment securities available for sale
|
26,869,270
|
|
|
—
|
|
|
26,869,270
|
|
|
—
|
|
|
26,869,270
|
|
|
Mortgage loans held for sale
|
189,131,150
|
|
|
—
|
|
|
189,131,150
|
|
|
—
|
|
|
189,131,150
|
|
|
Loans held for investment (net)
|
841,153,269
|
|
|
—
|
|
|
—
|
|
|
852,849,014
|
|
|
852,849,014
|
|
|
Accrued interest receivable
|
2,172,860
|
|
|
—
|
|
|
2,172,860
|
|
|
—
|
|
|
2,172,860
|
|
|
Bank owned life insurance
|
10,795,735
|
|
|
—
|
|
|
10,795,735
|
|
|
—
|
|
|
10,795,735
|
|
|
Derivative financial assets
|
3,440,793
|
|
|
—
|
|
|
3,440,793
|
|
|
—
|
|
|
3,440,793
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,063,411,226
|
|
|
$
|
—
|
|
|
$
|
1,061,154,192
|
|
|
$
|
—
|
|
|
$
|
1,061,154,192
|
|
|
Borrowings
|
10,000,000
|
|
|
—
|
|
|
—
|
|
|
6,243,249
|
|
|
6,243,249
|
|
|
Accrued interest payable
|
71,222
|
|
|
—
|
|
|
71,222
|
|
|
—
|
|
|
71,222
|
|
|
Derivative financial liabilities
|
1,545,380
|
|
|
—
|
|
|
1,545,380
|
|
|
—
|
|
|
1,545,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015 using
|
|
|
Carrying Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
73,879,510
|
|
|
$
|
73,879,510
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,879,510
|
|
|
Investment securities available for sale
|
30,213,130
|
|
|
—
|
|
|
30,213,130
|
|
|
—
|
|
|
30,213,130
|
|
|
Loans held for sale
|
169,345,205
|
|
|
—
|
|
|
169,345,205
|
|
|
—
|
|
|
169,345,205
|
|
|
Loans held for investment (net)
|
820,382,106
|
|
|
—
|
|
|
—
|
|
|
834,345,931
|
|
|
834,345,931
|
|
|
Accrued interest receivable
|
2,110,108
|
|
|
—
|
|
|
2,110,108
|
|
|
—
|
|
|
2,110,108
|
|
|
Bank owned life insurance
|
10,634,814
|
|
|
—
|
|
|
10,634,814
|
|
|
—
|
|
|
10,634,814
|
|
|
Derivative financial assets
|
2,105,204
|
|
|
|
|
2,105,204
|
|
|
|
|
1,514,083
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
999,093,598
|
|
|
$
|
—
|
|
|
$
|
996,519,992
|
|
|
$
|
—
|
|
|
$
|
996,519,992
|
|
|
Borrowings
|
26,000,000
|
|
|
—
|
|
|
16,000,000
|
|
|
6,184,750
|
|
|
22,184,750
|
|
|
Accrued interest payable
|
104,517
|
|
|
—
|
|
|
104,517
|
|
|
—
|
|
|
104,517
|
|
|
Derivative financial liability
|
368,577
|
|
|
—
|
|
|
368,577
|
|
|
—
|
|
|
368,577
|
|
NOTE 8. STOCK-BASED COMPENSATION
In May 2014, Monarch stockholders ratified the adoption of the Monarch Bank 2014 Equity Incentive Plan (2014EIP), a stock-based compensation plan which succeeds the Monarch Bank 2006 Equity Incentive Plan (2006EIP). The 2006EIP had succeeded the Monarch Bank 1999 Incentive Stock Option Plan (1999ISO) and was the only plan under which equity-based compensation could be awarded. Like the 2006EIP, the 2014EIP authorizes the compensation committee to grant options, stock
appreciation rights, stock awards, performance stock awards, and stock units to designated directors, officers, key employees, consultants and advisers to the Company and its subsidiaries.
The 2014EIP authorized the Company to issue up to
1,100,000
shares of Monarch Common Stock plus the number of shares of our common stock outstanding under the predecessor plans. The Plan also provides that
no
award may be granted more than
10
years after the May 2014 ratification date.
As of
March 31, 2016
,
1,818,460
shares were available for grants under all plans. A total of
437,440
shares are outstanding, all of which are non-vested restricted stock, subject to outstanding awards under the 2006EIP and 1999ISO. Restricted stock typically vests over a
60
month period. Total compensation costs are recognized over the service period to vesting.
No
additional options were granted in the periods covered. There were
no
options outstanding in the first quarter of 2016. There were
18,999
options exercised in the first quarter of 2015.
No
options on shares were forfeited in the
first quarter
of 2016 or 2015.
Compensation expense related to our restricted stock totaled
$215,763
in the
first quarter
of 2016. Remaining vesting periods are between
3
and
57
months with unrecognized remaining compensation expense of
$2,224,025
. We issued
no
shares of restricted stock in the
first quarter
of
2016
.
No
shares vested in the first quarter of 2016. There were
3,600
shares forfeited in the first quarter of 2016.
Share amounts have been restated to include the 11 for 10 stock dividend announced October 22, 2015 and payable December 4, 2015.
NOTE 9. SEGMENT REPORTING
Reportable segments include community banking and mortgage banking services. Community banking involves making loans to and generating deposits from individuals and businesses in the markets in which we have offices. Mortgage banking originates residential loans and subsequently sells them to investors. Our mortgage banking segment is a strategic business unit that offers different products and services. It is managed separately because the segment appeals to different markets and, accordingly, requires different technology and marketing strategies.
Beginning with the third quarter of 2015 and for all periods reported, the financial presentation for reportable segments has been modified to assist the reader in understanding the components of the segments. Funding for mortgage banking services' loans held for sale (LHFS) portfolio is provided by community banking services. For segmentation purposes the community banking segment charges the mortgage banking segment interest on average LHFS balances outstanding at a rate of the three month average 30 day London Interbank Offered Rate (LIBOR) plus
250 basis points
.
The mortgage banking segment’s most significant revenue and expense is non-interest income and non-interest expense, respectively. Under the mortgage banking segment we have broken out "forward rate commitments and unrealized hedge gain (loss)" because these represent changes in the our derivative position. Our derivative position is impacted quarterly by the number and dollar volume of loans locked with a borrower but not closed, changes in the market value of notional security sales, and the delivery method utilized for closed but not committed loans.
In the event of early payment default, Monarch has recorded a reserve for loan repurchases which totaled
$3,270,361
at
March 31, 2016
and
$3,287,667
at December 31, 2015. Our reserve for loan repurchases is not a part of our loan loss reserve and is carried in other liabilities. This reserve, which is an estimate of the potential for losses based on investor contracts, is not an indication that losses will occur and is periodically analyzed and adjusted through income.
We do not have other reportable operating segments. (The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of our annual 10-K.) All inter-segment sales prices are market based.
Segment information for the
three
months ended
March 31, 2016
and
2015
is shown in the following tables.
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking Segment
|
|
|
Quarter Ended March 31,
|
|
Income:
|
2016
|
|
2015
|
|
Interest income
|
$
|
12,106,934
|
|
|
$
|
10,999,638
|
|
|
Non-interest income
|
1,311,126
|
|
|
1,214,983
|
|
|
Total operating income
|
13,418,060
|
|
|
12,214,621
|
|
|
Expenses:
|
|
|
|
|
Interest expense
|
(912,119
|
)
|
|
(737,081
|
)
|
|
Provision for loan losses
|
—
|
|
|
(250,000
|
)
|
|
Personnel expense
|
(4,239,267
|
)
|
|
(4,673,468
|
)
|
|
Other non-interest expenses
|
(3,061,018
|
)
|
|
(3,047,925
|
)
|
|
Total operating expenses
|
(8,212,404
|
)
|
|
(8,708,474
|
)
|
|
Income before income taxes
|
5,205,656
|
|
|
3,506,147
|
|
|
Provision for income taxes
|
(1,903,459
|
)
|
|
(1,273,769
|
)
|
|
Less: Net income attributable to non-controlling interests
|
(12,430
|
)
|
|
(15,905
|
)
|
|
Net income attributable to community banking segment
|
$
|
3,289,767
|
|
|
$
|
2,216,473
|
|
|
|
|
|
|
|
Mortgage Banking Segment
|
|
|
Quarter Ended March 31,
|
|
Income:
|
2016
|
|
2015
|
|
Interest income
|
$
|
1,411,908
|
|
|
$
|
1,307,036
|
|
|
Non-interest income
|
17,742,535
|
|
|
18,294,663
|
|
|
Total operating income
|
19,154,443
|
|
|
19,601,699
|
|
|
Expenses:
|
|
|
|
|
Interest expense
|
(1,101,016
|
)
|
|
(921,104
|
)
|
|
Personnel expense
|
(13,158,454
|
)
|
|
(13,471,018
|
)
|
|
Other non-interest expenses
|
(4,302,382
|
)
|
|
(4,496,033
|
)
|
|
Total operating expenses
|
(18,561,852
|
)
|
|
(18,888,155
|
)
|
|
Net operating income
|
592,591
|
|
|
713,544
|
|
|
Forward rate commitments and unrealized hedge gain
|
665,109
|
|
|
1,267,129
|
|
|
Income before income taxes
|
1,257,700
|
|
|
1,980,673
|
|
|
Provision for income taxes
|
(459,881
|
)
|
|
(719,571
|
)
|
|
Less: Net income attributable to non-controlling interests
|
(30,877
|
)
|
|
(16,368
|
)
|
|
Net income attributable to mortgage banking segment
|
$
|
766,942
|
|
|
$
|
1,244,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
|
|
|
Quarter Ended March 31,
|
|
Income:
|
2016
|
|
2015
|
|
Interest income
|
$
|
12,417,826
|
|
|
$
|
11,385,570
|
|
|
Non-interest income
|
20,329,434
|
|
|
22,266,163
|
|
|
Total operating income
|
32,747,260
|
|
|
33,651,733
|
|
|
Expenses:
|
|
|
|
|
Interest expense
|
(912,119
|
)
|
|
(737,081
|
)
|
|
Provision for loan losses
|
—
|
|
|
(250,000
|
)
|
|
Personnel expense
|
(17,873,752
|
)
|
|
(19,039,414
|
)
|
|
Other non-interest expenses
|
(7,498,033
|
)
|
|
(8,138,418
|
)
|
|
Total operating expenses
|
(26,283,904
|
)
|
|
(28,164,913
|
)
|
|
Income before income taxes
|
6,463,356
|
|
|
5,486,820
|
|
|
Provision for income taxes
|
(2,363,340
|
)
|
|
(1,993,340
|
)
|
|
Less: Net income attributable to non-controlling interests
|
(43,307
|
)
|
|
(32,273
|
)
|
|
Net income attributable to Monarch Financial Holdings, Inc.
|
$
|
4,056,709
|
|
|
$
|
3,461,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination entries:
|
|
|
|
|
|
Interest income
|
|
(1,101,016
|
)
|
|
(921,104
|
)
|
|
Interest expense
|
|
1,101,016
|
|
|
921,104
|
|
|
Non-interest income
|
|
(1,275,773
|
)
|
|
(2,756,517
|
)
|
|
Personnel expense
|
|
476,031
|
|
|
894,928
|
|
|
Other non-interest expenses
|
|
134,633
|
|
|
594,460
|
|
|
Forward rate commitments and unrealized hedge gain (loss)
|
|
(665,109
|
)
|
|
(1,267,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking
|
|
Mortgage Banking
|
|
Elimination entries
|
|
Consolidated
|
|
Segment Assets
|
|
|
|
|
|
|
|
|
March 31, 2016
|
$
|
1,028,854,561
|
|
|
$
|
215,838,288
|
|
|
$
|
(32,185,481
|
)
|
|
$
|
1,212,507,368
|
|
|
December 31, 2015
|
$
|
996,432,802
|
|
|
$
|
192,062,857
|
|
|
$
|
(27,047,504
|
)
|
|
$
|
1,161,448,155
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
March 31, 2016
|
$
|
26,434
|
|
|
$
|
82,199
|
|
|
$
|
—
|
|
|
$
|
108,633
|
|
|
December 31, 2015
|
$
|
1,359,215
|
|
|
$
|
424,271
|
|
|
$
|
—
|
|
|
$
|
1,783,486
|
|
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets with indefinite lives are recorded at cost and reviewed at least annually for impairment based on evidence of certain impairment indicators. Intangible assets with identifiable lives are amortized over their estimated useful lives. The were
no
intangible assets at
March 31, 2016
.
Information concerning goodwill is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Goodwill
|
$
|
775,000
|
|
|
$
|
775,000
|
|
Goodwill is related the acquisition of a Maryland mortgage office plus certain other mortgage related assets in August 2007. Intangible assets related to this acquisition were fully amortized in 2014.
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage derivatives are not designated in hedge relationships. At March 31, 2016, the Company had approximately
$251 million
of interest rate lock commitments and
$369 million
of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of
$3,440,793
and a derivative liability of
$1,545,380
. At year-end 2015, the Company had approximately
$227 million
of interest rate lock commitments and
$244 million
of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of
$2,105,204
and a derivative liability of
$368,577
. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage banking derivatives are included in net gains on sales of loans.
The net gains (losses) relating to free-standing derivative instruments used for risk management are summarized below as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
March 31, 2016
|
March 31, 2015
|
|
Forward contracts related to mortgage loans held for sale
|
Mortgage banking revenue
|
$
|
(570,179
|
)
|
$
|
(394,324
|
)
|
|
Interest rate lock commitments
|
Mortgage banking revenue
|
$
|
1,235,290
|
|
$
|
1,661,453
|
|
The following table reflects the amount and market value of mortgage banking derivatives included in the Consolidated Statements of Condition as of the period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Included in other assets (1)
|
|
|
|
|
|
|
|
|
Forward contracts related to interest rate lock commitments and mortgage loans held for sale (2)
|
$
|
73,880,034
|
|
|
$
|
263,199
|
|
|
$
|
145,232,095
|
|
|
$
|
615,123
|
|
|
Interest rate lock commitments
|
246,671,447
|
|
|
3,154,781
|
|
|
210,260,999
|
|
|
1,490,081
|
|
|
Hedge positions
|
55,750,000
|
|
|
22,813
|
|
|
—
|
|
|
—
|
|
|
Total included in other assets
|
|
|
$
|
3,440,793
|
|
|
|
|
$
|
2,105,204
|
|
|
|
|
|
|
|
|
|
|
|
Included in other liabilities (1)
|
|
|
|
|
|
|
|
|
Forward contracts related to interest rate lock commitments and mortgage loans held for sale (2)
|
$
|
295,314,954
|
|
|
$
|
994,010
|
|
|
$
|
98,680,765
|
|
|
$
|
238,583
|
|
|
Interest rate lock commitments
|
4,510,785
|
|
|
58,831
|
|
|
16,489,999
|
|
|
76,856
|
|
|
Hedge positions
|
78,358,191
|
|
|
492,539
|
|
|
76,632,817
|
|
|
53,138
|
|
|
Total included in other assets
|
|
|
$
|
1,545,380
|
|
|
|
|
$
|
368,577
|
|
|
|
|
|
(1)
|
The Notional amount of mortgage banking derivatives is an off balance sheet item and only the fair value of the derivatives is recorded within the Consolidated Statements of Condition.
|
|
|
|
|
(2)
|
Certain forward sales commitments do no qualify under applicable accounting guidance as derivative instruments; however, the Company has elected the fair value option under ASC 825-10-15-4(b) for the loans held for sale portfolio and thus fair value adjustments have been recorded in the derivative asset and derivative liability as presented above.
|
NOTE 12. LOW INCOME HOUSING TAX CREDITS
The Company has invested in
two
housing equity funds at March 31, 2016 and December 31, 2015. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. One housing equity investment is still in the formation stages so annual capital calls and tax credits are undetermined at this date. The Company accounts for these investments under the proportional amortization method and at March 31, 2016 and December 31, 2015, the investment in these funds, recorded in other assets on the consolidated statement of condition, was
$933,842
and
$944,475
, respectively, with
$10,633
of tax credits and other tax benefits related to these investments recognized on the consolidated statements of income in the first quarter of 2016, and
$0
as of March 31, 2015. Total projected tax credits to be received for 2016 are
$41,267
, based on the most recent quarterly estimates received for the fully established fund. Additional capital calls expected for the funds totals
$949,000
at March 31, 2016 and December 31, 2015, and are included in other liabilities on the consolidated statement of condition.
NOTE 13. COMMON STOCK REPURCHASE
On September 24, 2015 we announced the Board of Monarch Financial Holdings, Inc., had approved the repurchase of up to
five
percent, or approximately
653,400
shares, of the Company's outstanding common stock. The repurchase program, which will expire September 22, 2016, may be conducted through open market purchases or privately negotiated transactions. The timing and actual number of shares repurchased will depend on market conditions and other factors.
Actual repurchase activity was conducted between October 1, 2015 and December 31, 2015 at a total cost of
$797,919
. There were
0
shares of common stock repurchased in the first quarter of 2016 and
65,590
shares of common stock repurchased through December 31, 2015. There were
587,810
shares of common stock available for future purchase at March 31, 2016 and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
Period 2015
|
|
Total Number of Common Shares Repurchased
|
|
Total Remaining Common Shares Available for Repurchase
|
|
October 1 through October 31
|
|
23,290
|
|
|
630,110
|
|
|
November 1 through November 23
|
|
42,300
|
|
|
587,810
|
|
NOTE 14. SUBSEQUENT EVENT
On April 21, 2016, we announced the Board had approved a quarterly common stock cash dividend of
$0.09
per share for common shareholders of record on May 10, 2016, payable on May 27, 2016.
ITEM 2.
MONARCH FINANCIAL HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and supplemental financial data.
A significant amount of our income is generated from the net interest income earned by Monarch Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the average amount of interest-earning assets outstanding during the period and the interest rates thereon. Monarch Bank’s cost of money is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of our assets further influence the amount of interest income lost due to non-accrual loans and the amount of additions to the allowance for loan losses.
We also generate income from non-interest sources. Non-interest income sources include fee income from residential and commercial mortgage sales, bank related service charges, fee income from the sale of investment and insurance services, fee income from title services, income from bank owned life insurance (BOLI) and company owned life (COLI) policies, as well as gains or losses from the sale of investment securities.
This report contains forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.
These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of our management and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected include the following:
|
|
|
|
•
|
Costs and difficulties related to the proposed merger, including, among other things, the integration of our business with TowneBank, the inability to retain key personnel, competitive response to the proposed merger, or potential adverse reactions of changes to business or employee relationships could be more significant than we anticipate, resulting in higher costs or reduced benefits.
|
|
|
|
|
•
|
Failure of the merger to be completed on the proposed terms and schedule, or at all.
|
|
|
|
|
•
|
General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances.
|
|
|
|
|
•
|
Changes in interest rates could reduce income.
|
|
|
|
|
•
|
Competitive pressures among financial institutions may increase.
|
|
|
|
|
•
|
The businesses that we are engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards.
|
|
|
|
|
•
|
New products developed or new methods of delivering products could result in a reduction in our business and income.
|
|
|
|
|
•
|
Adverse changes may occur in the securities market.
|
|
|
|
|
•
|
Other factors described from time to time in our reports with the Securities and Exchange Commission.
|
This section should be read in conjunction with the description of our “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2015
.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those applications of accounting principles or practices that require considerable judgment, estimation, or sensitivity analysis by management. In the financial service industry, examples, though not an all inclusive list, of disclosures that may fall within this definition are the determination of the adequacy of the allowance for loan losses, valuation of derivatives or securities without a readily determinable market value, and the valuation of the fair value of intangibles and goodwill. Except for the determination of the adequacy of the allowance for loan losses, derivative financial instrument estimations and fair value estimations related to foreclosed real estate, we do not believe there are other practices or policies that require significant sensitivity analysis, judgments, or estimations.
Our financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Our critical accounting policies are listed below. A summary of our significant accounting policies is set forth in Item 8, Note 1 of our Annual Report on Form 10-K for the year ended
December 31, 2015
.
Allowance for Loan Losses
Our allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on GAAP guidance which requires that losses be accrued when they have a probability of occurring and are estimable and that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses along with various economic factors and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified loans. Historical loss information, expected cash flows and fair value of collateral are used to estimate these losses. The unallocated allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. The use of these values is inherently subjective, and our actual losses could be greater or less than the estimates.
Derivative Financial Instruments
We may use derivatives to manage risks related to interest rate movements. Interest rate swap contracts designated and qualifying as cash flow hedges are reported at fair value. The gain or loss on the effective portion of the hedge initially is included as a component of other comprehensive income and is subsequently reclassified into earnings when interest on the related debt is paid. We document our risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. Our interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate swap contracts to convert variable-rate debt to a fixed rate. We did not hold any interest rate swap contracts at
March 31, 2016
or
December 31, 2015
. We do not hold or issue derivative financial instruments for trading purposes.
Commitments to fund mortgage loans are Interest Rate Lock Commitments (IRLC) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are free standing derivatives. The fair value of the interest rate lock is recorded at the end of the financial reporting period and adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the future delivery of mortgage loans. Fair value of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair value of these derivatives are included in net gains on sale of loans.
We participated in a “mandatory” delivery program for mortgage loans in all periods presented. Under the mandatory delivery system, loans with interest rate locks are paired with the sale of a notional security bearing similar attributes. Interim income or loss on the pairing of the loans and securities is recorded in mortgage banking income on our income statement. In addition, at the time the loan is delivered to an investor, matched securities are repurchased and a gain or loss on the pairing is recorded in mortgage banking income on our income statement. We had $98.6 million in the mandatory delivery program at
March 31, 2016
and $72.8 million at
December 31, 2015
.
Fair Value Measurements
Under GAAP we are permitted to choose or required to measure many financial instruments and certain other items at fair value. The estimation of fair value is significant to certain assets, including loans held-for-sale, available-for-sale securities, and foreclosed real estate owned. These assets are recorded at fair value or lower of cost or fair value, as applicable. The fair values of loans held-for-sale are based on commitments from investors. The fair values of available-for-sale securities are based on published market or dealer quotes for similar securities. The fair values of rate lock commitments are based on net fees currently charged to enter into similar agreements. The fair value of foreclosed real estate owned is estimated based on current appraisals, but may be further adjusted based upon our evaluation of the fair value of similar properties.
Fair values can be volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, and market conditions, among others. Since these factors can change significantly and rapidly, fair values are difficult to predict and subject to material changes that could impact our financial condition and results of operation.
RESULTS OF OPERATIONS
Net Income
Our consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, after all significant inter-company transactions have been eliminated. Net income attributable to our non-controlling interests were deducted from net income to arrive at net income attributable to Monarch Financial Holdings. Non-controlling interests' net income was $43 thousand and $32 thousand in the first quarters of 2016 and 2015, respectively. The ensuing references and ratios are related to net income attributable to Monarch Financial Holdings, Inc., (hereon referred to as "net income") after net income attributable to non-controlling interests has been deducted.
Net Income Attributable to Monarch Financial Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Net income
|
$
|
4,100,016
|
|
|
$
|
3,493,480
|
|
|
Less: Net income attributable to non-controlling interests
|
(43,307
|
)
|
|
(32,273
|
)
|
|
Net income attributable to Monarch Financial Holdings, Inc.
|
$
|
4,056,709
|
|
|
$
|
3,461,207
|
|
Net income for the first quarter ended
March 31, 2016
was $4.1 million, an increase of $596 thousand or 17.2% over the same quarter in
2015
. Basic and diluted earnings per share for the
first
quarter of
2016
and
2015
were $0.34 and $0.29, respectively. Two important and commonly used measures of profitability are return on assets (net income as a percentage of average total assets) and return on equity (net income as a percentage of average stockholders’ equity). Our annualized return on assets (ROA) for the three months ended March 31, 2016 was 1.42%, compared to 1.31% in 2015. Our annualized return on equity (ROE) for the first quarter of
2016
was 13.73% compared to 12.98% in
2015
.
Net interest income increased $857 thousand driven by an increase in interest income. Non-interest income declined $1.9 million and non-interest expense declined $1.8 million. Lower mortgage banking income and related commissions were the primary source of the declines on both non-interest income and non-interest expense.
We did not record a loan loss provision in the first quarter of 2016 but recorded a loan loss provision of $250 thousand in the first quarter of 2015. We reported recoveries in excess of charge offs of $14 thousand in the first quarter of 2016 and net charge offs of $555 thousand in the first quarter of 2015.
Net Interest Income
Net interest income, which is the excess of interest income over interest expense, is a major source of banking revenue. A number of factors influence net interest income, including the interest rates earned on earning assets, and the interest rates paid to obtain funding to support the assets, the average volume of interest-earning assets and interest bearing liabilities, and the mix of interest-earning assets and interest bearing liabilities.
The Federal Reserve Bank’s Federal Open Market Committee (FOMC), which shapes monetary policy through managing the short term money supply with the Federal Funds Rate and long term rates through the purchase and sale of various types of securities, increased the the Federal Funds Rate in December 2015 by 0.25%. This was the first short term rate increase since June 2006. While this increase has had a marginal impact on short term interest income and expense, long term rates have been less impacted because of global economics. Economic instability and uncertainties, primarily in Europe and Asia, have impacted long term rates as many foreign investors continue to purchase U.S. Treasuries in a flight to safety. These purchases keep the money
supply flowing and long term rates low, despite FOMC efforts. Predictions about the next possible rate increase vary, but the general consensus is there will be at least one more 0.25% increase in 2016. Competition between banks and other lending sources for high quality loans remains strong with borrowers targeting longer term funding at, or below, the current market rates. Many lenders are accepting these terms while offering higher interest rates on the funding side. Through all of this Monarch has been maintaining the discipline that has kept credit quality strong and earnings consistent throughout our history and we believe our balance sheet is adequately positioned for a response to any rate changes that occur.
Net interest income was $11.5 million in the first quarter of 2016 compared to $10.6 million, one year prior. This is an $857 thousand, or 8.1% increase over the first quarter of 2015. Interest income increased $1.0 million, or 9.1% driven by an $849 thousand increase in interest and fees on loans held for investment (LHFI). Interest expense also increased in the first quarter of 2016 by $175 thousand, or 23.7%, driven by an $186 thousand increase in interest expense on deposits.
Our greatest earning assets are loans which are comprised of two major portfolio classifications: mortgage loans held for sale (LHFS) and loans held for investment (LHFI). Both portfolios provided growth in interest income in the first quarter of 2016 compared to 2015.
LHFI are commercial, real estate, and consumer loans originated and maintained on the Bank's books. Average loans were $834 million in the first quarter of 2016, an increase of $68 million compared to $765 million in the first quarter of 2015. Interest income increased $849 thousand in the quarter compared to 2015. Average yield decreased 5 basis point in the first quarter of 2016 to 5.16% compared to 5.21% in 2015.
LHFS, which are residential mortgages originated by our mortgage division and sold to investors, earn interest while on our books but at rates typically lower than our loans held for investment portfolio. This portfolio is also subject to greater fluctuations in outstanding balances due to a combination of market demand, economic conditions and the prevailing mortgage rates. Mortgage balances in the first quarter of 2016 were $30 million less than the first quarter of 2015. Despite lower volume, interest income on our mortgage loans held for sale was $1.4 million in the first quarter of 2016, $105 thousand, or 8.0% higher than the first quarter of 2015. Average yield increased 11basis points to 4.01% in the first quarter of 2016 compared to 3.90% in 2015.
Income on all other interest bearing assets increased $34 thousand in 2016 compared to 2015. The increase was volume driven with greatest growth in securities and deposits in other banks.
Interest expense increased $175 thousand, or 23.7% in the first quarter of 2016 compared to 2015, driven by interest expense on money market savings and time deposits. Interest-bearing deposit volume increased $39.8 million to $719.8 million from $679.9 million. Average volume in money market accounts declined $6.1 million while interest expense on these accounts increased $71 thousand due to a 9 basis point increase in rates to 0.39% from 0.30%. Time deposit volume increased $114 million, on average while interest rates increased 7 basis points to 0.68% from 0.61%. Average borrowing volume declined $9.4 million while the average cost of borrowing increased 67 basis points, driven by an increase in LIBOR rates associated with our trust preferred borrowing. Interest bearing liabilities increased 7 basis points to 0.50% from 0.43%, one year prior.
For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income tax savings on tax-exempt assets, such as bank owned life insurance (BOLI) and company owned life insurance (COLI) and state and municipal securities. A tax rate of 35% was used in both 2016 and 2015 when adjusting interest on BOLI, COLI and tax-exempt securities to a fully taxable equivalent basis. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income, i.e. the FTE adjustment) and the cost of the supporting funds is measured by net interest margin.
Our net interest rate spread on a tax-equivalent basis decreased 9 basis points in the quarter to 4.10% from 4.19% in 2015. Our net interest margin for the first quarter of 2016 was 4.27%, a decrease of 5 basis points from 4.32% in 2015.
BOLI and COLI have been included in interest earning assets. We purchased $6.0 million in BOLI in 2005, an additional $2.0 million in BOLI during the third quarter of 2014. In 2015 we purchased an additional $255 thousand in BOLI and $449 thousand in COLI. We have purchased $121 thousand in COLI through the first quarter of 2016. Volatility in the market can impact COLI yield and has adversely impacted the yield through 2016. Income on BOLI and COLI is not subject to federal income tax, giving it a tax-effective yield of 2.33% for the first quarter of 2016 compared to 4.37% in 2015.
The following tables set forth average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders’ equity and the related income, expense and corresponding weighted average yields and costs.
The following is an analysis of net interest income, on a taxable equivalent basis.
NET INTEREST INCOME ANALYSIS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield
Rate (1)
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield
Rate (1)
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield
Rate (1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities, at amortized cost (2)
|
$
|
29,428
|
|
|
$
|
115
|
|
|
1.57
|
%
|
|
$
|
21,107
|
|
|
$
|
94
|
|
|
1.81
|
%
|
|
$
|
27,800
|
|
|
$
|
81
|
|
|
1.18
|
%
|
|
Loans, held for investment
|
833,853
|
|
|
10,690
|
|
|
5.16
|
%
|
|
765,635
|
|
|
9,840
|
|
|
5.21
|
%
|
|
698,645
|
|
|
9,479
|
|
|
5.50
|
%
|
|
Mortgage loans, held for sale
|
141,478
|
|
|
1,412
|
|
|
4.01
|
%
|
|
136,084
|
|
|
1,307
|
|
|
3.90
|
%
|
|
70,856
|
|
|
773
|
|
|
4.42
|
%
|
|
Federal funds sold
|
3,295
|
|
|
4
|
|
|
0.49
|
%
|
|
16,481
|
|
|
8
|
|
|
0.20
|
%
|
|
72,318
|
|
|
40
|
|
|
0.22
|
%
|
|
Dividend-earning restricted equity securities
|
3,432
|
|
|
45
|
|
|
5.27
|
%
|
|
3,633
|
|
|
39
|
|
|
4.35
|
%
|
|
3,622
|
|
|
30
|
|
|
3.36
|
%
|
|
Deposits in other banks
|
68,760
|
|
|
156
|
|
|
0.91
|
%
|
|
56,713
|
|
|
102
|
|
|
0.73
|
%
|
|
30,257
|
|
|
36
|
|
|
0.48
|
%
|
|
Bank owned life insurance (2)
|
10,698
|
|
|
62
|
|
|
2.33
|
%
|
|
9,736
|
|
|
105
|
|
|
4.37
|
%
|
|
7,432
|
|
|
89
|
|
|
4.86
|
%
|
|
Total earning assets
|
1,090,944
|
|
|
12,484
|
|
|
4.60
|
%
|
|
1,009,389
|
|
|
11,495
|
|
|
4.62
|
%
|
|
910,930
|
|
|
10,528
|
|
|
4.69
|
%
|
|
Less: Allowance for loan losses
|
(8,694
|
)
|
|
|
|
|
|
(8,891
|
)
|
|
|
|
|
|
(9,085
|
)
|
|
|
|
|
|
Nonperforming loans
|
3,952
|
|
|
|
|
|
|
6,016
|
|
|
|
|
|
|
6,073
|
|
|
|
|
|
|
Other non-earning assets
|
63,238
|
|
|
|
|
|
|
64,067
|
|
|
|
|
|
|
62,897
|
|
|
|
|
|
|
Total assets
|
$
|
1,149,440
|
|
|
|
|
|
|
$
|
1,070,581
|
|
|
|
|
|
|
$
|
970,815
|
|
|
|
|
|
|
LIABILITIES and STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
$
|
59,870
|
|
|
$
|
17
|
|
|
0.11
|
%
|
|
$
|
54,776
|
|
|
$
|
17
|
|
|
0.13
|
%
|
|
$
|
49,265
|
|
|
$
|
19
|
|
|
0.16
|
%
|
|
Savings
|
19,064
|
|
|
14
|
|
|
0.30
|
%
|
|
19,931
|
|
|
13
|
|
|
0.26
|
%
|
|
22,743
|
|
|
22
|
|
|
0.39
|
%
|
|
Money market savings
|
359,278
|
|
|
345
|
|
|
0.39
|
%
|
|
364,473
|
|
|
274
|
|
|
0.30
|
%
|
|
371,388
|
|
|
349
|
|
|
0.38
|
%
|
|
Time deposits
|
281,563
|
|
|
478
|
|
|
0.68
|
%
|
|
240,764
|
|
|
364
|
|
|
0.61
|
%
|
|
200,342
|
|
|
444
|
|
|
0.90
|
%
|
|
Total interest-bearing deposits
|
719,775
|
|
|
854
|
|
|
0.48
|
%
|
|
679,944
|
|
|
668
|
|
|
0.40
|
%
|
|
643,738
|
|
|
834
|
|
|
0.53
|
%
|
|
Borrowings
|
11,652
|
|
|
58
|
|
|
2.00
|
%
|
|
21,049
|
|
|
69
|
|
|
1.33
|
%
|
|
11,174
|
|
|
137
|
|
|
4.97
|
%
|
|
Total interest-bearing liabilities
|
731,427
|
|
|
$
|
912
|
|
|
0.50
|
%
|
|
700,993
|
|
|
$
|
737
|
|
|
0.43
|
%
|
|
654,912
|
|
|
$
|
971
|
|
|
0.60
|
%
|
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
283,531
|
|
|
|
|
|
|
246,041
|
|
|
|
|
|
|
205,231
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
15,624
|
|
|
|
|
|
|
15,373
|
|
|
|
|
|
|
12,298
|
|
|
|
|
|
|
Total liabilities
|
1,030,582
|
|
|
|
|
|
|
962,407
|
|
|
|
|
|
|
872,441
|
|
|
|
|
|
|
Stockholders’ equity
|
118,858
|
|
|
|
|
|
|
108,174
|
|
|
|
|
|
|
98,374
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
$
|
1,149,440
|
|
|
|
|
|
|
$
|
1,070,581
|
|
|
|
|
|
|
$
|
970,815
|
|
|
|
|
|
|
Net interest income (2)
|
|
|
$
|
11,572
|
|
|
|
|
|
|
$
|
10,758
|
|
|
|
|
|
|
$
|
9,557
|
|
|
|
|
Interest rate spread (2)(3)
|
|
|
|
|
4.10
|
%
|
|
|
|
|
|
4.19
|
%
|
|
|
|
|
|
4.09
|
%
|
|
Net interest margin (2)(4)
|
|
|
|
|
4.27
|
%
|
|
|
|
|
|
4.32
|
%
|
|
|
|
|
|
4.25
|
%
|
|
|
|
|
(1)
|
Yields are annualized and based on average daily balances.
|
|
|
|
|
(2)
|
Income and yields are reported on a taxable equivalent basis assuming a federal tax rate of 35%, with a $26,760 adjustment for 2016, a $41,828 adjustment for 2015 and a $36,355 adjustment for 2014.
|
|
|
|
|
(3)
|
Represents the differences between the yield on total average earning assets and the cost of total interest-bearing liabilities.
|
|
|
|
|
(4)
|
Represents the ratio of net interest-earnings to the average balance of interest-earning assets.
|
Rate/Volume Analysis
The goal of a rate/volume analysis is to compare two or more periods to determine whether the difference between those periods is the result of changes in rate, or volume, or some combination of the two. This is achieved through a “what if” analysis. We calculate what the potential income would have been in the new period if the prior period rate had remained unchanged, and compare that result to what the income would have been in the prior period if the current rates were in effect. Through the analysis of these income potentials, we are able to determine how much of the change between periods is the impact of differing rates and how much is volume driven.
For discussion purposes, our “Rate/Volume Analysis” and “Net Interest Income Analysis” tables include tax equivalent income on bank owned life insurance (BOLI) and municipal securities that are not in compliance with Generally Accepted Accounting Principals (GAAP). The following table is a reconciliation of our income statement presentation to these tables.
RECONCILIATION OF NET INTEREST INCOME
TO TAX EQUIVALENT INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Interest income:
|
|
|
|
|
|
|
Total interest income
|
$
|
12,417,826
|
|
|
$
|
11,385,570
|
|
|
$
|
10,434,083
|
|
|
Bank owned life insurance
|
39,990
|
|
|
67,954
|
|
|
57,773
|
|
|
Tax equivalent adjustment (35% tax rate)
|
|
|
|
|
|
|
Bank owned life insurance
|
21,533
|
|
|
36,591
|
|
|
31,109
|
|
|
Municipal securities
|
5,227
|
|
|
5,237
|
|
|
5,246
|
|
|
Adjusted income on earning assets
|
12,484,576
|
|
|
11,495,352
|
|
|
10,528,211
|
|
|
Interest expense:
|
|
|
|
|
|
|
Total interest expense
|
912,119
|
|
|
737,081
|
|
|
971,112
|
|
|
Net interest income—adjusted
|
$
|
11,572,457
|
|
|
$
|
10,758,271
|
|
|
$
|
9,557,099
|
|
Adjusted net interest income increased $814 thousand in the first quarter of 2016 compared to 2015. Net interest income in 2015 was $1.2 million higher than 2014. Interest income increased $990 thousand in the 2016 and 967 thousand in 2015 when compared to prior year. Interest expense increased $175 thousand in 2016 compared to 2015 interest expense after declining $233 thousand in 2015 compared to 2014.
Changes in Net Interest Income (Rate/Volume Analysis)
Net interest income is the product of the volume of average earning assets and the average rates earned, less the volume of average interest-bearing liabilities and the average rates paid. The portion of change relating to both rate and volume is allocated to each of the rate and volume changes based on the relative change in each category.
Interest earning asset growth provided $984 thousand in interest earnings in 2016 while changes in rate provided an additional $5 thousand for a total contribution of $989 thousand. The primary contributor to this increase was our loans held for investment portfolio which provided an additional $850 thousand in interest in 2016. Loans held for sale contributed an additional $105 thousand.
Interest expense increased $175 thousand in the first quarter of 2016 driven by increased rates. Interest expense on deposits increased $186 thousand, $123 thousand of which was due to increases in rates during the quarter. Money market and time deposit accounts were the source of the increase.
Interest income growth in 2015 compared to 2014 was driven by volume. Interest income increased $967 thousand due to growth in both loans held for sale and loans held for investment. A portion of the interest benefit related to growth was reduced due to lower yields on the new volume. Interest expense declined $234 thousand in 2015 compared to 2014 driven by lower rates on money market and time deposit accounts and borrowings.
The following table analyzes the changes in both rate and volume components of net interest income on a tax equivalent basis.
RATE / VOLUME ANALYSIS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2016 vs. 2015
|
|
2015 vs. 2014
|
|
|
Interest
Increase
(Decrease)
|
|
Change
Attributable to
|
|
Interest
Increase
(Decrease)
|
|
Change
Attributable to
|
|
|
Rate
|
|
Volume
|
|
Rate
|
|
Volume
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
$
|
21
|
|
|
$
|
(13
|
)
|
|
$
|
34
|
|
|
$
|
13
|
|
|
$
|
36
|
|
|
$
|
(23
|
)
|
|
Loans held for investment
|
850
|
|
|
(25
|
)
|
|
875
|
|
|
361
|
|
|
(517
|
)
|
|
878
|
|
|
Mortgage loans held for sale
|
105
|
|
|
52
|
|
|
53
|
|
|
534
|
|
|
(102
|
)
|
|
636
|
|
|
Federal funds sold
|
(4
|
)
|
|
6
|
|
|
(10
|
)
|
|
(32
|
)
|
|
(4
|
)
|
|
(28
|
)
|
|
Dividend-earning restricted equity securities
|
6
|
|
|
8
|
|
|
(2
|
)
|
|
9
|
|
|
9
|
|
|
—
|
|
|
Deposits in other banks
|
54
|
|
|
30
|
|
|
24
|
|
|
66
|
|
|
24
|
|
|
42
|
|
|
Bank owned life insurance
|
(43
|
)
|
|
(53
|
)
|
|
10
|
|
|
16
|
|
|
(10
|
)
|
|
26
|
|
|
Total interest income
|
$
|
989
|
|
|
$
|
5
|
|
|
$
|
984
|
|
|
$
|
967
|
|
|
$
|
(564
|
)
|
|
$
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
$
|
—
|
|
|
(2
|
)
|
|
2
|
|
|
$
|
(2
|
)
|
|
(4
|
)
|
|
2
|
|
|
Savings
|
1
|
|
|
2
|
|
|
(1
|
)
|
|
(9
|
)
|
|
(7
|
)
|
|
(2
|
)
|
|
Money market
|
71
|
|
|
75
|
|
|
(4
|
)
|
|
(75
|
)
|
|
(69
|
)
|
|
(6
|
)
|
|
Time
|
114
|
|
|
48
|
|
|
66
|
|
|
(80
|
)
|
|
(159
|
)
|
|
79
|
|
|
Total deposits
|
186
|
|
|
123
|
|
|
63
|
|
|
(166
|
)
|
|
(239
|
)
|
|
73
|
|
|
Borrowings
|
(11
|
)
|
|
27
|
|
|
(38
|
)
|
|
(68
|
)
|
|
(141
|
)
|
|
73
|
|
|
Total interest expense
|
175
|
|
|
150
|
|
|
25
|
|
|
(234
|
)
|
|
(380
|
)
|
|
146
|
|
|
Net interest income
|
$
|
814
|
|
|
$
|
(145
|
)
|
|
$
|
959
|
|
|
$
|
1,201
|
|
|
$
|
(184
|
)
|
|
$
|
1,385
|
|
Non-Interest Income
Non-interest income was $20.3 million in the first quarter of 2016, a decrease of $1.9 million, or 8.7% from the first quarter of 2015. Mortgage banking income, which is our largest source of non-interest income, was the primary source of the change. Non-interest income is broken out into more detail in the following table.
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
Mortgage banking income
|
$
|
19,018,308
|
|
|
$
|
21,063,679
|
|
|
Service charges and fees
|
500,139
|
|
|
516,554
|
|
|
Title company income
|
215,603
|
|
|
232,771
|
|
|
Bank owned life insurance income
|
39,990
|
|
|
67,954
|
|
|
Investment and insurance commissions
|
478,576
|
|
|
344,126
|
|
|
(Loss) gain on sale of assets
|
(97
|
)
|
|
35,011
|
|
|
Other
|
76,915
|
|
|
6,068
|
|
|
|
$
|
20,329,434
|
|
|
$
|
22,266,163
|
|
Mortgage banking income represents fees from originating and selling residential mortgage loans. Mortgage banking income declined $2.0 million in the first quarter due to lower volume. The following table summarizes quarterly mortgage loan production for the first quarter of 2016 compared to 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking Income
|
|
|
|
2016
|
|
2015
|
|
|
|
Number
|
Dollar Volume (000s)
|
Purchase
|
|
Number
|
Dollar Volume (000s)
|
Purchase
|
|
First Quarter
|
|
1,766
|
|
$
|
457,891
|
|
70.3
|
%
|
|
1,840
|
|
$
|
487,423
|
|
53.0
|
%
|
|
Second Quarter
|
|
—
|
|
—
|
|
—
|
%
|
|
2,356
|
|
605,599
|
|
66.0
|
%
|
|
Third Quarter
|
|
—
|
|
—
|
|
—
|
%
|
|
2,053
|
|
527,514
|
|
82.7
|
%
|
|
Fourth Quarter
|
|
—
|
|
$
|
—
|
|
—
|
%
|
|
1,768
|
|
$
|
468,606
|
|
75.7
|
%
|
|
Year to Date
|
|
1,766
|
|
$
|
457,891
|
|
70.3
|
%
|
|
8,017
|
|
$
|
2,089,142
|
|
72.3
|
%
|
Investment and insurance income increased $134 thousand in the first quarter of 2016. Income from Monarch Bank Private Wealth ("MBPW") is derived from a combination of new business and fees on existing business. MBPW offers products and services and asset management through affiliation with Raymond James Financial Services, Inc.
Service charges and fees on deposit accounts declined $16 thousand in the first quarter of 2016 compared to 2015 driven by lower service charges. The primary components of service charges and fees are non-sufficient fund and overdraft fees and ATM transaction fees and merchant service fees. Income growth is attributable to increases in our demand deposit products, year over year and increased merchant service income. We offer a credit card product through a third party vendor which has added to fee income. Monarch has an agreement with a third-party vendor to brand ATMs in Food Lion grocery stores in southeast Virginia and northeast North Carolina. In return for supplying the cash for the machines and paying the machines’ cash servicing fees, we receive a portion of the transaction surcharge, and our customers can withdraw cash from the machines without a fee or transaction surcharge. We have 12 ATMs located at our banking center sites. Combined with our third-party vendor relationship, our network includes 50 active branded ATMs.
Through Monarch Investment, LLC, we own a 75% interest in a title company, Real Estate Security Agency, LLC (RESA), which is being treated as a consolidated entity for accounting purposes. RESA's income declined $17 thousand in the first quarter of 2016 compared to 2015 driven by lower volume.
Income from bank owned life insurance (BOLI) and company owned life insurance (COLI) declined $27 thousand in the quarter when compared to 2015 due to market volatility associated with COLI and the purchase of additional insurance discussed previously.
Non-interest Expense
Total non-interest expenses declined $1.8 million to $25.4 million in the first quarter of 2016 compared to 2015. Net overhead expense, which is the difference between non-interest income and non-interest expense, declined $131 thousand in the first quarter of 2016 when compared to prior year.
The following table summarizes our non-interest expense for the periods indicated:
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
Salaries and employee benefits
|
$
|
10,142,860
|
|
|
$
|
9,594,276
|
|
|
Commissions and incentives
|
7,730,892
|
|
|
9,445,138
|
|
|
Loan expense
|
1,793,662
|
|
|
2,458,663
|
|
|
Occupancy expenses, net of rental income
|
1,453,405
|
|
|
1,446,833
|
|
|
Furniture and equipment expense
|
820,076
|
|
|
841,675
|
|
|
Marketing expense
|
774,401
|
|
|
746,227
|
|
|
Data processing services
|
613,954
|
|
|
629,750
|
|
|
Professional fees
|
525,258
|
|
|
258,601
|
|
|
Telephone
|
351,731
|
|
|
325,746
|
|
|
FDIC Insurance
|
131,099
|
|
|
134,741
|
|
|
Stationery and supplies
|
86,941
|
|
|
114,986
|
|
|
Virginia Franchise Tax
|
224,481
|
|
|
207,869
|
|
|
Postage and shipping
|
80,823
|
|
|
100,733
|
|
|
Travel expense
|
148,224
|
|
|
128,944
|
|
|
ATM expense
|
90,842
|
|
|
90,400
|
|
|
Insurance expense
|
40,749
|
|
|
110,739
|
|
|
Title expense
|
31,189
|
|
|
38,495
|
|
|
Other real estate expense
|
—
|
|
|
16,402
|
|
|
Rental income, other real estate
|
—
|
|
|
(1,955
|
)
|
|
Loss on sale of other real estate, net
|
—
|
|
|
38,879
|
|
|
Other
|
331,198
|
|
|
450,690
|
|
|
|
$
|
25,371,785
|
|
|
$
|
27,177,832
|
|
Employee compensation; in the form of salaries, benefits, commissions and incentives, represent approximately 70.5% of non-interest expense in the first quarter of 2016 compared to 70.1% in 2015. The number of full time equivalent employees at March 31, 2016 totaled 648 compared to 642 one year prior. Salaries and benefits increased $549 thousand, quarter over quarter driven by annual salary increases and profit sharing compensation expense. A change in the compensation mix of several highly compensated employees made later in 2015 also contributed to higher salary expense. Commissions and incentives decreased $1.7 million in the quarter driven by lower mortgage loans held for sale production and modifications made to that compensation in light of the pending merger with TowneBank. A significant number of our mortgage division employees are commission based.
Professional fees increased quarter over quarter because of changes made after the first quarter of 2015 with regard to outsourced audits which resulted in higher expenses. Director fees increased in 2016 compared to 2015 due a change in the timing of certain compensation. Loan expense is driven by the mortgage volume which, as previously noted, is down quarter over quarter.
We do not have any properties in other real estate at March 31, 2016. We had one property in other real estate at March 31, 2015. During the first quarter of 2015, one property was moved to other real estate and another property was sold at a loss of $38,879.
The following summary identifies non-interest expenses with the most significant quarter-over-quarter change.
|
|
|
|
|
|
|
|
|
|
|
|
Change - Increase (Decrease)
For the Three Months Ended
September 30, 2015
|
|
|
Dollars
|
|
Percentage
|
|
Salaries and employee benefits
|
$
|
548,584
|
|
|
5.7
|
%
|
|
Professional fees
|
266,657
|
|
|
103.1
|
%
|
|
Loan expense
|
(665,001
|
)
|
|
(27.0
|
)%
|
|
Commissions and incentives
|
(1,714,246
|
)
|
|
(18.1
|
)%
|
Income Statement Impact of Forward Rate Commitments and Unrealized Hedge Gain (Loss)
Included in mortgage banking income, commissions and incentives, and loan expense are accruals for changes in income related to interest rate lock commitments, and fair value adjustments related to hedging. The offset for these accruals are found
in the consolidated statements of condition. These accounting estimates, which are required by GAAP, create volatility in our financial statements because they accelerate earnings recognition and are driven by volume changes and market conditions. These unrealized estimates are made at a specified point in time and do not necessarily reflect the actual income or losses that will occur. Realized gains and losses from hedge activities are carried separately and included in mortgage banking income.
Interest rate lock commitments are a commitment at a specific rate to an identified potential borrower for a specified time period in the future. That specified time period is typically between 15 and 45 days from the date of initial lock. Although they represent a guaranteed commitment by the bank to a potential borrower, they do no represent an actual closed loan and that potential borrower may decide not to borrow from us at any time until the lock expires. Based on GAAP, unearned income and expenses related to these commitments must be recorded on our consolidated statements of income at quarter end, as if the loans had closed. Changes in the number and dollar volume of these commitments between quarters has a direct impact on earnings. If the number and dollar volume declines between measurement periods, rate lock income will most likely decline, whereas, an increase in number and dollar volume will most likely create an increase in income. Additionally, because the income or loss is an unrealized estimate with consolidated statements of condition offset, year to date measurements are impacted by reversals of prior period end levels.
For mortgage loans committed to our mandatory delivery program, loans with interest rate locks are paired with the sale of a notional security bearing similar attributes. The assumption is the two products will move in direct correlation in opposite directions and thereby reduce the risk of pricing movements. Interim income or losses on the pairing of the loans and securities is recorded in mortgage banking income on our consolidated statements of income with offset in our consolidated statements of condition. As with forward rate commitments, volume changes can impact the dollar value of notional shares between periods and an uncoupling of the mortgage market with the securities market due to volatility can impact the fair value of the securities. Year to date measurements are impacted by prior year levels because of the reversal of the accrual.
Loans in our mandatory delivery program that have closed but have not been committed to an investor are also required to be reported as if sold to an investor. A unrealized gain or loss on the loan is recorded in consolidated statements of income with offset to the consolidated statements of condition based on the market rate for a similar product at the measurement date.
The following summary identifies the components in non-interest income and non-interest expense related to forward rate commitments and unrealized hedge gain (loss) found in our consolidated statements of income with offset in our consolidated statements of condition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
Non-interest income:
|
2016
|
|
2015
|
|
Hedge income (loss)
|
$
|
(153,591
|
)
|
|
$
|
(456,064
|
)
|
|
Mark to market hedge income (loss)
|
(416,588
|
)
|
|
61,740
|
|
|
Rate lock income (expense)
|
1,845,952
|
|
|
3,150,841
|
|
|
Change in non-interest income
|
1,275,773
|
|
|
2,756,517
|
|
|
Non- interest expense:
|
|
|
|
|
Rate lock commissions
|
(476,031
|
)
|
|
(894,928
|
)
|
|
Rate lock loan expense
|
(134,633
|
)
|
|
(594,460
|
)
|
|
Change in non-interest (expense)
|
(610,664
|
)
|
|
(1,489,388
|
)
|
|
Forward rate commitments and unrealized hedge gain (loss)
|
665,109
|
|
|
1,267,129
|
|
Income Taxes
Our federal income tax provision was $2.3 million in the first quarter of
2016
compared to $2.0 million in the first quarter of
2015
. State income tax provision for the states of Maryland, North Carolina and South Carolina totaled $106 thousand in both quarters.
BOLI income and certain municipal securities are not subject to federal income tax. We had tax exempt income of $80 thousand in the first quarter of 2016 and $78 thousand in the first quarter of 2015.
Certain expenses related to marketing and executive retirement plans are non-deductible for tax purposes. These non-deductible expenses totaled $307 thousand and $115 thousand in the first quarter of 2016 and 2015, respectively.
The table below presents a summary of income taxes and the effective tax rate for quarters ended March 31,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Summary
|
|
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
Income tax provision
|
$
|
2,363,340
|
|
|
$
|
1,993,340
|
|
|
Less: state tax provision
|
105,840
|
|
|
105,840
|
|
|
Federal tax provision
|
$
|
2,257,500
|
|
|
$
|
1,887,500
|
|
|
|
|
|
|
|
Net income before tax
|
$
|
6,463,356
|
|
|
$
|
5,486,820
|
|
|
|
|
|
|
|
Effective federal tax rate
|
34.9
|
%
|
|
34.4
|
%
|
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Total assets were
$1.213 billion
at
March 31, 2016
, a
$51.1 million
or
4.4%
increase compared to assets of
$1.161 billion
at
December 31, 2015
. Total cash and cash equivalents were $86.8 million, an increase of $12.6 million or 17.5% over year end 2015. Mortgage loans held for sale increased $19.8 million or 11.7% and loans held for investment increased $20.8 million or 2.5%. Investment securities declined $3.3 million or 11.1%.
Cash and cash equivalents, which fluctuate daily based on our liquidity levels and mortgage settlement activity, increased $12.6 million. This increase is due to a $12.6 million increase in federal funds sold. Interest bearing bank balances increased $1.0 million. Included in interest bearing bank balances are fixed rate deposits which have maturities between one month and five years. These fixed rate deposits, which were $29.0 million at March 31, 2016, have declined $800 thousand since year end 2015.
Our mortgage loans held for sale portfolio represents mortgage loans that have been closed and are awaiting investor funding. A majority of our mortgage loans are pre-sold. These loans typically remain on our books for thirty to forty-five days. Outstanding balances, which are dependent on the current mortgage market, the timing of closings, and investor turn around, may fluctuate significantly between periods. However, general production levels typically decline in the later part of the year and increase with the approach of spring months. Outstanding loans increased $19.8 million when compared to December 2015 quarter end. Our loans held for investment portfolio which is comprised primarily of commercial loans and real estate loans increased $20.8 million in the first three months of 2016. The majority of this growth was in real estate construction, 1-4 family residential real estate and commercial real estate loans.
During the first three months of 2016, we purchased an additional $120 thousand in company owned life insurance (COLI). Income from BOLI and COLI is not subject to federal income tax. Restricted equity securities include stock in the Federal Reserve, Federal Home Loan Bank and other bankers' banks. The level of stock we retain is subject to evaluation by the various entities and may result in a periodic increase or decrease in share level. Our stock in the Federal Home Loan Bank decreased due to low borrowing levels. Investment securities declined $3.3 million due to security calls. With the impending merger, we are not purchasing additional investment securities.
Total liabilities were
$1.09 billion
at
March 31, 2016
, an increase of
$47.7 million
or
4.6%
from
December 31, 2015
liabilities of $1.04 billion. Total deposits, which are our primary funding source, increased
$64.3 million
to
$1,063.4 million
at
March 31, 2016
compared to
$999.1 million
at year-end
2015
. Total borrowings declined $16.0 million at
March 31, 2016
compared to
December 31, 2015
.
Non-interest bearing demand deposits increased $16.4 million or 5.9% in the first quarter of 2016, interest bearing demand increased $790 thousand or 1.1% and time deposits increased $49.2 million or 18.5%. Money market accounts declined $955 thousand and savings deposits declined $1.1 million.
Our non-interest bearing deposits represent 27.9% and 28.0% of our total deposits at March 31, 2016 and December 31, 2015, respectively. Commercial and small business checking accounts comprise the largest percentage of non-interest bearing demand deposits. At March 31, 2016, commercial checking accounts increased $12.3 million over December 31, 2015 and at $187.2 million were 63% of non-interest bearing demand. Attorney escrow accounts increased $12.6 million to $29.7 million and 10% of non-interest bearing demand in the first quarter of 2016. Escrow accounts ordinarily house real estate funds, which makes them sensitive to the growth within the real estate market. Small business checking accounts declined $6.6 million to $54.6 million, 18% of non-interest bearing demand. We are primarily a business bank and, as such, have focused our efforts on obtaining company
operating accounts, which are demand deposit accounts. Our focus on the business sector, coupled with the growth in business operating accounts, has resulted in continued growth in demand deposits.
Interest bearing demand deposits increased $790 thousand from December 31, 2015. Interest bearing demand deposits represent 9.1% of interest bearing deposits. Money market and time deposits ("CDs") represent 88.5% and savings deposits represent 2.4%, of interest bearing deposits. Money market deposits, which were $363.9 million at March 31, 2016, decreased $955 thousand since December 31, 2015. Brokered money market deposit accounts are included in our money market totals at both March 31, 2016 and December 31, 2015 and declined $952 thousand since year end. We have been managing money market account growth through pricing of our multi-tiered money market product, while keeping rates attractive and highly competitive in the market. Money market accounts are the most suitable product for individuals who typically invest in non-bank products because rates are higher than demand and savings accounts but they have withdrawal features more flexible than CDs. These account features make money market accounts more subject to fluctuation based on market conditions.
Outstanding CDs increased $49.2 million to $314.8 million at March 31, 2016 compared to December 31, 2015. Included in CDs are brokered CDs which are used along with our brokered money market accounts and Federal Home Loan Bank ("FHLB") borrowings to fund our loans held for sale portfolio. The majority of these brokered CDs are Certificate of Deposit Account Registry Service
®
(CDARS), which are typically short term, with maturities of between 4 and 13 weeks. However, we also house certain municipal deposits in CDARS because of the additional deposit insurance protection offered by the product. Brokered deposits increased $47.7 million at March 31, 2016 compared to December 31, 2015. Our remaining CD portfolio increased $1.5 million in the quarter. We do not actively promote our CD products as CD shoppers typically expect higher interest rates. We have focused on relationship pricing for CDs, with non-clients receiving lower rates for CDs than existing clients, thereby encouraging relationships which are beneficial to both the Bank and our clients.
Borrowings at the FHLB declined $16.0 million at March 31, 2016 compared to December 31, 2015 due to our moving LHFS funding to lower cost CDARs. When advantageous to pricing and margin management, we utilize this borrowing source to fund our loans held for sale portfolio along with CDARs.
Excluding brokered deposits, our loans held for investment to deposit ratio was 95.9% and 99.4% for March 31, 2016 and December 31, 2015, respectively.
Stockholders’ equity was $121.0 million at
March 31, 2016
, compared to
$117.7 million
at
December 31, 2015
. Components of the increase in stockholders’ equity include net income of $4.1 million, decrease in unrealized losses in other comprehensive income of $103 thousand, stock based compensation totaling $216 thousand, offset by common stock dividend payments of $1.1 million, and distributions to non-controlling interests of $31 thousand.
Loans Held for Investment
Our lending activities are our principal source of income. Loans held for investment, net of unearned income, increased $20.8 million or 2.5% in the first three months of 2016. Our allowance for loan losses increased $14 thousand after net recoveries of $14 thousand.
The following table provides a breakdown, by segment of our loans held for investment at
March 31, 2016
and
December 31, 2015
.
LOANS HELD FOR INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Commercial
|
$
|
156,582,498
|
|
|
$
|
158,072,698
|
|
|
Real estate
|
|
|
|
|
Construction
|
209,408,683
|
|
|
190,422,992
|
|
|
Residential (1-4 family)
|
116,380,071
|
|
|
113,278,318
|
|
|
Home equity lines
|
58,221,283
|
|
|
59,097,607
|
|
|
Multifamily
|
9,503,347
|
|
|
11,590,641
|
|
|
Commercial
|
294,316,513
|
|
|
290,531,083
|
|
|
Real estate subtotal
|
687,829,897
|
|
|
664,920,641
|
|
|
Consumers
|
|
|
|
|
Consumer and installment loans
|
5,813,500
|
|
|
6,356,473
|
|
|
Overdraft protection loans
|
48,153
|
|
|
121,217
|
|
|
Loans to individuals subtotal
|
5,861,653
|
|
|
6,477,690
|
|
|
Total gross loans
|
850,274,048
|
|
|
829,471,029
|
|
|
Unamortized loan fees, net of deferred costs
|
(219,747
|
)
|
|
(201,724
|
)
|
|
Loans held for investment, net of unearned income
|
850,054,301
|
|
|
829,269,305
|
|
|
Allowance for loan losses
|
(8,901,032
|
)
|
|
(8,887,199
|
)
|
|
Total net loans
|
$
|
841,153,269
|
|
|
$
|
820,382,106
|
|
Allowance and Provision for Loan Losses
We have certain lending policies and procedures in place, designed to balance loan growth and income with an acceptable level of risk, which management reviews and approves on a regular basis. Our review process is supported by a series of reports related to loan production, loan quality, credit concentrations, policy exceptions, loan delinquencies and non-performing and potential problem loans. We also utilize diversification in our loan portfolio as a means of managing risk.
Inherent losses in our loan portfolio are supported by our allowance for loan losses. Management is responsible for determining the level of the allowance for loan losses, subject to review by our Board of Directors. Among other factors, we consider our historical loss experience, the size and composition of our loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits including impaired loans and our risk-rating-based loan watch list, and local and national economic conditions. The economy of our trade area is well diversified. There are additional risks of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those factors include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate.
To determine the total allowance for loan losses, we estimate the reserves needed by analyzing loans on both, a pooled basis and individually. Our allowance for loan losses consists of amounts applicable to the following three loan types: commercial, real estate, and consumer. In addition, loans within these types are evaluated as a group or on an individual or relationship basis and assigned a risk grade based on the underlying characteristics. Loans are pooled by loan segment with loan type and losses modeled utilizing historical experience by segment, other known and inherent risks, and quantitative techniques which management has determined fit the characteristics of the loan type or segment within that type. We utilize a moving average historical loss "look back" period of twenty quarters.
The commercial loan type includes commercial and industrial loans which are usually secured by the assets being financed or other business assets such as accounts receivable or inventory and normally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand their business.
The real estate loan type includes all loans secured by real estate. This type is further broken down into segments. These segments are: construction loans, residential 1-4 family loans, home equity lines, multifamily loans, and commercial real estate loans. Construction and multifamily loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Residential 1-4 family and home equity loan originations utilize analytics to supplement the underwriting process. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.
Commercial and real estate portfolio loans are evaluated on an individual or relationship basis and assigned a risk grade at the time the loan is made. Additionally, we perform periodic reviews of the loan or relationship to determine if there have been any changes in the original underwriting which would change the risk grade and/or impact the borrower’s ability to repay the loan.
The consumer loan portfolio includes two classes: consumer and installment loans and overdraft protection loans. These loans, which are in relatively small loan amounts, are spread across many individual borrowers. We utilize analytics to supplement general underwriting. Loans within the consumer type are assigned risk grades and evaluated as a pool, unless specifically identified through delinquency or other signs of credit deterioration, at which time the identified loan is individually evaluated. Additionally, loans that have been specifically identified as a credit risk due to circumstances that may affect the ability of the borrower to repay interest and/or principal are analyzed on an individual basis. Adverse circumstances may include loss of repayment source, deterioration in the estimated value of collateral, elevated trends of delinquencies, and charge-offs.
We evaluate the adequacy of the allowance for loan losses monthly in order to maintain the allowance at a level that is sufficient to absorb probable credit losses. Such factors as the level and trend of interest rates and the condition of the national and local economies are also considered. From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts to, or release balances from, the allowance for loan losses. Our allowance for loan losses is sensitive to risk ratings assigned to individually evaluated loans, economic assumptions, and delinquency trends driving statistically modeled reserves.
There are nine numerical risk grades which are assigned to loans. These risk grades are as follows:
|
|
|
|
|
|
“Pass”
|
“Watch List”
|
|
1 Minimal
|
6 Special mention
|
|
2 Modest
|
7 Substandard
|
|
3 Average
|
8 Doubtful
|
|
4 Acceptable
|
9 Loss
|
|
5 Acceptable with care
|
|
The following is a breakdown between pass and watch list loans at
March 31, 2016
and
December 31, 2015
. There were no loans risk graded Doubtful (8) or Loss (9) included in our portfolio at
March 31, 2016
or
December 31, 2015
.
PASS AND WATCH LIST LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
Watch List
|
|
|
|
Weighted
Average
Risk Grade
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Total
|
|
|
Commercial
|
$
|
155,809,274
|
|
|
$
|
616,174
|
|
|
$
|
157,050
|
|
|
$
|
156,582,498
|
|
|
3.25
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
208,218,113
|
|
|
837,448
|
|
|
353,122
|
|
|
209,408,683
|
|
|
3.17
|
|
|
Residential (1-4 family)
|
111,566,983
|
|
|
1,626,704
|
|
|
3,186,384
|
|
|
116,380,071
|
|
|
3.67
|
|
|
Home equity lines
|
56,846,979
|
|
|
—
|
|
|
1,374,304
|
|
|
58,221,283
|
|
|
4.14
|
|
|
Multifamily
|
9,503,347
|
|
|
—
|
|
|
—
|
|
|
9,503,347
|
|
|
3.31
|
|
|
Commercial
|
291,299,163
|
|
|
2,005,623
|
|
|
1,011,727
|
|
|
294,316,513
|
|
|
3.36
|
|
|
Real estate subtotal
|
677,434,585
|
|
|
4,469,775
|
|
|
5,925,537
|
|
|
687,829,897
|
|
|
3.42
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
5,750,898
|
|
|
—
|
|
|
62,602
|
|
|
5,813,500
|
|
|
4.03
|
|
|
Overdraft protection loans
|
48,153
|
|
|
—
|
|
|
—
|
|
|
48,153
|
|
|
4.26
|
|
|
Loans to individuals subtotal
|
5,799,051
|
|
|
—
|
|
|
62,602
|
|
|
5,861,653
|
|
|
4.03
|
|
|
Total gross loans
|
$
|
839,042,910
|
|
|
$
|
5,085,949
|
|
|
$
|
6,145,189
|
|
|
$
|
850,274,048
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
Watch List
|
|
|
|
Weighted
Average
Risk Grade
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Total
|
|
|
Commercial
|
$
|
157,818,177
|
|
|
$
|
233,073
|
|
|
$
|
21,448
|
|
|
$
|
158,072,698
|
|
|
3.24
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
189,254,940
|
|
|
710,758
|
|
|
457,294
|
|
|
190,422,992
|
|
|
3.18
|
|
|
Residential (1-4 family)
|
108,692,612
|
|
|
1,075,477
|
|
|
3,510,229
|
|
|
113,278,318
|
|
|
3.71
|
|
|
Home equity lines
|
57,657,772
|
|
|
—
|
|
|
1,439,835
|
|
|
59,097,607
|
|
|
4.15
|
|
|
Multifamily
|
11,590,641
|
|
|
—
|
|
|
—
|
|
|
11,590,641
|
|
|
3.56
|
|
|
Commercial
|
288,533,180
|
|
|
1,007,152
|
|
|
990,751
|
|
|
290,531,083
|
|
|
3.39
|
|
|
Real estate subtotal
|
655,729,145
|
|
|
2,793,387
|
|
|
6,398,109
|
|
|
664,920,641
|
|
|
3.46
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
6,291,430
|
|
|
—
|
|
|
65,043
|
|
|
6,356,473
|
|
|
4.03
|
|
|
Overdraft protection loans
|
118,690
|
|
|
—
|
|
|
2,527
|
|
|
121,217
|
|
|
4.76
|
|
|
Loans to individuals subtotal
|
6,410,120
|
|
|
—
|
|
|
67,570
|
|
|
6,477,690
|
|
|
4.04
|
|
|
Total gross loans
|
$
|
819,957,442
|
|
|
$
|
3,026,460
|
|
|
$
|
6,487,127
|
|
|
$
|
829,471,029
|
|
|
3.42
|
|
Additional regulatory guidance with regard to the specifications of the special mention (6) risk grade, stipulates that loans with this risk grade be treated as transitory and should not remain special mention for more than one year. We continue to monitor and evaluate loans in our special mention risk grade on a monthly basis.
We evaluate the collectability of both principal and interest when assessing the need for a loss accrual. (For additional discussion on this evaluation refer to Note 1 and Note 3 of our
2015
Annual Report on Form10-K.)
We evaluate additional risk inherent in our satisfactory risk grade groups through a methodology that looks at these loans on a pool basis by loan segment which is further delineated by purpose. Each segment is assigned an expected loss factor based on a moving average “look-back” at our historical losses for that particular segment. At March 31, 2016 and December 31, 2015 our model includes a twenty quarter or five year "look back". This methodology provides a supportable means of evaluating the potential risk in our portfolio because the delineation by purpose establishes a stronger focus on areas of weakness and strength within the portfolio.
This evaluation includes, but is not limited to, the application of a loss factor which is arrived at by using a multi-year moving average “look back” at our historical losses. This loss factor is multiplied by the outstanding principal of loans not individually evaluated for impairment to arrive at an overall loss estimate. Environmental factors may also be applied to a class or classes of loans based on management’s subjective evaluation of such conditions as credit quality trends, collateral values, portfolio concentrations, specific industry conditions in the regional economy, regulatory examination results, external audit and loan review findings, and recent loss experiences in particular portfolio classes. Any unallocated portion of the allowance for loan losses reflects
management’s attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates of credit losses.
The allowance is subject to regulatory examinations and determination as to adequacy. This examination may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.
We recorded no provision for loan losses in the first quarter of 2016 but we recorded a $250 thousand provision during the same period of 2015. Based on the current economic environment and the composition of our loan portfolio, the level of our charged-off loans combined with our loss experience, we consider our loan loss allowance sufficient to meet the losses inherent in our portfolio.
Loans charged off during
first
quarter of
2016
totaled
$23,027
compared to
$598,454
for the same period in
2015
. Recoveries totaled
$36,860
in the
first
quarter of
2016
compared to
$43,170
for the same period in
2015
. The ratio of net charge-offs to average outstanding loans for the
first
quarter of
2016
was (0.01%) compared to 0.07% in
2015
. A total of $28,454 in specific reserves for loans charged off in the first three months of 2016 were included in our
December 31, 2015
loan loss allowance. Specific reserves totaling $582,500 were included in our December 31, 2015 loan loss allowance for loans charged off in the first three months of
2015
.
In the first three months of 2016, approximately $17 thousand in loans charged off were related to residential properties and $6 thousand were related to consumer loans. In the first quarter of 2015, approximately $565 thousand in loans charged off were related to business failure and $34 thousand were related to residential properties.
The allowance for loan losses totaled
$8,901,032
at
March 31, 2016
, a increase of $13,833 from
December 31, 2015
. The ratio of the allowance to loans held for investment, less unearned income, was 1.05% at
March 31, 2016
, and 1.07% at
December 31, 2015
. We believe the allowance for loan losses is adequate to absorb any inherent losses on existing loans in our loan portfolio at
March 31, 2016
. The allowance to loans ratio is supported by the level of non-performing loans, the seasoning of the loan portfolio, and the experience of the lending staff in the market.
LOAN LOSS ALLOWANCE AND LOSS EXPERIENCE
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
2016
|
|
2015
|
|
Balance, beginning of period
|
$
|
8,887,199
|
|
|
$
|
8,948,837
|
|
|
Loans charged-off
|
|
|
|
|
Commercial
|
—
|
|
|
(34,000
|
)
|
|
Real estate
|
|
|
|
|
Construction
|
—
|
|
|
(17,500
|
)
|
|
Residential (1-4 family)
|
(16,919
|
)
|
|
(546,954
|
)
|
|
Home equity lines
|
—
|
|
|
—
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
Commercial
|
—
|
|
|
—
|
|
|
Consumers
|
|
|
|
|
Consumer and installment loans
|
(3,581
|
)
|
|
—
|
|
|
Overdraft protection loans
|
(2,527
|
)
|
|
—
|
|
|
Loans charged-off total
|
(23,027
|
)
|
|
(598,454
|
)
|
|
Recoveries
|
|
|
|
|
Commercial
|
2,800
|
|
|
2,300
|
|
|
Real estate
|
|
|
|
|
Construction
|
4,023
|
|
|
13,661
|
|
|
Residential (1-4 family)
|
3,820
|
|
|
3,779
|
|
|
Home equity lines
|
26,217
|
|
|
23,430
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
Commercial
|
—
|
|
|
—
|
|
|
Consumers
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
—
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
Loan recoveries total
|
36,860
|
|
|
43,170
|
|
|
Net Charge Offs
|
13,833
|
|
|
(555,284
|
)
|
|
Provisions charged to operations
|
—
|
|
|
250,000
|
|
|
Balance, end of period
|
$
|
8,901,032
|
|
|
$
|
8,643,553
|
|
A summary of our allowance as of
March 31, 2016
and
December 31, 2015
by segment is as follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
Amount
|
|
Percentage of loans
in each category
to total loans
|
|
Commercial
|
$
|
920,904
|
|
|
18.5
|
%
|
|
Real estate
|
|
|
|
|
Construction
|
1,854,410
|
|
|
24.6
|
%
|
|
Residential (1-4 family)
|
1,853,610
|
|
|
13.7
|
%
|
|
Home equity lines
|
1,527,649
|
|
|
6.8
|
%
|
|
Multifamily
|
42,765
|
|
|
1.1
|
%
|
|
Commercial
|
2,185,523
|
|
|
34.6
|
%
|
|
Consumers
|
|
|
|
|
Consumer and installment loans
|
93,580
|
|
|
0.7
|
%
|
|
Overdraft protection loans
|
206
|
|
|
—
|
%
|
|
Unallocated
|
422,385
|
|
|
|
|
|
|
$
|
8,901,032
|
|
|
100.0
|
%
|
|
Total loans held for investment outstanding *
|
$
|
850,054,301
|
|
|
|
|
Ratio of allowance for loan losses to total loans held for investment
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Amount
|
|
Percentage of loans
in each category
to total loans
|
|
Commercial
|
$
|
855,813
|
|
|
19.1
|
%
|
|
Real estate
|
|
|
|
|
Construction
|
1,797,301
|
|
|
22.9
|
%
|
|
Residential (1-4 family)
|
1,876,528
|
|
|
13.7
|
%
|
|
Home equity lines
|
1,654,545
|
|
|
7.1
|
%
|
|
Multifamily
|
52,158
|
|
|
1.5
|
%
|
|
Commercial
|
2,177,890
|
|
|
35.0
|
%
|
|
Consumers
|
|
|
|
|
Consumer and installment loans
|
96,025
|
|
|
0.8
|
%
|
|
Overdraft protection loans
|
3,037
|
|
|
—
|
%
|
|
Unallocated
|
373,902
|
|
|
|
|
|
|
$
|
8,887,199
|
|
|
100.0
|
%
|
|
Total loans held for investment outstanding *
|
$
|
829,269,305
|
|
|
|
|
Ratio of allowance for loan losses to total loans held for investment
|
1.07
|
%
|
|
|
|
|
|
|
|
|
*
|
Total loans held for investment outstanding includes unamortized loan costs, net of deferred fees of ($219,747) at March 31, 2016 and ($201,724) at December 31, 2015.
|
Asset Quality and Non-Performing Loans
We identify specific credit exposures through periodic analysis of our loan portfolio and monitor general exposures from economic trends, market values and other external factors. We maintain an allowance for loan losses, which is available to absorb losses inherent in the loan portfolio. The allowance is increased by the provision for losses and by recoveries from losses. Charged-off loan balances are subtracted from the allowance. The adequacy of the allowance for loan losses is determined on a monthly basis. Various factors as defined in the previous section “Allowance and Provision for Loan Losses” are considered in determining the adequacy of the allowance. Loans are generally placed on non-accrual status after they are past due for 90 days.
Non-performing loans include loans on which interest is no longer accrued, accruing loans that are contractually past due 90 days or more as to principal and interest payments, and loans classified as troubled debt restructurings. Based on this definition total non-performing loans as a percentage of total loans were 0.48% and 0.53% at March 31,2016 and December 31, 2015. Five of our nine troubled debt restructure loans were performing at March 31, 2016. Six of our ten troubled debt restructure loans were performing at December 31, 2015. Excluding performing troubled debt restructure this percentage declines to 0.23% and 0.27% at March 31, 2016 and December 31, 2015, respectively. Non-performing assets at
March 31, 2016
and
December 31, 2015
are presented below.
NON-PERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans
|
|
|
|
|
|
|
Over 90 Days
and Accruing
|
|
Nonaccrual
Loans
|
|
Non-accruing Restructured Loans
|
|
Accruing Restructured
Loans
|
|
Total Non-Performing
Loans
|
|
Other
Real Estate
Owned and Other Non-Performing Assets
|
|
Total
Non-Performing
Assets
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential (1-4 family)
|
104,285
|
|
|
306,331
|
|
|
685,009
|
|
|
778,471
|
|
|
1,874,096
|
|
|
—
|
|
|
1,874,096
|
|
|
Home equity lines
|
—
|
|
|
481,562
|
|
|
—
|
|
|
—
|
|
|
481,562
|
|
|
—
|
|
|
481,562
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
—
|
|
|
152,549
|
|
|
218,208
|
|
|
1,329,584
|
|
|
1,700,341
|
|
|
—
|
|
|
1,700,341
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
—
|
|
|
—
|
|
|
62,602
|
|
|
62,602
|
|
|
—
|
|
|
62,602
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other non-performing assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
104,285
|
|
|
$
|
940,442
|
|
|
$
|
903,217
|
|
|
$
|
2,170,657
|
|
|
$
|
4,118,601
|
|
|
$
|
—
|
|
|
$
|
4,118,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
—
|
|
|
$
|
21,448
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,448
|
|
|
$
|
—
|
|
|
$
|
21,448
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
—
|
|
|
101,677
|
|
|
—
|
|
|
—
|
|
|
101,677
|
|
|
—
|
|
|
101,677
|
|
|
Residential (1-4 family)
|
248,326
|
|
|
312,764
|
|
|
695,886
|
|
|
785,257
|
|
|
2,042,233
|
|
|
—
|
|
|
2,042,233
|
|
|
Home equity lines
|
—
|
|
|
483,859
|
|
|
—
|
|
|
—
|
|
|
483,859
|
|
|
—
|
|
|
483,859
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
—
|
|
|
153,349
|
|
|
220,776
|
|
|
1,329,584
|
|
|
1,703,709
|
|
|
—
|
|
|
1,703,709
|
|
|
Consumers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and installment loans
|
—
|
|
|
—
|
|
|
—
|
|
|
65,043
|
|
|
65,043
|
|
|
—
|
|
|
65,043
|
|
|
Overdraft protection loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
248,326
|
|
|
$
|
1,073,097
|
|
|
$
|
916,662
|
|
|
$
|
2,179,884
|
|
|
$
|
4,417,969
|
|
|
$
|
—
|
|
|
$
|
4,417,969
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2014
|
|
Asset Quality Ratios:
|
|
|
|
|
Nonperforming loans to period end loans, excluding performing restructured loans
|
0.23
|
%
|
|
0.27
|
%
|
|
Nonperforming assets to total assets, excluding performing restructured loans
|
0.16
|
%
|
|
0.19
|
%
|
|
Nonperforming assets to period end assets
|
0.34
|
%
|
|
0.38
|
%
|
|
Allowance for loan losses to non-accruing nonperforming loans
|
456.94
|
%
|
|
397.09
|
%
|
|
Nonperforming loans to period end loans
|
0.48
|
%
|
|
0.53
|
%
|
Restructured loans are loans for which it has been determined the borrower is in financial distress and a concession has been made to those terms that would not otherwise have been considered. Restructured loans are evaluated in accordance with applicable accounting guidance as impaired loans. In addition, if it is determined the borrower is unable to perform under the modified terms, further steps, such as a full charge-off or foreclosure may be taken. We did not have any commitments to lend additional funds on restructured loans at
March 31, 2016
or December 31, 2015.
TROUBLED DEBT RESTRUCTURING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
1-4 Family
|
|
Real Estate Construction
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Balance beginning of the period
|
$
|
1,481,143
|
|
|
$
|
1,550,360
|
|
|
$
|
65,043
|
|
|
$
|
3,096,546
|
|
|
Investment in restructured loans
|
|
|
|
|
|
|
|
|
Additions (payments received) during the period
|
(17,663
|
)
|
|
(2,568
|
)
|
|
(2,441
|
)
|
|
(22,672
|
)
|
|
Charge-off during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Moved to other real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Valuation allowance for restructured loans included in charged-off loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Additions during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Restructured loans included in impaired loans end of the period
|
$
|
1,463,480
|
|
|
$
|
1,547,792
|
|
|
$
|
62,602
|
|
|
$
|
3,073,874
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Balance beginning of the period
|
$
|
1,520,390
|
|
|
$
|
1,332,589
|
|
|
$
|
74,582
|
|
|
$
|
2,927,561
|
|
|
Investment in restructured loans
|
|
|
|
|
|
|
|
|
Additions (payments received) during the period
|
444,622
|
|
|
217,771
|
|
|
(9,539
|
)
|
|
652,854
|
|
|
Charge-off during the period
|
(483,869
|
)
|
|
—
|
|
|
—
|
|
|
(483,869
|
)
|
|
Moved to other real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Valuation allowance for restructured loans included in charged-off loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Additions during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Restructured loans included in impaired loans end of the period
|
$
|
1,481,143
|
|
|
$
|
1,550,360
|
|
|
$
|
65,043
|
|
|
$
|
3,096,546
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of charged-off balance
|
|
|
|
|
|
|
|
|
March 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
December 31, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A loan is considered impaired when, based on current information and events; it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. In addition to loans 90 days past due and still accruing, nonaccrual loans and restructured loans, all loans risk graded doubtful or substandard qualify, by definition, as impaired.
Other Real Estate
Other real estate is real estate properties acquired through or in lieu of loan foreclosure. At foreclosure, these properties are recorded at their fair value less estimated selling costs as a nonperforming asset, with any write-downs to the carrying value of our investment charged to the allowance for loan loss. After foreclosure, periodic evaluations are performed to determine if any decrease in the fair value less estimated selling costs has occurred. Further adjustments to this fair value are charged to operations, in non-interest expense, when identified. Expenses associated with the maintenance of other real estate are charged to operations, foreclosed property expense, as incurred. When a property is sold, any gain or loss on the sale is recorded as gain or loss on foreclosed property in non-interest expense. The Company had no other real estate owned during the period ended March 31, 2016.
OTHER REAL ESTATE
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Balance
|
|
Number
|
|
January 1,
|
$
|
144,000
|
|
|
1
|
|
|
Balance moved into other real estate
|
250,000
|
|
|
2
|
|
|
|
394,000
|
|
|
3
|
|
|
Write down of property charged to operations
|
—
|
|
|
|
|
Payments received after foreclosure
|
—
|
|
|
|
|
Properties sold
|
(394,000
|
)
|
|
(3
|
)
|
|
Balance at December 31, 2015
|
$
|
—
|
|
|
—
|
|
|
Gross gains of sale of other real estate
|
$
|
—
|
|
|
|
|
Gross losses on sale of other real estate
|
(51,035
|
)
|
|
|
|
Write down of property charged to operations
|
—
|
|
|
|
|
Rental income, other real estate
|
1,955
|
|
|
|
|
Other real estate expense
|
(44,869
|
)
|
|
|
|
Foreclosed property (expense) income
|
$
|
(93,949
|
)
|
|
|
Liquidity
Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale of existing assets or the acquisition of additional funds through short-term borrowings. Our liquidity is provided from cash and amounts due from banks, federal funds sold, interest-bearing deposits in other banks, repayments from loans, increases in deposits, lines of credit from the Federal Home Loan Bank and six correspondent banks, and maturing investments. As a result of our management of liquid assets, and our ability to generate liquidity through liability funding, we believe that we maintain overall liquidity sufficient to satisfy our depositors’ requirements and to meet clients’ credit needs. We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit.
We monitor and plan our liquidity position for future periods. Liquidity strategies are implemented and monitored by our Asset/Liability Committee (ALCO).
Cash, cash equivalents and federal funds sold totaled $86.8 million as of
March 31, 2016
compared to $73.9 million as of December 31, 2015. At
March 31, 2016
, cash, interest bearing bank balances, securities classified as available for sale and federal funds sold were $113.7 million or 9.3% of total assets, compared to $104.1 million or 9.0% of total assets at December 31, 2015.
In the course of operations, due to fluctuations in loan and deposit levels, we occasionally find it necessary to purchase federal funds on a short-term basis. We maintain unsecured federal funds line arrangements with four other banks, which allow us to purchase funds totaling $58.0 million. These lines mature and re-price daily. At
March 31, 2016
and December 31, 2015, we had $0 in federal funds purchased outstanding.
We have access to the Federal Reserve Bank of Richmond’s discount window should a liquidity crisis occur. We have not used this facility in the past and consider it a backup source of funds.
We are also members of the Promontory Network and have access to a program through their Certificate of Deposit Account Registry Service
®
(CDARS) to use their CDARS One Way Buy
SM
to purchase cost-effective funding without collateralization (and in lieu of generating funds through “traditional” brokered CDs or the Federal Home Loan Bank). These funds are accessed through a weekly auction. The auction typically takes place on Wednesdays, with next day settlement. There are seven maturities available ranging from 4 weeks to 5 years. If we are allotted funds in the auction, we incur no transaction fees or commissions. Although the process to compete for these deposits is different from the process for traditional brokered CDs, they are still considered brokered for Call Report purposes. These funds, which are included in our Jumbo CDs, are subject to discretionary limitations on volume that we normally would impose on traditional brokered deposits. Based on our “well capitalized” status, we are able to draw up to 30% of assets or $363.8 million from this program at
March 31, 2016
. We had $165.0 million on our balance sheet from this program at
March 31, 2016
and $115.9 million at December 31, 2015.
We have a line of credit with the Federal Home Loan Bank of Atlanta (“FHLB”) that can equal up to 30% of our assets. Our line of credit totaled approximately $196.4 million with $188.4 million available at
March 31, 2016
. This line is currently reduced by $8.0 million, which has been pledged as collateral for public deposits.
There were no borrowings outstanding under the FHLB line of credit at
March 31, 2016
and $16.0 million at December 31, 2015. We have no material commitments or long-term debt for capital expenditures at the report date.
Off-Balance Sheet Arrangements
We enter into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. The off-balance sheet transactions recognized as of
March 31, 2016
and December 31, 2015 were a line of credit to secure public funds and commitments to extend credit and standby letters of credit issued to customers. The line of credit to secure public funds was from the Federal Home Loan Bank for $8 million at
March 31, 2016
and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Commitments to grant loans
|
|
$
|
156,036,184
|
|
|
$
|
157,554,990
|
|
|
Interest rate lock commitments
|
|
$
|
187,028,611
|
|
|
$
|
108,635,768
|
|
|
Unfunded commitments under lines of credit and similar arrangements
|
|
$
|
152,546,255
|
|
|
$
|
149,977,483
|
|
|
Standby letters of credit and guarantees written
|
|
$
|
32,835,431
|
|
|
$
|
33,062,276
|
|
The table above summarizes our off-balance sheet commitments at
March 31, 2016
and December 31, 2015. Commitments to extend credit and unfunded commitments under existing lines of credit represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. Standby letters of credit are conditional commitments we issue guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.
We did not have any outstanding commitments to purchase securities at
March 31, 2016
or December 31, 2015.
We have thirty-two non-cancellable leases for premises. The original lease terms are from one to thirty years and have various renewal and option dates.
Capital Resources
We review the adequacy of our capital on an ongoing basis with reference to the size, composition, and quality of our resources and are consistent with regulatory requirements and industry standards. We seek to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weighting, and other factors.
The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the Bank. Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. At
March 31, 2016
, the amount available was approximately $8.2 million. We paid our first common stock cash dividend in 2010. We paid semi-annual cash dividends on our common stock in 2011. We began paying common stock cash dividends on a quarterly basis in the first quarter of 2012.
In June 2012, we received approval from the Securities and Exchange Commission to begin a Dividend Reinvestment Program (DRP). The DRP, which is available to existing shareholders, allows for dividends to be reinvested in Monarch stock. In addition, shareholders may purchase additional shares on a quarterly basis.
On April 21, 2016 we announced the Board of Monarch Financial Holdings, Inc., had approved a quarterly common stock cash dividend. The quarterly cash dividend is $0.09 per share for common shareholders of record on May 10, 2016, payable on May 27, 2016.
Basel III
The Dodd-Frank Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding companies, which has resulted in more stringent capital requirements. Under the Collins Amendment to the Dodd-Frank Act, federal regulators established minimum leverage and risk-based capital requirements for banks and bank holding companies on a consolidated basis. In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.
The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules were effective for the Company and the Bank, subject to a phase-in period, on January 1, 2015.
The Basel III Capital Rules (i) introduce a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain
(i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).
Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2016 are:
• 4.5% CET1 plus the capital conservation buffer of 0.625% or 5.125% to risk-weighted assets.
• 6.0% Tier 1 capital plus the capital conservation buffer of 0.625% or 6.625% to risk-weighted assets.
• 8.0% Total capital plus the capital conservation buffer of 0.625% or 8.625% to risk-weighted assets.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
As of
March 31, 2016
, the Bank was categorized as “well capitalized,” the highest level of capital adequacy. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity risk-based, and Tier 1 leverage ratios as set forth in the table. The Bank’s actual capital amounts and ratios are also presented in the table as of
March 31, 2016
and December 31, 2015.
RISK BASED CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital Adequacy
Purposes
|
|
To Be Well Capitalized
Under Prompt Corrective
|
|
|
Amounts
|
|
Ratio
|
|
Amounts
|
|
Ratio
|
|
Amounts
|
|
Ratio
|
|
|
(Dollars in Thousands)
|
|
As of March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
139,158
|
|
|
13.85
|
%
|
|
$
|
86,652
|
|
|
8.625
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
138,157
|
|
|
13.76
|
%
|
|
$
|
86,625
|
|
|
8.625
|
%
|
|
$
|
106,712
|
|
|
10.625
|
%
|
|
(Total Risk-Based Capital to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
130,257
|
|
|
13.19
|
%
|
|
$
|
66,558
|
|
|
6.625
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
129,256
|
|
|
12.87
|
%
|
|
$
|
66,537
|
|
|
6.625
|
%
|
|
$
|
86,625
|
|
|
8.625
|
%
|
|
(Tier 1 Capital to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Risk-Based Capital (CET1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
120,257
|
|
|
11.97
|
%
|
|
$
|
51,489
|
|
|
5.125
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
119,256
|
|
|
11.87
|
%
|
|
$
|
51,473
|
|
|
5.125
|
%
|
|
$
|
71,560
|
|
|
7.125
|
%
|
|
(Total Common Equity to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
130,257
|
|
|
11.33
|
%
|
|
$
|
53,162
|
|
|
4.625
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
129,256
|
|
|
11.25
|
%
|
|
$
|
53,148
|
|
|
4.625
|
%
|
|
$
|
64,638
|
|
|
5.625
|
%
|
|
(Tier 1 Capital to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
135,955
|
|
|
13.69
|
%
|
|
$
|
79,411
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
134,953
|
|
|
13.60
|
%
|
|
$
|
79,386
|
|
|
8.00
|
%
|
|
$
|
99,230
|
|
|
10.00
|
%
|
|
(Total Risk-Based Capital to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
127,068
|
|
|
12.80
|
%
|
|
$
|
59,558
|
|
|
6.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
126,066
|
|
|
12.70
|
%
|
|
$
|
59,539
|
|
|
6.00
|
%
|
|
$
|
79,411
|
|
|
8.00
|
%
|
|
(Tier 1 Capital to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Risk-Based Capital (CET1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
117,068
|
|
|
11.79
|
%
|
|
$
|
44,669
|
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
126,066
|
|
|
12.70
|
%
|
|
$
|
44,655
|
|
|
4.50
|
%
|
|
$
|
64,501
|
|
|
6.50
|
%
|
|
(Total Common Equity to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated company
|
$
|
127,068
|
|
|
11.56
|
%
|
|
$
|
43,968
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
$
|
126,066
|
|
|
11.48
|
%
|
|
$
|
43,925
|
|
|
4.00
|
%
|
|
$
|
54,907
|
|
|
5.00
|
%
|
|
(Tier 1 Capital to Average Assets)
|
|
|
|
|
|
|
|
|
|
|