Notes to Consolidated Financial Statements
December 31, 2016
and
2015
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Four Oaks Fincorp, Inc. (the "Company") was incorporated under the laws of the State of North Carolina on February 5, 1997. The Company’s primary function is to serve as the holding company for its owned subsidiaries, Four Oaks Bank & Trust Company, Inc. (the "Bank") and Four Oaks Mortgage Services, L.L.C (inactive). The Bank operates
fifteen
offices in eastern and central North Carolina, and its primary source of revenue is derived from loans to customers and from its securities portfolio. The loan portfolio is comprised mainly of real estate, commercial, and consumer loans. These loans are primarily collateralized by residential and commercial properties, commercial equipment, and personal property.
Reverse Stock Split
On March 8, 2017, the Company completed a one for
five
reverse stock split of the Company’s authorized, issued, and outstanding common stock, par value
$1.00
per share (the “Reverse Stock Split”). The number of authorized shares of common stock was reduced from
80,000,000
to
16,000,000
. At the effective time of the Reverse Stock Split, every
five
shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. No fractional shares were issued in connection with the Reverse Stock Split, and any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest whole share. All share and share-related information presented in this Annual Report on Form 10-K have been retroactively adjusted to reflect the decreased number of shares resulting from the Reverse Stock Split. Refer to Note S - Subsequent Events for additional information.
Basis of Presentation
The consolidated financial statements include the accounts and transactions of the Company, a bank holding company incorporated under the laws of the State of North Carolina, and its wholly-owned subsidiaries, the Bank, and Four Oaks Mortgage Services, L.L.C., which has been inactive since September 30, 2012. All significant intercompany transactions have been eliminated. In March 2006, the Company formed Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing Trust Preferred Securities (as defined in Note H - Trust Preferred Securities). The Trust is not included in the consolidated financial statements of the Company.
Certain amounts previously presented in the Company's Consolidated Financial Statements for the prior periods have been reclassified to conform to current classifications. All such reclassifications had no impact on the prior period's Statements of Operations, Comprehensive Income, or Shareholders' Equity as previously reported.
Use of Estimates
Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, fair value of impaired loans, fair value of foreclosed assets, other than temporary impairment of investment securities available-for-sale and held-to-maturity, and the valuation allowance against deferred tax assets.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions cash and due from banks, and interest-earning deposits.
Federal regulations require institutions to set aside specified amounts of cash as reserves against transactions and time deposits. As of
December 31, 2016
, there was
no
daily average gross reserve requirement due to the amount of cash on the balance sheet.
Investment Securities
Investment securities are classified into three categories:
(1) Held-to-Maturity - Debt securities that the Company has the positive intent and the ability to hold to maturity are classified as held-to-maturity and reported at amortized cost.
(2) Trading - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
(3) Available-for-Sale - Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of income taxes, as other comprehensive income, a separate component of shareholders' equity. Gains and losses on sales of securities, computed based on specific identification of adjusted cost of each security, are included in income at the time of the sale. Premiums and discounts are amortized into interest income using a method that approximates the interest method over the period to maturity.
Transfers of securities into held-to-maturity from available-for-sale are made at fair value as of the transfer date. The unrealized gain or loss as of the transfer date is retained in accumulated other comprehensive income and in the carrying value of the held-to-maturity securities. The unrealized gain or loss is then amortized over the remaining life of the securities.
Each investment security in a loss position is evaluated for other-than-temporary impairment on at least a quarterly basis. The review includes an analysis of the facts and circumstances of each individual investment such as: (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.
Regardless of these factors, if we have developed a plan to sell the security or it is likely that we will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.
Loans Held for Sale
As part of the asset resolution plan (the "Asset Resolution Plan") executed during 2014 and 2015 and for other asset resolution efforts, the Company transferred loans held for investment to loans held for sale in anticipation of near term loan sales. The Asset Resolution Plan was completed in the fourth quarter of 2015 and all loans not sold were transferred from loans held for sale to loans held for investment. Other loans held for sale generally represent single-family, residential first mortgage loans on a pre-sold basis originated by our mortgage division. Commitments to sell the residential first mortgage loans are made after the intent to proceed with mortgage applications are initiated with borrowers, and all necessary components of the loan are approved according to secondary market underwriting standards of the investor that purchases the loan. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. Loans held for sale are measured at the lower of cost or fair value on an aggregated basis within the consolidated balance sheet under the caption “loans held for sale”.
Rate Lock Commitments
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). As required by Accounting Standard Codification ("ASC") ASC 815,
Derivatives and Hedging
, rate lock commitments related to the origination of mortgage loans held for sale and the corresponding forward loan sale commitments are considered to be derivatives. The commitments are generally for periods of
60
days and are at market rates.
In order to mitigate the risk from interest rate fluctuations, the Company enters into forward loan sale commitments on a “best efforts” basis while the loan is in the pipeline. Interest rate lock commitments and forward sales commitments are not material to the financial statements for any period presented.
Loans
Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on all loan classifications is calculated by using the simple interest method on daily balances of the principal amount outstanding.
Loan origination fees are deferred, as well as certain direct loan origination costs. Such costs and fees are recognized as an adjustment to yield over the contractual lives of the related loans utilizing the interest method.
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect full repayment of all principal and accrued interest when due either under the terms of the original loan agreement or within reasonably modified contractual terms. Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of the following methods; a calculation of the net present value of the expected future cash flows of the loan discounted by the effective interest rate of the loan or by determining the fair market value of the underlying collateral securing the loan. If a deficit is calculated, the amount of the measured impairment results in the establishment of a specific valuation allowance or charge-off, and is incorporated into the Bank's allowance for loan and lease losses ("ALLL"). Groups of small dollar impaired loans with similar risk characteristics are evaluated for impairment collectively.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual when doubts arise regarding the full collectibility of principal or interest and we are therefore uncertain that the borrower can satisfy the contractual terms of the loan agreement. In addition our policy is to place a loan on nonaccrual status at the point when the loan becomes past due
90 days
unless there is sufficient documentation to establish that the loan is well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged-off, the loan is generally classified as nonaccrual.
While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Allowance for Loan Losses
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed. Management evaluates the adequacy of our allowance for loan losses on at least a quarterly basis. The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations. Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.
Management has developed a model for evaluating the adequacy of the allowance for loan losses. The model uses the Company’s internal grading system to quantify the risk of each loan. The grade is initially assigned by the lending officer and/or the credit administration function. The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm. The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The grading system is comprised of seven risk categories for active loans. Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan. Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan. Grade 6 loans are considered substandard and are generally impaired. Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Grade 8 loans are considered uncollectable and identified as a confirmed loss. Loans can also be classified as non-accrual, troubled debt restructuring ("TDR"), or otherwise impaired, all of which are considered impaired.
Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of the following methods: a calculation of the net present value of the expected future cash flows of the loan discounted by the effective interest rate of the loan or by determining the fair market value of the underlying collateral securing the loan. If the fair market value of collateral method is selected for use, an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal. Groups of small dollar impaired loans with similar risk characteristics are evaluated for impairment collectively. Other impaired loans are then analyzed individually to determine the net value of collateral or cash flows and an estimate of potential loss. The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal. If collection is deemed to be collateral dependent then the deficiency is generally charged off. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value. Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and charge-offs. Groups of small dollar impaired loans with similar risk characteristics may be evaluated for impairment collectively.
Loans that are not assessed for specific reserves under FASB ASC 310-10 are reserved for under FASB ASC 450. The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels and is adjusted for the loan's risk grade. The qualitative factors address loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations. Together these two components comprise the ASC 450, or general reserve.
The Company utilizes a look back period of
five years
to determine historical loss rates under the quantitative ASC 450 reserve. The Company calculates historical loss rates from the most recent
five years
on a rolling quarter basis to provide an estimate of potential losses and to provide for the highest base charge-off rate regardless of whether the historical charge-offs are improving or declining. In addition, the Bank assigns a different percentage ("multiplier") of the base charge-off rate to the balances for each risk grade within a loan category to reflect the varied risk of charge-off for each. The standard multipliers range from
0%
for a risk grade 1 and
300%
for a risk grade 6 that is unimpaired. In addition, categories that have a concentrated level of charge-offs associated with a particular risk grade could have an additional reserve factor of
50%
to
100%
added to that particular risk grade. Categories that have had historically high charge-offs also have an additional reserve factor between
25%
to
100%
added to the risk grade 5s and 6s to account for the additional risk in those categories. The reserve amount by risk grade is calculated and then combined for a blended quantitative reserve factor for each loan category.
The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used. We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles. However, upon examination by various regulatory agencies, adjustments to the allowance may be required. Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.
Bank Premises and Equipment
Land is carried at cost. Buildings, furniture, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets. Useful lives range from
5
to
10
years for furniture and equipment and
40
years for buildings. Expenditures for repairs and maintenance are charged to expense as incurred.
Stock in Federal Home Loan Bank of Atlanta
The Company owned Federal Home Loan Bank of Atlanta (“FHLB”) stock that it accounts for under the cost method. Based on the continued payment of dividends and that redemption of this stock has historically been at par, management believes that its investment in FHLB stock was not other-than-temporarily impaired as of
December 31, 2016
or
December 31, 2015
. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the FHLB stock held by the Company.
Foreclosed Assets
Assets acquired as a result of foreclosure are valued at fair value, less estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations of the property are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Losses from the acquisition of property in full or partial satisfaction of debt are treated as credit losses. Routine holding costs, subsequent declines in value, and gains or losses on disposition are included in other income and expense.
Income Taxes
Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of “other assets” in the consolidated balance sheets. The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. These temporary differences consist primarily of the allowance for loan losses, differences in the financial statement and income tax basis in premises and equipment and differences in financial statement and income tax basis in accrued liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be fully realized.
Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset.
From time to time, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company’s income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes.
Stock Compensation Plans
The Company accounts for stock based awards granted to employees using the fair value method. The cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). The cost of employee services received in exchange for an award is based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.
Recent Accounting Pronouncements
In August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which addresses eight specific classification issues in an effort to reduce the diversity in practice in how these certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not believed to be material to the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This update replaces the incurred loss impairment methodology with one that reflects current expected credit losses (CECL) and requires consideration of a broader range of reasonable and supportable forecasted information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update amends several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016. The adoption of this guidance is not believed to be material to the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which will require lessees to be recorded as an asset on the balance sheet for the right to use the leased asset and a liability for the corresponding lease obligation for leases with terms of more than 12 months. The accounting treatment for lessors will remain relatively unchanged. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has
five
lease agreements which are currently considered operating leases, and therefore, not recognized on the Company's consolidated statements of condition. The Company expects the new guidance will require these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company's preliminary evaluation indicates the provisions of ASU No. 2016-02 will impact the Company's consolidated statements of condition and continues to evaluate the extent of potential impact on it's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which revises the accounting treatment related to classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Upon adoption, investments in equity securities, except those accounted for under the equity method or that result in the consolidation of the investee, will be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost minus impairment, plus or minus changes from observable price changes in an orderly transaction. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of certain provisions is permitted. The Company does not believe the adoption of this ASU will have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The existing recognition and measurement guidance for debt issuance costs are not affected by this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. We adopted ASU No. 2015-03 and there was no impact to the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition
, and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. On August 12, 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which defers the effective date of the new revenue recognition standard by one year. Based on ASU 2015-14, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is performing an overall assessment of revenue streams possibly affected by the ASU to determine the potential impact the new guidance will have on the Company's consolidated financial statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution. The Company plans to adopt ASU No. 2014-09 on January 1, 2018.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
NOTE B - NET INCOME PER SHARE
Basic net income per share represents earnings credited to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and vesting of restricted stock awards.
Basic and diluted net income per common share are computed based upon net income as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding. All share and per common share amounts have been adjusted to reflect the Reverse Stock Split. Refer to Note S - Subsequent Events for additional information.
The following table presents the calculation of basic and diluted net income per common share
(amounts in thousands, except share data).
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Net income available to common shareholders
|
|
$
|
6,858
|
|
|
$
|
20,008
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
|
6,480,154
|
|
|
6,420,734
|
|
Effect of dilutive stock options
|
|
7,664
|
|
|
3,155
|
|
Effect of dilutive restricted stock awards
|
|
76,475
|
|
|
25,656
|
|
Weighted average number of common shares - dilutive
|
|
6,564,293
|
|
|
6,449,545
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.06
|
|
|
$
|
3.12
|
|
Diluted earnings per common share
|
|
$
|
1.04
|
|
|
$
|
3.10
|
|
Anti-dilutive awards
|
|
2,461
|
|
|
29,531
|
|
NOTE C - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale as of
December 31, 2016
and
2015
are as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
At December 31
|
|
2016
|
|
2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Taxable municipal securities
|
$
|
19,846
|
|
|
$
|
350
|
|
|
$
|
147
|
|
|
$
|
20,049
|
|
|
$
|
24,789
|
|
|
$
|
225
|
|
|
$
|
447
|
|
|
$
|
24,567
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
11,704
|
|
|
44
|
|
|
68
|
|
|
11,680
|
|
|
13,512
|
|
|
68
|
|
|
50
|
|
|
13,530
|
|
FNMA & FHLMC
|
25,684
|
|
|
—
|
|
|
272
|
|
|
25,412
|
|
|
32,024
|
|
|
—
|
|
|
351
|
|
|
31,673
|
|
Other debt securities
|
1,000
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Equity securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total
|
$
|
58,234
|
|
|
$
|
394
|
|
|
$
|
487
|
|
|
$
|
58,141
|
|
|
$
|
70,836
|
|
|
$
|
293
|
|
|
$
|
848
|
|
|
$
|
70,281
|
|
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities held-to-maturity as of
December 31, 2016
and
2015
are as follows (
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
At December 31
|
|
2016
|
|
2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Taxable municipal securities
|
$
|
3,380
|
|
|
$
|
9
|
|
|
$
|
3
|
|
|
$
|
3,386
|
|
|
$
|
3,531
|
|
|
$
|
1
|
|
|
$
|
20
|
|
|
$
|
3,512
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
45,968
|
|
|
407
|
|
|
187
|
|
|
46,188
|
|
|
59,185
|
|
|
509
|
|
|
230
|
|
|
59,464
|
|
FNMA
|
1,857
|
|
|
21
|
|
|
—
|
|
|
1,878
|
|
|
2,638
|
|
|
19
|
|
|
—
|
|
|
2,657
|
|
Total
|
$
|
51,205
|
|
|
$
|
437
|
|
|
$
|
190
|
|
|
$
|
51,452
|
|
|
$
|
65,354
|
|
|
$
|
529
|
|
|
$
|
250
|
|
|
$
|
65,633
|
|
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality. If it is determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
The unrealized gains and losses on securities at
December 31, 2016
resulted from changing market interest rates compared to the yields available at the time the underlying securities were purchased. The investment portfolio included
19
of
54
Government National Mortgage Association ("GNMA") mortgage-backed securities ("MBS"),
11
of
14
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") MBS, and
10
of
33
taxable municipal securities that contained net unrealized losses at
December 31, 2016
. Management identified no impairment related to credit quality. At
December 31, 2016
, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result,
no
other than temporary impairment losses were recognized during the
twelve
months ended
December 31, 2016
.
The following tables reflect the gross unrealized losses and fair values of securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented.
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
December 31, 2016
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
Taxable municipal securities
|
$
|
9,988
|
|
|
$
|
147
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,988
|
|
|
$
|
147
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
8,842
|
|
|
68
|
|
|
—
|
|
|
—
|
|
|
8,842
|
|
|
68
|
|
FNMA & FHLMC
|
25,412
|
|
|
272
|
|
|
—
|
|
|
—
|
|
|
25,412
|
|
|
272
|
|
Total temporarily impaired securities
|
$
|
44,242
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,242
|
|
|
$
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
December 31, 2015
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
Taxable municipal securities
|
$
|
16,888
|
|
|
$
|
447
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,888
|
|
|
$
|
447
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
10,010
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
10,010
|
|
|
50
|
|
FNMA & FHLMC
|
31,673
|
|
|
351
|
|
|
—
|
|
|
—
|
|
|
31,673
|
|
|
351
|
|
Total temporarily impaired securities
|
$
|
58,571
|
|
|
$
|
848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,571
|
|
|
$
|
848
|
|
The following tables reflect the gross unrealized losses and fair values of securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented.
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
December 31, 2016
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
Taxable municipal securities
|
$
|
525
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
525
|
|
|
$
|
3
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
21,074
|
|
|
187
|
|
|
—
|
|
|
—
|
|
|
21,074
|
|
|
187
|
|
Total temporarily impaired securities
|
$
|
21,599
|
|
|
$
|
190
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,599
|
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
December 31, 2015
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
Taxable municipal securities
|
$
|
3,325
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,325
|
|
|
$
|
20
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
20,784
|
|
|
116
|
|
|
5,130
|
|
|
114
|
|
|
25,914
|
|
|
230
|
|
Total temporarily impaired securities
|
$
|
24,109
|
|
|
$
|
136
|
|
|
$
|
5,130
|
|
|
$
|
114
|
|
|
$
|
29,239
|
|
|
$
|
250
|
|
The amortized cost and fair value of available-for-sale and held-to-maturity securities at
December 31, 2016
by expected maturities are shown below
(amounts in thousands).
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Taxable municipal securities
|
|
Mortgage-backed securities - GNMA
|
|
Mortgage-backed securities - FNMA & FHLMC
|
|
Other Debt Securities
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
Due after five years through ten years
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Due after ten years
|
19,846
|
|
|
20,049
|
|
|
11,704
|
|
|
11,680
|
|
|
25,684
|
|
|
25,412
|
|
|
—
|
|
|
—
|
|
Total Munis, GNMA, FNMA & FHLMC, and Other Debt securities
|
$
|
19,846
|
|
|
$
|
20,049
|
|
|
$
|
11,704
|
|
|
$
|
11,680
|
|
|
$
|
25,684
|
|
|
$
|
25,412
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
Taxable municipal securities
|
|
Mortgage-backed securities - GNMA
|
|
Mortgage-backed securities - FNMA
|
|
|
|
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
|
|
|
Due within one year
|
$
|
155
|
|
|
$
|
155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Due after one year through five years
|
2,700
|
|
|
2,701
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Due after five years through ten years
|
525
|
|
|
530
|
|
|
5,231
|
|
|
5,366
|
|
|
1,857
|
|
|
1,878
|
|
|
|
|
|
Due after ten years
|
—
|
|
|
—
|
|
|
40,737
|
|
|
40,822
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Munis, GNMA, and FNMA securities
|
$
|
3,380
|
|
|
$
|
3,386
|
|
|
$
|
45,968
|
|
|
$
|
46,188
|
|
|
$
|
1,857
|
|
|
$
|
1,878
|
|
|
|
|
|
Securities with a carrying value of approximately
$28.4 million
and
$61.1 million
at
December 31, 2016
and
2015
, respectively, were pledged to secure public deposits, FHLB advances and for other purposes required or permitted by law.
Sales and calls of securities available-for-sale during
2016
and
2015
of
$5.2 million
and
$8.3 million
generated gross realized gains of
$266,400
and
$264,771
, respectively, and
no
gross realized losses for
2016
and
2015
.
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
The classification of loan segments as of
December 31, 2016
and
2015
are summarized as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Commercial and industrial
|
$
|
21,742
|
|
|
$
|
23,163
|
|
Commercial construction and land development
|
46,114
|
|
|
50,510
|
|
Commercial real estate
|
253,086
|
|
|
208,737
|
|
Residential construction
|
42,660
|
|
|
36,618
|
|
Residential mortgage
|
132,971
|
|
|
128,442
|
|
Consumer
|
6,896
|
|
|
6,638
|
|
Other
|
502
|
|
|
1,257
|
|
Consumer credit cards
|
2,114
|
|
|
2,240
|
|
Business credit cards
|
1,235
|
|
|
1,168
|
|
|
507,320
|
|
|
458,773
|
|
Net deferred loan fees
|
(316
|
)
|
|
(460
|
)
|
Allowance for loan losses
|
(9,647
|
)
|
|
(9,616
|
)
|
Total net loans
|
$
|
497,357
|
|
|
$
|
448,697
|
|
|
|
|
|
Loans held for sale
|
$
|
206
|
|
|
$
|
1,145
|
|
Nonperforming assets
Nonperforming assets at
December 31, 2016
and
2015
consist of the following
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Loans past due ninety days or more and still accruing
|
$
|
40
|
|
|
$
|
65
|
|
Nonaccrual loans
|
4,324
|
|
|
6,598
|
|
Foreclosed assets
|
1,682
|
|
|
1,760
|
|
Total
|
$
|
6,046
|
|
|
$
|
8,423
|
|
Related Party Loans
The Company had loan and deposit relationships with directors, executive officers, and associates of these parties as of
December 31, 2016
and
2015
. The following is a reconciliation of these loans
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
7,729
|
|
|
$
|
7,683
|
|
New loans
|
32
|
|
|
1,689
|
|
Principal repayments
|
(384
|
)
|
|
(1,643
|
)
|
Ending balance
|
$
|
7,377
|
|
|
$
|
7,729
|
|
As a matter of policy, these loans and credit lines are approved by the Company’s Board of Directors and are made with interest rates, terms, and collateral requirements comparable to those required of other borrowers. In the opinion of management, these loans do not involve more than the normal risk of collectibility.
Credit Risk
We use an internal grading system to assign the degree of inherent risk on each individual loan and monitor trends in portfolio quality. The grade is initially assigned by the lending officer or credit administration and reviewed by the loan administration function throughout the life of the loan. The credit grades have been defined as follows:
|
|
•
|
Grade 1 - Superior / Lowest Risk
|
Loans that are virtually risk-free and are well-collateralized by cash or cash-equivalent instruments held by the Bank. They are loans secured by properly margined liquid collateral such as certificates of deposit, government securities, cash value of life insurance, stock actively traded on one of the major stock exchanges, etc. The repayment program is well-defined and achievable, and repayment sources are numerous. Repayment is definite and being handled as agreed. No material documentation deficiencies or exceptions exist.
Loans secured by readily marketable collateral, properly margined and with a definite repayment program in effect. These loans are within guidelines to borrowers with sound financial condition and financial statements with liquid assets and/or other assets that can be easily liquidated to satisfy debts. These loans have excellent, multiple sources of repayment, with no significant identifiable risk of collection. The repayment source is well-defined by proven income, cash flow, trade asset turn, etc. Documented sources of repayment meet or exceed required minimum Bank guidelines, and can be supplemented with verifiable cash flow from other sources. Such loans conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).
|
|
•
|
Grade 3 - Solid / Standard
|
These loans have adequate sources of repayment, with little identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:
|
|
◦
|
Conformity in most respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (limited exceptions of any kind). All exceptions noted have documented mitigating factors that offset any additional risk associated with the exceptions noted.
|
|
|
◦
|
Documented sources of repayment that meet required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.
|
|
|
◦
|
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.
|
|
|
◦
|
Secured loans repaying as agreed where collateral value and marketability are sufficient and do not materially affect risk.
|
|
|
◦
|
Fully collectible, unsecured loans repaying as agreed and backed by sound personal or business financial statements with reachable assets that can be readily liquidated.
|
These are acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics:
|
|
◦
|
Exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions are greater for this risk grade, the exceptions may be properly mitigated by other documented factors that offset any additional risks.
|
|
|
◦
|
Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time.
|
|
|
◦
|
Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.
|
|
|
◦
|
Secured loans repaying as agreed where collateral value or marketability are questionable but do not materially affect risk of repayment/collection.
|
|
|
◦
|
Includes loans to borrowers with an established borrowing history with the Bank, with no Bank delinquencies and no delinquencies with other creditors, but with little or no identifiable cash flow to support the borrower's unblemished repayment history.
|
|
|
•
|
Grade 5 - Special Mention or Watch List
|
A Special Mention loan (OAEM) has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Special Mention or Watch List loans may include the following characteristics:
|
|
◦
|
Loans with guideline tolerances or exceptions of any kind that have not been mitigated by other economic or credit factors.
|
|
|
◦
|
Loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date.
|
|
|
◦
|
Borrowers that are experiencing adverse operating trends or an ill-proportioned balance sheet.
|
|
|
◦
|
Loans being repaid as agreed that require close following because of complexity, information or underwriting deficiencies, emerging signs of weakness or non-standard terms.
|
|
|
◦
|
Potential weaknesses exist, generally the result of deviations from prudent lending practices, such as over advances on collateral or unproven and inadequate primary repayment sources.
|
|
|
◦
|
Loans where adverse economic conditions have developed subsequent to the loan origination that may not jeopardize liquidation of the debt, but do substantially increase the level of risk, may also warrant this rating.
|
|
|
•
|
Grades 6-8 - Substandard (Grade 6), Doubtful (Grade 7) and Loss (Grade 8)
|
A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Loans are not typically made if graded Substandard or worse at inception without management's approval.
The following tables illustrate the credit risk profile by creditworthiness class as of
December 31, 2016
and
2015
(amounts in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Commercial and
Industrial
|
|
Commercial
Construction
and Land
Development
|
|
Commercial
Real Estate
|
|
Residential -
Construction
|
|
Residential -
Mortgage
|
|
Consumer
|
|
Other
|
|
Total
|
1 - Lowest Risk
|
$
|
897
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,321
|
|
|
$
|
—
|
|
|
$
|
2,218
|
|
2 - Strong
|
915
|
|
|
1,524
|
|
|
5,439
|
|
|
292
|
|
|
15,105
|
|
|
597
|
|
|
97
|
|
|
23,969
|
|
3 - Standard
|
9,588
|
|
|
13,671
|
|
|
116,065
|
|
|
12,300
|
|
|
56,374
|
|
|
1,131
|
|
|
311
|
|
|
209,440
|
|
4 - Acceptable
|
9,932
|
|
|
26,926
|
|
|
118,077
|
|
|
30,068
|
|
|
53,832
|
|
|
3,770
|
|
|
94
|
|
|
242,699
|
|
5 - Special Mention
|
373
|
|
|
3,261
|
|
|
10,088
|
|
|
—
|
|
|
5,804
|
|
|
77
|
|
|
—
|
|
|
19,603
|
|
6 - Substandard or worse
(1)
|
37
|
|
|
732
|
|
|
3,417
|
|
|
—
|
|
|
1,856
|
|
|
—
|
|
|
—
|
|
|
6,042
|
|
|
$
|
21,742
|
|
|
$
|
46,114
|
|
|
$
|
253,086
|
|
|
$
|
42,660
|
|
|
$
|
132,971
|
|
|
$
|
6,896
|
|
|
$
|
502
|
|
|
$
|
503,971
|
|
(1)
The above table does not include business and consumer credit cards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Commercial and
Industrial
|
|
Commercial
Construction
and Land
Development
|
|
Commercial
Real Estate
|
|
Residential -
Construction
|
|
Residential -
Mortgage
|
|
Consumer
|
|
Other
|
|
Total
|
1 - Lowest Risk
|
$
|
1,942
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,773
|
|
|
$
|
—
|
|
|
$
|
3,715
|
|
2 - Strong
|
971
|
|
|
749
|
|
|
2,280
|
|
|
—
|
|
|
15,187
|
|
|
386
|
|
|
7
|
|
|
19,580
|
|
3 - Standard
|
10,530
|
|
|
11,262
|
|
|
94,357
|
|
|
4,296
|
|
|
56,493
|
|
|
1,250
|
|
|
469
|
|
|
178,657
|
|
4 - Acceptable
|
9,297
|
|
|
33,832
|
|
|
103,740
|
|
|
31,431
|
|
|
50,226
|
|
|
3,170
|
|
|
757
|
|
|
232,453
|
|
5 - Special Mention
|
304
|
|
|
2,486
|
|
|
4,444
|
|
|
170
|
|
|
5,231
|
|
|
59
|
|
|
—
|
|
|
12,694
|
|
6 - Substandard or worse
(1)
|
119
|
|
|
2,181
|
|
|
3,916
|
|
|
721
|
|
|
1,305
|
|
|
—
|
|
|
24
|
|
|
8,266
|
|
|
$
|
23,163
|
|
|
$
|
50,510
|
|
|
$
|
208,737
|
|
|
$
|
36,618
|
|
|
$
|
128,442
|
|
|
$
|
6,638
|
|
|
$
|
1,257
|
|
|
$
|
455,365
|
|
(1)
The above table does not include business and consumer credit cards.
The following table illustrates the credit card portfolio exposure as of
December 31, 2016
and
2015
(amounts in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Consumer -
Credit Card
|
|
Business -
Credit Card
|
|
Consumer -
Credit Card
|
|
Business -
Credit Card
|
Performing
|
$
|
2,095
|
|
|
$
|
1,214
|
|
|
$
|
2,211
|
|
|
$
|
1,133
|
|
Nonperforming
|
19
|
|
|
21
|
|
|
29
|
|
|
35
|
|
|
$
|
2,114
|
|
|
$
|
1,235
|
|
|
$
|
2,240
|
|
|
$
|
1,168
|
|
Nonaccruals and Past Due Loans
The following tables illustrate the age analysis of past due loans by loan class as of
December 31, 2016
and
2015
(amounts in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
30-89 Days
Past Due
|
|
Nonaccrual
|
|
90 Days or More Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total
Loans
|
Commercial & industrial
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
21,706
|
|
|
$
|
21,742
|
|
Commercial construction & land development
|
89
|
|
|
691
|
|
|
—
|
|
|
780
|
|
|
45,334
|
|
|
46,114
|
|
Commercial real estate
|
10
|
|
|
2,153
|
|
|
—
|
|
|
2,163
|
|
|
250,923
|
|
|
253,086
|
|
Residential construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,660
|
|
|
42,660
|
|
Residential mortgage
|
295
|
|
|
1,444
|
|
|
—
|
|
|
1,739
|
|
|
131,232
|
|
|
132,971
|
|
Consumer
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
6,854
|
|
|
6,896
|
|
Consumer credit cards
|
48
|
|
|
—
|
|
|
19
|
|
|
67
|
|
|
2,047
|
|
|
2,114
|
|
Business credit cards
|
9
|
|
|
—
|
|
|
21
|
|
|
30
|
|
|
1,205
|
|
|
1,235
|
|
Other loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
502
|
|
|
502
|
|
Total
|
$
|
493
|
|
|
$
|
4,324
|
|
|
$
|
40
|
|
|
$
|
4,857
|
|
|
$
|
502,463
|
|
|
$
|
507,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
30-89 Days
Past Due
|
|
Nonaccrual
|
|
90 Days or More Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total
Loans
|
Commercial & industrial
|
$
|
56
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
22,988
|
|
|
$
|
23,163
|
|
Commercial construction & land development
|
211
|
|
|
1,626
|
|
|
—
|
|
|
1,837
|
|
|
48,673
|
|
|
50,510
|
|
Commercial real estate
|
—
|
|
|
2,929
|
|
|
—
|
|
|
2,929
|
|
|
205,808
|
|
|
208,737
|
|
Residential construction
|
133
|
|
|
721
|
|
|
—
|
|
|
854
|
|
|
35,764
|
|
|
36,618
|
|
Residential mortgage
|
499
|
|
|
1,203
|
|
|
—
|
|
|
1,702
|
|
|
126,740
|
|
|
128,442
|
|
Consumer
|
71
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
6,567
|
|
|
6,638
|
|
Consumer credit cards
|
95
|
|
|
—
|
|
|
29
|
|
|
124
|
|
|
2,116
|
|
|
2,240
|
|
Business credit cards
|
107
|
|
|
—
|
|
|
36
|
|
|
143
|
|
|
1,025
|
|
|
1,168
|
|
Other loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,257
|
|
|
1,257
|
|
Total
|
$
|
1,172
|
|
|
$
|
6,598
|
|
|
$
|
65
|
|
|
$
|
7,835
|
|
|
$
|
450,938
|
|
|
$
|
458,773
|
|
Impaired Loans
Impaired loans are those loans for which the Bank does not expect full repayment of all principal and accrued interest when due either under the terms of the original loan agreement or within reasonably modified contractual terms. If the loan has been restructured, such as in the case of a TDR, the loan continues to be considered impaired for the duration of the restructured loan term. Whereas loans which are classified as Substandard (Risk Grade 6) are not necessarily impaired, all loans which are classified as Doubtful (Risk Grade 7) are considered impaired.
Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of a number of available methods: a calculation of the net present value of the expected future cash flows of the loan discounted by the effective interest rate of the loan, through the observable market value of the loan or should the loan be collateral dependent, upon the fair market value of the underlying assets securing the loan. If a deficit is calculated, the amount of the measured impairment results in the establishment of a specific valuation allowance or reserve or charge-off, and is incorporated into the Bank's ALLL.
When a loan has been designated as impaired and full collection of principal and interest under the contractual terms is not assured, the impaired loan will be placed into nonaccrual status and interest income will not be recognized. Payments received against such loans are initially applied fully to the principal balance of the note until the principal balance is satisfied. Subsequent payments are thereupon applied to the accrued interest balance which only then results in the recognition of interest income. Payments received against accruing impaired loans are applied in the same manner as that of accruing loans which have not been deemed impaired. The recorded investment in impaired loans does not include deferred fees or accrued interest and management deems this amount to be immaterial.
The following tables illustrate the impaired loans by loan class as of
December 31, 2016
and
2015
(
amounts in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
Commercial construction & land development
|
53
|
|
|
60
|
|
|
—
|
|
|
58
|
|
|
—
|
|
Commercial real estate
|
1,131
|
|
|
1,660
|
|
|
—
|
|
|
1,189
|
|
|
50
|
|
Residential mortgage
|
1,804
|
|
|
1,882
|
|
|
—
|
|
|
1,881
|
|
|
37
|
|
Subtotal:
|
$
|
3,006
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
3,149
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
2
|
|
|
$
|
17
|
|
|
$
|
—
|
|
Commercial construction & land development
|
638
|
|
|
763
|
|
|
420
|
|
|
660
|
|
|
11
|
|
Commercial real estate
|
1,736
|
|
|
1,739
|
|
|
529
|
|
|
1,741
|
|
|
36
|
|
Residential mortgage
|
164
|
|
|
208
|
|
|
56
|
|
|
191
|
|
|
13
|
|
Subtotal:
|
$
|
2,556
|
|
|
$
|
2,728
|
|
|
$
|
1,007
|
|
|
$
|
2,609
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
3,594
|
|
|
$
|
4,259
|
|
|
$
|
951
|
|
|
$
|
3,686
|
|
|
$
|
97
|
|
Residential
|
1,968
|
|
|
2,090
|
|
|
56
|
|
|
2,072
|
|
|
50
|
|
Grand Total
|
$
|
5,562
|
|
|
$
|
6,349
|
|
|
$
|
1,007
|
|
|
$
|
5,758
|
|
|
$
|
147
|
|
At
December 31, 2016
, the recorded investment in loans considered impaired totaled
$5.6 million
. Of the total investment in loans considered impaired,
$2.6 million
were found to show specific impairment for which a
$1.0 million
valuation allowance was recorded; the remaining
$3.0 million
in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
67
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
3
|
|
Commercial construction & land development
|
737
|
|
|
1,706
|
|
|
—
|
|
|
1,031
|
|
|
19
|
|
Commercial real estate
|
2,258
|
|
|
2,614
|
|
|
—
|
|
|
2,020
|
|
|
50
|
|
Residential construction
|
721
|
|
|
722
|
|
|
—
|
|
|
408
|
|
|
8
|
|
Residential mortgage
|
1,305
|
|
|
1,312
|
|
|
—
|
|
|
1,191
|
|
|
51
|
|
Subtotal:
|
$
|
5,088
|
|
|
$
|
6,421
|
|
|
$
|
—
|
|
|
$
|
4,713
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
52
|
|
|
$
|
63
|
|
|
$
|
7
|
|
|
$
|
58
|
|
|
$
|
4
|
|
Commercial construction & land development
|
1,948
|
|
|
3,020
|
|
|
1,006
|
|
|
2,086
|
|
|
122
|
|
Commercial real estate
|
1,699
|
|
|
1,699
|
|
|
228
|
|
|
1,713
|
|
|
79
|
|
Residential mortgage
|
139
|
|
|
217
|
|
|
20
|
|
|
183
|
|
|
8
|
|
Subtotal:
|
$
|
3,838
|
|
|
$
|
4,999
|
|
|
$
|
1,261
|
|
|
$
|
4,040
|
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
6,761
|
|
|
$
|
9,169
|
|
|
$
|
1,241
|
|
|
$
|
6,971
|
|
|
$
|
277
|
|
Residential
|
2,165
|
|
|
2,251
|
|
|
20
|
|
|
1,782
|
|
|
67
|
|
Grand Total:
|
$
|
8,926
|
|
|
$
|
11,420
|
|
|
$
|
1,261
|
|
|
$
|
8,753
|
|
|
$
|
344
|
|
At
December 31, 2015
, the recorded investment in loans considered impaired totaled
$8.9 million
. Of the total investment in loans considered impaired,
$3.8 million
were found to show specific impairment for which a
$1.3 million
valuation allowance was recorded; the remaining
$5.1 million
in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance.
Troubled Debt Restructurings
Loans are classified as a TDR when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally, concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.
Loans in the process of renewal or modification are reviewed by the Bank to determine if the risk grade assigned is accurate based on updated information. All loans identified by the Bank's internal loan grading system to pose a heightened level of risk at or prior to renewal or modification are additionally reviewed to determine if the loan should be classified as a TDR. The Bank's knowledge of the borrower's situation and any updated financial information obtained is first used to determine whether the borrower is experiencing financial difficulty. Once this is determined, the Bank reviews the modification terms to determine whether a concession has been granted. If the Bank determines that both conditions have been met, the loan will be classified as a TDR. If the Bank determines that both conditions have not been met, the loan is not classified as a TDR, but would typically then be monitored for any additional deterioration. Documentation to support this determination of TDR classification is maintained within the credit file.
For the year ended
December 31, 2016
, there were
seven
loans modified as TDRs totaling
$1,004,000
. There were
no
loans modified as TDRs for the year ended
December 31, 2015
. The following table presents a breakdown of TDRs by loan class and the type of concession made to the borrower as of
December 31, 2016
(amounts in thousands, except number of loans):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31, 2016
|
|
Number of loans
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
Extended payment terms:
|
|
|
|
|
|
Commercial & industrial
|
3
|
|
$
|
27
|
|
|
$
|
24
|
|
Commercial real estate
|
2
|
|
591
|
|
|
587
|
|
Residential mortgage
|
1
|
|
260
|
|
|
260
|
|
Subtotal
|
6
|
|
$
|
878
|
|
|
$
|
871
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
Residential mortgage
|
1
|
|
$
|
126
|
|
|
$
|
121
|
|
Subtotal
|
1
|
|
$
|
126
|
|
|
$
|
121
|
|
|
|
|
|
|
|
Total
|
7
|
|
$
|
1,004
|
|
|
$
|
992
|
|
There were
no
loans modified as TDRs and for which there was a payment default during the year ended
December 31, 2016
.
The table below details the progression of TDRs which have been entered into during the previous 12 months
(amounts in thousands, except number of loans):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Paid in full
|
|
Paying as restructured
|
|
Converted to non-accrual
|
|
Foreclosure/Default
|
|
Number of loans
|
|
Recorded Investment
|
|
Number of loans
|
|
Recorded Investment
|
|
Number of loans
|
|
Recorded Investment
|
|
Number of loans
|
|
Recorded Investment
|
Extended payment terms
|
—
|
|
|
$
|
—
|
|
|
6
|
|
|
$
|
871
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
1
|
|
|
121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
—
|
|
|
$
|
—
|
|
|
7
|
|
|
$
|
992
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Allowance for Loan Losses and Recorded Investment in Loans
The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on at least a quarterly basis, which includes a review of loans both specifically and collectively evaluated for impairment.
Following is an analysis of the allowance for loan losses by loan segment as of and for the years ended
December 31, 2016
and
2015
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Real Estate
|
|
|
|
|
|
|
Allowances for loan losses:
|
Commercial and Industrial
|
|
Commercial construction and land development
|
|
Commercial real estate
|
|
Residential construction
|
|
Residential mortgage
|
|
Consumer
|
|
Other
|
|
Totals
|
Balance, beginning of period
|
$
|
221
|
|
|
$
|
5,470
|
|
|
$
|
2,268
|
|
|
$
|
305
|
|
|
$
|
1,191
|
|
|
$
|
113
|
|
|
$
|
48
|
|
|
$
|
9,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
(187
|
)
|
|
(1,114
|
)
|
|
1,474
|
|
|
(68
|
)
|
|
(138
|
)
|
|
33
|
|
|
—
|
|
|
—
|
|
Loans charged-off
|
(73
|
)
|
|
(229
|
)
|
|
(565
|
)
|
|
—
|
|
|
(45
|
)
|
|
(161
|
)
|
|
(9
|
)
|
|
(1,082
|
)
|
Recoveries
|
97
|
|
|
788
|
|
|
21
|
|
|
21
|
|
|
70
|
|
|
113
|
|
|
3
|
|
|
1,113
|
|
Net recoveries (charge-offs)
|
24
|
|
|
559
|
|
|
(544
|
)
|
|
21
|
|
|
25
|
|
|
(48
|
)
|
|
(6
|
)
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
58
|
|
|
$
|
4,915
|
|
|
$
|
3,198
|
|
|
$
|
258
|
|
|
$
|
1,078
|
|
|
$
|
98
|
|
|
$
|
42
|
|
|
$
|
9,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
$
|
—
|
|
|
$
|
415
|
|
|
$
|
530
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
984
|
|
Ending balance: collectively evaluated for impairment
(1)
|
$
|
58
|
|
|
$
|
4,500
|
|
|
$
|
2,668
|
|
|
$
|
258
|
|
|
$
|
1,039
|
|
|
$
|
98
|
|
|
$
|
42
|
|
|
$
|
8,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
22,977
|
|
|
$
|
46,114
|
|
|
$
|
253,086
|
|
|
$
|
42,660
|
|
|
$
|
132,971
|
|
|
$
|
9,010
|
|
|
$
|
502
|
|
|
$
|
507,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
$
|
24
|
|
|
$
|
652
|
|
|
$
|
2,866
|
|
|
$
|
—
|
|
|
$
|
1,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,386
|
|
Ending balance: collectively evaluated for impairment
(1)
|
$
|
22,953
|
|
|
$
|
45,462
|
|
|
$
|
250,220
|
|
|
$
|
42,660
|
|
|
$
|
131,127
|
|
|
$
|
9,010
|
|
|
$
|
502
|
|
|
$
|
501,934
|
|
(1)
At
December 31, 2016
, there were
$176,000
in impaired loans collectively evaluated for impairment with
$23,000
in reserves established.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Real Estate
|
|
|
|
|
|
|
Allowances for loan losses:
|
Commercial and Industrial
|
|
Commercial construction and land development
|
|
Commercial real estate
|
|
Residential construction
|
|
Residential mortgage
|
|
Consumer
|
|
Other
|
|
Totals
|
Balance, beginning of period
|
$
|
119
|
|
|
$
|
5,105
|
|
|
$
|
2,382
|
|
|
$
|
436
|
|
|
$
|
1,206
|
|
|
$
|
89
|
|
|
$
|
40
|
|
|
$
|
9,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
(58
|
)
|
|
(615
|
)
|
|
71
|
|
|
(90
|
)
|
|
497
|
|
|
121
|
|
|
74
|
|
|
—
|
|
Loans charged-off
|
(74
|
)
|
|
(196
|
)
|
|
(578
|
)
|
|
(41
|
)
|
|
(713
|
)
|
|
(210
|
)
|
|
(69
|
)
|
|
(1,881
|
)
|
Recoveries
|
234
|
|
|
1,176
|
|
|
393
|
|
|
—
|
|
|
201
|
|
|
113
|
|
|
3
|
|
|
2,120
|
|
Net recoveries (charge-offs)
|
160
|
|
|
980
|
|
|
(185
|
)
|
|
(41
|
)
|
|
(512
|
)
|
|
(97
|
)
|
|
(66
|
)
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
221
|
|
|
$
|
5,470
|
|
|
$
|
2,268
|
|
|
$
|
305
|
|
|
$
|
1,191
|
|
|
$
|
113
|
|
|
$
|
48
|
|
|
$
|
9,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
$
|
2
|
|
|
$
|
989
|
|
|
$
|
228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,219
|
|
Ending balance: collectively evaluated for impairment
(1)
|
$
|
219
|
|
|
$
|
4,481
|
|
|
$
|
2,040
|
|
|
$
|
305
|
|
|
$
|
1,191
|
|
|
$
|
113
|
|
|
$
|
48
|
|
|
$
|
8,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
24,331
|
|
|
$
|
50,510
|
|
|
$
|
208,737
|
|
|
$
|
36,618
|
|
|
$
|
128,442
|
|
|
$
|
8,878
|
|
|
$
|
1,257
|
|
|
$
|
458,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
$
|
84
|
|
|
$
|
2,564
|
|
|
$
|
3,957
|
|
|
$
|
721
|
|
|
$
|
1,305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,631
|
|
Ending balance: collectively evaluated for impairment
(1)
|
$
|
24,247
|
|
|
$
|
47,946
|
|
|
$
|
204,780
|
|
|
$
|
35,897
|
|
|
$
|
127,137
|
|
|
$
|
8,878
|
|
|
$
|
1,257
|
|
|
$
|
450,142
|
|
(1)
At
December 31, 2015
, there were
$295,000
in impaired loans collectively evaluated for impairment with
$42,000
in reserves established.
NOTE E - BANK PREMISES AND EQUIPMENT
Company premises and equipment at
December 31, 2016
and
2015
are as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land
|
$
|
2,564
|
|
|
$
|
4,394
|
|
Buildings and leasehold improvements
|
11,837
|
|
|
11,312
|
|
Furniture and equipment
|
4,691
|
|
|
5,182
|
|
Construction in process
|
—
|
|
|
1,467
|
|
|
19,092
|
|
|
22,355
|
|
Less accumulated depreciation
|
(9,248
|
)
|
|
(10,062
|
)
|
|
$
|
9,844
|
|
|
$
|
12,293
|
|
Depreciation expense was
$675,000
and
$684,000
for the years ended
December 31, 2016
and
2015
, respectively. As of
December 31, 2016
, the Company had a total of
$2.4 million
in premises and equipment which were classified as held for sale.
NOTE F - DEPOSITS
At
December 31, 2016
, the scheduled maturities of time deposits are as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
$250,000
|
|
$250,000
or more
|
|
Total
|
2017
|
$
|
101,946
|
|
|
$
|
15,546
|
|
|
$
|
117,492
|
|
2018
|
43,423
|
|
|
4,909
|
|
|
48,332
|
|
2019
|
9,278
|
|
|
3,327
|
|
|
12,605
|
|
2020
|
6,787
|
|
|
3,438
|
|
|
10,225
|
|
2021
|
9,843
|
|
|
2,297
|
|
|
12,140
|
|
2022 and beyond
|
241
|
|
|
250
|
|
|
491
|
|
Total time deposits
|
$
|
171,518
|
|
|
$
|
29,767
|
|
|
$
|
201,285
|
|
NOTE G - BORROWINGS
At
December 31, 2016
and
2015
, borrowed funds included the following FHLB advances
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Origination Date
|
Maturity Date
|
|
Interest Rate
|
|
December 31, 2016
|
February 4, 2008
|
February 5, 2018
|
|
2.06%
|
|
Fixed
|
|
$
|
10,000
|
|
June 5, 2008
|
June 5, 2018
|
|
2.25%
|
|
Fixed
|
|
5,000
|
|
June 5, 2008
|
June 5, 2018
|
|
2.55%
|
|
Fixed
|
|
5,000
|
|
September 18, 2008
|
September 18, 2018
|
|
2.71%
|
|
Fixed
|
|
10,000
|
|
February 10, 2016
|
August 9, 2017
|
|
0.73%
|
|
Fixed
|
|
10,000
|
|
April 29, 2016
(1)
|
April 29, 2019
|
|
2.54%
|
|
Fixed
|
|
5,000
|
|
April 29, 2016
(1)
|
April 29, 2019
|
|
2.62%
|
|
Fixed
|
|
5,000
|
|
April 29, 2016
(1)
|
April 29, 2019
|
|
2.83%
|
|
Fixed
|
|
10,000
|
|
May 25, 2016
|
May 25, 2018
|
|
1.13%
|
|
Fixed
|
|
10,000
|
|
|
|
|
|
|
|
|
$
|
70,000
|
|
(1)
These advances were redeemed and restructured on April 29, 2016 and were originally executed between 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Origination Date
|
Maturity Date
|
|
Interest Rate
|
|
December 31, 2015
|
August 13, 2007
|
August 14, 2017
|
|
3.94%
|
|
Fixed
|
|
$
|
5,000
|
|
February 4, 2008
|
February 5, 2018
|
|
2.06%
|
|
Fixed
|
|
10,000
|
|
June 5, 2008
|
June 5, 2018
|
|
2.25%
|
|
Fixed
|
|
5,000
|
|
June 5, 2008
|
June 5, 2018
|
|
2.55%
|
|
Fixed
|
|
5,000
|
|
June 5, 2008
|
June 5, 2018
|
|
3.03%
|
|
Fixed
|
|
5,000
|
|
September 9, 2008
|
September 10, 2018
|
|
3.14%
|
|
Fixed
|
|
10,000
|
|
September 18, 2008
|
September 18, 2018
|
|
2.71%
|
|
Fixed
|
|
10,000
|
|
December 21, 2015
|
February 22, 2016
|
|
0.48%
|
|
Fixed
|
|
10,000
|
|
|
|
|
|
|
|
|
$
|
60,000
|
|
FHLB advances are secured by a floating lien covering the Company’s loan portfolio of qualifying mortgage loans, as well as specific bonds in the investment portfolio. At
December 31, 2016
, the Company had available lines of credit totaling
$110.3 million
with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at
December 31, 2016
and
2015
were
2.06%
and
2.38%
, respectively.
In addition to the above advances, the Company has lines of credit of
$37.0 million
from various financial institutions to purchase federal funds on a short-term basis. The Company has
no
federal funds purchases outstanding as of
December 31, 2016
.
NOTE H - TRUST PREFERRED SECURITIES
On March 30, 2006,
$12.4 million
of trust preferred securities (the “Trust Preferred Securities”) were placed through the Trust. The Trust has invested the net proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the “Debentures”) issued by the Company and recorded in borrowings on the accompanying consolidated balance sheets. The Trust Preferred Securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to three month LIBOR plus
1.35%
. The dividends paid to holders of the Trust Preferred Securities, which will be recorded as interest expense, are deductible for income tax purposes. The Trust Preferred Securities are redeemable on June 15, 2011 or afterwards in whole or in part, on any June 15, September 15, December 15, or March 15. Redemption is mandatory by June 15, 2036.
The Company has fully and unconditionally guaranteed the Trust Preferred Securities through the combined operation of the Debentures and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The Trust Preferred Securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.
The Company has the right to defer payment of interest on the Debentures at any time and from time to time for a period not exceeding
five years
, provided that no deferral period extends beyond the stated maturities of the Debentures. Such deferral of interest payments by the Company will result in a deferral of distribution payments on the related Trust Preferred Securities. Whenever the Company defers the payment of interest on the Debentures, it will be precluded from the payment of cash dividends to shareholders. As of
December 31, 2016
, the Company is current with interest payments on the Debentures.
NOTE I – SUBORDINATED PROMISSORY NOTES
In late 2015, the Company sold
$11.5 million
aggregate principal amount of subordinated promissory notes. These notes are due on
November 30, 2025
and the Company is obligated to pay interest at an annualized rate of
6.25%
payable in quarterly installments commencing on March 1, 2016. The Company may prepay the notes at any time after November 30, 2020, subject to compliance with applicable law. The proceeds of the offering were used to refinance the Company's then outstanding subordinated promissory notes issued in 2009.
NOTE J - INCOME TAXES
Allocation of income tax expense between current and deferred portions is as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
Current tax expense (benefit):
|
|
|
|
|
|
Federal
|
$
|
110
|
|
|
$
|
34
|
|
State
|
—
|
|
|
—
|
|
|
110
|
|
|
34
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
Federal
|
(954
|
)
|
|
(15,184
|
)
|
State
|
(724
|
)
|
|
(1,330
|
)
|
|
(1,678
|
)
|
|
(16,514
|
)
|
|
|
|
|
Income tax benefit
|
$
|
(1,568
|
)
|
|
$
|
(16,480
|
)
|
The reconciliation of expected income tax at the statutory federal rate of
34%
with income tax expense is as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
Expense computed at statutory rate of 34%
|
$
|
1,800
|
|
|
$
|
1,200
|
|
Effect of state income taxes, net of federal benefit
|
(1,006
|
)
|
|
(790
|
)
|
Tax exempt income
|
(28
|
)
|
|
(19
|
)
|
Bank owned life insurance income
|
(72
|
)
|
|
(64
|
)
|
Valuation allowance
|
(2,287
|
)
|
|
(16,819
|
)
|
Other, net
|
25
|
|
|
12
|
|
|
$
|
(1,568
|
)
|
|
$
|
(16,480
|
)
|
Deferred income taxes consist of the following
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
|
3,471
|
|
|
$
|
3,523
|
|
Restricted stock and stock options
|
255
|
|
|
240
|
|
OTTI
|
184
|
|
|
188
|
|
Net deferred loan fees
|
114
|
|
|
169
|
|
Net operating loss
|
13,217
|
|
|
14,901
|
|
SERP accrual
|
147
|
|
|
186
|
|
Other
|
1,111
|
|
|
1,335
|
|
Unrealized gain on securities
|
9
|
|
|
165
|
|
Total deferred tax assets
|
18,508
|
|
|
20,707
|
|
Less valuation allowance
|
(87
|
)
|
|
(3,765
|
)
|
Net deferred tax assets
|
18,421
|
|
|
16,942
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
$
|
95
|
|
|
$
|
133
|
|
Prepaid expense
|
76
|
|
|
80
|
|
Other
|
49
|
|
|
50
|
|
Total deferred tax liabilities
|
220
|
|
|
263
|
|
Net deferred tax asset
|
$
|
18,201
|
|
|
$
|
16,679
|
|
When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50%
likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. For the years ended
December 31, 2016
and
2015
, there were no uncertain tax positions taken by the Company. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Fiscal years ending December 31, 2009 and thereafter are subject to IRS examination.
For the
twelve
months ended
December 31, 2016
, the Company recorded a discrete income tax benefit of
$1.6 million
as compared to
$16.5 million
for the same period in 2015. The year-over-year variance is due to the Company’s release of the valuation allowance against its deferred tax assets in the second quarter of 2015 offset by an income tax expense in the third quarter of 2015 as a result of changes to the North Carolina tax rate and its impact on future deferred tax benefits.
As of
December 31, 2016
, the Company had net operating losses available for carryforward of
$37.1 million
that will expire, if unused, from 2028 through 2034.
Under the accounting principles generally accepted in the United States ("GAAP"), companies are required to assess whether a valuation allowance should be established against their deferred tax assets based on consideration of all available positive and negative evidence using a “more likely than not” standard. During the analysis for the twelve months ended December 31, 2010 and continuing through March 31, 2015, the Company had concluded that it was not more-likely-than-not that the Company would be able to utilize its deferred tax assets and, accordingly, had established a full valuation allowance against the value of the deferred tax assets. This conclusion was based on negative credit quality trends, increasing provision for loan losses, cumulative loss position, and uncertainty regarding the amount of future taxable income that the Company could forecast. In the second quarter of 2015, the Company determined it was more likely than not that it will generate sufficient taxable income to utilize a significant portion of its deferred tax assets and completed a partial reversal of the valuation allowance on its deferred tax assets totaling
$16.6 million
.
As part of the ongoing evaluation of positive and negative factors, the Company determined in the fourth quarter of 2016 that it is more likely than not that it will generate sufficient taxable income to utilize substantially all of the remaining portion of its deferred tax assets. As a result of this judgment about the ability to utilize its deferred tax assets in future years, the Company released
$3.7 million
of the remaining valuation allowance against its deferred tax assets resulting in an income tax benefit. This conclusion, and release of substantially all remaining valuation allowance, was based upon a number of factors including continued improvement in quarterly earnings, forecasted future profitability, and improved asset quality.
NOTE K - CAPITAL AND REGULATORY INFORMATION
North Carolina banking law requires that the Bank may not pay a dividend that would reduce its capital below the applicable required capital. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the Bank. Although not currently limited by regulatory authorities, there were
no
dividends paid to the Company by the Bank during
2016
.
Current federal regulations require that the Company and the Bank maintain a minimum ratio of total capital to risk weighted assets of
8.0%
, with at least
6.0%
being in the form of Tier 1 capital, as defined in the regulations. In addition, the Company and the Bank must maintain a common equity Tier 1 capital ratio of
4.5%
and a leverage ratio of
4.0%
. For the Bank to be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. There is no such category for well capitalized at the Company level. At
December 31, 2016
, the Bank was classified as well capitalized for regulatory capital purposes.
Capital ratios for the Bank and the Company are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Ratio
|
|
Minimum For Capital
Adequacy Purposes
|
|
Minimum To be Well
Capitalized under
Prompt Corrective
Action Provisions
|
|
12/31/2016
|
|
12/31/2015
|
|
Ratio
|
|
Ratio
|
Bank
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
15.4
|
%
|
|
15.6
|
%
|
|
8.0
|
%
|
|
10.0
|
%
|
Tier I Capital (to Risk Weighted Assets)
|
14.1
|
%
|
|
14.4
|
%
|
|
6.0
|
%
|
|
8.0
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
14.1
|
%
|
|
14.4
|
%
|
|
4.5
|
%
|
|
6.5
|
%
|
Tier I Capital (to Average Assets)
|
11.0
|
%
|
|
10.2
|
%
|
|
4.0
|
%
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
15.6
|
%
|
|
16.0
|
%
|
|
8.0
|
%
|
|
N/A
|
|
Tier I Capital (to Risk Weighted Assets)
|
12.2
|
%
|
|
12.4
|
%
|
|
6.0
|
%
|
|
N/A
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
10.9
|
%
|
|
11.3
|
%
|
|
4.5
|
%
|
|
N/A
|
|
Tier I Capital (to Average Assets)
|
9.5
|
%
|
|
8.8
|
%
|
|
4.0
|
%
|
|
N/A
|
|
In July 2015, the Bank entered into a Written Agreement (the "2015 Written Agreement") with the FRB replacing the Written Agreement the Company and the Bank entered into with the FRB and the North Carolina Office of the Commissioner of Banks in May 2011. Under the terms of the 2015 Written Agreement, the Bank submitted and implemented the following plans:
•
a written plan to assure ongoing board oversight of the Bank's management and operations;
•
a written program for the review of new products, services, or business lines; and
•
an enhanced written program for conducting appropriate levels of customer due diligence by the Bank.
In addition, the Bank agreed that within
30 days
after the end of each calendar quarter following the date of the 2015 Written Agreement, it will submit to FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the 2015 Written Agreement and the results thereof.
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the commitment letter or contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Undisbursed lines of credit are commitments for possible future extensions of credit to customers on existing loans. These lines of credit generally contain a specified maturity date, but could also exclude an expiration date such as is the case for our overdraft protection lines. Similar to commitments, undisbursed lines of credit may not be drawn upon to the total extent to which the Bank is committed and do not necessarily represent future cash requirements.
Stand-by letters of credit are conditional lending commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within
four years
. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
At
December 31, 2016
and
2015
, financial instruments whose contract amounts represent credit risk were
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Commitments to extend credit
|
$
|
21,118
|
|
|
$
|
29,354
|
|
Undisbursed lines of credit
|
97,358
|
|
|
94,241
|
|
Financial stand-by letters of credit
|
439
|
|
|
438
|
|
Performance stand-by letters of credit
|
422
|
|
|
233
|
|
Legally binding commitments
|
119,337
|
|
|
124,266
|
|
Unused credit card lines
|
16,624
|
|
|
15,982
|
|
Total
|
$
|
135,961
|
|
|
$
|
140,248
|
|
Litigation Proceedings
In October 2013, multiple putative class action lawsuits were filed in United States district courts across the country against a number of different banks based on the banks’ alleged role in “payday lending.” As previously disclosed,
two
of these lawsuits, filed in the Middle District of North Carolina and the Southern District of Florida, named the Bank as one of the defendants. In December 2016, pursuant to a confidential settlement agreement, the parties filed stipulations of dismissal with prejudice as to both lawsuits.
Additionally, we are party to certain other legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.
NOTE M – FAIR VALUE MEASUREMENTS
Fair Value Measured on a Recurring Basis
.
The Company measures certain assets at fair value on a recurring basis, as described below.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities have historically included equity securities traded on an active exchange, such as the New York Stock Exchange. As of
December 31, 2016
, there were no Level 1 securities. Level 2 securities include taxable municipalities and mortgage-backed securities issued by government sponsored entities. The Company’s mortgage-backed securities were primarily issued by GNMA, FNMA, and FHLMC. As of
December 31, 2016
, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities. Securities classified as Level 3 include other debt securities in less liquid markets and with no quoted market price.
The following table presents information about assets measured at fair value on a recurring basis at
December 31, 2016
and
2015
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities:
|
|
Fair Value Measurements at
December 31, 2016, Using
|
|
Total Carrying
Amount in the
Consolidated
Balance Sheet
|
|
Assets
Measured
at Fair Value
|
|
Quoted Prices
in Active
Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Taxable municipal securities
|
|
$
|
20,049
|
|
|
$
|
20,049
|
|
|
$
|
—
|
|
|
$
|
20,049
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
11,680
|
|
|
11,680
|
|
|
—
|
|
|
11,680
|
|
|
—
|
|
FNMA & FHLMC
|
|
25,412
|
|
|
25,412
|
|
|
—
|
|
|
25,412
|
|
|
—
|
|
Other debt securities
|
|
1,000
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
Total available-for-sale securities
|
|
$
|
58,141
|
|
|
$
|
58,141
|
|
|
$
|
—
|
|
|
$
|
57,141
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities:
|
|
Fair Value Measurements at
December 31, 2015 Using
|
|
Total Carrying
Amount in the
Consolidated
Balance Sheet
|
|
Assets
Measured
at Fair Value
|
|
Quoted Prices
in Active
Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Taxable municipal securities
|
|
$
|
24,567
|
|
|
$
|
24,567
|
|
|
$
|
—
|
|
|
$
|
24,567
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
13,530
|
|
|
13,530
|
|
|
—
|
|
|
13,530
|
|
|
—
|
|
FNMA & FHLMC
|
|
31,673
|
|
|
31,673
|
|
|
—
|
|
|
31,673
|
|
|
—
|
|
Other debt securities
|
|
500
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Equity securities
|
|
11
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
—
|
|
Total available-for-sale securities
|
|
$
|
70,281
|
|
|
$
|
70,281
|
|
|
$
|
—
|
|
|
$
|
69,781
|
|
|
$
|
500
|
|
The table below presents reconciliation for the years ended
December 31, 2016
and
2015
for all Level 3 assets that are measured at fair value on a recurring basis
(amounts in thousands)
. During the year ended
December 31, 2016
,
no
securities were transferred from Level 3 to Level 2.
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
2016
|
|
2015
|
Beginning Balance
|
$
|
500
|
|
|
$
|
—
|
|
Purchases, issuances and settlements
|
500
|
|
|
500
|
|
Ending Balance
|
$
|
1,000
|
|
|
$
|
500
|
|
Fair Value Measured on a Nonrecurring Basis.
The Company measures certain assets at fair value on a nonrecurring basis, as described below.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale as a Level 2 valuation.
At
December 31, 2016
, the Company had
$206,000
in loans held for sale which were made up entirely of residential mortgage loans held for sale in the secondary market as compared to
$1.1 million
at
December 31, 2015
.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, when a loan is considered impaired, it is evaluated for impairment and written down to its estimated fair value or an allowance for loan losses is established. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When there is no observable market prices, an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.
As of
December 31, 2016
, the Bank identified
$2.2 million
in impaired loans that were carried at fair value compared to
$3.3 million
at
December 31, 2015
. For
2016
, this total included
$2.4 million
in loans that had a specific valuation allowance of
$1.0 million
and
$784,000
in loans without a specific valuation allowance that were previously written down to fair value. For
2015
, this total included
$3.5 million
in loans that had a specific valuation allowance of
$1.2 million
and
$1.0 million
in loans without a specific valuation allowance that were previously written down to fair value.
Foreclosed Assets
Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3. At
December 31, 2016
, there were
$405,000
of fair value adjustments required after transfer related to foreclosed real estate of
$1.7 million
compared to
$344,000
and
$1.8 million
, respectively, at
December 31, 2015
.
Premises and Equipment Held for Sale
Premises and equipment held for sale are carried at the lower of cost or fair value less estimate selling costs. Fair value is based upon independent market prices, appraised values of the property or management’s estimation of the value of the property. Given the lack of observable market prices, the Company records premises and equipment held for sale assets as non-recurring Level 3.
At
December 31, 2016
, the Company had
$2.4 million
in premises and equipment held for sale which included building and land held for sale. There were
no
premises and equipment classified as held for sale at
December 31, 2015
.
Assets measured at fair value on a non-recurring basis are included in the table below at
December 31, 2016
and
2015
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2016, Using
|
Description
|
|
Total Carrying Amount in the Consolidated Balance Sheet
|
|
Assets Measured at Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Loans held for sale
|
|
$
|
206
|
|
|
$
|
206
|
|
|
$
|
—
|
|
|
$
|
206
|
|
|
$
|
—
|
|
Impaired loans
|
|
2,179
|
|
|
2,179
|
|
|
—
|
|
|
—
|
|
|
2,179
|
|
Foreclosed assets
|
|
1,682
|
|
|
1,682
|
|
|
—
|
|
|
—
|
|
|
1,682
|
|
Premises and equipment held for sale
|
|
2,373
|
|
|
2,373
|
|
|
—
|
|
|
—
|
|
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2015, Using
|
Description
|
|
Total Carrying Amount in the Consolidated Balance Sheet
|
|
Assets Measured at Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Loans held for sale
|
|
$
|
1,145
|
|
|
$
|
1,145
|
|
|
$
|
—
|
|
|
$
|
1,145
|
|
|
$
|
—
|
|
Impaired loans
|
|
3,288
|
|
|
3,288
|
|
|
—
|
|
|
—
|
|
|
3,288
|
|
Foreclosed assets
|
|
1,760
|
|
|
1,760
|
|
|
—
|
|
|
—
|
|
|
1,760
|
|
Quantitative Information about Level 3 Fair Value Measurements
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring and nonrecurring basis at
December 31, 2016
(amounts in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
Total Carrying Amount at December 31, 2016
|
|
Valuation Methodology
|
|
Range of Inputs
|
Recurring measurements:
|
|
|
|
|
|
Other debt securities
|
$
|
1,000
|
|
|
Probability of default
|
|
0%
|
|
|
|
Loss given default
|
|
100%
|
Nonrecurring measurements:
|
|
|
|
|
|
Impaired loans
|
$
|
2,179
|
|
|
Collateral discounts
|
|
9 - 50%
|
Foreclosed assets
|
$
|
1,682
|
|
|
Discounted appraisals
|
|
10 - 30%
|
Premises and equipment held for sale
|
$
|
2,373
|
|
|
Discounted appraisals
|
|
10 - 50%
|
Collateral discounts to determine fair value on impaired loans varies widely and result from the consideration of the following factors: the age of the most recent appraisal, the type of asset serving as collateral, the expected marketability of the asset, its material or environmental condition, and comparisons to actual sales data of similar assets from both internal and external sources.
The following table reflects the general range of collateral discounts for impaired loans by segment:
|
|
|
Loan Segment:
|
Range of Percentages
|
Commercial construction and land development
|
10% - 40%
|
Commercial real estate
|
9% - 50%
|
Residential construction
|
9% - 30%
|
Residential mortgage
|
9% - 20%
|
All other segments
|
9% - 20%
|
As foreclosed assets are brought into other real estate owned through a process which requires a fair market valuation, further discounts typically reflect market conditions specific to the asset. These conditions are usually captured in subsequent appraisals which are required on an annual basis, and depending upon asset type and marketability demonstrate a more restrained variance than that noted above.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents are equal to the fair value due to the liquid nature of the financial instruments.
Certificates of Deposit
These investments are valued at carrying amounts for fair value purposes.
Securities Available-for-Sale and Securities Held-to-Maturity
Fair values of investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held For Sale
The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.
Loans
The fair value of loans has been estimated utilizing the net present value of future cash flows based upon contractual balances, prepayment assumptions, and applicable weighted average interest rates, adjusted for a
3%
current liquidity and market discount assumption. The Company has assigned no fair value to off-balance sheet financial instruments since they are either short term in nature or subject to immediate repricing.
FHLB Stock
The carrying amount of FHLB stock approximates fair value.
Deposits
The fair value of non-maturing deposits such as noninterest-bearing demand, money market, NOW, and savings accounts, are by definition, equal to the amount payable on demand. Fair value for maturing deposits such as CDs and IRAs are estimated using a discounted cash flow approach that applies current interest rates to expected maturities.
Borrowings, Subordinated Debentures, and Subordinated Promissory Notes
The fair value of borrowings, subordinated debentures, and subordinated promissory notes, is based on discounting expected cash flows at the interest rate from debt with the same or similar remaining maturities and collection requirements.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximates fair value.
The following table presents information for financial assets and liabilities as of
December 31, 2016
and
2015
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
32,563
|
|
|
$
|
32,563
|
|
|
$
|
32,563
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposit
|
18,125
|
|
|
18,125
|
|
|
—
|
|
|
18,125
|
|
|
—
|
|
Securities available-for-sale
|
58,141
|
|
|
58,141
|
|
|
—
|
|
|
57,141
|
|
|
1,000
|
|
Securities held-to-maturity
|
51,205
|
|
|
51,452
|
|
|
—
|
|
|
51,452
|
|
|
—
|
|
Loans held for sale
|
206
|
|
|
206
|
|
|
—
|
|
|
206
|
|
|
—
|
|
Loans, net
|
497,357
|
|
|
479,184
|
|
|
—
|
|
|
—
|
|
|
479,184
|
|
FHLB stock
|
3,596
|
|
|
3,596
|
|
|
—
|
|
|
3,596
|
|
|
—
|
|
Accrued interest receivable
|
1,598
|
|
|
1,598
|
|
|
—
|
|
|
1,598
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
553,531
|
|
|
$
|
552,207
|
|
|
$
|
—
|
|
|
$
|
552,207
|
|
|
$
|
—
|
|
Subordinated debentures and subordinated promissory notes
|
23,872
|
|
|
23,872
|
|
|
—
|
|
|
—
|
|
|
23,872
|
|
Borrowings
|
70,000
|
|
|
70,896
|
|
|
—
|
|
|
70,896
|
|
|
—
|
|
Accrued interest payable
|
384
|
|
|
384
|
|
|
—
|
|
|
384
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
26,755
|
|
|
$
|
26,755
|
|
|
$
|
26,755
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposit
|
23,520
|
|
|
23,520
|
|
|
—
|
|
|
23,520
|
|
|
—
|
|
Securities available-for-sale
|
70,281
|
|
|
70,281
|
|
|
—
|
|
|
69,781
|
|
|
500
|
|
Securities held-to-maturity
|
65,354
|
|
|
65,633
|
|
|
—
|
|
|
65,633
|
|
|
—
|
|
Loans held for sale
|
1,145
|
|
|
1,145
|
|
|
—
|
|
|
1,145
|
|
|
—
|
|
Loans, net
|
448,697
|
|
|
423,285
|
|
|
—
|
|
|
—
|
|
|
423,285
|
|
FHLB stock
|
3,288
|
|
|
3,288
|
|
|
—
|
|
|
3,288
|
|
|
—
|
|
Accrued interest receivable
|
1,594
|
|
|
1,594
|
|
|
—
|
|
|
1,594
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
542,334
|
|
|
$
|
541,818
|
|
|
$
|
—
|
|
|
$
|
541,818
|
|
|
$
|
—
|
|
Subordinated debentures and subordinated promissory notes
|
23,872
|
|
|
23,872
|
|
|
—
|
|
|
—
|
|
|
23,872
|
|
Borrowings
|
60,000
|
|
|
61,709
|
|
|
—
|
|
|
61,709
|
|
|
—
|
|
Accrued interest payable
|
437
|
|
|
437
|
|
|
—
|
|
|
437
|
|
|
—
|
|
NOTE N - STOCK OPTION PLAN
The Company has a non-qualified stock option plan for certain key employees under which it is authorized to issue options for up to
308,555
shares of common stock. Options are granted at the discretion of the Company’s Board of Directors at an exercise price approximating market value, as determined by a committee of Board members. All options granted subsequent to a 1997 amendment will be
100%
vested after either
one
or
two
years from the grant date and will expire after such a period as is determined by the Board at the time of grant. Options granted in 2014 have a
two
year vesting provision. There were
no
options granted during
2015
or
2016
. All share and share-related information have been adjusted to reflect the Reverse Stock Split. Refer to Note S - Subsequent Events for additional information.
A summary of option activity under the Plan for the year ended
December 31, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Option
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2016
|
38,621
|
|
|
$
|
21.68
|
|
|
|
|
|
Issued
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
2,825
|
|
|
6.70
|
|
|
|
|
|
Forfeited
|
3,840
|
|
|
7.58
|
|
|
|
|
|
Expired
|
8,215
|
|
|
15.00
|
|
|
|
|
|
Balance at December 31, 2016
|
23,741
|
|
|
$
|
28.06
|
|
|
1.22
|
|
$
|
117,814
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
23,741
|
|
|
$
|
28.06
|
|
|
1.22
|
|
$
|
117,814
|
|
The weighted average exercise price of all exercisable options at
December 31, 2016
is
$28.06
. There were
42,969
shares reserved for future issuance under the Company’s stock option plan at
December 31, 2016
.
A summary of the status of the Company's non-vested options as of
December 31, 2016
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted average grant date fair value
|
Non-vested - December 31, 2015
|
9,906
|
|
|
$
|
5.13
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
9,781
|
|
|
5.13
|
|
Forfeited/Expired
|
125
|
|
|
5.13
|
|
Non-vested - December 31, 2016
|
—
|
|
|
$
|
—
|
|
As of
December 31, 2016
, there was
no
unrecognized compensation cost related to non-vested options compared to
$6,241
at
December 31, 2015
.
Additional information concerning the Company’s stock options at
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Number
Outstanding
|
|
Contractual
Life (Years)
|
|
Number
Exercisable
|
5.75 - 8.49
|
|
6,085
|
|
|
1.19
|
|
6,085
|
|
8.50 - 203.94
|
|
15,195
|
|
|
1.26
|
|
15,195
|
|
203.95
|
|
2,461
|
|
|
1.07
|
|
2,461
|
|
|
|
23,741
|
|
|
1.22
|
|
23,741
|
|
NOTE O - RESTRICTED STOCK
In January 2015, the Board of the Company approved and adopted the Four Oaks Fincorp, Inc. 2015 Restricted Stock Plan (the “Plan”), which provides for awards of both performance and time based restricted stock and restricted stock unit awards. Awards of performance based restricted stock granted in 2015 vest in
two
separate tranches,
15%
at the end of the
one
-year period ended on December 31, 2015, and
85%
at the end of the
three
-year period ending on December 31, 2018 (each such period, a “Performance Period”), in each case based on the attainment of the performance measures and goals for that Performance Period. Awards of performance based restricted stock granted in 2016 vest
100%
at the end of the
three
-year period ending on December 31, 2018 based on the attainment of the performance measures and goals for that Performance Period. The performance measures for the
one
-year period which ended December 31, 2015 were (1) budgeted net income as set forth in the Company’s 2015 budget and (2) the Company having net income in each quarter of 2015. Budgeted net income must be achieved at the
70%
threshold performance level in order for
10.5%
of the awards to vest and at the
100%
target performance level in order for
15%
of the awards to vest. Where achievement against budgeted net income falls between these performance levels, the number of shares vested is determined based on straight-line interpolation. We achieved our targeted performance level for the
one
-year Performance Period ending December 31, 2015, and therefore
15%
of the shares of restricted stock have now vested. If the performance goals had not been met,
15%
of the awards would have been forfeited.
The performance measures and related goals for the
three
-year period ending December 31, 2018 are based on cumulative earnings per share and were set by the compensation committee of the Board (the "Committee"), in its sole discretion as administrator of the Plan, in the fourth quarter of 2015. Earnings per share must be achieved at the
60%
threshold performance level in order for
50%
of the remaining awards to vest and at the
100%
target performance level in order for
100%
of the awards to vest. Where achievement against earnings per share falls between these performance levels, the number of shares vest also falls within these levels. Achievement of
70%
,
80%
, and
90%
of target earnings per share results in vesting of
60%
,
75%
, and
87.5%
respectively. Additionally, if
110%
or more of the target performance level is obtained,
100%
of the awards will vest and an additional
10%
of the applicable restricted stock grant amount will be awarded to each recipient in fully-vested shares.
Awards of time based restricted stock granted in 2015 also vest in
two
separate tranches,
15%
at the end of the
one
-year period ended on December 31, 2015, and
85%
at the end of the
three
-year period ending on December 31, 2018.
No
awards of time based restricted stock were made in 2016. In order for these shares to vest, the recipient of the award generally must be employed by the Company on the vesting date. Any restricted stock that has not vested at the time of the termination of the recipient's service relationship will be forfeited; although, the Committee has the power, in its sole and absolute discretion, to accelerate vesting where such termination is a result of the recipient's death or disability or in other termination situations.
All share and share-related information have been adjusted to reflect the Reverse Stock Split. Refer to Note S - Subsequent Events for additional information.
A summary of the activity of the Company's restricted stock awards as of the period ended
December 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Weighted Average Grant-Date Fair Value
|
Unvested at December 31, 2015:
|
272,635
|
|
|
$
|
8.20
|
|
Granted
|
42,000
|
|
|
9.51
|
|
Vested
|
(37,865
|
)
|
|
7.70
|
|
Forfeited
|
(18,700
|
)
|
|
8.29
|
|
Unvested at December 31, 2016:
|
258,070
|
|
|
$
|
8.49
|
|
The Company measures the fair value of restricted shares based on the price of the Company's common stock on the grant date, and compensation expense is recorded over the vesting period. The related compensation expense recognized for restricted stock awards for the twelve months ended
December 31, 2016
and
2015
was
$350,000
and
$540,000
, respectively. At
December 31, 2016
, the Company estimates there was
$2.0 million
of total unrecognized compensation cost related to unvested restricted stock granted under the plan. That cost is expected to be recognized over the next three years. The grant-date fair value of restricted stock grants vested during the twelve months ended
December 31, 2016
was
$7.70
.
NOTE P - OTHER EMPLOYEE BENEFITS
Supplemental Retirement
In 1998, the Bank adopted a Supplemental Executive Retirement Plan (“SERP”) for its then president. The Company purchased life insurance policies in order to provide future funding of benefit payments. SERP benefits accrued and vested during the period of employment. Annual benefit payments began in 2016 after the officer's retirement on December 31, 2015. The liability accrued under the SERP plan amounts to
$410,000
and
$507,000
at
December 31, 2016
and
2015
, respectively. There were
no
expenses related to the SERP plan for
2016
compared to
$30,000
for
2015
. The annual benefit payout in
2016
was
$50,000
.
Employment Agreements
The Company has entered into employment agreements with certain of its executive officers to ensure a stable and competent management base. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Company’s Board of Directors, except for cause, without triggering the officers’ rights to receive certain vested rights, including severance compensation. In addition, the Company has entered into additional severance compensation arrangements with certain of its executive officers and key employees to provide them with increased severance pay benefits in the event of a termination of employment following a change in control of the Company, as outlined in the agreements; the acquirer will be bound to the terms of the contracts.
Defined Contribution Plan
The Company sponsors a contributory profit-sharing plan in effect for substantially all employees. Participants may make voluntary contributions resulting in salary deferrals in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). For the year ended
December 31, 2016
, the plan provided for employee contributions of up to
$18,000
of the participant's annual salary and an employer contribution of
75%
matching of the first
6%
of pre-tax salary contributed by each participant. For the year ended
December 31, 2015
, the plan provided for employee contributions of up to
$18,000
of the participant's annual salary and an employer contribution of
50%
matching of the first
6%
of pre-tax salary contributed. Expenses related to these plans for the years ended
December 31, 2016
and
2015
were
$336,000
and
$189,000
, respectively. Contributions under the plan are made at the discretion of the Company’s Board of Directors.
Employee Stock Purchase and Bonus Plan
The Employee Stock Purchase and Bonus Plan (the “Purchase Plan”) is a voluntary plan that enables full-time employees of the Company and its subsidiaries to purchase shares of the Company’s common stock. The Purchase Plan is administered by a committee of the Board of Directors, which has broad discretionary authority to administer the Purchase Plan. The Company’s Board of Directors may amend or terminate the Purchase Plan at any time. The Purchase Plan is not intended to be qualified as an employee stock purchase plan under Section 423 of the Code.
Once a year, participants in the Purchase Plan purchase the Company’s common stock at fair market value. Participants are permitted to purchase shares under the Purchase Plan up to
five
percent (
5%
) of their compensation, with a maximum purchase amount of
$1,000
per year. The Company matches, in cash,
fifty
percent (
50%
) of the amount of each participant’s purchase, up to
$500
. After withholding for income and employment taxes, participants use the balance of the Company’s matching grant to purchase shares of the Company’s common stock.
As of
December 31, 2016
,
23,388
shares of the Company’s common stock had been reserved for future issuance under the Purchase Plan, and
110,322
total shares had been purchased to date. During the year ended
December 31, 2016
,
14,374
shares were purchased under the Purchase Plan. All shares have been adjusted to reflect the Reverse Stock Split. Refer to Note S - Subsequent Events for additional information.
Sick Leave Plan
The Company allows employees to accrue up to
60 days
of sick leave that can be carried forward from one year to the next. Employees with
10
consecutive years of service who retire after age
55
are paid for unused sick leave up to a maximum of
60 days
. As of
December 31, 2016
and
2015
, the Company maintained an accrued liability for future obligations in the amount of
$544,000
and
$587,000
, respectively. Future obligations under the plan are assessed on an annual basis. Deferred compensation expenses under the plan totaled
$59,000
and
$68,000
for
2016
and
2015
, respectively. Cash benefits paid to retiring employees totaled
$106,000
and
$43,000
for
2016
and
2015
, respectively.
NOTE Q - LEASES
The Company has entered into non-cancelable operating leases for
five
facilities. Future minimum lease payments under the leases for future years are as follows
(amounts in thousands):
|
|
|
|
|
Leases
|
|
2017
|
$
|
249
|
|
2018
|
185
|
|
2019
|
178
|
|
2020
|
183
|
|
2021
|
187
|
|
2022 and beyond
|
79
|
|
|
$
|
1,061
|
|
Total rental expense under operating leases for the years ended
December 31, 2016
and
2015
amounted to
$329,000
and
$373,000
, respectively.
NOTE R - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Four Oaks Fincorp, Inc. at
December 31, 2016
and
2015
, and for the years ended
December 31, 2016
and
2015
is presented below
(amounts in thousands):
|
|
|
|
|
|
|
|
|
Condensed Balance Sheets
|
2016
|
|
2015
|
Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
289
|
|
|
$
|
1,362
|
|
Equity investment in subsidiaries
|
88,997
|
|
|
81,803
|
|
Investment securities available-for-sale
|
—
|
|
|
11
|
|
Other assets
|
2,603
|
|
|
1,128
|
|
Total Assets
|
$
|
91,889
|
|
|
$
|
84,304
|
|
|
|
|
|
Liabilities and Shareholders’ Equity:
|
|
|
|
|
|
Other liabilities
|
$
|
12
|
|
|
$
|
26
|
|
Subordinated debentures
|
12,372
|
|
|
12,372
|
|
Subordinated promissory notes
|
11,500
|
|
|
11,500
|
|
Shareholders' equity
|
68,005
|
|
|
60,406
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
91,889
|
|
|
$
|
84,304
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Condensed Statements of Operations
|
2016
|
|
2015
|
Equity in undistributed income of subsidiaries
|
$
|
6,642
|
|
|
$
|
20,367
|
|
Interest income
|
7
|
|
|
27
|
|
Other income
|
10
|
|
|
11
|
|
Other expenses
|
(1,203
|
)
|
|
(1,408
|
)
|
Income before income taxes
|
5,456
|
|
|
18,997
|
|
Applicable income tax benefit
|
(1,402
|
)
|
|
(1,011
|
)
|
Net income
|
$
|
6,858
|
|
|
$
|
20,008
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
Net income
|
$
|
6,858
|
|
|
$
|
20,008
|
|
Equity in undistributed income of subsidiaries
|
(6,642
|
)
|
|
(20,367
|
)
|
Excess tax benefits from stock options
|
2
|
|
|
—
|
|
Increase in other assets
|
(1,405
|
)
|
|
(972
|
)
|
Decrease in other liabilities
|
(14
|
)
|
|
(910
|
)
|
Net cash used in operating activities
|
(1,201
|
)
|
|
(2,241
|
)
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Sales and maturities of securities
|
11
|
|
|
—
|
|
Net cash provided by investing activities
|
11
|
|
|
—
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Proceeds from issuance of common stock
|
188
|
|
|
170
|
|
Repayment of subordinated promissory notes
|
—
|
|
|
(500
|
)
|
Shares withheld for payment of taxes
|
(71
|
)
|
|
(25
|
)
|
Net cash provided by (used in) financing activities
|
117
|
|
|
(355
|
)
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(1,073
|
)
|
|
(2,596
|
)
|
Cash and cash equivalents, beginning of year
|
1,362
|
|
|
3,958
|
|
Cash and cash equivalents, end of year
|
$
|
289
|
|
|
$
|
1,362
|
|
NOTE S - SUBSEQUENT EVENTS
On March 7, 2017, the Company filed with the North Carolina Department of the Secretary of State Articles of Amendment (the “Articles of Amendment”) to the Company’s Articles of Incorporation, as amended, to effect a one for
five
reverse stock split of the Company’s authorized, issued, and outstanding common stock, par value
$1.00
per share. The Articles of Amendment did not change the par value of the Company’s common stock. The Articles of Amendment provided that the Reverse Stock Split became effective at 5 P.M., Eastern Time, on March 8, 2017, at which time every
five
shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. No fractional shares were issued in connection with the Reverse Stock Split, and any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest whole share. In addition, the number of authorized shares of common stock was reduced from
80,000,000
to
16,000,000
.
The Articles of Amendment were approved by, and proposed and recommended to the Company’s shareholders by, the Company’s Board of Directors on September 26, 2016 and approved by the shareholders of the Company at a special meeting of shareholders held on November 8, 2016.