UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 000-27719
Southern First Bancshares, Inc.
(Exact name of registrant as specified in its charter)
South Carolina |
![]() | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Greenville, S.C. | 29607 | |
(Address of principal executive offices) | (Zip Code) |
864-679-9000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
SFST | ||||
The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,319,098
7,991,644 shares of common stock, par value $0.01 per share, were issued and outstanding as of October 25, 2017.July 29, 2022.
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYSeptember
June 30, 20172022 Form 10-Q
INDEX
i
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | ||||||
(dollars in thousands, except share data) | 2017 | 2016 | |||||
(Unaudited) | (Audited) | ||||||
ASSETS | |||||||
Cash and cash equivalents: | |||||||
Cash and due from banks | $ | 18,942 | 11,574 | ||||
Federal funds sold | 34,016 | 24,039 | |||||
Interest-bearing deposits with banks | 21,654 | 10,939 | |||||
Total cash and cash equivalents | 74,612 | 46,552 | |||||
Investment securities: | |||||||
Investment securities available for sale | 78,440 | 64,480 | |||||
Other investments | 3,064 | 5,742 | |||||
Total investment securities | 81,504 | 70,222 | |||||
Mortgage loans held for sale | 9,124 | 7,801 | |||||
Loans | 1,327,739 | 1,163,644 | |||||
Less allowance for loan losses | (15,579 | ) | (14,855 | ) | |||
Loans, net | 1,312,160 | 1,148,789 | |||||
Bank owned life insurance | 32,911 | 25,471 | |||||
Property and equipment, net | 31,549 | 28,362 | |||||
Deferred income taxes | 9,085 | 6,825 | |||||
Other assets | 6,739 | 6,886 | |||||
Total assets | $ | 1,557,684 | 1,340,908 | ||||
LIABILITIES | |||||||
Deposits | $ | 1,342,577 | 1,091,151 | ||||
Federal Home Loan Bank advances and other borrowings | 39,200 | 115,200 | |||||
Junior subordinated debentures | 13,403 | 13,403 | |||||
Other liabilities | 15,055 | 11,282 | |||||
Total liabilities | 1,410,235 | 1,231,036 | |||||
SHAREHOLDERS’ EQUITY | |||||||
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no shares issued and outstanding | - | - | |||||
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,319,098 and 6,463,789 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 73 | 65 | |||||
Nonvested restricted stock | (500 | ) | (600 | ) | |||
Additional paid-in capital | 99,464 | 73,371 | |||||
Accumulated other comprehensive income (loss) | (93 | ) | (504 | ) | |||
Retained earnings | 48,505 | 37,540 | |||||
Total shareholders’ equity | 147,449 | 109,872 | |||||
Total liabilities and shareholders’ equity | $ | 1,557,684 | 1,340,908 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(Unaudited)
For the three months | For the nine months | |||||||||
ended September 30, | ended September 30, | |||||||||
(dollars in thousands, except share data) | 2017 | 2016 | 2017 | 2016 | ||||||
Interest income | ||||||||||
Loans | $ | 15,282 | 12,486 | 43,089 | 36,280 | |||||
Investment securities | 443 | 395 | 1,208 | 1,342 | ||||||
Federal funds sold | 230 | 31 | 548 | 122 | ||||||
Total interest income | 15,955 | 12,912 | 44,845 | 37,744 | ||||||
Interest expense | ||||||||||
Deposits | 2,084 | 957 | 5,073 | 2,891 | ||||||
Borrowings | 562 | 1,075 | 2,504 | 3,153 | ||||||
Total interest expense | 2,646 | 2,032 | 7,577 | 6,044 | ||||||
Net interest income | 13,309 | 10,880 | 37,268 | 31,700 | ||||||
Provision for loan losses | 500 | 825 | 1,500 | 2,025 | ||||||
Net interest income after provision for loan losses | 12,809 | 10,055 | 35,768 | 29,675 | ||||||
Noninterest income | ||||||||||
Mortgage banking income | 1,403 | 2,003 | 4,063 | 5,685 | ||||||
Service fees on deposit accounts | 324 | 269 | 886 | 732 | ||||||
Income from bank owned life insurance | 224 | 187 | 590 | 553 | ||||||
Gain on sale of investment securities | - | 106 | 2 | 431 | ||||||
Loss on disposal of fixed assets | - | - | (50 | ) | - | |||||
Other income | 591 | 452 | 1,665 | 1,320 | ||||||
Total noninterest income | 2,542 | 3,017 | 7,156 | 8,721 | ||||||
Noninterest expenses | ||||||||||
Compensation and benefits | 5,698 | 4,948 | 16,496 | 14,353 | ||||||
Occupancy | 1,043 | 908 | 3,042 | 2,670 | ||||||
Real estate owned expenses | 28 | 81 | 38 | 725 | ||||||
Outside service and data processing costs | 794 | 690 | 2,362 | 1,916 | ||||||
Insurance | 258 | 227 | 845 | 678 | ||||||
Professional fees | 334 | 326 | 1,029 | 864 | ||||||
Marketing | 199 | 195 | 605 | 625 | ||||||
Other | 452 | 425 | 1,512 | 1,339 | ||||||
Total noninterest expenses | 8,806 | 7,800 | 25,929 | 23,170 | ||||||
Income before income tax expense | 6,545 | 5,272 | 16,995 | 15,226 | ||||||
Income tax expense | 2,295 | 1,839 | 6,030 | 5,481 | ||||||
Net income available to common shareholders | $ | 4,250 | 3,433 | 10,965 | 9,745 | |||||
Earnings per common share | ||||||||||
Basic | $ | 0.58 | 0.54 | 1.59 | 1.55 | |||||
Diluted | $ | 0.55 | 0.51 | 1.50 | 1.45 | |||||
Weighted average common shares outstanding | ||||||||||
Basic | 7,281,594 | 6,322,073 | 6,905,017 | 6,299,009 | ||||||
Diluted | 7,668,476 | 6,740,751 | 7,291,164 | 6,702,475 |
June 30, | December 31, | |||||||
(dollars in thousands, except share data) | 2022 | 2021 | ||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 21,090 | 21,770 | |||||
Federal funds sold | 124,462 | 86,882 | ||||||
Interest-bearing deposits with banks | 36,538 | 58,557 | ||||||
Total cash and cash equivalents | 182,090 | 167,209 | ||||||
Investment securities: | ||||||||
Investment securities available for sale | 98,991 | 120,281 | ||||||
Other investments | 5,065 | 4,021 | ||||||
Total investment securities | 104,056 | 124,302 | ||||||
Mortgage loans held for sale | 18,329 | 13,556 | ||||||
Loans | 2,845,205 | 2,489,877 | ||||||
Less allowance for credit losses | (34,192 | ) | (30,408 | ) | ||||
Loans, net | 2,811,013 | 2,459,469 | ||||||
Bank owned life insurance | 50,463 | 49,833 | ||||||
Property and equipment, net | 96,674 | 92,370 | ||||||
Deferred income taxes, net | 15,078 | 8,397 | ||||||
Accrued interest receivable | 7,433 | 7,624 | ||||||
Other assets | 2,527 | 2,788 | ||||||
Total assets | $ | 3,287,663 | 2,925,548 | |||||
LIABILITIES | ||||||||
Deposits | $ | 2,870,158 | 2,563,826 | |||||
FHLB advances and related debt | 50,000 | - | ||||||
Subordinated debentures | 36,160 | 36,106 | ||||||
Other liabilities | 48,708 | 47,715 | ||||||
Total liabilities | 3,005,026 | 2,647,647 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Preferred stock, par value $.01 per share, 10,000,000 shares authorized | - | - | ||||||
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,985,644 and 7,925,819 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 80 | 79 | ||||||
Nonvested restricted stock | (3,230 | ) | (1,435 | ) | ||||
Additional paid-in capital | 117,714 | 114,226 | ||||||
Accumulated other comprehensive loss | (10,143 | ) | (740 | ) | ||||
Retained earnings | 178,216 | 165,771 | ||||||
Total shareholders’ equity | 282,637 | 277,901 | ||||||
Total liabilities and shareholders’ equity | $ | 3,287,663 | 2,925,548 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
1
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the three months | For the nine months | ||||||||||||
ended September 30, | ended September 30, | ||||||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||
Net income | $ | 4,250 | 3,433 | 10,965 | 9,745 | ||||||||
Other comprehensive income (loss): | |||||||||||||
Unrealized gain (loss) on securities available for sale: | |||||||||||||
Unrealized holding gain (loss) arising during the period, pretax | 130 | (222 | ) | 626 | 1,552 | ||||||||
Tax (expense) benefit | (43 | ) | 75 | (213 | ) | (528 | ) | ||||||
Reclassification of realized gain | - | (106 | ) | (2 | ) | (431 | ) | ||||||
Tax expense | - | 37 | - | 147 | |||||||||
Other comprehensive income (loss) | 87 | (216 | ) | 411 | 740 | ||||||||
Comprehensive income | $ | 4,337 | 3,217 | 11,376 | 10,485 |
For the three months | For the six months | |||||||||||||||
ended June 30, | ended June 30, | |||||||||||||||
(dollars in thousands, except share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Interest income | ||||||||||||||||
Loans | $ | 26,610 | 22,409 | 50,541 | 44,875 | |||||||||||
Investment securities | 448 | 269 | 922 | 570 | ||||||||||||
Federal funds sold and interest-bearing deposits with banks | 180 | 53 | 239 | 99 | ||||||||||||
Total interest income | 27,238 | 22,731 | 51,702 | 45,544 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 1,844 | 920 | 2,752 | 2,075 | ||||||||||||
Borrowings | 510 | 381 | 902 | 766 | ||||||||||||
Total interest expense | 2,354 | 1,301 | 3,654 | 2,841 | ||||||||||||
Net interest income | 24,884 | 21,430 | 48,048 | 42,703 | ||||||||||||
Provision for (reversal of) credit losses | 1,775 | (1,900 | ) | 2,880 | (2,200 | ) | ||||||||||
Net interest income after provision for credit losses | 23,109 | 23,330 | 45,168 | 44,903 | ||||||||||||
Noninterest income | ||||||||||||||||
Mortgage banking income | 1,184 | 1,983 | 2,678 | 6,616 | ||||||||||||
Service fees on deposit accounts | 209 | 173 | 400 | 358 | ||||||||||||
ATM and debit card income | 563 | 521 | 1,092 | 991 | ||||||||||||
Income from bank owned life insurance | 315 | 331 | 630 | 598 | ||||||||||||
Net lender and referral fees on PPP loans | - | 268 | - | 268 | ||||||||||||
Loss on disposal of fixed assets | (394 | ) | - | (394 | ) | 10 | ||||||||||
Other income | 388 | 346 | 788 | 685 | ||||||||||||
Total noninterest income | 2,265 | 3,622 | 5,194 | 9,526 | ||||||||||||
Noninterest expenses | ||||||||||||||||
Compensation and benefits | 9,915 | 8,724 | 19,371 | 17,834 | ||||||||||||
Occupancy | 2,219 | 1,552 | 3,997 | 3,190 | ||||||||||||
Other real estate owned expenses | - | 1 | - | 388 | ||||||||||||
Outside service and data processing costs | 1,528 | 1,391 | 3,062 | 2,704 | ||||||||||||
Insurance | 367 | 262 | 628 | 563 | ||||||||||||
Professional fees | 693 | 615 | 1,292 | 1,210 | ||||||||||||
Marketing | 329 | 208 | 596 | 398 | ||||||||||||
Other | 737 | 742 | 1,528 | 1,370 | ||||||||||||
Total noninterest expenses | 15,788 | 13,495 | 30,474 | 27,657 | ||||||||||||
Income before income tax expense | 9,586 | 13,457 | 19,888 | 26,772 | ||||||||||||
Income tax expense | 2,346 | 3,134 | 4,678 | 6,083 | ||||||||||||
Net income | $ | 7,240 | 10,323 | 15,210 | 20,689 | |||||||||||
Earnings per common share | ||||||||||||||||
Basic | $ | 0.91 | 1.32 | 1.91 | 2.65 | |||||||||||
Diluted | 0.90 | 1.29 | 1.88 | 2.60 | ||||||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 7,957,631 | 7,847,516 | 7,944,814 | 7,811,217 | ||||||||||||
Diluted | 8,054,910 | 7,987,615 | 8,075,496 | 7,948,294 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
2
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
COMPREHENSIVE INCOMEFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Nonvested | Additional | other | ||||||||||||||||||||||||||
(dollars in thousands, except share data) | Common stock | Preferred stock | restricted | paid-in | comprehensive | Retained | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | stock | capital | income (loss) | earnings | Total | ||||||||||||||||||||
December 31, 2015 | 6,289,038 | $ | 63 | - | - | $ | (360 | ) | $ | 70,037 | $ | (4 | ) | $ | 24,504 | $ | 94,240 | |||||||||||
Net income | - | - | - | - | - | - | - | 9,745 | 9,745 | |||||||||||||||||||
Proceeds from exercise of stock options | 71,628 | 1 | - | - | - | 533 | - | - | 534 | |||||||||||||||||||
Issuance of restricted stock | 22,000 | - | - | - | (526 | ) | 526 | - | - | - | ||||||||||||||||||
Amortization of deferred compensation on restricted stock | - | - | - | - | 211 | - | - | - | 211 | |||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 553 | - | - | 553 | |||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 740 | - | 740 | |||||||||||||||||||
September 30, 2016 | 6,382,666 | $ | 64 | - | $ | - | $ | (675 | ) | $ | 71,649 | $ | 736 | $ | 34,249 | $ | 106,023 | |||||||||||
December 31, 2016 | 6,463,789 | 65 | - | - | (600 | ) | 73,371 | (504 | ) | 37,540 | 109,872 | |||||||||||||||||
Net income | - | - | - | - | - | - | - | 10,965 | 10,965 | |||||||||||||||||||
Net issuance of common stock | 805,000 | 8 | - | - | - | 24,750 | - | - | 24,758 | |||||||||||||||||||
Proceeds from exercise of stock options | 47,184 | - | - | - | - | 454 | - | - | 454 | |||||||||||||||||||
Issuance of restricted stock | 3,125 | - | - | - | (146 | ) | 146 | - | - | - | ||||||||||||||||||
Amortization of deferred compensation on restricted stock | - | - | - | - | 246 | - | - | - | 246 | |||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 743 | - | - | 743 | |||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 411 | - | 411 | |||||||||||||||||||
September 30, 2017 | 7,319,098 | $ | 73 | - | $ | - | $ | (500 | ) | $ | 99,464 | $ | (93 | ) | $ | 48,505 | $ | 147,449 |
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
(dollars in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Net income | $ | 7,240 | 10,323 | 15,210 | 20,689 | |||||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gain (loss) on securities available for sale: | ||||||||||||||||
Unrealized holding (loss) gain arising during the period, pretax | (4,749 | ) | 619 | (11,890 | ) | (790 | ) | |||||||||
Tax benefit (expense) | 997 | (129 | ) | 2,497 | 167 | |||||||||||
Reclassification of realized gain (loss) | 3 | - | (12 | ) | - | |||||||||||
Tax (expense) benefit | (1 | ) | - | 2 | - | |||||||||||
Other comprehensive (loss) income | (3,750 | ) | 490 | (9,403 | ) | (623 | ) | |||||||||
Comprehensive income | $ | 3,490 | 10,813 | 5,807 | 20,066 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
3
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SHAREHOLDERS’ EQUITY
(Unaudited)
For the nine months ended September 30, | ||||||||
(dollars in thousands) | 2017 | 2016 | ||||||
Operating activities | ||||||||
Net income | $ | 10,965 | $ | 9,745 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for loan losses | 1,500 | 2,025 | ||||||
Depreciation and other amortization | 1,053 | 939 | ||||||
Accretion and amortization of securities discounts and premium, net | 422 | 433 | ||||||
Gain on sale of investment securities available for sale | (2 | ) | (431 | ) | ||||
Loss on sale of real estate owned | 3 | 51 | ||||||
Loss on disposal of fixed assets | 50 | - | ||||||
Write-down of real estate owned | 7 | 389 | ||||||
Compensation expense related to stock options and grants | 989 | 764 | ||||||
Gain on sale of loans held for sale | (4,520 | ) | (5,704 | ) | ||||
Loans originated and held for sale | (144,622 | ) | (198,601 | ) | ||||
Proceeds from sale of loans held for sale | 147,819 | 200,122 | ||||||
Increase in cash surrender value of bank owned life insurance | (590 | ) | (553 | ) | ||||
(Increase) decrease in deferred tax asset | (2,472 | ) | 552 | |||||
Increase in other assets, net | (72 | ) | (606 | ) | ||||
Increase in other liabilities | 3,773 | 1,328 | ||||||
Net cash provided by operating activities | 14,303 | 10,453 | ||||||
Investing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Origination of loans, net | (165,160 | ) | (110,576 | ) | ||||
Purchase of property and equipment | (4,290 | ) | (4,079 | ) | ||||
Purchase of investment securities: | ||||||||
Available for sale | (20,675 | ) | (16,852 | ) | ||||
Other | (1,811 | ) | (806 | ) | ||||
Payments and maturities, calls and repayments of investment securities: | ||||||||
Available for sale | 6,918 | 18,448 | ||||||
Other | 4,489 | - | ||||||
Proceeds from sale of investment securities available for sale | - | 22,185 | ||||||
Purchase of life insurance policies | (6,850 | ) | - | |||||
Proceeds from sale of real estate owned | 498 | 395 | ||||||
Net cash used for investing activities | (186,881 | ) | (91,285 | ) | ||||
Financing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Increase in deposits, net | 251,426 | 59,342 | ||||||
Decrease in Federal Home Loan Bank advances and other borrowings, net | (76,000 | ) | - | |||||
Proceeds from issuance of common stock | 24,758 | - | ||||||
Proceeds from the exercise of stock options and warrants | 454 | 534 | ||||||
Net cash provided by financing activities | 200,638 | 59,876 | ||||||
Net increase (decrease) in cash and cash equivalents | 28,060 | (20,956 | ) | |||||
Cash and cash equivalents at beginning of the period | 46,552 | 62,866 | ||||||
Cash and cash equivalents at end of the period | $ | 74,612 | $ | 41,910 | ||||
Supplemental information | ||||||||
Cash paid for | ||||||||
Interest | $ | 7,404 | $ | 5,951 | ||||
Income taxes | 5,490 | 4,930 | ||||||
Schedule of non-cash transactions | ||||||||
Real estate acquired in settlement of loans | 289 | 245 | ||||||
Unrealized gain on securities, net of income taxes | 413 | 1,024 |
For the three months ended June 30, | ||||||||||||||||||||||||||||||||||||
Common stock | Preferred stock | Nonvested restricted | Additional paid-in | Accumulated other comprehensive | Retained | |||||||||||||||||||||||||||||||
(dollars in thousands, except share data) | Shares | Amount | Shares | Amount | stock | capital | income (loss) | earnings | Total | |||||||||||||||||||||||||||
March 31, 2021 | 7,853,096 | $ | 79 | - | $ | - | $ | (1,075 | ) | $ | 111,181 | $ | (90 | ) | $ | 129,426 | $ | 239,521 | ||||||||||||||||||
Net income | - | - | - | - | - | - | - | 10,323 | 10,323 | |||||||||||||||||||||||||||
Proceeds from exercise of stock options | 42,835 | - | - | - | - | 943 | - | - | 943 | |||||||||||||||||||||||||||
Issuance of restricted stock | 4,000 | - | - | - | (212 | ) | 212 | - | - | - | ||||||||||||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 114 | - | - | - | 114 | |||||||||||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 268 | - | - | 268 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 490 | - | 490 | |||||||||||||||||||||||||||
June 30, 2021 | 7,899,931 | $ | 79 | - | $ | - | $ | (1,173 | ) | $ | 112,604 | $ | 400 | $ | 139,749 | $ | 251,659 | |||||||||||||||||||
March 31, 2022 | 7,980,519 | 80 | - | - | (3,425 | ) | 117,286 | (6,393 | ) | 170,976 | 278,524 | |||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 7,240 | 7,240 | |||||||||||||||||||||||||||
Proceeds from exercise of stock options | 3,625 | - | - | - | - | 128 | - | - | 128 | |||||||||||||||||||||||||||
Issuance of restricted stock | 1,500 | - | - | - | (71 | ) | 71 | - | - | - | ||||||||||||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 266 | - | - | - | 266 | |||||||||||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 229 | - | - | 229 | |||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (3,750 | ) | - | (3,750 | ) | |||||||||||||||||||||||||
June 30, 2022 | 7,985,644 | $ | 80 | - | $ | - | $ | (3,230 | ) | $ | 117,714 | $ | (10,143 | ) | $ | 178,216 | $ | 282,637 |
For the six months ended June 30, | ||||||||||||||||||||||||||||||||||||
Common stock | Preferred stock | Nonvested restricted | Additional paid-in | Accumulated other comprehensive | Retained | |||||||||||||||||||||||||||||||
(dollars in thousands, except share data) | Shares | Amount | Shares | Amount | stock | capital | income (loss) | earnings | Total | |||||||||||||||||||||||||||
December 31, 2020 | 7,772,748 | $ | 78 | - | $ | - | $ | (698 | ) | $ | 108,831 | $ | 1,023 | $ | 119,060 | $ | 228,294 | |||||||||||||||||||
Net income | - | - | - | - | - | - | - | 20,689 | 20,689 | |||||||||||||||||||||||||||
Proceeds from exercise of stock options | 112,433 | 1 | - | - | - | 2,520 | - | - | 2,521 | |||||||||||||||||||||||||||
Issuance of restricted stock | 14,750 | - | - | - | (689 | ) | 689 | - | - | - | ||||||||||||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 214 | - | - | - | 214 | |||||||||||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 564 | - | - | 564 | |||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (623 | ) | - | (623 | ) | |||||||||||||||||||||||||
June 30, 2021 | 7,899,931 | $ | 79 | - | $ | - | $ | (1,173 | ) | $ | 112,604 | $ | 400 | $ | 139,749 | $ | 251,659 | |||||||||||||||||||
December 31, 2021 | 7,925,819 | 79 | - | - | (1,435 | ) | 114,226 | (740 | ) | 165,771 | 277,901 | |||||||||||||||||||||||||
Adoption of ASU 2016-13 | - | - | - | - | - | - | - | (2,765 | ) | (2,765 | ) | |||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 15,210 | 15,210 | |||||||||||||||||||||||||||
Proceeds from exercise of stock options | 21,750 | 1 | - | - | - | 706 | - | - | 707 | |||||||||||||||||||||||||||
Issuance of restricted stock | 38,075 | - | - | - | (2,305 | ) | 2,305 | - | - | - | ||||||||||||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 510 | - | - | - | 510 | |||||||||||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 477 | - | - | 477 | |||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (9,403 | ) | - | (9,403 | ) | |||||||||||||||||||||||||
June 30, 2022 | 7,985,644 | $ | 80 | - | $ | - | $ | (3,230 | ) | $ | 117,714 | $ | (10,143 | ) | $ | 178,216 | $ | 282,637 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
4
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
Operating activities | ||||||||
Net income | $ | 15,210 | 20,689 | |||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for (reversal of) credit losses | 2,880 | (2,200 | ) | |||||
Depreciation and other amortization | 1,341 | 1,092 | ||||||
Accretion and amortization of securities discounts and premium, net | 399 | 518 | ||||||
Loss on sale of real estate owned | - | 380 | ||||||
(Gain) Loss on sale of fixed assets | 394 | (10 | ) | |||||
Gain on sale of securities | (12 | ) | - | |||||
Net change in operating leases | 172 | 165 | ||||||
Compensation expense related to stock options and restricted stock grants | 987 | 778 | ||||||
Gain on sale of loans held for sale | (1,446 | ) | (8,153 | ) | ||||
Loans originated and held for sale | (145,513 | ) | (303,889 | ) | ||||
Proceeds from sale of loans held for sale | 142,185 | 335,872 | ||||||
Increase in cash surrender value of bank owned life insurance | (630 | ) | (598 | ) | ||||
Decrease in deferred tax asset | (3,446 | ) | (15,341 | ) | ||||
Increase in other assets | 452 | 2,589 | ||||||
Increase in other liabilities | 1,400 | 1,949 | ||||||
Net cash provided by operating activities | 14,373 | 33,841 | ||||||
Investing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Increase in loans, net | (355,594 | ) | (111,672 | ) | ||||
Purchase of property and equipment | (8,989 | ) | (11,105 | ) | ||||
Purchase of investment securities: | ||||||||
Available for sale | (10,094 | ) | (10,338 | ) | ||||
Other investments | (11,078 | ) | (1,000 | ) | ||||
Payments and maturities, calls and repayments of investment securities: | ||||||||
Available for sale | 19,095 | 12,526 | ||||||
Other investments | 10,034 | 1,865 | ||||||
Purchase of bank owned life insurance | - | (7,500 | ) | |||||
Proceeds from sale of fixed assets | 95 | 50 | ||||||
Proceeds from sale of other real estate owned | - | 788 | ||||||
Net cash used for investing activities | (356,531 | ) | (126,386 | ) | ||||
Financing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Increase in deposits, net | 306,332 | 168,134 | ||||||
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net | 50,000 | (25,000 | ) | |||||
Proceeds from the exercise of stock options | 707 | 2,521 | ||||||
Net cash provided by financing activities | 357,039 | 145,655 | ||||||
Net increase in cash and cash equivalents | 14,881 | 53,110 | ||||||
Cash and cash equivalents at beginning of the period | 167,209 | 100,687 | ||||||
Cash and cash equivalents at end of the period | $ | 182,090 | 153,797 | |||||
Supplemental information | ||||||||
Cash paid for | ||||||||
Interest | $ | 3,745 | 3,843 | |||||
Income taxes | 5,950 | 15,342 | ||||||
Schedule of non-cash transactions | ||||||||
Foreclosure of other real estate | - | 366 | ||||||
Unrealized loss on securities, net of income taxes | (11,902 | ) | (623 | ) |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
5
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
Business Activity
Southern First Bancshares, Inc. (the "Company"“Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the "Bank"“Bank”) and all of the stock of Greenville First Statutory TrustTrusts I and II (collectively, the "Trusts"“Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank'sBank’s primary federal regulator is the Federal Deposit Insurance Corporation (the "FDIC"“FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periodssix- month period ended SeptemberJune 30, 20172022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162021 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 3, 2017.4, 2022. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.
Business Segments
The Company, through the Bank, provides a broad range of financial services to individuals and companies in South Carolina, North Carolina, and Georgia. These services include demand, time and savings deposits; lending services; ATM processing and mortgage banking services. While the Company’s management periodically reviews limited production information for these revenue streams, that information is not complete as it does not include a full allocation of revenue, costs and capital from key corporate functions. Management will continue to evaluate these lines of business for separate reporting as facts and circumstances change. Accordingly, the Company’s various banking operations are not considered by management to constitute more than one reportable operating segment.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loancredit losses, real estate acquired in the settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.
Business Segments
Risks and Uncertainties
The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccines along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages; decreases in consumer confidence and spending; and rising geopolitical tensions.
6
The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.
As of June 30, 2022, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.
The Company began reporting its activities as three business segments – Commercial and Retail Banking, Mortgage Banking and Corporate – in 2016. In determining proper segment definition,maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the Company considerssubsidiary bank. As of June 30, 2022, the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment. The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices. Please refer to “Note 9 – Reportable Segments” for further information on the reporting for the Company’s three business segments.$15.0 million line was unused.
Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
Adoption of New Accounting Standard
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, the Current Expected Credit Loss (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. It also applies to off-balance sheet credit exposures, such as unfunded commitments to extend credit. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk.
On January 1, 2022, the Company adopted the guidance prospectively with a cumulative adjustment to retained earnings. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the previously applicable incurred loss accounting methodology. The transition adjustment for the adoption of CECL included an increase in the allowance for credit losses on loans of $1.5 million and an increase in the reserve for unfunded loan commitments of $2.0 million, which is recorded within other liabilities. The adoption of CECL had an insignificant impact on the Company’s investment securities portfolio. The Company recorded a net decrease to retained earnings of $2.8 million as of January 1, 2022 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The Company did not elect to use this optional relief.
Significant Accounting Policy Changes
Upon adoption of ASC 326, the Company revised the accounting policy for the Allowance for Credit Losses as detailed below.
7
Allowance for Credit Losses - Securities Available for Sale
For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2022, there was no allowance for credit losses related to the available-for-sale portfolio.
Accrued interest receivable on available for sale debt securities totaled $438,000 at June 30, 2022 and was excluded from the estimate of credit losses.
Allowance for Credit Losses - Loans
Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.
Management performed anassesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to determine whether there have beenrepay a loan, the estimated value of any subsequent events sinceunderlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet datedate. The allowance is increased through provision for credit losses and determineddecreased by charge-offs, net of recoveries of amounts previously charged-off.
The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:
Commercial loans
● | Owner occupied real estate - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. |
● | Non-owner occupied real estate - Non-owner occupied commercial mortgages consist of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. |
8
● | Construction - Construction loans consist of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers. |
● | Commercial business - Commercial business loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease. |
Consumer loans
● | Real estate - Residential mortgages consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. |
● | Home equity – Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render the junior lien position effectively unsecured. |
● | Construction - Construction loans consist of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral. |
● | Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and revolving lines of credit that can be secured or unsecured. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. |
For all loan pools, the Company uses a lifetime probability of default and loss given default modeling approach to estimate the allowance for credit losses on loans. This method uses historical correlations between default experience and the age of loans to forecast defaults and losses, assuming that no subsequent events occurred requiring accruala loan in a pool shares similar risk characteristics such as loan product type, risk rating and loan age, and demonstrates similar default characteristics as other loans in that pool, as the loan progresses through its lifecycle. The Company calculates lifetime probability of default and loss given default rates based on historical loss experience, which is used to calculate expected losses based on the pool’s loss rate and the age of loans in the pool. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The probability of default and loss given default method also includes assumptions of observed migration over the lifetime of the underlying loan data.
9
Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or disclosure.external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. These adjustments are based upon quarterly trend assessments in certain economic factors as well as associate retention and turnover, portfolio concentrations, and growth characteristics. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above.
Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Individual loan evaluations are generally performed for impaired loans, which includes nonaccrual loans and loans modified in a troubled debt restructuring (“TDR”). Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. The Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs in the event sale of the collateral is expected. Loans for which terms have been modified in a TDR are evaluated using these same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used to discount expected cash flows.
While the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.
Accrued Interest Receivable
Accrued interest receivable related to loans totaled $7.0 million at June 30, 2022 and was reported in accrued interest receivable on the consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectable interest.
Unfunded Commitments
Effective with the adoption of CECL, the Company estimates expected credit losses on commitments to extend credit over the contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within other liabilities on the consolidated balance sheet, is adjusted for as an increase or decrease to the provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.
The Company’s CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the size and composition of the loan portfolios.
10
Newly Issued, But Not Yet Effective Accounting Standards
In March 2022, the FASB amended the Receivables–Troubled Debt Restructuring by Creditors subtopic and Financial Instruments–Credit Losses subtopic to the Accounting Standards Codification. The amendments eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments require disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.
NOTE 2 – Investment Securities
The amortized costs and fair value of investment securities are as follows:
September 30, 2017 | |||||||||
Amortized | Gross Unrealized | Fair | |||||||
(dollars in thousands) | Cost | Gains | Losses | Value | |||||
Available for sale | |||||||||
US government agencies | $ | 8,754 | 14 | 58 | 8,710 | ||||
SBA securities | 4,357 | - | 18 | 4,339 | |||||
State and political subdivisions | 20,088 | 329 | 60 | 20,357 | |||||
Mortgage-backed securities | 45,381 | 15 | 362 | 45,034 | |||||
Total investment securities available for sale | $ | 78,580 | 358 | 498 | 78,440 | ||||
December 31, 2016 | |||||||||
Amortized | Gross Unrealized | Fair | |||||||
Cost | Gains | Losses | Value | ||||||
Available for sale | |||||||||
US government agencies | $ | 6,271 | 1 | 113 | 6,159 | ||||
SBA securities | 1,453 | - | 16 | 1,437 | |||||
State and political subdivisions | 20,625 | 141 | 292 | 20,474 | |||||
Mortgage-backed securities | 36,895 | 21 | 506 | 36,410 | |||||
Total investment securities available for sale | $ | 65,244 | 163 | 927 | 64,480 |
June 30, 2022 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
(dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Available for sale | ||||||||||||||||
Corporate bonds | $ | 2,185 | - | 204 | 1,981 | |||||||||||
US treasuries | 999 | - | 94 | 905 | ||||||||||||
US government agencies | 13,005 | - | 1,752 | 11,253 | ||||||||||||
State and political subdivisions | 23,071 | 4 | 3,096 | 19,979 | ||||||||||||
Asset-backed securities | 7,922 | - | 169 | 7,753 | ||||||||||||
Mortgage-backed securities | ||||||||||||||||
FHLMC | 21,809 | - | 2,835 | 18,974 | ||||||||||||
FNMA | 36,865 | - | 4,200 | 32,665 | ||||||||||||
GNMA | 5,974 | - | 493 | 5,481 | ||||||||||||
Total mortgage-backed securities | 64,648 | - | 7,528 | 57,120 | ||||||||||||
Total investment securities available for sale | $ | 111,830 | 4 | 12,843 | 98,991 |
During the first nine months of 2017, there were $915,000 of investment securities either sold or called, resulting in a gain on sale of $2,000. During the first nine months of 2016, approximately $33.5 million of investment securities were either sold or called, subsequently resulting in a gain on sale of $431,000.
December 31, 2021 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Available for sale | ||||||||||||||||
Corporate bonds | $ | 2,198 | - | 10 | 2,188 | |||||||||||
US treasuries | 999 | - | 7 | 992 | ||||||||||||
US government agencies | 14,504 | 1 | 336 | 14,169 | ||||||||||||
SBA securities | 429 | 9 | - | 438 | ||||||||||||
State and political subdivisions | 24,887 | 549 | 260 | 25,176 | ||||||||||||
Asset-backed securities | 10,136 | 45 | 17 | 10,164 | ||||||||||||
Mortgage-backed securities | ||||||||||||||||
FHLMC | 23,057 | 102 | 494 | 22,665 | ||||||||||||
FNMA | 40,924 | 235 | 660 | 40,499 | ||||||||||||
GNMA | 4,084 | 3 | 97 | 3,990 | ||||||||||||
Total mortgage-backed securities | 68,065 | 340 | 1,251 | 67,154 | ||||||||||||
Total investment securities available for sale | $ | 121,218 | 944 | 1,881 | 120,281 |
Contractual maturities and yields on the Company’s investment securities at SeptemberJune 30, 20172022 and December 31, 20162021 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2017 | ||||||||||||||||||||||||||
Less than one year | One to five years | Five to ten years | Over ten years | Total | ||||||||||||||||||||||
(dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||
Available for sale | ||||||||||||||||||||||||||
US government agencies | $ | 997 | 1.15 | % | 1,517 | 2.04 | % | 6,196 | 2.39 | % | - | - | 8,710 | 2.19 | % | |||||||||||
SBA securities | - | - | - | - | - | - | 4,339 | 2.48 | % | 4,339 | 2.48 | % | ||||||||||||||
State and political subdivisions | - | - | 3,668 | 1.64 | % | 11,730 | 2.44 | % | 4,959 | 2.88 | % | 20,357 | 2.40 | % | ||||||||||||
Mortgage-backed securities | 790 | 1.30 | % | - | - | 12,005 | 1.80 | % | 32,239 | 2.04 | % | 45,034 | 1.97 | % | ||||||||||||
Total | $ | 1,787 | 1.21 | % | 5,185 | 1.59 | % | 29,931 | 2.18 | % | 41,537 | 2.23 | % | 78,440 | 2.13 | % | ||||||||||
December 31, 2016 | ||||||||||||||||||||||||||
Less than one year | One to five years | Five to ten years | Over ten years | Total | ||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||
Available for sale | ||||||||||||||||||||||||||
US government agencies | $ | - | - | 997 | 1.15 | % | 5,162 | 2.23 | % | - | - | 6,159 | 2.06 | % | ||||||||||||
SBA securities | - | - | - | - | - | - | 1,437 | 1.32 | % | 1,437 | 1.32 | % | ||||||||||||||
State and political subdivisions | - | - | 2,271 | 1.73 | % | 12,287 | 2.35 | % | 5,916 | 2.77 | % | 20,474 | 2.40 | % | ||||||||||||
Mortgage-backed securities | - | - | - | - | 8,527 | 1.64 | % | 27,883 | 1.68 | % | 36,410 | 1.67 | % | |||||||||||||
Total | $ | - | - | 3,268 | 1.55 | % | 25,976 | 2.10 | % | 35,236 | 1.85 | % | 64,480 | 1.93 | % |
11
June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Less than one year | One to five years | Five to ten years | Over ten years | Total | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||||||
Corporate bonds | $ | - | - | - | - | 1,981 | 1.99 | % | - | - | 1,981 | 1.99 | % | |||||||||||||||||||||||||||
US treasuries | - | - | - | - | 905 | 1.27 | % | - | - | 905 | 1.27 | % | ||||||||||||||||||||||||||||
US government agencies | - | - | 2,445 | 0.83 | % | 8,001 | 1.49 | % | 807 | 1.48 | % | 11,253 | 1.34 | % | ||||||||||||||||||||||||||
State and political subdivisions | - | - | 468 | 2.13 | % | 4,571 | 1.62 | % | 14,940 | 2.19 | % | 19,979 | 2.05 | % | ||||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 1,246 | 3.33 | % | 6,507 | 2.03 | % | 7,753 | 2.23 | % | |||||||||||||||||||||||||||
Mortgage-backed securities | - | - | 3,280 | 1.20 | % | 4,976 | 1.43 | % | 48,864 | 1.60 | % | 57,120 | 1.56 | % | ||||||||||||||||||||||||||
Total investment securities | $ | - | - | 6,193 | 1.12 | % | 21,680 | 1.64 | % | 71,118 | 1.76 | % | 98,991 | 1.69 | % |
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Less than one year | One to five years | Five to ten years | Over ten years | Total | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||||||
Corporate bonds | $ | - | - | - | - | 2,188 | 1.98 | % | - | - | 2,188 | 1.98 | % | |||||||||||||||||||||||||||
US treasuries | - | - | - | - | 992 | 1.27 | % | - | - | 992 | 1.27 | % | ||||||||||||||||||||||||||||
US government agencies | - | - | 2,481 | 0.36 | % | 8,756 | 1.31 | % | 2,932 | 1.79 | % | 14,169 | 1.24 | % | ||||||||||||||||||||||||||
SBA securities | - | - | - | - | - | - | 438 | 1.01 | % | 438 | 1.01 | % | ||||||||||||||||||||||||||||
State and political subdivisions | - | - | 471 | 2.13 | % | 4,282 | 1.61 | % | 20,423 | 2.21 | % | 25,176 | 2.11 | % | ||||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 1,614 | 1.79 | % | 8,550 | 0.97 | % | 10,164 | 1.10 | % | |||||||||||||||||||||||||||
Mortgage-backed securities | 387 | 2.10 | % | 4,411 | 1.29 | % | 9,121 | 1.59 | % | 53,235 | 1.38 | % | 67,154 | 1.40 | % | |||||||||||||||||||||||||
Total investment securities | $ | 387 | 2.10 | % | 7,363 | 1.03 | % | 26,953 | 1.53 | % | 85,578 | 1.55 | % | 120,281 | 1.52 | % |
12
The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at SeptemberJune 30, 20172022 and December 31, 2016,2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
September 30, 2017 | |||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||
(dollars in thousands) | # | value | losses | # | value | losses | # | value | losses | ||||||||||||||||
Available for sale | |||||||||||||||||||||||||
US government agencies | 6 | $ | 5,250 | $ | 40 | 1 | $ | 740 | $ | 18 | 7 | $ | 5,990 | $ | 58 | ||||||||||
SBA securities | 1 | 2,937 | 12 | 1 | 1,402 | 6 | 2 | 4,339 | 18 | ||||||||||||||||
State and political subdivisions | 8 | 3,652 | 12 | 6 | 2,910 | 48 | 14 | 6,562 | 60 | ||||||||||||||||
Mortgage-backed securities | 25 | 29,392 | 230 | 8 | 9,839 | 132 | 33 | 39,231 | 362 | ||||||||||||||||
Total | 40 | $ | 41,231 | $ | 294 | 16 | $ | 14,891 | $ | 204 | 56 | $ | 56,122 | $ | 498 | ||||||||||
December 31, 2016 | |||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||
# | value | losses | # | value | losses | # | value | losses | |||||||||||||||||
Available for sale | |||||||||||||||||||||||||
US government agencies | 5 | $ | 5,144 | $ | 113 | - | $ | - | $ | - | 5 | $ | 5,144 | $ | 113 | ||||||||||
SBA securities | 1 | 1,437 | 16 | - | - | - | 1 | 1,437 | 16 | ||||||||||||||||
State and political subdivisions | 32 | 13,936 | 292 | - | - | - | 32 | 13,936 | 292 | ||||||||||||||||
Mortgage-backed securities | 25 | 27,292 | 476 | 2 | 3,991 | 30 | 27 | 31,283 | 506 | ||||||||||||||||
Total | 63 | $ | 47,809 | $ | 897 | 2 | $ | 3,991 | $ | 30 | 65 | $ | 51,800 | $ | 927 |
June 30, 2022 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | # | Fair value | Unrealized losses | # | Fair value | Unrealized losses | # | Fair value | Unrealized losses | |||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 1 | $ | 1,981 | $ | 204 | - | $ | - | $ | - | 1 | $ | 1,981 | $ | 204 | |||||||||||||||||||||
US treasures | 1 | 905 | 94 | - | - | - | 1 | 905 | 94 | |||||||||||||||||||||||||||
US government agencies | 4 | 6,069 | 942 | 6 | 5,184 | 810 | 10 | 11,253 | 1,752 | |||||||||||||||||||||||||||
State and political subdivisions | 22 | 15,137 | 2,194 | 9 | 4,601 | 902 | 31 | 19,738 | 3,096 | |||||||||||||||||||||||||||
Asset-backed | 6 | 5,496 | 126 | 2 | 1,502 | 43 | 8 | 6,998 | 169 | |||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||
FHLMC | 14 | 14,335 | 1,990 | 5 | 4,640 | 845 | 19 | 18,975 | 2,835 | |||||||||||||||||||||||||||
FNMA | 24 | 17,522 | 2,028 | 12 | 15,133 | 2,172 | 36 | 32,655 | 4,200 | |||||||||||||||||||||||||||
GNMA | 4 | 3,805 | 301 | 3 | 1,676 | 192 | 7 | 5,481 | 493 | |||||||||||||||||||||||||||
Total investment securities | 76 | $ | 65,250 | $ | 7,879 | 37 | $ | 32,736 | $ | 4,964 | 113 | $ | 97,986 | $ | 12,843 |
December 31, 2021 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | # | Fair value | Unrealized losses | # | Fair value | Unrealized losses | # | Fair value | Unrealized losses | |||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 1 | $ | 2,188 | $ | 10 | - | $ | - | $ | - | 1 | $ | 2,188 | $ | 10 | |||||||||||||||||||||
US treasures | 1 | 992 | 7 | - | - | - | 1 | 992 | 7 | |||||||||||||||||||||||||||
US government agencies | 7 | 9,831 | 173 | 4 | 3,837 | 163 | 11 | 13,668 | 336 | |||||||||||||||||||||||||||
State and political subdivisions | 9 | 7,821 | 193 | 6 | 2,909 | 67 | 15 | 10,730 | 260 | |||||||||||||||||||||||||||
Asset-backed | 2 | 1,751 | 9 | 2 | 1,717 | 7 | 4 | 3,468 | 16 | |||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||
FHLMC | 10 | 13,705 | 303 | 4 | 4,644 | 192 | 14 | 18,349 | 495 | |||||||||||||||||||||||||||
FNMA | 11 | 16,098 | 296 | 9 | 11,264 | 364 | 20 | 27,362 | 660 | |||||||||||||||||||||||||||
GNMA | 2 | 655 | 4 | 3 | 3,215 | 93 | 5 | 3,870 | 97 | |||||||||||||||||||||||||||
Total investment securities | 43 | $ | 53,041 | $ | 995 | 28 | $ | 27,586 | $ | 886 | 71 | $ | 80,627 | $ | 1,881 |
13
At SeptemberJune 30, 2017,2022 the Company had 4076 individual investments with a fair market value of $41.2$65.3 million that were in an unrealized loss position for less than 12 months and 1637 individual investments with a fair market value of $14.9$32.7 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. The Company also considers other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As theThe Company has no intentdoes not intend to sell these securities, with unrealized losses and it is more likely than not more-likely-than-not that the Company will not be required to sell these securities before recovery of the amortized cost, the Company has concluded that these securities are not impaired on an other-than-temporary basis.cost.
Other investments are comprised of the following and are recorded at cost which approximates fair value.
(dollars in thousands) | September 30, 2017 | December 31, 2016 | |||
Federal Home Loan Bank stock | $ | 2,479 | 5,173 | ||
Investment in Trust Preferred securities | 403 | 403 | |||
Other investments | 182 | 166 | |||
Total other investments | $ | 3,064 | 5,742 |
(dollars in thousands) | June 30, 2022 | December 31, 2021 | ||||||
Federal Home Loan Bank stock | $ | 3,632 | 1,241 | |||||
Other nonmarketable investments | 1,030 | 2,377 | ||||||
Investment in Trust Preferred subsidiaries | 403 | 403 | ||||||
Total other investments | $ | 5,065 | 4,021 |
The Company has evaluated the Federal Home Loan Bank (“FHLB”) stockother investments for impairment and determined that the investment in the FHLB stock isother investments are not other than temporarily impaired as of SeptemberJune 30, 20172022 and that ultimate recoverability of the par value of this investmentthe investments is probable. All of the FHLB stock is used to collateralize advances with the FHLB.
At September 30, 2017, $9.8 million of securities were pledged as collateral for repurchase agreements from brokers and no securities were pledged to secure client deposits. At December 31, 2016, $21.0 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $21.1 million of securities were pledged to secure client deposits.
NOTE 3 – Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option which was adopted by the Company on April 1, 2016, with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At SeptemberJune 30, 2017,2022, mortgage loans held for sale totaled $9.1$18.3 million compared to $7.8$13.6 million at December 31, 2016.2021.
Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets.
Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in mortgage banking income in the statement of income. Mortgage banking income also includes the unrealized gains and losses associated with the loans held for sale and the realized and unrealized gains and losses from derivatives.
Mortgage loans sold by the Company to investors and which were believed to have met investor and agency underwriting guidelines at the time of sale may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans.
NOTE 4 – Loans and Allowance for LoanCredit Losses
The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $2.2$6.2 million as of SeptemberJune 30, 20172022 and $2.0$5.0 million as of December 31, 2016.2021.
September 30, 2017 | December 31, 2016 | |||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||
Commercial | ||||||||||||||
Owner occupied RE | $ | 317,262 | 23.9 | % | $ | 285,938 | 24.6 | % | ||||||
Non-owner occupied RE | 301,360 | 22.7 | % | 239,574 | 20.6 | % | ||||||||
Construction | 32,332 | 2.4 | % | 33,393 | 2.9 | % | ||||||||
Business | 214,898 | 16.2 | % | 202,552 | 17.4 | % | ||||||||
Total commercial loans | 865,852 | 65.2 | % | 761,457 | 65.5 | % | ||||||||
Consumer | ||||||||||||||
Real estate | 250,483 | 18.9 | % | 215,588 | 18.5 | % | ||||||||
Home equity | 150,371 | 11.3 | % | 137,105 | 11.8 | % | ||||||||
Construction | 38,766 | 2.9 | % | 31,922 | 2.7 | % | ||||||||
Other | 22,267 | 1.7 | % | 17,572 | 1.5 | % | ||||||||
Total consumer loans | 461,887 | 34.8 | % | 402,187 | 34.5 | % | ||||||||
Total gross loans, net of deferred fees | 1,327,739 | 100.0 | % | 1,163,644 | 100.0 | % | ||||||||
Less—allowance for loan losses | (15,579 | ) | (14,855 | ) | ||||||||||
Total loans, net | $ | 1,312,160 | $ | 1,148,789 |
June 30, 2022 | December 31, 2021 | |||||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | 551,544 | 19.4 | % | $ | 488,965 | 19.6 | % | |||||||||
Non-owner occupied RE | 741,263 | 26.1 | % | 666,833 | 26.8 | % | ||||||||||
Construction | 84,612 | 3.0 | % | 64,425 | 2.6 | % | ||||||||||
Business | 389,790 | 13.7 | % | 333,049 | 13.4 | % | ||||||||||
Total commercial loans | 1,767,209 | 62.2 | % | 1,553,272 | 62.4 | % | ||||||||||
Consumer | ||||||||||||||||
Real estate | 812,130 | 28.5 | % | 694,401 | 27.9 | % | ||||||||||
Home equity | 161,512 | 5.6 | % | 154,839 | 6.2 | % | ||||||||||
Construction | 76,878 | 2.7 | % | 59,846 | 2.4 | % | ||||||||||
Other | 27,476 | 1.0 | % | 27,519 | 1.1 | % | ||||||||||
Total consumer loans | 1,077,996 | 37.8 | % | 936,605 | 37.6 | % | ||||||||||
Total gross loans, net of deferred fees | 2,845,205 | 100.0 | % | 2,489,877 | 100.0 | % | ||||||||||
Less—allowance for credit losses | (34,192 | ) | (30,408 | ) | ||||||||||||
Total loans, net | $ | 2,811,013 | $ | 2,459,469 |
14
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.
September 30, 2017 | ||||||||||
After one | ||||||||||
One year | but within | After five | ||||||||
(dollars in thousands) | or less | five years | years | Total | ||||||
Commercial | ||||||||||
Owner occupied RE | $ | 24,771 | 165,019 | 127,472 | 317,262 | |||||
Non-owner occupied RE | 47,778 | 155,987 | 97,595 | 301,360 | ||||||
Construction | 6,908 | 6,492 | 18,932 | 32,332 | ||||||
Business | 63,391 | 109,003 | 42,504 | 214,898 | ||||||
Total commercial loans | 142,848 | 436,501 | 286,503 | 865,852 | ||||||
Consumer | ||||||||||
Real estate | 23,864 | 62,991 | 163,628 | 250,483 | ||||||
Home equity | 10,441 | 25,930 | 114,000 | 150,371 | ||||||
Construction | 19,312 | 635 | 18,819 | 38,766 | ||||||
Other | 5,875 | 12,082 | 4,310 | 22,267 | ||||||
Total consumer loans | 59,492 | 101,638 | 300,757 | 461,887 | ||||||
Total gross loans, net of deferred fees | $ | 202,340 | 538,139 | 587,260 | 1,327,739 | |||||
Loans maturing after one year with: | ||||||||||
Fixed interest rates | $ | 851,998 | ||||||||
Floating interest rates | 273,401 | |||||||||
December 31, 2016 | ||||||||||
After one | ||||||||||
One year | but within | After five | ||||||||
or less | five years | years | Total | |||||||
Commercial | ||||||||||
Owner occupied RE | $ | 26,062 | 145,419 | 114,457 | 285,938 | |||||
Non-owner occupied RE | 34,685 | 142,261 | 62,628 | 239,574 | ||||||
Construction | 5,881 | 9,558 | 17,954 | 33,393 | ||||||
Business | 66,361 | 99,255 | 36,936 | 202,552 | ||||||
Total commercial loans | 132,989 | 396,493 | 231,975 | 761,457 | ||||||
Consumer | ||||||||||
Real estate | 26,342 | 49,832 | 139,414 | 215,588 | ||||||
Home equity | 7,142 | 29,041 | 100,922 | 137,105 | ||||||
Construction | 14,103 | 627 | 17,192 | 31,922 | ||||||
Other | 5,049 | 9,305 | 3,218 | 17,572 | ||||||
Total consumer | 52,636 | 88,805 | 260,746 | 402,187 | ||||||
Total gross loan, net of deferred fees | $ | 185,625 | 485,298 | 492,721 | 1,163,644 | |||||
Loans maturing after one year with: | ||||||||||
Fixed interest rates | $ | 733,892 | ||||||||
Floating interest rates | 244,127 |
Portfolio Segment Methodology
CommercialCommercial
June 30, 2022 | ||||||||||||||||||||
(dollars in thousands) | One year or less | After one but within five years | After five but within fifteen years | After fifteen years | Total | |||||||||||||||
Commercial | ||||||||||||||||||||
Owner occupied RE | $ | 13,891 | 117,631 | 377,520 | 42,502 | 551,544 | ||||||||||||||
Non-owner occupied RE | 38,324 | 347,550 | 327,641 | 27,748 | 741,263 | |||||||||||||||
Construction | 4,763 | 23,348 | 44,728 | 11,773 | 84,612 | |||||||||||||||
Business | 77,526 | 159,130 | 148,909 | 4,225 | 389,790 | |||||||||||||||
Total commercial loans | 134,504 | 647,659 | 898,798 | 86,248 | 1,767,209 | |||||||||||||||
Consumer | ||||||||||||||||||||
Real estate | $ | 8,016 | 43,504 | 207,090 | 553,520 | 812,130 | ||||||||||||||
Home equity | 1,554 | 22,238 | 132,251 | 5,469 | 161,512 | |||||||||||||||
Construction | 1,102 | 591 | 14,226 | 60,959 | 76,878 | |||||||||||||||
Other | 3,867 | 19,360 | 3,461 | 788 | 27,476 | |||||||||||||||
Total consumer loans | 14,539 | 85,693 | 357,028 | 620,736 | 1,077,996 | |||||||||||||||
Total gross loans, net of deferred fees | $ | 149,043 | 733,352 | 1,255,826 | 706,984 | 2,845,205 |
December 31, 2021 | ||||||||||||||||||||
(dollars in thousands) | One year or less | After one but within five years | After five but within fifteen years | After fifteen years | Total | |||||||||||||||
Commercial | ||||||||||||||||||||
Owner occupied RE | $ | 16,858 | 120,480 | 316,261 | 35,366 | 488,965 | ||||||||||||||
Non-owner occupied RE | 47,453 | 329,085 | 263,317 | 26,978 | 666,833 | |||||||||||||||
Construction | 4,882 | 16,393 | 29,310 | 13,840 | 64,425 | |||||||||||||||
Business | 66,833 | 152,732 | 109,008 | 4,476 | 333,049 | |||||||||||||||
Total commercial loans | 136,026 | 618,690 | 717,896 | 80,660 | 1,553,272 | |||||||||||||||
Consumer | ||||||||||||||||||||
Real estate | 14,632 | 45,219 | 162,655 | 471,895 | 694,401 | |||||||||||||||
Home equity | 2,178 | 21,280 | 125,427 | 5,954 | 154,839 | |||||||||||||||
Construction | 961 | 594 | 8,956 | 49,335 | 59,846 | |||||||||||||||
Other | 8,071 | 15,711 | 3,341 | 396 | 27,519 | |||||||||||||||
Total consumer | 25,842 | 82,804 | 300,379 | 527,580 | 936,605 | |||||||||||||||
Total gross loan, net of deferred fees | $ | 161,868 | 701,494 | 1,018,275 | 608,240 | 2,489,877 |
15
The following table summarizes the loans due after one year by category.
June 30, 2022 | December 31, 2021 | |||||||||||||||
Interest Rate | Interest Rate | |||||||||||||||
(dollars in thousands) | Fixed | Floating or Adjustable | Fixed | Floating or Adjustable | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | $ | 534,364 | 3,289 | 463,589 | 8,518 | |||||||||||
Non-owner occupied RE | 631,885 | 71,054 | 533,565 | 85,815 | ||||||||||||
Construction | 74,537 | 5,312 | 57,139 | 2,404 | ||||||||||||
Business | 240,839 | 71,425 | 191,522 | 74,694 | ||||||||||||
Total commercial loans | 1,481,625 | 151,080 | 1,245,815 | 171,431 | ||||||||||||
Consumer | ||||||||||||||||
Real estate | 804,102 | 12 | 679,756 | 13 | ||||||||||||
Home equity | 11,946 | 148,012 | 12,850 | 139,811 | ||||||||||||
Construction | 75,776 | - | 58,884 | - | ||||||||||||
Other | 17,522 | 6,087 | 13,220 | 6,228 | ||||||||||||
Total consumer loans | 909,346 | 154,111 | 764,710 | 146,052 | ||||||||||||
Total gross loans, net of deferred fees | $ | 2,390,971 | 305,191 | 2,010,525 | 317,483 |
Credit Quality Indicators
The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. After loans are assessedinitially graded, they are monitored regularly for estimated losses by gradingcredit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status.type.
ConsumerFor consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.
Credit Quality Indicators
CommercialWe manage a consistent process for assessing commercial loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by our banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.
We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:
● | Pass—These loans range from minimal to average credit risk |
● | Special mention—A special mention loan 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 the institution’s credit position at some future date. |
● | Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
● | Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. |
16
The tables below provide a breakdownfollowing table presents loan balances classified by credit quality indicators by year of outstanding commercial loansorigination as of June 30, 2022.
June 30, 2022 | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving | Revolving Converted to Term | Total | |||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||||||
Owner occupied RE | ||||||||||||||||||||||||||||||||||||
Pass | $ | 84,469 | 134,506 | 90,382 | 75,694 | 37,899 | 127,229 | - | - | 550,179 | ||||||||||||||||||||||||||
Special Mention | - | 159 | - | - | - | 156 | - | - | 315 | |||||||||||||||||||||||||||
Substandard | - | - | 648 | - | 294 | 108 | - | - | 1,050 | |||||||||||||||||||||||||||
Total Owner occupied RE | 84,469 | 134,665 | 91,030 | 75,694 | 38,193 | 127,493 | - | - | 551,544 | |||||||||||||||||||||||||||
Non-owner occupied RE | ||||||||||||||||||||||||||||||||||||
Pass | 135,632 | 175,361 | 118,012 | 74,974 | 79,186 | 130,248 | 603 | - | 714,016 | |||||||||||||||||||||||||||
Special Mention | - | 204 | - | 310 | 5,494 | 5,533 | - | - | 11,541 | |||||||||||||||||||||||||||
Substandard | - | 139 | - | 13,659 | 306 | 1,602 | - | - | 15,706 | |||||||||||||||||||||||||||
Total Non-owner occupied RE | 135,632 | 175,704 | 118,012 | 88,943 | 84,986 | 137,383 | 603 | - | 741,263 | |||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||||||||||
Pass | 17,630 | 54,916 | 8,762 | 2,771 | - | 533 | - | - | 84,612 | |||||||||||||||||||||||||||
Special Mention | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Total Construction | 17,630 | 54,916 | 8,762 | 2,771 | - | 533 | - | - | 84,612 | |||||||||||||||||||||||||||
Business | ||||||||||||||||||||||||||||||||||||
Pass | 63,532 | 65,669 | 35,262 | 25,887 | 37,371 | 34,691 | 122,374 | 625 | 385,411 | |||||||||||||||||||||||||||
Special Mention | 961 | - | 394 | - | - | 165 | 113 | 183 | 1,816 | |||||||||||||||||||||||||||
Substandard | - | - | 1,065 | 182 | 345 | 946 | 25 | - | 2,563 | |||||||||||||||||||||||||||
Total Business | 64,493 | 65,669 | 36,721 | 26,069 | 37,716 | 35,802 | 122,512 | 808 | 389,790 | |||||||||||||||||||||||||||
Total Commercial loans | 302,224 | 430,954 | 254,525 | 193,477 | 160,895 | 301,211 | 123,115 | 808 | 1,767,209 | |||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||||||||||
Pass | 143,204 | 260,391 | 193,806 | 77,863 | 41,377 | 86,659 | - | - | 803,300 | |||||||||||||||||||||||||||
Special Mention | - | 1,105 | 1,376 | 1,191 | 564 | 1,094 | - | - | 5,330 | |||||||||||||||||||||||||||
Substandard | - | 895 | 229 | 418 | 406 | 1,552 | - | - | 3,500 | |||||||||||||||||||||||||||
Total Real estate | 143,204 | 262,391 | 195,411 | 79,472 | 42,347 | 89,305 | - | - | 812,130 | |||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||||||
Pass | - | - | - | - | - | - | 156,910 | - | 156,910 | |||||||||||||||||||||||||||
Special Mention | - | - | - | - | - | - | 2,122 | - | 2,122 | |||||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | 2,480 | - | 2,480 | |||||||||||||||||||||||||||
Total Home equity | - | - | - | - | - | - | 161,512 | - | 161,512 | |||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||||||||||
Pass | 19,945 | 42,828 | 13,799 | - | - | - | - | - | 76,572 | |||||||||||||||||||||||||||
Special Mention | - | - | - | 306 | - | - | - | - | 306 | |||||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Total Construction | 19,945 | 42,828 | 13,799 | 306 | - | - | - | - | 76,878 | |||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||
Pass | 2,726 | 2,706 | 2,076 | 1,778 | 639 | 3,590 | 13,801 | - | 27,316 | �� | ||||||||||||||||||||||||||
Special Mention | 5 | - | 7 | 34 | 56 | 6 | 32 | - | 140 | |||||||||||||||||||||||||||
Substandard | - | - | - | 9 | - | - | 11 | - | 20 | |||||||||||||||||||||||||||
Total Other | 2,731 | 2,706 | 2,083 | 1,821 | 695 | 3,596 | 13,844 | - | 27,476 | |||||||||||||||||||||||||||
Total Consumer loans | 165,880 | 307,925 | 211,293 | 81,599 | 43,042 | 92,901 | 175,356 | - | 1,077,996 | |||||||||||||||||||||||||||
Total loans | $ | 468,104 | 738,879 | 465,818 | 275,076 | 203,937 | 394,112 | 298,471 | 808 | 2,845,205 |
17
The following table presents loan balances classified by risk category.credit quality indicators and loan categories as of December 31, 2021.
September 30, 2017 | |||||||||||
Owner | Non-owner | ||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||
Pass | $ | 312,878 | 294,934 | 32,332 | 204,694 | 844,838 | |||||
Special mention | 2,020 | 2,039 | - | 4,587 | 8,646 | ||||||
Substandard | 2,364 | 4,387 | - | 5,617 | 12,368 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 317,262 | 301,360 | 32,332 | 214,898 | 865,852 |
December 31, 2016 | |||||||||||
Owner | Non-owner | ||||||||||
occupied RE | occupied RE | Construction | Business | Total | |||||||
Pass | $ | 282,055 | 234,957 | 33,393 | 193,517 | 743,922 | |||||
Special mention | 1,097 | 975 | - | 2,489 | 4,561 | ||||||
Substandard | 2,786 | 3,642 | - | 6,546 | 12,974 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 285,938 | 239,574 | 33,393 | 202,552 | 761,457 |
December 31, 2021 | ||||||||||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||||||||||
(dollars in thousands) | Owner occupied RE | Non-owner occupied RE | Construction | Business | Real Estate | Home Equity | Construction | Other | Total | |||||||||||||||||||||||||||
Pass | $ | 487,422 | 589,280 | 64,425 | 328,371 | 684,923 | 148,933 | 59,846 | 27,365 | 2,390,565 | ||||||||||||||||||||||||||
Special mention | 327 | 48,310 | - | 1,530 | 4,294 | 2,986 | - | 129 | 57,576 | |||||||||||||||||||||||||||
Substandard | 1,216 | 29,243 | - | 3,148 | 5,184 | 2,920 | - | 25 | 41,736 | |||||||||||||||||||||||||||
Total loans | $ | 488,965 | 666,833 | 64,425 | 333,049 | 694,401 | 154,839 | 59,846 | 27,519 | 2,489,877 |
The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.present loan balances by payment status.
September 30, 2017 | |||||||||||
Owner | Non-owner | ||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||
Current | $ | 317,019 | 300,720 | 32,332 | 213,394 | 863,465 | |||||
30-59 days past due | - | - | - | 1,381 | 1,381 | ||||||
60-89 days past due | - | - | - | - | - | ||||||
Greater than 90 Days | 243 | 640 | - | 123 | 1,006 | ||||||
$ | 317,262 | 301,360 | 32,332 | 214,898 | 865,852 | ||||||
December 31, 2016 | |||||||||||
Owner | Non-owner | ||||||||||
occupied RE | occupied RE | Construction | Business | Total | |||||||
Current | $ | 284,700 | 238,346 | 33,393 | 200,624 | 757,063 | |||||
30-59 days past due | 981 | - | - | 1,423 | 2,404 | ||||||
60-89 days past due | 257 | 56 | - | - | 313 | ||||||
Greater than 90 Days | - | 1,172 | - | 505 | 1,677 | ||||||
$ | 285,938 | 239,574 | 33,393 | 202,552 | 761,457 |
June 30, 2022 | ||||||||||||||||||||||||
(dollars in thousands) | Accruing 30-59 days past due | Accruing 60-89 days past due | Accruing 90 days or more past due | Nonaccrual loans | Accruing current | Total | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Owner occupied RE | $ | - | - | - | - | 551,544 | 551,544 | |||||||||||||||||
Non-owner occupied RE | - | - | - | 981 | 740,282 | 741,263 | ||||||||||||||||||
Construction | - | - | - | - | 84,612 | 84,612 | ||||||||||||||||||
Business | 91 | - | - | - | 389,699 | 389,790 | ||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Real estate | 482 | 697 | - | 552 | 810,399 | 812,130 | ||||||||||||||||||
Home equity | - | - | - | 1,398 | 160,114 | 161,512 | ||||||||||||||||||
Construction | - | - | - | - | 76,878 | 76,878 | ||||||||||||||||||
Other | - | - | - | - | 27,476 | 27,476 | ||||||||||||||||||
Total loans | $ | 573 | 697 | - | 2,931 | 2,839,806 | 2,845,205 |
December 31, 2021 | ||||||||||||||||||||||||
(dollars in thousands) | Accruing 30-59 days past due | Accruing 60-89 days past due | Accruing 90 days or more past due | Nonaccrual loans | Accruing current | Total | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Owner occupied RE | $ | - | - | - | - | 488,965 | 488,965 | |||||||||||||||||
Non-owner occupied RE | - | - | - | 1,069 | 665,764 | 666,833 | ||||||||||||||||||
Construction | - | - | - | - | 64,425 | 64,425 | ||||||||||||||||||
Business | - | - | - | - | 333,049 | 333,049 | ||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Real estate | 136 | - | - | 1,750 | 692,515 | 694,401 | ||||||||||||||||||
Home equity | 417 | 174 | - | 2,045 | 152,203 | 154,839 | ||||||||||||||||||
Construction | - | - | - | - | 59,846 | 59,846 | ||||||||||||||||||
Other | 5 | - | - | - | 27,514 | 27,519 | ||||||||||||||||||
Total loans | $ | 558 | 174 | - | 4,864 | 2,484,281 | 2,489,877 |
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, loans 30 days or more past due represented 0.36%0.10% and 0.55%0.09% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.18%0.01% and 0.38%0.00% of the Company’s total loan portfolio as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.
ConsumerThe Company manages a consistent process for assessing consumer loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. The Company’s categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of the allowance for loan losses.
The tables below provide a breakdown of outstanding consumer loans by risk category.
September 30, 2017 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Pass | $ | 246,962 | 147,570 | 38,766 | 22,172 | 455,470 | |||||
Special mention | 719 | 126 | - | 7 | 852 | ||||||
Substandard | 2,802 | 2,675 | - | 88 | 5,565 | ||||||
Doubtful | - | - | - | - | - | ||||||
Loss | - | - | - | - | - | ||||||
$ | 250,483 | 150,371 | 38,766 | 22,267 | 461,887 |
December 31, 2016 | |||||||||||
Real estate | Home equity | Construction | Other | Total | |||||||
Pass | $ | 211,563 | 134,124 | 31,922 | 17,485 | 395,094 | |||||
Special mention | 1,064 | 2,109 | - | 16 | 3,189 | ||||||
Substandard | 2,961 | 872 | - | 71 | 3,904 | ||||||
Doubtful | - | - | - | - | - | ||||||
Loss | - | - | - | - | - | ||||||
$ | 215,588 | 137,105 | 31,922 | 17,572 | 402,187 |
The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.
September 30, 2017 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Current | $ | 248,907 | 149,978 | 38,493 | 22,175 | 459,553 | |||||
30-59 days past due | 132 | 90 | - | 92 | 314 | ||||||
60-89 days past due | 1,172 | 180 | 273 | - | 1,625 | ||||||
Greater than 90 Days | 272 | 123 | - | - | 395 | ||||||
$ | 250,483 | 150,371 | 38,766 | 22,267 | 461,887 | ||||||
December 31, 2016 | |||||||||||
Real estate | Home equity | Construction | Other | Total | |||||||
Current | $ | 214,228 | 136,638 | 31,922 | 17,427 | 400,215 | |||||
30-59 days past due | 1,041 | 210 | - | 126 | 1,377 | ||||||
60-89 days past due | 282 | - | - | 6 | 288 | ||||||
Greater than 90 Days | 37 | 257 | - | 13 | 307 | ||||||
$ | 215,588 | 137,105 | 31,922 | 17,572 | 402,187 |
As of September 30, 2017 and December 31, 2016, consumer loans 30 days or more past due were 0.18% and 0.17%0.09% of total loans respectively.as of June 30, 2022 and December 31, 2021.
Nonperforming assets
The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans.
Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.
Following is a summary of our The following table shows the nonperforming assets including nonaccruing TDRs.and the related percentage of nonperforming assets to total assets and gross loans.
(dollars in thousands) | September 30, 2017 | December 31, 2016 | |||
Commercial | |||||
Owner occupied RE | $ | 244 | 276 | ||
Non-owner occupied RE | 2,049 | 2,711 | |||
Construction | - | - | |||
Business | 1,116 | 686 | |||
Consumer | |||||
Real estate | 1,267 | 550 | |||
Home equity | 195 | 256 | |||
Construction | - | - | |||
Other | 2 | 13 | |||
Nonaccruing troubled debt restructurings | 730 | 990 | |||
Total nonaccrual loans, including nonaccruing TDRs | 5,603 | 5,482 | |||
Other real estate owned | 420 | 639 | |||
Total nonperforming assets | $ | 6,023 | 6,121 | ||
Nonperforming assets as a percentage of: | |||||
Total assets | 0.39% | 0.46% | |||
Gross loans | 0.45% | 0.53% | |||
Total loans over 90 days past due | 1,401 | 1,984 | |||
Loans over 90 days past due and still accruing | - | - | |||
Accruing troubled debt restructurings | $ | 6,954 | 5,675 |
Impaired Loans
18
(dollars in thousands) | June 30, 2022 | December 31, 2021 | ||||||
Nonaccrual loans | $ | 642 | - | |||||
Nonaccruing TDRs | 2,289 | 2,952 | ||||||
Total nonaccrual loans, including nonaccruing TDRs | 2,931 | 4,864 | ||||||
Other real estate owned | - | - | ||||||
Total nonperforming assets | $ | 2,931 | 4,864 | |||||
Nonperforming assets as a percentage of: | ||||||||
Total assets | 0.09 | % | 0.17 | % | ||||
Gross loans | 0.10 | % | 0.20 | % | ||||
Total loans over 90 days past due | $ | - | 554 | |||||
Loans over 90 days past due and still accruing | - | - | ||||||
Accruing troubled debt restructurings | 3,558 | 3,299 |
The table below summarizes nonaccrual loans by major categories for the periods presented.
CECL | Incurred loss | |||||||||||||||
June 30, 2022 | December 31, 2021 | |||||||||||||||
Nonaccrual | Nonaccrual | |||||||||||||||
loans | loans | Total | Total | |||||||||||||
with no | with an | nonaccrual | nonaccrual | |||||||||||||
(dollars in thousands) | allowance | allowance | loans | loans | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | - | - | - | - | ||||||||||||
Non-owner occupied RE | $ | 121 | 860 | 981 | 1,070 | |||||||||||
Construction | - | - | - | - | ||||||||||||
Business | - | - | - | - | ||||||||||||
Total commercial | 121 | 860 | 981 | 1,070 | ||||||||||||
Consumer | ||||||||||||||||
Real estate | - | 552 | 552 | 1,750 | ||||||||||||
Home equity | 200 | 1,198 | 1,398 | 2,044 | ||||||||||||
Construction | - | - | - | - | ||||||||||||
Other | - | - | - | - | ||||||||||||
Total consumer | 200 | 1,750 | 1,950 | 3,794 | ||||||||||||
Total | $ | 321 | 2,610 | 2,931 | 4,864 |
19
The table below summarizes key information for impaired loans. The Company’s impairedloans individually evaluated for impairment loans under the incurred loss methodology. These loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loancredit losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.
September 30, 2017 | |||||||||
Recorded investment | |||||||||
Impaired loans | |||||||||
Unpaid | with related | Related | |||||||
Principal | Impaired | allowance for | allowance for | ||||||
(dollars in thousands) | Balance | loans | loan losses | loan losses | |||||
Commercial | |||||||||
Owner occupied RE | $ | 2,232 | 2,177 | 830 | 192 | ||||
Non-owner occupied RE | 7,854 | 4,299 | 3,704 | 948 | |||||
Construction | - | - | - | - | |||||
Business | 4,488 | 3,355 | 2,090 | 1,140 | |||||
Total commercial | 14,574 | 9,831 | 6,624 | 2,280 | |||||
Consumer | |||||||||
Real estate | 2,382 | 2,357 | 2,357 | 1,304 | |||||
Home equity | 203 | 195 | 195 | 133 | |||||
Construction | - | - | - | - | |||||
Other | 175 | 174 | 174 | 25 | |||||
Total consumer | 2,760 | 2,726 | 2,726 | 1,462 | |||||
Total | $ | 17,334 | 12,557 | 9,350 | 3,742 |
December 31, 2016 | |||||||||
Recorded investment | |||||||||
Impaired loans | |||||||||
Unpaid | with related | Related | |||||||
Principal | Impaired | allowance for | allowance for | ||||||
Balance | loans | loan losses | loan losses | ||||||
Commercial | |||||||||
Owner occupied RE | $ | 2,284 | 2,243 | 2,224 | 263 | ||||
Non-owner occupied RE | 7,238 | 4,031 | 1,638 | 457 | |||||
Construction | - | - | - | - | |||||
Business | 3,699 | 2,593 | 1,610 | 1,154 | |||||
Total commercial | 13,221 | 8,867 | 5,472 | 1,874 | |||||
Consumer | |||||||||
Real estate | 1,853 | 1,843 | 1,843 | 682 | |||||
Home equity | 207 | 257 | - | - | |||||
Construction | - | - | - | - | |||||
Other | 261 | 190 | 177 | 88 | |||||
Total consumer | 2,321 | 2,290 | 2,020 | 770 | |||||
Total | $ | 15,542 | 11,157 | 7,492 | 2,644 |
December 31, 2021 | ||||||||||||||||||||
Recorded investment | ||||||||||||||||||||
Impaired loans | Impaired loans | |||||||||||||||||||
Unpaid | with no related | with related | Related | |||||||||||||||||
Principal | Impaired | allowance for | allowance for | allowance for | ||||||||||||||||
(dollars in thousands) | Balance | loans | credit losses | credit losses | credit losses | |||||||||||||||
Commercial | ||||||||||||||||||||
Owner occupied RE | $ | 1,261 | 1,261 | 1,261 | - | - | ||||||||||||||
Non-owner occupied RE | 2,012 | 1,070 | 270 | 800 | 171 | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Business | 1,104 | 1,104 | - | 1,104 | 452 | |||||||||||||||
Total commercial | 4,377 | 3,435 | 1,531 | 1,904 | 623 | |||||||||||||||
Consumer | ||||||||||||||||||||
Real estate | 2,638 | 2,561 | 1,743 | 818 | 144 | |||||||||||||||
Home equity | 2,206 | 2,044 | 1,989 | 55 | 55 | |||||||||||||||
Construction | - | - | - | - | - | |||||||||||||||
Other | 123 | 123 | - | 123 | 14 | |||||||||||||||
Total consumer | 4,967 | 4,728 | 3,732 | 996 | 213 | |||||||||||||||
Total gross loans | $ | 9,344 | 8,163 | 5,263 | 2,900 | 836 |
The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
Three months ended | Three months ended | ||||||||
September 30, 2017 | September 30, 2016 | ||||||||
Average | Recognized | Average | Recognized | ||||||
recorded | interest | recorded | interest | ||||||
(dollars in thousands) | investment | income | investment | income | |||||
Commercial | |||||||||
Owner occupied RE | $ | 2,182 | 25 | 2,000 | 30 | ||||
Non-owner occupied RE | 4,322 | 57 | 5,515 | 39 | |||||
Construction | - | - | - | - | |||||
Business | 3,498 | 58 | 5,072 | 71 | |||||
Total commercial | 10,002 | 140 | 12,587 | 140 | |||||
Consumer | |||||||||
Real estate | 2,361 | 40 | 1,573 | 16 | |||||
Home equity | 196 | 2 | 207 | - | |||||
Construction | - | - | - | - | |||||
Other | 176 | 1 | 257 | 2 | |||||
Total consumer | 2,733 | 43 | 2,037 | 18 | |||||
Total | $ | 12,735 | 183 | 14,624 | 158 |
Nine months ended | Nine months ended | Year ended | |||||||||||
September 30, 2017 | September 30, 2016 | December 31, 2016 | |||||||||||
Average | Recognized | Average | Recognized | Average | Recognized | ||||||||
recorded | interest | recorded | interest | recorded | interest | ||||||||
(dollars in thousands) | investment | income | investment | income | investment | income | |||||||
Commercial | |||||||||||||
Owner occupied RE | $ | 2,198 | 78 | 2,009 | 72 | 2,263 | 112 | ||||||
Non-owner occupied RE | 4,503 | 154 | 5,594 | 124 | 4,106 | 200 | |||||||
Construction | - | - | - | - | - | - | |||||||
Business | 3,585 | 165 | 5,134 | 199 | 2,873 | 135 | |||||||
Total commercial | 10,286 | 397 | 12,737 | 395 | 9,242 | 447 | |||||||
Consumer | |||||||||||||
Real estate | 2,370 | 73 | 1,578 | 49 | 1,854 | 81 | |||||||
Home equity | 196 | 4 | 257 | 1 | 257 | 2 | |||||||
Construction | - | - | - | - | - | - | |||||||
Other | 178 | 4 | 208 | 5 | 203 | 6 | |||||||
Total consumer | 2,744 | 81 | 2,043 | 55 | 2,314 | 89 | |||||||
Total | $ | 13,030 | 478 | 14,780 | 450 | 11,556 | 536 |
Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||||||||||
(dollars in thousands) | Average recorded investment | Recognized interest income | Average recorded investment | Recognized interest income | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | $ | 1,247 | 11 | 1,379 | 16 | |||||||||||
Non-owner occupied RE | 874 | 36 | 2,073 | 32 | ||||||||||||
Construction | - | - | 68 | - | ||||||||||||
Business | 1,051 | 10 | 2,118 | 20 | ||||||||||||
Total commercial | 3,172 | 57 | 5,638 | 68 | ||||||||||||
Consumer | ||||||||||||||||
Real estate | 1,908 | 17 | 4,337 | 60 | ||||||||||||
Home equity | 1,611 | (3 | ) | 1,679 | 18 | |||||||||||
Construction | - | - | - | - | ||||||||||||
Other | 118 | 1 | 131 | 1 | ||||||||||||
Total consumer | 3,637 | 15 | 6,147 | 79 | ||||||||||||
Total gross loans | $ | 6,809 | 72 | 11,785 | 147 |
Six months ended June 30, 2022 | Six months ended June 30, 2021 | Year ended December 31, 2021 | ||||||||||||||||||||||
(dollars in thousands) | Average recorded investment | Recognized interest income | Average recorded investment | Recognized interest income | Average recorded investment | Recognized interest income | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Owner occupied RE | $ | 1,253 | 32 | 1,469 | 32 | 1,387 | 65 | |||||||||||||||||
Non-owner occupied RE | 896 | 78 | 2,111 | 94 | 3,128 | 182 | ||||||||||||||||||
Construction | - | - | 91 | 2 | 55 | - | ||||||||||||||||||
Business | 1,070 | 28 | 2,229 | 54 | 2,218 | 62 | ||||||||||||||||||
Total commercial | 3,219 | 138 | 5,900 | 182 | 6,788 | 309 | ||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Real estate | 2,045 | 39 | 4,235 | 103 | 3,641 | 98 | ||||||||||||||||||
Home equity | 1,621 | 21 | 1,910 | 34 | 1,964 | 85 | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Other | 120 | 2 | 132 | 2 | 129 | 4 | ||||||||||||||||||
Total consumer | 3,786 | 62 | 6,277 | 139 | 5,734 | 187 | ||||||||||||||||||
Total gross loans | $ | 7,005 | 200 | 12,177 | 321 | 12,522 | 496 |
20
Allowance for LoanCredit Losses
The allowance for loan loss is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company has an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in the portfolio. While the Company attributes portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The Company’s process involves procedures to appropriately consider the unique risk characteristics of the commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. The Company’s allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.
The following table summarizes the activity related to the allowance for credit losses for the six months ended June 30, 2022 under the CECL methodology.
Three months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||||||||||
(dollars in thousands) | Owner occupied RE | Non- owner occupied RE | Construction | Business | Real Estate | Home Equity | Construction | Other | Total | |||||||||||||||||||||||||||
Balance, beginning of period | $ | 4,898 | 9,973 | 929 | 6,217 | 7,602 | 2,197 | 844 | 284 | 32,944 | ||||||||||||||||||||||||||
Provision for credit losses | (69 | ) | 37 | 131 | 524 | 390 | 407 | 7 | 98 | 1,525 | ||||||||||||||||||||||||||
Loan charge-offs | - | - | - | (55 | ) | - | (170 | ) | - | (91 | ) | (316 | ) | |||||||||||||||||||||||
Loan recoveries | - | - | - | 31 | - | 8 | - | - | 39 | |||||||||||||||||||||||||||
Net loan recoveries (charge-offs) | - | - | - | (24 | ) | - | (162 | ) | - | (91 | ) | (277 | ) | |||||||||||||||||||||||
Balance, end of period | $ | 4,829 | 10,010 | 1,060 | 6,717 | 7,992 | 2,442 | 851 | 291 | 34,192 | ||||||||||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.04 | % | ||||||||||||||||||||||||||||||||||
Allowance for credit losses to gross loans | 1.20 | % | ||||||||||||||||||||||||||||||||||
Allowance for credit losses to nonperforming loans | 1166.70 | % |
Six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||||||||||
(dollars in thousands) | Owner occupied RE | Non- owner occupied RE | Construction | Business | Real Estate | Home Equity | Construction | Other | Total | |||||||||||||||||||||||||||
Balance, beginning of period | $ | 4,700 | 10,518 | 625 | 4,887 | 7,083 | 1,697 | 578 | 320 | 30,408 | ||||||||||||||||||||||||||
Adjustment for CECL | (313 | ) | 333 | 154 | 1,057 | (294 | ) | 438 | 130 | (5 | ) | 1,500 | ||||||||||||||||||||||||
Provision for credit losses | 442 | (841 | ) | 281 | 683 | 1,203 | 572 | 143 | 67 | 2,550 | ||||||||||||||||||||||||||
Loan charge-offs | - | - | - | (55 | ) | - | (339 | ) | - | (91 | ) | (485 | ) | |||||||||||||||||||||||
Loan recoveries | - | - | - | 145 | - | 74 | - | - | 219 | |||||||||||||||||||||||||||
Net loan recoveries (charge-offs) | - | - | - | 90 | - | (265 | ) | - | (91 | ) | (266 | ) | ||||||||||||||||||||||||
Balance, end of period | $ | 4,829 | 10,010 | 1,060 | 6,717 | 7,992 | 2,442 | 851 | 291 | 34,192 | ||||||||||||||||||||||||||
Net charge-offs (recoveries) to average loans (annualized) | 0.02 | % | ||||||||||||||||||||||||||||||||||
Allowance for credit losses to gross loans | 1.20 | % | ||||||||||||||||||||||||||||||||||
Allowance for credit losses to nonperforming loans | 1166.70 | % |
21
Prior to the adoption of ASC 326 on January 1, 2022, the Company calculated the allowance for loan losses by commercial and consumer portfolio segments:under the incurred loss methodology. The following two tables are disclosures related to the allowance for loan losses in prior periods under this methodology.
Three months ended September 30, 2017 | ||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||
Owner | Non-owner | |||||||||||||||||||||||||
occupied | occupied | Real | Home | |||||||||||||||||||||||
(dollars in thousands) | RE | RE | Construction | Business | Estate | equity | Construction | Other | Total | |||||||||||||||||
Balance, beginning of period | $ | 2,964 | 2,981 | 350 | 3,857 | 3,061 | 1,608 | 328 | 295 | 15,444 | ||||||||||||||||
Provision for loan losses | (141 | ) | 634 | (122 | ) | 213 | 160 | (196 | ) | (47 | ) | (1 | ) | 500 | ||||||||||||
Loan charge-offs | - | - | - | (388 | ) | - | - | - | (11 | ) | (399 | ) | ||||||||||||||
Loan recoveries | - | 1 | - | 31 | 1 | - | - | 1 | 34 | |||||||||||||||||
Net loan charge-offs | - | 1 | - | (357 | ) | 1 | - | - | (10 | ) | (365 | ) | ||||||||||||||
Balance, end of period | $ | 2,823 | 3,616 | 228 | 3,713 | 3,222 | 1,412 | 281 | 284 | 15,579 | ||||||||||||||||
Net charge-offs to average loans (annualized) | 0.11% | |||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.17% | |||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 278.05% |
Three months ended September 30, 2016 | ||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||
Owner | Non-owner | |||||||||||||||||||||||||||
occupied | occupied | Real | Home | |||||||||||||||||||||||||
(dollars in thousands) | RE | RE | Construction | Business | Estate | equity | Construction | Other | Total | |||||||||||||||||||
Balance, beginning of period | $ | 2,797 | 3,011 | 350 | 4,019 | 2,302 | 1,296 | 212 | 330 | 14,317 | ||||||||||||||||||
Provision for loan losses | 98 | 47 | (53 | ) | 337 | 215 | 119 | (5 | ) | 67 | 825 | |||||||||||||||||
Loan charge-offs | - | (25 | ) | - | (515 | ) | - | (43 | ) | - | (100 | ) | (683 | ) | ||||||||||||||
Loan recoveries | - | 5 | - | 13 | - | - | - | 1 | 19 | |||||||||||||||||||
Net loan charge-offs | - | (20 | ) | - | (502 | ) | - | (43 | ) | - | (99 | ) | (664 | ) | ||||||||||||||
Balance, end of period | $ | 2,895 | 3,038 | 297 | 3,854 | 2,517 | 1,372 | 207 | 298 | 14,478 | ||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.24% | |||||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.30% | |||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 258.3% | |||||||||||||||||||||||||||
Nine months ended September 30, 2017 | ||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||
Owner | Non-owner | |||||||||||||||||||||||||||
occupied | occupied | Real | Home | |||||||||||||||||||||||||
(dollars in thousands) | RE | RE | Construction | Business | Estate | equity | Construction | Other | Total | |||||||||||||||||||
Balance, beginning of period | $ | 2,843 | 2,778 | 295 | 4,123 | 2,780 | 1,475 | 252 | 309 | 14,855 | ||||||||||||||||||
Provision for loan losses | (20 | ) | 1,257 | (67 | ) | 31 | 359 | (75 | ) | 29 | (14 | ) | 1,500 | |||||||||||||||
Loan charge-offs | - | (433 | ) | - | (518 | ) | - | - | - | (11 | ) | (962 | ) | |||||||||||||||
Loan recoveries | - | 14 | - | 77 | 83 | 12 | - | - | 186 | |||||||||||||||||||
Net loan charge-offs | - | (419 | ) | - | (441 | ) | 83 | 12 | - | (11 | ) | (776 | ) | |||||||||||||||
Balance, end of period | $ | 2,823 | 3,616 | 228 | 3,713 | 3,222 | 1,412 | 281 | 284 | 15,579 | ||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.08% | |||||||||||||||||||||||||||
Nine months ended September 30, 2016 | ||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||
Owner | Non-owner | |||||||||||||||||||||||||||
occupied | occupied | Real | Home | |||||||||||||||||||||||||
(dollars in thousands) | RE | RE | Construction | Business | Estate | equity | Construction | Other | Total | |||||||||||||||||||
Balance, beginning of period | $ | 2,347 | 3,187 | 338 | 3,800 | 2,070 | 1,202 | 313 | 372 | 13,629 | ||||||||||||||||||
Provision for loan losses | 553 | (81 | ) | 2 | 666 | 641 | 236 | (106 | ) | 114 | 2,025 | |||||||||||||||||
Loan charge-offs | (5 | ) | (100 | ) | (43 | ) | (862 | ) | (194 | ) | (66 | ) | - | (192 | ) | (1,462 | ) | |||||||||||
Loan recoveries | - | 32 | - | 250 | - | - | - | 4 | 286 | |||||||||||||||||||
Net loan charge-offs | (5 | ) | (68 | ) | (43 | ) | (612 | ) | (194 | ) | (66 | ) | - | (188 | ) | (1,176 | ) | |||||||||||
Balance, end of period | $ | 2,895 | 3,038 | 297 | 3,854 | 2,517 | 1,372 | 207 | 298 | 14,478 | ||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.15% |
Three months ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||||||||||
(dollars in thousands) | Owner occupied RE | Non-owner occupied RE | Construction | Business | Real Estate | Home equity | Construction | Other | Total | |||||||||||||||||||||||||||
Balance, beginning of period | $ | 7,154 | 15,195 | 827 | 6,848 | 9,666 | 2,688 | 685 | 436 | 43,499 | ||||||||||||||||||||||||||
Provision for loan losses | (149 | ) | (2,096 | ) | 124 | (226 | ) | 362 | (129 | ) | 68 | 146 | (1,900 | ) | ||||||||||||||||||||||
Loan charge-offs | - | - | - | - | - | - | - | (8 | ) | (8 | ) | |||||||||||||||||||||||||
Loan recoveries | 94 | 124 | - | 100 | - | 3 | - | - | 321 | |||||||||||||||||||||||||||
Net loan recoveries (charge-offs) | 94 | 124 | - | 100 | - | 3 | - | (8 | ) | 313 | ||||||||||||||||||||||||||
Balance, end of period | $ | 7,099 | 13,223 | 951 | 6,722 | 10,028 | 2,562 | 753 | 574 | 41,912 | ||||||||||||||||||||||||||
Net charge-offs (recoveries) to average loans (annualized) | (0.06 | %) | ||||||||||||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.86 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 619.47 | % |
Six months ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||||||||||
(dollars in thousands) | Owner occupied RE | Non-owner occupied RE | Construction | Business | Real Estate | Home Equity | Construction | Other | Total | |||||||||||||||||||||||||||
Balance, beginning of period | $ | 8,145 | 12,049 | 1,154 | 7,845 | 10,453 | 3,249 | 747 | �� | 507 | 44,149 | |||||||||||||||||||||||||
Provision for loan losses | (1,140 | ) | 1,050 | (203 | ) | (1,011 | ) | (425 | ) | (552 | ) | 6 | 75 | (2,200 | ) | |||||||||||||||||||||
Loan charge-offs | - | - | - | (268 | ) | - | (139 | ) | - | (8 | ) | (415 | ) | |||||||||||||||||||||||
Loan recoveries | 94 | 124 | - | 156 | - | 4 | - | - | 378 | |||||||||||||||||||||||||||
Net loan recoveries (charge-offs) | 94 | 124 | - | (112 | ) | - | (135 | ) | - | (8 | ) | (37 | ) | |||||||||||||||||||||||
Balance, end of period | $ | 7,099 | 13,223 | 951 | 6,722 | 10,028 | 2,562 | 753 | 574 | 41,912 | ||||||||||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.00 | % |
The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology under the incurred loss methodology.
September 30, 2017 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||
Individually evaluated | $ | 2,280 | 1,462 | 3,742 | 9,831 | 2,726 | 12,557 | ||||||
Collectively evaluated | 8,100 | 3,737 | 11,837 | 856,021 | 459,161 | 1,315,182 | |||||||
Total | $ | 10,380 | 5,199 | 15,579 | 865,852 | 461,887 | 1,327,739 | ||||||
December 31, 2016 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
Commercial | Consumer | Total | Commercial | Consumer | Total | ||||||||
Individually evaluated | $ | 1,874 | 770 | 2,644 | 8,867 | 2,290 | 11,157 | ||||||
Collectively evaluated | 8,165 | 4,046 | 12,211 | 752,590 | 399,897 | 1,152,487 | |||||||
Total | $ | 10,039 | 4,816 | 14,855 | 761,457 | 402,187 | 1,163,644 |
December 31, 2021 | ||||||||||||||||||||||||
Allowance for loan losses | Recorded investment in loans | |||||||||||||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | ||||||||||||||||||
Individually evaluated | $ | 623 | 213 | 836 | 3,435 | 4,728 | 8,163 | |||||||||||||||||
Collectively evaluated | 20,107 | 9,465 | 29,572 | 1,549,837 | 931,877 | 2,481,714 | ||||||||||||||||||
Total | $ | 20,730 | 9,678 | 30,408 | 1,553,272 | 936,605 | 2,489,877 |
June 30, 2021 | ||||||||||||||||||||||||
Allowance for loan losses | Recorded investment in loans | |||||||||||||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | ||||||||||||||||||
Individually evaluated | $ | 1,454 | 134 | 1,588 | 5,308 | 6,079 | 11,387 | |||||||||||||||||
Collectively evaluated | 26,536 | 13,788 | 40,324 | 1,415,635 | 827,113 | 2,242,748 | ||||||||||||||||||
Total | $ | 27,995 | 13,917 | 41,912 | 1,420,943 | 833,192 | 2,254,135 |
22
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.
The following table presents an analysis of collateral-dependent loans of the Company as of June 30, 2022.
June 30, 2022 | ||||||||||||||||
Real | Business | |||||||||||||||
(dollars in thousands) | estate | assets | Other | Total | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | $ | - | - | - | - | |||||||||||
Non-owner occupied RE | 121 | - | - | 121 | ||||||||||||
Construction | - | - | - | - | ||||||||||||
Business | - | - | - | - | ||||||||||||
Total commercial | 121 | - | - | 121 | ||||||||||||
Consumer | ||||||||||||||||
Real estate | - | - | - | - | ||||||||||||
Home equity | 200 | - | - | 200 | ||||||||||||
Construction | - | - | - | - | ||||||||||||
Other | - | - | - | - | ||||||||||||
Total consumer | 200 | - | - | 200 | ||||||||||||
Total | $ | 321 | - | - | 321 |
Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
Allowance for Credit Losses - Unfunded Loan Commitments
The allowance for credit losses for unfunded loan commitments was $2.3 million at June 30, 2022 and is separately classified on the balance sheet within other liabilities. Prior to the adoption of CECL, the Company’s reserve for unfunded commitments was not material. The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the six months ended June 30, 2022.
Six months ended | ||||
(dollars in thousands) | June 30, 2022 | |||
Balance, beginning of period | - | |||
Adjustment for adoption of CECL | $ | 2,000 | ||
Provision for loan losses | 330 | |||
Balance, end of period | $ | 2,330 |
NOTE 5 – Troubled Debt Restructurings
At SeptemberJune 30, 2017,2022, the Company had 1913 loans totaling $7.7$5.8 million compared to 1714 loans totaling $6.7$6.3 million at December 31, 2016,2021, which were considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of the workout plan for individual loan relationships, the Company may restructure loan terms to assist borrowers facing financial challenges in the current economic environment. To date, the Company has restored four commercial
The were no renewals or modifications to any loans previously classified asconsidered TDRs to accrual status.
The following table summarizes the concession at the time of modification and the recorded investment in the Company’s TDRs before and after their modification during the ninethree and six months ended SeptemberJune 30, 20172022. For the three and 2016, respectively.six months ended June 30, 2021, renewals and modifications were not material.
For the nine months ended September 30, 2017 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
modification | modification | |||||||||||||||
Renewals | Reduced | Converted | Maturity | Total | outstanding | outstanding | ||||||||||
deemed a | or deferred | to interest | date | Number | recorded | recorded | ||||||||||
(dollars in thousands) | concession | payments | only | extensions | of loans | investment | investment | |||||||||
Commercial | ||||||||||||||||
Non-owner occupied RE | 1 | - | - | - | 1 | $ | 976 | $ | 976 | |||||||
Business | 1 | 1 | - | - | 2 | 378 | 387 | |||||||||
Total loans | 2 | 1 | - | - | 3 | $ | 1,354 | $ | 1,363 | |||||||
For thenine months ended September 30, 2016 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
modification | modification | |||||||||||||||
Renewals | Reduced | Converted | Maturity | Total | outstanding | outstanding | ||||||||||
deemed a | or deferred | to interest | date | Number | recorded | recorded | ||||||||||
(dollars in thousands) | concession | payments | only | extensions | of loans | investment | investment | |||||||||
Commercial | ||||||||||||||||
Owner occupied | 1 | - | - | - | 1 | $ | 18 | $ | 22 | |||||||
Business | 1 | - | - | - | 1 | 2,381 | 2,381 | |||||||||
Consumer | ||||||||||||||||
Real estate | 1 | - | - | - | 1 | 188 | 188 | |||||||||
Other | 1 | - | - | - | 1 | 26 | 30 | |||||||||
Total loans | 4 | - | - | - | 4 | $ | 2,613 | $ | 2,621 |
As of SeptemberJune 30, 20172022 and 2021, there were no loans modified as TDRsa TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date. There was one such loan at September 30, 2016 with a recorded investment
23
NOTE 6 – Derivative Financial Instruments
The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change.
The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.
The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge.
The following table summarizes the Company’s outstanding financial derivative instruments at SeptemberJune 30, 20172022 and December 31, 2016.2021.
September 30, 2017 | |||||||||
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 29,258 | Other assets | $ | 343 | ||||
MBS forward sales commitments | 18,000 | Other assets | 46 | ||||||
Total derivative financial instruments | $ | 47,258 | $ | 389 | |||||
December 31, 2016 | |||||||||
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 17,986 | Other assets | $ | 256 | ||||
MBS forward sales commitments | 14,250 | Other assets | (3 | ) | |||||
Total derivative financial instruments | $ | 32,236 | $ | 253 |
June 30, 2022 | ||||||||||
Fair Value | ||||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | |||||||
Mortgage loan interest rate lock commitments | $ | 23,136 | Other assets | $ | 250 | |||||
MBS forward sales commitments | 15,000 | Other liabilities | (31 | ) | ||||||
Total derivative financial instruments | $ | 38,136 | $ | 219 | ||||||
December 31, 2021 | ||||||||||
Fair Value | ||||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | |||||||
Mortgage loan interest rate lock commitments | $ | 32,478 | Other assets | $ | 425 | |||||
MBS forward sales commitments | 21,000 | Other liabilities | (41 | ) | ||||||
Total derivative financial instruments | $ | 53,478 | $ | 384 |
NOTE 7 – Fair Value Accounting
FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted market price in active marketsQuoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market.
Level 1 – Quoted market price in active markets | |
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market. |
Level 2 – Significant other observable inputsObservable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term
24
Level 3 – Significant unobservable inputs
Level 2 – Significant other observable inputs | |
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans. | |
Level 3 – Significant unobservable inputs | |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data. |
The methods of determining the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flowpresented in this note are consistent with our methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may resultdisclosed in a significant portionNote 14 of the fair value being derived from unobservable data.
Following is a description of valuation methodologies used for assets recorded at fair value.
Investment SecuritiesSecurities available for sale are valuedCompany’s 2021 Annual Report on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Other Investments, such as FHLB stock, approximates fair value based on their redemption provisions.
Mortgage Loans Held for SaleLoans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.
LoansThe Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2.Form 10-K. The Company’s current loan and appraisal policies require the Bank to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either throughportfolio is initially fair valued using a new external appraisal or an appraisal evaluation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimatedsegmented approach, using the present valueeight categories of expected future cash flows to be realized on the loan, which is alsoloans as disclosed in Note 4 – Loans and Allowance for Credit Losses. Loans are considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation.classification.
Other Real Estate Owned (“OREO”)OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the OREO as nonrecurring Level 3.
Derivative Financial InstrumentsThe Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and an estimate of the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expenses (Level 2). The Company estimates the fair value of forward sales commitments based on quoted MBS prices (Level 2).
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20172022 and December 31, 2016.2021.
September 30, 2017 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale | |||||||||
US government agencies | $ | - | 8,710 | - | 8,710 | ||||
SBA securities | - | 4,339 | - | 4,339 | |||||
State and political subdivisions | - | 20,357 | - | 20,357 | |||||
Mortgage-backed securities | - | 45,034 | - | 45,034 | |||||
Mortgage loans held for sale | - | 9,124 | - | 9,124 | |||||
Interest rate lock commitments | - | 343 | - | 343 | |||||
MBS forward sales commitments | - | 46 | - | 46 | |||||
Total assets measured at fair value on a recurring basis | $ | - | 87,953 | - | 87,953 | ||||
December 31, 2016 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale: | |||||||||
US government agencies | $ | - | 6,159 | - | 6,159 | ||||
SBA securities | - | 1,437 | - | 1,437 | |||||
State and political subdivisions | - | 20,474 | - | 20,474 | |||||
Mortgage-backed securities | - | 36,410 | - | 36,410 | |||||
Mortgage loans held for sale | - | 7,801 | - | 7,801 | |||||
Interest rate lock commitments | - | 256 | - | 256 | |||||
Total assets measured at fair value on a recurring basis | $ | - | 72,537 | - | 72,537 | ||||
Liabilities | |||||||||
MBS forward sales commitments | $ | - | 3 | - | 3 | ||||
Total liabilities measured at fair value on a recurring basis | $ | - | 3 | - | 3 |
The Company has no liabilities carried at fair value or measured at fair value on a recurring basis as
June 30, 2022 | ||||||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Corporate bonds | $ | - | 1,981 | - | 1,981 | |||||||||||
US treasuries | - | 905 | - | 905 | ||||||||||||
US government agencies | - | 11,253 | - | 11,253 | ||||||||||||
State and political subdivisions | - | 19,979 | - | 19,979 | ||||||||||||
Asset-backed securities | - | 7,753 | - | 7,753 | ||||||||||||
Mortgage-backed securities | - | 57,120 | - | 57,120 | ||||||||||||
Mortgage loans held for sale | - | 18,329 | - | 18,329 | ||||||||||||
Mortgage loan interest rate lock commitments | - | 250 | - | 250 | ||||||||||||
Total assets measured at fair value on a recurring basis | $ | - | 117,570 | - | 117,570 | |||||||||||
Liabilities | ||||||||||||||||
MBS forward sales commitments | $ | - | 31 | - | 31 | |||||||||||
Total liabilities measured at fair value on a recurring basis | $ | - | 31 | - | 31 |
25
December 31, 2021 | |||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets | |||||||||||||
Securities available for sale: | |||||||||||||
Corporate bonds | $ | - | 2,188 | - | 2,188 | ||||||||
US treasuries | - | 992 | - | 992 | |||||||||
US government agencies | - | 14,169 | - | 14,169 | |||||||||
SBA securities | - | 438 | - | 438 | |||||||||
State and political subdivisions | - | 25,176 | - | 25,176 | |||||||||
Asset-backed securities | - | 10,164 | - | 10,164 | |||||||||
Mortgage-backed securities | - | 67,154 | - | 67,154 | |||||||||
Mortgage loans held for sale | - | 13,556 | - | 13,556 | |||||||||
Mortgage loan interest rate lock commitments | - | 425 | - | 425 | |||||||||
Total assets measured at fair value on a recurring basis | $ | - | 134,262 | - | 134,262 | ||||||||
Liabilities | |||||||||||||
MBS forward sales commitments | $ | - | 41 | - | 41 | ||||||||
Total liabilities measured at fair value on a recurring basis | $ | - | 41 | - | 41 |
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of September 30, 2017. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs.
The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of SeptemberJune 30, 20172022 and December 31, 2016.2021.
As of September 30, 2017 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Impaired loans | $ | - | 2,669 | 6,146 | 8,815 | ||||
Other real estate owned | - | 307 | 113 | 420 | |||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 2,976 | 6,259 | 9,235 |
As of December 31, 2016 | |||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||
Assets | |||||||||
Impaired loans | $ | - | 4,075 | 4,438 | 8,513 | ||||
Other real estate owned | - | 526 | 113 | 639 | |||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 4,601 | 4,551 | 9,152 |
As of June 30, 2022 | |||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets | |||||||||||||
Individually assessed loans | $ | - | 321 | 3,688 | 4,009 | ||||||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 321 | 3,688 | 4,009 |
As of December 31, 2021 | |||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets | |||||||||||||
Impaired loans | $ | - | 5,262 | 2,065 | 7,327 | ||||||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 5,262 | 2,065 | 7,327 |
The Company hashad no liabilities carried at fair value or measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016.basis.
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value of Financial Instruments
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.
The following is a description
26
Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, federal funds purchased, and securities sold under agreement to repurchase.
Deposits –Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
FHLB Advances and Other Borrowings –Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
Junior subordinated debentures – Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.
The estimated fair values of the Company’s financial instruments at SeptemberJune 30, 20172022 and December 31, 20162021 are as follows:
September 30, 2017 | |||||||||||
Carrying | Fair | ||||||||||
(dollars in thousands) | Amount | Value | Level 1 | Level 2 | Level 3 | ||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 3,064 | 3,064 | - | - | 3,064 | |||||
Loans, net | 1,312,160 | 1,315,125 | - | 2,669 | 1,312,456 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 1,342,577 | 1,246,252 | - | 1,246,252 | - | ||||||
FHLB and other borrowings | 39,200 | 40,452 | - | 40,452 | - | ||||||
Junior subordinated debentures | 13,403 | 12,595 | - | 12,595 | - | ||||||
December 31, 2016 | |||||||||||
Carrying | Fair | ||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | |||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 5,742 | 5,742 | - | - | 5,742 | |||||
Loans, net | 1,148,789 | 1,149,527 | - | 4,075 | 1,145,452 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 1,091,151 | 1,004,923 | - | 1,004,923 | - | ||||||
FHLB and other borrowings | 115,200 | 115,825 | - | 115,825 | - | ||||||
Junior subordinated debentures | 13,403 | 12,026 | - | 12,026 | - |
June 30, 2022 | ||||||||||||||||
(dollars in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||
Financial Assets: | ||||||||||||||||
Other investments, at cost | $ | 5,065 | 5,065 | - | - | 5,065 | ||||||||||
Loans1 | 2,804,524 | 2,688,356 | - | - | 2,688,356 | |||||||||||
Financial Liabilities: | ||||||||||||||||
Deposits | 2,822,594 | 2,419,809 | - | 2,419,809 | - | |||||||||||
Subordinated debentures | 36,160 | 36,651 | - | 36,651 | - |
December 31, 2021 | ||||||||||||||||
(dollars in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||
Financial Assets: | ||||||||||||||||
Other investments, at cost | $ | 4,021 | 4,021 | - | - | 4,021 | ||||||||||
Loans1 | 2,451,306 | 2,422,621 | - | - | 2,422,621 | |||||||||||
Financial Liabilities: | ||||||||||||||||
Deposits | 2,563,826 | 2,327,055 | - | 2,327,055 | - | |||||||||||
Subordinated debentures | 36,106 | 33,936 | - | 33,936 | - |
1 | Carrying amount is net of the allowance for credit losses or loan losses, as applicable, and previously presented individually assessed or impaired loans. |
NOTE 8 – Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”. As of June 30, 2022, we leased six of our offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2028 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was 7.39 years as of June 30, 2022.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was 2.28% as of June 30, 2022.
The total operating lease costs were $768,000 and $640,000 for the three months ended June 30, 2022 and 2021, respectively, and $1.5 million and $1.4 million for the six months ended June 30, 2022 and 2021, respectively. The right-of-use (ROU) asset, included in property and equipment, and lease liability, included in other liabilities, was $23.7 million and $25.3 million as of June 30, 2022, respectively, compared to $26.6 million and $28.0 million as of December 31, 2021, respectively. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.
27
Maturities of lease liabilities as of June 30, 2022 were as follows:
Operating | ||||
(dollars in thousands) | Leases | |||
2022 | $ | 377 | ||
2023 | 1,938 | |||
2024 | 1,990 | |||
2025 | 2,045 | |||
2026 | 2,096 | |||
Thereafter | 24,093 | |||
Total undiscounted lease payments | 32,539 | |||
Discount effect of cash flows | 7,263 | |||
Total lease liability | $ | 25,276 |
NOTE 89 – Earnings Per Common Share
The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the threethree- and nine monthssix- month periods ended SeptemberJune 30, 20172022 and 2016.2021. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at SeptemberJune 30, 2017.2022. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At SeptemberJune 30, 20172022 and 2016,2021, there were 109,450162,366 and 108,457113,239 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.
Three months ended | Nine months ended | ||||||||
September 30, | September 30, | ||||||||
(dollars in thousands, except share data) | 2017 | 2016 | 2017 | 2016 | |||||
Numerator: | |||||||||
Net income available to common shareholders | $ | 4,250 | 3,433 | 10,965 | 9,745 | ||||
Denominator: | |||||||||
Weighted-average common shares outstanding – basic | 7,281,594 | 6,322,073 | 6,905,017 | 6,299,009 | |||||
Common stock equivalents | 386,882 | 418,678 | 386,147 | 403,466 | |||||
Weighted-average common shares outstanding – diluted | 7,668,476 | 6,740,751 | 7,291,164 | 6,702,475 | |||||
Earnings per common share: | |||||||||
Basic | $ | 0.58 | 0.54 | 1.59 | 1.55 | ||||
Diluted | $ | 0.55 | 0.51 | 1.50 | 1.45 |
NOTE 9 – Reportable Segments
The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate. The following schedule presents financial information for each reportable segment.
Three months ended | Three months ended | ||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | ||||||||||||||||||||||||||||||
Commercial | Commercial | ||||||||||||||||||||||||||||||
and Retail | Mortgage | Elimin- | Consol- | and Retail | Mortgage | Elimin- | Consol- | ||||||||||||||||||||||||
(dollars in thousands) | Banking | Banking | Corporate | ations | idated | Banking | Banking | Corporate | ations | idated | |||||||||||||||||||||
Interest income | $ | 15,868 | 87 | 2 | (2 | ) | 15,955 | 12,824 | 87 | 1 | - | 12,912 | |||||||||||||||||||
Interest expense | 2,529 | - | 119 | (2 | ) | 2,646 | 1,932 | - | 100 | - | 2,032 | ||||||||||||||||||||
Net interest income (loss) | 13,339 | 87 | (117 | ) | - | 13,309 | 10,892 | 87 | (99 | ) | - | 10,880 | |||||||||||||||||||
Provision for loan losses | 500 | - | - | - | 500 | 825 | - | - | - | 825 | |||||||||||||||||||||
Noninterest income | 1,139 | 1,403 | - | - | 2,542 | 1,014 | 2,003 | - | - | 3,017 | |||||||||||||||||||||
Noninterest expense | 7,776 | 970 | 60 | - | 8,806 | 6,484 | 1,256 | 60 | - | 7,800 | |||||||||||||||||||||
Net income (loss) before taxes | 6,202 | 520 | (177 | ) | - | 6,545 | 4,597 | 834 | (159 | ) | - | 5,272 | |||||||||||||||||||
Income tax (provision) benefit | (2,165 | ) | (192 | ) | 62 | - | (2,295 | ) | (1,596 | ) | (299 | ) | 56 | - | (1,839 | ) | |||||||||||||||
Net income (loss) | $ | 4,037 | 328 | (115 | ) | - | 4,250 | 3,001 | 535 | (103 | ) | - | 3,433 | ||||||||||||||||||
Total assets | $ | 1,548,771 | 8,476 | 160,905 | (160,468 | ) | 1,557,684 | 1,277,213 | 9,678 | 119,431 | (116,576 | ) | 1,289,746 | ||||||||||||||||||
Nine months ended | Nine months ended | ||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | ||||||||||||||||||||||||||||||
Commercial | Commercial | ||||||||||||||||||||||||||||||
and Retail | Mortgage | Elimin- | Consol- | and Retail | Mortgage | Elimin- | Consol- | ||||||||||||||||||||||||
(dollars in thousands) | Banking | Banking | Corporate | ations | idated | Banking | Banking | Corporate | ations | idated | |||||||||||||||||||||
Interest income | $ | 44,612 | 233 | 9 | (9 | ) | 44,845 | 37,501 | 243 | 1 | (1 | ) | 37,744 | ||||||||||||||||||
Interest expense | 7,193 | - | 393 | (9 | ) | 7,577 | 5,750 | - | 295 | (1 | ) | 6,044 | |||||||||||||||||||
Net interest income (loss) | 37,419 | 233 | (384 | ) | - | 37,268 | 31,751 | 243 | (294 | ) | - | 31,700 | |||||||||||||||||||
Provision for loan losses | 1,500 | - | - | - | 1,500 | 2,025 | - | - | - | 2,025 | |||||||||||||||||||||
Noninterest income | 3,093 | 4,063 | - | - | 7,156 | 3,036 | 5,685 | - | - | 8,721 | |||||||||||||||||||||
Noninterest expense | 22,890 | 2,853 | 186 | - | 25,929 | 19,516 | 3,471 | 183 | - | 23,170 | |||||||||||||||||||||
Net income before taxes | 16,122 | 1,443 | (570 | ) | - | 16,995 | 13,246 | 2,457 | (477 | ) | - | 15,226 | |||||||||||||||||||
Income tax (provision) benefit | (5,695 | ) | (534 | ) | 199 | - | (6,030 | ) | (4,686 | ) | (909 | ) | 114 | - | (5,481 | ) | |||||||||||||||
Net income (loss) | $ | 10,427 | 909 | (371 | ) | - | 10,965 | 8,560 | 1,548 | (363 | ) | - | 9,745 | ||||||||||||||||||
Total assets | $ | 1,548,771 | 8,476 | 160,905 | (160,468 | ) | 1,557,684 | 1,277,213 | 9,678 | 119,431 | (116,576 | ) | 1,289,746 |
Three months ended June 30, | Six months ended June 30, | ||||||||||||
(dollars in thousands, except share data) | 2022 | 2021 | 2022 | 2021 | |||||||||
Numerator: | |||||||||||||
Net income available to common shareholders | $ | 7,240 | 10,323 | 15,210 | 20,689 | ||||||||
Denominator: | |||||||||||||
Weighted-average common shares outstanding – basic | 7,957,631 | 7,847,516 | 7,944,814 | 7,811,217 | |||||||||
Common stock equivalents | 97,279 | 140,099 | 130,682 | 137,077 | |||||||||
Weighted-average common shares outstanding – diluted | 8,054,910 | 7,987,615 | 8,075,496 | 7,948,294 | |||||||||
Earnings per common share: | |||||||||||||
Basic | $ | 0.91 | 1.32 | 1.91 | 2.65 | ||||||||
Diluted | $ | 0.90 | 1.29 | 1.88 | 2.60 |
Commercial and retail banking.The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.
Mortgage banking. The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors.
Corporate. Corporate is comprised primarily28
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.Analysis of Financial Condition and Results of Operations.
The following discussion reviews our results of operations for the three-three and nine-monthsix month periods ended SeptemberJune 30, 20172022 as compared to the three-three and nine-monthsix month periods ended SeptemberJune 30, 20162021 and assesses our financial condition as of SeptemberJune 30, 20172022 as compared to December 31, 2016.2021. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 20162021 included in our Annual Report on Form 10-K for that period. Results for the three-three and nine-monthsix month periods ended SeptemberJune 30, 20172022 are not necessarily indicative of the results for the year ending December 31, 20172022 or any future period.
CAUTIONARYWARNINGREGARDING FORWARD-LOOKING STATEMENTS
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc. and its consolidated subsidiary. References to the “Bank” refer to Southern First Bank.
Cautionary Warning Regarding forward-looking statements
This report, including information included or incorporated by reference in this report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described under Item 1A- Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2016, as well as the following:to:
● | The continuing impact of COVID-19 and its variants on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers; |
● | Restrictions or conditions imposed by our regulators on our operations; |
● | Increases in competitive pressure in the banking and financial services industries; |
● |
| |
| ||
Changes in access to funding or increased regulatory requirements with regard to funding; |
● | Changes in deposit flows; |
● | Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors; |
● | Credit losses due to loan concentration; |
● | Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; |
● | Our ability to successfully execute our business strategy; |
● | Our ability to attract and retain key personnel; |
● | The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets; |
● | Risks with respect to future mergers or acquisitions, including our ability to successfully expand and integrate the businesses and operations that we acquire and realize the anticipated benefits of the mergers or acquisitions; |
● | Changes in the interest rate environment which could reduce anticipated or actual margins; |
29
● | Changes in political conditions or the legislative or regulatory environment, including new governmental initiatives affecting the financial services industry; |
● | Changes in economic conditions resulting in, among other things, a deterioration in credit quality; |
● | Changes occurring in business conditions and inflation; |
● |
|
● | Changes in technology; |
● | The adequacy of the level of our allowance for |
● | Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for |
● | Changes in monetary and tax policies; |
● | The rate of delinquencies and amounts of loans charged-off; |
● | The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; |
● | Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements; |
● | Adverse changes in asset quality and resulting credit risk-related losses and expenses; |
● | Changes in accounting |
● | Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others; |
● | Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed; |
● | The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and |
● | Other risks and uncertainties detailed in Part I, |
If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and “Risk Factors” under Part II, Item 1A of this Quarterly Report on Form 10-Q. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements.statements, except as required by law.
30
OVERVIEW
Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as "ClientFIRST."“ClientFIRST.”
At SeptemberJune 30, 2017,2022, we had total assets of $1.6$3.29 billion, a 16.2%12.4% increase from total assets of $1.3$2.93 billion at December 31, 2016.2021. The largest componentscomponent of our total assets are netis loans and securities which were $1.3$2.85 billion and $81.5 million, respectively,$2.49 billion at SeptemberJune 30, 2017. Comparatively, our net loans2022 and securities totaled $1.2 billion and $70.2 million, respectively, at December 31, 2016.2021, respectively. Our liabilities and shareholders’ equity at SeptemberJune 30, 20172022 totaled $1.4$3.01 billion and $147.4$282.6 million, respectively, compared to liabilities of $1.2$2.65 billion and shareholders’ equity of $109.9$277.9 million at December 31, 2016.2021. The principal component of our liabilities is deposits which were $1.3$2.87 billion and $1.1$2.56 billion at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.
During the second quarter of 2017, we issued a total of 805,000 shares of our common stock at $32.75 per share in a public offering. Proceeds from the offering were used to improve our capital structure, including to repay our former $10 million holding company line of credit, to fund future organic growth, and for working capital and other general corporate purposes.
Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.
Our net income to common shareholders was $4.3$7.2 million and $3.4$10.3 million for the three months ended SeptemberJune 30, 20172022 and 2016, respectively, an increase of $817 thousand, or 23.8%.2021, respectively. Diluted earnings per share (“EPS”) was $0.55$0.90 for the thirdsecond quarter of 20172022 as compared to $0.51$1.29 for the same period in 2016.2021. The increasedecrease in net income resultedwas primarily fromdriven by an increase in net interest income, partially offset bythe provision for credit losses and a decrease in noninterestmortgage banking income, andas well as an increase in noninterest expense.
Our net income to common shareholders was $11.0$15.2 million and $9.7$20.7 million for the ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively, an increase of $1.2 million, or 12.5%.2021. Diluted EPS was $1.50$1.88 for the ninesix months ended SeptemberJune 30, 20172022 as compared to $1.45$2.60 for the same period in 2016.2021. The increasedecrease in net income resultedwas primarily fromdriven by an increase in net interest income, partially offset bythe provision for credit losses and a decrease in noninterestmortgage banking income, andas well as an increase in noninterest expense.expenses.
Economic conditions, competition, and
In addition, during the monetary and fiscal policiessecond quarter of 2022, we relocated our headquarters in Greenville, South Carolina to a newly constructed, 107,000 square foot building. As a result of the Federal government significantly affect most financial institutions,relocation, we disposed of assets with a book value of $489,000, including the Bank. Lendingleasehold improvements and deposit activitiesfurniture and fee income generation are influenced by levelsfixtures, and recorded a net loss on disposal of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.$394,000.
RESULTS OF OPERATIONS
Net Interest Income and Margin
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $13.3$24.9 million for the three-month period ended September 30, 2017,second quarter of 2022, a 22.3%16.1% increase over net interest income of $10.9$21.4 million for the second quarter of 2021, driven by an increase in interest income on loans as a result of loan growth during the past 12 months. In addition, our net interest margin, on a tax-equivalent basis (TE), was 3.35% for the second quarter of 2022 compared to 3.50% for the same period in 2016. In comparison, our average earning assets increased 22.8%, or $274.5 million, during the third quarter of 2017 compared to the third quarter of 2016, while our average interest-bearing liabilities increased by $188.6 million during the same period. Our net interest income was $37.3 million for the nine-month period ended September 30, 2017, a 17.6% increase over net interest income of $31.7 million for the same period in 2016. In comparison, our average earning assets increased 20.6%, or $240.2 million, during the first nine months of 2017 compared to the first nine months of 2016, while our average interest-bearing liabilities increased by $149.8 million during the same period. The increase in average earning assets is primarily related to an increase in average loans and federal funds sold, while the increase in average interest-bearing liabilities is primarily a result of an increase in interest-bearing deposits, partially offset by a decrease in our FHLB advances and other borrowings.2021.
We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three-three and nine-six month periods ended SeptemberJune 30, 20172022 and 2016.2021. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table demonstratestables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.
31
The following tables entitled “Average Balances, Income and Expenses, Yield and Rates” set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments owned have an original maturity of over one year. Nonaccrual loans are included in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.
Average Balances, Income and Expenses, Yields and Rates | ||||||||||||||||
For the Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||
(dollars in thousands) | Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | ||||||||||
Interest-earning assets | ||||||||||||||||
Federal funds sold | $ | 69,907 | $ | 230 | 1.31% | $ | 22,611 | $ | 31 | 0.55% | ||||||
Investment securities, taxable | 63,258 | 327 | 2.05% | 60,219 | 267 | 1.76% | ||||||||||
Investment securities, nontaxable(2) | 20,222 | 187 | 3.67% | 21,095 | 206 | 3.89% | ||||||||||
Loans(3) | 1,322,193 | 15,282 | 4.59% | 1,097,201 | 12,486 | 4.53% | ||||||||||
Total interest-earning assets | 1,475,580 | 16,026 | 4.31% | 1,201,126 | 12,990 | 4.30% | ||||||||||
Noninterest-earning assets | 74,295 | 60,801 | ||||||||||||||
Total assets | $ | 1,549,875 | $ | 1,261,927 | ||||||||||||
Interest-bearing liabilities | ||||||||||||||||
NOW accounts | $ | 214,929 | 98 | 0.18% | $ | 205,795 | 78 | 0.15% | ||||||||
Savings & money market | 518,918 | 1,098 | 0.84% | 326,722 | 329 | 0.40% | ||||||||||
Time deposits | 326,732 | 888 | 1.08% | 267,609 | 550 | 0.82% | ||||||||||
Total interest-bearing deposits | 1,060,579 | 2,084 | 0.78% | 800,126 | 957 | 0.48% | ||||||||||
FHLB advances and other borrowings | 50,418 | 446 | 3.51% | 122,308 | 980 | 3.19% | ||||||||||
Junior subordinated debentures | 13,403 | 116 | 3.43% | 13,403 | 95 | 2.82% | ||||||||||
Total interest-bearing liabilities | 1,124,400 | 2,646 | 0.93% | 935,837 | 2,032 | 0.86% | ||||||||||
Noninterest-bearing liabilities | 280,181 | 221,797 | ||||||||||||||
Shareholders’ equity | 145,294 | 104,293 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,549,875 | $ | 1,261,927 | ||||||||||||
Net interest spread | 3.38% | 3.44% | ||||||||||||||
Net interest income (tax equivalent) / margin | $ | 13,380 | 3.60% | $ | 10,958 | 3.63% | ||||||||||
Less: tax-equivalent adjustment(2) | 71 | 78 | ||||||||||||||
Net interest income | $ | 13,309 | $ | 10,880 |
Average Balances, Income and Expenses, Yields and Rates
For the Three Months Ended June 30, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
(dollars in thousands) | Average Balance | Income/ Expense | Yield/ Rate(1) | Average Balance | Income/ Expense | Yield/ Rate(1) | ||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | $ | 80,909 | $ | 180 | 0.89 | % | $ | 119,211 | $ | 53 | 0.18 | % | ||||||||||||
Investment securities, taxable | 98,527 | 404 | 1.64 | % | 85,306 | 212 | 1.00 | % | ||||||||||||||||
Investment securities, nontaxable(2) | 10,382 | 56 | 2.16 | % | 11,599 | 74 | 2.56 | % | ||||||||||||||||
Loans(3) | 2,795,274 | 26,610 | 3.82 | % | 2,240,236 | 22,409 | 4.01 | % | ||||||||||||||||
Total interest-earning assets | 2,985,092 | 27,250 | 3.66 | % | 2,456,352 | 22,748 | 3.71 | % | ||||||||||||||||
Noninterest-earning assets | 154,659 | 117,836 | ||||||||||||||||||||||
Total assets | $ | 3,139,751 | $ | 2,574,188 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
NOW accounts | $ | 389,563 | 144 | 0.15 | % | $ | 298,446 | 46 | 0.06 | % | ||||||||||||||
Savings & money market | 1,267,174 | 1,200 | 0.38 | % | 1,131,391 | 580 | 0.21 | % | ||||||||||||||||
Time deposits | 278,101 | 500 | 0.72 | % | 175,612 | 294 | 0.67 | % | ||||||||||||||||
Total interest-bearing deposits | 1,934,838 | 1,844 | 0.38 | % | 1,605,449 | 920 | 0.23 | % | ||||||||||||||||
FHLB advances and other borrowings | 53,179 | 105 | 0.79 | % | 44 | 2 | 18.23 | % | ||||||||||||||||
Subordinated debentures | 36,143 | 405 | 4.49 | % | 36,035 | 379 | 4.22 | % | ||||||||||||||||
Total interest-bearing liabilities | 2,024,160 | 2,354 | 0.47 | % | 1,641,528 | 1,301 | 0.32 | % | ||||||||||||||||
Noninterest-bearing liabilities | 833,943 | 688,576 | ||||||||||||||||||||||
Shareholders’ equity | 281,648 | 244,084 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,139,751 | $ | 2,574,188 | ||||||||||||||||||||
Net interest spread | 3.19 | % | 3.39 | % | ||||||||||||||||||||
Net interest income (tax equivalent) / margin | $ | 24,896 | 3.35 | % | $ | 21,447 | 3.50 | % | ||||||||||||||||
Less: tax-equivalent adjustment(2) | (12 | ) | 17 | |||||||||||||||||||||
Net interest income | $ | 24,884 | $ | 21,430 |
(1) | Annualized for the three month period. |
(2) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. |
(3) | Includes mortgage loans held for sale. |
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Our net interest margin on a tax-equivalent(TE) decreased 15 basis was 3.60% forpoints to 3.35% during the three months ended September 30, 2017second quarter of 2022, compared to 3.63% for the thirdsecond quarter of 2016. The three basis point decline2021, primarily due to a reduction in net interest margin was primarily driven by the increased rateyield on our interest-earning assets combined with higher costs on our interest-bearing deposits compared to the prior year.liabilities. Our average interest-earning assets grew by $274.5$528.7 million during the thirdsecond quarter of 2017 as compared to the same period in 2016, and2022, while the average yield on these assets slightly increased as well. However,decreased by five basis points to 3.66% during the same period. In addition, our average interest-bearing liabilities grew by $188.6$382.6 million during the 2017 period as compared to the same period in 2016,second quarter of 2022, while the rate on these liabilities increased seven15 basis points to 0.93% for the three months ended September 30, 2017.0.47%.
The $274.5 million increase in average interest-earning assets for the three months ended September 30, 2017,second quarter of 2022 related primarily to an increase of $555.0 million in our average loan balances. The decrease in yield on our interest-earning assets was driven by a 19 basis point decrease in loan yield as comparedour loan portfolio has repriced at rates lower than historic rates for the majority of the past 12 months. Following the Federal Reserve’s recent interest rate hikes, our loan yield has begun to increase, resulting in a five basis point gain from 3.77% in the samefirst quarter in 2016, primarily related to a $225.0 millionof 2022.
The increase in our average loan balances and a $47.3 million increase in federal funds sold. The slight increase in yield on these assets was driven by the increase in our average loan balances with higher yields on new loans originated and renewedinterest-bearing liabilities during the quarter than when compared to the past. The increase in yield was partially offset due to the increase in federal funds sold. The increase of federal funds sold is a result of our efforts to improve our liquidity position for future cash needs.
In addition, our average interest-bearing liabilities increased by $188.6 million during the thirdsecond quarter of 2017 as compared to the third quarter of 2016, while the cost of our interest-bearing liabilities increased by seven basis points during the same period. The increased rate during the 2017 period2022 resulted primarily from a $260.5$329.4 million increase in our interest-bearing deposits at an average rate of 0.78%,and a 30$53.1 million increase in FHLB advances and other borrowings, while the 15 basis point increase from the third quarter of 2016. In addition, the cost ofin rate on our other interest-bearing liabilities the majority of which are at variable rates tied to Libor, increasedresulted primarily from a 15 basis point increase in relation to current market rates and trends.deposit rates.
Our net interest spread was 3.38%3.19% for the three months ended September 30, 2017second quarter of 2022 compared to 3.44%3.39% for the same period in 2016.2021. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The one basis point increasedecrease in the yield on our interest-earning assets and the seven basis point increase in the rate on our interest-bearing liabilities resulted in a six20 basis point decrease in our net interest spread for the 20172022 period.
For the Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||
(dollars in thousands) | Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | ||||||||||
Interest-earning assets | ||||||||||||||||
Federal funds sold | $ | 65,026 | $ | 548 | 1.13% | $ | 27,746 | $ | 122 | 0.59% | ||||||
Investment securities, taxable | 55,545 | 850 | 2.05% | 64,502 | 949 | 1.97% | ||||||||||
Investment securities, nontaxable (2) | 19,984 | 577 | 3.86% | 20,745 | 634 | 4.08% | ||||||||||
Loans | 1,265,408 | 43,089 | 4.55% | 1,052,804 | 36,280 | 4.60% | ||||||||||
Total interest-earning assets | 1,405,963 | 45,064 | 4.29% | 1,165,797 | 37,985 | 4.35% | ||||||||||
Noninterest-earning assets | 68,852 | 70,827 | ||||||||||||||
Total assets | $ | 1,474,815 | $ | 1,236,624 | ||||||||||||
Interest-bearing liabilities | ||||||||||||||||
NOW accounts | $ | 220,066 | 304 | 0.18% | $ | 201,257 | 242 | 0.16% | ||||||||
Savings & money market | 451,490 | 2,471 | 0.73% | 325,271 | 999 | 0.41% | ||||||||||
Time deposits | 309,679 | 2,298 | 0.99% | 269,780 | 1,650 | 0.82% | ||||||||||
Total interest-bearing deposits | 981,235 | 5,073 | 0.69% | 796,308 | 2,891 | 0.48% | ||||||||||
Note payable and other borrowings | 82,810 | 2,172 | 3.51% | 117,934 | 2,873 | 3.25% | ||||||||||
Junior subordinated debentures | 13,403 | 332 | 3.31% | 13,403 | 280 | 2.79% | ||||||||||
Total interest-bearing liabilities | 1,077,448 | 7,577 | 0.94% | 927,645 | 6,044 | 0.87% | ||||||||||
Noninterest-bearing liabilities | 267,365 | 208,396 | ||||||||||||||
Shareholders’ equity | 130,002 | 100,583 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,474,815 | $ | 1,236,624 | ||||||||||||
Net interest spread | 3.35% | 3.48% | ||||||||||||||
Net interest income (tax equivalent) / margin | $ | 37,487 | 3.56% | $ | 31,941 | 3.66% | ||||||||||
Less: tax-equivalent adjustment (2) | 219 | 241 | ||||||||||||||
Net interest income | $ | 37,268 | $ | 31,700 |
Our We anticipate continued pressure on our net interest spread and net interest margin onin future periods as a tax-equivalentsignificant portion of our loan portfolio is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much more quickly.
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Average Balances, Income and Expenses, Yields and Rates
For the Six Months Ended June 30, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
(dollars in thousands) | Average Balance | Income/ Expense | Yield/ Rate(1) | Average Balance | Income/ Expense | Yield/ Rate(1) | ||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | $ | 84,980 | $ | 239 | 0.57 | % | $ | 104,449 | $ | 99 | 0.19 | % | ||||||||||||
Investment securities, taxable | 105,771 | 829 | 1.58 | % | 85,222 | 458 | 1.08 | % | ||||||||||||||||
Investment securities, nontaxable(2) | 11,139 | 121 | 2.19 | % | 11,300 | 147 | 2.62 | % | ||||||||||||||||
Loans(3) | 2,685,237 | 50,541 | 3.80 | % | 2,224,987 | 44,875 | 4.07 | % | ||||||||||||||||
Total interest-earning assets | 2,887,127 | 51,730 | 3.61 | % | 2,425,958 | 45,579 | 3.79 | % | ||||||||||||||||
Noninterest-earning assets | 153,618 | 109,928 | ||||||||||||||||||||||
Total assets | $ | 3,040,745 | $ | 2,535,886 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
NOW accounts | $ | 397,763 | 259 | 0.13 | % | $ | 289,640 | 93 | 0.06 | % | ||||||||||||||
Savings & money market | 1,254,768 | 1,818 | 0.29 | % | 1,108,059 | 824 | 0.15 | % | ||||||||||||||||
Time deposits | 218,741 | 675 | 0.62 | % | 194,781 | 1,087 | 1.13 | % | ||||||||||||||||
Total interest-bearing deposits | 1,871,272 | 2,752 | 0.30 | % | 1,592,480 | 2,004 | 0.25 | % | ||||||||||||||||
FHLB advances and other borrowings | 35,004 | 118 | 0.68 | % | 1,419 | 78 | 11.08 | % | ||||||||||||||||
Subordinated debentures | 36,130 | 784 | 4.38 | % | 36,022 | 759 | 4.25 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,942,406 | 3,654 | 0.38 | % | 1,629,921 | 2,841 | 0.35 | % | ||||||||||||||||
Noninterest-bearing liabilities | 818,207 | 668,491 | ||||||||||||||||||||||
Shareholders’ equity | 280,132 | 237,474 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,040,745 | $ | 2,535,886 | ||||||||||||||||||||
Net interest spread | 3.23 | % | 3.44 | % | ||||||||||||||||||||
Net interest income (tax equivalent) / margin | $ | 48,076 | 3.36 | % | $ | 42,738 | 3.55 | % | ||||||||||||||||
Less: tax-equivalent adjustment(2) | (28 | ) | 35 | |||||||||||||||||||||
Net interest income | $ | 48,048 | $ | 42,703 |
During the first six months of 2022, our net interest margin (TE) decreased by 19 basis was 3.56% for the nine months ended September 30, 2017points to 3.36%, compared to 3.66%3.55% for the first ninesix months of 2016. The ten basis point2021, driven by the decrease in net interest margin as compared to the same period in 2016 was driven primarily by a six basis point reduction in the yield on our interest-earning assets, combined with a seven basis point increase in the cost ofhigher yield on our interest-bearing liabilities.
Our average interest-earning assets grew by $461.2 million from the prior year, with the average yield decreasing by 18 basis points to 3.61%. In addition, our average interest-bearing liabilities grew by $312.5 million, while the rate on these liabilities increased by $240.2 million as comparedthree basis points to 0.38%.
The increase in average interest-earning assets for the 2016 periodfirst half of 2022 related primarily to a $212.6$460.3 million increase in our average loan balances for the 2017 period. However, thebalances. The decrease in yield on our interest-earning assets decreasedwas driven by six basis points due primarily to a five27 basis point decrease in our loan yield combined with an increase in our average federal funds sold balancesprimarily related to the interest rate reductions by the Federal Reserve which occurred during 2020. Recently, the period which yielded a lower rate when compared to our loan portfolio and other investments. The decline in yield on our loan portfolio was driven primarilyhas begun to increase as the Federal Reserve has raised interest rates by loans being originated or renewed during the 2017 period at market rates which are lower than those in the past.
In addition, our average interest-bearing liabilities increased by $149.8 million during the nine months ended September 30, 2017 as compared to the first nine months of 2016. The cost of our interest-bearing liabilities increased seven150 basis points during the same period,first six months of 2022.
34
The increase in average interest-bearing liabilities for the first half of 2022 was driven by an increase in interest-bearing deposits of $278.8 million and a $33.6 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a $184.9 millionfive basis point increase inon our average interest-bearing deposits at a rate 21 basis points higher than in the third quarter of 2016.deposits.
Our net interest spread was 3.35%3.23% for the nine months ended September 30, 2017first half of 2022 compared to 3.48%3.44% for the same period in 2016.2021. The 1321 basis point decrease in our net interest spread for the 2017 period was driven by the six18 basis point reductiondecrease in yield on our interest-earning assets paired with the seven basis point increase in cost on our interest-bearing liabilities.assets.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table setstables set forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.
Three Months Ended | |||||||||||||||||||||||||
September 30, 2017 vs. 2016 | September 30, 2016 vs. 2015 | ||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||||
Rate/ | Rate/ | ||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Total | Volume | Rate | Volume | Total | |||||||||||||||||
Interest income | |||||||||||||||||||||||||
Loans | $ | 2,599 | 164 | 33 | 2,796 | 1,343 | (195 | ) | (24 | ) | 1,124 | ||||||||||||||
Investment securities | 11 | 36 | 1 | 48 | 116 | (69 | ) | (23 | ) | 24 | |||||||||||||||
Federal funds sold | 65 | 43 | 91 | 199 | (18 | ) | 32 | (16 | ) | (2 | ) | ||||||||||||||
Total interest income | 2,675 | 243 | 125 | 3,043 | 1,441 | (232 | ) | (63 | ) | 1,146 | |||||||||||||||
Interest expense | |||||||||||||||||||||||||
Deposits | 304 | 626 | 197 | 1,127 | 85 | (63 | ) | (6 | ) | 16 | |||||||||||||||
FHLB advances and other borrowings | (576 | ) | 96 | (54 | ) | (534 | ) | 54 | 21 | 1 | 76 | ||||||||||||||
Junior subordinated debt | - | 21 | - | 21 | - | 12 | - | 12 | |||||||||||||||||
Total interest expense | (272 | ) | 743 | 143 | 614 | 139 | (30 | ) | (5 | ) | 104 | ||||||||||||||
Net interest income | $ | 2,947 | (500 | ) | (18 | ) | 2,429 | 1,302 | (202 | ) | (58 | ) | 1,042 |
Three Months Ended | ||||||||||||||||||||||||||||||||
June 30, 2022 vs. 2021 | June 30, 2021 vs. 2020 | |||||||||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Rate/ Volume | Total | Volume | Rate | Rate/ Volume | Total | ||||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||||||||
Loans | $ | 5,417 | (979 | ) | (237 | ) | 4,201 | $ | 980 | (2,040 | ) | (85 | ) | (1,145 | ) | |||||||||||||||||
Investment securities | 33 | 130 | 16 | 179 | 110 | (175 | ) | (50 | ) | (115 | ) | |||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | (17 | ) | 212 | (68 | ) | 127 | 10 | (9 | ) | (1 | ) | - | ||||||||||||||||||||
Total interest income | 5,433 | (637 | ) | (289 | ) | 4,507 | 1,100 | (2,224 | ) | (136 | ) | (1,260 | ) | |||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||||||||
Deposits | 195 | 602 | 127 | 924 | 318 | (2,781 | ) | (244 | ) | (2,707 | ) | |||||||||||||||||||||
FHLB advances and other borrowings | 2,415 | (2 | ) | (2,309 | ) | 104 | (175 | ) | 3,501 | (3,500 | ) | (174 | ) | |||||||||||||||||||
Subordinated debentures | 1 | 24 | - | 25 | 1 | (36 | ) | - | (35 | ) | ||||||||||||||||||||||
Total interest expense | 2,611 | 624 | (2,182 | ) | 1,053 | 144 | 684 | (3,744 | ) | (2,916 | ) | |||||||||||||||||||||
Net interest income | $ | 2,822 | (1,261 | ) | 1,893 | 3,454 | $ | 956 | (2,908 | ) | 3,608 | 1,656 |
Net interest income, the largest component of our income, was $13.3$24.9 million for the three-month period ended September 30, 2017second quarter of 2022 and $10.9$21.4 million for the three months ended September 30, 2016,second quarter of 2021, a $2.4$3.5 million, or 22.3%16.2%, increase. The increase during 2022 was driven by a $4.5 million increase in interest income primarily due to higher volume of loans. In addition, interest expense increased by $1.1 million due to an increase in volume of FHLB advances and other borrowings at decreased rates.
35
Six Months Ended | ||||||||||||||||||||||||||||||||
June 30, 2022 vs. 2021 | June 30, 2021 vs. 2020 | |||||||||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Rate/ Volume | Total | Volume | Rate | Rate/ Volume | Total | ||||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||||||||
Loans | $ | 9,012 | (2,786 | ) | (560 | ) | 5,666 | $ | 3,557 | (5,230 | ) | (373 | ) | (2,046 | ) | |||||||||||||||||
Investment securities | 120 | 191 | 41 | 352 | 254 | (351 | ) | (113 | ) | (210 | ) | |||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | (18 | ) | 195 | (37 | ) | 140 | 67 | (86 | ) | (37 | ) | (56 | ) | |||||||||||||||||||
Total interest income | 9,114 | (2,400 | ) | (556 | ) | 6,158 | 3,878 | (5,667 | ) | (523 | ) | (2,312 | ) | |||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||||||||
Deposits | 400 | 232 | 45 | 677 | 1,016 | (7,005 | ) | (808 | ) | (6,797 | ) | |||||||||||||||||||||
FHLB advances and other borrowings | 70 | 2 | 40 | 112 | (327 | ) | 3,096 | (3,025 | ) | (256 | ) | |||||||||||||||||||||
Subordinated debentures | 2 | 22 | - | 24 | 3 | (94 | ) | (1 | ) | (92 | ) | |||||||||||||||||||||
Total interest expense | 472 | 256 | 85 | 813 | 692 | (4,003 | ) | (3,834 | ) | (7,145 | ) | |||||||||||||||||||||
Net interest income | $ | 8,642 | (2,656 | ) | (641 | ) | 5,345 | $ | 3,186 | (1,664 | ) | 3,311 | 4,833 | |||||||||||||||||||
Net interest income for the third quarterfirst half of 2017.2022 was $48.0 million compared to $42.7 million for 2021, a $5.3 million, or 12.5%, increase. The increase in net interest income is due toduring 2022 was driven by a $3.0$6.2 million increase in interest income, partially offset by a $614,000 increase in interest expense. During the third quarter of 2017, the primary driver of the increase in net interest income was the $225.0 million increase in our averagerelated primarily to loan balances as compared to the third quarter of 2016.
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2017 vs. 2016 | September 30, 2016 vs. 2015 | |||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
Rate/ | Rate/ | |||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Total | Volume | Rate | Volume | Total | ||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans | $ | 7,455 | (538 | ) | (108 | ) | 6,809 | 3,713 | (122 | ) | (14 | ) | 3,577 | |||||||||||
Investment securities | (149 | ) | 17 | (2 | ) | (134 | ) | 495 | (175 | ) | (80 | ) | 240 | |||||||||||
Federal funds sold | 165 | 112 | 149 | 426 | (17 | ) | 76 | (16 | ) | 43 | ||||||||||||||
Total interest income | 7,471 | (409 | ) | 39 | 7,101 | 4,191 | (221 | ) | (110 | ) | 3,860 | |||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits | 712 | 1,181 | 289 | 2,182 | 382 | (47 | ) | (7 | ) | 328 | ||||||||||||||
FHLB advances and other borrowings | (848 | ) | 210 | (63 | ) | (701 | ) | (10 | ) | 206 | (1 | ) | 195 | |||||||||||
Junior subordinated debt | - | 52 | - | 52 | - | 36 | - | 36 | ||||||||||||||||
Total interest expense | (136 | ) | 1,443 | 226 | 1,533 | 372 | 195 | (8 | ) | 559 | ||||||||||||||
Net interest income | $ | 7,607 | (1,852 | ) | (187 | ) | 5,568 | 3,819 | (416 | ) | (102 | ) | 3,301 |
Net interest income for the nine months ended September 30, 2017 was $37.3 million compared to $31.7 million for the first nine months ended September 30, 2016, a $5.6 million, or 17.6% increase during the first nine months of 2017 compared to the same period in 2016. The increase in net interest income is due to a $7.1 million increase in interest income, offset in part by a $1.5 million increase in interest expense. The $212.6 million increase in average loan balances during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was the primary driver of the increase in net interest income during the 2017 period.growth.
Provision for LoanCredit Losses
We have established an allowanceThe provision for loancredit losses, throughwhich includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. On January 1, 2022, we adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, chargedwhich resulted in an increase of $1.5 million in our allowance for credit losses and an increase of $2.0 million in our reserve for unfunded commitments. The tax-effected impact of these two items amounted to $2.8 million and was recorded as an expense onadjustment to our consolidated statementsretained earnings as of income.January 1, 2022. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.credit losses on a quarterly basis. Please see the discussion below under “Balance Sheet Reviewincluded in Note 1 – Summary of Significant Accounting Policies and Note 4 – Loans and Allowance for Loan Losses”Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.
For
We recorded a $1.8 million provision for credit losses in the threesecond quarter of 2022, compared to a $1.9 million reversal of provision expense in the second quarter of 2021. We recorded a provision expense of $2.9 million and ninea provision reversal of $2.2 million for the six months ended SeptemberJune 30, 2017, we incurred2022 and June 30, 2021, respectively. The $1.8 million provision in 2022, which included a noncash expense related to the$250,000 provision for unfunded commitments, was driven by $184.5 million in loan lossesgrowth during the second quarter, combined with a $52.2 million increase in unfunded commitments. The $2.9 million provision expense for the first half of $500,000 and $1.5 million, respectively, which resulted in an allowance for loan losses of $15.6 million, or 1.17% of gross loans, as of September 30, 2017. For the three and nine months ended September 30, 2016, our2022 included a $330,000 provision for loan lossesunfunded commitments.
36
Noninterest Income
The following table sets forth information related to our noninterest income.
Three months ended | Nine months ended | |||||||||
September 30, | September 30, | |||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||
Mortgage banking income | $ | 1,403 | 2,003 | 4,063 | 5,685 | |||||
Service fees on deposit accounts | 324 | 269 | 886 | 732 | ||||||
Income from bank owned life insurance | 224 | 187 | 590 | 553 | ||||||
Gain on sale of investment securities | - | 106 | 2 | 431 | ||||||
Loss on disposal of fixed assets | - | - | (50 | ) | - | |||||
Other income | 591 | 452 | 1,665 | 1,320 | ||||||
Total noninterest income | $ | 2,542 | 3,017 | 7,156 | 8,721 |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(dollars in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Mortgage banking income | $ | 1,184 | 1,983 | 2,678 | 6,616 | |||||||||||
Service fees on deposit accounts | 209 | 173 | 400 | 358 | ||||||||||||
ATM and debit card income | 563 | 521 | 1,092 | 991 | ||||||||||||
Income from bank owned life insurance | 315 | 331 | 630 | 598 | ||||||||||||
Net lender and referral fees on PPP loans | - | 268 | - | 268 | ||||||||||||
Loss on disposal of fixed assets | (394 | ) | - | (394 | ) | - | ||||||||||
Other income | 388 | 346 | 788 | 695 | ||||||||||||
Total noninterest income | $ | 2,265 | 3,622 | 5,194 | 9,526 |
Noninterest income decreased $475,000,$1.4 million, or 15.7%37.5%, for the thirdsecond quarter of 20172022 as compared to the same period in 2016.2021. The decrease in total noninterest income during the 2017 period resulted primarily from the following:
● | Mortgage banking income decreased by |
● | Net lender and referral fees on PPP loans were $268,000 during the |
● |
Partially offsetting these decreases in noninterest income was a $55,000 increase in service fees on deposit accounts, driven by non-sufficient funds (“NSF”) fee income, and a $139,000 increase in other income due to increased loan fee income, including late charges, and ATM/debit card exchange income.
Noninterest income decreased $1.6$4.3 million, or 17.9%45.5%, during the nine months ended September 30, 2017first half of 2022 as compared to the same period in 2016.2021. The decrease in total noninterest income during the nine months ended September 30, 2017 resulted primarily from a $1.6 million decreasedecreases in mortgage banking income and a $429,000 decrease in gain on salethe disposal of investment securities as compared to thefixed assets from our prior period. Partially offsetting these decreases in noninterest income, was a $154,000 increase in service fees on deposit accounts and a $345,000 increase in other income which consists primarily of ATM/debit card transactions as well as wire transfer fees.headquarters building.
In accordance with the requirements set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in June 2011, the Federal Reserve approved a final rule which caps an issuer's base interchange fee at 21 cents per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Although the rule does not apply to institutions with less than $10 billion in assets, such as our Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. Our ATM/Debit card fee income is included in other noninterest income and was $295,000 and $220,000 for the three months ended September 30, 2017 and 2016, respectively, and $847,000 and $641,000 for the nine months ended September 30, 2017 and 2016, respectively, the majority of which related to interchange fee income.
Noninterest expenses
The following table sets forth information related to our noninterest expenses.
Three months ended | Nine months ended | ||||||||
September 30, | September 30, | ||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||
Compensation and benefits | $ | 5,698 | 4,948 | 16,496 | 14,353 | ||||
Occupancy | 1,043 | 908 | 3,042 | 2,670 | |||||
Real estate owned expenses | 28 | 81 | 38 | 725 | |||||
Outside service and data processing | 794 | 690 | 2,362 | 1,916 | |||||
Insurance | 258 | 227 | 845 | 678 | |||||
Professional fees | 334 | 326 | 1,029 | 864 | |||||
Marketing | 199 | 195 | 605 | 625 | |||||
Other | 452 | 425 | 1,512 | 1,339 | |||||
Total noninterest expense | $ | 8,806 | 7,800 | 25,929 | 23,170 |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(dollars in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Compensation and benefits | $ | 9,915 | 8,724 | 19,371 | 17,834 | |||||||||||
Occupancy | 2,219 | 1,552 | 3,997 | 3,190 | ||||||||||||
Real estate owned expenses | - | 1 | - | 388 | ||||||||||||
Outside service and data processing costs | 1,528 | 1,391 | 3,062 | 2,704 | ||||||||||||
Insurance | 367 | 262 | 628 | 563 | ||||||||||||
Professional fees | 693 | 615 | 1,292 | 1,210 | ||||||||||||
Marketing | 329 | 208 | 596 | 398 | ||||||||||||
Other | 737 | 742 | 1,528 | 1,370 | ||||||||||||
Total noninterest expense | $ | 15,788 | 13,495 | 30,474 | 27,657 |
37
Noninterest expense was $8.8$15.8 million for the three months ended September 30, 2017,second quarter of 2022, a $1.0$2.3 million, or 12.9%17.0%, increase from noninterest expense of $7.8$13.5 million for the three months ended September 30, 2016. Significant fluctuationssecond quarter of 2021. The increase in noninterest expenses resulted fromexpense was driven primarily by the following:
● | Compensation and benefits expense increased |
● | Occupancy costs increased $667,000, or 43.0%, driven by |
● |
|
● | Outside service and data processing costs increased |
● | Marketing expenses increased $121,000, or 58.2%, due to an increase in community outreach and sponsorships. |
Partially offsetting
Noninterest expense was $30.5 million for the increasesfirst half of 2022, a $2.8 million, or 10.2%, increase from noninterest expense of $27.7 million for the first half of 2021. The increase in noninterest expense was driven primarily by increases in compensation and benefits, occupancy, outside services and data processing costs and marketing expenses as discussed above. Partially offsetting these increases was a decrease in real estate owned expenses of $53,000, or 65.4%, due primarily to a loss on sale of property during the 20162022 period.
Noninterest expense for the nine months ended September 30, 2017 increased 11.9%, or $2.8 million, as compared to the nine months ended September 30, 2016. The increase was driven primarily by the $2.1 million increase in compensation and benefits expense, $446,000 in outside service and data processing fees, and $372,000 in occupancy fees. Partially offsetting the increases in noninterest expense was a decrease of $687,000 in real estate owned expenses during the first nine months of 2017.
Our efficiency ratio was 55.5%58.2% for the thirdsecond quarter of 20172022, compared to 56.1%53.9% for the same period in 2016.second quarter of 2021 and 57.2% for the first half of 2022 compared to 53.0% for the first half of 2021. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The decreasehigher ratio during the 2017 periodsecond quarter of 2022, compared to the second quarter of 2021, relates primarily to the increase in interest income partially offset by the increase in noninterest expense as well as a decrease in noninterest income compared to the prior year.mortgage banking income.
We incurred income tax expense of $2.3 million and $1.8$3.1 million for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively, and $6.0$4.7 million and $5.5$6.1 million for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Our effective tax rate was 35.1%23.5% and 34.9%22.7% for the threesix months ended SeptemberJune 30, 20172022 and 2016, respectively, and 35.5% and 36.0% for the nine months ended September 30, 2017 and 2016,2021, respectively. InThe higher tax rate during the first quartersix months of 2017, we adopted2022 relates to the new FASB guidance which simplified several aspectslesser impact of equity compensation transactions during the accounting for share-based payment award transactions, including income tax consequences. As a result, our income tax expense was reduced by $207,000 for the nine months ended September 30, 2017.period.
Balance Sheet Review
Investment Securities
At SeptemberJune 30, 2017,2022, the $81.5$104.1 million in our investment securities portfolio represented approximately 5.2%3.2% of our total assets.Ourassets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, SBA securities, state and political subdivisions, asset-backed securities and mortgage-backed securities withawith a fair value of $78.4$99.0 million and an amortized cost of $78.6$111.8 million, resulting in an unrealized loss of $140,000.$12.8 million. At December 31, 2016,2021, the $70.2$124.3 million in our investment securities portfolio represented approximately 5.2%4.2% of our total assets. At December 31, 2016, we heldassets, including investment securities available for sale with a fair value of $64.5$120.3 million and an amortized cost of $65.2$121.2 million for an unrealized loss of $764,000.$937,000.
38
Loans
Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 were $1.3$2.67 billion and $1.1$2.21 billion, respectively. Before the allowance for loancredit losses, total loans outstanding at SeptemberJune 30, 20172022 and December 31, 20162021 were $1.3$2.85 billion and $1.2$2.49 billion, respectively.
The principal component of our loan portfolio is loans secured by real estate mortgages. As of SeptemberJune 30, 2017,2022, our loan portfolio included $1.1$2.43 billion, or 82.1%85.3%, of real estate loans. As ofloans, compared to $2.13 billion, or 85.5%, at December 31, 2016, real estate loans made up 81.1% of our loan portfolio and totaled $943.5 million.2021. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral, is takenin order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. We do not generally originate traditional long term residential mortgages to hold in our loan portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled $150.4$161.5 million as of SeptemberJune 30, 2017,2022, of which approximately 42%50% were in a first lien position, while the remaining balance was second liens, compared to $137.1 million as ofliens. At December 31, 2016, with2021, our home equity lines of credit totaled $154.8 million, of which approximately 39%49% were in first lien positions, andwhile the remaining balance was in second liens. The average home equity loan had a balance of approximately $89,000$80,000 and a loan to value of 71% as of SeptemberJune 30, 2017,2022, compared to an average loan balance of $91,000$81,000 and a loan to value of approximately 73%62% as of December 31, 2016.2021. Further, 0.3%0.87% and 1.0% of our total home equity lines of credit were over 30 days past due as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.
Following is a summary of our loan composition at SeptemberJune 30, 20172022 and December 31, 2016.2021. During the first ninesix months of 2017,2022, our loan portfolio increased by $164.1$355.3 million, or 14.1%. Our commercial and consumer loan portfolios each experienced growth during the nine months ended September 30, 201714.3%, with a 13.7%13.8% increase in commercial loans and a 14.8% increase inwhile consumer loans increased by 15.1% during the period. Of the $164.1 million in loan growth during the first nine months of 2017, $147.1 millionThe majority of the increase was in loans secured by real estate, $12.3 million in commercial business loans, and $4.7 million in other consumer loans.estate. Our consumer real estate portfolio grew by $117.7 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $358,000,$468,000, a term of ten22 years, and an average rate of 4.34%3.48% as of SeptemberJune 30, 2017,2022, compared to a $341,000 principal balance of $454,000, a term of nine21 years, and an average rate of 4.34%3.47% as of December 31, 2016.2021.
September 30, 2017 | December 31, 2016 | |||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||
Commercial | ||||||||||||
Owner occupied RE | $ | 317,262 | 23.9% | $ | 285,938 | 24.6% | ||||||
Non-owner occupied RE | 301,360 | 22.7% | 239,574 | 20.6% | ||||||||
Construction | 32,332 | 2.4% | 33,393 | 2.9% | ||||||||
Business | 214,898 | 16.2% | 202,552 | 17.4% | ||||||||
Total commercial loans | 865,852 | 65.2% | 761,457 | 65.5% | ||||||||
Consumer | ||||||||||||
Real estate | 250,483 | 18.9% | 215,588 | 18.5% | ||||||||
Home equity | 150,371 | 11.3% | 137,105 | 11.8% | ||||||||
Construction | 38,766 | 2.9% | 31,922 | 2.7% | ||||||||
Other | 22,267 | 1.7% | 17,572 | 1.5% | ||||||||
Total consumer loans | 461,887 | 34.8% | 402,187 | 34.5% | ||||||||
Total gross loans, net of deferred fees | 1,327,739 | 100.0% | 1,163,644 | 100.0% | ||||||||
Less—allowance for loan losses | (15,579 | ) | (14,855 | ) | ||||||||
Total loans, net | $ | 1,312,160 | $ | 1,148,789 |
June 30, 2022 | December 31, 2021 | |||||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | $ | 551,544 | 19.39 | % | $ | 488,965 | 19.6 | % | ||||||||
Non-owner occupied RE | 741,263 | 26.05 | % | 666,833 | 26.8 | % | ||||||||||
Construction | 84,612 | 2.97 | % | 64,425 | 2.6 | % | ||||||||||
Business | 389,790 | 13.70 | % | 333,049 | 13.4 | % | ||||||||||
Total commercial loans | 1,767,209 | 62.11 | % | 1,553,272 | 62.4 | % | ||||||||||
Consumer | ||||||||||||||||
Real estate | 812,130 | 28.54 | % | 694,401 | 27.9 | % | ||||||||||
Home equity | 161,512 | 5.68 | % | 154,839 | 6.2 | % | ||||||||||
Construction | 76,878 | 2.70 | % | 59,846 | 2.4 | % | ||||||||||
Other | 27,476 | 0.97 | % | 27,519 | 1.1 | % | ||||||||||
Total consumer loans | 1,077,996 | 37.89 | % | 936,605 | 37.6 | % | ||||||||||
Total gross loans, net of deferred fees | 2,845,205 | 100.0 | % | 2,489,877 | 100.0 | % | ||||||||||
Less—allowance for credit losses | (34,192 | ) | (30,408 | ) | ||||||||||||
Total loans, net | $ | 2,811,013 | $ | 2,459,469 |
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Nonperforming assets
Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, we had no loans 90 days past due and still accruing.
Following is a summary of our nonperforming assets, including nonaccruing TDRs.
(dollars in thousands) | September 30, 2017 | December 31, 2016 | |||
Commercial | $ | 3,409 | 3,673 | ||
Consumer | 1,464 | 819 | |||
Nonaccruing troubled debt restructurings | 730 | 990 | |||
Total nonaccrual loans | 5,603 | 5,482 | |||
Other real estate owned | 420 | 639 | |||
Total nonperforming assets | $ | 6,023 | 6,121 |
(dollars in thousands) | June 30, 2022 | December 31, 2021 | ||||||
Commercial | $ | 259 | 270 | |||||
Consumer | 383 | 1,642 | ||||||
Nonaccruing troubled debt restructurings | 2,289 | 2,952 | ||||||
Total nonaccrual loans | 2,931 | 4,864 | ||||||
Other real estate owned | - | - | ||||||
Total nonperforming assets | $ | 2,931 | 4,864 |
At SeptemberJune 30, 2017,2022, nonperforming assets were $6.0$2.9 million, or 0.39%0.09% of total assets and 0.45%0.10% of gross loans. Comparatively, nonperforming assets were $6.1$4.9 million, or 0.46%0.17% of total assets and 0.53%0.20% of gross loans at December 31, 2016.2021. Nonaccrual loans were $5.6decreased $1.9 million at September 30, 2017, a $121,000 increase from December 31, 2016. Duringduring the first ninesix months of 2017, six2022 due primarily to $724,000 of loans were put on nonaccrual status and 12 nonaccrual loans were either paid or charged-off. charged off and $1.1 million of loans returning to accruing status.
The amount of foregone interest income on the nonaccrual loans in the first ninesix months of 20172022 and 20162021 was approximately $251,000not material. At June 30, 2022 and $341,000, respectively.
Nonperforming assets include other real estate owned which totaled $420,000 at September 30, 2017, a $219,000 decrease from December 31, 2016. The balance at September 30, 2017 includes six commercial properties totaling $367,000 and two residential properties totaling $53,000. All of these properties are located in the Upstate of South Carolina. We believe that these properties are appropriately valued at the lower of cost or market as of September 30, 2017.
At September 30, 2017 and 2016,2021, the allowance for loancredit losses represented 278.1%1,166.70% and 258.3%619.47% of the total amount of nonperforming loans, respectively. A significant portion, or 79%approximately 92%, of nonperforming loans at SeptemberJune 30, 2017 is2022, was secured by real estate. Our nonperforming loans have been written down to approximately 54% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of $15.6 million as of September 30, 2017 to be adequate.
As a general practice, most of our commercial loans and a portion of our consumer loans are originated with relatively short maturities of less than 10ten years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using the samesimilar credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonperformingnonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. NonperformingNonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, the Companywe will generally seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, the Companywe will typically seek performance under the guarantee.
In addition, at SeptemberJune 30, 2017, 82.1%2022, 85.3% of our loans arewere collateralized by real estate and 80.0%92.2% of our impaired loans arewere secured by real estate. The Company utilizesWe utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Companyus to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of SeptemberJune 30, 2017,2022, we dodid not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.
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At SeptemberJune 30, 2017,2022, impaired loans totaled $12.6$5.0 million, for which $9.4$4.7 million of these loans havehad a reserve of approximately $3.7$1.0 million allocated in the allowance. During the first ninesix months of 2017,2022, the average recorded investment in impaired loans was approximately $13.0$7.0 million. Comparatively, impaired loans totaled $11.2$8.2 million at December 31, 2016, and $7.52021 for which $2.9 million of these loans had a reserve of approximately $2.6 million$836,000 allocated in the allowance. During 2016,2021, the average recorded investment in impaired loans was approximately $11.6$12.5 million.
We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of SeptemberJune 30, 2017,2022, we determined that we had loans totaling $7.7$5.8 million that we considered TDRs. AsTDRs compared to $6.3 million as of December 31, 2016, we had loans totaling $6.7 million that we considered TDRs.2021.
Allowance for LoanCredit Losses
On January 1, 2022, we adopted CECL for estimating credit losses, which resulted in an increase of $1.5 million in our allowance for credit losses and an increase of $2.0 million in our reserve for unfunded commitments, which is recorded within other liabilities. The tax-effected impact of those two items amounted to $2.8 million and was recorded as an adjustment to our retained earnings as of January 1, 2022. The allowance for loan loss accounting in effect at December 31, 2021 and all prior periods was based on our estimate of probable incurred loan losses as of the reporting date.
The allowance for credit losses was $34.2 million, representing 1.20% of outstanding loans and providing coverage of 1,166.7%, of nonperforming loans at June 30, 2022 compared to $30.4 million, or 1.22% of outstanding loans and 625.22% of nonperforming loans at December 31, 2021. At June 30, 2021, the allowance for loan losses was $15.6 million and $14.5 million at September 30, 2017 and 2016, respectively, or 1.17% of outstanding loans at September 30, 2017 and 1.30% of outstanding loans at September 30, 2016. At December 31, 2016, our allowance for loan losses was $14.9$41.9 million, or 1.28%1.86% of outstanding loans and 619.47% of nonperforming loans. The adoption of CECL on January 1, 2022 increased the allowance for credit losses by $1.5 million. In addition, we had net loans charged-offrecorded a provision for credit losses of $1.1 million for the year ended December 31, 2016.
During the nine months ended September 30, 2017, we charged-off $962,000 of loans and recorded $186,000 of recoveries on loans previously charged-off, for net charge-offs of $776,000, or 0.08% of average loans, annualized. Comparatively, we charged-off $1.5 million during the second quarter of loans and recorded $286,000 of recoveries on loans previously charged-off, resulting2022 driven by the growth in net charge-offs of $1.2 million, or 0.15% of average loans, annualized, for the first nine months of 2016.our loan portfolio.
Following is a summary of the activity in the allowance for loancredit losses.
Nine months ended | ||||||||||
September 30, | Year ended | |||||||||
(dollars in thousands) | 2017 | 2016 | December 31, 2016 | |||||||
Balance, beginning of period | $ | 14,855 | 13,629 | 13,629 | ||||||
Provision | 1,500 | 2,025 | 2,300 | |||||||
Loan charge-offs | (962 | ) | (1,462 | ) | (1,648 | ) | ||||
Loan recoveries | 186 | 286 | 574 | |||||||
Net loan charge-offs | (776 | ) | (1,176 | ) | (1,074 | ) | ||||
Balance, end of period | $ | 15,579 | 14,478 | 14,855 |
Six months ended June 30, | Year ended December 31, | |||||||||||
(dollars in thousands) | 2022 | 2021 | 2021 | |||||||||
Balance, beginning of period | $ | 30,408 | 44,149 | 44,149 | ||||||||
Adjustment for adoption of CECL | 1,500 | - | - | |||||||||
Provision for (reversal of) credit losses | 2,550 | (2,200 | ) | (12,400 | ) | |||||||
Loan charge-offs | (485 | ) | (414 | ) | (2,166 | ) | ||||||
Loan recoveries | 219 | 377 | 825 | |||||||||
Net loan (charge-offs) | (266 | ) | (37 | ) | (1,341 | ) | ||||||
Balance, end of period | $ | 34,192 | 41,912 | 30,408 |
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits and advances from the FHLB, and structured repurchase agreements.FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in ordertoorder to obtain longer term deposits than are readily available in our local market. We have adoptedOur internal guidelines regarding ourthe use of brokered CDs that limit our brokered CDs to 20% of total deposits. In addition, we do not obtain time deposits and dictate that our current interest rate risk profile determinesof $100,000 or more through the terms.Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.
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Our retail deposits represented $1.3$2.68 billion, or 95.7%93.5% of total deposits, while our wholesale deposits represented $187.5 million, or 6.5%, of total deposits at SeptemberJune 30, 2017, while our out-of-market, or brokered, deposits represented $57.3 million, or 4.3% of our total deposits at September 30, 2017.2022. At December 31, 2016,2021, retail deposits represented $1.0$2.56 billion, or 94.6% of our total deposits, and brokered CDs were $59.1 million, representing 5.4%100%, of our total deposits. Our loan-to-deposit ratio was 99% at SeptemberJune 30, 20172022 and 107%97% at December 31, 2016.2021.
The following is a detail of our deposit accounts:
September 30, | December 31, | ||||
(dollars in thousands) | 2017 | 2016 | |||
Non-interest bearing | $ | 272,758 | 235,538 | ||
Interest bearing: | |||||
NOW accounts | 209,607 | 234,949 | |||
Money market accounts | 533,575 | 345,117 | |||
Savings | 15,659 | 14,942 | |||
Time, less than $100,000 | 54,133 | 48,638 | |||
Time and out-of-market deposits, $100,000 and over | 256,845 | 211,967 | |||
Total deposits | $ | 1,342,577 | 1,091,151 |
June 30, | December 31, | |||||||
(dollars in thousands) | 2022 | 2021 | ||||||
Non-interest bearing | $ | 799,169 | 768,650 | |||||
Interest bearing: | ||||||||
NOW accounts | 364,189 | 401,788 | ||||||
Money market accounts | 1,320,329 | 1,201,099 | ||||||
Savings | 41,944 | 39,696 | ||||||
Time, less than $250,000 | 62,340 | 68,179 | ||||||
Time and out-of-market deposits, $250,000 and over | 282,187 | 84,414 | ||||||
Total deposits | $ | 2,870,158 | 2,563,826 |
During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $1.2$2.59 billion and $937.5 million$2.48 billion at SeptemberJune 30, 2017,2022, and December 31, 2016,2021, respectively.
The following table shows the average balance amounts and the average rates paid on deposits.
Nine months ended | |||||||||
September 30, | |||||||||
2017 | 2016 | ||||||||
(dollars in thousands) | Amount | Rate | Amount | Rate | |||||
Noninterest bearing demand deposits | $ | 256,731 | -% | 198,166 | -% | ||||
Interest bearing demand deposits | 220,066 | 0.18% | 201,257 | 0.16% | |||||
Money market accounts | 435,939 | 0.76% | 312,833 | 0.42% | |||||
Savings accounts | 15,551 | 0.05% | 12,438 | 0.05% | |||||
Time deposits less than $100,000 | 50,345 | 0.81% | 56,034 | 0.73% | |||||
Time deposits greater than $100,000 | 259,258 | 1.03% | 213,746 | 0.84% | |||||
Total deposits | $ | 1,237,890 | 0.55% | 994,474 | 0.39% |
Six months ended June 30, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
(dollars in thousands) | Amount | Rate | Amount | Rate | ||||||||||||
Noninterest-bearing demand deposits | $ | 769,844 | 0.00 | % | $ | 621,934 | 0.00 | % | ||||||||
Interest-bearing demand deposits | 397,763 | 0.13 | % | 289,640 | 0.06 | % | ||||||||||
Money market accounts | 1,214,062 | 0.30 | % | 1,077,309 | 0.22 | % | ||||||||||
Savings accounts | 40,707 | 0.05 | % | 30,750 | 0.05 | % | ||||||||||
Time deposits less than $100,000 | 23,406 | 0.30 | % | 32,393 | 0.52 | % | ||||||||||
Time deposits greater than $100,000 | 195,334 | 0.39 | % | 161,997 | 0.91 | % | ||||||||||
Total deposits | $ | 2,641,116 | 0.19 | % | $ | 2,214,023 | 0.19 | % |
During the ninefirst six months ended September 30, 2017,of 2022, our average transaction account balances increased by $203.6$427.1 million, or 28.1%19.3%, from the nine months ended September 30, 2016,prior year, while our average time deposit balances increased by $39.8 million during the same nine month period.$24,000, or 12.5%.
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000$250,000 or more at SeptemberJune 30, 20172022 was as follows:
(dollars in thousands) | September 30, 2017 | |
Three months or less | $ | 54,404 |
Over three through six months | 69,842 | |
Over six through twelve months | 72,512 | |
Over twelve months | 60,087 | |
Total | $ | 256,845 |
Included in time deposits of $100,000 or more at September 30, 2017 is $57.3 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 1.08%.
(dollars in thousands) | June 30, 2022 | |||
Three months or less | $ | 125,510 | ||
Over three through six months | 69,975 | |||
Over six through twelve months | 74,329 | |||
Over twelve months | 12,373 | |||
Total | $ | 282,187 |
Time deposits that meet or exceed the FDIC insurance limit of $250,000 at SeptemberJune 30, 20172022 and December 31, 20162021 were $181.7$282.2 million and $153.7$84.4 million, respectively.
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Liquidity and Capital Resources
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
At SeptemberJune 30, 20172022 and December 31, 2016,2021 our liquid assets, consisting of cash and due from banks and federal funds sold, amounted to $74.6cash equivalents totaled $182.1 million and $46.6$167.2 million, respectively, or 4.8%5.5% and 3.5%5.7% of total assets, respectively. Our investment securities at SeptemberJune 30 20172022 and December 31, 20162021 amounted to $81.5$104.1 million and $70.2$124.3 million, respectively, or 5.2%3.2% and 4.2% of total assets, for both periods. The increase in cash and cash equivalents is primarily attributable to our effort to increase the amount of on balance sheet liquidity. In addition, investmentrespectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner; however, approximately 12.5% of these securities are pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash.manner.
Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain fourfive federal funds purchased lines of credit with correspondent banks totaling $72.0$118.5 million for which there were no borrowings against the lines of credit at SeptemberJune 30, 2017.2022.
We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at SeptemberJune 30, 20172022 was $243.0$556.6 million, based primarily on the Bank’s $2.5 million investment in FHLB stock, as well as qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at SeptemberJune 30, 20172022 and December 31, 20162021 we had $188.8$315.2 million and $130.1$254.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.
We entered intoalso have a new, unsecured interest only line of credit for $15.0 million with another financial institution effectivefor $15.0 million, which was unused at June 30, 2017.2022. The line of credit bearswas renewed on December 21, 2021 at an interest at LIBORrate of One Month CME Term SOFR plus 2.50%3.5% and matures on June 30, 2020. Asa maturity date of September 30, 2017, the line of credit was unused. The loan agreement contains various financial covenants related to capital, earnings and asset quality.December 20, 2023.
We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB and short-term repurchase agreements will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.
Total shareholders’ equity was $147.4$282.6 million at SeptemberJune 30, 20172022 and $109.9$277.9 million at December 31, 2016.2021. The $37.6$4.7 million increase from December 31, 20162021 is primarily related to the issuance of 805,000 shares of common stock on May 2, 2017 in a public offering. The common stock was issued at $32.75 per share for net proceeds of $24.8 million. Proceeds from the offering were used to improve our capital structure, including to repay our former $10 million line of credit with another financial institution, to fund future organic growth, and for working capital and other general corporate purposes. Net income of $11.0$15.2 million forduring the first ninesix months of 2017 also contributed2022 and stock option exercises and equity compensation expenses of $1.7 million, partially offset by a $9.4 million decrease in other comprehensive loss and the tax-effected impact of $2.8 million of expense related to the increase in shareholders’ equity.adoption of CECL recorded as an adjustment to retained earnings.
43
The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the ninesix months ended SeptemberJune 30, 20172022 and the year ended December 31, 2016.2021. Since our inception, we have not paid cash dividends.
September 30, 2017 | December 31, 2016 | |||
Return on average assets | 0.99% | 1.04% | ||
Return on average equity | 11.28% | 12.73% | ||
Return on average common equity | 11.28% | 12.73% | ||
Average equity to average assets ratio | 8.81% | 8.16% | ||
Tangible common equity to assets ratio | 9.47% | 8.19% |
At both the holding company and Bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies.
June 30, 2022 | December 31, 2021 | |||||||
Return on average assets | 1.01 | % | 1.75 | % | ||||
Return on average equity | 10.95 | % | 18.64 | % | ||||
Return on average common equity | 10.95 | % | 18.64 | % | ||||
Average equity to average assets ratio | 9.21 | % | 9.39 | % | ||||
Tangible common equity to assets ratio | 8.60 | % | 9.50 | % |
Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the regulatory frameworkunrealized gain or loss on securities available for prompt corrective action, we must meet specific capital guidelines that involve quantitative measuressale, minus certain intangible assets. In determining the amount of risk-weighted assets, liabilities, andall assets, including certain off-balance sheet items as calculated under regulatory accounting practices. Ourassets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital amounts and classificationsconsists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also subjectrequired to qualitative judgments bymaintain capital at a minimum level based on total average assets, which is known as the regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.Tier 1 leverage ratio.
Regulatory capital rules, released in July 2013which we refer to implement capital standards referred to as Basel III, and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with moreconsolidated assets of less than $1$3 billion (such as the Company). Although we had over $3 billion in total consolidated assets. The requirements inassets at June 30, 2022, under Federal Reserve guidance, the rule began to phase in for us on January 1, 2015 andCompany will be fully phased in by January 1, 2019.
The rule includes certain new and higher risk-based capital and leverage requirements than those currently in place. Specifically, the following minimum capital requirements apply to us:
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Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and,maintain its status as a result, will retain the pre-existing treatment for AOCI.
“small bank holding company” until March 2023. In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of itsour minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, Common Equity, but the buffer applies to all three measurements (Common Equity(common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consistconsists of an additional amount of common equityCET1 equal to 2.5% of risk-weighted assets. As
To be considered “well-capitalized” for purposes of January 1, 2016, we are required to holdcertain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital conservation bufferratio of 0.625%at least 10%, increasing by that amount each successive year until 2019.
In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equitya total Tier 1 capital ratio of at least 8%, a common equity exposures,Tier 1 capital ratio of at least 6.5%, and claims on securities firms, that are used in the denominatora leverage ratio of the three risk-basedat least 5%. As of June 30, 2022, our capital ratios.ratios exceed these ratios and we remain “well capitalized.”
It is management’s belief that, as
44
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.
September 30, 2017 | |||||||||||||
To be well capitalized | |||||||||||||
under prompt | |||||||||||||
For capital | corrective | ||||||||||||
adequacy purposes | action provisions | ||||||||||||
Actual | minimum | minimum | |||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||
Total Capital (to risk weighted assets) | $ | 172,876 | 13.33% | 103,772 | 8.00% | 129,715 | 10.00% | ||||||
Tier 1 Capital (to risk weighted assets) | 157,297 | 12.13% | 77,829 | 6.00% | 103,772 | 8.00% | |||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 157,297 | 12.13% | 58,372 | 4.50% | 84,314 | 6.50% | |||||||
Tier 1 Capital (to average assets) | 157,297 | 10.15% | 61,992 | 4.00% | 77,490 | 5.00% |
June 30, 2022 | ||||||||||||||||||||||||
Actual | For capital adequacy purposes minimum plus the capital conservation buffer | To be well capitalized under prompt corrective action provisions minimum | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to risk weighted assets) | $ | 347,708 | 13.45 | % | $ | 271,451 | 10.50 | % | $ | 258,525 | 10.00 | % | ||||||||||||
Tier 1 Capital (to risk weighted assets) | 315,369 | 12.20 | % | 219,746 | 8.50 | % | 206,820 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 315,369 | 12.20 | % | 180,967 | 7.00 | % | 168,041 | 6.50 | % | |||||||||||||||
Tier 1 Capital (to average assets) | 315,369 | 10.01 | % | 125,964 | 4.00 | % | 157,455 | 5.00 | % | |||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
Actual | For capital adequacy purposes minimum plus the capital conservation buffer | To be well capitalized under prompt corrective action provisions minimum | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to risk weighted assets) | $ | 331,052 | 14.36 | % | $ | 242,048 | 10.50 | % | $ | 230,522 | 10.00 | % | ||||||||||||
Tier 1 Capital (to risk weighted assets) | 302,217 | 13.11 | % | 195,944 | 8.50 | % | 184,418 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 302,217 | 13.11 | % | 161,365 | 7.00 | % | 149,839 | 6.50 | % | |||||||||||||||
Tier 1 Capital (to average assets) | 302,217 | 10.55 | % | 114,537 | 4.00 | % | 143,172 | 5.00 | % |
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The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.
September 30, 2017 | |||||||||||||
To be well capitalized | |||||||||||||
under prompt | |||||||||||||
For capital | corrective | ||||||||||||
adequacy purposes | action provisions | ||||||||||||
Actual | minimum | minimum | |||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||
Total Capital (to risk weighted assets) | $ | 176,121 | 13.58% | 103,772 | 8.00% | N/A | N/A | ||||||
Tier 1 Capital (to risk weighted assets) | 160,542 | 12.38% | 77,829 | 6.00% | N/A | N/A | |||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 147,542 | 11.37% | 58,372 | 4.50% | N/A | N/A | |||||||
Tier 1 Capital (to average assets) | 160,542 | 10.36% | 62,010 | 4.00% | N/A | N/A |
June 30, 2022 | ||||||||||||||||||||||||
Actual | For capital adequacy purposes minimum plus the capital conservation buffer (1) | To be well capitalized under prompt corrective action provisions minimum | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to risk weighted assets) | $ | 361,119 | 13.97 | % | $ | 271,451 | 10.50 | % | N/A | N/A | ||||||||||||||
Tier 1 Capital (to risk weighted assets) | 305,780 | 11.83 | % | 219,746 | 8.50 | % | N/A | N/A | ||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 292,780 | 11.33 | % | 180,967 | 7.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 Capital (to average assets) | 305,780 | 9.71 | % | 125,980 | 4.00 | % | N/A | N/A | ||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
Actual | For capital adequacy purposes minimum plus the capital conservation buffer (1) | To be well capitalized under prompt corrective action provisions minimum | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to risk weighted assets) | $ | 343,476 | 14.90 | % | $ | 242,048 | 10.50 | % | N/A | N/A | ||||||||||||||
Tier 1 Capital (to risk weighted assets) | 291,641 | 12.65 | % | 195,944 | 8.50 | % | N/A | N/A | ||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 278,641 | 12.09 | % | 161,365 | 7.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 Capital (to average assets) | 291,641 | 10.18 | % | 114,555 | 4.00 | % | N/A | N/A |
(1) | Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes. |
The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Since our inception, we have not paid cash dividends.
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Effect of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.
Off-Balance Sheet Risk
Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At SeptemberJune 30, 2017,2022, unfunded commitments to extend credit were $265.2$738.6 million, of which $68.2$273.8 million waswere at fixed rates and $197.0$465.0 million waswere at variable rates. At December 31, 2016,2021, unfunded commitments to extend credit were $226.6$618.7 million, of which approximately $57.8$205.4 million waswere at fixed rates and $168.8$413.3 million waswere at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. As disclosed in Note 6 – Derivative Financial Instruments,Following the adoption of CECL on January 1, 2022, we had mortgage loan interest rate lockrecorded a reserve for unfunded commitments of $29.3$2.0 million, and $18.0or 0.31% of total unfunded commitments. As of June 30, 2022, the reserve for unfunded commitments was $2.3 million asor 0.32% of Septembertotal unfunded commitments.
At June 30, 20172022 and December 31, 2016, respectively.
At September 30, 2017 and December 31, 2016,2021, there were commitments under letters of credit for $6.0$12.3 million and $4.4$10.2 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Market Risk and Interest Rate Sensitivity
Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
As of September 30, 2017, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.
Critical Accounting PoliciesEstimates
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2016, as filed in our Annual Report on Form 10-K.
Certain accounting policies inherently involve significanta greater reliance on the use of estimates, assumptions and judgments and, assumptions by us thatas such, have a material impact on the carrying valuegreater possibility of certain assets and liabilities. We consider these accounting policies toproducing results that could be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors,materially different than originally reported, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations. Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021, for a description our significant accounting policies that use critical accounting estimates.
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We have historically identified the determination of the allowance for loan losses as a significant accounting policy that uses critical accounting estimates. On January 1, 2022, we adopted the new CECL accounting methodology that requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans and other financial assets measured at amortized cost. In prior periods, our allowance was based on the incurred loss methodology where we recognized an allowance for loan losses based on probable incurred losses. We believe that the accounting estimates relating to the allowance for credit losses is also a “critical accounting policy” as:
● | changes in the provision for credit losses can materially affect our financial results; |
● | estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate lifetime probability of default and loss given default; |
● | the allowance for credit losses is influenced by factors outside of our control such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses; and |
● | considerable judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses. |
Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is uncertainty inherent in these estimates. Our estimate of lifetime expected credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our allowance and provision for credit losses. See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for a discussion of our Allowance for Credit Losses.
Accounting, Reporting, and Regulatory Matters
Recently Issued
See Note 1 – Summary of Significant Accounting StandardsThe following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by us:
In May 2014,Policies in the FASB issued guidanceaccompanying notes to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017.
The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of our revenues will not be affected. The Company is currently assessing our revenue contracts related to revenue streams that are within the scope of the standard. Our accounting policies will not change materially since the principles of revenue recognition from the ASU are largely consistent with existing guidance and current practices applied by our businesses. We have not identified material changes to the timing or amount of revenue recognition. Based on the updated guidance, we do anticipate changes in our disclosures associated with our revenues.
In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective forconsolidated financial statements included elsewhere in this report for details of recently issued for annual periods beginning after December 15, 2016,accounting pronouncements and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
We expect to adopt the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts and activities. We have also started developing our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2016 future minimum lease payments were $10.2 million). We do not expect a material change to the timing of expense recognition, but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures and may need to provide additional information as a result of adoption of the ASU.
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate thetheir expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. These amendments did not have a material effect on the Company’s financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.
The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we do not expect to elect that option. We are evaluating the impact of the ASU on our consolidated financial statements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows, and in November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify the presentation and classification how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.
In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 2. Management’s Discussion
Market risk is the risk of loss from adverse changes in market prices and Analysisrates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
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As of June 30, 2022, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial ConditionStatements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and Resultsother relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity Risk.changes in market conditions.
Interest rate scenario | Change in net interest income from base | |||
Up 300 basis points | (0.25 | )% | ||
Up 200 basis points | 0.17 | % | ||
Up 100 basis points | 0.49 | % | ||
Base | - | |||
Down 100 basis points | (4.85 | )% | ||
Down 200 basis points | (7.09 | )% | ||
Down 300 basis points | (8.01 | )% |
Item 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the threesix months ended SeptemberJune 30, 2017,2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the company’s financial position, results of operations or cash flows.
Item 1A1A. RISK FACTORS.
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2021, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part 1,I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.
There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.Not applicable
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Issuer Purchases of Registered Equity Securities |
The following table reflects share repurchase activity during the second quarter of 2022:
(d) Maximum | ||||||||||||||||
(c) Total | Number (or | |||||||||||||||
Number of | Approximate | |||||||||||||||
Shares (or | Dollar Value) of | |||||||||||||||
Units) | Shares (or | |||||||||||||||
(a) Total | Purchased as | Units) that May | ||||||||||||||
Number of | Part of Publicly | Yet Be | ||||||||||||||
Shares (or | (b) Average | Announced | Purchased | |||||||||||||
Units) | Price Paid per | Plans or | Under the Plans | |||||||||||||
Period | Purchased | Share (or Unit) | Programs | or Programs | ||||||||||||
April 1, 2022 – April 30, 2022 | - | - | - | - | ||||||||||||
May 1, 2022 – May 31, 2022 | - | - | - | - | ||||||||||||
June 1, 2022 – June 30, 2022 | - | - | - | 399,026* | ||||||||||||
Total | - | - | - | 399,026* |
*On June 21, 2022, the Company announced a share repurchase plan allowing us to repurchase up to 399,026 shares of our common stock (the “Repurchase Plan”). As of June 30, 2022, we have not repurchased any of the shares authorized for repurchase under the Repurchase Plan. The Company is not obligated to purchase any such shares under the Repurchase Plan, and the Repurchase Plan may be discontinued, suspended or restarted at any time; however, repurchases under the Repurchase Plan after December 31, 2022 would require additional approval of our Board of Directors and the Federal Reserve.
Item 3. DEFAULTS UPON SENIOR SECURITIES.Not applicable
None.
Item 4. MINE SAFETY DISCLOSURES.
Not applicableapplicable.
Item 5. OTHER INFORMATION.Not applicable
None.
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Item 6. EXHIBITS.
The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.INDEX TO EXHIBITS
Exhibit Number | |
INDEX TO EXHIBITS
48
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOUTHERN FIRST BANCSHARES, INC. | |
Registrant | |
Date: August 2, 2022 | /s/ R. Arthur Seaver, Jr. |
R. Arthur Seaver, Jr. | |
Chief Executive Officer (Principal Executive Officer) | |
Date: August 2, 2022 | /s/ Michael D. Dowling |
Michael D. Dowling | |
Chief Financial Officer (Principal Financial and Accounting Officer) |
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