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
For the Quarterly Period Ended March 31, 2021
OR
☐ 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 | 58-2459561 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
100 Verdae Boulevard, Suite 100 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) |
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 | ||
Common Stock | 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 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,” “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: 7,717,5827,853,096 shares of common stock, par value $0.01 per share, were issued and outstanding as of April 28, 2020.27, 2021.
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
March 31, 20202021 Form 10-Q
INDEX
PART I – CONSOLIDATED FINANCIAL INFORMATION | Page | ||||
Consolidated Financial Statements | |||||
3 | |||||
4 | |||||
5 | |||||
6 | |||||
7 | |||||
8 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||||
Quantitative and Qualitative Disclosures about Market Risk | 40 | ||||
Controls and Procedures | 41 | ||||
PART II – OTHER INFORMATION | |||||
41 | |||||
41 | |||||
Unregistered Sales of Equity Securities and Use of Proceeds | 41 | ||||
Defaults upon Senior Securities | 42 | ||||
Mine Safety Disclosures | 42 | ||||
42 | |||||
42 |
2
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | ||||||
(dollars in thousands, except share data) | 2020 | 2019 | |||||
(Unaudited) | (Audited) | ||||||
ASSETS | |||||||
Cash and cash equivalents: | |||||||
Cash and due from banks | $ | 17,521 | 19,196 | ||||
Federal funds sold | 40,277 | 89,256 | |||||
Interest-bearing deposits with banks | 83,314 | 19,364 | |||||
Total cash and cash equivalents | 141,112 | 127,816 | |||||
Investment securities: | |||||||
Investment securities available for sale | 70,507 | 67,694 | |||||
Other investments | 5,341 | 6,948 | |||||
Total investment securities | 75,848 | 74,642 | |||||
Mortgage loans held for sale | 34,948 | 27,046 | |||||
Loans | 2,030,261 | 1,943,525 | |||||
Less allowance for loan losses | (22,462 | ) | (16,642 | ) | |||
Loans, net | 2,007,799 | 1,926,883 | |||||
Bank owned life insurance | 40,281 | 40,011 | |||||
Property and equipment, net | 58,656 | 58,478 | |||||
Deferred income taxes | 4,087 | 4,275 | |||||
Other assets | 9,518 | 8,044 | |||||
Total assets | $ | 2,372,249 | 2,267,195 | ||||
LIABILITIES | |||||||
Deposits | $ | 2,025,698 | 1,876,124 | ||||
Federal Home Loan Bank advances and other borrowings | 65,000 | 110,000 | |||||
Subordinated debentures | 35,917 | 35,890 | |||||
Other liabilities | 35,159 | 39,321 | |||||
Total liabilities | 2,161,774 | 2,061,335 | |||||
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, 7,717,582 and 7,672,678 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 77 | 77 | |||||
Nonvested restricted stock | (1,105 | ) | (803 | ) | |||
Additional paid-in capital | 107,529 | 106,152 | |||||
Accumulated other comprehensive income (loss) | 410 | (298 | ) | ||||
Retained earnings | 103,564 | 100,732 | |||||
Total shareholders’ equity | 210,475 | 205,860 | |||||
Total liabilities and shareholders’ equity | $ | 2,372,249 | 2,267,195 |
March 31, | December 31, | |||||||
(dollars in thousands, except share data) | 2021 | 2020 | ||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 12,621 | 12,920 | |||||
Federal funds sold | 74,268 | 21,744 | ||||||
Interest-bearing deposits with banks | 68,456 | 66,023 | ||||||
Total cash and cash equivalents | 155,345 | 100,687 | ||||||
Investment securities: | ||||||||
Investment securities available for sale | 92,997 | 94,729 | ||||||
Other investments | 1,770 | 3,635 | ||||||
Total investment securities | 94,767 | 98,364 | ||||||
Mortgage loans held for sale | 57,073 | 60,257 | ||||||
Loans | 2,183,682 | 2,142,867 | ||||||
Less allowance for loan losses | (43,499 | ) | (44,149 | ) | ||||
Loans, net | 2,140,183 | 2,098,718 | ||||||
Bank owned life insurance | 48,869 | 41,102 | ||||||
Property and equipment, net | 61,710 | 60,236 | ||||||
Deferred income taxes | 9,813 | 9,518 | ||||||
Other assets | 12,162 | 13,705 | ||||||
Total assets | $ | 2,579,922 | 2,482,587 | |||||
LIABILITIES | ||||||||
Deposits | $ | 2,258,751 | 2,142,758 | |||||
Federal Home Loan Bank advances and other borrowings | 0- | 25,000 | ||||||
Subordinated debentures | 36,025 | 35,998 | ||||||
Other liabilities | 45,625 | 50,537 | ||||||
Total liabilities | 2,340,401 | 2,254,293 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Preferred stock, par value $.01 per share, 10,000,000 shares authorized | 0- | 0- | ||||||
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,853,096 and 7,772,748 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 79 | 78 | ||||||
Nonvested restricted stock | (1,075 | ) | (698 | ) | ||||
Additional paid-in capital | 111,181 | 108,831 | ||||||
Accumulated other comprehensive income (loss) | (90 | ) | 1,023 | |||||
Retained earnings | 129,426 | 119,060 | ||||||
Total shareholders’ equity | 239,521 | 228,294 | ||||||
Total liabilities and shareholders’ equity | $ | 2,579,922 | 2,482,587 |
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 INCOME
(Unaudited)
For the three months | |||||
ended March 31, | |||||
(dollars in thousands, except share data) | 2020 | 2019 | |||
Interest income | |||||
Loans | $ | 23,367 | 20,889 | ||
Investment securities | 396 | 549 | |||
Federal funds sold and interest-bearing deposits with banks | 103 | 174 | |||
Total interest income | 23,866 | 21,612 | |||
Interest expense | |||||
Deposits | 5,174 | 5,375 | |||
Borrowings | 594 | 419 | |||
Total interest expense | 5,768 | 5,794 | |||
Net interest income | 18,098 | 15,818 | |||
Provision for loan losses | 6,000 | 300 | |||
Net interest income after provision for loan losses | 12,098 | 15,518 | |||
Noninterest income | |||||
Mortgage banking income | 2,668 | 1,857 | |||
Service fees on deposit accounts | 262 | 265 | |||
ATM and debit card income | 398 | 380 | |||
Income from bank owned life insurance | 270 | 216 | |||
Other income | 318 | 276 | |||
Total noninterest income | 3,916 | 2,994 | |||
Noninterest expenses | |||||
Compensation and benefits | 7,871 | 6,783 | |||
Occupancy | 1,536 | 1,339 | |||
Outside service and data processing costs | 1,192 | 960 | |||
Insurance | 320 | 318 | |||
Professional fees | 497 | 439 | |||
Marketing | 258 | 260 | |||
Other | 698 | 549 | |||
Total noninterest expenses | 12,372 | 10,648 | |||
Income before income tax expense | 3,642 | 7,864 | |||
Income tax expense | 810 | 1,855 | |||
Net income available to common shareholders | $ | 2,832 | 6,009 | ||
Earnings per common share | |||||
Basic | $ | 0.37 | 0.81 | ||
Diluted | 0.36 | 0.78 | |||
Weighted average common shares outstanding | |||||
Basic | 7,678,598 | 7,459,342 | |||
Diluted | 7,827,173 | 7,741,860 |
For the three months | ||||||||
ended March 31, | ||||||||
(dollars in thousands, except share data) | 2021 | 2020 | ||||||
Interest income | ||||||||
Loans | $ | 22,465 | 23,367 | |||||
Investment securities | 301 | 396 | ||||||
Federal funds sold and interest-bearing deposits with banks | 47 | 103 | ||||||
Total interest income | 22,813 | 23,866 | ||||||
Interest expense | ||||||||
Deposits | 1,155 | 5,174 | ||||||
Borrowings | 385 | 594 | ||||||
Total interest expense | 1,540 | 5,768 | ||||||
Net interest income | 21,273 | 18,098 | ||||||
Provision for loan losses | (300 | ) | 6,000 | |||||
Net interest income after provision for loan losses | 21,573 | 12,098 | ||||||
Noninterest income | ||||||||
Mortgage banking income | 4,633 | 2,668 | ||||||
Service fees on deposit accounts | 185 | 262 | ||||||
ATM and debit card income | 470 | 398 | ||||||
Income from bank owned life insurance | 267 | 270 | ||||||
Other income | 349 | 318 | ||||||
Total noninterest income | 5,904 | 3,916 | ||||||
Noninterest expenses | ||||||||
Compensation and benefits | 6,683 | 6,390 | ||||||
Mortgage production costs | 2,867 | 1,807 | ||||||
Occupancy | 1,637 | 1,533 | ||||||
Other real estate owned expenses | 387 | 0- | ||||||
Outside service and data processing costs | 1,142 | 1,070 | ||||||
Insurance | 301 | 320 | ||||||
Professional fees | 421 | 400 | ||||||
Marketing | 182 | 230 | ||||||
Other | 542 | 622 | ||||||
Total noninterest expenses | 14,162 | 12,372 | ||||||
Income before income tax expense | 13,315 | 3,642 | ||||||
Income tax expense | 2,949 | 810 | ||||||
Net income available to common shareholders | $ | 10,366 | 2,832 | |||||
Earnings per common share | ||||||||
Basic | $ | 1.33 | 0.37 | |||||
Diluted | 1.31 | 0.36 | ||||||
Weighted average common shares outstanding | ||||||||
Basic | 7,774,515 | 7,678,598 | ||||||
Diluted | 7,908,537 | 7,827,173 |
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 COMPREHENSIVE INCOME
(Unaudited)
For the three months | |||||||
ended March 31, | |||||||
(dollars in thousands) | 2020 | 2019 | |||||
Net income | $ | 2,832 | 6,009 | ||||
Other comprehensive income: | |||||||
Unrealized gain on securities available for sale: | |||||||
Unrealized holding gain arising during the period, pretax | 895 | 684 | |||||
Tax expense | (187 | ) | (143 | ) | |||
Reclassification of realized gain | - | (4 | ) | ||||
Tax expense | - | 1 | |||||
Other comprehensive income | 708 | 538 | |||||
Comprehensive income | $ | 3,540 | 6,547 |
For the three months | ||||||||
ended March 31, | ||||||||
(dollars in thousands) | 2021 | 2020 | ||||||
Net income | $ | 10,366 | 2,832 | |||||
Other comprehensive income: | ||||||||
Unrealized gain on securities available for sale: | ||||||||
Unrealized holding gain (loss) arising during the period, pretax | (1,409 | ) | 895 | |||||
Tax (expense) benefit | 296 | (187 | ) | |||||
Reclassification of realized gain | 0- | 0- | ||||||
Tax expense | 0- | 0- | ||||||
Other comprehensive income (loss) | (1,113 | ) | 708 | |||||
Comprehensive income | $ | 9,253 | 3,540 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
5
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 2019
2020
(Unaudited)
Accumulated | |||||||||||||||||||||||||||
Nonvested | Additional | other | |||||||||||||||||||||||||
Common stock | Preferred stock | restricted | paid-in | comprehensive | Retained | ||||||||||||||||||||||
(dollars in thousands, except share data) | Shares | Amount | Shares | Amount | stock | capital | loss | earnings | Total | ||||||||||||||||||
December 31, 2018 | 7,466,481 | 75 | - | - | (741 | ) | 102,625 | (917 | ) | 72,874 | 173,916 | ||||||||||||||||
Net income | - | - | - | - | - | - | - | 6,009 | 6,009 | ||||||||||||||||||
Proceeds from exercise of stock options | 28,455 | - | - | - | - | 322 | - | - | 322 | ||||||||||||||||||
Issuance of restricted stock | 10,700 | - | - | - | (347 | ) | 347 | - | - | - | |||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 95 | - | - | - | 95 | ||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 306 | - | - | 306 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 538 | - | 538 | ||||||||||||||||||
March 31, 2019 | 7,505,636 | $ | 75 | - | $ | - | $ | (993 | ) | $ | 103,600 | $ | (379 | ) | $ | 78,883 | $ | 181,186 | |||||||||
December 31, 2019 | 7,672,678 | 77 | - | - | (803 | ) | 106,152 | (298 | ) | 100,732 | 205,860 | ||||||||||||||||
Net income | - | - | - | - | - | - | - | 2,832 | 2,832 | ||||||||||||||||||
Proceeds from exercise of stock options | 35,404 | - | - | - | - | 741 | - | - | 741 | ||||||||||||||||||
Issuance of restricted stock | 9,500 | - | - | - | (406 | ) | 406 | - | - | - | |||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 104 | - | - | - | 104 | ||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 230 | - | - | 230 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 708 | - | 708 | ||||||||||||||||||
March 31, 2020 | 7,717,582 | $ | 77 | - | $ | - | $ | (1,105 | ) | $ | 107,529 | $ | 410 | $ | 103,564 | $ | 210,475 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
| ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Nonvested | Additional | other | ||||||||||||||||||||||||||
Common stock | Preferred stock | restricted | paid-in | comprehensive | Retained | |||||||||||||||||||||||
(dollars in thousands, except share data) | Shares | Amount | Shares | Amount | stock | capital | income (loss) | earnings | Total | |||||||||||||||||||
December 31, 2019 | 7,672,678 | $ | 77 | 0- | $ | 0- | $ | (803 | ) | $ | 106,152 | $ | (298 | ) | $ | 100,732 | $ | 205,860 | ||||||||||
Net income | - | - | - | - | - | - | - | 2,832 | 2,832 | |||||||||||||||||||
Proceeds from exercise of stock options | 35,404 | - | - | - | - | 741 | - | - | 741 | |||||||||||||||||||
Issuance of restricted stock | 9,500 | - | - | - | (406 | ) | 406 | - | - | - | ||||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 104 | - | - | - | 104 | |||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 230 | - | - | 230 | |||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 708 | - | 708 | |||||||||||||||||||
| ||||||||||||||||||||||||||||
March 31, 2020 | 7,717,582 | $ | 77 | 0- | $ | 0- | $ | (1,105 | ) | $ | 107,529 | $ | 410 | $ | 103,564 | $ | 210,475 | |||||||||||
December 31, 2020 | 7,772,748 | 78 | 0- | 0- | (698 | ) | 108,831 | 1,023 |
| 119,060 | 228,294 | |||||||||||||||||
Net income | - | - | - | - | - | - | - | 10,366 | 10,366 | |||||||||||||||||||
Proceeds from exercise of stock options | 69,598 | 1 | - | - | - | 1,577 | - | - | 1,578 | |||||||||||||||||||
Issuance of restricted stock | 10,750 | - | - | - | (477 | ) | 477 | - | - | - | ||||||||||||||||||
Compensation expense related to restricted stock, net of tax | - | - | - | - | 100 | - | - | - | 100 | |||||||||||||||||||
Compensation expense related to stock options, net of tax | - | - | - | - | - | 296 | - | - | 296 | |||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (1,113 | ) | - | (1,113 | ) | |||||||||||||||||
March 31, 2021 | 7,853,096 | $ | 79 | 0- | $ | 0- | $ | (1,075 | ) | $ | 111,181 | $ | (90 | ) | $ | 129,426 | $ | 239,521 |
See notes to consolidated financial statements that are an integral part of these consolidated statements. |
6
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended | |||||||
March 31, | |||||||
(dollars in thousands) | 2020 | 2019 | |||||
Operating activities | |||||||
Net income | $ | 2,832 | 6,009 | ||||
Adjustments to reconcile net income to cash provided by (used for) operating activities: | |||||||
Provision for loan losses | 6,000 | 300 | |||||
Depreciation and other amortization | 549 | 453 | |||||
Accretion and amortization of securities discounts and premium, net | 116 | 83 | |||||
Net change in operating leases | 55 | 447 | |||||
Compensation expense related to stock options and restricted stock grants | 334 | 401 | |||||
Gain on sale of loans held for sale | (2,778 | ) | (1,775 | ) | |||
Loans originated and held for sale | (95,423 | ) | (55,178 | ) | |||
Proceeds from sale of loans held for sale | 90,299 | 56,801 | |||||
Increase in cash surrender value of bank owned life insurance | (270 | ) | (216 | ) | |||
Decrease in deferred tax asset | - | 1 | |||||
Increase in other assets, net | (1,490 | ) | (400 | ) | |||
Increase (decrease) in other liabilities | (3,782 | ) | 5,978 | ||||
Net cash provided by (used for) operating activities | (3,558 | ) | 12,904 | ||||
Investing activities | |||||||
Increase (decrease) in cash realized from: | |||||||
Increase in loans, net | (86,916 | ) | (56,643 | ) | |||
Purchase of property and equipment | (1,119 | ) | (266 | ) | |||
Purchase of investment securities: | |||||||
Available for sale | (6,302 | ) | - | ||||
Payments and maturities, calls and repayments of investment securities: | |||||||
Available for sale | 4,269 | 2,205 | |||||
Other investments | 1,607 | 812 | |||||
Net cash used for investing activities | (88,461 | ) | (53,892 | ) | |||
Financing activities | |||||||
Increase (decrease) in cash realized from: | |||||||
Increase in deposits, net | 149,574 | 110,099 | |||||
Decrease in Federal Home Loan Bank advances and other borrowings, net | (45,000 | ) | (25,000 | ) | |||
Proceeds from the exercise of stock options and warrants | 741 | 322 | |||||
Net cash provided by financing activities | 105,315 | 85,421 | |||||
Net increase in cash and cash equivalents | 13,296 | 44,433 | |||||
Cash and cash equivalents at beginning of the period | 127,816 | 72,873 | |||||
Cash and cash equivalents at end of the period | $ | 141,112 | 117,306 | ||||
Supplemental information | |||||||
Cash paid for | |||||||
Interest | $ | 7,103 | 5,570 | ||||
Income taxes | - | - | |||||
Schedule of non-cash transactions | |||||||
Unrealized gain on securities, net of income taxes | 708 | 541 | |||||
Right-of-use assets obtained in exchange for lease obligations: | |||||||
Operating leases | - | 15,395 |
See notes to consolidated financial statements that are an integral part of these consolidated statements.
| ||||||||
For the three months ended | ||||||||
March 31, | ||||||||
(dollars in thousands) | 2021 | 2020 | ||||||
Operating activities | ||||||||
Net income | $ | 10,366 | 2,832 | |||||
Adjustments to reconcile net income to cash provided by (used for) operating activities: | ||||||||
Provision for loan losses | (300 | ) | 6,000 | |||||
Depreciation and other amortization | 551 | 549 | ||||||
Accretion and amortization of securities discounts and premium, net | 232 | 116 | ||||||
Loss on sale of real estate owned | 380 | 0- | ||||||
Gain on sale of fixed assets | (10 | ) | 0- | |||||
Net change in operating leases | 121 | 55 | ||||||
Compensation expense related to stock options and restricted stock grants | 396 | 334 | ||||||
Gain on sale of loans held for sale | (4,813 | ) | (2,778 | ) | ||||
Loans originated and held for sale | (173,380 | ) | (95,423 | ) | ||||
Proceeds from sale of loans held for sale | 181,377 | 90,299 | ||||||
Increase in cash surrender value of bank owned life insurance | (267 | ) | (270 | ) | ||||
Decrease in deferred tax asset | 1 | 0- | ||||||
Decrease (increase) in other assets | 376 |
| (1,490 | ) | ||||
Decrease in other liabilities | (4,461 | ) | (3,782 | ) | ||||
Net cash provided by (used for) operating activities | 10,569 |
| (3,558 | ) | ||||
Investing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Increase in loans, net | (41,165 | ) | (86,916 | ) | ||||
Purchase of property and equipment | (2,609 | ) | (1,119 | ) | ||||
Purchase of investment securities: | ||||||||
Available for sale | (5,366 | ) | (6,302 | ) | ||||
Payments and maturities, calls and repayments of investment securities: | ||||||||
Available for sale | 5,458 | 4,269 | ||||||
Other investments | 1,862 | 1,607 | ||||||
Purchase of bank owned life insurance | (7,500 | ) | 0- | |||||
Proceeds from sale of fixed assets | 50 | 0- | ||||||
Proceeds from sale of other real estate owned | 788 | 0- | ||||||
Net cash used for investing activities | (48,482 | ) | (88,461 | ) | ||||
Financing activities | ||||||||
Increase (decrease) in cash realized from: | ||||||||
Increase in deposits, net | 115,993 | 149,574 | ||||||
Decrease in Federal Home Loan Bank advances and other borrowings, net | (25,000 | ) | (45,000 | ) | ||||
Proceeds from the exercise of stock options | 1,578 | 741 | ||||||
Net cash provided by financing activities | 92,571 | 105,315 | ||||||
Net increase in cash and cash equivalents | 54,658 | 13,296 | ||||||
Cash and cash equivalents at beginning of the period | 100,687 | 127,816 | ||||||
Cash and cash equivalents at end of the period | $ | 155,345 | 141,112 | |||||
Supplemental information | ||||||||
Cash paid for | ||||||||
Interest | $ | 2,767 | 7,103 | |||||
Income taxes | 0- | 0- | ||||||
Schedule of non-cash transactions | ||||||||
Unrealized gain (loss) on securities, net of income taxes | (1,113 | ) | 708 |
See notes to consolidated financial statements that are an integral part of these consolidated statements. |
7
SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Nature of Business and Basis of Presentation
Business Activity
Southern First Bancshares, Inc.(the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the “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-month period ended March 31, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. 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, 20192020 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 2, 2020.2021. 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
In determining proper segment definition, the Company considers 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 10 – Reportable Segments” for further information on the reporting for the Company’s three business segments.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP 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 loan 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.
Risks and UncertaintiesIn December 2019, a novel strain
The unprecedented and rapid spread of coronavirus (“COVID-19”) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in the Bank’s markets. In response to the COVID-19 pandemic, the governments of the states in which the Bank has retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.
The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our clients, employees and vendors.
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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.
On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect thehave had, and are expected to continue to have, possibly materially, an adverse effect on Company’s business, financial condition and results of operations. As a result ofFor instance, the spread of COVID-19, economic uncertainties have arisen which are likely to negatively impact netpandemic has had negative effects on the Bank’s interest income, provision for loan losses, and certain transaction-based line items of noninterest income. Other financial impactimpacts could occur though such potential impact is unknown at this time.
As of March 31, 2020,2021, the CompanyCompany’s and Bankthe 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 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 subsidiary bank. As of April 21, 2020,March 31, 2021, the entire $15.0 million line was being utilized by the Company.unused.
As of March 31, 2020, over 400 of our clients had requested loan payment deferrals or payments of interest only on loans totaling $380.2 million, of which 93.3% were commercial loans. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty; however, three client relationships, with loans totaling $2.9 million, were granted short-term loan modifications which were considered TDRs due to the client experiencing financial difficulty prior to the pandemic.Reclassifications
In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends. The table below provides a breakdown of loan modification requests due to the COVID-19 pandemic by type of concession.
March 31, 2020 | ||||||||
(dollars in thousands) | # Loans | Amount | % of Total Portfolio | |||||
Payment deferrals | 252 | $ | 208,555 | 10.3 | % | |||
Interest only | 170 | 168,723 | 8.3 | % | ||||
Financial difficulty (TDR) | 6 | 2,925 | 0.1 | % | ||||
428 | $ | 380,203 | 18.7 | % |
Through April 21, 2020, we have modified more than 750 loans totaling $591.8 million which remain predominately in the commercial loan categories.
While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we have identified nine loan categories considered to be “at-risk” of significant impact. The table below identifies these segments as well as the outstanding, committed and modified loan balances for each industry.
March 31, 2020 | |||||||||||||||
% of | |||||||||||||||
% of Total | Total | Committed | Total | ||||||||||||
Balance | Loans | Committed | Balance | Modified | |||||||||||
(dollars in thousands) | Outstanding | Outstanding | Balance | Outstanding | Balance | % Modified | |||||||||
Religious organizations | $ | 56,306 | 2.8% | $ | 88,422 | 63.6% | $ | 1,539 | 2.7% | ||||||
Entertainment facilities | 4,605 | 0.2% | 9,464 | 48.7% | 255 | 5.5% | |||||||||
Hotels | 82,227 | 4.1% | 104,155 | 78.9% | 6,050 | 7.4% | |||||||||
Personal care businesses | 1,349 | 0.1% | 1,385 | 97.4% | 137 | 10.2% | |||||||||
Restaurants | 48,352 | 2.4% | 53,526 | 90.3% | 3,673 | 7.6% | |||||||||
Sports facilities | 22,229 | 1.1% | 22,882 | 97.1% | 683 | 3.1% | |||||||||
Travel related businesses | 3,328 | 0.2% | 4,085 | 81.5% | 555 | 16.7% | |||||||||
Private healthcare facilities | 36,462 | 1.8% | 41,899 | 87.0% | 12,531 | 34.4% | |||||||||
Non-essential retail | 154,450 | 7.6% | 160,702 | 96.1% | 13,843 | 9.0% | |||||||||
Total | $ | 409,308 | 20.2% | $ | 486,520 | 84.1% | $ | 39,266 | 9.6% |
As of April 21, 2020, the total outstanding balance within these nine portfolios was $413.4 million with approximately 48% of the balances having been modified.
We continue to monitor unfunded commitments through the pandemic, including home equity lines of credit, for evidence of increased credit exposure as borrowers utilize these lines for liquidity purposes.
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.
Newly Issued, But Not Yet Effective Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for all annual and interim periods beginning after December 31, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. Adoption will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has established a team of individuals from credit, finance and risk management to evaluate the requirements of the new standard and the impact it will have on its processes.
In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments affect a variety of Topics in the Accounting Standards Codification. For public business entities that meet the definition of a smaller reporting company, such as the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as the Company has adopted to amendments in ASU 2016-13. Currently, the Company is evaluating the impact of adoption on its financial statements and does not expect to adopt the ASU before the effective period.
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Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 2 – Investment Securities
The amortized costs and fair value of investment securities are as follows:
March 31, 2020 | |||||||||
Amortized | Gross Unrealized | Fair | |||||||
(dollars in thousands) | Cost | Gains | Losses | Value | |||||
Available for sale | |||||||||
US government agencies | $ | 500 | - | 1 | 499 | ||||
SBA securities | 519 | - | 18 | 501 | |||||
State and political subdivisions | 9,385 | 295 | 1 | 9,679 | |||||
Asset-backed securities | 12,929 | - | 643 | 12,286 | |||||
Mortgage-backed securities | |||||||||
FHLMC | 10,034 | 270 | 4 | 10,300 | |||||
FNMA | 33,057 | 702 | 135 | 33,624 | |||||
GNMA | 3,565 | 53 | - | 3,618 | |||||
Total mortgage-backed securities | 46,656 | 1,025 | 139 | 47,542 | |||||
Total investment securities available for sale | $ | 69,989 | 1,320 | 802 | 70,507 | ||||
December 31, 2019 | |||||||||
Amortized | Gross Unrealized | Fair | |||||||
Cost | Gains | Losses | Value | ||||||
Available for sale | |||||||||
US government agencies | $ | 500 | - | 1 | 499 | ||||
SBA securities | 550 | - | 19 | 531 | |||||
State and political subdivisions | 4,205 | 3 | 24 | 4,184 | |||||
Asset-backed securities | 13,351 | - | 184 | 13,167 | |||||
Mortgage-backed securities | |||||||||
FHLMC | 10,609 | 14 | 15 | 10,608 | |||||
FNMA | 35,275 | 34 | 169 | 35,140 | |||||
GNMA | 3,581 | 5 | 21 | 3,565 | |||||
Total mortgage-backed securities | 49,465 | 53 | 205 | 49,313 | |||||
Total | $ | 68,071 | 56 | 433 | 67,694 |
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March 31, 2021 | ||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||
(dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||
Available for sale | ||||||||||||||
US government agencies | $ | 7,494 | 1 | 232 | 7,263 | |||||||||
SBA securities | 498 | 0- | 18 | 480 | ||||||||||
State and political subdivisions | 19,632 | 451 | 272 | 19,811 | ||||||||||
Asset-backed securities | 11,234 | 58 | 9 | 11,283 | ||||||||||
Mortgage-backed securities | ||||||||||||||
FHLMC | 13,099 | 167 | 254 | 13,012 | ||||||||||
FNMA | 33,870 | 424 | 377 | 33,917 | ||||||||||
GNMA | 7,284 | 35 | 88 | 7,231 | ||||||||||
Total mortgage-backed securities | 54,253 | 626 | 719 | 54,160 | ||||||||||
Total investment securities available for sale | $ | 93,111 | 1,136 | 1,250 | 92,997 |
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December 31, 2020 | ||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||
| Cost | Gains | Losses | Value | ||||||||||
Available for sale | ||||||||||||||
US government agencies | $ | 6,500 | 1 | 8 | 6,493 | |||||||||
SBA securities | 504 | 0- | 19 | 485 | ||||||||||
State and political subdivisions | 18,614 | 804 | 30 | 19,388 | ||||||||||
Asset-backed securities | 11,587 | 15 | 73 | 11,529 | ||||||||||
Mortgage-backed securities | ||||||||||||||
FHLMC | 12,157 | 206 | 47 | 12,316 | ||||||||||
FNMA | 35,893 | 507 | 91 | 36,309 | ||||||||||
GNMA | 8,179 | 53 | 23 | 8,209 | ||||||||||
Total mortgage-backed securities | 56,229 | 766 | 161 | 56,834 | ||||||||||
Total | $ | 93,434 | 1,586 | 291 | 94,729 |
Contractual maturities and yields on the Company’s investment securities at March 31, 20202021 and December 31, 20192020 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.
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March 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 | |||||||||||||||||||||||||||||||
US government agencies | $ | 0- | 0- | 2,497 | 0.36 | % | 3,832 | 1.12 | % | 934 | 1.48 | % | 7,263 | 0.91 | % | ||||||||||||||||
SBA securities | 0- | 0- | 0- | 0- | 0- | 0- | 480 | 0.99 | % | 480 | 0.99 | % | |||||||||||||||||||
State and political subdivisions | 0- | 0- | 470 | 2.13 | % | 2,756 | 1.90 | % | 16,585 | 2.18 | % | 19,811 | 2.14 | % | |||||||||||||||||
Asset-backed securities | 0- | 0- | 0- | 0- | 1,888 | 1.15 | % | 9,395 | 0.97 | % | 11,283 | 1.00 | % | ||||||||||||||||||
Mortgage-backed securities | 0- | 0- | 1,743 | 1.78 | % | 8,867 | 1.78 | % | 43,550 | 1.15 | % | 54,160 | 1.28 | % | |||||||||||||||||
Total | $ | 0- | 0- | 4,710 | 1.06 | % | 17,343 | 1.59 | % | 70,944 | 1.37 | % | 92,997 | 1.40 | % |
March 31, 2020 | |||||||||||||||||||||
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 | $ | - | - | 499 | 1.11% | - | - | - | - | 499 | 1.11% | ||||||||||
SBA securities | - | - | - | - | - | - | 501 | 2.39% | 501 | 2.39% | |||||||||||
State and political subdivisions | - | - | - | - | 972 | 2.65% | 8,707 | 2.86% | 9,679 | 2.84% | |||||||||||
Asset-backed securities | - | - | - | - | 1,402 | 2.22% | 10,884 | 2.45% | 12,286 | 2.43% | |||||||||||
Mortgage-backed securities | - | - | 3,224 | 1.80% | 8,263 | 2.05% | 36,055 | 2.34% | 47,542 | 2.25% | |||||||||||
Total | $ | - | - | 3,723 | 1.71% | 10,637 | 2.13% | 56,147 | 2.44% | 70,507 | 2.36% | ||||||||||
December 31, 2019 | |||||||||||||||||||||
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 | $ | - | - | 499 | 1.97% | - | - | - | - | 499 | 1.97% | ||||||||||
SBA securities | - | - | - | - | - | - | 531 | 2.62% | 531 | 2.62% | |||||||||||
State and political subdivisions | - | - | 808 | 2.81% | 1,283 | 2.96% | 2,093 | 2.67% | 4,184 | 2.79% | |||||||||||
Asset-backed securities | - | - | - | - | 1,493 | 2.34% | 11,674 | 2.61% | 13,167 | 2.58% | |||||||||||
Mortgage-backed securities | - | - | 3,368 | 1.78% | 7,638 | 2.00% | 38,307 | 2.24% | 49,313 | 2.17% | |||||||||||
Total | $ | - | - | 4,675 | 1.98% | 10,414 | 2.17% | 52,605 | 2.34% | 67,694 | 2.29% |
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December 31, 2020 | |||||||||||||||||||||||||||||||
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 | $ | 0- | 0- | 2,501 | 0.37 | % | 2,995 | 1.07 | % | 997 | 1.48 | % | 6,493 | 0.86 | % | ||||||||||||||||
SBA securities | 0- | 0- | 0- | 0- | 0- | 0- | 485 | 0.98 | % | 485 | 0.98 | % | |||||||||||||||||||
State and political subdivisions | 0- | 0- | 470 | 2.13 | % | 3,053 | 1.98 | % | 15,865 | 2.23 | % | 19,388 | 2.18 | % | |||||||||||||||||
Asset-backed securities | 0- | 0- | 0- | 0- | 1,983 | 1.17 | % | 9,546 | 1.00 | % | 11,529 | 1.03 | % | ||||||||||||||||||
Mortgage-backed securities | 0- | 0- | 2,044 | 1.77 | % | 9,544 | 1.74 | % | 45,246 | 1.36 | % | 56,834 | 1.44 | % | |||||||||||||||||
Total | $ | 0- | 0- | 5,015 | 1.10 | % | 17,575 | 1.60 | % | 72,139 | 1.50 | % | 94,729 | 1.50 | % |
The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at March 31, 20202021 and December 31, 2019,2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
March 31, 2020 | ||||||||||||||||||||||||
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 | 1 | $ | 499 | $ | 1 | - | $ | - | $ | - | 1 | $ | 499 | $ | 1 | |||||||||
SBA securities | - | - | - | 1 | 501 | 18 | 1 | 501 | 18 | |||||||||||||||
State and political subdivisions | 1 | 505 | 1 | - | - | - | 1 | 505 | 1 | |||||||||||||||
Asset-backed securities | 5 | 5,489 | 365 | 5 | 6,797 | 278 | 10 | 12,286 | 643 | |||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||
FHLMC | 1 | 258 | 4 | - | - | - | 1 | 258 | 4 | |||||||||||||||
FNMA | - | - | - | 4 | 2,778 | 135 | 4 | 2,778 | 135 | |||||||||||||||
Total | 8 | $ | 6,751 | $ | 371 | 10 | $ | 10,076 | $ | 431 | 18 | $ | 16,827 | $ | 802 | |||||||||
December 31, 2019 | ||||||||||||||||||||||||
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 | 1 | $ | 499 | $ | 1 | - | $ | - | $ | - | 1 | $ | 499 | $ | 1 | |||||||||
SBA securities | - | - | - | 1 | 531 | 19 | 1 | 531 | 19 | |||||||||||||||
State and political subdivisions | 2 | 2,093 | 24 | - | - | - | 2 | 2,093 | 24 | |||||||||||||||
Asset-backed securities | 5 | 5,921 | 68 | 5 | 7,246 | 116 | 10 | 13,167 | 184 | |||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||
FHLMC | 4 | 3,842 | 2 | 4 | 2,323 | 13 | 8 | 6,165 | 15 | |||||||||||||||
FNMA | 14 | 15,500 | 67 | 11 | 9,462 | 102 | 25 | 24,962 | 169 | |||||||||||||||
GNMA | 2 | 2,240 | 6 | 1 | 734 | 15 | 3 | 2,974 | 21 | |||||||||||||||
Total | 28 | $ | 30,095 | $ | 168 | 22 | $ | 20,296 | $ | 265 | 50 | $ | 50,391 | $ | 433 |
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March 31, 2021 | |||||||||||||||||||||||||||
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 | 7 | $ | 6,762 | $ | 232 | 0- | $ | 0- | $ | 0- | 7 | $ | 6,762 | $ | 232 | ||||||||||||
SBA securities | 0- | 0- | 0- | 1 | 479 | 18 | 1 | 479 | 18 | ||||||||||||||||||
State and political subdivisions | 11 | 7,239 | 272 | 0- | 0- | 0- | 11 | 7,239 | 272 | ||||||||||||||||||
Asset-backed securities | 0- | 0- | 0- | 2 | 1,961 | 9 | 2 | 1,961 | 9 | ||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||
FHLMC | 6 | 6,896 | 254 | 0- | 0- | 0- | 6 | 6,896 | 254 | ||||||||||||||||||
FNMA | 12 | 14,882 | 367 | 2 | 1,251 | 10 | 14 | 16,133 | 377 | ||||||||||||||||||
GNMA | 3 | 5,293 | 88 | 0- | 0- | 0- | 3 | 5,293 | 88 | ||||||||||||||||||
Total | 39 | $ | 41,072 | $ | 1,213 | 5 | $ | 3,691 | $ | 37 | 44 | $ | 44,763 | $ | 1,250 |
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December 31, 2020 | |||||||||||||||||||||||||||
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 | 3 | $ | 2,992 | $ | 8 | 0- | $ | 0- | $ | 0- | 3 | $ | 2,992 | $ | 8 | ||||||||||||
SBA securities | 0- | 0- | 0- | 1 | 484 | 19 | 1 | 484 | 19 | ||||||||||||||||||
State and political subdivisions | 8 | 4,861 | 30 | 0- | 0- | 0- | 8 | 4,861 | 30 | ||||||||||||||||||
Asset-backed securities | 0- | 0- | 0- | 6 | 6,998 | 73 | 6 | 6,998 | 73 | ||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||
FHLMC | 4 | 5,313 | 47 | 0- | 0- | 0- | 4 | 5,313 | 47 | ||||||||||||||||||
FNMA | 9 | 11,659 | 66 | 3 | 1,984 | 25 | 12 | 13,643 | 91 | ||||||||||||||||||
GNMA | 2 | 3,838 | 23 | 0- | 0- | 0- | 2 | 3,838 | 23 | ||||||||||||||||||
Total | 26 | $ | 28,663 | $ | 174 | 10 | $ | 9,466 | $ | 117 | 36 | $ | 38,129 | $ | 291 |
At March 31, 2020,2021 the Company had eight39 individual investments with a fair market value of $6.8$41.1 million that were in an unrealized loss position for less than 12 months and ten5 individual investments with a fair market value of $10.1$3.7 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 the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, the Company has concluded that these securities are not impaired on an other-than-temporary basis.
11
Other investments are comprised of the following and are recorded at cost which approximates fair value.
(dollars in thousands) | March 31, 2020 | December 31, 2019 | |||
Federal Home Loan Bank stock | $ | 4,803 | 6,386 | ||
Other investments | 135 | 159 | |||
Investment in Trust Preferred securities | 403 | 403 | |||
Total other investments | $ | 5,341 | 6,948 |
| |||||||
(dollars in thousands) | March 31, 2021 | December 31, 2020 | |||||
Federal Home Loan Bank stock | $ | 1,241 | 3,103 | ||||
Other investments | 126 | 129 | |||||
Investment in Trust Preferred securities | 403 | 403 | |||||
Total other investments | $ | 1,770 | 3,635 |
The Company has evaluated the Federal Home Loan Bank (“FHLB”) stock for impairment and determined that the investment in the FHLB stock is not other than temporarily impaired as of March 31, 20202021 and that ultimate recoverability of the par value of this investment is probable. All of the FHLB stock is used to collateralize advances with the FHLB.
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 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 March 31, 2020,2021, mortgage loans held for sale totaled $34.9$57.1 million compared to $27.0$60.2 million at December 31, 2019. The $7.9 million increase in mortgage loans held for sale during the first quarter of 2020 was driven by an increase in volume of mortgage loans originated and sold in the favorable mortgage rate environment.2020.
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 to investors by the Company, 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. As appropriate, the Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses.
12
NOTE 4 – Loans and Allowance for Loan 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 $3.6$3.9 million as of March 31, 20202021 and $3.3 million as of December 31, 2019.2020.
March 31, 2020 | December 31, 2019 | |||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||
Commercial | ||||||||||||
Owner occupied RE | $ | 422,124 | 20.8% | $ | 407,851 | 21.0% | ||||||
Non-owner occupied RE | 534,846 | 26.3% | 501,878 | 25.8% | ||||||||
Construction | 74,758 | 3.7% | 80,486 | 4.1% | ||||||||
Business | 317,702 | 15.7% | 308,123 | 15.9% | ||||||||
Total commercial loans | 1,349,430 | 66.5% | 1,298,338 | 66.8% | ||||||||
Consumer | ||||||||||||
Real estate | 427,697 | 21.1% | 398,245 | 20.5% | ||||||||
Home equity | 183,099 | 9.0% | 179,738 | 9.3% | ||||||||
Construction | 45,240 | 2.2% | 41,471 | 2.1% | ||||||||
Other | 24,795 | 1.2% | 25,733 | 1.3% | ||||||||
Total consumer loans | 680,831 | 33.5% | 645,187 | 33.2% | ||||||||
Total gross loans, net of deferred fees | 2,030,261 | 100.0% | 1,943,525 | 100.0% | ||||||||
Less—allowance for loan losses | (22,462 | ) | (16,642 | ) | ||||||||
Total loans, net | $ | 2,007,799 | $ | 1,926,883 |
| ||||||||||||||||
March 31, 2021 | December 31, 2020 | |||||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||||
Commercial | ||||||||||||||||
Owner occupied RE | $ | 448,505 | 20.5 | % | $ | 433,320 | 20.2 | % | ||||||||
Non-owner occupied RE | 584,187 | 26.8 | % | 585,269 | 27.3 | % | ||||||||||
Construction | 51,996 | 2.4 | % | 61,467 | 2.9 | % | ||||||||||
Business | 303,895 | 13.9 | % | 307,599 | 14.4 | % | ||||||||||
Total commercial loans | 1,388,583 | 63.6 | % | 1,387,655 | 64.8 | % | ||||||||||
Consumer | ||||||||||||||||
Real estate | 574,541 | 26.3 | % | 536,311 | 25.0 | % | ||||||||||
Home equity | 154,157 | 7.1 | % | 156,957 | 7.3 | % | ||||||||||
Construction | 44,170 | 2.0 | % | 40,525 | 1.9 | % | ||||||||||
Other | 22,231 | 1.0 | % | 21,419 | 1.0 | % | ||||||||||
Total consumer loans | 795,099 | 36.4 | % | 755,212 | 35.2 | % | ||||||||||
Total gross loans, net of deferred fees | 2,183,682 | 100.0 | % | 2,142,867 | 100.0 | % | ||||||||||
Less—allowance for loan losses | (43,499 | ) | (44,149 | ) | ||||||||||||
Total loans, net | $ | 2,140,183 | $ | 2,098,718 |
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.
March 31, 2020 | ||||||||||
After one | ||||||||||
One year | but within | After five | ||||||||
(dollars in thousands) | or less | five years | years | Total | ||||||
Commercial | ||||||||||
Owner occupied RE | $ | 35,613 | 143,626 | 242,885 | 422,124 | |||||
Non-owner occupied RE | 53,806 | 276,462 | 204,578 | 534,846 | ||||||
Construction | 12,178 | 28,280 | 34,300 | 74,758 | ||||||
Business | 86,055 | 151,281 | 80,366 | 317,702 | ||||||
Total commercial loans | 187,652 | 599,649 | 562,129 | 1,349,430 | ||||||
Consumer | ||||||||||
Real estate | 15,969 | 74,920 | 336,808 | 427,697 | ||||||
Home equity | 8,207 | 26,334 | 148,558 | 183,099 | ||||||
Construction | 14,698 | 1,121 | 29,421 | 45,240 | ||||||
Other | 5,696 | 14,763 | 4,336 | 24,795 | ||||||
Total consumer loans | 44,570 | 117,138 | 519,123 | 680,831 | ||||||
Total gross loans, net of deferred fees | $ | 232,222 | 716,787 | 1,081,252 | 2,030,261 | |||||
Loans maturing after one year with: | ||||||||||
Fixed interest rates | $ | 1,425,015 | ||||||||
Floating interest rates | 373,024 |
| |||||||||||||||
March 31, 2021 | |||||||||||||||
After one | |||||||||||||||
One year | but within | After five | |||||||||||||
(dollars in thousands) | or less | five years | years | Total | |||||||||||
Commercial | |||||||||||||||
Owner occupied RE | $ | 24,523 | 134,934 | 289,048 | 448,505 | ||||||||||
Non-owner occupied RE | 46,417 | 328,193 | 209,577 | 584,187 | |||||||||||
Construction | 20,043 | 10,372 | 21,581 | 51,996 | |||||||||||
Business | 77,057 | 136,088 | 90,750 | 303,895 | |||||||||||
Total commercial loans | 168,040 | 609,587 | 610,956 | 1,388,583 | |||||||||||
Consumer | |||||||||||||||
Real estate | 13,740 | 51,884 | 508,917 | 574,541 | |||||||||||
Home equity | 3,637 | 22,883 | 127,637 | 154,157 | |||||||||||
Construction | 802 | 1,361 | 42,007 | 44,170 | |||||||||||
Other | 8,205 | 10,528 | 3,498 | 22,231 | |||||||||||
Total consumer loans | 26,384 | 86,656 | 682,059 | 795,099 | |||||||||||
Total gross loans, net of deferred fees | $ | 194,424 | 696,243 | 1,293,015 | 2,183,682 | ||||||||||
Loans maturing after one year with: | |||||||||||||||
Fixed interest rates | $ | 1,636,382 | |||||||||||||
Floating interest rates | 352,876 |
December 31, 2019 | ||||||||||
After one | ||||||||||
One year | but within | After five | ||||||||
(dollars in thousands) | or less | five years | years | Total | ||||||
Commercial | ||||||||||
Owner occupied RE | $ | 40,476 | 147,945 | 219,430 | 407,851 | |||||
Non-owner occupied RE | 55,187 | 267,879 | 178,812 | 501,878 | ||||||
Construction | 31,035 | 19,278 | 30,173 | 80,486 | ||||||
Business | 84,452 | 146,051 | 77,620 | 308,123 | ||||||
Total commercial loans | 211,150 | 581,153 | 506,035 | 1,298,338 | ||||||
Consumer | ||||||||||
Real estate | 16,663 | 82,445 | 299,137 | 398,245 | ||||||
Home equity | 9,921 | 25,828 | 143,989 | 179,738 | ||||||
Construction | 13,405 | 1,222 | 26,844 | 41,471 | ||||||
Other | 6,422 | 15,022 | 4,289 | 25,733 | ||||||
Total consumer | 46,411 | 124,517 | 474,259 | 645,187 | ||||||
Total gross loan, net of deferred fees | $ | 257,561 | 705,670 | 980,294 | 1,943,525 | |||||
Loans maturing after one year with: | ||||||||||
Fixed interest rates | $ | 1,310,744 | ||||||||
Floating interest rates | 375,220 |
13
| |||||||||||||||
December 31, 2020 | |||||||||||||||
After one | |||||||||||||||
One year | but within | After five | |||||||||||||
(dollars in thousands) | or less | five years | years | Total | |||||||||||
Commercial | |||||||||||||||
Owner occupied RE | $ | 22,232 | 136,031 | 275,057 | 433,320 | ||||||||||
Non-owner occupied RE | 39,359 | 335,249 | 210,661 | 585,269 | |||||||||||
Construction | 21,824 | 15,785 | 23,858 | 61,467 | |||||||||||
Business | 76,662 | 140,959 | 89,978 | 307,599 | |||||||||||
Total commercial loans | 160,077 | 628,024 | 599,554 | 1,387,655 | |||||||||||
Consumer | |||||||||||||||
Real estate | 14,205 | 54,863 | 467,243 | 536,311 | |||||||||||
Home equity | 4,824 | 23,835 | 128,298 | 156,957 | |||||||||||
Construction | 1,629 | 1,234 | 37,662 | 40,525 | |||||||||||
Other | 6,438 | 11,413 | 3,568 | 21,419 | |||||||||||
Total consumer | 27,096 | 91,345 | 636,771 | 755,212 | |||||||||||
Total gross loan, net of deferred fees | $ | 187,173 | 719,369 | 1,236,325 | 2,142,867 | ||||||||||
Loans maturing after one year with: | |||||||||||||||
Fixed interest rates | $ | 1,590,171 | |||||||||||||
Floating interest rates | 365,523 |
Paycheck Protection Program (“PPP”)
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act or the “Act”) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The Small Business Administration (“SBA”) received funding and authority through the Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency. The Act temporarily permits the SBA to guarantee 100% of certain loans under a new program titled the “Paycheck Protection Program” and also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.
We became an approved SBA lender in March 2020 and processed 853 loans under the PPP for a total of $97.5 million during the second quarter of 2020. On June 26, 2020, we completed the sale of our PPP loan portfolio to The Loan Source Inc., together with its servicing partner, ACAP SME LLC.
The SBA is offering a second round of PPP loans through May 31, 2021; however, we do not intend to originate any new PPP loans, but through our relationship with The Loan Source Inc., we may receive a referral fee on PPP loans they originate to our clients. We did not receive any referral fees through March 31, 2021.
Portfolio Segment Methodology
Commercial
Commercial loans are assessed for estimated losses by grading 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.
Consumer
For 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
Commercial
We 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 loan 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 credit risk to average credit risk; however, still have acceptable credit risk.
14
• 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. | |
| |
|
The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.
March 31, 2020 | |||||||||||
Owner | Non-owner | ||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||
Current | $ | 419,978 | 531,119 | 74,758 | 315,562 | 1,341,417 | |||||
30-59 days past due | 1,595 | 3,275 | - | 1,909 | 6,779 | ||||||
60-89 days past due | - | 264 | - | - | 264 | ||||||
Greater than 90 Days | 551 | 188 | - | 231 | 970 | ||||||
$ | 422,124 | 534,846 | 74,758 | 317,702 | 1,349,430 | ||||||
December 31, 2019 | |||||||||||
Owner | Non-owner | ||||||||||
occupied RE | occupied RE | Construction | Business | Total | |||||||
Current | $ | 406,594 | 501,676 | 80,486 | 307,710 | 1,296,466 | |||||
30-59 days past due | 706 | 151 | - | 178 | 1,035 | ||||||
60-89 days past due | - | - | - | - | - | ||||||
Greater than 90 Days | 551 | 51 | - | 235 | 837 | ||||||
$ | 407,851 | 501,878 | 80,486 | 308,123 | 1,298,338 |
| |||||||||||||||||||
March 31, 2021 | |||||||||||||||||||
Owner | Non-owner | ||||||||||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||||||||||
Current | $ | 448,298 | 583,489 | 51,996 | 303,808 | 1,387,591 | |||||||||||||
30-59 days past due | 0- | 0- | 0- | 50 | 50 | ||||||||||||||
60-89 days past due | 0- | 147 | 0- | 0- | 147 | ||||||||||||||
Greater than 90 Days | 207 | 551 | 0- | 37 | 795 | ||||||||||||||
$ | 448,505 | 584,187 | 51,996 | 303,895 | 1,388,583 |
| |||||||||||||||||||
December 31, 2020 | |||||||||||||||||||
Owner | Non-owner | ||||||||||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||||||||||
Current | $ | 432,711 | 584,565 | 61,467 | 307,261 | 1,386,004 | |||||||||||||
30-59 days past due | 403 | 282 | 0- | 35 | 720 | ||||||||||||||
60-89 days past due | 0- | 0- | 0- | 266 | 266 | ||||||||||||||
Greater than 90 Days | 206 | 422 | 0- | 37 | 665 | ||||||||||||||
$ | 433,320 | 585,269 | 61,467 | 307,599 | 1,387,655 |
As of March 31, 20202021 and December 31, 2019,2020, loans 30 days or more past due represented 0.60%0.12% and 0.23%0.17% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.39%0.05% and 0.10%0.08% of the Company’s total loan portfolio as of March 31, 20202021 and December 31, 2019,2020, respectively.
15
The tables below provide a breakdown of outstanding commercial loans by risk category.
March 31, 2020 | |||||||||||
Owner | Non-owner | ||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||
Pass | $ | 418,504 | 525,927 | 74,758 | 310,953 | 1,330,142 | |||||
Special mention | 1,321 | 865 | - | 3,271 | 5,457 | ||||||
Substandard | 2,299 | 8,054 | - | 3,478 | 13,831 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 422,124 | 534,846 | 74,758 | 317,702 | 1,349,430 | ||||||
December 31, 2019 | |||||||||||
Owner | Non-owner | ||||||||||
occupied RE | occupied RE | Construction | Business | Total | |||||||
Pass | $ | 404,237 | 492,941 | 80,486 | 301,504 | 1,279,168 | |||||
Special mention | 1,312 | 744 | - | 3,108 | 5,164 | ||||||
Substandard | 2,302 | 8,193 | - | 3,511 | 14,006 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 407,851 | 501,878 | 80,486 | 308,123 | 1,298,338 |
| |||||||||||||||||||
March 31, 2021 | |||||||||||||||||||
Owner | Non-owner | ||||||||||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||||||||||
Pass | $ | 445,915 | 505,500 | 51,861 | 297,637 | 1,300,913 | |||||||||||||
Special mention | 2,074 | 49,394 | 0- | 1,930 | 53,398 | ||||||||||||||
Substandard | 516 | 29,293 | 135 | 4,328 | 34,272 | ||||||||||||||
Doubtful | 0- | 0- | - | 0- | 0- | ||||||||||||||
$ | 448,505 | 584,187 | 51,996 | 303,895 | 1,388,583 |
| |||||||||||||||||||
December 31, 2020 | |||||||||||||||||||
Owner | Non-owner | ||||||||||||||||||
(dollars in thousands) | occupied RE | occupied RE | Construction | Business | Total | ||||||||||||||
Pass | $ | 430,291 | 576,095 | 61,328 | 301,838 | 1,369,552 | |||||||||||||
Special mention | 624 | 587 | 0- | 1,703 | 2,914 | ||||||||||||||
Substandard | 2,405 | 8,587 | 139 | 4,058 | 15,189 | ||||||||||||||
Doubtful | 0- | 0- | 0- | 0- | 0- | ||||||||||||||
$ | 433,320 | 585,269 | 61,467 | 307,599 | 1,387,655 |
Consumer
The 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 following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.
March 31, 2020 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Current | $ | 426,127 | 180,486 | 45,240 | 24,790 | 676,643 | |||||
30-59 days past due | 559 | 1,527 | - | 5 | 2,091 | ||||||
60-89 days past due | - | 886 | - | - | 886 | ||||||
Greater than 90 Days | 1,011 | 200 | - | - | 1,211 | ||||||
$ | 427,697 | 183,099 | 45,240 | 24,795 | 680,831 | ||||||
December 31, 2019 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Current | $ | 396,445 | 179,051 | 41,471 | 25,650 | 642,617 | |||||
30-59 days past due | 799 | 369 | - | 83 | 1,251 | ||||||
60-89 days past due | - | 118 | - | - | 118 | ||||||
Greater than 90 Days | 1,001 | 200 | - | - | 1,201 | ||||||
$ | 398,245 | 179,738 | 41,471 | 25,733 | 645,187 |
| |||||||||||||||||||
March 31, 2021 | |||||||||||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||||||||||
Current | $ | 573,372 | 153,771 | 44,170 | 22,231 | 793,544 | |||||||||||||
30-59 days past due | 551 | 189 | 0- | 0- | 740 | ||||||||||||||
60-89 days past due | 0- | 0- | 0- | 0- | 0- | ||||||||||||||
Greater than 90 Days | 618 | 197 | 0- | 0- | 815 | ||||||||||||||
$ | 574,541 | 154,157 | 44,170 | 22,231 | 795,099 |
| |||||||||||||||||||
December 31, 2020 | |||||||||||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||||||||||
Current | $ | 534,648 | 156,657 | 40,525 | 21,419 | 753,249 | |||||||||||||
30-59 days past due | 0- | 0- | 0- | 0- | 0- | ||||||||||||||
60-89 days past due | 332 | 0- | 0- | 0- | 332 | ||||||||||||||
Greater than 90 Days | 1,331 | 300 | 0- | 0- | 1,631 | ||||||||||||||
$ | 536,311 | 156,957 | 40,525 | 21,419 | 755,212 |
Consumer loans 30 days or more past due were 0.21%0.07% and 0.13%0.09% of total loans as of March 31, 20202021 and December 31, 2019,2020, respectively.
16
The tables below provide a breakdown of outstanding consumer loans by risk category.
March 31, 2020 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Pass | $ | 420,588 | 178,520 | 45,240 | 24,487 | 668,835 | |||||
Special mention | 3,717 | 1,097 | - | 242 | 5,056 | ||||||
Substandard | 3,392 | 3,482 | - | 66 | 6,940 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 427,697 | 183,099 | 45,240 | 24,795 | 680,831 | ||||||
December 31, 2019 | |||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||
Pass | $ | 392,572 | 176,532 | 41,471 | 25,421 | 635,996 | |||||
Special mention | 2,267 | 775 | - | 261 | 3,303 | ||||||
Substandard | 3,406 | 2,431 | - | 51 | 5,888 | ||||||
Doubtful | - | - | - | - | - | ||||||
$ | 398,245 | 179,738 | 41,471 | 25,733 | 645,187 |
| |||||||||||||||||||
March 31, 2021 | |||||||||||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||||||||||
Pass | $ | 565,956 | 147,196 | 43,970 | 22,013 | 779,135 | |||||||||||||
Special mention | 3,993 | 3,888 | 200 | 167 | 8,248 | ||||||||||||||
Substandard | 4,592 | 3,073 | 0- | 51 | 7,716 | ||||||||||||||
Doubtful | 0- | 0- | 0- | 0- | 0- | ||||||||||||||
$ | 574,541 | 154,157 | 44,170 | 22,231 | 795,099 |
| |||||||||||||||||||
December 31, 2020 | |||||||||||||||||||
(dollars in thousands) | Real estate | Home equity | Construction | Other | Total | ||||||||||||||
Pass | $ | 530,515 | 152,154 | 40,525 | 21,290 | 744,484 | |||||||||||||
Special mention | 1,968 | 1,005 | 0- | 91 | 3,064 | ||||||||||||||
Substandard | 3,828 | 3,798 | 0- | 38 | 7,664 | ||||||||||||||
Doubtful | 0- | 0- | 0- | 0- | 0- | ||||||||||||||
$ | 536,311 | 156,957 | 40,525 | 21,419 | 755,212 |
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 nonperforming assets, including nonaccruing TDRs.
(dollars in thousands) | March 31, 2020 | December 31, 2019 | |||||
Commercial | |||||||
Owner occupied RE | $ | - | - | ||||
Non-owner occupied RE | 3,268 | 188 | |||||
Construction | - | - | |||||
Business | 231 | 235 | |||||
Consumer | |||||||
Real estate | 1,821 | 1,829 | |||||
Home equity | 427 | 431 | |||||
Construction | - | - | |||||
Other | - | - | |||||
Nonaccruing troubled debt restructurings | 4,186 | 4,111 | |||||
Total nonaccrual loans, including nonaccruing TDRs | 9,933 | 6,794 | |||||
Other real estate owned | - | - | |||||
Total nonperforming assets | $ | 9,933 | 6,794 | ||||
Nonperforming assets as a percentage of: | |||||||
Total assets | 0.42 | % | 0.30 | % | |||
Gross loans | 0.49 | % | 0.35 | % | |||
Total loans over 90 days past due | $ | 2,181 | 2,038 | ||||
Loans over 90 days past due and still accruing | - | - | |||||
Accruing troubled debt restructurings | 7,939 | 5,219 |
| ||||||||
(dollars in thousands) | March 31, 2021 | December 31, 2020 | ||||||
Commercial | ||||||||
Owner occupied RE | $ | 0- | 0- | |||||
Non-owner occupied RE | 1,127 | 1,143 | ||||||
Construction | 135 | 139 | ||||||
Business | 190 | 195 | ||||||
Consumer | ||||||||
Real estate | 2,762 | 2,536 | ||||||
Home equity | 439 | 547 | ||||||
Construction | 0- | 0- | ||||||
Other | 0- | 0- | ||||||
Nonaccruing troubled debt restructurings | 3,150 | 3,509 | ||||||
Total nonaccrual loans, including nonaccruing TDRs | 7,803 | 8,069 | ||||||
Other real estate owned | 0- | 1,169 | ||||||
Total nonperforming assets | $ | 7,803 | 9,238 | |||||
Nonperforming assets as a percentage of: | ||||||||
Total assets | 0.30 | % | 0.37 | % | ||||
Gross loans | 0.36 | % | 0.43 | % | ||||
Total loans over 90 days past due | $ | 1,610 | 2,296 | |||||
Loans over 90 days past due and still accruing | 0- | 0- | ||||||
Accruing troubled debt restructurings | 4,379 | 4,893 |
17
Impaired Loans
The table below summarizes key information for impaired loans. The Company’s impaired 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 loan losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.
March 31, 2020 | |||||||||||
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 | loan losses | loan losses | loan losses | ||||||
Commercial | |||||||||||
Owner occupied RE | $ | 2,787 | 2,722 | 2,268 | 454 | 76 | |||||
Non-owner occupied RE | 7,586 | 7,085 | 5,485 | 1,600 | 486 | ||||||
Construction | - | - | - | - | - | ||||||
Business | 2,628 | 2,539 | 540 | 1,999 | 824 | ||||||
Total commercial | 13,001 | 12,346 | 8,293 | 4,053 | 1,386 | ||||||
Consumer | |||||||||||
Real estate | 3,036 | 3,030 | 1,966 | 1,064 | 362 | ||||||
Home equity | 2,403 | 2,352 | 2,174 | 178 | 65 | ||||||
Construction | - | - | - | - | - | ||||||
Other | 144 | 144 | - | 144 | 15 | ||||||
Total consumer | 5,583 | 5,526 | 4,140 | 1,386 | 442 | ||||||
Total | $ | 18,584 | 17,872 | 12,433 | 5,439 | 1,828 |
| |||||||||||||||||
March 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 | loan losses | loan losses | loan losses | ||||||||||||
Commercial | |||||||||||||||||
Owner occupied RE | $ | 1,593 | 1,490 | 1,490 | 0- | 0- | |||||||||||
Non-owner occupied RE | 3,208 | 2,133 | 695 | 1,438 | 363 | ||||||||||||
Construction | 139 | 135 | 135 | 0- | 0- | ||||||||||||
Business | 2,302 | 2,209 | 277 | 1,932 | 808 | ||||||||||||
Total commercial | 7,242 | 5,967 | 2,597 | 3,370 | 1,171 | ||||||||||||
Consumer | |||||||||||||||||
Real estate | 4,767 | 4,393 | 2,933 | 1,460 | 388 | ||||||||||||
Home equity | 1,797 | 1,690 | 1,631 | 59 | 59 | ||||||||||||
Construction | 0- | 0- | 0- | 0- | 0- | ||||||||||||
Other | 132 | 132 | 0- | 132 | 17 | ||||||||||||
Total consumer | 6,696 | 6,215 | 4,564 | 1,651 | 464 | ||||||||||||
Total | $ | 13,938 | 12,182 | 7,161 | 5,021 | 1,635 |
December 31, 2019 | |||||||||||
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 | loan losses | loan losses | loan losses | ||||||
Commercial | |||||||||||
Owner occupied RE | $ | 2,791 | 2,726 | 2,270 | 456 | 75 | |||||
Non-owner occupied RE | 4,512 | 4,051 | 2,419 | 1,632 | 465 | ||||||
Construction | - | - | - | - | - | ||||||
Business | 1,620 | 1,531 | 558 | 973 | 452 | ||||||
Total commercial | 8,923 | 8,308 | 5,247 | 3,061 | 992 | ||||||
Consumer | |||||||||||
Real estate | 2,727 | 2,720 | 1,638 | 1,082 | 364 | ||||||
Home equity | 885 | 838 | 459 | 379 | 66 | ||||||
Construction | - | - | - | - | - | ||||||
Other | 147 | 147 | - | 147 | 16 | ||||||
Total consumer | 3,759 | 3,705 | 2,097 | 1,608 | 446 | ||||||
Total | $ | 12,682 | 12,013 | 7,344 | 4,669 | 1,438 |
| |||||||||||||||||
December 31, 2020 | |||||||||||||||||
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 | loan losses | loan losses | loan losses | ||||||||||||
Commercial | |||||||||||||||||
Owner occupied RE | $ | 1,753 | 1,649 | 1,497 | 152 | 76 | |||||||||||
Non-owner occupied RE | 3,212 | 2,188 | 705 | 1,483 | 366 | ||||||||||||
Construction | 141 | 139 | 139 | 0- | 0- | ||||||||||||
Business | 2,892 | 2,449 | 279 | 2,170 | 897 | ||||||||||||
Total commercial | 7,998 | 6,425 | 2,620 | 3,805 | 1,339 | ||||||||||||
Consumer | |||||||||||||||||
Real estate | 4,362 | 4,031 | 3,108 | 923 | 190 | ||||||||||||
Home equity | 2,498 | 2,371 | 2,096 | 275 | 163 | ||||||||||||
Construction | 0- | 0- | 0- | 0- | 0- | ||||||||||||
Other | 135 | 135 | 0- | 135 | 17 | ||||||||||||
Total consumer | 6,995 | 6,537 | 5,204 | 1,333 | 370 | ||||||||||||
Total | $ | 14,993 | 12,962 | 7,824 | 5,138 | 1,709 |
18
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 | Year ended | |||||||||||
March 31, 2020 | March 31, 2019 | December 31, 2019 | |||||||||||
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 | $ | 2,725 | 18 | 2,757 | 30 | 2,739 | 128 | ||||||
Non-owner occupied RE | 7,108 | 62 | 2,977 | 49 | 4,161 | 255 | |||||||
Construction | - | - | - | - | - | - | |||||||
Business | 2,553 | 28 | 2,567 | 40 | 1,582 | 79 | |||||||
Total commercial | 12,386 | 108 | 8,301 | 119 | 8,482 | 462 | |||||||
Consumer | |||||||||||||
Real estate | 3,036 | 26 | 2,761 | 25 | 2,771 | 131 | |||||||
Home equity | 2,355 | 12 | 1,677 | 30 | 853 | 42 | |||||||
Construction | - | - | - | - | - | - | |||||||
Other | 145 | 1 | 157 | 1 | 153 | 5 | |||||||
Total consumer | 5,536 | 39 | 4,595 | 56 | 3,777 | 178 | |||||||
Total | $ | 17,922 | 147 | 12,896 | 175 | 12,259 | 640 |
| |||||||||||||||||||||||
Three months ended | Three months ended | Year ended | |||||||||||||||||||||
March 31, 2021 | March 31, 2020 | December 31, 2020 | |||||||||||||||||||||
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 | $ | 1,569 | 16 | 2,725 | 18 | 2,423 | 88 | ||||||||||||||||
Non-owner occupied RE | 2,161 | 62 | 7,108 | 62 | 4,217 | 221 | |||||||||||||||||
Construction | 137 | 2 | 0- | 0- | 56 | 6 | |||||||||||||||||
Business | 2,329 | 34 | 2,553 | 28 | 2,306 | 243 | |||||||||||||||||
Total commercial | 6,196 | 114 | 12,386 | 108 | 9,002 | 558 | |||||||||||||||||
Consumer | |||||||||||||||||||||||
Real estate | 4,212 | 43 | 3,036 | 26 | 3,372 | 170 | |||||||||||||||||
Home equity | 2,030 | 16 | 2,355 | 12 | 2,128 | 5 | |||||||||||||||||
Construction | 0- | 0- | 0- | 0- | 0- | 0- | |||||||||||||||||
Other | 134 | 1 | 145 | 1 | 141 | 79 | |||||||||||||||||
Total consumer | 6,376 | 60 | 5,536 | 39 | 5,641 | 254 | |||||||||||||||||
Total | $ | 12,572 | 174 | 17,922 | 147 | 14,643 | 812 |
Allowance for Loan 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 loan losses by commercial and consumer portfolio segments:
Three months ended March 31, 2020 | ||||||||||||||||||||||
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 | $ | 2,835 | 4,304 | 541 | 3,692 | 3,278 | 1,447 | 268 | 277 | 16,642 | ||||||||||||
Provision for loan losses | 1,170 | 1,711 | 153 | 1,006 | 1,326 | 381 | 147 | 106 | 6,000 | |||||||||||||
Loan charge-offs | - | (221 | ) | - | - | - | - | - | (45 | ) | (266 | ) | ||||||||||
Loan recoveries | - | - | - | 16 | 2 | 68 | - | - | 86 | |||||||||||||
Net loan charge-offs | - | (221 | ) | - | 16 | 2 | 68 | - | (45 | ) | (180 | ) | ||||||||||
Balance, end of period | $ | 4,005 | 5,794 | 694 | 4,714 | 4,606 | 1,896 | 415 | 338 | 22,462 | ||||||||||||
Net charge-offs to average loans (annualized) | 0.04 | % | ||||||||||||||||||||
Allowance for loan losses to gross loans | 1.11 | % | ||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 226.14 | % |
Three months ended March 31, 2019 | |||||||||||||||||||||||
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 | $ | 2,726 | 3,811 | 615 | 3,616 | 3,081 | 1,348 | 275 | 290 | 15,762 | |||||||||||||
Provision for loan losses | 57 | 74 | (43 | ) | 171 | (56 | ) | 61 | 7 | 29 | 300 | ||||||||||||
Loan charge-offs | - | - | - | - | - | - | - | (41 | ) | (41 | ) | ||||||||||||
Loan recoveries | - | 1 | - | 9 | 16 | 1 | - | 3 | 30 | ||||||||||||||
Net loan charge-offs | - | 1 | - | 9 | 16 | 1 | - | (38 | ) | (11 | ) | ||||||||||||
Balance, end of period | $ | 2,783 | 3,886 | 572 | 3,796 | 3,041 | 1,410 | 282 | 281 | 16,051 | |||||||||||||
Net charge-offs to average loans (annualized) | 0.00 | % | |||||||||||||||||||||
Allowance for loan losses to gross loans | 0.93 | % | |||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 265.35 | % |
| ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||
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 | $ | 8,145 | 12,049 | 1,154 | 7,845 | 10,453 | 3,249 | 747 | 507 | 44,149 | ||||||||||||||||||||||||||
Provision for loan losses | (991 | ) | 3,146 | (327 | ) | (785 | ) | (787 | ) | (423 | ) | (62 | ) | (71 | ) | (300 | ) | |||||||||||||||||||
Loan charge-offs | 0- | 0- |
| 0- | (267 | ) | 0- | (139 | ) | 0- | 0- |
| (406 | ) | ||||||||||||||||||||||
Loan recoveries | 0- | 0- | 0- | 55 | 0- | 1 | 0- | 0- | 56 | |||||||||||||||||||||||||||
Net loan charge-offs | 0- | 0- |
| 0- | (212 | ) | 0- | (138 | ) | 0- | 0- |
| (350 | ) | ||||||||||||||||||||||
Balance, end of period | $ | 7,154 | 15,195 | 827 | 6,848 | 9,666 | 2,688 | 685 | 436 | 43,499 | ||||||||||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.07 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.99 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 557.47 | % |
19
| ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||
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 | $ | 2,835 | 4,304 | 541 | 3,692 | 3,278 | 1,447 | 268 | 277 | 16,642 | ||||||||||||||||||||||||||
Provision for loan losses | 1,170 | 1,711 | 153 | 1,006 | 1,326 | 381 | 147 | 106 | 6,000 | |||||||||||||||||||||||||||
Loan charge-offs | 0- | (221 | ) | 0- | 0- | 0- | 0- | 0- | (45 | ) | (266 | ) | ||||||||||||||||||||||||
Loan recoveries | 0- | 0- | 0- | 16 | 2 | 68 | 0- | 0- | 86 | |||||||||||||||||||||||||||
Net loan charge-offs | 0- | (221 | ) | 0- | 16 | 2 | 68 | 0- | (45 | ) | (180 | ) | ||||||||||||||||||||||||
Balance, end of period | $ | 4,005 | 5,794 | 694 | 4,714 | 4,606 | 1,896 | 415 | 338 | 22,462 | ||||||||||||||||||||||||||
Net charge-offs to average loans (annualized) | 0.04 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan losses to gross loans | 1.11 | % | ||||||||||||||||||||||||||||||||||
Allowance for loan losses to nonperforming loans | 226.14 | % |
The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology.
March 31, 2020 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||
Individually evaluated | $ | 1,386 | 442 | 1,828 | 12,346 | 5,526 | 17,872 | ||||||
Collectively evaluated | 13,822 | 6,812 | 20,634 | 1,337,084 | 675,305 | 2,012,389 | |||||||
Total | $ | 15,208 | 7,254 | 22,462 | 1,349,430 | 680,831 | 2,030,261 | ||||||
December 31, 2019 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||
Individually evaluated | $ | 992 | 446 | 1,438 | 8,308 | 3,705 | 12,013 | ||||||
Collectively evaluated | 10,380 | 4,824 | 15,204 | 1,290,030 | 641,482 | 1,931,512 | |||||||
Total | $ | 11,372 | 5,270 | 16,642 | 1,298,338 | 645,187 | 1,943,525 |
| |||||||||||||
March 31, 2021 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||
Individually evaluated | $ | 1,171 | 464 | 1,635 | 5,967 | 6,215 | 12,182 | ||||||
Collectively evaluated | 28,853 | 13,011 | 41,864 | 1,382,616 | 788,884 | 2,171,500 | |||||||
Total | $ | 30,024 | 13,475 | 43,499 | 1,388,583 | 795,099 | 2,183,682 |
| |||||||||||||
December 31, 2020 | |||||||||||||
Allowance for loan losses | Recorded investment in loans | ||||||||||||
(dollars in thousands) | Commercial | Consumer | Total | Commercial | Consumer | Total | |||||||
Individually evaluated | $ | 1,339 | 370 | 1,709 | 6,425 | 6,537 | 12,962 | ||||||
Collectively evaluated | 27,826 | 14,614 | 42,440 | 1,381,230 | 748,675 | 2,129,905 | |||||||
Total | $ | 29,165 | 14,984 | 44,149 | 1,387,655 | 755,212 | 2,142,867 |
NOTE 5 – Troubled Debt Restructurings
At March 31, 2020,2021, the Company had 2417 loans totaling $12.1$7.5 million compared to 1920 loans totaling $9.3$8.4 million at December 31, 2019,2020, 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.
A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with interagency guidance, short term deferrals granted duethe CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic, areand the Company elected the accounting policy in the CARES Act to not considered TDRs unlessapply TDR accounting to loans modified for borrowers impacted by the borrower was experiencing financial difficulty prior to the pandemic; however, three client relationships, with loans totaling $2.9 million, were granted short-term loan modifications which were considered TDRs due to the client experiencing financial difficulty prior to theCOVID-19 pandemic.
20
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 for the three months ended March 31, 2021 and 2020. There were no loans determined to be a TDR during the three months ended March 31, 2019.
For the three months ended March 31, 2020 | ||||||||||||||||
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 | ||||||||||||||||
Business | 1 | 1 | $ | 1,037 | $ | 1,037 | ||||||||||
Consumer | ||||||||||||||||
Real estate | 1 | 1 | 322 | 322 | ||||||||||||
Home equity | 3 | - | - | - | 3 | 1,522 | 1,522 | |||||||||
Total loans | 5 | - | - | - | 5 | $ | 2,881 | $ | 2,881 |
| ||||||||||||||||||||||||||||
For the three months ended March 31, 2021 | ||||||||||||||||||||||||||||
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 | |||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Real estate | 1 | 0- | 0- | 0- | 1 | $ | 153 | $ | 153 | |||||||||||||||||||
Total loans | 1 | 0- | 0- | 0- | 1 | $ | 153 | $ | 153 |
| ||||||||||||||||||||||||||||
For the three months ended March 31, 2020 | ||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
Business | 1 | 0- | 0- | 0- | 1 | $ | 1,037 | $ | 1,037 | |||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Real estate | 1 | 0- | 0- | 0- | 1 | 322 | 322 | |||||||||||||||||||||
Home equity | 3 | 0- | 0- | 0- | 3 | 1,522 | 1,522 | |||||||||||||||||||||
Total loans | 5 | 0- | 0- | 0- | 5 | $ | 2,881 | $ | 2,881 |
As of March 31, 20202021 and 2019,2020, there were no loans modified as a TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date.
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.
21
The following table summarizes the Company’s outstanding financial derivative instruments at March 31, 20202021 and December 31, 2019.2020.
March 31, 2020 | |||||||||
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 109,337 | Other assets | $ | 1,649 | ||||
MBS forward sales commitments | 63,000 | Other liabilities | (1,087 | ) | |||||
Total derivative financial instruments | $ | 172,337 | $ | 562 | |||||
December 31, 2019 | |||||||||
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 26,446 | Other assets | $ | 344 | ||||
MBS forward sales commitments | 20,500 | Other liabilities | (39 | ) | |||||
Total derivative financial instruments | $ | 46,946 | $ | 305 |
| |||||||||
March 31, 2021 | |||||||||
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 95,689 | Other assets | $ | 794 |
| |||
MBS forward sales commitments | 63,000 | Other assets | 497 |
| |||||
Total derivative financial instruments | $ | 158,689 | $ | 1,291 |
|
| |||||||||
December 31, 2020 | |||||||||
Fair Value | |||||||||
(dollars in thousands) | Notional | Balance Sheet Location | Asset/(Liability) | ||||||
Mortgage loan interest rate lock commitments | $ | 107,569 | Other assets | $ | 2,385 |
| |||
MBS forward sales commitments | 75,500 | Other liabilities | (501 | ) | |||||
Total derivative financial instruments | $ | 183,069 | $ | 1,884 |
|
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 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 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 assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 20192020 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 classification.
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 March 31, 20202021 and December 31, 2019.2020.
March 31, 2020 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale | |||||||||
US government agencies | $ | - | 499 | - | 499 | ||||
SBA securities | - | 501 | - | 501 | |||||
State and political subdivisions | - | 9,679 | - | 9,679 | |||||
Asset-backed securities | - | 12,286 | - | 12,286 | |||||
Mortgage-backed securities | - | 47,542 | - | 47,542 | |||||
Mortgage loans held for sale | - | 34,948 | - | 34,948 | |||||
Mortgage loan interest rate lock commitments | - | 1,649 | - | 1,649 | |||||
Total assets measured at fair value on a recurring basis | $ | - | 107,104 | - | 107,104 | ||||
Liabilities | |||||||||
MBS forward sales commitments | $ | - | 1,087 | - | 1,087 | ||||
Total liabilities measured at fair value on a recurring basis | $ | - | 1,087 | - | 1,087 | ||||
December 31, 2019 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale: | |||||||||
US government agencies | $ | - | 499 | - | 499 | ||||
SBA securities | - | 531 | - | 531 | |||||
State and political subdivisions | - | 4,184 | - | 4,184 | |||||
Asset-backed securities | - | 13,167 | - | 13,167 | |||||
Mortgage-backed securities | - | 49,313 | - | 49,313 | |||||
Mortgage loans held for sale | - | 27,046 | - | 27,046 | |||||
Mortgage loan interest rate lock commitments | - | 344 | - | 344 | |||||
Total assets measured at fair value on a recurring basis | $ | - | 95,084 | - | 95,084 | ||||
Liabilities | |||||||||
MBS forward sales commitments | $ | - | 39 | - | 39 | ||||
Total liabilities measured at fair value on a recurring basis | $ | - | 39 | - | 39 |
22
| |||||||||
March 31, 2021 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale | |||||||||
US government agencies | $ | 0- | 7,263 | 0- | 7,263 | ||||
SBA securities | 0- | 480 | 0- | 480 | |||||
State and political subdivisions | 0- | 19,811 | 0- | 19,811 | |||||
Asset-backed securities | 0- | 11,283 | 0- | 11,283 | |||||
Mortgage-backed securities | 0- | 54,160 | 0- | 54,160 | |||||
Mortgage loans held for sale | 0- | 57,073 | 0- | 57,073 | |||||
Mortgage loan interest rate lock commitments | 0- | 794 | 0- | 794 | |||||
MBS forward sales commitments | 0- | 497 | 0- | 497 | |||||
Total assets measured at fair value on a recurring basis | $ | 0- | 151,361 | 0- | 151,361 |
| |||||||||
December 31, 2020 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Securities available for sale: | |||||||||
US government agencies | $ | 0- | 6,493 | 0- | 6,493 | ||||
SBA securities | 0- | 485 | 0- | 485 | |||||
State and political subdivisions | 0- | 19,388 | 0- | 19,388 | |||||
Asset-backed securities | 0- | 11,529 | 0- | 11,529 | |||||
Mortgage-backed securities | 0- | 56,834 | 0- | 56,834 | |||||
Mortgage loans held for sale | 0- | 60,257 | 0- | 60,257 | |||||
Mortgage loan interest rate lock commitments | 0- | 2,385 | 0- | 2,385 | |||||
Total assets measured at fair value on a recurring basis | $ | 0- | 157,371 | 0- | 157,371 | ||||
| |||||||||
Liabilities | |||||||||
MBS forward sales commitments | $ | 0- | 501 | 0- | 501 | ||||
Total liabilities measured at fair value on a recurring basis | $ | 0- | 501 | 0- | 501 |
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 20202021 and December 31, 2019.2020.
As of March 31, 2020 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Impaired loans | $ | - | 10,552 | 5,492 | 16,044 | ||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 10,552 | 5,492 | 16,044 | ||||
As of December 31, 2019 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Impaired loans | $ | - | 5,634 | 4,941 | 10,575 | ||||
Total assets measured at fair value on a nonrecurring basis | $ | - | 5,634 | 4,941 | 10,575 |
| |||||||||
As of March 31, 2021 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Impaired loans | $ | 0- | 7,833 | 2,714 | 10,547 | ||||
Total assets measured at fair value on a nonrecurring basis | $ | 0- | 7,833 | 2,714 | 10,547 |
| |||||||||
As of December 31, 2020 | |||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||
Assets | |||||||||
Impaired loans | $ | 0- | 8,144 | 3,109 | 11,253 | ||||
Other real estate owned | 0- | 1,169 | 0- | 1,169 | |||||
Total assets measured at fair value on a nonrecurring basis | $ | 0- | 9,313 | 3,109 | 12,422 |
The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis.
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.
23
The estimated fair values of the Company’s financial instruments at March 31, 20202021 and December 31, 20192020 are as follows:
March 31, 2020 | |||||||||||
Carrying | Fair | ||||||||||
(dollars in thousands) | Amount | Value | Level 1 | Level 2 | Level 3 | ||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 5,341 | 5,341 | - | - | 5,341 | |||||
Loans1 | 1,989,927 | 1,942,206 | - | - | 1,942,206 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 2,025,698 | 1,947,258 | - | 1,947,258 | - | ||||||
FHLB and other borrowings | 65,000 | 65,021 | - | 65,021 | - | ||||||
Subordinated debentures | 35,917 | 31,989 | - | 31,989 | - | ||||||
December 31, 2019 | |||||||||||
Carrying | Fair | ||||||||||
(dollars in thousands) | Amount | Value | Level 1 | Level 2 | Level 3 | ||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 6,948 | 6,948 | - | - | 6,948 | |||||
Loans1 | 1,914,870 | 1,900,216 | - | - | 1,900,216 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 1,876,124 | 1,772,121 | - | 1,772,121 | - | ||||||
FHLB and other borrowings | 110,000 | 109,737 | - | 109,737 | - | ||||||
Subordinated debentures | 35,890 | 33,250 | - | 33,250 | - |
1Carrying amount is net of the allowance for loan losses and previously presented impaired loans.
| |||||||||||
March 31, 2021 | |||||||||||
Carrying | Fair | ||||||||||
(dollars in thousands) | Amount | Value | Level 1 | Level 2 | Level 3 | ||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 1,770 | 1,770 | 0- | 0- | 1,770 | |||||
Loans1 | 2,128,001 | 2,078,530 | 0- | 0- | 2,078,530 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 2,258,751 | 2,085,976 | 0- | 2,085,976 | 0- | ||||||
Subordinated debentures | 36,025 | 30,548 | 0- | 30,548 | 0- |
| |||||||||||
December 31, 2020 | |||||||||||
Carrying | Fair | ||||||||||
(dollars in thousands) | Amount | Value | Level 1 | Level 2 | Level 3 | ||||||
Financial Assets: | |||||||||||
Other investments, at cost | $ | 3,635 | 3,635 | 0- | 0- | 3,635 | |||||
Loans1 | 2,085,756 | 2,060,698 | 0- | 0- | 2,060,698 | ||||||
Financial Liabilities: | |||||||||||
Deposits | 2,142,758 | 2,008,317 | 0- | 2,008,317 | 0- | ||||||
FHLB and other borrowings | 25,000 | 24,972 | 0- | 24,972 | 0- | ||||||
Subordinated debentures | 35,998 | 30,371 | 0- | 30,371 | 0- |
1 | Carrying amount is net of the allowance for loan losses and previously presented impaired loans. |
NOTE 8 – Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”. As of March 31, 2020,2021, we lease sevenleased six of our offices under various operating lease agreements. The lease agreements have maturity dates ranging from February 2022 to October 2029, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was 7.786.90 years as of March 31, 2020.2021.
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 in to.into. The weighted average discount rate for leases was 2.86%2.70% as of March 31, 2020.2021.
The total operating lease costs were $596,000$714,000 and $528,000$596,000 for the three months ended March 31, 20202021 and 2019,2020, respectively. The ROUright-of-use (ROU) asset, included in property and equipment, and lease liabilities, included in other liabilities, were $19.1$18.2 million and $19.7$19.1 million as of March 31, 2020,2021, respectively, compared to $19.5$18.8 million and $20.1$19.5 million as of December 31, 2019,2020, respectively. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.
24
Maturities of lease liabilities as of March 31, 20202021 were as follows:
(dollars in thousands) | Operating Leases | ||
2020 | $ | 1,581 | |
2021 | 2,152 | ||
2022 | 1,400 | ||
2023 | 1,273 | ||
2024 | 1,305 | ||
Thereafter | 17,405 | ||
Total undiscounted lease payments | 25,116 | ||
Discount effect of cash flows | 5,407 | ||
Total lease liability | $ | 19,709 |
| |||
Operating | |||
(dollars in thousands) | Leases | ||
2021 | $ | 1,755 | |
2022 | 1,587 | ||
2023 | 1,462 | ||
2024 | 1,501 | ||
2025 | 1,544 | ||
Thereafter | 15,886 | ||
Total undiscounted lease payments | 23,735 | ||
Discount effect of cash flows | 4,653 | ||
Total lease liability | $ | 19,082 |
NOTE 9 – Earnings Per Common Share
The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three-monththree month periods ended March 31, 20202021 and 2019.2020. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at March 31, 2020.2021. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At March 31, 20202021 and 2019,2020, there were 288,053210,899 and 271,034288,053 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.
Three months ended March 31, | |||||
(dollars in thousands, except share data) | 2020 | 2019 | |||
Numerator: | |||||
Net income available to common shareholders | $ | 2,832 | 6,009 | ||
Denominator: | |||||
Weighted-average common shares outstanding – basic | 7,678,598 | 7,459,342 | |||
Common stock equivalents | 148,575 | 282,518 | |||
Weighted-average common shares outstanding – diluted | 7,827,173 | 7,741,860 | |||
Earnings per common share: | |||||
Basic | $ | 0.37 | 0.81 | ||
Diluted | $ | 0.36 | 0.78 |
| |||||
Three months ended | |||||
March 31, | |||||
(dollars in thousands, except share data) | 2021 | 2020 | |||
Numerator: | |||||
Net income available to common shareholders | $ | 10,366 | 2,832 | ||
Denominator: | |||||
Weighted-average common shares outstanding – basic | 7,774,515 | 7,678,598 | |||
Common stock equivalents | 134,022 | 148,575 | |||
Weighted-average common shares outstanding – diluted | 7,908,537 | 7,827,173 | |||
Earnings per common share: | |||||
Basic | $ | 1.33 | 0.37 | ||
Diluted | $ | 1.31 | 0.36 |
NOTE 10 – 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 three3 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 | |||||||||||||||||||||||||
March 31, 2021 | March 31, 2020 | |||||||||||||||||||||||||
Commercial | Commercial | |||||||||||||||||||||||||
and Retail | Mortgage | Elimin- | Consol- | and Retail | Mortgage | Elimin- | Consol- | |||||||||||||||||||
(dollars in thousands) | Banking | Banking | Corporate | ations | idated | Banking | Banking | Corporate | ation | idated | ||||||||||||||||
Interest income | $ | 22,414 | 399 | 3 | (3 | ) | 22,813 | $ | 23,670 | 196 | 4 | (4 | ) | 23,866 | ||||||||||||
Interest expense | 1,161 | 0- | 382 | (3 | ) | 1,540 | 5,333 | 0- | 439 | (4 | ) | 5,768 | ||||||||||||||
Net interest income (loss) | 21,253 | 399 | (379 | ) | 0- | 21,273 | 18,337 | 196 | (435 | ) | 0- | 18,098 | ||||||||||||||
Provision for loan losses | (300 | ) | 0- | 0- | 0- | (300 | ) | 6,000 | 0- | 0- | 0- | 6,000 | ||||||||||||||
Noninterest income | 1,271 | 4,633 | 0- | 0- | 5,904 | 1,248 | 2,668 | 0- | 0- | 3,916 | ||||||||||||||||
Noninterest expense | 11,233 | 2,867 | 62 | 0- | 14,162 | 10,499 | 1,807 | 66 | 0- | 12,372 | ||||||||||||||||
Net income (loss) before taxes | 11,591 | 2,165 | (441 | ) | 0- | 13,315 | 3,086 | 1,057 | (501 | ) | 0- | 3,642 | ||||||||||||||
Income tax provision (benefit) | 2,564 | 478 | (93 | ) | 0- | 2,949 | 693 | 222 | (105 | ) | 0- | 810 | ||||||||||||||
Net income (loss) | $ | 9,027 | 1,687 | (348 | ) | 0- | 10,366 | $ | 2,393 | 835 | (396 | ) | 0- | 2,832 | ||||||||||||
Total assets | $ | 2,516,869 | 62,530 | 275,941 | (275,418 | ) | 2,579,922 | $ | 2,335,160 | 36,577 | 246,424 | (245,912 | ) | 2,372,249 |
Three months ended March 31, 2020 | Three months ended March 31, 2019 | ||||||||||||||||||||||
(dollars in thousands) | Commercial and Retail Banking | Mortgage Banking | Corporate | Elimin- ations | Consol- idated | Commercial and Retail Banking | Mortgage Banking | Corporate | Elimin- ation | Consol- idated | |||||||||||||
Interest income | $ | 23,670 | 196 | 4 | (4) | 23,866 | $ | 21,519 | 93 | 3 | (3) | 21,612 | |||||||||||
Interest expense | 5,333 | - | 439 | (4) | 5,768 | 5,631 | - | 166 | (3) | 5,794 | |||||||||||||
Net interest income (loss) | 18,337 | 196 | (435) | - | 18,098 | 15,888 | 93 | (163 | ) | - | 15,818 | ||||||||||||
Provision for loan losses | 6,000 | - | - | - | 6,000 | 300 | - | - | - | 300 | |||||||||||||
Noninterest income | 1,248 | 2,668 | - | - | 3,916 | 1,137 | 1,857 | - | - | 2,994 | |||||||||||||
Noninterest expense | 10,499 | 1,807 | 66 | - | 12,372 | 9,465 | 1,123 | 60 | - | 10,648 | |||||||||||||
Net income (loss) before taxes | 3,086 | 1,057 | (501) | - | 3,642 | 7,260 | 827 | (223 | ) | - | 7,864 | ||||||||||||
Income tax provision (benefit) | 693 | 222 | (105) | - | 810 | 1,728 | 174 | (47 | ) | - | 1,855 | ||||||||||||
Net income (loss) | $ | 2,393 | 835 | (396) | - | 2,832 | $ | 5,532 | 653 | (176 | ) | - | 6,009 | ||||||||||
Total assets | $ | 2,335,160 | 36,577 | 246,424 | (245,912) | 2,372,249 | $ | 2,002,957 | 11,003 | 194,671 | (194,205 | ) | 2,014,426 |
25
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 primarily of compensation and benefits for certain members of management and interest on parent company debt.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion reviews our results of operations for the three month period ended March 31, 20202021 as compared to the three month period ended March 31, 20192020 and assesses our financial condition as of March 31, 20202021 as compared to December 31, 2019.2020. 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, 20192020 included in our Annual Report on Form 10-K for that period. Results for the three month period ended March 31, 20202021 are not necessarily indicative of the results for the year ending December 31, 20202021 or any future period.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc. and its subsidiaries.consolidated subsidiary. References to the “Bank” refer to Southern First Bank.
CAUTIONARYWARNINGREGARDING FORWARD-LOOKING STATEMENTSCautionary 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 (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,” “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:
•
The impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to those described undertry 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;
26
•
The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets;
•
Changes in the interest rate environment which could reduce anticipated or actual margins;
•
Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the new presidential administration and Democratic control of Congress;
•
Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
•
Changes occurring in business conditions and inflation;
•
Increased cybersecurity risk, including potential business disruptions or financial losses;
•
Changes in technology;
•
The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
•
Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
•
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 policies and practices;
•
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, Item 1A. Risk Factors1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, as well as2020, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the following:SEC.
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, 2019 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.
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.”
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At March 31, 2020,2021, we had total assets of $2.37$2.58 billion, a 4.6%3.9% increase from total assets of $2.27$2.48 billion at December 31, 2019.2020. The largest components of our total assets are loans which were $2.03$2.18 billion and $1.94$2.14 billion at March 31, 20202021 and December 31, 2019,2020, respectively. Our liabilities and shareholders’ equity at March 31, 20202021 totaled $2.16$2.34 billion and $210.5$239.5 million, respectively, compared to liabilities of $2.06$2.25 billion and shareholders’ equity of $205.9$228.3 million at December 31, 2019.2020. The principal component of our liabilities is deposits which were $2.03$2.26 billion and $1.88$2.14 billion at March 31, 20202021 and December 31, 2019,2020, respectively.
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 $2.8$10.4 million and $6.0$2.8 million for the three months ended March 31, 20202021 and 2019,2020, respectively. Diluted earnings per share (“EPS”) was $0.36$1.31 for the first quarter of 20202021 as compared to $0.78$0.36 for the same period in 2019.2020. The decreaseincrease in net income resulted primarily from a $5.7$6.3 million increasedecrease in loan loss provision recorded in the first quarter of 20202021 compared to the same period in 2019, partially offset by2020, a $2.3$3.2 million increase in net interest income, and a $922,000$2.0 million increase in noninterest income.income and partially offset by a $1.8 million increase in noninterest expense.
Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels 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.recent events – covid-19 pandemic
RECENT EVENTS–COVID-19 PANDEMIC
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, the governments of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.
The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on our business, financial condition and results of operations. 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, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.
Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic has begun to have a significant impact on our business, industry and operations. As partclients. Twelve months ago, unemployment rates were at historical highs, our bank lobbies were closed to guests, and the majority of our effortsteam was working remotely. As of March 31, 2021, normalcy has begun to exercise social distancing,return as unemployment rates have decreased to near pre-COVID levels, our bank lobbies have re-opened, and our team members have returned to the office. Our digital technology channels are also stronger and better utilized as a result of the pandemic.
Beginning in March 2020, we closed all of our banking lobbies and are conducting most of our business at this time through drive-thru tellers and through electronic and online means. To support the health and well-being of our employees, approximately 70% of our workforce is working from home. We are focused on servicing the financial needs of our commercial and consumer clients with flexible loan payment arrangements, including short-termbegan granting loan modifications or forbearance payments and reducing or waivingdeferrals to certain feesborrowers affected by the pandemic on deposit accounts. Future governmental actions may require these and other typesa short-term basis of client-related responses.
Atthree to six months. As of March 31, 2020, more than 400 clients, with aggregate outstanding loan principal balances2021, all but two of approximately $380.2 million, have been granted deferrals on loan payments. these loans are under a normal payment structure.
We are also a small business administration approved lender and have begun processing customer applications under the Paycheck Protection Program (“PPP”), established under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act.
At March 31, 2020, our non-performing assets were not yet materially impacted by the economic pressures of COVID-19. In addition, as we closelycontinue to monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial clients,clients. In doing so, we have identified nine portfolios consideredbelieve that the hospitality and tourism industry is still at risk for credit loss due to be “at-risk”reduced business and recreational travel in our regions. We will not know the depth of significant impact from the pandemic. For additional information on the nine identified portfolios, see Note 1 –Nature of Business and Basis of Presentation, in the accompanying condensed notes to consolidated financial statements included elsewhere in this report.
We are monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly traded investments and will review our investment portfolio for impairment at period end. Because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term valuehospitality and tourism industry until a significant portion of the population has received the vaccine and travel restrictions have been lifted.
Hotel portfolio as of March 31, 2021:
•
21 loans totaled $109.7 million
•
2 loans totaled $13.5 million remained under a deferral arrangement
•
0% of hotel loans were 30 days or more past due
•
0% of hotel loans were on nonaccrual
•
4 hotel loans totaling $48.8 million were downgraded to special mention during the first quarter of 2021
•
7 hotel loans totaling $26.2 million were downgraded to substandard during the first quarter of 2021
During the first quarter of 2021, our portfolio.classified asset ratio rose to 14.42% as a result of $26.2 million of hotel loans we downgraded to substandard. Downgrading these loans reflects our commitment to closely monitor our most at-risk clients.
As of March 31, 2020,2021, all of our capital ratios, and our subsidiary bank’sthe Bank’s capital ratios, were in excess of all regulatory requirements. While we believe 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.
We maintain 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 subsidiary bank.Bank.
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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 $18.1$21.3 million for the three month period ended March 31, 2020,first quarter of 2021, a 14.4%17.5% increase over net interest income of $15.8$18.1 million for the same period in 2019.prior year resulting primarily from lower deposit costs, partially offset by lower yields on interest-earning assets. In addition, our average earning assets increased 16.3%net interest margin, on a tax-equivalent basis (TE), or $296.6 million, duringwas 3.60% for the first quarter of 20202021 compared to the first quarter of 2019, while our interest-bearing liabilities increased by $210.7 million, or 15.2%, during the same period. The increase3.43% in average earning assets was primarily related to an increase in average loans, while the increase in average interest-bearing liabilities was primarily a result of an increase in interest-bearing deposits.2020.
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 month periods ended March 31, 20202021 and 2019.2020. 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 demonstrates 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.
The following table sets 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 March 31, | ||||||||||||||||||
2020 | 2019 | |||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||
(dollars in thousands) | Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | ||||||||||||
Interest-earning assets | ||||||||||||||||||
Federal funds sold and interest-bearing | ||||||||||||||||||
deposits with banks | $ | 46,101 | $ | 103 | 0.90 | % | $ | 30,656 | $ | 174 | 2.30 | % | ||||||
Investment securities, taxable | 66,640 | 381 | 2.30 | % | 71,876 | 508 | 2.87 | % | ||||||||||
Investment securities, nontaxable(2) | 3,815 | 19 | 2.05 | % | 5,427 | 53 | 3.98 | % | ||||||||||
Loans(3) | 2,003,554 | 23,367 | 4.69 | % | 1,715,570 | 20,889 | 4.94 | % | ||||||||||
Total interest-earning assets | 2,120,110 | 23,870 | 4.53 | % | 1,823,529 | 21,624 | 4.81 | % | ||||||||||
Noninterest-earning assets | 111,338 | 86,431 | ||||||||||||||||
Total assets | $ | 2,231,448 | $ | 1,909,960 | ||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||
NOW accounts | $ | 227,688 | 168 | 0.30 | % | $ | 186,070 | 86 | 0.19 | % | ||||||||
Savings & money market | 956,588 | 3,369 | 1.42 | % | 780,115 | 3,300 | 1.72 | % | ||||||||||
Time deposits | 329,664 | 1,637 | 2.00 | % | 371,694 | 1,989 | 2.17 | % | ||||||||||
Total interest-bearing deposits | 1,513,940 | 5,174 | 1.37 | % | 1,337,879 | 5,375 | 1.63 | % | ||||||||||
FHLB advances and other borrowings | 43,470 | 158 | 1.46 | % | 31,302 | 256 | 3.32 | % | ||||||||||
Subordinated debentures | 35,900 | 436 | 4.88 | % | 13,403 | 163 | 4.93 | % | ||||||||||
Total interest-bearing liabilities | 1,593,310 | 5,768 | 1.46 | % | 1,382,584 | 5,794 | 1.70 | % | ||||||||||
Noninterest-bearing liabilities | 427,992 | 349,988 | ||||||||||||||||
Shareholders’ equity | 210,146 | 177,388 | ||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,231,448 | $ | 1,909,960 | ||||||||||||||
Net interest spread | 3.07 | % | 3.11 | % | ||||||||||||||
Net interest income (tax equivalent) / margin | $ | 18,102 | 3.43 | % | $ | 15,830 | 3.52 | % | ||||||||||
Less: tax-equivalent adjustment(2) | 4 | 12 | ||||||||||||||||
Net interest income | $ | 18,098 | $ | 15,818 |
Average Balances, Income and Expenses, Yields and Rates | ||||||||||||||||||
For the Three Months Ended March 31, | ||||||||||||||||||
2021 | 2020 | |||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||
(dollars in thousands) | Balance | Expense | Rate(1) | Balance | Expense | Rate(1) | ||||||||||||
Interest-earning assets | ||||||||||||||||||
Federal funds sold and interest-bearing | ||||||||||||||||||
deposits with banks | $ | 89,522 | $ | 47 | 0.21 | % | $ | 46,101 | $ | 103 | 0.90 | % | ||||||
Investment securities, taxable | 85,136 | 245 | 1.17 | % | 66,640 | 381 | 2.30 | % | ||||||||||
Investment securities, nontaxable(2) | 11,000 | 73 | 2.68 | % | 3,815 | 19 | 2.05 | % | ||||||||||
Loans(3) | 2,209,569 | 22,465 | 4.12 | % | 2,003,554 | 23,367 | 4.69 | % | ||||||||||
Total interest-earning assets | 2,395,227 | 22,830 | 3.87 | % | 2,120,110 | 23,870 | 4.53 | % | ||||||||||
Noninterest-earning assets | 101,932 | 111,338 | ||||||||||||||||
Total assets | $ | 2,497,159 | $ | 2,231,448 | ||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||
NOW accounts | $ | 280,737 | 46 | 0.07 | % | $ | 227,688 | 168 | 0.30 | % | ||||||||
Savings & money market | 1,084,467 | 586 | 0.22 | % | 956,588 | 3,369 | 1.42 | % | ||||||||||
Time deposits | 213,378 | 523 | 0.99 | % | 329,664 | 1,637 | 2.00 | % | ||||||||||
Total interest-bearing deposits | 1,578,582 | 1,155 | 0.30 | % | 1,513,940 | 5,174 | 1.37 | % | ||||||||||
FHLB advances and other borrowings | 2,809 | 5 | 0.72 | % | 43,470 | 158 | 1.46 | % | ||||||||||
Subordinated debentures | 36,008 | 380 | 4.28 | % | 35,900 | 436 | 4.88 | % | ||||||||||
Total interest-bearing liabilities | 1,617,399 | 1,540 | 0.39 | % | 1,593,310 | 5,768 | 1.46 | % | ||||||||||
Noninterest-bearing liabilities | 648,969 | 427,992 | ||||||||||||||||
Shareholders’ equity | 230,791 | 210,146 | ||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,497,159 | $ | 2,231,448 | ||||||||||||||
Net interest spread | 3.48 | % | 3.07 | % | ||||||||||||||
Net interest income (tax equivalent) / margin | $ | 21,290 | 3.60 | % | $ | 18,102 | 3.43 | % | ||||||||||
Less: tax-equivalent adjustment(2) | 17 | 4 | ||||||||||||||||
Net interest income | $ | 21,273 | $ | 18,098 |
(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. |
29
Our net interest margin on a tax-equivalent(TE) increased 17 basis (TE), was 3.43% for the three months ended March 31, 2020 comparedpoints to 3.52% for3.60% during the first quarter of 2019. The nine basis point decrease2021 primarily due to a reduction in net interest margin (TE) was drivencost on our interest-bearing liabilities, partially offset by the decreased yield on our interest-earning assets, partially offset by the decreased rates on our interest-bearing liabilities as compared to the prior year period.assets. Our average interest-earning assets grew by $296.6$275.1 million during the first three monthsquarter of 2020, as compared to the same period in 2019, while the average yield on these assets decreased by 2866 basis points.points to 3.87%. In addition, our average interest-bearing liabilities grew by $210.7$24.1 million during the 20202021 period while the rate on these liabilities decreased 24107 basis points to 1.46% for the three months ended March 31, 2020.0.39%.
The increase in average interest-earning assets for the three months ended March 31, 2020 as compared to the same period in 2019first quarter of 2021 related primarily to an increase of $288.0$206.0 million in our average loan balances.balances combined with a $43.4 million increase in federal funds sold and interest-bearing deposits with banks. The 28 basis point decrease in yield during the same periodon our interest earning assets was driven by a 2557 basis point decrease in loan yield dueas our loan portfolio continues to loans being originated or renewed at market rates which are lower than those inshow the past. Theimpact of the Federal Reserve reduced interest rates byReserve’s aggregate 225 basis pointspoint interest rate reduction since August 2019 which2019. These rate reductions resulted in the decreased loan yield, as well as a significant decrease in yield on our Federalfederal funds sold and interest bearing depositsbearing-deposits with banks and a decrease in yield on our investment securities.
In addition, theThe increase in our average interest-bearing liabilities resulted primarily from a $176.1$64.6 million increase in our interest-bearing deposits at an average rate of 1.37%0.30%, a 26107 basis point decrease from the average rate in the first quarter of 2019. In addition,2020, partially offset by a $40.7 million decrease in our average subordinated debentures increased due to the issuance of $23 million on September 30, 2019.FHLB advances and other borrowings.
Our net interest spread was 3.07%3.48% for the three months ended March 31, 2020first quarter of 2021 compared to 3.11%3.07% for the same period in 2019.2020. 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 28 basis point decrease in both the yield on our interest-earning assets and the 24 basis point decrease in rate on our interest-bearing liabilities resulted in the foura 41 basis point decreaseincrease in our net interest spread for the 20202021 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods based on the Federal Reserve’s 225 basis point interest rate decrease since August 2019.as our loan yield continues to decline due to new and renewed loans pricing at rates lower than our current portfolio rate.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets 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 | ||||||||||||||||||||||||||
March 31, 2020 vs. 2019 | March 31, 2019 vs. 2018 | |||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||||
Rate/ | Rate/ | |||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Total | Volume | Rate | Volume | Total | ||||||||||||||||||
Interest income | ||||||||||||||||||||||||||
Loans | $ | 3,507 | (881 | ) | (148 | ) | 2,478 | $ | 3,110 | 1,024 | 192 | 4,326 | ||||||||||||||
Investment securities | (49 | ) | (114 | ) | 10 | (153 | ) | 69 | 94 | 18 | 181 | |||||||||||||||
Federal funds sold and interest-bearing | ||||||||||||||||||||||||||
deposits with banks | 88 | (106 | ) | (53 | ) | (71 | ) | (124 | ) | 103 | (52 | ) | (73 | ) | ||||||||||||
Total interest income | 3,546 | (1,101 | ) | (191 | ) | 2,254 | 3,055 | 1,221 | 158 | 4,434 | ||||||||||||||||
Interest expense | ||||||||||||||||||||||||||
Deposits | 790 | (864 | ) | (127 | ) | (201 | ) | 439 | 1,894 | 304 | 2,637 | |||||||||||||||
FHLB advances and other borrowings | 100 | (142 | ) | (56 | ) | (98 | ) | (32 | ) | 6 | (1 | ) | (27 | ) | ||||||||||||
Subordinated debentures | 273 | - | - | 273 | - | 48 | - | 48 | ||||||||||||||||||
Total interest expense | 1,163 | (1,006 | ) | (183 | ) | (26 | ) | 407 | 1,948 | 303 | 2,658 | |||||||||||||||
Net interest income | $ | 2,383 | (95 | ) | (8 | ) | 2,280 | $ | 2,648 | (727 | ) | (145 | ) | 1,776 |
| ||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||
March 31, 2021 vs. 2020 | March 31, 2020 vs. 2019 | |||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||||
Rate/ | Rate/ | |||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Volume | Total | Volume | Rate | Volume | Total | ||||||||||||||||||
Interest income | ||||||||||||||||||||||||||
Loans | $ | 2,403 | (2,996 | ) | (309 | ) | (902 | ) | $ | 3,507 | (881 | ) | (148 | ) | 2,478 | |||||||||||
Investment securities | 144 | (175 | ) | (64 | ) | (95 | ) | (49 | ) | (114 | ) | 10 | (153 | ) | ||||||||||||
Federal funds sold and interest-bearing deposits with banks | 97 | (79 | ) | (74 | ) | (56 | ) | 88 | (106 | ) | (53 | ) | (71 | ) | ||||||||||||
Total interest income | 2,644 | (3,250 | ) | (447 | ) | (1,053 | ) | 3,546 | (1,101 | ) | (191 | ) | 2,254 | |||||||||||||
Interest expense | ||||||||||||||||||||||||||
Deposits | (889 | ) | (3,778 | ) | 648 | (4,019 | ) | 790 | (864 | ) | (127 | ) | (201 | ) | ||||||||||||
FHLB advances and other borrowings | (148 | ) | (112 | ) | 105 | (155 | ) | 100 | (142 | ) | (56 | ) | (98 | ) | ||||||||||||
Subordinated debentures | 1 | (55 | ) | - | (54 | ) | 273 | - | - | 273 | ||||||||||||||||
Total interest expense | (1,036 | ) | (3,945 | ) | 753 | (4,228 | ) | 1,163 | (1,006 | ) | (183 | ) | (26 | ) | ||||||||||||
Net interest income | $ | 3,680 | 695 | (1,200 | ) | 3,175 | $ | 2,383 | (95 | ) | (8 | ) | 2,280 |
Net interest income, the largest component of our income, was $18.1$21.3 million for the three months ended March 31, 2020 and $15.8 million for the three months ended March 31, 2019, a $2.3 million, or 14.4%, increase during the first quarter of 2020. The increase in net interest income is due to a $2.32021 and $18.1 million increase in interest income and a $26,000 decrease in interest expense. Duringfor the first quarter of 2020, our average interest-earning assets increased $296.6a $3.2 million, as comparedor 17.5%, increase. The increase during 2021 was driven by a $4.2 million decrease in interest expense primarily due to the same period in 2019, resulting in $3.5 million of additional interest income, while lower rates on our interest-earning assets decreasedinterest-bearing liabilities. In addition, interest income decreased by $1.1 million from the prior year period. In contrast, ourdue to a decrease in rates across all interest expense decreased $26,000 during the first quarter of 2020, despite a $210.7 millionearning assets, partially offset by an increase in averagevolume of loans, investment securities and federal funds sold and interest-bearing liabilities as the lower rates on our deposits and borrowing outweighed the increase in volume.with banks.
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Provision for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. 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. Please see the discussion included in Note 4 – Loans and Allowance for Loan 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 the three months ended March 31, 2020,2021, we incurredrecorded a noncash expense related to thenegative provision for loan losses of $300,000 which resulted in an allowance for loan losses of $43.5 million, or 1.99% of gross loans. Comparatively, our provision for loan losses was $6.0 million for the three months ended March 31, 2020 which resulted in an allowance for loan losses of $22.5 million, or 1.11% of gross loans. For the three months ended March 31, 2019, ourThe negative provision for loan losses of $300,000 resulted in an allowance for loan losses of $16.1 million, or 0.93% of gross loans. The increased provision during the first quarter of 2020 is related primarily to the COVID-19 pandemic and2021 was driven by a reduction in qualitative adjustment factors related to improvement in the uncertain economic and business conditions at both the national and regional levels as well as a small increase in past due and nonaccrual loans atof March 31, 2020.2021, partially offset by downgrades in our hotel loan portfolio as we believe the tourism and hospitality industry remains at risk of credit losses due to the pandemic.
Noninterest Income
The following table sets forth information related to our noninterest income.
| ||||||||||
Three months ended | Three months ended | |||||||||
March 31, | March 31, | |||||||||
(dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||
Mortgage banking income | $ | 2,668 | 1,857 | $ | 4,633 | 2,668 | ||||
Service fees on deposit accounts | 262 | 265 | 185 | 262 | ||||||
ATM and debit card income | 398 | 380 | 470 | 398 | ||||||
Income from bank owned life insurance | 270 | 216 | 267 | 270 | ||||||
Other income | 318 | 276 | 349 | 318 | ||||||
Total noninterest income | $ | 3,916 | 2,994 | $ | 5,904 | 3,916 |
Noninterest income increased $922,000,$2.0 million, or 30.8%50.8%, for the first quarter of 20202021 as compared to the same period in 2019.2020. The increase in total noninterest income during the 2020 period resulted primarily from the following:
•
Mortgage banking income increased by $2.0 million, or 73.7%, driven by higher mortgage origination volume due to the favorable interest rate environment for mortgage loans.
•
ATM and debit card income increased by $72,000, or 18.1%, due to an increase in debit card transactions.
•
Other income increased by $31,000, or 9.7%, related to higher loan and wire transfer fees.
Offsetting the above increases was a decrease in service fees on deposit accounts primarily due to lower non-sufficient funds fees in the 2021 period.
Noninterest expenses
The following table sets forth information related to our noninterest expenses.
Three months ended | |||||
March 31, | |||||
(dollars in thousands) | 2020 | 2019 | |||
Compensation and benefits | $ | 7,871 | 6,783 | ||
Occupancy | 1,536 | 1,339 | |||
Outside service and data processing costs | 1,192 | 960 | |||
Insurance | 320 | 318 | |||
Professional fees | 497 | 439 | |||
Marketing | 258 | 260 | |||
Other | 698 | 549 | |||
Total noninterest expense | $ | 12,372 | 10,648 |
| |||||
Three months ended | |||||
March 31, | |||||
(dollars in thousands) | 2021 | 2020 | |||
Compensation and benefits | $ | 6,683 | 6,390 | ||
Mortgage production costs | 2,867 | 1,807 | |||
Occupancy | 1,637 | 1,533 | |||
Real estate owned expenses | 387 | - | |||
Outside service and data processing costs | 1,142 | 1,070 | |||
Insurance | 301 | 320 | |||
Professional fees | 421 | 400 | |||
Marketing | 182 | 230 | |||
Other | 542 | 622 | |||
Total noninterest expense | $ | 14,162 | 12,372 |
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Noninterest expense was $12.4$14.2 million for the three months ended March 31, 2020,first quarter of 2021, a $1.7$1.8 million, or 16.2%14.5%, increase from noninterest expense of $10.6$12.4 million for the three months ended March 31, 2019.first quarter of 2020. The increase in noninterest expenses during the 2020 period was driven primarily by the following:
•
Compensation and benefits expense increased $293,000, or 4.6%, relating primarily to increases in base and incentive compensation.
•
Mortgage production costs increased $1.1 million, or 58.7%, due to higher commission expense related to the increased mortgage activity resulting from the current favorable interest rate environment.
•
Occupancy expense increased $104,000, or 6.8%, primarily related to the expansion of our current office space in Atlanta that took place during the third quarter of 2020.
•
Real estate owned expenses increased $387,000 primarily due to a loss on sale of one commercial property.
•
Outside service and data processing fees increased by $72,000, or 6.7%, primarily due to increased electronic banking and software licensing costs.
Offsetting the above increases were decreases in marketing expenses, due to fewer corporate sponsorships, and in other expenses, primarily due to lower travel costs.
Our efficiency ratio was 52.1% for the first quarter of 2021 compared to 56.2% for the first quarter of 2020 compared to 56.6% for the same period in 2019.2020. 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 slight improvement during the 20202021 period relates primarily to the decreaseincrease in noninterest expenses as a percentage of net interest and noninterest income compared to the prior year.mortgage banking income.
We incurred income tax expense of $810,000$2.9 million and $1.9 million$810,000 for the three months ended March 31, 20202021 and 2019,2020, respectively. Our effective tax rate was 22.2%22.1% and 23.6%22.2% for the three months ended March 31, 2021 and 2020, and 2019, respectively. The lower tax rate for the 2020 period relates to the greater impact of our tax exempt income on our taxable income.
BALANCESHEETREVIEWBalance Sheet Review
Investment Securities
At March 31, 2020,2021, the $75.8$94.8 million in our investment securities portfolio represented approximately 3.2%3.7% of our total assets.Ourassets. Our available for sale investment portfolio included U.S. government agency securities, SBA securities, state and political subdivisions, asset-backed securities and mortgage-backed securities withawith a fair value of $70.5$93.0 million and an amortized cost of $70.0$93.1 million, resulting in an unrealized gainloss of $518,000.$114,000. At December 31, 2019,2020, the $74.6$98.4 million in our investment securities portfolio represented approximately 3.3%4.0% of our total assets. At December 31, 2019, we heldassets, including investment securities available for sale with a fair value of $67.7$94.7 million and an amortized cost of $68.1$93.4 million for an unrealized lossgain of $377,000.$1.3 million.
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 three months ended March 31, 2021 and 2020 and 2019 were $1.98$2.15 billion and $1.71$1.98 billion, respectively. Before the allowance for loan losses, total loans outstanding at March 31, 20202021 and December 31, 20192020 were $2.03$2.18 billion and $1.94$2.14 billion, respectively.
The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, 2020,2021, our loan portfolio included $1.69$1.86 billion, or 83.1%85.1%, of real estate loans, compared to $1.61$1.81 billion, or 82.8%84.6%, of real estate loans at December 31, 2019.2020. 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 $183.1$154.2 million as of March 31, 2020,2021, of which approximately 44%48% were in a first lien position, while the remaining balance was second liens, compared to $179.7 million as ofliens. At December 31, 2019, also2020, our home equity lines of credit totaled $157.0 million, of which approximately 44%45% were in first lien positions, withwhile the remaining balance was in second liens. The average loan had a balance of approximately $91,000$81,000 and a loan to value of 67%61% as of March 31, 2020,2021, compared to an average loan balance of $90,000$83,000 and a loan to value of approximately 68%62% as of December 31, 2019.2020. Further, 1.4%0.3% and 0.4%0.2% of our total home equity lines of credit were over 30 days past due as of March 31, 20202021 and December 31, 2019,2020, respectively.
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Following is a summary of our loan composition at March 31, 20202021 and December 31, 2019.2020. During the first three months of 2020,2021, our loan portfolio increased by $86.7$40.8 million, or 4.5%. Our commercial and consumer loan portfolios each experienced growth during the three months ended March 31, 20201.9%, with a 3.9% increase in commercial loans and a 5.5%5.3% increase in consumer loans while commercial loans remained stable during the period. Of the $86.7 million in loan growth during the first three months of 2020, $78.1 millionThe majority of the increase was in loans secured by real estate with the remainder in commercial business loans.estate. Our consumer real estate portfolio includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $394,000,$437,000, a term of 1520 years, and an average rate of 4.32%3.67% as of March 31, 2020,2021, compared to a principal balance of $386,000,$429,000, a term of 1419 years, and an average rate of 4.46%3.82% as of December 31, 2019.2020.
March 31, 2020 | December 31, 2019 | |||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||
Commercial | ||||||||||||||
Owner occupied RE | $ | 422,124 | 20.8 | % | $ | 407,851 | 21.0 | % | ||||||
Non-owner occupied RE | 534,846 | 26.3 | % | 501,878 | 25.8 | % | ||||||||
Construction | 74,758 | 3.7 | % | 80,486 | 4.1 | % | ||||||||
Business | 317,702 | 15.7 | % | 308,123 | 15.9 | % | ||||||||
Total commercial loans | 1,349,430 | 66.5 | % | 1,298,338 | 66.8 | % | ||||||||
Consumer | ||||||||||||||
Real estate | 427,697 | 21.1 | % | 398,245 | 20.5 | % | ||||||||
Home equity | 183,099 | 9.0 | % | 179,738 | 9.3 | % | ||||||||
Construction | 45,240 | 2.2 | % | 41,471 | 2.1 | % | ||||||||
Other | 24,795 | 1.2 | % | 25,733 | 1.3 | % | ||||||||
Total consumer loans | 680,831 | 33.5 | % | 645,187 | 33.2 | % | ||||||||
Total gross loans, net of deferred fees | 2,030,261 | 100.0 | % | 1,943,525 | 100.0 | % | ||||||||
Less—allowance for loan losses | (22,462 | ) | (16,642 | ) | ||||||||||
Total loans, net | $ | 2,007,799 | $ | 1,926,883 |
March 31, 2021 | December 31, 2020 | |||||||||||||
(dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||
Commercial | ||||||||||||||
Owner occupied RE | $ | 448,505 | 20.5 | % | $ | 433,320 | 20.2 | % | ||||||
Non-owner occupied RE | 584,187 | 26.8 | % | 585,269 | 27.3 | % | ||||||||
Construction | 51,996 | 2.4 | % | 61,467 | 2.9 | % | ||||||||
Business | 303,895 | 13.9 | % | 307,599 | 14.4 | % | ||||||||
Total commercial loans | 1,388,583 | 63.6 | % | 1,387,655 | 64.8 | % | ||||||||
| ||||||||||||||
Consumer | ||||||||||||||
Real estate | 574,541 | 26.3 | % | 536,311 | 25.0 | % | ||||||||
Home equity | 154,157 | 7.1 | % | 156,957 | 7.3 | % | ||||||||
Construction | 44,170 | 2.0 | % | 40,525 | 1.9 | % | ||||||||
Other | 22,231 | 1.0 | % | 21,419 | 1.0 | % | ||||||||
Total consumer loans | 795,099 | 36.4 | % | 755,212 | 35.2 | % | ||||||||
Total gross loans, net of deferred fees | 2,183,682 | 100.0 | % | 2,142,867 | 100.0 | % | ||||||||
Less—allowance for loan losses | (43,499 | ) | (44,149 | ) | ||||||||||
Total loans, net | $ | 2,140,183 | $ | 2,098,718 |
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 March 31, 20202021 and December 31, 2019,2020, 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) | March 31, 2020 | December 31, 2019 | |||
Commercial | $ | 3,499 | 423 | ||
Consumer | 2,248 | 2,260 | |||
Nonaccruing troubled debt restructurings | 4,186 | 4,111 | |||
Total nonaccrual loans | 9,933 | 6,794 | |||
Other real estate owned | - | - | |||
Total nonperforming assets | $ | 9,933 | 6,794 |
| ||||||
(dollars in thousands) | March 31, 2021 | December 31, 2020 | ||||
Commercial | $ | 1,452 | 1,477 | |||
Consumer | 3,201 | 3,083 | ||||
Nonaccruing troubled debt restructurings | 3,150 | 3,509 | ||||
Total nonaccrual loans | 7,803 | 8,069 | ||||
Other real estate owned | - | 1,169 | ||||
Total nonperforming assets | $ | 7,803 | 9,238 |
33
At March 31, 2020,2021, nonperforming assets were $9.9$7.8 million, or 0.42%0.30% of total assets and 0.49%0.36% of gross loans. Comparatively, nonperforming assets were $6.8$9.2 million, or 0.30%0.37% of total assets and 0.35%0.43% of gross loans at December 31, 2019.2020. Nonaccrual loans increased $3.1 milliondecreased $266,000 during the first quarterthree months of 20202021 due primarily to two$452,000 of nonaccrual loans putreturned to accrual status and $365,000 of loans paid or charged off, partially offset by $551,000 of new loans on nonaccrual status.nonaccrual. The amount of foregone interest income on the nonaccrual loans in the first three months of 20202021 and 20192020 was approximately $1,000 and $51,000, and $20,000, respectively.
At March 31, 20202021 and 2019,2020, the allowance for loan losses represented 226.1%557.5% and 265.4%226.1% of the total amount of nonperforming loans, respectively. A significant portion, or approximately 98%, of nonperforming loans at March 31, 20202021 was secured by real estate. 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 $22.5 million as of March 31, 2020 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 ten years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using similar 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 nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we 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, we will typically seek performance under the guarantee.
In addition, at March 31, 2020, 83.1%2021, 85.1% of our loans were collateralized by real estate and 91% of our impaired loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us 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 March 31, 2020,2021, we did 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.
At March 31, 2020,2021, impaired loans totaled $17.9$12.2 million, for which $5.4$5.0 million of these loans had a reserve of approximately $1.8$1.6 million allocated in the allowance. During the first three months of 2021, the average recorded investment in impaired loans was approximately $12.6 million. Comparatively, impaired loans totaled $13.0 million at December 31, 2020 for which $5.1 million of these loans had a reserve of approximately $1.7 million allocated in the allowance. During 2020, the average recorded investment in impaired loans was approximately $17.9 million. Comparatively, impaired loans totaled $12.0 million at December 31, 2019 for which $4.7 million of these loans had a reserve of approximately $1.4 million allocated in the allowance. During 2019, the average recorded investment in impaired loans was approximately $12.3$14.6 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 March 31, 2020,2021, we determined that we had loans totaling $12.1$7.5 million that we considered TDRs compared to $9.3$8.4 million as of December 31, 2019.2020. The increasedecrease during the first quarterthree months of 20202021 was driven by threefour client relationships with loans totaling $2.9 million$908,000 that were modified due topaid off or removed from TDR status during the COVID-19 pandemic, and considered to be TDRs due to experiencing financial difficulty prior to the COVID-19 pandemic.quarter.
Allowance for Loan Losses
The allowance for loan losses was $22.5$43.5 million and $16.1$22.5 million at March 31, 20202021 and 2019,2020, respectively, or 1.99% of outstanding loans at March 31, 2021 and 1.11% of outstanding loans at March 31, 2020 and 0.93% of outstanding loans at March 31, 2019.2020. At December 31, 2019,2020, our allowance for loan losses was $16.6$44.1 million, or 0.86%2.06% of outstanding loans.
During the three months ended March 31, 2020,2021, we charged-off $406,000 of loans and recorded $56,000 of recoveries on loans previously charged-off, for net charge-offs of $350,000. Comparatively, we charged-off $266,000 of loans and recorded $86,000 of recoveries on loans previously charged-off, for net charge-offs of $180,000. Comparatively, we charged-off $41,000 of loans and recorded $30,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $11,000$180,000 for the first three months of 2019.2020. The $5.8 million increase$650,000 decrease in the allowance for loan losses during the first three months of 20202021 is driven by the impact of the COVID-19 pandemic anda reduction in qualitative adjustment factors related to the uncertainimprovement in economic conditions as well as an increase in past dueat both the national and nonaccrual loansregional levels at March 31, 2020. We expect economic uncertainty to continue for2021, partially offset by downgrades in our hotel loan portfolio as we believe the next few months which may result in a significant increasetourism and hospitality industry remains at risk of credit losses due to the allowance for loan losses for the second quarter of 2020.pandemic.
34
Following is a summary of the activity in the allowance for loan losses.
Three months ended | ||||||||||
March 31, | Year ended | |||||||||
(dollars in thousands) | 2020 | 2019 | December 31, 2019 | |||||||
Balance, beginning of period | $ | 16,642 | 15,762 | 15,762 | ||||||
Provision | 6,000 | 300 | 2,300 | |||||||
Loan charge-offs | (266 | ) | (41 | ) | (1,515 | ) | ||||
Loan recoveries | 86 | 30 | 95 | |||||||
Net loan charge-offs | (180 | ) | (11 | ) | (1,420 | ) | ||||
Balance, end of period | $ | 22,462 | 16,051 | 16,642 |
| ||||||||||
Three months ended | ||||||||||
March 31, | Year ended | |||||||||
(dollars in thousands) | 2021 | 2020 | December 31, 2020 | |||||||
Balance, beginning of period | $ | 44,149 | 16,642 | 16,642 | ||||||
Provision | (300 | ) | 6,000 | 29,600 | ||||||
Loan charge-offs | (406 | ) | (266 | ) | (3,414 | ) | ||||
Loan recoveries | 56 | 86 | 1,321 | |||||||
Net loan charge-offs | (350 | ) | (180 | ) | (2,093 | ) | ||||
Balance, end of period | $ | 43,499 | 22,462 | 44,149 |
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total deposits. In addition, we do not obtain time deposits of $100,000 or more through the Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.
Our retail deposits represented $1.94$2.26 billion, or 95.8%100% of total deposits at March 31, 2020, while our out-of-market, or brokered, deposits represented $84.1 million, or 4.2% of our total deposits at March 31, 2020.2021. At December 31, 2019,2020, retail deposits represented $1.81$2.12 billion, or 96.4%99.0% of our total deposits, and brokered CDs were $67.4$22.0 million, representing 3.6%1.0% of our total deposits. Our loan-to-deposit ratio was 100%97% at March 31, 20202021 and 104%100% at December 31, 2019.2020.
The following is a detail of our deposit accounts:
March 31, | December 31, | ||||
(dollars in thousands) | 2020 | 2019 | |||
Non-interest bearing | $ | 437,855 | 397,331 | ||
Interest bearing: | |||||
NOW accounts | 260,320 | 228,680 | |||
Money market accounts | 979,861 | 898,923 | |||
Savings | 19,563 | 16,258 | |||
Time, less than $100,000 | 43,596 | 47,941 | |||
Time and out-of-market deposits, $100,000 and over | 284,503 | 286,991 | |||
Total deposits | $ | 2,025,698 | 1,876,124 |
| ||||||
March 31, | December 31, | |||||
(dollars in thousands) | 2021 | 2020 | ||||
Non-interest bearing | $ | 677,282 | 576,610 | |||
Interest bearing: | ||||||
NOW accounts | 304,530 | 268,739 | ||||
Money market accounts | 1,064,659 | 1,042,745 | ||||
Savings | 31,588 | 27,254 | ||||
Time, less than $100,000 | 31,856 | 36,454 | ||||
Time and out-of-market deposits, $100,000 and over | 148,836 | 190,956 | ||||
Total deposits | $ | 2,258,751 | 2,142,758 |
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 $1.79$2.16 billion and $1.66$2.01 billion at March 31, 2020,2021, and December 31, 2019,2020, respectively.
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The following table shows the average balance amounts and the average rates paid on deposits.
Three months ended | ||||||||||||
March 31, | ||||||||||||
2020 | 2019 | |||||||||||
(dollars in thousands) | Amount | Rate | Amount | Rate | ||||||||
Noninterest-bearing demand deposits | $ | 391,761 | - | % | $ | 323,800 | - | % | ||||
Interest-bearing demand deposits | 227,688 | 0.30 | % | 186,070 | 0.19 | % | ||||||
Money market accounts | 938,808 | 1.44 | % | 764,638 | 1.75 | % | ||||||
Savings accounts | 17,780 | 0.05 | % | 15,477 | 0.05 | % | ||||||
Time deposits less than $100,000 | 48,775 | 1.61 | % | 62,371 | 1.85 | % | ||||||
Time deposits greater than $100,000 | 280,889 | 2.06 | % | 309,323 | 2.24 | % | ||||||
Total deposits | $ | 1,905,701 | 1.09 | % | $ | 1,661,679 | 1.31 | % |
| ||||||||||||
Three months ended | ||||||||||||
March 31, | ||||||||||||
2021 | 2020 | |||||||||||
(dollars in thousands) | Amount | Rate | Amount | Rate | ||||||||
Noninterest-bearing demand deposits | $ | 603,292 | - | % | $ | 391,761 | - | % | ||||
Interest-bearing demand deposits | 280,737 | 0.07 | % | 227,688 | 0.30 | % | ||||||
Money market accounts | 1,055,678 | 0.22 | % | 938,808 | 1.44 | % | ||||||
Savings accounts | 28,789 | 0.05 | % | 17,780 | 0.05 | % | ||||||
Time deposits less than $100,000 | 34,416 | 0.80 | % | 48,775 | 1.61 | % | ||||||
Time deposits greater than $100,000 | 178,962 | 1.03 | % | 280,889 | 2.06 | % | ||||||
Total deposits | $ | 2,181,874 | 0.21 | % | $ | 1,905,701 | 1.09 | % |
During the first three months ended March 31, 2020,of 2021, our average transaction account balances increased by $286.1$392.5 million, or 22.2%24.9%, from the three months ended March 31, 2019,prior year, while our average time deposit balances decreased by $42.0$116.3 million, or 11.3%, during the same three-month period.35.3%.
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, 20202021 was as follows:
| ||||||
(dollars in thousands) | March 31, 2020 | March 31, 2021 | ||||
Three months or less | $ | 56,241 | $ | 37,817 | ||
Over three through six months | 54,008 | 32,177 | ||||
Over six through twelve months | 142,352 | 51,691 | ||||
Over twelve months | 31,902 | 27,151 | ||||
Total | $ | 284,503 | $ | 148,836 |
Included in time deposits of $100,000 or more at March 31, 2020 is $84.1 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 1.90%. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at March 31, 20202021 and December 31, 20192020 were $236.8$97.0 million and $220.1$130.9 million, respectively.
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. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic.
At March 31, 20202021 and December 31, 2019,2020 cash and cash equivalents amounted to $141.1totaled $155.3 million and $127.8$100.7 million, respectively, or 5.9%6.0% and 5.6%4.1% of total assets, respectively. Our investment securities at March 31, 20202021 and December 31, 20192020 amounted to $75.8$94.8 million and $74.6$98.4 million, respectively, or 3.2%3.7% and 3.3%4.0% of total assets, respectively.Investmentrespectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely 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 March 31, 2020.2021.
36
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 March 31, 20202021 was $385.9$511.9 million, based on the Bank’s $4.8$1.2 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 March 31, 20202021 and December 31, 20192020 we had $229.3$232.8 million and $238.1$206.2 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.
We also have a line of credit with another financial institution for $15.0 million, which was unused at March 31, 2020.2021. The line of credit bearshas an interest atrate of LIBOR plus 2.50%3.50% and matures on June 30, 2020. As noted in Note 1 – Naturea maturity date of Business and Basis of Presentation, we have utilized $15.0 million of the line subsequent to MarchDecember 31, 2020.2021.
We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB 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 $210.5$239.5 million at March 31, 20202021 and $205.9$228.3 million at December 31, 2019.2020. The $4.6$11.2 million increase from December 31, 20192020 is primarily related to net income of $2.8$10.4 million during the first three months of 2020,2021, stock option exercises and expenses of $2.0 million, partially offset by a $1.1 million and $708,000 in other comprehensive income.loss.
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 three months ended March 31, 20202021 and the year ended December 31, 2019.2020. Since our inception, we have not paid cash dividends.
March 31, 2020 | December 31, 2019 | |||||
Return on average assets | 0.51 | % | 1.35 | % | ||
Return on average equity | 5.42 | % | 14.72 | % | ||
Return on average common equity | 5.42 | % | 14.72 | % | ||
Average equity to average assets ratio | 9.42 | % | 9.16 | % | ||
Tangible common equity to assets ratio | 8.87 | % | 9.08 | % |
| ||||||
March 31, 2021 | December 31, 2020 | |||||
Return on average assets | 1.68 | % | 0.76 | % | ||
Return on average equity | 18.22 | % | 8.49 | % | ||
Return on average common equity | 18.22 | % | 8.49 | % | ||
Average equity to average assets ratio | 9.24 | % | 9.01 | % | ||
Tangible common equity to assets ratio | 9.28 | % | 9.20 | % |
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 unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, 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 consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.
Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose 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 consolidated assets of less than $3 billion (such as the Company). 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 our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.
37
To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of March 31, 2020,2021, our capital ratios exceed these ratios and we remain “well capitalized.”
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.
March 31, 2020 | ||||||||||||||||||
For capital | To be well capitalized | |||||||||||||||||
adequacy purposes | under prompt | |||||||||||||||||
minimum plus the | corrective | |||||||||||||||||
capital conservation | action provisions | |||||||||||||||||
Actual | buffer | minimum | ||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total Capital (to risk weighted assets) | $ | 259,896 | 13.16 | % | 158,033 | 10.50 | % | 197,542 | 10.00 | % | ||||||||
Tier 1 Capital (to risk weighted assets) | 237,433 | 12.02 | % | 118,525 | 8.50 | % | 158,033 | 8.00 | % | |||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 237,433 | 12.02 | % | 88,894 | 7.00 | % | 128,402 | 6.50 | % | |||||||||
Tier 1 Capital (to average assets) | 237,433 | 10.64 | % | 89,255 | 4.00 | % | 111,569 | 5.00 | % | |||||||||
December 31, 2019 | ||||||||||||||||||
For capital | To be well capitalized | |||||||||||||||||
adequacy purposes | under prompt | |||||||||||||||||
minimum plus the | corrective | |||||||||||||||||
capital conservation | action provisions | |||||||||||||||||
Actual | buffer | minimum | ||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total Capital (to risk weighted assets) | $ | 250,847 | 13.31 | % | $ | 150,807 | 10.50 | % | $ | 188,510 | 10.00 | % | ||||||
Tier 1 Capital (to risk weighted assets) | 234,205 | 12.42 | % | 113,106 | 8.50 | % | 150,807 | 8.00 | % | |||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 234,205 | 12.42 | % | 84,829 | 7.00 | % | 122,531 | 6.50 | % | |||||||||
Tier 1 Capital (to average assets) | 234,205 | 10.80 | % | 86,772 | 4.00 | % | 108,465 | 5.00 | % |
| |||||||||||||||
March 31, 2021 | |||||||||||||||
For capital | To be well capitalized | ||||||||||||||
adequacy purposes | under prompt | ||||||||||||||
minimum plus the | corrective | ||||||||||||||
capital conservation | action provisions | ||||||||||||||
Actual | buffer | minimum | |||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
Total Capital (to risk weighted assets) | $ | 290,432 | 14.29% | 213,370 | 10.50% | 203,209 | 10.00% | ||||||||
Tier 1 Capital (to risk weighted assets) | 264,807 | 13.03% | 172,728 | 8.50% | 162,568 | 8.00% | |||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 264,807 | 13.03% | 142,247 | 7.00% | 132,086 | 6.50% | |||||||||
Tier 1 Capital (to average assets) | 264,807 | 10.61% | 99,853 | 4.00% | 124,816 | 5.00% |
| |||||||||||||||
December 31, 2020 | |||||||||||||||
For capital | To be well capitalized | ||||||||||||||
adequacy purposes | under prompt | ||||||||||||||
minimum plus the | corrective | ||||||||||||||
capital conservation | action provisions | ||||||||||||||
Actual | buffer | minimum | |||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
Total Capital (to risk weighted assets) | $ | 279,414 | 13.92% | $ | 160,554 | 8.00% | $ | 200,693 | 10.00% | ||||||
Tier 1 Capital (to risk weighted assets) | 254,092 | 12.66% | 120,416 | 6.00% | 160,554 | 8.00% | |||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 254,092 | 12.66% | 90,312 | 4.50% | 130,451 | 6.50% | |||||||||
Tier 1 Capital (to average assets) | 254,092 | 10.26% | 99,094 | 4.00% | 123,867 | 5.00% |
The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.
March 31, 2020 | |||||||||||||||
For capital | To be well capitalized | ||||||||||||||
adequacy purposes | under prompt | ||||||||||||||
minimum plus the | corrective | ||||||||||||||
capital conservation | action provisions | ||||||||||||||
Actual | buffer(1) | minimum | |||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
Total Capital (to risk weighted assets) | $ | 268,528 | 13.59 | % | 158,033 | 10.50 | % | N/A | N/A | ||||||
Tier 1 Capital (to risk weighted assets) | 223,065 | 11.29 | % | 118,525 | 8.50 | % | N/A | N/A | |||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 210,065 | 10.63 | % | 88,894 | 7.00 | % | N/A | N/A | |||||||
Tier 1 Capital (to average assets) | 223,065 | 10.00 | % | 89,255 | 4.00 | % | N/A | N/A |
| |||||||||||||
March 31, 2021 | |||||||||||||
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) | $ | 301.236 | 14.82% | 213,370 | 10.50% | N/A | N/A | ||||||
Tier 1 Capital (to risk weighted assets) | 252,611 | 12.43% | 172,728 | 8.50% | N/A | N/A | |||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 239,611 | 11.79% | 142,247 | 7.00% | N/A | N/A | |||||||
Tier 1 Capital (to average assets) | 252,611 | 10.12% | 99,853 | 4.00% | N/A | N/A |
December 31, 2019 | ||||||||||||||||
For capital | To be well capitalized | |||||||||||||||
adequacy purposes | under prompt | |||||||||||||||
minimum | corrective | |||||||||||||||
plus the capital | action provisions | |||||||||||||||
Actual | conservation buffer(1) | minimum | ||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
Total Capital (to risk weighted assets) | $ | 258,800 | 13.73 | % | $ | 150,807 | 10.50 | % | N/A | N/A | ||||||
Tier 1 Capital (to risk weighted assets) | 219,158 | 11.63 | % | 113,106 | 8.50 | % | N/A | N/A | ||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 206,158 | 10.94 | % | 84,829 | 7.00 | % | N/A | N/A | ||||||||
Tier 1 Capital (to average assets) | 219,158 | 10.10 | % | 86,772 | 4.00 | % | N/A | N/A |
| ||||||||||||||
December 31, 2020 | ||||||||||||||
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) | $ | 288,593 | 14.38% | $ | 160,554 | 8.00% | N/A | N/A | ||||||
Tier 1 Capital (to risk weighted assets) | 240,271 | 11.97% | 120,416 | 6.00% | N/A | N/A | ||||||||
Common Equity Tier 1 Capital (to risk weighted assets) | 227,271 | 11.32% | 90,312 | 4.50% | N/A | N/A | ||||||||
Tier 1 Capital (to average assets) | 240,271 | 9.70% | 99,094 | 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) |
38
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.
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 March 31, 2020,2021, unfunded commitments to extend credit were $458.7$490.1 million, of which $137.6$116.5 million were at fixed rates and $321.1$373.6 million were at variable rates. At December 31, 2019,2020, unfunded commitments to extend credit were $426.6$480.1 million, of which approximately $105.0$114.6 million were at fixed rates and $321.7$365.5 million were at variable rates. A significant portion of the unfunded commitments related to consumer home equity lines of credit. 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.
At March 31, 20202021 and December 31, 2019,2020, there were commitments under letters of credit for $9.3$9.0 million and $9.9$8.7 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.
39
As of March 31, 2020,2021, 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.
Change in net interest | |||
Interest rate scenario | income from base | ||
Up 300 basis points | 17.93 | % | |
Up 200 basis points | 12.11 | % | |
Up 100 basis points | 6.14 | % | |
Base | - | ||
Down 100 basis points | (2.93) | % | |
Down 200 basis points | (4.88) | % | |
Down 300 basis points | (6.50) | % |
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2019,2020, as filed in our Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments 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. A brief discussion of each of these areas appears in our 20192020 Annual Report on Form 10-K. During the first three months of 2020,2021, we did not significantly alter the manner in which we applied our Critical Accounting Policies or developed related assumptions and estimates.
Accounting, Reporting, and Regulatory Matters
See Note 1 – Nature of Business and Basis of Presentation in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated 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.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
40
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 three months ended March 31, 2020,2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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 1A. RISK FACTORS.
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, 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 I, Item 2 of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q, and in our other filings with the SEC.
We are providing this additional risk factorThere have been no material changes to supplement the risk factors containeddisclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.
The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:
These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.
The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.
We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.
As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) | Not applicable. | ||
(b) | Not applicable. | ||
| Issuer Purchases of Registered Equity Securities |
The following table reflects share repurchase activity during the first quarter of 2020:2021:
(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 | |||||
January 1 – January 31 | - | $ | - | - | 388,612 | ||||
February 1 | - | - | - | 388,612 | |||||
March 1 | - | - | - | 388,612 | |||||
Total | - | - | 388,612* | ||||||
*On March 11, 2020,9, 2021, the Company announced a share repurchase plan allowing us to repurchase up to 383,650388,612 shares of our common stock (the “Repurchase Plan”). As of March 31, 2020,2021, 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, 20202021 would require additional approval of our Board of Directors and the Federal Reserve.
41
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
Item 5. OTHER INFORMATION.
None.
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.
42
INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
Rule 13a-14(a) Certification of the Principal Executive Officer. | ||
Rule 13a-14(a) Certification of the Principal Financial Officer. | ||
101 | The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended March 31, | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
43
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: April | /s/R. Arthur Seaver, Jr. | ||
R. Arthur Seaver, Jr. | |||
Chief Executive Officer (Principal Executive Officer) | |||
Date: April | /s/Michael D. Dowling | ||
Michael D. Dowling | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
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