UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
| For the fiscal year ended: December 31, 2014 | Commission File Number: 000-11448 |
NewBridge Bancorp
(Exact name of Registrant as specified in its Charter)
| North Carolina | 56-1348147 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |
| 1501 Highwoods Blvd., Suite 400 | ||
| Greensboro, North Carolina | 27410 | |
| (Address of principal executive offices) | (Zip Code) |
(336) 369-0900
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934:
| Name of each exchange | ||
| Title of each class | on which registered | |
| Class A Common Stock, no par value per share | Nasdaq Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes¨ Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes¨ Nox
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yesx No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
| Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
The aggregate market value of the Registrant’s voting and nonvoting common equity held by non-affiliates of the Registrant, based on the average bid and asked price of such common equity on the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $294.0 million. As of March 11, 2015 (the most recent practicable date), the Registrant had 35,795,134 shares of Class A common stock outstanding and 3,186,748 shares of Class B common stock outstanding.
Documents incorporated by reference – Portions of the Proxy Statement for the 2015 Annual Meeting of Shareholders of NewBridge Bancorp (the “Proxy Statement”) are incorporated by reference into Part III hereof.
The Exhibit Index begins on page 123.
NewBridge Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 2014
Table of Contents
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of NewBridge Bancorp (hereinafter referred to as the “Company”) including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects,” “anticipates,” “should,” “estimates,” “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation:
| • | Revenues are lower than expected; |
| • | Credit quality deterioration, which could cause an increase in the provision for credit losses; |
| • | Competitive pressure among depository institutions increases significantly; |
| • | Changes in consumer spending, borrowings and savings habits; |
| • | Technological changes and security and operations risks associated with the use of technology; |
| • | The cost of additional capital is more than expected; |
| • | The interest rate environment could reduce interest margins; |
| • | Asset/liability repricing risks, ineffective hedging and liquidity risks; |
| • | Counterparty risk; |
| • | General economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business, are less favorable than expected; |
| • | The effects of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments; |
| • | The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; |
| • | Volatility in the credit or equity markets and its effect on the general economy; |
| • | Demand for the products or services of the Company, as well as its ability to attract and retain qualified people; |
| • | The costs and effects of legal, accounting and regulatory developments and compliance; |
| • | Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule; |
| • | The effects of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, and the enactment of further regulations related to this Act; |
| • | More stringent capital requirements effective January 1, 2015; |
| • | Risks associated with the Company’s growth strategy, including acquisitions; and |
| • | The effects of any intangible or deferred tax asset impairments that may be required in the future. |
The Company cautions that the foregoing list of important factors is not exhaustive. See also “Risk Factors” which begins on page 15. The Company undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time, by or on behalf of the Company.
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| Item 1. | Business |
General
The Company is a bank holding company incorporated under the laws of the State of North Carolina (“NC”) and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company’s principal asset is stock of its banking subsidiary, NewBridge Bank (the “Bank”). Accordingly, throughout this Annual Report on Form 10-K, there are frequent references to the Bank. The principal executive offices of the Company and the Bank are located at 1501 Highwoods Boulevard, Suite 400, Greensboro, NC 27410. The telephone number is (336) 369-0900 and its website is www.newbridgebank.com. The Bank maintains operations facilities in Lexington and Reidsville, NC.
Business of Bank and Other Subsidiaries
Through its branch network, the Bank, a NC chartered member bank, provides a wide range of banking products to small to medium-sized businesses and retail clients in its market areas, including interest-bearing and noninterest-bearing demand deposit accounts, certificates of deposits, individual retirement accounts, overdraft protection, personal and corporate trust services, safe deposit boxes, online banking, corporate cash management, brokerage, financial planning and asset management, and secured and unsecured loans.
As of December 31, 2014, the Bank operated two active non-bank subsidiaries: LSB Properties, Inc. (“LSB Properties”) and Henry Properties, LLC (“Henry Properties”), which together own the real estate acquired in settlement of loans of the Bank.
The Company has one non-bank subsidiary, FNB Financial Services Capital Trust I (“FNB Trust”), a Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. FNB Trust is not consolidated in the Company’s financial statements.
As part of its operations, the Company regularly holds discussions and evaluates the potential acquisition of, or merger with, various financial institutions and other businesses. The Company also periodically considers the potential disposition of certain assets, and the addition or disposition of branches. As a general rule, the Company only publicly announces any material acquisitions or dispositions once a definitive agreement has been reached.
The Company operates one reportable segment, the Bank. Reference is made to Item 8 – “Financial Statements and Supplementary Data.” Management believes that the Company is not dependent upon any single client, or a few clients, the loss of any one or more of which would have a material adverse effect on the Company’s operations.
Market Areas
The Bank’s primary market areas are the Piedmont Triad Region of NC, the Cape Fear Region of NC, which is comprised of the state’s five most southeastern counties, and two of North Carolina’s strongest growth market areas, Charlotte and Raleigh. On December 31, 2014, the Bank operated 40 branch offices in its four primary markets, which are also four of the largest markets in NC. The Bank also had loan production offices in Asheboro, Greensboro, Morganton, Raleigh, Southport and Winston-Salem, NC, and in Greenville and Charleston, SC. The following table lists the Bank’s branch offices as of December 31, 2014, categorized by market and city.
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| Charlotte: | Piedmont Triad: |
| Charlotte (SouthPark) | Lexington (five offices) |
| Greensboro (four offices) | |
| Raleigh: | Winston-Salem (four offices) |
| Raleigh (two offices) | Reidsville (two offices) |
| Cary | Clemmons |
| Clinton | Danbury |
| Fuqua Varina | Eden |
| High Point | |
| Cape Fear: | Jamestown |
| Wilmington (two offices) | Kernersville |
| Burgaw | King |
| Calabash | Madison |
| Oak Island | Thomasville |
| Shallotte | Walkertown |
| Southport (two offices) | |
| Sunset Beach |
In October 2014, the Bank announced that it had entered into an agreement to acquire Premier Commercial Bank (“Premier”), a commercial bank headquartered in Greensboro, NC with one branch centrally located in Greensboro and residential mortgage origination offices in Greensboro, Charlotte, Raleigh, High Point, Kernersville and Burlington, NC. The acquisition was successfully completed on February 27, 2015. Following the acquisition, the Bank has 41 branch offices.
As of December 31, 2014, the Bank operated 25 branches and three loan production offices in the Piedmont Triad Region of North Carolina. The Piedmont Triad Region is a 12 county area, located in the interstate corridor between the Charlotte and Research Triangle metro areas, and has a combined population of approximately 1.6 million people. The Piedmont Triad Region includes the cities of Greensboro, Winston-Salem and High Point, respectively the third, fifth and ninth largest cities in NC.
The Piedmont Triad Region’s economy was built on the textile, furniture and tobacco industries. As these industries have contracted, the Piedmont Triad Region has transitioned to a more service-oriented economy by successfully diversifying into areas related to transportation, logistics, health care, education and technology. The Piedmont Triad International Airport is home to Honda Aircraft Company’s world headquarters and a national FedEx hub.
In addition to its strategic proximity to key markets, the Piedmont Triad Region has a well-defined transportation infrastructure, providing access to both global and national markets. Interstates 40, 85 and 77 provide both North-South and East-West routes. In addition, local manufacturers and distribution hubs will have direct access to both Midwest markets and additional Southeast ports when Interstates 73 and 74, which will bisect the Piedmont Triad Region, are completed. Moreover, extensive rail services are offered by Norfolk Southern, CSX and Amtrak, as well as a number of short-line railroads.
The Piedmont Triad Region is home to numerous institutions of higher education, including Wake Forest University, Wake Forest University Baptist Medical Center, North Carolina School of the Arts, Salem College and Winston-Salem State University (Winston-Salem); High Point University (High Point); the University of North Carolina at Greensboro, North Carolina A&T University, Elon University School of Law and the Joint School of Nanoscience and Nanoengineering (Greensboro); and a number of well-respected private colleges, as well as many community colleges and technical schools. All are recognized for academic excellence and enhance the Piedmont Triad Region’s business development efforts, particularly in the field of biotechnology.
As of December 31, 2014, the Bank operated nine branches and one loan production office in the Cape Fear Region. The Cape Fear Region is centered around Wilmington, the eighth largest city in NC. A historic seaport and a popular tourist destination, Wilmington has a diversified economy and is a major resort area, a light manufacturing center, a chemical manufacturing center and the distribution hub of southeastern NC. The city also serves as the retail and medical center for the region.
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In addition to economic diversification, Wilmington has experienced extensive industrial development and growth in the service and trade sectors over the last 20 years. Companies in the Wilmington area produce fiber optic cables for the communications industry, aircraft engine parts, pharmaceuticals, nuclear fuel components and various textile products. The motion picture and television industries also have a significant presence in the area.
The total population of the Cape Fear Region is approximately 476,000. The area is served by Interstate 40 and U.S. Highways 17 and 74, major rail connections and national and regional airlines through facilities at Wilmington International Airport. Wilmington is also home to the Port of Wilmington, one of two deep-water ports in NC, and the University of North Carolina at Wilmington.
As of December 31, 2014, the Bank operated one branch in Charlotte. The office is located in Charlotte’s SouthPark neighborhood featuring one of the largest business districts in the State, as well as upscale shopping and residential areas.
Charlotte is the largest city in North Carolina and is within one of the fastest growing metropolitan statistical areas (“MSAs”) in the Southeast. The city is also considered one of the major banking centers in the country. The Charlotte-Concord-Gastonia MSA is the 23rd largest MSA in the nation. Mecklenburg County alone, where Charlotte is located, has grown more than 7.8% since 2010 and has a population of approximately 991,000.
As of December 31, 2014, the Bank operated five branches and one loan production office in the Raleigh Market. Raleigh is the capital of North Carolina, and the downtown Raleigh branch office is located just one block from the State Capitol.
Raleigh is the second largest city in North Carolina. The Raleigh-Cary MSA is the 47th largest MSA in the country and is one of the fastest growing MSAs. Raleigh is also one of the three cities that make up the area known as the Triangle (Raleigh, Durham and Chapel Hill). The Triangle is best known for Research Triangle Park and the three universities which anchor each of its cities: Duke University in Durham, The University of North Carolina in Chapel Hill, and North Carolina State University in Raleigh.
Management believes that unemployment data is the most significant indicator of the economic health of its market areas and monitors this data on a regular basis. As reflected in the following table, the unemployment rate in each of the Bank’s primary market areas was elevated from the end of 2008 through 2012 but showed significant improvement in 2013 and 2014. The table also shows the Bank’s nonperforming loans as a percentage of its total loans in each market as of December 31, 2014.
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| Unemployment Rate(1) | As of December 31, 2014 | |||||||||||||||||||||||||||||||||||||||
| December 31 | Total Loans(2) | Non- performing Loans | % of Total Loans | |||||||||||||||||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | (dollars in thousands) | |||||||||||||||||||||||||||||||||
| Piedmont Triad: | ||||||||||||||||||||||||||||||||||||||||
| Guilford County | 8.3 | % | 11.2 | % | 10.1 | % | 9.9 | % | 9.5 | % | 6.9 | % | 5.3 | % | $ | 222,313 | $ | 477 | 0.21 | % | ||||||||||||||||||||
| Davidson County | 9.7 | 13.4 | 11.1 | 10.5 | 10.1 | 6.9 | 5.3 | 128,843 | 1,691 | 1.31 | ||||||||||||||||||||||||||||||
| Rockingham County | 10.1 | 12.6 | 12.1 | 11.4 | 10.6 | 7.5 | 5.9 | 58,716 | 510 | 0.87 | ||||||||||||||||||||||||||||||
| Forsyth/Stokes Counties | 7.4 | 9.9 | 9.1 | 9.5 | 8.8 | 6.1 | 4.9 | 156,011 | 252 | 0.16 | ||||||||||||||||||||||||||||||
| Raleigh: | ||||||||||||||||||||||||||||||||||||||||
| Wake County | 5.9 | 8.5 | 8.0 | 7.7 | 7.3 | 5.0 | 4.1 | 295,329 | 59 | 0.02 | ||||||||||||||||||||||||||||||
| Charlotte: | ||||||||||||||||||||||||||||||||||||||||
| Mecklenburg County | 7.7 | 11.2 | 10.5 | 9.5 | 9.2 | 6.7 | 5.1 | 290,386 | - | - | ||||||||||||||||||||||||||||||
| Cape Fear | 7.5 | 9.7 | 8.9 | 9.7 | 9.5 | 7.5 | 5.4 | 221,914 | 771 | 0.35 | ||||||||||||||||||||||||||||||
| Loan Production Offices | N/A | N/A | N/A | N/A | N/A | N/A | N/A | 19,326 | - | - | ||||||||||||||||||||||||||||||
| Corporate Centers: | ||||||||||||||||||||||||||||||||||||||||
| Mortgage Center | N/A | N/A | N/A | N/A | N/A | N/A | N/A | 235,599 | 3,116 | 1.32 | ||||||||||||||||||||||||||||||
| Virginia Loans | N/A | N/A | N/A | N/A | N/A | N/A | N/A | 4,795 | 247 | 5.15 | ||||||||||||||||||||||||||||||
| Credit Cards | N/A | N/A | N/A | N/A | N/A | N/A | N/A | 7,853 | - | - | ||||||||||||||||||||||||||||||
| Other | N/A | N/A | N/A | N/A | N/A | N/A | N/A | 163,321 | 89 | 0.05 | ||||||||||||||||||||||||||||||
| (1) | Source: U.S. Bureau of Labor Statistics and North Carolina Department of Commerce. |
| (2) | Excludes loans held for sale. |
The following table reflects the Bank’s loans, deposits and branch locations in its four primary markets at December 31, 2014, and the Bank’s rank by deposit market share as of June 30, 2014 (dollars in thousands):
| Market | Loans(1)(2) | Deposits(2) | Number of Branches | Deposit Market Share Rank(3) | ||||||||||||
| Piedmont Triad | $ | 565,883 | $ | 969,966 | 25 | 2 | ||||||||||
| Raleigh | 295,329 | 247,399 | 5 | 5 | ||||||||||||
| Charlotte | 290,386 | 23,366 | 1 | 14 | ||||||||||||
| Cape Fear | 221,914 | 257,750 | 9 | 3 | ||||||||||||
| (1) | Excludes loans held for sale. |
| (2) | Excludes loans and deposits held in corporate centers and loan production offices. |
| (3) | As of June 30, 2014, rank for community banks; excludes banks with more than $10 billion in assets. |
Deposits
The Bank offers a variety of deposit products to small to medium-sized businesses and retail clients at interest rates generally competitive with those of other financial institutions. The table below sets forth the mix of depository accounts at the Bank as a percentage of total deposits of the Bank at the dates indicated.
| As of December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Noninterest-bearing demand | 17.4 | % | 15.5 | % | 15.4 | % | ||||||
| Savings, NOW, MMI | 52.6 | 55.4 | 59.5 | |||||||||
| Certificates of deposit | 30.0 | 29.1 | 25.1 | |||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||
The Bank accepts deposits at its banking offices, most of which have automated teller machines (“ATMs”). Its memberships in multiple ATM networks allow clients access to their depository accounts from ATM facilities throughout the United States. Competitive fees are charged for the use of its ATM facilities by clients not having an account with the Bank. Deposit flows are controlled primarily through the pricing of deposits.
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At December 31, 2014, the Bank had $385.0 million in certificates of deposit of $100,000 or more, including $294.1 million in certificates of deposit of $250,000 or more. It also utilizes brokered deposits and deposits obtained through the Certificate of Deposit Account Registry Service (“CDARS”), a service of Promontory InterFinancial Network, LLC, to supplement in-market deposits. The accompanying table presents the scheduled maturities of time deposits of $100,000 or more and $250,000 or more at December 31, 2014.
| Scheduled maturity of time deposits | $100,000 or more | $250,000 or more | ||||||
| (dollars in thousands) | ||||||||
| Less than three months | $ | 175,549 | $ | 154,710 | ||||
| Three through six months | 111,602 | 95,124 | ||||||
| Seven through twelve months | 52,039 | 32,296 | ||||||
| More than twelve months | 45,810 | 11,955 | ||||||
| Total | $ | 385,000 | $ | 294,085 | ||||
See also Note 7 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Marketing
The Bank focuses its marketing efforts on small to medium-sized businesses, professionals and retail clients, and on achieving certain strategic objectives, including increasing noninterest income and growing core deposits and loans. The Bank promotes its brand through its association with the Greensboro minor league baseball team and ballpark (NewBridge Bank Park), traditional advertising and promotions, sponsorship of local events and other community-focused campaigns. The Bank also invests in bank-hosted events and client hospitality opportunities that foster relationship building and business development.
Competition
Commercial banking in North Carolina is extremely competitive. Many of the Bank’s competitors are significantly larger and have greater resources. The Bank encounters significant competition from a number of sources, including commercial banks, thrift institutions, credit unions and other financial institutions and financial intermediaries. The Bank competes in its market areas with some of the largest banking organizations in the Southeast and nationally, almost all of which have numerous branches in NC. Many of its competitors have substantially higher lending limits due to their greater total capitalization, and some perform functions for their clients that the Bank generally does not offer. The Bank primarily relies on providing quality products and services at a competitive price within its market areas. As a result of interstate banking legislation, the Bank’s market is open to future penetration by out-of-state banks thereby further increasing future competition.
As of June 30, 2014, the Bank competed with 33 commercial banks and savings institutions in the Piedmont Triad Region; 20 in the Cape Fear Region; 26 in Raleigh; and 24 in Charlotte. There are also a large number of competing credit unions in each market.
Employees
At December 31, 2014, the Company had a total of 487 employees, including 457 full time employees, all of whom were compensated by the Bank. None of the Company’s employees are represented by a collective bargaining unit, and the Company has not recently experienced any type of strike or labor dispute. The Company considers its relationship with its employees to be good.
Supervision and Regulation
Bank holding companies and commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company and the Bank. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. Statutes and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. The Company cannot predict whether, or in what form, any proposed statute or regulation will be adopted or the extent to which the business of the Company and the Bank may be affected by such statute or regulation.
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General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event the depository institution becomes in danger of default or in default. For example, to mitigate the risk of failure, holding companies are required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank’s total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with such capital restoration plan. The Company, as a registered bank holding company, is subject to the regulation of the Board of Governors of the Federal Reserve System (“Federal Reserve”). Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve, under the BHCA, also has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the holding company.
As a result of the Company’s ownership of the Bank, the Company is also registered under the bank holding company laws of North Carolina. Accordingly, the Company is also subject to supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). As a state chartered member bank, the Bank is also subject to the regulation of the Federal Reserve.
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as the Bank, will continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance and permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The legislation also, among other things, requires originators of certain securitized loans to retain a portion of the credit risk, stipulates regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. The Dodd-Frank Act increased the ability of shareholders to influence boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the implementing regulations and, therefore, their impact on our operations cannot be fully determined at this time. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Bank and the Company.
Capital Adequacy.The Company and the Bank must comply with the Federal Reserve’s established capital adequacy standards. The Federal Reserve has promulgated two basic measures of capital adequacy for bank holding companies: a risk-based measure and a leverage measure. A bank holding company must satisfy all applicable capital standards to be considered in compliance.
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The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, account for off-balance-sheet exposure and minimize disincentives for holding liquid assets.
Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. At least half of total capital must be comprised of Tier I Capital, which is common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder may consist of Tier II Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves.
At December 31, 2014, the Company’s total risk-based capital ratio and its Tier I risk-based capital ratio were 12.23% and 10.36%, respectively. Neither the Company nor the Bank has been advised by any federal banking agency of any additional specific minimum capital ratio requirement applicable to it.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier I Capital to average assets, less goodwill and certain other intangible assets, of 3% for bank holding companies that meet specified criteria. All other bank holding companies generally are required to maintain a minimum leverage ratio of 4%. The Company’s ratio at December 31, 2014, was 8.57%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier I Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised the Company of any additional specific minimum leverage ratio or tangible Tier I Capital leverage ratio applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the federal bank regulatory agencies can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements.
The Federal Deposit Insurance Act (the “FDI Act”) requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements. The FDI Act establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.
The federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the Total Risk-Based Capital ratio, Tier I Risk-Based Capital ratio and the leverage ratio. Under the regulations, an FDIC-insured bank will be:
| · | “well capitalized” if it has a Total Risk-Based Capital ratio of 10% or greater, a Tier I Risk-Based Capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by the appropriate regulatory authority to meet and maintain a specific capital level for any capital measure; |
| · | “adequately capitalized” if it has a Total Risk-Based Capital ratio of 8% or greater, a Tier I Risk-Based Capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not “well capitalized;” |
| · | “undercapitalized” if it has a Total Risk-Based Capital ratio of less than 8%, a Tier I Risk-Based Capital ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); |
| · | “significantly undercapitalized” if it has a Total Risk-Based Capital ratio of less than 6%, a Tier I Risk-Based Capital ratio of less than 3% or a leverage ratio of less than 3%; and |
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| · | “critically undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets. |
An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. At December 31, 2014, the Bank was deemed to be “well capitalized.”
The FDI Act generally prohibits an FDIC-insured bank from making a capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of: (i) an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized;” and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” insured banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and the cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. A bank that is not “well capitalized” is also subject to certain limitations relating to brokered deposits.
The regulatory capital framework under which the Company and the Bank operate is changing in significant respects as a result of the Dodd-Frank Act, which was enacted in July 2010, and other regulations, including the separate regulatory capital requirements put forth by the Basel Committee on Banking Supervision, commonly known “Basel III.” Prior to January 1, 2015, the Company and the Bank were governed by a set of capital rules that the Federal Reserve have had in place since 1988, with some subsequent amendments and revisions.
On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule, which became effective on January 1, 2015, implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.
The major provisions of the new rule applicable to the Company and the Bank are:
| · | The new rule implements higher minimum capital requirements, includes a new common equity Tier I capital requirement, and establishes criteria that instruments must meet in order to be considered common equity Tier I capital, additional Tier I capital, or Tier II capital. These enhancements will both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets (RWA) requirements are a common equity Tier I capital ratio of 4.5% and a Tier I capital ratio of 6.0%, which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier I capital to total assets) is 4.0%. The new rule maintains the general structure of the current prompt corrective action framework while incorporating these increased minimum requirements. |
| · | The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier I capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (MSAs), deferred tax assets (DTAs), and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier I capital. |
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| · | Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier I capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements will begin on January 1, 2016. Initially, the minimum capital conservation buffer will be 0.625%, rising to 2.5% on January 1, 2019. A banking organization that fails to satisfy the minimum capital conservation buffer requirements will be subject to increasingly stringent limits on capital distributions or discretionary bonus payments. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the well-capitalized thresholds under the prompt corrective action framework. |
| · | The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. |
Dividend and Repurchase Limitations.Federal regulations provide that the Company must obtain Federal Reserve approval prior to repurchasing common stock for consideration in excess of 10% of its net worth during any 12 month period unless the Company (i) both before and after the redemption satisfies capital requirements for a “well capitalized” bank holding company; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues.
The ability of the Company to pay dividends or repurchase shares is dependent upon the Company’s receipt of dividends from the Bank. NC commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Also, an insured depository institution, such as the Bank, is prohibited from making distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).
Deposit Insurance Assessments.The assessment paid by each Deposit Insurance Fund member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. The Bank’s insurance assessment was $1.6 million in 2013 and 2014.
An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The FDIC may terminate insurance of deposits upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
The Dodd-Frank Act expands the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act. Among other things, the final rule revises the assessment rate schedule to provide assessments ranging from 5 to 35 basis points, with the initial assessment rates subject to adjustments which could increase or decrease the total base assessment rates. The FDIC has three possible adjustments to an institution’s initial base assessment rate: (i) a decrease of up to five basis points (or 50% of the initial base assessment rate) for long-term unsecured debt, including senior unsecured debt (other than debt guaranteed under the TLGP) and subordinated debt; (ii) an increase for holding long-term unsecured or subordinated debt issued by other insured depository institutions known as the Depository Institution Debt Adjustment (the “DIDA”) and (iii) for institutions not well rated and well capitalized, an increase not to exceed 10 basis points for brokered deposits in excess of 10 percent of domestic deposits. To date, these changes have resulted in a reduction in the Bank’s insurance assessments, due in part to the Bank receiving a new rating in 2011, which further reduced the Bank’s assessments.
The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of the Financing Corporation (the “FICO”). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The Bank paid FICO assessments totaling approximately $123,000 in 2014 and $99,000 in 2013.
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Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.09% of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta. At December 31, 2014, the Bank was in compliance with these requirements.
Community Reinvestment Act (the “CRA”).The CRA requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.
The CRA regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s CRA performance and to review the institution’s CRA public file. Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The CRA requires public disclosure of a financial institution’s written CRA evaluations. This promotes enforcement of CRA requirements by providing the public with the status of a particular institution’s community reinvestment record.
The Gramm-Leach-Bliley Act made various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory CRA rating in its latest CRA examination. The Bank received a “Satisfactory” rating in its last CRA examination which was conducted during September 2011.
Changes in Control. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank or financial holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-objection) must be obtained prior to any person acquiring control of the Company. Control is deemed to exist if, among other things, a person acquires 25% or more of any class of voting stock of the Company or controls in any manner the election of a majority of the directors of the Company. Control is presumed to exist if a person acquires 10% or more of any class of voting stock, the stock is registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), and the acquiror will be the largest shareholder after the acquisition. The Company has only one class of voting stock (Class A common stock).
Federal Securities Law.The Company has registered a class of its common stock (Class A common stock) with the Securities and Exchange Commission (“SEC”) pursuant to Section 12(g) of the Exchange Act. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company.
Transactions with Affiliates.Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution, and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans to one borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.
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Loans to One Borrower.The Bank is subject to the loans to one borrower limits imposed by NC law, which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any single borrower outstanding at one time and not fully secured by readily marketable collateral may exceed 15% of the Bank’s capital, as used in the calculation of its risk-based capital ratios, plus those portions of the Bank’s allowance for credit losses, deferred tax assets, and intangible assets that are excluded from the Bank’s capital. At December 31, 2014, this limit was $43.1 million. This limit is increased by an additional 10% of the Bank’s capital, or $28.8 million as of December 31, 2014, for loans and extensions of credit that are fully secured by readily marketable collateral.
Gramm-Leach-Bliley Act.The federal Gramm-Leach-Bliley Act, enacted in 1999 (the “GLB Act”), dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. In doing so, it increased competition in the financial services industry, presenting greater opportunities for our larger competitors, which were more able to expand their service and products than smaller, community-oriented financial institutions, such as the Bank.
USA Patriot Act of 2001.The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA PATRIOT Act also requires the Secretary of the Treasury to prescribe by regulation minimum standards that financial institutions must follow to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
Sarbanes-Oxley Act of 2002.The Sarbanes-Oxley Act of 2002 mandates for public companies such as NewBridge, a variety of reforms intended to address corporate and accounting fraud and provides for the establishment of the Public Company Accounting Oversight Board (the “PCAOB”) which enforces auditing, quality control and independence standards for firms that audit SEC-reporting companies. The Act imposes higher standards for auditor independence and restricts the provision of consulting services by auditing firms to companies they audit and requires that certain audit partners be rotated periodically. It also requires chief executive officers and chief financial officers, or their equivalents, to certify the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement, and increases the oversight and authority of audit committees of publicly traded companies.
Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of insured depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution’s normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew or roll-over such deposits without restriction; “adequately capitalized” depository institutions may accept, renew or roll-over such deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates); and “undercapitalized” depository institutions may not accept, renew, or roll-over such deposits. Definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” are the same as the definitions adopted by the federal banking agencies to implement the prompt corrective action provisions discussed above.
Taxation.Federal Income Taxation. Financial institutions such as the Company are subject to the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), in the same general manner as other corporations. The Bank computes its bad debt deduction under the specific chargeoff method.
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State Taxation. Under NC law, the Company and its subsidiaries are each subject to corporate income taxes at a 5.00% rate and an annual franchise tax at a rate of 0.15% of equity. During the third quarter of 2013, North Carolina reduced its corporate income tax rate from 6.90% to 6.00% effective January 1, 2014, and to 5.00% effective January 1, 2015. Further reductions to 4.00% on January 1, 2016, and 3.00% on January 1, 2017, are contingent upon the State meeting revenue targets.
Other.Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards.
As a state-chartered member bank, the Bank is subject to examination by the Federal Reserve Bank of Richmond (the “Federal Reserve Bank”)and the Commissioner. In addition, it is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit, equal credit and fair credit reporting laws and laws relating to branch banking. The Bank, as an insured NC commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the Deposit Insurance Fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.
As a Federal Housing Administration approved Title II supervised lender, the Bank is required to report to the Department of Housing and Urban Development (“HUD”) its annual, audited financial and non-financial information necessary for HUD to evaluate compliance with Federal Housing Administration recertification requirements.
Future Requirements. Statutes and regulations, which contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions, are introduced regularly. Neither the Company nor the Bank can predict whether or what form any proposed statute or regulation will be adopted or the extent to which the business of the Company or the Bank may be affected by such statute or regulation.
Available Information
The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available free of charge on its internet websitewww.newbridgebank.com as soon as reasonably practicable after the reports are electronically filed with the SEC. The Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are also available on its internet website in interactive data format using the eXtensible Business Reporting Language (XBRL), which allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. Any materials that the Company files with the SEC may be read and/or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These filings are also accessible on the SEC’s website atwww.sec.gov.
Additionally, the Company’s corporate governance policies, including the charters of the Audit and Risk Management, Compensation, and Corporate Governance and Nominating Committees, theCorporate Governance Guidelines,Code of Business Conduct and Ethics, and Code of Business Conduct and Ethics for CEO and Senior Financial Officers may also be found under the“Investor Relations” section of the Company’s website. A written copy of the foregoing corporate governance policies is available upon written request to the Company.
| Item 1A. | Risk Factors |
An investment in the Company’s common stock is subject to risks inherent in the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider these risks and uncertainties, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.
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If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.
Risks Associated with Our Business
Financial reform legislation enacted by Congress and resulting regulations have increased, and are expected to continue to increase our costs of operations. Congress enacted the Dodd-Frank Act in 2010. This law has significantly changed the structure of the bank regulatory system and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations. Although many of these regulations have been promulgated, additional regulations are expected to be issued in 2015 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. This significant change to existing law has already had an adverse effect on our interest expense.
The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. It also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to quantify what specific impact the Dodd-Frank Act and related regulations have had on the Company to date and what impact yet to be written regulations will have on us in the future. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
We are subject to extensive regulation and oversight,and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory action.We are subject to extensive regulation and supervision, including examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on us if they determine, upon conclusion of their examination or otherwise, violations of laws with which we must comply or weaknesses or failures with respect to general standards of safety and soundness, including, for example, in respect of any financial concerns that the regulators may identify and desire for us to address. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, consent orders, civil money penalties and termination of deposit insurance and bank closure. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective actions. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions, paying dividends or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. The imposition of regulatory sanctions, including monetary penalties, may have a material impact on our financial condition and results of operations and/or damage our reputation. In addition, compliance with any such action could distract management’s attention from our operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities and limit our ability to raise capital.
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The Company will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.In July 2013, the Federal Reserve approved a new rule that substantially amended the regulatory risk-based capital rules applicable to the Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and revises the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital requirements will be: (i) a new common equity Tier I capital ratio of 4.5%; (ii) a Tier I to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier I leverage ratio of 4%. These rules also establish a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier I capital ratio of 7.0%, (ii) a Tier I to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for the Bank could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.
The Company may need additional access to capital, which it may be unable to obtain on attractive terms or at all. We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments, for future growth or to fund losses or additional provision for loan losses in the future. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to it, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our stock price negatively affected.
If the Bank loses key employees with significant business contacts in its market areas, its business may suffer. The Bank’s success is largely dependent on the personal contacts of our officers and employees in its market areas. If the Bank loses key employees temporarily or permanently, this could have a material adverse effect on the business. The Bank could be particularly affected if its key employees go to work for competitors. The Bank’s future success depends on the continued contributions of its existing senior management personnel, many of whom have significant local experience and contacts in its market areas. The Bank has employment agreements or non-competition agreements with several of its senior and executive officers in an attempt to partially mitigate this risk.
The Company may not be able to implement aspects of its growth strategy.The Company’s growth strategy contemplates the future expansion of its business and operations both organically and by selective acquisitions of banks and the establishment of banking offices in its market areas and other markets in the Carolinas and Virginia. Implementing these aspects of the Company’s growth strategy depends, in part, on its ability to successfully identify acquisition opportunities and strategic partners that will complement its operating philosophy and to successfully integrate their operations with those of the Company, as well as generate loans and deposits of acceptable risk and expense. To successfully acquire or establish banks or banking offices, the Company must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships and high caliber banking personnel to make these new banking offices profitable. In addition, the Company may not be able to identify suitable opportunities for further growth and expansion or, if it does, the Company may not be able to successfully integrate these new operations into its business.
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As consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. The Company will compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than the Company does and may be able to pay more for an acquisition than the Company is able or willing to pay.
The Company can offer no assurance that it will have opportunities to acquire other financial institutions or acquire or establish any new branches or loan production offices, or that it will be able to negotiate, finance and complete any opportunities available to it.
If the Company is unable to effectively implement its growth strategies, its business, results of operations and stock price may be materially and adversely affected.
Future expansion involves risks.The acquisition by the Company of other financial institutions or parts of those institutions, or the establishment of de novo branch offices and loan production offices, involves a number of risks, including the risk that:
| · | The Company may incur substantial costs in identifying and evaluating potential acquisitions and merger partners, or in evaluating new markets, hiring experienced local managers, and opening new offices; |
| · | The Company’s estimates and judgments used to evaluate credit, operations, management and market risks relating to target institutions may not be accurate; |
| · | The institutions the Company acquires may have distressed assets and there can be no assurance that the Company will be able to realize the value it predicts from those assets or that it will make sufficient provisions or have sufficient capital for future losses; |
| · | The Company may be required to take writedowns or writeoffs, restructuring and impairment, or other charges related to the institutions it acquires that could have a significant negative effect on the Company’s financial condition and results of operations; |
| · | There may be substantial lag-time between completing an acquisition or opening a new office and generating sufficient assets and deposits to support costs of the expansion; |
| · | The Company may not be able to finance an acquisition, or the financing it obtains may have an adverse effect on its results of operations or result in dilution to its existing shareholders; |
| · | The Company’s management’s attention in negotiating a transaction and integrating the operations and personnel of the combining businesses may be diverted from its existing business and the Company may not be able to successfully integrate such operations and personnel; |
| · | If the Company experiences problems with system conversions, financial losses could be sustained from transactions processed incorrectly or not at all; |
| · | The Company may not be able to obtain regulatory approval for an acquisition; |
| · | The Company may enter new markets where it lacks local experience or that introduce new risks to its operations, or that otherwise result in adverse effects on its results of operations; |
| · | The Company may introduce new products and services it is not equipped to manage or that introduce new risks to its operations, or that otherwise result in adverse effects on its results of operations; |
| · | The Company may incur intangible assets in connection with an acquisition, or the intangible assets it incurs may become impaired, which results in adverse short-term effects on the Company’s results of operations; |
| · | The Company may assume liabilities in connection with an acquisition, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on the Company’s results of operations, financial condition and stock price; or |
| · | The Company may lose key employees and customers. |
The Company cannot assure you that it will be able to successfully integrate any banking offices that the Company acquires into its operations or retain the customers of those offices. If any of these risks occur in connection with the Company’s expansion efforts, it may have a material and adverse effect on the Company’s results of operations and financial condition.
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New bank office facilities and other facilities may not be profitable. The Company may not be able to organically expand into new markets that are profitable for its franchise. The costs to start up bank branches and loan production offices in new markets, other than through acquisitions, and the additional costs to operate these facilities would increase the Company’s noninterest expense and may decrease its earnings. It may be difficult to adequately and profitably manage the Company’s growth through the establishment of bank branches or loan production offices in new markets. In addition, the Company can provide no assurance that its expansion into any such new markets will successfully attract enough new business to offset the expenses of their operation. If the Company is not able to do so, its earnings and stock price may be negatively impacted.
Acquisition of assets and assumption of liabilities may expose the Company to intangible asset risk, which could impact its results of operations and financial condition. In connection with any acquisitions, as required by accounting principles generally accepted in the United States (“GAAP”), the Company will record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions may result in the Company recording intangible assets, including deposit intangibles and goodwill. The Company will perform a goodwill valuation at least annually to test for goodwill impairment. Impairment testing is a two-step process that first compares the fair value of goodwill with its carrying amount, and second measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in its business climate, including a significant decline in future operating cash flows, a significant change in the Company’s stock price or market capitalization, or a deviation from the Company’s expected growth rate and performance may significantly affect the fair value of any goodwill and may trigger impairment losses, which could be materially adverse to the Company’s results of operations, financial condition and stock price.
The success of the Company’s growth strategy depends on the Company’s ability to identify and retain individuals with experience and relationships in the markets in which it intends to expand.The Company’s growth strategy contemplates that it may expand its business and operations to other markets in the Carolinas and Virginia through organic growth and selective acquisitions. The Company intends to primarily target market areas that it believes possess attractive demographic, economic or competitive characteristics. To expand into new markets successfully, The Company must identify and retain experienced key management members with local expertise and relationships in these markets. Competition for qualified personnel in the markets in which the Company may expand may be intense, and there may be a limited number of qualified persons with knowledge of and experience in the commercial banking industry in these markets. Even if the Company identifies individuals that it believes could assist it in establishing a presence in a new market, the Company may be unable to recruit these individuals away from other banks or be unable to do so at a reasonable cost. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out the Company’s strategy is often lengthy. The Company’s inability to identify, recruit and retain talented personnel to manage new offices effectively would limit its growth and could materially adversely affect its business, financial condition, results of operations and stock price.
Increases in FDIC insurance premiums may adversely affect the Company’s net income and profitability.The Company is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are bank or financial institution failures that exceed the FDIC’s expectations, the Bank may be required to pay higher FDIC premiums than those currently in force. Any future increases or required prepayments of FDIC insurance premiums may adversely impact the Company’s earnings and financial condition.
We rely on dividends from the Bank.The Company is a separate and distinct legal entity from the Bank. Dividends received from the Bank are the principal source of funds to pay dividends on the Company’s common stock and interest and principal on its outstanding debt securities. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. In the event the Bank were unable to pay dividends to the Company, the Company might not be able to service debt, pay obligations, or pay dividends on the Company’s common stock. Such an inability to receive dividends from the Bank could have a material adverse effect on the Company’s business, financial condition and results of operations. See Item 1 “Business – Supervision and Regulation” and Note 18 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
| 19 |
Our allowance for credit losses may be insufficient.All borrowers carry the potential to default, and our remedies to recover (seizure and/or sale of collateral, legal actions, guarantees, etc.) may not fully satisfy money previously lent. We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated credit losses and risks inherent in the loan portfolio. The level of the allowance for credit losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of additional loan chargeoffs, based on judgments different than those of management. An increase in the allowance for credit losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.
If the value of real estate in the markets we serve were to decline, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us. At December 31, 2014, our loans secured by real estate totaled $1.58 billion, or 87.4% of total loans (excluding loans held for sale). A decline in local economic conditions in our markets could adversely affect the value of the real estate collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. See Allocation of Allowance for Credit Losses in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to the Bank’s process for determining the appropriate level of the allowance for possible credit losses. Additionally, a decrease in asset quality could require additions to our allowance for credit losses through increased provisions for credit losses, which would negatively impact our profits. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies, and natural disasters.
Our commercial real estate lending may expose us to risk of loss and hurt our earnings and profitability. We regularly make loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one to four family residential mortgage loans. Further, loans secured by commercial real estate properties are generally for larger amounts and involve a greater degree of risk than one to four family residential mortgage loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. Because of the recent general economic slowdown, these loans represent higher risk, could result in an increase in our total net chargeoffs and could require us to increase our allowance for credit losses, which could have a material adverse effect on our financial condition or results of operations. At December 31, 2014, our loans secured by commercial real estate totaled $736.9 million, which represented 40.8% of total loans (excluding loans held for sale). Of those loans, loans secured by owner-occupied commercial real estate totaled $310.0 million. While we seek to minimize risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
Our land acquisition, development and construction loans involve a higher degree of risk than other segments of our loan portfolio.A portion of our loan portfolio is comprised of land acquisition, development and construction loans. Construction financing typically involves a higher degree of credit risk than commercial real estate lending. Repayment of land acquisition, development and construction loans are dependent on the successful completion of the projects they finance. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although our underwriting criteria are designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will safeguard against material delinquencies and losses to our operations. At December 31, 2014, we had loans of $168.1 million, or 9.3% of total loans outstanding (excluding loans held for sale), to finance land acquisition, development and construction, including $45.8 million of speculative residential construction and residential acquisition and development. At December 31, 2014, the Bank’s concentration levels of land acquisition, development and construction (the “AD&C portfolio”) loans and total commercial real estate loans were 63.82% and 256.55%, respectively, of total regulatory capital. The interagency regulatory guidance maximum concentrations are 100% and 300%, respectively.
| 20 |
The Bank is subject to interest rate risk.The Bank’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and investment securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Bank’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Bank’s ability to originate loans and obtain deposits, (ii) the fair value of the Bank’s financial assets and liabilities, and (iii) the average duration of certain of the Bank’s interest-rate sensitive assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Bank’s net interest income and therefore earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, there are costs associated with the Bank’s risk management techniques, and these costs could be material. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurances of the Bank’s ability to continue to maintain a consistent, positive spread between the interest earned on the Bank’s earning assets and the interest paid on the Bank’s interest-bearing liabilities. See Item 7A Quantitative and Qualitative Disclosures about Market Risk for further discussion related to the Company’s management of interest rate risk.
Our hedging strategies may not be successful in mitigating our exposure to interest rate risk.We use derivative financial instruments, primarily consisting of interest rate swaps contracts, to limit our exposure to interest rate risk. No hedging strategy can completely protect us; the derivative financial instruments we elect may not have the effect of reducing our interest rate risks. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs. We cannot be assured that our hedging strategies and the derivatives that we use will adequately offset the risks of interest rate volatility or that our hedging transactions will not result in or magnify losses.
We may face increasing loan and investment yield pressures, which may, among other things reduce our profitability.The interest rate environment has been at a historically low level for an extended period of time. This has had a negative effect on our interest income and net interest margin as new loans and investments are made, or existing loans renewed and maturing investments replaced, at lower rates than those of the portfolios as a whole. If interest rates continue at these low levels, there likely will be further negative effect on interest income and the net interest margin.
We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability.Checking and savings account balances and other forms of deposits can decrease when our deposit clients perceive alternative investments, such as the stock market or other non-depository investments, as providing superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank clients to transfer funds into alternative investments, including products offered by other financial institutions or non-bank service providers. Increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank clients move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs.
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The Company’s operating results and financial condition would likely suffer if there is a deterioration in the general economic condition of the areas in which the Bank does business. Unlike larger national or other regional banks that are more geographically diversified, the Bank primarily provides services to clients located in four principal market areas in NC. Because the Bank’s lending and deposit-gathering activities are concentrated in these markets, particularly the Piedmont Triad Region, the Bank will be affected by the business activity, population, income levels, deposits and real estate activity in these markets. Adverse developments in local industries have had and could continue to have a negative effect on the Bank’s financial condition and results of operations. Even though the Bank’s clients’ business and financial interest may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce the Bank’s growth rate, affect the ability of the Bank’s clients to repay their loans and generally affect the Company’s financial condition and results of operations. A decline in general economic conditions in the Bank’s market areas, caused by inflation, recession, higher unemployment or other factors which are beyond the Bank’s control would also impact these local economic conditions and could have an adverse effect on the Company’s financial condition and results of operations.
The Bank competes with much larger companies for some of the same business.The banking and financial services business in our market areas continues to be a competitive field and it is becoming more competitive as a result of changes in regulations, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers.
We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition. We compete for loans, deposits and clients with various bank and nonbank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services.
Negative publicity could damage our reputation.Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract clients and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, disclosure, sharing or inadequate protection of client information, criminal security breaches and from actions taken by government regulators and community organizations in response to that conduct.
The Bank is subject to environmental liability risk associated with lending activities. A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about clients and counterparties.In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, credit reports, and other financial information. We may also rely on representations of those clients, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.
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Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows.Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital, possible acquisitions and other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under repurchase agreements, the sale of loans and other sources could have a substantial negative effect on our liquidity. We do not anticipate that our retail and commercial deposits will be sufficient to meet our funding needs in the foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB advances, securities sold under agreements to repurchase and other wholesale funding sources to obtain the funds necessary to manage our balance sheet.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general, including a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned which could have a material adverse effect on our financial condition, results of operations and cash flows.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.
From time to time the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.
The FASB is moving forward with its proposal to change the manner in which the allowance for credit losses is established and evaluated from the concept of incurred losses to that of expected losses. Management is in the process of evaluating this change in accounting standard on the Company’s financial position and results of operations. If the change results in a material increase in our allowance and future provisions for credit losses, this could have a material adverse effect on our financial condition and results of operations.
Impairment of investment securities, goodwill, certain other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.In assessing the impairment of investment securities, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Under current accounting standards, certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. Assessment of certain other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified. In assessing the realizability of our deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the corporate income tax rate during the periods in which those temporary differences become deductible. The value of our deferred tax assets reflects the current federal and state corporate income tax rates of approximately 35 percent and five percent, respectively. Failure to generate future taxable income in line with our current projections and/or a reduction in the corporate income tax rate could cause us to further impair our deferred tax assets, which impairment would be reflected as a charge to earnings in the period during which such impairment is identified. The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.
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Technological advances impact the Bank’s business.The banking industry continues to undergo technological changes with frequent introductions of new technology-driven products and services. In addition to improving client services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s future success will depend, in part, on our ability to address the needs of the Bank’s clients by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. The Bank may not be able to effectively implement new technology-driven products and services or successfully market such products and services to its clients.
We rely on other companies to provide key components of our business infrastructure.Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our clients and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.
Our information systems may experience an interruption or breach in security.We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot make assurances that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation; result in a loss of client business; result in expense to investigate, respond to, mitigate, and recover from the event; subject us to additional regulatory scrutiny; or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. The Company has not experienced any failure, interruption, or breach in security or operational integrity of our communications and information systems. The company has incurred immaterial expense due to well publicized external card breaches.
Unpredictable catastrophic events could have a material adverse effect on the Company.The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods, severe winter weather (including snow, freezing water, ice storms and blizzards), fires and other catastrophes could adversely affect the Company’s consolidated financial condition or results of operations. Unpredictable natural and other disasters could have an adverse effect on the Bank in that such events could materially disrupt its operations or the ability or willingness of its clients to access the financial services offered by the Bank. The incidence and severity of catastrophes are inherently unpredictable. Although the Bank carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce the Company’s earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on the Company’s financial condition and/or results of operations.
Risks Related to our Common Stock
Our stock price can be volatile.Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
| • | Actual or anticipated variations in quarterly results of operations; |
| • | Recommendations by securities analysts; |
| • | Operating results and stock price performance of other companies that investors deem comparable to us; |
| • | News reports relating to trends, concerns, and other issues in the financial services industry; |
| • | Perceptions in the marketplace regarding us and/or our competitors; |
| • | New technology used or services offered by competitors; |
| • | Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and |
| • | Changes in government regulations. |
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General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of operating results.
The Company’s trading volume is low compared with larger national and regional banks.A class of the Company’s common stock (Class A common stock) is traded on the NASDAQ Global Select Market. However, the trading volume of the Company’s Class A common stock is relatively low when compared with larger companies listed on the NASDAQ, the NYSE or other consolidated reporting systems or stock exchanges. Thus, the market in the Company’s Class A common stock may be limited in scope relative to larger companies. In addition, the Company cannot say with any certainty that a more active and liquid trading market for its Class A common stock will develop.
The Company has outstanding subordinated debt, which ranks senior to our common stock. In 2005, the Company issued $25.8 million in subordinated debentures in connection with the issuance of trust preferred securities by its trust subsidiary. In 2014, the Company issued $15.5 million in subordinated notes. This subordinated debt ranks senior to our common stock. As a result, we must make dividend payments on the trust preferred securities and interest payments on the subordinated notes before any dividends can be paid on our common stock and, in the event of our liquidation, the holders of the trust preferred securities and the subordinated notes must be satisfied before any distributions can be made on our common stock.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.We may issue additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
We may issue additional debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in the event of liquidation, which could negatively affect the value of our common stock.In the future, we may issue additional debt or equity securities, including securities convertible into equity securities. In the event of our liquidation, the holders of our debt and preferred securities must be satisfied before any distributions can be made on our common stock. Because our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate with certainty the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
Our common stock is not FDIC insured. The Company’s common stock is not a savings or deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental agency and is subject to investment risk, including the possible loss of principal. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock may lose some or all of their investment.
| Item 1B. | Unresolved Staff Comments |
None
| Item 2. | Properties |
The Company and the Bank’s executive offices are located at 1501 Highwoods Boulevard in Greensboro, NC. The Bank’s principal support and operational functions are located at 38 West First Avenue, Lexington, NC and 202 South Main Street in Reidsville, NC. On December 31, 2014, the Bank operated 40 branch offices in its four primary markets—Charlotte, Raleigh, the Cape Fear Region and the Piedmont Triad Region—and eight loan production offices. The locations of the Bank’s executive and banking offices, their form of occupancy, deposits as of December 31, 2014, and year opened, are provided in the accompanying table (dollars in thousands):
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| Location | Owned or Lease | Deposits | Year | |||||||
| 1501 Highwoods Boulevard, Greensboro, NC(1) | Leased | $ | - | 2004 | ||||||
| 38 West First Avenue, Lexington, NC(2) | Owned | 168,318 | 1949 | |||||||
| 202 South Main Street, Reidsville, NC(2) | Owned | 57,329 | 1910 | |||||||
| 301 East Fremont Street, Burgaw, NC | Leased | 27,491 | 1999 | |||||||
| 10231 Beach Drive Southwest, Calabash, NC(3) | Owned | 37,699 | 1983 | |||||||
| 2000 Regency Parkway, Cary, NC(4) | Leased | 20,119 | 2013 | |||||||
| 5925 Carnegie Boulevard, Charlotte, NC | Leased | 4,404 | 2013 | |||||||
| 2386 Lewisville-Clemmons Road, Clemmons, NC | Owned | 20,515 | 2001 | |||||||
| 1008 Sunset Avenue, Clinton, NC(4) | Owned | 23,905 | 2010 | |||||||
| 1101 North Main Street, Danbury, NC | Owned | 22,957 | 1997 | |||||||
| 801 South Van Buren Road, Eden, NC | Owned | 32,540 | 1996 | |||||||
| 210 North Main Street, Fuquay-Varina, NC(4) | Owned | 55,210 | 2006 | |||||||
| 4638 Hicone Road, Greensboro, NC | Owned | 27,455 | 2000 | |||||||
| 2132 New Garden Road, Greensboro, NC | Owned | 42,869 | 1997 | |||||||
| 201 North Elm Street, Greensboro, NC | Leased | 13,110 | 2009 | |||||||
| 3202 Randleman Road, Greensboro, NC | Owned | 23,092 | 2000 | |||||||
| 200 Westchester Drive, High Point, NC | Owned | 17,912 | 2001 | |||||||
| 120 East Main Street, Jamestown, NC | Owned | 12,785 | 2004 | |||||||
| 230 East Mountain Street, Kernersville, NC | Leased | 12,234 | 1997 | |||||||
| 647 South Main Street, King, NC | Owned | 40,600 | 1997 | |||||||
| 4481 Highway 150 South, Lexington, NC | Owned | 27,211 | 2002 | |||||||
| 298 Lowes Boulevard, Lexington, NC | Owned | 31,118 | 2011 | |||||||
| 6123 Old U.S. Highway 52, Lexington, NC | Owned | 37,865 | 1958 | |||||||
| 500 South Main Street, Lexington, NC(5) | Owned | - | 2004 | |||||||
| 605 North Highway Street, Madison, NC | Owned | 19,636 | 1997 | |||||||
| 4815 East Oak Island Drive, Oak Island, NC(3) | Owned | 13,342 | 1986 | |||||||
| 4505 Falls of Neuse Road, Raleigh, NC(4) | Leased | 113,786 | 2006 | |||||||
| 133 Fayetteville Street, Raleigh, NC | Leased | 8,825 | 2013 | |||||||
| 1646 Freeway Drive, Reidsville, NC | Owned | 37,189 | 1972 | |||||||
| 5074 Main Street, Shallotte, NC(3) | Owned | 41,780 | 1999 | |||||||
| 3020 George II Highway, Southport, NC(3) | Owned | 12,100 | 2007 | |||||||
| 101 North Howe Street, Southport, NC(3) | Owned | 33,374 | 1981 | |||||||
| 840 Sunset Boulevard North, Sunset Beach, NC(3) | Owned | 14,169 | 2001 | |||||||
| 919 Randolph Street, Thomasville, NC | Owned | 34,210 | 1987 | |||||||
| 3000 Old Hollow Road, Walkertown, NC | Leased | 19,947 | 1997 | |||||||
| 10335 North NC Highway 109, Winston-Salem, NC | Owned | 28,420 | 1992 | |||||||
| 3500 Old Salisbury Road, Winston-Salem, NC | Owned | 36,286 | 1978 | |||||||
| 11492 Old U.S. Highway 52, Winston-Salem, NC | Owned | 31,934 | 1973 | |||||||
| 161 South Stratford Road, Winston-Salem, NC | Leased | 32,252 | 1997 | |||||||
| 1001 Military Cutoff Road, Wilmington, NC | Leased | 22,307 | 2006 | |||||||
| 704 South College Road, Wilmington, NC | Leased | 21,674 | 1997 | |||||||
| (1) | Executive offices of the Company and the Bank. |
| (2) | Serves as a full service branch as well as an operations center for the Bank. |
| (3) | Branches acquired in Security Savings Bank, SSB acquisition on October 1, 2013. |
| (4) | Branches acquired in CapStone Bank acquisition on April 1, 2014. |
| (5) | This location is an express drive through facility that only processes transactions and does not open client accounts. |
| 26 |
The Bank operates a loan production office within the Bank’s executive office and loan production offices in leased premises in Winston-Salem, Asheboro, Morganton and Raleigh, NC and in Charleston and Greenville, SC and in a premises in Southport, NC, which it owns. In addition, as of December 31, 2014, the Bank also operated nine offsite ATM machines in various locations throughout its markets.
Following the acquisition of Premier on February 27, 2015, the Bank assumed a leased property, from which it will operate a banking office previously operated by Premier.
| Item 3. | Legal Proceedings |
In the ordinary course of operations, the Company and its subsidiaries are at times involved in legal proceedings. In the opinion of management, neither the Company nor its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the fourth quarter of the Company’s fiscal year ended December 31, 2014.
| 27 |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Prices and Dividend Policies
A class of the Company’s common stock (Class A common stock) is traded on the Global Select Market of the NASDAQ Stock Market (“NASDAQ GSM”) under the symbol “NBBC.” The following table shows the high, low and closing sales prices of the Company’s common stock on the NASDAQ GSM, based on published financial sources, for each quarter within the last two fiscal years.
| Quarter ended | High | Low | Close | |||||||||
| December 31, 2014 | $ | 8.98 | $ | 7.34 | $ | 8.71 | ||||||
| September 30, 2014 | 8.46 | 7.20 | 7.59 | |||||||||
| June 30, 2014 | 8.69 | 6.99 | 8.06 | |||||||||
| March 31, 2014 | 7.62 | 6.55 | 7.14 | |||||||||
| December 31, 2013 | $ | 7.92 | $ | 6.40 | $ | 7.43 | ||||||
| September 30, 2013 | 9.17 | 5.96 | 7.29 | |||||||||
| June 30, 2013 | 6.41 | 5.55 | 5.99 | |||||||||
| March 31, 2013 | 6.48 | 4.50 | 5.89 | |||||||||
As of January 31, 2015, there were approximately 5,942 beneficial owners, including 3,068 holders of record, of the Company’s Class A common stock, and seven holders of record of the Company’s Class B common stock.
Holders of the Company’s common stock (Class A and Class B) are entitled to receive ratably such dividends as may be declared by the Company’s Board of Directors out of legally available funds. On February 18, 2015, the Company declared a $0.015 per share dividend payable April 15, 2015, to shareholders of record on March 16, 2015. This is the first cash dividend declared by the Company on its common stock since 2008. The ability of the Company’s Board of Directors to declare and pay dividends on its capital stock is subject to the terms of applicable North Carolina law and banking regulations. The Company may not pay dividends on its capital stock if it is in default or, where permitted, has elected to defer payments of interest under its junior subordinated debentures or subordinated notes. The declaration and payment of future dividends to holders of the Company’s common stock will also depend upon the Company’s earnings and financial condition, the capital requirements of the Company’s subsidiaries, regulatory conditions and other factors as the Company’s Board of Directors may deem relevant. For a further discussion as to restrictions on the Company and the Bank’s ability to pay dividends, please refer to “Item 1 – Supervision and Regulation”.
The following table sets forth certain information regarding shares issuable upon exercise of outstanding options and rights under equity compensation plans, and shares remaining available for future issuance under equity compensation plans, in each case as of December 31, 2014. Individual equity compensation arrangements are aggregated and included within this table.
| 28 |
| Number of Shares | ||||||||||||
| Remaining Available | ||||||||||||
| for Future Issuance | ||||||||||||
| under Equity | ||||||||||||
| Number of Shares to be | Weighted Average | Compensation Plans | ||||||||||
| Issued Upon Exercise of | Exercise Price of | (excluding shares | ||||||||||
| Outstanding Options, | Outstanding Options, | reflected in | ||||||||||
| Warrants and Rights | Warrants and Rights | column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
| Equity Compensation Plans | ||||||||||||
| Approved by Shareholders | 472,349 | |||||||||||
| Stock Options | 985,071 | $ | 7.51 | |||||||||
| Restricted Stock Units | 395,852 | - | ||||||||||
| Equity Compensation Plans Not | ||||||||||||
| Approved by Shareholders | - | - | - | |||||||||
| Total | 1,380,923 | $ | 5.36 | 472,349 | ||||||||
| 29 |
FIVE-YEAR STOCK PERFORMANCE TABLE
The following graph compares the cumulative total shareholder return on the Company’s common stock with the S&P 500 Index (U.S.) and the SNL Southeast Bank Index. The graph assumes that $100 was originally invested on December 31, 2009, and that all subsequent dividends were reinvested in additional shares.
NEWBRIDGE BANCORP
Comparison of Cumulative Total Shareholder Return
Years Ended December 31
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||||||
| NewBridge Bancorp | 100 | 212 | 174 | 209 | 334 | 392 | ||||||||||||||||||
| SNL Southeast Bank Index(1) | 100 | 97 | 57 | 94 | 128 | 144 | ||||||||||||||||||
| S&P 500 Index | 100 | 115 | 117 | 136 | 180 | 205 | ||||||||||||||||||
| (1) | The SNL Southeast Bank Index is comprised of a peer group of 89 bank holding companies headquartered in Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia, whose common stock is traded on the NYSE, NYSE Amex or NASDAQ stock exchanges. The total five year return was calculated for each of the bank holding companies in the peer group taking into consideration changes in stock price, cash dividends, stock dividends and stock splits since December 31, 2009. The individual results were then weighted by the market capitalization of each company relative to the entire peer group. The total return approach and the weighting based upon market capitalization are consistent with the preparation of the S&P 500 total return index. |
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| Item 6. | Selected Financial Data |
The following table should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and “Item 8 - Financial Statements and Supplementary Data,” which begin on page 32 and page 63 below, respectively.
| (dollars in thousands, except per share data) | Years Ended December 31 | |||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| SUMMARY OF OPERATIONS | ||||||||||||||||||||
| Interest income | $ | 85,816 | $ | 68,819 | $ | 71,080 | $ | 79,445 | $ | 89,913 | ||||||||||
| Interest expense | 7,145 | 5,643 | 7,514 | 12,319 | 20,454 | |||||||||||||||
| Net interest income | 78,671 | 63,176 | 63,566 | 67,126 | 69,459 | |||||||||||||||
| Provision for credit losses | 883 | 2,691 | 35,893 | 16,785 | 21,252 | |||||||||||||||
| Net interest income after provision for credit losses | 77,788 | 60,485 | 27,673 | 50,341 | 48,207 | |||||||||||||||
| Noninterest income | 16,713 | 17,454 | 16,888 | 18,393 | 21,323 | |||||||||||||||
| Noninterest expense | 72,706 | 60,384 | 72,413 | 62,607 | 66,397 | |||||||||||||||
| Income (loss) before income taxes | 21,795 | 17,555 | (27,852 | ) | 6,127 | 3,133 | ||||||||||||||
| Income tax expense (benefit) | 7,819 | (3,216 | ) | (2,598 | ) | 1,449 | (247 | ) | ||||||||||||
| Net income (loss) | 13,976 | 20,771 | (25,254 | ) | 4,678 | 3,380 | ||||||||||||||
| Dividends and accretion on preferred stock | (337 | ) | (1,854 | ) | (2,918 | ) | (2,917 | ) | (2,919 | ) | ||||||||||
| Net income (loss) available to common shareholders | $ | 13,639 | $ | 18,917 | $ | (28,172 | ) | $ | 1,761 | $ | 461 | |||||||||
| Cash dividends declared on common stock | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| SELECTED YEAR END ASSETS AND LIABILITIES | ||||||||||||||||||||
| Investment securities | $ | 496,798 | $ | 368,866 | $ | 393,815 | $ | 337,811 | $ | 325,129 | ||||||||||
| Loans held for investment, net of unearned income | 1,804,406 | 1,416,703 | 1,155,421 | 1,200,070 | 1,260,585 | |||||||||||||||
| Assets | 2,520,232 | 1,965,232 | 1,708,707 | 1,734,564 | 1,809,891 | |||||||||||||||
| Deposits | 1,832,564 | 1,553,996 | 1,332,493 | 1,418,676 | 1,452,995 | |||||||||||||||
| Shareholders’ equity | 231,355 | 166,792 | 196,014 | 163,387 | 165,918 | |||||||||||||||
| PERFORMANCE MEASURES | ||||||||||||||||||||
| Net income (loss) to average total assets | 0.60 | % | 1.17 | % | (1.46 | )% | 0.27 | % | 0.18 | % | ||||||||||
| Net income (loss) to average shareholders’ equity | 6.53 | 11.75 | (15.18 | ) | 2.81 | 2.00 | ||||||||||||||
| Dividend payout | - | - | - | - | - | |||||||||||||||
| Average shareholders’ equity to average total assets | 9.18 | 9.94 | 9.65 | 9.51 | 8.81 | |||||||||||||||
| Average tangible shareholders’ equity to average tangible total assets | 8.29 | 9.73 | 9.47 | 9.29 | 8.58 | |||||||||||||||
| PER SHARE DATA | ||||||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||
| Basic | $ | 0.39 | $ | 0.71 | $ | (1.80 | ) | $ | 0.11 | $ | 0.03 | |||||||||
| Diluted | 0.38 | 0.65 | (1.80 | ) | 0.11 | 0.03 | ||||||||||||||
| Cash dividends declared | - | - | - | - | - | |||||||||||||||
| Book value at year end | 6.22 | 5.33 | 5.58 | 7.09 | 7.25 | |||||||||||||||
| Tangible book value at year end | 5.50 | 5.04 | 5.38 | 6.85 | 6.96 | |||||||||||||||
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following presents management’s discussion and analysis of the Company’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.
Executive Overview
The Company was formed in 2007 through a merger of equals between the two holding company parents of FNB Southeast founded in 1919 and Lexington State Bank founded in 1949, each with approximately $1 billion in total assets. Having achieved critical mass and established a new corporate identity, the Company planned to become an active acquirer in the Carolinas by combining with smaller commercial banks. Following the merger, however, the Company experienced a setback through the recession of 2008 as small businesses in the Piedmont Triad and the Company’s other markets suffered deep losses and unemployment escalated. Through successful execution of the Company’s business strategy, the Company resolved a significant portion of its asset problems at that time through a planned problem asset disposition in 2012, while concurrently raising capital to retire preferred shares issued under the U.S. Treasury’s TARP Program.
In 2013, the Company renewed its growth strategies and increased total assets 15%, including $140 million of organic loan growth and $122 million of acquired loan growth through its Security Savings Bank, SSB (“Security Savings”) acquisition. In 2014, the Company further increased assets an additional $555 million through a disciplined four-part strategy: focusing on organic in market expansion, expansion in select metropolitan de novo markets, the acquisition of CapStone Bank (“CapStone”) in the Raleigh market and the addition of an experienced team of bankers focused on middle market companies.
The Company’s business strategy follows three basic tenets: Quality, Profitability and Growth. Utilizing this strategy, the Company achieved record pre-tax earnings of $21.8 million in 2014, a 24% increase over 2013 results. Excluding acquisition-related costs and gains on sale of investments, pre-tax core net operating income totaled $26.9 million, a 41% increase over the same adjusted core net operating income for the prior year. Management regularly evaluates the Company’s performance using pre-tax core net operating income comparisons because of its focus on normalized operating performance metrics.
| Pre-tax core net operating income | ||||||||
| (dollars in thousands) | ||||||||
| Twelve Months Ended December 31 | ||||||||
| 2014 | 2013 | |||||||
| Income before income tax | $ | 21,795 | $ | 17,555 | ||||
| Gain on sale of investment securities | - | (736 | ) | |||||
| Acquisition-related expenses | 5,081 | 2,232 | ||||||
| Pre-tax core net operating income | $ | 26,876 | $ | 19,051 | ||||
Net income available to common shareholders declined in 2014 to $13.6 million from $18.9 million in 2013 and earnings per diluted share declined from $0.65 in 2013 to $0.38 in 2014. The results for 2013 were affected by a tax benefit of $3.2 million that resulted from a reversal of a deferred tax valuation allowance of $10.0 million. The Company provided for income taxes in 2014 at an effective tax rate of 35.9%, resulting in an $11.0 million increase in tax provision from the prior year. Common shareholders further benefitted in 2014 by the Company’s decision to redeem the final $15.0 million of TARP preferred shares in March of 2014 following the redemption of 37,372 preferred shares in 2013. Dividends and accretion on preferred stock decreased 82% to $337,000 in 2014 from $1.9 million in 2013 as a result. Therefore, adjusting for the normalized tax rate and removing acquisition-related expenses and dividends and accretion on preferred stock, normalized diluted earnings per share improved 26% over the prior year.
| 32 |
| 2014 | 2013 | |||||||||||||||
| (dollars and shares in thousands) | Actual | Actual | Var $ | Var % | ||||||||||||
| Non-GAAP Analysis | ||||||||||||||||
| Income before income tax | $ | 21,795 | $ | 17,555 | $ | 4,240 | 24.2 | % | ||||||||
| Add acquisition-related expense | 5,081 | 2,232 | 2,849 | 127.6 | % | |||||||||||
| Adjusted net income before tax | 26,876 | 19,787 | 7,089 | 35.8 | % | |||||||||||
| Normalized tax provision | 9,643 | 6,856 | 2,787 | 40.6 | % | |||||||||||
| Less preferred dividends | 337 | 1,854 | (1,517 | ) | (81.8 | )% | ||||||||||
| Adjusted net income after tax & preferred dividend | $ | 16,896 | $ | 11,077 | $ | 5,819 | 52.5 | % | ||||||||
| Weighted average diluted shares | 35,466 | 29,070 | 6,396 | 22.0 | % | |||||||||||
| Normalized diluted EPS | $ | 0.48 | $ | 0.38 | $ | 0.10 | 26.3 | % | ||||||||
| GAAP Comparison | ||||||||||||||||
| Income before income tax | $ | 21,795 | $ | 17,555 | $ | 4,240 | 24.2 | % | ||||||||
| Tax provision | 7,819 | (3,216 | ) | 11,035 | (343.1 | )% | ||||||||||
| Net income | 13,976 | 20,771 | (6,795 | ) | (32.7 | )% | ||||||||||
| Less preferred dividends | 337 | 1,854 | (1,517 | ) | (81.8 | )% | ||||||||||
| Net income available to common shareholders | $ | 13,639 | $ | 18,917 | $ | (5,278 | ) | (27.9 | )% | |||||||
| Weighted average diluted shares | 35,466 | 29,070 | 6,396 | 22.0 | % | |||||||||||
| Diluted EPS | $ | 0.38 | $ | 0.65 | $ | (0.27 | ) | (41.5 | )% | |||||||
Quality.Over the past three years, one of the Company’s most significant accomplishments has been an aggressive reduction of its adversely classified assets.
In mid-2012 the Company formulated an asset disposition plan to resolve the lingering impact of the 2008 recession on its asset quality. Dispositions were made through direct negotiations with customers, direct sales of notes, auctions and sales of small pools of homogeneous assets. By year end 2012, the Company had reduced total classified assets by $96 million.
Asset quality trends continued to improve in 2013. Nonperforming loans declined 56% during the year to $9.4 million from $21.3 million at December 31, 2012. As a percentage of total assets, nonperforming loans represented 0.48% at December 31, 2013 compared to 1.25% at December 31, 2012. The allowance for credit losses to nonperforming loans improved to 261% at year end 2013 from 125% at year end 2012. Total nonperforming assets to total assets declined to 0.87% at December 31, 2013 from 1.56% at December 31, 2012.
Asset quality reflected continued improvement throughout 2014. The highlights of 2014 are as follows:
| · | Nonperforming loans declined to $7.2 million from $9.4 million the previous year; |
| · | As a percentage of assets, nonperforming loans declined to 0.29% from 0.48%; |
| · | Allowance for credit losses to nonperforming loans improved to 307% from 261%; |
| · | Real estate acquired in settlement of loans decreased to $3.1 million from $7.6 million at December 31, 2013; |
| · | Total nonperforming assets to total assets declined to 0.41% from 0.87%; and |
| · | Net chargeoffs decreased to $3.3 million, or 0.20% of average loans held for investment, from $4.8 million, or 0.38% of average loans held for investment, in the prior year. |
| 33 |
Profitability.The Company’s ability to achieve sustained profitability depends not only on the maintenance of a high level of asset quality but on careful management of interest income, interest expense and other expense. Management has implemented a number of steps to increase net interest and fee income, preserve an acceptable net interest margin and control our controllable expenses.
Our 2012 operating results reflected the impact of the implementation of the asset disposition plan. For the year 2012, the Company had a net loss of $25.3 million, which was anticipated.
The success of the asset disposition plan positioned the Company to achieve record earnings in 2013. In 2013, earnings to common shareholders totaled $18.9 million, provision for credit costs declined $33.2 million to $2.7 million, and loss on real estate acquired in settlement of loans improved $15.9 million to a gain of $126,000. Results for 2013 were positively affected by a tax benefit of $3.2 million that resulted from a reversal of a deferred tax asset valuation allowance of $10.0 million.
The Company produced solid operating results in 2014. The highlights of 2014 are as follows:
| · | Pre-tax earnings increased 24% for the year; |
| · | Net interest income grew 25% to $78.7 million; |
| · | Average earning assets increased $506.4 million; |
| · | Provision for credit losses declined $1.8 million to $0.8 million; |
| · | Wealth management revenues increased 13.6%; |
| · | Noninterest-bearing deposits increased 33%, or $78.3 million; |
| · | Total core deposits grew 16% and represented 70% of total deposits at year end; |
| · | Average cost of borrowings was 0.99%, down from 1.50 % the previous year; and |
| · | Realignment of our retail banking structure was equivalent to a 5% reduction in the Company’s work force. |
Although noninterest expense increased $12.3 million, or 20.4%, in 2014 compared to 2013, the primary increases were in acquisition-related expenses and investments made to build our team of bankers and expand key offices and branches. Acquisition-related expense in 2014 was $5.1 million, compared to $2.2 million in 2013. Personnel expense increased 14.1%, and occupancy expense and furniture and equipment expense increased 16.7% and 8.7%, respectively. These expenditures have positioned the Company to drive increased revenue and maximize profitability.
Growth.The past three years have been transformative as the Company has become one of the largest community-focused banks in the Carolinas, both in asset size and geographical footprint. Our management philosophy focuses on promoting core organic growth with a disciplined acquisition strategy targeted at expanding the Company’s presence in select markets. The Company takes a balanced approach to promoting growth in valuable core transaction deposits, commercial and private bank lending and expansion of fee income services. Our goal is to provide excellence in value to our customers and shareholders as we grow.
Loan balances increased 5%, net of classified loans, in 2012. During the same year, our footprint was expanded into the Raleigh and Charlotte markets through loan production offices, and twelve senior level experienced community bankers were employed, including new market executives in the Piedmont Triad and Charlotte markets.
The Company experienced significant organic and acquired loan growth in 2013. Loan balances increased 22.6%, with organic loan growth totaling 12%, or $140 million, for the year. Expansion efforts were strengthened as our loan production offices in Charlotte and Raleigh became full-service bank locations. During 2013, the Security Savings acquisition was completed, and the CapStone acquisition was announced.
The growth of our balance sheet in 2014 was a visible indication of the Company’s significant expansion. The highlights for 2014 include:
| · | Total assets increased by $555.0 million, or 28%, to $2.52 billion; |
| 34 |
| · | Total loans held for investment increased 27% to $1.80 billion, up from $1.42 billion the prior year, reflecting both acquired loans and organic growth; |
| · | Acquired CapStone Bank resulting in expanded operations in Raleigh, NC; |
| · | Established middle market banking group and reorganized commercial banking operation into specialized teams; |
| · | Expanded array of treasury services and wealth management business; |
| · | Opened Charleston and Greenville, SC loan production offices; |
| · | Expanded operations in Charlotte and Winston-Salem, NC; and |
| · | Announced planned acquisition of Premier Commercial Bank, a $168.7 million asset bank based in Greensboro, NC, to add commercial banking clients and assets in Greensboro and residential mortgage banking in several North Carolina markets. |
Financial Condition at December 31, 2014 and 2013
The Company’s consolidated assets of $2.52 billion at year end 2014 reflect an increase of 28.2% from year end 2013. The increase reflects the combined result of the acquisition of CapStone on April 1, 2014, and organic and acquired loan growth. Total average assets increased 31.2% from $1.78 billion in 2013, to $2.33 billion in 2014, while average earning assets increased 31.0%, from $1.63 billion in 2013, to $2.14 billion in 2014. The increases in total average assets and average earning assets were primarily the result of an increase in loans outstanding.
Loans (excluding loans held for sale) increased $387.7 million during 2014, or 27.4%, compared to an increase of 22.6% in 2013. The Company’s success in expanding its loan portfolio is attributed to a balanced strategy of organic and acquired loan growth. In the fourth quarter of 2014, the middle market team, which focuses on commercial and industrial loan customers with revenues between $25 million and $250 million, was responsible for $99.7 million of loan growth, including $75.7 million of credit relationships previously existing with the team. Loans secured by real estate totaled $1.58 billion at year end 2014 and represented 87.4% of total loans (excluding loans held for sale), compared with 89.5% at year end 2013. Within this category, residential real estate loans increased 10.2% to $672.6 million, and land acquisition, development and construction loans increased 45.7% to $168.1 million. Commercial loans totaled $928.8 million at year end 2014, an increase of 41.5% from the end of 2013. Consumer loans decreased 1.0% during 2014, ending the year at $26.2 million.
Investment securities available for sale (at amortized cost) totaled $358.5 million at year end 2014, a 20.5% increase from $297.5 million at year end 2013. U.S. government agency securities totaled $49.6 million, or 13.8% of the available for sale portfolio, at year end 2014, compared to $49.1 million, or 16.5% of the portfolio one year earlier. Mortgage backed securities totaled $53.0 million, or 14.8% of the available for sale portfolio, at December 31, 2014, compared to $52.6 million, or 17.7% of the portfolio, at the previous year end. Available for sale state and municipal obligations totaled $33.9 million at year end 2014, and comprised 9.5% of the available for sale portfolio, compared to $15.8 million, or 5.3% of the portfolio, a year earlier. Corporate bonds totaled $178.8 million, or 49.9% of the available for sale portfolio at December 31, 2014, of which $50.0 million were covered bonds, compared to corporate bonds of $155.7 million, or 52.3% of the portfolio at December 31, 2013, of which $49.9 million were covered bonds. Collateralized mortgage obligations totaled $10.5 million, or 2.9% of the available for sale portfolio at year end 2014, compared to $6.6 million, or 2.2% of the portfolio, at the end of the previous year.
During 2014, the Company classified a number of its investment security purchases as held to maturity. The weighted average duration of investment securities classified as held to maturity does not exceed five years. The Company believes it has the capacity to hold these investments to maturity. Investment securities held to maturity (at amortized cost) totaled $130.7 million at year end 2014, a 94.2% increase from $67.3 million at year end 2013. U.S. government agency securities totaled $32.8 million, or 25.1% of the held to maturity portfolio, at year end 2014, compared to $28.7 million, or 42.7% of the portfolio, one year earlier. Mortgage backed securities totaled $54.3 million, or 41.6% of the held to maturity portfolio, at December 31, 2014, compared to $32.4 million, or 48.2% of the portfolio, at the previous year end. Held to maturity state and municipal obligations amounted to $1.2 million at year end 2014, and comprised 0.9% of the held to maturity portfolio, compared to $1.1 million, or 1.7% of the portfolio, a year earlier. Corporate bonds totaled $28.4 million, or 21.7% of the held to maturity portfolio at December 31, 2014, of which $5.0 million were covered bonds. There were no corporate bonds in the held to maturity portfolio at December 31, 2013. Subordinated debt issues totaled $14.0 million, or 10.7% of the held to maturity portfolio, at year end 2014, compared to $5.0 million, or 7.4% of the portfolio, one year earlier.
| 35 |
The Company’s investment strategy is to achieve acceptable total returns through investments in securities with varying maturity dates, cash flows and yield characteristics. U.S. government agency securities are generally purchased for liquidity and collateral purposes, mortgage backed securities are purchased for yield and cash flow purposes, corporate bonds are purchased for yield, and longer maturity municipal bonds are purchased for yield and income tax advantage. The table “Investment Securities,” on page 54, presents the composition of the securities portfolio for the last three years, as well as information about cost and fair value. The table“Investment Securities Portfolio Maturity Schedule,” on page 56, presents the maturities, fair values and weighted average yields of the Company’s securities portfolio.
Total deposits increased $278.6 million to $1.83 billion at December 31, 2014, a 17.9% increase from a total of $1.55 billion one year earlier. The increase in deposits was primarily due to the acquisition of CapStone. Retail time deposits increased $7.6 million during 2014. Noninterest-bearing deposits increased $78.3 million during 2014 to $319.3 million.
To supplement core deposit growth, the Bank uses several different sources such as brokered certificates of deposit secured through broker/dealer arrangements and deposits obtained through the Certificate of Deposit Account Registry Service (“CDARS”), a service of Promontory InterFinancial Network, LLC. CDARS increased $53.3 million, from $143.3 million at year end 2013 to $196.6 million at year end 2014, while brokered deposits increased $36.0 million, from $13.4 million at year end 2013 to $49.4 million at year end 2014.
The Bank also has a credit facility available with the FHLB of Atlanta. The credit line at December 31, 2014 was $488.2 million, compared to $360.2 million at December 31, 2013. FHLB borrowings totaled $346.7 million at year end 2014. Based on collateral pledged, an additional $110.5 million of borrowings was available at year end 2014. At December 31, 2013, FHLB borrowings totaled $170.0 million, and an additional $91.3 million of borrowings available. In addition to the credit line at the FHLB of Atlanta, at December 31, 2014 the Bank had borrowing capacity at the Federal Reserve Bank totaling $4.3 million of which none was used and had federal funds lines of $89.8 million of which $29.5 million was outstanding at year end 2014. At December 31, 2013 the Bank had borrowing capacity at the Federal Reserve Bank totaling $3.9 million of which none was used and had federal funds lines of $30.0 million of which $13.0 million was outstanding at year end 2013. Management believes these credit lines are a cost effective and prudent alternative to deposit balances, affording the Bank additional flexibility because particular amounts, terms and structures may be selected to meet changing needs.
Financial Condition at December 31, 2013 and 2012
The Company’s consolidated assets of $1.97 billion at year end 2013 reflect an increase of 15.0% from year end 2012. The increase was primarily a result of the acquisition of Security Savings on October 1, 2013. Total average assets increased 3.1% from $1.72 billion in 2012, to $1.78 billion in 2013, while average earning assets increased 3.7%, from $1.58 billion in 2012, to $1.63 billion in 2013. The increases in total average assets and average earning assets were primarily the result of an increase in loans outstanding.
Loans (excluding loans held for sale) increased $261.3 million during 2013, or 22.6%, compared to a decrease of 3.7% in 2012, primarily due to organic loan growth and the acquisition of Security Savings. Loans secured by real estate totaled $1.27 billion at year end 2013 and represented 89.5% of total loans (excluding loans held for sale), compared with 87.5% at year end 2012. Within this category, residential real estate loans increased 21.7% to $610.2 million, and land acquisition, development and construction loans increased 52.5% to $115.4 million. Commercial loans totaled $656.4 million at year end 2013, an increase of 20.4% from the end of 2012. Consumer loans decreased 1.7% during 2013, ending the year at $26.4 million.
Investment securities available for sale (at amortized cost) totaled $297.5 million at year end 2013, a 21.5% decrease from $379.1 million at year end 2012. U.S. government agency securities totaled $49.1 million, or 16.5% of the available for sale portfolio, at year end 2013, compared to $67.1 million, or 17.7% of the portfolio one year earlier. Mortgage backed securities totaled $52.6 million, or 17.7% of the available for sale portfolio, at December 31, 2013, compared to $64.7 million, or 17.1% of the portfolio, at the previous year end. Available for sale state and municipal obligations totaled $15.8 million at year end 2013, and comprised 5.3% of the available for sale portfolio, compared to $18.0 million, or 4.7% of the portfolio, a year earlier. Corporate bonds totaled $155.7 million, or 52.4% of the available for sale portfolio at December 31, 2013, of which $49.9 million were covered bonds, compared to corporate bonds of $195.5 million, or 51.6% of the portfolio at December 31, 2012, of which $44.9 million were covered bonds. Collateralized mortgage obligations totaled $6.6 million, or 2.2% of the available for sale portfolio at year end 2013, compared to $10.4 million, or 2.7% of the portfolio, at the end of the previous year.
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During 2013, the Company classified a number of its investment security purchases as held to maturity. The weighted average life of investment securities classified as held to maturity does not exceed seven years. The Company believes it has the capacity to hold these investments to maturity. Investment securities held to maturity (at amortized cost) totaled $67.3 million at year end 2013. U.S. government agency securities totaled $28.7 million, or 42.7% of the held to maturity portfolio, at year end 2013. Mortgage backed securities totaled $32.4 million, or 48.2% of the held to maturity portfolio, at December 31, 2013. Held to maturity state and municipal obligations amounted to $1.1 million at year end 2013, and comprised 1.7% of the held to maturity portfolio. Corporate bonds totaled $5.0 million, or 7.4% of the held to maturity portfolio at December 31, 2013. The Company had no investment securities held to maturity at December 31, 2012.
Total deposits increased $221.5 million to $1.55 billion at December 31, 2013, a 16.6% increase from a total of $1.33 billion one year earlier. The increase in deposits was primarily due to the acquisition of Security Savings. Retail time deposits increased $20.6 million for the year. Noninterest-bearing deposits increased $35.0 million for the year to $241.0 million.
To supplement core deposit growth, the Bank uses several different sources such as brokered certificates of deposit secured through broker/dealer arrangements and deposits obtained through CDARS; CDARS increased $100.9 million, from $42.4 million at year end 2012 to $143.3 million at year end 2013, while brokered deposits decreased $4.3 million, from $17.7 million at year end 2012 to $13.4 million at year end 2013.
The Bank also has a credit facility available with the FHLB of Atlanta. The credit line at December 31, 2013 was $360.2, compared to $342.5 million at December 31, 2012. FHLB borrowings totaled $170.0 million at year end 2013. Based on collateral pledged, an additional $91.3 million of borrowings was available at year end 2013. At December 31, 2012, FHLB borrowings totaled $113.0 million, and an additional $95.3 million of borrowings was available. In addition to the credit line at the FHLB of Atlanta, at December 31, 2013 the Bank had borrowing capacity at the Federal Reserve Bank totaling $3.9 million of which none was used and had federal funds lines of $30.0 million of which $13.0 million was outstanding. At December 31, 2012, the Bank had borrowing capacity at the Federal Reserve Bank totaling $7.7 million and had federal funds lines of $25.0 million, of which there were no borrowings outstanding for either. Management believes these credit lines are a cost effective and prudent alternative to deposit balances, affording the Bank additional flexibility because particular amounts, terms and structures may be selected to meet changing needs.
Net Interest Income
As with most financial institutions, the primary component of the Company’s revenue is net interest income. Net interest income is the difference between interest income, principally from loans and investments, and interest expense on client deposits and borrowings. Changes in net interest income result from changes in volume and mix of the various interest-earning asset and interest-bearing liability components and changes in interest rates earned and paid. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Spread and margin are influenced by the levels and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities.
Average balances and net interest income analysis.The following table sets forth, for the years 2012 through 2014, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or rates, net interest income, net interest spread, and net interest margin. Average loans include nonaccruing loans, the effect of which is to lower the average yield.
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Average Balances and Net Interest Income Analysis
Fully taxable-equivalent basis(1) (dollars in thousands)
| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||||||||||||||
| Average | Income/ | Average | Average | Income/ | Average | Average | Income/ | Average | ||||||||||||||||||||||||||||
| Balance | Expense | Yield/Rate | Balance | Expense | Yield/Rate | Balance | Expense | Yield/Rate | ||||||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||||||||||||||
| Loans receivable(2) | $ | 1,670,113 | $ | 71,230 | 4.26 | % | $ | 1,247,095 | $ | 56,617 | 4.54 | % | $ | 1,175,938 | $ | 57,676 | 4.90 | % | ||||||||||||||||||
| Taxable securities | 411,464 | 12,908 | 3.14 | 355,864 | 11,239 | 3.16 | 357,463 | 12,492 | 3.49 | |||||||||||||||||||||||||||
| Tax-exempt securities(1) | 29,010 | 1,492 | 5.14 | 15,519 | 1,115 | 7.18 | 17,502 | 1,119 | 6.39 | |||||||||||||||||||||||||||
| FHLB stock | 13,057 | 463 | 3.55 | 7,631 | 195 | 2.56 | 7,323 | 122 | 1.67 | |||||||||||||||||||||||||||
| Federal Reserve Bank stock | 1,731 | 102 | 5.89 | - | - | - | - | - | ||||||||||||||||||||||||||||
| Interest-bearing bank balances | 14,763 | 118 | 0.80 | 7,656 | 23 | 0.30 | 16,923 | 40 | 0.24 | |||||||||||||||||||||||||||
| Total earning assets | 2,140,138 | 86,313 | 4.04 | 1,633,765 | 69,189 | 4.24 | 1,575,149 | 71,449 | 4.54 | |||||||||||||||||||||||||||
| Non-earning assets: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 31,551 | 25,020 | 25,681 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 45,436 | 37,327 | 36,284 | |||||||||||||||||||||||||||||||||
| Other assets | 139,170 | 108,266 | 117,213 | |||||||||||||||||||||||||||||||||
| Allowance for credit losses | (23,745 | ) | (26,309 | ) | (29,872 | ) | ||||||||||||||||||||||||||||||
| Total assets | $ | 2,332,550 | $ | 1,778,069 | $ | 1,724,455 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Savings deposits | $ | 66,347 | $ | 36 | 0.05 | % | $ | 51,197 | $ | 26 | 0.05 | % | $ | 44,144 | $ | 26 | 0.06 | % | ||||||||||||||||||
| NOW deposits | 478,188 | 893 | 0.19 | 425,435 | 709 | 0.17 | 428,299 | 1,242 | 0.29 | |||||||||||||||||||||||||||
| Money market deposits | 392,322 | 780 | 0.20 | 339,664 | 602 | 0.18 | 365,718 | 1,204 | 0.33 | |||||||||||||||||||||||||||
| Time deposits | 552,436 | 2,291 | 0.41 | 368,189 | 1,779 | 0.48 | 377,289 | 2,663 | 0.71 | |||||||||||||||||||||||||||
| Other borrowings | 76,913 | 2,344 | 3.05 | 48,773 | 1,332 | 2.73 | 46,957 | 1,367 | 2.91 | |||||||||||||||||||||||||||
| FHLB Borrowings | 241,945 | 801 | 0.33 | 120,136 | 1,195 | 0.99 | 79,941 | 1,012 | 1.27 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,808,151 | 7,145 | 0.40 | 1,353,394 | 5,643 | 0.42 | 1,342,348 | 7,514 | 0.56 | |||||||||||||||||||||||||||
| Other liabilities and shareholders’ equity: | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 294,704 | 228,635 | 196,365 | |||||||||||||||||||||||||||||||||
| Other liabilities | 15,537 | 19,302 | 19,362 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 214,158 | 176,738 | 166,380 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,332,550 | $ | 1,778,069 | $ | 1,724,455 | ||||||||||||||||||||||||||||||
| Net interest income and net interest margin(3) | $ | 79,168 | 3.70 | % | $ | 63,546 | 3.89 | % | $ | 63,935 | 4.06 | % | ||||||||||||||||||||||||
| Interest rate spread(4) | 3.64 | % | 3.82 | % | 3.98 | % | ||||||||||||||||||||||||||||||
| (1) | Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable-equivalent basis were $497 for 2014, $370 for 2013 and $369 for 2012. |
| (2) | Average loans receivable include nonaccruing loans and loans held for sale. Amortization of loan fees, net of deferred costs, and other loan-related fees of $(420), $136 and $600, for 2014, 2013 and 2012, respectively, are included in interest income. Also included in interest income for 2014 is $212 from interest rate cash flow hedges. |
| (3) | Net interest margin is computed by dividing taxable-equivalent net interest income by average earning assets. |
| (4) | Interest rate spread is computed by subtracting interest-bearing liability rate from earning asset yield. |
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Volume and Rate Variance Analysis
The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table identifies (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) have been allocated, based on the absolute value, between changes attributable to volume and changes attributable to rate.
Volume and Rate Variance Analysis
Fully taxable-equivalent basis(1) (dollars in thousands)
| 2014 | 2013 | |||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
| Variance(2) | Variance(2) | Variance | Variance(2) | Variance(2) | Variance | |||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Loans receivable | $ | 18,274 | $ | (3,661 | ) | $ | 14,613 | $ | 3,346 | $ | (4,405 | ) | $ | (1,059 | ) | |||||||||
| Taxable investment securities | 1,741 | (72 | ) | 1,669 | (57 | ) | (1,196 | ) | (1,253 | ) | ||||||||||||||
| Tax-exempt investment securities(1) | 761 | (384 | ) | 377 | (134 | ) | 130 | (4 | ) | |||||||||||||||
| FHLB stock | 174 | 94 | 268 | 5 | 68 | 73 | ||||||||||||||||||
| Federal Reserve Bank stock | 102 | - | 102 | - | - | - | ||||||||||||||||||
| Interest-bearing bank balances | 34 | 61 | 95 | (26 | ) | 9 | (17 | ) | ||||||||||||||||
| Total interest income | 21,086 | (3,962 | ) | 17,124 | 3,134 | (5,394 | ) | (2,260 | ) | |||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Savings deposits | 10 | 0 | 10 | 4 | (4 | ) | 0 | |||||||||||||||||
| NOW deposits | 94 | 90 | 184 | (8 | ) | (525 | ) | (533 | ) | |||||||||||||||
| Money market deposits | 104 | 74 | 178 | (82 | ) | (520 | ) | (602 | ) | |||||||||||||||
| Time deposits | 796 | (284 | ) | 512 | (61 | ) | (823 | ) | (884 | ) | ||||||||||||||
| Other borrowings | 841 | 171 | 1,012 | 52 | (87 | ) | (35 | ) | ||||||||||||||||
| Borrowings from FHLB | 719 | (1,113 | ) | (394 | ) | 438 | (255 | ) | 183 | |||||||||||||||
| Total interest expense | 2,564 | (1,062 | ) | 1,502 | 343 | (2,214 | ) | (1,871 | ) | |||||||||||||||
| Increase (decrease) in net interest income | $ | 18,522 | $ | (2,900 | ) | $ | 15,622 | $ | 2,791 | $ | (3,180 | ) | $ | (389 | ) | |||||||||
| (1) | Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35% and is then reduced by the non-deductible portion of interest expense. |
| (2) | The volume/rate variance for each category has been allocated on a consistent basis between rate and volume variances, based on the percentage of rate, or volume, variance to the sum of the two absolute variances. |
Results of Operations – Years Ended December 31, 2014 and 2013
Net income.Net income available to common shareholders for 2014 was $13.6 million, representing net income per diluted share of $0.38, compared to net income available to common shareholders of $18.9 million, or $0.65 per diluted share, the prior year. In 2013, the Company had a tax benefit of $3.2 million resulting from a deferred tax asset valuation allowance reversal of $10.0 million, $740,000 due to a NC corporate tax rate change, and a calculated tax provision of $6.1 million. In the second quarter of 2014, the Bank acquired CapStone, and in the Fall of 2014, established loan production offices in Greenville and Charleston, SC. Provision for credit losses was $883,000 in 2014 compared to $2.7 million in 2013. Results for 2014 included $5.1 million in acquisition-related expense, reflecting an increase of $2.9 million compared to $2.2 million in acquisition-related expense included in 2013. Net interest income for 2014 after provision for credit losses increased by $17.3 million, or 28.6%, as compared to 2013. The taxable-equivalent net interest margin decreased 19 basis points for 2014 to 3.70%, from 3.89% for 2013. Noninterest income decreased $741,000, or 4.2%, in 2014, while noninterest expense for 2014 increased $12.3 million, or 20.4%. Return on average assets for 2014 was 0.60% compared to 1.17% for 2013. Return on average shareholders' equity for 2014 was 6.53% compared to 11.75% in 2013.
Net interest income. Net interest income for 2014, on a taxable-equivalent basis, increased $15.6 million, or 24.6%, compared to 2013. Average earning assets for 2014 increased $506.4 million, or 31.0%, to $2.14 billion from $1.63 billion for the prior year. Average interest-bearing liabilities for 2014 increased $454.8 million, or 33.6%, to $1.81 billion, compared to $1.35 billion for 2013.
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The net interest margin for the year ended December 31, 2014 was 3.70%, down from 3.89% for the prior year. The decline in net interest margin was primarily a result of a lower yield on the loan portfolio. In 2014, the average yield on earning assets decreased by 20 basis points while the average rate on interest-bearing liabilities decreased by two basis points, which resulted in a decrease in the interest rate spread in 2014 of 18 basis points compared to the prior year.
The table,“Average Balances and Net Interest Income Analysis,” above summarizes net interest income and average yields earned, and rates paid for the years indicated, on a taxable-equivalent basis. The table, “Volume and Rate Variance Analysis” above presents the changes in interest income and interest expense attributable to volume and rate changes between the years indicated.
Provision for credit losses and allowance for credit losses.The Company recorded a $883,000 provision for credit losses during the year ended December 31, 2014, compared to a $2.7 million provision during the previous year. The Company’s allowance for credit losses was $22.1 million at December 31, 2014, compared to $24.6 million at December 31, 2013. The allowance for credit losses expressed as a percentage of total loans (excluding loans held for sale) decreased to 1.23% at December 31, 2014 from 1.73% at December 31, 2013. The allowance for credit losses expressed as a percentage of loans excluding purchased credit-impaired (“PCI”) loans and loans held for sale decreased to 1.28% at December 31, 2014 from 1.80% at December 31, 2013. The allowance for credit losses as a percentage of nonperforming loans was 306.60% at year end 2014, compared to 261.23% at year end 2013.
Noninterest income. In 2014, noninterest income decreased $741,000 to $16.7 million, or 4.2%, compared to 2013. In 2014, there were no gains on sale of investment securities, compared to pre-tax gains on sale of investment securities of $736,000 in 2013. In 2014, retail banking revenue increased $196,000 to $10.4 million, or 1.9%, for the year. Wealth management revenue increased 13.6% to $2.9 million for 2014 from $2.6 million in 2013 as the division increased trust assets under management to $233.6 million at December 31, 2014 from $222.5 million at December 31, 2013; included in revenue in 2014 were several one-time fees collected due to estate settlements. Mortgage banking revenue decreased $774,000, or 47.1%, for 2014 due to a lower level of mortgage loan production resulting from increases in interest rates.
Noninterest expense. In 2014, noninterest expense increased $12.3 million, or 20.4%, compared to 2013. The increase was due to several factors. Acquisition-related expense in 2014 was $5.1 million, compared to $2.2 million in 2013. Personnel expense increased 14.1% to $36.6 million, from $32.1 million in 2013. The increase in personnel expense is due primarily to hiring related to the new middle market banking group and reorganized commercial banking groups, to the expansion of the commercial banking team in Winston-Salem, NC, and to additional personnel resulting from the acquisition of Security Savings in October, 2013 and the acquisition of CapStone in April, 2014, partially offset by the workforce reduction resulting from a retail banking realignment announced in the second quarter of 2014. Occupancy expense increased $702,000, or 16.7%, to $4.9 million, and furniture and equipment expense increased $305,000, or 8.7%, to $3.8 million in 2014 from $4.2 million and $3.5 million, respectively, in 2013 due primarily to the acquisitions of Security Savings and CapStone. Real estate acquired in settlement of loans expense (benefit) increased to $870,000 in 2014, from $(126,000) in the same period last year. For the detailed change in other operating expense please see the table “Other Operating Expenses” in Note 13 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Provision for income taxes. The Company recorded an income tax expense of $7.8 million in 2014, compared to an income tax benefit of $3.2 million in 2013. The Company’s effective tax rate was 35.9% in 2014 and (18.3)% in 2013. In 2013, the difference between the effective tax rate and the statutory rate was primarily a result of a decrease of $10.0 million in the valuation allowance against deferred tax assets.
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Results of Operations – Years Ended December 31, 2013 and 2012
Net income (loss).Net income available to common shareholders for 2013 was $18.9 million, representing net income per diluted share of $0.65, compared to net loss available to common shareholders of $28.2 million, or $1.80 per diluted share, the prior year. In 2013, the Company had a tax benefit of $3.2 million resulting from a deferred tax asset valuation allowance reversal of $10.0 million, $740,000 due to a NC corporate tax rate change, and a calculated tax provision of $6.1 million. In the fourth quarter of 2013, the Bank acquired Security Savings, and earlier in the year loan production offices in Charlotte and Raleigh became full service branches. The results for 2012 were largely impacted by the Company’s plan to accelerate the disposition of problem assets. Provision for credit losses was $2.7 million in 2013 compared to $35.9 million in 2012. Results for 2013 include $2.2 million in acquisition-related expense and a loan recourse obligation expense of $356,000, while results for 2012 included $1.8 million taken in the third quarter of 2012 for impairments on facilities related to branch offices closed or scheduled to be closed and for adjustments for various nonrecurring accruals, as well as a $10.0 million valuation allowance against the Company’s deferred tax asset. Net interest income for 2013 after provision for credit losses increased by $32.8 million, or 118.6%, as compared to 2012. The taxable-equivalent net interest margin decreased 17 basis points for 2013 to 3.89%, from 4.06% for 2012. Noninterest income increased $566,000, or 3.4%, in 2013, while noninterest expense for 2013 decreased $12.0 million, or 16.6%. Lower mortgage banking revenue, which declined $1.0 million from 2012, was partially offset by gains on sales of investment securities of $736,000. The decrease in noninterest expense is due to a net gain for real estate acquired in settlement of loans expense of $126,000 in 2013 compared to a net loss of $15.7 million in 2012. Return on average assets for 2013 was 1.17% compared to (1.46)% for 2012. Return on average shareholders' equity for 2013 was 11.75% compared to (15.18)% in 2012.
Net interest income. Net interest income for 2013, on a taxable-equivalent basis, decreased $389,000, or 0.6%, compared to 2012. Average earning assets increased $58.6 million, or 3.7%, to $1.63 billion from $1.58 billion for the prior year. Average interest-bearing liabilities for 2013 increased $11.0 million, or 0.8%, to $1.35 billion, compared to $1.34 billion for 2012.
The net interest margin for the year ended December 31, 2013 was 3.89%, down from 4.06% for the prior year. The decline in net interest margin was partially as a result of the disposition of high risk loans with high yields as a part of our asset disposition plan in late 2012. In 2013, the average yield on earning assets decreased by 30 basis points while the average rate on interest-bearing liabilities decreased by 14 basis points, which resulted in a decrease in the interest rate spread in 2013 of 16 basis points compared to the prior year.
The table,“Average Balances and Net Interest Income Analysis,” above summarizes net interest income and average yields earned, and rates paid for the years indicated, on a taxable-equivalent basis. The table, “Volume and Rate Variance Analysis” above presents the changes in interest income and interest expense attributable to volume and rate changes between the years indicated.
Provision for credit losses and allowance for credit losses.The Company recorded a $2.7 million provision for credit losses during the year ended December 31, 2013, compared to a $35.9 million provision during the previous year. The Company’s allowance for credit losses was $24.6 million at December 31, 2013, compared to $26.6 million at December 31, 2012. The allowance for credit losses expressed as a percentage of total loans (excluding loans held for sale) decreased to 1.73% at December 31, 2013 from 2.30% at December 31, 2012. The allowance for credit losses expressed as a percentage of loans excluding PCI loans and loans held for sale was 1.80% at December 31, 2013. There were no PCI loans at December 31, 2012. The allowance for credit losses as a percentage of nonperforming loans was 261.23% at year end 2013, compared to 124.93% at year end 2012.
Noninterest income. In 2013, noninterest income increased $566,000 to $17.5 million, or 3.4%, compared to 2012. Pre-tax gains on sale of investment securities totaled $736,000 in 2013, compared to $3,000 in 2012. In 2013, retail banking revenue increased $489,000 to $10.2 million, or 5.0%, due primarily to changes in the rate and fee structures the Bank applied to certain product offerings in the fourth quarter of 2012. Wealth management revenue increased 9.4% to $2.6 million for 2013 from $2.3 million in 2012 as the division increased trust assets under management to $222.5 million at December 31, 2013 from $189.9 million at December 31, 2012. Mortgage banking revenue decreased $1.0 million, or 37.6%, for 2013 due to a lower level of mortgage loan production resulting from increases in interest rates.
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Noninterest expense. In 2013, noninterest expense decreased $12.0 million, or 16.6%, compared to 2012. Real estate acquired in settlement of loans expense was a net gain of $126,000 in 2013 compared to a net loss of $15.7 million in 2012. Personnel expense in 2013 increased $2.8 million, or 9.4%, compared to 2012. The increase in personnel expense was due primarily to the hiring of commercial lenders in the Raleigh and Charlotte markets and the addition of key lending personnel in the Piedmont Triad Region as well as the fourth quarter additions resulting from the acquisition of Security Savings. The decrease in occupancy and other expenses was due primarily to one-time charges of $1.8 million taken in the third quarter of 2012 for impairments on facilities related to branch offices closed or scheduled to be closed and for adjustments for various nonrecurring accruals. In 2013, the Company recorded $2.2 million of acquisition-related costs, which included $2.0 million related to the acquisition of Security Savings and $260,000 related to the anticipated acquisition of CapStone. In addition, in 2013, the Company recorded a recourse obligation expense of $356,000 to cover estimated losses on nonperforming loans sold prior to September 2008. The Bank did not sell a significant number of mortgage loans prior to the recession of 2008 and does not anticipate any additional significant losses related to mortgage recourse obligations. Finally, operating costs were elevated due to the acquisition of Security Savings. For the detailed change in other operating expense please see the table “Other Operating Expenses” in Note 13 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Provision for income taxes. The Company recorded an income tax benefit of $3.2 million in 2013, compared to an income tax benefit of $2.6 million in 2012. The Company’s effective tax rate was (18.3)% in 2013 and (9.3)% in 2012. In 2013, the difference between the effective tax rate and the statutory rate was primarily a result of a decrease of $10.0 million in the valuation allowance against deferred tax assets, while in 2012, the difference between the effective tax rate and the statutory rate was primarily a result of an increase of $10.0 million in the valuation allowance against deferred tax assets.
Liquidity and Cash Flow
Liquidity management refers to the policies and practices that ensure the Bank has the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Bank’s clients. Management measures our liquidity position by giving consideration to both on- and off-balance sheet sources of, and demands for, funds on a daily and other periodic bases. Deposit withdrawals, loan funding and general corporate activity create the primary needs for liquidity for the Bank. Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, investments available for sale, loan repayments, loan sales, increases in deposits, and increases in borrowings from the FHLB of Atlanta secured with pledged loans and securities, and from correspondent banks under overnight federal funds credit lines and securities sold under repurchase agreements.
The Company (the holding company only) had sufficient cash and cash equivalents on hand at December 31, 2014 to provide for the Company’s anticipated obligations and service its debt for approximately two and a half years.
The investment portfolio at December 31, 2014 included securities with a par value of approximately $151.7 million with call features, whereby the issuers of such securities have the option to repay the securities before the contractual maturity dates.
The Bank has the ability to manage, within competitive and cost of funds constraints, increases in deposits within its market areas. The Bank utilizes CDARS and brokered deposits to supplement in-market deposit growth.
The Bank has established wholesale repurchase agreements with regional brokerage firms. The Bank can access this additional source of liquidity by pledging investment securities with the brokerage firms.
Liquidity is further enhanced by a line of credit with the FHLB of Atlanta of approximately $488.2 million, collateralized by FHLB stock, investment securities, qualifying residential one to four family first mortgage loans, qualifying multi-family first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. Based upon collateral pledged, as of December 31, 2014, the borrowing capacity under this line was $488.2 million, with $110.5 million available to be borrowed. The Bank provides various reports to the FHLB on a regular basis to maintain the availability of the credit line. Each borrowing request to the FHLB is initiated through an advance application that is subject to approval by the FHLB before funds are advanced under the line of credit. In addition to the credit line at the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling $4.3 million of which none was used and has federal funds lines of $89.8 million of which $29.5 million was outstanding at December 31, 2014.
As presented in the Consolidated Statement of Cash Flows, the Company generated $17.4 million in operating cash flow during 2014, compared to $22.5 million in 2013 and $23.5 million in 2012. Accretion on acquired loans was $5.7 million in 2014 compared to $783,000 in 2013 and none in 2012. There was a deferred income tax expense of $7.3 million in 2014, compared to a deferred income tax benefit of $3.3 million in 2013 and $2.5 million in 2012. The significant difference in 2012 between net income and operating cash flow is the result of provision for credit losses and writedowns on real estate acquired in settlement of loans.
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Cash used in investing activities in 2014 was $156.9 million, compared to cash used in investing activities of $60.7 million in 2013 and $27.4 million in 2012. Cash outflows for 2014 included a $101.6 million increase in the loan portfolio, including $75.7 million of credit relationships previously existing with the middle market team, compared to an increase of $141.3 million in 2013 and $56.3 million in 2012. Cash outflows for 2014 also included $111.5 million in purchases of securities, compared to $164.0 million in 2013 and $271.3 million in 2012. Cash inflows for 2014 included $35.8 million in proceeds from sales, maturities, prepayments and calls of investment securities, compared to $182.2 million in 2013 and $228.7 million in 2012. Cash inflows for 2014 also included $6.0 million in proceeds from sales of loans, compared to none in 2013 and $54.4 million in 2012.
Cash provided by financing activities was $140.4 million in 2014, compared to cash provided by financing activities of $32.0 million in 2013 and cash used in financing activities of $10.3 million in 2012. Cash inflows for 2014 included an increase of $5.8 million in deposits, compared to an increase of $53.3 million in deposits in 2013 and a net decrease in deposits of $86.2 million in 2012. During 2014, the Company had cash inflows of $147.7 million related to increased borrowing, compared to $25.7 million in 2013 and $26.3 million in 2012. In 2014, the Company had cash outflows of $15.0 million as a result of the redemption of the remaining 15,000 shares of preferred stock previously issued in connection with the U.S. Treasury’s TARP Program. In 2013 the Company had cash outflows of $37.5 million (including related expense of $100,000) as a result of the redemption of 37,372 shares of preferred stock and $7.8 million paid in connection with the repurchase of a stock warrant (the “Warrant”), both of which were previously issued in connection with the TARP Program. During 2012, the Company had a net cash inflow of $52.2 million from the issuance of preferred stock, which was subsequently converted to common stock.
Contractual Obligations and Commitments
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, which may or may not require future cash outflows. Payments for borrowings do not include interest. Payments related to leases and service contracts are based on actual payments specified in the underlying contracts. The following table reflects the material contractual obligations of the Company outstanding as of December 31, 2014.
Contractual Obligations
(dollars in thousands)
| Payments Due by Period | ||||||||||||||||||||
| Within One Year | One Year to Three Years | Three Years to Five Years | After Five Years | Total | ||||||||||||||||
| Federal funds purchased | $ | 29,500 | $ | - | $ | - | $ | - | $ | 29,500 | ||||||||||
| FHLB borrowings | 273,500 | 73,200 | - | - | 346,700 | |||||||||||||||
| Wholesale repurchase agreements | - | 21,000 | - | - | 21,000 | |||||||||||||||
| Subordinated debt | - | - | - | 15,500 | 15,500 | |||||||||||||||
| Junior subordinated notes | - | - | - | 25,774 | 25,774 | |||||||||||||||
| Operating lease obligations | 1,796 | 2,828 | 1,289 | 513 | 6,426 | |||||||||||||||
| Service contracts and purchase obligations | 6,363 | 4,124 | 870 | 218 | 11,575 | |||||||||||||||
| Other long-term liabilities | 2,041 | 490 | 587 | 2,230 | 5,348 | |||||||||||||||
| Total contractual cash obligations excluding deposits | 313,200 | 101,642 | 2,746 | 44,235 | 461,823 | |||||||||||||||
| Deposits | 1,746,863 | 68,755 | 16,921 | 25 | 1,832,564 | |||||||||||||||
| Total contractual cash obligations | $ | 2,060,063 | $ | 170,397 | $ | 19,667 | $ | 44,260 | $ | 2,294,387 | ||||||||||
Capital Resources
Banks, bank holding companies, and financial holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve has minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are required to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines.
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On November 30, 2012, the Company completed a private placement of Series B preferred stock and Series C preferred stock for an aggregate of $56.3 million. At a special meeting of shareholders on February 20, 2013, shareholders approved the conversion of up to 422,456 shares of Series B preferred stock and up to 140,217 shares of Series C preferred stock into shares of voting and nonvoting common stock, respectively, at a conversion rate of $4.40 per share. Articles of Amendment filed with the North Carolina Secretary of State on February 21, 2013, created a new class of nonvoting common stock designated “Class B common stock,” and redesignated the Company’s existing common stock as “Class A common stock.” The Class A common stock and the Class B common stock each have no par value per share. As a result, on February 22, 2013, the Series B preferred stock was converted into 9,601,262 shares of voting Class A common stock, and the Series C preferred stock was converted into 3,186,748 shares of nonvoting Class B common stock.
On May 15, 2013, the Company repurchased the Warrant issued and sold to the U.S. Treasury for its fair market value of $7,779,000. On June 3, 2013, the Company redeemed 37,372 of the Company’s 52,372 outstanding shares of Series A preferred stock at the liquidation price of $1,000 per share for a total of $37,372,000 plus $93,430 of accrued and unpaid dividends. On March 31, 2014, the Company redeemed all of its remaining 15,000 outstanding shares of Series A preferred stock at the liquidation price of $1,000 per share for a total of $15.0 million, plus $172,500 of accrued and unpaid dividends.
On March 14, 2014, the Company entered into a Subordinated Note Purchase Agreement with 14 accredited investors under which the Company issued an aggregate of $15.5 million of subordinated notes to the accredited investors, including several members of the Company’s Board of Directors. The subordinated notes have a maturity date of March 14, 2024 and bear interest, payable on the 1st of January and July of each year, commencing July 1, 2014, at a fixed interest rate of 7.25% per year. The subordinated notes are intended to qualify as Tier II capital for regulatory purposes.
On April 1, 2014, the Company completed its acquisition of CapStone, pursuant to which CapStone’s shareholders received 2.25 shares of the Company’s Class A common stock for each share of CapStone common stock. The Company issued 8,075,228 shares of Class A common stock (in exchange for 3,589,028 shares of CapStone common stock issued and outstanding as of the closing date) at a price of $7.14 per share, the closing stock price of the Class A common stock on March 31, 2014. The implied value of the consideration received by CapStone shareholders was $16.065 per share of CapStone common stock. The total purchase price was $62.3 million, including the conversion of 617,270 CapStone stock options having a fair value of $4.6 million. No cash was issued in the transaction other than an immaterial amount of cash paid in lieu of fractional shares.
As shown in Note 18 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K, the Company and the Bank both maintained capital levels exceeding the minimum levels required to be categorized as “well capitalized” for each of the three years presented.
In July 2013, the Federal Reserve approved a final rule implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The final rule revises minimum capital requirements and adjusts prompt corrective action thresholds. The final rule revises the regulatory capital elements, adds a new common equity Tier I capital ratio, and increases the minimum Tier I capital ratio requirement. The rule also permits certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income and implements a new capital conservation buffer. The final rule took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rule. The Company has performed a preliminary evaluation of the impact of the final rule on its capital levels and anticipates that the Company and the Bank will continue to have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies.
Lending Activities
General. The Bank offers a broad array of lending services, including construction, real estate, commercial and consumer loans, to small to medium-sized businesses, middle market businesses, real estate developers and retail clients that are located in or conduct a substantial portion of their business in the Bank’s market areas. The Bank’s total loans (excluding loans held for sale) at December 31, 2014 were $1.80 billion, or 71.6% of total assets. At December 31, 2014, the Bank had no large loan concentrations (exceeding 10% of its portfolio) in any particular industry, other than real estate. The Bank’s legal lending limit at December 31, 2014 was $43.1 million (absent fully marketable collateral), and the largest credit relationship was approximately $24.9 million.
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Loan Composition. The following table summarizes, at the dates indicated, the composition of the Bank’s loan portfolio and the related percentage composition (excluding loans held for sale).
Summary of Loan Portfolio
(dollars in thousands; excluding loans held for sale)
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||
| % Of | % Of | % Of | % Of | % Of | ||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 309,982 | $ | 302,976 | $ | 247,628 | $ | 269,972 | $ | 222,889 | ||||||||||||||||||||||||||||||
| Secured by other nonfarm nonresidential properties | 426,875 | 239,062 | 186,864 | 157,594 | 159,086 | |||||||||||||||||||||||||||||||||||
| Other commercial and industrial | 191,904 | 114,402 | 110,850 | 119,877 | 134,011 | |||||||||||||||||||||||||||||||||||
| Total Commercial | 928,761 | 51.5 | % | 656,440 | 46.3 | % | 545,342 | 47.2 | % | 547,443 | 45.6 | % | 515,986 | 40.9 | % | |||||||||||||||||||||||||
| Construction loans – 1 to 4 family residential | 43,681 | 20,582 | 13,206 | 7,781 | 16,736 | |||||||||||||||||||||||||||||||||||
| Other construction and land development | 124,428 | 94,814 | 62,460 | 81,630 | 122,382 | |||||||||||||||||||||||||||||||||||
| Total Real estate – construction | 168,109 | 9.3 | 115,396 | 8.1 | 75,666 | 6.6 | 89,411 | 7.4 | 139,118 | 11.0 | ||||||||||||||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 406,272 | 358,332 | 277,820 | 287,268 | 304,640 | |||||||||||||||||||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 228,704 | 213,112 | 200,465 | 209,634 | 219,557 | |||||||||||||||||||||||||||||||||||
| Loans secured by 5 or more family residential properties | 37,598 | 38,735 | 23,116 | 25,883 | 20,207 | |||||||||||||||||||||||||||||||||||
| Total Real estate – mortgage | 672,574 | 37.3 | 610,179 | 43.1 | 501,401 | 43.4 | 522,785 | 43.6 | 544,404 | 43.2 | ||||||||||||||||||||||||||||||
| Credit cards | 7,656 | 7,659 | 7,610 | 7,649 | 7,749 | |||||||||||||||||||||||||||||||||||
| Other revolving credit plans | 9,112 | 8,529 | 9,018 | 9,444 | 9,042 | |||||||||||||||||||||||||||||||||||
| Other consumer loans | 9,396 | 10,249 | 10,263 | 17,648 | 36,224 | |||||||||||||||||||||||||||||||||||
| Total Consumer | 26,164 | 1.4 | 26,437 | 1.9 | 26,891 | 2.3 | 34,741 | 2.9 | 53,015 | 4.2 | ||||||||||||||||||||||||||||||
| Loans to other depository institutions | - | - | - | - | 3,800 | |||||||||||||||||||||||||||||||||||
| All other loans | 8,798 | 8,251 | 6,121 | 5,690 | 4,262 | |||||||||||||||||||||||||||||||||||
| Total Other | 8,798 | 0.5 | 8,251 | 0.6 | 6,121 | 0.5 | 5,690 | 0.5 | 8,062 | 0.7 | ||||||||||||||||||||||||||||||
| Total | $ | 1,804,406 | 100.0 | % | $ | 1,416,703 | 100.0 | % | $ | 1,155,421 | 100.0 | % | $ | 1,200,070 | 100.0 | % | $ | 1,260,585 | 100.0 | % | ||||||||||||||||||||
The Company has no foreign loan activity.
Real estate loans. Loans secured by real estate totaled $1.58 billion, or 87.4% of total loans (excluding loans held for sale), at December 31, 2014. At year end 2014, the Bank had real estate loan relationships of various sizes ranging up to $16.0 million of outstanding balances and commitments up to $25.0 million, secured by office buildings, retail establishments, residential development and construction, warehouses, motels, restaurants and other types of property. Loan terms are typically limited to five years, with payments through the date of maturity generally based on a 15-20 year (15-30 year for owner-occupied single and multi-family properties) amortization schedule. Interest rates may be fixed or adjustable, based on market conditions, and the Bank generally charges an origination fee. Management has attempted to reduce credit risk in the real estate portfolio by emphasizing loans on properties where the loan to value ratio, established by independent appraisals, does not exceed 70% to 80%, and net projected cash flow available for debt service amounts to at least 120% to 135% of the debt service requirement. The Bank also generally requires personal guarantees and personal financial statements from the principal owners in such cases.
Real estate – mortgage.The Bank originates fixed and adjustable rate mortgages as well as Federal Housing Administration, Veterans Administration and U.S. Department of Agriculture government supported loans for resale into the secondary market. The Bank provides bank-held mortgage products to accommodate qualified borrowers who may or may not meet all the standards for a conventional secondary market mortgage. The Bank has little or no exposure to subprime lending. During 2014, the Bank originated $143.6 million of loans in these various categories. Also included in real estate mortgage loans are home equity revolving lines of credit, with $228.7 million outstanding as of December 31, 2014. On a quarterly basis, the Bank obtains current credit scores on all consumer purpose loans, including home equity revolving lines of credit, and using other factors such as past due counters, line utilization, and market area, the portfolio is subdivided for monitoring into those with high risk, medium risk, and low risk. The Bank recorded net chargeoffs from mortgage loans of $3.2 million during 2014, compared to $2.0 million in 2013 and $12.6 million in 2012.
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Real estate – construction loans. The Bank’s current lending strategy is to moderately increase exposure in this portfolio segment. The Bank expects that the majority of its new construction and development loans on commercial and residential projects will be in the range of $1.0 million to $5.0 million. At December 31, 2014 and 2013, the Bank held $168.1 million and $115.4 million, respectively, of such loans. To reduce credit risk associated with such loans, the Bank emphasizes properties with high quality credit anchor tenants and neighborhood centers that are substantially pre-leased, or residential projects that are substantially pre-sold and built in strong, proven markets. The loans on commercial projects must generally result in a loan to appraised value of 75% to 80% or less and a net cash flow to debt service of no less than 120% to 135%. The Bank typically requires a personal guarantee from the developer or builder. Loan terms are generally 12-18 months, although the Bank will make a “mini-permanent” loan for purposes of construction and development of up to a five year term. Rates can be either fixed or variable, and the Bank usually charges an origination fee. The Bank experienced net recoveries from real estate – construction loans of $0.5 million in 2014 and net chargeoffs of $0.8 million in 2013 and $8.4 million in 2012.
Commercial loans. The Bank makes loans for commercial purposes to various types of businesses. At December 31, 2014, the Bank held $928.8 million of commercial loans, or 51.5% of its total loan portfolio. Equipment loans are typically made on terms up to five years at fixed or variable rates, with the financed equipment pledged as collateral to the Bank. The Bank attempts to reduce its credit risk on these loans by limiting the loan to value percentage to 80%. Working capital loans are made on terms typically not exceeding one year. These loans may be secured or unsecured, but the Bank attempts to limit its credit risk by requiring the borrower to demonstrate its capacity to produce net cash flow available for debt service equal to 120% to 150% of its debt service requirements. The Bank experienced net chargeoffs from commercial loans of $0.1 million in 2014, $1.0 million in 2013, and $16.4 million in 2012.
Consumer loans.Using a centralized underwriting process, the Bank makes a variety of loans to individuals for personal and household purposes, including (i) secured and unsecured installment and term loans originated directly by the Bank; (ii) unsecured revolving lines of credit, and (iii) amortizing secured lot loans. Certain of the direct loans are secured by the borrowers’ residences. At December 31, 2014, the Bank held $26.2 million of consumer loans. During 2014, 2013, and 2012, the Bank experienced net consumer loan chargeoffs of $0.5 million, $0.7 million and $0.9 million, respectively.
Loan approval and review. When the aggregate outstanding loans to a single borrower or related entities exceed an individual officer’s lending authority, or the individual officer’s lending authority is not applicable to the contemplated transaction, the loan request must be considered and approved by an officer with a higher lending limit. All consumer purpose loan decisions are initiated through a centralized underwriting process. Commercial banking managers (“CBM”) can generally approve commercial relationships up to $1.0 million on a secured basis. If the lending request exceeds the CBM’s lending limit, the loan must be submitted to and approved by a senior credit officer. Generally, a senior credit officer has authority to approve commercial relationships up to $5.0 million on a secured basis. All loan relationships between $5.0 million and $7.5 million must be approved by the Chief Commercial Credit Officer (“CCCO”). All loans between $7.5 million and $12.5 million must be approved by the Chief Credit Officer (“CCO”). Loan relationships exceeding $12.5 million must be unanimously approved by a committee of the CCCO, the CCO, and the Bank’s Chief Executive Officer (“CEO”).
The Bank’s Loan Review Program is headed by the Loan Review Manager, who reports directly to the Credit Management Committee of the Bank’s Board of Directors. The Program includes the Annual Loan Review Coverage Plan which is approved by the Credit Management Committee and which stipulates a certain number of loan reviews to be completed by the Loan Review Manager and employees under his or her guidance. The Bank’s credit review system supplements its loan rating system, pursuant to which the Bank may place a loan on its criticized asset list or may classify a loan in one of various other classification categories. In addition, all loan officers are charged with the responsibility of reviewing their portfolios and making adjustments to the risk ratings as needed. The “Watch List Committee,” which includes the CCO, the Special Assets Manager and the Special Assets Officers, reviews all commercial loans graded special mention, substandard, doubtful and loss on a monthly basis, and provides a summary to the Credit Management Committee, also on a monthly basis.
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The Bank’s loan portfolio is analyzed on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. Past due loans are reviewed with varying frequency and at multiple levels. Its allowance for credit losses is also analyzed monthly by management. This analysis includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. A specified minimum percentage of loans in each adverse asset classification category, based on the probability of default and on the historical loss experience of the Bank in each such category, as well as other environmental factors such as the unemployment level or other economic conditions affecting that type of loan, are used to determine the adequacy of the Bank’s allowance for credit losses monthly. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. The provisions of Accounting Standards Codification (“ASC”) 310-10-35, “Receivables-Overall-Subsequent Measurement” are applied to individually significant loans. See Note 5 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Loan Portfolio – Maturities and Interest Rate Sensitivities
(dollars in thousands, excluding loans held for sale)
| Maturity | Maturity Greater Than One Year | |||||||||||||||||||||||
| One Year or Less | Over One Year to Five Years | Over Five Years | Total | Fixed Interest Rate | Floating or Adjustable Rate | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 33,896 | $ | 160,496 | $ | 115,590 | $ | 309,982 | $ | 255,860 | $ | 20,226 | ||||||||||||
| Secured by other nonfarm nonresidential properties | 16,415 | 292,514 | 117,946 | 426,875 | 290,635 | 119,825 | ||||||||||||||||||
| Other commercial and industrial | 42,157 | 116,749 | 32,998 | 191,904 | 100,122 | 49,625 | ||||||||||||||||||
| Total Commercial | 92,468 | 569,759 | 266,534 | 928,761 | 646,617 | 189,676 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | 40,550 | 2,852 | 279 | 43,681 | 3,131 | - | ||||||||||||||||||
| Other construction and land development | 15,669 | 92,709 | 16,050 | 124,428 | 55,226 | 53,533 | ||||||||||||||||||
| Total Real estate – construction | 56,219 | 95,561 | 16,329 | 168,109 | 58,357 | 53,533 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 27,792 | 82,510 | 295,970 | 406,272 | 222,929 | 155,551 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 3,176 | 34,181 | 191,347 | 228,704 | 624 | 224,904 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | 6,120 | 24,066 | 7,412 | 37,598 | 23,711 | 7,767 | ||||||||||||||||||
| Total Real estate – mortgage | 37,088 | 140,757 | 494,729 | 672,574 | 247,264 | 388,222 | ||||||||||||||||||
| Credit cards | 7,656 | - | - | 7,656 | - | - | ||||||||||||||||||
| Other revolving credit plans | 3,227 | 1,134 | 4,751 | 9,112 | 2,586 | 3,299 | ||||||||||||||||||
| Other consumer loans | 1,628 | 6,782 | 986 | 9,396 | 7,205 | 563 | ||||||||||||||||||
| Total Consumer | 12,511 | 7,916 | 5,737 | 26,164 | 9,791 | 3,862 | ||||||||||||||||||
| All other loans | 572 | 3,022 | 5,204 | 8,798 | 8,225 | 1 | ||||||||||||||||||
| Total Other | 572 | 3,022 | 5,204 | 8,798 | 8,225 | 1 | ||||||||||||||||||
| Total | $ | 198,858 | $ | 817,015 | $ | 788,533 | $ | 1,804,406 | $ | 970,254 | $ | 635,294 | ||||||||||||
Asset Quality
The Bank considers asset quality to be of primary importance and employs a formal internal loan review process to ensure adherence to its lending policy as approved by its Board of Directors. See “Lending Activities – Loan Approval and Review.” It is the responsibility of each commercial lending officer to assign an appropriate risk grade to every loan they originate. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, it is the lending officer’s responsibility to recommend appropriate changes in the borrower’s risk grade.
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The following table summarizes, by internally assigned risk grade, the risk grade for loans for which the bank has assigned a risk grade. The remainder of the loan portfolio consists of non risk graded homogeneous types of loans. The following table reflects $57.4 million of PCI loans at December 31, 2014, resulting from the acquisitions of Security Savings on October 1, 2013 and CapStone on April 1, 2014. Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit impaired. Loans – excluding PCI at December 31, 2014, includes $121.4 million of risk graded loans from the acquisitions that are not PCI.
Risk Profile by Internally Assigned Risk Grade
(dollars in thousands)
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||||||||||||
| Loans – excluding PCI | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Commercial | $ | 858,218 | $ | 18,578 | $ | 12,717 | $ | 969 | $ | 890,482 | $ | 592,221 | $ | 30,962 | $ | 15,044 | $ | 302 | $ | 638,529 | ||||||||||||||||||||
| Real estate – construction | 148,226 | 1,144 | 88 | 60 | 149,518 | 82,483 | 8,628 | 2,288 | - | 93,399 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 99,200 | 4,794 | 1,987 | - | 105,981 | 84,999 | 4,243 | 5,168 | - | 94,410 | ||||||||||||||||||||||||||||||
| Consumer | 928 | - | - | - | 928 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Other | 7,646 | 1,152 | - | - | 8,798 | 7,373 | - | - | - | 7,373 | ||||||||||||||||||||||||||||||
| Total | $ | 1,114,218 | $ | 25,668 | $ | 14,792 | $ | 1,029 | $ | 1,155,707 | $ | 767,076 | $ | 43,833 | $ | 22,500 | $ | 302 | $ | 833,711 | ||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||||||||||||
| PCI loans | Pass(1) | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Commercial | $ | 27,766 | $ | 5,345 | $ | 3,205 | $ | - | $ | 36,316 | $ | 5,451 | $ | 4,831 | $ | 7,031 | $ | 135 | $ | 17,448 | ||||||||||||||||||||
| Real estate – construction | 2,838 | 1,248 | 339 | - | 4,425 | 1,568 | 1,743 | 731 | 198 | 4,240 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 11,246 | 3,811 | 1,627 | - | 16,684 | 2,811 | 2,361 | 5,739 | 499 | 11,410 | ||||||||||||||||||||||||||||||
| Consumer | - | - | - | - | - | 2 | 1 | - | - | 3 | ||||||||||||||||||||||||||||||
| Other | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Total | $ | 41,850 | $ | 10,404 | $ | 5,171 | $ | - | $ | 57,425 | $ | 9,832 | $ | 8,936 | $ | 13,501 | $ | 832 | $ | 33,101 | ||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||||||||||||
| Total loans | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Commercial | $ | 885,984 | $ | 23,923 | $ | 15,922 | $ | 969 | $ | 926,798 | $ | 597,672 | $ | 35,793 | $ | 22,075 | $ | 437 | $ | 655,977 | ||||||||||||||||||||
| Real estate – construction | 151,064 | 2,392 | 427 | 60 | 153,943 | 84,051 | 10,371 | 3,019 | 198 | 97,639 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 110,446 | 8,605 | 3,614 | - | 122,665 | 87,810 | 6,604 | 10,907 | 499 | 105,820 | ||||||||||||||||||||||||||||||
| Consumer | 928 | - | - | - | 928 | 2 | 1 | - | - | 3 | ||||||||||||||||||||||||||||||
| Other | 7,646 | 1,152 | - | - | 8,798 | 7,373 | - | - | - | 7,373 | ||||||||||||||||||||||||||||||
| Total | $ | 1,156,068 | $ | 36,072 | $ | 19,963 | $ | 1,029 | $ | 1,213,132 | $ | 776,908 | $ | 52,769 | $ | 36,001 | $ | 1,134 | $ | 866,812 | ||||||||||||||||||||
| (1) | PCI loans in the Pass category are in the pre-watch risk grade, which is the lowest risk grade in the Pass category. |
Allocation of Allowance for Credit Losses(1)
(dollars in thousands)
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||
| % Of | % Of | % Of | % Of | % Of | ||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
| Commercial | $ | 11,155 | 50.4 | % | $ | 11,480 | 46.8 | % | $ | 12,314 | 46.2 | % | $ | 16,366 | 56.7 | % | $ | 14,788 | 51.4 | % | ||||||||||||||||||||
| Real estate – construction | 1,984 | 9.0 | 2,027 | 8.2 | 2,058 | 7.7 | 2,834 | 9.8 | 4,243 | 14.8 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 8,459 | 38.3 | 10,479 | 42.7 | 11,673 | 43.8 | 8,669 | 30.1 | 8,483 | 29.5 | ||||||||||||||||||||||||||||||
| Consumer | 421 | 1.9 | 469 | 1.9 | 466 | 1.8 | 898 | 3.1 | 1,202 | 4.2 | ||||||||||||||||||||||||||||||
| Other | 93 | 0.4 | 95 | 0.4 | 119 | 0.5 | 77 | 0.3 | 36 | 0.1 | ||||||||||||||||||||||||||||||
| Total | $ | 22,112 | 100.0 | % | $ | 24,550 | 100.0 | % | $ | 26,630 | 100.0 | % | $ | 28,844 | 100.0 | % | $ | 28,752 | 100.0 | % | ||||||||||||||||||||
| (1) | The allowance for credit losses has been allocated on an approximate basis. The allocation is not necessarily indicative of future losses. |
The Bank’s loan review program is designed to evaluate the credit risk in its loan portfolio. Through this loan review process, the Bank maintains an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. In establishing the appropriate classification for specific loans, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as special mention, substandard, doubtful or loss as described below, and reserves are allocated based on management’s judgment and historical experience.
| 48 |
Special Mention – These loans have potential weaknesses, which may, if not corrected or reversed, weaken the bank's credit position at some future date. The loans may not currently show problems due to the borrower(s)’ apparent ability to service the debt, but special circumstances surround the loans of which the bank and management should be aware. This category may also include loans where repayment has not been satisfactory, where constant attention is required to maintain a set repayment schedule, or where terms of a loan agreement have been violated but the borrower still appears to have sufficient financial strength to avoid a lower rating. It also includes new loans that significantly depart from established loan policy and loans to weak borrowers with a strong guarantor.
Substandard – These are loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management, such as unprofitable and/or undercapitalized businesses, inability to generate sufficient cash flow for debt reduction, deterioration of collateral and special problems arising from the particular condition of an industry. It also includes workout loans on a liquidation basis when a loss is not expected. Some of these loans are considered impaired.
Doubtful – These loans have all the weakness inherent in loans graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable. In some instances, the extent of the potential loss is not currently determinable. Most of these loans are considered impaired.
Loss – These loans are considered uncollectible and will be charged off immediately. These loans may have some recovery or salvage value but can no longer be considered active assets.
The process of determining the allowance for credit losses is driven by the risk grade system and the loss experience on non risk graded homogeneous types of loans. The allowance for credit losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. In determining the allowance for credit losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined to be impaired, the impairment is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral, less selling and other handling costs, for collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance.
Management believes the allowance for credit losses of $22.1 million at December 31, 2014 is adequate to cover inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting future operating results of the Bank.
| 49 |
The following table presents an analysis of the changes in the allowance for credit losses.
Analysis of Allowance for Credit Losses
(dollars in thousands)
| Beginning | Charge | Ending | ||||||||||||||||||
| Balance | Offs | Recoveries | Provision | Balance | ||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||||||
| Commercial | $ | 11,480 | $ | 1,411 | $ | 1,368 | $ | (282 | ) | $ | 11,155 | |||||||||
| Real estate – construction | 2,027 | 427 | 894 | (510 | ) | 1,984 | ||||||||||||||
| Real estate – mortgage | 10,479 | 4,607 | 1,433 | 1,154 | 8,459 | |||||||||||||||
| Consumer | 469 | 868 | 356 | 464 | 421 | |||||||||||||||
| Other | 95 | - | 36 | (38 | ) | 93 | ||||||||||||||
| Total | $ | 24,550 | $ | 7,313 | $ | 4,087 | $ | 788 | $ | 22,112 | ||||||||||
| PCI loans | ||||||||||||||||||||
| Commercial | $ | - | $ | 62 | $ | - | $ | 62 | $ | - | ||||||||||
| Real estate – construction | - | - | - | - | - | |||||||||||||||
| Real estate – mortgage | - | 33 | - | 33 | - | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Other | - | - | - | - | - | |||||||||||||||
| Total | $ | - | $ | 95 | $ | - | $ | 95 | $ | - | ||||||||||
| Total loans | ||||||||||||||||||||
| Commercial | $ | 11,480 | $ | 1,473 | $ | 1,368 | $ | (220 | ) | $ | 11,155 | |||||||||
| Real estate – construction | 2,027 | 427 | 894 | (510 | ) | 1,984 | ||||||||||||||
| Real estate – mortgage | 10,479 | 4,640 | 1,433 | 1,187 | 8,459 | |||||||||||||||
| Consumer | 469 | 868 | 356 | 464 | 421 | |||||||||||||||
| Other | 95 | - | 36 | (38 | ) | 93 | ||||||||||||||
| Total | $ | 24,550 | $ | 7,408 | $ | 4,087 | $ | 883 | $ | 22,112 | ||||||||||
| December 31, 2013 | ||||||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||||||
| Commercial | $ | 12,314 | $ | 2,212 | $ | 1,260 | $ | 118 | $ | 11,480 | ||||||||||
| Real estate – construction | 2,058 | 1,308 | 496 | 781 | 2,027 | |||||||||||||||
| Real estate – mortgage | 11,673 | 3,552 | 1,544 | 814 | 10,479 | |||||||||||||||
| Consumer | 466 | 1,116 | 389 | 730 | 469 | |||||||||||||||
| Other | 119 | 338 | 66 | 248 | 95 | |||||||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||||||
| PCI loans | ||||||||||||||||||||
| Commercial | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Real estate – construction | - | - | - | - | - | |||||||||||||||
| Real estate – mortgage | - | - | - | - | - | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Other | - | - | - | - | - | |||||||||||||||
| Total | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Total loans | ||||||||||||||||||||
| Commercial | $ | 12,314 | $ | 2,212 | $ | 1,260 | $ | 118 | $ | 11,480 | ||||||||||
| Real estate – construction | 2,058 | 1,308 | 496 | 781 | 2,027 | |||||||||||||||
| Real estate – mortgage | 11,673 | 3,552 | 1,544 | 814 | 10,479 | |||||||||||||||
| Consumer | 466 | 1,116 | 389 | 730 | 469 | |||||||||||||||
| Other | 119 | 338 | 66 | 248 | 95 | |||||||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||||||
| December 31, 2012 | ||||||||||||||||||||
| Commercial | $ | 16,366 | $ | 17,306 | $ | 879 | $ | 12,375 | $ | 12,314 | ||||||||||
| Real estate – construction | 2,834 | 8,774 | 423 | 7,575 | 2,058 | |||||||||||||||
| Real estate – mortgage | 8,669 | 13,337 | 766 | 15,575 | 11,673 | |||||||||||||||
| Consumer | 898 | 1,191 | 314 | 445 | 466 | |||||||||||||||
| Other | 77 | 3 | 122 | (77 | ) | 119 | ||||||||||||||
| Total | $ | 28,844 | $ | 40,611 | $ | 2,504 | $ | 35,893 | $ | 26,630 | ||||||||||
| December 31, 2011 | ||||||||||||||||||||
| Commercial | $ | 14,788 | $ | 5,045 | $ | 495 | $ | 6,128 | $ | 16,366 | ||||||||||
| Real estate – construction | 4,243 | 3,985 | 534 | 2,042 | 2,834 | |||||||||||||||
| Real estate – mortgage | 8,483 | 6,822 | 443 | 6,565 | 8,669 | |||||||||||||||
| Consumer | 1,202 | 1,358 | 362 | 692 | 898 | |||||||||||||||
| Other | 36 | 1,387 | 70 | 1,358 | 77 | |||||||||||||||
| Total | $ | 28,752 | $ | 18,597 | $ | 1,904 | $ | 16,785 | $ | 28,844 | ||||||||||
| December 31, 2010 | ||||||||||||||||||||
| Commercial | $ | 17,374 | $ | 9,052 | $ | 1,370 | $ | 5,096 | $ | 14,788 | ||||||||||
| Real estate – construction | 6,157 | 5,379 | 80 | 3,385 | 4,243 | |||||||||||||||
| Real estate – mortgage | 10,383 | 7,260 | 270 | 5,090 | 8,483 | |||||||||||||||
| Consumer | 1,871 | 2,829 | 647 | 1,513 | 1,202 | |||||||||||||||
| Other | 58 | 6,200 | 10 | 6,168 | 36 | |||||||||||||||
| Total | $ | 35,843 | $ | 30,720 | $ | 2,377 | $ | 21,252 | $ | 28,752 | ||||||||||
| 50 |
| As of or for the Years Ended | ||||||||||||||||||||
| December 31 | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Average loans held for investment | $ | 1,665,969 | $ | 1,243,269 | $ | 1,168,840 | $ | 1,267,601 | $ | 1,398,474 | ||||||||||
| Loans held for investment at December 31 | 1,804,406 | 1,416,703 | 1,155,421 | 1,200,070 | 1,332,928 | |||||||||||||||
| Net chargeoffs of loans to average loans held for investment | 0.20 | % | 0.38 | % | 3.26 | % | 1.32 | % | 2.03 | % | ||||||||||
| Allowance to loans held for investment | 1.23 | % | 1.73 | % | 2.30 | % | 2.40 | % | 2.16 | % | ||||||||||
| Allowance to nonperforming loans | 306.60 | % | 261.23 | % | 124.93 | % | 71.18 | % | 56.87 | % | ||||||||||
Commercial loans. All commercial loans within the portfolio are risk graded among nine risk grades based on management’s evaluation of the overall credit quality of the loan, including the payment history, the financial position of the borrower, the underlying collateral value, an internal credit risk assessment and examination results. As a result, the allowance is adjusted upon any migration of a loan to a higher or lower risk grade within the commercial loan portfolio. The reserve percentages utilized have been determined by management to be appropriate based on probability of default, historical loan loss levels and the risk for each corresponding risk grade.
Mortgage, home equity, and credit lines. Reserves are calculated on mortgage, home equity, and credit lines based on historical loss experience. The average rolling 20 quarter net loss percentage is calculated for each of these loan categories, and is multiplied by the dollar balance of loans in each of these categories to determine the required reserve.
Consumer loans. The consumer loans are pooled together to determine the reserve requirement. The average rolling 20 quarter net loss percentage is calculated for this loan category, and is multiplied by the dollar balance of retail loans to determine a required reserve.
Qualitative factors. Some of the qualitative factors considered by management when determining the appropriate level of the allowance for credit losses include: changes in lending policies and procedures, including underwriting standards and collection, charge off and recovery practices; the national and local economic and business conditions, including condition of various market segments; the nature and volume of the portfolio; the experience, ability and depth of lending management and staff; the volume, severity and trends of past due and classified loans and the volume of nonaccruals, TDRs and other loan modifications; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effects of external factors, such as competition and legal and regulatory requirements. In addition, economic conditions may be different than they appear, or qualitative factors estimating the impact of changes in lending staff personnel may be misstated.
Specific impairment.Management evaluates significant loans that are on nonaccrual or otherwise deemed impaired on an individual basis for impairment. The specific allowance is calculated based upon a review of these loans and the estimated losses at the balance sheet date. At December 31, 2014 and 2013, the recorded investment in loans specifically identified and evaluated for impairment was approximately $4.2 million and $5.9 million, respectively and the specific allowance for credit losses associated with those loans was approximately $905,000 and $772,000, respectively.
| 51 |
Provision for credit losses. The 2014 provision for credit losses totaled $883,000, compared to $2.7 million in 2013. As of December 31, 2014, nonperforming assets totaled $10.3 million, comprised of $7.2 million in nonperforming loans and $3.1 million in real estate acquired in settlement of loans. Those figures compare to $17.0 million in nonperforming assets, comprised of $9.4 million in nonperforming loans and $7.6 million in real estate acquired in settlement of loans, at the end of 2013. Net chargeoffs decreased in 2014 to $3.3 million, or 0.20% of average loans held for investment, compared with $4.8 million, or 0.38% of average loans held for investment, in the prior year.AtDecember 31, 2014 and 2013 the allowance for credit losses as a percentage of year end loans (excluding loans held for sale) was 1.23% and 1.73%, respectively.AtDecember 31, 2014 and 2013 the allowance for credit losses as a percentage of loansexcludingPCI loans and loans held for sale was 1.28% and 1.80%, respectively. The allowance for credit losses as a percentage of nonperforming loans was306.60%at year end 2014, compared to 261.23% atyear end 2013.
Nonperforming Assets
(dollars in thousands)
| At December 31 | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Commercial nonaccrual loans, not restructured | $ | 1,620 | $ | 2,542 | $ | 11,119 | $ | 15,773 | $ | 23,453 | ||||||||||
| Commercial nonaccrual loans, restructured | - | 294 | 1,788 | 7,489 | 11,190 | |||||||||||||||
| Non-commercial nonaccrual loans | 3,476 | 4,071 | 4,605 | 9,852 | 8,537 | |||||||||||||||
| Total nonaccrual loans | 5,096 | 6,907 | 17,512 | 33,114 | 43,180 | |||||||||||||||
| Troubled debt restructurings, accruing | 2,116 | 2,491 | 3,804 | 7,406 | 7,378 | |||||||||||||||
| Total nonperforming loans | 7,212 | 9,398 | 21,316 | 40,520 | 50,558 | |||||||||||||||
| Real estate acquired in settlement of loans | 3,057 | 7,620 | 5,355 | 30,587 | 26,718 | |||||||||||||||
| Total nonperforming assets | $ | 10,269 | $ | 17,018 | $ | 26,671 | 71,107 | $ | 77,276 | |||||||||||
| Restructured loans, performing(1) | $ | 1,151 | $ | 2,166 | $ | 1,220 | $ | 4,888 | $ | - | ||||||||||
| Nonperforming loans to loans held for investment at end of year | 0.40 | % | 0.66 | % | 1.84 | % | 3.38 | % | 4.01 | % | ||||||||||
| Nonperforming assets to total assets at end of year | 0.41 | % | 0.87 | % | 1.56 | % | 4.10 | % | 4.27 | % | ||||||||||
(1) Loans restructured in a previous year without an interest rate concession or forgiveness of debt that are performing in accordance with their modified terms.
Nonperforming assets include nonaccrual loans, restructured loans, and real estate acquired in settlement of loans. Loans are placed on nonaccrual status when: (i) management has concerns relating to the ability to collect the loan principal and interest and (ii) generally when such loans are 90 days or more past due. No assurance can be given, however, that economic conditions will not adversely affect borrowers and result in increased credit losses.
| 52 |
The Bank’s policy for impaired loan accounting subjects all loans to impairment recognition; however, loans with total credit exposure of less than $500,000 are not evaluated on an individual basis for level of impairment. The Bank generally considers loans 90 days or more past due, all nonaccrual loans and all troubled debt restructured (“TDR”) loans to be impaired. All TDR loans are evaluated on an individual basis for level of impairment. Loans specifically identified and evaluated for impairment totaled $4.2 million and $5.9 million at December 31, 2014 and December 31, 2013, respectively, as summarized in the following tables (dollars in thousands):
| Impaired Loans | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||||||
| Balance | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| At December 31, 2014 | ||||||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||
| Commercial | $ | 283 | $ | 283 | $ | - | $ | 342 | $ | 22 | ||||||||||
| Real estate – construction | 453 | 453 | - | 480 | 32 | |||||||||||||||
| Real estate – mortgage | 361 | 381 | - | 454 | 36 | |||||||||||||||
| Consumer | 17 | 17 | - | 18 | 1 | |||||||||||||||
| Total | 1,114 | 1,134 | - | 1,294 | 91 | |||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||
| Commercial | 1,087 | 1,194 | 588 | 1,409 | 78 | |||||||||||||||
| Real estate – construction | 148 | 148 | 53 | 186 | 11 | |||||||||||||||
| Real estate – mortgage | 1,878 | 1,878 | 264 | 1,913 | 71 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | 3,113 | 3,220 | 905 | 3,508 | 160 | |||||||||||||||
| Total impaired loans | ||||||||||||||||||||
| Commercial | 1,370 | 1,477 | 588 | 1,751 | 100 | |||||||||||||||
| Real estate – construction | 601 | 601 | 53 | 666 | 43 | |||||||||||||||
| Real estate – mortgage | 2,239 | 2,259 | 264 | 2,367 | 107 | |||||||||||||||
| Consumer | 17 | 17 | - | 18 | 1 | |||||||||||||||
| Total | $ | 4,227 | $ | 4,354 | $ | 905 | $ | 4,802 | $ | 251 | ||||||||||
| Impaired Loans | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||||||
| Balance | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| At December 31, 2013 | ||||||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||
| Commercial | $ | 1,210 | $ | 1,246 | $ | - | $ | 1,261 | $ | 30 | ||||||||||
| Real estate – construction | 480 | 480 | - | 514 | 34 | |||||||||||||||
| Real estate – mortgage | 338 | 369 | - | 358 | 7 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | 2,028 | 2,095 | - | 2,133 | 71 | |||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||
| Commercial | 738 | 846 | 68 | 747 | 42 | |||||||||||||||
| Real estate – construction | 152 | 152 | 8 | 189 | 12 | |||||||||||||||
| Real estate – mortgage | 2,961 | 2,961 | 696 | 3,025 | 107 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | 3,851 | 3,959 | 772 | 3,961 | 161 | |||||||||||||||
| Total impaired loans | ||||||||||||||||||||
| Commercial | 1,948 | 2,092 | 68 | 2,008 | 72 | |||||||||||||||
| Real estate – construction | 632 | 632 | 8 | 703 | 46 | |||||||||||||||
| Real estate – mortgage | 3,299 | 3,330 | 696 | 3,383 | 114 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | $ | 5,879 | $ | 6,054 | $ | 772 | $ | 6,094 | $ | 232 | ||||||||||
| 53 |
Investment Activities
Our investment portfolio plays a primary role in the management of liquidity and interest rate sensitivity and, therefore, is managed in the context of the overall balance sheet. In 2014, the securities portfolio generated approximately 16.9% of our interest income and served as a necessary source of liquidity.
Management attempts to deploy investable funds into instruments that are expected to increase the overall return of the portfolio given the current assessment of economic and financial conditions, while maintaining acceptable levels of credit, interest rate and liquidity risk, as well as capital usage and risk.
The following tables present the carrying values, fair values, unrealized gains and losses, and weighted average yields and durations of our investment portfolio at December 31, 2014, 2013 and 2012, as well as the interval of maturities or repricings at December 31, 2014.
Investment Securities
(dollars in thousands)
| December 31, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||
| Amortized | Market | Amortized | Market | Amortized | Market | |||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
| U.S. Treasury securities | $ | - | $ | - | $ | - | $ | - | $ | 10,000 | $ | 10,000 | ||||||||||||
| U.S. government agency securities | 82,371 | 80,565 | 77,823 | 71,341 | 67,090 | 67,037 | ||||||||||||||||||
| Agency mortgage backed securities | 73,653 | 76,260 | 46,656 | 48,054 | 21,607 | 23,760 | ||||||||||||||||||
| Collateralized mortgage obligations | 10,492 | 10,709 | 6,611 | 6,774 | 10,417 | 10,668 | ||||||||||||||||||
| Commercial mortgage backed securities | 33,646 | 34,825 | 38,367 | 39,388 | 43,046 | 45,282 | ||||||||||||||||||
| Corporate bonds | 152,253 | 155,389 | 105,772 | 109,266 | 150,589 | 155,487 | ||||||||||||||||||
| Covered bonds | 54,960 | 56,929 | 49,937 | 52,628 | 44,924 | 48,618 | ||||||||||||||||||
| Subordinated debt issues | 14,000 | 14,033 | 5,000 | 5,000 | - | - | ||||||||||||||||||
| State and municipal obligations | 35,081 | 36,347 | 16,985 | 16,750 | 17,978 | 18,712 | ||||||||||||||||||
| Total debt securities | 456,456 | 465,057 | 347,151 | 349,201 | 365,651 | 379,564 | ||||||||||||||||||
| Equity securities | 32,750 | 32,955 | 17,660 | 17,787 | 13,460 | 14,251 | ||||||||||||||||||
| Total securities | $ | 489,206 | $ | 498,012 | $ | 364,811 | $ | 366,988 | $ | 379,111 | $ | 393,815 | ||||||||||||
| 54 |
Investment securities at December 31 consisted of the following (dollars in thousands):
Securities Available for Sale
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Average Yield |
Average | |||||||||||||||||||
| 2014: | ||||||||||||||||||||||||
| U.S. government agency securities | $ | 49,599 | $ | - | $ | (1,485 | ) | $ | 48,114 | 2.05 | % | 6.80 | ||||||||||||
| Agency mortgage backed securities | 19,314 | 1,255 | - | 20,569 | 3.78 | 3.46 | ||||||||||||||||||
| Collateralized mortgage obligations | 10,492 | 217 | - | 10,709 | 3.81 | 3.72 | ||||||||||||||||||
| Commercial mortgage backed securities | 33,646 | 1,179 | - | 34,825 | 3.40 | 2.62 | ||||||||||||||||||
| Corporate bonds | 128,798 | 3,612 | (535 | ) | 131,875 | 3.78 | 3.50 | |||||||||||||||||
| Covered bonds | 49,976 | 2,017 | (73 | ) | 51,920 | 3.49 | 1.98 | |||||||||||||||||
| State and municipal obligations | 33,930 | 1,204 | (4 | ) | 35,130 | 5.17 | (2) | 3.75 | ||||||||||||||||
| Total debt securities | 325,755 | 9,484 | (2,097 | ) | 333,142 | 3.58 | (2) | 3.71 | ||||||||||||||||
| Federal Home Loan Bank stock | 17,712 | - | - | 17,712 | ||||||||||||||||||||
| Federal Reserve Bank stock | 5,702 | - | - | 5,702 | ||||||||||||||||||||
| Other equity securities | 9,336 | 361 | (156 | ) | 9,541 | |||||||||||||||||||
| Total | $ | 358,505 | $ | 9,845 | $ | (2,253 | ) | $ | 366,097 | |||||||||||||||
| 2013: | ||||||||||||||||||||||||
| U.S. government agency securities | $ | 49,094 | $ | - | $ | (4,562 | ) | $ | 44,532 | 2.07 | % | 7.67 | ||||||||||||
| Agency mortgage backed securities | 14,217 | 1,261 | - | 15,478 | 5.09 | 2.83 | ||||||||||||||||||
| Collateralized mortgage obligations | 6,611 | 163 | - | 6,774 | 5.63 | 2.60 | ||||||||||||||||||
| Commercial mortgage backed securities | 38,367 | 1,123 | (102 | ) | 39,388 | 3.32 | 3.36 | |||||||||||||||||
| Corporate bonds | 105,772 | 4,066 | (572 | ) | 109,266 | 3.83 | 4.13 | |||||||||||||||||
| Covered bonds | 49,937 | 2,924 | (233 | ) | 52,628 | 3.49 | 2.90 | |||||||||||||||||
| State and municipal obligations | 15,836 | 161 | (301 | ) | 15,696 | 6.46 | (2) | 7.94 | ||||||||||||||||
| Total debt securities | 279,834 | 9,698 | (5,770 | ) | 283,762 | 3.65 | (2) | 4.55 | ||||||||||||||||
| Federal Home Loan Bank stock | 9,988 | - | - | 9,988 | ||||||||||||||||||||
| Other equity securities | 7,672 | 596 | (469 | ) | 7,799 | |||||||||||||||||||
| Total | $ | 297,494 | $ | 10,294 | $ | (6,239 | ) | $ | 301,549 | |||||||||||||||
Securities Held to Maturity
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Average Yield | Average Duration(1) | |||||||||||||||||||
| 2014: | ||||||||||||||||||||||||
| U.S. government agency securities | $ | 32,772 | $ | 95 | $ | (416 | ) | $ | 32,451 | 2.16 | % | 4.75 | ||||||||||||
| Agency mortgage backed securities | 54,339 | 1,352 | - | 55,691 | 2.58 | 4.43 | ||||||||||||||||||
| Corporate bonds | 23,455 | 123 | (64 | ) | 23,514 | 2.72 | 4.19 | |||||||||||||||||
| Covered bonds | 4,984 | 25 | - | 5,009 | 2.08 | 3.92 | ||||||||||||||||||
| Subordinated debt issues | 14,000 | 50 | (17 | ) | 14,033 | 6.26 | 9.35 | |||||||||||||||||
| State and municipal obligations | 1,151 | 66 | - | 1,217 | 4.28 | (2) | 7.60 | |||||||||||||||||
| Total | $ | 130,701 | $ | 1,711 | $ | (497 | ) | $ | 131,915 | 2.89 | (2) | 5.00 | ||||||||||||
| 2013: | ||||||||||||||||||||||||
| U.S. government agency securities | $ | 28,729 | $ | - | $ | (1,920 | ) | $ | 26,809 | 2.13 | % | 6.73 | ||||||||||||
| Agency mortgage backed securities | 32,439 | 171 | (34 | ) | 32,576 | 2.64 | 5.90 | |||||||||||||||||
| Subordinated debt issues | 5,000 | - | - | 5,000 | 7.63 | 9.61 | ||||||||||||||||||
| State and municipal obligations | 1,149 | - | (95 | ) | 1,054 | 4.25 | (2) | 13.58 | ||||||||||||||||
| Total | $ | 67,317 | $ | 171 | $ | (2,049 | ) | $ | 65,439 | 2.81 | (2) | 6.66 | ||||||||||||
(1) Average remaining duration to maturity, in years.
(2) Fully taxable-equivalent basis.
| 55 |
Investment Securities Portfolio Maturity Schedule
(dollars in thousands)
| At December 31, 2014 | ||||||||
| Weighted | ||||||||
| Market | Average | |||||||
| Value | Yield(1) | |||||||
| U. S. government agencies and mortgage backed obligations: | ||||||||
| Within one year | $ | 503 | 0.21 | % | ||||
| One to five years | 12,381 | 1.92 | ||||||
| Five to ten years | 71,516 | 2.26 | ||||||
| After ten years | 117,959 | 3.07 | ||||||
| Total | 202,359 | 2.69 | ||||||
| State and municipal obligations: | ||||||||
| Within one year | - | - | ||||||
| One to five years | 1,268 | 6.37 | ||||||
| Five to ten years | 7,246 | 3.59 | ||||||
| After ten years | 27,833 | 5.48 | ||||||
| Total | 36,347 | 5.13 | ||||||
| Corporate bonds, covered bonds and subordinated debt issues: | ||||||||
| Within one year | 20,678 | 2.96 | ||||||
| One to five years | 135,905 | 3.58 | ||||||
| Five to ten years | 69,768 | 4.22 | ||||||
| After ten years | - | - | ||||||
| Total | 226,351 | 3.72 | ||||||
| Total debt securities | $ | 465,057 | 3.38 | % | ||||
| (1) | The yield related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%. |
See also Note 4 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
Information about the Company’s off-balance sheet risk exposure is presented in Note 11 and Note 22 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair values of financial instruments or other assets caused by changes in interest rates, currency exchange rates, or equity prices. Interest rate risk is the Company’s primary market risk and results from timing differences in the repricing of assets and liabilities, changes in relationships between rate indices, and the potential exercise of explicit or embedded options.
For a complete discussion on market risk and how the Company addresses this risk, see Item 7A of this Annual Report on Form 10-K.
Effects of Inflation
As discussed in Item 7A of this Annual Report on Form 10-K, the effect of interest rate movements in response to changes in the actual and perceived rates of inflation can materially impact the Bank operations, which rely on net interest margins as a major source of earnings. Noninterest expense, such as salaries and wages, occupancy and equipment are also negatively affected by inflation.
| 56 |
Application of Critical Accounting Policies
The Company's accounting policies are in accordance with accounting principles generally accepted in the United States and with general practice within the banking industry, and are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company's significant accounting policies are discussed in detail in Note 1 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
The preparation of the financial information contained in this Annual Report on Form 10-K requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s management evaluates these estimates on an ongoing basis.Business combinations and the acquisition method of accounting are discussed in Note 2 of the Notes to Consolidated Financial Statements. A summary of the allowance for credit losses, the most complex and subjective accounting policy of the Company, is discussed under the heading “Lending Activities” as well as in Note 5 of the Notes to Consolidated Financial Statements. Income taxes and any required valuation allowance against deferred tax assets are discussed in Note 10 of the Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Significant accounting policies are described in Note 1 to the audited consolidated financial statements. These policies may involve significant judgments and estimates that have a material impact on the carrying value of certain assets and liabilities. Different assumptions made in the application of these policies could result in material changes in our financial position and results of operations.
Business combinations and method of accounting for loans acquired
We account for acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 805,Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. No allowance for credit losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
The acquired loans were segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration since origination based on such factors as past due status, nonaccrual status and credit risk ratings. Acquired credit-impaired loans (PCI loans) are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30,Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants ("AICPA") Statement of Position (SOP) 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, such as acquired performing loans and lines of credit (consumer and commercial) are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated lives of the loans.
For further discussion of the Company's loan accounting and acquisitions, see Note 1—Summary of Significant Accounting Policies, Note 2— Business Combinations and Acquisitions and Note 5—Loans of the Notes to Consolidated Financial Statements.
| 57 |
Allowance for credit losses
The allowance for credit losses reflects the estimated losses that will result from the inability of the Bank's borrowers to make required loan payments. The allowance for credit losses is established for estimated credit losses through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The Company’s allowance for credit losses methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and chargeoff trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets, composition of the loan portfolio and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and five-year loss history are also incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina.
Allowance for credit losses for acquired loans
Subsequent to the acquisition date, decreases in cash flows expected to be received on FASB ASC Topic 310-30 acquired loans from the Company's initial estimates are recognized as impairment through the provision for credit losses.In pools where impairment has already been recognized, an increase in cash flows will result in a reversal of prior impairment.Probable and significant increases in cash flows (in a loan pool where an allowance for acquired credit losses was previously recorded) reduces the established allowance for that pool for acquired credit losses before recalculating the amount of accretable yield percentage for the loan pool in accordance with ASC 310-30. The increase in yield is recognized as interest income prospectively.
Acquired loans that are not subject to FASB ASC Topic 310-30 are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on contractual cash flows over the estimated life of the loan. The allowance for these loans will be determined in a similar manner to the non-acquired credit losses.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans, consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors, including length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for credit losses. Subsequent declines in the fair value of real estate acquired in settlement of loans below the new cost basis are recorded through valuation adjustments. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate. Management reviews the value of real estate acquired in settlement of loans periodically and adjusts the values as appropriate.
Income taxes and deferred tax assets
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available for sale securities, allowance for credit losses, writedowns of real estate acquired in settlement of loans, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded in situations where it is "more likely than not" that a deferred tax asset is not realizable. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Company and the Bank. In addition, we evaluate the need for income tax reserves related to uncertain income tax positions but had no such reserves at December 31, 2014 or 2013.
| 58 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Company’s primary market risk is considered to be the Bank’s interest rate risk which could potentially have the greatest impact on operating earnings. The Bank is not subject to other types of market risk, such as foreign currency exchange rate risk, commodity or equity price risk. Interest rate risk on our balance sheet arises from the maturity mismatch of interest-earning assets versus interest-bearing liabilities, as well as the potential for maturities to shorten or lengthen our interest-earning assets and interest-bearing liabilities. In addition, market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets, over interest expense on interest-bearing liabilities.
Interest rate risk management is a part of the Bank’s overall asset/liability management process. The primary oversight of asset/liability management rests with the Bank’s Asset and Liability Committee, which is comprised of the Bank’s CEO, Chief Financial Officer (“CFO”) and other senior executives. The Committee meets approximately monthly to review the asset/liability management activities of the Bank and monitor compliance with established policies. Activities of the Asset and Liability Committee are reported to the Audit and Risk Management Committees of the Company’s and the Bank’s Board of Directors.
The Bank uses several interest rate risk measurement tools provided by a national asset liability management consultant to help manage this risk. The Bank’s Asset/Liability Policy provides guidance for acceptable levels of interest rate risk and potential remediations. Management provides the consultant with key assumptions, which are used as inputs into the measurement tools. Following is a summary of two different tools management uses on a quarterly basis to monitor and manage interest rate risk.
Earnings Simulation Modeling.Net income is affected by changes in the level of interest rates, the shape of the yield curve and the general market pressures affecting current market interest rates at the time of simulation. Many interest rate indices do not move uniformly, creating certain disunities between them. For example, the spread between a 30 day prime-based asset and a 30 day FHLB of Atlanta advance may not be uniform over time. The earnings simulation model projects changes in net interest income caused by the effect of changes in interest rates on interest-earning assets and interest-bearing liabilities. Simulation results are measured as a percentage change in net interest income compared to the static-rate or “base case” scenario. The model uses the Company’s current balance sheet, but considers decreases in asset and liability volumes based on prepayment assumptions as well as rate changes. Rate changes are modeled gradually over a 12 month period, referred to as a “rate ramp,” and instantaneously, referred to as a “rate shock.” The model projects only changes in interest income and expense and does not project changes in noninterest income, noninterest expense, provision for credit losses or the impact of changing tax rates. At December 31, 2014, net interest income simulation showed a negative 0.76% change from the base case in a 200 basis point ramped rising rate environment and a negative 0.72% change from the base case in a 100 basis point ramped declining rate environment while showing a negative 2.24% change from the base case in a 200 basis point shocked rising rate environment and a negative 3.23% change from the base case in a 100 basis point shocked declining rate environment.
The following tables summarize the results of the Company’s income simulation model as of December 31, 2014.
| “Rate Ramp” | ||||||||
| Change in Net Interest Income | ||||||||
| Year 1 | Year 2 | |||||||
| Change in Market Interest Rates: | ||||||||
| 200 basis point “ramped" increase | (0.76 | )% | (0.67 | )% | ||||
| Base case – no change | - | (1.27 | )% | |||||
| 100 basis point “ramped” decrease | (0.72 | )% | (7.02 | )% | ||||
| 59 |
| “Rate Shock” | ||||||||
| Change in Net Interest Income | ||||||||
| Year 1 | Year 2 | |||||||
| Change in Market Interest Rates: | ||||||||
| 200 basis point “shocked” increase | (2.24 | )% | 0.99 | % | ||||
| Base case – no change | - | (1.27 | )% | |||||
| 100 basis point “shocked” decrease | (3.23 | )% | (9.27 | )% | ||||
The projected changes in net interest income are within the Board of Directors’ guidelines in a 200 basis point increasing or 100 basis point decreasing interest rate environment; however, management continually monitors signs of elevated risks and takes certain actions to limit these risks.
Net Portfolio Value Analysis.Net portfolio value (“NPV”) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 200 basis point increase or decrease in market interest rates with no effect given to any actions management might take to counter the effect of that interest rate movement.
The following is a summary of the results of the report compiled by the Company’s outside consultant using data and assumptions management provided as of December 31, 2014.
| Estimated Change in Net Portfolio Value | ||||||||
| Amount in 000s | Percent | |||||||
| Change in Market Interest Rates: | ||||||||
| 200 basis point increase | $ | (18,208 | ) | (7.51 | )% | |||
| Base case – no change | - | - | ||||||
| 100 basis point decrease | $ | (15,174 | ) | (6.26 | )% | |||
The preceding table indicates that, at December 31, 2014, in the event of a 200 basis point increase in prevailing market interest rates, NPV would be expected to decrease by $18.2 million, or 7.51% of the base case scenario value of $242.6 million. In the event of a decrease in prevailing market rates of 100 basis points, NPV would be expected to decline by $15.2 million, or 6.26% of the base case scenario value. The projected changes in NPV are within the Board of Directors’ guidelines in a 200 basis point increasing or 100 basis point decreasing interest rate environment; however, management continually monitors signs of elevated risks and takes certain actions to limit these risks.
A primary objective of interest rate sensitivity management is to ensure the stability and quality of the Company’s primary earnings component, net interest income. This process involves monitoring the Company’s balance sheet in order to determine the potential impact that changes in the interest rate environment may have on net interest income. Rate sensitive assets and liabilities have interest rates that are subject to change within a specific time period, due to either maturity or to contractual agreements which allow the instruments to reprice prior to maturity. Interest rate sensitivity management seeks to ensure that both assets and liabilities react to changes in interest rates within a similar time period, thereby minimizing the risk to net interest income.
Over the past several years, the Company’s balance sheet has been consistently slightly “asset sensitive,” i.e. should interest rates decline, the Company’s assets will reprice faster than its liabilities, resulting in a declining net interest margin and less net interest income. In order to mitigate its exposure in the event the interest rate curve flattens over the next three years, in August and November, 2014, the Bank entered into interest rate swaps totaling $100 million notional amount that qualify as cash flow hedges under GAAP. These are designated as cash flow hedges of the interest rate risk associated with the benchmark rate of the 30-day LIBOR attributable to the forecasted interest payments received from the 30-day LIBOR loan portfolio and investment securities (the hedged forecasted transaction). For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statements of income. The Bank’s interest rate swaps have been fully effective since inception. Changes in the fair value of the interest rate swaps, therefore, have had no impact on net income. In addition, as of December 31, 2014, the Bank had two other interest rate swap contracts that were classified as non-designated hedges executed with commercial borrowers to allow the customers to pay a fixed rate of interest to the Bank. These interest rate swaps were simultaneously hedged by executing offsetting interest rate swaps with a derivatives dealer to mitigate the net risk exposure to the Bank resulting from the transactions and allow the Bank to receive a variable rate of interest. (See Note 22 of the Notes to Consolidated Financial Statements.)
| 60 |
Interest Sensitivity Analysis
At December 31, 2014
(dollars in thousands, except ratios)
| 1 – 90 Day Sensitive | 91 – 365 Day Sensitive | Total Sensitive Within One Year | Total Sensitive Over One Year | Total | ||||||||||||||||
| Interest earning assets: | ||||||||||||||||||||
| Loans (excluding held for sale), net of unearned income | $ | 532,540 | $ | 177,598 | $ | 710,138 | $ | 1,094,268 | $ | 1,804,406 | ||||||||||
| U. S. government agencies and mortgage backed obligations(1) | 503 | - | 503 | 199,659 | 200,162 | |||||||||||||||
| State and municipal obligations(1) | - | - | - | 35,081 | 35,081 | |||||||||||||||
| Corporate bonds, covered bonds and subordinated debt issues(1) | 23,982 | 9,965 | 33,947 | 187,266 | 221,213 | |||||||||||||||
| Other investment securities(1) | 4,936 | - | 4,936 | 27,814 | 32,750 | |||||||||||||||
| Investment certificates of deposit | 292 | 7,119 | 7,411 | 8,221 | 15,632 | |||||||||||||||
| Overnight funds | 1,499 | - | 1,499 | - | 1,499 | |||||||||||||||
| Total interest earning assets | 563,752 | 194,682 | 758,434 | 1,552,309 | 2,310,743 | |||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||
| NOW | 509,450 | - | 509,450 | - | 509,450 | |||||||||||||||
| MMI | 386,733 | - | 386,733 | - | 386,733 | |||||||||||||||
| Savings | 67,639 | - | 67,639 | - | 67,639 | |||||||||||||||
| Time deposits | 227,100 | 239,009 | 466,109 | 83,306 | 549,415 | |||||||||||||||
| Federal funds purchased | 29,500 | 29,500 | 29,500 | |||||||||||||||||
| FHLB borrowings | 250,700 | 96,000 | 346,700 | - | 346,700 | |||||||||||||||
| Wholesale repurchase agreements | - | - | - | 21,000 | 21,000 | |||||||||||||||
| Subordinated debt | - | - | - | 15,500 | 15,500 | |||||||||||||||
| Junior subordinated notes | 25,774 | - | 25,774 | - | 25,774 | |||||||||||||||
| Total interest bearing liabilities | 1,496,896 | 335,009 | 1,831,905 | 119,806 | 1,951,711 | |||||||||||||||
| Interest sensitivity gap | $ | (933,144 | ) | $ | (140,327 | ) | $ | (1,073,471 | ) | $ | 1,432,503 | $ | 359,032 | |||||||
| Ratio of interest sensitive assets to liabilities | 0.38 | 0.58 | 0.41 | 12.96 | 1.18 | |||||||||||||||
(1) At amortized cost.
The measurement of the Company’s interest rate sensitivity, or “gap,” is a technique traditionally used in asset/liability management. The interest sensitivity gap is the difference between repricing assets and repricing liabilities for a particular time period. The table, “Interest Sensitivity Analysis,” indicates a ratio of rate sensitive assets to rate sensitive liabilities within one year at December 31, 2014, to be 0.41. This ratio indicates that a larger balance of liabilities, compared to assets, could potentially reprice during the upcoming 12 month period. Included in rate sensitive liabilities are certain deposit accounts (Negotiable Order of Withdrawal (“NOW”), Money Market Investment (“MMI”), and savings) that are subject to immediate withdrawal and repricing. These balances are presented in the category that management believes best identifies their actual repricing patterns. The overall risk to net interest income is also influenced by the Bank’s level of variable rate loans. These are loans with a contractual interest rate tied to an interest rate index, such as the prime rate. A portion of these loans may reprice on multiple occasions during a one-year period due to changes in the underlying interest rate index. Approximately 41.9% of the total loan portfolio at December 31, 2014 had a variable interest rate and reprices in accordance with the underlying rate index subject to terms of individual note agreements.
| 61 |
The table, “Market Sensitive Financial Instruments Maturities,” presents the Company’s financial instruments that are considered to be sensitive to changes in interest rates, categorized by contractual maturities, average interest rates and estimated fair values as of December 31, 2014.
Market Sensitive Financial Instruments Maturities
(dollars in thousands)
| Contractual Maturities as of December 31, 2014 | ||||||||||||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | After Five Years | Total | ||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||
| Debt securities at amortized cost | $ | 20,960 | $ | 39,966 | $ | 36,052 | $ | 3,778 | $ | 66,447 | $ | 289,253 | $ | 456,456 | ||||||||||||||
| Loans: | ||||||||||||||||||||||||||||
| Fixed rate | 77,447 | 75,849 | 142,014 | 185,631 | 181,104 | 385,656 | 1,047,701 | |||||||||||||||||||||
| Variable rate | 121,411 | 38,745 | 38,852 | 77,690 | 77,130 | 402,877 | 756,705 | |||||||||||||||||||||
| Total | $ | 219,818 | $ | 154,560 | $ | 216,918 | $ | 267,099 | $ | 324,681 | $ | 1,077,786 | $ | 2,260,862 | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||||
| NOW | $ | 509,450 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 509,450 | ||||||||||||||
| MMI | 386,733 | - | - | - | - | - | 386,733 | |||||||||||||||||||||
| Savings | 67,639 | - | - | - | - | - | 67,639 | |||||||||||||||||||||
| Time deposits | 463,714 | 55,703 | 13,052 | 12,341 | 4,580 | 25 | 549,415 | |||||||||||||||||||||
| Federal funds purchased | 29,500 | - | - | - | - | - | 29,500 | |||||||||||||||||||||
| FHLB borrowing | 273,500 | 73,200 | - | - | - | - | 346,700 | |||||||||||||||||||||
| Wholesale repurchase Agreements | - | 21,000 | - | - | - | - | 21,000 | |||||||||||||||||||||
| Subordinated debt | - | - | - | - | - | 15,500 | 15,500 | |||||||||||||||||||||
| Junior subordinated notes | - | - | - | - | - | 25,774 | 25,774 | |||||||||||||||||||||
| Total | $ | 1,730,536 | $ | 149,903 | $ | 13,052 | $ | 12,341 | $ | 4,580 | $ | 41,299 | $ | 1,951,711 | ||||||||||||||
Market Sensitive Financial Instruments Maturities (continued)
(dollars in thousands)
| Average Interest Rate | Estimated Fair Value | |||||||
| Financial assets: | ||||||||
| Debt and equity securities | 3.32 | % | $ | 498,012 | ||||
| Loans: | ||||||||
| Fixed rate | 4.52 | 1,027,980 | ||||||
| Variable rate | 3.69 | 756,497 | ||||||
| Total loans | 1,784,477 | |||||||
| Total | $ | 2,282,489 | ||||||
| Financial liabilities: | ||||||||
| NOW | 0.23 | $ | 509,450 | |||||
| MMI | 0.22 | 386,733 | ||||||
| Savings | 0.05 | 67,639 | ||||||
| Time deposits | 0.46 | 551,184 | ||||||
| Total interest-bearing deposits | 1,515,006 | |||||||
| Federal funds purchased | 0.74 | 29,500 | ||||||
| FHLB borrowing | 0.27 | 346,712 | ||||||
| Wholesale repurchase agreements | 4.03 | 22,252 | ||||||
| Subordinated debt | 7.25 | 15,978 | ||||||
| Junior subordinated notes | 1.71 | 12,515 | ||||||
| Total | $ | 1,942,200 | ||||||
| 62 |
| Item 8. | Financial Statements and Supplementary Data |
QUARTERLY FINANCIAL INFORMATION– UNAUDITED
The following table sets forth, for the periods indicated, certain of the Company’s consolidated quarterly financial information. This information is derived from the Company’s unaudited financial statements, which include all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with the Company’s consolidated financial statements included elsewhere in this report. The results for any quarter are not necessarily indicative of results for any future period.
Quarterly Financial Data
(dollars in thousands, except per share data)
| 2014 | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | ||||||||||||
| Interest income | $ | 23,250 | $ | 22,379 | $ | 22,123 | $ | 18,064 | ||||||||
| Interest expense | 1,946 | 1,903 | 1,868 | 1,428 | ||||||||||||
| Net interest income | 21,304 | 20,476 | 20,255 | 16,636 | ||||||||||||
| Provision for credit losses | 50 | 89 | 600 | 144 | ||||||||||||
| Net interest income after provision for credit losses | 21,254 | 20,387 | 19,655 | 16,492 | ||||||||||||
| Noninterest income | 4,077 | 4,104 | 4,206 | 4,326 | ||||||||||||
| Noninterest expense | 18,608 | 16,588 | 22,043 | 15,467 | ||||||||||||
| Income before income taxes | 6,723 | 7,903 | 1,818 | 5,351 | ||||||||||||
| Income tax expense | 2,458 | 2,804 | 657 | 1,900 | ||||||||||||
| Net income | 4,265 | 5,099 | 1,161 | 3,451 | ||||||||||||
| Dividends and accretion on preferred stock | - | - | - | (337 | ) | |||||||||||
| Net income available to common shareholders | $ | 4,265 | $ | 5,099 | $ | 1,161 | $ | 3,114 | ||||||||
| Income per common share: | ||||||||||||||||
| Basic | $ | 0.11 | $ | 0.14 | $ | 0.03 | $ | 0.11 | ||||||||
| Diluted | $ | 0.11 | $ | 0.14 | $ | 0.03 | $ | 0.11 | ||||||||
| 2013 | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | ||||||||||||
| Interest income | $ | 18,547 | $ | 17,142 | $ | 16,706 | $ | 16,424 | ||||||||
| Interest expense | 1,634 | 1,346 | 1,296 | 1,367 | ||||||||||||
| Net interest income | 16,913 | 15,796 | 15,410 | 15,057 | ||||||||||||
| Provision for credit losses | 642 | 33 | 1,037 | 979 | ||||||||||||
| Net interest income after provision for credit losses | 16,271 | 15,763 | 14,373 | 14,078 | ||||||||||||
| Noninterest income | 4,069 | 4,497 | 4,215 | 4,673 | ||||||||||||
| Noninterest expense | 18,390 | 14,411 | 13,563 | 14,020 | ||||||||||||
| Income before income taxes | 1,950 | 5,849 | 5,025 | 4,731 | ||||||||||||
| Income tax expense (benefit) | 524 | 2,861 | (6,601 | ) | - | |||||||||||
| Net income | 1,426 | 2,988 | 11,626 | 4,731 | ||||||||||||
| Dividends and accretion on preferred stock | (237 | ) | (208 | ) | (679 | ) | (730 | ) | ||||||||
| Net income available to common shareholders | $ | 1,189 | $ | 2,780 | $ | 10,947 | $ | 4,001 | ||||||||
| Income per common share: | ||||||||||||||||
| Basic | $ | 0.04 | $ | 0.10 | $ | 0.38 | $ | 0.19 | ||||||||
| Diluted | $ | 0.04 | $ | 0.10 | $ | 0.38 | $ | 0.13 | ||||||||
| 63 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
NewBridge Bancorp
We have audited the accompanying consolidated balance sheets of NewBridge Bancorp and Subsidiary (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NewBridge Bancorp and Subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NewBridge Bancorp and Subsidiary’s internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)and our report dated March 12, 2015, expressed an unqualified opinion thereon.
/s/ DIXON HUGHES GOODMAN LLP
Raleigh, North Carolina
March 12, 2015
| 64 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
NewBridge Bancorp
We have audited NewBridge Bancorp and Subsidiary’s (the “Company”) internal control overfinancial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control overfinancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, the Company acquired CapStone Bank (CapStone) on April 1, 2014, and management excluded from its assessment of internal control over financial reporting as of December 31, 2014 CapStone’s internal control over financial reporting associated with 8.4% of consolidated revenue (total interest income and total noninterest income) for the year ended December 31, 2014 and 9.3% of consolidated total assets as of December 31, 2014. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of CapStone.
In our opinion, NewBridge Bancorp and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of NewBridge Bancorp and Subsidiary as of December 31, 2014 and 2013, and for each of the years in the three-year period ended December 31, 2014, and our report dated March 12, 2015, expressed an unqualified opinion thereon.
/s/ DIXON HUGHES GOODMAN LLP
Raleigh, North Carolina
March 12, 2015
| 65 |
NewBridge Bancorp and Subsidiary
Consolidated Balance Sheets
December 31, 2014 and 2013
(dollars in thousands, except per share data)
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | 32,870 | $ | 29,598 | ||||
| Interest-bearing bank balances | 1,499 | 3,915 | ||||||
| Investment certificates of deposit | 15,632 | - | ||||||
| Loans held for sale | 6,181 | 3,530 | ||||||
| Available for sale investment securities | 366,097 | 301,549 | ||||||
| Held to maturity investment securities (market value of $131,915 and $65,439 at December 31, 2014 and December 31, 2013, respectively) | 130,701 | 67,317 | ||||||
| Loans | 1,804,406 | 1,416,703 | ||||||
| Less allowance for credit losses | (22,112 | ) | (24,550 | ) | ||||
| Net loans | 1,782,294 | 1,392,153 | ||||||
| Premises and equipment | 44,822 | 44,108 | ||||||
| Goodwill and other intangible assets | 26,679 | 8,388 | ||||||
| Real estate acquired in settlement of loans | 3,057 | 7,620 | ||||||
| Bank-owned life insurance | 52,891 | 48,161 | ||||||
| Deferred tax assets | 33,133 | 36,779 | ||||||
| Other assets | 24,376 | 22,114 | ||||||
| Total assets | $ | 2,520,232 | $ | 1,965,232 | ||||
| Liabilities | ||||||||
| Noninterest-bearing deposits | $ | 319,327 | $ | 240,979 | ||||
| NOW deposits | 509,450 | 439,624 | ||||||
| Savings and money market deposits | 454,372 | 421,527 | ||||||
| Time deposits | 549,415 | 451,866 | ||||||
| Total deposits | 1,832,564 | 1,553,996 | ||||||
| Federal Home Loan Bank borrowings | 346,700 | 170,000 | ||||||
| Other borrowings | 91,774 | 59,774 | ||||||
| Accrued expenses and other liabilities | 17,839 | 14,670 | ||||||
| Total liabilities | 2,288,877 | 1,798,440 | ||||||
| Shareholders’ Equity | ||||||||
| Preferred stock – Authorized 30,000,000 shares no par value | - | 15,000 | ||||||
| Series A preferred stock – Liquidation preference $1,000 per share; issued and outstanding – none at 12/31/14 and 15,000 at 12/31/2013 | ||||||||
| Common stock | 275,615 | 210,297 | ||||||
| Class A, no par value – Authorized 90,000,000 shares; issued and outstanding – 34,008,795 at 12/31/2014 and 25,291,568 at 12/31/2013 | ||||||||
| Class B, no par value – Authorized 10,000,000 shares; issued and outstanding – 3,186,748 at 12/31/2014 and 12/31/2013 | ||||||||
| Directors’ deferred compensation plan | (324 | ) | (468 | ) | ||||
| Accumulated deficit | (43,241 | ) | (56,880 | ) | ||||
| Accumulated other comprehensive loss | (695 | ) | (1,157 | ) | ||||
| Total shareholders’ equity | 231,355 | 166,792 | ||||||
| Total liabilities and shareholders’ equity | $ | 2,520,232 | $ | 1,965,232 | ||||
See notes to consolidated financial statements
| 66 |
NewBridge Bancorp and Subsidiary
Consolidated Statements of Income
Years ended December 31, 2014, 2013 and 2012
(dollars in thousands, except per share data)
| 2014 | 2013 | 2012 | ||||||||||
| Interest Income | ||||||||||||
| Interest and fees on loans | $ | 71,230 | $ | 56,617 | $ | 57,676 | ||||||
| Interest on taxable investment securities | 13,473 | 11,434 | 12,614 | |||||||||
| Interest on tax-exempt investment securities | 995 | 745 | 750 | |||||||||
| Interest-bearing bank balances, investment certificates of deposit and federal funds sold | 118 | 23 | 40 | |||||||||
| Total Interest Income | 85,816 | 68,819 | 71,080 | |||||||||
| Interest Expense | ||||||||||||
| Deposits | 4,000 | 3,116 | 5,135 | |||||||||
| Federal Home Loan Bank borrowings | 801 | 1,195 | 1,012 | |||||||||
| Other borrowings | 2,344 | 1,332 | 1,367 | |||||||||
| Total Interest Expense | 7,145 | 5,643 | 7,514 | |||||||||
| Net Interest Income | 78,671 | 63,176 | 63,566 | |||||||||
| Provision for credit losses | 883 | 2,691 | 35,893 | |||||||||
| Net interest income after provision for credit losses | 77,788 | 60,485 | 27,673 | |||||||||
| Noninterest Income | ||||||||||||
| Retail banking | 10,424 | 10,228 | 9,739 | |||||||||
| Wealth management services | 2,919 | 2,570 | 2,349 | |||||||||
| Mortgage banking services | 870 | 1,644 | 2,636 | |||||||||
| Gain on sales of investment securities | - | 736 | 3 | |||||||||
| Bank-owned life insurance | 1,385 | 1,429 | 1,494 | |||||||||
| Other | 1,115 | 847 | 667 | |||||||||
| Total Noninterest Income | 16,713 | 17,454 | 16,888 | |||||||||
| Noninterest Expense | ||||||||||||
| Personnel | 36,617 | 32,104 | 29,354 | |||||||||
| Occupancy | 4,910 | 4,208 | 5,171 | |||||||||
| Furniture and equipment | 3,806 | 3,501 | 3,335 | |||||||||
| Technology and data processing | 4,727 | 4,192 | 4,063 | |||||||||
| Legal and professional | 2,994 | 2,683 | 3,029 | |||||||||
| FDIC insurance | 1,602 | 1,565 | 1,770 | |||||||||
| Real estate acquired in settlement of loans | 870 | (126 | ) | 15,726 | ||||||||
| Acquisition-related | 5,081 | 2,232 | - | |||||||||
| Other operating | 12,099 | 10,025 | 9,965 | |||||||||
| Total Noninterest Expense | 72,706 | 60,384 | 72,413 | |||||||||
| Income (Loss) Before Income Taxes | 21,795 | 17,555 | (27,852 | ) | ||||||||
| Income Tax Expense (Benefit) | 7,819 | (3,216 | ) | (2,598 | ) | |||||||
| Net Income (Loss) | 13,976 | 20,771 | (25,254 | ) | ||||||||
| Dividends and accretion on preferred stock | (337 | ) | (1,854 | ) | (2,918 | ) | ||||||
| Net Income (Loss) Available to Common Shareholders | $ | 13,639 | $ | 18,917 | $ | (28,172 | ) | |||||
| Income (Loss) Per Share – Basic | $ | 0.39 | $ | 0.71 | $ | (1.80 | ) | |||||
| Income (Loss) Per Share – Diluted | $ | 0.38 | $ | 0.65 | $ | (1.80 | ) | |||||
| Weighted Average Shares Outstanding | ||||||||||||
| Basic | 34,944,660 | 26,643,820 | 15,655,868 | |||||||||
| Diluted | 35,466,430 | 29,070,127 | 15,655,868 | |||||||||
See notes to consolidated financial statements
| 67 |
NewBridge Bancorp and Subsidiary
Consolidated Statements of Comprehensive Income
Years ended December 31, 2014, 2013 and 2012
(dollars in thousands, except per share data)
| 2014 | 2013 | 2012 | ||||||||||
| Net Income (Loss) | $ | 13,976 | $ | 20,771 | $ | (25,254 | ) | |||||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||||||
| Unrealized gains (losses) on securities: | ||||||||||||
| Unrealized holding gains (losses) arising during period, net of tax of $1,327, $(3,937) and $5,488, respectively | 2,210 | (5,975 | ) | 8,411 | ||||||||
| Reclassification adjustment for (gains) losses included in net income, net of tax of $0, $291 and $1, respectively | - | (445 | ) | (2 | ) | |||||||
| Unrealized gains (losses) of cash flow hedges: | ||||||||||||
| Unrecognized holding gains (losses) arising during period, net of tax of $(20), $0 and $0, respectively | (32 | ) | - | - | ||||||||
| Reclassification adjustment for (gains) losses included in net income, net of tax of $(81), $0 and $0, respectively | (131 | ) | - | - | ||||||||
| Defined benefit pension plans: | ||||||||||||
| Pension obligation, net of tax of $(1,054), $1,660 and $(456), respectively | (1,700 | ) | 2,717 | (694 | ) | |||||||
| Amortization of net loss, net of tax of $71, $245, and $225, respectively | 115 | 397 | 340 | |||||||||
| Adjustment to deferred tax asset resulting from North Carolina State income tax rate reduction | - | (135 | ) | - | ||||||||
| Total other comprehensive income (loss) | 462 | (3,441 | ) | 8,055 | ||||||||
| Comprehensive Income (Loss) | $ | 14,438 | $ | 17,330 | $ | (17,199 | ) | |||||
See notes to consolidated financial statements
| 68 |
NewBridge Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2014, 2013 and 2012
(dollars in thousands, except share data)
| Directors’ | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Common Stock | Deferred | Other | Total | ||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Class A | Class B | Paid-In | Compensation | Accumulated | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Shares | Shares | Amount | Capital | Plan | Deficit | Income (Loss) | Equity | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2011 | $ | 51,789 | $ | - | $ | - | 15,655,868 | - | $ | 78,279 | $ | 87,190 | $ | (575 | ) | $ | (47,525 | ) | $ | (5,771 | ) | $ | 163,387 | |||||||||||||||||||||
| Net Loss | (25,254 | ) | (25,254 | ) | ||||||||||||||||||||||||||||||||||||||||
| Change in accumulated other comprehensive income (loss) net of deferred income taxes | 8,055 | 8,055 | ||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued | 42,246 | 14,022 | 56,268 | |||||||||||||||||||||||||||||||||||||||||
| Expense of stock issuance | (4,090 | ) | (4,090 | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends and accretion on preferred stock | 300 | (2,918 | ) | (2,618 | ) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 159 | 159 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | 107 | 107 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2012 | $ | 52,089 | $ | 42,246 | $ | 14,022 | 15,655,868 | - | $ | 78,279 | $ | 83,259 | $ | (468 | ) | $ | (75,697 | ) | $ | 2,284 | $ | 196,014 | ||||||||||||||||||||||
| Net Income | 20,771 | 20,771 | ||||||||||||||||||||||||||||||||||||||||||
| Change in accumulated other comprehensive income (loss) net of deferred income taxes | (3,441 | ) | (3,441 | ) | ||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | (42,246 | ) | (14,022 | ) | 9,601,262 | 3,186,748 | 139,527 | (83,259 | ) | - | ||||||||||||||||||||||||||||||||||
| Expense of stock issuance | (117 | ) | (117 | ) | ||||||||||||||||||||||||||||||||||||||||
| Redemption of preferred stock | (37,372 | ) | (100 | ) | (37,472 | ) | ||||||||||||||||||||||||||||||||||||||
| Dividends and accretion on preferred stock | 283 | (1,854 | ) | (1,571 | ) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of stock warrant | (7,779 | ) | (7,779 | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock issuance pursuant to restricted stock units | 34,438 | (78 | ) | (78 | ) | |||||||||||||||||||||||||||||||||||||||
| Excess tax benefits from stock-based awards | 26 | 26 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 439 | 439 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2013 | $ | 15,000 | $ | - | $ | - | 25,291,568 | 3,186,748 | $ | 210,297 | $ | - | $ | (468 | ) | $ | (56,880 | ) | $ | (1,157 | ) | $ | 166,792 | |||||||||||||||||||||
| Net Income | 13,976 | 13,976 | ||||||||||||||||||||||||||||||||||||||||||
| Change in accumulated other comprehensive income (loss) net of deferred income taxes | 462 | 462 | ||||||||||||||||||||||||||||||||||||||||||
| Redemption of preferred stock | (15,000 | ) | (15,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | (337 | ) | (337 | ) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of CapStone Bank | 8,075,228 | 62,264 | 62,264 | |||||||||||||||||||||||||||||||||||||||||
| Expense of stock issuance | (383 | ) | (383 | ) | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 628,045 | 2,598 | 2,598 | |||||||||||||||||||||||||||||||||||||||||
| Stock issuance pursuant to restricted stock units | 13,954 | (49 | ) | (49 | ) | |||||||||||||||||||||||||||||||||||||||
| Excess tax benefits from stock-based awards | 101 | 101 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 787 | 787 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | 144 | 144 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2014 | $ | - | $ | - | $ | - | 34,008,795 | 3,186,748 | $ | 275,615 | $ | - | $ | (324 | ) | $ | (43,241 | ) | $ | (695 | ) | $ | 231,355 | |||||||||||||||||||||
See notes to consolidated financial statements
| 69 |
NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 2014, 2013 and 2012
(dollars in thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Cash Flow from operating activities | ||||||||||||
| Net Income (Loss) | $ | 13,976 | $ | 20,771 | $ | (25,254 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 5,228 | 4,169 | 3,406 | |||||||||
| Securities premium amortization and discount accretion, net | 601 | 387 | 444 | |||||||||
| (Gain) loss on sale of securities | - | (736 | ) | (3 | ) | |||||||
| Earnings on bank-owned life insurance | (1,385 | ) | (1,429 | ) | (1,494 | ) | ||||||
| Mortgage banking services | (870 | ) | (1,644 | ) | (2,636 | ) | ||||||
| Originations of loans held for sale | (87,205 | ) | (98,322 | ) | (156,880 | ) | ||||||
| Proceeds from sales of loans held for sale | 85,424 | 105,900 | 157,973 | |||||||||
| Accretion on acquired loans | (5,660 | ) | (783 | ) | - | |||||||
| Excess tax benefits from stock-based awards | (101 | ) | (26 | ) | - | |||||||
| Deferred income tax expense (benefit) | 7,346 | (3,292 | ) | (2,532 | ) | |||||||
| Writedowns and losses (gains) on sales of real estate acquired in settlement of loans, net | 423 | (779 | ) | 14,520 | ||||||||
| Provision for credit losses | 883 | 2,691 | 35,893 | |||||||||
| Stock-based compensation | 787 | 439 | 159 | |||||||||
| (Increase) decrease in income taxes receivable | 293 | (102 | ) | (218 | ) | |||||||
| (Increase) decrease in interest earned but not received | (427 | ) | (206 | ) | 624 | |||||||
| Increase (decrease) in interest accrued but not paid | (120 | ) | (244 | ) | (212 | ) | ||||||
| Net (increase) decrease in other assets | (1,692 | ) | (2,185 | ) | (1,452 | ) | ||||||
| Net increase (decrease) in other liabilities | (112 | ) | (2,111 | ) | 1,195 | |||||||
| Net cash provided by (used in) operating activities | 17,389 | 22,498 | 23,533 | |||||||||
| Cash Flow from investing activities | ||||||||||||
| Cash received from acquisition | 6,198 | 55,205 | - | |||||||||
| Proceeds from maturities of investment certificates of deposit | 2,482 | - | - | |||||||||
| Purchases of available for sale (“AFS”) securities | (41,632 | ) | (97,693 | ) | (271,293 | ) | ||||||
| Purchases of held to maturity (“HTM”) securities | (69,846 | ) | (66,318 | ) | - | |||||||
| Proceeds from sales of AFS securities | 9,045 | 65,711 | 6,724 | |||||||||
| Proceeds from maturities, prepayments and calls of AFS securities | 20,168 | 116,008 | 222,020 | |||||||||
| Proceeds from maturities, prepayments and calls of HTM securities | 6,546 | 483 | - | |||||||||
| Net (increase) decrease in loans | (101,562 | ) | (141,306 | ) | (56,346 | ) | ||||||
| Proceeds from sales of loans | 5,974 | - | 54,440 | |||||||||
| Purchases of premises and equipment | (2,416 | ) | (2,685 | ) | (3,342 | ) | ||||||
| Proceeds from sales of premises and equipment | 1,324 | 702 | 1,181 | |||||||||
| Proceeds from sales of real estate acquired in settlement of loans | 6,772 | 9,163 | 19,205 | |||||||||
| Net cash provided by (used in) investing activities | (156,947 | ) | (60,730 | ) | (27,411 | ) | ||||||
| Cash Flow from financing activities | ||||||||||||
| Net increase (decrease) in demand deposits and NOW accounts | 65,728 | 9,865 | 17,100 | |||||||||
| Net increase (decrease) in savings and money market accounts | (45,955 | ) | 11,122 | (43,873 | ) | |||||||
| Net increase (decrease) in time deposits | (13,989 | ) | 32,283 | (59,410 | ) | |||||||
| Net increase (decrease) in borrowings from FHLB | 115,700 | 12,675 | 26,300 | |||||||||
| Net increase (decrease) in other borrowings | 32,000 | 13,000 | - | |||||||||
| Proceeds from issuance of preferred stock | - | - | 56,268 | |||||||||
| Dividends paid | (337 | ) | (1,571 | ) | (2,618 | ) | ||||||
| Redemption of preferred stock and related expense | (15,000 | ) | (37,472 | ) | - | |||||||
| Repurchase of stock warrant | - | (7,779 | ) | - | ||||||||
| Exercise of stock options | 2,598 | - | - | |||||||||
| Cash paid in lieu of issuing shares pursuant to restricted stock units | (49 | ) | (78 | ) | - | |||||||
| Excess tax benefits from stock-based awards | 101 | 26 | - | |||||||||
| Expense of stock issuance | (383 | ) | (117 | ) | (4,090 | ) | ||||||
| Net cash provided by (used in) financing activities | 140,414 | 31,954 | (10,323 | ) | ||||||||
| Increase (decrease) in cash and cash equivalents | 856 | (6,278 | ) | (14,201 | ) | |||||||
| Cash and cash equivalents at the beginning of the years | 33,513 | 39,791 | 53,992 | |||||||||
| Cash and cash equivalents at the end of the years | $ | 34,369 | $ | 33,513 | $ | 39,791 | ||||||
See notes to consolidated financial statements
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NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 2014, 2013 and 2012
(dollars in thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Supplemental disclosures of cash flow information | ||||||||||||
| Cash paid during the years for: | ||||||||||||
| Interest | $ | 7,131 | $ | 5,659 | $ | 7,726 | ||||||
| Income taxes | 234 | - | 250 | |||||||||
| Supplemental disclosures of noncash transactions | ||||||||||||
| Transfer of loans to real estate acquired in settlement of loans | $ | 2,468 | $ | 6,968 | $ | 8,492 | ||||||
| Unrealized gains/(losses) on securities available for sale: | ||||||||||||
| Change in securities available for sale | 3,537 | (10,648 | ) | 13,897 | ||||||||
| Change in deferred income taxes | (1,327 | ) | 4,228 | (5,488 | ) | |||||||
| Change in shareholders’ equity | (2,210 | ) | 6,420 | (8,409 | ) | |||||||
| Unrealized gain (loss) on cash flow hedges: | ||||||||||||
| Change in fair value of cash flow hedges | (264 | ) | - | - | ||||||||
| Change in deferred income taxes | 101 | - | - | |||||||||
| Change in shareholders’ equity | 163 | - | - | |||||||||
| Conversion of preferred stock | - | 56,268 | - | |||||||||
| Acquisition: | ||||||||||||
| Fair value of assets acquired | 381,594 | 208,570 | - | |||||||||
| Fair value of liabilities assumed | 336,730 | 213,232 | - | |||||||||
See notes to consolidated financial statements
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NewBridge Bancorp and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2014, 2013, and 2012
Note 1 – Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of NewBridge Bancorp (the “Company”) and its wholly owned subsidiary NewBridge Bank (the “Bank”).The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry.All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of operations
The Bank provides a variety of financial services to individual and corporate clients in North Carolina (“NC”) and South Carolina (“SC”).On October 1, 2013, theCompany acquired Security Savings Bank, SSB (“Security Savings”) of Southport, NC, a mutual savings bank with six branches serving Brunswick County. On April 1, 2014, the Company acquired CapStone Bank (“CapStone”), headquartered in Raleigh, NC, with branches in Cary, Clinton, Fuquay-Varina and Raleigh.See Note 2 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. As of December 31, 2014, the Bank operated 40 branches in Charlotte, Raleigh, the Cape Fear Region and the Piedmont Triad Region of NC. The majority of the Bank’s clients are located in Brunswick, Davidson, Forsyth, Guilford, Mecklenburg, New Hanover, Pender, Rockingham, Sampson, Stokes and Wake Counties. The Bank’s primary deposit products are noninterest-bearing checking accounts, interest-bearing checking accounts, money market accounts, certificates of deposit and individual retirement accounts. Its primary lending products are commercial, real estate and consumer loans.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, fair value of financial instruments, fair values of assets and liabilities acquired in business combinations, real estate acquired in settlement of loans, evaluating other than temporary impairment of investment securities, valuation of deferred tax assets, and pension plan assumptions.
In connection with the determination of the allowance for credit losses, the majority of the Bank’s loan portfolio consists of loans in the geographic areas cited above. The local economies of these areas depend heavily on the industrial, agricultural and service sectors. Accordingly, the ultimate collectability of a large portion of the Bank’s loan portfolio would be affected by changes in local economic conditions.
Business combinations
Business combinations are accounted for under the acquisition method of accounting in accordance withFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations.”Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of income from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.
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The acquired assets and assumed liabilities are recorded at estimated fair values. Management makes significant estimates and exercises significant judgment in accounting for business combinations. Management judgmentally assigns risk ratings to loans based on credit quality, appraisals and estimated collateral values, and estimated expected cash flows to measure fair values for loans. Real estate acquired in settlement of loans and acquired premises are valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Core deposit intangibles are valued based on a weighted combination of the income and market approach where the income approach converts anticipated economic benefits to a present value and the market approach evaluates the market in which the asset is traded to find an indication of prices from actual transactions. Management uses quoted or current market prices to determine the fair value of investment securities. Fair values of deposits and borrowings are based on current market interest rates and are inclusive of any applicable prepayment penalties.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks and interest-bearing bank deposits. Cash and cash equivalents are defined as cash and short-term investments with maturities of three months or less at the time of acquisition.
Investment securities
Investment securities may be classified as held to maturity, available for sale or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.
Securities classified as available for sale or trading are reported as an asset on the consolidated balance sheets at their estimated fair value. As the fair value of available for sale securities changes, the changes are reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired securities. When available for sale securities are sold, the unrealized gain or loss is reclassified from OCI to noninterest income. Gains and losses on sales of securities are recognized when realized on a specific identification basis. The changes in the fair values of trading securities are reported in noninterest income. Securities classified as available for sale are both equity and debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Interest income is recognized based on the coupon rates and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual lives of the securities using methods that approximate the level yield method. For mortgage backed securities, estimates of prepayments are considered in the constant yield calculations.
The Company’s policy regarding other than temporary impairment of investment securities requires continuous monitoring. Individual investment securities with a fair market value that is materially less than its original cost over a continuous period of two quarters are evaluated for impairment during the subsequent quarter. The evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its original value.In evaluating whether there are any other than temporary impairment losses, management considers (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the impact of changes in market interest rates, and (iv) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security.
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Declines in the fair value of held to maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Declines in the fair value of individual debt securities available for sale that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to (i) credit loss is recognized in earnings, and (ii) market or other factors is recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost. For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the other than temporary impairment is recognized in earnings equal to the entire difference between the security’s cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
The other-than-temporary impairment review for available for sale equity securities includes an analysis of the facts and circumstances of each individual investment and focuses on the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the financial condition and near-term prospects of the issuer, and management’s intent and ability to hold the security to recovery. Declines in the value of available for sale equity securities that are considered to be other-than-temporary are reflected in earnings as realized losses.
The Bank is required to maintain certain levels of Federal Home Loan Bank (“FHLB”) of Atlanta stock based on various criteria established by the issuer. Effective September 1, 2014, the Bank became a member of the Federal Reserve System. As a state-chartered Federal Reserve member bank, the Bank’s primary federal regulator is the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). In order to satisfy minimum stock ownership requirements, during the third quarter of 2014, the Bank purchased 76,566 shares of Federal Reserve Bank stock at $50.00 per share, or an aggregate of $3.8 million. During the fourth quarter of 2014, the Bank purchased an additional 37,471 shares of Federal Reserve Bank stock at $50.00 per share, or an aggregate of $1.9 million. Although the Bank pays only $50.00 per share at the time of purchase, the par value of the Federal Reserve Bank stock is $100.00 per share, and the other half of the subscription amount is subject to call at any time.
Loans
Interest income on loans is accrued daily using methods that approximate the effective interest method and recognized over the terms of the loans.The accrual of interest on a loan is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Loans are placed on nonaccrual status when: (i) management has concerns relating to the ability to collect the loan principal and interest and (ii) generally when such loans are 90 days or more past due. Interest income is subsequently recognized on the cash basis only to the extent payments are received and only if the loan is well secured. Commercial loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) of interest and principal by the borrower in accordance with the contractual terms. Residential mortgage and consumer loans are typically returned to accrual status once they are no longer past due.
The acquired loans are segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors as past due status, nonaccrual status and credit risk ratings. In determining the acquisition date fair value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates purchased loans into pools of loans with common risk characteristicswithin the following loan categories – one to four family residential loans other than junior liens, one to four family residential junior liens, construction and land development, farm land, commercial real estate (nonowner-occupied), commercial real estate (owner-occupied), commercial and industrial, and all other loan categories. Expected cash flows at the acquisition date in excess of the fair value of loans arereferred to as the “accretable yield” and is recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively.Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
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The difference between the fair value of an acquired performing loan pool and the expected cash flows at the acquisition date (the “accretable yield”) is accreted into income over the estimated life of the pool. The Company’s policy for determining when to discontinue accruing interest on acquired performing loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans described earlier.
Loan origination fees and costs
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
Troubled debt restructured loans
A troubled debt restructured (“TDR”) loan is a loan on which the Bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, the stated interest rate; extension of the maturity or renewal of the loan at an interest rate below current market; reduction in the face amount of the debt; and reduction in the accrued interest or other amounts due from the borrower. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a TDR loan in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers. Like other financial institutions, the Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the contractual principal or interest will not be collected. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount believed adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluation of the collectability of loans and prior credit loss experience together with other factors. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
The Company’s allowance for credit losses methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and chargeoff trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets, composition of the loan portfolio and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and five-year loss history are also incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina.
While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the Federal Reserve Bank and state bank regulatory agencies, as an integral part of their examination processes, periodically review our subsidiary bank’s allowance for credit losses, and may require us to make additions to our allowance based on their judgment about information available to them at the time of their examinations. Management regularly reviews the assumptions and formulae used in determining the allowance and makes adjustments if required to reflect the current risk profile of the portfolio. The allowance consists of specific and general components. The specific allowance relates to impaired loans that meet the Bank’s criteria for impairment testing. In general, impaired loans include those where interest recognition has been suspended, loans that are more than 90 days delinquent but, because of adequate collateral coverage, income continues to be recognized, and other loans not paying substantially according to the original contract terms. For such loans that meet the Bank’s criteria for impairment testing, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310, “Receivables.” Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest rate. The amount to which the present value falls short of the current loan obligation is established as a reserve for that account or charged off.
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Decreases in expected cash flows of PCI loans after the acquisition date are recognized by recording an allowance for credit loss. In pools where impairment has already been recognized, an increase in cash flows will result in a reversal of prior impairment. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based upon the collateral type and/or specific review by managment. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted average risk grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans, through partial or total satisfaction of loans, is initially recorded at fair market value, less estimated costs to sell, which becomes the property’s new basis. At the date of acquisition, losses are charged to the allowance for credit losses. Expenses to maintain the property, subsequent writedowns, and gains or losses on sales of foreclosed properties are recorded as noninterest expense in the period they are incurred.
Premises and equipment
Premises and equipment are stated at cost (or at fair value for premises and equipment acquired in business combinations) less accumulated depreciation and amortization. The provision for depreciation and amortization is computed principally by the straight-line method over the estimated useful lives of the assets. Useful lives are estimated at 20 to 40 years for buildings and three to ten years for equipment. Leasehold improvements are amortized over the expected terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Expenditures for maintenance and repairs are charged to operations, and expenditures for major replacements and betterments are added to the premises and equipment accounts. The cost and accumulated depreciation of premises and equipment retired or sold are eliminated from the appropriate asset accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations.
Goodwill and other intangible assets
Intangible assets consist of goodwill and core deposit intangibles that result from the acquisition of other banks or branches from other financial institutions. Core deposit intangibles represent the value of long-term deposit relationships acquired in these transactions. Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill assigned to that reporting unit is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has one reporting unit.
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The Company evaluated the carrying value of goodwill in the fourth quarter of 2014 and concludedthat there is no impairment of the recorded goodwill. In conducting this evaluation, it was noted thatthe aggregate fair value of the Company’s common stock is in excess of the recorded equity of the Company and the ratio of the Company’s stock price to its book value is consistent with that of its peer group of bank holding companies with total assets of $1 - $5 billion. The Company did not evaluate its value based on the acquisition value of comparable financial institutions because the Company’s common stock is trading at a higher multiple of its tangible book value than the average multiple reported in regional transactions during the past year. Should the Company's future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required.
Core deposit intangibles, included in goodwill and other intangibles, are amortized over the estimated useful lives of the deposit accounts acquired (generally 5 to 10 years) on either (i) the straight-line method or (ii) an accelerated basis method which reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
Bank-owned life insurance
Bank-owned life insurance is stated at its cash surrender value with changes recorded in other noninterest income. The face amount of the underlying policies’ death benefits was $107.7 million and $102.7 million as of December 31, 2014 and December 31, 2013, respectively, net of split dollar arrangements with the insured individuals. There are no loans outstanding against cash surrender values, and there are no restrictions as to the use of death proceeds.
Employee benefit plans
The Company's defined benefit pension and other post retirement plans are accounted for in accordance with FASB ASC 715, “Compensation– Retirement Benefits,” which requires the Company to recognize the funded status in its statement of financial position. The calculation of the obligations and related expenses under the plans require the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment, and the funded status may differ significantly if different assumptions are used. See Note 17 for information regarding the Company’s defined benefit pension and other post retirement benefit plans. The expected costs of the plans are being expensed over the period that employees provide service.
Stock-based compensation
Stock-based compensation expense is calculated on a ratable basis over the vesting periods, which vary by grant, of the related stock options or restricted stock units. This expense had no impact on the Company’s reported cash flows. The stock-based compensation expense is reported under personnel expense in the consolidated statements of income. To determine the amounts recorded in the financial statements, the fair value of each stock option is estimated on the date of the grant using the Black-Scholes-Merton option-pricing model. For restricted stock units, the fair value is considered to be the market price on the date the restricted stock unit is granted.
Income taxes
Provisions for income taxes are based on taxes payable or refundable, for the current year (after exclusion of non-taxable income such as interest on state and municipal securities and bank-owned life insurance and non-deductible expenses) and deferred taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established against deferred tax assets when it is more likely than not that the assets will not be realized.
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Per share data
Basic net income per share of common stock is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during each year. Diluted net income per share of common stock is computed by dividing net income available to common shareholders plus any adjustments to net income related to the issuance of dilutive potential common shares, comprised of convertible preferred stock, outstanding options and warrants to purchase shares of common stock and restricted stock units, by the weighted average number of shares of common stock outstanding during each year plus the number of dilutive potential common shares.
Sales of loans
Gains and losses on the sales of loans are accounted for as the difference between the proceeds received and the carrying value of the loans. Such gains or losses are recognized in the financial statements at the time of the sale. Loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.
Interest rate swaps
The fair value of the interest rate swaps that qualify as cash flow hedges is included in other liabilities in the consolidated balance sheet. For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statements of income.
The fair values of interest rate swap derivatives that are classified as non-designated hedges are recorded in other assets and other liabilities on the balance sheet. As these interest rate swaps do not meet hedge accounting requirements, changes in the fair value of these interest rate swaps are recognized directly in earnings.
Other off-balance sheet arrangements
In the ordinary course of business, the Bank enters into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
Segment information
Operating segments are components of an enterprise with separate financial information available for use by the chief operating decision maker to allocate resources and to assess performance. The Company has determined that it has one significant operating segment, providing financial services through the Bank, including banking, mortgage, and investment services, to clients located principally in Brunswick, Davidson, Forsyth, Guilford, Mecklenburg, New Hanover, Pender, Rockingham, Sampson, Stokes and Wake Counties in NC, and in the surrounding communities. The various products are those generally offered by community banks, and the allocation of resources is based on the overall performance of the Bank, rather than the individual branches or products.
There are no differences between the measurements used in reporting segment information and those used in the Company’s general-purpose financial statements.
Subsequent events
The Company has evaluated subsequent events for accounting and disclosure purposes through the date the financial statements are issued.
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Recent accounting pronouncements
In January 2014, the FASBissued Accounting Standards Update (“ASU”)2014-04, “Receivables –Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This Update provides guidance on when an in-substance repossession or foreclosure is deemed to occur, which event requires the mortgage loan to be derecognized and the related real estate be recognized. The Update clarifies that an in-substance repossession or foreclosure is deemed to occur upon either (i) a creditor obtaining legal title to the residential real estate or (ii) the borrower conveying all interest in the residential real estate through a deed in lieu of foreclosure (or a similar legal agreement). Creditors must disclose the amount of foreclosed residential real estate held as well as the amount of collateralized loans for which foreclosure is in process. The Update is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Update can be adopted on either a modified retrospective or a prospective method, and early adoption is permitted. This Update will require additional disclosure by the Company but will not otherwise materially affect our financial statements.
In May 2014, the FASB issued ASU 2014-09,“Revenue from Contracts with Customers (Topic 660).”This Updatesets new guidance to clarify principles for recognizing revenue and develops a common revenue standard with the International Accounting Standards Board. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently evaluating the effect of adopting ASU 2014-09 on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-11,“Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (Topic 860).”The amendments in this Update require two accounting changes. First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. Also, the amendments in this Update require disclosure for certain transactions accounted for as a sale and for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings. The accounting changes and the disclosure for certain transactions accounted for as a sale in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014 and for interim periods beginning after March 15, 2015. Early adoption for a public business entity is prohibited. This Update will require additional disclosure by the Company but will not otherwise materially affect our financial statements.
In August 2014, the FASB issued ASU 2014-14, “Receivables –Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted ASU 2014-04. The Company does not anticipate that the adoption of ASU 2014-14 will have a material effect on its consolidated financial statements as the Company has not historically had a material amount of government-guaranteed mortgage loans.
Reclassification
Certain items for 2013 and 2012 have been reclassified to conform to the 2014 presentation. Such reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.
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Note 2 – Business Combinations and Acquisitions
Acquisition of CapStone Bank
On April 1, 2014, the Company completed its acquisition of CapStone, headquartered in Raleigh, NC, with branches in Cary, Clinton, Fuquay-Varina and Raleigh, pursuant to which CapStone’s shareholders received 2.25 shares of the Company’s Class A common stock for each share of CapStone common stock. The Company issued 8,075,228shares of Class A common stock (in exchange for3,589,028shares of CapStone common stock issued and outstanding as of the closing date) at a price of $7.14 per share, the closing stock price of the Class A common stock on March 31, 2014. The implied value of the consideration received by CapStone shareholders was $16.065 per share of CapStone common stock. The total purchase price was $62.3 million, including the conversion of617,270 CapStone stock options having a fair value of $4.6 million. No cash was issued in the transaction other than an immaterial amount of cash paid in lieu of fractional shares. The acquisition was a tax-free transaction.
The transaction was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of CapStone, as of April 1, 2014, were recorded at their respective estimated fair values, and the excess of the acquisition consideration over the fair value of CapStone’s net assets was allocated to goodwill.The estimated fair values of assets acquired and liabilities assumed are based on the information available, and the Company believes this information provides a reasonable basis for determining fair values. Management continues to evaluate these fair values, which are subject to revision as more detailed analyses are completed and additional information becomes available; however, no material adjustments are anticipated for the remainder of the one-year measurement period that ends March 31, 2015. Any changes resulting from the evaluation of these or other estimates as of the acquisition date may change the amount of the fair values recorded.
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The following table summarizes the allocation of the purchase price to the assets acquired and the liabilities assumed based on their estimated fair values (dollars in thousands, except per share data):
| Fair value of assets acquired | ||||
| Cash | $ | 6,198 | ||
| Investment certificates of deposit | 18,250 | |||
| Federal funds sold | 1,000 | |||
| Available for sale investment securities | 49,357 | |||
| Loans | 292,848 | |||
| Premises and equipment | 3,185 | |||
| Core deposit intangible | 2,490 | |||
| Real estate acquired in settlement of loans | 169 | |||
| Deferred tax assets | 3,740 | |||
| Other assets | 4,357 | |||
| Total assets acquired | 381,594 | |||
| Fair value of liabilities assumed | ||||
| Deposits | 273,665 | |||
| Federal Home Loan Bank borrowings | 61,268 | |||
| Accrued expenses and other liabilities | 1,797 | |||
| Total liabilities assumed | 336,730 | |||
| Net assets acquired | $ | 44,864 | ||
| Purchase price | ||||
| Shares of common stock issued | 8,075,228 | |||
| Purchase price per share of Class A common stock | $ | 7.14 | ||
| Class A common stock issued and cash exchanged for fractional shares | 57,658 | |||
| Fair value of converted stock options | 4,606 | |||
| Total purchase price | $ | 62,264 | ||
| Goodwill | $ | 17,400 |
During the third quarter of 2014, adjustments of $509,000 were made to deferred tax assets acquired and goodwill. During the fourth quarter of 2014, there was an adjustment of $5,000 made to real estate acquired in settlement of loans and goodwill.
PCI loans acquired totaled $65.8 million at estimated fair value, and acquired performing loans totaled $227.0 million at estimated fair value. The gross contractual amount receivable for PCI loans and acquired performing loans was $84.9 million and $274.8 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected is $2.5 million.
Goodwill recorded for CapStone represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. None of the goodwill is expected to be deductible for tax purposes.
Pro forma
The following unaudited table reflects (dollars in thousands) the pro forma total net interest income, noninterest income and net income for the years 2014 and 2013 as though the acquisition of CapStone had taken place on January 1, 2013; the pro forma results are not adjusted for acquisition-related expense, and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2013, nor of future results of operations.
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| (unaudited) | 2014 | 2013 | ||||||
| Net interest income | $ | 82,399 | $ | 77,622 | ||||
| Noninterest income | 16,947 | 23,193 | ||||||
| Net income | 14,241 | 28,741 | ||||||
It is not practicable to present the revenue and earnings of CapStone since acquisition because CapStone has not been maintained as a separate accounting entity.
Acquisition of Security Savings Bank, SSB
OnOctober 1, 2013, the Company completed its acquisition of Security Savings, a mutual savings bank, headquartered in Southport, NC.When Security Savings merged with and into the Bank, this acquisition expanded the Bank’s coastal NC presence with the addition ofsix branches and one loan production office in Brunswick County. No shares were issued or cash exchanged in the transaction.Under the acquisition method, the assets and liabilities of Security Savings, as of the effective date of the acquisition, were recorded at their respective fair values. The estimated fair values of assets acquired and liabilities assumed were based on the information that was available, and the Company believes this information provided a reasonable basis for determining fair values. Management evaluated these fair values, and adjustments were made as more detailed analyses were completed and additional information became available. Changes resulting from the evaluation of these or other estimates as of the acquisition date impacted the amount of the preliminary fair values recorded.
The following table presents the estimated fair value of the assets acquired and the liabilities assumed as of the acquisition date and after subsequent adjustments (dollars in thousands):
| As Reported | ||||||||||||
| December 31, | Subsequent | As Recorded | ||||||||||
| 2013 | Adjustments | by Company | ||||||||||
| Fair value of assets acquired: | ||||||||||||
| Cash and cash equivalents | $ | 55,205 | $ | - | $ | 55,205 | ||||||
| Investment securities | 3,541 | - | 3,541 | |||||||||
| Loans held for investment | 131,361 | - | 131,361 | |||||||||
| Premises and equipment | 9,727 | (141 | ) | 9,586 | ||||||||
| Real estate acquired in settlement of loans | 4,086 | (405 | ) | 3,681 | ||||||||
| Deferred tax asset | 1,945 | 1 | 1,946 | |||||||||
| Core deposit intangible | 1,460 | - | 1,460 | |||||||||
| Other assets | 1,790 | - | 1,790 | |||||||||
| Total assets acquired | 209,115 | (545 | ) | 208,570 | ||||||||
| Fair value of liabilities assumed: | ||||||||||||
| Deposits | 167,939 | - | 167,939 | |||||||||
| FHLB borrowings | 44,324 | - | 44,324 | |||||||||
| Accrued expenses and other liabilities | 969 | - | 969 | |||||||||
| Total liabilities assumed | 213,232 | - | 213,232 | |||||||||
| Net assets acquired | $ | (4,117 | ) | $ | (545 | ) | $ | (4,662 | ) | |||
| Total purchase price | $ | - | $ | - | $ | - | ||||||
| Goodwill | $ | 4,117 | $ | 545 | $ | 4,662 | ||||||
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PCI loans acquired totaled $60.0 million at estimated fair value, and acquired performing loans totaled $71.4 million at estimated fair value. The gross contractual amount receivable for PCI loans and acquired performing loans was $88.3 million and $104.0 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected was $1.1 million. Goodwill recorded for Security Savings represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. The acquisition was a taxable transaction.
Acquisition-related expenses
Acquisition-related expenses during 2014 and 2013 totaled $5.1 million and $2.2 million, respectively, which were recorded as noninterest expense as incurred. The components of acquisition-related expense for 2014 and 2013 are as follows (dollars in thousands):
| 2014 | 2013 | |||||||
| Personnel | $ | 1,584 | $ | 337 | ||||
| Furniture and equipment | 13 | 22 | ||||||
| Technology and data processing | 2,700 | 1,115 | ||||||
| Legal and professional | 623 | 456 | ||||||
| Marketing | 7 | 11 | ||||||
| Stationery, printing and supplies | 72 | 148 | ||||||
| Travel, dues and subscriptions | 41 | 71 | ||||||
| Other | 41 | 72 | ||||||
| Total acquisition-related expense | $ | 5,081 | $ | 2,232 | ||||
Note 3 – Restriction on cash and due from banks
The Bank’s gross reserve requirement with the Federal Reserve Bank was $1.2 million and $1.8 million at December 31, 2014 and December 31, 2013, respectively. Due to vault cash that exceeded the gross reserve requirement, the balance to be maintained with the Federal Reserve Bank was zero at both year ends. Interest-bearing bank balances of $690,000 at December 31, 2014 were pledged as collateral to secure the liability position of interest rate swaps.
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Note 4 – Investment securities
Investment securities at December 31 consist of the following (dollars in thousands):
| December 31, 2014 – Securities Available for Sale | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. government agency securities | $ | 49,599 | $ | - | $ | (1,485 | ) | $ | 48,114 | |||||||
| Agency mortgage backed securities | 19,314 | 1,255 | - | 20,569 | ||||||||||||
| Collateralized mortgage obligations | 10,492 | 217 | - | 10,709 | ||||||||||||
| Commercial mortgage backed securities | 33,646 | 1,179 | - | 34,825 | ||||||||||||
| Corporate bonds | 128,798 | 3,612 | (535 | ) | 131,875 | |||||||||||
| Covered bonds | 49,976 | 2,017 | (73 | ) | 51,920 | |||||||||||
| State and municipal obligations | 33,930 | 1,204 | (4 | ) | 35,130 | |||||||||||
| Total debt securities | 325,755 | 9,484 | (2,097 | ) | 333,142 | |||||||||||
| FHLB stock | 17,712 | - | - | 17,712 | ||||||||||||
| Federal Reserve Bank stock | 5,702 | - | - | 5,702 | ||||||||||||
| Other equity securities | 9,336 | 361 | (156 | ) | 9,541 | |||||||||||
| Total | $ | 358,505 | $ | 9,845 | $ | (2,253 | ) | $ | 366,097 | |||||||
| December 31, 2013 – Securities Available for Sale | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. government agency securities | $ | 49,094 | $ | - | $ | (4,562 | ) | $ | 44,532 | |||||||
| Agency mortgage backed securities | 14,217 | 1,261 | - | 15,478 | ||||||||||||
| Collateralized mortgage obligations | 6,611 | 163 | - | 6,774 | ||||||||||||
| Commercial mortgage backed securities | 38,367 | 1,123 | (102 | ) | 39,388 | |||||||||||
| Corporate bonds | 105,772 | 4,066 | (572 | ) | 109,266 | |||||||||||
| Covered bonds | 49,937 | 2,924 | (233 | ) | 52,628 | |||||||||||
| State and municipal obligations | 15,836 | 161 | (301 | ) | 15,696 | |||||||||||
| Total debt securities | 279,834 | 9,698 | (5,770 | ) | 283,762 | |||||||||||
| FHLB stock | 9,988 | - | - | 9,988 | ||||||||||||
| Other equity securities | 7,672 | 596 | (469 | ) | 7,799 | |||||||||||
| Total | $ | 297,494 | $ | 10,294 | $ | (6,239 | ) | $ | 301,549 | |||||||
| December 31, 2014 – Securities Held to Maturity | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. government agency securities | $ | 32,772 | $ | 95 | $ | (416 | ) | $ | 32,451 | |||||||
| Agency mortgage backed securities | 54,339 | 1,352 | - | 55,691 | ||||||||||||
| Corporate bonds | 23,455 | 123 | (64 | ) | 23,514 | |||||||||||
| Covered bonds | 4,984 | 25 | - | 5,009 | ||||||||||||
| Subordinated debt issues | 14,000 | 50 | (17 | ) | 14,033 | |||||||||||
| State and municipal obligations | 1,151 | 66 | - | 1,217 | ||||||||||||
| Total | $ | 130,701 | $ | 1,711 | $ | (497 | ) | $ | 131,915 | |||||||
| December 31, 2013 – Securities Held to Maturity | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. government agency securities | $ | 28,729 | $ | - | $ | (1,920 | ) | $ | 26,809 | |||||||
| Agency mortgage backed securities | 32,439 | 171 | (34 | ) | 32,576 | |||||||||||
| Subordinated debt issues | 5,000 | - | - | 5,000 | ||||||||||||
| State and municipal obligations | 1,149 | - | (95 | ) | 1,054 | |||||||||||
| Total | $ | 67,317 | $ | 171 | $ | (2,049 | ) | $ | 65,439 | |||||||
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The aggregate cost of the Company’s investment in FHLB stock totaled $17.7 million at December 31, 2014. Because of the redemption provisions of this stock, the Company estimates that the fair value equals the cost of this investment and that it is not impaired. The aggregate cost of the Company’s investment in Federal Reserve Bank stock at December 31, 2014 totaled $5.7 million. The Company estimates that the fair value equals the cost of this investment and that it is not impaired.
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2014 and 2013. There were 24 available for sale debt securities and 12 held to maturity securities in an unrealized loss position at December 31, 2014, compared to 29 available for sale debt securities and 16 held to maturity securities in an unrealized loss position at December 31, 2013. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. As of December 31, 2014, management of the Company does not have the intent to sell any of the securities classified as available for sale in an unrealized loss position and believes that it is more likely than not that it will not be necessary to sell any such securities before a recovery of cost; therefore, since none of the unrealized losses are material relative to the specific securities and do not relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other-than-temporarily impaired.
There were two available for sale equity securities in an unrealized loss position at December 31, 2014 and 2013. Although those two securities have been in a loss position one year or more at December 31, 2014, they are graded as investment grade by all rating agencies and show no indication that dividend payments or credit of the issuer are at risk. Management does not intend to sell these securities, believes that it is not likely that sales of these securities will be necessary before a recovery of cost and does not consider these securities other-than-temporarily impaired.
| 2014 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||
| U.S. government agency securities | $ | - | $ | - | $ | 69,094 | $ | (1,901 | ) | $ | 69,094 | $ | (1,901 | ) | ||||||||||
| Corporate bonds | 47,518 | (599 | ) | - | - | 47,518 | (599 | ) | ||||||||||||||||
| Covered bonds | - | - | 4,909 | (73 | ) | 4,909 | (73 | ) | ||||||||||||||||
| Subordinated debt issues | 8,983 | (17 | ) | - | - | 8,983 | (17 | ) | ||||||||||||||||
| State and municipal obligations | 176 | (4 | ) | - | - | 176 | (4 | ) | ||||||||||||||||
| Equity securities | - | - | 1,741 | (156 | ) | 1,741 | (156 | ) | ||||||||||||||||
| Total temporarily impaired securities | $ | 56,677 | $ | (620 | ) | $ | 75,744 | $ | (2,130 | ) | $ | 132,421 | $ | (2,750 | ) | |||||||||
| 2013 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||
| U.S. government agency securities | $ | 37,203 | $ | (2,544 | ) | $ | 34,138 | $ | (3,938 | ) | $ | 71,341 | $ | (6,482 | ) | |||||||||
| Agency mortgage backed securities | 5,439 | (34 | ) | - | - | 5,439 | (34 | ) | ||||||||||||||||
| Commercial mortgage backed securities | 3,134 | (84 | ) | 1,875 | (18 | ) | 5,009 | (102 | ) | |||||||||||||||
| Corporate bonds | 19,794 | (312 | ) | 8,240 | (260 | ) | 28,034 | (572 | ) | |||||||||||||||
| Covered bonds | 4,745 | (233 | ) | - | - | 4,745 | (233 | ) | ||||||||||||||||
| State and municipal obligations | 7,859 | (396 | ) | - | - | 7,859 | (396 | ) | ||||||||||||||||
| Equity securities | 1,428 | (469 | ) | - | - | 1,428 | (469 | ) | ||||||||||||||||
| Total temporarily impaired securities | $ | 79,602 | $ | (4,072 | ) | $ | 44,253 | $ | (4,216 | ) | $ | 123,855 | $ | (8,288 | ) | |||||||||
The amortized cost and estimated market value of debt securities at December 31, 2014, by contractual maturities, are shown in the accompanying schedule (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage backed securities have been included in maturity groupings based on the contractual maturity.
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| Amortized Cost | Estimated Fair Value | |||||||
| U. S. government agencies and mortgage backed obligations: | ||||||||
| Within one year | $ | 502 | $ | 503 | ||||
| One to five years | 12,441 | 12,381 | ||||||
| Five to ten years | 73,050 | 71,516 | ||||||
| After ten years | 114,168 | 117,959 | ||||||
| Total | 200,161 | 202,359 | ||||||
| State and municipal obligations: | ||||||||
| Within one year | - | - | ||||||
| One to five years | 1,265 | 1,268 | ||||||
| Five to ten years | 7,037 | 7,246 | ||||||
| After ten years | 26,779 | 27,833 | ||||||
| Total | 35,081 | 36,347 | ||||||
| Corporate bonds, covered bonds and subordinated debt issues: | ||||||||
| Within one year | 20,458 | 20,678 | ||||||
| One to five years | 132,537 | 135,905 | ||||||
| Five to ten years | 68,219 | 69,768 | ||||||
| After ten years | - | - | ||||||
| Total | 221,214 | 226,351 | ||||||
| Total debt securities | $ | 456,456 | $ | 465,057 | ||||
There were no maturities of held to maturity securities in 2014, 2013 or 2012. A recap of the maturities and sales of available for sale securities follows (dollars in thousands):
| Years Ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Proceeds from maturities | $ | - | $ | 55,465 | $ | 131,400 | ||||||
| Proceeds from sales | 9,045 | 65,711 | 6,724 | |||||||||
| Gross realized gains | - | 791 | 3 | |||||||||
| Gross realized losses | - | (55 | ) | - | ||||||||
During 2014, CapStone investment securities having a fair value of $9.0 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during 2014. During 2013, the Company sold investments with a book value of $65.0 million for a gain of $736,000. Investment securities with a book value of $6.7 million were sold during 2012, for a gain of $3,000.
Principal paydowns on available for sale mortgage backed obligations were $11.3 million, $18.6 million and $29.7 million for 2014, 2013, and 2012, respectively, while principal paydowns on held to maturity mortgage backed obligations were $6.5 million and $483,000 for 2014 and 2013, respectively. Calls of available for sale securities were $2.3 million, $24.7 million and $54.9 million for 2014, 2013, and 2012. There were no calls of held to maturity securities in 2014 or 2013. There were no held to maturity securities in 2012
Investment securities with amortized costs of approximately $170.0 million and $106.2 million and market values of approximately $172.3 million and $101.1 million as of December 31, 2014 and 2013, respectively, were pledged to secure public deposits and for other purposes. The Company has $30.0 million in letters of credit issued by the FHLB of Atlanta, which are used in lieu of securities to pledge against public deposits.
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Note 5 – Loans
Loans are summarized in the following table (dollars in thousands) which include $81.0 million at December 31, 2014 of PCI loans resulting from the acquisition of Security Savings on October 1, 2013 and the acquisition of CapStone on April 1, 2014, and $56.0 million at December 31, 2013 of PCI loans resulting from the acquisition of Security Savings; loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered PCI loans:
| December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
| Loans – | Loans – | |||||||||||||||||||||||
| Excluding | PCI | Total | Excluding | PCI | Total | |||||||||||||||||||
| PCI | Loans | Loans | PCI | Loans | Loans | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 292,013 | $ | 17,969 | $ | 309,982 | $ | 290,953 | $ | 12,023 | $ | 302,976 | ||||||||||||
| Secured by other nonfarm nonresidential properties | 411,107 | 15,768 | 426,875 | 234,355 | 4,707 | 239,062 | ||||||||||||||||||
| Other commercial and industrial | 189,085 | 2,819 | 191,904 | 113,620 | 782 | 114,402 | ||||||||||||||||||
| Total Commercial | 892,205 | 36,556 | 928,761 | 638,928 | 17,512 | 656,440 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | 42,969 | 712 | 43,681 | 20,582 | - | 20,582 | ||||||||||||||||||
| Other construction and land development | 120,612 | 3,816 | 124,428 | 90,575 | 4,239 | 94,814 | ||||||||||||||||||
| Total Real estate – construction | 163,581 | 4,528 | 168,109 | 111,157 | 4,239 | 115,396 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 379,646 | 26,626 | 406,272 | 334,127 | 24,205 | 358,332 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residentialproperties | 222,329 | 6,375 | 228,704 | 205,524 | 7,588 | 213,112 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | 32,611 | 4,987 | 37,598 | 38,735 | - | 38,735 | ||||||||||||||||||
| Total Real estate – mortgage | 634,586 | 37,988 | 672,574 | 578,386 | 31,793 | 610,179 | ||||||||||||||||||
| Credit cards | 7,656 | - | 7,656 | 7,659 | - | 7,659 | ||||||||||||||||||
| Other revolving credit plans | 9,085 | 27 | 9,112 | 8,520 | 9 | 8,529 | ||||||||||||||||||
| Other consumer loans | 7,414 | 1,982 | 9,396 | 7,787 | 2,462 | 10,249 | ||||||||||||||||||
| Total Consumer | 24,155 | 2,009 | 26,164 | 23,966 | 2,471 | 26,437 | ||||||||||||||||||
| All other loans | 8,798 | - | 8,798 | 8,251 | - | 8,251 | ||||||||||||||||||
| Total Other | 8,798 | - | 8,798 | 8,251 | - | 8,251 | ||||||||||||||||||
| Total loans | $ | 1,723,325 | $ | 81,081 | $ | 1,804,406 | $ | 1,360,688 | $ | 56,015 | $ | 1,416,703 | ||||||||||||
Unamortized deferred loan origination fees and costs were a net cost of $1.3 million at December 31, 2014 and 2013.
As of December 31, 2014 and December 31, 2013, loans totaling approximately $768.9 million and $517.1 million, respectively, were pledged to secure the lines of credit with the FHLB and the Federal Reserve Bank.
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Nonperforming assets include nonaccrual loans, restructured loans, and real estate acquired in settlement of loans. Nonperforming assets are summarized as follows (dollars in thousands):
| December 31 | ||||||||
| 2014 | 2013 | |||||||
| Commercial nonaccrual loans, not restructured | $ | 1,620 | $ | 2,542 | ||||
| Commercial nonaccrual loans, restructured | - | 294 | ||||||
| Non-commercial nonaccrual loans, not restructured | 3,471 | 3,680 | ||||||
| Non-commercial nonaccrual loans, restructured | 5 | 391 | ||||||
| Total nonaccrual loans | 5,096 | 6,907 | ||||||
| Troubled debt restructured, accruing | 2,116 | 2,491 | ||||||
| Total nonperforming loans | 7,212 | 9,398 | ||||||
| Real estate acquired in settlement of loans | 3,057 | 7,620 | ||||||
| Total nonperforming assets | $ | 10,269 | $ | 17,018 | ||||
| Restructured loans, performing(1) | $ | 1,151 | $ | 2,166 | ||||
| Loans past due 90 days or more and still accruing(2) | $ | 1,534 | $ | 2,887 | ||||
(1) Loans restructured in a previous year without an interest rate concession or forgiveness of debt that are performing in accordance with their modified terms.
(2) Loans past due 90 days or more and still accruing includes $1,463 and $2,834 of PCI loans as of December 31, 2014 and 2013, respectively.
Commitments to lend additional funds to borrowers whose loans have been restructured are not material at December 31, 2014 or 2013.
The aging of loans is summarized in the following tables (dollars in thousands):
| Loans – Excluding PCI | ||||||||||||||||||||||||
| December 31, 2014 | 30-89 Days | 90+ Days | Nonaccrual | Total Past Due | Total Loans | |||||||||||||||||||
| Past Due | Past Due | Loans | + Nonaccrual | Current | Receivable | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,366 | $ | - | $ | 1,353 | $ | 2,719 | $ | 289,294 | $ | 292,013 | ||||||||||||
| Secured by other nonfarm nonresidential properties | - | - | 237 | 237 | 410,870 | 411,107 | ||||||||||||||||||
| Other commercial and industrial | 1,451 | - | 30 | 1,481 | 187,604 | 189,085 | ||||||||||||||||||
| Total Commercial | 2,817 | - | 1,620 | 4,437 | 887,768 | 892,205 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | - | - | - | - | 42,969 | 42,969 | ||||||||||||||||||
| Other construction and land development | 66 | - | 159 | 225 | 120,387 | 120,612 | ||||||||||||||||||
| Total Real estate – construction | 66 | - | 159 | 225 | 163,356 | 163,581 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 3,529 | 35 | 1,871 | 5,435 | 374,211 | 379,646 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 2,578 | - | 1,301 | 3,879 | 218,450 | 222,329 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | - | - | - | - | 32,611 | 32,611 | ||||||||||||||||||
| Total Real estate – mortgage | 6,107 | 35 | 3,172 | 9,314 | 625,272 | 634,586 | ||||||||||||||||||
| Credit cards | 93 | 35 | - | 128 | 7,528 | 7,656 | ||||||||||||||||||
| Other revolving credit plans | 121 | 1 | 102 | 224 | 8,861 | 9,085 | ||||||||||||||||||
| Other consumer loans | 131 | - | 43 | 174 | 7,240 | 7,414 | ||||||||||||||||||
| Total Consumer | 345 | 36 | 145 | 526 | 23,629 | 24,155 | ||||||||||||||||||
| All other loans | - | - | - | - | 8,798 | 8,798 | ||||||||||||||||||
| Total Other | - | - | - | - | 8,798 | 8,798 | ||||||||||||||||||
| Total loans | $ | 9,335 | $ | 71 | $ | 5,096 | $ | 14,502 | $ | 1,708,823 | $ | 1,723,325 | ||||||||||||
| 88 |
| PCI Loans | ||||||||||||||||||||||||
| December 31, 2014 | 30-89 Days | 90+ Days | Nonaccrual | Total Past Due | Total Loans | |||||||||||||||||||
| Past Due | Past Due | Loans | + Nonaccrual | Current | Receivable | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 285 | $ | - | $ | - | $ | 285 | $ | 17,684 | $ | 17,969 | ||||||||||||
| Secured by other nonfarm nonresidential properties | - | - | - | - | 15,768 | 15,768 | ||||||||||||||||||
| Other commercial and industrial | - | 13 | - | 13 | 2,806 | 2,819 | ||||||||||||||||||
| Total Commercial | 285 | 13 | - | 298 | 36,258 | 36,556 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | - | - | - | - | 712 | 712 | ||||||||||||||||||
| Other construction and land development | - | - | - | - | 3,816 | 3,816 | ||||||||||||||||||
| Total Real estate – construction | - | - | - | - | 4,528 | 4,528 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 2,394 | 1,396 | - | 3,790 | 22,836 | 26,626 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 380 | 33 | - | 413 | 5,962 | 6,375 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | - | - | - | - | 4,987 | 4,987 | ||||||||||||||||||
| Total Real estate – mortgage | 2,774 | 1,429 | - | 4,203 | 33,785 | 37,988 | ||||||||||||||||||
| Credit cards | - | - | - | - | - | - | ||||||||||||||||||
| Other revolving credit plans | - | - | - | - | 27 | 27 | ||||||||||||||||||
| Other consumer loans | 46 | 21 | - | 67 | 1,915 | 1,982 | ||||||||||||||||||
| Total Consumer | 46 | 21 | - | 67 | 1,942 | 2,009 | ||||||||||||||||||
| All other loans | - | - | - | - | - | - | ||||||||||||||||||
| Total Other | - | - | - | - | - | - | ||||||||||||||||||
| Total loans | $ | 3,105 | $ | 1,463 | $ | - | $ | 4,568 | $ | 76,513 | $ | 81,081 | ||||||||||||
| Total Loans | ||||||||||||||||||||||||
| December 31, 2014 | 30-89 Days | 90+ Days | Nonaccrual | Total Past Due | Total Loans | |||||||||||||||||||
| Past Due | Past Due | Loans | + Nonaccrual | Current | Receivable | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,651 | $ | - | $ | 1,353 | $ | 3,004 | $ | 306,978 | $ | 309,982 | ||||||||||||
| Secured by other nonfarm nonresidential properties | - | - | 237 | 237 | 426,638 | 426,875 | ||||||||||||||||||
| Other commercial and industrial | 1,451 | 13 | 30 | 1,494 | 190,410 | 191,904 | ||||||||||||||||||
| Total Commercial | 3,102 | 13 | 1,620 | 4,735 | 924,026 | 928,761 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | - | - | - | - | 43,681 | 43,681 | ||||||||||||||||||
| Other construction and land development | 66 | - | 159 | 225 | 124,203 | 124,428 | ||||||||||||||||||
| Total Real estate – construction | 66 | - | 159 | 225 | 167,884 | 168,109 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 5,923 | 1,431 | 1,871 | 9,225 | 397,047 | 406,272 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 2,958 | 33 | 1,301 | 4,292 | 224,412 | 228,704 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | - | - | - | - | 37,598 | 37,598 | ||||||||||||||||||
| Total Real estate – mortgage | 8,881 | 1,464 | 3,172 | 13,517 | 659,057 | 672,574 | ||||||||||||||||||
| Credit cards | 93 | 35 | - | 128 | 7,528 | 7,656 | ||||||||||||||||||
| Other revolving credit plans | 121 | 1 | 102 | 224 | 8,888 | 9,112 | ||||||||||||||||||
| Other consumer loans | 177 | 21 | 43 | 241 | 9,155 | 9,396 | ||||||||||||||||||
| Total Consumer | 391 | 57 | 145 | 593 | 25,571 | 26,164 | ||||||||||||||||||
| All other loans | - | - | - | - | 8,798 | 8,798 | ||||||||||||||||||
| Total Other | - | - | - | - | 8,798 | 8,798 | ||||||||||||||||||
| Total loans | $ | 12,440 | $ | 1,534 | $ | 5,096 | $ | 19,070 | $ | 1,785,336 | $ | 1,804,406 | ||||||||||||
| 89 |
| Loans – Excluding PCI | ||||||||||||||||||||||||
| December 31, 2013 | 30-89 Days | 90+ Days | Nonaccrual | Total Past Due | Total Loans | |||||||||||||||||||
| Past Due | Past Due | Loans | + Nonaccrual | Current | Receivable | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,170 | $ | - | $ | 1,948 | $ | 3,118 | $ | 287,835 | $ | 290,953 | ||||||||||||
| Secured by other nonfarm nonresidential properties | 256 | - | 745 | 1,001 | 233,354 | 234,355 | ||||||||||||||||||
| Other commercial and industrial | 22 | - | 143 | 165 | 113,455 | 113,620 | ||||||||||||||||||
| Total Commercial | 1,448 | - | 2,836 | 4,284 | 634,644 | 638,928 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | 231 | - | - | 231 | 20,351 | 20,582 | ||||||||||||||||||
| Other construction and land development | 368 | - | 719 | 1,087 | 89,488 | 90,575 | ||||||||||||||||||
| Total Real estate – construction | 599 | - | 719 | 1,318 | 109,839 | 111,157 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 4,691 | 41 | 2,326 | 7,058 | 327,069 | 334,127 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 1,825 | - | 899 | 2,724 | 202,800 | 205,524 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | 951 | - | - | 951 | 37,784 | 38,735 | ||||||||||||||||||
| Total Real estate – mortgage | 7,467 | 41 | 3,225 | 10,733 | 567,653 | 578,386 | ||||||||||||||||||
| Credit cards | 92 | 12 | - | 104 | 7,555 | 7,659 | ||||||||||||||||||
| Other revolving credit plans | 37 | - | 102 | 139 | 8,381 | 8,520 | ||||||||||||||||||
| Other consumer loans | 229 | - | 25 | 254 | 7,533 | 7,787 | ||||||||||||||||||
| Total Consumer | 358 | 12 | 127 | 497 | 23,469 | 23,966 | ||||||||||||||||||
| All other loans | - | - | - | - | 8,251 | 8,251 | ||||||||||||||||||
| Total Other | - | - | - | - | 8,251 | 8,251 | ||||||||||||||||||
| Total loans | $ | 9,872 | $ | 53 | $ | 6,907 | $ | 16,832 | $ | 1,343,856 | $ | 1,360,688 | ||||||||||||
| PCI Loans | ||||||||||||||||||||||||
| December 31, 2013 | 30-89 Days | 90+ Days | Nonaccrual | Total Past Due | Total Loans | |||||||||||||||||||
| Past Due | Past Due | Loans | + Nonaccrual | Current | Receivable | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 95 | $ | - | $ | - | $ | 95 | $ | 11,928 | $ | 12,023 | ||||||||||||
| Secured by other nonfarm nonresidential properties | - | 222 | - | 222 | 4,485 | 4,707 | ||||||||||||||||||
| Other commercial and industrial | 15 | 13 | - | 28 | 754 | 782 | ||||||||||||||||||
| Total Commercial | 110 | 235 | - | 345 | 17,167 | 17,512 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | - | - | - | - | - | - | ||||||||||||||||||
| Other construction and land development | 181 | 79 | - | 260 | 3,979 | 4,239 | ||||||||||||||||||
| Total Real estate – construction | 181 | 79 | - | 260 | 3,979 | 4,239 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 2,484 | 1,634 | - | 4,118 | 20,087 | 24,205 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 132 | 795 | - | 927 | 6,661 | 7,588 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | - | - | - | - | - | - | ||||||||||||||||||
| Total Real estate – mortgage | 2,616 | 2,429 | - | 5,045 | 26,748 | 31,793 | ||||||||||||||||||
| Credit cards | - | - | - | - | - | - | ||||||||||||||||||
| Other revolving credit plans | - | 1 | - | 1 | 8 | 9 | ||||||||||||||||||
| Other consumer loans | 95 | 90 | - | 185 | 2,277 | 2,462 | ||||||||||||||||||
| Total Consumer | 95 | 91 | - | 186 | 2,285 | 2,471 | ||||||||||||||||||
| All other loans | - | - | - | - | - | - | ||||||||||||||||||
| Total Other | - | - | - | - | - | - | ||||||||||||||||||
| Total loans | $ | 3,002 | $ | 2,834 | $ | - | $ | 5,836 | $ | 50,179 | $ | 56,015 | ||||||||||||
| 90 |
| Total Loans | ||||||||||||||||||||||||
| December 31, 2013 | 30-89 Days | 90+ Days | Nonaccrual | Total Past Due | Total Loans | |||||||||||||||||||
| Past Due | Past Due | Loans | + Nonaccrual | Current | Receivable | |||||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,265 | $ | - | $ | 1,948 | $ | 3,213 | $ | 299,763 | $ | 302,976 | ||||||||||||
| Secured by other nonfarm nonresidential properties | 256 | 222 | 745 | 1,223 | 237,839 | 239,062 | ||||||||||||||||||
| Other commercial and industrial | 37 | 13 | 143 | 193 | 114,209 | 114,402 | ||||||||||||||||||
| Total Commercial | 1,558 | 235 | 2,836 | 4,629 | 651,811 | 656,440 | ||||||||||||||||||
| Construction loans – 1 to 4 family residential | 231 | - | - | 231 | 20,351 | 20,582 | ||||||||||||||||||
| Other construction and land development | 549 | 79 | 719 | 1,347 | 93,467 | 94,814 | ||||||||||||||||||
| Total Real estate – construction | 780 | 79 | 719 | 1,578 | 113,818 | 115,396 | ||||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 7,175 | 1,675 | 2,326 | 11,176 | 347,156 | 358,332 | ||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 1,957 | 795 | 899 | 3,651 | 209,461 | 213,112 | ||||||||||||||||||
| Loans secured by 5 or more family residential properties | 951 | - | - | 951 | 37,784 | 38,735 | ||||||||||||||||||
| Total Real estate – mortgage | 10,083 | 2,470 | 3,225 | 15,778 | 594,401 | 610,179 | ||||||||||||||||||
| Credit cards | 92 | 12 | - | 104 | 7,555 | 7,659 | ||||||||||||||||||
| Other revolving credit plans | 37 | 1 | 102 | 140 | 8,389 | 8,529 | ||||||||||||||||||
| Other consumer loans | 324 | 90 | 25 | 439 | 9,810 | 10,249 | ||||||||||||||||||
| Total Consumer | 453 | 103 | 127 | 683 | 25,754 | 26,437 | ||||||||||||||||||
| All other loans | - | - | - | - | 8,251 | 8,251 | ||||||||||||||||||
| Total Other | - | - | - | - | 8,251 | 8,251 | ||||||||||||||||||
| Total loans | $ | 12,874 | $ | 2,887 | $ | 6,907 | $ | 22,668 | $ | 1,394,035 | $ | 1,416,703 | ||||||||||||
Loans specifically identified and individually evaluated for impairment totaled $4.2 million and $5.9 million at December 31, 2014 and 2013, respectively. Included in these balances were $3.3 million and $5.3 million, respectively, of loans classified as TDR loans. A restructured loan is classified as a TDR if the lender grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. The Company monitors the performance of restructured loans on an ongoing basis. For loans classified as TDRs, the Company further evaluates the loans as performing or nonperforming. Loans retain their accrual status at the time of their restructuring. As a result, if a loan is on nonaccrual at the time it is restructured, it stays as nonaccrual; and if a loan is on accrual at the time of the restructuring, it generally stays on accrual. A restructured loan will be reclassified to nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. Nonperforming TDRs originally classified as nonaccrual may be reclassified as accruing if, subsequent to restructuring, they experience six consecutive months of payment performance according to the restructured terms. Further, a TDR may be considered performing and subsequently removed from nonperforming status in years subsequent to the restructuring if it meets the following criteria:
| · | At the time of restructuring, the loan was made at a market rate of interest for comparable risk; |
| · | The loan has shown at least six consecutive months of payment performance in accordance with the restructured terms; and |
| · | The loan has been included in the TDR disclosures for at least one Annual Report on Form 10-K. |
Restructurings of loans and their classification as TDRs are based on individual facts and circumstances. Loan restructurings that are classified as TDRs may involve an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments, which the Company considers are concessions. All loans classified as TDRs were restructured due to financial difficulties experienced by the borrowers. The Company had $1.2 million and $2.2 million of performing TDRs at December 31, 2014 and 2013, respectively, which were restructured in a prior year without an interest rate concession and were performing in accordance with their restructured terms.
| 91 |
The following tables provide information about TDR loans restructured during the current and prior year (dollars in thousands):
| Restructurings During the Year Ended December 31, 2014 | Restructurings During the Year Ended December 31, 2013 | |||||||||||||||||||||||
| Number of Contracts | Pre- Restructuring Outstanding Recorded Investment | Post- Restructuring Outstanding Recorded Investment | Number of Contracts | Pre- Restructuring Outstanding Recorded Investment | Post- Restructuring Outstanding Recorded Investment | |||||||||||||||||||
| Troubled Debt Restructurings: | ||||||||||||||||||||||||
| Commercial | 1 | $ | 124 | $ | 124 | 2 | $ | 874 | $ | 407 | ||||||||||||||
| Real estate – construction | - | - | - | 1 | 460 | 460 | ||||||||||||||||||
| Real estate – mortgage | 3 | 183 | 176 | 3 | 323 | 323 | ||||||||||||||||||
| Consumer | 2 | 19 | 19 | - | - | - | ||||||||||||||||||
| Total | 6 | $ | 326 | $ | 319 | 6 | $ | 1,657 | $ | 1,190 | ||||||||||||||
Six loans were restructured and classified as TDR loans during 2014. The one commercial loan restructured in 2014 involved an extension of the term of the loan. The two consumer loans restructured in 2014 involved an extension of the term of the loan and an interest rate reduction. One of the real estate - mortgage loans restructured in 2014 involved a forgiveness of principal, and the other two loans restructured in 2014 involved deferral of interest payments. In 2013, six loans were restructured and classified as TDR loans. One of the commercial loans restructured in 2013 involved an interest rate concession, and two of the real estate - mortgage loans restructured in 2013 involved deferrals of principal payments. The remaining three restructured loanseach involved an extension of the term of the loan. A TDR loan is considered to be in default if it is 90 days or more past due at the end of any month during the reporting period.
No TDRs were restructured in the prior 12 months that subsequently defaulted during 2014 or 2013.
Interest is not typically accrued on nonperforming loans, as they are normally in nonaccrual status. However, interest may be accrued in certain circumstances on nonperforming TDRs, such as those that have an interest rate concession but are otherwise performing. Interest income on performing or nonperforming accruing TDRs is recognized consistent with any other accruing loan. Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on a loan is discontinued when, in management’s opinion, the borrower is not likely to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Loans are placed on nonaccrual status when (i) management has concerns relating to the ability to collect the loan principal and interest, and (ii) generally when loans are 90 days or more past due. Interest income is subsequently recognized on a cash basis only to the extent payments are received and only if the loan is well secured. Commercial loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance (generally a minimum of six months) of interest and principal by the borrower in accordance with the contractual terms. Residential mortgage and consumer loans are typically returned to accrual status once they are no longer past due. There were $2.1 million in nonperforming TDR loans at December 31, 2014, compared to $2.5 million at December 31, 2013, that were considered impaired and were accruing. The following table shows interest income recognized and received on these nonperforming TDR loans for the years ended December 31, 2014 and 2013 (dollars in thousands):
| Year Ended December 31, 2014 | Year Ended December 31, 2013 | |||||||||||||||
| Recognized | Received | Recognized | Received | |||||||||||||
| Interest Income: | ||||||||||||||||
| Commercial | $ | 9 | $ | 8 | $ | 28 | $ | 29 | ||||||||
| Real estate – construction | 4 | 4 | 3 | 3 | ||||||||||||
| Real estate – mortgage | 74 | 68 | 85 | 77 | ||||||||||||
| Consumer | - | 1 | - | - | ||||||||||||
| Total | $ | 87 | $ | 81 | $ | 116 | $ | 109 | ||||||||
The Company’s policy for impaired loan accounting subjects all loans to impairment recognition; however, loans with total credit exposure of less than $500,000 are generally not evaluated on an individual basis for levels of impairment. The Company generally considers loans 90 days or more past due, all nonaccrual loans and all TDRs to be impaired. All TDRs are evaluated on an individual basis for levels of impairment.
| 92 |
Loans specifically identified and evaluated for levels of impairment totaled $4.2 million and $5.9 million at December 31, 2014 and 2013, respectively, as displayed in the following tables (dollars in thousands).
| Impaired Loans | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||||||
| At December 31, 2014 | Balance | Balance | Allowance | Investment | Recognized | |||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||
| Commercial | $ | 283 | $ | 283 | $ | - | $ | 342 | $ | 22 | ||||||||||
| Real estate – construction | 453 | 453 | - | 480 | 32 | |||||||||||||||
| Real estate – mortgage | 361 | 381 | - | 454 | 36 | |||||||||||||||
| Consumer | 17 | 17 | - | 18 | 1 | |||||||||||||||
| Total | 1,114 | 1,134 | - | 1,294 | 91 | |||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||
| Commercial | 1,087 | 1,194 | 588 | 1,409 | 78 | |||||||||||||||
| Real estate – construction | 148 | 148 | 53 | 186 | 11 | |||||||||||||||
| Real estate – mortgage | 1,878 | 1,878 | 264 | 1,913 | 71 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | 3,113 | 3,220 | 905 | 3,508 | 160 | |||||||||||||||
| Total impaired loans | ||||||||||||||||||||
| Commercial | 1,370 | 1,477 | 588 | 1,751 | 100 | |||||||||||||||
| Real estate – construction | 601 | 601 | 53 | 666 | 43 | |||||||||||||||
| Real estate – mortgage | 2,239 | 2,259 | 264 | 2,367 | 107 | |||||||||||||||
| Consumer | 17 | 17 | - | 18 | 1 | |||||||||||||||
| Total | $ | 4,227 | $ | 4,354 | $ | 905 | $ | 4,802 | $ | 251 | ||||||||||
| Impaired Loans | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||||||
| At December 31, 2013 | Balance | Balance | Allowance | Investment | Recognized | |||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||
| Commercial | $ | 1,210 | $ | 1,246 | $ | - | $ | 1,261 | $ | 30 | ||||||||||
| Real estate – construction | 480 | 480 | - | 514 | 34 | |||||||||||||||
| Real estate – mortgage | 338 | 369 | - | 358 | 7 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | 2,028 | 2,095 | - | 2,133 | 71 | |||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||
| Commercial | 738 | 846 | 68 | 747 | 42 | |||||||||||||||
| Real estate – construction | 152 | 152 | 8 | 189 | 12 | |||||||||||||||
| Real estate – mortgage | 2,961 | 2,961 | 696 | 3,025 | 107 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | 3,851 | 3,959 | 772 | 3,961 | 161 | |||||||||||||||
| Total impaired loans | ||||||||||||||||||||
| Commercial | 1,948 | 2,092 | 68 | 2,008 | 72 | |||||||||||||||
| Real estate – construction | 632 | 632 | 8 | 703 | 46 | |||||||||||||||
| Real estate – mortgage | 3,299 | 3,330 | 696 | 3,383 | 114 | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total | $ | 5,879 | $ | 6,054 | $ | 772 | $ | 6,094 | $ | 232 | ||||||||||
| 93 |
In the first quarter of 2014, the Bank changed its methodology for allocating the allowance for credit losses by portfolio segment. Prior period allocations were revised to conform to the new methodology. The change in methodology did not change the total allowance for credit losses. The balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on the reserving method as of December 31, 2014 and 2013 were as follows:
| Real Estate - | Real Estate - | Total | ||||||||||||||||||||||
| Allowance for credit losses: | Commercial | Construction | Mortgage | Consumer | Other | Allowance | ||||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 588 | $ | 53 | $ | 264 | $ | - | $ | - | $ | 905 | ||||||||||||
| Collectively evaluated for impairment | 10,567 | 1,931 | 8,195 | 421 | 93 | 21,207 | ||||||||||||||||||
| PCI | - | - | - | - | - | - | ||||||||||||||||||
| Total ending allowance | $ | 11,155 | $ | 1,984 | $ | 8,459 | $ | 421 | $ | 93 | $ | 22,112 | ||||||||||||
| Allowance for credit losses as a percentage of recorded investment | 1.20 | % | 1.18 | % | 1.26 | % | 1.61 | % | 1.06 | % | 1.23 | % | ||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 68 | $ | 8 | $ | 696 | $ | - | $ | - | $ | 772 | ||||||||||||
| Collectively evaluated for impairment | 11,412 | 2,019 | 9,783 | 469 | 95 | 23,778 | ||||||||||||||||||
| PCI | - | - | - | - | - | - | ||||||||||||||||||
| Total ending allowance | $ | 11,480 | $ | 2,027 | $ | 10,479 | $ | 469 | $ | 95 | $ | 24,550 | ||||||||||||
| Allowance for credit losses as a percentage of recorded investment | 1.75 | % | 1.76 | % | 1.72 | % | 1.77 | % | 1.15 | % | 1.73 | % | ||||||||||||
| Real Estate - | Real Estate - | Total | ||||||||||||||||||||||
| Recorded investment in loans: | Commercial | Construction | Mortgage | Consumer | Other | Loans | ||||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 1,370 | $ | 601 | $ | 2,239 | $ | 17 | $ | - | $ | 4,227 | ||||||||||||
| Collectively evaluated for impairment | 890,835 | 162,980 | 632,347 | 24,138 | 8,798 | 1,719,098 | ||||||||||||||||||
| PCI | 36,556 | 4,528 | 37,988 | 2,009 | - | 81,081 | ||||||||||||||||||
| Total recorded investment in loans | $ | 928,761 | $ | 168,109 | $ | 672,574 | $ | 26,164 | $ | 8,798 | $ | 1,804,406 | ||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 1,948 | $ | 632 | $ | 3,299 | $ | - | $ | - | $ | 5,879 | ||||||||||||
| Collectively evaluated for impairment | 636,980 | 110,525 | 575,087 | 23,966 | 8,251 | 1,354,809 | ||||||||||||||||||
| PCI | 17,512 | 4,239 | 31,793 | 2,471 | - | 56,015 | ||||||||||||||||||
| Total recorded investment in loans | $ | 656,440 | $ | 115,396 | $ | 610,179 | $ | 26,437 | $ | 8,251 | $ | 1,416,703 | ||||||||||||
The allowance for credit losses as a percentage of the recorded investment in loans shown in the table above reflects the improvement in asset quality in 2014. Particularly noteworthy is a greater proportion of low risk, high quality loans in the loan portfolio at year end 2014 than at year end 2013. As a result, the allowance for credit losses as a percentage of the total recorded investment in loans at year end 2014 is significantly lower than at year end 2013. Also impacting the allowance for credit losses as a percentage of the total recorded investment in loans is the acquired non-PCI portfolio, which is recorded at fair value on the acquisition date and has an immaterial amount of allowance for credit losses as of December 31, 2014.
The Bank’s policy for calculating and assigning specific reserves is applicable to all loans except for groups of smaller balance homogeneous loans such as credit card, residential mortgage and consumer loans in which impairment is collectively evaluated. The Bank generally considers loans 90 days or more past due and all nonaccrual loans to be impaired.
Management follows a loan review program designed to evaluate the credit risk in its loan portfolio. Sample selection is a combination of random selection and targeted selection based on total credit exposure and identified risk factors. The Internal Loan Review Department consists of qualified personnel knowledgeable in lending practices, bank policies and procedures and relevant laws and regulations. Internal Loan Review along with lending personnel utilize a system of nine risk grades in assessing and identifying the risk in the loan portfolio. The nine risk grades are minimal risk, low risk, low to moderate risk, moderate risk, pre-watch, special mention, substandard, doubtful, and loss. Through this loan review process, the Bank maintains an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as pass, special mention, substandard, or doubtful as described below, and reserves are allocated based on management’s judgment and historical experience. The Management Credit Committee, consisting of the Chief Credit Officer, Chief Commercial Credit Officer, Senior Credit Officers, and the Loan Review Manager perform a monthly high level review of new and renewed production.
| 94 |
Pass – These loans are loans that have been assigned to one of the first five risk grades: minimal risk, low risk, low to moderate risk, moderate risk, or pre-watch.
Special Mention – These loans have potential weaknesses, which may, if not corrected or reversed, weaken the bank's credit position at some future date. The loans may not show problems as yet due to the borrower(s)’ apparent ability to service the debt, but special circumstances surround the loans of which the bank and management should be aware. This category may also include loans where repayment has not been satisfactory, where constant attention is required to maintain a set repayment schedule, or where terms of a loan agreement have been violated but the borrower still appears to have sufficient financial strength to avoid a lower rating. It also includes new loans that significantly depart from established loan policy and loans to weak borrowers with a strong guarantor.
Substandard – These are loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management, such as unprofitable and/or undercapitalized businesses, inability to generate sufficient cash flow for debt reduction, deterioration of collateral and special problems arising from the particular condition of an industry. It also includes workout loans on a liquidation basis when a loss is not expected.
Doubtful – These are loans that have all the weakness inherent in one graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable. In addition, the extent of the potential loss may not be currently determinable. Most of these loans are considered impaired.
Loss – These loans are considered uncollectible and will be charged off immediately. These loans may have some recovery or salvage value but can no longer be considered active assets.
The following table summarizes, by internally assigned risk grade, the risk grade for loans for which the Bank has assigned a risk grade (dollars in thousands). The remainder of the loan portfolio consists of non risk graded homogeneous types of loans. The following table reflects $57.4 million of PCI loans at December 31, 2014 resulting from the acquisitions of CapStone and Security Savings, and $33.1 million of PCI loans at December 31, 2013 resulting from the acquisition of Security Savings. Loans – Excluding PCI includes $121.4 million of loans at December 31, 2014 from the CapStone and Security Savings acquisitions, and $12.0 million of loans at December 31, 2013 form the Security Savings acquisition that are not PCI.
| 95 |
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||||||||||||
| Loans – excluding PCI | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Commercial | $ | 858,218 | $ | 18,578 | $ | 12,717 | $ | 969 | $ | 890,482 | $ | 592,221 | $ | 30,962 | $ | 15,044 | $ | 302 | $ | 638,529 | ||||||||||||||||||||
| Real estate – construction | 148,226 | 1,144 | 88 | 60 | 149,518 | 82,483 | 8,628 | 2,288 | - | 93,399 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 99,200 | 4,794 | 1,987 | - | 105,981 | 84,999 | 4,243 | 5,168 | - | 94,410 | ||||||||||||||||||||||||||||||
| Consumer | 928 | - | - | - | 928 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Other | 7,646 | 1,152 | - | - | 8,798 | 7,373 | - | - | - | 7,373 | ||||||||||||||||||||||||||||||
| Total | $ | 1,114,218 | $ | 25,668 | $ | 14,792 | $ | 1,029 | $ | 1,155,707 | $ | 767,076 | $ | 43,833 | $ | 22,500 | $ | 302 | $ | 833,711 | ||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||||||||||||
| PCI loans | Pass(1) | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Commercial | $ | 27,766 | $ | 5,345 | $ | 3,205 | $ | - | $ | 36,316 | $ | 5,451 | $ | 4,831 | $ | 7,031 | $ | 135 | $ | 17,448 | ||||||||||||||||||||
| Real estate – construction | 2,838 | 1,248 | 339 | - | 4,425 | 1,568 | 1,743 | 731 | 198 | 4,240 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 11,246 | 3,811 | 1,627 | - | 16,684 | 2,811 | 2,361 | 5,739 | 499 | 11,410 | ||||||||||||||||||||||||||||||
| Consumer | - | - | - | - | - | 2 | 1 | - | - | 3 | ||||||||||||||||||||||||||||||
| Other | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Total | $ | 41,850 | $ | 10,404 | $ | 5,171 | $ | - | $ | 57,425 | $ | 9,832 | $ | 8,936 | $ | 13,501 | $ | 832 | $ | 33,101 | ||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||||||||||||
| Total loans | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | ||||||||||||||||||||||||||||||
| Commercial | $ | 885,984 | $ | 23,923 | $ | 15,922 | $ | 969 | $ | 926,798 | $ | 597,672 | $ | 35,793 | $ | 22,075 | $ | 437 | $ | 655,977 | ||||||||||||||||||||
| Real estate – construction | 151,064 | 2,392 | 427 | 60 | 153,943 | 84,051 | 10,371 | 3,019 | 198 | 97,639 | ||||||||||||||||||||||||||||||
| Real estate – mortgage | 110,446 | 8,605 | 3,614 | - | 122,665 | 87,810 | 6,604 | 10,907 | 499 | 105,820 | ||||||||||||||||||||||||||||||
| Consumer | 928 | - | - | - | 928 | 2 | 1 | - | �� | - | 3 | |||||||||||||||||||||||||||||
| Other | 7,646 | 1,152 | - | - | 8,798 | 7,373 | - | - | - | 7,373 | ||||||||||||||||||||||||||||||
| Total | $ | 1,156,068 | $ | 36,072 | $ | 19,963 | $ | 1,029 | $ | 1,213,132 | $ | 776,908 | $ | 52,769 | $ | 36,001 | $ | 1,134 | $ | 866,812 | ||||||||||||||||||||
(1) PCI loans in the Pass category are in the pre-watch risk grade, which is the lowest risk grade in the Pass category.
The process of determining the allowance for credit losses is driven by the risk grade system and the loss experience on non risk graded homogeneous types of loans. The Bank’s allowance for credit losses is calculated and determined, at a minimum, each fiscal quarter end. The allowance for credit losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. In determining the allowance for credit losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined to be impaired, the impairment is based on discounted expected cash flows using the loan’s initial effective interest rate or the fair value of the collateral (less selling costs) for collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. The Credit Management Committee of the Board of Directors has responsibility for oversight.
Management believes the allowance for credit losses of $22.1 million at December 31, 2014 is adequate to cover probable inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting future operating results of the Bank.
| 96 |
An analysis of the changes in the allowance for credit losses follows (dollars in thousands):
| Beginning | Charge | Ending | ||||||||||||||||||
| Balance | Offs | Recoveries | Provision | Balance | ||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||||||
| Commercial | $ | 11,480 | $ | 1,411 | $ | 1,368 | $ | (282 | ) | $ | 11,155 | |||||||||
| Real estate – construction | 2,027 | 427 | 894 | (510 | ) | 1,984 | ||||||||||||||
| Real estate – mortgage | 10,479 | 4,607 | 1,433 | 1,154 | 8,459 | |||||||||||||||
| Consumer | 469 | 868 | 356 | 464 | 421 | |||||||||||||||
| Other | 95 | - | 36 | (38 | ) | 93 | ||||||||||||||
| Total | $ | 24,550 | $ | 7,313 | $ | 4,087 | $ | 788 | $ | 22,112 | ||||||||||
| PCI loans | ||||||||||||||||||||
| Commercial | $ | - | $ | 62 | $ | - | $ | 62 | $ | - | ||||||||||
| Real estate – construction | - | - | - | - | - | |||||||||||||||
| Real estate – mortgage | - | 33 | - | 33 | - | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Other | - | - | - | - | - | |||||||||||||||
| Total | $ | - | $ | 95 | $ | - | $ | 95 | $ | - | ||||||||||
| Total loans | ||||||||||||||||||||
| Commercial | $ | 11,480 | $ | 1,473 | $ | 1,368 | $ | (220 | ) | $ | 11,155 | |||||||||
| Real estate – construction | 2,027 | 427 | 894 | (510 | ) | 1,984 | ||||||||||||||
| Real estate – mortgage | 10,479 | 4,640 | 1,433 | 1,187 | 8,459 | |||||||||||||||
| Consumer | 469 | 868 | 356 | 464 | 421 | |||||||||||||||
| Other | 95 | - | 36 | (38 | ) | 93 | ||||||||||||||
| Total | $ | 24,550 | $ | 7,408 | $ | 4,087 | $ | 883 | $ | 22,112 | ||||||||||
| December 31, 2013 | ||||||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||||||
| Commercial | $ | 12,314 | $ | 2,212 | $ | 1,260 | $ | 118 | $ | 11,480 | ||||||||||
| Real estate – construction | 2,058 | 1,308 | 496 | 781 | 2,027 | |||||||||||||||
| Real estate – mortgage | 11,673 | 3,552 | 1,544 | 814 | 10,479 | |||||||||||||||
| Consumer | 466 | 1,116 | 389 | 730 | 469 | |||||||||||||||
| Other | 119 | 338 | 66 | 248 | 95 | |||||||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||||||
| PCI loans | ||||||||||||||||||||
| Commercial | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Real estate – construction | - | - | - | - | - | |||||||||||||||
| Real estate – mortgage | - | - | - | - | - | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Other | - | - | - | - | - | |||||||||||||||
| Total | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Total loans | ||||||||||||||||||||
| Commercial | $ | 12,314 | $ | 2,212 | $ | 1,260 | $ | 118 | $ | 11,480 | ||||||||||
| Real estate – construction | 2,058 | 1,308 | 496 | 781 | 2,027 | |||||||||||||||
| Real estate – mortgage | 11,673 | 3,552 | 1,544 | 814 | 10,479 | |||||||||||||||
| Consumer | 466 | 1,116 | 389 | 730 | 469 | |||||||||||||||
| Other | 119 | 338 | 66 | 248 | 95 | |||||||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||||||
| December 31, 2012 | ||||||||||||||||||||
| Commercial | $ | 16,366 | $ | 17,306 | $ | 879 | $ | 12,375 | $ | 12,314 | ||||||||||
| Real estate – construction | 2,834 | 8,774 | 423 | 7,575 | 2,058 | |||||||||||||||
| Real estate – mortgage | 8,669 | 13,337 | 766 | 15,575 | 11,673 | |||||||||||||||
| Consumer | 898 | 1,191 | 314 | 445 | 466 | |||||||||||||||
| Other | 77 | 3 | 122 | (77 | ) | 119 | ||||||||||||||
| Total | $ | 28,844 | $ | 40,611 | $ | 2,504 | $ | 35,893 | $ | 26,630 | ||||||||||
Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired companies.
| 97 |
In conjunction with the acquisition of CapStone on April 1, 2014, the PCI loan portfolio was accounted for at fair value as follows (dollars in thousands):
| April 1, 2014 | ||||
| Contractual principal and interest at acquisition | $ | 84,855 | ||
| Nonaccretable difference | (5,070 | ) | ||
| Expected cash flows at acquisition | 79,785 | |||
| Accretable yield | (13,969 | ) | ||
| Basis in PCI loans at acquisition – estimated fair value | $ | 65,816 | ||
A summary of changes in the recorded investment of PCI loans for the years ended December 31, 2014 and 2013 follows (dollars in thousands):
| 2014 | 2013 | |||||||
| Recorded investment, beginning of period | $ | 56,015 | $ | - | ||||
| Fair value of loans acquired during the year | 65,816 | 59,636 | ||||||
| Accretion | 4,581 | 685 | ||||||
| Reductions for payments, sales and foreclosures | (45,331 | ) | (4,306 | ) | ||||
| Recorded investment, end of period | $ | 81,081 | $ | 56,015 | ||||
| Outstanding principal balance, end of period | $ | 88,917 | $ | 63,585 | ||||
In the third quarter of 2014, the Bank sold a small group of nonperforming loans with a total recorded investment of $5.4 million for net proceeds of $6.0 million. Included in this sale were PCI loans with a total outstanding principal balance of $4.8 million and a total recorded investment of $2.6 million for net proceeds of $2.7 million. The $100,000 excess proceeds on the PCI loan sales was recorded as an adjustment to the recorded investment of the remaining PCI portfolio. The remaining excess proceeds from the loan sale of $500,000 was recorded as recoveries of previously charged off loans.
A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2014 and 2013 follows (dollars in thousands):
| 2014 | 2013 | |||||||
| Accretable yield, beginning of period | $ | 14,462 | $ | - | ||||
| Addition from acquisition | 13,969 | 15,147 | ||||||
| Accretion | (4,581 | ) | (685 | ) | ||||
| Reclassification from nonaccretable difference | 1,716 | - | ||||||
| Other changes, net | (3,119 | ) | - | |||||
| Accretable yield, end of period | $ | 22,447 | $ | 14,462 | ||||
| 98 |
Note 6 – Premises and equipment
The following is a summary of premises and equipment (dollars in thousands):
| December 31 | ||||||||
| 2014 | 2013 | |||||||
| Land | $ | 18,359 | $ | 17,604 | ||||
| Buildings | 26,912 | 25,242 | ||||||
| Equipment | 29,103 | 27,887 | ||||||
| Leasehold improvements | 2,567 | 2,469 | ||||||
| Premises and equipment, total cost | 76,941 | 73,202 | ||||||
| Less, accumulated depreciation | 32,119 | 29,094 | ||||||
| Premises and equipment, net | $ | 44,822 | $ | 44,108 | ||||
Depreciation and amortization expense amounting to $3.4 million, $3.0 million and $2.8 million, for the years ended December 31, 2014, 2013, and 2012, respectively, is included in occupancy expense and furniture and equipment expense in the consolidated statements of income.
Note 7 – Deposits
The aggregate amount of certificates of deposit of $250,000 or more was approximately $294.1 million and $195.3 million at December 31, 2014 and 2013, respectively. The accompanying table presents the scheduled maturities of total time deposits at December 31, 2014 (dollars in thousands).
| Years ending December 31 | ||||
| 2015 | $ | 463,714 | ||
| 2016 | 55,703 | |||
| 2017 | 13,052 | |||
| 2018 | 12,341 | |||
| 2019 | 4,580 | |||
| Thereafter | 25 | |||
| Total time deposits | $ | 549,415 | ||
Note 8 – Short-term borrowings and long-term debt
The following is a schedule of short-term borrowings and long-term debt (dollars in thousands):
| Balance as of December 31 | Interest Rate as of December 31 | Average Balance | Average Interest Rate | Maximum Outstanding at Any Month End | ||||||||||||||||
| 2014 | ||||||||||||||||||||
| FHLB borrowings | $ | 346,700 | 0.27 | % | $ | 241,945 | 0.33 | % | $ | 347,200 | ||||||||||
| Federal funds purchased and repurchase agreements | 50,500 | 2.11 | % | 38,699 | 2.57 | % | 62,000 | |||||||||||||
| Subordinated debt | 15,500 | 7.25 | % | 12,440 | 7.25 | % | 15,500 | |||||||||||||
| Junior subordinated notes | 25,774 | 1.72 | % | 25,774 | 1.72 | % | 25,774 | |||||||||||||
| Total | $ | 438,474 | $ | 318,858 | $ | 450,474 | ||||||||||||||
| 2013 | ||||||||||||||||||||
| FHLB borrowings | $ | 170,000 | 0.58 | % | $ | 120,136 | 0.99 | % | $ | 170,000 | ||||||||||
| Federal funds purchased and repurchase agreements | 34,000 | 2.81 | % | 22,999 | 3.77 | % | 34,000 | |||||||||||||
| Junior subordinated notes | 25,774 | 1.71 | % | 25,774 | 1.76 | % | 25,774 | |||||||||||||
| Total | $ | 229,774 | $ | 168,909 | $ | 229,474 | ||||||||||||||
At December 31, 2014, the Bank had a $488.2 million line of credit with the FHLB of Atlanta under which $377.7 million was used. This consisted of $346.7 million in advances, $30.0 million in letters of credit used in lieu of securities to pledge against public deposits, and a $1.0 million financial standby letter of credit issued by the FHLB of Atlanta on behalf of one of the Bank’s clients. This line of credit is secured with FHLB stock, investment securities, qualifying residential one to four family first mortgage loans, qualifying multi-family first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. Based upon collateral pledged, as of December 31, 2014, the borrowing capacity under this line was $488.2 million, of which $110.5 million was available to be borrowed.In addition to the credit line at the FHLB of Atlanta, the Bank has borrowing capacity at the Federal Reserve Bank totaling $4.3 million and has federal funds lines of $89.8 million of which $29.5 million was outstanding at December 31, 2014.
| 99 |
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank.
The Bank sold securities under an agreement to repurchase (a “wholesale repurchase agreement”) in 2006. This $21.0 million borrowing has a maturity date in 2016 and is callable quarterly at a fixed rate of 4.03%. The investment securities serving as collateral for this borrowing had a market value of approximately $25.0 million at December 31, 2014.
On March 14, 2014, the Company entered into a Subordinated Note Purchase Agreement with 14 accredited investors under which the Company issued an aggregate of $15.5 million of subordinated notes to the accredited investors, including members of the Company’s Board of Directors. The subordinated notes have a maturity date of March 14, 2024 and bear interest, payable on the 1st of January and July of each year, commencing July 1, 2014, at a fixed interest rate of 7.25% per year. The subordinated notes are intended to qualify as Tier II capital for regulatory purposes. Costs associated with the issuance were $278,000, which are recorded in the balance sheet as other assets and are being amortized to other expense over the term of the notes.
FNB Financial Services Capital Trust I, a Delaware statutory trust (the “Trust,” wholly owned by the Company), issued and sold in a private placement, on August 26, 2005, $25.0 million of the Trust’s floating rate preferred securities, with a liquidation amount of $1,000 per preferred security, bearing a variable rate of interest per annum, reset quarterly, equal to 3 month London Interbank Offered Rate (“LIBOR”) plus 1.46% (the “Preferred Securities”) and a maturity date of September 30, 2035. The Preferred Securities became callable after five years. Interest payment dates are March 30, June 30, September 30 and December 31 of each year. The Preferred Securities are fully and unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds from the sale by the Trust to the holders of the Preferred Securities was combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the “Common Securities”), and was used by the Trust to purchase $25.8 million in principal amount of the Floating Rate Junior Subordinated Notes (the “Junior Subordinated Notes”) of the Company. The Company has not included the Trust in the consolidated financial statements. Currently, regulatory capital rules allow these trust preferred securities to be included as a component of regulatory capital for the Company.
The maturities of short-term borrowings and long-term debt at December 31, 2014, are as follows (dollars in thousands):
| Years Ending December 31 | ||||
| 2015 | $ | 303,000 | ||
| 2016 | 94,200 | |||
| 2017 | - | |||
| 2018 | - | |||
| 2019 | - | |||
| Thereafter | 41,274 | |||
| Total maturities of short-term borrowings and long-term debt | $ | 438,474 | ||
| 100 |
Note 9 – Other assets and other liabilities
The components of other assets and liabilities at December 31 are as follows (dollars in thousands):
| 2014 | 2013 | |||||||
| Other assets: | ||||||||
| Accrued interest receivable | $ | 7,677 | $ | 6,392 | ||||
| Assets held in trusts for deferred compensation plans | 7,385 | 6,254 | ||||||
| Retirement plans | - | 952 | ||||||
| Other | 9,314 | 8,516 | ||||||
| Total | $ | 24,376 | $ | 22,114 | ||||
| Other liabilities: | ||||||||
| Accrued interest payable | $ | 369 | $ | 355 | ||||
| Accrued compensation | 1,939 | 1,684 | ||||||
| Dividends payable | - | 128 | ||||||
| Retirement plans | 4,031 | 3,024 | ||||||
| Deferred compensation | 7,730 | 6,737 | ||||||
| Other | 3,770 | 2,742 | ||||||
| Total | $ | 17,839 | $ | 14,670 | ||||
Note 10 – Income taxes
The components of income tax expense (benefit) for the years ended December 31 are as follows (dollars in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Current tax (benefit) expense | ||||||||||||
| Federal | $ | 473 | $ | 76 | $ | (81 | ) | |||||
| State | - | - | 15 | |||||||||
| Total current | 473 | 76 | (66 | ) | ||||||||
| Deferred tax (benefit) expense | ||||||||||||
| Federal | 6,073 | (4,771 | ) | (2,408 | ) | |||||||
| State | 1,273 | 1,479 | (124 | ) | ||||||||
| Total deferred | 7,346 | (3,292 | ) | (2,532 | ) | |||||||
| Total income tax (benefit) expense | $ | 7,819 | $ | (3,216 | ) | $ | (2,598 | ) | ||||
ASC Topic 740 requires that the realizability of the deferred tax asset and evaluation of the need for a valuation allowance consider all positive and negative evidence to form a conclusion as to whether the realization of the deferred tax asset is more likely than not. The Company must also assign weight to the various forms of evidence, based upon the ability to verify the evidence.Management evaluates the realizability of the recorded deferred tax assets on a regular basis. This evaluation includes a review of all available evidence, including recent historical financial performance and expected near-term levels of net interest margin, nonperforming assets, operating expenses, earnings and other factors. It further includes the consideration of the items that have given rise to the deferred tax assets, as well as tax planning strategies.
During the third quarter of 2012, the Company recorded material writedowns and losses on the disposition or resolution of problem assets, which resulted in a material pre-tax net loss for that quarter. As a consequence, the Company was in a cumulative pre-tax loss position for the three-year period ended September 30, 2012, which constituted significant negative evidence in the context of evaluating deferred tax assets for realizability as prescribed by ASC Topic 740.At that time, the Company believed the three-year cumulative loss position was due to an unusual, self-imposed, acceleration of loss recognition to dispose of problem assets in a liquidation market. However, there was insufficient verifiable evidence to substantiate that belief, and the deferred tax asset was deemed impaired and a valuation allowance of $11.0 million was established by recording a charge to income tax expense at September 30, 2012. In each of the quarters ended December 31, 2012 and March 31, 2013, adjustments were made to the valuation allowance to carry the deferred tax assets at net realizable value. In addition, in the second quarter of 2013, after having completed three consecutive quarters of meaningful profitability, coupled with continuing improvement in asset quality, the Company was able to place a high level of significance to this verifiable positive evidence. As a result, management concluded at that time that only the portion of the deferred tax asset associated with certain state net economic loss and contribution carryforwards should be impaired. Therefore, in the second quarter of 2013, the valuation allowance against the deferred tax asset was further reduced by $8.4 million to $1.0 million. At December 31, 2014 management maintains its conclusion that no additional valuation allowance is necessary. Management has also concluded that the utilization of the remaining deferred tax assets is more likely than not.
| 101 |
During the third quarter of 2013, North Carolina reduced its corporate income tax rate from 6.90% to 6.00% effective January 1, 2014, and to 5.00% effective January 1, 2015. Further reductions to 4.00% on January 1, 2016, and 3.00% on January 1, 2017, are contingent upon the State meeting revenue targets. As a result, the Company’s deferred tax asset was reduced by $875,000 at September 30, 2013, for the estimated effect of these changes by a charge to income tax expense of $740,000 and a charge to accumulated other comprehensive income – pension of $135,000. No provision has been made for the future contingent rate reductions, the effect of which is estimated to be less than $300,000 each.
The significant components of deferred tax assets at December 31 are as follows (dollars in thousands):
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for credit losses | $ | 8,458 | $ | 9,428 | ||||
| Non-qualified deferred compensation plans | 2,365 | 2,293 | ||||||
| Accrued compensation | 459 | 546 | ||||||
| Stock-based compensation | 1,327 | - | ||||||
| Writedowns on real estate acquired in settlement of loans | 767 | 800 | ||||||
| Interest on nonaccrual loans | 180 | 227 | ||||||
| Net operating losses | 21,554 | 28,201 | ||||||
| Pension plans | 3,233 | 2,276 | ||||||
| Interest rate swaps | 101 | - | ||||||
| Purchase accounting adjustments | 2,446 | - | ||||||
| Contribution carryforward | - | 141 | ||||||
| Other | 2,542 | 2,148 | ||||||
| Valuation allowance | (328 | ) | (571 | ) | ||||
| Total | 43,104 | 45,489 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciable basis of property and equipment | (1,981 | ) | (2,278 | ) | ||||
| Intangible assets | (573 | ) | - | |||||
| Deferred loan fees | (509 | ) | (583 | ) | ||||
| Net unrealized gain on available for sale securities | (2,904 | ) | (1,577 | ) | ||||
| CapStone investment securities fair value greater than cost | (222 | ) | - | |||||
| Other | (3,782 | ) | (4,272 | ) | ||||
| Total | (9,971 | ) | (8,710 | ) | ||||
| Net deferred tax assets | $ | 33,133 | $ | 36,779 | ||||
Federal net operating loss carryforwards of $11,509,000, $13,108,000 and $31,252,000 expire in 2029, 2030 and 2032 respectively. State net economic loss carryforwards of $997,000, $3,428,000, $2,767,000, $5,229,000, $30,549,000 and $553,000 expire in 2022, 2023, 2024, 2025, 2027 and 2028, respectively.
| 102 |
The provision for income taxes differs from that computed by applying the federal statutory rate of 35% as indicated in the following analysis (dollars in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Tax based on statutory rates | $ | 7,628 | $ | 6,144 | $ | (9,748 | ) | |||||
| Increase (decrease) resulting from: | ||||||||||||
| Effect of tax-exempt income | (434 | ) | (343 | ) | (337 | ) | ||||||
| State income taxes, net of federal benefit | 827 | 739 | (1,322 | ) | ||||||||
| State tax rate reduction | - | 740 | - | |||||||||
| Income on bank-owned life insurance | (485 | ) | (500 | ) | (523 | ) | ||||||
| Change in valuation allowance | (243 | ) | (10,496 | ) | 10,030 | |||||||
| Other, net | 526 | 500 | (698 | ) | ||||||||
| Total provision (benefit) for income taxes | $ | 7,819 | $ | (3,216 | ) | $ | (2,598 | ) | ||||
| Effective tax rate | 35.9 | % | (18.3 | )% | 9.3 | % | ||||||
The Company’s federal and state income tax returns through 2010 have been examined and settled. The Company does not have any material uncertain tax positions.
Note 11 – Commitments and contingent liabilities
The minimum annual lease commitments under noncancelable operating leases in effect at December 31, 2014, are as follows (dollars in thousands):
| Years Ending December 31 | ||||
| 2015 | $ | 1,796 | ||
| 2016 | 1,595 | |||
| 2017 | 1,233 | |||
| 2018 | 786 | |||
| 2019 | 503 | |||
| Thereafter | 513 | |||
| Total lease commitments | $ | 6,426 | ||
Payments for all operating leases amounted to approximately $2.1 million, $1.9 million and $1.7 million for the years ended December 31, 2014, 2013, and 2012, respectively.
The Company’s consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the contractual amounts of the Bank’s exposure to off-balance sheet risk at December 31 is as follows (dollars in thousands):
| Contractual Amount | ||||||||
| 2014 | 2013 | |||||||
| Loan commitments | $ | 494,890 | $ | 317,520 | ||||
| Credit card lines | 25,712 | 25,569 | ||||||
| Standby letters of credit | 5,606 | 2,841 | ||||||
| Total commitments and contingent liabilities | $ | 526,208 | $ | 345,930 | ||||
The Bank’s exposure to credit loss in the event of nonperformance by the counterparty is equal to the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company and its subsidiary are involved at times in certain litigation arising in the normal course of business. In the opinion of management as of December 31, 2014, there is no pending or threatened litigation that will have a material effect on the Company's consolidated financial position or results of operations.
| 103 |
Note 12 – Related party transactions
The Bank had loans outstanding to officers and directors and their affiliated entities during each of the past two years. Such loans were made substantially on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers, and, at the time that they were made, did not involve more than the normal risks of collectability. The following table summarizes the transactions for the past two years (dollars in thousands):
| 2014 | 2013 | |||||||
| Balance, beginning of year | $ | 10,240 | $ | 7,142 | ||||
| Amounts added as a result of acquisition | 13,784 | - | ||||||
| Amounts removed as a result of director departures | - | (170 | ) | |||||
| Advances (repayments), net, during year | 769 | 3,268 | ||||||
| Balance, end of year | $ | 24,793 | $ | 10,240 | ||||
Note 13 – Other operating expenses
The components of other operating expense for the years ended December 31, 2014, 2013 and 2012 are as follows (dollars in thousands):
| Years Ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Other operating expenses: | ||||||||||||
| Advertising | $ | 1,779 | $ | 1,583 | $ | 1,506 | ||||||
| Bankcard expense | 527 | 488 | 450 | |||||||||
| Postage | 939 | 743 | 746 | |||||||||
| Stationery, printing and supplies | 613 | 487 | 420 | |||||||||
| Telephone | 493 | 666 | 699 | |||||||||
| Travel, dues and subscriptions | 1,205 | 1,001 | 823 | |||||||||
| Directors’ fees | 696 | 601 | 517 | |||||||||
| Franchise and privilege taxes | 543 | 403 | 430 | |||||||||
| Deposit premium amortization | 1,599 | 809 | 726 | |||||||||
| Other expense | 3,705 | 3,244 | 3,648 | |||||||||
| Total | $ | 12,099 | $ | 10,025 | $ | 9,965 | ||||||
Note 14 – Stock-based compensation
As of December 31, 2014, the Company’s Compensation Committee administered the Company’s five stock-based compensation plans, each of which was approved by the shareholders. Four of these plans have expired, and while there are options and other grants outstanding that have not yet expired, no new awards may be granted thereunder. The active plan, which will expire in 2016, had 535,000 shares of common stock authorized for issuance to plan participants in the form of stock options, rights to receive restricted shares of common stock and/or performance units. At December 31, 2014, a total of 472,349 shares were available for future grants under this unexpired plan.
Upon the acquisition of CapStone on April 1, 2014, 617,270 CapStone stock options under four stock-based compensation plans were converted to 1,388,849 Company stock options with a fair value of $4.6 million determined using the Black-Scholes-Merton option-pricing model. At December 31, 2014, 744,004 of these converted options were outstanding and exercisable with an average weighted remaining contractual life of approximately two years and an aggregate intrinsic value of $2.9 million.No new awards may be granted under these plans, which are also administered by the Company’s Compensation Committee.
The Company recorded $787,000 of total stock-based compensation expense during 2014, compared to $439,000 in 2013 and $159,000 in 2012. As of December 31, 2014, there was $1.0 million of total unrecognized compensation expense related to stock options and restricted stock units. This expense will be fully amortized by December 31, 2016.
| 104 |
As of December 31, 2014, 396,041 restricted stock units granted to certain senior officers were outstanding. The fair value of each restricted stock unit is the closing price of the Company’scommon stock on the dates they were granted. The number of units, date of grant and the fair value of each restricted stock unit are as follows:
| December 31, 2014 | ||||||||
| Grant | Fair Value | |||||||
| Units | Date | Per Unit | ||||||
| 17,470 | 02/09/11 | $ | 5.15 | |||||
| 95,569 | 01/11/12 | 3.89 | ||||||
| 7,580 | 07/25/12 | 4.10 | ||||||
| 100,190 | 01/16/13 | 5.00 | ||||||
| 2,390 | 03/06/13 | 5.91 | ||||||
| 1,460 | 04/24/13 | 5.99 | ||||||
| 35,359 | 07/24/13 | 8.80 | ||||||
| 1,701 | 10/09/13 | 6.61 | ||||||
| 93,021 | 01/15/14 | 7.19 | ||||||
| 36,301 | 07/29/14 | 7.64 | ||||||
| 5,000 | 10/29/14 | 8.41 | ||||||
| 396,041 | ||||||||
The following is a summary of restricted stock unit activity and related information for the years ended December 31:
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Units | Weighted Average Grant Date Value | Units | Weighted Average Grant Date Value | Units | Weighted Average Grant Date Value | |||||||||||||||||||
| Outstanding – | ||||||||||||||||||||||||
| Beginning of year | 302,389 | $ | 5.09 | 229,420 | $ | 4.31 | 98,094 | $ | 4.85 | |||||||||||||||
| Granted | 140,230 | 7.35 | 168,754 | 5.85 | 131,326 | 3.91 | ||||||||||||||||||
| Vested | (20,530 | ) | 5.27 | (47,660 | ) | 4.53 | - | - | ||||||||||||||||
| Forfeited | (26,048 | ) | 5.12 | (48,125 | ) | 4.61 | - | - | ||||||||||||||||
| Outstanding – | ||||||||||||||||||||||||
| End of year | 396,041 | $ | 5.88 | 302,389 | $ | 5.09 | 229,420 | $ | 4.31 | |||||||||||||||
The intrinsic value of restricted stock units that vested in 2014 and 2013 is $153,000 and $282,000 respectively.
The following is a summary of stock option activity and related information for the years ended December 31:
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||||||||||||
| Outstanding – | ||||||||||||||||||||||||
| Beginning of year | 377,629 | $ | 15.64 | 529,825 | $ | 14.55 | 658,465 | $ | 14.82 | |||||||||||||||
| Converted | 1,388,849 | 4.54 | - | - | - | - | ||||||||||||||||||
| Exercised | (628,045 | ) | 4.14 | - | - | - | - | |||||||||||||||||
| Forfeited | (153,362 | ) | 14.42 | (152,196 | ) | 11.86 | (128,640 | ) | 15.93 | |||||||||||||||
| Outstanding – | ||||||||||||||||||||||||
| End of year | 985,071 | $ | 7.51 | 377,629 | $ | 15.64 | 529,825 | $ | 14.55 | |||||||||||||||
| Exercisable – | ||||||||||||||||||||||||
| End of year | 985,071 | $ | 7.51 | 377,629 | $ | 15.64 | 529,825 | $ | 14.55 | |||||||||||||||
All options were granted at fair value on date of grant, which is equal to the exercise price. The intrinsic value of stock options exercised in 2014 is $2.3 million. There were no stock option exercises in 2013 and 2012.
| 105 |
The following is a summary of information on outstanding and exercisable stock options at December 31, 2014:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices | Number | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||||||
| $ 0.00 – $ 5.00 | 467,710 | 1.59 | $ | 4.08 | 467,710 | $ | 4.08 | |||||||||||||
| $ 5.81 – $10.05 | 289,294 | 2.40 | 6.29 | 289,294 | 6.29 | |||||||||||||||
| $11.06 – $14.93 | 5,350 | 2.07 | 13.64 | 5,350 | 13.64 | |||||||||||||||
| $15.42 – $16.93 | 200,217 | 0.49 | 16.01 | 200,217 | 16.01 | |||||||||||||||
| $17.10 – $18.00 | 22,500 | 1.46 | 17.38 | 22,500 | 17.38 | |||||||||||||||
| 985,071 | 1.60 | $ | 7.51 | 985,071 | $ | 7.51 | ||||||||||||||
The Company recorded excess tax benefits related to stock-based compensation as a credit to shareholders’ equity of $101,000 during 2014 and $26,000 during 2013.
Note 15 – Net income (loss) per share
The following is a reconciliation of the numerator and denominator of basic and diluted net income (loss) per share of common stock (dollars in thousands, except per share data):
| For the years ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Basic: | ||||||||||||
| Net income (loss) available to common shareholders | $ | 13,639 | $ | 18,917 | $ | (28,172 | ) | |||||
| Weighted average shares outstanding | 34,944,660 | 26,643,820 | 15,655,868 | |||||||||
| Net income (loss) per share, basic | $ | 0.39 | $ | 0.71 | $ | (1.80 | ) | |||||
| Diluted: | ||||||||||||
| Net income (loss) available to common shareholders | $ | 13,639 | $ | 18,917 | $ | (28,172 | ) | |||||
| Weighted average shares outstanding | 34,944,660 | 26,643,820 | 15,655,868 | |||||||||
| Effect of dilutive securities: | ||||||||||||
| Stock options | 393,565 | 357 | - | |||||||||
| Restricted stock units | 128,205 | 98,843 | - | |||||||||
| Warrant | - | 505,254 | - | |||||||||
| Convertible preferred stock | - | 1,821,853 | - | |||||||||
| Weighted average shares outstanding and dilutive potential shares outstanding | 35,466,430 | 29,070,127 | 15,655,868 | |||||||||
| Net income (loss) per share, diluted | $ | 0.38 | $ | 0.65 | $ | (1.80 | ) | |||||
On December 31, 2014, there were 241,067 options that were antidilutive (because the exercise price exceeded the average market price for the year), and there were 393,565 dilutive stock options and 128,205 restricted stock units. On December 31, 2013, there were 374,629 options that were antidilutive (because the exercise price exceeded the average market price for the year), and there were 357 dilutive stock options, 98,843 restricted stock units, a warrant to purchase 505,254 shares of common stock, and mandatorily convertible preferred stock convertible into 1,821,853 shares of common stock. For the year ended December 31, 2012, there were 529,825 options that were antidilutive (because the exercise price exceeded the average market price for the year). The calculation of diluted net income (loss) per share for 2012 excludes the effect of 41,116 restricted stock units, a warrant to purchase 759,749 shares of common stock, and mandatorily convertible preferred stock convertible into 1,101,191 shares of common stock as these were deemed antidilutive as a result of the Company’s net loss for 2012.
See Note 21 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a description of the warrant.
| 106 |
Note 16 – Parent company only
The Company’s principal asset is its investment in its subsidiary, the Bank. The Company’s principal source of income is dividends received from the Bank. The following presents condensed financial information of the Company:
| 2014 | 2013 | |||||||
| Condensed balance sheets (dollars in thousands) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | 6,130 | $ | 5,936 | ||||
| Investment in wholly owned subsidiary | 265,436 | 186,712 | ||||||
| Other assets | 1,630 | 787 | ||||||
| Total assets | $ | 273,196 | $ | 193,435 | ||||
| Liabilities | ||||||||
| Subordinated debt | $ | 15,500 | $ | - | ||||
| Junior subordinated notes | 25,774 | 25,774 | ||||||
| Other liabilities | 567 | 869 | ||||||
| Shareholders’ equity | 231,355 | 166,792 | ||||||
| Total liabilities and shareholders’ equity | $ | 273,196 | $ | 193,435 | ||||
| 2014 | 2013 | 2012 | ||||||||||
| Condensed statements of income | ||||||||||||
| Management and service fees from subsidiary | $ | - | $ | 619 | $ | 523 | ||||||
| Other operating expense | 1,150 | 1,199 | 972 | |||||||||
| Income (loss) before equity in undistributed net income (loss) of subsidiary | (1,150 | ) | (580 | ) | (449 | ) | ||||||
| Equity in undistributed net income (loss) of subsidiary | 15,126 | 21,351 | (24,805 | ) | ||||||||
| Net income (loss) | $ | 13,976 | $ | 20,771 | $ | (25,254 | ) | |||||
| 2014 | 2013 | 2012 | ||||||||||
| Condensed statements of cash flows | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) | $ | 13,976 | $ | 20,771 | $ | (25,254 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Other changes, net | (1,336 | ) | (375 | ) | (425 | ) | ||||||
| Equity in undistributed net income (loss) of subsidiary | (15,126 | ) | (21,351 | ) | 24,805 | |||||||
| Net cash (used in) provided by operating activities | (2,486 | ) | (955 | ) | (874 | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Investments in wholly owned subsidiary | - | - | - | |||||||||
| Net cash provided by (used in) investing activities | - | - | - | |||||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issuance of long-term debt | 15,500 | - | - | |||||||||
| Proceeds from issuance of preferred stock | - | - | 52,337 | |||||||||
| Exercise of stock options | 2,598 | - | - | |||||||||
| Payment to repurchase preferred stock | (15,000 | ) | (37,472 | ) | - | |||||||
| Payment to repurchase warrant | - | (7,779 | ) | - | ||||||||
| Cash paid in lieu of issuing shares pursuant to restricted stock units | (49 | ) | (78 | ) | - | |||||||
| Dividends paid | (337 | ) | (1,571 | ) | (2,618 | ) | ||||||
| Other changes, net | (32 | ) | (91 | ) | - | |||||||
| Net cash provided by (used in) financing activities | 2,680 | (46,991 | ) | 49,719 | ||||||||
| Increase (decrease) in cash | 194 | (47,946 | ) | 48,845 | ||||||||
| Cash at beginning of year | 5,936 | 53,882 | 5,037 | |||||||||
| Cash at end of year | $ | 6,130 | $ | 5,936 | $ | 53,882 | ||||||
| 107 |
Note 17 – Employee benefit plans
The Company has three defined benefit retirement plans:
| · | A pension plan, which is frozen; |
| · | A supplemental executive retirement plan (“SERP”) covering certain executive and former executive officers, which is frozen; and |
| · | A supplemental executive retirement plan (“SERP”) covering senior officers, which is active. |
The curtailed pension plan and the curtailed SERP provide for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and a percentage of qualifying compensation during the employee’s final years of employment. Contributions to the pension plan are based upon the projected unit credit actuarial funding method and comply with the funding requirements of the Employee Retirement Income Security Act. Contributions prior to the curtailments were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets of the pension plan consist primarily of cash and cash equivalents, U.S. government securities, and other securities. The curtailed SERP is unfunded. Effective September 1, 2014 the Bank established an unfunded SERP for senior officers to provide an annual retirement benefit for 10 years following retirement. The benefit vests ratably in proportion to years of service completed after September 1, 2014 over the projected number of years of service to retirement date, but not less than five years. The Company is accruing the service cost component of this benefit straight line over the vesting period.
The disclosures presented represent combined information for all of the employee benefit plans. The following tables outline the changes in these pension obligations, assets and funded status for the years ended December 31, 2014 and 2013, and the assumptions and components of net periodic pension cost for the two and three years in the period ended December 31, 2014 (dollars in thousands):
| 2014 | 2013 | |||||||
| Change in benefit obligation | ||||||||
| Projected benefit obligation at beginning of year | $ | 28,169 | $ | 31,652 | ||||
| Service cost | 102 | 20 | ||||||
| Interest cost | 1,522 | 1,398 | ||||||
| Actuarial (gain) loss | 1,898 | (3,342 | ) | |||||
| Benefits paid | (1,589 | ) | (1,559 | ) | ||||
| Projected benefit obligation at end of year | 30,102 | 28,169 | ||||||
| Change in plan assets | ||||||||
| Fair value of plan assets at beginning of year | 26,098 | 21,538 | ||||||
| Actual return on plan assets | 1,122 | 2,824 | ||||||
| Employer contributions | 440 | 3,295 | ||||||
| Benefits paid | (1,589 | ) | (1,559 | ) | ||||
| Fair value of plan assets at end of year | 26,071 | 26,098 | ||||||
| Funded status at end of year | ||||||||
| Plan assets less projected benefit obligation – pension liability | $ | (4,031 | ) | $ | (2,071 | ) | ||
| 2014 | 2013 | |||||||
| Amounts recognized in the consolidated balance sheets consist of: | ||||||||
| Pension asset (liability) | $ | (888 | ) | $ | 952 | |||
| SERP liability | (3,143 | ) | (3,023 | ) | ||||
| Deferred tax asset | 1,542 | 805 | ||||||
| Accumulated comprehensive income, net | 5,220 | 3,597 | ||||||
| Net amount recognized | $ | 2,731 | $ | 2,331 | ||||
| 108 |
| 2014 | 2013 | 2012 | ||||||||||
| Components of net periodic pension cost | ||||||||||||
| Service | $ | 102 | $ | 20 | $ | 26 | ||||||
| Interest | 1,522 | 1,398 | 1,433 | |||||||||
| Expected return on plan assets | (2,035 | ) | (1,826 | ) | (1,605 | ) | ||||||
| Amortization of prior service cost | 1 | 1 | 1 | |||||||||
| Amortization of net (gain) loss | 185 | 641 | 564 | |||||||||
| Net periodic pension cost | $ | (225 | ) | $ | 234 | $ | 419 | |||||
| Weighted average assumptions | ||||||||||||
| Discount rate | 5.00 | % | 5.50 | % | 4.50 | % | ||||||
| Expected return on plan assets | 8.00 | % | 8.00 | % | 8.25 | % | ||||||
| Rate of compensation increases | 4.00 | % | 4.00 | % | 4.00 | % | ||||||
Target asset allocations are established based on periodic evaluations of risk/reward under various economic scenarios and with varying asset class allocations. The near-term and long-term impact on obligations and asset values are projected and evaluated for funding and financial accounting implications. Actual allocation and investment performance is reviewed quarterly. The current target allocation ranges, along with the actual allocation as of December 31, 2014, are included in the accompanying table.
| Plan Assets | Market Value as of December 31, 2014 (dollars in thousands) | Actual Allocation as of December 31, 2014 | Long-Term Allocation Target | |||||||||
| Equity securities | $ | 16,026 | 61.5 | % | 40% - 75 | % | ||||||
| Debt securities | 10,045 | 38.5 | % | 25% - 60 | % | |||||||
| Total | $ | 26,071 | 100 | % | 100 | % | ||||||
The fair value of the Company’s pension plan assets at December 31, 2014 and 2013 by asset category are reflected in the following table (dollars in thousands). The fair value hierarchy descriptions used to measure these plan assets are identified in Note 19 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||||
| Plan Assets at December 31, 2014 | ||||||||||||||||
| US equity securities | $ | 5,025 | $ | - | $ | - | $ | 5,025 | ||||||||
| Equity mutual funds | 10,906 | - | - | 10,906 | ||||||||||||
| Foreign equity securities | 95 | - | - | 95 | ||||||||||||
| Fixed income securities | - | 2,207 | - | 2,207 | ||||||||||||
| Fixed income mutual funds | - | 7,817 | - | 7,817 | ||||||||||||
| Cash and money market funds | 21 | - | - | 21 | ||||||||||||
| Total plan assets | $ | 16,047 | $ | 10,024 | $ | - | $ | 26,071 | ||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||||
| Plan Assets at December 31, 2013 | ||||||||||||||||
| US equity securities | $ | 5,237 | $ | - | $ | - | $ | 5,237 | ||||||||
| Equity mutual funds | 10,574 | - | - | 10,574 | ||||||||||||
| Foreign equity securities | 112 | - | - | 112 | ||||||||||||
| Fixed income securities | - | 1,933 | - | 1,933 | ||||||||||||
| Fixed income mutual funds | - | 7,879 | - | 7,879 | ||||||||||||
| Cash and money market funds | 363 | - | - | 363 | ||||||||||||
| Total plan assets | $ | 16,286 | $ | 9,812 | $ | - | $ | 26,098 | ||||||||
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The Company’s policy is to amortize actuarial gains and losses over the average remaining service periods for active participants when the accumulated net gain or loss exceeds 10% of the projected benefit obligation or market value of plan assets, whichever is greater. The assumed expected return on assets considers the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in the portfolio and the expectation for future returns of each asset class. The expected return of each asset class is weighted based on the target allocation to develop the expected long-term rate of return on assets. This resulted in the selection of the 8.25% rate used in 2012 and the 8.00% rate used in 2013 and 2014 and to be used for 2015.
The contributions for all plans for 2014 were approximately $440,000, and the required contributions for 2015 are expected to be approximately $430,000. The expected benefit payments for all plans for the next ten years are as follows (dollars in thousands):
| Years Ending December 31 | ||||
| 2015 | $ | 1,640 | ||
| 2016 | 1,710 | |||
| 2017 | 1,850 | |||
| 2018 | 1,870 | |||
| 2019 | 1,957 | |||
| 2020 through 2024 | 10,940 | |||
| Total | $ | 19,967 | ||
The Company also has a separate contributory 401(k) savings plan covering substantially all employees. The 401(k) savings plan allows eligible employees to contribute up to a fixed percentage of their compensation, with the Bank matching a portion of each employee’s contribution. The Bank’s contributions were $928,000 for 2014, $832,000 for 2013 and $751,000 for 2012. The 401(k) savings plan contribution expense is reported under personnel expense in the consolidated statements of income.
A deferred compensation plan allows the directors and executive officers of the Company to defer compensation. Each plan participant makes an annual election to either receive that year’s compensation or to defer receipt until his or her death, disability or retirement. The deferred compensation balances of this plan are maintained in a rabbi trust. The balances in the trust at December 31, 2014 and 2013 were $7.3 million and $6.2 million, respectively. In addition, the Company has an inactive Director Deferred Compensation Plan that acquired shares of the Company’s Class A common stock in the open market. These shares are held in a trust at cost, as a component of shareholders’ equity, until distributed.
Note 18 – Regulatory matters
The primary source of funds for dividends that may be paid by the Company to its shareholders is dividends received from the Bank plus cash on hand of $6.1 million as of December 31, 2014. Dividends paid by the Company and the Bank may be limited by minimum capital requirements imposed by banking regulators.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes that as of December 31, 2014, both the Company and the Bank met all capital adequacy requirements to which they are subject.
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The most recent notification from the Bank’s primary federal regulator categorized the Bank as “well capitalized” under the Regulatory Framework for Prompt Corrective Action. There are no conditions or events since that notification that management believes have changed the Bank’s category. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the accompanying table (dollars in thousands).
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
| Amount | Percentages | Amount | Percentages | Amount | Percentages | |||||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||
| Total Capital (To Risk-Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | $ | 247,131 | 12.23 | % | $ | 161,638 | ≥8.0 | % | N/A | |||||||||||||||
| Bank | 240,806 | 11.92 | 161,605 | ≥8.0 | $ | 202,007 | ≥10.0 | % | ||||||||||||||||
| Tier I Capital (To Risk-Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | 209,366 | 10.36 | 80,819 | ≥4.0 | N/A | |||||||||||||||||||
| Bank | 218,541 | 10.82 | 80,803 | ≥4.0 | 121,204 | ≥6.0 | % | |||||||||||||||||
| Tier I Capital (To Average Assets) | ||||||||||||||||||||||||
| Consolidated | 209,366 | 8.57 | 97,701 | ≥4.0 | N/A | |||||||||||||||||||
| Bank | 218,541 | 8.95 | 97,697 | ≥4.0 | 122,121 | ≥5.0 | % | |||||||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||
| Total Capital (To Risk-Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | $ | 177,222 | 11.67 | % | $ | 121,496 | ≥8.0 | % | N/A | |||||||||||||||
| Bank | 171,422 | 11.29 | 121,437 | ≥8.0 | $ | 151,796 | ≥10.0 | % | ||||||||||||||||
| Tier I Capital (To Risk-Weighted Assets) | ||||||||||||||||||||||||
| Consolidated | 158,113 | 10.41 | 60,748 | ≥4.0 | N/A | |||||||||||||||||||
| Bank | 152,322 | 10.03 | 60,719 | ≥4.0 | 91,078 | ≥6.0 | % | |||||||||||||||||
| Tier I Capital (To Average Assets) | ||||||||||||||||||||||||
| Consolidated | 158,113 | 8.30 | 76,197 | ≥4.0 | N/A | |||||||||||||||||||
| Bank | 152,322 | 8.00 | 76,151 | ≥4.0 | 95,189 | ≥5.0 | % | |||||||||||||||||
Banking regulations restrict the amount of deferred income tax assets that may be recognized for purposes of calculating regulatory capital ratios. At December 31, 2014, $21.0 million of the Company’s deferred income tax assets were deducted from regulatory capital. This amount, which is principally comprised of the future tax benefit associated with net operating loss carry-forwards, when fully utilized would add 0.90% to the total risk-based capital ratio.
In July 2013, the Federal Reserve approved a final rule implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rule revises minimum capital requirements and adjusts prompt corrective action thresholds. The final rule revises the regulatory capital elements, adds a new common equity Tier I capital ratio, and increases the minimum Tier I capital ratio requirement. The rule also permits certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income and implements a new capital conservation buffer. The final rule took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rule.
Note 19 – Fair value of financial instruments
FASB ASC 825, “Financial Instruments” requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2014 or December 31, 2013. The estimated fair value amounts for December 31, 2014 and December 31, 2013 have been measured as of period-end, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period end.
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The estimated fair value amounts should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value, establishes a three level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
| · | Level 1 — Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| · | Level 2 — Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, matrix pricing or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly in the market. |
| · | Level 3 — Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of discounted cash flow models and similar techniques. |
The Company’s policy is to recognize transfers in and transfers out of the fair value hierarchy levels as of the end of the quarter in which the transfer occurred. During the years ended December 31, 2014 and 2013, the Company did not have any transfers between levels.
The following methods and assumptions were used to estimate the fair value for each class of the Company’s financial instruments.
Cash and cash equivalents.The carrying amounts for cash and due from banks approximate fair value because of the short maturities of those instruments and are categorized as Level 1 (quoted prices in active markets for identical assets).
Investment certificates of deposit.Investment certificates of deposit are certificates of deposit of $250,000 or less placed in multiple financial institutions. The fair value is estimated using the difference between the coupon rate on each certificate of deposit and the current required rate and is categorized as Level 2 (“significant other observable inputs”).
Investment securities. The fair value of investment securities is based on quoted prices in active markets for identical assets (Level 1), if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities, corresponding to the “significant other observable inputs” definition of GAAP (Level 2). If a quoted market price for a similar security is not available, fair value is estimated using “significant unobservable inputs” as defined by GAAP (Level 3). The fair value of equity investments in the restricted stock of the FHLB of Atlanta and the Federal Reserve Bank equals the carrying value based on the redemption provisions and is categorized as Level 3.
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Loans.The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value. The fair value of loans is categorized as Level 3.
Impaired loans. The fair value of each impaired loan is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral, less selling and other handling costs, for certain collateral dependent loans less specific reserves. The fair value of impaired loans is categorized as Level 3.
Loans held for sale.Substantially all residential mortgage loans held for sale are pre-sold; therefore, their carrying value approximates fair value and is categorized as Level 2.
Investments held in trust and non-qualified defined contribution plan liability.Investments held in trust consist primarily of cash and cash equivalents, equity securities, and mutual fund investments, and are recorded at fair value and included in other assets. The purpose of these investments is to fund certain director and executive officer non-qualified retirement benefits and deferred compensation. The benefit payable is the non-qualified defined contribution plan liability, which is recorded at fair value and included in other liabilities. For cash and cash equivalents, which have maturities of 90 days or less, their carrying amounts reported in the consolidated balance sheets approximate fair value and are categorized as Level 1. The fair value of other equity securities and mutual funds are valued based on quoted prices from the market and are categorized as Level 1.
Interest rate swaps.Under the terms of cash flow hedges, which the Bank entered into in August and November, 2014, for the duration of the hedges the Bank and the counterparty pay one another the difference between the variable amount payable by the Bank based on the 30-day LIBOR rate and the fixed payment payable by the counterparty. The fair values of the cash flow hedges are based on projected LIBOR rates for the duration of the hedges, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument. In addition, as of December 31, 2014, the Bank had two other interest rate swap contracts that were classified as non-designated hedges that allow the customers to pay a fixed rate of interest to the Bank. These interest rate swaps were simultaneously hedged by executing offsetting interest rate swaps with a derivatives dealer to mitigate the net risk exposure to the Bank resulting from the transactions and allow the Bank to receive a variable rate of interest. The fair values of the interest rate swaps are categorized as Level 2.
Deposits.The fair value of noninterest-bearing demand deposits and Negotiable Order of Withdrawal (“NOW”), savings, and money market deposits are the amounts payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of deposits is categorized as Level 2.
Federal funds purchased and retail repurchase agreements. The carrying values of federal funds purchased and retail repurchase agreements are considered to be a reasonable estimate of fair value and are categorized as Level 1.
Wholesale repurchase agreements, subordinated debt, junior subordinated notes and FHLB of Atlanta borrowings.The fair values of these liabilities are estimated using the discounted values of the contractual cash flows and are categorized as Level 2. The discount rate is estimated using the rates currently in effect for similar borrowings.
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The estimated fair values of financial instruments for the years ending December 31 (dollars in thousands):
| December 31, 2014 | Carrying Value | Estimated Fair Value | ||||||
| Financial assets: | ||||||||
| Cash and cash equivalents | $ | 34,369 | $ | 34,369 | ||||
| Investment certificates of deposit | 15,632 | 15,705 | ||||||
| Investment securities | 496,798 | 498,012 | ||||||
| Loans | 1,782,294 | 1,784,477 | ||||||
| Loans held for sale | 6,181 | 6,181 | ||||||
| Investments held in trust | 7,342 | 7,342 | ||||||
| Interest rate swaps | 224 | 224 | ||||||
| Financial liabilities: | ||||||||
| Deposits | 1,832,564 | 1,834,333 | ||||||
| Federal funds purchased | 29,500 | 29,500 | ||||||
| Wholesale repurchase agreements | 21,000 | 22,252 | ||||||
| Subordinated debt | 15,500 | 15,978 | ||||||
| Junior subordinated notes | 25,774 | 12,515 | ||||||
| Federal Home Loan Bank borrowings | 346,700 | 346,712 | ||||||
| Non-qualified defined contribution plan liability | 7,342 | 7,342 | ||||||
| Interest rate swaps | 492 | 492 | ||||||
| December 31, 2013 | Carrying Value | Estimated Fair Value | ||||||
| Financial assets: | ||||||||
| Cash and cash equivalents | $ | 33,513 | $ | 33,513 | ||||
| Investment securities | 368,866 | 366,988 | ||||||
| Loans | 1,392,153 | 1,414,109 | ||||||
| Loans held for sale | 3,530 | 3,530 | ||||||
| Investments held in trust | 6,184 | 6,184 | ||||||
| Financial liabilities: | ||||||||
| Deposits | 1,553,996 | 1,555,221 | ||||||
| Federal funds purchased | 13,000 | 13,000 | ||||||
| Wholesale repurchase agreements | 21,000 | 22,915 | ||||||
| Junior subordinated notes | 25,774 | 11,279 | ||||||
| Federal Home Loan Bank borrowings | 170,000 | 170,153 | ||||||
| Non-qualified defined contribution plan liability | 6,184 | 6,184 | ||||||
The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
| 114 |
The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset (dollars in thousands):
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
| Assets measured at fair value | ||||||||||||
| Available for sale securities at December 31, 2014 | $ | 4,465 | $ | 338,218 | $ | 23,414 | ||||||
| Available for sale securities at December 31, 2013 | 2,845 | 288,716 | 9,988 | |||||||||
| Investments held in trust at December 31, 2014 | 7,342 | - | - | |||||||||
| Investments held in trust at December 31, 2013 | 6,184 | - | - | |||||||||
| Interest rate swaps at December 31, 2014 | - | 224 | - | |||||||||
| Interest rate swaps at December 31, 2013 | - | - | - | |||||||||
| Liabilities measured at fair value | ||||||||||||
| Non-qualified defined contribution plan liability at December 31, 2014 | 7,342 | - | - | |||||||||
| Non-qualified defined contribution plan liability at December 31, 2013 | 6,184 | - | - | |||||||||
| Interest rate swaps at December 31, 2014 | - | 492 | - | |||||||||
| Interest rate swaps at December 31, 2013 | - | - | - | |||||||||
The table below presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) during 2014 and 2013 (dollars in thousands):
| Twelve Months | Twelve Months | |||||||
| Ended | Ended | |||||||
| December 31 | December 31 | |||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Available for sale securities | ||||||||
| Beginning balance | $ | 9,988 | $ | 7,685 | ||||
| Purchases | 16,947 | 17,464 | ||||||
| Acquisitions | 3,089 | 2,090 | ||||||
| Redemptions | (6,610 | ) | (17,251 | ) | ||||
| Ending balance | $ | 23,414 | $ | 9,988 | ||||
The table below presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation of each asset (dollars in thousands):
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
| Loans held for sale at December 31, 2014 | $ | - | $ | 6,181 | $ | - | ||||||
| Loans held for sale at December 31, 2013 | - | 3,530 | - | |||||||||
| Real estate acquired in settlement of loans at December 31, 2014 | - | - | 2,485 | |||||||||
| Real estate acquired in settlement of loans at December 31, 2013 | - | - | 7,620 | |||||||||
| Impaired loans, net of allowance at December 31, 2014 | - | - | 3,322 | |||||||||
| Impaired loans, net of allowance at December 31, 2013 | - | - | 5,107 | |||||||||
The fair value of collateral dependent loans is determined by appraisals or by alternative evaluations, such as tax evaluations. The fair value of loans may also be determined by sales contracts in hand or settlement agreements.
The following table presents the valuation and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at December 31, 2014 (dollars in thousands):
| 115 |
| Description | Fair Value | Valuation Methodology | Unobservable Inputs | Range of Inputs | ||||||||
| Real estate acquired in settlement of loans | $ | 2,485 | Appraised value | Discount to reflect current market conditions | 0.00% - 47.00% | |||||||
| Impaired loans, net of allowance | 3,222 | Appraised value | Discount to reflect current market conditions | 0.00% - 47.00% | ||||||||
| Discounted cash flows | Discount rates | 3.00% - 7.50% | ||||||||||
Note 20 — Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income, net of tax, at December 31, 2014 and 2013 are as follows (dollars in thousands):
| 2014 | 2013 | |||||||
| Components of accumulated other comprehensive income | ||||||||
| Unrealized gains on available for sale securities | $ | 4,688 | $ | 2,478 | ||||
| Funded status of pension plans | (5,220 | ) | (3,635 | ) | ||||
| Unrecognized loss on cash flow hedges | (163 | ) | - | |||||
| Total accumulated other comprehensive income | $ | (695 | ) | $ | (1,157 | ) | ||
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Reclassifications from accumulated other comprehensive income (loss) for the years ended December 31, 2014 and 2013 are as follows (dollars in thousands):
| Details about accumulated other | Amount reclassified from accumulated other | Affected line item in the Consolidated | ||||
| comprehensive income (loss) | comprehensive income (loss) | Statements of Income | ||||
| Year ended December 31, 2014 | ||||||
| Unrealized gains (losses) on cash flow hedges | $ | 212 | Interest and fees on loans | |||
| (81 | ) | Income tax expense (benefit) | ||||
| $ | 131 | Net of tax | ||||
| Amortization of net actuarial loss | $ | (186 | ) | Personnel expense | ||
| 71 | Income tax expense (benefit) | |||||
| $ | (115 | ) | Net of tax | |||
| Total reclassifications for the period | $ | 16 | ||||
| Year ended December 31, 2013 | ||||||
| Unrealized gains (losses) on available for sale securities | $ | 736 | Gain on sales of investment securities | |||
| (291 | ) | Income tax expense (benefit) | ||||
| $ | 445 | Net of tax | ||||
| Amortization of net actuarial loss | $ | (642 | ) | Personnel expense | ||
| 245 | Income tax expense (benefit) | |||||
| $ | (397 | ) | Net of tax | |||
| Total reclassifications for the period | $ | 48 | ||||
| Year ended December 31, 2012 | ||||||
| Unrealized gains (losses) on available for sale securities | $ | 3 | Gain on sales of investment securities | |||
| (1 | ) | Income tax expense (benefit) | ||||
| $ | 2 | Net of tax | ||||
| Amortization of net actuarial loss | $ | (565 | ) | Personnel expense | ||
| 225 | Income tax expense (benefit) | |||||
| $ | (340 | ) | Net of tax | |||
| Total reclassifications for the period | $ | (338 | ) | |||
Note 21 – Capital transactions
In November, 2012, the Company entered into securities purchase agreements with select investors, pursuant to which it sold shares of mandatorily convertible (Series B and C) preferred stock in a private placement for an aggregate of $56.3 million. Expenses incurred in the offering of $4.1 million were deducted from paid-in capital.
At a special meeting of shareholders of the Company on February 20, 2013, shareholders approved the conversion of up to 422,456 shares of Series B preferred stock and up to 140,217 shares of Series C preferred stock into voting and nonvoting common stock, respectively, at a conversion rate of $4.40 per share. Articles of Amendment filed with the North Carolina Secretary of State on February 21, 2013, created a new class of nonvoting common stock designated “Class B common stock,” and redesignated the Company’s existing (voting) common stock as “Class A common stock.” The Class A common stock and the Class B common stock each have no par value per share. As a result, on February 22, 2013, the Series B preferred stock was converted into 9,601,262 shares of voting Class A common stock, and the Series C preferred stock was converted into 3,186,748 shares of nonvoting Class B common stock.
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On May 15, 2013, the Company completed its repurchase of a stock warrant issued and sold to the U.S. Treasury on December 12, 2008 for its fair market value of $7.8 million. On June 3, 2013, the Company redeemed 37,372 of the Company’s 52,372 outstanding shares of Series A preferred stock at the liquidation price of $1,000 per share for a total of $37.4 million plus $93,430 of accrued and unpaid dividends. On March 31, 2014, the Company redeemed all of its remaining 15,000 outstanding shares of Series A preferred stock at the liquidation price of $1,000 per share for a total of $15.0 million plus $172,500 of accrued and unpaid dividends.
On March 14, 2014, the Company entered into a Subordinated Note Purchase Agreement with 14 accredited investors under which the Company issued an aggregate of $15.5 million of subordinated notes to the accredited investors, including members of the Company’s Board of Directors. The subordinated notes have a maturity date of March 14, 2024 and bear interest, payable on the 1st of January and July of each year, commencing July 1, 2014, at a fixed interest rate of 7.25% per year. The subordinated notes are intended to qualify as Tier II capital for regulatory purposes.
On April 1, 2014, the Company completed its acquisition of CapStone. (See Note 2 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K for details of the transaction.)
Note 22 – Derivatives
Interest rate risk management is a part of the Company’s overall asset/liability management process. The primary oversight of asset/liability management rests with the Asset and Liability Committee, which is comprised of the Company’s Chief Executive Officer, Chief Financial Officer, and other senior executives. Over the past several years, the Company’s balance sheet has been consistently slightly “asset sensitive,” i.e. should interest rates decline, the Company’s assets will reprice faster than its liabilities, resulting in a declining net interest margin and less net interest income.
In order to partially mitigate its exposure in the event the interest rate curve flattens over the next three years, on August 8, 2014 and on November 13, 2014, the Bank entered into interest rate swaps that qualify as cash flow hedges under GAAP. The fair value of the swaps is included in other liabilities in the consolidated balance sheets, and the net change in fair value is included in other comprehensive income and in the consolidated statements of cash flows under the caption net (increase) decrease in other liabilities. At December 31, 2014, the estimated fair value of the liability is $264,000.
The risk management objective is to mitigate the Bank’s interest rate risk exposure to the variability of the cash flows upon changes to its forecasted interest receipts as the 30-day LIBOR, the benchmark interest rate used by the Bank, changes. The Bank has sought to manage its interest rate risk exposure by entering into two interest rate swaps with a notional amount of $50.0 million each. These are designated as cash flow hedges of the interest rate risk associated with the benchmark rate of the 30-day LIBOR attributable to the forecasted interest payments received from the 30-day LIBOR loan portfolio and investment securities (the hedged forecasted transaction). For the interest rate swap entered into on August 8, 2014, the Bank will receive interest at a fixed rate of 0.925 percent and pay interest at a rate based on the 30-day LIBOR. This interest rate swap hedges interest receipts through August 8, 2017. For the interest rate swap entered into on November 13, 2014, the Bank will receive interest at a fixed rate of 0.98 percent and pay interest at a rate based on the 30-day LIBOR. This interest rate swap hedges interest receipts through November 13, 2017. Settlement of the swaps occurs monthly. As of December 31, 2014, collateral of $450,000 was pledged and on deposit with the counterparty to secure the existing obligations under these interest rate swaps.
For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statements of income. The Bank’s interest rate swaps have been fully effective since inception. Changes in the fair value of the interest rate swaps, therefore, have had no impact on net income. For 2014, the Bank recognized interest income of $212,000 resulting from incremental interest received from the counterparty, none of which related to ineffectiveness. The Bank regularly monitors the credit risk of the interest rate swaps counterparty.
| 118 |
In addition, as of December 31, 2014, the Bank had two other interest rate swap contracts that were classified as non-designated hedges. These derivatives are interest rate swaps executed with commercial borrowers to allow the customers to pay a fixed rate of interest to the Bank. These interest rate swaps were simultaneously hedged by executing offsetting interest rate swaps with a derivatives dealer to mitigate the net risk exposure to the Bank resulting from the transactions and allow the Bank to receive a variable rate of interest.
The interest rate swap contracts with the commercial borrowers require the borrowers to pay to or receive from the Bank an amount equal to and offsetting the value of the interest rate swaps. If the commercial borrowers fail to perform and the market value for the interest rate swap with the derivatives dealer is negative (i.e. in a net liability position), the Bank would have to continue to pay the settlement amount for the financial derivative to the dealer or pay a termination fee. If the market value for the interest rate swap with the derivatives dealer is positive (i.e. in a net asset position), the Bank would continue to receive a payment for the settlement amount for the financial derivative with the dealer. The settlement amount is impacted by the fluctuation of interest rates.
The fair values of interest rate swap derivatives that are classified as non-designated hedges are recorded in other assets and other liabilities on the balance sheet. As these interest rate swaps do not meet hedge accounting requirements, changes in the fair value of these interest rate swaps are recognized directly in earnings. These changes are recorded in other noninterest expense and were immaterial for 2014. As of December 31, 2014, the customer interest rate swaps and the offsetting swaps each had an aggregate notional amount of approximately $11.3 million and the fair value of these two interest rate swap derivatives are recorded in other assets for $224,000 and in other liabilities for $227,000 on the balance sheet. The net effect of recording the derivatives at fair value through earnings was immaterial to the Company’s financial condition and results of operations during 2014.
As of December 31, 2014, the fair value of the interest rate swaps with the derivatives dealer was in a net liability position of $227,000, which includes adjustment for nonperformance risk, related to these agreements. As of December 31, 2014, the Bank provided $240,000 of collateral, which is included in cash on the balance sheet as interest-bearing deposits with banks. If the Bank had breached any of these provisions at December 31, 2014, it would have been required to settle its obligations under the agreement by paying the termination value of $248,000.
Note 23 — Subsequent Events
Acquisition of Premier Commercial Bank
On February 27, 2015,the acquisition of Premier Commercial Bank (“Premier”)was completed. Premier, a commercial bank headquartered in Greensboro, NC, operates one full-service banking office centrally located in Greensboro and residential mortgage origination offices in Greensboro, Charlotte, Raleigh, High Point, Kernersville and Burlington, NC.Initial accounting for acquisition fair values is in process but incomplete. At December 31, 2014, total assets of Premier were $168.7 million. Substantially all of the acquisition-related costs will be incurred in the first quarter of 2015.
Per the terms of the Agreement and Plan of Combination and Reorganization, 75% of the 1,925,247 shares of Premier common stock outstanding at acquisition were exchanged for 1,735,465 shares of the Company’s Class A common stock at an exchange ratio of 1.2019, and the remaining 25% were exchanged for cash of $4.8 million. The shares were issuedat a price of $8.30 per share, the closing stock price of the Class A common stock on February 27, 2014.The total purchase price was $19.8 million, including the conversion of 294,400 Premier stock options having a fair value of $632,000. The acquisition was a tax-free transaction. Due to the close proximity of the acquisition date and the date that the Company’s financial statements were issued, preliminary fair value estimates are not available.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial |
| Disclosure |
None.
| 119 |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s management, including its CEO, CFO, and Chief Accounting Officer (“CAO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2014. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of December 31, 2014, the end of the period covered by this Annual Report on Form 10-K, the Company maintained effective disclosure controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. On April 1, 2014, the Company acquired Capstone. As permitted by guidance provided by the Staff of the U.S. Securities and Exchange Commission, management excluded from its assessment of internal control over financial reporting as of December 31, 2014 CapStone’s internal control over financial reporting associated with 8.4% of consolidated revenue (total interest income and total noninterest income) for the year ended December 31, 2014 and 9.3% of consolidated total assets as of December 31, 2014. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s CEO, CFO and CAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Management has made a comprehensive review, evaluation and assessment of the Company’s internal control over financial reporting as of December 31, 2014. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control – Integrated Framework (2013). Based on this assessment, management has determined that, as of December 31, 2014, the Company’s internal control over financial reporting is effective. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:
| • | Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting. |
| • | Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. |
The Company’s independent registered public accounting firm, Dixon Hughes Goodman LLP, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. This Report of Independent Registered Public Accounting Firm is included in Item 8, Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s CEO, CFO, and CAO, changes in the Company’s internal control over financial reporting during the fourth quarter of 2014. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the fourth quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 9B. | Other Information |
None.
| 120 |
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
(a) Directors and Executive Officers – The information required by this Item regarding directors, nominees and executive officers of the Company is set forth in the Proxy Statement under the sections captioned “Proposal 1 – Election of Directors” and “Executive Officers of the Company,” which sections are incorporated herein by reference.
(b) Section 16(a) Compliance – The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is set forth in the Proxy Statement under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance,” which section is incorporated herein by reference.
(c) Audit Committee – The information required by this Item regarding the Company’s Audit Committee, including the Audit Committee Financial Expert, is set forth in the Company’s Proxy Statement under the sections captioned “Board Committees – Audit and Risk Management Committee” and “Board Committees – Audit Committee Report,” which sections are incorporated herein by reference.
(d) Code of Ethics – The information required by this Item regarding the Company’s code of ethics is set forth in the Proxy Statement under the section captioned “Code of Business Conduct and Ethics,” which section is incorporated herein by reference.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by this Item is set forth in the Proxy Statement under the sections captioned “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “ Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon Termination or Change in Control,” “Director Compensation,” “Directors’ Fees and Practices,” “Board Committees – Compensation Committee Interlocks and Insider Participation” and “Board Committees – Compensation Committee Report,” which sections are incorporated herein by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is set forth in the Proxy Statement under the sections captioned “Security Ownership of Certain Beneficial Owners” and “How Much Common Stock do our Directors and Executive Officers Own?” and in Item 5 of this Annual Report on Form 10-K, which sections and Item are incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is set forth in the Proxy Statement under the sections captioned “Proposal 1 – Election of Directors,” “Certain Relationships and Related Transactions,” “Board Committees,” “Board Committees – Compensation Committee Interlocks and Insider Participation,” and “Related Party Matters,” which sections are incorporated herein by reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is set forth in the Proxy Statement under the section captioned “Audit Fees Paid to Independent Auditor,” which section is incorporated herein by reference.
| 121 |
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this report.
| Financial Statements | Page | |
| Quarterly Financial Information | 63 | |
| Reports of Independent Registered Public Accounting Firm | 64 | |
| Consolidated Balance Sheets as of December 31, 2014 and 2013 | 66 | |
| Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 | 67 | |
| Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 | 68 | |
| Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012 | 69 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 | 70 | |
| Notes to Consolidated Financial Statements | 72 |
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits.The exhibits required by Item 601 of Regulation S-K are listed below.
(b) The exhibits to the Form 10-K begin on page 123 of this Report.
(c) See 15(a)(2) above.
| 122 |
Exhibit Index
| Exhibit No. | Description | |
| 2.1 | Agreement and Plan of Combination and Reorganization dated as of October 8, 2014, by and among Premier Commercial Bank, NewBridge Bancorp and NewBridge Bank, incorporated herein by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on October 8, 2014 (SEC File No. 000-11448). | |
| 3.1 | Articles of Incorporation, and amendments thereto, incorporated herein by reference to Exhibit 4.1 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046). | |
| 3.2 | Articles of Merger of FNB Financial Services Corporation with and into LSB Bancshares Inc., including amendments to the Articles of Incorporation, as amended, incorporated herein by reference to Exhibit 3.4 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC File No. 000-11448). | |
| 3.3 | Amended and Restated Bylaws adopted by the Board of Directors on August 17, 2004 and amended on July 23, 2008 (with identified Bylaw approved by the shareholders) incorporated herein by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 8, 2009 (SEC File No. 000-11448). | |
| 3.4 | Articles of Amendment, filed with the North Carolina Department of the Secretary of State on December 12, 2008, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). | |
| 3.5 | Articles of Amendment to Designate the Terms of the Series B Mandatorily Convertible Adjustable Rate Cumulative Perpetual Preferred Stock and Series C Mandatorily Convertible Adjustable Rate Cumulative Perpetual Preferred Stock, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on November 30, 2012 (SEC File No. 000-11448). | |
| 3.6 | Articles of Amendment, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on February 21, 2013 (SEC File No. 000-11448). | |
| 4.1 | Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.02 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086). | |
| 4.2 | Guarantee Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.03 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086). | |
| 4.3 | Indenture, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.04 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086). | |
| 4.4 | Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). | |
| 4.5 | Certificate of Designation for the Class B Common Stock, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on February 21, 2013 (SEC File No. 000-11448). | |
| 4.6 | Specimen Certificate of Class A Common Stock, no par value, incorporated herein by reference to Exhibit 4.6 of the Annual Report on Form 10-K filed with the SEC on March 12, 2014 (SEC File No. 000-11448). | |
| 4.7 | Form of Subordinated Note, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2014 (SEC File No. 000-11448). |
| 123 |
| 10.1 | Benefit Equivalency Plan of FNB Southeast, effective January 1, 1994, incorporated herein by reference to Exhibit 10 of the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1995, filed with the SEC (SEC File No. 000-13086).* | |
| 10.2 | 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1995, filed with the SEC on March 28, 1996 (SEC File No. 000-11448).* | |
| 10.3 | Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10(B) of the Annual Report on Form 10-KSB40 for the fiscal year ended December 31, 1996, filed with the SEC on March 31, 1997 (SEC File No. 000-13086).* | |
| 10.4 | Amendment to Benefit Equivalency Plan of FNB Southeast, effective January 1, 1998, incorporated herein by reference to Exhibit 10.16 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the SEC on March 25, 1999 (SEC File No. 000-13086).* | |
| 10.5 | Amendment Number 1 to 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 4.5 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046).* | |
| 10.6 | Long Term Stock Incentive Plan for certain senior management employees of FNB Southeast, incorporated herein by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the SEC on March 27, 2003 (SEC File No. 000-13086).* | |
| 10.7 | Form of Stock Option Award Agreement for a Director adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448).* | |
| 10.8 | Form of Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448).* | |
| 10.9 | Form of Amendment to the applicable Grant Agreements under the 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448).* | |
| 10.10 | Form of Amendment to the Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448).* | |
| 10.11 | Restated Form of Director Fee Deferral Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448).* | |
| 10.12 | Form of Stock Appreciation Rights Award Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448).* | |
| 10.13 | FNB Amended and Restated Directors Retirement Policy, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on August 3, 2007 (SEC File No. 000-11448).* | |
| 10.14 | Amendment to the FNB Directors and Senior Management Deferred Compensation Plan Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, FNB Southeast and FNB, dated July 31, 2007, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on August 3, 2007 (SEC File No. 000-11448).* |
| 124 |
| 10.15 | Directors and Senior Management Deferred Compensation Plan Trust Agreement between FNB Southeast and Morgan Trust Company, incorporated herein by reference to Exhibit 99.7 of the Current Report on Form 8-K filed with the SEC on March 14, 2008 (SEC File No. 000-11448).* | |
| 10.16 | Second Amendment to the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, NewBridge Bancorp and NewBridge Bank, which is incorporated herein by reference to Exhibit 99.8 of the current Report on Form 8-K filed with the SEC on March 14, 2008 (SEC File No. 000-11448).* | |
| 10.17 | NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2008 (SEC File No. 000-11448).* | |
| 10.18 | First Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.10 of the Current Report on Form 8-K filed with the SEC on March 14, 2008 (SEC File No. 000-11448).* | |
| 10.19 | NewBridge Bancorp Amended and Restated Long Term Stock Incentive Plan, formerly the “FNB Long Term Stock Incentive Plan” (the “2006 Omnibus Plan”), incorporated herein by reference to Exhibit 10.27 of the Quarterly Report on Form 10-Q filed with the SEC on May 9, 2008 (SEC File No. 000-11448).* | |
| 10.20 | Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q filed with the SEC on August 11, 2008 (SEC File No. 000-11448).* | |
| 10.21 | Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.45 of the Quarterly Report on Form 10-Q filed with the SEC on August 11, 2008 (SEC File No. 000-11448).* | |
| 10.22 | Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Ramsey K. Hamadi, dated March 2, 2012, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on March 2, 2012 (SEC File No. 000-11448).* | |
| 10.23 | Second Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 11, 2012, incorporated herein by reference to Exhibit 10.33 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).* | |
| 10.24 | Third Amendment to the Trust Agreement for the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy, effective March 5, 2012, incorporated herein by reference to Exhibit 10.34 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).* | |
| 10.25 | Appointment of Successor Trustee under the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management dated March 5, 2012, incorporated herein by reference to Exhibit 10.35 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).* | |
| 10.26 | Second Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.36 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).* | |
| 10.27 | Third Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.37 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).* |
| 125 |
| 10.28 | Fourth Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.38 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).* | |
| 10.29 | Form of Securities Purchase Agreement, dated November 1, 2012, between NewBridge Bancorp and certain investors, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on November 1, 2012 (SEC File No. 000-11448). | |
| 10.30 | Form of Registration Rights Agreement, dated November 1, 2012, between NewBridge Bancorp and certain investors, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on November 1, 2012 (SEC File No. 000-11448). | |
| 10.31 | Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and William W. Budd, Jr., executed February 8, 2013, and effective March 5, 2013, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on February 11, 2013 (SEC File No. 000-11448).* | |
| 10.32 | Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Robin S. Hager, executed February 8, 2013, and effective August 1, 2013, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on February 11, 2013 (SEC File No. 000-11448).* | |
| 10.33 | Third Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 23, 2013, incorporated herein by reference to Exhibit 10.35 of the Annual Report on Form 10-K filed with the SEC on March 12, 2014 (SEC File No. 000-11448).* | |
| 10.34 | Form of Subordinated Note Purchase Agreement, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2014 (SEC File No. 000-11448). | |
| 10.35 | CapStone Bank 2006 Incentive Stock Option Plan, incorporated herein by reference to Exhibit 99.1 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).* | |
| 10.36 | CapStone Bank 2006 Nonstatutory Stock Option Plan, incorporated herein by reference to Exhibit 99.2 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).* | |
| 10.37 | Patriot State Bank 2007 Incentive Stock Option Plan, incorporated herein by reference to Exhibit 99.3 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).* | |
| 10.38 | Patriot State Bank 2007 Nonstatutory Stock Option Plan, incorporated herein by reference to Exhibit 99.4 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).* | |
| 10.39 | Form of Settlement and Release Agreement between NewBridge Bank and Michael S. Patterson, incorporated herein by reference to Exhibit 10.37 of the Registration Statement on Form S-4, filed with the SEC on December 23, 2013 (SEC File No. 333-193045).* | |
| 10.40 | Form of Continuing Services Agreement between NewBridge Bank and Michael S. Patterson, incorporated herein by reference to Exhibit 10.36 of the Registration Statement on Form S-4, filed with the SEC on December 23, 2013 (SEC File No. 333-193045).* | |
| 10.41 | Amended and Restated Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Pressley A. Ridgill, executed August 21, 2014, and effective September 1, 2014, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on August 21, 2014 (SEC File No. 000-11448).* |
| 126 |
| 10.42 | NewBridge Bank Supplemental Executive Retirement Plan, executed November 6, 2014, and effective September 1, 2014, incorporated herein by reference to Exhibit 10.43 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 7, 2014 (SEC File No. 000-11448).* | |
| 10.43 | NewBridge Bank Supplemental Executive Retirement Plan Participation Agreement by and between NewBridge Bank and Pressley A. Ridgill, executed November 6, 2014, and effective September 1, 2014, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 7, 2014 (SEC File No. 000-11448).* | |
| 10.44 | Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Ramsey K. Hamadi, effective March 30, 2015, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on February 6, 2015 (SEC File No. 000-11448).* | |
| 21.1 | Schedule of Subsidiaries. | |
| 23.1 | Consent of Dixon Hughes Goodman LLP. | |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.1 | Financial Statements filed in XBRL format. |
* Management contract and compensatory arrangements.
| 127 |
Pursuant to the requirements of Section 13 or 15(d) 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.
NEWBRIDGE BANCORP
| Date: | March 12, 2015 | By: | /s/Pressley A. Ridgill | |
| Pressley A. Ridgill, | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity | Date | ||
| /s/pressley a. ridgill | President, Chief Executive Officer, Director | March 12, 2015 | ||
| Pressley A. Ridgill | (Principal Executive Officer) | |||
| /s/ramsey k. hamadi | Senior Executive Vice President, Chief Financial Officer | March 12, 2015 | ||
| Ramsey K. Hamadi | (Principal Financial Officer) | |||
| /s/richard m. cobb | Executive Vice President, Chief Accounting Officer, Controller | March 12, 2015 | ||
| Richard M. Cobb | (Principal Accounting Officer) | |||
| /s/michael s. albert | Chairman of the Board | March 12, 2015 | ||
| Michael S. Albert | ||||
| /s/barry Z. dodson | Vice Chairman of the Board | March 12, 2015 | ||
| Barry Z. Dodson | ||||
| /s/ robert a. boyette | Director | March 12, 2015 | ||
| Robert A. Boyette | ||||
| /s/j. david branch | Director | March 12, 2015 | ||
| J. David Branch | ||||
| /s/ c. arnold britt | Director | March 12, 2015 | ||
| C. Arnold Britt | ||||
| /s/ robert c. clark | Director | March 12, 2015 | ||
| Robert C. Clark | ||||
| /s/alex a. diffey, jr. | Director | March 12, 2015 | ||
| Alex A. Diffey, Jr. | ||||
| /s/donald p. johnson | Director | March 12, 2015 | ||
| Donald P. Johnson | ||||
| Director | March 12, 2015 | |||
| Joseph H. Kinnarney | ||||
| /s/michael s. patterson | Director | March 12, 2015 | ||
| Michael S. Patterson |
| 128 |
| /s/mary e. rittling | Director | March 12, 2015 | ||
| Mary E. Rittling | ||||
| /s/e. reid teague, jr. | Director | March 12, 2015 | ||
| E. Reid Teague, Jr. | ||||
| /s/richard a. urquhart, iii | Director | March 12, 2015 | ||
| Richard A. Urquhart, III | ||||
| /s/g. alfred webster | Director | March 12, 2015 | ||
| G. Alfred Webster | ||||
| /s/kenan c. wright | Director | March 12, 2015 | ||
| Kenan C. Wright | ||||
| Director | March 12, 2015 | |||
| Julius S. Young, Jr. |
| 129 |
EXHIBIT INDEX
| Exhibit | Description | |
| 21.1 | Schedule of Subsidiaries. | |
| 23.1 | Consent of Dixon Hughes Goodman LLP. | |
| 31.1 | Certification of Pressley A. Ridgill. | |
| 31.2 | Certification of Ramsey K. Hamadi. | |
| 32.1 | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 | |
| 101.1 | Financial Statements submitted in XBRL format. |
| 130 |