Attached files
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EXCEL - IDEA: XBRL DOCUMENT - TIDELANDS BANCSHARES INC | Financial_Report.xls |
EX-31.1 - CERTIFICATION - TIDELANDS BANCSHARES INC | tdbk_ex311.htm |
EX-32 - CERTIFICATION - TIDELANDS BANCSHARES INC | tdbk_ex32.htm |
EX-31.2 - CERTIFICATION - TIDELANDS BANCSHARES INC | tdbk_ex312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period ended March 31, 2015
OR
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Transition Period from _________to_________
Commission File No. 001-33065
TIDELANDS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina
|
02-0570232
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(State or other jurisdiction of incorporation)
|
(I.R.S. Employer Identification No.)
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875 Lowcountry Blvd.
Mount Pleasant, South Carolina 29464
(Address of principal executive offices)
(843) 388-8433
(Registrant’s telephone number, including area code)
________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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 definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated | o | Smaller reporting company | þ |
(do not check if 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 o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,277,176 shares of common stock, $.01 par value per share, were issued and outstanding as of May 8, 2015.
INDEX
This statement has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.
2
Consolidated Balance Sheets
March 31,
|
December 31,
|
|||||||
Assets:
|
2015
|
2014
|
||||||
(Unaudited)
|
(Audited)
|
|||||||
Cash and cash equivalents:
|
||||||||
Cash and due from banks
|
$ | 3,558,301 | $ | 4,327,269 | ||||
Interest bearing balances
|
19,483,133 | 16,958,000 | ||||||
Total cash and cash equivalents
|
23,041,434 | 21,285,269 | ||||||
Securities available-for-sale
|
79,399,577 | 82,261,996 | ||||||
Nonmarketable equity securities
|
896,300 | 905,400 | ||||||
Total securities
|
80,295,877 | 83,167,396 | ||||||
Mortgage loans held for sale
|
417,000 | — | ||||||
Loans receivable
|
320,614,320 | 317,996,474 | ||||||
Less allowance for loan losses
|
4,794,450 | 4,749,537 | ||||||
Loans, net
|
315,819,870 | 313,246,937 | ||||||
Premises, furniture and equipment, net
|
20,519,123 | 20,760,992 | ||||||
Accrued interest receivable
|
1,320,150 | 1,308,204 | ||||||
Bank owned life insurance
|
16,390,272 | 16,285,081 | ||||||
Other real estate owned
|
17,218,318 | 17,518,665 | ||||||
Other assets
|
1,635,219 | 2,008,077 | ||||||
Total assets
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$ | 476,657,263 | $ | 475,580,621 | ||||
Liabilities:
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing transaction accounts
|
$ | 29,379,093 | $ | 26,743,189 | ||||
Interest-bearing transaction accounts
|
35,083,034 | 38,824,146 | ||||||
Savings and money market accounts
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104,656,458 | 102,113,233 | ||||||
Time deposits $100,000 and over
|
164,659,807 | 162,898,316 | ||||||
Other time deposits
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95,495,897 | 97,534,837 | ||||||
Total deposits
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429,274,289 | 428,113,721 | ||||||
Securities sold under agreements to repurchase
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10,000,000 | 10,000,000 | ||||||
Advances from Federal Home Loan Bank
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9,000,000 | 9,000,000 | ||||||
Junior subordinated debentures
|
14,434,000 | 14,434,000 | ||||||
Accrued interest payable
|
3,298,261 | 3,159,215 | ||||||
Other liabilities
|
5,492,932 | 5,532,996 | ||||||
Total liabilities
|
471,499,482 | 470,239,932 | ||||||
Commitments and contingencies-Note 5,14, and 19
|
||||||||
Shareholders’ equity:
|
||||||||
Preferred stock, $.01 par value and liquidation value per share of $1,000, 10,000,000 shares authorized, 14,448 issued and outstanding
|
14,448,000 | 14,448,000 | ||||||
Common stock, $.01 par value, 75,000,000 shares authorized;
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||||||||
4,277,176 shares issued and outstanding
|
42,772 | 42,772 | ||||||
Common stock-warrant, 571,821 shares outstanding
|
1,112,248 | 1,112,248 | ||||||
Capital surplus
|
41,550,104 | 41,550,104 | ||||||
Retained deficit
|
(51,410,253 | ) | (50,680,789 | ) | ||||
Accumulated other comprehensive loss
|
(585,090 | ) | (1,131,646 | ) | ||||
Total shareholders’ equity
|
5,157,781 | 5,340,689 | ||||||
Total liabilities and shareholders’ equity
|
$ | 476,657,263 | $ | 475,580,621 |
See accompanying notes to the consolidated financial statements.
3
Consolidated Statements of Operations and Comprehensive Income
For the three months ended March 31, 2015 and 2014
(Unaudited)
Interest income:
|
2015
|
2014
|
||||||
Loans, including fees
|
$ | 3,823,679 | $ | 3,947,199 | ||||
Securities available-for-sale, taxable
|
355,977 | 440,563 | ||||||
Interest bearing deposits
|
9,522 | 6,385 | ||||||
Other interest income
|
8,997 | 11,453 | ||||||
Total interest income
|
4,198,175 | 4,405,600 | ||||||
Interest expense:
|
||||||||
Time deposits $100,000 and over
|
544,693 | 554,573 | ||||||
Other deposits
|
406,831 | 402,225 | ||||||
Other borrowings
|
289,509 | 316,322 | ||||||
Total interest expense
|
1,241,033 | 1,273,120 | ||||||
Net interest income
|
2,957,142 | 3,132,480 | ||||||
Provision for loan losses
|
— | 41,000 | ||||||
Net interest income after provision for loan losses
|
2,957,142 | 3,091,480 | ||||||
Noninterest income:
|
||||||||
Service charges on deposit accounts
|
9,503 | 9,922 | ||||||
Residential mortgage origination income
|
48,200 | 35,018 | ||||||
Gain on sale of securities available-for-sale
|
6,053 | — | ||||||
Loss on sale and disposal of other assets
|
(1,701 | ) | — | |||||
Other service fees and commissions
|
143,771 | 107,875 | ||||||
Increase in cash surrender value of BOLI
|
105,191 | 105,058 | ||||||
Other
|
4,586 | 1,992 | ||||||
Total noninterest income
|
315,603 | 259,865 | ||||||
Noninterest expense:
|
||||||||
Salaries and employee benefits
|
1,636,353 | 1,500,120 | ||||||
Net occupancy
|
448,652 | 368,496 | ||||||
Furniture and equipment
|
177,084 | 242,543 | ||||||
Other real estate owned expense, net
|
128,924 | 202,212 | ||||||
Other operating
|
1,197,664 | 1,169,917 | ||||||
Total noninterest expense
|
3,588,677 | 3,483,288 | ||||||
Loss before income taxes
|
(315,932 | ) | (131,943 | ) | ||||
Income tax expense
|
— | — | ||||||
Net loss
|
$ | (315,932 | ) | $ | (131,943 | ) | ||
Preferred dividends accrued
|
413,532 | 212,253 | ||||||
Net loss available to common shareholders
|
$ | (729,464 | ) | $ | (344,196 | ) | ||
Comprehensive Income:
|
||||||||
Net loss
|
$ | (315,932 | ) | $ | (131,943 | ) | ||
Unrealized gain on securities available for sale
|
887,595 | 1,093,110 | ||||||
Reclassification adjustment for realized gain on securities
|
(6,053 | ) | — | |||||
Tax effect
|
(334,986 | ) | (415,381 | ) | ||||
Comprehensive income
|
$ | 230,624 | $ | 545,786 | ||||
Basic loss per common share
|
$ | (.17 | ) | $ | (.08 | ) | ||
Diluted loss per common share
|
$ | (.17 | ) | $ | (.08 | ) | ||
Weighted average common shares outstanding
|
||||||||
Basic
|
4,220,991 | 4,187,652 | ||||||
Diluted
|
4,220,991 | 4,187,652 |
See accompanying notes to the consolidated financial statements.
4
Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended March 31, 2015 and 2014
(Unaudited)
Preferred Stock | Common Stock |
Common Stock
|
Unearned
ESOP
|
Capital |
Retained
Earnings
|
Accumulated other
Comprehensive
|
||||||||||||||||||||||||||||||||||
Shares | Amount |
Warrants
|
Shares | Amount |
Shares
|
Surplus
|
(deficit) |
income
|
Total
|
|||||||||||||||||||||||||||||||
Balance, December 31, 2013
|
14,448 | $ | 14,448,000 | $ | 1,112,248 | 4,277,176 | $ | 42,772 | $ | (1,183,898 | ) | $ | 42,708,140 | $ | (48,851,197 | ) | $ | (3,307,615 | ) | $ | 4,968,450 | |||||||||||||||||||
Repayment of ESOP borrowings
|
(1,158,036 | ) | (1,158,036 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, dividend accrued
|
(212,253 | ) | (212,253 | ) | ||||||||||||||||||||||||||||||||||||
Allocation of unearned ESOP shares
|
1,183,898 | 1,183,898 | ||||||||||||||||||||||||||||||||||||||
Net loss
|
(131,943 | ) | (131,943 | ) | ||||||||||||||||||||||||||||||||||||
Other comprehensive income
|
677,729 | 677,729 | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2014
|
14,448 | $ | 14,448,000 | $ | 1,112,248 | 4,277,176 | $ | 42,772 | $ | — | $ | 41,550,104 | $ | (49,195,393 | ) | $ | (2,629,886 | ) | $ | 5,327,845 | ||||||||||||||||||||
Balance, December 31, 2014
|
14,448 | $ | 14,448,000 | $ | 1,112,248 | 4,277,176 | $ | 42,772 |
—
|
$ | 41,550,104 | $ | (50,680,789 | ) | $ | (1,131,646 | ) | $ | 5,340,689 | |||||||||||||||||||||
Preferred stock, dividend accrued
|
(413,532 | ) | (413,532 | ) | ||||||||||||||||||||||||||||||||||||
Net loss
|
(315,932 | ) | (315,932 | ) | ||||||||||||||||||||||||||||||||||||
Other comprehensive income
|
546,556 | 546,556 | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2015
|
14,448 | $ | 14,448,000 | $ | 1,112,248 | 4,277,176 | $ | 42,772 | $ | — | $ | 41,550,104 | $ | (51,410,253 | ) | $ | (585,090 | ) | $ | 5,157,781 |
See accompanying notes to the consolidated financial statements.
5
Consolidated Statements of Cash Flows
For the three months ended March 31, 2015 and 2014
2015
|
2014
|
|||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (315,932 | ) | $ | (131,943 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities:
|
||||||||
Provision for loan losses
|
— | 41,000 | ||||||
Depreciation and amortization of premises, furniture and equipment
|
306,224 | 275,944 | ||||||
Discount accretion and premium amortization, net
|
90,044 | 86,253 | ||||||
Proceeds from sale of residential mortgages held-for-sale
|
2,869,690 | 2,712,230 | ||||||
Disbursements for residential mortgages held-for-sale
|
(3,286,690 | ) | (2,712,230 | ) | ||||
Increase in accrued interest receivable
|
(11,946 | ) | (17,366 | ) | ||||
Increase in accrued interest payable
|
139,046 | 153,920 | ||||||
Increase in cash surrender value of life insurance
|
(105,191 | ) | (105,058 | ) | ||||
Loss from sale and disposal of other assets
|
1,701 | — | ||||||
Gain from sale of real estate and other assets
|
(15,709 | ) | (28,834 | ) | ||||
Gain from sale of securities available-for-sale
|
(6,053 | ) | — | |||||
Decrease in carrying value of other real estate
|
— | 57,600 | ||||||
Decrease in other assets
|
37,872 | 117,662 | ||||||
Decrease in other liabilities
|
(453,596 | ) | (435,490 | ) | ||||
Net cash (used) provided by operating activities
|
(750,540 | ) | 13,688 | |||||
Cash flows from investing activities:
|
||||||||
Purchases of securities available-for-sale
|
(6,006,885 | ) | — | |||||
Proceeds from sales of securities available-for-sale
|
7,227,111 | — | ||||||
Proceeds from calls, maturities, and paydowns of securities available-for-sale
|
2,448,844 | 2,055,125 | ||||||
Net (increase) decrease in loans receivable
|
(2,876,483 | ) | 672,800 | |||||
Proceeds from sale of other real estate owned
|
619,606 | 741,660 | ||||||
Purchase of premises, furniture and equipment, net
|
(66,056 | ) | (544,740 | ) | ||||
Net cash provided by investing activities
|
1,346,137 | 2,924,845 | ||||||
Cash flows from financing activities:
|
||||||||
Net increase (decrease) in demand deposits, interest-bearing transaction accounts and savings accounts
|
1,438,017 | (956,104 | ) | |||||
Net decrease in certificates of deposit and other time deposits
|
(277,449 | ) | (8,852,994 | ) | ||||
Repayment of ESOP borrowings
|
— | (600,000 | ) | |||||
Decrease in unearned ESOP shares
|
— | 25,862 | ||||||
Net cash used (provided) by financing activities
|
1,160,568 | (10,383,236 | ) | |||||
Net increase (decrease) in cash and cash equivalents
|
1,756,165 | (7,444,703 | ) | |||||
Cash and cash equivalents, beginning of period
|
21,285,269 | 19,278,497 | ||||||
Cash and cash equivalents, end of period
|
$ | 23,041,434 | $ | 11,833,794 | ||||
Supplemental cash flow information:
|
||||||||
Interest paid on deposits and borrowed funds
|
$ | 1,101,988 | $ | 1,119,200 | ||||
Transfer of loans to foreclosed assets
|
$ | 303,550 | $ | 866,415 | ||||
Preferred stock-dividends accrued
|
$ | 413,532 | $ | 212,253 | ||||
Change in unrealized gain (loss) on securities available for sale
|
$ | 881,542 | $ | 1,093,110 |
See accompanying notes to the consolidated financial statements.
6
The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report on Form 10-K. The financial statements, as of March 31, 2015 and for the interim periods ended March 31, 2015 and 2014, are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The financial information as of December 31, 2014 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in the Company’s 2014 Annual Report on Form 10-K.
In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Tidelands Bancshares, Inc. (the “Company”) was incorporated on January 31, 2002 to serve as a bank holding company for its subsidiary, Tidelands Bank (the “Bank”). The Company operated as a development stage company from January 31, 2002 to October 5, 2003. Tidelands Bank commenced business on October 6, 2003. The principal business activity of the Bank is to provide banking services to domestic markets, principally in Charleston, Dorchester, Berkeley, Horry, Georgetown, Beaufort and Jasper counties in South Carolina. The Bank is a state-chartered commercial bank, and its deposits are insured by the Federal Deposit Insurance Corporation. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions. The Company formed Tidelands Statutory Trust I and Tidelands Statutory Trust II on February 22, 2006 and June 20, 2008, respectively, for the purpose of issuing trust preferred securities. In accordance with current accounting guidance, the Trusts are not consolidated in these financial statements. As further discussed in Note 18, on December 19, 2008, as part of the Capital Purchase Program established by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008, the Company issued 14,448 preferred shares and a common stock warrant to purchase 571,821 shares in return for $14.4 million in cash, to the U.S. Department of Treasury.
Management’s Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income 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 losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans and valuation of foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans and valuation of foreclosed real estate may change materially in the near term.
Consent Order - The Bank is under a Consent Order with the Federal Deposit Insurance Corporation (‘FDIC”). See note 16.
Trust Preferred Securities - The Company has issued trust preferred securities. See note 11.
Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.
The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Charleston metropolitan area (which includes Charleston, Dorchester, and Berkeley counties), Horry, Georgetown, Jasper and Beaufort counties, and additional markets along the South Carolina coast. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.
7
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.
The Company’s investment portfolio consists principally of obligations of the United States and its agencies or its corporations. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.
Securities Available-for-Sale - Securities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders’ equity net of deferred income taxes. Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.
Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Company’s investment in the stock of the Federal Home Loan Bank and stock in community bank holding companies. The Federal Home Loan Bank stock has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. Dividends received on this stock are included as interest income.
Loans Receivable - Loans are stated at their unpaid principal balance. Interest income on loans is computed based upon the unpaid principal balance. Interest income is recorded in the period earned.
The accrual of interest income is generally discontinued when a loan becomes contractually 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. Nonaccrual loans may be restored to performing status when all principal and interest has been kept current for six months and full repayment of the remaining contractual principal and interest is expected.
Loan origination and commitment fees are deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method, which approximates the interest method.
Loans are defined as impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are subject to these criteria except for smaller balance homogeneous loans that are collectively evaluated for impairment and loans measured at fair value or at the lower of cost or fair value. The Company considers its consumer installment portfolio, credit card loans, and home equity lines as such exceptions.
Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less estimated costs to sell, if the loan is collateral dependent. When management determines that a loan is impaired, the difference between the Company’s investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, less estimated costs to sell, is generally charged off with a corresponding entry to the allowance for loan losses. The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.
Troubled Debt Restructurings (“TDRs”) – The Company designates loan modifications as TDRs when, for economic or legal reasons related to the borrower’s financial difficulties, it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance is in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accruing status when there is economic substance to the restructuring, there is well documented credit evaluation of the borrower’s financial condition,, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated repayment performance in accordance with the modified terms for a reasonable period of time (a minimum of six months).
8
Allowance for Loan Losses - An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio. The Company’s judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which the Company believes to be reasonable, but which may or may not prove to be accurate. The Company’s determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of the Company’s overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, the Company’s historical loan loss experience, and a review of specific problem loans. The Company also considers subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance. Our analysis in accordance with generally accepted accounting principles (“GAAP”) indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio.
Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for furniture and equipment of five to 10 years and buildings of 40 years. Leasehold improvements are amortized over the life of the leases, which range up to 40 years. The cost of assets sold or otherwise disposed of and the related allowance for depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.
Other Real Estate Owned - Other real estate is acquired through, or in lieu of, foreclosure and is held for sale. It is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations are included within noninterest expense as part of other operating expense.
Securities Sold Under Agreements to Repurchase - The Bank enters into sales of securities under agreements to repurchase. Fixed-coupon repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.
Income Taxes - Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the net operating loss carry forward. Deferred tax assets are reduced by a valuation allowance, if based on the weight of evidence available; it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
Retirement Plan - The Company has a 401(k) profit sharing plan, which provides retirement benefits to substantially all officers and employees who meet certain age and service requirements. The plan includes a “salary reduction” feature pursuant to Section 401(k) of the Internal Revenue Code. Additionally, the Company maintains supplemental retirement plans for certain highly compensated employees designed to offset the impact of regulatory limits on benefits under qualified pension plans. There are supplemental retirement plans in place for certain current employees. Effective June 30, 2010, the executive officers agreed to cease further benefit accrual under the contracts and will only be entitled to receive benefits accrued through June 30, 2010.
Bank Owned Life Insurance - Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain current and former employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. The Bank purchases BOLI in order to use its earnings to help offset the costs of the Bank’s benefit expenses including pre- and post-retirement employee benefits. Increases in the cash surrender value (“CSV”) of the policies, as well as death benefits received net of any CSV, are recorded in other non-interest income, and are not subject to income taxes. The CSV of the policies are recorded as assets of the Bank. Any amounts owed to employees from policy benefits are recorded as liabilities of the Bank. The Company reviews the financial strength of the insurance carriers prior to the purchase of BOLI and annually thereafter. The Bank is currently not in compliance with Company policy that BOLI with any individual carrier is limited to 15% of tier one capital and BOLI in total is limited to 25% of tier one capital.
9
Stock Option Plan - On May 10, 2004, the Company established the 2004 Tidelands Bancshares, Inc. Stock Incentive Plan (“Stock Plan”) that provides for the granting of options to purchase 20% of the outstanding shares of the Company’s common stock to directors, officers, or employees of the Company. The Stock Plan expired on May 10, 2014 and there were no options outstanding for the years ended December 31, 2014 and 2013.
Employee Stock Ownership Plan - The Company established the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (“ESOP”) for the exclusive benefit of all eligible employees and their beneficiaries subject to authority to amend, from time to time, or terminate, the ESOP. The ESOP is primarily designed to invest in common stock of the Company and is permitted to purchase Company common stock with contributions to the ESOP made by the Company. Also, the ESOP is permitted to borrow money and use the loan proceeds to purchase Company common stock. The money and Company common stock in the ESOP is intended to grow tax free until retirement, death, permanent disability or other severance of employment with the Company. When an employee retires, he/she will receive the value of the accounts that have been set up for the contributions to the ESOP. An employee may also be eligible for benefits in the event of death, permanent disability or other severance from employment with the Company. The employee must pay taxes when the money is paid following one of these events or any other distributable event described in the ESOP.
Earnings (Loss) Per Common Share - Basic earnings (loss) per common share represent income (loss) available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and warrants and are determined using the treasury stock method. Weighted average shares outstanding are reduced for shares encumbered by the ESOP borrowings.
Comprehensive Income - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income
Statements of Cash Flows - For purposes of reporting cash flows in the consolidated financial statements, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
Changes in the valuation account of securities available-for-sale, including the deferred tax effects, are considered noncash transactions for purposes of the statement of cash flows and are presented in detail in the notes to the consolidated financial statements.
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.
Recently Issued Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.
In January 2014, the FASB amended the Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
10
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from U.S. GAAP. Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and transactions. The amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets. Credit risk is the risk of default on the loan portfolio that results from borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. Periodic examinations by the regulatory agencies may subject the Company to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.
Reclassifications - Certain captions and amounts in the 2014 financial statements were reclassified to conform to the 2015 presentation. These reclassifications had no effect on shareholders’ equity or results of operations as previously presented.
11
NOTE 3 - FAIR VALUE MEASUREMENTS
The current accounting literature requires the disclosure of fair value information for financial instruments, whether or not they are recognized in the consolidated balance sheets, when it is practical to estimate the fair value. The guidance defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment, accrued interest receivable and payable, and other assets and liabilities.
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.
The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Cash and Due from Banks and Interest Bearing Balances- The carrying amount for cash and due from banks is a reasonable estimate of fair value.
Federal Funds Sold - Federal funds sold are for a term of one day, and the carrying amount approximates the fair value.
Securities Available-for-sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.
With respect to securities available-for-sale, Level 1 includes those securities traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Nonmarketable Equity Securities - The carrying amount for nonmarketable equity securities approximates the fair value since no readily available market exists for these securities.
Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of 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. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans.
Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.
Securities Sold Under Agreements to Repurchase - These repurchase agreements have a fixed rate. Due to the minor change in interest rates, management estimated the fair value using a discounted cash flow calculation that applies the Company’s current borrowing rate for the securities sold under agreements to repurchase.
12
Advances from Federal Home Loan Bank - The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.
Junior Subordinated Debentures - The Company is unable to determine value based on the significant unobservable inputs required in the calculation. Refer to Note 11 for further information.
Off-Balance Sheet Financial Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Assets and liabilities that are carried at fair value are classified in one of the following three categories based on a hierarchy for ranking the quality and reliability of the information used to determine fair value.
Level 1 —
|
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.
|
Level 2 —
|
Observable market based inputs or unobservable inputs that are corroborated by market data. Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
|
Level 3 —
|
Unobservable inputs that are not corroborated by market data. Observable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity instruments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.
|
In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Following is a description of valuation methodologies used for assets received of fair value on a recurring and nonrecurring basis.
13
The carrying values and estimated fair values of the Company’s financial instruments are as follows:
March 31, 2015 | ||||||||||||||||||||
Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets:
|
||||||||||||||||||||
Cash and due from banks
|
$ | 3,558,301 | $ | 3,558,301 | $ | 3,558,301 | $ | — | $ | — | ||||||||||
Interest bearing balances
|
19,483,133 | 19,483,133 | 19,483,133 | — | — | |||||||||||||||
Securities available-for-sale
|
79,399,577 | 79,399,577 | 4,492,188 | 74,907,389 | — | |||||||||||||||
Nonmarketable equity securities
|
896,300 | 896,300 | — | — | 896,300 | |||||||||||||||
Mortgage loans held for sale
|
417,000 | 417,000 | — | 417,000 | — | |||||||||||||||
Loans receivable
|
320,614,320 | 319,299,271 | — | 295,848,831 | 23,450,440 | |||||||||||||||
Financial Liabilities:
|
||||||||||||||||||||
Demand deposit, interest-bearing transaction, and savings accounts
|
$ | 169,118,585 | $ | 169,118,585 | $ | — | $ | 169,118,585 | $ | — | ||||||||||
Certificates of deposit and other time deposits
|
260,155,704 | 259,589,000 | — | 259,589,000 | — | |||||||||||||||
Securities sold under agreements to repurchase
|
10,000,000 | 10,654,000 | — | 10,654,000 | — | |||||||||||||||
Advances from Federal Home Loan Bank
|
9,000,000 | 9,251,000 | — | 9,251,000 | — | |||||||||||||||
Junior subordinated debentures
|
14,434,000 | (1) | N/A | (1) | — | — | N/A | (1) |
December 31, 2014 | ||||||||||||||||||||
Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets:
|
||||||||||||||||||||
Cash and due from banks
|
$ | 4,327,269 | $ | 4,327,269 | $ | 4,327,269 | $ | — | $ | — | ||||||||||
Interest bearing balances
|
16,958,000 | 16,958,000 | 16,958,000 | — | — | |||||||||||||||
Securities available-for-sale
|
82,261,996 | 82,261,996 | 4,458,906 | 77,803,090 | — | |||||||||||||||
Nonmarketable equity securities
|
905,400 | 905,400 | — | — | 905,400 | |||||||||||||||
Loans receivable
|
317,996,474 | 316,801,415 | — | 295,073,003 | 21,728,412 | |||||||||||||||
Financial Liabilities:
|
||||||||||||||||||||
Demand deposit, interest-bearing transaction, and savings accounts
|
$ | 167,680,568 | $ | 167,680,568 | $ | — | $ | 167,680,568 | $ | — | ||||||||||
Certificates of deposit and other time deposits
|
260,433,153 | 259,904,000 | — | 259,904,000 | — | |||||||||||||||
Securities sold under agreements to repurchase
|
10,000,000 | 10,735,000 | — | 10,735,000 | — | |||||||||||||||
Advances from Federal Home Loan Bank
|
9,000,000 | 9,247,000 | — | 9,247,000 | — | |||||||||||||||
Junior subordinated debentures
|
14,434,000 | (1) | N/A | (1) | — | — | N/A | (1) |
(1) The Company is unable to determine value based on the significant unobservable inputs required in the calculation. Refer to Note 11 for further information.
March 31, 2015
|
December 31, 2014
|
|||||||||||||||
Notional
Amount
|
Estimated
Fair Value
|
Notional
Amount
|
Estimated
Fair Value
|
|||||||||||||
Off-Balance Sheet Financial Instruments:
|
||||||||||||||||
Commitments to extend credit
|
$ | 17,564,145 | $ | — | $ | 17,911,866 | $ | — | ||||||||
Letters of credit
|
547,073 | — | 545,614 | — |
14
Investment Securities Available-for-Sale
Measurement is on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange or by dealers or brokers in active over-the-counter markets. Level 2 securities include securities issued by government sponsored enterprises, municipal enterprises, and mortgage-backed securities issued by government sponsored enterprises. Generally these fair values are priced from established pricing models.
Loans
Loans that are considered impaired are recorded at fair value on a non-recurring basis. Once a loan is considered impaired, the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. When the Company records the fair value based on a current appraisal, the fair value measurement is considered a non-recurring Level 3 measurement.
Other Real Estate Owned (OREO)
Other real estate owned is adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, other real estate owned is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the other real estate owned as non-recurring Level 3.
Assets measured at fair value on a recurring basis are as follows as of March 31, 2015 and December 31, 2014:
March 31, 2015
|
Quoted market price in active markets
(Level 1)
|
Significant other observable inputs
(Level 2)
|
Significant
unobservable inputs
(Level 3)
|
|||||||||
US Treasuries
|
$ | 4,492,188 | $ | — | $ | — | ||||||
Government sponsored enterprises
|
10,850,973 | |||||||||||
Mortgage-backed securities
|
52,974,464 | |||||||||||
SBA loan pools
|
— | 11,081,952 | — | |||||||||
Total available-for-sale investment securities
|
$ | 4,492,188 | $ | 74,907,389 | $ | — | ||||||
December 31, 2014
|
||||||||||||
US Treasuries
|
$ | 4,458,906 | $ | — | $ | — | ||||||
Government sponsored enterprises
|
8,814,888 | |||||||||||
Mortgage-backed securities
|
57,881,853 | |||||||||||
SBA loan pools
|
— | 11,106,349 | — | |||||||||
Total available-for-sale investment securities
|
$ | 4,458,906 | $ | 77,803,090 | $ | — |
Assets measured at fair value on a nonrecurring basis are as follows as of March 31, 2015 and December 31, 2014:
March 31, 2015
|
Quoted market price in active markets
(Level 1)
|
Significant other observable inputs
(Level 2)
|
Significant
unobservable inputs
(Level 3)
|
|||||||||
Impaired loans
|
$ | — | $ | — | $ | 23,450,440 | ||||||
Other real estate owned
|
— | — | 17,218,318 | |||||||||
Total
|
$ | — | $ | — | $ | 40,668,758 | ||||||
December 31, 2014
|
||||||||||||
Impaired loans
|
$ | — | $ | — | $ | 21,728,412 | ||||||
Other real estate owned
|
— | — | 17,518,665 | |||||||||
Total
|
$ | — | $ | — | $ | 39,247,077 |
15
For Level 3 assets measured at fair value on a non-recurring basis as of March 31, 2015 and December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:
March 31,
2015
|
December 31,
2014
|
Valuation Technique
|
Significant Observable Inputs
|
Significant Unobservable Inputs
|
|||||||||
Other real estate owned
|
$ | 17,218,318 | $ | 17,518,665 |
Appraisal Value/Comparison Sales/Other Estimates
|
Appraisals and or sales of comparable properties
|
Appraisals discounted 7% for sales commissions and other holding costs
|
||||||
Impaired loans
|
$ | 23,450,440 | $ | 21,728,412 |
Appraisal Value/Comparison Sales/Discounted Cash Flows
|
Appraisals, sales of comparable properties and or discounted cash flows
|
Appraisals discounted 2% to 12% for sales commissions and other holding costs
|
NOTE 4 - CASH AND DUE FROM BANKS
The Company maintains cash balances on hand in order to meet reserve requirements determined by the Federal Reserve. At March 31, 2015, the Bank had $366,000 on hand with the Federal Reserve Bank to meet this requirement. At March 31, 2015, the Bank had $1.5 million in actual currency and cash on hand, $2.0 million in due from non-interest bearing balances and $19.5 million in due from interest bearing balances.
NOTE 5 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available-for-sale were:
Amortized | Gross Unrealized |
Estimated Fair
|
||||||||||||||
March 31, 2015 | Cost | Gains | Losses | Value | ||||||||||||
US Treasuries
|
$ | 4,464,259 | $ | 27,929 | $ | — | $ | 4,492,188 | ||||||||
Government-sponsored enterprises
|
10,818,527 | 32,446 | — | 10,850,973 | ||||||||||||
Mortgage-backed securities
|
53,819,251 | 57,100 | 901,887 | 52,974,464 | ||||||||||||
SBA loan pools
|
11,241,233 | 1,154 | 160,435 | 11,081,952 | ||||||||||||
Total
|
$ | 80,343,270 | $ | 118,629 | $ | 1,062,322 | $ | 79,399,577 | ||||||||
December 31, 2014
|
||||||||||||||||
US Treasuries
|
$ | 4,461,116 | $ | — | $ | 2,210 | $ | 4,458,906 | ||||||||
Government-sponsored enterprises
|
8,920,551 | 5,277 | 110,940 | 8,814,888 | ||||||||||||
Mortgage-backed securities
|
59,311,268 | 34,030 | 1,463,445 | 57,881,853 | ||||||||||||
SBA loan pools
|
11,394,296 | — | 287,947 | 11,106,349 | ||||||||||||
Total
|
$ | 84,087,231 | $ | 39,307 | $ | 1,864,542 | $ | 82,261,996 |
The amortized cost and estimated fair values of investment securities at March 31, 2015, by contractual maturity dates, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities are presented as a separate line item since pay downs are expected before contractual maturity dates.
Estimated Fair | ||||||||
Amortized Cost
|
Value
|
|||||||
Due within one year
|
$ | — | $ | — | ||||
Due after one year through five years
|
13,462,786 | 13,522,554 | ||||||
Due after five years through ten years
|
944,288 | 938,399 | ||||||
Due after ten years
|
12,116,945 | 11,964,160 | ||||||
Subtotal
|
26,524,019 | 26,425,113 | ||||||
Mortgage-backed securities
|
53,819,251 | 52,974,464 | ||||||
Total Securities
|
$ | 80,343,270 | $ | 79,399,577 |
16
At March 31, 2015 and December 31, 2014, investment securities with market values of $19,405,132 and $19,600,592 respectively, were pledged as collateral for securities sold under agreements to repurchase and a fed funds line. Gross proceeds from the sale of investment securities totaled $7,227,111 and $2,771,695 for the periods ended March 31, 2015 and December 31, 2014, respectively. The gross realized gain on the sale of investment securities totaled $17,654 with gross realized losses of $11,601 resulting in a net realized gain of $6,053 for the period ended March 31, 2015. There were gross realized losses of $32,118 resulting in a net realized loss of $32,118 for the year ended December 31, 2014. There were no proceeds from the sale of investment securities for the three months ended March 31, 2014, resulting in no realized gains or losses on the sale of investment securities for the three months ended March 31, 2014. The cost of investments sold is determined using the specific identification method.
For investments where fair value is less than amortized cost the following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014:
Less than Twelve months
|
Twelve months or more
|
Total | ||||||||||||||||||||||
March 31, 2015
|
Estimated Fair value
|
Unrealized losses
|
Estimated Fair value
|
Unrealized losses
|
Estimated Fair value
|
Unrealized losses
|
||||||||||||||||||
US Treasuries
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Government-sponsored enterprises
|
— | — | — | — | — | — | ||||||||||||||||||
Mortgage-backed securities
|
2,623,293 | 8,297 | 42,875,178 | 893,590 | 45,498,471 | 901,887 | ||||||||||||||||||
SBA loan pools
|
— | — | 9,715,295 | 160,435 | 9,715,295 | 160,435 | ||||||||||||||||||
$ | 2,623,293 | $ | 8,297 | $ | 52,590,473 | $ | 1,054,025 | $ | 55,213,766 | $ | 1,062,322 |
Less than Twelve months | Twelve months or more | Total | ||||||||||||||||||||||
December 31, 2014 |
Estimated Fair value
|
Unrealized losses |
Estimated Fair value
|
Unrealized losses |
Estimated Fair value
|
Unrealized losses | ||||||||||||||||||
US Treasuries
|
$ | 4,458,906 | $ | 2,210 | $ | — | $ | — | $ | 4,458,906 | $ | 2,210 | ||||||||||||
Government-sponsored enterprises
|
— | — | 6,827,436 | 110,940 | 6,827,436 | 110,940 | ||||||||||||||||||
Mortgage-backed securities
|
3,539,126 | 10,561 | 44,632,067 | 1,452,884 | 48,171,193 | 1,463,445 | ||||||||||||||||||
SBA loan pools
|
— | — | 11,106,349 | 287,947 | 11,106,349 | 287,947 | ||||||||||||||||||
$ | 7,998,032 | $ | 12,771 | $ | 62,565,852 | $ | 1,851,771 | $ | 70,563,884 | $ | 1,864,542 |
Securities classified as available-for-sale are recorded at fair market value. Of the securities in an unrealized loss position, there were thirty-three securities in a continuous loss position for 12 months or more at March 31, 2015 and there were thirty-nine securities in a continuous loss position for 12 months or more at December 31, 2014. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.
Nonmarketable equity securities include the fair value of stock in community bank holding companies of $63,500 for the periods ended March 31, 2015 and December 31, 2014, respectively, and the Federal Home Loan Bank stock which has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At March 31, 2015 and December 31, 2014, the Company’s investment in Federal Home Loan Bank stock was $832,800 and $841,900, respectively.
The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.
17
NOTE 6 - LOANS RECEIVABLE
Major classifications of loans receivable are summarized as follows for the periods ended March 31, 2015 and December 31, 2014:
2015
|
2014
|
|||||||
Real estate - construction
|
$ | 42,591,560 | $ | 44,388,045 | ||||
Real estate - mortgage
|
251,276,554 | 248,248,879 | ||||||
Commercial and industrial
|
23,696,592 | 22,631,641 | ||||||
Consumer and other
|
3,134,580 | 2,818,248 | ||||||
Total loans receivable, gross
|
320,699,286 | 318,086,813 | ||||||
Deferred origination fees
|
(84,966 | ) | (90,339 | ) | ||||
Total loans receivable, net of deferred origination fees
|
320,614,320 | 317,996,474 | ||||||
Less allowance for loan losses
|
4,794,450 | 4,749,537 | ||||||
Total loans receivable, net of allowance for loan loss
|
$ | 315,819,870 | $ | 313,246,937 |
The composition of gross loans by rate type is as follows for the periods ended March 31, 2015 and December 31, 2014:
2015
|
2014
|
|||||||
Variable rate loans
|
$ | 103,840,039 | $ | 98,674,261 | ||||
Fixed rate loans
|
216,774,281 | 219,322,213 | ||||||
Total gross loans
|
$ | 320,614,320 | $ | 317,996,474 |
The following is an analysis of our loan portfolio by credit quality indicators at March 31, 2015 and December 31, 2014:
Commercial and Industrial
|
Commercial Real Estate
|
Commercial Real Estate Construction
|
||||||||||||||||||||||
2015
|
2014
|
2015
|
2014
|
2015
|
2014
|
|||||||||||||||||||
Grade:
|
||||||||||||||||||||||||
Pass
|
$ | 17,218,104 | $ | 16,117,119 | $ | 126,971,930 | $ | 126,670,206 | $ | 15,943,173 | $ | 17,338,505 | ||||||||||||
Special Mention
|
297,335 | 274,961 | 13,599,454 | 7,018,717 | 256,680 | — | ||||||||||||||||||
Substandard
|
6,181,153 | 6,239,561 | 10,098,693 | 15,203,258 | — | 259,309 | ||||||||||||||||||
Doubtful
|
— | — | — | — | — | — | ||||||||||||||||||
Loss
|
— | — | — | — | — | — | ||||||||||||||||||
Total
|
$ | 23,696,592 | $ | 22,631,641 | $ | 150,670,077 | $ | 148,892,181 | $ | 16,199,853 | $ | 17,597,814 |
Residential Real Estate
|
Real Estate Residential Construction
|
Consumer and Other
|
||||||||||||||||||||||
2015
|
2014
|
2015
|
2014
|
2015
|
2014
|
|||||||||||||||||||
Grade:
|
||||||||||||||||||||||||
Pass
|
$ | 91,502,633 | $ | 89,704,023 | $ | 20,844,825 | $ | 21,144,838 | $ | 3,102,657 | $ | 2,783,083 | ||||||||||||
Special Mention
|
2,518,822 | 2,991,889 | 2,418,650 | 3,591,151 | 30,181 | 31,905 | ||||||||||||||||||
Substandard
|
6,585,022 | 6,660,786 | 3,128,232 | 2,054,242 | 1,742 | 3,260 | ||||||||||||||||||
Doubtful
|
— | — | — | — | — | — | ||||||||||||||||||
Loss
|
— | — | — | — | — | — | ||||||||||||||||||
Total
|
$ | 100,606,477 | $ | 99,356,698 | $ | 26,391,707 | $ | 26,790,231 | $ | 3,134,580 | $ | 2,818,248 |
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
18
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
The following is an aging analysis of our loan portfolio at March 31, 2015 and December 31, 2014:
Commercial and Industrial
|
Commercial Real Estate
|
Commercial Real Estate Construction
|
Residential Real Estate
|
Residential Real Estate
Construction
|
Consumer and Other
|
Total
|
||||||||||||||||||||||
March 31, 2015
|
||||||||||||||||||||||||||||
Accruing Loans Paid Current
|
$ | 22,352,780 | $ | 142,274,753 | $ | 16,199,853 | $ | 96,308,716 | $ | 23,770,837 | $ | 3,089,051 | $ | 303,995,990 | ||||||||||||||
Accruing Loans Past Due:
|
||||||||||||||||||||||||||||
30-59 Days
|
147,824 | 4,632,836 | — | 1,233,157 | — | 1,743 | 6,015,560 | |||||||||||||||||||||
60-89 Days
|
— | 923,500 | — | — | 114,642 | 43,786 | 1,081,928 | |||||||||||||||||||||
Total Loans Past Due
|
147,824 | 5,556,336 | — | 1,233,157 | 114,642 | 45,529 | 7,097,488 | |||||||||||||||||||||
Loans Receivable on Nonaccrual Status
|
$ | 1,195,988 | $ | 2,838,988 | $ | — | $ | 3,064,604 | $ | 2,506,228 | $ | — | $ | 9,605,808 | ||||||||||||||
Total Loans Receivable
|
$ | 23,696,592 | $ | 150,670,077 | $ | 16,199,853 | $ | 100,606,477 | $ | 26,391,707 | $ | 3,134,580 | $ | 320,699,286 | ||||||||||||||
December 31, 2014
|
||||||||||||||||||||||||||||
Accruing Loans Paid Current
|
$ | 21,189,439 | $ | 145,122,155 | $ | 17,597,814 | $ | 97,388,692 | $ | 25,361,595 | $ | 2,814,483 | $ | 309,474,178 | ||||||||||||||
Accruing Loans Past Due:
|
||||||||||||||||||||||||||||
30-59 Days
|
112,460 | 923,500 | — | 428,836 | — | 1,735 | 1,466,531 | |||||||||||||||||||||
60-89 Days
|
133,754 | — | — | 171,130 | — | 2,030 | 306,914 | |||||||||||||||||||||
Total Loans Past Due
|
246,214 | 923,500 | — | 599,966 | — | 3,765 | 1,773,445 | |||||||||||||||||||||
Loans Receivable on Nonaccrual Status
|
$ | 1,195,988 | $ | 2,846,526 | $ | — | $ | 1,368,040 | $ | 1,428,636 | $ | — | $ | 6,839,190 | ||||||||||||||
Total Loans Receivable
|
$ | 22,631,641 | $ | 148,892,181 | $ | 17,597,814 | $ | 99,356,698 | $ | 26,790,231 | $ | 2,818,248 | $ | 318,086,813 |
The following is a summary of information pertaining to impaired and nonaccrual loans at March 31, 2015 and December 31, 2014:
2015
|
2014
|
|||||||
Impaired loans without a valuation allowance
|
$ | 12,993,416 | $ | 11,672,229 | ||||
Impaired loans with a valuation allowance
|
12,331,753 | 12,052,219 | ||||||
Total impaired loans
|
$ | 25,325,169 | $ | 23,724,448 | ||||
Valuation allowance related to impaired loans
|
$ | 1,874,729 | $ | 1,996,036 | ||||
Average of impaired loans during the period
|
$ | 26,722,991 | $ | 26,051,836 | ||||
Total nonaccrual loans
|
$ | 9,605,808 | $ | 6,839,190 | ||||
Total Loans past due 90 days and still accruing
|
$ | — | $ | — | ||||
Total loans considered impaired which are classified as troubled debt restructurings
|
$ | 12,082,331 | $ | 12,182,214 |
19
The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at March 31, 2015 and December 31, 2014:
March 31, 2015
|
Commercial and Industrial
|
Commercial Real Estate
|
Commercial Real Estate Construction
|
Residential Real Estate
|
Residential Real Estate Construction
|
Consumer and Other
|
Total
|
|||||||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||||||||||
Recorded Investment
|
$ | 1,195,988 | $ | 6,270,518 | $ | — | $ | 4,385,608 | $ | 1,141,302 | $ | — | $ | 12,993,416 | ||||||||||||||
Unpaid Principal Balance
|
1,195,988 | 7,016,644 | — | 4,385,608 | 1,537,558 | — | 14,135,798 | |||||||||||||||||||||
Related Allowance
|
— | — | — | — | — | — | — | |||||||||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||||||||||
Recorded Investment
|
$ | 4,840,000 | $ | 3,690,949 | $ | — | $ | 2,435,879 | $ | 1,364,925 | $ | — | $ | 12,331,753 | ||||||||||||||
Unpaid Principal Balance
|
4,840,000 | 3,961,533 | — | 2,435,879 | 1,364,925 | — | 12,602,337 | |||||||||||||||||||||
Related Allowance
|
450,000 | 547,584 | — | 354,339 | 522,806 | — | 1,874,729 | |||||||||||||||||||||
Total:
|
||||||||||||||||||||||||||||
Recorded Investment
|
$ | 6,035,988 | $ | 9,961,467 | $ | — | $ | 6,821,487 | $ | 2,506,227 | $ | — | $ | 25,325,169 | ||||||||||||||
Unpaid Principal Balance
|
6,035,988 | 10,978,177 | — | 6,821,487 | 2,902,483 | — | 26,738,135 | |||||||||||||||||||||
Related Allowance
|
450,000 | 547,584 | — | 354,339 | 522,806 | — | 1,874,729 | |||||||||||||||||||||
December 31, 2014
|
||||||||||||||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||||||||||
Recorded Investment
|
$ | 1,195,988 | $ | 6,238,887 | $ | — | $ | 3,001,142 | $ | 1,236,212 | $ | — | $ | 11,672,229 | ||||||||||||||
Unpaid Principal Balance
|
1,195,988 | 6,985,013 | — | 3,066,547 | 1,671,153 | — | 12,918,701 | |||||||||||||||||||||
Related Allowance
|
— | — | — | — | — | — | — | |||||||||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||||||||||
Recorded Investment
|
$ | 4,840,000 | $ | 3,715,788 | $ | — | $ | 2,131,506 | $ | 1,364,925 | $ | — | $ | 12,052,219 | ||||||||||||||
Unpaid Principal Balance
|
4,840,000 | 3,986,372 | — | 2,131,506 | 1,364,925 | — | 12,322,803 | |||||||||||||||||||||
Related Allowance
|
450,000 | 682,424 | — | 340,806 | 522,806 | — | 1,996,036 | |||||||||||||||||||||
Total:
|
||||||||||||||||||||||||||||
Recorded Investment
|
$ | 6,035,988 | $ | 9,954,675 | $ | — | $ | 5,132,648 | $ | 2,601,137 | $ | — | $ | 23,724,448 | ||||||||||||||
Unpaid Principal Balance
|
6,035,988 | 10,971,385 | — | 5,198,053 | 3,036,078 | — | 25,241,504 | |||||||||||||||||||||
Related Allowance
|
450,000 | 682,424 | — | 340,806 | 522,806 | — | 1,996,036 |
The following is an analysis of our impaired loan portfolio detailing average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2015 and 2014, respectively.
For the Three Months Ended
|
Commercial and Industrial
|
Commercial Real Estate
|
Commercial Real Estate Construction
|
Residential Real Estate
|
Residential Real Estate
Construction
|
Consumer and Other
|
Total
|
|||||||||||||||||||||
March 31, 2015
With no related allowance recorded:
|
|
|||||||||||||||||||||||||||
Average Recorded Investment
|
$ | 1,195,988 | $ | 6,987,478 | $ | — | $ | 4,389,872 | $ | 1,537,559 | $ | — | $ | 14,110,897 | ||||||||||||||
Interest Income Recognized
|
23,890 | 52,473 | — | 39,762 | — | — | 116,125 | |||||||||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||||||||||
Average Recorded Investment
|
$ | 4,840,000 | $ | 3,970,930 | $ | — | $ | 2,436,238 | $ | 1,364,926 | $ | — | $ | 12,612,094 | ||||||||||||||
Interest Income Recognized
|
54,450 | 15,936 | — | 20,107 | 8,995 | — | 99,488 | |||||||||||||||||||||
March 31, 2014
With no related allowance recorded:
|
||||||||||||||||||||||||||||
Average Recorded Investment
|
$ | 845,670 | $ | 9,606,659 | $ | 1,249,456 | $ | 5,502,857 | $ | 2,098,545 | $ | 41,012 | $ | 19,344,199 | ||||||||||||||
Interest Income Recognized
|
— | 101,445 | — | 22,353 | — | — | 123,798 | |||||||||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||||||||||
Average Recorded Investment
|
$ | 671,438 | $ | 4,122,341 | $ | — | $ | 2,949,344 | $ | 2,867,769 | $ | 5,000 | $ | 10,615,892 | ||||||||||||||
Interest Income Recognized
|
14 | 16,330 | — | 24,456 | 14,456 | 73 | 55,329 |
20
The following is a summary of information pertaining to our allowance for loan losses at March 31, 2015 and December 31, 2014:
March 31, 2015
|
Commercial and Industrial
|
Commercial Real Estate
|
Commercial Real Estate Construction
|
Residential Real Estate
|
Residential Real Estate
Construction
|
Consumer and Other
|
Unallocated
|
Total
|
||||||||||||||||||||||||
Allowance for loan losses:
|
||||||||||||||||||||||||||||||||
Beginning Balance
|
$ | 546,588 | $ | 1,311,805 | $ | 73,911 | $ | 921,649 | $ | 1,082,036 | $ | 93,165 | $ | 720,383 | $ | 4,749,537 | ||||||||||||||||
Charge-offs
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Recoveries
|
1,138 | — | — | 43,568 | — | 207 | — | 44,913 | ||||||||||||||||||||||||
Provision
|
(17,808 | ) | (231,022 | ) | (12,352 | ) | (148,376 | ) | (160,609 | ) | (9,859 | ) | 580,026 | — | ||||||||||||||||||
Ending Balance
|
$ | 529,918 | $ | 1,080,783 | $ | 61,559 | $ | 816,841 | $ | 921,427 | $ | 83,513 | $ | 1,300,409 | $ | 4,794,450 | ||||||||||||||||
Individually evaluated for impairment
|
450,000 | 547,584 | — | 354,339 | 522,806 | — | — | 1,874,729 | ||||||||||||||||||||||||
Collectively evaluated for impairment
|
79,918 | 533,199 | 61,559 | 462,502 | 398,621 | 83,513 | 1,300,409 | 2,919,721 | ||||||||||||||||||||||||
Loans Receivable:
|
||||||||||||||||||||||||||||||||
Ending Balance
|
$ | 23,696,592 | $ | 150,670,077 | $ | 16,199,853 | $ | 100,606,477 | $ | 26,391,707 | $ | 3,134,580 | $ | — | $ | 320,699,286 | ||||||||||||||||
Individually evaluated for impairment
|
6,035,989 | 9,961,467 | — | 6,821,487 | 2,506,227 | — | — | 25,325,169 | ||||||||||||||||||||||||
Collectively evaluated for impairment
|
17,660,603 | 140,708,610 | 16,199,853 | 93,784,990 | 23,885,480 | 3,134,580 | — | 295,374,117 |
December 31, 2014
|
Commercial and Industrial
|
Commercial Real Estate
|
Commercial Real Estate Construction
|
Residential Real Estate
|
Residential Real Estate
Construction
|
Consumer and Other
|
Unallocated
|
Total
|
||||||||||||||||||||||||
Allowance for loan losses:
|
||||||||||||||||||||||||||||||||
Beginning Balance
|
$ | 370,543 | $ | 1,000,124 | $ | 71,090 | $ | 1,990,816 | $ | 1,172,156 | $ | 30,538 | $ | 1,390,843 | $ | 6,026,110 | ||||||||||||||||
Charge-offs
|
(484,649 | ) | (138,856 | ) | — | (409,195 | ) | (743,231 | ) | (3,016 | ) | — | (1,778,947 | ) | ||||||||||||||||||
Recoveries
|
88,341 | 12,181 | — | 204,897 | 101,761 | 24,194 | — | 431,374 | ||||||||||||||||||||||||
Provision
|
572,353 | 438,356 | 2,821 | (864,869 | ) | 551,350 | 41,449 | (670,460 | ) | 71,000 | ||||||||||||||||||||||
Ending Balance
|
$ | 546,588 | $ | 1,311,805 | $ | 73,911 | $ | 921,649 | $ | 1,082,036 | $ | 93,165 | $ | 720,383 | $ | 4,749,537 | ||||||||||||||||
Individually evaluated for impairment
|
450,000 | 682,424 | — | 340,806 | 522,806 | — | — | 1,996,036 | ||||||||||||||||||||||||
Collectively evaluated for impairment
|
96,588 | 629,381 | 73,911 | 580,843 | 559,230 | 93,165 | 720,383 | 2,753,501 | ||||||||||||||||||||||||
Loans Receivable:
|
||||||||||||||||||||||||||||||||
Ending Balance
|
$ | 22,631,641 | $ | 148,892,181 | $ | 17,597,814 | $ | 99,356,698 | $ | 26,790,231 | $ | 2,818,248 | $ | — | $ | 318,086,813 | ||||||||||||||||
Individually evaluated for impairment
|
6,035,988 | 9,954,675 | — | 5,132,648 | 2,601,137 | — | — | 23,724,448 | ||||||||||||||||||||||||
Collectively evaluated for impairment
|
16,595,653 | 138,937,506 | 17,597,814 | 94,224,050 | 24,189,094 | 2,818,248 | — | 294,362,365 |
The allowance for loan losses, as a percent of loans, net of deferred fees, was 1.50% and 1.49% for periods ended March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, the Bank had 25 loans totaling $9,605,808 or 3.00% of gross loans, in nonaccrual status, of which $4,509,865 were deemed to be troubled debt restructurings. There were 12 loans totaling $7.6 million deemed to be troubled debt restructurings not in nonaccrual status at March 31, 2015. At December 31, 2014, the Bank had 24 loans totaling $6,839,190 or 2.15% of gross loans, in nonaccrual status, of which $3,443,851 were deemed to be troubled debt restructurings. There were 13 loans totaling $8,738,363 deemed to be troubled debt restructurings not in nonaccrual status at December 31, 2014. There were no loans contractually past due 90 days or more and still accruing interest at March 31, 2015 or December 31, 2014. Our analysis under generally accepted accounting principles indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio. We do not recognize interest income on loans that are in nonaccrual status. At March 31, 2015 and December 31, 2014, the Bank had $20,000 reserved for off-balance sheet credit exposure related to unfunded commitments included in other liabilities on our consolidated balance sheet.
At March 31, 2015, loans totaling $22.7 million were pledged as collateral at the Federal Home Loan Bank, and no loans were required to be pledged to maintain a line of credit with the Federal Reserve Bank.
21
NOTE 7 - OTHER REAL ESTATE OWNED
Transactions in other real estate owned for the three months ended March 31, 2015 and the year ended December 31, 2014 are summarized below:
2015
|
2014
|
|||||||
Balance, beginning of year
|
$ | 17,518,665 | $ | 18,692,607 | ||||
Additions
|
303,550 | 4,606,046 | ||||||
Sales
|
(603,897 | ) | (5,205,744 | ) | ||||
Write-downs
|
— | (574,244 | ) | |||||
Balance, end of period
|
$ | 17,218,318 | $ | 17,518,665 |
NOTE 8 - PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment consist of the following for the three months ended March 31, 2015 and the year ended December 31, 2014:
2015
|
2014
|
|||||||
Land and land improvements
|
$ | 3,434,431 | $ | 3,434,431 | ||||
Building and leasehold improvements
|
18,668,886 | 18,668,886 | ||||||
Furniture and equipment
|
4,823,174 | 4,997,469 | ||||||
Software
|
597,188 | 648,829 | ||||||
Construction in progress
|
108,366 | 203,709 | ||||||
Total
|
27,632,045 | 27,953,324 | ||||||
Less, accumulated depreciation
|
7,112,922 | 7,192,332 | ||||||
Premises, furniture and equipment, net
|
$ | 20,519,123 | $ | 20,760,992 |
Depreciation expense for the three months ended March 31, 2015 and 2014 amounted to $306,224 and $275,944, respectively. Construction in progress is related to financial reporting software upgrades. For the three months ended March 31, 2015 the Bank capitalized $0 in interest related to the in process item. The expected costs to complete the in process item are $15,000.
NOTE 9 - DEPOSITS
At March 31, 2015, the scheduled maturities of certificates of deposit were as follows:
Maturing:
|
Amount
|
|||
Remaining through 2015
|
$ | 105,358,433 | ||
2016
|
95,301,116 | |||
2017
|
53,482,388 | |||
2018
|
4,067,345 | |||
2019
|
641,435 | |||
Thereafter
|
1,304,987 | |||
Total
|
$ | 260,155,704 |
The Bank had no wholesale deposits for the periods ended March 31, 2015 and December 31, 2014. For the period ended March 31, 2015 the Bank had $25.5 million in certificates of deposits greater than $250,000.
Overdraft deposit accounts are reclassified to consumer loans and are included in gross loans. At March 31, 2015 and December 31, 2014, overdraft deposits were $5,974 and $5,334, respectively.
NOTE 10 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Bank has entered into sales of securities under an agreement to repurchase. This obligation to repurchase securities sold is reflected as a liability on the consolidated balance sheet as one obligation totaling $10.0 million at March 31, 2015. On November 14, 2007, the Bank borrowed $10.0 million under a nine-year repurchase agreement at a fixed rate of 4.40%. This repurchase agreement requires quarterly interest only payments with principal and interest due on maturity. The dollar amounts of securities underlying the agreements are book entry securities. Available-for-sale securities with fair values of $11,596,506 and $11,709,202 at March 31, 2015 and December 31, 2014, respectively, are used as collateral for the agreement.
22
Securities sold under repurchase agreements are summarized as follows for the periods ended March 31, 2015 and December 31, 2014:
2015
|
2014
|
|||||||
Amount outstanding at period end
|
$ | 10,000,000 | $ | 10,000,000 | ||||
Average amount outstanding during the period
|
10,000,000 | 10,000,000 | ||||||
Maximum outstanding at any month-end
|
10,000,000 | 10,000,000 | ||||||
Weighted average rate paid at period-end
|
4.40 | % | 4.40 | % | ||||
Weighted average rate paid during the period
|
4.46 | % | 4.45 | % |
NOTE 11 - JUNIOR SUBORDINATED DEBENTURES
On February 22, 2006, Tidelands Statutory Trust (the “Trust I”), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the “Trust I Securities”), generating proceeds of $8.0 million. The Trust I loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.
The Trust I Securities in the transaction accrue and pay distributions quarterly at a rate per annum equal to the three-month LIBOR plus 1.38%, which was 1.637% at the period ended March 31, 2015. The distribution rate payable on the Trust I Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust I Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of March 30, 2036.
The Trust I Securities mature or are mandatorily redeemable upon maturity on March 30, 2036 or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Trust I Securities in whole or in part, on or after March 30, 2011. The Company may also redeem the Trust I Securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.
On June 20, 2008, Tidelands Statutory Trust II (the “Trust II”), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the “Trust II Securities”), generating proceeds of $6.0 million. The Trust II loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 Capital under Federal Reserve Board guidelines.
The Trust II Securities accrue and pay distributions quarterly at a rate equal to (i) 9.425% fixed for the first 5 years, and (ii) the three-month LIBOR rate plus 5.075%, which was 5.332% at the period ended March 31, 2015. The distribution rate payable on the Trust II Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust II Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of June 30, 2038.
The Trust II Securities mature or are mandatorily redeemable upon maturity on June 30, 2038 or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Trust II Securities in whole or in part, on or after June 30, 2013. The Company may also redeem the Trust II Securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.
Beginning with the scheduled payment date of December 30, 2010, the Company has deferred the payments of interest on its outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods). This and any future deferred distributions will continue to accrue interest. Distributions on the trust preferred securities are cumulative. Therefore, in accordance with generally accepted accounting principles, the Company will continue to accrue the monthly cost of the trust preferred securities as it has since issuance. As of March 31, 2015, the amount of accrued interest was $2,825,147.
As described in Note 16 below, on March 18, 2011, the Company entered into an agreement with the Federal Reserve Bank of Richmond (“FRB”) which, among other things, prohibits the Company making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior approval of the FRB.
After the Company has deferred payments on the subordinated debentures for 20 quarters, the holders of the junior subordinated debentures have certain rights that may be pursued against the Company, including, but not limited to, forcing the Company into bankruptcy.
The Company will have deferred interest payments for 20 quarters on December 30, 2015, and is currently pursuing all available options to pay the interest in arrears, but cannot provide assurances that it will be able to pay these obligations.
23
NOTE 12 – ADVANCES FROM FEDERAL HOME LOAN BANK
At March 31, 2015, advances from the Federal Home Loan Bank (“FHLB”) consisted of one advance totaling $9.0 million. On September 21, 2007, the Bank borrowed $9.0 million under a 10-year convertible advance at a fixed rate of 3.96%. The advance is collateralized by pledged FHLB stock and certain loans. At March 31, 2015, loans totaling $22.7 million were pledged as collateral at the Federal Home Loan Bank.
FHLB advances are summarized as follows for the periods ended March 31, 2015 and December 31, 2014:
2015
|
2014
|
|||||||
Amount outstanding at period end
|
$ | 9,000,000 | $ | 9,000,000 | ||||
Average amount outstanding during the period
|
9,000,000 | 11,761,644 | ||||||
Maximum outstanding at any month-end
|
9,000,000 | 13,000,000 | ||||||
Weighted average rate at period-end
|
3.96 | % | 3.96 | % | ||||
Weighted average rate during the period
|
4.01 | % | 3.14 | % |
NOTE 13 - OTHER OPERATING EXPENSES
Other operating expenses for the three months ended March 31, 2015 and 2014 are summarized below:
2015
|
2014
|
|||||||
Professional fees
|
$ | 273,111 | $ | 355,242 | ||||
Telephone expenses
|
51,181 | 51,452 | ||||||
Office supplies, stationery, and printing
|
27,633 | 24,177 | ||||||
Insurance
|
102,924 | 105,413 | ||||||
Postage
|
2,666 | 2,509 | ||||||
Data processing
|
186,887 | 187,736 | ||||||
Advertising and marketing
|
61,088 | 21,989 | ||||||
FDIC Insurance
|
265,489 | 277,899 | ||||||
Other loan related expenses
|
107,959 | 41,966 | ||||||
Other
|
118,726 | 101,534 | ||||||
Total
|
$ | 1,197,664 | $ | 1,169,917 |
NOTE 14 - COMMITMENTS AND CONTINGENCIES
From time to time, we are involved in routine legal matters incidental to our business. In the opinion of management, the ultimate resolution of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.
NOTE 15 –LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Potentially dilutive common share equivalents include common shares issuable upon the exercise of outstanding stock options and warrants.
Basic and diluted loss per share is computed below for the three months ended March 31, 2015 and 2014:
2015
|
2014
|
|||||||
Basic loss per common share computation:
|
||||||||
Net loss available to common shareholders
|
$ | (729,464 | ) | $ | (344,196 | ) | ||
Average common shares outstanding - basic
|
4,220,991 | 4,187,652 | ||||||
Basic net loss per common share
|
$ | (.17 | ) | $ | (.08 | ) | ||
Diluted loss per common share computation:
|
||||||||
Net loss available to common shareholders
|
$ | (729,464 | ) | $ | (344,196 | ) | ||
Average common shares outstanding - basic
|
4,220,991 | 4,187,652 | ||||||
Incremental shares from assumed conversions: Stock options and warrants
|
— | — | ||||||
Average common shares outstanding - diluted
|
4,220,991 | 4,187,652 | ||||||
Diluted loss per common share
|
$ | (.17 | ) | $ | (.08 | ) |
24
For the period ended March 31, 2015 and 2014, there were no stock options outstanding. At March 31, 2015 and 2014, there were 571,821 warrant shares outstanding that were anti-dilutive. Warrants are considered anti-dilutive because the exercise price exceeded the average market price for the period.
NOTE 16 - REGULATORY MATTERS
As reported in the Form 8-K filed on March 22, 2011, the Company entered into a written agreement (the “FRB Written Agreement”) with the Federal Reserve Bank of Richmond (‘FRB’) on March 18, 2011. The FRB Written Agreement is designed to enhance the Company’s ability to act as a source of strength to the Bank. The Bank’s lending and deposit operations continue to be conducted in the usual and customary manner, and all other products, services and hours of operation remain the same. All Bank deposits will remain insured by the Federal Deposit Insurance Corporation (‘FDIC”) to the maximum extent allowed by law.
In addition to the foregoing, on June 1, 2010, the FDIC and the South Carolina State Board of Financial Institutions (the “State Board”) conducted their annual joint examination of the Bank. As a result of the examination, the Bank entered into a Consent Order, effective December 28, 2010 (the “Consent Order”), with the FDIC and the State Board. Based on information included in the FDIC’s report, the Bank’s credit risk rating at the FHLB has been negatively impacted, resulting in reduced borrowing capacity. This action also restricts the Bank’s ability to accept, renew, or roll over brokered deposits. In addition, the Bank’s ability to borrow funds from the Federal Reserve Bank Discount Window as a source of short-term liquidity is not guaranteed. The Federal Reserve Discount Window borrowing capacity has been curtailed to only overnight terms, contingent upon credit approval for each transaction.
The Consent Order requires the Bank to, among other things, take the following actions: establish a board committee to monitor and coordinate compliance with the Consent Order; ensure that the Bank has competent management in place; develop an independent assessment of the Bank’s management and staffing needs; achieve Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets within 150 days and establish a capital plan that includes a contingency plan to sell or merge the Bank; implement a plan addressing liquidity, contingency funding, and asset liability management; implement a program designed to reduce the Bank’s exposure in problem assets; develop a three year strategic plan; adopt an effective internal loan review and grading system; adopt a plan to reduce concentrations of credit; implement a policy to ensure the adequacy of the Bank’s allowance for loan and lease losses; implement a written plan to improve and sustain the Bank’s earnings; revise, adopt and implement a written asset/liability management policy to provide effective guidance and control over the Bank’s funds management activities; develop a written policy for managing interest rate risk; not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval; not accept, renew, or rollover any brokered deposits unless it is in compliance with regulatory requirements and adopt a plan to eliminate reliance on brokered deposits; limit asset growth to 10% per year; adopt an employee compensation plan after undertaking an independent review of compensation paid to all the Bank’s senior executive officers; and address various violations of law and regulation cited by the FDIC.
The Company intends to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order. There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the FDIC and the State Board. Failure to meet the requirements of the Consent Order could result in additional regulatory requirements, which could ultimately lead to the Bank being taken into receivership by the FDIC. As of March 31, 2015, the Bank is not in compliance with all the provisions outlined in the Consent Order.
Regulatory Capital Requirements
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Company’s or Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
25
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
The Company and Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.
To be considered “well-capitalized,” generally a bank must maintain a Leverage Capital ratio of at least 5%, Tier 1 Capital of at least 6%, and Total Risk-Based Capital of at least 10%. The Consent Order, however, includes a requirement that the Bank achieves and maintains minimum capital requirements that exceed the minimum regulatory capital ratios for “well capitalized” banks.
On July 2, 2013, the Federal Reserve Board adopted a final rule for the Basel III capital framework and, on July 9, 2013, the FDIC adopted the same provisions in the form of an "interim final rule." These rules substantially amend the regulatory risk-based capital rules applicable to us. Beginning in 2015, the minimum capital requirements for the Company and the Bank will be (i) a Common Equity Tier 1 ("CET1") ratio of 4.5%, (ii) a Tier 1 capital (CET1 plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Our leverage ratio requirement will remain at the 4% level now required. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the CET1, Tier 1 and total capital requirements, resulting in a required CET1 ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%.
The following table summarizes the capital amounts and ratios of the Company and the regulatory minimum requirements at March 31, 2015 and December 31, 2014:
Actual
|
For Capital Adequacy Purposes
|
To Be Well-Capitalized Under Prompt Corrective
Action Provisions
|
||||||||||||||||||||||
Tidelands Bancshares, Inc.
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
March 31, 2015
|
||||||||||||||||||||||||
Common Equity Tier 1 (to risk-weighted assets)
|
$ | (8,705,000 | ) | (2.44 | %) | $ | 16,043,000 | 4.50 | % | N/A | N/A | |||||||||||||
Total capital (to risk-weighted assets)
|
15,314,000 | 4.30 | % | 28,521,000 | 8.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 capital (to risk-weighted assets)
|
7,657,000 | 2.15 | % | 21,391,000 | 6.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 capital (to average assets)
|
7,657,000 | 1.62 | % | 18,904,000 | 4.00 | % | N/A | N/A | ||||||||||||||||
December 31, 2014
|
||||||||||||||||||||||||
Total capital (to risk-weighted assets)
|
$ | 17,260,000 | 4.91 | % | $ | 28,128,000 | 8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital (to risk-weighted assets)
|
8,630,000 | 2.45 | % | 14,064,000 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 capital (to average assets)
|
8,630,000 | 1.81 | % | 19,118,000 | 4.00 | % | N/A | N/A |
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at March 31, 2015 and December 31, 2014:
Actual
|
For Capital Adequacy Purposes
|
To Be Well-Capitalized Under Prompt Corrective Action Provisions
|
||||||||||||||||||||||
Tidelands Bank
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
March 31, 2015
|
||||||||||||||||||||||||
Common Equity Tier 1 (to risk-weighted assets)
|
$ | 26,849,000 | 7.53 | % | $ | 16,040,000 | 4.50 | % | $ | 21,387,000 | 6.00 | % | ||||||||||||
Total capital (to risk-weighted assets)
|
31,309,000 | 8.78 | % | 28,516,000 | 8.00 | % | 35,645,000 | 10.00 | % | |||||||||||||||
Tier 1 capital (to risk-weighted assets)
|
26,849,000 | 7.53 | % | 21,387,000 | 6.00 | % | 28,516,000 | 8.00 | % | |||||||||||||||
Tier 1 capital (to average assets)
|
26,849,000 | 5.69 | % | 18,884,000 | 4.00 | % | 23,605,000 | 5.00 | % | |||||||||||||||
December 31, 2014
|
||||||||||||||||||||||||
Total capital (to risk-weighted assets)
|
$ | 31,474,000 | 8.95 | % | $ | 28,123,000 | 8.00 | % | $ | 35,154,000 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets)
|
27,075,000 | 7.70 | % | 14,062,000 | 4.00 | % | 21,092,000 | 6.00 | % | |||||||||||||||
Tier 1 capital (to average assets)
|
27,075,000 | 5.67 | % | 19,098,000 | 4.00 | % | 23,873,000 | 5.00 | % |
To be considered “well-capitalized” per the requirements of the Consent Order, the Bank must obtain and maintain a minimum amount of $35,645,000 in total capital in order to maintain a Total Risk-Based Capital of 10%. In addition, the Bank would need $37,768,000 of Tier 1 capital in order to maintain a minimum Leverage Capital ratio of 8%. As of March 31, 2015, the Bank was deemed “adequately capitalized”. As such, the Bank is not in compliance with the capital requirements of the Consent Order.
26
NOTE 17 - UNUSED LINES OF CREDIT
As of March 31, 2015, the Bank had a line of credit with Alostar Bank of Commerce of $6.0 million, Raymond James of $5 million, and $131,000 with the Federal Reserve Bank. These credit lines are currently secured by $7.4 million, zero, and $420,000, respectively in bonds as of March 31, 2015. The Raymond James line of credit is required to be secured by bonds prior to any disbursements. A line of credit is also available from the FHLB with a remaining credit availability of $61.6 million and an excess lendable collateral value of approximately $4.3 million at March 31, 2015.
NOTE 18 - SHAREHOLDERS’ EQUITY
Preferred Stock - In December 2008, in connection with the Troubled Asset Relief Program (the “TARP”) Capital Purchase Program (the “CPP”), established as part of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company issued to the U.S. Treasury 14,448 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the “Preferred Stock”), having a liquidation preference of $1,000 per share. The Preferred Stock qualifies as Tier 1 capital and will be entitled to cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum beginning with the May 15, 2014 dividend date. We must consult with the Federal Reserve before we may redeem the Preferred Stock but, contrary to the original restrictions in the EESA, will not necessarily be required to raise additional equity capital in order to redeem this stock. The Preferred Stock has a call feature after three years.
In connection with the sale of the Preferred Stock, the Company also issued to the U.S. Treasury a ten-year warrant to purchase up to 571,821 shares of the Company’s common stock (the “Warrants”), par value $0.01 per share at an initial exercise price of $3.79 per share. Please see the Form 8-K we filed with the SEC on December 19, 2008, for additional information about the Series T Preferred Stock and the CPP Warrant.
As required under the TARP Capital Purchase Program, dividend payments on and repurchase of the Company’s common stock are subject to certain restrictions. For as long as the Preferred Stock is outstanding, no dividends may be declared or paid on the Company’s common stock until all accrued and unpaid dividends on the Preferred Stock are fully paid. In addition, the U.S. Treasury’s consent is required for any increase in dividends on common stock before the third anniversary of issuance of the Preferred Stock and for any repurchase of any common stock except for repurchases of common shares in connection with benefit plans.
The Preferred Stock and Warrants were sold to the U.S. Treasury for an aggregate purchase price of $14,448,000 in cash. The purchase price was allocated between the Preferred Stock and the Warrants based upon the relative fair values of each to arrive at the amounts recorded by the Company. This resulted in the Preferred Stock being issued at a discount which was amortized on a level yield basis and charged to retained earnings over the assumed life of five years.
Beginning with the payment date of November 15, 2010, the Company deferred dividend payments on the TARP Preferred Stock. Although the Company may defer dividend payments, the dividend is a cumulative dividend and failure to pay dividends for six dividend periods triggered board appointment rights for the holder of the TARP Preferred Stock. The Company deferred its seventh dividend payment in May 2012. The Treasury has appointed an observer to the Board. As of March 31, 2015, the amount of cumulative unpaid dividends is $4,344,798.
Restrictions on Dividends - A South Carolina state bank may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. The Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the State Board, provided that the Bank received a composite rating of one or two at the last federal or state regulatory examination. The Bank must obtain approval from the State Board prior to the payment of any other cash dividends. In addition, under the Federal Deposit Insurance Corporation Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. As described above on December 28, 2010, the Bank entered into the Consent Order with the FDIC and the State Board which, among other things, prohibits the Bank from declaring or paying any dividends or making any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.
As described above, on March 18, 2011, the Company entered into the FRB Written Agreement with the FRB which, among other things, prohibits the Company’s declaring or paying any dividends or directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank without the prior approval of the FRB.
27
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Standby letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. At March 31, 2015, the Bank had $20,000 reserved for off-balance sheet credit exposure related to unfunded commitments, which is included in other liabilities on our consolidated balance sheet.
Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.
The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2015.
Amount
|
||||
Commitments to extend credit
|
$ | 17,564,145 | ||
Standby letters of credit
|
547,073 | |||
Total
|
$ | 18,111,218 |
NOTE 20 - EMPLOYEE STOCK OWNERSHIP PLAN
On May 17, 2007, the Company announced the formation of the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (“ESOP”), a non-contributory plan, for its employees. The ESOP will purchase shares of the Company’s common stock on the open market from time to time with funds borrowed from a loan from a third party lender. All employees of the Company meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $0 and $25,862 for the three months ended March 31, 2015 and 2014.
A summary of the unallocated share activity of the Company’s ESOP is presented for the three months ended March 31, 2015 and the year ended December 31, 2014.
2015
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2014
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|||||||
Balance, beginning of year
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— | 56,186 | ||||||
New share purchases
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— | — | ||||||
Shares released to participants
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— | — | ||||||
Shares allocated to participants
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— | (56,186 | ) | |||||
Balance, end of year
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— | — |
The aggregate fair market value of the 56,186 unallocated shares was $22,474 based on the $0.40 closing price of our common stock on March 31, 2014.
NOTE 21 – RETIREMENT PLAN
The Company has a 401(k) profit sharing plan, which provides retirement benefits to a majority of officers and employees who meet certain age and service requirements. The plan includes a “salary reduction” feature pursuant to Section 401(k) of the Internal Revenue Code. Expenses charged to earnings for the 401(k) profit sharing plan were $23,939 and $21,521, for the three months ended March 31, 2015 and 2014, respectively.
The Bank has a Supplemental Executive Retirement Plan (Supplemental Plan). This plan provides an annual post-retirement cash payment beginning after a chosen retirement date for certain officers of the Bank. The officers will receive an annual payment from the Bank equal to the promised benefits. In connection with this plan, life insurance contracts were purchased on the officers. Effective June 30, 2010, the executive officers agreed to cease further benefit accrual under the contracts and will only be entitled to receive benefits accrued through June 30, 2010. As a result, there was no expense related to the plan for the three months ended March 31, 2015 and 2014.
28
NOTE 22 – TROUBLED DEBT RESTRUCTURINGS
The troubled debt restructurings (“TDR’s”) amounted to $12,082,331 at March 31, 2015. The accruing TDR’s were $7,572,466 and the non-accruing TDR’s were $4,509,865 at March 31, 2015. The TDR’s amounted to $14,922,991 at March 31, 2014. The accruing TDR’s were $9,147,776 and the non-accruing TDR’s were $5,775,215 at March 31, 2014.
During the three months ended March 31, 2015 and 2014, the Bank did not modify any loans that were considered to be troubled debt restructurings.
The following chart represents the troubled debt restructurings that subsequently defaulted during the three months ended March 31, 2015.
For the three months ended
March 31, 2015
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||||||||
Number of Contracts
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Recorded Investment
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|||||||
Troubled Debt Restructurings
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||||||||
That Subsequently Defaulted During the Period:
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Commercial Real Estate
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1 | 1,172,501 | ||||||
Totals
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1 | $ | 1,172,501 |
The Bank did not have any troubled debt restructurings that subsequently defaulted during the three months ended March 31, 2014.
During the three months ended March 31, 2015, one loan that had previously been restructured went into default. No loans that were determined to be troubled debt restructurings during the three months ended March 31, 2014, subsequently defaulted during the quarter.
In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by performing the usual process for all loans in determining the allowance for loan loss.
29
The following is a discussion of our financial condition as of March 31, 2015 compared to December 31, 2014 and the results of operations for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. These comments should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2014 Annual Report on Form 10-K.
This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties include, but are not limited to those described under “Risk Factors” in Item 1A of our 2014 Annual Report on Form 10-K and the following:
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our ability on December 30, 2015 to pay the interest in arrears on the outstanding junior subordinated debentures, which failure to pay could result in the holders of the junior subordinated debentures pursuing certain legal rights against the Company, including, but not limited to, forcing the Company into bankruptcy;
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general economic conditions (both generally and in our markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;
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a general decline in the real estate and lending market, particularly in our market areas, could negatively affect our financial results;
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our ability to raise additional capital may be impaired if market disruption and volatility occur;
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the results of our most recent external, independent review of our credit risk assets may not accurately predict the adverse effects on our financial condition if the economy were to deteriorate;
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our ability to comply with our Consent Order and potential regulatory actions if we fail to comply;
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our ability to maintain appropriate levels of capital, including the potential that the regulatory agencies may require higher levels of capital above the standard regulatory-mandated minimums;
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our ability to complete the sale of our Other Real Estate Owned properties, specifically at values equal or above the currently recorded loan balances which could result in additional writedowns;
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the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
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increased funding costs due to market illiquidity, increased competition for funding, and /or increased regulatory requirements with regard to funding;
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changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board and the Financial Accounting Standards Board;
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legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged;
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competitive pressures among depository and other financial institutions may increase significantly;
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changes in the interest rate environment may reduce margins or the volumes or values of the loans we make;
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competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than we can;
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our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;
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adverse changes may occur in the bond and equity markets;
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war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets;
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economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate; and
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We will or may continue to face the risk factors discussed from time to time in the periodic reports we file with the SEC.
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We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements whether as a result of new information, future events, or otherwise.
30
Overview
We are a South Carolina corporation organized in 2002 to serve as the holding company for Tidelands Bank (the “Bank”), a state-chartered banking association under the laws of South Carolina headquartered in Mount Pleasant, South Carolina. The Bank commenced operations in October 2003 through our main office located in Mount Pleasant, South Carolina. On April 23, 2007, we opened a permanent full service banking facility in our Summerville, South Carolina location. We opened a permanent facility for our full service branch in Myrtle Beach, South Carolina on June 7, 2007. In addition, we opened a new full service branch office in the Park West area of Mount Pleasant, South Carolina on May 14, 2007, and converted the loan production office in the West Ashley area of Charleston, South Carolina to a full service branch on July 2, 2007. The Bluffton, South Carolina loan production office opened as a full service banking facility on May 21, 2008. On July 23, 2008, we opened a permanent full service banking facility in Murrells Inlet, South Carolina. We plan to focus our efforts at these branch locations on obtaining lower cost deposits that are less affected by rising rates.
The following discussion describes our results of operations for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 and also analyzes our financial condition as of March 31, 2015 as compared to December 31, 2014. Like most community banks, we derive most of our income from interest we receive on our loans and investments. In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process.
We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of March 31, 2015 and our audited consolidated financial statements included in our 2014 Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.
We believe other real estate is a critical accounting policy that requires significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our other real estate include judgments about the estimated value of the property, the impact of current events, and conditions and other factors impacting the value. Under different conditions or using different assumptions, the actual value of other real estate determined by us may be different from management’s estimates provided in our consolidated financial statements.
31
Legislative and Regulatory Initiatives
In response to the challenges facing the financial services sector, regulatory and governmental actions have included the following:
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On October 14, 2008, the U.S. Treasury created the Troubled Asset Relief Program (the “TARP”) Capital Purchase Program (the “CPP”) that helped financial institutions build capital through the sale of senior preferred shares to the U.S. Treasury on terms that were non-negotiable.
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On February 17, 2009 President Obama signed into law The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the U.S. Treasury. These new limits are in place until the institution has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient institution’s appropriate regulatory agency.
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On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed by the President of the United States. The Dodd-Frank Act resulted in changing the financial regulatory system, some of which became effective immediately and some which became effective at various future dates. Implementation of the Dodd-Frank Act requires many new rules by various federal regulatory agencies over the next several years. The ultimate impact of the Dodd-Frank Act is still developing. It could have an adverse impact on the financial services industry as a whole or on our financial condition, results of operations, and cash flows. Provisions in the legislation that affect consumer financial protection regulations, deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act includes provisions that:
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o
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Made permanent the $250,000 limit for federal deposit insurance.
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o
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Implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, which apply to all public companies, not just financial institutions.
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On July 2, 2013, the Federal Reserve Board adopted a final rule for the Basel III capital framework and, on July 9, 2013, the FDIC adopted the same provisions in the form of an "interim final rule." These rules substantially amend the regulatory risk-based capital rules applicable to us. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The rules apply to the Company as well as to the Bank. The final rules increase capital requirements and generally include two new capital measurements that will affect us, a risk-based common equity Tier 1 ratio and a capital conservation buffer. Common Equity Tier 1 ("CET1") capital is a subset of Tier 1 capital and is limited to common equity (plus related surplus), retained earnings, accumulated other comprehensive income and certain other items. Other instruments that have historically qualified for Tier 1 treatment, including non-cumulative perpetual preferred stock, are consigned to a category known as Additional Tier 1 capital and must be phased out over a period of nine years beginning in 2014. The rules permit bank holding companies with less than $15 billion in assets to continue to include trust preferred securities and non-cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not CET1. Tier 2 capital consists of instruments that have historically been placed in Tier 2, as well as cumulative perpetual preferred stock. The final rules adjust all three categories of capital by requiring new deductions from and adjustments to capital that will result in more stringent capital requirements and may require changes in the ways we do business. Beginning in 2015, the minimum capital requirements for the Company and the Bank will be (i) a CET1 ratio of 4.5%, (ii) a Tier 1 capital (CET1 plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Our leverage ratio requirement will remain at the 4% level now required. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the CET1, Tier 1 and total capital requirements, resulting in a required CET1 ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses.
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From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company.
32
Regulatory Developments
I.
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Federal Reserve Board
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As reported in our Current Report on Form 8-K filed on March 22, 2011, the Company entered into a written agreement (the “FRB Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) on March 18, 2011. The FRB Agreement is designed to enhance the Company’s ability to act as a source of strength to the Bank. The Bank’s lending and deposit operations continue to be conducted in the usual and customary manner, and all other products, services and hours of operation remain the same. All Bank deposits will remain insured by the FDIC to the maximum extent allowed by law.
Pursuant to the FRB Agreement, the Company agreed to seek the prior written approval of the FRB before (i) declaring or paying any dividends, (ii) directly or indirectly taking dividends or any other form of payment representing a reduction in capital from the Bank, (iii) directly or indirectly making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities, (iv) directly or indirectly incurring, increasing or guaranteeing any debt, or (v) directly or indirectly purchasing or redeeming any shares of its stock.
Pursuant to its plans to preserve capital and to inject more capital into the Bank, the Company has no plans to undertake any of the foregoing activities.
The Company submitted, and the FRB approved, a written plan designed to maintain sufficient capital at the Company on a consolidated basis. Although the FRB Agreement does not contain specific target capital ratios or specific timelines, the plan must address the Company’s and Bank’s current and future capital requirements, the adequacy of the Bank’s capital, the source and timing of additional funds to satisfy the Company’s and the Bank’s future capital requirements, and supervisory requests for additional capital at the Bank or the supervisory action imposed on the Bank.
The Company also agreed to comply with certain notice provisions set forth in the Federal Deposit Insurance Act and Board of Governors’ Regulations in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position. The Company is also required to comply with certain restrictions on indemnification and severance payments pursuant to the Federal Deposit Insurance Act and FDIC regulations. The Company is providing quarterly progress reports on all provisions of the FRB Agreement.
II. FDIC and South Carolina State Board
On June 1, 2010, the FDIC and the State Board conducted their annual joint examination of the Bank. As a result of the examination, the Bank entered into a Consent Order, effective December 28, 2010 (the “Consent Order”), with the FDIC and the State Board. The Consent Order requires the Bank to, among other things, take the following actions:
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Establish, within 60 days from the effective date of the Consent Order, a board committee to monitor compliance with the Consent Order, consisting of at least four members of the board, three of whom shall not be officers of the Bank. This requirement has been completed by the Bank.
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Develop, within 60 days from the effective date of the Consent Order, a written management plan that addresses specific areas in the Joint Report of Examinations dated as of June 1, 2010. This requirement has been completed by the Bank.
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Notify the supervisory authorities in writing of the resignation or termination of any of the Bank’s directors or senior executive officers and provide prior notification and approval for any new directors or senior executive officers. This requirement has been completed by the Bank.
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Achieve and maintain, within 150 days from the effective date of the Consent Order, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets. The Bank is not in compliance with this requirement.
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Establish, within 60 days from the effective date of the Consent Order, a written capital plan to include a contingency plan in the event the Bank fails to maintain minimums, submit an acceptable capital plan as required by the Consent Order, or implement or adhere to the capital plan to which supervisory authorities have taken no objections. Such contingency plan must include a plan to sell or merge the Bank. The Bank must implement the contingency plan upon written notice from the Regional Director. This requirement has been completed by the Bank.
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Adopt and implement, within 60 days from the effective date of the Consent Order, a written plan addressing liquidity, contingency funding, and asset /liability management. This requirement has been completed by the Bank.
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33
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Eliminate, within 30 days from the effective date of the Consent Order, by charge-off or collection, all assets or portions of assets classified “Loss,” and during the Consent Order, within 30 days of receipt of any Report of Examination, eliminate by collection, charge-off, or other proper entry, the remaining balance of any assets classified as “Loss” and 50% of those assets classified “Doubtful”. This requirement has been completed by the Bank. The Bank is in compliance with this continuing requirement.
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Submit, within 60 days from the effective date of the Consent Order, a written plan to reduce the Bank’s risk exposure in relationships with assets in excess of $500,000 criticized as “Substandard” in the Report of Examination. The plan must require a reduction in the aggregate balance of assets criticized as “Substandard” in accordance with the following schedule: (i) within 180 days, a reduction of 25% in the balance of assets criticized “Substandard; (ii) within 360 days, a reduction of 45% in the balance of assets criticized “Substandard; (iii) within 540 days, a reduction of 60% in the balance of assets criticized “Substandard; and (iv) within 720 days, a reduction of 70% in the balance of assets criticized “Substandard.” The Bank is in compliance with this ongoing requirement.
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Not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “Loss,” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been criticized, in whole or in part, “Substandard,” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank. The Bank is in compliance with this requirement.
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Prepare and submit, within 90 days from the effective date of the Order, a plan consisting of long term goals designed to improve the condition of the Bank and its viability, and strategies for achieving those goals. The plan must cover minimum of three years and provide specific objectives for asset growth, market focus, earnings projections, capital needs, and liquidity position. The Bank is in compliance with this requirement.
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Adopt, within 60 days from the effective date of the Consent Order, an effective internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality. This requirement has been completed by the Bank.
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Perform, within 60 days from the effective date of the Consent Order, a risk segmentation analysis with respect to the Bank’s concentrations of credit and develop a written plan to reduce any segment of the portfolio which the supervisory authorities deem to be an undue concentration of credit in relation to Tier 1 capital. The Bank is working to reduce concentrations within required thresholds.
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Review and establish, within 60 days from the effective date of the Consent Order, a policy to ensure the adequacy of the Bank’s allowance for loan and lease losses, which must provide for a review of the Bank’s allowance for loan and lease losses at least once each calendar quarter. This requirement has been completed by the Bank.
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Formulate and implement, within 60 days from the effective date of the Consent Order, a written plan to improve and sustain Bank earnings, which shall include (i) goals and strategies for improving and sustaining earnings; (ii) major areas and means by which to improve operating performance; (iii) realistic and comprehensive budget; (iv) budget review process to monitor income and expenses to compare with budgetary projections; (v) operating assumptions forming the basis for, and adequately support, major projected income and expense components; and (vi) coordination of the Bank’s loan, investment, and operating policies and budget and profit planning with the funds management policy. The written plan must be evaluated at the end of each calendar quarter and record results and any actions taken by the Board in minutes. The Bank is in compliance with this ongoing requirement.
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Revise, adopt and implement, within 60 days of the effective date of the Consent Order, the Bank’s written asset/liability management policy to provide effective guidance and control over the Bank’s funds management activities, which shall also address all items of criticism set forth in the Joint Report of Examinations in June 2010. This requirement has been completed by the Bank.
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Develop and implement, within 60 days of the effective date of the Consent Order, a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and the complexity of its assets. The policy shall comply with the Joint Inter-Agency Policy Statement on Interest Rate Risk. This requirement has been completed by the Bank.
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34
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Eliminate or correct, within 30 days from the effective date of the Consent Order, all violations of law and regulation or contraventions of FDIC guidelines and statements of policy described in the Joint Report of Examinations in June 2010. This requirement has been completed by the Bank.
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Not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities. The Bank is in compliance with this ongoing requirement.
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Not accept, renew, or rollover any brokered deposits unless it is in compliance with the requirements of 12 C.F.R. § 337.6(b), and, within 60 days of the effective date of the Consent Order, submit a written plan to the supervisory authorities for eliminating reliance on brokered deposits. This requirement has been completed by the Bank.
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Limit asset growth to 10% per annum. The Bank is in compliance with this ongoing requirement.
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Adopt, within 60 days of the effective date of the Consent Order, an employee compensation plan after undertaking an independent review of compensation paid to all the Bank’s senior executive officers, as defined at Section 301.101(b) of the FDIC Rules and Regulations. This requirement has been completed by the Bank.
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Furnish, within 30 days from the end of the first quarter following the effective date of the Consent Order, and within 30 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order. The Bank is in compliance with this ongoing requirement.
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We have taken actions to comply with the requirements of both the FRB Agreement and the Consent Order. All of the provisions except for two have been completed. Capital levels are below the thresholds of 10% for Total Risk-Based Capital and 8% for Tier 1 Leverage Capital. Credit concentrations within the portfolio continue to decrease, but remain elevated.
The Bank presents monthly updates to the Board of Directors regarding compliance with the FRB Agreement and the Consent Order, and quarterly updates to the regulators on all provisions. We continue to focus our efforts on meeting the objectives in these two documents designed to improve the Bank’s financial condition and enable the Bank to meet regulatory requirements.
The determination of our compliance with the regulatory requirements will be made by the FDIC and the South Carolina State Board. Failure to comply with the requirements could result in additional regulatory pressures and, if the Bank is unable to comply, could ultimately lead to further action by the FDIC including the Bank being taken into receivership by the FDIC.
35
Results of Operations
Income Statement Review
Summary
Three months ended March 31, 2015 and 2014
Our net loss available to common shareholders was approximately $729,000 for the three months ended March 31, 2015, compared to a net loss available to common shareholders of $344,000 for the three months ended March 31, 2014. The pre-tax loss for the three months ended March 31, 2015 was $316,000 compared to $132,000 for the three months ended March 31, 2014. We recorded provisions for loan losses of $0 and $41,000 for the three months ended March 31, 2015 and 2014, respectively. For both the three months ended March 31, 2015 and 2014, there was no income tax expense or benefit.
In comparing the three months ended March 31, 2015 and 2014, the increase in net loss from $132,000 to a net loss of $316,000 resulted primarily from a decrease of $175,000 in net interest income before provision for loan losses, an increase of $105,000 in noninterest expense, which was offset by a decrease of $41,000 in credit provisions. The decrease in net interest income is a result of a decrease in interest earning assets.
Net Interest Income
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. The growth in our loan portfolio has historically been the primary driver of the increase in net interest income. During the three months ended March 31, 2015, our loan portfolio increased $2.6 million from the year-end balance. We anticipate any growth in loans will drive growth in assets and growth in net interest income.
Our loans typically provide higher interest yields than other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. This strategy resulted in a significant portion of our assets being in higher earning loans rather than in lower yielding investments. At March 31, 2015, loans represented 67.3% of total assets, while securities and interest bearing balances represented 20.7% of total assets. While we focus on increasing the size of our loan portfolio, we also anticipate managing the size of the investment portfolio as investment yields become more attractive.
At March 31, 2015, retail deposits represented $429.3 million, or 92.8% of total funding, which includes total deposits plus borrowings. Borrowings represented $33.4 million, or 7.2% of total funding, and we had no wholesale deposits. We plan to continue to offer competitive rates on our retail deposit accounts, including investment checking, money market accounts, savings accounts and time deposits. Our goal is to maintain a higher percentage of assets being funded by retail deposits and to increase the percentage of low-cost transaction accounts to total deposits. No assurance can be given that these objectives will be achieved. We operate seven full service banking offices located along the South Carolina coast. We anticipate that our full service banking offices will assist us in meeting these objectives. We believe these strategies will provide us with additional customers and a lower alternative cost of funding.
In addition to the growth in both assets and liabilities, and the timing of the repricing of our assets and liabilities, net interest income is also affected by the ratio of interest-earning assets to interest-bearing liabilities and the changes in interest rates earned on our assets and interest rates paid on our liabilities. For the three months ended March 31, 2015, average interest-bearing liabilities exceeded average interest-earning assets by $15.9 million compared to $21.8 million for the three months ended March 31, 2014.
The impact of the Federal Reserve’s interest rate cuts has resulted in a decrease in both the yields on our variable rate assets and the rates that we pay for our short-term deposits and borrowings. The net interest margin decreased to 2.89% for the three months ended March 31, 2015, as a result of the Bank’s lower yield and volume of interest earning assets. Net interest margin for the three months ended March 31, 2014 was 3.00%.
36
Three Months Ended March 31, 2015 and 2014
The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the three months ended March 31, 2015 and 2014, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year.
Average Balances, Income and Expenses, and Rates
For the Three Months Ended
March 31, 2015
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For the Three Months Ended
March 31, 2014
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Average Balance
|
Income/Expense
|
Yield/Rate(1)
|
Average Balance
|
Income/Expense
|
Yield/Rate(1)
|
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Earning assets:
|
||||||||||||||||||||||||
Interest bearing balances
|
$ | 15,842 | $ | 18 | 0.47 | % | $ | 11,365 | $ | 18 | 0.64 | % | ||||||||||||
Taxable investment securities
|
79,993 | 356 | 1.80 | % | 82,210 | 440 | 2.17 | % | ||||||||||||||||
Loans receivable(2)
|
319,330 | 3,824 | 4.86 | % | 330,197 | 3,947 | 4.85 | % | ||||||||||||||||
Total earning assets
|
415,165 | 4,198 | 4.10 | % | 423,772 | 4,405 | 4.22 | % | ||||||||||||||||
Nonearning assets:
|
||||||||||||||||||||||||
Cash and due from banks
|
3,417 | 5,014 | ||||||||||||||||||||||
Mortgages held for sale
|
201 | 135 | ||||||||||||||||||||||
Premises and equipment, net
|
20,664 | 21,151 | ||||||||||||||||||||||
Other assets
|
37,041 | 38,774 | ||||||||||||||||||||||
Allowance for loan losses
|
(4,763 | ) | (6,039 | ) | ||||||||||||||||||||
Total nonearning assets
|
56,560 | 59,035 | ||||||||||||||||||||||
Total assets
|
$ | 471,725 | $ | 482,807 | ||||||||||||||||||||
Interest-bearing liabilities:
|
||||||||||||||||||||||||
Interest bearing transaction accounts
|
$ | 35,433 | 16 | 0.19 | % | $ | 42,086 | 22 | 0.22 | % | ||||||||||||||
Savings & money market
|
101,226 | 93 | 0.38 | % | 91,485 | 68 | 0.30 | % | ||||||||||||||||
Time deposits less than $100,000
|
96,555 | 297 | 1.25 | % | 103,918 | 312 | 1.22 | % | ||||||||||||||||
Time deposits greater than $100,000
|
164,385 | 545 | 1.34 | % | 170,545 | 555 | 1.32 | % | ||||||||||||||||
Securities sold under repurchase agreement
|
10,000 | 110 | 4.46 | % | 10,000 | 110 | 4.46 | % | ||||||||||||||||
Advances from FHLB
|
9,000 | 89 | 4.01 | % | 13,000 | 90 | 2.83 | % | ||||||||||||||||
Junior subordinated debentures
|
14,434 | 91 | 2.54 | % | 14,434 | 116 | 3.26 | % | ||||||||||||||||
ESOP borrowings
|
— | — | 0.00 | % | 80 | — | 0.00 | % | ||||||||||||||||
Total interest-bearing liabilities
|
431,033 | 1,241 | 1.17 | % | 445,548 | 1,273 | 1.16 | % | ||||||||||||||||
Noninterest-bearing liabilities:
|
||||||||||||||||||||||||
Demand deposits
|
26,246 | 22,900 | ||||||||||||||||||||||
Other liabilities
|
8,902 | 6,948 | ||||||||||||||||||||||
Shareholders’ equity
|
5,544 | 7,411 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity
|
$ | 471,725 | $ | 482,807 | ||||||||||||||||||||
Net interest income
|
$ | 2,957 | $ | 3,132 | ||||||||||||||||||||
Net interest spread
|
2.93 | % | 3.06 | % | ||||||||||||||||||||
Net interest margin
|
2.89 | % | 3.00 | % |
(1) Annualized for the three month period.
(2) Includes nonaccruing loans
37
During the three months ended March 31, 2015, the net interest spread and net interest margin decreased in comparison to the previous period in 2014. Our net interest spread was 2.93% and 3.06% for the three months ended March 31, 2015 and 2014, respectively. This decrease in net interest spread was due to average earning assets yield decreasing by 0.12% and the average rate on total funding increasing by 0.01%. Our net interest margin for the three months ended March 31, 2015 was 2.89% compared to 3.00% for the three months ended March 31, 2014. During the first quarter of 2015, interest-earning assets averaged $415.2 million, compared to $423.8 million in the same quarter of 2014. During the same periods, average interest-bearing liabilities were $431.0 million and $445.5 million, respectively.
Interest income for the three months ended March 31, 2015 was $4.2 million, consisting of $3.8 million on loans, $356,000 on investments, and $10,000 on interest bearing balances. Interest income for the three months ended March 31, 2014 was $4.4 million, consisting of $3.9 million on loans, $441,000 on investments, and $6,000 on interest bearing balances. Interest and fees on loans represented 91.1% and 89.6% of total interest income for the three months ended March 31, 2015 and 2014, respectively. Income from investments and interest bearing balances represented 8.7% and 10.1% of total interest income for the three months ended March 31, 2015 and 2014, respectively. The higher percentage of interest income from loans relates to our strategy to maintain a significant portion of our assets in higher earning loans compared to lower yielding investments. Average loans represented 76.9% and 77.9% of average interest-earning assets for the three months ended March 31, 2015 and 2014, respectively.
Interest expense for the three months ended March 31, 2015 was $1.2 million, consisting of $952,000 related to deposits, $110,000 related to securities sold under repurchase agreements, $91,000 related to junior subordinated debentures, and $89,000 related to FHLB advances. Interest expense for the three months ended March 31, 2014 was $1.3 million, consisting of $957,000 related to deposits, $110,000 related to securities sold under repurchase agreements, $116,000 related to junior subordinated debentures, and $90,000 related to FHLB advances. Interest expense on deposits for the three months ended March 31, 2015 and 2014 represented 76.7% and 75.2%, respectively, of total interest expense, while interest expense on other liabilities represented 23.3% and 24.8%, respectively, of total interest expense for the three months ended March 31, 2015 and 2014, respectively. During the three months ended March 31, 2015, average interest-bearing liabilities were lower than the comparable period ended March 31, 2014 by $14.5 million.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.
Three Months Ended
March 31, 2015 vs. March 31, 2014
|
Three Months Ended
March 31, 2014 vs. March 31, 2013
|
|||||||||||||||||||||||||||||||
Increase (Decrease) Due to
|
Increase (Decrease) Due to
|
|||||||||||||||||||||||||||||||
Volume
|
Rate
|
Rate/Volume
|
Total
|
Volume
|
Rate
|
Rate/Volume
|
Total
|
|||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||||||
Interest income
|
||||||||||||||||||||||||||||||||
Loans
|
$ | (129 | ) | $ | 6 | $ | — | $ | (123 | ) | $ | (23 | ) | $ | 22 | $ | (15 | ) | $ | (16 | ) | |||||||||||
Taxable investment securities
|
(12 | ) | (74 | ) | 2 | (84 | ) | (8 | ) | 279 | (11 | ) | 260 | |||||||||||||||||||
Interest bearing balances
|
7 | (5 | ) | (2 | ) | — | (114 | ) | (29 | ) | 1 | (142 | ) | |||||||||||||||||||
Total interest income
|
(134 | ) | (73 | ) | — | (207 | ) | (145 | ) | 272 | (25 | ) | 102 | |||||||||||||||||||
Interest expense
|
||||||||||||||||||||||||||||||||
Deposits
|
(16 | ) | 10 | — | (6 | ) | (54 | ) | (151 | ) | 7 | (198 | ) | |||||||||||||||||||
Junior subordinated debentures
|
— | (25 | ) | — | (25 | ) | — | (66 | ) | — | (66 | ) | ||||||||||||||||||||
Advances from FHLB
|
(27 | ) | 38 | (12 | ) | (1 | ) | (66 | ) | 54 | (27 | ) | (39 | ) | ||||||||||||||||||
Securities sold under repurchase agreements
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
ESOP borrowings
|
— | — | — | — | (13 | ) | (14 | ) | 13 | (14 | ) | |||||||||||||||||||||
Total interest expense
|
(43 | ) | 23 | (12 | ) | (32 | ) | (133 | ) | (177 | ) | (7 | ) | (317 | ) | |||||||||||||||||
Net interest income
|
$ | (91 | ) | $ | (96 | ) | $ | 12 | $ | (175 | ) | $ | (12 | ) | $ | 449 | $ | (18 | ) | $ | 419 |
38
Provision for Loan Losses
We have established an allowance for loan losses through a provision for loan losses charged as an expense on our statement of operations. We review our loan portfolio monthly to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion below under “Balance Sheet Review – Provision and Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.
Three Months Ended March 31, 2015 and 2014
Included in the statement of operations for the three months ended March 31, 2015 and 2014 is a noncash expense related to the provision for loan losses of $0 and $41,000 respectively. The allowance for loan losses was approximately $4.8 million and $5.9 million as of March 31, 2015 and 2014, respectively. The allowance for loan losses as a percentage of gross loans was 1.50% at March 31, 2015 and 1.80% at March 31, 2014. At March 31, 2015, we had 25 nonaccrual loans totaling approximately $9.6 million. At March 31, 2014, we had 47 nonaccrual loans totaling approximately $13.8 million. Net charge offs (recoveries) amounted to approximately ($45,000) and $153,000 for the three months ended March 31, 2015 and 2014, respectively.
Noninterest Income
The following table sets forth information related to our noninterest income during the three months ended March 31, 2015 and 2014:
2015
|
2014
|
|||||||
(dollars in thousands)
|
||||||||
Service fees on deposit accounts
|
$ | 10 | $ | 10 | ||||
Residential mortgage origination income
|
48 | 35 | ||||||
Gain on sale of investment securities
|
6 | — | ||||||
Loss on sale of other assets
|
(2 | ) | — | |||||
Other service fees and commissions
|
144 | 108 | ||||||
Bank owned life insurance
|
105 | 105 | ||||||
Other
|
5 | 2 | ||||||
Total noninterest income
|
$ | 316 | $ | 260 |
Three Months Ended March 31, 2015 and 2014
Noninterest income for the three months ended March 31, 2015 was $316,000 compared to $260,000 during the same period in 2014. The increase was primarily attributable to gains on sale of investment securities and other service fees. For the three months ended March 31, 2015, we had $6,000 in gains on sales of investment securities in comparison to no gains on sales of investment securities for the same period in 2014. For the three months ended March 31, 2015, we had $144,000 in other service fees in comparison to $108,000 in other service fees for the same period in 2014. The increase in other service fees was primarily related to an increase in loan origination fees.
Residential mortgage origination income consists primarily of mortgage origination fees we receive on residential loans sold to third parties. Residential mortgage origination fees were $48,000 and $35,000 for the three months ended March 31, 2015 and 2014, respectively. The increase of $13,000 is related primarily to an increase in origination volume in the mortgage department during the first quarter of 2015.
We also earned $105,000 in noninterest income received from bank owned life insurance for both the three months ended March 31, 2015 and 2014. Other income consists primarily of income received on fees received on debit and credit card transactions, income from sales of checks, and the fees received on wire transfers. Other income was $5,000 and $2,000 for the three months ended March 31, 2015 and 2014, respectively.
39
Noninterest Expense
The following table sets forth information related to our noninterest expense for the three months ended March 31, 2015 and 2014:
2015
|
2014
|
|||||||
(dollars in thousands)
|
||||||||
Salaries and benefits
|
$ | 1,636 | $ | 1,500 | ||||
Occupancy
|
449 | 368 | ||||||
Furniture and equipment expense
|
177 | 243 | ||||||
Other real estate owned expense
|
129 | 202 | ||||||
Professional fees
|
273 | 355 | ||||||
Advertising and marketing
|
61 | 22 | ||||||
Insurance
|
103 | 105 | ||||||
FDIC assessment
|
265 | 278 | ||||||
Data processing and related costs
|
187 | 188 | ||||||
Telephone
|
51 | 51 | ||||||
Postage
|
3 | 3 | ||||||
Office supplies, stationery and printing
|
28 | 24 | ||||||
Other loan related expense
|
108 | 42 | ||||||
Other
|
119 | 102 | ||||||
Total noninterest expense
|
$ | 3,589 | $ | 3,483 |
Three Months Ended March 31, 2015 and 2014
We incurred noninterest expense of approximately $3.6 million for the three months ended March 31, 2015 compared to $3.5 million for the three months ended March 31, 2014. The differences resulted from increases of $66,000 in other loan related expenses, $136,000 in salaries and benefits, $39,000 in advertising and marketing expenses, and $81,000 in occupancy expenses, offset by a decreases of $66,000 in furniture and equipment expenses, $73,000 in other real estate owned expenses, and $82,000 in professional fees.
Salaries and employee benefits expense was approximately $1.6 million and $1.5 million for the three months ended March 31, 2015 and 2014, respectively. These expenses represented 45.6% and 43.1% of our total noninterest expense for the three months ended March 31, 2015 and 2014, respectively. The $136,000 increase in salaries and employee benefits expense resulted from increases in base compensation.
Data processing and related costs were $187,000 and $188,000 for the three months ended March 31, 2015 and 2014, respectively. During the three months ended March 31, 2015, our data processing costs for our core processing system were $160,000 compared to $167,000 for the three months ended March 31, 2014. We have contracted with an outside computer service company to provide our core data processing services. A significant portion of the fee charged by our third party processor is directly related to the number of loan and deposit accounts and the related number of transactions.
Income Tax Expense
Three Months Ended March 31, 2015 and 2014
Our lack of income tax expense or benefit for March 31, 2015 and 2014 is reflective of our establishing a valuation allowance for deferred tax assets previously recorded. Management has determined that it is more likely than not that the deferred tax asset related to continuing operations at March 31, 2015 will not be realized, and accordingly, has established a full valuation allowance.
40
Balance Sheet Review
General
At March 31, 2015, we had total assets of $476.7 million, consisting principally of $320.6 million in loans, $79.4 million in investment securities, $19.5 million in interest bearing balances, $20.5 million in net premises, furniture and equipment, $16.4 million in bank owned life insurance, $17.2 million in other real estate owned and $3.6 million in cash and due from banks. Our liabilities at March 31, 2015 totaled $471.5 million, consisting principally of $429.3 million in deposits, $10.0 million in securities sold under agreements to repurchase, $14.4 million in junior subordinated debentures, and $9.0 million in FHLB advances. At March 31, 2015, our shareholders’ equity was $5.2 million.
Investments
At March 31, 2015, the $79.4 million in our available for sale investment securities portfolio represented approximately 16.7% of our total assets, compared to $82.3 million, or 17.3% of total assets, at December 31, 2014. At March 31, 2015, we held U.S. treasuries, U.S. government agency securities, government sponsored enterprises, small business administration securities, and mortgage-backed securities with a fair value of $79.4 million and an amortized cost of $80.3 million for a net unrealized loss of $944,000. During 2015, we utilized the investment portfolio to provide additional income and to absorb liquidity. We anticipate maintaining an investment portfolio to provide both increased earnings and liquidity. As deposit growth outpaces our ability to lend to creditworthy customers, we anticipate maintaining the relative size of the investment portfolio and extinguishing other funding liabilities.
Contractual maturities and yields on our investments at March 31, 2015 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
One year or less
|
After one year through five years |
After five years through ten years
|
After ten years
|
Total | ||||||||||||||||||||||||||||||||||||
Amount
|
Yield
|
Amount
|
Yield |
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Available for Sale:
|
||||||||||||||||||||||||||||||||||||||||
Government- sponsored enterprises
|
$ | — | — | % | $ | 9,030 | 1.07 | % | $ | — | — | % | $ | 1,821 | 3.08 | % | $ | 10,851 | 1.54 | % | ||||||||||||||||||||
US Treasuries
|
— | — | % | 4,492 | 1.07 | % | — | — | % | — | — | % | 4,492 | 1.07 | % | |||||||||||||||||||||||||
SBA loan pools
|
— | — | % | — | — | % | 938 | 2.16 | % | 10,144 | 2.08 | % | 11,082 | 2.08 | % | |||||||||||||||||||||||||
Mortgage-backed securities
|
— | — | % | — | — | % | 121 | 1.32 | % | 52,854 | 1.69 | % | 52,975 | 1.68 | % | |||||||||||||||||||||||||
Total
|
$ | — | — | % | $ | 13,522 | 1.07 | % | $ | 1,059 | 2.06 | % | $ | 64,819 | 1.79 | % | $ | 79,400 | 1.68 | % |
At March 31, 2015, our investments included government sponsored enterprises with amortized costs of approximately $10.8 million, US treasuries with amortized costs of approximately $4.5 million, and small business administration surety bonds with amortized costs of approximately $11.2 million. Mortgage-backed securities consist of securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association with amortized costs of approximately $7.4 million, $19.4 million and $27.0 million, respectively.
Other nonmarketable equity securities at March 31, 2015 consisted of Federal Home Loan Bank stock with a cost of $832,800 and other investments of approximately $63,500.
The amortized costs and the fair value of our investments at March 31, 2015 and December 31, 2014 are shown in the following table.
March 31, 2015
|
December 31, 2014
|
|||||||||||||||
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Available for Sale:
|
||||||||||||||||
US Treasuries
|
$ | 4,464 | $ | 4,492 | $ | 4,461 | $ | 4,459 | ||||||||
Government-sponsored enterprises
|
10,819 | 10,851 | 8,921 | 8,815 | ||||||||||||
SBA loan pools
|
11,241 | 11,082 | 11,394 | 11,106 | ||||||||||||
Mortgage-backed securities
|
53,819 | 52,975 | 59,311 | 57,882 | ||||||||||||
Total
|
$ | 80,343 | $ | 79,400 | $ | 84,087 | $ | 82,262 |
41
Loans
Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans at March 31, 2015 and December 31, 2014 were $319.3 million and $326.5 million, respectively. Gross loans outstanding at March 31, 2015 and December 31, 2014 were $320.6 million and $318.0 million, respectively.
Loans secured by real estate mortgages are the principal component of our loan portfolio. Most of our real estate loans are secured by residential or commercial property. We do not generally originate traditional long term residential mortgages for the portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 85%. The current mix may not be indicative of the ongoing portfolio mix. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral.
The following table summarizes the composition of our loan portfolio at March 31, 2015 and December 31, 2014.
March 31, 2015
|
December 31, 2014
|
|||||||||||||||
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Commercial | ||||||||||||||||
Commercial and industrial
|
$ | 23,697 | 7.4 | % | $ | 22,632 | 7.1 | % | ||||||||
Real Estate | ||||||||||||||||
Mortgage
|
251,276 | 78.3 | % | 248,249 | 78.0 | % | ||||||||||
Construction | 42,592 | 13.3 | % | 44,388 | 14.0 | % | ||||||||||
Total real estate | 293,868 | 91.6 | % | 292,637 | 92.0 | % | ||||||||||
Consumer | ||||||||||||||||
Consumer
|
3,134 | 1.0 | % | 2,818 | 0.9 | % | ||||||||||
Total Gross Loans
|
320,699 | 100.0 | % | 318,087 | 100.0 | % | ||||||||||
Deferred origination fees, net
|
(85 | ) | (0.0 | %) | (90 | ) | (0.0 | %) | ||||||||
Total gross loans, net of deferred fees
|
320,614 | 100.0 | % | 317,997 | 100.0 | % | ||||||||||
Less: allowance for loan losses
|
(4,794 | ) | (4,750 | ) | ||||||||||||
Total loans, net
|
$ | 315,820 | $ | 313,247 |
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following table is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.
The following table summarizes the loan maturity distribution by type and related interest rate characteristics at March 31, 2015:
One year or less
|
After one but within five years
|
After five years
|
Total
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Commercial
|
$ | 3,874 | $ | 17,296 | $ | 2,527 | $ | 23,697 | ||||||||
Real estate
|
38,965 | 194,733 | 60,170 | 293,868 | ||||||||||||
Consumer
|
565 | 2,047 | 522 | 3,134 | ||||||||||||
Deferred origination fees
|
(5 | ) | (80 | ) | — | (85 | ) | |||||||||
Total gross loans, net of deferred fees
|
$ | 43,399 | $ | 213,996 | $ | 63,219 | $ | 320,614 | ||||||||
Gross loans maturing after one year with:
|
||||||||||||||||
Fixed interest rates
|
$ | 201,176 | ||||||||||||||
Floating interest rates
|
76,119 | |||||||||||||||
Total
|
$ | 277,295 |
42
Allowance for Loan Losses and Provisions
We have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of operations. The allowance is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the portfolio. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.
More specifically, in determining our allowance for loan losses, we review loans for specific and impaired reserves based on current appraisals less estimated closing costs. General and unallocated reserves are determined using historical loss trends applied to risk rated loans grouped by FDIC call report classification code. The general and unallocated reserves are calculated by applying the appropriate historical loss ratio to the loan categories grouped by risk rating (pass, special mention, substandard and doubtful). The quantitative value of the qualitative factors, as described below, is then applied to this amount to estimate the general and unallocated reserve for the specific loans within this rating category and particular loan category. Impaired loans are excluded from this analysis as they are individually reviewed for valuation. The sum of all such amounts determines our general and unallocated reserves.
We also track our portfolio and analyze loans grouped by call report categories. The first step in this process is to risk grade each and every loan in the portfolio based on a common set of parameters. These parameters include debt to worth, liquidity of the borrower, net worth, experience in a particular field and other factors. Weight is also given to the relative strength of any guarantors on the loan. We have retained an independent consultant to review the loan files on a test basis to confirm the loan grade assigned to the loan.
After risk grading each loan, we then use fourteen qualitative factors to analyze the trends in the portfolio. These fourteen factors include both internal and external factors. The internal factors considered are the concentration of credit across the portfolio, current delinquency ratios and trends, the experience level of management and staff, our adherence to lending policies and procedures, current loss and recovery trends, the nature and volume of the portfolio’s categories, current nonaccrual and problem loan trends, the quality of our loan review system, policy exceptions, value of underlying collateral and other factors which include insurance shortfalls, loan fraud and unpaid tax risk. The external factors considered are regulatory and legal factors and the current economic and business environment, which includes indicators such as national GDP, pricing indicators, employment statistics, housing statistics, market indicators, financial regulatory economic analysis, and economic forecasts from reputable sources. A quantitative value is assigned to current delinquency ratios and trends and the current nonaccrual and problem loan trends, which, when added together, creates a net qualitative weight. The net qualitative weight is then added to the loss ratio. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the loss ratio. As a result, an increased loss ratio will result in a higher allowance for loan loss. For example, as delinquency ratios and trends increase, this qualitative factor’s quantitative value will increase, which will increase the net qualitative weight and the loss ratio (assuming all other qualitative factors remain constant). Similarly, positive trends in the nonaccrual and problem loans trends, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the net qualitative weight and the loss ratio (assuming all other qualitative factors remain constant). These factors are reviewed and updated by the Bank’s executive management on a quarterly basis to arrive at a consensus for our qualitative adjustments.
Our methodology for determining our historical loss ratio is to analyze the most recent losses because we believe this period encompasses the most appropriate time period. In addition, we have moved to a fully migrated loss history for all loan pools and all risk grades as of the period ended March 31, 2015. The resulting historical loss factor is used as a beginning point upon which we add our quantitative adjustments based on the qualitative factors discussed above. Once the qualitative adjustments are made, we refer to the final amount as the total factor. The total factor is then multiplied by the loans outstanding for the period ended, except for any loans classified as non-performing which are addressed specifically as discussed below, to estimate the general and unallocated reserves.
Separately, we review all impaired loans individually to determine a specific allocation for each. In our assessment of impaired loans, we consider the primary source of repayment when determining whether or not loans are collateral dependent. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. When management determines that a loan is impaired, the difference between our investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is then reserved for or charged against the allowance for loan losses.
43
Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add back subsequent recoveries. In addition, on a periodic basis we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions. We would only consider further adjustments to our allowance for loan losses based on this review of peers if our allowance was significantly different from our peer group. To date, we have not made any such adjustment. There can be no assurance that loan charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.
The following table summarizes the activity related to our allowance for loan losses for the three months ended March 31, 2015 and 2014.
2015
|
2014
|
|||||||
(dollars in thousands)
|
||||||||
Balance, beginning of year
|
$ | 4,750 | $ | 6,026 | ||||
Provision for loan losses
|
— | 71 | ||||||
Charge offs, Commercial and Industrial
|
— | (485 | ) | |||||
Charge offs, Real Estate Mortgage
|
— | (548 | ) | |||||
Charge offs, Real Estate Construction
|
— | (743 | ) | |||||
Charge offs, Consumer
|
— | (3 | ) | |||||
Recoveries, Commercial and Industrial
|
1 | 89 | ||||||
Recoveries, Real Estate Mortgage
|
43 | 217 | ||||||
Recoveries, Real Estate Construction
|
— | 102 | ||||||
Recoveries, Consumer
|
— | 24 | ||||||
Balance, end of period
|
$ | 4,794 | $ | 4,750 | ||||
Total loans outstanding at end of period
|
$ | 320,614 | $ | 317,996 | ||||
Allowance for loan losses to gross loans
|
1.50 | % | 1.49 | % | ||||
Net charge-offs to average loans
|
0.00 | % | 0.41 | % |
Nonperforming Assets
The following table sets forth our nonperforming assets at March 31, 2015 and December 31, 2014:
2015
|
2014
|
|||||||
(dollars in thousands)
|
||||||||
Nonaccrual loans
|
$ | 9,606 | $ | 6,839 | ||||
Other real estate owned
|
17,218 | 17,519 | ||||||
Total nonperforming assets
|
$ | 26,814 | $ | 24,358 | ||||
Nonperforming assets to total assets
|
5.63 | % | 5.12 | % |
The Bank had 25 loans on non-accrual status at March 31, 2015, totaling $9.6 million and 24 loans on non-accrual status totaling $6.8 million at December 31, 2014. Of the 25 loans on non-accrual status at March 31, 2015, it is anticipated that 20 loans totaling approximately $8.7 million will move to other real estate owned through foreclosure or through the Bank’s acceptance of a deed in lieu of foreclosure. An additional 5 loans amounting to approximately $910,000 are expected to be paid down or paid in full. At March 31, 2015 and December 31, 2014, the allowance for loan losses was $4.8 million and $4.7 million, respectively, or 1.50% and 1.49%, respectively, of outstanding loans. At March 31, 2015 the Bank had 39 impaired loans totaling $25.3 million, which is a increase of $1.6 million when compared to December 31, 2014. This increase was primarily related to one loan that was moved to nonaccrual status. We remain committed to working with borrowers to help them overcome their difficulties and will review loans on a loan by loan basis.
To determine current collateral values we obtain new appraisals on loan renewals and potential problem loans. In the process of estimating collateral values for non-performing loans, management evaluates markets for stagnation or distress and discounts appraised values on a property by property basis. Currently, management does not review collateral values for properties located in stagnant or distressed residential areas if the loan is performing and not up for renewal.
44
As of March 31, 2015, we had 40 loans with a current principal balance of $19.1 million on the watch list compared to 25 loans with a current principal balance of $13.9 million at December 31, 2014. The watch list is the classification utilized by us when we have an initial concern about the financial health of a borrower. We then gather current financial information about the borrower and evaluate our current risk in the credit. We will then either move it to “substandard” or back to its original risk rating after a review of the information. There are times when we may leave the loan on the “watch list,” if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we want to review it on a more regular basis. Loans on the watch list are not considered “potential problem loans” until they are determined by management to be classified as substandard.
Loans past due 30-89 days amounted to $7.1 million at March 31, 2015 as compared to $1.8 million at December 31, 2014. Past due loans are often regarded as a precursor to further credit problems which would lead to future increases in nonaccrual loans and other real estate owned. At March 31, 2015, there were no loans past due greater than 90 days that were not already placed on nonaccrual. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. During the three months ended March 31, 2015 and March 31, 2014, the gross interest that we would have recorded if the loans were had been in current status was $56,000 and $27,000 respectively. Forgone interest income on impaired loans was $99,000 and $55,000 during the three months ended March 31, 2015 and March 31, 2014.
Deposits
Our primary source of funds for loans and investments is our deposits. Due to the Consent Order, we may not accept brokered deposits unless a waiver is granted by the FDIC. We no longer have any brokered or wholesale deposits. Our loan-to-deposit ratio was 74.7% and 74.3% at March 31, 2015 and December 31, 2014, respectively. Although we currently do not utilize brokered deposits as a funding source, if we were to seek to begin using such funding source, there is no assurance that the FDIC will grant us the approval when requested. These restrictions could have a substantial negative impact on our liquidity. Additionally, we are restricted from offering an effective yield on deposits of more than 75 basis points over the national rates published by the FDIC weekly on their website.
The following table shows the average balance amounts and the average rates paid on deposits held by us for the three months ended March 31, 2015 and the year ended December 31, 2014.
March 31, 2015
|
December 31, 2014
|
|||||||||||||||
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
(dollars in thousands)
|
||||||||||||||||
Noninterest bearing demand deposits
|
$ | 26,246 | — | % | $ | 25,615 | — | % | ||||||||
Interest bearing demand deposits
|
35,433 | 0.19 | % | 38,745 | 0.21 | % | ||||||||||
Savings and money market accounts
|
101,226 | 0.38 | % | 98,291 | 0.35 | % | ||||||||||
Time deposits less than $100,000
|
96,555 | 1.25 | % | 101,080 | 1.23 | % | ||||||||||
Time deposits greater than $100,000
|
164,385 | 1.34 | % | 168,073 | 1.33 | % | ||||||||||
Total deposits
|
$ | 423,845 | 0.91 | % | $ | 431,804 | 0.91 | % |
All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, 2015 and December 31, 2014 was as follows:
March 31,
2015
|
December 31,
2014
|
|||||||
(dollars in thousands)
|
||||||||
Three months or less
|
$ | 37,013 | $ | 18,904 | ||||
Over three through six months
|
17,537 | 33,384 | ||||||
Over six though twelve months
|
28,437 | 23,742 | ||||||
Over twelve months
|
81,673 | 86,868 | ||||||
Total
|
$ | 164,660 | $ | 162,898 |
45
Borrowings and Other Interest-Bearing Liabilities
The following table outlines our various sources of borrowed funds during the three months ended March 31, 2015 and the year ended December 31, 2014, the amounts outstanding at the end of each period, at the maximum point for each component during the periods, on average for each period, and the average and period end interest rate that we paid for each borrowing source. The maximum month-end balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown.
Average for the Period
|
||||||||||||||||||||
Ending Balance
|
Period End Rate
|
Maximum Month End Balance
|
Balance
|
Rate | ||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||
At or for the three months ended March 31, 2015:
|
||||||||||||||||||||
Securities sold under agreement to repurchase
|
$ | 10,000 | 4.40 | % | $ | 10,000 | $ | 10,000 | 4.46 | % | ||||||||||
Advances from FHLB
|
9,000 | 3.96 | % | 9,000 | 9,000 | 4.01 | % | |||||||||||||
Junior subordinated debentures
|
14,434 | 3.22 | % | 14,434 | 14,434 | 2.54 | % | |||||||||||||
At or for the year ended December 31, 2014:
|
||||||||||||||||||||
Securities sold under agreement to repurchase
|
$ | 10,000 | 4.40 | % | $ | 10,000 | $ | 10,000 | 4.45 | % | ||||||||||
Advances from FHLB
|
9,000 | 3.96 | % | 13,000 | 11,762 | 3.14 | % | |||||||||||||
Junior subordinated debentures
|
14,434 | 3.20 | % | 14,434 | 14,434 | 3.24 | % | |||||||||||||
ESOP borrowings
|
— | — | % | ——- | 19 | — | % | |||||||||||||
Federal funds purchased
|
— | — | % | ——- | 8 | 0.56 | % |
We have exercised our right to defer distributions on the junior subordinated debentures (and the related trust preferred securities), during which time we cannot pay any dividends on our common stock. In addition, the Consent Order prohibits us from declaring or paying any dividends or making any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.
Federal Home Loan Bank Advances, Fed Funds Lines of Credit and Federal Reserve Discount Window
Our other borrowings have traditionally included proceeds from FHLB advances and federal funds lines of credit from correspondent banks. At March 31, 2015, we had $9.0 million in total advances and lines outstanding from the FHLB with a remaining credit availability of $61.6 million and an excess lendable collateral value of approximately $4.3 million. We also have credit availability through the Federal Reserve Discount Window. As of March 31, 2015, $131,000 was available based on qualifying collateral. The Federal Reserve Discount Window borrowing capacity has been curtailed to only overnight terms, contingent upon credit approval for each transaction. Availability of the Federal Reserve Discount Window may be terminated at any time by the Federal Reserve, and we can make no assurances that this funding source will continue to be available to us.
Capital Resources
Total shareholders’ equity was $5.2 million at March 31, 2015 and $5.3 million at December 31, 2014. The difference is attributable to the amount of preferred stock dividend accrued of $414,000, an increase of $547,000 in the fair value of available-for-sale securities, and by net loss of $316,000 for the three month period ended March 31, 2015.
The following table shows the return on average assets (net loss divided by average total assets), return on average equity (net loss divided by average equity), and average equity to average assets ratio (average equity divided by average total assets) for the periods ended March 31, 2015 and December 31, 2014:
March 31,
2015
|
December 31,
2014
|
|||||||
Return on average assets
|
(0.02 | %) | (0.09 | %) | ||||
Return on average equity
|
(1.41 | %) | (7.08 | %) | ||||
Equity to assets ratio
|
1.18 | % | 1.26 | % |
The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. Our bank is required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.
46
To be considered “well-capitalized,” banks must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, banking regulators have established a minimum Tier 1 leverage ratio of at least 4%. In addition, the Consent Order requires us to achieve and maintain Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets by May 27, 2011. As of March 31, 2015, the Bank is not in compliance with the capital requirements established in the Consent Order.
The following table sets forth the Company’s various capital ratios at March 31, 2015 and December 31, 2014. For all periods, the Company was in compliance with regulatory capital requirements established by the Federal Reserve Board’s Capital Adequacy Guidelines for Bank Holding Companies.
Tidelands Bancshares, Inc.
|
March 31,
|
December 31,
|
||||||
2015
|
2014
|
|||||||
Common Equity Tier 1
|
(2.44 | %) | — | |||||
Leverage ratio
|
1.62 | % | 1.81 | % | ||||
Tier 1 risk-based capital ratio
|
2.15 | % | 2.45 | % | ||||
Total risk-based capital ratio
|
4.30 | % | 4.91 | % |
The following table sets forth the Bank’s various capital ratios at March 31, 2015 and December 31, 2014.
Tidelands Bank
|
March 31,
|
December 31,
|
||||||
2015
|
2014
|
|||||||
Common Equity Tier 1
|
7.53 | % | — | |||||
Leverage ratio
|
5.69 | % | 5.67 | % | ||||
Tier 1 risk-based capital ratio
|
7.53 | % | 7.70 | % | ||||
Total risk-based capital ratio
|
8.78 | % | 8.95 | % |
On February 22, 2006, Tidelands Statutory Trust, a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust, generating net proceeds of $8.0 million. The trust loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The junior subordinated debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. On October 10, 2006, we closed a public offering in which 1,200,000 shares of our common stock were issued at a purchase price of $15.00 per share. Net proceeds after deducting the underwriter’s discount and expenses were $16.4 million.
On June 20, 2008, Tidelands Statutory Trust II (“Trust II”), a non-consolidated subsidiary of the Company, issued and sold fixed/floating rate capital securities of the trust, generating proceeds of $6.0 million. Trust II loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The junior subordinated debentures qualify as Tier I under Federal Reserve Board guidelines.
Beginning with the scheduled payment date of December 30, 2010, the Company has deferred the payments of interest on its outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods). This and any future deferred distributions will continue to accrue interest. Distributions on the trust preferred securities are cumulative. Therefore, in accordance with generally accepted accounting principles, the Company will continue to accrue the monthly cost of the trust preferred securities as it has since issuance. As of March 31, 2015, the amount of accrued interest was $2,825,147. After the Company has deferred payments on the subordinated debentures for 20 quarters, the holders of the junior subordinated debentures have certain rights that may be pursued against the Company, including, but not limited to, forcing the Company into bankruptcy. The Company will have deferred interest payments for 20 quarters on December 30, 2015, and is currently pursuing all available options to pay the interest in arrears, but cannot provide assurances that it will be able to pay these obligations.
On December 19, 2008, we entered into the CPP Purchase Agreement with the Treasury, pursuant to which the Company issued and sold to Treasury (i) 14,448 shares of the Company’s Series T Preferred Stock, having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 571,821 shares of the Company’s common stock, par value $0.01 per share, at an initial exercise price of $3.79 per share, for an aggregate purchase price of $14,448,000 in cash. The Series T Preferred Stock qualifies as Tier 1 capital under Federal Reserve Board guidelines and will be entitled to cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum beginning with the May 15, 2014 dividend date.
47
Beginning with the payment date of November 15, 2010, the Company deferred dividend payments on the TARP Preferred Stock. Although the Company may defer dividend payments, the dividend is a cumulative dividend and failure to pay dividends for six dividend periods triggered board appointment rights for the holder of the TARP Preferred Stock. The Company deferred its seventh dividend payment in May 2012. The Treasury has appointed an observer to the Board. As of March 31, 2015, the amount of cumulative unpaid dividends is $4,344,798.
Effect of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.
Off-Balance Sheet Risk
Commitments to extend credit are agreements to lend to a customer as long as the customer has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At March 31, 2015, unfunded commitments to extend credit were $17.6 million. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
At March 31, 2015, there were commitments totaling approximately $547,000 under letters of credit. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or transactions that could result in liquidity needs or other commitments that significantly impact earnings.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.
We actively monitor and manage our interest rate risk exposure principally by measuring our interest sensitivity “gap,” and net interest income simulations. Interest sensitivity gap is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. We are currently liability sensitive on a cumulative basis over the one year and three year horizon.
48
Approximately 32.4% of our loans were variable rate loans at March 31, 2015 and 66.4% of interest-bearing liabilities reprice within one year. However, interest rate movements typically result in changes in interest rates on assets that are different in magnitude from the corresponding changes in rates paid on liabilities. While a smaller portion of our loans reprice within a year, a larger majority of our deposits will reprice within a 12-month period. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.
Liquidity and Interest Rate Sensitivity
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
At March 31, 2015 and December 31, 2014, our liquid assets, which consist of cash and due from banks, amounted to $23.0 million and $21.3 million, or 4.8% and 4.5% of total assets, respectively. Our available-for-sale securities at March 31, 2015 and December 31, 2014 amounted to $79.4 million and $82.3 million, or 16.7% and 17.3% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately $19.4 million of these securities are pledged against outstanding debt or borrowing lines of credit. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash.
Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the generation of deposits. In addition, we receive cash upon the maturity and sale of loans and the maturity of investment securities. We are also a member of the Federal Home Loan Bank of Atlanta, from which applications for borrowings can be made for leverage or liquidity purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances. At March 31, 2015, we had $9.0 million in total advances and lines from the FHLB with a remaining credit availability of $61.6 million and an excess lendable collateral value of approximately $4.3 million. In addition, we maintain a line of credit with the Federal Reserve Bank of $131,000 secured by securities.
Asset/liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. The asset/liability committee monitors and considers methods of managing exposure to interest rate risk. The asset/liability committee is responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.
Not applicable.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our current disclosure controls and procedures are effective as of March 31, 2015. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
49
PART II – OTHER INFORMATION
Neither the Company nor the Bank is a party to, nor is any of their property the subject of, any pending legal proceedings , the ultimate resolution of which will have a material adverse effect on our financial position, results of operations or liquidity.
As previously disclosed in the Current Report on Form 8-K filed on March 22, 2011, the Written Agreement between the Company and the Federal Reserve Bank of Richmond requires that we obtain the written approval of the Federal Reserve Bank before incurring additional debt, purchasing or redeeming our capital stock, or declaring or paying cash dividends on our securities, including dividends on our TARP preferred stock and interest on our trust preferred securities. Furthermore, pursuant to the terms of our trust preferred securities, absent authorization from a majority of its holders, we are prohibited from paying dividends on our TARP preferred stock until we pay all interest payments due and payable on our trust preferred securities.
Per the FRB Agreement the Company cannot pay dividends on TARP preferred stock or interest on our trust preferred securities, until such time as the Company has shown sustained profitability, improvement in asset quality indicators, and compliance with existing regulatory guidance related to such payments. Cash dividends on the TARP preferred stock are cumulative and accrue and compound on each subsequent payment date. Beginning with the payment date of November 15, 2010, the Company deferred dividend payments on the TARP Preferred Stock. Although the Company may defer dividend payments, the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the TARP Preferred Stock. The dividend payment that was deferred in February, 2014 was the fourteenth missed dividend payment. Consequently, the Treasury has appointed an observer to the Board. As of March 31, 2015, the amount of cumulative unpaid dividend is $4,344,798.
Beginning with the scheduled payment date of December 30, 2010, the Company has deferred the payments of interest on its outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods). As of March 31, 2015, the amount of accrued interest was $2,825,147. After the Company has deferred payments on the subordinated debentures for 20 quarters, the holders of the junior subordinated debentures have certain rights that may be pursued against the Company, including, but not limited to, forcing the Company into bankruptcy. The Company will have deferred interest payments for 20 quarters on December 30, 2015, and is currently pursuing all available options to pay the interest in arrears, but cannot provide assurances that it will be able to pay these obligations.
Exhibit No. | Description | |
31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. | |
31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. | |
32 | Section 1350 Certifications. | |
101
|
The following financial information from Tidelands Bancshares Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2015, filed with the SEC on May 8, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet at March 31, 2015 and December 31, 2014, (ii) the Consolidated Statement of Operations and Comprehensive Loss for the three month periods ended March 31, 2015 and 2014, (iii) the Consolidated Statement of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2015 and 2014, and (iv) Notes to Consolidated Financial Statements. |
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TIDELANDS BANCSHARES, INC. | |||
Date: May 8, 2015
|
By:
|
/s/ Thomas H. Lyles | |
Thomas H. Lyles, President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: May 8, 2015 |
By:
|
/s/ John D. Dalton | |
John D. Dalton, Controller and Vice President | |||
(Principal Financial and Accounting Officer) | |||
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EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. | |
31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. | |
32 | Section 1350 Certifications. | |
101
|
The following financial information from Tidelands Bancshares Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2015, filed with the SEC on May 8, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet at March 31, 2015 and December 31, 2014, (ii) the Consolidated Statement of Operations and Comprehensive Loss for the three month periods ended March 31, 2015 and 2014, (iii) the Consolidated Statement of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2015 and 2014, and (iv) Notes to Consolidated Financial Statements. |
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