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EX-32.2 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0616ex32ii_sbfinancial.htm
EX-32.1 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0616ex32i_sbfinancial.htm
EX-31.2 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0616ex31ii_sbfinancial.htm
EX-31.1 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0616ex31i_sbfinancial.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________to_________________

 

Commission file number 1-36785

 

SB FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Ohio  

34-1395608

(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

401 Clinton Street, Defiance, Ohio 43512

 

(Address of principal executive offices)

(Zip Code)

 

(419) 783-8950

 

(Registrant’s telephone number, including area code)

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerate Filer  ☐ Accelerated Filer  ☐ Non-Accelerated Filer  ☐ Smaller Reporting Company ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

Title of each class   Name of each exchange on which registered
Common Shares, No Par Value   The NASDAQ Stock Market, LLC
4,891,671 Outstanding at August 12, 2016   (NASDAQ Capital Market)

 

 

 

 

 

SB FINANCIAL GROUP, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures  40
     
PART II – OTHER INFORMATION 41
     
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Mine Safety Disclosures 41
Item 5. Other Information 41
Item 6. Exhibits  41
     
Signatures   42

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SB Financial Group, Inc.

Condensed Consolidated Balance Sheets
June 30, 2016 and December 31, 2015

 

   June   December 
($ in Thousands)  2016   2015 
   (Unaudited)     
ASSETS         
Cash and due from banks  $29,945   $20,459 
           
Securities available for sale, at fair value   92,472    89,789 
Other securities - FRB and FHLB Stock   3,748    3,748 
           
Total investment securities   96,220    93,537 
           
Loans held for sale   8,441    7,516 
           
Loans, net of unearned income   604,776    557,659 
Allowance for loan losses   (7,450)   (6,990)
           
Net loans   597,326    550,669 
           
Premises and equipment, net   18,806    19,010 
Cash surrender value of life insurance   13,581    13,437 
Goodwill & other intangibles   16,429    16,435 
Foreclosed assets held for sale, net   157    286 
Mortgage servicing rights   6,494    7,152 
Accrued interest receivable   1,397    1,260 
Other assets   4,367    3,310 
           
Total assets  $793,163   $733,071 
           
LIABILITIES AND EQUITY          
Deposits          
Non interest bearing demand  $110,899   $113,113 
Interest bearing demand   129,658    126,443 
Savings   84,975    83,447 
Money market   134,365    104,412 
Time deposits   188,403    159,038 
           
Total deposits   648,300    586,453 
           
Advances from Federal Home Loan Bank   23,000    35,000 
Repurchase agreements   17,797    12,406 
Trust preferred securities   10,310    10,310 
Accrued interest payable   384    264 
Other liabilities   8,422    7,397 
           
Total liabilities   708,213    651,830 
           
Commitments & Contingent Liabilities   -    - 
           
Stockholders' Equity          
Preferred stock, Series A   13,983    13,983 
Common stock   12,569    12,569 
Additional paid-in capital   15,367    15,438 
Retained earnings   42,925    40,059 
Accumulated other comprehensive income   1,552    650 
Treasury stock, at cost   (1,446)   (1,458)
           
Total equity   84,950    81,241 
           
Total liabilities and equity  $793,163   $733,071 

  

See notes to condensed consolidated financial statements (unaudited)

 

Note: The balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date

 

 1 

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Income (Unaudited)

 

($ in thousands, except share data)  Three Months Ended   Six Months Ended 
   June   June   June   June 
Interest income  2016   2015   2016   2015 
Loans                
Taxable  $6,648    5,835    12,908    11,454 
Nontaxable   24    9    33    15 
Securities                    
Taxable   392    395    794    767 
Nontaxable   149    175    305    352 
                     
Total interest income   7,213    6,414    14,040    12,588 
                     
Interest expense                      
Deposits   647    500    1,192    995 
Repurchase Agreements & Other   4    4    9    9 
Federal Home Loan Bank advances   77    94    183    186 
Trust preferred securities   62    53    121    104 
                     
Total interest expense   790    651    1,505    1,294 
                     
Net interest income   6,423    5,763    12,535    11,294 
                     
Provision for loan losses   -    500    250    850 
                    
Net interest income after provision for loan losses     6,423    5,263    12,285    10,444 
                     
Noninterest income                      
Wealth Management Fees   643    656    1,276    1,325 
Customer service fees   680    702    1,360    1,334 
Gain on sale of mtg. loans & OMSR's   2,284    1,771    3,667    3,205 
Mortgage loan servicing fees, net   (273)   521    (719)   545 
Gain on sale of non-mortgage loans   151    321    600    575 
Data service fees   233    306    510    623 
Net gain on sale of securities   92    -    203    - 
Gain/(loss) on sale/disposal of assets   186    (1)   208    (20)
Other income   311    167    641    452 
                     
Total non-interest income   4,307    4,443    7,746    8,039 
                     
Noninterest expense                      
Salaries and employee benefits   4,314    3,935    8,093    7,412 
Net occupancy expense   524    480    1,089    983 
Equipment expense   639    524    1,234    1,089 
Data processing fees   339    247    644    510 
Professional fees   326    426    642    866 
Marketing expense   199    142    370    291 
Telephone and communication   102    98    201    188 
Postage and delivery expense   162    201    359    435 
State, local and other taxes   171    128    270    257 
Employee expense   128    138    246    291 
Intangible amortization expense   3    55    6    109 
Other expenses   500    444    1,148    1,031 
                     
Total non-interest expense   7,407    6,818    14,302    13,462 
                     
Income before income tax expense   3,323    2,888    5,729    5,021 
                     
Income tax expense   1,058    897    1,809    1,534 
                     
Net income     $2,265    1,991    3,920    3,487 
                     
Preferred Stock Dividends   244    244    488    469 
                     
Net income available to common shareholders   2,021    1,747    3,432    3,018 
                     
Basic earnings per common share  $0.41    0.36    0.70    0.62 
                     
Diluted earnings per common share  $0.35    0.31    0.61    0.54 
                     
Dividends per common share  $0.06    0.05    0.115    0.095 
                     
Average common shares outstanding (in thousands):                    
Basic:   4,893    4,884    4,894    4,882 
Diluted:   6,390    6,382    6,396    6,381 

 

See notes to condensed consolidated financial statements (unaudited)

 

 2 

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
($'s in thousands)  2016   2015   2016   2015 
                 
Net income  $2,265   $1,991   $3,920   $3,487 
Other comprehensive income:                    
Available-for-sale investment securities:                    
Gross unrealized holding gain(loss) arising in the period   480    (779)   1,570    (255)
Related tax (expense)/benefit   (163)   265    (534)   87 
Less: Reclassification for gain realized in income   (92)   -    (203)   - 
Related tax expense   31    -    69    - 
Net effect on other comprehensive income   256    (514)   902    (168)
Total comprehensive income  $2,521   $1,477   $4,822   $3,319 

 

 3 

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

 

   Preferred   Common   Additional Paid-in   Retained   Accumulated Other Comprehensive   Treasury     
($'s in thousands)  Stock   Stock   Capital   Earnings   Income   Stock   Total 
                             
Balance, January 1, 2016  $13,983   $12,569   $15,438   $40,059   $650   $(1,458)  $81,241 
Net Income                  3,920              3,920 
Other Comprehensive Income                       902         902 
Dividends on Common Stk., $0.055 per share                  (566)             (566)
Dividends on Preferred Stk., $0.1625 per share                  (488)             (488)
Issuance of Restricted Stock and Stock Options             (151)             175    24 
Stock Repurchase                            (163)   (163)
Share based compensation expense             80                   80 
Balance, June 30, 2016  $13,983   $12,569   $15,367   $42,925   $1,552   $(1,446)  $84,950 
                                    
Balance, January 1, 2015  $13,983   $12,569   $15,461   $34,379   $918   $(1,627)  $75,683 
Net Income                  3,487              3,487 
Other Comprehensive Income                       (168)        (168)
Dividends on Common Stk., $0.045 per share                  (467)             (467)
Dividends on Preferred Stk., $0.15 per share                  (469)             (469)
Issuance of Restricted Stock and Stock Options             (78)             96    18 
Stock Repurchase                            (2)   (2)
Share based compensation expense             41                   41 
Balance, June 30, 2015  $13,983   $12,569   $15,424   $36,930   $750   $(1,533)  $78,123 

  

See notes to condensed consolidated financial statements (unaudited)

 

 4 

 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   Six Months Ended
June 30,
 
($'s in thousands)  2016   2015 
Operating Activities        
Net Income  $3,920   $3,487 
Items providing/(using) cash          
Depreciation and amortization   696    547 
Provision for loan losses   250    850 
Expense of share-based compensation plan   80    41 
Amortization of premiums and discounts on securities   461    499 
Amortization of intangible assets   6    109 
Amortization of originated mortgage servicing rights   482    501 
Recapture of originated mortgage servicing rights impairment   -    (269)
Impairment of mortgage servicing rights   1,236    80 
Proceeds from sale of loans held for sale   148,995    150,977 
Originations of loans held for sale   (142,612)   (146,906)
Gain from sale of loans   (4,267)   (3,780)
(Gain)/loss on sale of assets   (181)   20 
Changes in          
Interest receivable   (137)   (160)
Other assets   (5,870)   (7,804)
Interest payable and other liabilities   1,145    2,066 
           
Net cash provided by operating activities   4,204    258 
           
Investing Activities          
Purchases of available-for-sale securities   (11,322)   (25,456)
Proceeds from maturities of available-for-sale securities   7,145    11,155 
Proceeds from sales of available-for-sale-securities   2,400    - 
Net change in loans   (47,150)   (6,709)
Purchase of premises and equipment and software   (497)   (3,411)
Proceeds from sales or disposal of premises and equipment   5    36 
Proceeds from sale of foreclosed assets   656    110 
           
Net cash used in investing activities   (48,763)   (24,275)
           
Financing Activities          
Net increase in demand deposits, money market, interest checking and savings accounts   32,482    15,123 
Net increase (decrease) in certificates of deposit   29,365    (3,103)
Net increase in securities sold under agreements to repurchase   5,391    2,429 
Repayment of Federal Home Loan Bank advances   (14,000)   - 
Proceeds from Federal Home Loan Bank advances   2,000    4,000 
Net proceeds from share based compensation plans   24    18 
Repurchase of common stock   (163)   (2)
Dividends on common stock   (566)   (467)
Dividends on preferred stock   (488)   (469)
           
Net cash provided by financing activities   54,045    17,529 
           
Increase in Cash and Cash Equivalents   9,486    (6,488)
           
Cash and Cash Equivalents, Beginning of Year   20,459    28,197 
           
Cash and Cash Equivalents, End of Period  $29,945   $21,709 
           
Supplemental Cash Flows Information          
           
Interest paid  $1,385   $1,269 
Income taxes paid  $2,309   $1,060 
Transfer of loans to foreclosed assets  $243   $27 

 

See notes to condensed consolidated financial statements (unaudited)

 

 5 

 

 

SB FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION

 

SB Financial Group, Inc., an Ohio corporation (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”) and State Bank Insurance, LLC (“SBI”).

 

The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, and SBI. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the six months ended June 30, 2016, are not necessarily indicative of results for the complete year.

 

The condensed consolidated balance sheet of the Company as of December 31, 2015 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

The following paragraphs summarize the impact of new accounting pronouncements:

 

Accounting Standards Update (ASU) No. 2016-13: Financial Instruments – Credit Losses (Topic 326)

 

This ASU replaces the current GAAP incurred impairment methodology regarding credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. The amendments in this ASU are effective for reporting periods beginning after December 15, 2019, and management will need further study to determine the impact on the Company’s consolidated financial statements.

 

ASU No. 2016-09: Stock Compensation (Topic 718)

 

This ASU affects all entities that issue share-based payment awards to their employees. The update is intended to simplify the accounting for these transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and management will need further study to determine the impact on the Company’s consolidated financial statements.

 

ASU No. 2016-06: Derivatives and Hedging (Topic 815)

 

This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and management does not believe this ASU will have a material impact on the Company’s consolidated financial statements.

 

 6 

 

 

ASU No. 2016-05: Derivatives and Hedging (Topic 815)

 

This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedging accounting criteria continue to be met. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and management does not believe this ASU will have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2016-02: Leases (Topic 842)

 

This ASU is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU are effective for reporting periods beginning after December 15, 2019, and management will need further study to determine the impact on the Company’s consolidated financial statements.

 

ASU No. 2016-01: Financial Instruments – Recognition and measurement of financial assets and financial liabilities (Subtopic 825-10)

 

This ASU makes targeted improvements to generally accepted accounting principles. Specifically, the amendments require equity securities with readily determinable fair values be classified into different categories and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, and management does not believe this ASU will have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2015-16: Business Combinations (Topic 805)

 

This ASU requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Further, an entity must present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings that would have been recorded previously if the provisional amounts had been recorded as of the acquisition date. The amendments in this ASU are in effect, and they did not have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2015-15: Interest – Imputation of Interest (Subtopic 835-30)

 

This ASU requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The amendments in this ASU are in effect, and they did not have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2015-14: Revenue from Contracts with Customers (Subtopic 606)

 

This ASU defers by one year the effective date of the guidance in ASU 2014-09. The amendments in this ASU are now effective for reporting periods beginning after December 15, 2017, and management still does not believe this ASU will have a material impact on the Company’s consolidated financial statements.

 

 7 

 

 

NOTE 2 – EARNINGS PER SHARE

 

Earnings per share (EPS) have been computed based on the weighted average number of common shares outstanding during the periods presented. For the period ended June 30, 2016, share-based awards totaling 33,924 common shares were not considered in computing diluted EPS as they were anti-dilutive. For the period ended June 30, 2015, share-based awards totaling 50,424 common shares were not considered in computing diluted EPS as they were anti-dilutive. Included in the diluted EPS for June 30, 2016 are the impact of the full conversion of the Company’s depository shares issued in December of 2014. Based upon the current conversion ratio, the 1,500,000 outstanding depository shares are convertible into an aggregate of 1,453,435 common shares. The average number of common shares used in the computation of basic and diluted earnings per share were:

 

   Three Months Ended
June 30,
 
($ in thousands - except per share data)  2016   2015 
         
Distributed earnings allocated to common shares  $296   $246 
Undistributed earnings allocated to common shares   1,723    1,499 
Net earnings allocated to common shares   2,019    1,745 
Net earnings allocated to participating securities   2    2 
Dividends on convertible preferred shares   244    244 
Net Income allocated to common shares and participating securities  $2,265   $1,991 
           
Weighted average shares outstanding for basic earnings per share   4,893    4,884 
Dilutive effect of stock compensation   45    47 
Dilutive effect of convertible shares   1,452    1,451 
Weighted average shares outstanding for diluted earnings per share   6,390    6,382 
           
Basic earnings per common share  $0.41   $0.36 
           
Diluted earnings per common share  $0.35   $0.31 

 

   Six Months Ended
June 30,
 
($ in thousands - except per share data)  2016   2015 
         
Distributed earnings allocated to common shares  $566   $467 
Undistributed earnings allocated to common shares   2,861    2,548 
Net earnings allocated to common shares   3,427    3,015 
Net earnings allocated to participating securities   5    3 
Dividends on convertible preferred shares   488    469 
Net Income allocated to common shares and participating securities  $3,920   $3,487 
           
Weighted average shares outstanding for basic earnings per share   4,894    4,882 
Dilutive effect of stock compensation   50    48 
Dilutive effect of convertible shares   1,452    1,451 
Weighted average shares outstanding for diluted earnings per share   6,396    6,381 
           
Basic earnings per common share  $0.70   $0.62 
           
Diluted earnings per common share  $0.61   $0.54 

 

 8 

 

 

Note 3 – Securities

 

The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at June 30, 2016 and December 31, 2015 were as follows:

 

       Gross   Gross     
($ in thousands)  Amortized   Unrealized   Unrealized     
   Cost   Gains   Losses   Fair Value 
Available-for-Sale Securities:                
June 30, 2016                
U.S. Treasury and Government agencies  $11,600   $137   $-   $11,737 
Mortgage-backed securities   63,237    1,131    (19)   64,349 
State and political subdivisions   15,260    1,103    -    16,363 
Equity securities   23    -    -    23 
                     
   $90,120   $2,371   $(19)  $92,472 

 

       Gross   Gross     
($ in thousands)  Amortized   Unrealized   Unrealized     
   Cost   Gains   Losses   Fair Value 
Available-for-Sale Securities:                
December 31, 2015:                
U.S. Treasury and Government agencies  $10,804   $101   $-   $10,905 
Mortgage-backed securities   61,459    311    (427)   61,343 
State and political subdivisions   16,519    999    -    17,518 
Equity securities   23    -    -    23 
                     
   $88,805   $1,411   $(427)  $89,789 

 

The amortized cost and fair value of securities available for sale at June 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Available for Sale 
   Amortized   Fair 
($ in thousands)  Cost   Value 
         
Within one year  $438   $450 
Due after one year through five years   4,960    5,230 
Due after five years through ten years   6,583    6,938 
Due after ten years   14,879    15,482 
    26,860    28,100 
           
Mortgage-backed securities & equity securities   63,260    64,372 
           
Totals  $90,120   $92,472 

 

 9 

 

 

The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $75.6 million at June 30, 2016 and $42.6 million at December 31, 2015. The fair value of securities delivered for repurchase agreements were $20.7 million at June 30, 2016 and $15.8 million at December 31, 2015.

 

For the six months ended June 30, 2016, there were gross gains of $0.20 million resulting from sales of available-for-sale securities, which was a reclassification from accumulated other comprehensive income (OCI) and was included in the net gain on sale of securities. The related $0.07 million in tax expense was a reclassification from OCI and was included in the income tax expense line item in the income statement. There were no realized gains and losses from sales of available-for-sale securities for the six months ended June 30, 2015.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments was $1.8 million at June 30, 2016, and $37.2 million at December 31, 2015, which was approximately 2 and 34 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2016 and December 31, 2015 are as follows:

 

($ in thousands)  Less than 12 Months   12 Months or Longer   Total 
June 30, 2016  Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Available-for-Sale Securities:                        
Mortgage-backed securities          -   $      -   $1,792   $(19)  $1,792   $(19)
                               
   $-   $-   $1,792   $(19)  $1,792   $(19)

 

($ in thousands)  Less than 12 Months   12 Months or Longer   Total 
December 31, 2015  Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Available-for-Sale Securities:                        
Mortgage-backed securities   30,184    (253)   7,061    (174)   37,245    (427)
                               
   $30,184   $(253)  $7,061   $(174)  $37,245   $(427)

 

The total potential unrealized loss as of June 30, 2016 in the securities portfolio was $0.02 million, which was down from the $0.43 million unrealized loss at December 31, 2015. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on these securities.

 

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on non-accrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

 10 

 

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

When State Bank moves a loan to non-accrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

 

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

 11 

 

 

Categories of loans at June 30, 2016 and December 31, 2015 include:

 

   Total Loans   Non-Accrual Loans 
($ in thousands)  June
2016
   December
2015
   June
2016
   December
2015
 
                 
Commercial & Industrial  $100,442   $86,542    158    188 
Commercial RE & Construction   261,923    242,208    5,309    5,670 
Agricultural & Farmland   52,375    43,835    -    7 
Residential Real Estate   135,506    130,806    1,088    749 
Consumer & Other   54,321    54,224    138    32 
                     
Total Loans  $604,567   $557,615   $6,693   $6,646 
                     
Unearned Income  $209   $44           
                     
Total Loans, net of unearned income  $604,776   $557,659           
                     
Allowance for loan losses  $(7,450)  $(6,990)          

 

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2016, December 31, 2015 and June 30, 2015.

 

   Commercial   Commercial RE   Agricultural   Residential   Consumer     
   & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Three Months Ended - June 30, 2016                    
                         
Beginning balance  $925   $4,120   $188   $1,342   $630   $7,205 
Charge Offs   -    -    -    -    (2)  $(2)
Recoveries   212    6    1    -    28    247 
Provision   -    -    -    -    -    - 
Ending Balance  $1,137   $4,126   $189   $1,342   $656   $7,450 
                               
For the Six Months Ended - June 30, 2016                         
                               
Beginning balance  $914   $3,886   $204   $1,312   $674   $6,990 
Charge Offs   (92)   -    -    -    (4)  $(96)
Recoveries   247    6    1    -    52    306 
Provision   68    234    (16)   30    (66)   250 
Ending Balance  $1,137   $4,126   $189   $1,342   $656   $7,450 
                               
Loans Receivable at June 30, 2016                          
Allowance:                              
Ending balance:                              
individually evaluated for impairment  $-   $1,758   $-   $151   $19   $1,928 
Ending balance:                              
collectively evaluated for  impairment  $1,137   $2,368   $189   $1,191   $637   $5,522 
Loans:                              
Ending balance:                              
Individually evaluated for impairment  $-   $5,387   $-   $1,891   $351   $7,629 
Ending balance:                              
collectively evaluated for impairment  $100,442   $256,536   $52,375   $133,615   $53,970   $596,938 

 

 12 

 

 

   Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
Loans Receivable at December 31, 2015                
Allowance:                        
Ending balance:                        
individually evaluated for impairment  $-   $1,759   $-   $167   $37   $1,963 
Ending balance:                              
collectively evaluated for impairment  $914   $2,127   $204   $1,145   $637   $5,027 
Loans:                              
Ending balance:                              
individually evaluated for impairment  $126   $5,754   $-   $1,713   $464   $8,057 
Ending balance:                              
collectively evaluated for impairment  $86,416   $236,454   $43,835   $129,093   $53,760   $549,558 

 

   Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & onstruction   & Farmland   Real Estate   & Other   Total 
                         
ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Three Months Ended - June 30, 2015            
                         
Beginning balance  $1,574   $2,892   $212   $1,318   $834   $6,830 
Charge Offs   (300)   -    -    (48)   (2)  $(350)
Recoveries   15    3    1    3    4    26 
Provision   199    171    48    137    (55)   500 
Ending Balance  $1,488   $3,066   $261   $1,410   $781   $7,006 
                               
For the Six Months Ended - June 30, 2015                          
                               
Beginning balance  $1,630   $2,857   $208   $1,308   $768   $6,771 
Charge Offs   (309)   (250)   -    (61)   (32)  $(652)
Recoveries   21    3    2    5    6    37 
Provision   146    456    51    158    39    850 
Ending Balance  $1,488   $3,066   $261   $1,410   $781   $7,006 

 

The risk characteristics of each loan portfolio segment are as follows:

 

Commercial and Agricultural

 

Commercial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

 13 

 

 

Commercial Real Estate including Construction

 

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

 

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Residential and Consumer

 

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.

 

 14 

 

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2016 and December 31, 2015.

 

June 30, 2016  Commercial   Commercial RE   Agricultural   Residential   Consumer     
($ in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
1-2  $227   $47   $43   $36   $7   $360 
3   28,569    84,220    7,943    114,564    51,063    286,359 
4   71,141    166,128    44,389    18,833    2,984    303,475 
Total Pass (1 - 4)   99,937    250,395    52,375    133,433    54,054    590,194 
                               
Special Mention (5)   -    4,457    -    574    63    5,094 
Substandard (6)   145    1,741    -    411    66    2,363 
Doubtful (7)   360    5,330    -    1,088    138    6,916 
Loss (8)   -    -    -    -    -    - 
Total Loans  $100,442   $261,923   $52,375   $135,506   $54,321   $604,567 

 

December 31, 2015  Commercial   Commercial RE   Agricultural   Residential   Consumer     
($ in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
1-2  $709   $767   $47   $-   $15   $1,538 
3   23,362    79,915    8,195    118,463    50,745    280,680 
4   61,799    149,473    35,593    10,418    3,223    260,506 
Total Pass (1 - 4)   85,870    230,155    43,835    128,881    53,983    542,724 
                               
Special Mention (5)   330    5,260    -    756    70    6,416 
Substandard (6)   110    1,072    -    420    139    1,741 
Doubtful (7)   232    5,721    -    749    32    6,734 
Loss (8)   -    -    -    -    -    - 
Total Loans  $86,542   $242,208   $43,835   $130,806   $54,224   $557,615 

 

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis.

 

Credit Risk Profile

The Company categorizes loans 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 Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.

 

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

 

 15 

 

 

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

 

Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

The following tables present the Company’s loan portfolio aging analysis as of June 30, 2016 and December 31, 2015.

 

($ in thousands)  30-59 Days   60-89 Days   Greater Than   Total Past       Total Loans 
June 30, 2016  Past Due   Past Due   90 Days   Due   Current   Receivable 
                         
Commercial & Industrial  $148   $-   $54   $202   $100,240   $100,442 
Commercial RE & Construction   -    935    5,008    5,943    255,980    261,923 
Agricultural & Farmland   -    -    -    -    52,375    52,375 
Residential Real Estate   89    -    187    276    135,230    135,506 
Consumer & Other   37    -    124    161    54,160    54,321 
Total Loans  $274   $935   $5,373   $6,582   $597,985   $604,567 

  

($ in thousands)  30-59 Days   60-89 Days   Greater Than   Total Past       Total Loans 
December 31, 2015  Past Due   Past Due   90 Days   Due   Current   Receivable 
                         
Commercial & Industrial  $-   $60   $188   $248   $86,294   $86,542 
Commercial RE & Construction   99    -    5,280    5,379    236,829    242,208 
Agricultural & Farmland   -    -    -    -    43,835    43,835 
Residential Real Estate   98    198    156    452    130,354    130,806 
Consumer & Other   64    -    2    66    54,158    54,224 
Total Loans  $261   $258   $5,626   $6,145   $551,470   $557,615 

 

All loans past due 90 days are systematically placed on nonaccrual status.

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

 16 

 

 

The following tables present impaired loan information as of and for the three and six months ended June 30, 2016 and 2015, and for the twelve months ended December 31, 2015:

 

Six Months Ended June 30, 2016  Recorded   Unpaid Principal   Related   Average Recorded   Interest Income 
($'s in thousands)  Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                         
Commercial & Industrial  $-   $-   $-   $-   $- 
Commercial RE & Construction   744    744    -    766    11 
Agricultural & Farmland   -    -    -    -    - 
Residential Real Estate   997    1,040    -    1,199    34 
Consumer & Other   81    81    -    96    4 
All Impaired Loans < $100,000   438    438    -    438    - 
With a specific allowance recorded:                         
Commercial & Industrial   -    -    -    -    - 
Commercial RE & Construction   4,643    4,893    1,758    4,924    - 
Agricultural & Farmland   -    -    -    -    - 
Residential Real Estate   894    895    151    962    19 
Consumer & Other   270    270    19    274    9 
Totals:                         
Commercial & Industrial  $-   $-   $-   $-   $- 
Commercial RE & Construction  $5,387   $5,637   $1,758   $5,690   $11 
Agricultural & Farmland  $-   $-   $-   $-   $- 
Residential Real Estate  $1,891   $1,935   $151   $2,161   $53 
Consumer & Other  $351   $351   $19   $370   $13 
All Impaired Loans < $100,000  $438   $438   $-   $438   $- 

 

Three Months Ended June 30, 2016  Average Recorded   Interest Income 
($'s in thousands)  Investment   Recognized 
With no related allowance recorded:        
Commercial & Industrial  $-   $- 
Commercial RE & Construction   761    6 
Agricultural & Farmland   -    - 
Residential Real Estate   1,195    16 
Consumer & Other   94    2 
All Impaired Loans < $100,000   438    - 
With a specific allowance recorded:          
Commercial & Industrial   -    - 
Commercial RE & Construction   4,924    - 
Agricultural & Farmland   -    - 
Residential Real Estate   958    10 
Consumer & Other   272    4 
Totals:          
Commercial & Industrial  $-   $- 
Commercial RE & Construction  $5,685   $6 
Agricultural & Farmland  $-   $- 
Residential Real Estate  $2,153   $26 
Consumer & Other  $366   $6 
All Impaired Loans < $100,000  $438   $- 

 

 17 

 

 

Twelve Months Ended December 31, 2015  Recorded   Unpaid Principal   Related   Average Recorded   Interest Income 
($'s in thousands)  Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                         
Commercial & Industrial  $126   $1,214   $-   $1,388   $- 
Commercial RE & Construction   1,110    1,110    -    1,206    27 
Agricultural & Farmland   -    -    -    -    - 
Residential Real Estate   657    657    -    862    52 
Consumer & Other   90    90    -    107    9 
All Impaired Loans < $100,000   131    131    -    131    - 
With a specific allowance recorded:                         
Commercial & Industrial   -    -    -    -    - 
Commercial RE & Construction   4,644    4,893    1,759    5,006    90 
Agricultural & Farmland   -    -    -    -    - 
Residential Real Estate   1,056    1,013    167    1,084    45 
Consumer & Other   374    374    37    385    22 
Totals:                         
Commercial & Industrial  $126   $1,214   $-   $1,388   $- 
Commercial RE & Construction  $5,754   $6,003   $1,759   $6,212   $117 
Agricultural & Farmland  $-   $-   $-   $-   $- 
Residential Real Estate  $1,713   $1,670   $167   $1,946   $97 
Consumer & Other  $464   $464   $37   $492   $31 
All Impaired Loans < $100,000  $131   $131   $-   $131   $- 

 

   Six Months Ended   Three Months Ended 
   Average Recorded   Interest Income   Average Recorded   Interest Income 
June 30, 2015  Investment   Recognized   Investment   Recognized 
                 
With no related allowance recorded:                
Commercial & Industrial  $316   $-   $316   $- 
Commercial RE & Construction   1,089    19    1,077    6 
Agricultural & Farmland   -    -    -    - 
Residential Real Estate   767    26    764    13 
Consumer & Other   112    4    110    3 
All Impaired Loans < $100,000   334    -    334    - 
With a specific allowance recorded:                    
Commercial & Industrial   1,152    -    1,152    - 
Commercial RE & Construction   1,448    1    1,447    - 
Agricultural & Farmland   -    -    -    - 
Residential Real Estate   1,050    22    1,046    12 
Consumer & Other   391    12    388    5 
Totals:                    
Commercial & Industrial  $1,468   $-   $1,468   $- 
Commercial RE & Construction  $2,537   $20   $2,524   $6 
Agricultural & Farmland  $-   $-   $-   $- 
Residential Real Estate  $1,817   $48   $1,810   $25 
Consumer & Other  $503   $16   $498   $8 
All Impaired Loans < $100,000  $334   $-   $334   $- 

 

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

 

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

 

Troubled Debt Restructured (TDR) Loans

 

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

 

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TDR Concession Types

 

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. The types of concessions provided to borrowers include:

 

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the loan. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.

 

Amortization or maturity date change: A change in the amortization or maturity date beyond what the collateral supports, including a concession that does any of the following:

 

(1)Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(2)Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(3)Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

 

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

 

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The following presents the activity of TDRs during the three and six months ended June 30, 2016 and 2015.

 

    Three Months ended June 30, 2016 
($ in thousands)   Number of Loans    Pre-Modification
Recorded Balance
    Post Modification
Recorded Balance
 
                
Residential Real Estate     -   $      -   $   - 
Commercial   -    -    - 
Consumer & Other   -    -    - 
                
Total Modifications   -   $-   $- 

 

    Interest              Total 
    Only    Term    Combination    Modification 
                     
Residential Real Estate  $  -   $  -   $  -   $  - 
Commercial   -    -    -    - 
Consumer & Other   -    -    -    - 
                     
Total Modifications  $-   $-   $-   $- 

 

There was no increase in the allowance for loan losses due to TDR's in the three month period ended June 30, 2016.

 

   Six Months ended June 30, 2016 
($ in thousands)  Number of Loans   Pre-Modification
Recorded Balance
   Post Modification
Recorded Balance
 
             
Residential Real Estate   -   $-   $- 
Commercial   -    -    - 
Consumer & Other   1    221    221 
                
Total Modifications   1   $221   $221 

 

   Interest           Total 
   Only   Term   Combination   Modification 
                 
Residential Real Estate  $    -   $-   $    -   $- 
Commercial   -    -    -    - 
Consumer & Other   -    221    -    221 
                     
Total Modifications  $-   $221   $-   $221 

 

 20 

 

 

There was no increase in the allowance for loan losses due to TDR's in the three month period ended June 30, 2016.

 

   Three Months ended June 30, 2015 
($ in thousands)   Number of Loans    Pre-Modification
Recorded Balance
    Post Modification
Recorded Balance
 
                
Residential Real Estate        -   $       -   $    - 
Commercial   -    -    - 
Consumer & Other   -    -    - 
                
Total Modifications   -   $-   $- 

 

   Interest           Total 
   Only   Term   Combination   Modification 
                     
Residential Real Estate  $     -   $     -   $         -   $       - 
Consumer & Other   -    -    -    - 
                     
Total Modifications  $-   $-   $-   $- 

 

There was no increase in the allowance for loan losses due to TDR's in the three month period ended June 30, 2015.

 

   Six Months ended June 30, 2015 
($ in thousands)  Number of Loans   Pre-Modification
Recorded Balance
   Post Modification
Recorded Balance
 
             
Residential Real Estate   1   $24   $24 
Consumer & Other   -    -    - 
                
Total Modifications   1   $24   $24 

 

   Interest           Total 
   Only   Term   Combination   Modification 
                 
Residential Real Estate  $    -   $24   $    -   $24 
Consumer & Other   -    -    -    - 
                     
Total Modifications  $-   $24   $-   $24 

 

There was no increase in the allowance for loan losses due to TDR's in the six month period ended June 30, 2015.

 

TDR's modified in 2016 that have subsequently defaulted

 

   Number of   Recorded 
($ in thousands)  Contracts   Balance 
         
Consumer & Other   1   $221 
           
    1    221 

 

There were no TDR's modified during 2015 that have subsequently defaulted.

 

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NOTE 5 – DERIVATIVE FINANCIAL INSTRUMENTS AND REPURCHASE AGREEMENTS

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks primarily through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to certain variable-rate assets.

 

Non-designated Hedges

 

The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2016 and December 31, 2015, the notional amount of customer-facing swaps was approximately $30.1 million and $17.6 million, respectively. The same amounts were offset with third party counterparties, as described above.

 

The Company has minimum collateral posting thresholds with its derivative counterparties. As of June 30, 2016 and December 31, 2015, the Company had posted cash as collateral in the amount of $1.6 million and $0.7 million, respectively.

 

The table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the Balance Sheet, as of June 30, 2016 and December 31, 2015.

 

   Asset Derivatives  Liability Derivatives
   June 30, 2016  June 30, 2016
($ in thousands)  Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
Derivatives not designated as hedging instruments:              
Interest rate contracts  Other Assets  $1,524   Other Liabilities  $1,524 

 

   Asset Derivatives  Liability Derivatives
   December 31, 2015  December 31, 2015
($ in thousands)  Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
Derivatives not designated as hedging instruments:              
Interest rate contracts  Other Assets  $490   Other Liabilities  $490 

 

The Company’s derivative financial instruments had no net effect on the Income Statements for the three and six months ended June 30, 2016 and 2015.

 

Securities Sold Under Repurchase Agreements

 

State Bank has retail repurchase agreements to facilitate cash management transactions with commercial customers. These obligations are secured by agency and mortgage-backed securities and such collateral is held by the Federal Home Loan Bank. The agreements mature within one month. These repurchase agreements are secured by agency securities and mortgage-backed securities with corresponding liabilities of $5.7 million and of $14.9 million. These securities have various maturity dates beyond 2017.

 

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NOTE 6 – FAIR VALUE OF ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

  Level 1 Quoted prices in active markets for identical assets or liabilities
     
  Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
     
  Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy.

 

Available-for-Sale Securities

 

The fair values of available-for-sale securities are determined by various valuation methodologies. Level 1 securities include money market mutual funds. Level 1 inputs include quoted prices in an active market. Level 2 securities include U.S. treasury and government agencies, mortgage-backed securities, obligations of political and state subdivisions and equity securities. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

 

Interest Rate Contracts

 

The fair values of interest rate contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

  

 23 

 

 

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2016 and December 31, 2015.

 

($ in thousands)
Available-for-Sale Securities:
  Fair Values
at 6/30/16
   (Level 1)   (Level 2)   (Level 3) 
                 
U.S. Treasury and Government Agencies  $11,737   $       -   $11,737   $        - 
Mortgage-backed securities   64,349    -    64,349    - 
State and political subdivisions   16,363    -    16,363    - 
Equity securities   23    -    23    - 
Interest rate contracts - assets   1,524    -    1,524    - 
Interest rate contracts - liabilities   (1,524)   -    (1,524)   - 

 

Fair Value Measurements Using:

 

($ in thousands)
Available-for-Sale Securities:
  Fair Values
at 12/31/2015
   (Level 1)   (Level 2)   (Level 3) 
                 
U.S. Treasury and Government Agencies  $10,905   $       -   $10,905   $        - 
Mortgage-backed securities   61,343    -    61,343    - 
State and political subdivisions   17,518    -    17,518    - 
Equity securities   23         23      
Interest rate contracts - assets   490         490      
Interest rate contracts - liabilities   (490)        (490)     

 

Level 1 – Quoted Prices in Active Markets for Identical Assets

Level 2 – Significant Other Observable Inputs

Level 3 – Significant Unobservable Inputs

 

The following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Collateral-dependent Impaired Loans, NET of ALLL

 

Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The estimated fair value of collateral-dependent impaired loans is based on the appraised value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. This method requires obtaining an independent appraisal of the collateral, which is reviewed for accuracy and consistency by Credit Administration. These appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at June 30, 2016 and December 31, 2015.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees; miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.

 

 24 

 

 

Unobservable (Level 3) Inputs

 

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

 

($ in thousands)

Description

  Fair Values at 6/30/2016   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $180   $    -   $     -   $180 
Mortgage Servicing Rights   

6,575

    -    -    

6,575

 

 

($ in thousands)
Description
  Fair Values at 12/31/2015   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $3,011   $     -   $    -   $3,011 
Mortgage Servicing Rights   2,585    -    -    2,585 

 

Level 1 - Quoted Prices in Active Markets for Identical Assets

Level 2 - Significant Other Observable Inputs

Level 3 - Significant Unobservable Inputs

 

($'s in thousands)  Fair Value at 6/30/2016   Valuation Technique  Unobservable Inputs  Range (Weighted Average) 
Collateral-dependent impaired loans
  $180   Market comparable
properties
  Comparability adjustments (%)
 Not available 
Mortgage servicing rights   

6,575

   Discounted cash flow  Discount Rate   9.16%
           Constant prepayment rate   14.63%
           P&I earnings credit   0.45%
           T&I earnings credit   1.22%
           Inflation for cost of servicing   1.50%

 

($'s in thousands)  Fair Value at
12/31/2015
   Valuation Technique  Unobservable Inputs  Range (Weighted
Average)
 
Collateral-dependent impaired loans  $3,011   Market comparable properties  Comparability adjustments (%)  Not available 
Mortgage servicing rights   2,585   Discounted cash flow  Discount Rate   9.75%
           Constant prepayment rate   8.90%
           P&I earnings credit   0.42%
           T&I earnings credit   1.54%
           Inflation for cost of servicing   1.50%

 

There were no changes in the inputs or methodologies used to determine fair value at June 30, 2016 as compared to December 31, 2015.

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and Due From Banks, Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest Receivable and Payable

 

The carrying amount approximates the fair value.

 

 25 

 

 

Loans Held for Sale

 

The fair value of loans held for sale is based upon quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

 

Loans

 

The estimated fair value for loans receivable is based on estimates of the rate State Bank would charge for similar loans at June 30, 2016 and December 31, 2015, applied for the time period until the loans are assumed to re-price or be paid.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates, prepayment speeds and default rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. These mortgage servicing rights are tested for impairment on a quarterly basis.

 

Deposits, FHLB advances & Repurchase agreements

 

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at June 30, 2016 and December 31, 2015.

 

Loan Commitments

 

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values for other financial instruments and off-balance-sheet loan commitments approximate cost at June 30, 2016 and December 31, 2015 and are not considered significant to this presentation.

 

Trust Preferred Securities

 

The fair value for Trust Preferred Securities is estimated by discounting the cash flows using an appropriate discount rate.

 

 26 

 

 

The following table presents estimated fair values of the Company’s other financial instruments carried at other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

   June 30,
2016 Carrying
   Fair Value Measurements Using 
   Amount   (Level 1)   (Level 2)   (Level 3) 
Financial assets                
Cash and cash equivalents  $29,945   $29,945   $-   $- 
Loans held for sale   8,441    -    8,673    - 
Loans, net of allowance for loan losses   597,326    -    -    599,125 
Federal Reserve and FHLB Bank stock   3,748    -    3,748    -