|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
|
INTRODUCTION
Citizens
Bancshares Corporation (the “Company”) is a holding company that provides a full range of commercial and personal
banking services to individuals and corporate customers in its primary market areas, metropolitan Atlanta and Columbus, Georgia,
and Birmingham and Eutaw, Alabama through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”). The Bank
is a member of the Federal Reserve System and operates under a state charter. The Company serves its customers through 10 full-service
financial centers in Georgia and Alabama.
Forward
Looking Statements
In
addition to historical information, this report on Form 10-Q may contain forward-looking statements. For this purpose, any statements
contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Without
limiting the foregoing, the words “believe,” “anticipates,” “plan,” expects,” and similar
expressions are intended to identify forward-looking statements.
Forward-looking
statements are based on current management expectations and, by their nature, are subject to risk and uncertainties because of
the possibility of changes in underlying factors and assumptions. Actual conditions, events or results could differ materially
from those contained in or implied by such forward-looking statements for a variety of reasons, including: sharp and/or rapid
changes in interest rates; significant changes in the economic scenario from the current anticipated scenario which could materially
change anticipated credit quality trends and the ability to generate loans and gather deposits; significant delay in or inability
to execute strategic initiatives designed to grow revenues and/or control expenses; unanticipated issues during the integration
of acquisitions; and significant changes in accounting, tax or regulatory practices or requirements. The Company undertakes no
obligation to, nor does it intend to, update forward-looking statements to reflect circumstances or events that occur after the
date hereof or to reflect the occurrence of unanticipated events.
The
following discussion is of the Company’s financial condition as of March 31, 2016 and December 31, 2015, and the changes
in the financial condition and results of operations for the three month periods ended March 31, 2016 and 2015.
Critical
Accounting Policies
In
response to the Securities and Exchange Commission’s (“SEC”) Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, the Company has identified the following as the most critical accounting policies
upon which its financial status depends. The critical policies were determined by considering accounting policies that involve
the most complex or subjective decisions or assessments. The Company’s most critical accounting policies relate to:
Investment
Securities
- The Company classifies investments in one of three categories based on management’s intent upon purchase:
held to maturity securities which are reported at amortized cost, trading securities which are reported at fair value with unrealized
holding gains and losses included in earnings, and available for sale securities which are recorded at fair value with unrealized
holding gains and losses included as a component of accumulated other comprehensive income. The Company had no investment securities
classified as trading securities during 2016 or 2015.
Premiums
and discounts on available for sale and held to maturity securities are amortized or accreted using a method which approximates
a level yield.
Gains
and losses on sales of investment securities are recognized upon disposition, based on the adjusted cost of the specific security.
A decline in market value of any security below cost that is deemed other than temporary is charged to earnings or OCI resulting
in the establishment of a new cost basis for the security.
Loans
- Loans are reported at principal amounts outstanding less unearned income and the allowance for loan losses. Interest income
on loans is recognized on a level-yield basis. Loan fees and certain direct origination costs are deferred and amortized over
the estimated terms of the loans using the level-yield method. Discounts on loans purchased are accreted using the level-yield
method over the estimated remaining life of the loan purchased.
Allowance
for Loan Losses
- The Company provides for estimated losses on loans receivable when any significant and permanent decline
in value occurs. These estimates for losses are based, not only on individual assets and their related cash flow forecasts, sales
values, and independent appraisals, but also on the volatility of certain real estate markets, and the concern for disposing of
real estate in distressed markets. For loans that are pooled for purposes of determining the necessary provisions, estimates are
based on loan types, history of charge-offs, and other delinquency analyses. Therefore, the value used to determine the provision
for losses is subject to the reasonableness of these estimates. The adequacy of the allowance for loan losses is reviewed on a
monthly basis by management and the Board of Directors. On a semi-annual basis an independent comprehensive review of the methodology
and allocation of the allowance for loan losses is performed. This assessment is made in the context of historical losses as well
as existing economic conditions, and individual concentrations of credit. Loans are charged against the allowance when, in the
opinion of management, such loans are deemed uncollectible and subsequent recoveries are added to the allowance.
Other
Real Estate Owned
-
Other real estate owned is reported at the lower of cost or fair value less estimated disposal
costs, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from
independent sources. Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as
collateral is treated as a charge-off against the allowance for loan losses. Any subsequent declines in value are charged to earnings.
Income
Taxes
- Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and
liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income tax expense in the period that includes the enactment date.
In
the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s
assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits
indicated by such assets is required. A valuation allowance is provided for the portion of a deferred tax asset when it is more
likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the
deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income,
and tax planning strategies.
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.
A
description of other accounting policies are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The
Company has followed those policies in preparing this report.
FINANCIAL
CONDITION
At
March 31, 2016, the Company had total assets of $404,525,000 compared to $388,620,000 at December 31, 2015. The $15,905,000 increase
is primarily related to interest-bearing deposits with banks of $16,755,000 and net loans of $4,104,000; offset by declines in
available for sale investments of $4,026,000, and other assets principally comprised of other real estate owned (OREO) of $1,733,000.
Interest-bearing deposits with banks primarily represent funds maintained on deposit at the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank (FHLB). These funds fluctuate daily and are used to manage the Company’s liquidity. The decrease
in available for sale securities is primarily attributed to securities called/matured and paydowns as the Company continues to
manage its asset/liability position in light of the current economic environment. At March 31, 2016, total assets consisted
primarily of $119,232,000 in investment securities and $188,940,000 in net loans representing 29% and 47% of total assets, respectively.
Investment securities and net loans represented 32% and 48% of total assets at December 31, 2015.
Loans
typically provide higher interest yields than other types of interest-earning assets and, therefore, continue to be the largest
component of the Company’s assets. Net loans receivable increased by $4,104,000 at March 31, 2016 compared to December 31,
2015. The increases were primarily in commercial real estate of $2,142,000, construction and development of $1,815,000 and single-family
residential loans of $1,665,000, coupled with a net increase in allowance for loan losses of $28,000; offset by a decrease in
commercial, financial and agriculture loans of $1,459,000 and consumer loans of $31,000. The Company continues to pursue opportunities
to enhance its lending as well as investing in the resources needed to strengthen these efforts.
At
March 31, 2016, OREO decreased by $1,733,000 to $2,730,000 compared to $4,463,000 reported at the year-end of 2015. This decrease
is primarily related to the sale of OREO properties totaling $1,728,000 and $18,000 in write-downs, partially offset by $13,000
in additions to the OREO balance during the first quarter of 2016.
Cash
value of life insurance, a comprehensive compensation program for directors and certain senior managers of the Company, increased
by $67,000 to $10,157,000 at March 31, 2016. The increase is primarily due to the earnings on the premiums paid over the life
of the insurance contract during the first quarter of 2016.
The
Company’s liabilities at March 31, 2016 totaled $352,635,000 and consisted primarily of $342,410,000 in deposits, which
increased by $13,548,000 compared to total deposits of $328,862,000 at December 31, 2015. Accrued expenses and other liabilities were $4,995,000, representing an increase of
$848,000 compared to $4,147,000 at December 31, 2015 primarily in deferred income taxes and accrued other expenses. FHLB advances
totaled $5,230,000 at March 31, 2016 compared to $5,235,000 at December 31, 2015.
The
Company’s asset/liability management program, which monitors the Company’s interest rate sensitivity as well as volume
and mix changes in earning assets and interest bearing liabilities, may impact the growth of the Company’s balance sheet
as it seeks to maximize net interest income and minimize its interest rate risk.
INVESTMENT
SECURITIES
The
composition of the Company’s investment securities portfolio reflects the Company’s investment strategy of maximizing
portfolio yields commensurate with risk and liquidity considerations. The primary objective of the Company’s investment
strategy is to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company’s interest
rate sensitivity position, while at the same time producing adequate levels of interest income.
At
March 31, 2016, and December 31, 2015, the investment securities portfolio represented approximately 29% and 32%, respectively,
of the Company’s total assets.
LOANS
Loans
outstanding, by classification, are summarized as follows (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Commercial, Financial, and Agricultural
|
|
$
|
41,289
|
|
|
$
|
42,748
|
|
Commercial Real Estate
|
|
|
106,234
|
|
|
|
104,092
|
|
Single-Family Residential
|
|
|
32,761
|
|
|
|
31,096
|
|
Construction and Development
|
|
|
4,035
|
|
|
|
2,220
|
|
Consumer
|
|
|
6,773
|
|
|
|
6,804
|
|
|
|
|
191,092
|
|
|
|
186,960
|
|
Allowance for loan losses
|
|
|
2,152
|
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,940
|
|
|
$
|
184,836
|
|
The
Company does not have any concentrations of loans exceeding 10% of total loans of which management is aware and which are not
otherwise disclosed as a category of loans in the table above or in other sections of this Quarterly Report on Form 10-Q. A substantial
portion of the Company’s loan portfolio is secured by real estate in metropolitan Atlanta and Birmingham.
The
largest component of loans in the Company’s loan portfolio is real estate loans. At March 31, 2016 and December 31,
2015, real estate loans, which represent commercial and industrial real estate and other loans secured by single-family properties,
totaled $139.0 million and $135.2 million, respectively, and represented 72.7% and 72.3% of loans, respectively, net of unearned
income for the period.
As
stated above, a substantial portion of the Company’s loan portfolio is collateralized by real estate in metropolitan Atlanta
and Birmingham markets. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio
is susceptible to changes in market conditions in the metropolitan Atlanta and Birmingham areas.
|
·
|
The
Company’s loans to area churches, which are generally secured by real estate, were
approximately $47.5 million and $42.0 million at March 31, 2016 and December 31, 2015,
respectively.
|
|
·
|
The
Company’s loans to area convenience stores were approximately $6.0 million and
$6.1 million at March 31, 2016 and December 31, 2015, respectively. Loans to convenience
stores are generally secured by real estate.
|
|
·
|
The
Company’s loans to area hotels, which are generally secured by real estate, were
approximately $15.4 million and $15.6 million at March 31, 2016 and December 31, 2015,
respectively.
|
NONPERFORMING
ASSETS
Nonperforming
assets include nonperforming loans, real estate acquired through foreclosure, and repossessed assets. Nonperforming loans generally
include loans and leases whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing
financial difficulties or are past due with respect to principal or interest more than 90 days and have been placed on nonaccrual
status.
Accrued
interest income is reversed when a loan is placed on nonaccrual status. Interest collections on nonaccruing loans and leases for
which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are
credited to income when received. Nonperforming loans may be restored to accrual status when all principal and interest is current
and the full repayment of the remaining contractual principal and interest is expected, or when the loan becomes well-secured
and is in the process of collection.
With
the exception of the loans included within nonperforming assets in the table below, management is not aware of any loans classified
for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed which (1) represent or
result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (2) represent any information on material credits of which management is aware that causes management
to have serious doubts as to the abilities of such borrowers to comply with the loan repayment terms.
For
the three months ended March 31, 2016, nonperforming assets decreased by $924,000, or 12.4%, to $6,555,000 when compared to December
31, 2015. The year-to-date decrease is primarily attributed to a $1,733,000 decline in other real estate owned (OREO), offset by
an increase in nonperforming loans of $809,000. The Company charged-off $151,000 in nonperforming loans during the first three
months of 2016 which is a decrease of $84,000 compared to the $235,000 charged-off for the same period last year. Charged-offs,
net of recoveries, for the same period decreased by $101,000. At March 31, 2016, nonperforming assets represent 1.62% of total
assets compared to 1.92% at December 31, 2015. There was one (1) loan greater than 90 days past due and still accruing interest
at March 31, 2016 and none at December 31, 2015.
The
table below presents a summary of the Company’s nonperforming assets at March 31, 2016 and December 31, 2015.
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in
thousands, except
|
|
|
|
financial
ratios)
|
|
Nonperforming
assets:
|
|
|
|
|
|
|
|
|
Nonperforming
loans:
|
|
|
|
|
|
|
|
|
Restructured
nonperforming loans (TDRs)
|
|
$
|
2,488
|
|
|
$
|
2,497
|
|
Other
nonaccrual loans
|
|
|
1,331
|
|
|
|
519
|
|
Past-due
loans of 90 days or more and still accruing
|
|
|
6
|
|
|
|
—
|
|
Nonperforming
loans
|
|
|
3,825
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
|
Real
estate acquired through foreclosure
|
|
|
2,730
|
|
|
|
4,463
|
|
Total
nonperforming assets
|
|
$
|
6,555
|
|
|
$
|
7,479
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Nonperforming
loans to loans, net of unearned income
|
|
|
2.00
|
%
|
|
|
1.61
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets to loans, net of unearned income,
|
|
|
|
|
|
|
|
|
and
real estate acquired through foreclosure
|
|
|
3.38
|
%
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets to total assets
|
|
|
1.62
|
%
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to nonperforming loans
|
|
|
56.26
|
%
|
|
|
70.42
|
%
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to nonperforming assets
|
|
|
32.83
|
%
|
|
|
28.40
|
%
|
TROUBLED
DEBT RESTRUCTURINGS
Loans
to be restructured are identified based on an assessment of the borrower’s credit status, which involves, but is not limited
to, a review of financial statements, payment delinquency, non-accrual status, and risk rating. Determining the borrower’s
credit status is a continual process that is performed by the Company’s staff with periodic participation from an independent
external loan review group.
Troubled
debt restructurings (“TDR”) generally occur when a borrower is experiencing, or is expected to experience, financial
difficulties in the near-term and it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Company seeks to assist these borrowers by working with them to prevent further difficulties,
and ultimately to improve the likelihood of recovery on the loan while ensuring compliance with the Federal Financial Institutions
Examination Council (FFIEC) guidelines. To facilitate this process, a formal concessionary modification that would not otherwise
be considered may be granted resulting in classification of the loan as a TDR. All concessionary modifications are considered
troubled debt restructurings.
The
modification may include a change in the interest rate or the payment amount or a combination of both. Substantially all modifications
completed under a formal restructuring agreement are considered TDRs. Modifications can involve loans remaining on nonaccrual,
moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. These
restructurings rarely result in the forgiveness of principal or interest.
With
respect to commercial TDRs, an analysis of the credit evaluation, in conjunction with an evaluation of the borrower’s performance
prior to the restructuring, are considered when evaluating the borrower’s ability to meet the restructured terms of the
loan agreement. Nonperforming commercial TDRs may be returned to accrual status based on a current, well-documented credit evaluation
of the borrower’s financial condition and prospects for repayment under the modified terms. This evaluation must include
consideration of the borrower’s sustained historical repayment performance for a reasonable period (generally a minimum
of six months) prior to the date on which the loan is returned to accrual status.
In
connection with consumer loan TDRs, a nonperforming loan will be returned to accruing status when current as to principal and
interest and upon a sustained historical repayment performance (generally a minimum of six months).
The
following table summarizes the Company’s TDRs and loans modifications (in thousands):
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Troubled Debt Restructured Loans:
|
|
|
|
|
|
|
|
|
Restructured loans still accruing
|
|
$
|
5,195
|
|
|
$
|
5,285
|
|
Restructured loans nonaccruing
|
|
|
2,488
|
|
|
|
2,497
|
|
Total restructured and modified loans
|
|
$
|
7,683
|
|
|
$
|
7,782
|
|
ALLOWANCE
FOR LOAN LOSSES
The
allowance for loan losses is primarily available to absorb losses inherent in the loan portfolio. Credit exposures deemed uncollectible
are charged against the allowance for loan losses.
The
Company provides for estimated losses on loans receivable when any significant and permanent decline in value occurs. These estimates
for losses are based on individual assets and their cash flow forecasts, sales values, independent appraisals, the volatility
of certain real estate markets, and concern for disposing of real estate in distressed markets. For loans that are pooled for
purposes of determining the necessary provisions, estimates are based on loan types, history of charge-offs, and other delinquency
analyses. Therefore, the value used to determine the provision for losses is subject to the reasonableness of these estimates.
The adequacy of the allowance for loan losses is reviewed on a monthly basis by management and the Board of Directors. On a semi-annual
basis an independent review of the adequacy of allowance for loan losses is performed. This assessment is made in the context
of historical losses as well as existing economic conditions, and individual concentrations of credit.
Portions
of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for
loan losses is available for any loan that, in the judgment of management, should be charged-off. For the three month periods
ended March 31, 2016 and 2015, a provision for loan losses of $75,000 was charged against operating earnings based on growth of
the loan portfolio and the Company’s evaluation of the loan portfolio. Approximately $599,000 of the allowance for loan
losses was allocated to loans management considered impaired at March 31, 2016 compared to $650,000 at December 31, 2015.
At
March 31, 2016, management believes the allowance for loan losses is adequate. Management uses available information to recognize
losses on loans; however, future additions to the allowance may be necessary based on changes in economic conditions, particularly
in the metropolitan Atlanta, Georgia and Birmingham, Alabama areas. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The
following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans
previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and
for the three months ended March 31, 2016 and 2015 (amount in thousands, except financial ratios):
|
|
2016
|
|
|
2015
|
|
Loans, net of unearned income
|
|
$
|
191,092
|
|
|
$
|
193,751
|
|
|
|
|
|
|
|
|
|
|
Average loans, net of unearned income and the allowance for loan losses
|
|
$
|
184,916
|
|
|
$
|
189,205
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at the beginning of period
|
|
$
|
2,124
|
|
|
$
|
2,299
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
30
|
|
|
|
—
|
|
Real estate - loans
|
|
|
43
|
|
|
|
180
|
|
Installment loans to individuals
|
|
|
78
|
|
|
|
55
|
|
Total loans charged-off
|
|
|
151
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
6
|
|
|
|
5
|
|
Real estate - loans
|
|
|
82
|
|
|
|
67
|
|
Installment loans to individuals
|
|
|
16
|
|
|
|
15
|
|
Total loans recovered
|
|
|
104
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
47
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Additions to allowance for loan losses charged to operating expense
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at period end
|
|
$
|
2,152
|
|
|
$
|
2,226
|
|
|
|
|
|
|
|
|
|
|
Ratio of net loans
charged-off to average loans, net of unearned income and the allowance for loan losses
|
|
|
0.03
|
%
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to loans, net of unearned income
|
|
|
1.13
|
%
|
|
|
1.15
|
%
|
The
following table presents the allocation of the allowance for loan losses. The allocation is based on an evaluation of defined
loan problems, historical ratios of loan losses, and other factors that may affect future loan losses in the categories of loans
shown (amount in thousands):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
Commercial, financial, and agricultural
|
|
$
|
604
|
|
|
|
22
|
%
|
|
$
|
342
|
|
|
|
23
|
%
|
Commercial Real Estate
|
|
|
952
|
|
|
|
56
|
%
|
|
|
1,170
|
|
|
|
56
|
%
|
Single-family Residential
|
|
|
364
|
|
|
|
17
|
%
|
|
|
435
|
|
|
|
17
|
%
|
Construction and Development
|
|
|
6
|
|
|
|
2
|
%
|
|
|
3
|
|
|
|
1
|
%
|
Consumer
|
|
|
226
|
|
|
|
3
|
%
|
|
|
174
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
2,152
|
|
|
|
100
|
%
|
|
$
|
2,124
|
|
|
|
100
|
%
|
DEPOSITS
Deposits
are the Company’s primary source of funding loan growth. Total deposits at March 31, 2016 increased by 4.1% or $13,548,000
to $342,410,000 when compared to December 31, 2015. The bank has a stable core deposit base with a high percentage of non-interest
bearing deposits. Noninterest-bearing deposits increased by $1,692,000, or approximately 1.9% to $90,235,000 and interest-bearing
deposits increased by $11,856,000, or 4.9%, to $252,175,000 for the three month period ending March 31, 2016. On an average basis,
noninterest-bearing deposits increased by $2,896,000 to $90,865,000 during the first quarter of 2016 compared to $87,970,000 for
the year ended December 31, 2015. Average interest-bearing deposits decreased by $2,312,000 to $249,183,000 at March 31, 2016
compared to $251,494,000 for the year ended December 31, 2015. At March 31, 2016, the Company’s cost of funds was approximately
0.18% compared to 0.20% for the same period last year.
The
Company participates in Certificate of Deposit Account Registry Services (“CDARS”), a program that allows its customers
the ability to benefit from the FDIC insurance coverage on their time deposits over the $250,000 limit. At March 31, 2016 and
December 31, 2015, the Company had $20,974,000 and $21,020,000, respectively, in CDARS deposits. Participation in this program
has enhanced the Company’s ability to retain customers with time deposits higher than the FDIC $250,000 insurance coverage
limit.
Time
deposits that meet or exceed the FDIC Insurance limit of $250,000 were $34,642,000 and $35,020,000 at March 31, 2016 and December
31, 2015, respectively.
The
following is a summary of interest-bearing deposits (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
NOW and money market accounts
|
|
$
|
101,848
|
|
|
$
|
89,470
|
|
Savings accounts
|
|
|
36,042
|
|
|
|
34,807
|
|
Time deposits of $100,000 or more
|
|
|
85,294
|
|
|
|
86,914
|
|
Other time deposits
|
|
|
28,991
|
|
|
|
29,128
|
|
|
|
$
|
252,175
|
|
|
$
|
240,319
|
|
OTHER
BORROWED FUNDS
The
Company continues to emphasize funding earning asset growth through core deposits; however, the Company has relied on other borrowings
as a supplemental funding source. Other borrowings consist of Federal funds purchased, short-term borrowings, and FHLB advances.
These
advances are collateralized by FHLB stock, a blanket lien on 1-4 family and multifamily mortgage loans, certain commercial real
estate loans and investment securities. As of March 31, 2016 and December 31, 2015, total loans pledged as collateral were $26,979,000
and $27,033,000, respectively.
Maturity
Callable
Type
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
(in
thousands)
|
|
December
2016
(1)
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
August
2026
(2)
|
|
|
230
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Total
Principal Outstanding
|
|
$
|
5,230
|
|
|
$
|
5,235
|
|
|
(1)
|
This
FHLB advance had a fixed rate of 0.42% as of March 31, 2016.
|
|
(2)
|
Represents
an Affordable Housing Program (AHP) award used to subsidize loans for homeownership or
rental initiatives. The AHP is a principal reducing credit, scheduled to mature on August
17, 2026 with an interest rate of zero.
|
At
March 31, 2016 the Company had approximately a $77.6 million line of credit facility at the FHLB of which $25.2 million was committed
consisting of advances of $5,230,000 and a letter of credit to secure public deposits in the amount of $20.0 million. The Company
also had approximately $24.1 million of borrowing capacity at the Federal Reserve Bank discount window and an unsecured $4.0 million
fed funds line of credit.
RESULTS
OF OPERATIONS
Net
Interest Income:
Net
interest income is the principal component of a financial institution’s income stream and represents the difference, or
spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds.
Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially
impact net interest income.
For
the three-month period ended March 31, 2016, net interest income decreased by $56,000 or 1.87% to $2,934,000 compared to
$2,990,000 reported for the same period last year. Total interest income decreased by $71,000, or 2.24%, to $3,103,000
compared to $3,174,000 for the same three month period in 2015. Interest income on loans decreased by $106,000 due to a 11
bps decrease in yields earned on loans coupled with lower average loan balances compared to the same period last year due to
large expected liquidations in third quarter of 2015. Interest income on investment securities decreased by $23,000 primarily
due to a 6 bps decrease in investment yields compared to first quarter of 2015. This decline was offset by an increase in
interest earned on federal funds sold and interest-bearing deposits of $58,000 compared to the same period last year. Total
interest expense for the period decreased by $15,000 or 8.15% compared to the same three month period in 2015 as the Company
continues to manage the funding cost and deposit mix. At March 31, 2016, the Company’s cost of funds was approximately
0.18% compared to 0.20% for the same period last year.
At
March 31, 2016, the Company maintained an annualized net interest margin on a fully tax equivalent basis of 3.29% compared to
3.40% reported at March 31, 2015. The decrease in the net interest margin on a fully tax equivalent basis compared to the same
period last year is primarily due to the paydown of higher rate legacy loans that are being replaced by lower yielding loans.
Similarly, interest income on investment securities declined due to lower investment yields caused by higher yielding bonds being
paid down, maturing or being called and being replaced with lower yielding securities. The Company is mindful of the interest rate risk of investing its excess
liquidity in this low rate environment which could negatively impact its liquidity and capital position with an interest rate
increase on the horizon.
The
Company has an asset/liability management program which monitors the Company’s interest rate sensitivity and ensures the
Company is competitive in the loan and deposit market. The Company continues to monitor its asset/liability mix and will make
changes as appropriate to ensure it is properly positioned to react to changing interest rates and inflationary trends.
Provision
for loan losses
For
the three months ended March 31, 2016 and 2015, the Company charged against operating earnings a provision for loan losses of
$75,000 in each period.
The
allowance for loan losses was $2,152,000, $2,124,000, and $2,226,000 at March 31, 2016, December 31, 2015, and March 31, 2015,
respectively. The allowance for loan losses was 56.26%, 70.42%, and 34.35% of nonperforming loans at March 31, 2016, December
31, 2015, and March 31, 2015, respectively. The provision for loan losses and the resulting allowance for loan losses are based
on changes in the size and character of the Company’s loan portfolio, changes in nonperforming and past due loans, the existing
risk of individual loans, concentrations of loans to specific borrowers or industries, and economic conditions. At March 31, 2016
the Company considered its allowance for loan losses to be adequate.
Noninterest
income:
Noninterest
income consists of revenues generated from a broad range of financial services and activities, including fee-based services and
commissions earned through insurance sales. In addition, gains and losses realized from the sale of investment portfolio securities
and sales of assets are included in noninterest income.
Noninterest
income totaled $903,000 for the three month period ended March 31, 2016, a decrease of $261,000, or 22.42% compared with the same
period last year. This decrease is primarily due to gains on the sale of investment securities of $191,000 reported for the first
quarter of 2015. There were no gains on sale of investment securities for the same period in 2016. The service charges on deposits
and other operating income decreased by $24,000 and $46,000, respectively, compared to the same period last year.
Noninterest
expense:
Noninterest
expense includes compensation and benefits, occupancy expenses, advertising and marketing, professional fees, office supplies,
data processing, telephone expenses, miscellaneous items, and other losses.
Non-interest
expense in the first quarter of 2016 decreased by $230,000 to $3,328,000 compared to $3,558,000 for the same quarter last year.
Salaries and employee benefits expense increased by $58,000 due to the hiring of additional lending officers to enhance loan production,
and the filling of one officer level position that was vacant in early 2015. Net occupancy and equipment expense decreased by
$26,000 compared to the same period of last year. OREO related expenses decreased by $152,000 compared to the same period last
year primarily due to a gain on sale of OREO. Other operating expenses decreased by $103,000 compared to the same period in the
prior year. The decline in other operating expenses is in multiple expense categories as the Company continues to manage its expenses
in line with declines in interest income.
INTEREST
RATE SENSITIVITY MANAGEMENT
Interest
rate sensitivity management involves managing the potential impact of interest rate movements on net interest income within acceptable
levels of risk. The Company seeks to accomplish this by structuring the balance sheet so that repricing opportunities exist for
both assets and liabilities in equivalent amounts and time intervals. Imbalances in these repricing opportunities at any point
in time constitute a financial institution’s interest rate risk. The Company’s ability to reprice assets and liabilities
in the same dollar amounts and at the same time minimizes interest rate risk.
One
method of measuring the impact of interest rate sensitivity is the cumulative gap analysis. The difference between interest rate
sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap. The Company is liability
sensitive on a short-term basis as reflected in the following table. Generally, a net liability sensitive position indicates that
there would be a negative impact on net interest income in an increasing rate environment. However, interest rate sensitivity
gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest
rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject
to competitive pressures and the needs of the Company’s customers. In addition, various assets and liabilities indicated
as repricing within the same period may in fact reprice at different times within such period and at different rates. The following
table shows the contractual maturities of all interest rate sensitive assets and liabilities at March 31, 2016. 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. Taking a conservative approach, the Company has included demand deposits such as NOW, money market, and
savings accounts in the three month category. However, the actual repricing of these accounts may extend beyond twelve months.
The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.
The
following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and interest
rate sensitive liabilities as of March 31, 2016.
|
|
Cumulative
amounts as of March 31, 2016
|
|
|
|
Maturing
and repricing within
|
|
|
|
3
|
|
|
3
to 12
|
|
|
1
to 5
|
|
|
Over
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
Years
|
|
|
5
Years
|
|
|
Total
|
|
|
|
|
|
|
(amounts
in thousands, except ratios)
|
|
|
|
|
Interest-sensitive
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits with other banks
|
|
$
|
46,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,575
|
|
Federal
funds sold
|
|
|
16,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,519
|
|
Certificates
of deposit
|
|
|
—
|
|
|
|
900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
900
|
|
Investments
|
|
|
—
|
|
|
|
54
|
|
|
|
5,066
|
|
|
|
114,112
|
|
|
|
119,232
|
|
Loans
|
|
|
77,617
|
|
|
|
20,290
|
|
|
|
69,621
|
|
|
|
23,564
|
|
|
|
191,092
|
|
Total
interest-sensitive assets
|
|
$
|
140,711
|
|
|
$
|
21,244
|
|
|
$
|
74,687
|
|
|
$
|
137,676
|
|
|
$
|
374,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitive
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
(a)
|
|
$
|
158,267
|
|
|
$
|
66,132
|
|
|
$
|
27,776
|
|
|
$
|
—
|
|
|
$
|
252,175
|
|
Other
borrowings
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
230
|
|
|
|
5,230
|
|
Total
interest-sensitive liabilities
|
|
$
|
158,267
|
|
|
$
|
71,132
|
|
|
$
|
27,776
|
|
|
$
|
230
|
|
|
$
|
257,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitivity
gap
|
|
$
|
(17,556
|
)
|
|
$
|
(49,888
|
)
|
|
$
|
46,911
|
|
|
$
|
137,446
|
|
|
$
|
116,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
interest-sensitivity gap
|
|
|
(17,556
|
)
|
|
|
(67,444
|
)
|
|
|
(20,533
|
)
|
|
|
116,913
|
|
|
|
116,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
interest-sensitivity gap to total interest-sensitive assets
|
|
|
(4.69
|
)%
|
|
|
(18.02
|
)%
|
|
|
(5.49
|
)%
|
|
|
31.23
|
%
|
|
|
31.23
|
%
|
(a)
Savings, NOW, and money market deposits totaling $137,890 are included in the maturing in 3 months classification.
LIQUIDITY
Liquidity
is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional
funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day
cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to
meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of
a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Additionally, the Company
requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its
subsidiary; the servicing of debt; and the payment of general corporate expenses. The Company has access to various capital markets
and on March 6, 2009, the Company issued 7,462 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S.
Department of the Treasury (“Treasury”) under the TARP Program for an investment of $7,462,000. On August 13, 2010,
the Company exchanged the outstanding 7,462 shares of Series A Preferred Stock for 7,462 shares of Series B Preferred Stock. No
monetary consideration was given in connection with this exchange. The Company also issued 4,379 shares of Series C Preferred
Stock for $4,379,000 to the Treasury on September 17, 2010. However, the primary source of liquidity for the Company is dividends
from its bank subsidiary. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company as
well as the Company’s payment of dividends to its stockholders. The Georgia Department of Banking and Finance regulates
the Bank’s dividend payments and must approve dividend payments that exceed 50 percent of the Bank’s prior year net
income. The payment of dividends may also be affected or limited by other factors, such as the requirement by federal agencies
to maintain adequate capital above regulatory guidelines and that bank holding companies and insured banks pay dividends out of
current earnings.
Asset
and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Company’s
customers, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so
that the Company can earn a return that meets the investment requirements of its shareholders. Daily monitoring of the sources
and uses of funds is necessary to maintain an acceptable cash position that meets both requirements.
The
asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities
and, to a lesser extent, sales or paydowns of investment securities available for sale and held to maturity. Other short-term
investments such as federal funds sold and maturing interest bearing deposits with other banks are additional sources of liquidity
funding.
The
liability portion of the balance sheet provides liquidity through various customers’ interest bearing and noninterest bearing
deposit accounts. Federal funds purchased and other short-term borrowings from the Federal Reserve Bank Discount Window and the
Federal Home Loan Bank are additional sources of liquidity and, basically, represent the Company’s incremental borrowing
capacity. At March 31, 2016 the Company had approximately a $77.6 million line of credit facility at the FHLB of which $25.2 million
was committed consisting of advances of $5,230,000 and a letter of credit to secure public deposits in the amount of $20.0 million.
The Company also had approximately $24.1 million of borrowing capacity at the Federal Reserve Bank discount window and an unsecured
$4.0 million fed funds line of credit. These sources of liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs. The Company does not anticipate any liquidity requirements in the near future that
it will not be able to meet.
CAPITAL
RESOURCES
Stockholders’
equity increased by $1,514,000 during the three month period ended March 31, 2016 due to multiple factors. Accumulated other comprehensive
income, net of income taxes, increased by $1,223,000. This increase is attributed to the volatility in interest rates and swings
in credit spreads, and their impact on the fair value of the Company’s available for sale securities portfolio. Retained
earnings increased by $299,000 primarily due to a net income of $358,000, partially offset by $59,000 of preferred dividends paid
to the U.S. Treasury. Additional paid-in-capital decreased by $21,000 due to issuance of common stock associated with restricted
stock.
Quantitative
measures established by regulation to ensure capital adequacy require the Company to maintain minimum amount and ratios of
total and Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets. Effective January 1, 2015, the
regulation now also requires the Company to maintain a minimum amount and ratio of common equity Tier 1 capital to risk
weighted assets. Futhermore, effective January 1, 2016, in addition to the minimum risk-based capital and leverage ratios,
banking organizations must maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5%
of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain
discretionary bonus payments to executive officers. At March 31, 2016, the Company and the Bank met all capital adequacy
requirements to which they are subject and are considered to be “well capitalized” under regulatory
standards.
The
following table presents regulatory capital adequancy ratios for the Company and the Bank as at March 31, 2016 and December 31,
2015:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
The
Company
|
|
|
The Bank
|
|
|
The
Company
|
|
|
The Bank
|
|
Tier 1 Capital (to average assets)
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
Tier 1 Common Equity (to risk weighted assets)
|
|
|
N/A
|
|
|
|
20
|
%
|
|
|
N/A
|
|
|
|
20
|
%
|
Total Capital (to risk weighted assets)
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
21
|
%
|