Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Statements in this report that are not statements of historical fact are forward-looking statements. In general, forward-looking statements relate to a discussion of future financial results or projections, future economic performance, future operational plans and objectives, and statements regarding the underlying assumptions of such statements. Although management of Farmers Capital Bank Corporation (the “Company” or “Parent Company”) believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.
Various risks and uncertainties may cause actual results to differ materially from those indicated by the Company’s forward-looking statements. In addition to the risks described under Part 1, Item 1A
“Risk Factors”
in the Company’s most recent annual report on Form 10-K, factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate) and lower interest margins; competition for the Company’s customers from other providers of financial services; deposit outflows or reduced demand for financial services and loan products; government legislation, regulation, and changes in monetary and fiscal policies (which changes from time to time and over which the Company has no control); changes in interest rates; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; changes in the level of non-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for, close, and realize the benefits of anticipated transactions; unexpected claims or litigation against the Company; expected insurance or other recoveries; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; the ability of the Parent Company to receive dividends from its subsidiaries; the impact of larger or similar financial institutions encountering difficulties, which may adversely affect the banking industry or the Company; the Company or its subsidiary bank’s ability to maintain required capital levels and adequate funding sources and liquidity; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.
The Company’s forward-looking statements are based on information available at the time such statements are made. The Company expressly disclaims any intent or obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or other changes.
RESULTS OF OPERATIONS
Net income for the second quarter of 2018 was $5.8 million, or $.78 per common share, an increase of 30.5% compared to $4.5 million, or $.60 per common share, for the second quarter of 2017. For the six months ended June 30, 2018, net income was $11.5 million, or $1.53 per common share, an increase of 47.1% compared to $7.8 million, or $1.04 per common share, for the first six months of 2017.
The three and six months ended June 30, 2018 include pre-tax expenses of $467 thousand ($369 thousand after tax), or $.05 per common share, and $501 thousand ($396 thousand after tax), or $.05 per common share, respectively, related to the Company’s agreement and plan of merger with and into WesBanco, Inc. (“WesBanco”) announced during the second quarter of 2018. The first six months of 2017 includes pre-tax expenses of $472 thousand ($307 thousand after tax), or $.04 per common share, related to the Company’s consolidation of its four bank subsidiaries and data processing subsidiary into one bank, which was completed in February 2017.
Selected income statement amounts and related data are summarized in the table below.
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(In thousands except per share data)
|
|
2018
|
|
|
2017
|
|
|
Increase
(Decrease)
|
|
|
2018
|
|
|
2017
|
|
|
Increase
(Decrease)
|
|
Interest income
|
|
$
|
15,932
|
|
|
$
|
14,830
|
|
|
$
|
1,102
|
|
|
$
|
31,276
|
|
|
$
|
29,209
|
|
|
$
|
2,067
|
|
Interest expense
|
|
|
966
|
|
|
|
881
|
|
|
|
85
|
|
|
|
1,853
|
|
|
|
1,797
|
|
|
|
56
|
|
Net interest income
|
|
|
14,966
|
|
|
|
13,949
|
|
|
|
1,017
|
|
|
|
29,423
|
|
|
|
27,412
|
|
|
|
2,011
|
|
Provision for loan losses
|
|
|
127
|
|
|
|
(499
|
)
|
|
|
626
|
|
|
|
(134
|
)
|
|
|
81
|
|
|
|
(215
|
)
|
Net interest income after provision for loan losses
|
|
|
14,839
|
|
|
|
14,448
|
|
|
|
391
|
|
|
|
29,557
|
|
|
|
27,331
|
|
|
|
2,226
|
|
Noninterest income
|
|
|
5,973
|
|
|
|
5,102
|
|
|
|
871
|
|
|
|
11,174
|
|
|
|
10,353
|
|
|
|
821
|
|
Noninterest expenses
|
|
|
13,662
|
|
|
|
13,346
|
|
|
|
316
|
|
|
|
26,780
|
|
|
|
26,875
|
|
|
|
(95
|
)
|
Income before income taxes
|
|
|
7,150
|
|
|
|
6,204
|
|
|
|
946
|
|
|
|
13,951
|
|
|
|
10,809
|
|
|
|
3,142
|
|
Income tax expense
|
|
|
1,303
|
|
|
|
1,722
|
|
|
|
(419
|
)
|
|
|
2,463
|
|
|
|
2,998
|
|
|
|
(535
|
)
|
Net income
|
|
$
|
5,847
|
|
|
$
|
4,482
|
|
|
$
|
1,365
|
|
|
$
|
11,488
|
|
|
$
|
7,811
|
|
|
$
|
3,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per common share
|
|
$
|
.78
|
|
|
$
|
.60
|
|
|
$
|
.18
|
|
|
$
|
1.53
|
|
|
$
|
1.04
|
|
|
$
|
.49
|
|
Cash dividends declared per common share
|
|
|
.125
|
|
|
|
.10
|
|
|
|
.025
|
|
|
|
.25
|
|
|
|
.20
|
|
|
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
7,520
|
|
|
|
7,512
|
|
|
|
8
|
|
|
|
7,519
|
|
|
|
7,511
|
|
|
|
8
|
|
Return on average assets
|
|
|
1.42
|
%
|
|
|
1.09
|
%
|
|
33
|
bp
|
|
|
1.40
|
%
|
|
|
.95
|
%
|
|
45
|
bp
|
Return on average equity
|
|
|
12.04
|
%
|
|
|
9.45
|
%
|
|
259
|
bp
|
|
|
11.95
|
%
|
|
|
8.37
|
%
|
|
358
|
bp
|
The increase in net income in both the quarterly and six-month comparisons is attributed primarily to higher net interest income and noninterest income. Interest income continued to be positively affected by the rising interest rate environment and loan growth over the past twelve months. Noninterest income includes an $808 thousand net gain on the sale of 7,672 shares of VISA Class B stock during the second quarter of 2018. Further information related to the more significant components making up the changes in net income follows.
Net Interest Income
The overall interest rate environment at June 30, 2018 (as measured by the Treasury yield curve) increased during the quarter, but remained at very low levels when compared with long-term historical trends. During the quarter, the shape of the yield curve flattened as a result of yields on short-term maturities increasing more than yields on longer-term maturities. Yields for the two and three-year maturity periods were up 28 and 26 basis points, respectively, while yields on the ten and thirty-year maturities increased 13 and 2 basis points, respectively.
The Federal Reserve Board increased the short-term federal funds target interest rate 25 basis points during June 2018 to a range between 1.75% and 2.00% and has indicated that it will continue to assess realized and expected economic conditions relative to its objectives of maximum employment and two percent inflation when determining the timing and size of future adjustments to the target rate. At June 30, 2018, the national and Kentucky unemployment rates were 4.0% and 4.2%, respectively. The national inflation rate at June 30, 2018 was 2.9% based on the Consumer Price Index published by the Bureau of Labor Statistics, up from 2.1% at year-end 2017.
Net interest income increased $1.0 million, or 7.3%, and $2.0 million, or 7.3%, for the second quarter and first six months of 2018, respectively, compared to the same periods of 2017. The increase was driven by overall loan growth and higher average rates earned on loans and investment securities, partially offset by a decline in the average balance of investment securities and higher average rates paid on deposits and borrowed funds. Net interest margin increased 19 and 18 basis points in the second quarter and six-month comparisons, respectively, reflecting the Company’s efforts to improve net interest income and net interest margin through loan growth combined with continued refinement of the Company’s investment securities portfolio.
Interest income on loans was up $932 thousand, or 7.7%, and $1.7 million, or 7.0%, in the three and six-month comparisons, respectively, driven by a higher average loan balance outstanding in both comparison periods. Average loans grew $58.4 million, or 5.9%, in the quarterly comparison and $60.0 million, or 6.1% in the year-to-date comparison.
Interest income on investment securities is down $91 thousand, or 3.6%, and $82 thousand, or 1.6% for the second quarter and first six months of 2018, respectively, compared to the same periods in 2017. Lower volume was partially offset by an increase in the average rate earned on investment securities. Average investment securities decreased $67.6 million, or 13.8%, and $61.2 million, or 12.5%, in the quarterly and year-to-date comparisons, respectively, as the result of deposit outflows and higher loan demand. As loan demand increases, the Company uses proceeds from maturities, calls, and sales of investment securities to fund higher-earning loans. The average rate earned on investment securities was up 12 basis points compared to both the year-ago quarter and six-month periods.
Interest expense on deposits was up $91 thousand, or 17.4%, and $144 thousand, or 13.6%, for the quarterly and year-to-date comparisons, respectively, driven by an increase in average rate paid, partially offset by a decline in the average balance of deposits. The average rate paid on deposits was up 4 and 3 basis points for the second quarter and first six months of 2018 compared to the same periods in 2017. The average rate on interest bearing demand deposits was up 17 basis points for the quarter and 16 basis points for the year-to-date which correlates to the increase in market rates and local market competition. Rates on time deposits decreased 4 and 6 basis points in the quarterly and year-to-date comparisons. The decline in average total deposits was driven by lower volume of time deposits partially offset by higher average interest bearing demand deposits. The Company has continued to aggressively reprice higher-rate maturing time deposits downward with lower rate offerings or to allow them to mature without renewal.
Interest expense on borrowed funds was down $6 thousand, or 1.7%, and $88 thousand, or 11.9%, for the second quarter and first six months of 2018, respectively, compared to the same periods in 2017, primarily due to a lower average balance of Federal Home Loan Bank (“FHLB”) advances. The lower average resulted from the maturity of advances in the amount of $10.0 million and $5.0 million during September and February 2017, respectively. The average rate paid on subordinated notes payable to the Company’s unconsolidated trusts, which is tied to the 3-month LIBOR, increased 110 and 89 basis points, in the second quarter and six month comparisons, respectively. The 3-month LIBOR was 2.34% as of the end of the quarter, up from 1.30% at June 30, 2017.
The average rate earned from interest income on loans and average interest rate paid on deposits, although rising, continue to be near historical lows as a result of the low interest rate environment, competitive pressures, and the Company’s ongoing strategy of being more selective in pricing its loans and deposits. The goal of this strategy is to improve credit quality, net interest income, overall profitability, and capital position.
The Company has improved its mix of earning assets and interest bearing liabilities mainly through growth in the loan portfolio over the past year combined with a significant decrease in lower-yielding investment securities and a decline in higher-rate borrowings. On an average basis, loans represented 66.2% of earning assets for the first six months of 2018, an increase of 330 basis points compared to 62.9% for the first six months of 2017. Loans typically involve an increase in credit risk and higher yields when compared to investment securities.
For the current quarter, net interest margin on a taxable equivalent basis was 3.88%, an increase of 19 basis points compared with 3.69% a year earlier. Net interest spread increased 17 basis points to 3.77%, up from 3.60% in the year-ago quarter. Net interest margin and spread for the current quarter were negatively impacted 3 and 2 basis points, respectively, by lower tax-equivalent adjustments related to tax-exempt loans and investment securities due to a reduction in Federal income tax rates that went into effect at the beginning of 2018.
For the first six months of 2018, net interest margin on a taxable equivalent basis was 3.82%, up 18 basis points from 3.64% in the comparable period a year ago. Net interest spread increased 17 basis points to 3.72%, up from 3.55% for the first six months of 2017. Net interest margin and spread for the current quarter were both negatively impacted 3 basis points by lower tax-equivalent adjustments related to tax-exempt loans and investment securities due to a reduction in Federal income tax rates that went into effect at the beginning of 2018.
The Company expects its net interest margin to stay relatively flat or trend slightly upward in the near term according to internal modeling using expectations about future market interest rates, loan volume, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.
The following tables present an analysis of net interest income for periods indicated.
Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential
Three Months Ended June 30,
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
331,071
|
|
|
$
|
2,023
|
|
|
|
2.45
|
%
|
|
$
|
370,020
|
|
|
$
|
1,984
|
|
|
|
2.15
|
%
|
Nontaxable
2
|
|
|
90,953
|
|
|
|
566
|
|
|
|
2.50
|
|
|
|
119,640
|
|
|
|
871
|
|
|
|
2.92
|
|
Interest bearing deposits in banks, federal funds sold, and money market mutual funds
|
|
|
100,103
|
|
|
|
422
|
|
|
|
1.69
|
|
|
|
81,734
|
|
|
|
161
|
|
|
|
.79
|
|
Loans
2,3,4
|
|
|
1,041,521
|
|
|
|
13,076
|
|
|
|
5.04
|
|
|
|
983,139
|
|
|
|
12,179
|
|
|
|
4.97
|
|
Total earning assets
|
|
|
1,563,648
|
|
|
$
|
16,087
|
|
|
|
4.13
|
%
|
|
|
1,554,533
|
|
|
$
|
15,195
|
|
|
|
3.92
|
%
|
Allowance for loan losses
|
|
|
(9,786
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,499
|
)
|
|
|
|
|
|
|
|
|
Total earning assets, net of allowance for loan losses
|
|
|
1,553,862
|
|
|
|
|
|
|
|
|
|
|
|
1,545,034
|
|
|
|
|
|
|
|
|
|
Nonearning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
22,375
|
|
|
|
|
|
|
|
|
|
|
|
21,005
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
31,292
|
|
|
|
|
|
|
|
|
|
|
|
31,923
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
44,186
|
|
|
|
|
|
|
|
|
|
|
|
62,245
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,651,715
|
|
|
|
|
|
|
|
|
|
|
$
|
1,660,207
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
377,152
|
|
|
$
|
281
|
|
|
|
.30
|
%
|
|
$
|
345,206
|
|
|
$
|
110
|
|
|
|
.13
|
%
|
Savings
|
|
|
418,397
|
|
|
|
123
|
|
|
|
.12
|
|
|
|
424,297
|
|
|
|
132
|
|
|
|
.12
|
|
Time
|
|
|
205,953
|
|
|
|
210
|
|
|
|
.41
|
|
|
|
251,141
|
|
|
|
281
|
|
|
|
.45
|
|
Federal funds purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Short-term securities sold under agreements to repurchase
|
|
|
33,170
|
|
|
|
19
|
|
|
|
.23
|
|
|
|
31,712
|
|
|
|
14
|
|
|
|
.18
|
|
Long-term securities sold under agreements to repurchase
|
|
|
273
|
|
|
|
1
|
|
|
|
.89
|
|
|
|
1,048
|
|
|
|
2
|
|
|
|
.77
|
|
Federal Home Loan Bank advances
|
|
|
3,407
|
|
|
|
27
|
|
|
|
3.18
|
|
|
|
13,579
|
|
|
|
129
|
|
|
|
3.81
|
|
Subordinated notes payable to unconsolidated trusts
|
|
|
33,506
|
|
|
|
305
|
|
|
|
3.65
|
|
|
|
33,506
|
|
|
|
213
|
|
|
|
2.55
|
|
Total interest bearing liabilities
|
|
|
1,071,858
|
|
|
$
|
966
|
|
|
|
.36
|
%
|
|
|
1,100,493
|
|
|
$
|
881
|
|
|
|
.32
|
%
|
Noninterest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
357,156
|
|
|
|
|
|
|
|
|
|
|
|
341,535
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
27,839
|
|
|
|
|
|
|
|
|
|
|
|
27,421
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,456,853
|
|
|
|
|
|
|
|
|
|
|
|
1,469,449
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
194,862
|
|
|
|
|
|
|
|
|
|
|
|
190,758
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,651,715
|
|
|
|
|
|
|
|
|
|
|
$
|
1,660,207
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
15,121
|
|
|
|
|
|
|
|
|
|
|
|
14,314
|
|
|
|
|
|
TE basis adjustment
|
|
|
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
14,966
|
|
|
|
|
|
|
|
|
|
|
$
|
13,949
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
Impact of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
.09
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
1
Average yields on securities available for sale have been calculated based on amortized cost.
2
Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 21% for 2018 and 35% for 2017.
3
Loan balances include principal balances on nonaccrual loans.
4
Loan fees included in interest income amounted to $523 thousand and $429 thousand in 2018 and 2017, respectively.
Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential
Six Months Ended June 30,
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
336,689
|
|
|
$
|
4,048
|
|
|
|
2.42
|
%
|
|
$
|
369,820
|
|
|
$
|
3,884
|
|
|
|
2.12
|
%
|
Nontaxable
2
|
|
|
93,300
|
|
|
|
1,164
|
|
|
|
2.52
|
|
|
|
121,407
|
|
|
|
1,758
|
|
|
|
2.92
|
|
Interest bearing deposits in banks, federal funds sold, and money market mutual funds
|
|
|
101,294
|
|
|
|
797
|
|
|
|
1.59
|
|
|
|
87,174
|
|
|
|
327
|
|
|
|
.76
|
|
Loans
2,3,4
|
|
|
1,039,038
|
|
|
|
25,594
|
|
|
|
4.97
|
|
|
|
979,063
|
|
|
|
23,975
|
|
|
|
4.94
|
|
Total earning assets
|
|
|
1,570,321
|
|
|
$
|
31,603
|
|
|
|
4.06
|
%
|
|
|
1,557,464
|
|
|
$
|
29,944
|
|
|
|
3.88
|
%
|
Allowance for loan losses
|
|
|
(9,800
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,473
|
)
|
|
|
|
|
|
|
|
|
Total earning assets, net of allowance for loan losses
|
|
|
1,560,521
|
|
|
|
|
|
|
|
|
|
|
|
1,547,991
|
|
|
|
|
|
|
|
|
|
Nonearning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
22,337
|
|
|
|
|
|
|
|
|
|
|
|
23,234
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
31,049
|
|
|
|
|
|
|
|
|
|
|
|
31,888
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
46,257
|
|
|
|
|
|
|
|
|
|
|
|
60,448
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,660,164
|
|
|
|
|
|
|
|
|
|
|
$
|
1,663,561
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
379,245
|
|
|
$
|
529
|
|
|
|
.28
|
%
|
|
$
|
347,209
|
|
|
$
|
201
|
|
|
|
.12
|
%
|
Savings
|
|
|
422,202
|
|
|
|
238
|
|
|
|
.11
|
|
|
|
422,763
|
|
|
|
256
|
|
|
|
.12
|
|
Time
|
|
|
212,327
|
|
|
|
433
|
|
|
|
.41
|
|
|
|
257,863
|
|
|
|
599
|
|
|
|
.47
|
|
Federal funds purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Short-term securities sold under agreements to repurchase
|
|
|
33,692
|
|
|
|
37
|
|
|
|
.22
|
|
|
|
32,717
|
|
|
|
37
|
|
|
|
.23
|
|
Long-term securities sold under agreements to repurchase
|
|
|
393
|
|
|
|
2
|
|
|
|
.89
|
|
|
|
1,168
|
|
|
|
4
|
|
|
|
.76
|
|
Federal Home Loan Bank advances
|
|
|
3,429
|
|
|
|
55
|
|
|
|
3.23
|
|
|
|
14,789
|
|
|
|
289
|
|
|
|
3.94
|
|
Subordinated notes payable to unconsolidated trusts
|
|
|
33,506
|
|
|
|
559
|
|
|
|
3.36
|
|
|
|
33,506
|
|
|
|
411
|
|
|
|
2.47
|
|
Total interest bearing liabilities
|
|
|
1,084,794
|
|
|
$
|
1,853
|
|
|
|
.34
|
%
|
|
|
1,110,037
|
|
|
$
|
1,797
|
|
|
|
.33
|
%
|
Noninterest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
353,670
|
|
|
|
|
|
|
|
|
|
|
|
339,276
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
27,782
|
|
|
|
|
|
|
|
|
|
|
|
25,981
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,466,246
|
|
|
|
|
|
|
|
|
|
|
|
1,475,294
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
193,918
|
|
|
|
|
|
|
|
|
|
|
|
188,267
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,660,164
|
|
|
|
|
|
|
|
|
|
|
$
|
1,663,561
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
29,750
|
|
|
|
|
|
|
|
|
|
|
|
28,147
|
|
|
|
|
|
TE basis adjustment
|
|
|
|
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
(735
|
)
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
29,423
|
|
|
|
|
|
|
|
|
|
|
$
|
27,412
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
Impact of noninterest bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
.09
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.82
|
%
|
|
|
|
|
|
|
|
|
|
|
3.64
|
%
|
1
Average yields on securities available for sale have been calculated based on amortized cost.
2
Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 21% for 2018 and 35% for 2017.
3
Loan balances include principal balances on nonaccrual loans.
4
Loan fees included in interest income amounted to $821 thousand and $755 thousand in 2018 and 2017, respectively.
Analysis of Changes in Net Interest Income (tax equivalent basis)
(In thousands)
|
|
Variance
|
|
|
Variance Attributed to
|
|
Three Months Ended June 30,
|
|
2018/2017
1
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
$
|
39
|
|
|
$
|
(938
|
)
|
|
$
|
977
|
|
Nontaxable investment securities
2
|
|
|
(305
|
)
|
|
|
(191
|
)
|
|
|
(114
|
)
|
Interest bearing deposits in banks, federal funds sold, and money market mutual funds
|
|
|
261
|
|
|
|
43
|
|
|
|
218
|
|
Loans
2
|
|
|
897
|
|
|
|
725
|
|
|
|
172
|
|
Total interest income
|
|
|
892
|
|
|
|
(361
|
)
|
|
|
1,253
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
171
|
|
|
|
11
|
|
|
|
160
|
|
Savings deposits
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
Time deposits
|
|
|
(71
|
)
|
|
|
(48
|
)
|
|
|
(23
|
)
|
Federal funds purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term securities sold under agreements to repurchase
|
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
Long-term securities sold under agreements to repurchase
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
2
|
|
Federal Home Loan Bank advances
|
|
|
(102
|
)
|
|
|
(83
|
)
|
|
|
(19
|
)
|
Subordinated notes payable to unconsolidated trusts
|
|
|
92
|
|
|
|
-
|
|
|
|
92
|
|
Total interest expense
|
|
|
85
|
|
|
|
(131
|
)
|
|
|
216
|
|
Net interest income
|
|
$
|
807
|
|
|
$
|
(230
|
)
|
|
$
|
1,037
|
|
Percentage change
|
|
|
100.0
|
%
|
|
|
(28.5
|
)%
|
|
|
128.5
|
%
|
(In thousands)
|
|
Variance
|
|
|
Variance Attributed to
|
|
Six Months Ended June 30,
|
|
2018/2017
1
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
$
|
164
|
|
|
$
|
(796
|
)
|
|
$
|
960
|
|
Nontaxable investment securities
2
|
|
|
(594
|
)
|
|
|
(373
|
)
|
|
|
(221
|
)
|
Interest bearing deposits in banks, federal funds sold, and money market mutual funds
|
|
|
470
|
|
|
|
61
|
|
|
|
409
|
|
Loans
2
|
|
|
1,619
|
|
|
|
1,473
|
|
|
|
146
|
|
Total interest income
|
|
|
1,659
|
|
|
|
365
|
|
|
|
1,294
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
|
328
|
|
|
|
21
|
|
|
|
307
|
|
Savings deposits
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
Time deposits
|
|
|
(166
|
)
|
|
|
(96
|
)
|
|
|
(70
|
)
|
Federal funds purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term securities sold under agreements to repurchase
|
|
|
-
|
|
|
|
2
|
|
|
|
(2
|
)
|
Long-term securities sold under agreements to repurchase
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
2
|
|
Federal Home Loan Bank advances
|
|
|
(234
|
)
|
|
|
(190
|
)
|
|
|
(44
|
)
|
Subordinated notes payable to unconsolidated trusts
|
|
|
148
|
|
|
|
-
|
|
|
|
148
|
|
Total interest expense
|
|
|
56
|
|
|
|
(267
|
)
|
|
|
323
|
|
Net interest income
|
|
$
|
1,603
|
|
|
$
|
632
|
|
|
$
|
971
|
|
Percentage change
|
|
|
100.0
|
%
|
|
|
39.4
|
%
|
|
|
60.6
|
%
|
1
The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis for allocation.
2
Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 21% for 2018 and 35% for 2017.
Provision for Loan Losses
The provision for loan losses represents charges or credits to earnings that are necessary to maintain an allowance for loan losses at an adequate level to cover credit losses specifically identified in the loan portfolio, as well as management’s best estimate of incurred probable loan losses in the remainder of the portfolio at the balance sheet date. The credit quality of the Company’s loan portfolio continued recent trends of improvement during the current quarter, as certain credit quality metrics further improved upon recent quarterly bests.
The Company recorded a provision for loan losses in the amount of $127 thousand for the current quarter and a credit to the provision of $499 thousand for the year-ago quarter. For the first six months of 2018, the Company recorded a credit to the provision of $134 thousand compared with a provision of $81 thousand in the year ago period. The allowance for loan losses as a percentage of outstanding loans was 0.94% at June 30, 2018 compared to 0.94% and 0.93% at year-end 2017 and June 30, 2017, respectively. The provision for the current quarter was driven by loan growth, partially offset by a decline in specific reserves on impaired loans of $131 thousand and net recoveries of previously charged-off loans of $126 thousand. For the first six months of 2018, the credit to the provision was driven by net recoveries of $352 thousand and a decline in specific reserves on impaired loans of $140 thousand, partially offset by loan portfolio growth. Net recoveries in the three and six months ended June 30, 2018 include $239 thousand and $458 thousand, respectively, from a real estate development project. The Company recorded a total of $2.4 million in principal charge-offs primarily between 2010 and 2012 related to this project. Recoveries in the current quarter bring the total recoveries related to this project to $2.4 million.
Overall credit quality metrics of the loan portfolio have continued to improve. Nonperforming loans, impaired loans, loans graded as substandard or below, and watch list loans have each declined when compared with a year earlier even though total loans outstanding have increased $75.2 million, or 7.6%, over that period of time. For further information about improvements in the Company’s overall credit quality, please refer to the discussion under the captions
“Allowance for Loan Losses”
and
“Nonperforming Loans”
that follows.
Noninterest Income
The components of noninterest income are as follows for the periods indicated:
|
|
Three months ended June 30
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Service charges and fees on deposits
|
|
$
|
1,897
|
|
|
$
|
2,012
|
|
|
$
|
(115
|
)
|
|
|
(5.7
|
)%
|
|
$
|
3,809
|
|
|
$
|
3,970
|
|
|
$
|
(161
|
)
|
|
|
(4.1
|
)%
|
Allotment processing fees
|
|
|
677
|
|
|
|
651
|
|
|
|
26
|
|
|
|
4.0
|
|
|
|
1,397
|
|
|
|
1,366
|
|
|
|
31
|
|
|
|
2.3
|
|
Other service charges, commissions, and fees
|
|
|
1,490
|
|
|
|
1,328
|
|
|
|
162
|
|
|
|
12.2
|
|
|
|
2,862
|
|
|
|
2,700
|
|
|
|
162
|
|
|
|
6.0
|
|
Trust income
|
|
|
695
|
|
|
|
626
|
|
|
|
69
|
|
|
|
11.0
|
|
|
|
1,484
|
|
|
|
1,330
|
|
|
|
154
|
|
|
|
11.6
|
|
Net loss on sales of available for sale investment securities
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(100.0
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
10
|
|
|
|
(100.0
|
)
|
Net gain on sales of equity investment securities
|
|
|
808
|
|
|
|
-
|
|
|
|
808
|
|
|
|
NM
|
|
|
|
808
|
|
|
|
-
|
|
|
|
808
|
|
|
|
NM
|
|
Gain on sale of mortgage loans, net
|
|
|
104
|
|
|
|
189
|
|
|
|
(85
|
)
|
|
|
(45.0
|
)
|
|
|
199
|
|
|
|
343
|
|
|
|
(144
|
)
|
|
|
(42.0
|
)
|
Income from company-owned life insurance
|
|
|
213
|
|
|
|
221
|
|
|
|
(8
|
)
|
|
|
(3.6
|
)
|
|
|
506
|
|
|
|
456
|
|
|
|
50
|
|
|
|
11.0
|
|
Other
|
|
|
89
|
|
|
|
76
|
|
|
|
13
|
|
|
|
17.1
|
|
|
|
109
|
|
|
|
198
|
|
|
|
(89
|
)
|
|
|
(44.9
|
)
|
Total noninterest income
|
|
$
|
5,973
|
|
|
$
|
5,102
|
|
|
$
|
871
|
|
|
|
17.1
|
%
|
|
$
|
11,174
|
|
|
$
|
10,353
|
|
|
$
|
821
|
|
|
|
7.9
|
%
|
NM – not meaningful.
The more significant items impacting noninterest income in the comparison are included below.
Service charges and fees on deposits were down in the three and six month comparisons due to lower dormant account fees of $84 thousand, or 12.8%, and $157 thousand, or 11.9%, respectively. Dormant fees were down primarily due to a decline in certain savings account balances.
Allotment processing fees in the second quarter and first six months of 2018 include extra processing periods compared to the same periods of the prior year due to the timing of scheduled transactions, which offset an overall reduction in processing volume. Allotment processing fees continued to be affected by lower processing volume, led by the U.S. Department of Defense policy that became effective January 1, 2015, restricting the types of purchases active service members are able to make using the military allotment system for payment. The rate of decline in allotment processing fees began to subside during 2017 and the Company is beginning to see higher volume from new customers as it continues efforts to diversify its customer base and expand its payment processing options.
Nondeposit service charges, commissions, and fees were up due to higher interchange fees of $109 thousand, or 13.5%, and $155 thousand, or 9.7%, in the quarterly and year-to-date comparisons, respectively, due to higher transaction volume as well as an increase in the rate earned on certain transactions. During the first quarter of 2018, the Company condensed its debit payments networks for certain PIN/POS transactions into a single network, which resulted in higher rates earned per transaction.
The increase in trust income was driven by a revision of fee schedules and an increase in the market value of accounts. The Company standardized the fee schedules for its trust services following the consolidation of its subsidiaries in 2017. The new fee schedule became effective for new customer accounts during the second quarterA of 2017 and effective for existing accounts as of January 1, 2018, resulting in higher overall fee rates.
During the current quarter the Company recognized a net gain on equity investment securities of $808 thousand related to the sale of all of its 7,672 shares of VISA Class B stock during the current quarter. The shares were acquired with a zero cost basis in 2008 as a result of the initial public offering of VISA.
Net gains on the sale of mortgage loans were down in the comparisons mainly due to lower sales volume, partially offset by an increase in fees earned per loan sold beginning in 2018. Sales of mortgage loans decreased $4.0 million, or 57.6%, in the quarterly comparison and $8.0 million, or 59.8%, in the six-month comparison. The decrease in sales activity is mainly the result of the Company retaining a limited amount of certain mortgage loans that meet specific criteria in order to grow its loan portfolio.
The increase in income from company-owned life insurance in the year-to-date comparison is primarily due to a tax-free death benefit received in excess of the cash surrender value of $67 thousand during the first quarter of 2018.
Other noninterest income during the current year includes a net unrealized loss on equity securities of $79 thousand related to the adoption of Accounting Standards Update (“ASU”) 2016-01 at the beginning of 2018 which requires equity investments to be measured at fair value with changes in the fair value recognized through net income. Prior to 2018, changes in the fair value of equity securities were recognized through accumulated other comprehensive income.
Noninterest Expense
The components of noninterest expense are as follows for the periods indicated:
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Salaries and employee benefits
|
|
$
|
7,410
|
|
|
$
|
7,475
|
|
|
$
|
(65
|
)
|
|
|
(0.9
|
)%
|
|
$
|
14,900
|
|
|
$
|
15,335
|
|
|
$
|
(435
|
)
|
|
|
(2.8
|
)%
|
Occupancy expenses, net
|
|
|
1,177
|
|
|
|
1,135
|
|
|
|
42
|
|
|
|
3.7
|
|
|
|
2,431
|
|
|
|
2,349
|
|
|
|
82
|
|
|
|
3.5
|
|
Equipment expenses
|
|
|
678
|
|
|
|
599
|
|
|
|
79
|
|
|
|
13.2
|
|
|
|
1,279
|
|
|
|
1,152
|
|
|
|
127
|
|
|
|
11.0
|
|
Data processing and communication expenses
|
|
|
1,055
|
|
|
|
1,093
|
|
|
|
(38
|
)
|
|
|
(3.5
|
)
|
|
|
2,138
|
|
|
|
2,386
|
|
|
|
(248
|
)
|
|
|
(10.4
|
)
|
Bank franchise tax
|
|
|
525
|
|
|
|
609
|
|
|
|
(84
|
)
|
|
|
(13.8
|
)
|
|
|
1,025
|
|
|
|
1,166
|
|
|
|
(141
|
)
|
|
|
(12.1
|
)
|
Deposit insurance expenses
|
|
|
116
|
|
|
|
130
|
|
|
|
(14
|
)
|
|
|
(10.8
|
)
|
|
|
242
|
|
|
|
267
|
|
|
|
(25
|
)
|
|
|
(9.4
|
)
|
Other real estate expenses, net
|
|
|
522
|
|
|
|
326
|
|
|
|
196
|
|
|
|
60.1
|
|
|
|
639
|
|
|
|
400
|
|
|
|
239
|
|
|
|
59.8
|
|
Other
|
|
|
2,179
|
|
|
|
1,979
|
|
|
|
200
|
|
|
|
10.1
|
|
|
|
4,126
|
|
|
|
3,820
|
|
|
|
306
|
|
|
|
8.0
|
|
Total noninterest expense
|
|
$
|
13,662
|
|
|
$
|
13,346
|
|
|
$
|
316
|
|
|
|
2.4
|
%
|
|
$
|
26,780
|
|
|
$
|
26,875
|
|
|
$
|
(95
|
)
|
|
|
(0.4
|
)%
|
Noninterest expense for the three and six months ended June 30, 2018 includes $467 thousand and $501 thousand, respectively, related to the Company’s agreement and plan of merger with and into WesBanco announced during the second quarter of 2018 (the “Merger”). Noninterest expense for the prior year includes $472 thousand related to the consolidation of the Company’s subsidiaries that was completed during the first quarter of 2017. The more significant items impacting noninterest expense in the comparison are included below.
The decrease in salaries and employee benefits in the quarterly comparison was led by a decline in salaries and related payroll taxes of $133 thousand, or 2.2%, mainly due to retention payments of $201 thousand during the second quarter of 2017 related to the consolidation of subsidiaries. Benefit expenses were up $88 thousand, or 8.8%, in the quarterly comparison, primarily due to higher claims activity of the Company’s self-funded health insurance plan.
The decrease in salaries and employee benefits in the year-to-date comparison was led by a decline in salaries and related payroll taxes of $435 thousand, or 3.5%, driven by retention payments of $201 thousand during the second quarter of 2017 and the reduction in workforce related to the subsidiary consolidation plan completed during the first quarter of 2017. The Company had an average of 425 full time equivalent employees for the first six months of 2018, down from an average of 445 in the year-ago period. Salaries and employee benefits for the first six months of 2017 include severance pay expense of $301 thousand. There were no similar expenses during the first six months of 2018. Benefit expenses were up $219 thousand, or 10.9%, in the year-to-date comparison, primarily due to higher claims activity of the Company’s self-funded health insurance plan.
In connection with the merger of certain of its subsidiaries in February 2017, the Company revalued its postretirement medical benefits plan liability due to the reduction in workforce. This resulted in a curtailment gain of $417 thousand, which is recorded in other noninterest expense, and prior service costs of $66 thousand, which is recorded in salaries and employee benefits, for a net gain of $351 thousand at the time of curtailment during the first quarter of 2017.
Net occupancy expenses were up in both comparisons due primarily to higher building maintenance expenses of $48 thousand, or 30.9%, and $108 thousand, or 31.7%, for the three and six months ended June 30, 2018, respectively, compared to the same periods a year earlier. The increase in equipment expenses for both comparisons was driven by higher software costs and depreciation.
The decline in data processing and communication expenses in the six-month comparison was primarily due to $127 thousand related to the consolidation of subsidiaries in the first quarter of 2017. The reduction in bank franchise taxes in both comparisons is primarily due to a lower tax base and a refinement of the accrual in the current year.
The increase in expenses related to repossessed real estate was mainly the result of higher write-downs of $222 thousand, or 92.5%, in the quarterly comparison. For the year-to-date comparison, the increase was the result of a net loss on the sale of property of $76 thousand compared to a net gain of $72 thousand in the prior year combined with higher write-downs of $145 thousand, or 41.4%.Impairment charges during the quarter include $439 thousand related to a real estate development property written down to its estimated fair value less cost to sell due to an updated appraisal being obtained.
Other noninterest expenses also includes legal and consultant fee expenses in the current quarter of $384 thousand related to the Merger. Supplies expense declined $119 thousand, or 42.4%, mainly due to additional purchases in the year-ago quarter related to the consolidation and the timing of the replenishment of operational supplies.
Income Taxes
Income tax expense was $1.3 million for the current quarter, a decrease of $419 thousand, or 24.3%, compared to $1.7 million for the second quarter of 2017. The effective income tax rates were 18.2% and 27.8% for the current and year-ago quarters, respectively. For the first six months of 2018, income tax expense was $2.5 million, a decrease of $535 thousand, or 17.8%, compared to $3.0 million for 2017. The effective income tax rates were 17.7% and 27.7% for the current and year-ago periods, respectively. Tax expense and the effective tax rate declined as a result of the decrease in the top Federal income tax rate from 35% to 21% that went into effect in 2018.
FINANCIAL CONDITION
Total assets were $1.6 billion at June 30, 2018, a decrease of $41.9 million, or 2.5%, from year-end 2017, led by a decline in investment securities of $43.2 million and lower cash and cash equivalents of $27.2 million, partially offset by an increase in loans, net of allowance, of $28.7 million. Liabilities were down $46.4 million, or 3.1%, mainly due to a decrease in deposits, and equity increased $4.5 million, or 2.3%, in the comparison. Selected balance sheet amounts and related data are presented in the table below and discussion that follows.
(Dollars in thousands, except per share data)
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
Increase
(Decrease)
|
|
|
%
|
|
Cash and cash equivalents
|
|
$
|
93,246
|
|
|
$
|
120,408
|
|
|
$
|
(27,162
|
)
|
|
|
(22.6
|
)%
|
Investment securities
|
|
|
384,389
|
|
|
|
427,617
|
|
|
|
(43,228
|
)
|
|
|
(10.1
|
)
|
Loans, net of allowance of $10,001 and $9,783
|
|
|
1,054,214
|
|
|
|
1,025,480
|
|
|
|
28,734
|
|
|
|
2.8
|
|
Other real estate owned
|
|
|
4,031
|
|
|
|
5,489
|
|
|
|
(1,458
|
)
|
|
|
(26.6
|
)
|
Other assets
|
|
|
96,082
|
|
|
|
94,878
|
|
|
|
1,204
|
|
|
|
1.3
|
|
Total assets
|
|
$
|
1,631,962
|
|
|
$
|
1,673,872
|
|
|
$
|
(41,910
|
)
|
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,334,787
|
|
|
$
|
1,379,903
|
|
|
$
|
(45,116
|
)
|
|
|
(3.3
|
)%
|
Securities sold under agreements to repurchase
|
|
|
33,532
|
|
|
|
34,252
|
|
|
|
(720
|
)
|
|
|
(2.1
|
)
|
Other borrowings
|
|
|
36,898
|
|
|
|
36,985
|
|
|
|
(87
|
)
|
|
|
(0.2
|
)
|
Other liabilities
|
|
|
28,853
|
|
|
|
29,379
|
|
|
|
(526
|
)
|
|
|
(1.8
|
)
|
Total liabilities
|
|
|
1,434,070
|
|
|
|
1,480,519
|
|
|
|
(46,449
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
940
|
|
|
|
940
|
|
|
|
-
|
|
|
|
-
|
|
Capital surplus
|
|
|
52,348
|
|
|
|
52,201
|
|
|
|
147
|
|
|
|
0.3
|
|
Retained earnings
|
|
|
153,442
|
|
|
|
143,778
|
|
|
|
9,664
|
|
|
|
6.7
|
|
Accumulated other comprehensive loss
|
|
|
(8,838
|
)
|
|
|
(3,566
|
)
|
|
|
(5,272
|
)
|
|
|
147.8
|
|
Total shareholders’ equity
|
|
|
197,892
|
|
|
|
193,353
|
|
|
|
4,539
|
|
|
|
2.3
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,631,962
|
|
|
$
|
1,673,872
|
|
|
$
|
(41,910
|
)
|
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period tangible book value per common share
1
|
|
$
|
26.31
|
|
|
$
|
25.72
|
|
|
$
|
.59
|
|
|
|
2.3
|
%
|
End of period per common share closing price
|
|
|
52.10
|
|
|
|
38.50
|
|
|
|
13.60
|
|
|
|
35.3
|
|
1
Represents total common equity less intangible assets divided by the number of common shares outstanding at the end of the period.
Cash and cash equivalents declined as the result of the outflow of deposits and funding new loans. The increase in loans was driven mainly by commercial real estate lending, followed by commercial and industrial lending.
The decline in total liabilities was driven by lower deposits. Deposits were down primarily from a decrease in time deposits and interest bearing demand deposits, which was driven by a decline in public funds of $24.0 million.
Shareholders’ equity was up primarily due to net income of $11.5 million, partially offset by other comprehensive loss of $5.2 million and dividends declared on common stock of $1.9 million. Other comprehensive loss was driven by an increase in the after-tax unrealized loss of $5.2 million related to the available for sale investment securities portfolio.
Temporary Investments
Temporary investments consist of interest bearing deposits in other banks, federal funds sold, and money market mutual funds. The Company uses these funds in the management of liquidity and interest rate sensitivity, as a short-term holding prior to subsequent movement into other investments with higher yields, or for other purposes. At June 30, 2018, temporary investments were $69 million, a decrease of $25.5 million, or 26.9%, from year-end 2017.
Investment Securities
The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale debt securities. Proceeds received from maturing or called investment securities not needed to fund higher-earning loans are either reinvested in similar investments or used to manage liquidity, such as for deposit outflows or other payment obligations. Total investment securities had a carrying amount of $384 million at June 30, 2018, a decrease of $43.2 million, or 10.1%, compared to $428 million at year-end 2017.
The decline in investment securities was driven by net maturities and calls totaling $35.0 million, lower pre-tax market values related to the available for sale portfolio of $6.6 million, and net premium amortization of $1.2 million. The decrease in the market value of the available for sale portfolio correlates with an overall increase in market interest rates during the quarter. As market interest rates rise, the value of fixed rate investments generally declines.
Loans
Loans were $1.1 billion at June 30, 2018, up $29.0 million, or 2.8%, compared to year-end 2017 despite early payoffs of several larger-balance loans totaling $17.9 million in the aggregate. The loan portfolio has grown in nine of the last twelve quarters and is at the highest level since the fourth quarter of 2011.
From time to time the Company may purchase a limited amount of loans originated by otherwise nonaffiliated third parties. The Company performs its own risk assessment and makes the credit decision on each loan prior to purchase. The Company purchased smaller balance commercial loans totaling $1.2 million and $1.8 million in the aggregate during the first six months of 2018 and 2017, respectively. The average amount of the purchased loans was $100 thousand for 2018 and $150 thousand for 2017.
The composition of the loan portfolio is summarized in the table below.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage – construction and land development
|
|
$
|
128,183
|
|
|
|
12.0
|
%
|
|
$
|
129,181
|
|
|
|
12.5
|
%
|
Real estate mortgage – residential
|
|
|
350,778
|
|
|
|
33.0
|
|
|
|
355,304
|
|
|
|
34.3
|
|
Real estate mortgage – farmland and other commercial enterprises
|
|
|
457,014
|
|
|
|
42.9
|
|
|
|
432,321
|
|
|
|
41.8
|
|
Commercial, financial, and agriculture
|
|
|
120,978
|
|
|
|
11.4
|
|
|
|
110,542
|
|
|
|
10.7
|
|
Installment
|
|
|
7,262
|
|
|
|
.7
|
|
|
|
7,915
|
|
|
|
.7
|
|
Total
|
|
$
|
1,064,215
|
|
|
|
100.0
|
%
|
|
$
|
1,035,263
|
|
|
|
100.0
|
%
|
On an average basis, loans represented 66.2% of earning assets for the first six months of 2018, an increase of 288 basis points compared to 63.3% for the full year of 2017. The increase in the level of loans as a percentage of earning assets reflects the overall growth in the loan portfolio over the past year combined with a decrease in investment securities. The increase in loans in recent periods has been funded primarily by cash flows from the investment portfolio. Loans typically involve an increase in credit risk and higher yields when compared to investment securities and temporary investment alternatives.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level management believes is adequate to cover probable losses in the loan portfolio. The determination of the appropriate level of allowance for loan losses requires significant judgment in order to reflect credit losses specifically identified in the Company’s loan portfolio as well as management's best estimate of probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses and the related provision for loan losses generally fluctuate as the relative level of nonperforming and impaired loans vary. However, other factors impact the amount of the allowance such as the Company’s historical loss experience, the financial condition of its borrowers, general economic conditions, and other qualitative risk factors as described in greater detail in the Company’s most recent annual report on Form 10-K.
The allowance for loan losses was $10.0 million, or 0.94% of outstanding loans, at June 30, 2018, up $218 thousand compared to $9.8 million, or 0.94% of loans outstanding, at year-end 2017. The increase in the allowance was the result of net recoveries of $352 thousand, partially offset by a credit to the provision for loan losses of $134 thousand. The allowance as a percentage of loans outstanding was unchanged from the prior year-end as the level of allowance kept pace with the increase in loans of $29.0 million. As a percentage of nonperforming loans, the allowance for loan losses was 64.7% at June 30, 2018 compared to 63.7% at year-end 2017. The relatively low amount of the allowance for loan losses as a percentage of nonperforming loans is due mainly to the makeup of nonperforming loans as discussed further below.
Nonperforming loans include $11.4 million of accruing restructured loans, which represents 73.5% of total nonperforming loans at June 30, 2018. At year-end 2017, this amount was $11.5 million, or 74.7%. The allowance attributed to credits that are restructured with lower interest rates generally represents the difference in the present value of future cash flows calculated at the loan’s original effective interest rate and the new lower rate resulting from the restructuring. This typically results in a reserve for loan losses that is less severe than for other loans that are collateral dependent. The allowance specifically allocated to impaired loans, which includes restructured loans, was $3.0 million, or 13.8%, and $3.2 million, or 13.8% of such loans, at June 30, 2018 and year-end 2017, respectively. As a percentage of nonaccrual loans and loans past due 90 days or more and still accruing, the allowance for loan losses was 244% and 252% for the current quarter-end and year-end 2017, respectively.
The overall improvement in the credit quality of the loan portfolio experienced during 2017 continued during the first six months of 2018. Certain credit quality measures are summarized in the table that follows for the periods indicated. Several of these measures are at or near the best level in the last three years.
(In thousands)
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
Three-year
High
1
|
|
|
Three-year
Low
1
|
|
Nonperforming loans
|
|
$
|
15,467
|
|
|
$
|
15,369
|
|
|
$
|
26,844
|
|
|
$
|
32,356
|
|
|
$
|
15,141
|
|
Nonaccrual loans
|
|
|
4,102
|
|
|
|
3,887
|
|
|
|
4,427
|
|
|
|
8,380
|
|
|
|
3,719
|
|
Loans past due 30-89 days and still accruing
|
|
|
783
|
|
|
|
2,099
|
|
|
|
1,218
|
|
|
|
2,719
|
|
|
|
588
|
|
Loans graded substandard or below
|
|
|
29,535
|
|
|
|
30,121
|
|
|
|
35,325
|
|
|
|
44,220
|
|
|
|
29,535
|
|
Impaired loans
|
|
|
22,089
|
|
|
|
23,141
|
|
|
|
39,196
|
|
|
|
43,395
|
|
|
|
22,089
|
|
Loans, net of unearned income
|
|
|
1,064,215
|
|
|
|
1,035,263
|
|
|
|
989,049
|
|
|
|
1,064,215
|
|
|
|
935,145
|
|
1
Based on quarter-end balances over the previous three years.
Nonperforming Loans
Nonperforming loans consist of nonaccrual loans, accruing restructured loans, and loans 90 days or more past due and still accruing interest. The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection.
Restructured loans occur when a lender, because of economic or legal reasons related to a borrower’s financial difficulty, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically include a reduction of the stated interest rate or an extension of the maturity date, among other possible concessions. The Company gives careful consideration to identifying which of its challenged credits merit a restructuring of terms that it believes will result in maximum loan repayments and mitigation of possible losses. Cash flow projections are carefully scrutinized prior to restructuring any credits; past due credits are typically not granted concessions.
Nonperforming loans were $15.5 million at June 30, 2018, an increase of $98 thousand, or 0.6%, compared to $15.4 million at year-end 2017. Nonaccrual loans were up $215 thousand, or 5.5%, driven by the addition of one credit relationship of $549 thousand secured by commercial real estate. Accruing restructured loans decreased $117 thousand, or 1.0%. Loan payments include $751 thousand related to nonaccrual loans during the first six months of 2018.
Accruing restructured loans make up $11.4 million, or 73.5%, of the Company’s nonperforming loans at June 30, 2018. Additionally, two larger balance credits account for $10.2 million, or 89.9%, of total restructured loans.
Nonperforming loans, presented by class, were as follows for the periods indicated:
Nonperforming Loans
(In thousands)
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Nonaccrual Loans
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
Real estate mortgage – construction and land development
|
|
$
|
149
|
|
|
$
|
151
|
|
Real estate mortgage – residential
|
|
|
1,441
|
|
|
|
1,763
|
|
Real estate mortgage – farmland and other commercial enterprises
|
|
|
2,355
|
|
|
|
1,752
|
|
Commercial
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
11
|
|
|
|
53
|
|
Consumer
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
146
|
|
|
|
168
|
|
Total nonaccrual loans
|
|
$
|
4,102
|
|
|
$
|
3,887
|
|
|
|
|
|
|
|
|
|
|
Restructured Loans
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
Real estate mortgage – construction and land development
|
|
$
|
1,595
|
|
|
$
|
1,955
|
|
Real estate mortgage – residential
|
|
|
5,618
|
|
|
|
5,326
|
|
Real estate mortgage – farmland and other commercial enterprises
|
|
|
3,660
|
|
|
|
3,703
|
|
Commercial
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
367
|
|
|
|
370
|
|
Consumer
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
125
|
|
|
|
128
|
|
Total restructured loans
|
|
$
|
11,365
|
|
|
$
|
11,482
|
|
|
|
|
|
|
|
|
|
|
Past Due 90 Days or More and Still Accruing
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
15,467
|
|
|
$
|
15,369
|
|
|
|
|
|
|
|
|
|
|
Ratio of total nonperforming loans to total loans
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2018 related to these two components was as follows:
(In thousands)
|
|
Nonaccrual
Loans
|
|
|
Restructured
Loans
|
|
Balance at December 31, 2017
|
|
$
|
3,887
|
|
|
$
|
11,482
|
|
Additions
|
|
|
1,183
|
|
|
|
-
|
|
Principal paydowns
|
|
|
(751
|
)
|
|
|
(117
|
)
|
Charge-offs
|
|
|
(217
|
)
|
|
|
-
|
|
Balance at June 30, 2018
|
|
$
|
4,102
|
|
|
$
|
11,365
|
|
The Company’s comprehensive risk-grading and loan review program includes a review of loans to assess risk and assign a grade to those loans, a review of delinquencies, and an assessment of loans for needed charge-offs or placement on nonaccrual status. The Company had loans in the amount of $30.7 million and $32.7 million at June 30, 2018 and year-end 2017, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the table above. These loans, however, are considered in establishing an appropriate allowance for loan losses. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate including commercial, construction properties, and residential real estate developments. At June 30, 2018, the five largest potential problem credits were $7.6 million in the aggregate compared to $9.3 million at year-end 2017.
Potential problem loans are identified on the Company’s watch list and consist of loans that require close monitoring by management. Credits may be considered as a potential problem loan for reasons that are temporary or correctable, such as for a deficiency in loan documentation or absence of current financial statements of the borrower. Potential problem loans may also include credits where adverse circumstances are identified that may affect the borrower’s ability to comply with the contractual terms of the loan. Other factors which might indicate the existence of a potential problem loan include the delinquency of a scheduled loan payment, deterioration in a borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Certain loans on the Company’s watch list are also considered impaired and specific allowances related to these loans are established in accordance with the appropriate accounting guidance.
Other Real Estate
OREO includes real estate properties acquired by the Company through, or in lieu of, actual foreclosure. At June 30, 2018, OREO was $4.0 million, a decrease of $1.5 million, or 26.6%, compared to $5.5 million at year-end 2017. The decrease was primarily due to sales activity, driven by the sale of four real estate development properties that sold for $526 thousand with a related loss of $61 thousand. OREO has declined $48.5 million or 92.3% from its peak of $52.6 million, which occurred at year-end 2012. A summary of OREO activity for 2018 follows.
(In thousands)
|
|
Amount
|
|
Balance at December 31, 2017
|
|
$
|
5,489
|
|
Transfers from loans and other increases
|
|
|
126
|
|
Proceeds from sales
|
|
|
(1,013
|
)
|
Loss on sales, net
|
|
|
(76
|
)
|
Write-downs
|
|
|
(495
|
)
|
Balance at June 30, 2018
|
|
$
|
4,031
|
|
Deposits
A summary of the Company’s deposits are as follows for the periods indicated:
|
|
End of Period
|
|
|
Average
|
|
(In thousands)
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
Increase
(Decrease)
|
|
|
Six Months
June 30,
2018
|
|
|
Twelve Months
December 31,
2017
|
|
|
Increase
(Decrease)
|
|
Noninterest Bearing
|
|
$
|
357,657
|
|
|
$
|
361,855
|
|
|
$
|
(4,198
|
)
|
|
$
|
353,670
|
|
|
$
|
347,355
|
|
|
$
|
6,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
366,847
|
|
|
|
379,027
|
|
|
|
(12,180
|
)
|
|
|
379,245
|
|
|
|
356,023
|
|
|
|
23,222
|
|
Savings
|
|
|
411,096
|
|
|
|
416,163
|
|
|
|
(5,067
|
)
|
|
|
422,202
|
|
|
|
418,507
|
|
|
|
3,695
|
|
Time
|
|
|
199,187
|
|
|
|
222,858
|
|
|
|
(23,671
|
)
|
|
|
212,327
|
|
|
|
245,215
|
|
|
|
(32,888
|
)
|
Total interest bearing
|
|
|
977,130
|
|
|
|
1,018,048
|
|
|
|
(40,918
|
)
|
|
|
1,013,774
|
|
|
|
1,019,745
|
|
|
|
(5,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
1,334,787
|
|
|
$
|
1,379,903
|
|
|
$
|
(45,116
|
)
|
|
$
|
1,367,444
|
|
|
$
|
1,367,100
|
|
|
$
|
344
|
|
The decline in total end of period deposits was driven by lower time deposits and interest bearing demand deposits. The decrease in time deposits is a result of the Company’s overall high liquidity position and a strategy to minimize overall funding costs, mainly by allowing higher-rate certificates of deposit to roll off or reprice at lower interest rates. Many of those balances have been moved into noninterest bearing demand or lower-rate interest bearing demand or savings accounts or withdrawn by customers seeking higher returns. The decline in interest bearing demand deposits was driven by fluctuations in public funds, which were down $24.0 million, or 14.7% compared to year-end. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.
Borrowed Funds
Total borrowed funds were $70.4 million at June 30, 2018, down $807 thousand, or 1.1%, from year-end 2017. The decrease in borrowed funds was driven by securities sold under agreements to repurchase, which were $33.5 million at quarter-end, down $720 thousand, or 2.1%, from year-end. Securities sold under agreements to repurchase represent funds that have been swept out of the deposit accounts into repurchase agreements to facilitate the needs of certain qualifying customers, primarily commercial. Such transactions are accounted for as secured borrowings.
LIQUIDITY
The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary bank, United Bank & Capital Trust Company (“United Bank” or the “Bank”), balances of cash and cash equivalents maintained, and borrowings from nonaffiliated sources. Primary uses of cash include the payment of dividends to its shareholders, paying interest on borrowings, and payments to fund general operating expenses.
Payments of dividends to the Parent Company by the Bank are subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. Capital ratios at the Bank exceed regulatory established “well-capitalized” status at June 30, 2018 under the prompt corrective action regulatory framework. The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
The Parent Company had cash and cash equivalents of $63.9 million and $61.6 million at June 30, 2018 and year-end 2017, respectively. Significant cash receipts for 2018 include dividend payments from United Bank of $5 million. Significant cash payments include $1.9 million and $420 thousand for the payment of dividends on common stock and interest on subordinated notes payable, respectively.
The Company's objective as it relates to liquidity is to ensure that the Bank has funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the Bank has several sources of funds available on a daily basis. For assets, those sources of funds include liquid assets that are readily marketable or that can be pledged, or which mature in the near future. These assets primarily include cash and due from banks, federal funds sold, investment securities, and cash flow generated by the repayment of principal and interest on loans and investment securities. For liabilities, sources of funds primarily include the Bank’s core deposits, FHLB and other borrowings, and federal funds purchased and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.
As of June 30, 2018, the Company had $425 million of additional borrowing capacity under various FHLB, federal funds, and other borrowing agreements. However, there is no guarantee that these sources of funds will continue to be available to the Company, or that current borrowings can be refinanced upon maturity, although the Company is not aware of any events or uncertainties that are likely to cause a decrease in the Company’s liquidity from these sources. The Company’s borrowing capacity was $406 million at year-end 2017.
For the longer term, the liquidity position is managed by balancing the maturity structure of the balance sheet. This process allows for an orderly flow of funds over an extended period of time. The Company’s Asset and Liability Management Committee meets regularly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity.
Liquid assets consist of cash and cash equivalents, available for sale debt securities, and equity investment securities. At June 30, 2018, consolidated liquid assets were $475 million, down $69.9 million, or 12.8%, compared to $545 million at year-end 2017. The Company’s liquidity position remains elevated mainly as a result of the Company’s overall net funding position. The overall funding position of the Company changes as loan demand, deposit levels, and other sources and uses of funds fluctuate.
Net cash provided by operating activities was $14.5 million and $13.4 million for the first six months of 2018 and 2017, respectively. This represents an increase of $1.1 million, or 8.3%. Net cash provided by investing activities was $6.0 million for the first six months of 2018 compared to a net use of cash of $1.5 million for the first six months of the prior year. The change was primarily driven by investment securities activity, partially offset by loan activity. The Company had net cash proceeds of $35.0 million related to investment securities for 2018, up $16.1 million compared with the year-ago period with most of the proceeds generally used to fund loan growth during the period. Net cash inflows represent proceeds from the sale, maturity, and call of investment securities in excess of purchases. For loans, the Company had cash outflows representing overall net principal advances of $28.4 million for 2018, up $11.3 million from a year earlier.
Net cash used in financing activities was $47.7 million and $27.4 million for the first six months of 2018 and 2017, respectively. This represents an increase of $20.3 million, or 74.3%, driven primarily by deposit activity. For 2018, cash outflows from deposits were $45.1 million, up $28.0 million compared to $17.1 million for the first six months of 2017. Short-term securities sold under agreements to repurchase declined $468 thousand during the first six months of 2018, down $3.1 million compared to a decrease of $3.5 million in the year-ago period. For 2018, the Company had net repayments of FHLB advances of $87 thousand compared to net repayments of $5.1 million in 2017.
Commitments to extend credit are entered into with customers in the ordinary course of providing traditional banking services and are considered in addressing the Company’s liquidity management. The Company does not expect these commitments to significantly affect the liquidity position in future periods. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, or similar instruments.
CAPITAL RESOURCES
Shareholders’ equity was $198 million at June 30, 2018, an increase of $4.5 million, or 2.3%, compared to $193 million at year-end 2017. The increase in shareholders’ equity was driven by net income of $11.5 million, partially offset by higher accumulated other comprehensive loss of $5.3 million, and dividends declared on common stock of $1.9 million. The increase in accumulated other comprehensive loss is primarily due to a $5.2 million after-tax decline in the market value of the available for sale investment securities portfolio, which correlates with an overall increase in market interest rates during the quarter. As market interest rates rise, the value of fixed rate investments generally declines.
At June 30, 2018, the Company’s tangible common equity ratio was 12.13%, an increase of 58 basis points compared to 11.55% at year-end 2017. The tangible common equity ratio represents tangible common equity as a percentage of tangible assets, which excludes intangible assets.
In July 2013, U.S. banking regulators adopted final rules related to standards on bank capital adequacy and liquidity (commonly referred to as “Basel III”). The rules were effective for the Company beginning on January 1, 2015, subject to a phase-in period for certain provisions extending through January 1, 2019. The rules include a new common equity Tier 1 capital ratio, an increase to the minimum Tier 1 capital ratio, an increase to risk-weightings of certain assets, implementation of a new capital conservation buffer in excess of the required minimum (which began being phased in during 2016), and changes to how regulatory capital is defined. At June 30, 2018, the Company and the Bank met the minimum capital ratios and a fully phased-in capital conservation buffer under the rules.
Consistent with the objective of operating a sound financial organization, the Company’s goal is to maintain capital ratios well above the regulatory minimum requirements. The capital ratios of the Company and its subsidiary bank are presented in the following table for the dates indicated.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Common
Equity Tier
1 Risk-
based
Capital
1
|
|
|
Tier 1
Risk-
based
Capital
1
|
|
|
Total
Risk
-based
Capital
1
|
|
|
Tier 1
Leverage
2
|
|
|
Common
Equity Tier
1 Risk-
based
Capital
1
|
|
|
Tier 1
Risk-
based
Capital
1
|
|
|
Total
Risk-
based
Capital
1
|
|
|
Tier 1
Leverage
2
|
|
Consolidated
|
|
|
17.13
|
%
|
|
|
19.82
|
%
|
|
|
20.65
|
%
|
|
|
14.41
|
%
|
|
|
16.56
|
%
|
|
|
19.30
|
%
|
|
|
20.12
|
%
|
|
|
13.75
|
%
|
United Bank
|
|
|
14.48
|
|
|
|
14.48
|
|
|
|
15.32
|
|
|
|
10.65
|
|
|
|
14.05
|
|
|
|
14.05
|
|
|
|
14.88
|
|
|
|
10.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory minimum
|
|
|
4.50
|
|
|
|
6.00
|
|
|
|
8.00
|
|
|
|
4.00
|
|
|
|
4.50
|
|
|
|
6.00
|
|
|
|
8.00
|
|
|
|
4.00
|
|
Well-capitalized status
|
|
|
6.50
|
|
|
|
8.00
|
|
|
|
10.00
|
|
|
|
5.00
|
|
|
|
6.50
|
|
|
|
8.00
|
|
|
|
10.00
|
|
|
|
5.00
|
|
1
Common Equity Tier 1 Risked-based, Tier 1 Risk-based, and Total Risk-based Capital ratios are computed by dividing a bank’s Common Equity Tier 1, Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation.
2
Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.