COLONY BANKCORP INC - Quarter Report: 2019 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2019

 

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

 

Commission File Number: 000-12436

 

 

COLONY BANKCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

GEORGIA  (State or Other Jurisdiction of Incorporation or Organization)

58-1492391 (I.R.S. Employer Identification No.)

                                                                   

115 South Grant Street, Fitzgerald, Georgia 31750

(Address of principal executive offices)

 

(229) 426-6000

(Registrant’s Telephone Number, Including Area Code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	CBAN	NASDAQ Global Market

 

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

 

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

 

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

 

Large Accelerate Filer ☐     Accelerated Filer ☒     Non-accelerated Filer ☐

Smaller Reporting Company ☒     Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with the new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of July 30, 2019, there were 9,498,937 shares of common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

		Page
PART I – Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets – June 30, 2019 (unaudited) and December 31, 2018 (audited)	3
	Consolidated Statements of Income – For the Three Months and Six Months Ended June 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income – For the Three Months and Six Months Ended June 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity – For the Six Months Ended June 30, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows – For the Six Months Ended June 30, 2019 and 2018 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70
Item 4.	Controls and Procedures	70
PART II – Other Information
Item 1.	Legal Proceedings	71
Item 1A.	Risk Factors	71
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	71
Signatures		74

 

 

Part I Financial Information
Item 1 Financial Statements

 

		June 30, 2019				December 31, 2018
		(Unaudited)				(Audited)
ASSETS
Cash and Due from Banks		$	13,911			$	10,377
Interest-Bearing Deposits in Banks			58,617				49,779
Federal Funds Sold			2,884				-
Cash and Cash Equivalents			75,412				60,156
Investment Securities Available for Sale, at Fair Value			409,839				353,066
Other Investments, at Cost			3,261				2,978
Loans Held for Sale			3,813				-
Loans			935,271				782,027
Unearned Interest and Fees			(565	)			(501	)
Allowance for Loan Losses			(6,789	)			(7,277	)
Loans, Net			927,917				774,249
Premises and Equipment			32,909				28,831
Other Real Estate (Net of Allowance of $950 and $877 as of June 30, 2019 and December 31, 2018, Respectively)			987				1,841
Goodwill			16,134				202
Other Intangible Assets			3,481				556
Bank-Owned Life Insurance			21,357				17,598
Other Assets			11,862				12,401
Total Assets		$	1,506,972			$	1,251,878
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-Bearing		$	232,311			$	192,847
Interest-Bearing			1,065,412				892,278
Total Deposits			1,297,723				1,085,125
Subordinated Debentures			24,229				24,229
Other Borrowed Money			55,063				44,000
Other Liabilities			3,448				2,832
Total Liabilities			1,380,463				1,156,186
Stockholders' Equity
Common Stock, Par Value $1 per Share; Authorized 20,000,000 Shares, 9,498,937 and 8,444,908 Shares Issued as of June 30, 2019 and December 31, 2018, Respectively			9,499				8,445
Paid-In Capital			43,650				25,978
Retained Earnings			73,129				69,459
Accumulated Other Comprehensive Income (Loss), Net of Tax			231				(8,190	)
Total Stockholders' Equity			126,509				95,692
Total Liabilities and Stockholders' Equity		$	1,506,972			$	1,251,878

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		Three Months Ended								Six Months Ended
		June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018
Interest Income
Loans, Including Fees		$	12,294			$	10,065			$	22,764			$	19,793
Loans Held for Sale			19				-				19				-
Deposits with Other Banks			281				69				563				144
Investment Securities
U.S. Government Agencies			2,352				1,877				4,508				3,788
State, County and Municipal			33				25				58				52
Corporate Bonds			31				29				58				57
Federal Funds Sold			41				-				41				-
Dividends on Other Investments			47				44				100				85
Total Interest Income			15,098				12,109				28,111				23,919
Interest Expense
Deposits			2,632				1,401				4,754				2,601
Federal Funds Purchased			-				1				-				1
Borrowed Money			641				542				1,175				1,023
Total Interest Expense			3,273				1,944				5,929				3,625
Net Interest Income			11,825				10,165				22,182				20,294
Provision for Loan Losses			179				44				310				70
Net Interest Income After Provision for Loan Losses			11,646				10,121				21,872				20,224
Noninterest Income
Service Charges on Deposits			1,070				1,031				2,034				2,132
Other Service Charges, Commissions and Fees			1,110				822				2,010				1,611
Mortgage Fee Income			544				182				687				331
Securities Gains			65				116				65				116
Other			1,211				173				1,538				568
Total Noninterest Income			4,000				2,324				6,334				4,758
Noninterest Expenses
Salaries and Employee Benefits			6,292				5,002				11,663				9,922
Occupancy and Equipment			1,144				979				2,169				2,025
Acquisition Related Expenses			1,928				-				1,961				-
Deposit Intangible Expenses			148				9				176				18
Other			3,502				2,611				6,071				5,172
Total Noninterest Expense			13,014				8,601				22,040				17,137
Income Before Income Taxes			2,632				3,844				6,166				7,845
Income Taxes			531				775				1,230				1,588
Net Income		$	2,101			$	3,069			$	4,936			$	6,257
Net Income Per Share of Common Stock
Basic		$	0.23			$	0.36			$	0.56			$	0.74
Diluted		$	0.23			$	0.36			$	0.56			$	0.72
Cash Dividends Paid Per Share of Common Stock		$	0.075			$	0.05			$	0.15			$	0.10
Weighted Average Basic Shares Outstanding			9,089,461				8,439,258				8,764,909				8,439,258
Weighted Average Diluted Shares Outstanding			9,089,461				8,612,352				8,764,909				8,634,865

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		Three Months Ended								Six Months Ended
		June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018
Net Income		$	2,101			$	3,069			$	4,936			$	6,257
Other Comprehensive Income:
Gains (Losses) on Securities Arising During the Period			6,720				(1,392	)			10,724				(5,346	)
Tax Effect			(1,411	)			293				(2,252	)			1,123
Realized Gains on Sale of AFS Securities			(65	)			(116	)			(65	)			(116	)
Tax Effect			14				24				14				24
Change in Unrealized Gains (Losses) on Securities
Available for Sale, Net of Reclassification
Adjustment and Tax Effects			5,258				(1,191	)			8,421				(4,315	)
Comprehensive Income		$	7,359			$	1,878			$	13,357			$	1,942

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		Common Shares Issued				Common Stock				Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
Balance, December 31, 2017			8,439			$	8,439			$	29,145			$	59,230			$	(6,491	)		$	90,323
Change in Net Unrealized (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																			(4,315	)			(4,315	)
Dividends on Common Shares															(844	)							(844	)
Repurchase of Warrants											(3,175	)											(3,175	)
Net Income															6,257								6,257
Balance, June 30, 2018			8,439			$	8,439			$	25,970			$	64,643			$	(10,806	)		$	88,246
Balance, December 31, 2018			8,445			$	8,445			$	25,978			$	69,459			$	(8,190	)		$	95,692
Change in Net Unrealized Gains on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																			8,421				8,421
Dividends on Common Shares															(1,266	)							(1,266	)
Stock-based Compensation Expense											17												17
Issuance of Common Stock			1,054				1,054				17,655												18,709
Net Income															4,936								4,936
Balance, June 30, 2019			9,499			$	9,499			$	43,650			$	73,129			$	231			$	126,509

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		Six Months Ended
		June 30, 2019				June 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	4,936			$	6,257
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation			903				867
Share-based Compensation Expense			17				-
Provision for Loan Losses			310				70
Securities (Gains)			(65	)			(116	)
Amortization and Accretion			483				591
(Gain) on Sale of Other Real Estate and Repossessions			(937	)			(120	)
Provision for Losses on Other Real Estate			104				157
(Increase) in Cash Surrender Value of Life Insurance			(316	)			(261	)
(Gain) on Sale of Premises & Equipment			(2	)			-
Provision for Losses on Premises & Equipment			151				3
Originations of Loans Held for Sale			(13,404	)			-
Proceeds from Sales of Loans Held for Sale			9,591				-
Other Prepaids, Deferrals and Accruals, Net			1,647				465
Net Cash Provided by Operating Activities			3,418				7,913
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Investment Securities Available for Sale			(82,057	)			(19,257	)
Proceeds from Maturities, Calls, and Paydowns of
Investment Securities:
Available for Sale			27,373				24,379
Proceeds from Sale of Investment Securities
Available for Sale			56,821				11,268
Held to Maturity			1,766				-
Net Loans to Customers			(23,474	)			(2,560	)
Purchase of Premises and Equipment			(2,576	)			(1,869	)
Proceeds from Sale of Other Real Estate and Repossessions			2,143				1,236
Proceeds from Cash Surrender Value of Life Insurance			535				-
Redemption (Purchase of) Federal Home Loan Bank Stock			195				(339	)
Proceeds from Sale of Premises and Equipment			37				-
Net Cash and Cash Equivalents Paid in Acquisition			(467	)			-
Net Cash (Used in) Provided by Investing Activities			(19,704	)			12,858
CASH FLOWS FROM FINANCING ACTIVITIES
Noninterest-Bearing Customer Deposits			8,017				(13,592	)
Interest-Bearing Customer Deposits			14,728				(18,507	)
Dividends Paid for Common Stock			(1,266	)			(844	)
Repurchase of Warrants			-				(3,175	)
Payments on Federal Home Loan Bank Advances			(5,000	)			(2,500	)
Proceeds from Federal Home Loan Bank Advances			-				10,000
Payments on Other Borrowed Money			(250	)			(1,500	)
Proceeds from Other Borrowed Money			15,313				7
Net Cash (Used in) Provided by Financing Activities			31,542				(30,111	)
Net Increase (Decrease) in Cash and Cash Equivalents			15,256				(9,340	)
Cash and Cash Equivalents at Beginning of Period			60,156				57,813
Cash and Cash Equivalents at End of Period		$	75,412			$	48,473

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(1) Summary of Significant Accounting Policies

 

Presentation

 

Colony Bankcorp, Inc. (the “Company”) is a bank holding company located in Fitzgerald, Georgia. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Colony Bank, Fitzgerald, Georgia (the “Bank”). All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and practices utilized in the commercial banking industry.

 

In July 2019, a new subsidiary of the Company was incorporated under the name Colony Risk Management, Inc. Colony Risk Management, Inc. is a subsidiary of the Company and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which insures various liability and property damage policies for the Company and its related subsidiaries. Colony Risk Management is regulated by the State of Nevada Division of Insurance.

 

All dollars in notes to consolidated financial statements are rounded to the nearest thousand, except for per share amounts.

 

The consolidated financial statements in this report are unaudited, except for the December 31, 2018 consolidated balance sheet. All adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements, have been included and fairly and accurately present the financial position, results of operations and cash flows of the Company. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results which may be expected for the entire year.

 

Nature of Operations

 

The Bank provides a full range of retail, commercial and mortgage banking services for consumers and small- to medium-size businesses located primarily in central, south and coastal Georgia. The Bank is headquartered in Fitzgerald, Georgia with banking and mortgage offices in Albany, Ashburn, Athens, Broxton, Centerville, Columbus, Cordele, Douglas, Eastman, Fitzgerald, LaGrange, Leesburg, Macon, Moultrie, Quitman, Rochelle, Savannah, Soperton, Sylvester, Statesboro, Thomaston, Tifton, Valdosta and Warner Robins. Lending and investing activities are funded primarily by deposits gathered through its retail banking office network.

 

Use of Estimates

 

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and fair value of assets acquired and liabilities assumed in a business combination.

 

Reclassifications

 

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to statement presentations selected for 2019. Such reclassifications have not affected previously reported stockholders’ equity or net income.

 

Concentrations of Credit Risk

 

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions. The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk. At June 30, 2019, approximately 86 percent of the Company’s loan portfolio was concentrated in loans secured by real estate. A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector. Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(1) Summary of Significant Accounting Policies (Continued)

 

Concentrations of Credit Risk (Continued)

 

The success of the Company is dependent, to a certain extent, upon the economic conditions in the geographic markets it serves. Adverse changes in the economic conditions in these geographic markets would likely have a material adverse effect on the Company’s results of operations and financial condition. The operating results of the Company depend primarily on its net interest income. Accordingly, operations are subject to risks and uncertainties surrounding the exposure to changes in the interest rate environment.

 

At times, the Company may have cash and cash equivalents at financial institutions in excess of federal deposit insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions whose credit ratings are monitored by management to minimize credit risk.

 

Investment Securities

 

The Company classifies its investment securities as trading, available for sale or held to maturity. Securities that are held principally for resale in the near term are classified as trading. Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income. Currently, no securities are classified as trading. Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost. All securities not classified as trading or held to maturity are considered available for sale. Securities available for sale are reported at estimated fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity. Gains and losses from sales of securities available for sale are computed using the specific identification method. Securities available for sale includes securities which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions.

 

The Company evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (“OTTI”). In estimating other-than-temporary impairment losses, management considers such factors as the length of time and the extent to which the market value has been below cost, the financial condition of the issuer and the Company’s intent to sell and whether it is more likely than not that the Company will be required to sell the security before anticipated recovery of the amortized cost basis. If the Company intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery, the OTTI write-down is recognized in earnings. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings and an amount related to all other factors, which is recognized in other comprehensive income (loss).

 

Loans Held for Sale

 

Loans held for sale are classified at the lower of cost or market value, which is computed by the aggregate method. Gains and losses on loans held for sale are included in the determination of income for the period in which the sales occur.

 

Loans

 

Loans that the Company has the ability and intent to hold for the foreseeable future or until maturity are recorded at their principal amount outstanding, net of unearned interest and fees. Loan origination fees, net of certain direct origination costs, are deferred and amortized over the estimated terms of the loans using the straight-line method. Interest income on loans is recognized using the effective interest method.

 

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date.

 

When management believes there is sufficient doubt as to the collectability of principal or interest on any loan or generally when loans are 90 days or more past due, the accrual of applicable interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection. Interest payments received on nonaccrual loans are either applied against principal or reported as income, according to management’s judgment as to the collectability of principal. Loans are returned to an accrual status when factors indicating doubtful collectability on a timely basis no longer exist.

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(1) Summary of Significant Accounting Policies (Continued)

 

Loans Modified in a Troubled Debt Restructuring (“TDR”)

 

Loans are considered to have been modified in a TDR when, due to a borrower’s financial difficulty, the Company makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of 6 months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Once a loan is modified in a troubled debt restructuring it is accounted for as an impaired loan, regardless of its accrual status, until the loan is paid in full, sold or charged off. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis.

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the inability to collect a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

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

 

The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio. General valuation allowances are based on internal and external qualitative risk factors such as (1) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices, (2) changes in international, national, regional, and local conditions, (3) changes in the nature and volume of the portfolio and terms of loans, (4) changes in the experience, depth, and ability of lending management, (5) changes in the volume and severity of past due loans and other similar conditions, (6) changes in the quality of the organization's loan review system, (7) changes in the value of underlying collateral for collateral dependent loans, (8) the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and (9) the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.

 

Loans identified as losses by management, internal loan review and/or regulatory agencies are charged off.

 

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

 

 

Part I (Continued)
Item 1 (Continued)   

 

(1) Summary of Significant Accounting Policies (Continued)

 

Allowance for Loan Losses (Continued)

 

A significant portion of the Company’s impaired loans are deemed to be collateral dependent. Management therefore measures impairment on these loans based on the fair value of the collateral. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company or by senior members of the Company’s credit administration staff. The decision whether or not to obtain an external third-party appraisal usually depends on the type of property being evaluated. External appraisals are usually obtained on more complex, income producing properties such as hotels, shopping centers and businesses. Less complex properties such as residential lots, farm land and single family houses may be evaluated internally by senior credit administration staff. When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or current market values. The appraisals, whether prepared internally or externally, may utilize a single valuation approach or a combination of approaches including the comparable sales, income and cost approach. Appraised amounts used in the impairment calculation are typically discounted 10 percent to account for selling and marketing costs, if the repayment of the loan is to come from the sale of the collateral. Although appraisals are not obtained each year on all impaired loans, the collateral values used in the impairment calculations are evaluated quarterly by management. Based on management’s knowledge of the collateral and the current real estate market conditions, appraised values may be further discounted to reflect facts and circumstances known to management since the most recent appraisal was performed.

 

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.

 

Premises and Equipment

 

Premises and equipment are recorded at acquisition cost net of accumulated depreciation.

 

Depreciation is charged to operations over the estimated useful lives of the assets. The estimated useful lives and methods of depreciation are as follows:

 

                                                                                                      

Expenditures for major renewals and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. When property and equipment are retired or sold, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in other income or expense.

 

Goodwill

 

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Goodwill is assigned to reporting units and tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.

 

Intangible Assets

 

Intangible assets consist of core deposit intangibles acquired in connection with a business combination. The core deposit intangible is initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized on an accelerated basis over the average remaining life of the acquired customer deposits.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(1) Summary of Significant Accounting Policies (Continued)

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Statement of Cash Flows

 

For reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing amounts due from banks and federal funds sold. Cash flows from demand deposits, interest-bearing checking accounts, savings accounts, loans and certificates of deposit are reported net.

 

Advertising Costs

 

The Company expenses the cost of advertising in the periods in which those costs are incurred.

 

Income Taxes

 

The provision for income taxes is based upon income for financial statement purposes, adjusted for nontaxable income and nondeductible expenses. Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes.

 

Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax bases. The differences relate primarily to depreciable assets (use of different depreciation methods for financial statement and income tax purposes) and allowance for loan losses (use of the allowance method for financial statement purposes and the direct write-off method for tax purposes). In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company and its subsidiary file a consolidated federal income tax return. The subsidiary pays its proportional share of federal income taxes to the Company based on its taxable income.

 

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income.

 

Other Real Estate

 

Other real estate generally represents real estate acquired through foreclosure and is initially recorded at estimated fair value at the date of acquisition less the cost of disposal. Losses from the acquisition of property in full or partial satisfaction of debt are recorded as loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost of disposal. Routine holding costs and gains or losses upon disposition are included in other noninterest expense.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(1) Summary of Significant Accounting Policies (Continued)

 

Bank-Owned Life Insurance

 

The Company has purchased life insurance on the lives of certain key members of management and directors. The life insurance policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if applicable. Increases in the cash surrender value are recorded as other income in the consolidated statements of income. The cash surrender value of the insurance contracts is recorded in other assets on the consolidated balance sheets in the amount of $21,357 and $17,598 as of June 30, 2019 and December 31, 2018, respectively.

 

Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, represent equity changes from economic events of the period other than transactions with owners and are not reported in the consolidated statements of income but as a separate component of the equity section of the consolidated balance sheets. Such items are considered components of other comprehensive income (loss). Accounting standards codification requires the presentation in the consolidated financial statements of net income and all items of other comprehensive income (loss) as total comprehensive income (loss).

 

Off-Balance Sheet Credit Related Financial Instruments

 

In the ordinary course of business, the Company has entered into commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

 

Changes in Accounting Principles and Effects of New Accounting Pronouncements

 

ASU 2016-02, Leases (Topic 842). This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. ASU 2016-02 was effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements as of June 30, 2019.

 

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supported forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements. On July 17, 2019, FASB voted to delay the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022. 

 

ASU 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard must be adopted using a prospective basis and the nature and reason for the change in accounting principle should be disclosed upon transition. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. The Company is currently evaluating the impact this ASU will have on the Company’s Consolidated Financial Statements, but it is not expected to have a material impact.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(1) Summary of Significant Accounting Policies (Continued)

 

Changes in Accounting Principles and Effects of New Accounting Pronouncements (Continued)

 

ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2017-08 was effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). This ASU modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods after December 15, 2019; early adoption is permitted. The Company is currently evaluating the provisions of ASU 2018-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

 

ASU 2019-1, Leases (Topic 842): Codification Improvements. ASU 2019-1 amends certain aspects of ASU 2016-02, Leases. This ASU addresses the following issues: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) statement of cash flow presentation for sales – type and direct financing leases by lessors within the scope of ASC 942, Financial Services – Depository and Lending; and (3) clarification of interim disclosure requirements during transition. ASU 2019-1 is effective for the first and second issues for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. If an entity early adopts, the ASU will be applied as of the date the entity first applies ASU 2016-02. For the third issue, there is no transition and effective date because the amendments are to the original transition requirements in ASU 2016-02. The Company is currently evaluating the impact this ASU will have on the Company’s Consolidated Financial Statements, but it is not expected to have a material impact.

 

ASU 2019-04, Codification Improvements to Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Financial Instruments (Topic 825). ASU 2019-4 clarifies certain aspects of ASU 2016-13, Financial Instruments – Credit Losses; ASU 2017-12, Hedging Activities; and ASU 2016-1, Financial Instruments. For amendments dealing with ASU 2016-13, which is currently the only standard of the three listed in this update that would apply for the Company, it addresses accrued interest with a financing receivable or investment; transfers between classifications or categories for loans and debt securities; the inclusion of recoveries on financial assets in the calculation of the current expected credit losses allowance for both pools of financial assets and individual financial assets. These amendments dealing with ASU 2016-13 are effective on the same date as the effective date in ASU 2016-13. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

 

(2) Business Acquisitions

 

Acquisition of Albany, Georgia Branch from Planters First Bank

 

On October 22, 2018, the Bank completed its acquisition of one branch office and a vacant lot from Planters First Bank (“PFB”) located in Albany, Georgia for a total cash consideration of $10.2 million. The assets and liabilities as of the effective date of the transaction were recorded at their respective estimated fair values. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill. In the periods following the acquisition, the financial statements will include the results attributable to the Albany branch purchase beginning on the date of purchase. For the three and six months period ended June 30, 2019, the revenues attributable to the Albany branch were $58 thousand and $129 thousand, respectively. For the three and six months period ended June 30, 2019, net loss attributable to the Albany branch were $85 thousand and $159 thousand. It is impracticable to determine the pro-forma impact to the 2018 revenues and net income if the acquisition had occurred on January 1, 2018 as the Bank does not have access to those records for a single branch.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(2) Business Acquisitions (Continued)

 

The following table provides the purchase price as of acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $202 thousand recorded from the acquisition:

 

 

The total amount of goodwill arising from this transaction of $202 thousand is deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

 

The Bank recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Bank only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

 

Acquisition of LBC Bancshares, Inc.

 

On May 1, 2019, the Company completed its acquisition of LBC Bancshares, Inc. (“LBC”), a bank holding company headquartered in LaGrange, Georgia. Upon consummation of the acquisition, LBC was merged with and into the Company, with Colony as the surviving entity in the merger. At that time, LBC’s wholly owned bank subsidiary, Calumet Bank, was also merged with and into the Bank. The acquisition expanded the Company’s market presence, as Calumet Bank had two full-service banking locations, one each in LaGrange, Georgia and Columbus, Georgia, as well as a loan production office in Atlanta, Georgia. Under the terms of the Merger Agreement, each LBC shareholder had the option to receive either $23.50 in cash or 1.3239 shares of the Company’s Common Stock in exchange for each share of LBC common stock, subject to customary proration and location procedures, such that 55 percent of LBC shares received the stock consideration and 45 percent received the cash consideration, and at least 50 percent of the merger consideration paid in the Company stock. As a result, the Company issued 1,054,029 common shares at a fair value of $18.7 million and paid $15.3 million in cash to the former shareholders of LBC as merger consideration.

 

The merger is being accounted for using the acquisition method accounting, in accordance with the provisions of FASB ASC 805-10 Business Combinations. Under this guidance, for accounting purposes, the Company is considered the acquirer in the merger, and as a result the historical financial statements of the combined entity are the historical consolidated financial statements of the Company.

 

The merger was effected by the issuance of shares of the Company’s common stock along with cash consideration to shareholders to LBC. The assets and liabilities of LBC as of the effective date of the merger were recorded at their respective estimated fair values and combined with those of the Company. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill. Goodwill from the transaction was $15,390, none of which is deductible for income tax purposes. The goodwill recognized from the acquisition with LBC was created based on the consideration paid by the Company for enhancing its presence in Georgia in addition to our expected synergies from the combined operations of the Company and LBC.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(2) Business Acquisitions (Continued)

 

In periods following the merger, the financial statements of the combined entity will include the results attributable to LBC beginning on the date the merger was completed. In the three and six month period ended June 30, 2019, the revenues attributable to LBC were approximately $1.77 million and $1.77 million. In the three and six month period ended June 30, 2019, the net income attributable to LBC was approximately $501 thousand and $501 thousand, respectively.

 

The pro-forma impact to 2018 revenues if the merger had occurred on January 1, 2018 would have been $2.35 million and $4.61 million for the three and six month period ending June 30, 2018, respectively. The pro-forma impact to 2018 net income if the merger had occurred on December 31, 2017 would have been $610 thousand and $1.15 million for the three and six month period ending June 30, 2018, respectively. While certain adjustments were made for the estimated impact of certain fair value adjustments, they are not indicative of what would have occurred had the merger taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of LBC’s provision for credit losses not have been necessary or any adjustments to estimate any additional income that would have been recorded as a result of fair value adjustments for the first six months of 2018 that may have occurred had the acquired loans been recorded at fair value as of the beginning of 2018. In addition, there are no adjustments to reflect any expenses that potentially could have been reduced for the first six months of 2018 had the merger occurred on January 1, 2018.

 

As of June 30, 2019, the Company recorded a preliminary allocation of the purchase price to LBC’s tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values as of May 1, 2019. The following table presents the assets acquired and liabilities assumed as of May 1, 2019, and their fair value estimates. The Company continues its evaluation of the facts and circumstances available as of May 1, 2019, to assign fair values to assets acquired and liabilities assumed which could result in further adjustments to the fair values presented below.

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(2) Business Acquisitions (Continued)

 

In the acquisition, the Company purchased $130.57 million of loans at fair value, net of $2.17 million, or 1.63%, estimated discount to the outstanding principal balance. Of the total loans acquired, management identified $176 thousand that were considered to be credit impaired and are accounted for under ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of the acquisition date for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

 

The following table presents the acquired loan data for the LBC acquisition.

 

 

 

Acquisition of PFB Mortgage from Planters First Bank

 

On May 1, 2019, the Bank completed its acquisition of PFB Mortgage, the secondary market mortgage business of Planters First Bank for a total cash consideration of $833 thousand. It included fixed assets and all pipeline loans, and customers will not be affected as loans will close and be processed as normal. Planters First Bank retained closed loans not yet sold (loans held for sale). The assets and liabilities as of the effective date of the transaction were recorded at their respective estimated fair values. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill. In the periods following the acquisition, the financial statements will include the results attributable to PFB Mortgage beginning on the date of purchase. For the three and six months period ended June 30, 2019, the revenues attributable to PFB Mortgage were $228 thousand and $228 thousand, respectively. For the three and six months period ended June 30, 2019, net loss attributable to PFB Mortgage were $211 thousand and $211 thousand. It is impracticable to determine the pro-forma impact to the 2018 revenues and net income if the acquisition had occurred on January 1, 2018 as the Bank does not have access to those records for PFB Mortgage.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(2) Business Acquisitions (Continued)

 

The following table provides the purchase price as of acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $541 thousand recorded from the acquisition:

 

 

The total amount of goodwill arising from this transaction of $541 thousand is deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

 

(3) Investment Securities

 

Investment securities as of June 30, 2019 and December 31, 2018 are summarized as follows:

 

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(3) Investment Securities (Continued)

 

The amortized cost and fair value of investment securities as of June 30, 2019, by contractual maturity, are shown hereafter. Expected maturities may differ from contractual maturities for certain investments because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

 

 

Proceeds from the sale of investments available for sale totaled $56,920 and $11,268 for the first six months of 2019 and 2018, respectively. The sale of investments available for sale during the first six months of 2019 resulted in gross realized gains $117 and losses of $52. The sale of investments available for sale during the first six months of 2018 resulted in gross realized gains of $116 and losses of $0.

 

Proceeds from the sale of investments held to maturity totaled $1,766 for the first six months of 2019. The sale of investments held to maturity during the first six months of 2019 resulted in gross realized gains of $0 and losses of $0. The Bank did not sell any investments held to maturity during the first six months of 2018. Therefore, the Bank did not have any proceeds, gains or losses during the first six months of 2018.

 

Investment securities having a carrying value approximating $169,821 and $178,978 as of June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(3) Investment Securities (Continued)

 

Information pertaining to securities with gross unrealized losses at June 30, 2019 and December 31, 2018 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

At June 30, 2019, 103 securities have unrealized losses which have depreciated 1.60 percent from the Company’s amortized cost basis. These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans

 

The following table presents the composition of loans segregated by legacy and purchased loans and by class of loans, as of June 30, 2019 and December 31, 2018. Purchased loans are defined as loans that were acquired in bank acquisitions.

 

 

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

Commercial and industrial loans are extended to a diverse group of businesses within the Company’s market area. These loans are often underwritten based on the borrower’s ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the Bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

 

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company’s geographic markets.

 

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

 

●

Grades 1 and 2 – Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the “pass” classification.

 

●

Grades 3 and 4 – Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

 

●

Grade 5 – This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

 

●

Grade 6 – This grade includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

 

●

Grades 7 and 8 – These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

The following table presents the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of June 30, 2019 and December 31, 2018. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes. For the period ending June 30, 2019, the Company did not have any loans classified as “doubtful” or a “loss”.

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of June 30, 2019 and December 31, 2018. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes. For the period ending June 30, 2019, the Company did not have any loans classified as “doubtful” or a “loss”.

 

 

 

A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

 

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

 

The following table represents an age analysis of past due loans and nonaccrual loans for legacy loans, segregated by class of loans, excluding purchased loans as of June 30, 2019 and December 31, 2018:

 

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, for purchased loans as of June 30, 2019 and December 31, 2018:

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

The following table details impaired loan data, including purchased credit impaired loans, as of June 30, 2019.

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

The following table details impaired loan data as of December 31, 2018. There were no purchased credit impaired loans and related allowance for loan losses as of December 31, 2018.

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

The following table details impaired loan data as of June 30, 2018. There were no purchased credit impaired loans and related allowance for loan losses as of June 30, 2018.

 

 

 

Part I (Continued)
Item 1 (Continued)  

 

(4) Loans (Continued)

 

TDRs are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

 

●

Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

 

●

Amortization or maturity date changes – Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

 

●

Principal reductions – These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged-off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged-off during modification there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

 

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of June 30, 2019. The Company had no loan contracts restructured during the three month period ended and the six month period ended June 30, 2019 and 2018. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis.

 

The Company had no loans that subsequently defaulted during the three months ended June 30, 2019 and 2018, respectively. The Company had no loans that subsequently defaulted during the six months ended June 30, 2019 and one loan that subsequently defaulted during the six months ended June 30, 2018. The loan totaling $131 thousand failed to continue to perform as agreed and was moved to non-accrual status.

 

 

Part I (Continued)
Item 1 (Continued)