Dear Shareholder:
2018 was a year of exceptional financial performance for Truxton Trust Company and its parent, Truxton
Corporation. We delivered 23% growth in earnings per fully diluted share, a sixth year of increased
dividends and a 15.5% return on our average equity. Our loans grew by 13.2% and our wealth
management revenue grew by 8.1%. For the fourteenth year, we experienced no significant credit
issues.
But why? With all the banks and wealth management firms out there, how does a player like Truxton
attract the patronage of very sophisticated clients who could hire any wealth management firm in the
world? How do we work with borrowers who could finance their projects anywhere?
Not surprisingly, the answer is people. Truxton’s professionals are experienced and credentialed. They
have the knowledge to deliver authoritative answers to complex financing and wealth management
inquiries. They are burdened neither by the bureaucracy that afflicts the staff at the largest banks nor
the relentless production imperatives that can cloud the judgment of many in finance. Our team has
exceptional breadth of knowledge in asset management, treasury operations, private bank lending, and
trust and estates planning and implementation. For people who need advice and guidance from superb
professionals, Truxton is a great answer.
There is another ingredient in the brew: a devout commitment to “doing the right thing”, putting our
clients’ interests first even when it is inconvenient or less profitable in the short term. People need
service; sometimes they need service on weekends and sometimes when they are in Europe on
vacation. Sometimes they need services you can barely imagine – refereeing difficult family dynamics,
checking on the house here in town when winter is spent in Florida, closing a loan for a child’s car on a
few hours’ notice. When you have a relationship that spans many years and several generations of a
family, you make the extra effort. You know the family’s situation well enough to provide confidence
that shareholders will be rewarded – even if today’s act of service models poorly under the cost
accountant’s lens.
A bit more on the financial performance. We earned $2.95 per fully diluted share compared to an
adjusted (non‐GAAP) diluted earnings per share of $2.39 in 2017, an increase of 23%. Recall that we
adjusted our 2017 earnings for certain changes caused by the adoption of lower tax rates in 2018.
Compared to reported (GAAP) earnings in 2017, earnings per fully diluted share rose 29%. About half of
our increase in net income came from the tax cuts in 2018, the rest from revenue growth and margin
expansion. Gross loans grew 13.2% compared to year end 2017, deposits by 11.5%. Non‐interest
income (over 90% comes from our wealth management area), grew by 10% despite market declines at
the end of the year. Non‐interest expense grew by only 5%. We continue to occupy only one Nashville
location. Since inception, we have been determined to let revenue lead payroll expense.
Key financial performance metrics hit new highs. Our return on average assets hit 1.76%, a superb level
in our industry. We are very conservatively capitalized at 11.6% equity to assets but still produced the
highest return on average equity in our history, 15.5%. Both return numbers were aided by lower tax
rates, but we also had the best efficiency ratio in our history (a pre‐tax calculation) at 59.3%.
We expect many challenges in 2019: a highly competitive environment in our Nashville home, uneasy
equity markets, a flat yield curve, and tremendous demand for our most precious commodity, talented
people. Truxton has grown and thrived in difficult circumstances before. With hard work, attention to
detail, and a little luck, we believe 2019 will be no exception.
Thomas S. Stumb
Chairman of the Board
and Chief Executive Officer
Andrew L. May
President
and Chief Financial Officer
TRUXTON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
TRUXTON CORPORATION
Nashville, Tennessee
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
CONTENTS
INDEPENDENT AUDITOR’S REPORT .................................................................................................... 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS .............................................................................................. 2
CONSOLIDATED STATEMENTS OF NET INCOME ........................................................................ 3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ................................................ 4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY .......................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS ....................................................................... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... 7
Crowe LLP
Independent Member Crowe Global
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Truxton Corporation
Nashville, Tennessee
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Truxton Corporation, which
comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related
consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and
cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Truxton Corporation as of December 31, 2018 and 2017, and the results
of its operations and its cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Franklin, Tennessee
February 19, 2019
Crowe LLP
1.
TRUXTON CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
ASSETS
Cash and due from financial institutions
Interest bearing deposits in other financial institutions
Federal funds sold
Cash and cash equivalents
Time deposits in other financial institutions
Securities available for sale
Gross loans
Allowance for loan losses
Net loans
Bank owned life insurance
Restricted equity securities
Premises and equipment, net
Accrued interest receivable
Deferred tax asset, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing
Interest bearing
Total deposits
Federal funds purchased
Federal Home Loan Bank advances
Other liabilities
Total liabilities
Shareholders’ equity
Preferred stock, $0.10 par value; 5,000,000 shares authorized;
no shares issued
Common stock, $0.10 par value; 40,000,000 shares authorized;
2,728,975 shares issued and outstanding in 2018 and
2,683,496 shares issued and outstanding in 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
2018
2017
$
7,139
3,660
6
10,805
$
6,425
3,750
6
10,181
18,268
109,696
11,544
109,295
331,809
(3,356)
328,453
293,117
(3,074)
290,043
9,755
2,578
429
1,804
1,022
2,323
9,535
2,556
731
1,444
363
1,990
$ 485,133
$ 437,682
$ 93,464
311,218
404,682
$ 87,049
275,906
362,955
1,282
19,249
3,525
428,738
1,071
20,198
2,681
386,905
-
-
273
28,254
29,283
(1,415)
268
26,985
23,569
(45)
56,395
50,777
Total liabilities and shareholders’ equity
$ 485,133
$ 437,682
See accompanying notes to consolidated financial statements.
2.
TRUXTON CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME
Years ended December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
Non-interest income
Wealth management services
Service charges on deposit accounts
Loss on sale of securities, net
Bank owned life insurance income
Other
Total non-interest income
Interest income
Loans, including fees
Taxable securities
Tax-exempt securities
Interest bearing deposits
Federal funds sold
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Long-term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total revenue, net
Non-interest expense
Compensation and employee benefits
Occupancy
Furniture and equipment
Data processing
Wealth management processing fees
Advertising and public relations
Professional services
FDIC insurance assessments
Other
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
2018
2017
$
$
9,843
344
(74)
220
220
10,553
9,108
341
(189)
231
101
9,592
13,828
1,673
982
656
53
156
17,348
2,596
11
374
2,981
12,531
1,140
795
313
22
139
14,940
1,451
3
332
1,786
14,367
13,154
283
75
14,084
13,079
24,637
22,670
10,339
764
157
1,135
442
111
602
124
942
14,616
10,021
1,827
9,557
718
217
1,218
475
172
617
140
801
13,915
8,755
2,577
$
8,194
$
6,178
$
$
3.02
2.95
$
$
2.32
2.28
See accompanying notes to consolidated financial statements.
3.
TRUXTON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
Net income
Other comprehensive income (loss):
Unrealized gains/losses on securities:
Unrealized holding loss arising during the period
Reclassification adjustment for losses included
in net income as loss on sale of securities
Tax effect, income tax benefit included in net income related
to reclassification adjustments $20 and $72, respectively
Unrealized gains/losses on cash flow hedging activities:
Unrealized holding loss arising during the period
Tax effect
Total other comprehensive income (loss), net of tax
2018
2017
$
8,194
$
6,178
(1,544)
(131)
74
355
(357)
93
(1,379)
189
22
-
-
80
Comprehensive income
$
6,815
$
6,258
See accompanying notes to consolidated financial statements.
4.
TRUXTON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
Shares
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Total
Shareholders’
Equity
2,649,178 $
265 $ 26,469 $ 19,519 $
(125) $ 46,128
2,661
31,657
-
-
-
-
-
3
-
-
-
-
55
(3)
464
-
-
-
-
-
-
(2,128)
6,178
-
-
-
-
-
-
80
55
-
464
(2,128)
6,178
80
2,683,496
268
26,985
23,569
(45)
50,777
-
-
28,976
16,503
-
-
-
-
-
-
3
2
-
-
-
-
-
-
519
(2)
(84)
(9)
-
-
-
9
-
-
(84)
-
522
-
752 - - 752
-
-
-
(2,387)
8,194
-
-
-
(1,379)
(2,387)
8,194
(1,379)
Balance at January 1, 2017
Exercise of stock options,
net of forfeitures
Issuance of restricted
shares of common stock, net
Stock based compensation
expense
Cash dividends declared
($0.80 per share)
Net income
Other comprehensive income
Balance at December 31, 2017
Effect of adoption of new accounting
standard (note 1 – Securities)
Effect of adoption of new accounting
standard (note 1 – Income taxes)
Exercise of stock options,
net of forfeitures
Issuance of restricted
shares of common stock, net
Stock based compensation
expense
Cash dividends declared
($0.88 per share)
Net income
Other comprehensive loss
Balance at December 31, 2018
2,728,975 $
273 $ 28,254 $ 29,283 $
(1,415) $ 56,395
See accompanying notes to consolidated financial statements.
5.
TRUXTON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization
Net amortization of securities
Deferred income tax benefit
Provision for loan losses
Loss on securities
Gain on sale of loans held for sale
Loans originated and held for sale
Proceeds from sale of loans held for sale
Stock based compensation expense
Bank owned life insurance income
Net change in:
Accrued interest receivable
Other assets
Other liabilities
Net cash from operating activities
Cash flows from investing activities
Net decrease in time deposits in other financial institutions
Available for sale securities:
Purchases
Maturities, calls and paydowns
Sales
Net increase in loans
Purchase of restricted equity securities
Additions of premises and equipment, net
Net cash from investing activities
Cash flows from financing activities
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Net increase in deposits
Net change in federal funds purchased
Proceeds from exercise of stock options
Cash dividends paid
Net cash from financing activities
2018
2017
$
8,194
$
6,178
313
861
(182)
283
74
25
2,334
(2,359)
752
(220)
(360)
(333)
488
9,870
442
710
417
75
189
-
-
-
464
(231)
(183)
(542)
1,037
8,556
(6,724)
5,084
(35,898)
11,587
21,391
(38,693)
(22)
(11)
(48,370)
-
(949)
41,727
211
522
(2,387)
39,124
(53,718)
9,054
13,588
(5,020)
(13)
(356)
(31,381)
8,000
(8,324)
24,024
1,071
55
(2,128)
22,698
Net change in cash and cash equivalents
624
(127)
Cash and cash equivalents at beginning of year
10,181
10,308
Cash and cash equivalents at end of year
$ 10,805
$ 10,181
Supplemental cash flow information:
Cash paid during year for interest
Cash paid during year for income taxes
$
2,945
1,355
$
1,786
2,605
See accompanying notes to consolidated financial statements.
6.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial statements include
Truxton Corporation and its wholly owned subsidiaries, Truxton Trust Company and Truxton Risk
Management, together referred to as “the Corporation.” Intercompany transactions and balances are
eliminated in consolidation.
Truxton Trust Company, referred to as “the Bank”, represents substantially all the operations in the
consolidated financial statements and it provides a variety of banking, investment management and trust
administration services to individuals, businesses and charitable institutions. Its primary deposit products
are demand, money market and certificates of deposit and its primary lending products are residential
and commercial real estate mortgages, commercial loans and loans to individuals.
Subsequent Events: The Corporation has evaluated subsequent events for recognition and disclosure
through February 19, 2019, which is the date the financial statements were available to be issued.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally
accepted in the United States of America, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided and actual results could differ.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with
maturities under 90 days, and federal funds sold. Net cash flows are reported for customer loan and
deposit transactions, premises and equipment, and time deposits in other financial institutions.
Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits
institutions mature within one year and are carried at cost.
in other
financial
Time Deposits in Other Financial Institutions: Time deposits in other financial institutions are carried at
cost. These accounts are maintained at several financial institutions and are all within the insurance
limits provided by the Federal Deposit Insurance Corporation “FDIC” and have maturities ranging from
2019 to 2023.
Securities: Debt securities are classified as available for sale when they might be sold before maturity.
Securities available for sale are carried at fair value with unrealized holding gains and losses reported in
accumulated other comprehensive income (loss), net of tax.
Interest income includes net amortization of purchase premium or discount. Premiums and discounts on
securities are amortized on the level-yield method. Gains and losses on sales are recorded on the trade
date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment “OTTI” on at least a quarterly
basis, and more frequently when economic or market conditions warrant such an evaluation. For
securities in an unrealized loss position, management considers the extent and duration of the unrealized
loss, and the financial condition and near-term prospects of the issuer. Management also assesses
whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding
intent or requirement to sell is met, the entire difference between amortized cost and fair value is
recognized as impairment through earnings. For debt securities that do not meet the aforementioned
criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss,
which must be recognized in the income statement, and 2) OTTI related to other factors, which is
recognized in other comprehensive income (loss). The credit loss is defined as the difference between
the present value of the cash flows expected to be collected and the amortized cost basis. For equity
securities, the entire amount of impairment is recognized through earnings.
7.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In 2018, the Corporation adopted ASU 2017-08 “Premium Amortization Period for Purchased Callable
Debt Securities.” As a result of the adoption, the Corporation recognized a cumulative effect adjustment
to retained earnings totaling $84.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized in interest income using the level-yield method without
anticipating prepayments.
Interest income is reported on the interest method and includes amortization of net deferred loan fees and
costs over the loan term. Interest income on all loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of collection. Past due status is based on the
contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90
days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for
impairment and individually classified impaired loans.
All interest accrued, but not received, for loans placed on nonaccrual are reversed against interest
income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method until
qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Concentration of Credit Risk: Most of the Corporation’s business activity is with customers located within
Nashville, Tennessee. Therefore, the Corporation’s exposure to credit risk is significantly affected by
changes in the economy in the Nashville, Tennessee metropolitan area.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance balance required using historical loan loss experience of both the
bank and the banking industry, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available for any loan that, in
management’s judgment, should be charged-off. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries if any,
are credited to the allowance.
The allowance consists of specific and general components. The specific component relates to loans that
are individually classified as impaired. The general component covers loans that are collectively
evaluated for impairment and is based on historical loss experience adjusted for current factors.
A loan is impaired when, based on current information and events, it is probable that the Corporation will
be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for
which the terms have been modified resulting in a concession, and for which the borrower is experiencing
financial difficulties, are considered troubled debt restructurings and classified as impaired.
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.
8.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is
impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as
consumer and residential real estate loans are collectively evaluated for impairment and accordingly, they
are not separately identified for impairment disclosures.
Troubled debt restructurings are individually evaluated for impairment and included in the separately
identified impairment disclosures. Troubled debt restructurings are measured at the present value of
estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is
considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.
For troubled debt restructurings that subsequently default, the Corporation determines the amount of the
allowance on the loan in accordance with the accounting policy for the allowance for loan losses
individually evaluated as impaired.
The historical loss experience used in management’s analysis of the general component for the
allowance for loan losses is determined by portfolio segment and is based on the average loss history
experienced by the bank and banking industry over the most recent 3 year periods. The Corporation
used the loss history of its peers, as it has experienced very few losses on its own during the entire
history of the Corporation. Management evaluates 3 years of peer losses in order to align with what
management expects normalized probable incurred losses to be for the Corporation. This actual loss
experience is supplemented with other economic factors based on the risks present for each portfolio
segment. These economic factors include consideration of the following: levels of and trends in
delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume
and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in
lending policies, procedures, and practices; experience, ability, and depth of lending management and
other relevant staff; national and local economic trends and conditions; industry conditions; and effects of
changes in credit concentrations.
The following portfolio segments have been identified:
Commercial loans include loans for commercial, industrial or agricultural purposes to business
enterprises that are not secured by real estate. These loans are typically made on the basis of the
borrower's ability to repay from the cash flow of the borrower's business and are generally secured by
accounts receivable, inventory and equipment. The collateral securing loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Commercial Real Estate
loans secured by non-residential real estate and
improvements thereon. Often these loans are made to single borrowers or groups of related
borrowers, and the repayment of these loans largely depends on the results of operations and
management of these properties. Adverse economic conditions may affect the repayment ability of
these loans.
include
loans
Residential Real Estate loans include loans secured by residential real estate, including single-family
and multi-family dwellings. Adverse economic conditions in the Corporation’s market area may
reduce borrowers' ability to repay these loans and may reduce the collateral securing these loans.
9.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Construction and Land Development loans include loans to finance the process of improving
properties preparatory to erecting new structures or the on-site construction of industrial, commercial,
residential or farm buildings. Construction and land development loans also include loans secured by
vacant land, except land known to be used or usable for agricultural purposes. Construction loans
generally are made for relatively short terms. They generally are more vulnerable to changes in
economic conditions. Furthermore, the nature of these loans is such that they are more difficult to
evaluate and monitor. The risk of loss on a construction loan is dependent largely upon the accuracy
of the initial estimate of the property's value upon completion of the project and the estimated cost
(including interest) of the project. Periodic site inspections are made on construction loans.
Consumer loans include loans to individuals for household, family and other personal expenditures
that are not secured by real estate.
The Bank has purchased life insurance policies on certain key
Bank Owned Life Insurance:
employees. Bank owned life insurance is 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 other amounts due that are probable at settlement.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over
the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the
assets have been isolated from the Corporation, 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 the
Corporation does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation.
Leasehold improvements are amortized using the straight-line method over the shorter of the lease terms
or the useful lives. Furniture, fixtures and equipment are depreciated using the straight-line method with
useful lives ranging from three to five years.
Restricted Equity Securities: The Bank is a member of the Federal Home Loan Bank (FHLB) and Federal
Reserve Bank (FRB) systems. Members are required to own a certain amount of stock based on the
level of borrowings and on their level of equity and may invest in additional amounts. FHLB and FRB
stock are carried at cost, classified as restricted equity securities and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as
income.
Prepaid Long-term Compensation: The Corporation paid retention bonuses in cash to certain key
employees. These cash bonuses are considered long-term compensation to be earned over a 36 to 60
month requisite service period. The amount of the contracts is earned pro rata by the employees and
expensed pro rata by the Corporation over the contractual term of the agreements. In the event that the
employee leaves during the life of the contract, the employee is obligated to repay the unearned amount.
Prepaid long-term compensation amounts of $167 and $185 were included in other assets as of
December 31, 2018 and 2017.
Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment
when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.
If impaired, the assets are recorded at fair value.
Assets Under Management: Assets held in fiduciary or agency capacities are not included in the
consolidated balance sheets since such items are not assets of the Corporation.
10.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Wealth Management Services Income Recognition: Income from Wealth Management Services is
calculated by multiplying each investment management account’s market value, determined on a specific
date each month, by a static or tiered percentage, according to the investment management agreement.
The income resulting from Wealth Management Services accounts is recognized monthly.
Derivatives: The Corporation has entered into derivative contracts designated as a) a hedge of fair value
of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), and b) a
hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash
flow hedge”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or
gain on the hedged item, are recognized in current earning as fair values change. For a cash flow hedge,
the gain or loss on the derivative is reported in other comprehensive income and is reclassified into
earnings in the same periods during which the hedged transaction effects earnings. For both types of
hedges, changes in the fair values of derivatives that are not highly effective in hedging the changes in
fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Net
cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or
interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow
statement the same as the cash flows of the items being hedged.
The Corporation formally documents the relationship between derivatives and hedged items, as well as
the risk-management objective and the strategy for undertaking hedge transactions at the inception of the
hedging relationship. This documentation includes linking hedge’s to specific assets and liabilities on the
balance sheet. The Corporation also formally assesses, both at the hedges inception and on an ongoing
basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair
values or expected cash flows of hedged items. The Corporation discontinues hedge accounting when it
determines that the derivative is no longer effective in offsetting changes in fair value of the hedged item,
the derivative is settled or terminates, or the treatment of the derivative as a hedge is no longer
appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of
the derivative are recorded as non-interest income.
Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock
awards issued to employees and directors, based on the fair value of these awards at the date of grant.
A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the
Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation cost
is recognized, on a straight-line basis over the requisite service period for the entire award generally
defined as the vesting period.
Retirement Plans: Employee 401(k) benefit plan expense is the amount of matching contributions for the
period.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive
income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities
available for sale and unrealized gains and losses on cash flow hedges, which are also recognized as
separate components of shareholders’ equity.
Income Taxes: Income tax expense or benefit is the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
11.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Corporation recognizes interest and/or penalties related to income tax matters in income tax
expense.
On December 22, 2017, the United States government enacted comprehensive tax legislation commonly
referred to as the Tax Cuts and Jobs Act (the Act). The Act makes changes to the United States tax
code, including, but not limited to the reduction of the United States federal corporate tax rate from 35
percent to 21 percent.
As a result of the reduction in the corporate tax rate, there was an adjustment to the Corporation’s net
deferred tax asset, which was recorded through income tax expense. We have recorded a discrete tax
expense of $164 related to the corporate rate reduction as of December 31, 2017.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive
Income, to allow a reclassification from accumulated other comprehensive income to retained earnings
for stranded effects resulting from the Act. The amendments eliminate the stranded tax effects resulting
from the Act and will improve the usefulness of information reported to financial statement users. The
effect of adopting this standard was a reclassification of $9 from accumulated other comprehensive loss
to retained earnings as of December 31, 2018.
Earnings Per Share: Basic earnings per share available to common shareholders is computed by
dividing net income adjusted for income allocated to participating securities by the weighted average
number of common shares outstanding during the period. All outstanding unvested share-based
payment awards that contain rights to non-forfeitable dividends are considered participating securities for
this calculation. Diluted earnings per share include the dilutive effect of additional potential common
shares issuable under stock options.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course
of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of
loss can be reasonably estimated. Management does not believe that there now are such matters that
will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank is required to meet
regulatory reserve and clearing requirements.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the Bank to the Corporation or by the Corporation to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant
market information and other assumptions as more fully disclosed in a separate note. Fair value
estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for particular items. Changes
in assumptions or in market conditions could significantly affect the estimates.
Off Balance Sheet Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit issued to meet customer
financing needs. The face amount for these items represents the exposure to loss before considering
customer collateral or ability to repay. Such financial instruments are recorded as loans when funded.
12.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effect of Newly Adopted Accounting Standards:
On January 1, 2018, the Corporation adopted ASU 2014-09 Revenue from Contracts with Customers
(Topic 606). The standard creates a single framework for recognizing revenue from contracts with
customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the
transfer of non-financial assets. The majority of the Corporation’s revenues come from interest income
and other sources that are outside the scope of ASC 606. The Corporation’s services that fall within the
scope of ASC 606 are presented within non-interest income and are recognized as revenue as the
Corporation satisfies its obligation to the customer. Services within the scope of ASC 606 include service
charges on deposit accounts, commercial deposit and treasury management fees, wealth management
fees, and debit card interchange income.
ASC Topic 606 focuses on revenues from contracts earned over time, but nearly all of these in-scope
noninterest income revenue streams are governed by agreements that do not have an enforceable,
contractual term. Given the cancellable-at-will structure, ASC Topic 606 views these contracts as
agreements-at-will without a defined term, the revenues of which are immediately recognized. The
revenue recognition timing is identical compared to previous revenue recognition standards. The
Corporation concluded that the non-cancellable revenue streams are immaterial to the Corporation’s
financial statement. The Corporation determined that the adoption of ASU 2014-09 did not impact the
Consolidated Financial Statements of the Corporation.
Newly Issued, Not Yet Effective Accounting Standards:
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB amended existing guidance that requires lessees recognize the following for
all leases (with the exception of short-term leases) at the commencement date (1) A lease liability, which
is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis;
and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use
of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.
Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee
accounting model and Topic 606, Revenue from Contracts with Customers.
These amendments are effective for public business entities for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. The Corporation adopted the new guidance on
January 1, 2019.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. The modified
retrospective approach would not require any transition accounting for leases that expired before the
earliest comparative period presented. Lessees may not apply a full retrospective transition approach.
Upon adoption, the Corporation recognized additional operating liabilities and corresponding right of use
assets based on the present value of the remaining minimum rental payments for the Corporation’s
existing operating leases.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
In June 2016, FASB issued guidance to replace the incurred loss model with an expected loss model,
which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to
the measurement of credit losses on financial assets measured at amortized cost, including loan
receivables, held-to maturity debt securities, and reinsurance receivables. It also applies to off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit,
financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.
13.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Transition:
For debt securities with other-than-temporary impairment (OTTI), the guidance will be applied
prospectively.
Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased
credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the
allowance for expected credit losses for all PCD assets at the date of adoption and will continue to
recognize the noncredit discount in interest income based on the yield of such assets as of the
adoption date. Subsequent changes in expected credit losses will be recorded through the allowance.
For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in
retained earnings as of the beginning of the first reporting period in which the guidance is effective.
The standard will be effective for fiscal years beginning after Dec. 15, 2020, including interim periods
within those fiscal years. For calendar year-end PBEs that are not SEC filers, it is effective for March 31,
2021 Interim Financial Statements.
The Corporation is currently evaluating the impact of this new accounting standard on the consolidated
financial statements.
NOTE 2 - SECURITIES
The following table summarizes the amortized cost and fair value of the available for sale securities
portfolio at December 31, 2018 and 2017 and the corresponding amounts of gross unrealized gains and
losses recognized in accumulated other comprehensive income (loss):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
2018
Available for sale
US treasury
Asset backed securities
$
4,973
5,838
$
US government sponsored entities
and agencies
Corporate bonds
State and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
3,002
11,846
34,149
12,722
15,759
22,949
-
-
-
-
50
53
19
19
$
$
(7)
(2)
4,966
5,836
(10)
(439)
(402)
(205)
(378)
(240)
2,992
11,407
33,797
12,570
15,400
22,728
Total available for sale
$ 111,238
$
141
$
(1,683)
$ 109,696
14.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 2 – SECURITIES (Continued)
2017
Available for sale
US government sponsored entities
and agencies
Corporate bonds
State and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
3,007
12,059
38,985
12,914
21,124
21,278
$
-
32
338
27
14
104
(21)
(62)
(96)
(82)
(207)
(119)
$
2,986
12,029
39,227
12,859
20,931
21,263
Total available for sale
$ 109,367
$
515
$
(587)
$ 109,295
Sales of available for sale securities were as follows for the years ending December 31, 2018 and 2017:
Proceeds
Gross gains
Gross losses
2018
2017
$ 21,391
145
(219)
$ 13,588
33
(222)
Securities pledged at year-end 2018 and 2017 had carry value of $6,764 and $6,982 and were pledged to
secure public deposits, interest rate swaps, and one of the bank’s federal fund line of credit. The
Corporation had no holdings of securities of any one issuer, other than the U.S. government sponsored
entities and agencies, in an amount greater than 10% of shareholders’ equity.
The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity.
Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at a single maturity date are
shown separately.
Within one year
One to five years
Five to ten years
Beyond ten years
Collateralized mortgage obligations
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Total
December 31, 2018
Fair
Amortized
Value
Cost
$
9,991
7,841
3,436
38,540
12,722
15,759
22,949
$
9,966
7,469
3,381
38,182
12,570
15,400
22,728
$ 111,238
$ 109,696
15.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 2 – SECURITIES (Continued)
The following table summarizes the investment securities with unrealized losses at December 31, 2018
and 2017 aggregated by major security type and length of time in a continuous unrealized loss position:
December 31, 2018
Available for sale
US treasury
Asset backed securities
US government sponsored
entities and agencies
Corporate bonds
State and political
subdivisions
Collateralized mortgage
obligation
Mortgage-backed securities:
residential
Mortgage-backed securities:
commercial
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
4,966 $
5,836
(7) $
(2)
- $
-
- $
-
4,966 $
5,836
-
2,811
9,186
1,902
1,423
8,689
-
(205)
2,992
7,596
(10)
(234)
2,992
10,407
(64)
16,358
(338)
25,544
(12)
7,889
(193)
9,791
(5)
12,251
(373)
13,674
(37)
9,654
(203)
18,343
(7)
(2)
(10)
(439)
(402)
(205)
(378)
(240)
Total available for sale
$
34,813 $
(332) $
56,740 $
(1,351) $
91,553 $
(1,683)
December 31, 2017
Available for sale
US government sponsored
entities and agencies
$
Corporate bonds
State and political
subdivisions
Collateralized mortgage
obligation
Mortgage-backed securities:
residential
Mortgage-backed securities:
commercial
2,986 $
6,796
(21) $
(50)
- $
672
- $
(12)
2,986 $
7,468
9,615
6,264
13,287
10,174
(45)
2,330
(51)
11,945
(48)
1,796
(34)
8,060
(132)
3,984
(75)
17,271
(78)
2,194
(41)
12,368
(21)
(62)
(96)
(82)
(207)
(119)
Total available for sale
$
49,122 $
(374) $
10,976 $
(213) $
60,098 $
(587)
Unrealized losses on securities have not been recognized into income because the issuers are of high
credit quality, management does not intend to sell and it is more likely than not that management will not
be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely
due to changes in market interest rates instead of credit quality. The fair value is expected to recover as
the securities approach their maturity dates and/or market rates change. As a result, the Corporation
does not consider these securities to be other-than-temporarily impaired at December 31, 2018.
Restricted equity securities consist of securities which are restricted as to transferability. These securities
are recorded at cost. Restricted equity securities consist of the following at December 31, 2018 and
2017:
Federal Home Loan Bank stock
Federal Reserve Bank stock
2018
2017
$
1,852
726
$
1,852
704
$
2,578
$
2,556
16.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS
Loans at year end were as follows:
Commercial
Commercial real estate
Residential real estate:
Closed-end
Open-end
Construction and land development:
Owner occupied
Development
Consumer
Subtotal
Net deferred loan fees
Gross loans
2018
2017
$ 37,003
139,117
$ 29,590
118,467
77,917
44,649
64,388
44,095
4,330
8,577
20,493
332,086
(277)
4,492
14,411
17,857
293,300
(183)
$ 331,809
$ 293,117
17.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS (Continued)
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2018 and 2017:
December 31, 2018
Commercial
Commercial Residential Construction
Real
Estate
Real
Estate
and Land
Development Consumer
Unallocated
Total
Allowance for loan losses:
Beginning balance
Provision (credit) for loan losses
Loans charged-off
Recoveries
$
$
358
142
-
-
1,627
194
-
-
$
$
695
(18)
(2)
1
$
235
(82)
-
-
$
140
27
-
-
Total ending allowance balance
$
500
$
1,821
$
676
$
153
$
167
$
December 31, 2017
Allowance for loan losses:
Beginning balance
Provision (credit) for loan losses
Loans charged-off
Recoveries
$
$
205
153
-
-
$
1,317
310
-
-
$
935
(241)
-
1
$
287
(52)
-
-
$
254
(114)
-
-
Total ending allowance balance
$
358
$
1,627
$
695
$
235
$
140
$
19
20
-
-
39
-
19
-
-
19
$
3,074
283
(2)
1
$
3,356
$
2,998
75
-
1
$
3,074
18.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS (Continued)
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment
method as of December 31, 2018 and 2017. The recorded investment amounts do not include accrued and unpaid interest or any net deferred loan fees or costs
due to immateriality.
December 31, 2018
Commercial
Commercial Residential Construction
Real
Estate
Real
Estate
and Land
Development Consumer
Unallocated
Total
$
-
500
-
1,821
$
$
15
661
-
153
$
-
167
$
$
-
39
15
3,341
500
$
1,821
$
676
$
153
$
167
$
39
$
3,356
Total ending loans balance
$ 37,003
$ 139,117
$ 122,556
$ 12,907
$ 20,493
$
-
37,003
107
$
139,010
2,495
$
120,071
$
-
12,907
$
-
20,493
$
-
-
-
2602
$
329,484
$ 332,086
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
December 31, 2017
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
-
358
-
1,627
$
$
14
681
-
235
$
-
140
$
$
-
19
14
3,060
358
$
1,627
$
695
$
235
$
140
$
19
$
3,074
-
29,590
$
125
118,342
$
428
108,055
$
470
18,433
$
-
17,857
$
-
-
-
$
1,023
292,277
$ 293,300
Total ending loans balance
$ 29,590
$ 118,467
$ 108,483
$ 18,903
$ 17,857
$
19.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS (Continued)
As of December 31, 2018 and 2017, the Corporation has a recorded investment in troubled debt
restructurings of $224 and $796. The Corporation has allocated no specific reserves for those loans at
December 31, 2018 and 2017.
The modifications in terms associated with troubled debt restructurings that occurred in 2018 included the
reduction of near-term interest and/or principal payments as a concession to borrowers experiencing
financial stress. These loans are well secured by residential and commercial real estate.
The troubled debt restructurings described above had no impact on the allowance for loan losses or
charge offs during the year ending December 31, 2018.
December 31, 2018
Troubled debt restructurings:
Commercial
Residential real estate:
Closed-end
Construction and land development
Development
Total
December 31, 2017
Troubled debt restructurings:
Commercial
Residential real estate:
Closed-end
Construction and land development
Development
Total
Pre-Modification Post-Modification
Number
Of
Loans
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
1
1
-
2
$
107
$
107
117
-
117
-
$
224
$
224
Pre-Modification Post-Modification
Number
Of
Loans
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
1
2
1
4
$
125
$
125
201
470
201
470
$
796
$
796
There were no loans that were modified as troubled debt restructurings for which there was a payment
default within twelve months following the modification during the years ended December 31, 2018 and
2017.
20.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS (Continued)
The following table presents information related to impaired loans by class of loans as of and for the years ended December 31, 2018 and 2017:
December 31, 2018
With no related allowance recorded:
Commercial real estate:
Residential real estate
Closed-end
Construction and land development
Development
With an allowance recorded:
Residential real estate:
Closed-end
Total
December 31, 2017
With no related allowance recorded:
Commercial real estate:
Residential real estate:
Closed-end
Construction and land development
Development
With an allowance recorded:
Residential real estate:
Closed-end
Total
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
Interest
Average
Recorded
Income
Investment Recognized Recognized
Cash Basis
Interest
$
107
$
107
$
2,192
2,192
-
-
303
303
$
2,602
$
2,602
$
$
125
$
125
$
201
470
201
470
227
227
$
1,023
$
1,023
$
-
-
-
15
15
-
-
-
14
14
$
115
$
5
$
1,504
29
320
37
-
8
$
1,968
$
50
$
$
136
$
202
491
236
$
6
9
22
4
$
1,065
$
41
$
5
37
-
8
50
6
9
22
4
41
For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.
21.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS (Continued)
There were no loans past due over 90 days and still accruing as of December 31, 2018 and 2017.
There were no commercial loans on non-accrual as of December 31, 2018 and 2017.
The following table presents the aging of the recorded investment in past due loans as of December 31,
2018 and 2017 by class of loans:
December 31, 2018
30 - 59
Days
Past Due
60 - 89 Greater than
Days
Past Due
89 Days
Past Due
Total
Past Due
Loans Not
Past Due
Total
Commercial
Commercial real estate
Residential real estate:
$
Closed-end
Open-end
Construction and land
Development:
Owner occupied
Development
Consumer
- $
-
- $
-
- $
-
- $ 37,003 $ 37,003
139,117
-
139,117
40
-
-
-
-
2
-
-
-
-
-
-
-
-
-
42
-
77,875
44,649
77,917
44,649
-
-
-
4,330
8,577
4,330
8,577
20,493
20,493
Total
$
40 $
2 $
- $
42 $ 332,044 $ 332,086
December 31, 2017
Commercial
Commercial real estate
Residential real estate:
$
Closed-end
Open-end
Construction and land
Development:
Owner occupied
Development
Consumer
- $
-
- $
-
- $
-
- $ 29,590 $ 29,590
118,467
-
118,467
7
-
-
-
-
3
-
-
-
-
-
-
-
-
-
10
-
64,378
44,095
64,388
44,095
-
-
-
4,492
14,411
4,492
14,411
17,857
17,857
Total
$
7 $
3 $
- $
10 $ 293,290 $ 293,300
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of
borrowers to service their debt such as: current financial information, historical payment experience,
credit documentation, public information, and current economic trends, among other factors. The
Corporation periodically analyzes loans individually by classifying the loans as to credit risk. The
Corporation uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves
management's close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan or of the institution's credit position at some
future date.
22.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 3 - LOANS (Continued)
Substandard. Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They
are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as
substandard, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be pass rated loans. As of December 31, 2018 and 2017, based on the most
recent analysis performed, the risk category of loans by class of loans is as follows:
Pass
Special
Mention
Substandard
Doubtful
$
$
-
-
2,075
-
-
-
-
$
2,075
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
December 31, 2018
Commercial
Commercial real estate
Residential real estate:
Closed-end
Open-end
Construction and land development:
Owner occupied
Development
Consumer
$ 37,003
139,117
$
75,842
44,649
4,330
8,577
20,493
Total
$ 330,011
$
December 31, 2017
Commercial
Commercial real estate
Residential real estate:
Closed-end
Open-end
Construction and land development:
Owner occupied
Development
Consumer
$ 29,590
118,467
$
$
64,388
42,005
4,492
14,411
17,857
-
2,090
-
-
-
Total
$ 291,210
$
2,090
$
23.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
Leasehold improvements
Furniture, fixtures and equipment
Computer software
Less: Accumulated depreciation and amortization
Net premises and equipment
2018
2017
$
1,124
1,004
1,067
3,195
(2,766)
$
1,124
1,004
1,055
3,183
(2,452)
$
429
$
731
Depreciation and amortization expense totaled $313 and $442 for 2018 and 2017, respectively.
The Corporation’s main office facility is subject to a five-year lease, terminating June 1, 2023. The rent
for the first 36 months will remain constant with the original lease agreement. There is an increase in the
amount of $6,453 per month for the remaining two years. The Corporation’s second office facility is in its
two-year lease extension period, terminating on May 31, 2020. The lease agreement includes one
renewal option of two years. Total rent expense for 2018 and 2017 was $421 and $406.
Rent commitments for office facilities under non-cancelable operating leases were as follows, before
considering renewal options that are present.
2019
2020
2021
2022
2023
$
429
416
452
484
202
The Corporation had operating leases for property and equipment that have non-cancelable lease
commitments as follows:
2019
2020
2021
2022
$
63
36
9
1
These leases have terms of three, four, or five years and resulted in lease expense of $122 and $107 for
the years ending December 31, 2018 and 2017.
NOTE 5 - DEPOSITS
Scheduled maturities of time deposits, included in interest bearing deposits, for the next five years were
as follows:
2019
2020
2021
2022
2023
$
6,933
3,278
839
250
9
24.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 5 – DEPOSITS (Continued)
Time deposits that meet or exceed the FDIC Insurance limit of $250 at December 31, 2018 and 2017
were $4,302 and $3,044.
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 2018 and 2017, advances from the FHLB were as follows:
For 2018, interest rates ranged from 1.00% to 2.59%,
averaging 1.78% with maturities between January 14,
2019 and June 1, 2028.
For 2017, interest rates ranged from 1.00% to 2.36%,
averaging 1.662% with maturities between January 12,
2018 and June 1, 2028.
$ 19,249
$ 20,198
The advances are subject to penalties if repaid before scheduled payments are due. The Bank’s
outstanding borrowings from the FHLB are secured by a blanket pledge agreement of 150% of 1-4 family
loans, first lien mortgage loans. The Bank has approximately $48,864 of 1-4 family, first mortgage loans
and $29,575 of home equity mortgage loans available to pledge under the blanket pledge arrangement
dated March 16, 2006. Based on the collateral and the Corporation’s holdings of FHLB Stock, the Bank
is eligible to borrow additional advances of approximately $35,595 as of December 31, 2018.
Payments over the next five years are as follows:
2019
2020
2021
2022
2023
Thereafter
NOTE 7 - INCOME TAXES
Income tax expense was as follows:
Current expense
Federal
State
Total current
Deferred expense (benefit)
Federal
State
Total deferred
Expense due to enactment of federal tax reform
$
3,137
2,985
6,147
4,039
2,475
466
2018
2017
$
$
1,841
168
2,009
2,151
9
2,160
(150)
(32)
(182)
-
235
18
253
164
Total
$
1,827
$
2,577
25.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 7 - INCOME TAXES (Continued)
Effective tax rates differ from federal statutory rate of 21% applied to income before income taxes due to
the following:
Federal statutory rate times financial statement income
Effect of:
State taxes, net of federal benefit
Tax exempt interest income
Bank owned life insurance income
Captive insurance premiums and disallowances
Federal rate change impact
Other, net
Total income tax expense
Year-end deferred tax assets and liabilities were due to the following:
Deferred tax assets:
2018
2017
$
2,104
$
2,977
107
(190)
(46)
(136)
-
(12)
18
(285)
(79)
(246)
164
28
$
1,827
$
2,577
2018
2017
Organizational and start-up expenditures
Allowance for loan losses
854
3
138
Loan origination income
Net unrealized loss on available for sale securities
403
Net unrealized loss on cash flow hedges 93
1
1,492
Other
Total deferred tax assets
$
Deferred tax liabilities:
Prepaid expenses
Stock based compensation expense
Restricted equity stock dividends
Loan origination expenses
Depreciation
Total deferred tax liabilities
(171)
(152)
(7)
(66)
(74)
(470)
$
780
4
103
19
-
36
942
(169)
(218)
(7)
(55)
(130)
(579)
Deferred tax asset, net
$
1,022
$
363
The Corporation does not have any uncertain tax positions and has minimal interest and penalties
recorded or accrued in the consolidated financial statements for the years ended December 31, 2018 and
2017. The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax
of the states of Georgia and Tennessee. The Corporation is no longer subject to examination by taxing
authorities for years before 2014.
The Corporation’s balance sheet tax accounts were adjusted for 2017 to reflect the effects of federal tax
reform enacted on December 22, 2017 in the form of H.R. 1, commonly known as the Tax Cuts and Jobs
Act. The primary impact to the Corporation was the re-measurement of federal deferred tax assets and
liabilities from 34% to 21%.
26.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 8 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors and their affiliates at December 31, 2018 and 2017 totaled $4,734
and $5,159, respectively.
Deposits from principal officers, directors and their affiliates at December 31, 2018 and 2017 totaled
$1,050 and $1,335, respectively.
Wealth management fees earned from assets under management for principal officers, directors and their
affiliates at December 31, 2018 and 2017 totaled $546 and $372, respectively.
NOTE 9 - REGULATORY CAPITAL MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action
regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks
(Basel III rules) became effective for the Bank on January 1, 2015 with full compliance of all the
requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under
the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-
based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by
2019. The capital conservation buffer for 2018 is 1.875%. The net unrealized gain or loss on available for
sale securities is not included in computing regulatory capital. Management believes as of December 31,
2018, the Bank met all capital adequacy requirements to which it is subject. Bank holding companies
under $3 billion in assets are not required to report regulatory capital ratios.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are
not used to represent overall financial condition. If adequately capitalized, regulatory approval is required
to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At December 31, 2018 and 2017, the most recent
regulatory notifications categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that notification that management
believes have changed the institution’s category.
27.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 9 - REGULATORY CAPITAL MATTERS (Continued)
Actual and required capital amounts and ratios for the Bank are presented below as of December 31,
2018 and 2017. The capital conservation buffer is not included in the required ratios of the table
presented below.
2018
Total Capital to risk
weighted assets
Tier 1 (Core) Capital to
risk weighted assets
Common Tier 1 (CET1)
Tier 1 (Core) Capital to
average assets
2017
Total Capital to risk
weighted assets
Tier 1 (Core) Capital to
risk weighted assets
Common Tier 1 (CET1)
Tier 1 (Core) Capital to
average assets
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 55,697 15.14%
$ 29,431
8.00%
$ 36,789 10.00%
52,341 14.23%
52,341 14.23%
22,073
16,555
6.00%
4.50%
29,431
23,913
8.00%
6.50%
52,341 10.71%
19,557
4.00%
24,447
5.00%
$ 49,853 15.62%
$ 25,531
8.00%
$ 31,914 10.00%
46,780 14.66%
46,780 14.66%
19,148
14,361
6.00%
4.50%
25,531
20,744
8.00%
6.50%
46,780 10.54%
17,746
4.00%
22,183
5.00%
Dividend Restrictions - The Corporation’s principal source of funds for dividend payments is dividends
received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior
approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in
any calendar year is limited to the current year's net profits, combined with the retained net profits of the
preceding two years, subject to the capital requirements described above. During 2019, the Bank could,
without prior approval, declare dividends of approximately $8,497 plus any 2019 net profits retained to
date of declaration.
NOTE 10 - OFF-BALANCE SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to
meet customer financing needs. These are agreements to provide credit or to support the credit of others
as long as conditions established in the contract are met. In addition, these agreements usually have
expiration dates, and the commitments may expire without being used.
Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material
losses are not anticipated. The same credit policies are used to make such commitments as are used for
loans, including obtaining collateral at the exercise of the commitment. The majority of the Corporation’s
commitments to extend credit have maturities of less than one year and reflect the prevailing market
interest rates at the time of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at
December 31:
Letters of Credit
Unused Lines of Credit
2018
2017
$
6,759
80,880
$
4,300
75,083
28.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 11 - STOCK BASED COMPENSATION PLAN
Total stock-based compensation expense in 2018 and 2017 was $752 and $464, respectively. Related to
the 2018 and 2017 restricted stock grants, some employees made an election, in accordance with
Section 83(b) of the Internal Revenue Code, to have the fair value of the awards taxable immediately. In
connection with the election, the Corporation allowed the employees to forfeit shares to cover the related
personal tax obligation. During 2018 employees forfeited 1,684 shares with a total fair value of $55.
During 2017 employees forfeited 1,230 shares with a total fair value of $39. These amounts were
recorded in salaries and employee benefits on the Corporation’s consolidated statements of income in
2018 and 2017.
The Corporation’s 2008 Equity Incentive Plan as modified in 2015 provides for the grant of stock options,
restricted stock and other equity-based incentives up to 900,000 shares. As of December 31, 2018, the
Corporation had issued grants totaling 776,085 shares under the 2008 Equity Incentive Plan and its
predecessor, the 2004 Employee Share Option Plan.
Stock Option Grants
Option awards are granted with an exercise price equal to the market price of the Corporation’s common
stock at the date of grant. Option awards have vesting periods of one to six years and have 10-year
contractual terms. The Corporation uses newly-issued shares to satisfy share option exercises.
The fair value of each option award is estimated on the date of grant using a closed form option valuation
(Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are
based on historical trading of the shares of Truxton Corporation common stock for 2018 and 2017. The
expected term of options granted is based on historical data and represents the period of time that
options granted are expected to be outstanding taking into account that the options are not transferable.
The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant.
During 2018 and 2017, the Corporation issued incentive stock options to outside directors and certain
employees for the purchase of 3,000 and 10,000 shares of common stock, respectively. The fair value of
options granted in 2018 and 2017 was determined using the following assumptions as of grant date:
Risk-free interest rate
Expected term
Expected stock price volatility
Dividend yield
2018
2017
2.60%
8.0 years
22.0%
2.46%
2.15%
6.1 years
28.16%
2.50%
29.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 11 - STOCK BASED COMPENSATION PLAN (Continued)
A summary of the stock option activity for 2018 follows:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
Outstanding at beginning of year
Granted
Forfeited
Exercised
148,544
3,000
(1,500)
(28,976)
$ 20.15
36.50
34.67
18.00
Outstanding at end of year
121,068
20.89
Vested or expected to vest
121,068
20.89
Exercisable at end of year
85,076
19.61
6.7
5.9
5.9
5.6
$
1,824
1,824
1,390
Information related to stock options during each year follows:
Intrinsic value of options exercised
Cash received from option exercises
Weighted average fair value of options granted
2018
2017
$
$
520
522
7.45
53
38
9.99
There was a total of $56 in unrecognized compensation cost related to non-vested stock options granted
under the Plan as of December 31, 2018. The cost is expected to be recognized over a weighted-
average period of 1.5 years.
Restricted Stock Grants
In 2018 and 2017, the Corporation issued 22,597 and 32,887 restricted shares of common stock.
Compensation expense is recognized over the vesting period of the awards based on the value of the
stock at issue date. The fair value of the stock was determined by current stock trade activity. These
shares vest in 20% increments through 2023.
A summary of the changes in the Corporation’s non-vested shares for the year follows:
Non-vested shares
Non-vested at January 1, 2018
Granted
Vested
Forfeited or expired
Weighted-
Average
Grant-Date
Fair Value
$
26.03
33.06
23.67
22.49
Shares
68,479
22,597
(23,652)
(5,654)
Non-vested at December 31, 2018
61,770
$
30.37
As of December 31, 2018, there was $1,486 of total unrecognized compensation cost related to non-
vested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-
average period of 2.2 years.
30.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 12 - DERIVATIVES
The Corporation utilizes interest rate swap agreements as part of its asset liability management strategy
to help manage its interest rate risk position. The notional amount of the interest rate swaps does not
represent amounts exchanged by the parties. The amount exchanged is determined by reference to the
notional amount and the other terms of the individual interest rate swap agreements.
Fair Value Hedge
The following table reflects the fair value hedges included in the Consolidated Statements of Net Income
as of December 31:
Interest rate contracts
Location
2018
2017
Change in fair value on interest rate
swaps hedging loans
Change in fair value on loans – hedged item
Loan interest income
Loan interest income
$
$
497 $
(367) $
16
45
The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of
December 31:
Included in other assets:
2018
2017
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Interest rate swaps related to loans
$ 20,377 $
370
$ 12,057 $
478
Cash Flow Hedge
Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with notional amounts
totaling $15,000 and $0 as of December 31, 2018 and 2017, were designated as cash flow hedges of
certain deposit accounts and were determined to be fully effective during the periods presented. As such,
no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of
swaps is recorded in other liabilities with changes in fair value recorded in other comprehensive income
(loss). The Company expects the hedges to remain fully effective during the remaining terms of the
swaps.
The following table presents the net losses recorded in accumulated other comprehensive income and
the Consolidated Statements of Net Income relating to the cash flow derivative instruments for the year
ended December 31:
Amount of Gain
(Loss) Recognized
In OCI
(Effective Portion)
2018
Amount of Gain
(Loss) Recognized
from OCI to
Interest Income
Amount of Gain
(Loss) Recognized
in Non-Interest Income
(Ineffective Portion)
$
(357)
$
-
$
-
Interest rate swaps related
to deposits
The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of
December 31:
Included in other liabilities:
2018
2017
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Interest rate swaps related to deposits
$ 15,000 $
(357)
$
- $
-
31.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. There are three levels of inputs that may be used
to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that
the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a Corporation’s own assumptions about
the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods and significant assumptions to estimate the fair value of
each type of financial instrument:
Investment Securities: The fair values for investment securities are determined by quoted market prices,
if available “Level 1”. For securities where quoted prices are not available, fair values are calculated
using a matrix pricing model, which is based on market prices of similar securities “Level 2”. Matrix
pricing is a mathematical technique commonly used to price debt securities that are not actively traded,
which values debt securities without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark securities.
Derivatives: The fair value of the derivatives is based on valuation models using observable market data
as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where
quoted market prices are not always available. Therefore, the fair values of derivatives are determined
using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of
derivative, prepayment rates, and volatility factors to value the position. The majority of the market inputs
is actively quoted and can be validated through external sources, including brokers, market transactions
and third-party pricing services.
32.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Assets and liabilities measured at fair value on a recurring basis are summarized below:
December 31, 2018
Financial assets:
Investment securities available for sale
U.S. Treasury and federal agency
U.S. government sponsored entities and agencies
Corporate bonds
State and political subdivisions
Collateralized mortgage obligations
Mortgage backed securities: residential
Mortgage backed securities: commercial
Asset backed securities
Total investment securities available for sale
Derivatives
Financial liabilities:
Derivatives
$
$
Fair Value Measurements at Using:
Quoted Prices Significant
In Active
Other
Markets for Observable
Carrying
Value
Identical Assets
“Level 1”
Inputs
“Level 2”
$
4,966
2,992
11,407
33,797
12,570
15,400
22,728
5,836
$ 109,696
370
$
$
$
-
-
-
-
-
-
-
-
-
-
$
4,966
2,992
11,407
33,797
12,570
15,400
22,728
5,836
$ 109,696
$
370
357 $
-
$
357
December 31, 2017
Financial assets:
Investment securities available for sale
U.S. government sponsored entities and agencies
Corporate bonds
State and political subdivisions
Collateralized mortgage obligations
Mortgage backed securities: residential
Mortgage backed securities: commercial
Total investment securities available for sale
Derivatives – Interest Rate Swap
Fair Value Measurements at Using:
Quoted Prices Significant
In Active
Other
Markets for Observable
Carrying
Value
Identical Assets
“Level 1”
Inputs
“Level 2”
$
2,986
12,029
39,227
12,859
20,931
21,263
$ 109,295
$
478
$
$
$
-
-
-
-
-
-
-
-
$
2,986
12,029
39,227
12,859
20,931
21,263
$ 109,295
$
478
There were no transfers between Level 1 and Level 2 during 2018 or 2017.
33.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of financial instruments, at December 31, 2018 and
December 31, 2017 are as follows:
Fair Value Measurements Using:
Carrying
Value
Level 1
Level 2
Level 3
Total
$ 10,805
$ 10,805
$
-
$
-
$ 10,805
December 31, 2018
Financial assets
Cash and cash equivalents
Time deposits in other
financial institutions
Securities available-for-sale
Restricted equity securities
Loans, net
Accrued interest receivable
18,268
109,696
2,578
328,453
1,804
Financial liabilities
Deposits
Federal Home Loan Bank advances
Accrued interest payable
$ 404,682
19,249
44
$
-
-
NA
-
-
-
-
44
18,268
109,696
NA
-
791
-
-
NA
328,732
1,013
18,268
109,696
NA
328,732
1,804
$ 403,729
18,689
-
$
-
-
-
$ 403,729
18,689
44
December 31, 2017
Financial assets
Cash and cash equivalents
Time deposits in other
financial institutions
Securities available-for-sale
Restricted equity securities
Loans, net
Accrued interest receivable
$ 10,181
$ 10,181
$
-
$
-
$ 10,181
11,544
109,295
2,556
290,043
1,444
-
-
NA
-
-
11,544
109,295
NA
-
672
-
-
NA
290,277
772
11,544
109,295
NA
290,277
1,444
Financial liabilities
Deposits
Federal Home Loan Bank advances
Accrued interest payable
$ 362,955
20,198
8
$
-
-
8
$ 362,801
20,796
-
$
-
-
-
$ 362,801
20,796
8
The methods and assumptions, not previously presented, used to estimate fair values are described as
follows:
The carrying amount of cash and cash equivalents approximates fair values and are classified as Level 1.
Time deposits in other financial institutions have infrequent repricing or repricing limits and their fair value
is based on discounted cash flows using current market rates applied to the estimated life and are
classified as Level 2. It is not practical to determine the fair value of restricted equity securities due to the
restrictions placed on its transferability.
On January 1, 2018, the Company adopted ASU 2016-01 Recognition of Measurement of Financial
Assets and Financial Liabilities, therefore the fair value presented in the table above may not be
comparable to prior periods. At December 31, 2018, the fair value of loans is determined using exit
pricing based on a discounted cash flow analysis (income approach.) The discounted cash flow was
based on contractual maturity of the loan and current market assumptions resulting in a level 3
classification. At December 31, 2017, the fair values of loans were estimated as follows: for variable rate
loans, that reprice frequently and with no significant change in credit risk, fair values are based on
carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using
discounted cash flows, using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality resulting in a Level 3 classification. At both December 31, 2018 and
2017, impaired loans are valued at the lower of cost or fair value as described previously. The methods
utilized to estimate the fair value of loans as of December 31, 2017 do not necessarily represent an exit
price.
34.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The fair values disclosed for demand deposits are by definition, equal to the amount payable on demand
at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit
are estimated using a discounted cash flows calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a
Level 2 classification. The fair values of the Bank’s Federal Home Loan Bank advances are estimated
using discounted cash flows based on the current borrowing rates for similar types of borrowing
arrangements resulting in a Level 2 classification. The carrying amounts of accrued interest approximate
fair value resulting in Level 2 or 3 classifications.
NOTE 14 - OTHER BENEFIT PLANS
The Corporation has a 401(k) benefit plan that covers all employees who meet certain eligibility
requirements and choose to participate in the plan. The plan allows employee contributions up to the
federal limits, which are matched 100% for the first 3% of compensation contributed and then 50% of the
next 2% of compensation contributed beginning on the first day of the calendar quarter following the
employee’s one year anniversary. The 401(k) benefit plan expense for 2018 and 2017 was $223 and
$213, respectively.
NOTE 15 – OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the accumulated other comprehensive income balances, net of tax:
Balance
at
12/31/2017
Reclassification of
Disproportionate
Tax Effect
Current
Period
Change
Balance
at
12/31/2018
Unrealized gains on securities
available for sale
Unrealized losses on cash
flow hedge
Total
$
$
(45)
$
-
(45)
$
9
-
9
$
(1,115)
$
(1,151)
(264)
(264)
$
(1,379)
$
(1,415)
35.
TRUXTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands except share and per share amounts)
NOTE 16 – EARNINGS PER SHARE
Basic earnings per share available to common shareholders is computed by dividing net income adjusted
for income allocated to participating securities by the weighted average number of common shares
outstanding during the period. All outstanding unvested share-based payment awards that contain rights
to non-forfeitable dividends are considered participating securities for this calculation. Diluted earnings
per share available to common shareholders reflects the potential dilution that could occur if stock options
to issue common stock were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. The factors used in the earnings per share
computation follows:
Basic
Net income
Less: Undistributed income allocated to
participating securities
2018
2017
$
8,194
$
6,178
203
151
Net earnings allocated to common stock
$
7,991
$
6,027
Weighted common shares outstanding including
participating securities
Less: Participating securities
Weighted average shares
Basic earnings per share
Diluted earnings allocated to common stock
Weighted average shares
Add: Diluted effects of assumed exercises
of stock options and warrants
2,713,980
67,110
2,657,865
65,139
2,646,870
2,592,726
$
$
3.02
7,991
$
$
2.32
6,027
2,646,870
2,592,726
61,527
52,592
Average shares and dilutive potential common shares
2,708,397
2,645,318
Dilutive earnings per share
$
2.95
$
2.28
At year-end 2018, there were 3,000 stock options that were not considered in computing diluted earnings
per common share for 2018, because they were antidilutive. At year-end 2017, there were 9,500 stock
options that were not considered in computing diluted earnings per common share for 2017, because
they were antidilutive.
36.