UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 8-K/A

AMENDMENT NO. 1

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):  September 7, 2018

 

Triumph Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

(214) 365-6900

(Registrant’s telephone number, including area code)  

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).

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 any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

 

 

 

 

 

 

 

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As previously disclosed, on September 7, 2018, Triumph Bancorp, Inc. (the “Company”) completed its previously announced acquisitions of First Bancorp of Durango, Inc. (“FBD”) and Southern Colorado Corp. (“SCC”). This Current Report on Form 8-K/A (Amendment No. 1) (this “Report”) amends and supplements the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission (the “SEC”) on September 7, 2018 to include under Item 9.01 the required financial statements of businesses acquired and pro forma financial information relating to the acquisitions.

Item 9.01 Financial Statement and Exhibits.

Forward-Looking Statements

This Report may contain forward-looking statements within the meaning of the federal securities laws.  Investors are cautioned that such statements, including statements with respect to the expected benefits of the transactions, are predictions and that actual events or results may differ materially. These forward-looking statements are not guarantees of future results and are subject to factors that could cause actual results to differ materially from those we may expect, including, but not limited to: economic, political and market conditions and fluctuations; competition; the possibility that the expected benefits related to the transactions may not materialize as expected; and other factors identified in our filings with the SEC.  For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” and the forward-looking statement disclosure contained in the Company’s Annual Report on Form 10-K, filed with the SEC on February 13, 2018.  Forward-looking statements speak only as of the date made and the Company undertakes no duty to update such information.

 

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(d)Exhibits

 

 

 

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EXHIBIT INDEX

 

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

 

Date: November 5, 2018

 

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

We consent to the incorporation by reference in the Registration Statements on Form S-3 (333-223411) and on Form S-8 (No. 333-200456) of Triumph Bancorp, Inc. of our report dated March 23, 2018, with respect to the consolidated balance sheets of First Bancorp of Durango, Inc. and Subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, which report is included in the Form 8-K/A of Triumph Bancorp, Inc. filed on November 5, 2018.

 

 

Denver, Colorado

November 5, 2018

 

Exhibit 23.2

 

Consent of Independent Registered Public Accounting Firm

 

 

We consent to the incorporation by reference in the Registration Statements on Form S-3 (333-223411) and on Form S-8 (No. 333-200456) of Triumph Bancorp, Inc. of our report dated July 10, 2018, with respect to the consolidated statement of financial condition of Southern Colorado Corp. and Subsidiary as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended, which report is included in the Form 8-K/A of Triumph Bancorp, Inc. filed on November 5, 2018.

 

 

Denver, Colorado

November 5, 2018

 

 

 

Exhibit 99.1

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

AND INDEPENDENT AUDITORS' REPORT

 

First Bancorp of Durango, Inc. and Subsidiaries

 

December 31, 2017 and 2016

 

 

 

 

 

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INDEPENDENT AUDITORS' REPORT

 

Board of Directors

First Bancorp of Durango, Inc.

Inverness, Illinois

 

 

We have audited the accompanying consolidated financial statements of First Bancorp of Durango, Inc. and Subsidiaries, which are comprised of  the consolidated balance sheets as of  December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.  The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 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 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 First Bancorp of Durango, Inc. and Subsidiaries at December 31, 2017 and 2016 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

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Report on Consolidating Information

Our audits were conducted for the purpose of forming an opinion on the 2017 and 2016 consolidated financial statements as a whole.  The accompanying consolidating schedules on pages 40 through 43 are presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual companies, and are not a required part of the consolidated financial statements.  The supplemental consolidating schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the consolidated financial statements.  The supplemental consolidating schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling the information directly to the underlying accounting records used to prepare the consolidated financial statements and to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America.  In our opinion, the supplemental consolidating schedules are fairly stated in all material respects in relation to the consolidated financial statements as a whole.

 

 

/s/ Fortner, Bayens, Levkulich, & Garrison, P.C.

 

Denver, Colorado

March 23, 2018

 

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

 

 

The accompanying notes are an integral part of these consolidated statements.

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

The accompanying notes are an integral part of these consolidated statements.

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

The accompanying notes are an integral part of these consolidated statements.

6

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Years Ended December 31, 2017 and 2016

 

 

 

The accompanying notes are an integral part of these consolidated statements.

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

The accompanying notes are an integral part of these consolidated statements.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accounting and reporting policies of First Bancorp of Durango, Inc. and Subsidiaries conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry.  The following is a summary of the significant accounting and reporting policies:

 

Organization and Principles of Consolidation

 

First Bancorp of Durango, Inc. (“FBD”) is a multi-bank holding company that owns 100% of the common stock of The First National Bank of Durango (“FNB") and 100% of the common stock of Bank of New Mexico (“BNM”).  The entities are collectively referred to as "the Company.”  The accompanying consolidated financial statements include the consolidated totals of the accounts of FBD and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain items in the prior year financial statements were reclassified to conform to the current year presentation.  

 

Nature of Operations

 

The Company provides a full range of banking and mortgage services to individual and business customers, principally in La Plata County, Colorado, and in Cibola, McKinley and Bernalillo Counties, New Mexico.  In 2017, the Company also opened a loan production office in Littleton, Colorado, and closed a branch facility in Milan, New Mexico.  Loan and deposit relationships at the closed branch were transferred to the nearby branch in Grants, New Mexico.  The Company is subject to competition from other financial institutions, and from non-financial institutions that provide financial products and services, for loans and deposit accounts. The Company is also subject to regulation by certain governmental agencies and undergoes periodic examinations by those regulatory agencies.

 

Use of Estimates

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  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 date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.

 

 

Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses.  Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Significant Group Concentrations of Credit Risk

 

Cash and Cash Equivalents

 

Balances in transaction accounts at other financial institutions and the Federal Home Loan Banks may exceed amounts covered by federal deposit insurance.  Management regularly evaluates the credit risk associated with other financial institutions and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents.

 

Investment Securities

 

Debt securities are classified as “available for sale.”  Available for sale securities are stated at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

 

The amortized cost of debt securities classified as available for sale is adjusted for amortization of purchase premiums and accretion of purchase discounts.  Premiums and discounts are recognized in interest income using the interest method over the terms of the securities or to the call date, if earlier.  Gains and losses on the sale of securities are 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 an impairment charge to 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 is recognized as an impairment charge to earnings, and 2) OTTI related to other factors, which is recognized in other comprehensive income.  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.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Nonmarketable Equity Securities

 

The Company, as a member of the Federal Reserve and Federal Home Loan Bank systems, is required to maintain investments in the capital stock of the Federal Reserve, the Federal Home Loan Bank of Topeka and the Federal Home Loan Bank of Dallas.  Also, the Company maintains an investment in the capital stock of Bankers’ Bank of the West Bancorp, Inc.  No ready market exists for these stocks, and they have no quoted market value.  For reporting purposes, such stock is considered restricted and is carried at cost under the caption “nonmarketable equity securities.”

 

Loans Held for Sale

 

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value.  Net unrealized losses, if any, are recognized through a valuation allowance charged to earnings.  Income from sales of loans is recognized at the time of sale, and consists of origination fees, service release premiums and documentation fees.  All loans are sold with recourse limited to certain events of default occurring within 120 days of the loans’ origination dates.  The Company does not retain servicing rights on loans sold.

 

Loans

 

Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, deferred fees or costs on originated loans and purchase premiums or discounts on purchased loans.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized into interest income over the life of related loans using the interest method.

 

 

The accrual of interest on any loan is discontinued at the time a loan is 90 days past due unless the loan is well secured and in process of collection.  Additionally, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful.  When placing a loan on nonaccrual status, interest accrued to date is generally reversed and is charged against the current year's interest income.  Payments received on a loan on nonaccrual status are applied against the balance of the loan. A loan is returned to accrual status when principal and interest are no longer past due and collectibility is no longer doubtful.  

 

Troubled debt restructurings are loans for which concessions in terms have been made as a result of the borrower experiencing financial difficulty.  Generally, concessions granted to customers include lower interest rates and modification of the payment stream to lower or defer payments.  Interest on troubled debt restructurings is accrued under the new terms if the loans are performing and full collection of principal and interest is expected.  However, interest accruals are discontinued on troubled debt restructurings that meet the Company’s nonaccrual criteria.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Generally, loans are charged off in whole or in part after they become significantly past due unless the loan is in the process of restructuring.  Charge-offs are determined on a loan-by-loan basis and are based upon management’s monthly review of the carrying amount of loans and the amount estimated to be collectible as determined by analyses of expected future cash flows and the liquidation of loan collateral.

 

Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses, and is established through a provision for loan losses charged to earnings.  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 as follows:

 

 

Included in impaired loans are all nonaccrual loans and all troubled debt restructurings.  Loans that experience insignificant payment delays or payment shortfalls generally are not considered impaired.  For individually evaluated impaired loans for which repayment is expected solely from the collateral, impairment is measured based on the fair value of the collateral.  For other individually evaluated impaired loans, impairment may be measured based on the fair value of the collateral or on the present value of expected future cash flows discounted at the loan’s original effective interest rate.  For impaired loans evaluated on a pool basis, impairment is measured based on statistics reflective of the increased risk of the loan pool.   When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

 

 

Although the allowance contains a specific component, the entire allowance is available for any loan that, in management’s judgment, should be charged off.  

 

On a quarterly basis, management estimates the allowance balance required using the criteria identified above in relation to the relevant risks for each of the Company’s major loan segments.  The most significant overall risk factors for both the Company’s commercial and consumer portfolios is the strength of the real estate market in the Company’s lending areas.

  

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

The quality of the Company's loan portfolio is assessed as a function of the levels of past due loans and impaired loans, and internal credit quality ratings which are updated quarterly by management. The ratings on the Company’s internal credit scale are broadly grouped into the categories “non-classified” and “classified.”  Non-classified loans are those loans with minimal identified credit risk, as well as loans with potential credit weaknesses which deserve management’s attention but for which full collection of contractual principal and interest is not significantly at risk.  Classified loans are those loans that have well-defined weakness that put full collection of contractual principal or interest at risk, and classified loans for which it is probable that the Company will not collect all contractual principal or interest are also considered impaired. The credit quality ratings are an important part of the Company's overall credit risk management process and are considered in the determination of the allowance for loan losses.

 

Determination of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance.  Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination.

 

Premises and Equipment

 

Land is carried at cost.  Buildings, building improvements, leasehold improvements, furniture and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the lease term, if shorter.  Maintenance and repairs, which do not extend the useful lives of premises and equipment, are charged to expense as incurred.

 

Real Estate Held for Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value when acquired (less an estimate of cost to sell), establishing a new cost basis.    Bank premises transferred to real estate held for sale are also initially recorded at fair value.  If fair value declines subsequent to acquisition or transfer, a valuation allowance is recorded through earnings.  Operating expenses relative to real estate held for sale are expensed as incurred, while certain improvements may be capitalized if the expenditures are likely to be recaptured upon disposition of the real estate.   Gain or loss on sale, if any, is recognized at the time of sale.  

 

Intangible Assets

 

Core Deposit Intangibles

 

Core deposit intangibles result from business acquisitions and represent the excess of the fair value of deposits acquired over their book value.  Core deposit intangibles are amortized over their estimated economic lives which range from periods of seven to twelve years.  In addition, core deposit intangibles are assessed at least annually for impairment, and any impairment losses are recognized in earnings in the period identified.

 

Goodwill

 

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment, and any impairment losses are recognized in earnings in the period identified.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Income Taxes

 

The Company is taxed under the provisions of Subchapter S of the Internal Revenue Code.  Under those provisions, subject to certain exceptions, the Company neither pays corporate income taxes on its taxable income nor is allowed to carry back losses to claim refunds for previously paid income taxes.  Instead, the stockholders of the Company include their respective shares of consolidated taxable income or loss in their individual income tax returns. Accordingly, no income taxes are reflected in the consolidated financial statements.

 

The Company is no longer subject to examination by federal tax authorities for years before 2014.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income for the Company consists of entirely of changes in the unrealized gains and losses on securities available for sale, with no related tax effects.  

 

Note Receivable for Issuance of Common Stock

 

The Company has extended a loan to an executive officer to facilitate the officer’s purchase of Company stock.  The loan is secured by the stock purchased, and accordingly the outstanding balance of the loan is offset against the equity issued such that equity balances reflect only amounts for which the Company does not have a collateral interest in its own stock.

 

Off- Balance Sheet Financial Instruments

 

In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit, unused lines of credit, standby letters of credit and undisbursed loans in process.  These financial instruments are recorded in the consolidated financial statements when they are funded.

 

The Company is exposed to credit risk on its off-balance sheet financial instruments.  In conjunction with the determination of the allowance for loan losses, and using the same criteria, the Company estimates an allowance for probable incurred credit losses on off- balance sheet credit exposures.  Provisions for the allowance are recorded as a component of other noninterest expense, and the allowance is carried as a component of other liabilities.

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished and, for loan participations sold, incoming cash flows on the base loan are allocated to all participants on a pro-rata basis. Control over transferred assets is deemed to be relinquished when the assets have been isolated from the Company, 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 Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

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 there now are such matters that will have a material effect on the consolidated financial statements.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, excluding transaction costs. When measuring fair value, entities should maximize the use of observable inputs and minimize the use of unobservable inputs. The following describes the three levels of inputs that may be used to measure fair value:

 

 

 

 

Significant Applicable Accounting Standards Updates Not Yet Effective

 

Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.   Under the new standard, the Company will be required to convert from the existing incurred-loss model for determining the allowance for loan losses to an expected-loss model.  An expected-loss model will determine the allowance for loan losses balance based upon credit losses expected to be incurred over the life of the loan portfolio, and will consider not only current credit conditions but also reasonably supportable expectations as to future credit conditions.  The standard will also require securities held to maturity to be evaluated for impairment under an expected-loss model.  The standard is effective for the Company beginning January 1, 2021.  Management is in the processing of determining the impact of the standard on the Company’s consolidated financial statements.

 

Accounting Standards Update 2016-02, Leases (Topic 326).   Under the new standard, the Company will be required to record a right-of-use asset for leased property and also record a corresponding lease liability.   In general, rather than expense lease payments as they are made as currently done under operating lease guidance, the right-of-use asset will be amortized to expense over the lease term and lease payments will reduce the lease obligation.   The standard is effective for the Company beginning January 1, 2020, and is not expected to have a significant impact on the consolidated financial statements.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

The Financial Accounting Standards Board recently issued Accounting Standards Update 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  Under the new standard, certain equity investments are required to be carried at fair value, with changes in fair value recognized in net income. This applies to equity investments with readily determinable fair values that are not consolidated or carried on the equity method.  Debt securities classified as available-for-sale will continue to be carried at fair value with changes in fair value recorded through other comprehensive income.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.  

 

Accounting Standards Update 2014-09, Revenue from Contracts With Customers (Topic 606).  The new standard prescribes a five-step model to determine the amount and timing of revenue recognition related to the consideration the Company expects to receive from the transfer of goods and services.  The standard does not apply to financial instruments, and accordingly will not impact the Company’s recognition of interest income on its loans and investment securities, and will not impact the Company’s recognition of revenue from sales or transfers of loans and investment securities.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.

 

Subsequent Events

 

Management evaluates events occurring subsequent to the balance sheet date, through the date the financial statements are eligible to be issued, to determine whether the events require recognition or disclosure in the financial statements.  With respect to the December 31, 2017 financial statements, Management has considered subsequent events through March 23, 2018.

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 2 - INVESTMENT SECURITIES

 

 

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Pass-through securities listed above are comprised of a mix of mortgage-backed securities, SBA loan pools and student loan pools.

 

The amortized cost and fair value of debt securities available for sale at December 31, 2017, by contractual maturity, follows:

 

 

Various investments, including pass-though securities, may have actual maturities that differ from contractual maturities due to paydowns on the assets underlying the bonds or early call provisions.

 

Information pertaining to securities available for sale, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

At December 31, 2017, unrealized losses are largely due to differences in market yields as compared to yields available at the time securities were purchased. Management has performed analyses of investment credit quality and cash flows, and does not believe that any securities are impaired due to reasons of credit quality other than securities for which impairment charges have already been recognized through earnings.  The Company has the ability and intent to hold investment securities for a period of time sufficient for a recovery of cost, and fair value is expected to recover as bonds approach maturity.  Accordingly, as of December 31, 2017, management believes the impairments detailed in the table above are temporary.

 

 

Gross realized gains and losses on sales of securities available for sale are as follows:

  

 

 

Gross realized gains for 2017 include $231,000 related to a sale of securities to a shareholder of the Company.  The sale was initiated for the purpose of removing from the Company’s books non investment-grade municipal securities, and was transacted at estimated fair value.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 3 – NONMARKETABLE EQUITY SECURITIES

 

Nonmarketable equity securities are comprised of the following:

 

 

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

 

 

Loans with carrying values of $233,436,000 and $200,094,000 at December 31, 2017 and 2016, respectively, were pledged as collateral for Federal Home Loan Bank and other borrowings.

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Transactions in the allowance for loan losses are as follows:

 

Components of the allowance for loan losses, and the related carrying amount of loans for which the allowance is determined, are as follows:

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Information relative to impaired loans is as follows:

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Interest income recognized on impaired loans is immaterial to the financial statements for 2017 and 2016. There are no commitments to extend credit on impaired loans at December 31, 2017.

 

The carrying amount of loans by performance status and credit quality indicator are as follows:

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

  

Information relative to troubled debt restructurings included in impaired loans is as follows:

 

At December 31, 2017, the $290,000 of commercial loan troubled debt restructurings and $5,000 of other loan troubled debt restructurings are on nonaccrual status.

 

 

24

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

 

At December 31, 2016, the $299,000 of commercial loan troubled debt restructurings are on nonaccrual status.

 

 

NOTE 5 - PREMISES AND EQUIPMENT

 

Premises and equipment are as follows:

 

The Company leases certain premises under various operating lease agreements.  Future minimum rent commitments under these leases are immaterial to the financial statements.  In 2017 and 2016, rent expense was $181,000 and $133,000 respectively.

25

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

 

NOTE 6 – REAL ESTATE HELD FOR SALE

 

A summary of activity in real estate held for sale is as follows:

 

 

Net expense from real estate held for sale is as follows:

 

Changes in the valuation allowance for real estate held for sale are as follows:

 

26

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 7 – INTANGIBLE ASSETS

 

 

Intangible assets consist of the following:

 

Estimated amortization expense of the core deposit intangible is as follows:

 

 

NOTE 8 - DEPOSITS

 

Interest-bearing deposits are summarized as follows:

 

 

27

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Scheduled maturities of time deposits at December 31, 2017 are as follows:

 

 

NOTE 9 - REPURCHASE AGREEMENTS

 

Securities sold under agreements to repurchase are classified as secured borrowings and generally mature within one to three days from the transaction date.  Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction.  At December 31, 2017 and 2016, the Company had investment securities with a carrying value of $4,639,000 and $4,744,000, respectively, pledged as collateral to secure repurchase agreements.  The Company may be required to provide additional collateral based on the fair values of the underlying securities.  

 

NOTE 10 - FEDERAL HOME LOAN BANK BORROWING

 

 

 

Borrowings from the Federal Home Loan Bank are secured by various loans and investment securities of the Company. At December 31, 2017, the Company was eligible to borrow a maximum of $120,067,000 from the Federal Home Loan Bank.

 

28

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 11 – FEDERAL FUNDS AND DISCOUNT WINDOW

 

The Company has unsecured federal funds lines at various correspondent banks with an aggregate available credit limit of $53,604,000 at December 31, 2017.  No amounts are drawn under these lines as of December 31, 2017 or 2016.  Federal funds lines are uncommitted, and funding requests made by the Company are subject to the lending institutions’ approval and funding availability at the time of request.

The Company is eligible to borrow from the Federal Reserve discount window based upon the amount of investment securities and loans pledged as collateral.  At December 31, 2017, the Company is eligible to borrow $21,232,000.

 

 

NOTE 12 - EMPLOYEE BENEFIT PLANS

 

Defined Contribution and Profit Sharing

 

The Company has a defined contribution and profit sharing plan in which substantially all full-time employees have elected to participate.  Employees may contribute from 1% to 75% of their compensation to the plan, subject to certain limits based on federal tax laws.  The Company may make safe harbor contributions to the plan of 3% of participants’ compensation and these contributions are immediately vested.  Additionally, based on certain performance measures of the Banks, the Company may make profit sharing contributions of up to 12% of participants’ compensation. Company profit sharing contributions vest to participant’s over six years.  Expense attributable to this plan for 2017 and 2016 was $359,000 and $244,000, respectively.

 

Stock Appreciation Rights

 

The Company has Stock Appreciation Rights (SAR) plans for key employees.  Under the plans, participants are granted a number of SARs at the discretion of the Company’s Board of Directors. Each SAR entitles the holder to the book value appreciation of the Company’s common stock during the four-year period following the date of grant.  The value of the stock appreciation vests in the fifth year, at which time the holder is entitled to receive the value in cash.  Expense attributable to the plans in 2017 and 2016 was $46,000 and $60,000, respectively.

 

Note Receivable for Issuance of Common Stock and Restricted Stock

 

The Company’s Note Receivable for Issuance of Common Stock was issued in 2015 for the purpose of facilitating an executive officer’s purchase of 230 shares of common stock that are subject to various restrictions on transfers, forfeiture provisions, and other call and put provisions.  Though the transfer restrictions and forfeiture provisions lapse at 20% per year through June, 2020, the stock remains subject to collateral provisions of the loan.  The loan requires annual principal payments of at least 10% of the amount borrowed through 2025, along with interest that accrues at 1.53%.  The related Stock Purchase and Restriction Agreement (the “Agreement”) provides for annual bonus opportunities of 10% of the original amount borrowed based on certain performance metrics of the Company, the proceeds of which could be used to fund annual payments on the note payable.  No bonuses have been earned under the plan to date, and the Agreement allows for deferral of each annual loan payment to final maturity in 2025 in the event a bonus is not awarded for the year.  In the event of a sale of the Company, a bonus equal to the outstanding balance of the loan, plus a gross-up for related personal taxes thereon, is awarded.

29

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.  The Company’s exposure to credit loss is represented by the contractual amount of these commitments.  The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

 

The following financial instruments were outstanding whose contract amounts represent credit risk:

 

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer's credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on management's credit evaluation of the customer.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and real estate.  Some unfunded commitments under commercial lines of credit, revolving lines of credit and overdraft protection agreements are uncollateralized.

 

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  

 

The Company establishes an allowance for losses on unfunded credit commitments as losses are estimated to have occurred.  During both 2017 and 2016, the provision for unfunded credit commitments was $-0-. At both December 31, 2017 and 2016, the balance of the allowance for unfunded credit commitments was $120,000.

 

 

NOTE 14 - RELATED PARTY TRANSACTIONS

 

In the ordinary course of business, the Company has transactions with principal shareholders, directors, executive officers and parties affiliated with these persons (collectively “insiders”). At December 31, 2017 and 2016, the Company had loans to insiders aggregating $1,884,000 and $1,413,000, respectively.  In management's opinion, the terms of these loans, including interest rates and collateral, were comparable to terms afforded non-related borrowers.  At December 31, 2017 and 2016, deposits by insiders totaled $12,454,000 and $7,500,000, respectively.

30

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

The Company is affiliated with Citizens Bank of Pagosa Springs, Farmers Savings Bank and Chain Bridge Bank through common ownership.  The Company had loan participations sold to these affiliates of $-0- and $2,425,000 at December 31, 2017 and 2016, respectively.  The Company had loan participations purchased from these affiliates of $6,914,000 and $958,000 at December 31, 2017 and 2016, respectively.

 

The Company provides item processing and data processing services for Citizens Bank of Pagosa Springs.  Fees received by the Company for these services totaled $65,000 and $64,000 in 2017 and 2016, respectively.

 

The Company is affiliated with BankNote Capital Corp., Otis Management LLC and TF Management LLC through common ownership.  These affiliates provide various management services to the Company.  The Company paid the affiliates $844,000 and $813,000 during 2017 and 2016, respectively. Included in these payments are reimbursements to BankNote Capital Corp. for expenses incurred on the Company’s behalf.

 

 

NOTE 15 - REGULATORY MATTERS

 

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and 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 about components, risk weighting and other factors.

 

The Basel III Capital Rules became effective for the Banks on January 1, 2015, subject to a phase-in for certain provisions.  Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity tier 1 capital, tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to quarterly average assets (as defined).

 

The Banks’ regulatory capital is comprised of the following:  1) Common equity tier 1 capital – consisting of common stock and related paid-in-capital and retained earnings, net of certain intangible asset balances; 2) Additional tier 1 capital – there are no components of tier 1 capital beyond common equity tier 1 capital; 3) Tier 2 capital - consisting of a permissible portion of the allowance for loan losses; and 4) total capital - the aggregate of  all tier 1 and tier 2 capital.  In connection with the adoption of the Basel III Capital Rules, the Banks elected to opt-out of the requirement to include most components of accumulated other comprehensive income in common equity tier 1 capital.  

 

When fully phased in on January 1, 2019, the Basel III capital rules will require the Banks to maintain a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity tier 1 capital ratio as the buffer is phased in, effectively resulting in a minimum ratio of common equity tier 1 capital to risk-weighted assets of 7% upon full phase in).  The Banks will also be required to maintain a tier 1 capital to risk-weighted assets ratio of 6.0% (8.5% including the capital conservation buffer), a total capital to risk-weighted assets ratio of 8.0% (10.5% including the capital conservation buffer), and a tier 1 capital to quarterly average assets ratio of 4.0%.  

31

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

The aforementioned capital conservation buffer phases in at 0.625% annually over a four-year period beginning January 1, 2016, and is designed to absorb losses during periods of economic stress.  Banking institutions with capital ratios above the base minimums but below the effective minimums (which include the buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The following table presents actual and required capital ratios as of December 31, 2017 and 2016 for the Banks under the Basel III Capital Rules.  The minimum required capital amounts presented include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital rules have been fully phased-in, and include the capital conservation buffer.  Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect changes under the Basel III Capital Rules.

 

32

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Regulatory authorities can initiate certain mandatory actions if the Banks fail to meet the minimum capital requirements, which could have a direct and material effect on the Company’s financial statements.  Management believes, as of December 31, 2017 and 2016, that the Banks meet all capital adequacy requirements to which they are subject and that the Banks exceed the minimum levels necessary to be considered “well capitalized.”

 

The principal source of income and funds of FBD are dividends from the Banks.  Dividends declared by the Banks that exceed their retained net income for the most current year plus retained net income for the preceding two years must be approved by their federal regulatory agencies. In addition, dividends paid by the Banks would be prohibited if the effect thereof would cause the Banks' capital to be reduced below the minimum capital requirements.

33

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 16 – FAIR VALUE MEASUREMENTS AND DISCLOSURES

 

The following is a description of the Company’s valuation methodologies for assets and liabilities recorded at fair value:

 

Securities Available for Sale – Securities are recorded at fair value on a recurring basis based upon measurements obtained from independent pricing services.  For certain corporate securities and exchange traded funds, fair value measurements are based on quoted market prices (level 1). For U.S. Government agency securities, mortgage-backed securities, collateralized mortgage obligations, certain municipal securities and certain corporate securities, fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, market consensus prepayment speeds, credit information and the bonds’ terms and conditions, among other things (level 2).  For certain municipal securities and corporate securities, including auction rate municipal securities and securities for which OTTI charges have been recorded through earnings, market activity and observable data is highly limited. Fair value of these securities is based upon management’s estimates of the securities’ future cash flows and future market conditions (level 3).

 

Loans Held For Sale -  The Company does not record loans held for sale at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect declines in value based on commitments in hand from investors or prevailing investor yield requirements (level 2).

 

Impaired Loans - The Company does not record loans at fair value on a recurring basis. However, from time to time, valuation allowances are recorded on impaired loans to reflect (1) the current appraised or market-quoted value of the underlying collateral, or (2) the discounted value of expected cash flows. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for impaired loans evaluated individually are obtained from independent appraisers or other third-party consultants, or are based on discounted cash flow analyses (level 3).  Fair value estimates for impaired loans evaluated collectively are based on statistics reflective of the loans’ credit risk (level 3).

 

Real Estate Held For Sale-  The Company does not record real estate held for sale at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these properties to reflect the current appraised value (less an estimate of cost to sell). In some cases, the properties for which appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for real estate held for sale are obtained from independent appraisers or other third party consultants (level 3).

 

34

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a recurring basis:

 

 

35

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

Activity for investment securities recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is immaterial to the financial statements for 2017 and 2016.

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a non-recurring basis:

 

At December 31, 2017, impaired loans with a gross carrying amount of $1,231,000 have a valuation allowance of $395,000.  At December 31, 2016, impaired loans with a gross carrying amount of $481,000 have a valuation allowance of $103,000.  The valuation allowances have been recorded through the provision for loan losses.  Impaired loans of $5,481,000 at December 31, 2017 and $4,672,000 at December 31, 2016 have no valuation allowances.

 

At December 31, 2017, real estate held for sale with an initial cost basis of $4,629,000 has a $2,747,000 valuation allowance.  At December 31, 2016, real estate held for sale with an initial cost basis of $4,967,000 has a $2,920,000 valuation allowance.  The valuation allowances were recorded through net expense from real estate held for sale.

 

There are no fair value adjustments to loans held for sale at December 31, 2017 and 2016.

36

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 17 - STATEMENTS OF CASH FLOWS

 

Statements of Cash Flows for FBD (parent company only) are as follows:

 

 

37

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017 and 2016

 

NOTE 18 - PRO FORMA FINANCIAL INFORMATION

 

C Corporation Income Taxes

 

As discussed in Note 1, the Company is an S Corporation for income tax purposes and, accordingly, the Consolidated Statements of Income for 2017 and 2016 reflect no corporate income tax expense.  Pro forma results of operations, presented on a C Corporation basis, would have been as follows:

 

 

Taxable Equivalent Income

 

A portion of the Company's revenue consists of tax-exempt interest income.  Tax-exempt investment and loan income totaled approximately $4,300,000 and $4,800,000 during 2017 and 2016, respectively. The following pro forma presentation of results of operations on a taxable equivalent basis contains increases to revenue on this tax-exempt income to a level comparable to the level at which income is taxable, at an effective tax rate of approximately 37%.

 

 

 

NOTE 19 – SUBSEQUENT EVENT

 

In January, 2018, the Company declared and paid a dividend of $2,007,000.

 

38

 

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SUPPLEMENTAL CONSOLIDATING SCHEDULES

 

 

 

 

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

 

 

 

 

 

 

40

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

 

 

 

41

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

 

42

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

 

 

 

43

 

 

Exhibit 99.2

 

 

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

and INDEPENDENT AUDITORS’ REPORT

 

SOUTHERN COLORADO CORP.

AND SUBSIDIARY

 

December 31, 2017

 

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INDEPENDENT AUDITORS' REPORT

 

Board of Directors

Southern Colorado Corp.

Inverness, Illinois

 

 

We have audited the accompanying consolidated financial statements of Southern Colorado Corp. and Subsidiary, which are comprised of the consolidated statement of financial condition as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit 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 financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.  The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 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 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 Southern Colorado Corp. and Subsidiary at December 31, 2017 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

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Report on Consolidating Information

Our audit was conducted for the purpose of forming an opinion on the 2017 consolidated financial statements as a whole.  The accompanying consolidating schedules on pages 35 and 36 are presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual companies, and are not a required part of the consolidated financial statements.  The supplemental consolidating schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the consolidated financial statements.  The supplemental consolidating schedules have been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling the information directly to the underlying accounting records used to prepare the consolidated financial statements and to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America.  In our opinion, the supplemental consolidating schedules are fairly stated in all material respects in relation to the consolidated financial statements as a whole.

 

 

/s/ Fortner, Bayens, Levkulich, & Garrison, P.C.

 

Denver, Colorado

July 10, 2018

 

 

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Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

 

December 31, 2017

 

(dollars in thousands, except per share amounts)

 

 

 

The accompanying notes are an integral part of this consolidated statement.

4

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Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF INCOME

 

Year Ended December 31, 2017

 

(dollars in thousands, except per share amounts)

 

 

 

The accompanying notes are an integral part of this consolidated statement.

5

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Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

Year Ended December 31, 2017

 

(dollars in thousands)

 

 

 

 

 

The accompanying notes are an integral part of this consolidated statement.

6

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Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Year Ended December 31, 2017

 

(dollars in thousands)

 

 

 

The accompanying notes are an integral part of this consolidated statement.

7

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Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

Year Ended December 31, 2017

 

(dollars in thousands)

 

 

 

 

The accompanying notes are an integral part of this consolidated statement.

8

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

 

 

Organization and Principles of Consolidation

 

Southern Colorado Corp. (“SCC”) is a bank holding company that owns 100% of the stock of Citizens Bank of Pagosa Springs (“the Bank”).  SCC and the Bank are collectively referred to as “the Company.”  

 

The accompanying consolidated financial statements include the consolidated totals of the accounts of SCC and the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.  

 

Nature of Operations

 

The Company provides a full range of banking and mortgage services to individual and business customers through its two branches located in Pagosa Springs, Colorado.

 

The Company is subject to competition from other financial institutions, and from non-financial institutions that provide financial products and services, for loans and deposit accounts. The Company is also subject to regulation by certain governmental agencies and undergoes periodic examinations by those regulatory agencies.  SCCs primary regulator is the Federal Reserve, and the Bank’s primary regulators are the state of Colorado Division of Banking and the Federal Deposit Insurance Corporation.  

 

Use of Estimates

 

 

9

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Significant Group Concentrations of Credit Risk

 

Most of the Company's activities are with customers located within the Company’s areas of operations. A majority of the Company’s loans are related to real estate.  Borrowers’ abilities to honor their loans are dependent upon the continued economic viability of the areas in which the Company lends.  Note 3 discusses the types of lending in which the Company engages.  Note 2 discusses the types of securities in which the Company invests.

 

Cash and Cash Equivalents

 

 

Investment Securities

 

Investment securities are classified as “available for sale” and are stated at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

 

The amortized cost of debt securities classified as available for sale is adjusted for amortization of purchase premiums and accretion of purchase discounts.  Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  For mortgage-backed securities, the term of the security is the expected life of the security given estimated paydowns.  For other securities, the term of the security is the earlier of final maturity or the expected call date.  The Company believes amortization to the call date rather than the final maturity date is insignificant to the financial statements as a whole.  Gains and losses on the sale of securities are 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 an impairment charge to 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 is recognized as an impairment charge to earnings, and 2) OTTI related to other factors, which is recognized in other comprehensive income.  

10

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

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.

 

Federal Home Loan Bank Stock

 

The Company, as a member of the Federal Home Loan Bank system, is required to maintain an investment in the capital stock of the Federal Home Loan of Topeka.  No ready market exists for this stock, and it has no quoted market value and may generally only be redeemed by the Federal Home Loan Bank at par.  For reporting purposes, such stock is considered restricted and is carried at cost.  

 

Loans

 

Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, deferred fees or costs on originated loans and purchase premiums or discounts on purchased loans.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized into interest income over the life of related loans using the interest method.

 

Past due loans are any loans for which payments of interest, principal or both have not been received within the timeframes designated by the loan agreements.  Loans with payments in arrears but for which borrowers have resumed making scheduled payments are considered past due until arrearages are brought current. Loans that experience insignificant payment delays or payment shortfalls generally are not considered past due. 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.

 

The accrual of interest on any loan is discontinued at the time the loan is 90 days past due unless the loan is well secured and in process of collection.  Additionally, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful.  When placing a loan on nonaccrual status, interest accrued to date is generally reversed and is charged against the current year's interest income.  Payments received on a loan on nonaccrual status are applied against the balance of the loan. A loan is returned to accrual status when principal and interest are no longer past due and collectibility is no longer doubtful.

 

Troubled debt restructurings are loans for which concessions in terms have been made as a result of the borrower experiencing financial difficulty. Generally, concessions granted to customers include lower interest rates and modification of the payment stream to lower or defer payments.  Interest on troubled debt restructurings is accrued under the new terms if the loans are performing and full collection of principal and interest is expected.  However, interest accruals are discontinued on troubled debt restructurings that meet the Company’s nonaccrual criteria.

11

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Generally, loans are charged off in whole or in part after they become significantly past due unless the loan is in the process of restructuring or collection efforts are ongoing and deemed likely to be successful.  Charge off amounts are determined based upon the carrying amount of loans and the amount estimated to be collectible as determined by analyses of expected future cash flows and the liquidation of loan collateral.

 

Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses, and is established through a provision for loan losses charged to earnings.  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 as follows:  

 

 

Included in impaired loans are all nonaccrual loans and all troubled debt restructurings.  Loans that experience insignificant payment delays or payment shortfalls generally are not considered impaired.  For individually evaluated impaired loans for which repayment is expected solely from the collateral, impairment is measured based on the fair value of the collateral.  For other individually evaluated impaired loans, impairment may be measured based on the fair value of the collateral or on the present value of expected future cash flows discounted at the loan’s original effective interest rate.  For impaired loans evaluated on a pool basis, impairment is measured based on statistics reflective of the increased risk of the loan pool.   When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

 

 

Although the allowance contains a specific component, the entire allowance is available for any loan that, in management’s judgment, should be charged off.  

12

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

On a quarterly basis, management estimates the allowance balance required using the criteria identified above in relation to the relevant risks for each of the Company’s major loan segments.  Significant overall risk factors for both the Company’s commercial and consumer portfolios include the strength of the real estate market and general economic activity in the Company’s market area.

 

The quality of the Company's loan portfolio is assessed as a function of the levels of past due loans and impaired loans, and internal credit quality ratings which are updated quarterly by management. The ratings on the Company’s internal credit scale are an important part of the Company's overall credit risk management process and are considered in the determination of the allowance for loan losses, and are grouped as follows:

 

Pass -   Loans with minimal to average identified credit risk.  These loans have borrowers considered creditworthy who have the ability to repay the debt in the normal course of business.  Borrowers have a sound primary and secondary repayment source, with sufficient cash generation to meet ongoing debt service requirements.  Loans are typically fully secured with marketable, margined collateral.

 

Special mention -   Loans with potential credit weaknesses which deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects or the Company’s credit position at some future date.  These loans exhibit characteristics such as declining or stressed financial condition of the borrower, and declining or narrow collateral coverage.

 

Substandard – Loans inadequately protected by the current financial condition and paying capacity of the borrower or the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  These loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  In some instances, though not all, the weakness or weaknesses in these loans will necessitate nonaccrual treatment.

 

Doubtful – Loans in this category 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.  The probability of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the loans, classification as a loss is deferred until more exact status may be determined.

 

Loss – Loans considered loss are considered uncollectable and of such little value that their continuance as a bankable asset, even with a valuation allowance, is not warranted.  This does not mean the loans have no recovery or salvage value, but rather it is not practical or desirable to defer a charge-off even though a partial recovery may be effected in the future.  Loans classified as a loss are charged-off in the period they are deemed uncollectible.

13

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Management believes that the allowance for loan losses is adequate.  However, determination of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or credit conditions change.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance.  Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination.

 

Premises and Equipment

 

 

Real Estate Held for Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value when acquired (less an estimate of cost to sell), establishing a new cost basis.    If fair value declines subsequent to acquisition, a valuation allowance is recorded through earnings.  Operating expenses relative to real estate held for sale are expensed as incurred, while certain improvements may be capitalized if the expenditures are likely to be recaptured upon disposition of the real estate.   Gain or loss on sale, if any, is recognized at the time of sale.  

 

Income Taxes

 

The Company has elected taxation under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company neither pays federal corporate income taxes on its taxable income nor is allowed a net operating loss carryover or carryback as a deduction.  Instead, the stockholders of the Company include their respective share of the consolidated taxable income or loss in their individual income tax returns.  Accordingly, no income taxes are reflected in the consolidated financial statements.  

 

The Company is no longer subject to examination by federal tax authorities for years before 2014.

 

Comprehensive Income

 

 

Earnings Per Share

 

Earnings per share is computed by dividing net income by the weighted average number of shares outstanding.  The Company has no dilutive instruments and accordingly reports only basic earnings per share.  

14

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Off- Balance Sheet Financial Instruments

 

 

In conjunction with the determination of the allowance for loan losses, and using the same criteria, the Company determines the extent of credit risk on its off-balance sheet financial instruments and whether there are probable incurred credit losses on those instruments for which a loss provision is necessary.  The Company has determined that there is minimal credit risk on its off-balance sheet financial instruments, and accordingly has not recorded a loss provision or allowance for those instruments.

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished and, for loan participations sold, incoming cash flows on the base loan are allocated to all participants on a pro-rata basis. Control over transferred assets is deemed to be relinquished when the assets have been isolated from the Company, 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 Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Mortgage Banking and Loan Servicing

 

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value.  Net unrealized losses, if any, are recognized through a valuation allowance charged to earnings.  There are no loans held for sale at December 31, 2017.

 

Mortgage banking income is comprised of servicing fees on loans sold to other parties that are serviced for those parties, and from the origination fees and sale premiums on the loans sold. Servicing fees are recognized over the servicing period as the fees are collected, and loan origination fees and sale premiums are recognized at the time of sale.   Loans sold to other parties that are serviced for those parties are not included in the consolidated statement of financial position as they are not assets of the Company.

 

The Company has not recorded a mortgage servicing right asset for loans sold with servicing retained as it believes that recording a servicing right asset would be immaterial to the consolidated financial statements as a whole.

15

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

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.  

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, excluding transaction costs. When measuring fair value, entities should maximize the use of observable inputs and minimize the use of unobservable inputs. The following describes the three levels of inputs that may be used to measure fair value:

 

 

 

 

Significant Applicable Accounting Standards Updates Not Yet Effective

 

Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.   Under the new standard, the Company will be required to convert from the existing incurred-loss model for determining the allowance for loan losses to an expected-loss model.  An expected-loss model will determine the allowance for loan losses balance based upon credit losses expected to be incurred over the life of the loan portfolio, and will consider not only current credit conditions but also reasonably supportable expectations as to future credit conditions.  The standard will also require securities held to maturity to be evaluated for impairment under an expected-loss model.  The standard is effective for the Company beginning January 1, 2021.  Management is in the processing of determining the impact of the standard on the Company’s consolidated financial statements.

 

Accounting Standards Update 2016-02, Leases (Topic 326).   Under the new standard, the Company will be required to record a right-of-use asset for leased property and also record a corresponding lease liability.   In general, rather than expense lease payments as they are made as currently done under operating lease guidance, the right-of-use asset will be amortized to expense over the lease term and lease payments will reduce the lease obligation.   The standard is effective for the Company beginning January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.

16

---

Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Accounting Standards Update 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  Under the new standard, certain equity investments are required to be carried at fair value, with changes in fair value recognized in net income. This applies to equity investments with readily determinable fair values that are not consolidated or carried on the equity method.  Debt securities classified as available-for-sale will continue to be carried at fair value with changes in fair value recorded through other comprehensive income.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.

 

Accounting Standards Update 2014-09, Revenue from Contracts With Customers (Topic 606).  The new standard prescribes a five-step model to determine the amount and timing of revenue recognition related to the consideration the Company expects to receive from the transfer of goods and services.  The standard does not apply to financial instruments, and accordingly will not impact the Company’s recognition of interest income on its loans and investment securities, and will not impact the Company’s recognition of revenue from sales or transfers of loans and investment securities.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.

 

 

Management evaluates events occurring subsequent to the balance sheet date, through the date the financial statements are eligible to be issued, to determine whether the events require recognition or disclosure in the financial statements.  With respect to the December 31, 2017 financial statements, Management has considered subsequent events through July 10, 2018.  See Note 16 - Subsequent Events and Related Contingencies.

 

 

NOTE 2 - INVESTMENT SECURITIES

 

 

 

17

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

The amortized cost and fair value of debt securities available for sale at December 31, 2017, by contractual maturity, are shown below.

 

 

Investment securities may have actual maturities that differ from contractual maturities due to paydowns on the assets underlying the bonds or early call provisions.

 

Information pertaining to securities available-for-sale, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

At December 31, 2017, unrealized losses are largely due to differences in market yields as compared to yields available at the time securities were purchased. Management has performed analyses of investment credit quality and cash flows, and does not believe that any securities are impaired due to reasons of credit quality.  The Company has the ability and intent to hold investment securities for a period of time sufficient for a recovery of cost, and fair value is expected to recover as bonds approach maturity.  Accordingly, as of December 31, 2017, management believes the unrealized losses detailed in the table above are temporary.

18

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

The Company realized $16,000 in gains and no losses on the sale of investment securities in 2017.  All 2017 sales were to an entity affiliated with the Company’s primary shareholder through common ownership.  The sale was initiated for the purpose of removing from the Company’s books non investment-grade municipal securities, and was transacted at estimated fair value.

 

 

 

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

 

 

In the ordinary course of business, the Company may grant loans to its executive officers, significant shareholders, directors, and parties affiliated with those persons (collectively, “related parties”).  However, the Company had no loans to related parties at December 31, 2017.

 

At December 31, 2017, residential 1-4 family real estate loans totaling $10,560,000 are pledged to secure credit facilities and credit enhancement arrangements with the Federal Home Loan Bank of Topeka.

19

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Transactions in the allowance for loan losses are as follows:

 

 

Components of the allowance for loan losses, and the related carrying amount of loans for which the allowance is determined, are as follows:

 

 

20

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Information relative to impaired loans is as follows:

 

 

Impaired loans at December 31, 2017 is comprised of a single loan which is considered a troubled debt restructuring and which is performing under the modified terms.  There are no nonaccrual loans at December 31, 2017.

 

Interest income recognized on impaired loans is immaterial for the year ended December 31, 2017.  

 

At December 31, 2017, there are no loans in the process of foreclosure.

 

At December 31, 2017, there are no loans past due 30 days or greater.

 

There were no loans modified as a troubled debt restructuring that defaulted in 2017 where the default occurred within 12 months of the restructuring.  For the purpose of this disclosure, a default is considered a payment delinquency of 90 days or greater, or foreclosure and repossession of the applicable collateral.

21

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

The following summarizes loans by credit rating:

 

 

At December 31, 2017, commercial real estate loans graded “special mention” include a $338,000 loan for which $236,000 is covered by a U.S. Department of Agriculture guaranty.

 

 

NOTE 4– SERVICED LOANS AND CREDIT ENHANCEMENTS

 

At December 31, 2017, the Company has 96 loans, totaling $18,026,000, sold to and serviced for the Federal Home Loan Bank of Topeka under the Federal Home Loan Bank’s Mortgage Partnership Finance Program.  Servicing income earned by the Company in 2017 was $43,000 and is included as a component of mortgage banking income.  As discussed in Note 1, a servicing right asset has not been recorded on the basis of immateriality.

 

At December 31, 2017, the Company has $666,000 in gross credit enhancement exposure to the Federal Home Loan Bank of Topeka relative to the serviced loan portfolio.   In the event that serviced loans default, and borrower equity and private mortgage insurance amounts are depleted and loan losses occur, the credit enhancement exposure is the loss sharing amount to the Federal Home Loan Bank.  The Company has not recorded a liability for the credit enhancement exposure as it believes the fair value of the credit enhancement exposure is immaterial to the consolidated financial statements due to strong credit quality and no loss history.  The gross credit enhancement exposure amount is collateralized by a pledge of loans.

 

22

---

Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

NOTE 5 – PREMISES, EQUIPMENT AND SOFTWARE

 

Premises and equipment are as follows at December 31, 2017 (in thousands):

 

 

Depreciation expense in 2017 was $107,000.

 

At December 31, 2017, there is $51,000 of software included as a component of Other Assets ($323,000 cost and $272,000 accumulated amortization).  Software amortization expense in 2017 was $31,000.

 

In 2017, occupancy and equipment expense of $294,000 is net of $67,000 in rental income.

 

 

NOTE 6 - DEPOSITS

 

 

 

At December 31, 2017, there is $23,458,000 in accounts with a balance of $250,000 or greater, including $871,000 in individual retirement accounts and time certificates of deposit.  

 

Scheduled maturities of individual retirement accounts and time certificates of deposit at December 31, 2017 are as follows (in thousands):

 

 

23

---

Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

At December 31, 2017, the Company had $854,000 in deposits from its executive officers, significant shareholders, directors, and parties affiliated with those persons.

 

 

NOTE 7 –NOTES PAYABLE AND CREDIT FACILITIES

 

 

Notes Payable

 

Notes payable of $500,000 at December 31, 2017 are comprised of unsecured promissory notes payable to certain shareholders of the Company. The notes bear interest at a variable rate equal to the Bank’s base rate (4.5% at December 31, 2017), and interest is due quarterly and principal is due upon demand with no specified maturity date.  The notes were paid off and retired in February, 2018.

 

Federal Home Loan Bank

 

The Company is eligible to borrow from the Federal Home Loan Bank of Topeka on both a short-term and long-term basis.  The amount of credit available is based on discounted amounts of any loans and investment securities pledged as collateral, subject to a maximum amount based on the Company’s asset size.  Any outstanding borrowings are also secured by the Company’s Federal Home Loan Bank stock.  At December 31, 2017, no borrowings are outstanding and the Company is eligible to borrow up to $7,885,000.

 

Federal Funds

 

The Company has an unsecured federal funds line at one of its correspondent banks with a maximum credit limit of $2,260,000 at December 31, 2017. No amounts were outstanding under this line at December 31, 2017. The federal funds line is uncommitted, and funding requests made by the Company are subject to the lending institution’s approval and funding availability at the time of request.

 

Discount Window

 

The Company is eligible to borrow from the Federal Reserve discount window based upon discounted amounts of investment securities and loans pledged as collateral.  At December 31, 2017, the Company has not pledged any collateral to the Federal Reserve and borrowing capacity is $-0-.

 

 

NOTE 8 – SHAREHOLDER EQUITY

 

 

Various restrictions limit the extent to which dividends may be paid by the Bank to SCC.  Generally, regulatory approval is required for the Bank to pay dividends in any calendar year that exceed the Bank’s net profit for that year combined with its retained profits for the preceding two years.  In addition, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.  During 2017, the Bank did not pay any dividends to SCC.

24

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer's credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on management's credit evaluation of the customer.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and real estate.  Some unfunded commitments under commercial lines of credit, revolving lines of credit and overdraft protection agreements are uncollateralized.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

 

The following financial instruments were outstanding at December 31, 2017 whose contract amounts represent risk (in thousands):

 

 

 

NOTE 10 - EMPLOYEE BENEFIT PLAN

 

The Company has a defined contribution and profit sharing plan in which substantially all full-time employees have elected to participate.  Employees may contribute from 1% to 75% of their compensation to the plan, subject to certain limits based on federal tax laws.  The Company may make safe harbor contributions to the plan of 3% of participants’ compensation and these contributions are immediately vested.  Additionally, based on certain performance measures of the Bank, the Company may make profit sharing contributions of up to 12% of participants’ compensation. Company profit sharing contributions vest to participant’s over six years.  Expense attributable to this plan for 2017 was $17,000.

25

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

NOTE 11 - REGULATORY MATTERS

 

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and 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 about components, risk weighting and other factors.

 

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in for certain provisions.  Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity tier 1 capital, tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to quarterly average assets (as defined).

 

At December 31, 2017, the Bank’s regulatory capital is comprised of the following:  1) Common equity tier 1 capital – consisting of common stock, related paid-in-capital and retained earnings; 2) Additional tier 1 capital – there are no components of tier 1 capital beyond common equity tier 1 capital; 3) Tier 2 capital - consisting of a permissible portion of the allowance for loan losses; and 4) total capital - the aggregate of  all tier 1 and tier 2 capital.  In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include most components of accumulated other comprehensive income/loss in common equity tier 1 capital.

 

When fully phased in on January 1, 2019, the Basel III capital rules will require the Bank to maintain a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity tier 1 capital ratio as the buffer is phased in, effectively resulting in a minimum ratio of common equity tier 1 capital to risk-weighted assets of 7.0% upon full phase in).  The Bank will also be required to maintain a tier 1 capital to risk-weighted assets ratio of 6.0% (8.5% including the capital conservation buffer), a total capital to risk-weighted assets ratio of 8.0% (10.5% including the capital conservation buffer), and a tier 1 capital to quarterly average assets ratio of 4.0%.  

 

The aforementioned capital conservation buffer phases in at 0.625% annually over a four-year period beginning January 1, 2016, and is designed to absorb losses during periods of economic stress.  Banking institutions with capital ratios above the base minimums but below the effective minimums (which include the buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The following table presents actual and required capital ratios as of December 31, 2017 for the Bank under the Basel III Capital Rules.  The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2017 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital rules have been fully phased-in, and include the capital conservation buffer.  Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect changes under the Basel III Capital Rules.

 

 

26

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

 

Regulatory authorities can initiate certain mandatory actions if the Bank fails to meet the minimum capital requirements, which could have a direct and material effect on the Company’s financial statements.  Management believes, as of December 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject and that the Bank exceeds the minimum levels necessary to be considered “well capitalized.”

 

 

Note 12 - Fair Value MEASUREMENTS AND DISCLOSURES

 

The following is a description of the Company’s valuation methodologies for assets and liabilities recorded at fair value:

 

Securities Available for Sale –Debt securities are reported at fair value based upon measurements obtained from an independent pricing service. The fair value measurements are determined by quoted market prices, if available (Level 1), or consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, market consensus prepayment speeds, credit information and the bonds’ terms and conditions, among other things (Level 2).  For certain municipal securities and corporate securities, including auction rate municipal securities, market activity and observable data is highly limited. Fair value of these securities is considered to be amortized cost (level 3).

 

Impaired Loans - The Company does not record loans at fair value on a recurring basis. However, from time to time, valuation allowances are recorded on these loans to reflect (1) the current appraised or market-quoted value of the underlying collateral, less an estimate of cost to sell, or (2) the discounted value of expected cash flows. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for impaired loans measured for impairment based upon the value of the collateral are obtained from independent appraisers or other third-party consultants, and for other impaired loans are based on discounted cash flow analyses (Level 3).

27

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Real Estate Held For Sale-  The Company does not record real estate held for sale at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these properties to reflect the current appraised value (less an estimate of cost to sell). In some cases, the properties for which appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for real estate held for sale are obtained from independent appraisers or other third-party consultants (level 3).

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a recurring basis as of December 31, 2017:

 

 

Activity for debt securities available for sale recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is immaterial to the financial statements for 2017.

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a non-recurring basis as of December 31, 2017:

 

 

28

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

At December 31, 2017, real estate held for sale with an initial cost basis of $770,000 has a $638,000 valuation allowance.

 

At December 31, 2017, there are no impaired loans with a valuation allowance.

 

 

NOTE 13– PARENT COMPANY FINANCIAL INFORMATION

 

Following is financial information on SCC, presented on a parent company only basis:

 

 

29

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

 

 

30

---

Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

NOTE 14– PRO FORMA FINANCIAL INFORMATION

 

As discussed in Note 1, the Company is an S Corporation for income tax purposes and, accordingly, the Consolidated Statement of Income for 2017 reflects no corporate income tax expense.  Pro forma results of operations, presented on a C Corporation basis using statutory federal and state rates in effect for 2017, would have been as follows:

 

 

The pro-forma effective tax rate of 6.9% differs from the 37% blended federal and Colorado statutory rate due primarily to tax-exempt interest on investment securities and loans.

 

 

NOTE 15–RELATED PARTY TRANSACTIONS

 

Related party investment transactions, loans and deposits are described in Notes 2, 3 and 6, respectively.  A subsequent event involving a related party is described in Note 16.

 

The Company is affiliated with First National Bank of Durango, Bank of New Mexico, Farmers Savings Bank and Chain Bridge Bank through common ownership.  The Company had loan participations sold to these affiliates of $1,389,000 at December 31, 2017.  The Company had loan participations purchased from these affiliates of $2,315,000 at December 31, 2017.

 

The Company receives item processing and data processing services from First National Bank of Durango.  Fees paid by the Company for these services totaled $65,000 in 2017.

 

The Company is affiliated with BankNote Capital Corp. and Otis Management LLC through common ownership.  These affiliates provide various management and administration services to the Company. The Company paid these affiliates $231,000 in 2017, including $220,000 in management and administration fees and $11,000 in reimbursements for expenses incurred on the Company’s behalf.

 

31

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

NOTE 16– SUBSEQUENT EVENTS AND RELATED CONTINGENCIES

 

Land Sale to Related Party and Remediation Contingency

 

In 2018, the Company sold land with a carrying amount of $702,000 to an entity affiliated with the Company through common ownership.  The land was vacant land held for a future branch location no longer expected to be constructed by the Company, and was sold for its estimated fair value of $700,000.  

 

The land has a drainage issue existing prior to the sale of the land which the Company believes is due to the incorrect installation of a highway drainage system by the Colorado Department of Transportation. The Town of Pagosa Springs has petitioned the Company to remedy the drainage issue, citing a risk of improper drainage during a flood. It is not clear to the Company whether or not it has any responsibility for rectifying potential drainage issues. The Company is currently evaluating its options and has not committed to the Town of Pagosa Springs to take any remediation action.

 

Notwithstanding the lack of commitment to the Town of Pagosa Springs, the Company has committed to a buyer of the Company (see sale of Company in the next section of this note) that it will use reasonable best efforts to do the following prior to closing of the sale: (1) investigate, evaluate and determine whether Company is legally responsible for the remediation of the drainage issue; (2) if the Company determines it is not legally responsible, seek confirmation of such determination from relevant authorities (if applicable) and/or seek to have the responsible third party remediate the drainage issue; and (3) obtain one or more reports from independent contracting firm(s) estimating the cost of such remediation.  The Company has also committed to the buyer that: (1) if, following the investigation, the Company determines it is responsible for remediation of the drainage issue, then prior to closing of the sale the Company will either remediate the drainage issue or a related party of the Company will assume the liability to remediate the drainage issue (which may include a cash payment by Company to the related party) pursuant to an agreement reasonably acceptable to the related party and the buyer of the Company; (2) if responsibility for the drainage issue is not determined prior to the closing of the sale or the Company and buyer cannot in good faith agree on whether the Company is responsible, the related party will assume the liability to remediate the drainage issue (which may include a cash payment by Company to the Related Party) pursuant to an agreement reasonably acceptable to the related party and the buyer of the Company; and (3) if, following the investigation, the Company determines it is not responsible for remediation of the drainage issue and the buyer, acting in good faith, concurs in such determination, then no further action by Company or any related party will be required.

 

As of December 31, 2017, the Company has not recorded any liability with respect to remediation of the drainage issue as the Company cannot reasonably determine whether it is probable that it is responsible.  However, in 2018 and subject to Bank Board review and approval, the Company determined that it is likely to make a payment to the related party for the related party to assume the remediation contingency even though the Company’s responsibility for remediation has not been determined.  As of July 10, 2018, formal action by the Bank Board is pending along with completion of engineer estimates as to remediation cost and the related determination of the cost to the Company to transfer the continent liability to the related party.  If the Company determines to transfer the remediation contingency regardless of whether it is responsible, management believes that the cost will range from $200,000 to $250,000; however, the actual cost could be materially different based upon the results of the engineering assessment.

32

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Southern Colorado Corp. and Subsidiary

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2017

 

Sale of Company

 

In the second quarter of 2018, the Company entered into a definitive agreement to be acquired by, and merged with and into, Triumph Bancorp, Inc. through the Company’s shareholders’ exchange of all the Company’s common stock for cash from Triumph (NASDAQ:  TBK).  The transaction is subject to regulatory approval, shareholder approval and customary closing conditions, and is expected to close in the third quarter of 2018.

 

Bank Dividend to SCC

 

In the first quarter of 2018 the Bank paid dividends of $1,000,000 to SCC which were used to retire SCC’s debt and provide liquidity at the holding company level.

 

Reverse Provision to Allowance for Loan Losses

 

During the period January 1, 2018 through July 10, 2018, the Company recorded $400,000 in reverse provisions to the allowance for loan losses.

33

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SUPPLEMENTAL CONSOLIDATING SCHEDULES

 

34

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Southern Colorado Corp. and Subsidiary

 

SUPPLEMENTAL CONSOLIDATING STATEMENT OF FINANCIAL CONDITION

 

December 31, 2017

 

 

 

 

35

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Southern Colorado Corp. and Subsidiary

 

SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME

 

Year Ended December 31, 2017

 

 

 

36

 

Exhibit 99.3

 

 

 

 

 

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS and

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

First Bancorp of Durango, Inc. and Subsidiaries

 

As of June 30, 2018 and December 31, 2017

 

and for the six months ended June 30, 2018 and 2017

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

2

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF INCOME

 

(Unaudited)

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

3

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

4

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Six Months Ended June 30, 2018 and 2017

 

(Unaudited)

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

5

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

6

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accounting and reporting policies of First Bancorp of Durango, Inc. and Subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practice within the banking industry.  The following is a summary of the significant accounting and reporting policies:

 

Organization and Basis of Presentation

 

First Bancorp of Durango, Inc. (“FBD”) is a multi-bank holding company that owns 100% of the common stock of The First National Bank of Durango (“FNB") and 100% of the common stock of Bank of New Mexico (“BNM”).  The entities are collectively referred to as "the Company.”  

 

The accompanying unaudited consolidated financial statements include the consolidated totals of the accounts of FBD and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  

 

The unaudited consolidated financial statements and notes herein have been prepared in accordance with U.S. GAAP for interim financial information and do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.  However, the unaudited consolidated financial statements and notes herein reflect all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s financial condition, results of operations, changes in comprehensive income and cash flows for the unaudited interim periods.

 

The results of operations for the six-month period ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or any other period. The unaudited consolidated financial statements and notes herein should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2017.

 

Nature of Operations

 

The Company provides a full range of banking and mortgage services to individual and business customers, principally in La Plata County, Colorado, and in Cibola, McKinley and Bernalillo Counties, New Mexico.  In 2017, the Company also opened a loan production office in Littleton, Colorado.

 

Use of Estimates

 

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.

7

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

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 held for sale and the fair value of investment securities.  In connection with the determination of the allowance for loan losses and the valuation of real estate held for sale, management obtains independent appraisals for significant properties and assesses estimated future cash flows from borrowers’ operations and the liquidation of loan collateral.  In connection with the determination of the fair value of investment securities, management obtains valuations from third-party investment accounting service providers except for certain securities internally valued using level 3 inputs (see note 10 on fair value measurement).

 

Investment Securities

 

Debt securities are classified as “available for sale.”  Available for sale securities are stated at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

 

The amortized cost of debt securities classified as available for sale is adjusted for amortization of purchase premiums and accretion of purchase discounts.  Premiums and discounts are recognized in interest income using the interest method over the terms of the securities or to the call date, if earlier.  Gains and losses on the sale of securities are 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 an impairment charge to 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 is recognized as an impairment charge to earnings, and 2) OTTI related to other factors, which is recognized in other comprehensive income.  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.

 

Loans

 

Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, deferred fees or costs on originated loans and purchase premiums or discounts on purchased loans.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized into interest income over the life of related loans using the interest method.

 

8

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Past due loans are any loans for which payments of interest, principal or both have not been received within the timeframes designated by the loan agreements.  Loans with payments in arrears but for which borrowers have resumed making scheduled payments are considered past due until arrearages are brought current. Loans that experience insignificant payment delays or payment shortfalls generally are not considered past due. 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.

 

The accrual of interest on any loan is discontinued at the time a loan is 90 days past due unless the loan is well secured and in process of collection.  Additionally, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful.  When placing a loan on nonaccrual status, interest accrued to date is generally reversed and is charged against the current year's interest income.  Payments received on a loan on nonaccrual status are applied against the balance of the loan. A loan is returned to accrual status when principal and interest are no longer past due and collectibility is no longer doubtful.  

 

Troubled debt restructurings are loans for which concessions in terms have been made as a result of the borrower experiencing financial difficulty.  Generally, concessions granted to customers include lower interest rates and modification of the payment stream to lower or defer payments.  Interest on troubled debt restructurings is accrued under the new terms if the loans are performing and full collection of principal and interest is expected.  However, interest accruals are discontinued on troubled debt restructurings that meet the Company’s nonaccrual criteria.

 

Generally, loans are charged off in whole or in part after they become significantly past due unless the loan is in the process of restructuring.  Charge-offs are determined on a loan-by-loan basis and are based upon management’s monthly review of the carrying amount of loans and the amount estimated to be collectible as determined by analyses of expected future cash flows and the liquidation of loan collateral.

 

Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses, and is established through a provision for loan losses charged to earnings.  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 as follows:

 

 

9

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Included in impaired loans are all nonaccrual loans and all troubled debt restructurings.  Loans that experience insignificant payment delays or payment shortfalls generally are not considered impaired.  For individually evaluated impaired loans for which repayment is expected solely from the collateral, impairment is measured based on the fair value of the collateral.  For other individually evaluated impaired loans, impairment may be measured based on the fair value of the collateral or on the present value of expected future cash flows discounted at the loan’s original effective interest rate.  For impaired loans evaluated on a pool basis, impairment is measured based on statistics reflective of the increased risk of the loan pool.   When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

 

 

Although the allowance contains a specific component, the entire allowance is available for any loan that, in management’s judgment, should be charged off.  

 

On a quarterly basis, management estimates the allowance balance required using the criteria identified above in relation to the relevant risks for each of the Company’s major loan segments.  The most significant overall risk factors for both the Company’s commercial and consumer portfolios is the strength of the real estate market in the Company’s lending areas.

  

10

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

The quality of the Company's loan portfolio is assessed as a function of the levels of past due loans and impaired loans, and internal credit quality ratings which are updated quarterly by management. The ratings on the Company’s internal credit scale are broadly grouped into the categories “non-classified” and “classified.”  Non-classified loans are those loans with minimal identified credit risk, as well as loans with potential credit weaknesses which deserve management’s attention but for which full collection of contractual principal and interest is not significantly at risk.  Classified loans are those loans that have well-defined weakness that put full collection of contractual principal or interest at risk, and classified loans for which it is probable that the Company will not collect all contractual principal or interest are also considered impaired. The credit quality ratings are an important part of the Company's overall credit risk management process and are considered in the determination of the allowance for loan losses.

 

Determination of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance.  Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination.

 

Income Taxes

 

The Company is taxed under the provisions of Subchapter S of the Internal Revenue Code.  Under those provisions, subject to certain exceptions, the Company neither pays corporate income taxes on its taxable income nor is allowed to carry back losses to claim refunds for previously paid income taxes. Instead, the stockholders of the Company include their respective shares of consolidated taxable income or loss in their individual income tax returns. Accordingly, no income taxes are reflected in the consolidated financial statements.

 

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 there now are such matters that will have a material effect on the consolidated financial statements.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, excluding transaction costs. When measuring fair value, entities should maximize the use of observable inputs and minimize the use of unobservable inputs. The following describes the three levels of inputs that may be used to measure fair value:

 

 

 

11

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

 

Significant Applicable Accounting Standards Updates Not Yet Effective

 

Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.   Under the new standard, the Company will be required to convert from the existing incurred-loss model for determining the allowance for loan losses to an expected-loss model.  An expected-loss model will determine the allowance for loan losses balance based upon credit losses expected to be incurred over the life of the loan portfolio, and will consider not only current credit conditions but also reasonably supportable expectations as to future credit conditions.  The standard will also require securities held to maturity to be evaluated for impairment under an expected-loss model.  The standard is effective for the Company beginning January 1, 2022.  Management is in the processing of determining the impact of the standard on the Company’s consolidated financial statements.

 

Accounting Standards Update 2016-02, Leases (Topic 326).   Under the new standard, the Company will be required to record a right-of-use asset for leased property and also record a corresponding lease liability.   In general, rather than expense lease payments as they are made as currently done under operating lease guidance, the right-of-use asset will be amortized to expense over the lease term and lease payments will reduce the lease obligation.   The standard is effective for the Company beginning January 1, 2020, and is not expected to have a significant impact on the consolidated financial statements.

 

The Financial Accounting Standards Board recently issued Accounting Standards Update 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  Under the new standard, certain equity investments are required to be carried at fair value, with changes in fair value recognized in net income. This applies to equity investments with readily determinable fair values that are not consolidated or carried on the equity method.  Debt securities classified as available-for-sale will continue to be carried at fair value with changes in fair value recorded through other comprehensive income.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.  

 

Accounting Standards Update 2014-09, Revenue from Contracts With Customers (Topic 606).  The new standard prescribes a five-step model to determine the amount and timing of revenue recognition related to the consideration the Company expects to receive from the transfer of goods and services.  The standard does not apply to financial instruments, and accordingly will not impact the Company’s recognition of interest income on its loans and investment securities, and will not impact the Company’s recognition of revenue from sales or transfers of loans and investment securities.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.

12

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Subsequent Events

 

Management evaluates events occurring subsequent to the balance sheet date, through the date the financial statements are eligible to be issued, to determine whether the events require recognition or disclosure in the financial statements.  With respect to the June 30, 2018 financial statements, Management has considered subsequent events through August 29, 2018.

 

NOTE 2 - INVESTMENT SECURITIES

 

The amortized cost and fair value of investment securities available for sale, with gross unrealized gains and losses, follows:

 

 

13

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Pass-through securities listed above are comprised of a mix of mortgage-backed securities, SBA loan pools and student loan pools.

 

The amortized cost and fair value of debt securities available for sale at June 30, 2018, by contractual maturity, follows:

 

 

Various investments, including pass-through securities, may have actual maturities that differ from contractual maturities due to paydowns on the assets underlying the bonds or early call provisions.

 

Information pertaining to securities available for sale, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

14

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

 

At June 30, 2018, unrealized losses are largely due to differences in market yields as compared to yields available at the time securities were purchased. Management has performed analyses of investment credit quality and cash flows, and does not believe that any securities are impaired due to reasons of credit quality.  The Company has the ability and intent to hold investment securities for a period of time sufficient for a recovery of cost, and fair value is expected to recover as bonds approach maturity.  Accordingly, as of June 30, 2018, management believes the unrealized losses detailed in the table above are temporary.

 

Investment securities with carrying values of $60,470,000 and $70,391,000 at June 30, 2018 and December 31,  2017, respectively, were pledged as collateral on public deposits and for other purposes.

 

Gross realized gains and losses on sales of securities available for sale are as follows:

 

 

 

15

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Major classifications of loans are as follows:

 

Loans with carrying values of $233,163,000 and $233,436,000 at June 30, 2018 and December 31, 2017, respectively, were pledged as collateral for Federal Home Loan Bank and other borrowings.

 

16

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Transactions in the allowance for loan losses are as follows:

 

17

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Components of the allowance for loan losses, and the related carrying amount of loans for which the allowance is determined, are as follows:

 

 

18

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Information relative to impaired loans is as follows:

 

 

Interest income recognized on impaired loans is immaterial to the financial statements for the six months ended June 30, 2018 and 2017. There are no commitments to extend credit on impaired loans at June 30, 2018.

 

19

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

The carrying amount of loans by performance status and credit quality indicator are as follows:

 

  

20

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Information relative to troubled debt restructurings included in impaired loans is as follows:

 

 

 

At June 30, 2018, all troubled debt restructurings are on nonaccrual status.  At December 31, 2017, the $290,000 of commercial loan troubled debt restructurings and $5,000 of other troubled debt restructurings are on nonaccrual status.

 

21

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

NOTE 4 – INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

The core deposit intangible will be fully amortized within one year.

 

NOTE 5 - DEPOSITS

 

Interest-bearing deposits are summarized as follows:

 

22

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Scheduled maturities of time deposits at June 30, 2018 are as follows:

 

 

NOTE 6 - EMPLOYEE BENEFIT PLANS

 

Defined Contribution and Profit Sharing

 

The Company has a defined contribution and profit sharing plan in which substantially all full-time employees have elected to participate.  Employees may contribute from 1% to 75% of their compensation to the plan, subject to certain limits based on federal tax laws.  The Company may make safe harbor contributions to the plan of 3% of participants’ compensation and these contributions are immediately vested.  Additionally, based on certain performance measures of the Banks, the Company may make profit sharing contributions of up to 12% of participants’ compensation. Company profit sharing contributions vest to participant’s over six years.  Expense attributable to this plan for the six months ended June 30, 2018 and 2017 ,was $168,000 and $182,000, respectively.

 

Stock Appreciation Rights

 

The Company has a Stock Appreciation Right (SAR) plan for key employees.  Under the plan, participants are granted a number of SARs at the discretion of the Company’s Board of Directors. Each SAR entitles the holder to the book value appreciation of the Company’s common stock during the four-year period following the date of grant.  The value of the stock appreciation vests in the fifth year, at which time the holder is entitled to receive the value in cash.  Expense (benefit) attributable to the plan for the six months ended June 30, 2018 and 2017 was $(5,000) and $31,000, respectively.

 

Note Receivable for Issuance of Common Stock and Restricted Stock

 

The Company’s Note Receivable for Issuance of Common Stock was issued in 2015 for the purpose of facilitating an executive officer’s purchase of 230 shares of common stock that are subject to various restrictions on transfers, forfeiture provisions, and other call and put provisions.  Though the transfer restrictions and forfeiture provisions lapse at 20% per year through June, 2020, the stock remains subject to collateral provisions of the loan.  The loan requires annual principal payments of at least 10% of the amount borrowed through 2025, along with interest that accrues at 1.53%.  The related Stock Purchase and Restriction Agreement (the “Agreement”) provides for annual bonus opportunities of 10% of the original amount borrowed based on certain performance metrics of the Company, the proceeds of which could be used to fund annual payments on the note payable.  

23

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

No bonuses have been earned under the plan to date, and the Agreement allows for deferral of each annual loan payment to final maturity in 2025 in the event a bonus is not awarded for the year.  In the event of a sale of the Company, a bonus equal to the outstanding balance of the loan, plus a gross-up for related personal taxes thereon, is awarded.

 

 

NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.  The Company’s exposure to credit loss is represented by the contractual amount of these commitments.  The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

 

The following financial instruments were outstanding whose contract amounts represent credit risk:

 

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer's credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on management's credit evaluation of the customer.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and real estate.  Some unfunded commitments under commercial lines of credit, revolving lines of credit and overdraft protection agreements are uncollateralized.

 

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  

 

The Company establishes an allowance for losses on unfunded credit commitments as losses are estimated to have occurred.  During each of the six-month periods ended June 30, 2018 and 2017, the provision for unfunded credit commitments was $-0-. At both June 30, 2018 and December 31, 2017, the balance of the allowance for unfunded credit commitments was $120,000.

 

24

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

In the ordinary course of business, the Company has transactions with principal shareholders, directors, executive officers and parties affiliated with these persons (collectively “insiders”). At June 30, 2018 and December 31, 2017, the Company had loans to insiders aggregating $1,700,000 and $1,884,000, respectively.  In management's opinion, the terms of these loans, including interest rates and collateral, were comparable to terms afforded non-related borrowers.  At June 30, 2018 and December 31, 2017, deposits by insiders totaled $12,770,000 and $12,454,000 respectively.

 

The Company is affiliated with other banks through common ownership.  The Company had loan participations sold to these affiliates of $2,640,000 and $-0- at June 30, 2018 and December 31, 2017, respectively.  The Company had loan participations purchased from these affiliates of $4,695,000 and $6,914,000 at June 30, 2018 and December 31 2017, respectively.

 

The Company provides item processing and data processing services for Citizens Bank of Pagosa Springs, a bank affiliated through common ownership.  Fees received by the Company for these services totaled $32,000 for each of the six months ended June 30, 2018 and 2017.

 

The Company is affiliated with several non-bank entities through common ownership.  These affiliates provide various management services to the Company.  The Company paid the affiliates $369,000 during each of the six-month periods ended June 30, 2018 and 2017. Included in these payments are reimbursements for certain expenses incurred on the Company’s behalf.

 

NOTE 9 - REGULATORY MATTERS

 

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and 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 about components, risk weighting and other factors.

 

The Basel III Capital Rules became effective for the Banks on January 1, 2015, subject to a phase-in for certain provisions.  Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity tier 1 capital, tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to quarterly average assets (as defined).

 

The Banks’ regulatory capital is comprised of the following:  1) Common equity tier 1 capital – consisting of common stock and related paid-in-capital and retained earnings, net of certain intangible asset balances; 2) Additional tier 1 capital – there are no components of tier 1 capital beyond common equity tier 1 capital; 3) Tier 2 capital - consisting of a permissible portion of the allowance for loan losses; and 4) total capital - the aggregate of  all tier 1 and tier 2 capital.  In connection with the adoption of the Basel III Capital Rules, the Banks elected to opt-out of the requirement to include most components of accumulated other comprehensive income in common equity tier 1 capital.  

25

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

When fully phased in on January 1, 2019, the Basel III capital rules will require the Banks to maintain a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity tier 1 capital ratio as the buffer is phased in, effectively resulting in a minimum ratio of common equity tier 1 capital to risk-weighted assets of 7% upon full phase in).  The Banks will also be required to maintain a tier 1 capital to risk-weighted assets ratio of 6.0% (8.5% including the capital conservation buffer), a total capital to risk-weighted assets ratio of 8.0% (10.5% including the capital conservation buffer), and a tier 1 capital to quarterly average assets ratio of 4.0%.  

 

The aforementioned capital conservation buffer phases in at 0.625% annually over a four-year period beginning January 1, 2016, and is designed to absorb losses during periods of economic stress.  Banking institutions with capital ratios above the base minimums but below the effective minimums (which include the buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The following table presents actual and required capital ratios as of June 30, 2018 and December 31, 2017 and for the Banks under the Basel III Capital Rules.  The minimum required capital amounts presented include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital rules have been fully phased-in, and include the capital conservation buffer.  Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect changes under the Basel III Capital Rules.

 

26

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

 

 

Regulatory authorities can initiate certain mandatory actions if the Banks fail to meet the minimum capital requirements, which could have a direct and material effect on the Company’s financial statements.  Management believes, as of June 30, 2018 and December 31, 2017, that the Banks meet all capital adequacy requirements to which they are subject and that the Banks exceed the minimum levels necessary to be considered “well capitalized.”

 

The principal source of income and funds of FBD are dividends from the Banks.  Dividends declared by the Banks that exceed their retained net income for the most current year plus retained net income for the preceding two years must be approved by their federal regulatory agencies. In addition, dividends paid by the Banks would be prohibited if the effect thereof would cause the Banks' capital to be reduced below the minimum capital requirements.

27

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

NOTE 10 – FAIR VALUE MEASUREMENTS AND DISCLOSURES

 

The following is a description of the Company’s valuation methodologies for assets and liabilities recorded at fair value:

 

Securities Available for Sale – Securities are recorded at fair value on a recurring basis based upon measurements obtained from independent pricing services.  For certain corporate securities, fair value measurements are based on quoted market prices (level 1). For U.S. Government agency securities, mortgage-backed securities, collateralized mortgage obligations, certain municipal securities and certain corporate securities, fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, market consensus prepayment speeds, credit information and the bonds’ terms and conditions, among other things (level 2).  For certain municipal securities and other securities, market activity and observable data is highly limited. Fair value of these securities is based upon management’s estimates of the securities’ future cash flows and future market conditions (level 3).

 

Loans Held For Sale - The Company does not record loans held for sale at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect declines in value based on commitments in hand from investors or prevailing investor yield requirements (level 2).

 

Impaired Loans - The Company does not record loans at fair value on a recurring basis. However, from time to time, valuation allowances are recorded on impaired loans to reflect (1) the current appraised or market-quoted value of the underlying collateral, or (2) the discounted value of expected cash flows. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for impaired loans evaluated individually are obtained from independent appraisers or other third-party consultants, or are based on discounted cash flow analyses (level 3).  Fair value estimates for impaired loans evaluated collectively are based on statistics reflective of the loans’ credit risk (level 3).

 

Real Estate Held For Sale - The Company does not record real estate held for sale at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these properties to reflect the current appraised value (less an estimate of cost to sell). In some cases, the properties for which appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for real estate held for sale are obtained from independent appraisers or other third-party consultants (level 3).

 

28

 

---

First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a recurring basis:

 

 

Activity for investment securities recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is immaterial to the financial statements for the six months ended June 30, 2018 and 2017.

29

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and December 31, 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a non-recurring basis:

 

 

At June 30, 2018, impaired loans with a gross carrying amount of $1,743,000 have a valuation allowance of $434,000.  At December 31, 2017, impaired loans with a gross carrying amount of $1,231,000 have a valuation allowance of $395,000.  The valuation allowances have been recorded through the provision for loan losses.  Impaired loans of $413,000 at June 30, 2018 and $5,481,000 at December 31, 2017 have no valuation allowances.

 

At June 30, 2018 there are no valuation allowances on real estate held for sale and the property is carried at its initial fair value cost basis established at acquisition.  At December 31, 2017, real estate held for sale with an initial cost basis of $4,629,000 has a $2,747,000 valuation allowance.  The valuation allowances were recorded through net expense from real estate held for sale.

 

There are no fair value adjustments to loans held for sale at June 30, 2018 and December 31, 2017.

 

NOTE 11 – SALE OF COMPANY AND SUBSEQUENT EVENTS

 

In the second quarter of 2018, the Company entered into a definitive agreement to be acquired by, and merged with and into, Triumph Bancorp, Inc. through the Company’s shareholders’ exchange of all the Company’s common stock for cash from Triumph (NASDAQ:  TBK).  The transaction is expected to close in September, 2018.

 

In July, 2018, the Company declared and paid a dividend of $300,000.  In August, 2018, the Company recorded a $403,000 reverse provision to the allowance for loan losses and a $58,000 reverse provision to the allowance for losses on unfunded credit commitments.

 

30

 

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SUPPLEMENTAL CONSOLIDATING SCHEDULES

 

 

 

 

 

---

First Bancorp of Durango, Inc. and Subsidiaries

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

 

 

 

32

 

---

First Bancorp of Durango, Inc. and Subsidiaries

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

 

 

 

33

 

---

First Bancorp of Durango, Inc. and Subsidiaries

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

 

 

34

 

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First Bancorp of Durango, Inc. and Subsidiaries

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

 

 

 

 

35

 

 

Exhibit 99.4

 

 

 

 

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS and

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

SOUTHERN COLORADO CORP. AND SUBSIDIARY

 

As of June 30, 2018 and December 31, 2017

 

and for the six months ended June 30, 2018 and 2017

 

 

---

 

Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying condensed notes to consolidated financial statements.

2

---

 

Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF INCOME

 

(Unaudited)

 

 

 

See accompanying condensed notes to consolidated financial statements.

3

---

 

Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

4

---

 

Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Six Months Ended June 30, 2018 and 2017

 

(Unaudited)

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

5

---

 

Southern Colorado Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

6

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

 

 

Organization and Basis of Presentation

 

Southern Colorado Corp. (“SCC”) is a bank holding company that owns 100% of the stock of Citizens Bank of Pagosa Springs (“the Bank”).  SCC and the Bank are collectively referred to as “the Company.”  

 

The accompanying unaudited consolidated financial statements include the consolidated totals of the accounts of SCC and the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.  

 

The unaudited consolidated financial statements and notes herein have been prepared in accordance with U.S. GAAP for interim financial information and do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.  However, the unaudited consolidated financial statements and notes herein reflect all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s financial condition, results of operations, changes in comprehensive income and cash flows for the unaudited interim periods.

 

The results of operations for the six-month period ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or any other period. The unaudited consolidated financial statements and notes herein should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2017.

 

Nature of Operations

 

The Company provides a full range of banking and mortgage services to individual and business customers through its two branches located in Pagosa Springs, Colorado.

 

Use of Estimates

 

 

7

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

Investment Securities

 

Investment securities are classified as “available for sale” and are stated at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

 

The amortized cost of debt securities classified as available for sale is adjusted for amortization of purchase premiums and accretion of purchase discounts.  Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  For mortgage-backed securities, the term of the security is the expected life of the security given estimated paydowns.  For other securities, the term of the security is the earlier of final maturity or the expected call date.  The Company believes amortization to the call date rather than the final maturity date is insignificant to the financial statements as a whole.  Gains and losses on the sale of securities are 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 an impairment charge to 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 is recognized as an impairment charge to earnings, and 2) OTTI related to other factors, which is recognized in other comprehensive income.  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.

 

 

8

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Loans

 

 

Past due loans are any loans for which payments of interest, principal or both have not been received within the timeframes designated by the loan agreements.  Loans with payments in arrears but for which borrowers have resumed making scheduled payments are considered past due until arrearages are brought current. Loans that experience insignificant payment delays or payment shortfalls generally are not considered past due. 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.

 

The accrual of interest on any loan is discontinued at the time the loan is 90 days past due unless the loan is well secured and in process of collection.  Additionally, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful.  When placing a loan on nonaccrual status, interest accrued to date is generally reversed and is charged against the current year's interest income.  Payments received on a loan on nonaccrual status are applied against the balance of the loan. A loan is returned to accrual status when principal and interest are no longer past due and collectibility is no longer doubtful.

 

Troubled debt restructurings are loans for which concessions in terms have been made as a result of the borrower experiencing financial difficulty.  Generally, concessions granted to customers include lower interest rates and modification of the payment stream to lower or defer payments.  Interest on troubled debt restructurings is accrued under the new terms if the loans are performing and full collection of principal and interest is expected.  However, interest accruals are discontinued on troubled debt restructurings that meet the Company’s nonaccrual criteria.

 

Generally, loans are charged off in whole or in part after they become significantly past due unless the loan is in the process of restructuring or collection efforts are ongoing and deemed likely to be successful.  Charge off amounts are determined based upon the carrying amount of loans and the amount estimated to be collectible as determined by analyses of expected future cash flows and the liquidation of loan collateral.

 

 

9

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses, and is established through a provision for loan losses charged to earnings.  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 as follows:  

 

 

Included in impaired loans are all nonaccrual loans and all troubled debt restructurings.  Loans that experience insignificant payment delays or payment shortfalls generally are not considered impaired.  For individually evaluated impaired loans for which repayment is expected solely from the collateral, impairment is measured based on the fair value of the collateral.  For other individually evaluated impaired loans, impairment may be measured based on the fair value of the collateral or on the present value of expected future cash flows discounted at the loan’s original effective interest rate.  For impaired loans evaluated on a pool basis, impairment is measured based on statistics reflective of the increased risk of the loan pool.   When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

 

 

Although the allowance contains a specific component, the entire allowance is available for any loan that, in management’s judgment, should be charged off.  

 

10

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

On a quarterly basis, management estimates the allowance balance required using the criteria identified above in relation to the relevant risks for each of the Company’s major loan segments.  Significant overall risk factors for both the Company’s commercial and consumer portfolios include the strength of the real estate market and general economic activity in the Company’s market area.

 

The quality of the Company's loan portfolio is assessed as a function of the levels of past due loans and impaired loans, and internal credit quality ratings which are updated quarterly by management. The ratings on the Company’s internal credit scale are an important part of the Company's overall credit risk management process and are considered in the determination of the allowance for loan losses, and are grouped as follows:

 

Pass -   Loans with minimal to average identified credit risk.  These loans have borrowers considered creditworthy who have the ability to repay the debt in the normal course of business.  Borrowers have a sound primary and secondary repayment source, with sufficient cash generation to meet ongoing debt service requirements.  Loans are typically fully secured with marketable, margined collateral.

 

Special mention -   Loans with potential credit weaknesses which deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects or the Company’s credit position at some future date.  These loans exhibit characteristics such as declining or stressed financial condition of the borrower, and declining or narrow collateral coverage.

 

Substandard – Loans inadequately protected by the current financial condition and paying capacity of the borrower or the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  These loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  In some instances, though not all, the weakness or weaknesses in these loans will necessitate nonaccrual treatment.

 

Doubtful – Loans in this category 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.  The probability of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the loans, classification as a loss is deferred until more exact status may be determined.

 

Loss – Loans considered loss are considered uncollectable and of such little value that their continuance as a bankable asset, even with a valuation allowance, is not warranted.  This does not mean the loans have no recovery or salvage value, but rather it is not practical or desirable to defer a charge-off even though a partial recovery may be effected in the future.  Loans classified as a loss are charged-off in the period they are deemed uncollectible.

 

11

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Determination of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or credit conditions change.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination.

 

Income Taxes

 

The Company has elected taxation under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company neither pays federal corporate income taxes on its taxable income nor is allowed a net operating loss carryover or carryback as a deduction.  Instead, the stockholders of the Company include their respective share of the consolidated taxable income or loss in their individual income tax returns.  Accordingly, no income taxes are reflected in the consolidated financial statements.  

 

Comprehensive Income

 

 

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.  

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, excluding transaction costs. When measuring fair value, entities should maximize the use of observable inputs and minimize the use of unobservable inputs. The following describes the three levels of inputs that may be used to measure fair value:

 

 

 

 

12

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Significant Applicable Accounting Standards Updates Not Yet Effective

 

Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.   Under the new standard, the Company will be required to convert from the existing incurred-loss model for determining the allowance for loan losses to an expected-loss model.  An expected-loss model will determine the allowance for loan losses balance based upon credit losses expected to be incurred over the life of the loan portfolio, and will consider not only current credit conditions but also reasonably supportable expectations as to future credit conditions.  The standard will also require securities held to maturity to be evaluated for impairment under an expected-loss model.  The standard is effective for the Company beginning January 1, 2022.  Management is in the processing of determining the impact of the standard on the Company’s consolidated financial statements.

 

Accounting Standards Update 2016-02, Leases (Topic 326).   Under the new standard, the Company will be required to record a right-of-use asset for leased property and also record a corresponding lease liability.   In general, rather than expense lease payments as they are made as currently done under operating lease guidance, the right-of-use asset will be amortized to expense over the lease term and lease payments will reduce the lease obligation.   The standard is effective for the Company beginning January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.

 

Accounting Standards Update 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  Under the new standard, certain equity investments are required to be carried at fair value, with changes in fair value recognized in net income. This applies to equity investments with readily determinable fair values that are not consolidated or carried on the equity method.  Debt securities classified as available-for-sale will continue to be carried at fair value with changes in fair value recorded through other comprehensive income.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.

 

Accounting Standards Update 2014-09, Revenue from Contracts With Customers (Topic 606).  The new standard prescribes a five-step model to determine the amount and timing of revenue recognition related to the consideration the Company expects to receive from the transfer of goods and services.  The standard does not apply to financial instruments, and accordingly will not impact the Company’s recognition of interest income on its loans and investment securities, and will not impact the Company’s recognition of revenue from sales or transfers of loans and investment securities.  The standard is effective for the Company beginning January 1, 2019, and is not expected to have a significant impact to the consolidated financial statements.

 

13

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

Management evaluates events occurring subsequent to the balance sheet date, through the date the financial statements are eligible to be issued, to determine whether the events require recognition or disclosure in the financial statements.  With respect to the June 30, 2018 financial statements, Management has considered subsequent events through August 29, 2018.

 

 

NOTE 2 - INVESTMENT SECURITIES

 

 

 

 

 

14

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

The amortized cost and fair value of debt securities available for sale at June 30, 2018, by contractual maturity, are shown below.

 

 

 

Investment securities may have actual maturities that differ from contractual maturities due to paydowns on the assets underlying the bonds or early call provisions.

 

Information pertaining to securities available-for-sale, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

 

15

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

At June 30, 2018, unrealized losses are largely due to differences in market yields as compared to yields available at the time securities were purchased. Management has performed analyses of investment credit quality and cash flows, and does not believe that any securities are impaired due to reasons of credit quality.  The Company has the ability and intent to hold investment securities for a period of time sufficient for a recovery of cost, and fair value is expected to recover as bonds approach maturity.  Accordingly, as of June 30, 2018, management believes the unrealized losses detailed in the table above are temporary.

 

The Company realized $2,000 in losses and no gains on the sale of investment securities during the six months ended June 30, 2018.  The Company realized $16,000 in gains and no losses on the sale of investment securities during the six months ended June 30, 2017.  All 2017 sales were to an entity affiliated with the Company’s primary shareholder through common ownership.  The sale was initiated for the purpose of removing from the Company’s books non investment-grade municipal securities, and was transacted at estimated fair value.

 

 

 

16

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

 

 

In the ordinary course of business, the Company may grant loans to its executive officers, significant shareholders, directors, and parties affiliated with those persons (collectively, “related parties”).  However, the Company had no loans to related parties at June 30, 2018 and December 31, 2017.

 

At June 30, 2018 and December 31, 2017, residential 1-4 family real estate loans totaling $9,570,000 and $10,560,000, respectively, are pledged to secure credit facilities and credit enhancement arrangements with the Federal Home Loan Bank of Topeka.

 

17

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Transactions in the allowance for loan losses are as follows:

 

 

 

18

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Components of the allowance for loan losses, and the related carrying amount of loans for which the allowance is determined, are as follows:

 

 

 

19

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

Information relative to impaired loans is as follows:

 

 

 

20

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

 

 

Impaired loans at June 30, 2018 and December 31, 2017 is comprised of a single loan which is considered a troubled debt restructuring and which is performing under the modified terms.  There are no nonaccrual loans at June 30, 2018 and December 31, 2017.

 

Interest income recognized on impaired loans is immaterial for the six months ended June 30, 2018 and 2017.  

 

At June 30, 2018, there are no loans in the process of foreclosure.

 

At June 30, 2018, there are $25,000 in commercial non real-estate loans past due between 30 and 60 days.  At December 31, 2017, there are no loans past due 30 days or greater.

 

There were no loans modified as a troubled debt restructuring that defaulted during the six months ended June 30, 2018 and 2017 where the default occurred within 12 months of the restructuring.  For the purpose of this disclosure, a default is considered a payment delinquency of 90 days or greater, or foreclosure and repossession of the applicable collateral.

 

21

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

The following summarizes loans by credit rating:

 

 

 

 

22

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

NOTE 4– SERVICED LOANS AND CREDIT ENHANCEMENTS

 

At June 30, 2018 and December 31, 2017, the Company has loans totaling $17,806,000 and $18,026,000, respectively, sold to and serviced for the Federal Home Loan Bank of Topeka under the Federal Home Loan Bank’s Mortgage Partnership Finance Program.  Servicing income earned by the Company was $22,000 for each of the six-month periods ended June 30, 2018 and 2017, and is included as a component of mortgage banking income.  A servicing right asset has not been recorded on the basis of immateriality.

 

At June 30, 2018, the Company has approximately $650,000 in gross credit enhancement exposure to the Federal Home Loan Bank of Topeka relative to the serviced loan portfolio.   In the event that serviced loans default, and borrower equity and private mortgage insurance amounts are depleted and loan losses occur, the credit enhancement exposure is the loss sharing amount to the Federal Home Loan Bank.  The Company has not recorded a liability for the credit enhancement exposure as it believes the fair value of the credit enhancement exposure is immaterial to the consolidated financial statements due to strong credit quality and no loss history.  The gross credit enhancement exposure amount is collateralized by a pledge of loans.

 

 

NOTE 5 - DEPOSITS

 

 

 

At June 30, 2018, there is $20,741,000 in accounts with a balance of $250,000 or greater, including $1,130,000 in individual retirement accounts and time certificates of deposit.  At December 31, 2017, there is $23,458,000 in accounts with a balance of $250,000 or greater, including $871,000 in individual retirement accounts and time certificates of deposit.  

 

 

23

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Scheduled maturities of individual retirement accounts and time certificates of deposit at June 30, 2018 are as follows (in thousands):

 

 

 

At June 30, 2018 and December 31, 2017, the Company had $693,000 and $854,000, respectively, in deposits from its executive officers, significant shareholders, directors, and parties affiliated with those persons.

 

 

NOTE 6 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer's credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, by the Company upon extension of credit is based on management's credit evaluation of the customer.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and real estate.  Some unfunded commitments under commercial lines of credit, revolving lines of credit and overdraft protection agreements are uncollateralized.

 

24

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

 

The following financial instruments were outstanding whose contract amounts represent risk:

 

 

 

NOTE 7 - EMPLOYEE BENEFIT PLAN

 

The Company has a defined contribution and profit sharing plan in which substantially all full-time employees have elected to participate.  Employees may contribute from 1% to 75% of their compensation to the plan, subject to certain limits based on federal tax laws.  The Company may make safe harbor contributions to the plan of 3% of participants’ compensation and these contributions are immediately vested.  Additionally, based on certain performance measures of the Bank, the Company may make profit sharing contributions of up to 12% of participants’ compensation. Company profit sharing contributions vest to participant’s over six years.  Expense attributable to this plan for was $23,000 and $9,000 for the six months ended June 30, 2018 and 2017, respectively.

 

 

NOTE 8 - REGULATORY MATTERS

 

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and 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 about components, risk weighting and other factors.

 

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in for certain provisions.  Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity tier 1 capital, tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to quarterly average assets (as defined).

 

25

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

The Bank’s regulatory capital is comprised of the following:  1) Common equity tier 1 capital – consisting of common stock, related paid-in-capital and retained earnings; 2) Additional tier 1 capital – there are no components of tier 1 capital beyond common equity tier 1 capital; 3) Tier 2 capital - consisting of a permissible portion of the allowance for loan losses; and 4) total capital - the aggregate of  all tier 1 and tier 2 capital.  In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include most components of accumulated other comprehensive income/loss in common equity tier 1 capital.

 

When fully phased in on January 1, 2019, the Basel III capital rules will require the Bank to maintain a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity tier 1 capital ratio as the buffer is phased in, effectively resulting in a minimum ratio of common equity tier 1 capital to risk-weighted assets of 7.0% upon full phase in).  The Bank will also be required to maintain a tier 1 capital to risk-weighted assets ratio of 6.0% (8.5% including the capital conservation buffer), a total capital to risk-weighted assets ratio of 8.0% (10.5% including the capital conservation buffer), and a tier 1 capital to quarterly average assets ratio of 4.0%.  

 

The aforementioned capital conservation buffer phases in at 0.625% annually over a four-year period beginning January 1, 2016, and is designed to absorb losses during periods of economic stress.  Banking institutions with capital ratios above the base minimums but below the effective minimums (which include the buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The following table presents actual and required capital ratios as of June 30, 2018 and December 31, 2017 for the Bank under the Basel III Capital Rules.  The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2018 and December 31, 2017 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital rules have been fully phased-in, and include the capital conservation buffer.  Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect changes under the Basel III Capital Rules.

 

 

 

26

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Regulatory authorities can initiate certain mandatory actions if the Bank fails to meet the minimum capital requirements, which could have a direct and material effect on the Company’s financial statements.  Management believes, as of June 30, 2018, that the Bank meets all capital adequacy requirements to which it is subject and that the Bank exceeds the minimum levels necessary to be considered “well capitalized.”

 

 

 

27

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

Note 9 - Fair Value MEASUREMENTS AND DISCLOSURES

 

The following is a description of the Company’s valuation methodologies for assets and liabilities recorded at fair value:

 

Securities Available for Sale –Debt securities are reported at fair value based upon measurements obtained from an independent pricing service. The fair value measurements are determined by quoted market prices, if available (Level 1), or consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, market consensus prepayment speeds, credit information and the bonds’ terms and conditions, among other things (Level 2).  For certain municipal securities and corporate securities, including auction rate municipal securities, market activity and observable data is highly limited. Fair value of these securities is considered to be amortized cost (level 3).

 

Impaired Loans - The Company does not record loans at fair value on a recurring basis. However, from time to time, valuation allowances are recorded on these loans to reflect (1) the current appraised or market-quoted value of the underlying collateral, less an estimate of cost to sell, or (2) the discounted value of expected cash flows. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for impaired loans measured for impairment based upon the value of the collateral are obtained from independent appraisers or other third-party consultants, and for other impaired loans are based on discounted cash flow analyses (Level 3).

 

Real Estate Held For Sale-  The Company does not record real estate held for sale at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these properties to reflect the current appraised value (less an estimate of cost to sell). In some cases, the properties for which appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for real estate held for sale are obtained from independent appraisers or other third-party consultants (level 3).

 

28

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

The following table provides the hierarchy and fair value for each major category of assets and liabilities recorded at fair value on a recurring basis:

 

 

 

Activity for debt securities available for sale recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is immaterial to the financial statements for each of the six-month periods ended June 30, 2018 and 2017.

 

Assets and liabilities recorded at fair value on a non-recurring basis are comprised of impaired loans and real estate held for sale which are all valued using level 3 measurements.  At June 30, 2018 and December 31, 2017, there are no impaired loans with valuation allowances.  At June 30, 2018, there is no real estate held for sale.  At December 31, 2017, real estate held for sale with an initial cost basis of $770,000 has a $638,000 valuation allowance, resulting in a net carrying amount of $132,000.

 

29

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

NOTE 10–RELATED PARTY TRANSACTIONS

 

Related party investment transactions, loans and deposits are described in Notes 2, 3 and 5, respectively.  A subsequent event involving a related party is described in Note 11.

 

The Company is affiliated with other banks through common ownership.  The Company had loan participations sold to these affiliates of $696,000 and $1,389,000 at June 30, 2018 and December 31, 2017, respectively.  The Company had loan participations purchased from these affiliates of $835,000 and $2,315,000 at June 30, 2018 and December 31, 2017, respectively.

 

The Company receives item processing and data processing services from First National Bank of Durango, one of the affiliated banks.  Fees paid by the Company for these services totaled $32,000 in each of the six-month periods ended June 30, 2018 and 2017.

 

The Company is affiliated with several non-bank entities through common ownership.  These affiliates provide various management and administration services to the Company. The Company paid these affiliates $69,000 and $60,000 during the six months ended June 30, 2018 and 2017, respectively.

 

Notes payable of $500,000 at December 31, 2017 are comprised of unsecured promissory notes payable to certain shareholders of the Company. The notes were paid off and retired in February, 2018.

 

 

NOTE 11– SALE OF COMPANY, SUBSEQUENT EVENTS AND RELATED CONTINGENCIES

 

Sale of Company

 

In the second quarter of 2018, the Company entered into a definitive agreement to be acquired by, and merged with and into, Triumph Bancorp, Inc. through the Company’s shareholders’ exchange of all the Company’s common stock for cash from Triumph (NASDAQ:  TBK).  The transaction is expected to close in September, 2018.

 

Land Sale to Related Party and Remediation Contingency

 

In March, 2018, the Company sold land with a carrying amount of $702,000 to a non-bank entity affiliated with the Company through common ownership.  The land was vacant land held for a future branch location no longer expected to be constructed by the Company, and was sold for its estimated fair value of $700,000.  The land has a drainage issue existing prior to the sale of the land which the Company believes is due to the incorrect installation of a highway drainage system by the Colorado Department of Transportation.  The Town of Pagosa Springs petitioned the Company to remedy the drainage issue, citing a risk of improper drainage during a flood. It was not clear to the Company whether or not it had any responsibility for rectifying potential drainage issues; however, subsequent to June 30, 2018, the Company paid an additional $289,000 to the related party for the related party to assume the remediation contingency.  The payment amount was based on an engineering estimate of remediation cost.  

 

30

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Southern Colorado Corp. and Subsidiary

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018 and 2017

and for the six months ended June 30, 2018 and 2017

 

(Unaudited)

As of June 30, 2018, the Company had not recorded any liability with respect to the remediation contingency as the Company could not reasonably determine whether it is probable that it is responsible for remediation, and the decision to convey the contingency to the related party even though responsibility for remediation has not been established was a determination made by the Company subsequent to June 30, 2018.

 

 

 

 

 

 

31

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SUPPLEMENTAL CONSOLIDATING SCHEDULES

 

 

32

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Southern Colorado Corp. and Subsidiary

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

  

 

 

 

 

33

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Southern Colorado Corp. and Subsidiary

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

  

 

 

 

 

 

34

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Southern Colorado Corp. and Subsidiary

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

 

  

 

 

35

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Southern Colorado Corp. and Subsidiary

 

UNAUDITED SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

 

  

 

 

 

36

Exhibit 99.5

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial data for Triumph Bancorp, Inc. (“Triumph” or the “Company”), First Bancorp of Durango, Inc. (“FBD”) and Southern Colorado Corp. (“SCC”), have been prepared to reflect the acquisitions of FBD and SCC by the Company, which were effective on September 8, 2018. The unaudited pro forma combined balance sheets as of June 30, 2018 give effect to the acquisitions as if they occurred on that date. The unaudited pro forma combined statements of income for the six months ended June 30, 2018 and the year ended December 31, 2017 give effect to the acquisitions as if they occurred on January 1, 2017.

The unaudited pro forma combined financial statements have been prepared using the acquisition method of accounting for business combinations under U.S. GAAP. The Company is the acquirer for accounting purposes. Under this method of accounting, the assets and liabilities of FBD and SCC were recorded by the Company at their estimated fair values, with the excess cost over the fair value of FBD’s and SCC’s net assets recorded as goodwill. The Company is currently in the process of obtaining fair values for certain assets and assumed liabilities; therefore, the following estimates are preliminary. Certain reclassifications have been made to the historical financial statements of FBD and SCC to conform to the presentation in the Company’s financial statements.

The following unaudited pro forma combined statements of income do not include the effects of any non-recurring costs associated with any restructuring or integration activities resulting from the acquisitions that had not yet been recorded at June 30, 2018, as they are non-recurring in nature and not factually supportable at this time.

The unaudited pro forma combined financial statements are provided for informational purposes only and are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined financial statements and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma combined financial information is based on, and should be read together with:

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UNAUDITED PRO FORMA COMBINED BALANCE SHEETS

June 30, 2018

(Dollar amounts in thousands)

 

 

⁽¹⁾ See Note 3 of the Notes to the Unaudited Pro Forma Combined Financial Statements

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UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME

For the Six Months Ended June 30, 2018

(Dollar amounts in thousands, except per share amounts)

 

⁽¹⁾ See Note 3 of the Notes to the Unaudited Pro Forma Combined Financial Statements

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UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME

For the Year Ended December 31, 2017

(Dollar amounts in thousands, except per share amounts)

⁽¹⁾ See Note 3 of the Notes to the Unaudited Pro Forma Combined Financial Statements

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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRO FORMA PRESENTATION

The unaudited pro forma combined balance sheets as of June 30, 2018 and the unaudited pro forma combined statements of income for the six months ended June 30, 2018 and the year ended December 31, 2017 are based on the historical financial statements of the Company, FBD, and SCC after giving effect to the completion of the acquisitions and the assumptions and adjustments described in the accompanying notes. The unaudited pro forma combined balance sheets as of June 30, 2018 give effect to the acquisitions and other adjustments as if they occurred on that date. The unaudited pro forma combined statements of income for the six months ended June 30, 2018 and the year ended December 31, 2017 give effect to the acquisitions as if they occurred on January 1, 2017. Such financial statements do not reflect cost savings or operating synergies expected to result from the acquisition, or the cost to achieve these cost savings or operating synergies, or any anticipated disposition of assets or liquidation of liabilities that may result from the integration of the operations of the three companies.

The transaction was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under ASC 805, all of the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair values, while transaction and restructuring costs associated with the business combination are expensed as incurred. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which resulted from the combination of expected operational synergies and expanded market share.

The unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the combined results of operation or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.

NOTE 2 – PRO FORMA UNAUDITED PURCHASE PRICE AND PURCHASE PRICE ALLOCATION

Pursuant to the acquisition agreements between the Company and FBD as well as the Company and SCC, the Company paid $147,961,000 in cash for the outstanding common stock of FBD and SCC. The following table presents the preliminary purchase accounting allocations used in the pro forma financial statements as of June 30, 2018:

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Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities of FBD and SCC based on their estimated fair values as of the closing of the acquisitions. The excess of the purchase price over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.

The preliminary allocation is based on estimates, assumptions, valuations, and other studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the pro forma purchase price allocation and unaudited pro forma adjustments will remain preliminary until the Company's management determines the final fair value of assets acquired and liabilities assumed. The final determination of the purchase price allocation is anticipated to be completed at the earlier of (i) twelve months from the date of the acquisitions or (ii) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma combined financial statements.

Identifiable intangible assets. The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805.

The Company has preliminarily allocated $14,069,000 to amortizable core deposit intangible assets acquired. The amortization related to the preliminary fair value of net amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma combined financial statements.  The core deposit intangibles will be amortized over a ten year period on an accelerated basis which is expected to produce the following amortization expense for the combined operations:

Goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired. In accordance with ASC Topic 350, Intangibles – Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of the impairment during the period in which the determination is made.

NOTE 3 – PRELIMINARY UNAUDITED PRO FORMA ADJUSTMENTS

The unaudited pro forma financial information is not necessarily indicative of what the financial position actually would have been had the acquisitions been completed at the date indicated, and includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined companies would have been, nor necessarily indicative of the financial position of the post-acquisition periods. The unaudited pro forma financial information does not give consideration to the impact of possible expense efficiencies, synergies, or other actions that may result from the acquisition.

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The following unaudited pro forma adjustments result from accounting for the acquisitions, including the determination of fair value of the assets, liabilities and commitments which the Company, as the acquirer for accounting purposes, acquired from FBD and SCC. Additionally, because FBD and SCC were Subchapter S corporations before the acquisitions and did not incur any federal income tax liabilities, adjustments have been included to estimate the impact of federal income taxes on FBD and SCC’s net income for the periods presented. The descriptions related to these preliminary adjustments are as follows (in thousands):

Balance Sheets

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Statements of Income

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NOTE 4 – UNAUDITED EARNINGS PER COMMON SHARE

Unaudited pro forma earnings per common share for the six months ended June 30, 2018 and the year ended December 31, 2017 have been calculated using the Company’s weighted average common shares outstanding for the respective periods increased by the portion of the common shares sold in the Company’s April 12, 2018 underwritten public offering for which the proceeds were assumed to be used for the purpose of funding the acquisitions of FBD and SCC. The weighted average impact of the common shares assumed to have been issued to fund the acquisitions was calculated as if the shares were issued on January 1, 2017.

The following table sets forth the calculation of basic and diluted unaudited pro forma earnings per common share for the six months ended June 30, 2018:

Shares that were not considered in computing diluted earnings per common share because they were antidilutive are as follows:

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The following table sets forth the calculation of basic and diluted unaudited pro forma earnings per common share for the year ended December 31, 2017:

Shares that were not considered in computing diluted earnings per common share because they were antidilutive are as follows: