Asset Quality

Key credit quality metrics continue to be excellent.  There was a net loan recovery for the quarter of $55 thousand.  The non-performing assets ratio, at 0.52% of total assets, is an area of strength for the company.  Non-accrual loans decreased 14.4% on a linked quarter basis to $3.5 million.  Other Real Estate Owned balances remained relatively flat during the quarter at $1.2 million.  The ratio of classified loans plus OREO now stands at 8.79% of total regulatory risk-based capital as of March 31, 2017 down significantly from the March 31, 2016 ratio of 13.53%.  Loans past due 30-89 days were $2.20 million or 0.40% of loans this quarter. 

Mr. Crapps commented, "With our current level of liquidity and continued success in pure deposit growth, we have the funding available to support significant additional loan growth."    

Revenue

Net Interest Income/Net Interest Margin

Net interest income increased on a linked quarter basis to $7.061 million for the first quarter of 2017 compared to fourth quarter 2016 net interest income of $6.794 million.  First quarter 2017 net interest margin, on a tax equivalent basis, was 3.52%, an increase on a linked quarter basis compared to the net interest margin of 3.35% in the fourth quarter of 2016.  During the first quarter of 2017, net interest margin was positively impacted by approximately 9 basis points as a result of the collection of interest on several non-accrual loans which were paid off during the quarter.  Net interest income in the first quarter of 2016 was $6.337 million and net interest margin on a tax equivalent basis was 3.33%. 

Non-Interest Income

Non-interest income, adjusted for securities gains and losses on the early extinguishment of debt, was $1.982 million in the first quarter of 2017, a decrease of $48 thousand over the first quarter of 2016 non-interest income adjusted for securities gains and the loss on the early extinguishment of debt of $2.030 million.  Income from the mortgage line of business was $670 thousand in the first quarter of 2017, flat year-over-year, but down $197 thousand on a linked quarter basis which was expected due to seasonal fluctuations in the mortgage industry.  Mr. Crapps noted, "Although the beginning of the year was slow, we experienced growth in production during the quarter and are encouraged by the momentum as we move into the peak mortgage season."  Income from the financial planning and investment advisory line of business was $258 thousand for the quarter, which was down 2.30% on a linked quarter basis and 11.30% on a year-over-year basis, largely the result in a change in the payment structure on these products which will have a negative impact in the short term, but will build a recurring revenue stream that will be beneficial in the future. 

Non-Interest Expense

Non-interest expense increased on a linked quarter basis to $6.7 million with the majority of the increase based in salaries and benefits and other operating expenses.  The salaries and benefits expense increase included normal salary increases, increased medical benefit costs, as well as the recent addition of several new positions.  The majority of other operating expenses were related the bank's planned conversion to a new operating system which is scheduled to occur in June of this year. 

Income tax expense was positively impacted in the first quarter of 2017 by changes in the accounting for income taxes on equity based compensation.  This change reduced our income tax expense by approximately $115 thousand for the quarter.  Beginning January 1, 2017, the benefit for equity based compensation costs not previously recognized in the income statement are recognized as a reduction in income tax expense in the income statement period when the equity awards vest.  Prior to this change, the related tax benefit was recognized directly through shareholder equity.  This change may increase the volatility of income tax expense in future periods when equity based compensation vests during the period.