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Section 1: 10-Q (FORM 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                      

 

Commission File Number: 000-23565

 

EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

VIRGINIA 54-1866052
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
10900 Nuckols Road, Suite 325, Glen Allen, Virginia 23060
(Address of principal executive office) (Zip Code)
   

 

(804) 443-8400

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨

 

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

 

Large accelerated filer ¨   Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
    Emerging growth company ¨

 

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

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of May 5, 2017 was 13,112,393.

 

 

 

 

 

EASTERN VIRGINIA BANKSHARES, INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016 2
     
  Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016 3
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016 4
     
  Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016 5
     
  Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016 6
     
  Notes to the Interim Consolidated Financial Statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 59
     
Item 4. Controls and Procedures 59
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 60
     
Item 1A. Risk Factors 60
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 60
     
Item 3. Defaults Upon Senior Securities 60
     
Item 4. Mine Safety Disclosures 60
     
Item 5. Other Information 60
     
Item 6. Exhibits 61
     
  SIGNATURES 62

 

 

 1 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)

 

   March 31, 2017   December 31, 2016* 
Assets:  (unaudited)      
Cash and due from banks  $4,797   $4,997 
Interest bearing deposits with banks   16,648    11,919 
Federal funds sold   924    699 
Securities available for sale, at fair value   230,593    219,632 
Securities held to maturity, at carrying value (fair value of $27,090 and $28,735, respectively)   26,230    27,956 
Restricted securities, at cost   9,557    11,557 
Loans, net of allowance for loan losses of $10,952 and $11,270, respectively   1,060,504    1,021,961 
Deferred income taxes, net   11,275    12,419 
Bank premises and equipment, net   23,965    27,694 
Assets held for sale   2,970    - 
Accrued interest receivable   4,921    4,705 
Other real estate owned, net of valuation allowance of $49 and $36, respectively   1,631    2,656 
Goodwill   17,081    17,081 
Bank owned life insurance   25,885    25,734 
Other assets   9,620    9,583 
Total assets  $1,446,601   $1,398,593 
           
Liabilities and Shareholders' Equity:          
Liabilities          
Noninterest-bearing demand accounts  $225,976   $209,138 
Interest-bearing deposits   920,679    842,223 
Total deposits   1,146,655    1,051,361 
Federal funds purchased and repurchase agreements   5,460    5,140 
Short-term borrowings   123,890    173,650 
Junior subordinated debt   10,310    10,310 
Senior subordinated debt   19,151    19,125 
Accrued interest payable   1,128    752 
Other liabilities   7,064    7,055 
Total liabilities   1,313,658    1,267,393 
           
Shareholders' Equity          
Preferred stock, $2 par value per share, authorized 10,000,000 shares, issued and outstanding:          
Series B; 5,240,192 shares non-voting mandatorily convertible non-cumulative preferred   10,480    10,480 
Common stock, $2 par value per share, authorized 50,000,000 shares,          
issued and outstanding 13,112,393 and 13,116,600 including          
152,750 and 168,000 nonvested shares in 2017 and 2016, respectively   25,919    25,897 
Surplus   49,336    49,321 
Retained earnings   52,281    51,051 
Accumulated other comprehensive loss, net   (5,073)   (5,549)
Total shareholders' equity   132,943    131,200 
Total liabilities and shareholders' equity  $1,446,601   $1,398,593 

 

*Derived from audited consolidated financial statements.

 

The accompanying notes are an integral part of the consolidated financial statements.

 2 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

  

   Three Months Ended 
   March 31, 
   2017   2016 
Interest and Dividend Income          
Interest and fees on loans  $12,417   $10,953 
Interest on investments:          
Taxable interest income   1,377    1,506 
Tax exempt interest income   52    70 
Dividends   138    115 
Interest on deposits with banks   27    10 
Interest on federal funds sold   2    - 
Total interest and dividend income   14,013    12,654 
           
Interest Expense          
Deposits   1,354    1,071 
Federal funds purchased and repurchase agreements   6    7 
Short-term borrowings   257    122 
Junior subordinated debt   99    88 
Senior subordinated debt   351    351 
Total interest expense   2,067    1,639 
Net interest income   11,946    11,015 
Provision for Loan Losses   -    17 
Net interest income after provision for loan losses   11,946    10,998 
Noninterest Income          
Service charges and fees on deposit accounts   743    739 
Debit card/ATM fees   417    397 
Gain on sale of available for sale securities, net   2    65 
Gain (loss) on sale of bank premises and equipment   8    (4)
Earnings on bank owned life insurance policies   150    159 
Other operating income   242    195 
Total noninterest income   1,562    1,551 
Noninterest Expenses          
Salaries and employee benefits   5,790    5,248 
Occupancy and equipment expenses   1,476    1,430 
Telephone   263    208 
FDIC expense   198    203 
Consultant fees   155    222 
Collection, repossession and other real estate owned   211    165 
Marketing and advertising   233    461 
Loss on sale of other real estate owned   233    1 
Impairment losses on other real estate owned   31    - 
Merger and merger related expenses   478    - 
Other operating expenses   1,761    1,481 
Total noninterest expenses   10,829    9,419 
Income before income taxes   2,679    3,130 
Income Tax Expense   899    903 
Net Income  $1,780   $2,227 
           
Net income per common share: basic and diluted  $0.10   $0.12 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 3 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

   Three Months Ended 
   March 31, 
   2017   2016 
Net income  $1,780   $2,227 
Other comprehensive income, net of tax:          
Unrealized securities gains arising during          
period (net of tax, $237 and $1,210, respectively)   458    2,350 
Amortization of unrealized losses on securities transferred from          
available for sale to held to maturity (net of tax, $10 and $10, respectively)   19    18 
Less: reclassification adjustment for securities gains          
included in net income (net of tax, ($1) and ($22), respectively)   (1)   (43)
Other comprehensive income   476    2,325 
Comprehensive income  $2,256   $4,552 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 4 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Three Months Ended March 31, 2017 and 2016

(dollars in thousands)

 

                   Accumulated     
       Preferred           Other     
   Common   Stock       Retained   Comprehensive     
   Stock   Series B   Surplus   Earnings   (Loss) Income   Total 
Balance, December 31, 2015  $25,817   $10,480   $48,923   $44,941   $(3,886)  $126,275 
Net income   -    -    -    2,227    -    2,227 
Other comprehensive income   -    -    -    -    2,325    2,325 
Cash dividends - preferred stock, Series B   -    -    -    (105)   -    (105)
Cash dividends - common stock ($0.02 per share)   -    -    -    (260)   -    (260)
Repurchase of common stock   (3)   -    (6)   -    -    (9)
Stock based compensation   -    -    61    -    -    61 
Restricted common stock vested   18    -    (18)   -    -    - 
Balance, March 31, 2016  $25,832   $10,480   $48,960   $46,803   $(1,561)  $130,514 
                               
Balance, December 31, 2016  $25,897   $10,480   $49,321   $51,051   $(5,549)  $131,200 
Net income   -    -    -    1,780    -    1,780 
Other comprehensive income   -    -    -    -    476    476 
Cash dividends - preferred stock, Series B   -    -    -    (157)   -    (157)
Cash dividends - common stock ($0.03 per share)   -    -    -    (393)   -    (393)
Repurchase of common stock   (9)   -    (36)   -    -    (45)
Stock based compensation   -    -    82    -    -    82 
Restricted common stock vested   31    -    (31)   -    -    - 
Balance, March 31, 2017  $25,919   $10,480   $49,336   $52,281   $(5,073)  $132,943 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 5 

 

  

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

  

   Three Months Ended 
   March 31, 
   2017   2016 
Operating Activities:          
Net income  $1,780   $2,227 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   -    17 
Depreciation and amortization   613    633 
Stock based compensation   82    61 
Amortization of debt issuance costs   26    26 
Net accretion of certain acquisition related fair value adjustments   (51)   (56)
Net amortization of premiums and accretion of discounts          
on investment securities, net   618    636 
(Gain) on sale of available for sale securities, net   (2)   (65)
(Gain) loss on sale of bank premises and equipment   (8)   4 
Loss on sale of other real estate owned   233    1 
Impairment losses on other real estate owned   31    - 
Loss on LLC investments   12    24 
Earnings on bank owned life insurance policies   (150)   (159)
Net change in:          
Deferred taxes   899    913 
Accrued interest receivable   (216)   (431)
Other assets   (98)   343 
Accrued interest payable   376    326 
Other liabilities   9    (90)
Net cash provided by operating activities   4,154    4,410 
Investing Activities:          
Purchase of securities available for sale   (21,507)   (22,238)
Purchase of restricted securities   (1,725)   (3,128)
Purchases of bank premises and equipment   (362)   (574)
Purchases of loans   (6,872)   (5,372)
Improvements to other real estate owned   (13)   - 
Net change in loans   (32,095)   (23,551)
Proceeds from:          
Maturities, calls, and paydowns of securities available for sale   8,024    6,776 
Maturities, calls, and paydowns of securities held to maturity   1,644    146 
Sale of securities available for sale   2,709    12,931 
Sale of restricted securities   3,725    3,042 
Sale of bank premises and equipment   516    - 
Sale of other real estate owned   1,299    87 
Net cash (used in) investing activities   (44,657)   (31,881)
Financing Activities:          
Net change in:          
Demand, interest-bearing demand and savings deposits   59,945    6,773 
Time deposits   35,347    3,378 
Federal funds purchased and repurchase agreements   320    994 
Short-term borrowings   (49,760)   147 
Debt issuance costs   -    (2)
Repurchase of common stock   (45)   (9)
Dividends paid - preferred stock, Series B   (157)   (105)
Dividends paid - common stock   (393)   (260)
Net cash provided by financing activities   45,257    10,916 
Net increase (decrease) in cash and cash equivalents   4,754    (16,555)
Cash and cash equivalents, December 31   17,615    31,955 
Cash and cash equivalents, March 31  $22,369   $15,400 
Supplemental disclosure:          
Interest paid  $1,691   $1,313 
Supplemental disclosure of noncash investing and financing activities:          
Unrealized gains on securities available for sale  $693   $3,495 
Loans transferred to other real estate owned  $(525)  $(466)
Reclassification of bank premises and equipment to assets held for sale  $(2,970)  $- 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 6 

 

 

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

Notes to the Interim Consolidated Financial Statements

(unaudited)

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements of Eastern Virginia Bankshares, Inc. (the “Company”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), which is unconsolidated, and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).

 

The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to the Trust is reported as a liability of the Company.

 

Nature of Operations

 

Eastern Virginia Bankshares, Inc. is a bank holding company that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. The Company was headquartered in Tappahannock, Virginia until October 2016 at which time it was relocated to Glen Allen, Virginia. The Company conducts its primary operations through its wholly-owned bank subsidiary, EVB, which is headquartered in Tappahannock, Virginia. Two of EVB’s three predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In April 2006, these three banks were merged and the surviving bank was re-branded as EVB. Additionally, the Company acquired Virginia Company Bank (“VCB”) on November 14, 2014 and merged VCB with and into the Bank, with the Bank surviving, thus adding three additional branches to the Bank located in Hampton, Newport News and Williamsburg, respectively. On December 13, 2016, the Company entered into an Agreement and Plan of Merger to merge with and into Southern National Bancorp of Virginia, Inc. (“Southern National”), with Southern National surviving (such transaction, the “Pending Merger”). The Pending Merger, which is expected to be completed by the third quarter of 2017, is subject to the approval of the shareholders of both companies, as well as customary closing conditions.

 

The Bank provides a full range of banking and related financial services to individuals and businesses through its network of retail branches. With twenty-four retail branches, the Bank serves diverse markets that primarily are in the counties of Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Northumberland, Southampton, Surry, Sussex and the cities of Colonial Heights, Hampton, Newport News, Richmond and Williamsburg. The Bank also operates a loan production office in Chesterfield County, Virginia, that the Bank opened during the second quarter of 2014. The Bank operates under a state bank charter and as such is subject to regulation by the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

 

The Bank owns EVB Financial Services, Inc., which in turn has a 100% ownership interest in EVB Investments, Inc. EVB Investments, Inc. offers a comprehensive range of investment services through Infinex Investments, Inc. On May 15, 2014, the Bank acquired a 4.9% ownership interest in Southern Trust Mortgage, LLC. Pursuant to an independent contractor agreement with Southern Trust Mortgage, LLC, the Company advises and consults with Southern Trust Mortgage, LLC and facilitates the marketing and brand recognition of their mortgage business. In addition, the Company provides Southern Trust Mortgage, LLC with offices at two retail branches in the Company’s market area and access to office equipment at these locations during normal business hours. For its services, the Company receives fixed monthly compensation from Southern Trust Mortgage, LLC in the amount of $2 thousand, which is adjustable on a quarterly basis.

 

On October 1, 2014, the Bank acquired a 6.0% ownership interest in Bankers Title, LLC. Bankers Title, LLC is a multi-bank owned title agency providing a full range of title insurance settlement and related financial services. The Bank has a 2.94% ownership interest in Bankers Insurance, LLC, which primarily sells insurance products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has a 100% ownership interest in Dunston Hall LLC and POS LLC which were formed to hold the title to real estate acquired by the Bank upon foreclosure on property of real estate secured loans. The financial position and operating results of all of these subsidiaries are not significant to the Company as a whole and are not considered principal activities of the Company at this time. The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “EVBS.”

 

 7 

 

 

Basis of Presentation

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, loans acquired in a business combination, impairment of loans, impairment of securities, the valuation of other real estate owned (or “OREO”), the valuation of assets held for sale, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred income taxes and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these interim financial statements, have been made. Certain prior year amounts have been reclassified to conform to the 2017 presentation. These reclassifications have no effect on previously reported net income.

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will be required to use additional forward-looking information when determining their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for public companies that file reports with the SEC for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

 

 8 

 

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.

 

 

 9 

 

 

Note 2. Investment Securities

 

The amortized cost and fair value, with gross unrealized gains and losses, of investment securities at March 31, 2017 and December 31, 2016 were as follows:

 

(dollars in thousands)  March 31, 2017 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
SBA Pool securities  $60,144   $6   $1,083   $59,067 
Agency residential mortgage-backed securities*   28,988    -    950    28,038 
Agency commercial mortgage-backed securities   28,480    1    484    27,997 
Agency CMO securities   59,162    39    1,054    58,147 
Non agency CMO securities*   37    -    -    37 
State and political subdivisions   56,208    153    1,067    55,294 
Corporate securities   2,000    13    -    2,013 
Total  $235,019   $212   $4,638   $230,593 

 

*The combined unrealized gains on these securities were less than $1.

 

(dollars in thousands)  December 31, 2016 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
SBA Pool securities  $58,787   $13   $1,081   $57,719 
Agency residential mortgage-backed securities   26,710    9    890    25,829 
Agency commercial mortgage-backed securities   28,522    -    670    27,852 
Agency CMO securities   52,991    42    1,350    51,683 
Non agency CMO securities*   43    -    -    43 
State and political subdivisions   55,698    182    1,379    54,501 
Corporate securities   2,000    5    -    2,005 
Total  $224,751   $251   $5,370   $219,632 

 

*The combined unrealized gains on these securities were less than $1.

 

 10 

 

 

(dollars in thousands)  March 31, 2017 
       Net Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
   Cost   in AOCI*   Value   Gains   Losses   Value 
Held to Maturity:                              
Agency CMO securities  $9,139   $31   $9,108   $170   $7   $9,271 
State and political subdivisions   17,486    364    17,122    703    6    17,819 
Total  $26,625   $395   $26,230   $873   $13   $27,090 

 

*Represents the unamortized net unrealized holding loss for securities transferred from available for sale to held to maturity, net of amortization or accretion.

 

 

(dollars in thousands)  December 31, 2016 
       Net Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
   Cost   in AOCI*   Value   Gains   Losses   Value 
Held to Maturity:                              
Agency CMO securities  $9,830   $37   $9,793   $153   $8   $9,938 
State and political subdivisions   18,550    387    18,163    643    9    18,797 
Total  $28,380   $424   $27,956   $796   $17   $28,735 

 

*Represents the unamortized net unrealized holding loss for securities transferred from available for sale to held to maturity, net of amortization or accretion.

 

There were no investment securities classified as “Trading” at March 31, 2017 or December 31, 2016. During the fourth quarter of 2013, the Company transferred investment securities with an amortized cost of $35.5 million, previously designated as “Available for Sale,” to “Held to Maturity” classification. The fair value of those investment securities as of the date of the transfer was $34.5 million, reflecting a gross unrealized loss of $994 thousand. The gross unrealized loss net of tax at the time of transfer remained in Accumulated Other Comprehensive Income (Loss) and is being amortized over the remaining life of the investment securities as an adjustment to interest income.

 

At March 31, 2017, the Company’s mortgage-backed investment securities consisted of commercial and residential mortgage-backed investment securities. The Company’s mortgage-backed investment securities are all backed by an Agency of the U.S. government and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.

 

 

 

 

 

 

 

 

 11 

 

 

The amortized cost, carrying value and fair value of investment securities at March 31, 2017, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

 

(dollars in thousands)  March 31, 2017 
Available for Sale:  Amortized
Cost
   Fair
Value
 
         
Due in one year or less  $2,051   $2,037 
Due after one year through five years   96,336    94,885 
Due after five years through ten years   121,617    118,889 
Due after ten years   15,015    14,782 
Total  $235,019   $230,593 

 

(dollars in thousands)  March 31, 2017 
Held to Maturity:  Carrying
Value
   Fair
Value
 
         
Due after one year through five years  $23,789   $24,568 
Due after five years through ten years   1,693    1,781 
Due after ten years   748    741 
Total  $26,230   $27,090 

 

The following table presents the gross realized gains and losses on the sale of investment securities available for sale and proceeds from the sale of investment securities available for sale during the three months ended March 31, 2017 and 2016:

 

   Three Months
Ended
   Three Months
Ended
 
(dollars in thousands)  March 31, 2017   March 31, 2016 
Realized gains (losses):          
Gross realized gains  $2   $84 
Gross realized (losses)   -    (19)
Net realized gains  $2   $65 
Proceeds from sales of investment securities          
available for sale  $2,709   $12,931 

 

Proceeds from maturities, calls and paydowns of investment securities available for sale for the three months ended March 31, 2017 and 2016 were $8.0 million and $6.8 million, respectively. Proceeds from maturities, calls and paydowns of investment securities held to maturity for the three months ended March 31, 2017 and 2016 were $1.6 million and $146 thousand, respectively.

 

The Company pledges investment securities to secure public deposits, balances with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and repurchase agreements. Investment securities with an aggregate book value of $39.3 million and an aggregate fair value of $39.8 million were pledged at March 31, 2017. Investment securities with an aggregate book of $57.9 million and an aggregate fair value of $58.1 million were pledged at December 31, 2016.

 

Investment securities in an unrealized loss position at March 31, 2017, by duration of the period of the unrealized loss, are shown below:

 

   March 31, 2017 
(dollars in thousands)  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Investment Securities  Value   Loss   Value   Loss   Value   Loss 
SBA Pool securities  $32,249   $556   $18,469   $527   $50,718   $1,083 
Agency residential mortgage-backed securities   21,989    875    3,949    75    25,938    950 
Agency commercial mortgage-backed securities   25,966    484    -    -    25,966    484 
Agency CMO securities   41,876    800    8,349    261    50,225    1,061 
State and political subdivisions   35,914    1,009    2,170    64    38,084    1,073 
Total  $157,994   $3,724   $32,937   $927   $190,931   $4,651 

 

 

 12 

 

 

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment that may result due to adverse economic conditions and associated credit deterioration. A determination as to whether an investment security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain investment securities in unrealized loss positions, the Company will enlist independent third-party firms to prepare cash flow analyses to compare the present value of cash flows expected to be collected from the investment security with the amortized cost basis of the investment security.

 

Based on the Company’s evaluation, management does not believe any unrealized losses at March 31, 2017 represent an other-than-temporary impairment as these unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, which rose during 2016 causing bond prices to decline and are not attributable to credit deterioration. During the first three months of 2017, unrealized losses declined due to decreases in interest rates, which caused bond prices to increase. At March 31, 2017, there were 153 debt investment securities with fair values totaling $190.9 million considered temporarily impaired. Of these debt investment securities, 124 with fair values totaling $158.0 million were in an unrealized loss position of less than 12 months and 29 with fair values totaling $32.9 million were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities until recovery of the amortized cost basis and it is more likely than not that the Company will not be required to sell these investment securities before a recovery of unrealized losses, the Company does not consider these investment securities to be other-than-temporarily impaired at March 31, 2017 and no impairment has been recognized. At March 31, 2017, there were no equity investment securities in an unrealized loss position.

 

Investment securities in an unrealized loss position at December 31, 2016, by duration of the period of the unrealized loss, are shown below:

 

   December 31, 2016 
(dollars in thousands)  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Investment Securities  Value   Loss   Value   Loss   Value   Loss 
SBA Pool securities  $33,591   $547   $19,223   $534   $52,814   $1,081 
Agency residential mortgage-backed securities   18,617    802    4,063    88    22,680    890 
Agency commercial mortgage-backed securities   27,853    670    -    -    27,853    670 
Agency CMO securities   47,468    1,226    3,605    132    51,073    1,358 
State and political subdivisions   39,000    1,309    2,165    79    41,165    1,388 
Total  $166,529   $4,554   $29,056   $833   $195,585   $5,387 

 

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $6.5 million and $8.5 million at March 31, 2017 and December 31, 2016, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Because the FHLB generated positive net income for each quarterly period beginning April 1, 2016, and ending March 31, 2017, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2017 and no impairment has been recognized. FHLB stock is included in a separate line item on the consolidated balance sheets (Restricted securities, at cost) and is not part of the Company’s investment securities portfolio. The Company’s restricted securities also include investments in the Reserve Bank and Community Bankers Bank totaling $3.0 million at both March 31, 2017 and December 31, 2016, which are carried at cost.

 

 

 

 

 

 

 

 13 

 

 

Note 3. Loan Portfolio

 

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the Company’s total gross loans at the dates indicated:

 

   March 31, 2017   December 31, 2016 
(dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial, industrial and agricultural  $150,469    14.04%   $148,963    14.42% 
Real estate - one to four family residential:                    
Closed end first and seconds   212,758    19.85%    215,462    20.85% 
Home equity lines   124,192    11.59%    122,506    11.85% 
Total real estate - one to four family residential   336,950    31.44%    337,968    32.70% 
Real estate - multifamily residential   31,569    2.95%    32,400    3.14% 
Real estate - construction:                    
One to four family residential   18,822    1.76%    16,204    1.57% 
Other construction, land development and other land   104,277    9.73%    92,466    8.95% 
  Total real estate - construction   123,099    11.49%    108,670    10.52% 
Real estate - farmland   11,229    1.05%    11,289    1.09% 
Real estate - non-farm, non-residential:                    
Owner occupied   216,597    20.22%    201,284    19.48% 
Non-owner occupied   146,464    13.67%    139,649    13.52% 
Total real estate - non-farm, non-residential   363,061    33.89%    340,933    33.00% 
Consumer   44,303    4.13%    42,403    4.10% 
Other   10,776    1.01%    10,605    1.03% 
     Total loans   1,071,456    100.00%    1,033,231    100.00% 
Less allowance for loan losses   (10,952)        (11,270)     
     Loans, net  $1,060,504        $1,021,961      

 

Deferred costs, net of deferred fees, are included in the table above and totaled $1.8 million for both March 31, 2017 and December 31, 2016.

 

 14 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2017 by class of loans:

 

(dollars in thousands)  30-59 Days
Past Due
   60-89 Days
Past Due
   Over 90 Days Past Due   Total Past Due   Total Current*   Total Loans 
Commercial, industrial and agricultural  $45   $-   $58   $103   $150,366   $150,469 
Real estate - one to four family residential:                              
Closed end first and seconds   1,237    444    3,773    5,454    207,304    212,758 
Home equity lines   301    -    150    451    123,741    124,192 
Total real estate - one to four family residential   1,538    444    3,923    5,905    331,045    336,950 
Real estate - multifamily residential   -    -    -    -    31,569    31,569 
Real estate - construction:                              
One to four family residential   -    -    191    191    18,631    18,822 
Other construction, land development and other land   -    -    -    -    104,277    104,277 
  Total real estate - construction   -    -    191    191    122,908    123,099 
Real estate - farmland   -    -    -    -    11,229    11,229 
Real estate - non-farm, non-residential:                              
Owner occupied   28    70    634    732    215,865    216,597 
Non-owner occupied   92    -    -    92    146,372    146,464 
Total real estate - non-farm, non-residential   120    70    634    824    362,237    363,061 
Consumer   17    12    17    46    44,257    44,303 
Other   -    -    -    -    10,776    10,776 
     Total loans  $1,720   $526   $4,823   $7,069   $1,064,387   $1,071,456 

 

*For purposes of this table only, the "Total Current" column includes loans that are 1-29 days past due.

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 by class of loans:

 

(dollars in thousands)  30-59 Days
Past Due
   60-89 Days
Past Due
   Over 90 Days Past Due   Total Past Due   Total Current*   Total Loans 
Commercial, industrial and agricultural  $118   $89   $166   $373   $148,590   $148,963 
Real estate - one to four family residential:                              
Closed end first and seconds   3,408    1,472    3,505    8,385    207,077    215,462 
Home equity lines   92    219    369    680    121,826    122,506 
Total real estate - one to four family residential   3,500    1,691    3,874    9,065    328,903    337,968 
Real estate - multifamily residential   -    -    -    -    32,400    32,400 
Real estate - construction:                              
One to four family residential   240    -    15    255    15,949    16,204 
Other construction, land development and other land   -    -    -    -    92,466    92,466 
  Total real estate - construction   240    -    15    255    108,415    108,670 
Real estate - farmland   -    -    -    -    11,289    11,289 
Real estate - non-farm, non-residential:                              
Owner occupied   61    -    225    286    200,998    201,284 
Non-owner occupied   -    -    -    -    139,649    139,649 
Total real estate - non-farm, non-residential   61    -    225    286    340,647    340,933 
Consumer   77    7    17    101    42,302    42,403 
Other   -    -    -    -    10,605    10,605 
     Total loans  $3,996   $1,787   $4,297   $10,080   $1,023,151   $1,033,231 

 

*For purposes of this table only, the "Total Current" column includes loans that are 1-29 days past due.

 

 15 

 


The following table presents nonaccrual loans, loans past due 90 days and accruing interest and troubled debt restructurings (accruing) at the dates indicated:

 

(dollars in thousands)  March 31, 2017   December 31, 2016 
Nonaccrual loans  $5,606   $5,181 
Loans past due 90 days and accruing interest   1,272    1,341 
Troubled debt restructurings (accruing)   10,669    10,441 

 

At March 31, 2017 and December 31, 2016, there were approximately $1.8 million and $2.2 million, respectively, in troubled debt restructurings (“TDRs”) included in nonaccrual loans.

 

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans greater than 90 days past due may remain on an accrual status if management determines it has adequate collateral to cover the principal and interest. If a loan or a portion of a loan is adversely classified, or is partially charged off, the loan is generally classified as nonaccrual. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on a nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due.

 

When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, and the amortization of related deferred loan fees or costs is suspended. While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. These policies are applied consistently across our loan portfolio.

 

A loan (including a TDR) may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

 

 16 

 

 

Outstanding principal balance and the carrying amount of loans acquired pursuant to the Company’s acquisition of VCB (or “Acquired Loans”) that were recorded at fair value at the acquisition date and are included in the consolidated balance sheet at March 31, 2017 and December 31, 2016 were as follows:

 

   March 31, 2017   December 31, 2016 
   Acquired           Acquired         
   Loans -   Acquired       Loans -   Acquired     
   Purchased   Loans -   Acquired   Purchased   Loans -   Acquired 
   Credit   Purchased   Loans -   Credit   Purchased   Loans - 
(dollars in thousands)  Impaired   Performing   Total   Impaired   Performing   Total 
Commercial, industrial and agricultural  $393   $2,341   $2,734   $420   $2,452   $2,872 
Real estate - one to four family residential:                              
Closed end first and seconds   1,136    4,730    5,866    1,135    4,914    6,049 
Home equity lines   32    7,991    8,023    32    8,417    8,449 
Total real estate - one to four family residential   1,168    12,721    13,889    1,167    13,331    14,498 
Real estate - multifamily residential   -    1,566    1,566    -    1,652    1,652 
Real estate - construction:                              
One to four family residential   -    353    353    -    360    360 
Other construction, land development and other land   236    115    351    252    2,182    2,434 
  Total real estate - construction   236    468    704    252    2,542    2,794 
Real estate - farmland   -    -    -    -    -    - 
Real estate - non-farm, non-residential:                              
Owner occupied   2,527    10,846    13,373    2,988    12,298    15,286 
Non-owner occupied   943    6,084    7,027    1,475    6,639    8,114 
Total real estate - non-farm, non-residential   3,470    16,930    20,400    4,463    18,937    23,400 
Consumer   -    138    138    -    148    148 
Other   -    476    476    -    642    642 
     Total loans  $5,267   $34,640   $39,907   $6,302   $39,704   $46,006 

 

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at March 31, 2017 and December 31, 2016:

 

           Over 90 Days Past 
   Nonaccrual   Due and Accruing 
   March 31,   December 31,   March 31,   December 31, 
(dollars in thousands)  2017   2016   2017   2016 
Commercial, industrial and agricultural  $758   $784   $-   $- 
Real estate - one to four family residential:                    
Closed end first and seconds   3,290    3,240    1,136    1,135 
Home equity lines   324    543    -    - 
Total real estate - one to four family residential   3,614    3,783    1,136    1,135 
Real estate - construction:                    
One to four family residential   191    15    -    - 
  Total real estate - construction   191    15    -    - 
Real estate - non-farm, non-residential:                    
Owner occupied   1,026    578    136    206 
Total real estate - non-farm, non-residential   1,026    578    136    206 
Consumer   17    21    -    - 
     Total loans  $5,606   $5,181   $1,272   $1,341 

 

 17 

 

 

The Company uses a risk grading system for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

 

Pass Grades

·Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;
·Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;
·Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;
·Risk Grade 4 loans are satisfactory loans with borrowers not as strong as risk grade 3 loans but may exhibit a higher degree of financial risk based on the type of business supporting the loan; and
·Risk Grade 5 loans are loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay.

 

Special Mention

·Risk Grade 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position.

 

Classified Grades

·Risk Grade 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged. These have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;
·Risk Grade 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined; and
·Risk Grade 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as a bank asset is not warranted.

 

The Company uses a past due grading system for consumer loans, including one to four family residential first and seconds and home equity lines. The past due status of a loan is based on the contractual due date of the most delinquent payment due. The past due grading of consumer loans is based on the following categories: current, 1-29 days past due, 30-59 days past due, 60-89 days past due and over 90 days past due. The consumer loans are segregated between performing and nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue interest, are greater than 90 days past due and accruing interest or considered impaired. Non-impaired consumer loans are assigned an allowance factor which increases with the severity of past due status. This component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

 

The allocation methodology applied by the Company includes management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of migration analysis and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of classified loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. In determining the allowance for loan losses, the Company considers its portfolio segments and loan classes to be the same.

 

 18 

 

 

The following table presents commercial loans by credit quality indicator at March 31, 2017:

 

                       Acquired     
                       Loans -     
                       Purchased     
       Special               Credit     
(dollars in thousands)  Pass   Mention   Substandard   Doubtful   Impaired   Impaired   Total 
Commercial, industrial and agricultural  $145,087   $3,066   $707   $28   $1,188   $393   $150,469 
Real estate - multifamily residential   31,569    -    -    -    -    -    31,569 
Real estate - construction:                                   
One to four family residential   18,260    131    265    -    166    -    18,822 
Other construction, land development and other land   96,695    -    210    -    7,136    236    104,277 
  Total real estate - construction   114,955    131    475    -    7,302    236    123,099 
Real estate - farmland   7,239    3,481    -    -    509    -    11,229 
Real estate - non-farm, non-residential:                                   
Owner occupied   199,338    4,826    1,969    -    7,937    2,527    216,597 
Non-owner occupied   136,290    1,193    680    -    7,358    943    146,464 
Total real estate - non-farm, non-residential   335,628    6,019    2,649    -    15,295    3,470    363,061 
Total commercial loans  $634,478   $12,697   $3,831   $28   $24,294   $4,099   $679,427 

 

The following table presents commercial loans by credit quality indicator at December 31, 2016:

 

                   Acquired     
                   Loans -     
                   Purchased     
       Special           Credit     
(dollars in thousands)  Pass   Mention   Substandard   Impaired   Impaired   Total 
Commercial, industrial and agricultural  $136,533   $9,839   $531   $1,640   $420   $148,963 
Real estate - multifamily residential   32,400    -    -    -    -    32,400 
Real estate - construction:                              
One to four family residential   15,624    319    91    170    -    16,204 
Other construction, land development                              
and other land   84,832    -    212    7,170    252    92,466 
  Total real estate - construction   100,456    319    303    7,340    252    108,670 
Real estate - farmland   7,270    3,504    -    515    -    11,289 
Real estate - non-farm, non-residential:                              
Owner occupied   179,400    9,359    1,892    7,645    2,988    201,284 
Non-owner occupied   127,817    2,222    689    7,446    1,475    139,649 
Total real estate - non-farm, non-residential   307,217    11,581    2,581    15,091    4,463    340,933 
Total commercial loans  $583,876   $25,243   $3,415   $24,586   $5,135   $642,255 

 

At March 31, 2017 and December 31, 2016, the Company did not have any loans classified as Loss.

 

 19 

 

 

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at March 31, 2017:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $201,933   $10,825   $212,758 
Home equity lines   123,817    375    124,192 
Total real estate - one to four family residential   325,750    11,200    336,950 
Consumer   43,985    318    44,303 
Other   10,776    -    10,776 
Total consumer loans  $380,511   $11,518   $392,029 

 

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at December 31, 2016:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $204,847   $10,615   $215,462 
Home equity lines   121,912    594    122,506 
Total real estate - one to four family residential   326,759    11,209    337,968 
Consumer   42,077    326    42,403 
Other   10,605    -    10,605 
Total consumer loans  $379,441   $11,535   $390,976 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. The Company measures impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are considered impaired loans. TDRs occur when we agree to modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions can be temporary and are made in an attempt to avoid foreclosure and with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include, without limitation, rate reductions to below market rates, payment deferrals, forbearance, and, in some cases, forgiveness of principal or interest.

 

At the time of a TDR, the loan is placed on nonaccrual status. A loan (including a TDR) may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

 

 20 

 

 

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2017:

 

   Beginning               Ending 
   Balance               Balance 
(dollars in thousands)  January 1, 2017   Charge-offs   Recoveries   Provision   March 31, 2017 
 Commercial, industrial and agricultural  $3,035   $(207)  $98   $(265)  $2,661 
 Real estate - one to four family residential:                         
 Closed end first and seconds   1,487    (193)   70    113    1,477 
 Home equity lines   653    (76)   3    (76)   504 
Total real estate - one to four family residential   2,140    (269)   73    37    1,981 
 Real estate - multifamily residential   71    -    -    (22)   49 
 Real estate - construction:                         
 One to four family residential   197    -    1    45    243 
 Other construction, land development and other land   2,632    -    -    427    3,059 
Total real estate - construction   2,829    -    1    472    3,302 
 Real estate - farmland   157    -    -    (2)   155 
 Real estate - non-farm, non-residential:                         
 Owner occupied   1,267    -    -    4    1,271 
 Non-owner occupied   584    -    -    (156)   428 
Total real estate - non-farm, non-residential   1,851    -    -    (152)   1,699 
 Consumer   459    (9)   11    48    509 
 Other   728    (24)   8    (116)   596 
 Total  $11,270   $(509)  $191   $-   $10,952 

 

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2016:

 

   Beginning               Ending 
   Balance               Balance 
(dollars in thousands)  January 1, 2016   Charge-offs   Recoveries   Provision   March 31, 2016 
Commercial, industrial and agricultural  $1,894   $(46)  $26   $348   $2,222 
Real estate - one to four family residential:                         
 Closed end first and seconds   1,609    (373)   81    320    1,637 
 Home equity lines   795    -    12    312    1,119 
Total real estate - one to four family residential   2,404    (373)   93    632    2,756 
Real estate - multifamily residential   78    -    -    11    89 
Real estate - construction:                         
 One to four family residential   295    -    1    (9)   287 
 Other construction, land development and other land   2,423    -    -    (116)   2,307 
Total real estate - construction   2,718    -    1    (125)   2,594 
Real estate - farmland   272    -    -    4    276 
Real estate - non-farm, non-residential:                         
 Owner occupied   1,964    (208)   63    (470)   1,349 
 Non-owner occupied   1,241    -    61    (428)   874 
Total real estate - non-farm, non-residential   3,205    (208)   124    (898)   2,223 
Consumer   287    (33)   15    37    306 
Other   469    (15)   8    8    470 
 Total  $11,327   $(675)  $267   $17   $10,936 

 

 21 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of March 31, 2017:

 

   Allowance allocated to loans:   Total Loans: 
           Acquired               Acquired     
   Individually   Collectively   loans -       Individually   Collectively   loans -     
   evaluated   evaluated   purchased       evaluated   evaluated   purchased     
   for   for   credit       for   for   credit     
(dollars in thousands)  impairment   impairment   impaired   Total   impairment   impairment   impaired   Total 
Commercial, industrial and agricultural  $638   $2,023   $-   $2,661   $1,188   $148,888   $393   $150,469 
Real estate - one to four family residential:                                        
Closed end first and seconds   557    903    17    1,477    7,052    204,570    1,136    212,758 
Home equity lines   50    454    -    504    225    123,935    32    124,192 
Total real estate - one to four family residential   607    1,357    17    1,981    7,277    328,505    1,168    336,950 
Real estate - multifamily residential   -    49    -    49    -    31,569    -    31,569 
Real estate - construction:                                        
One to four family residential   54    189    -    243    166    18,656    -    18,822 
Other construction, land development and other land   1,572    1,487    -    3,059    7,136    96,905    236    104,277 
Total real estate - construction   1,626    1,676    -    3,302    7,302    115,561    236    123,099 
Real estate - farmland   37    118    -    155    509    10,720    -    11,229 
Real estate - non-farm, non-residential:                                        
Owner occupied   449    822    -    1,271    7,937    206,133    2,527    216,597 
Non-owner occupied   157    271    -    428    7,358    138,163    943    146,464 
Total real estate - non-farm, non-residential   606    1,093    -    1,699    15,295    344,296    3,470    363,061 
Consumer   59    450    -    509    301    44,002    -    44,303 
Other   -    596    -    596    -    10,776    -    10,776 
Total  $3,573   $7,362   $17   $10,952   $31,872   $1,034,317   $5,267   $1,071,456 

 

 22 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2016:

 

   Allowance allocated to loans:   Total Loans: 
           Acquired               Acquired     
   Individually   Collectively   loans -       Individually   Collectively   loans -     
   evaluated   evaluated   purchased       evaluated   evaluated   purchased     
   for   for   credit       for   for   credit     
(dollars in thousands)  impairment   impairment   impaired   Total   impairment   impairment   impaired   Total 
Commercial, industrial and agricultural  $865   $2,170   $-   $3,035   $1,640   $146,903   $420   $148,963 
Real estate - one to four family residential:                                        
Closed end first and seconds   416    1,054    17    1,487    7,110    207,217    1,135    215,462 
Home equity lines   50    603    -    653    225    122,249    32    122,506 
Total real estate - one to four family residential   466    1,657    17    2,140    7,335    329,466    1,167    337,968 
Real estate - multifamily residential   -    71    -    71    -    32,400    -    32,400 
Real estate - construction:                                        
One to four family residential   55    142    -    197    170    16,034    -    16,204 
Other construction, land development and other land   1,368    1,264    -    2,632    7,170    85,044    252    92,466 
Total real estate - construction   1,423    1,406    -    2,829    7,340    101,078    252    108,670 
Real estate - farmland   40    117    -    157    515    10,774    -    11,289 
Real estate - non-farm, non-residential:                                        
Owner occupied   321    946    -    1,267    7,645    190,651    2,988    201,284 
Non-owner occupied   177    407    -    584    7,446    130,728    1,475    139,649 
Total real estate - non-farm, non-residential   498    1,353    -    1,851    15,091    321,379    4,463    340,933 
Consumer   63    396    -    459    309    42,094    -    42,403 
Other   -    728    -    728    -    10,605    -    10,605 
Total  $3,355   $7,898   $17   $11,270   $32,230   $994,699   $6,302   $1,033,231 

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2017:

 

           Recorded   Recorded             
       Unpaid   Investment   Investment       Average   Interest 
   Recorded   Principal   With No   With   Related   Recorded   Income 
(dollars in thousands)  Investment   Balance   Allowance   Allowance   Allowance   Investment   Recognized 
Commercial, industrial and agricultural  $1,188   $1,199   $550   $638   $638   $1,346   $20 
Real estate - one to four family residential:                                   
Closed end first and seconds   7,052    7,665    3,423    3,629    557    7,080    89 
Home equity lines   225    225    175    50    50    225    1 
Total real estate - one to four family residential   7,277    7,890    3,598    3,679    607    7,305    90 
Real estate - construction:                                   
One to four family residential   166    166    16    150    54    168    2 
Other construction, land development and other land   7,136    7,136    1,745    5,391    1,572    7,144    95 
Total real estate - construction   7,302    7,302    1,761    5,541    1,626    7,312    97 
Real estate - farmland   509    512    257    252    37    512    8 
Real estate - non-farm, non-residential:                                   
Owner occupied   7,937    7,940    6,133    1,804    449    7,678    100 
Non-owner occupied   7,358    7,358    6,097    1,261    157    7,608    77 
Total real estate - non-farm, non-residential   15,295    15,298    12,230    3,065    606    15,286    177 
Consumer   301    313    -    301    59    305    4 
Total loans*  $31,872   $32,514   $18,396   $13,476   $3,573   $32,066   $396 

 

*PCI loans are excluded from this table.

 

 23 

 

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016:

 

           Recorded   Recorded             
       Unpaid   Investment   Investment       Average   Interest 
   Recorded   Principal   With No   With   Related   Recorded   Income 
(dollars in thousands)  Investment   Balance   Allowance   Allowance   Allowance   Investment   Recognized 
Commercial, industrial and agricultural  $1,640   $1,640   $668   $972   $865   $1,094   $70 
Real estate - one to four family residential:                                   
Closed end first and seconds   7,110    7,712    3,760    3,350    416    6,893    393 
Home equity lines   225    225    175    50    50    453    2 
Total real estate - one to four family residential   7,335    7,937    3,935    3,400    466    7,346    395 
Real estate - construction:                                   
One to four family residential   170    170    17    153    55    178    8 
Other construction, land development and other land   7,170    7,170    1,745    5,425    1,368    5,885    317 
Total real estate - construction   7,340    7,340    1,762    5,578    1,423    6,063    325 
Real estate - farmland   515    517    261    254    40    525    34 
Real estate - non-farm, non-residential:                                   
Owner occupied   7,645    7,647    6,195    1,450    321    6,176    407 
Non-owner occupied   7,446    7,446    6,166    1,280    177    11,509    380 
Total real estate - non-farm, non-residential   15,091    15,093    12,361    2,730    498    17,685    787 
Consumer   309    322    3    306    63    323    17 
Total loans*  $32,230   $32,849   $18,990   $13,240   $3,355   $33,036   $1,628 

 

*PCI loans are excluded from this table.

 

Determining the fair value of purchased credit-impaired (“PCI”) loans at November 14, 2014 required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference and is not recorded. In accordance with U.S. GAAP, the Company did not “carry over” any allowances for loan losses that were reserved for the VCB loan portfolio prior to the Company’s acquisition of VCB. PCI loans had unpaid principal balances of $6.0 million and $7.1 million and recorded carrying values of $5.3 million and $6.3 million at March 31, 2017 and December 31, 2016, respectively.

 

The following table presents a summary of the changes in the accretable yield of the PCI loan portfolio for the periods indicated:

 

   Three months ended   Three months ended 
   March 31, 2017   March 31, 2016 
(dollars in thousands)  Accretable Yield   Accretable Yield 
Balance at beginning of period  $903   $1,280 
Accretion   (110)   (129)
Reclassification of nonaccretable difference due to          
improvement in expected cash flows   248    24 
Other changes, net   583    46 
Balance at end of period  $1,624   $1,221 

 

 

 

 24 

 

 

The following table presents, by loan class, information related to loans modified as TDRs during the three months ended March 31, 2017 and 2016:

 

   Three Months Ended March 31, 2017   Three Months Ended March 31, 2016 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
(dollars in thousands)  Loans   Balance   Balance*   Loans   Balance   Balance* 
Commercial, industrial and agricultural   -   $-   $-    1   $68   $68 
Real estate - one to four family residential:                              
Closed end first and seconds   1    112    111    1    41    41 
Total   1   $112   $111    2   $109   $109 

 

*The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

 

The following table presents, by loan class, information related to the loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three months ended March 31, 2017 and 2016 and were modified as TDRs within the 12 months prior to default:

 

   Three Months Ended   Three Months Ended 
   March 31, 2017   March 31, 2016 
   Number of   Recorded   Number of   Recorded 
(dollars in thousands)  Loans   Balance   Loans   Balance 
Real estate - one to four family residential:                    
Closed end first and seconds   2   $501    -   $- 
Total   2   $501    -   $- 

 

At March 31, 2017, $1.6 million in foreclosed residential real estate properties were included in OREO, and $127 thousand in residential real estate loans were in the process of foreclosure.

 

Note 4. Deferred Income Taxes

 

As of March 31, 2017 and December 31, 2016, the Company had recorded net deferred income tax assets of approximately $11.3 million and $12.4 million, respectively. The realization of deferred income tax assets is assessed quarterly and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.  Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future.  Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Further, management has considered future reversals of existing taxable temporary differences and limited, prudent and feasible tax-planning strategies, such as changes in investment security income (tax-exempt to taxable), additional sales of loans and sales of branches/buildings with an appreciated asset value over the tax basis. Based upon an analysis of available evidence, management has determined that it is “more likely than not” that the Company’s deferred income tax assets as of March 31, 2017 and December 31, 2016 will be fully realized and therefore no valuation allowance to the Company’s deferred income tax assets was recorded. However, the Company can give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions which are subject to uncertainty and based on estimates that may change due to changing economic conditions and other factors.  Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

 

The Company’s ability to realize its deferred income tax assets may be limited if the Company experiences an ownership change as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). For additional information see Part I, Item 1A. “Risk Factors” included in the Company’s 2016 Form 10-K.

 

 

 

 25 

 

 

Note 5. Bank Premises and Equipment

 

Bank premises and equipment are summarized as follows:

 

(dollars in thousands)  March 31, 2017   December 31, 2016 
Land and improvements  $5,208   $7,788 
Buildings and leasehold improvements   25,460    29,091 
Furniture, fixtures and equipment   15,455    21,152 
Construction in progress   1,034    798 
    47,157    58,829 
Less accumulated depreciation   (23,192)   (31,135)
Net balance  $23,965   $27,694 

 

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2017 and 2016 amounted to $613 thousand and $633 thousand, respectively.

 

Note 6. Borrowings

 

Federal funds purchased and repurchase agreements. The Company has unsecured lines of credit with SunTrust Bank, Community Bankers Bank and Pacific Coast Bankers Bank for the purchase of federal funds in the amount of $20.0 million, $15.0 million and $5.0 million, respectively. These lines of credit have a variable rate based on the lending bank’s daily federal funds sold rate and are due on demand. Repurchase agreements are secured transactions and generally mature the day following the day sold. Customer repurchases are standard transactions that involve a Bank customer instead of a wholesale bank or broker. The Company offers this product as an accommodation to larger retail and commercial customers that request safety for their funds beyond the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limits. The Company does not use or have any open repurchase agreements with broker-dealers.

 

The tables below present selected information on federal funds purchased and repurchase agreements during the three months ended March 31, 2017 and the year ended December 31, 2016:

 

Federal funds purchased        
(dollars in thousands)  March 31, 2017   December 31, 2016 
Balance outstanding at period end  $1,500   $- 
Maximum balance at any month end during the period  $1,500   $2,000 
Average balance for the period  $26   $42 
Weighted average rate for the period   0.60%    0.93% 
Weighted average rate at period end   0.40%    0.00% 

 

Repurchase agreements        
(dollars in thousands)  March 31, 2017   December 31, 2016 
Balance outstanding at period end  $3,960   $5,140 
Maximum balance at any month end during the period  $5,079   $11,942 
Average balance for the period  $4,711   $5,777 
Weighted average rate for the period   0.47%    0.47% 
Weighted average rate at period end   0.47%    0.47% 

 

Short-term borrowings. Short-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. Short-term advances from the FHLB at March 31, 2017 consisted of $123.9 million in fixed rate one month advances. Short-term advances from the FHLB at December 31, 2016 consisted of $6.8 million using a daily rate credit, which is due on demand, and $166.9 million in fixed rate one month advances. Outstanding accrued interest at March 31, 2017 and December 31, 2016 totaled $54 thousand and $53 thousand, respectively.

 

 

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The table below presents selected information on short-term borrowings during the three months ended March 31, 2017 and the year ended December 31, 2016:

 

Short-term borrowings        
(dollars in thousands)  March 31, 2017   December 31, 2016 
Balance outstanding at period end  $123,890   $173,650 
Maximum balance at any month end during the period  $171,625   $173,650 
Average balance for the period  $150,675   $119,366 
Weighted average rate for the period   0.69%    0.43% 
Weighted average rate at period end   0.79%    0.53% 

 

Long-term borrowings. From time to time, the Company may obtain long-term borrowings from the FHLB, which consist of advances from the FHLB that are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. At March 31, 2017 and December 31, 2016, the Company had no long-term FHLB advances outstanding.

 

The Company’s line of credit with the FHLB can equal up to 30% of the Company’s gross assets or approximately $419.4 million at March 31, 2017. This line of credit totaled $224.6 million with approximately $100.8 million available at March 31, 2017. As of March 31, 2017 and December 31, 2016, loans with a carrying value of $297.6 million and $301.0 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

 

Note 7. Net Income Per Common Share

 

The Company applies the two-class method of computing basic and diluted net income per common share.  Under the two-class method, net income per common share is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.  Based on FASB guidance, the Company considers its Series B Preferred Stock (defined below) to be a participating security. FASB guidance requires that all outstanding unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders.  Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

 

The following table shows the computation of basic and diluted net income per common share for the periods presented: 

 

   Three Months Ended 
(dollars in thousands, except share and per share amounts)  March 31, 2017   March 31, 2016 
Basic Net Income Per Common Share          
Net income  $1,780   $2,227 
Less: Net income allocated to participating securities, Series B          
Preferred Stock   508    639 
Net income allocated to common shareholders  $1,272   $1,588 
Weighted average common shares outstanding for basic net          
income per common share   13,116,554    13,035,249 
Basic net income per common share  $0.10   $0.12 
           
Diluted Net Income Per Common Share          
Net income  $1,780   $2,227 
Weighted average common shares outstanding for basic net          
income per common share   13,116,554    13,035,249 
Effect of dilutive securities, stock options   -    - 
Effect of dilutive securities, Series B Preferred Stock   5,240,192    5,240,192 
Weighted average common shares outstanding for diluted net          
income per common share   18,356,746    18,275,441 
Diluted net income per common share  $0.10   $0.12 

 

At March 31, 2017 and 2016, options to acquire 35,750 and 67,525 shares of common stock, respectively, were not included in computing diluted net income per common share for the three months ended March 31, 2017 and 2016 because their effects were anti-dilutive.

 

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On June 12, 2013, the Company issued 5,240,192 shares of non-voting mandatorily convertible non-cumulative preferred stock, Series B (the “Series B Preferred Stock”) through private placements to certain investors. Each share of Series B Preferred Stock can, under certain limited circumstances as set forth in the Company’s articles of incorporation, be converted into one share of the Company’s common stock, and is therefore reflected in the dilutive weighted average common shares outstanding. For more information related to the conversion rights of these preferred shares, see Note 11 – Preferred Stock.

 

Note 8. Stock Based Compensation Plans

 

On September 21, 2000, the Company adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan (the “2000 Plan”) to provide a means for selected key employees and directors to increase their personal financial interest in the Company, thereby stimulating their efforts and strengthening their desire to remain with the Company. Under the 2000 Plan, up to 400,000 shares of Company common stock could be granted in the form of stock options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the “2003 Plan”) and still authorizing the issuance of up to 400,000 shares of common stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights, common stock, restricted stock and phantom stock. No additional awards may be granted under the 2003 Plan. Any awards previously granted under the 2003 Plan that were outstanding as of April 17, 2013 remain outstanding and will vest in accordance with their regular terms.

 

On April 19, 2007, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative and to encourage such persons to have a greater financial interest in the Company. Under the 2007 Plan, the Company could issue up to 400,000 additional shares of common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units. No additional awards may be granted under the 2007 Plan. Any awards previously granted under the 2007 Plan that were outstanding as of May 19, 2016 remain outstanding and will vest in accordance with their regular terms.

 

On May 19, 2016, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2016 Equity Compensation Plan (the “2016 Plan”) to promote the success of the Company by providing incentives to key employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company and with growth in shareholder value consistent with the Company’s risk management practices. The 2016 Plan authorizes the Company to issue up to 500,000 additional shares of common stock pursuant to stock options, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards. There were 484,232 shares still available to be granted as awards under the 2016 Plan as of March 31, 2017.

 

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant.

 

Accounting standards also require that new awards to employees eligible for accelerated vesting at retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.

 

Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock option award. There were no stock options granted or exercised in the three months ended March 31, 2017 and 2016. There was no remaining unrecognized compensation expense related to stock options at March 31, 2017, and there was no stock option compensation expense for three months ended March 31, 2017 and 2016.

 

A summary of the Company’s stock option activity and related information is as follows:

  

           Remaining   Aggregate 
   Options   Weighted Average   Contractual Life   Intrinsic Value* 
   Outstanding   Exercise Price   (in years)   (in thousands) 
Stock options outstanding at December 31, 2016   36,500   $15.81           
  Forfeited   (750)   12.36           
Stock options outstanding at March 31, 2017   35,750   $15.88    1.00   $- 
                     
Stock options exercisable at March 31, 2017   35,750   $15.88    1.00   $- 

 

*Intrinsic value is the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date.

 

 

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The table below summarizes information concerning stock options outstanding and exercisable at March 31, 2017:

  

Stock Options Outstanding and Exercisable
Exercise   Number   Weighted Average
Price   Outstanding   Remaining Term
$19.25    18,250   0.50 years
$12.36    17,500   1.50 years
$15.88    35,750   1.00 year

 

On April 29, 2016, the Company granted 6,500 shares of restricted stock under the 2007 Plan to various senior officers of the Bank. All of the shares are subject to time vesting over a one-year period and will vest on April 29, 2017. On March 24, 2016, the Company granted 65,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2017.  The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2019 to the extent certain financial performance requirements for fiscal year 2018 are met. On March 19, 2015, the Company granted 45,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2016.  The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2018 to the extent certain financial performance requirements for fiscal year 2017 are met. On October 15, 2014, the Company granted 42,500 shares of restricted stock under the 2007 Plan to its executive officers.  Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2015.  The remaining fifty percent (50%) of these shares were originally subject to performance vesting based on financial performance requirements for fiscal year 2016. However, in light of the Pending Merger and the fact that a comparison to the peer group was challenging as a result of the recent merger activity within the peer group, in March 2017 the Company’s compensation committee converted these shares into time-based restricted stock. In connection with the Pending Merger, all outstanding time and performance based shares of restricted stock will vest on an accelerated basis upon completing the Pending Merger.

 

For the three months ended March 31, 2017, restricted stock compensation expense was $82 thousand, compared to restricted stock compensation expense of $61 thousand for the same period in 2016, and in each case was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $7.00 per share for the April 29, 2016 awards, $6.80 per share for the March 24, 2016 awards, $6.28 per share for the March 19, 2015 awards and $6.10 per share for the October 15, 2014 awards.

 

A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of March 31, 2017, and changes during the three months ended March 31, 2017, is presented below; the weighted average price is the weighted average fair value at the date of grant:

 

       Weighted-Average 
   Shares   Price 
Nonvested as of December 31, 2016   168,000   $6.41 
Vested   (15,250)   6.45 
Nonvested as of March 31, 2017   152,750   $6.40 

 

At March 31, 2017, there was $557 thousand of total unrecognized compensation expense related to restricted stock awards. This unearned compensation is being amortized over the remaining vesting period for the time and performance based shares.

 

Note 9. Employee Benefit Plan – Pension

 

The Company historically maintained a defined benefit pension plan covering substantially all of the Company’s employees. The plan was amended January 28, 2008 to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participants’ account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year.

 

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The Company made no contributions to the pension plan during 2016. In connection with the Pending Merger, the Company expects to fully fund the pension plan and terminate it effective May 1, 2017.

 

Components of net periodic pension expense (benefit) related to the Company’s pension plan were as follows for the periods indicated:

  

   Three Months Ended 
   March 31, 
(dollars in thousands)  2017   2016 
Components of net periodic pension expense (benefit)        
Interest cost  $86   $98 
Expected return on plan assets   (36)   (158)
Amortization of prior service cost   2    2 
Recognized net actuarial loss   30    27 
Net periodic pension expense (benefit)  $82   $(31)

 

Note 10. Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

*Level 1 – Valuation is based upon quoted prices (unadjusted) for identical instruments traded in active markets.

 

*Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

*Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market.

 

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any fair value option elections as of March 31, 2017.

 

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Assets Measured at Fair Value on a Recurring Basis

 

Securities Available For Sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available for sale securities are considered to be Level 2 securities.

 

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The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Assets Measured at Fair Value on a Recurring Basis at March 31, 2017 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   March 31, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2017 
Assets                    
Securities available for sale                    
SBA Pool securities  $-   $59,067   $-   $59,067 
Agency residential mortgage-backed securities   -    28,038    -    28,038 
Agency commercial mortgage-backed securities   -    27,997    -    27,997 
Agency CMO securities   -    58,147    -    58,147 
Non agency CMO securities   -    37    -    37 
State and political subdivisions   -    55,294    -    55,294 
Corporate securities   -    2,013    -    2,013 
Total securities available for sale  $-   $230,593   $-   $230,593 

 

  

Assets Measured at Fair Value on a Recurring Basis at December 31, 2016 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2016 
Assets                    
Securities available for sale                    
SBA Pool securities  $-   $57,719   $-   $57,719 
Agency residential mortgage-backed securities   -    25,829    -    25,829 
Agency commercial mortgage-backed securities   -    27,852    -    27,852 
Agency CMO securities   -    51,683    -    51,683 
Non agency CMO securities   -    43    -    43 
State and political subdivisions   -    54,501    -    54,501 
Corporate securities   -    2,005    -    2,005 
Total securities available for sale  $-   $219,632   $-   $219,632 

 

Assets Measured at Fair Value on a Non-Recurring Basis

 

Certain assets are measured at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of fair value accounting or impairment write-downs of individual assets.

 

Impaired Loans. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

 

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a non-recurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

 

Other Real Estate Owned. OREO is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a non-recurring basis. Any initial fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of income.

 

Assets Held For Sale. Assets held for sale are measured at fair value less cost to sell, based on real estate tax assessments or appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data. If the fair value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. Assets held for sale are measured at fair value on a non-recurring basis. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of income.

 

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The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

  

Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2017 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   March 31, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2017 
Assets                    
Impaired loans  $-   $-   $9,903   $9,903 
Other real estate owned  $-   $-   $1,631   $1,631 
Assets held for sale  $-   $-   $2,970   $2,970 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2016 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2016 
Assets                    
Impaired loans  $-   $-   $9,885   $9,885 
Other real estate owned  $-   $-   $2,656   $2,656 

 

The following table displays quantitative information about Level 3 Fair Value Measurements as of March 31, 2017 and December 31, 2016:

   

Quantitative information about Level 3 Fair Value Measurements at March 31, 2017
                   
(dollars in thousands)   Fair Value   Valuation Technique(s)   Unobservable Input   Range (Weighted Average)
Assets                  
Impaired loans   $  9,903    Discounted appraised value   Selling cost   6% - 24% (12%)
              Discount for lack of    
              marketability and age    
              of appraisal   0% - 20% (12%)
                   
Other real estate owned   $  1,631    Discounted appraised value   Selling cost   10% (10%)
              Discount for lack of    
              marketability and age    
              of appraisal   0% - 42% (6%)
Assets held for sale   $  2,970    Discounted appraised value   Selling cost   6% (6%)

 

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Quantitative information about Level 3 Fair Value Measurements at December 31, 2016
                   
(dollars in thousands)   Fair Value   Valuation Technique(s)   Unobservable Input   Range (Weighted Average)
Assets                  
Impaired loans   $  9,885    Discounted appraised value   Selling cost   0% - 93%  (13%)
              Discount for lack of    
              marketability and age    
              of appraisal   0% - 25% (7%)
                   
Other real estate owned   $  2,656    Discounted appraised value   Selling cost   10% (10%)
              Discount for lack of    
              marketability and age    
              of appraisal   0% - 40% (5%)

 

Fair Value of Financial Instruments

 

U.S. GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies and assumptions for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies and assumptions for other financial assets and financial liabilities are discussed below:

 

Cash and Short-Term Investments. For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Investment Securities. For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. All securities prices are provided by independent third party vendors.

 

Restricted Securities. The carrying amount approximates fair value based on the redemption provisions of the correspondent banks.

 

Loans. The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note.

 

Bank Owned Life Insurance. Bank owned life insurance represents insurance policies on officers of the Company. The cash values of the policies are estimated using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

 

Deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using market rates for deposits of similar remaining maturities.

 

Short-Term Borrowings. The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.

 

Long-Term Borrowings. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

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Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest approximate fair value.

 

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

 

The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of guarantees of credit card accounts previously sold is based on the estimated cost to settle the obligations with the counterparty at the reporting date. At March 31, 2017 and December 31, 2016, the fair value of loan commitments, standby letters of credit and credit card guarantees are not significant and are not included in the table below.

 

The fair value and the carrying value of the Company’s recorded financial instruments are as follows:

  

       Fair Value Measurements at March 31, 2017 Using 
       Quoted Prices in   Significant Other   Significant     
       Active Markets for   Observable   Unobservable   Balance at 
   Carrying   Identical Assets   Inputs   Inputs   March 31, 
(dollars in thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   2017 
Assets:                         
Cash and short-term investments*  $5,721   $5,721   $-   $-   $5,721 
Interest bearing deposits with banks   16,648    16,648    -    -    16,648 
Securities available for sale   230,593    -    230,593    -    230,593 
Securities held to maturity   26,230    -    27,090    -    27,090 
Restricted securities   9,557    -    9,557    -    9,557 
Loans, net   1,060,504    -    -    1,046,828    1,046,828 
Bank owned life insurance   25,885    -    25,885    -    25,885 
Accrued interest receivable   4,921    -    4,921    -    4,921 
Total  $1,380,059   $22,369   $298,046   $1,046,828   $1,367,243 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $225,976   $225,976   $-   $-   $225,976 
Interest-bearing deposits   920,679    -    844,366    -    844,366 
Short-term borrowings**   129,350    129,350    -    -    129,350 
Junior subordinated debt   10,310    -    10,983    -    10,983 
Senior subordinated debt***   19,151    -    19,580    -    19,580 
Accrued interest payable   1,128    -    1,128    -    1,128 
Total  $1,306,594   $355,326   $876,057   $-   $1,231,383 

 

*Includes federal funds sold.
**Includes federal funds purchased and repurchase agreements.
***Net of unamortized debt issuance costs of $849.

 

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       Fair Value Measurements at December 31, 2016 Using 
       Quoted Prices in   Significant Other   Significant     
       Active Markets for   Observable   Unobservable   Balance at 
   Carrying   Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   2016 
Assets:                    
Cash and short-term investments*  $5,696   $5,696   $-   $-   $5,696 
Interest bearing deposits with banks   11,919    11,919    -    -    11,919 
Securities available for sale   219,632    -    219,632    -    219,632 
Securities held to maturity   27,956    -    28,735    -    28,735 
Restricted securities   11,557    -    11,557    -    11,557 
Loans, net   1,021,961    -    -    1,012,425    1,012,425 
Bank owned life insurance   25,734    -    25,734    -    25,734 
Accrued interest receivable   4,705    -