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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, 2015

 

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.)
     
330 Hospital Road, Tappahannock, Virginia   22560
(Address of principal executive offices)   (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 or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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 11, 2015 was 13,023,550.

 

 
 

  

EASTERN VIRGINIA BANKSHARES, INC.

 

INDEX 

 

PART I. FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
  Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014   2
       
  Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2015 and March 31, 2014   3
       
  Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2015 and March 31, 2014   4
       
  Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2015 and March 31, 2014   5
       
  Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2015 and March 31, 2014   6
       
  Notes to the Interim Consolidated Financial Statements (unaudited)   7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   47
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   72
       
Item 4. Controls and Procedures   72
       
PART II. OTHER INFORMATION    
       
Item 1. Legal Proceedings   73
       
Item 1A. Risk Factors   73
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   73
       
Item 3. Defaults Upon Senior Securities   73
       
Item 4. Mine Safety Disclosures   73
       
Item 5. Other Information   73
       
Item 6. Exhibits   74
       
  SIGNATURES   75

 

 
 

  

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, 
2015
   December 31,
2014*
 
   (unaudited)     
Assets:          
Cash and due from banks  $14,130   $14,024 
Interest bearing deposits with banks   11,772    5,272 
Federal funds sold   107    334 
Securities available for sale, at fair value   225,797    214,011 
Securities held to maturity, at carrying value (fair value of $32,998 and $33,367, respectively)   31,495    32,163 
Restricted securities, at cost   7,415    7,533 
Loans, net of allowance for loan losses of $12,658 and $13,021, respectively   803,549    807,548 
Deferred income taxes, net   16,266    17,529 
Bank premises and equipment, net   27,551    27,433 
Accrued interest receivable   4,229    4,013 
Other real estate owned, net of valuation allowance of $3 and $76, respectively   1,755    1,838 
Goodwill   17,085    17,085 
Bank owned life insurance   24,618    24,463 
Other assets   8,389    8,726 
Total assets  $1,194,158   $1,181,972 
           
Liabilities and Shareholders' Equity:          
Liabilities          
Noninterest-bearing demand accounts  $169,976   $162,328 
Interest-bearing deposits   788,181    776,926 
Total deposits   958,157    939,254 
Federal funds purchased and repurchase agreements   11,322    14,885 
Short-term borrowings   76,090    76,818 
Trust preferred debt   10,310    10,310 
Accrued interest payable   293    316 
Other liabilities   6,028    6,115 
Total liabilities   1,062,200    1,047,698 
           
Shareholders' Equity          
Preferred stock, $2 par value per share, authorized 10,000,000 shares, issued and outstanding:          
Series A; $1,000 stated value per share, 9,000 and 14,000 shares fixed rate cumulative perpetual preferred in 2015 and 2014, respectively   9,000    14,000 
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 13,023,550 and 12,978,934 including 144,892 and 104,142 nonvested shares in 2015 and 2014, respectively   25,757    25,750 
Surplus   47,383    47,339 
Retained earnings   40,440    39,290 
Warrant   1,481    1,481 
Accumulated other comprehensive loss, net   (2,583)   (4,066)
Total shareholders' equity   131,958    134,274 
           
Total liabilities and shareholders' equity  $1,194,158   $1,181,972 

 

*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, 
   2015   2014 
Interest and Dividend Income          
Interest and fees on loans  $10,191   $8,550 
Interest on investments:          
Taxable interest income   1,202    1,507 
Tax exempt interest income   260    213 
Dividends   108    102 
Interest on deposits with banks   4    4 
Total interest and dividend income   11,765    10,376 
           
Interest Expense          
Deposits   1,051    987 
Federal funds purchased and repurchase agreements   18    5 
Short-term borrowings   42    35 
Trust preferred debt   80    88 
Total interest expense   1,191    1,115 
Net interest income   10,574    9,261 
Provision for Loan Losses   -    250 
Net interest income after provision for loan losses   10,574    9,011 
Noninterest Income          
Service charges and fees on deposit accounts   663    822 
Debit/credit card fees   363    309 
Gain on sale of available for sale securities, net   25    380 
Gain on sale of bank premises and equipment   3    5 
Other operating income   465    376 
Total noninterest income   1,519    1,892 
Noninterest Expenses          
Salaries and employee benefits   5,590    4,586 
Occupancy and equipment expenses   1,521    1,319 
Telephone   197    211 
FDIC expense   172    332 
Consultant fees   405    343 
Collection, repossession and other real estate owned   89    67 
Marketing and advertising   321    167 
Loss (gain) on sale of other real estate owned   32    (13)
Impairment losses on other real estate owned   5    5 
Other operating expenses   1,635    1,161 
Total noninterest expenses   9,967    8,178 
Income before income taxes   2,126    2,725 
Income Tax Expense   517    729 
Net Income  $1,609   $1,996 
Effective dividend on Series A Preferred Stock   220    518 
           
Net income available to common shareholders  $1,389   $1,478 
Net income per common share: basic  $0.11   $0.12 
Net income per common share: diluted  $0.08   $0.09 
           
Dividends paid per share, common  $0.01   $- 

 

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, 
   2015   2014 
Net income  $1,609   $1,996 
Other comprehensive income, net of tax:          
Unrealized securities gains arising during period (net of tax, $758 and $1,355 respectively)   1,473    2,632 
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $14 and $15, respectively)   26    28 
Less: reclassification adjustment for securities gains included in net income (net of tax, $9 and $129, respectively)   (16)   (251)
Other comprehensive income   1,483    2,409 
Comprehensive income  $3,092   $4,405 

 

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, 2015 and 2014

(dollars in thousands)

 

                       Accumulated     
       Preferred   Preferred           Other     
   Common   Stock   Stock       Retained   Comprehensive     
   Stock   Series A (1)   Series B   Surplus   Earnings   (Loss) Income   Total 
Balance, December 31, 2013  $23,578   $25,481   $10,480   $42,697   $39,581   $(8,868)  $132,949 
Net income                       1,996         1,996 
Other comprehensive income                            2,409    2,409 
Stock based compensation   -    -    -    20    -    -    20 
Balance, March 31, 2014  $23,578   $25,481   $10,480   $42,717   $41,577   $(6,459)  $137,374 
                                    
Balance, December 31, 2014  $25,750   $15,481   $10,480   $47,339   $39,290   $(4,066)  $134,274 
Net income                       1,609         1,609 
Other comprehensive income                            1,483    1,483 
Cash dividends - preferred                       (277)        (277)
Cash dividends - common ($0.01 per share)                       (182)        (182)
Repurchase of preferred stock        (5,000)                       (5,000)
Repurchase of common stock   (1)                            (1)
Stock based compensation                  52              52 
Restricted common stock vested   8    -    -    (8)   -    -    - 
Balance, March 31, 2015  $25,757   $10,481   $10,480   $47,383   $40,440   $(2,583)  $131,958 

 

(1) For the purposes of this table, Preferred Stock Series A includes the effect of the warrant issued in connection with the sale of the Series A Preferred Stock and the discount on such preferred stock.

 

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, 
   2015   2014 
Operating Activities:          
Net income  $1,609   $1,996 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   -    250 
Depreciation and amortization   631    527 
Stock based compensation   52    20 
Net accretion of certain acquisition related fair value adjustments   (178)   - 
Net amortization of premiums and accretion of discounts on investment securities, net   716    770 
Gain on sale of securities available for sale transactions, net   (25)   (380)
Gain on sale of bank premises and equipment   (3)   (5)
Loss (gain) on sale of other real estate owned   32    (13)
Impairment losses on other real estate owned   5    5 
Loss (gain) on LLC investments   28    (24)
Net change in:          
Accrued interest receivable   (216)   (185)
Other assets   88    89 
Accrued interest payable   (23)   75 
Other liabilities   414   803 
Net cash provided by operating activities   3,130    3,928 
Investing Activities:          
Purchase of securities available for sale   (19,583)   (5,024)
Purchase of securities held to maturity   (22)   - 
Purchase of restricted securities   (1,038)   (2,998)
Purchases of bank premises and equipment   (749)   (753)
Improvements to other real estate owned   (1)   - 
Net change in loans   3,893    (26,002)
Proceeds from:          
Maturities, calls, and paydowns of securities available for sale   5,038    4,665 
Maturities, calls, and paydowns of securities held to maturity   613    619 
Sales of securities available for sale   4,390    3,593 
Sale of restricted securities   1,156    1,486 
Sale of bank premises and equipment   3    5 
Sale of other real estate owned   431    387 
Net cash used in investing activities   (5,869)   (24,022)
Financing Activities:          
Net change in:          
Demand, interest-bearing demand and savings deposits   26,075    (6,288)
Time deposits   (7,206)   (1,240)
Federal funds purchased and repurchase agreements   (3,563)   291 
Short-term borrowings   (728)   33,060 
Repurchase of preferred stock   (5,000)   - 
Repurchase of common stock   (1)   - 
Dividends paid - preferred   (277)   - 
Dividends paid - common   (182)   - 
Net cash provided by financing activities   9,118    25,823 
Net increase in cash and cash equivalents   6,379    5,729 
Cash and cash equivalents, December 31   19,630    19,346 
Cash and cash equivalents, March 31  $26,009   $25,075 
Supplemental disclosure:          
Interest paid  $1,214   $1,040 
Supplemental disclosure of noncash investing and financing activities:          
Unrealized gains on securities available for sale  $2,206   $3,607 
Loans transferred to other real estate owned  $(384)  $(136)

 

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 “Parent”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014 (the “2014 Form 10-K”).

 

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

 

Nature of Operations

 

Eastern Virginia Bankshares, Inc. is a bank holding company headquartered in Tappahannock, Virginia 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 conducts its primary operations through its wholly-owned bank subsidiary, EVB. 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 Parent acquired Virginia Company Bank (“VCB”) (see Note 2 – Business Combinations) 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 Newport News, Williamsburg, and Hampton, respectively. 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”).

 

The Bank owns EVB Financial Services, Inc., which in turn has a 100% ownership interest in EVB Investments, Inc. EVB Investments, Inc. is a full-service brokerage firm offering a comprehensive range of investment services. 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 five 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 $1 thousand, which is adjustable on a quarterly basis.

 

7
 

  

The Bank had a 75% ownership interest in EVB Title, LLC, which primarily sold title insurance to the mortgage loan customers of the Bank and EVB Mortgage, LLC. Effective January 2014, the Bank ceased operations of EVB Title, LLC due to low volume and profitability. 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 2.33% ownership 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, POS LLC, Tartan Holdings LLC and ECU-RE 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 stock trades on the NASDAQ Global Select Market under the symbol “EVBS.”

 

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, impairment of loans, impairment of securities, the valuation of other real estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, goodwill impairment and fair value of financial instruments. 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 2015 presentation. These reclassifications have no effect on previously reported net income.

 

Recent Accounting Pronouncements

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

  

8
 

  

In June 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” most industry-specific guidance, and some cost guidance included in “Revenue Recognition—Construction-Type and Production-Type Contracts (Subtopic 605-35).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including: identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation. Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement. The amendments in this ASU were scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. In April 2015, the FASB voted in favor of a one year deferral of the effective date of this amendment. An exposure draft is expected with a thirty day comment period. The Company is currently assessing the impact that ASU 2014-09 will have on its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014. However, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718)” should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted, and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

 

9
 

  

In August 2014, the FASB issued ASU 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU apply to creditors that hold government-guaranteed mortgage loans and are intended to eliminate the diversity in practice related to the classification of these guaranteed loans upon foreclosure. The new guidance stipulates that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if (1) the mortgage loan has a government guarantee that is not separable from the mortgage loan prior to foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the other receivable should be measured on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. Entities may adopt the amendments on a prospective basis or modified retrospective basis as of the beginning of the annual period of adoption; however, the entity must apply the same method of transition as elected under ASU 2014-04. Early adoption is permitted provided the entity has already adopted ASU 2014-04. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

 

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification (“ASC”) and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

  

10
 

  

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers regarding cloud computing arrangements that include a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

 

11
 

  

Note 2. Business Combinations

 

On November 14, 2014, the Company completed its acquisition of VCB. Pursuant to the Agreement and Plan of Reorganization dated May 29, 2014, VCB's common shareholders received for each share of VCB common stock they owned either (i) cash at a rate of $6.25 per share of VCB common stock, or approximately $2.4 million in the aggregate, or (ii) the Company’s common stock at a rate of 0.9259 shares of the Company’s common stock per share of VCB common stock, which totaled approximately $6.7 million based on the Company’s closing common stock price on November 14, 2014 of $6.27 per share. In addition, the Company purchased VCB’s Series A Preferred Stock for $4.3 million. VCB was established in 2005 and was headquartered in Newport News, Virginia. VCB operated three branches, one each in Newport News, Hampton and Williamsburg, Virginia.

 

The Company accounted for the acquisition using the acquisition method of accounting in accordance with FASB ASC 805, “Business Combinations.” Under the acquisition method of accounting, the assets and liabilities of VCB were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. The Company recognized goodwill of $1.1 million in connection with the acquisition, none of which is deductible for income tax purposes.

 

The following table details the total consideration paid by the Company on November 14, 2014 in connection with the acquisition of VCB, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill.

  

12
 

  

           As Recorded 
   As Recorded   Fair Value   by the 
(dollars in thousands)  by VCB   Adjustments   Company 
Consideration paid:               
Cash            $6,688 
EVBS common stock             6,676 
Total consideration paid            $13,364 
                
Identifiable assets acquired:               
Cash and due from banks  $1,377   $-   $1,377 
Interest bearing deposits with banks   249    -    249 
Securities available for sale, at fair value   11,277    -    11,277 
Restricted securities, at cost   557    -    557 
Loans   103,791    (2,322)   101,469 
Deferred income taxes   -    3,513    3,513 
Bank premises and equipment   7,020    (1,044)   5,976 
Accrued interest receivable   344    -    344 
Other real estate owned   211    (108)   103 
Core deposit intangible   -    1,010    1,010 
Bank owned life insurance   2,742         2,742 
Other assets   243    -    243 
Total identifiable assets acquired   127,811    1,049    128,860 
                
Identifiable liabilities assumed:               
Noninterest-bearing demand accounts   18,797    -    18,797 
Interest-bearing deposits   85,791    (149)   85,642 
Federal funds purchased and repurchase agreements   3,119    -    3,119 
Federal Home Loan Bank advances   8,650    -    8,650 
Accrued interest payable   30         30 
Other liabilities   373    -    373 
Total identifiable liabilities assumed   116,760    (149)   116,611 
                
Net identifiable assets assumed  $11,051   $1,198   $12,249 
                
Goodwill resulting from acquisition            $1,115 

 

The following table illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2015. The unaudited combined pro forma revenue and net income combines the historical results of VCB with the Company's consolidated statements of income for the periods listed below and, while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2015. Acquisition related expenses of $56 thousand were included in the Company's actual consolidated statement of net income for the three months ended March 31, 2015, but were excluded from the unaudited pro forma information listed below. While the majority of the merger-related expenses have been recognized, the Company believes that additional legal and other transition expenses related to this acquisition will be likely throughout the first half of 2015. Additionally, the Company expects to achieve further operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the unaudited pro forma amounts below:

 

   Unaudited   Unaudited 
   Pro Forma   Pro Forma 
   Three Months Ended   Three Months Ended 
   March 31,   March 31, 
(dollars in thousands)  2015   2014 
Net interest income  $10,574   $10,488 
Net income   1,665    1,572 

 

13
 

  

Note 3. Investment Securities

 

The amortized cost and estimated fair value, with gross unrealized gains and losses, of securities at March 31, 2015 and December 31, 2014 were as follows:

 

(dollars in thousands)  March 31, 2015 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
Obligations of U.S. Government agencies  $14,991   $7   $124   $14,874 
SBA Pool securities   72,738    133    1,124    71,747 
Agency mortgage-backed securities   33,570    310    152    33,728 
Agency CMO securities   46,105    613    233    46,485 
Non agency CMO securities   746    34    -    780 
State and political subdivisions   57,669    795    336    58,128 
FNMA and FHLMC preferred stock   7    48    -    55 
Total  $225,826   $1,940   $1,969   $225,797 

 

(dollars in thousands)  December 31, 2014 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
Obligations of U.S. Government agencies  $14,991   $-   $422   $14,569 
SBA Pool securities   76,469    70    1,740    74,799 
Agency mortgage-backed securities   28,740    208    319    28,629 
Agency CMO securities   39,343    302    430    39,215 
Non agency CMO securities   820    11    3    828 
State and political subdivisions   55,877    510    461    55,926 
FNMA and FHLMC preferred stock   7    38    -    45 
Total  $216,247   $1,139   $3,375   $214,011 

 

14
 

  

(dollars in thousands)  March 31, 2015 
       Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
Held to Maturity:  Cost   in AOCI*   Value   Gains   Losses   Value 
Agency CMO securities  $11,962   $76   $11,886   $374   $-   $12,260 
State and political subdivisions   20,217    608    19,609    1,167    38    20,738 
Total  $32,179   $684   $31,495   $1,541   $38   $32,998 

 

*Represents the unrealized holding gain or loss at the date of transfer from available for sale to held to maturity, net of any accretion.

 

(dollars in thousands)  December 31, 2014 
       Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
Held to Maturity:  Cost   in AOCI*   Value   Gains   Losses   Value 
Agency CMO securities  $12,073   $80   $11,993   $294   $-   $12,287 
State and political subdivisions   20,814    644    20,170    928    18    21,080 
Total  $32,887   $724   $32,163   $1,222   $18   $33,367 

 

*Represents the unrealized holding gain or loss at the date of transfer from available for sale to held to maturity, net of any accretion.

 

There are no securities classified as “Trading” at March 31, 2015 or December 31, 2014. During the fourth quarter of 2013, the Company transferred 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 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 (Loss) and is being amortized over the remaining life of the securities as an adjustment to interest income. The Company’s mortgage-backed securities consist entirely of residential mortgage-backed securities. The Company does not hold any commercial mortgage-backed securities. The Company’s mortgage-backed 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.

 

The Company’s pooled trust preferred securities included one senior issue of Preferred Term Securities XXVII which remained current on all payments and on which the Company took an impairment charge in the third quarter of 2009 to reduce the Company’s book value to the market value at September 30, 2009. On December 9, 2014 the Company sold this security resulting in a gain on sale of $82 thousand and the Company reversed the related impairment reserve. During the second quarter of 2010, the Company recognized an impairment charge in the amount of $77 thousand on the Company’s investment in Preferred Term Securities XXIII mezzanine tranche, thus reducing the book value of this investment to $0. On September 22, 2014 the Company sold this security resulting in a gain on sale of $2 thousand and the Company reversed the related impairment reserve. The decision to recognize the other-than-temporary impairment had been based upon an analysis of the market value of the discounted cash flow for the security as provided by Moody’s at June 30, 2010, which indicated that the Company was unlikely to recover any of its remaining investment in these securities.

 

15
 

 

The amortized cost, carrying value and estimated fair values of securities at March 31, 2015, 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, 2015 
Available for Sale:  Amortized
Cost
   Fair
Value
 
         
Due in one year or less  $3,435   $3,450 
Due after one year through five years   65,131    65,638 
Due after five years through ten years   141,032    140,529 
Due after ten years   16,228    16,180 
Total  $225,826   $225,797 

 

(dollars in thousands)  March 31, 2015 
Held to Maturity:  Carrying
Value
   Fair
Value
 
         
Due in one year or less  $-   $- 
Due after one year through five years   14,983    15,545 
Due after five years through ten years   15,765    16,644 
Due after ten years   747    809 
Total  $31,495   $32,998 

 

Proceeds from the sales of securities available for sale for the three months ended March 31, 2015 and 2014 were $4.4 million and $3.6 million, respectively. Net realized gains on the sales of securities available for sale for the three months ended March 31, 2015 and 2014 were $25 thousand and $380 thousand, respectively. Proceeds from maturities, calls and paydowns of securities available for sale for the three months ended March 31, 2015 and 2014 were $5.0 million and $4.7 million, respectively. Proceeds from maturities, calls and paydowns of securities held to maturity were for the three months ended March 31, 2015 and 2014 were $613 thousand and $619 thousand, respectively.

 

The Company pledges securities to secure public deposits, balances with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and repurchase agreements. Securities with an aggregate book value of $83.1 million and an aggregate fair value of $84.2 million were pledged at March 31, 2015. Securities with an aggregate book value of $86.9 million and an aggregate fair value of $87.1 million were pledged at December 31, 2014.

 

Securities in an unrealized loss position at March 31, 2015, by duration of the period of the unrealized loss, are shown below:

 

   March 31, 2015 
(dollars in thousands)  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Securities  Value   Loss   Value   Loss   Value   Loss 
Obligations of U.S. Government agencies  $1,487   $13   $11,885   $111   $13,372   $124 
SBA Pool securities   3,377    69    52,062    1,055    55,439    1,124 
Agency mortgage-backed securities   1,316    20    13,537    132    14,853    152 
Agency CMO securities   8,121    51    9,238    182    17,359    233 
State and political subdivisions   13,092    124    11,546    250    24,638    374 
Total  $27,393   $277   $98,268   $1,730   $125,661   $2,007 

 

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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 a 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 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 security with the amortized cost basis of the security.

 

Based on the Company’s evaluation, management does not believe any unrealized losses at March 31, 2015, 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 2013 causing bond prices to decline, and are not attributable to credit deterioration. During 2014 and the first three months of 2015, interest rates have fallen, specifically in the middle and long-end of the yield curve, which has caused bond prices to rise and thereby reduced the amount of unrealized losses. At March 31, 2015, there were 97 debt securities with fair values totaling $125.7 million considered temporarily impaired. Of these debt securities, 27 with fair values totaling $27.4 million were in an unrealized loss position of less than 12 months and 70 with fair values totaling $98.3 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 investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2015 and no impairment has been recognized. At March 31, 2015, there were no equity securities in an unrealized loss position.

 

Securities in an unrealized loss position at December 31, 2014, by duration of the period of the unrealized loss, are shown below.

 

   December 31, 2014 
(dollars in thousands)  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Securities  Value   Loss   Value   Loss   Value   Loss 
Obligations of U.S. Government agencies  $-   $-   $14,587   $422   $14,587   $422 
SBA Pool securities   3,520    73    63,290    1,667    66,810    1,740 
Agency mortgage-backed securities   -    -    15,343    319    15,343    319 
Agency CMO securities   5,140    34    16,478    396    21,618    430 
Non agency CMO securities   281    3    44    -    325    3 
State and political subdivisions   3,663    36    21,509    443    25,172    479 
Total  $12,604   $146   $131,251   $3,247   $143,855   $3,393 

 

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $4.4 million and $4.5 million at March 31, 2015 and December 31, 2014, 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, 2014, and ending March 31, 2015, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2015 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 Federal Reserve Bank of Richmond and Community Bankers Bank, which are carried at cost.

 

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Note 4. 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, 2015   December 31, 2014 
(dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial, industrial and agricultural  $80,607    9.88%  $85,119    10.37%
Real estate - one to four family residential:                    
Closed end first and seconds   239,261    29.32%   236,761    28.86%
Home equity lines   109,968    13.47%   110,100    13.42%
Total real estate - one to four family residential   349,229    42.79%   346,861    42.28%
Real estate - multifamily residential   24,543    3.01%   25,157    3.07%
Real estate - construction:                    
One to four family residential   15,552    1.91%   19,698    2.40%
Other construction, land development and other land   42,920    5.25%   35,591    4.34%
Total real estate - construction   58,472    7.16%   55,289    6.74%
Real estate - farmland   7,861    0.96%   9,471    1.15%
Real estate - non-farm, non-residential:                    
Owner occupied   160,563    19.67%   157,745    19.22%
Non-owner occupied   97,537    11.95%   104,827    12.77%
Total real estate - non-farm, non-residential   258,100    31.62%   262,572    31.99%
Consumer   15,123    1.85%   15,919    1.94%
Other   22,272    2.73%   20,181    2.46%
Total loans   816,207    100.00%   820,569    100.00%
Less allowance for loan losses   (12,658)        (13,021)     
Loans, net  $803,549        $807,548      

 

Deferred costs, net are included in the table above and totaled $1.4 million for both March 31, 2015 and December 31, 2014.

 

18
 

  

The following table presents the aging of the recorded investment in past due loans as of March 31, 2015 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  $276   $166   $320   $762   $79,845   $80,607 
Real estate - one to four family residential:                              
Closed end first and seconds   5,630    766    3,013    9,409    229,852    239,261 
Home equity lines   1,122    60    30    1,212    108,756    109,968 
Total real estate - one to four family residential   6,752    826    3,043    10,621    338,608    349,229 
Real estate - multifamily residential   -    -    -    -    24,543    24,543 
Real estate - construction:                              
One to four family residential   133    157    297    587    14,965    15,552 
Other construction, land development and other land   143    -    -    143    42,777    42,920 
Total real estate - construction   276    157    297    730    57,742    58,472 
Real estate - farmland   276    -    590    866    6,995    7,861 
Real estate - non-farm, non-residential:                              
Owner occupied   2,343    157    1,521    4,021    156,542    160,563 
Non-owner occupied   676    -    -    676    96,861    97,537 
Total real estate - non-farm, non-residential   3,019    157    1,521    4,697    253,403    258,100 
Consumer   42    -    -    42    15,081    15,123 
Other   -    -    -    -    22,272    22,272 
Total loans  $10,641   $1,306   $5,771   $17,718   $798,489   $816,207 

 

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

 

19
 

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2014 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  $278   $6   $373   $657   $84,462   $85,119 
Real estate - one to four family residential:                              
Closed end first and seconds   5,515    1,123    1,247    7,885    228,876    236,761 
Home equity lines   366    -    360    726    109,374    110,100 
Total real estate - one to four family residential   5,881    1,123    1,607    8,611    338,250    346,861 
Real estate - multifamily residential   -    -    -    -    25,157    25,157 
Real estate - construction:                              
One to four family residential   150    -    221    371    19,327    19,698 
Other construction, land development and other land   5    -    -    5    35,586    35,591 
Total real estate - construction   155    -    221    376    54,913    55,289 
Real estate - farmland   -    -    590    590    8,881    9,471 
Real estate - non-farm, non-residential:                              
Owner occupied   1,873    158    1,738    3,769    153,976    157,745 
Non-owner occupied   -    -    -    -    104,827    104,827 
Total real estate - non-farm, non-residential   1,873    158    1,738    3,769    258,803    262,572 
Consumer   157    32    -    189    15,730    15,919 
Other   -    -    -    -    20,181    20,181 
Total loans  $8,344   $1,319   $4,529   $14,192   $806,377   $820,569 

 

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

 

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

 

   March 31,   December 31, 
(dollars in thousands)  2015   2014 
Nonaccrual loans  $7,940   $6,622 
Loans past due 90 days and accruing interest   240    53 
Troubled debt restructurings (accruing)   14,881    15,223 

 

At March 31, 2015 and December 31, 2014, there were approximately $3.7 million and $3.4 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.

 

20
 

  

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.

  

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of interest and principal.

 

21
 

  

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, 2015 and December 31, 2014 were as follows:

 

   March 31, 2015   December 31, 2014 
(dollars in thousands)  Acquired
Loans -
Purchased
Credit
Impaired
   Acquired
Loans -
Purchased
Performing
   Acquired
Loans -
Total
   Acquired
Loans -
Purchased
Credit
Impaired
   Acquired
Loans -
Purchased
Performing
   Acquired
Loans -
Total
 
Commercial, industrial and agricultural  $792   $9,750   $10,542   $1,023   $15,673   $16,696 
Real estate - one to four family residential:                              
Closed end first and seconds   1,415    9,330    10,745    1,374    6,475    7,849 
Home equity lines   33    12,505    12,538    33    11,858    11,891 
Total real estate - one to four family residential   1,448    21,835    23,283    1,407    18,333    19,740 
Real estate - multifamily residential   -    4,107    4,107    -    3,539    3,539 
Real estate - construction:                              
One to four family residential   -    373    373    -    3,206    3,206 
Other construction, land development and other land   188    4,920    5,108    79    3,674    3,753 
Total real estate - construction   188    5,293    5,481    79    6,880    6,959 
Real estate - farmland   -    -    -    -    -    - 
Real estate - non-farm, non-residential:                              
Owner occupied   1,822    19,798    21,620    1,841    21,037    22,878 
Non-owner occupied   3,302    15,569    18,871    3,472    20,762    24,234 
Total real estate - non-farm, non-residential   5,124    35,367    40,491    5,313    41,799    47,112 
Consumer   -    983    983    -    1,462    1,462 
Other   -    525    525    -    -    - 
Total loans  $7,552   $77,860   $85,412   $7,822   $87,686   $95,508 

 

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at March 31, 2015 and December 31, 2014:

 

           Over 90 Days Past 
   Nonaccrual   Due and Accruing 
   March 31,   December 31,   March 31,   December 31, 
(dollars in thousands)  2015   2014   2015   2014 
Commercial, industrial and agricultural  $320   $334   $-   $53 
Real estate - one to four family residential:                    
Closed end first and seconds   4,983    3,364    240    - 
Home equity lines   205    564    -    - 
Total real estate - one to four family residential   5,188    3,928    240    - 
Real estate - construction:                    
One to four family residential   297    221    -    - 
Other construction, land development and other land   -    -    -    - 
Total real estate - construction   297    221    -    - 
Real estate - farmland   590    590    -    - 
Real estate - non-farm, non-residential:                    
Owner occupied   1,520    1,521    -    - 
Non-owner occupied   -    -    -    - 
Total real estate - non-farm, non-residential   1,520    1,521    -    - 
Consumer   25    28    -    - 
Total loans  $7,940   $6,622   $240   $53 

 

22
 

 

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, or are greater than 90 days past due and accruing interest. 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 tracking movement of loans through past due classifications 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.

 

23
 

 

The following table presents commercial loans by credit quality indicator at March 31, 2015:

 

(dollars in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Impaired   Acquired
Loans -
Purchased
Credit
Impaired
   Total 
Commercial, industrial and agricultural  $74,335   $3,930   $483   $230   $837   $792   $80,607 
Real estate - multifamily residential   24,531    -    12    -    -    -    24,543 
Real estate - construction:                                   
One to four family residential   14,774    129    307    -    342    -    15,552 
Other construction, land development and other land   34,177    1,788    1,133    -    5,634    188    42,920 
Total real estate - construction   48,951    1,917    1,440    -    5,976    188    58,472 
Real estate - farmland   6,390    881    590    -    -    -    7,861 
Real estate - non-farm, non-residential:                                   
Owner occupied   137,046    8,551    2,032    -    11,112    1,822    160,563 
Non-owner occupied   79,585    2,849    655    -    11,146    3,302    97,537 
Total real estate - non-farm, non-residential   216,631    11,400    2,687    -    22,258    5,124    258,100 
Total commercial loans  $370,838   $18,128   $5,212   $230   $29,071   $6,104   $429,583 

 

The following table presents commercial loans by credit quality indicator at December 31, 2014:

 

(dollars in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Impaired   Acquired
Loans -
Purchased
Credit
Impaired
   Total 
Commercial, industrial and agricultural  $79,191   $2,779   $675   $-   $1,451   $1,023   $85,119 
Real estate - multifamily residential   25,157    -    -    -    -    -    25,157 
Real estate - construction:                                   
One to four family residential   18,978    300    244    -    176    -    19,698 
Other construction, land development and other land   26,916    1,791    1,144    -    5,661    79    35,591 
Total real estate - construction   45,894    2,091    1,388    -    5,837    79    55,289 
Real estate - farmland   9,471    -    -    -    -    -    9,471 
Real estate - non-farm, non-residential:                                   
Owner occupied   132,266    11,339    2,253    -    10,046    1,841    157,745 
Non-owner occupied   84,951    4,771    1,817    -    9,816    3,472    104,827 
Total real estate - non-farm, non-residential   217,217    16,110    4,070    -    19,862    5,313    262,572 
Total commercial loans  $376,930   $20,980   $6,133   $-   $27,150   $6,415   $437,608 

 

At March 31, 2015 and December 31, 2014, the Company did not have any loans classified as Loss.

 

24
 

  

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, 2015:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $227,706   $11,555   $239,261 
Home equity lines   109,313    655    109,968 
Total real estate - one to four family residential   337,019    12,210    349,229 
Consumer   14,758    365    15,123 
Other   22,267    5    22,272 
Total consumer loans  $374,044   $12,580   $386,624 

 

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, 2014:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $226,801   $9,960   $236,761 
Home equity lines   109,565    535    110,100 
Total real estate - one to four family residential   336,366    10,495    346,861 
Consumer   15,548    371    15,919 
Other   20,175    6    20,181 
Total consumer loans  $372,089   $10,872   $382,961 

 

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.

 

25
 

  

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2015:

 

   Beginning Balance               Ending Balance 
(dollars in thousands)  January 1, 2015   Charge-offs   Recoveries   Provision   March 31, 2015 
Commercial, industrial and agricultural  $1,168   $-   $9   $91   $1,268 
Real estate - one to four family residential:                         
Closed end first and seconds   1,884    (285)   7    114    1,720 
Home equity lines   1,678    (108)   4    442    2,016 
Total real estate - one to four family residential   3,562    (393)   11    556    3,736 
Real estate - multifamily residential   89    -    -    (5)   84 
Real estate - construction:                         
One to four family residential   235    (1)   1    23    258 
Other construction, land development and other land   2,670    -    -    11    2,681 
Total real estate - construction   2,905    (1)   1    34    2,939 
Real estate - farmland   144    -    -    (18)   126 
Real estate - non-farm, non-residential:                         
Owner occupied   2,416    -    -    (381)   2,035 
Non-owner occupied   1,908    -    -    (230)   1,678 
Total real estate - non-farm, non-residential   4,324    -    -    (611)   3,713 
Consumer   305    (1)   18    (59)   263 
Other   524    (12)   5    12    529 
Total  $13,021   $(407)  $44   $-   $12,658 

 

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2014:

 

   Beginning Balance               Ending Balance 
(dollars in thousands)  January 1, 2014   Charge-offs   Recoveries   Provision   March 31, 2014 
Commercial, industrial and agricultural  $1,787   $(213)  $11   $(54)  $1,531 
Real estate - one to four family residential:                         
Closed end first and seconds   2,859    (77)   205    97    3,084 
Home equity lines   1,642    (54)   2    49    1,639 
Total real estate - one to four family residential   4,501    (131)   207    146    4,723 
Real estate - multifamily residential   79    -    -    18    97 
Real estate - construction:                         
One to four family residential   364    -    5    (60)   309 
Other construction, land development and other land   1,989    -    1    512    2,502 
Total real estate - construction   2,353    -    6    452    2,811 
Real estate - farmland   116    -    -    3    119 
Real estate - non-farm, non-residential:                         
Owner occupied   3,236    -    -    (437)   2,799 
Non-owner occupied   1,770    -    2    (166)   1,606 
Total real estate - non-farm, non-residential   5,006    -    2    (603)   4,405 
Consumer   387    (13)   28    78    480 
Other   538    (15)   7    210    740 
Total  $14,767   $(372)  $261   $250   $14,906 

 

26
 

  

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, 2015:

 

   Allowance allocated to loans:   Total Loans: 
(dollars in thousands)  Individually
evaluated for
impairment
   Collectively
evaluated for
impairment
   Acquired
loans -
purchased
credit
impaired
   Total   Individually
evaluated for
impairment
   Collectively
evaluated for
impairment
   Acquired
loans -
purchased
credit
impaired
   Total 
Commercial, industrial and agricultural  $-   $1,268   $-   $1,268   $837   $78,978   $792   $80,607 
Real estate - one to four family residential:                                        
Closed end first and seconds   732    988    -    1,720    8,782    229,064    1,415    239,261 
Home equity lines   336    1,680    -    2,016    625    109,310    33    109,968 
Total real estate - one to four family residential   1,068    2,668    -    3,736    9,407    338,374    1,448    349,229 
Real estate - multifamily residential   -    84    -    84    -    24,543    -    24,543 
Real estate - construction:                                        
One to four family residential   75    183    -    258    342    15,210    -    15,552 
Other construction, land development and other land   1,605    1,076    -    2,681    5,634    37,098    188    42,920 
Total real estate - construction   1,680    1,259    -    2,939    5,976    52,308    188    58,472 
Real estate - farmland   -    126    -    126    -    7,861    -    7,861 
Real estate - non-farm, non-residential:                                        
Owner occupied   1,040    995    -    2,035    11,112    147,629    1,822    160,563 
Non-owner occupied   1,240    438    -    1,678    11,146    83,089    3,302    97,537 
Total real estate - non-farm, non-residential   2,280    1,433    -    3,713    22,258    230,718    5,124    258,100 
Consumer   102    161    -    263    365    14,758    -    15,123 
Other   -    529    -    529    5    22,267    -    22,272 
Total  $5,130   $7,528   $-   $12,658   $38,848   $769,807   $7,552   $816,207 

 

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, 2014:

 

   Allowance allocated to loans:   Total Loans: 
(dollars in thousands)  Individually
evaluated for
impairment
   Collectively
evaluated for
impairment
   Acquired
loans -
purchased
credit
impaired
   Total   Individually
evaluated for
impairment
   Collectively
evaluated for
impairment
   Acquired
loans -
purchased
credit
impaired
   Total 
Commercial, industrial and agricultural  $-   $1,168   $-   $1,168   $1,451   $82,645   $1,023   $85,119 
Real estate - one to four family residential:                                        
Closed end first and seconds   1,006    878    -    1,884    8,713    226,674    1,374    236,761 
Home equity lines   -    1,678    -    1,678    175    109,892    33    110,100 
Total real estate - one to four family residential   1,006    2,556    -    3,562    8,888    336,566    1,407    346,861 
Real estate - multifamily residential   -    89    -    89    -    25,157    -    25,157 
Real estate - construction:                                        
One to four family residential   78    157    -    235    176    19,522    -    19,698 
Other construction, land development and other land   1,632    1,038    -    2,670    5,661    29,851    79    35,591 
Total real estate - construction   1,710    1,195    -    2,905    5,837    49,373    79    55,289 
Real estate - farmland   -    144    -    144    -    9,471    -    9,471 
Real estate - non-farm, non-residential:                                        
Owner occupied   1,240    1,176    -    2,416    10,046    145,858    1,841    157,745 
Non-owner occupied   1,262    646    -    1,908    9,816    91,539    3,472    104,827 
Total real estate - non-farm, non-residential   2,502    1,822    -    4,324    19,862    237,397    5,313    262,572 
Consumer   106    199    -    305    371    15,548    -    15,919 
Other   -    524    -    524    6    20,175    -    20,181 
Total  $5,324   $7,697   $-   $13,021   $36,415   $776,332   $7,822   $820,569 

 

27
 

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2015:

 

(dollars in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Recorded
Investment With
No Allowance
   Recorded
Investment With
Allowance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial, industrial and agricultural  $837   $837   $837   $-   $-   $1,201   $16 
Real estate - one to four family residential:                                   
Closed end first and seconds   8,782    9,145    2,515    6,267    732    8,574    93 
Home equity lines   625    625    175    450    336    288    2 
Total real estate - one to four family residential   9,407    9,770    2,690    6,717    1,068    8,862    95 
Real estate - construction:                                   
One to four family residential   342    342    -    342    75    217    2 
Other construction, land development and other land   5,634    5,634    -    5,634    1,605    5,641    70 
Total real estate - construction   5,976    5,976    -    5,976    1,680    5,858    72 
Real estate - non-farm, non-residential:                                   
Owner occupied   11,112    11,212    8,432    2,680    1,040    9,551    128 
Non-owner occupied   11,146    11,146    4,526    6,620    1,240    10,747    140 
Total real estate - non-farm, non-residential   22,258    22,358    12,958    9,300    2,280    20,298    268 
Consumer   365    365    -    365    102    368    5 
Other   5    5    5    -    -    6    - 
Total loans*  $38,848   $39,311   $16,490   $22,358   $5,130   $36,593   $456 

 

* PCI loans are excluded from this table

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014:

 

(dollars in thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Recorded
Investment With
No Allowance
   Recorded
Investment With
Allowance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial, industrial and agricultural  $1,451   $1,451   $1,451   $-   $-   $2,010   $128 
Real estate - one to four family residential:                                   
Closed end first and seconds   8,713    8,813    3,611    5,102    1,006    9,800    474 
Home equity lines   175    175    175    -    -    289    - 
Total real estate - one to four family residential   8,888    8,988    3,786    5,102    1,006    10,089    474 
Real estate - construction:                                   
One to four family residential   176    176    -    176    78    312    7 
Other construction, land development and other land   5,661    5,661    -    5,661    1,632    5,399    256 
Total real estate - construction   5,837    5,837    -    5,837    1,710    5,711    263 
Real estate - non-farm, non-residential:                                   
Owner occupied   10,046    10,146    3,734    6,312    1,240    12,056    534 
Non-owner occupied   9,816    9,816    4,262    5,554    1,262    9,356    456 
Total real estate - non-farm, non-residential   19,862    19,962    7,996    11,866    2,502    21,412    990 
Consumer   371    371    -    371    106    420    21 
Other   6    6    6    -    -    328    - 
Total loans*  $36,415   $36,615   $13,239   $23,176   $5,324   $39,970   $1,876 

 

* PCI loans are excluded from this table

 

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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 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 $8.5 million and $8.8 million and recorded carrying values of $7.6 million and $7.8 million at March 31, 2015 and December 31, 2014, respectively.

 

Loans acquired from VCB that constituted PCI loans were recorded by the Company at fair value on the date of acquisition as follows:

 

   November 14, 
(dollars in thousands)  2014 
Contractual principal and interest at acquisition  $9,977 
Nonaccretable difference   937 
Accretable yield   1,185 
PCI loans at acquisition, at estimated fair value  $7,855 

 

The following table presents a summary of the changes in the accretable yield of the PCI loan portfolio for the period from December 31, 2014 to March 31, 2015:

 

(dollars in thousands)  Accretable Yield 
Balance, December 31, 2014  $1,131 
Accretion   (102)
Reclassification of nonaccretable difference due to improvement in expected cash flows   - 
Other changes, net   - 
Balance, March 31, 2015  $1,029 

 

No loans were modified as TDRs during the three months ended March 31, 2015 and 2014. Additionally, no loans modified as TDRs subsequently defaulted (i.e., 90 days or more past due following a modification) during the three months ended March 31, 2015 and 2014 that were modified as TDRs within the 12 months prior to default. At March 31, 2015, there were $387 thousand in consumer residential loans in the process of foreclosure.

 

Note 5. Deferred Income Taxes

 

As of March 31, 2015 and December 31, 2014, the Company had recorded net deferred income tax assets of approximately $16.3 million and $17.5 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 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, 2015 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.

  

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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 2014 Form 10-K.

 

Note 6. Bank Premises and Equipment

 

Bank premises and equipment are summarized as follows:

 

   March 31,   December 31, 
(dollars in thousands)  2015   2014 
         
Land and improvements  $6,929   $6,929 
Buildings and leasehold improvements   28,015    28,001 
Furniture, fixtures and equipment   22,186    21,719 
Construction in progress   790    553 
    57,920    57,202 
Less accumulated depreciation   (30,369)   (29,769)
Net balance  $27,551   $27,433 

 

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2015 and 2014 amounted to $631 thousand and $527 thousand, respectively.

 

Note 7. 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.

 

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The tables below present selected information on federal funds purchased and repurchase agreements during the three months ended March 31, 2015 and the year ended December 31, 2014:

 

Federal funds purchased  March 31,   December 31, 
(dollars in thousands)  2015   2014 
Balance outstanding at period end  $-   $- 
Maximum balance at any month end during the period  $-   $2,000 
Average balance for the period  $37   $174 
Weighted average rate for the period   0.76%   0.78%
Weighted average rate at period end   0.00%   0.00%

 

Repurchase agreements  March 31,   December 31, 
(dollars in thousands)  2015   2014 
Balance outstanding at period end  $11,322   $14,885 
Maximum balance at any month end during the period  $12,392   $14,885 
Average balance for the period  $11,698   $4,523 
Weighted average rate for the period   0.62%   0.59%
Weighted average rate at period end   0.63%   0.60%

 

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 1-4 family residential properties. Short-term advances from the FHLB at March 31, 2015 consisted of $76.1 million in fixed rate one month advances. Short-term advances from the FHLB at December 31, 2014 consisted of $16.4 million using a daily rate credit, which was due on demand, and a $60.4 million fixed rate one month advance.

 

The table below presents selected information on short-term borrowings during the three months ended March 31, 2015 and the year ended December 31, 2014:

 

Short-term borrowings  March 31,   December 31, 
(dollars in thousands)  2015   2014 
Balance outstanding at period end  $76,090   $76,818 
Maximum balance at any month end during the period  $88,240   $82,930 
Average balance for the period  $82,435   $72,565 
Weighted average rate for the period   0.21%   0.21%
Weighted average rate at period end   0.19%   0.22%

 

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 1-4 family residential properties. At March 31, 2015 and December 31, 2014, the Company had no long-term FHLB advances outstanding.

 

The Company’s line of credit with the FHLB can equal up to 25% of the Company’s gross assets or approximately $298.9 million at March 31, 2015. This line of credit totaled $221.1 million with approximately $130.5 million available at March 31, 2015. As of March 31, 2015 and December 31, 2014, loans with a carrying value of $302.7 million and $304.5 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. Short-term borrowings outstanding under the FHLB line of credit were $76.1 million and $76.8 million as of March 31, 2015 and December 31, 2014, respectively.

  

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Note 8. Net Income Per Common Share

 

FASB guidance requires that all outstanding unvested share-based payment awards that contain 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 both vested and unvested shares of the Company’s common stock outstanding.

 

The following table shows the weighted average number of common shares used in computing net income per common share and the effect on the weighted average number of shares of potential dilutive common stock.

 

   Three Months Ended 
   March 31, 2015   March 31, 2014 
Weighted average common shares outstanding for basic net income per common share   12,985,429    11,862,367 
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   18,225,621    17,102,559 
Basic net income per common share  $0.11   $0.12 
Diluted net income per common share  $0.08   $0.09 

 

At March 31, 2015 and 2014, options to acquire 103,887 and 146,287 shares of common stock, respectively, were not included in computing diluted net income per common share because their effects were anti-dilutive.

 

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 on these preferred shares, see Note 12 – Preferred Stock and Warrant.

 

Additionally, the impact of warrants to acquire shares of the Company’s common stock that were issued to the U.S. Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Troubled Asset Relief Program is not included, as the warrants were anti-dilutive. For additional information on preferred stock warrants see Note 12 – Preferred Stock and Warrant and Note 17 - Subsequent Events.

 

Note 9. 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”) 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. Under the terms of the 2003 Plan, after April 17, 2013 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. The 2007 Plan authorizes the Company to 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. There were 225,642 shares still available to be granted as awards under the 2007 Plan as of March 31, 2015.

 

32
 

 

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. The Company’s stock options granted to eligible participants are being recognized, as required, as compensation cost over the vesting period except in the instance where a participant reaches normal retirement age of 65 prior to the normal vesting date.

 

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, 2015 and 2014. There was no remaining unrecognized compensation expense related to stock options.

 

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 January 1, 2015   110,487   $18.76           
Forfeited   (6,600)   18.46           
Stock options outstanding at March 31, 1015   103,887   $18.74    1.81   $- 
                     
Stock options exercisable at March 31, 2015   103,887   $18.74    1.81   $- 

 

* 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.

 

The table below summarizes information concerning stock options outstanding and exercisable at March 31, 2015:

 

Stock Options Outstanding and Exercisable
Exercise   Number   Weighted Average
Price   Outstanding   Remaing Term
$20.57    27,362   0.25 years
$21.16    31,525   1.50 years
$19.25    24,000   2.50 years
$12.36    21,000   3.50 years
$18.74    103,887   1.81 years

 

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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 the shares are subject to performance vesting and will vest on March 31, 2017 to the extent certain financial performance requirements for fiscal year 2016 are met. On November 20, 2014, the Company granted 3,242 shares of restricted stock under the 2007 Plan to one of its executive officers.  All of these shares are subject to time vesting over a two year period, and generally vest fifty percent (50%) on the first and second anniversaries of the grant date. On November 18, 2013, the Company granted 38,000 shares of restricted stock under the 2007 Plan to its executive officers in the form of Troubled Asset Relief Program (“TARP”) compliant restricted stock awards. All of these shares are subject to time vesting over a five year period, and generally vest forty percent (40%) on the second anniversary of the grant date and twenty percent (20%) on each of the third, fourth and fifth anniversaries of the grant date. On June 29, 2012, the Company granted 34,000 shares of restricted stock under the 2007 Plan to its executive officers in the form of TARP compliant restricted stock awards. All of these shares are subject to time vesting over a five year period, and generally vest forty percent (40%) on the second anniversary of the grant date and twenty percent (20%) on each of the third, fourth and fifth anniversaries of the grant date.

 

For the three months ended March 31, 2015 and 2014, restricted stock compensation expense was $52 thousand and $20 thousand, respectively, and was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair market value of the Company’s common stock on the date the restricted shares were awarded, which was $6.28 per share for the March 19, 2015 awards, $6.10 per share for the October 15, 2014 awards, $6.17 per share for the November 20, 2014 award, $6.70 per share for the 2013 awards and $3.72 per share for the 2012 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, 2015, and changes during the three months ended March 31, 2015, 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 January 1, 2015   104,142   $5.85 
Granted   45,000    6.28 
Vested   (4,250)   6.10 
Nonvested as of March 31, 2015   144,892   $5.98 

 

At March 31, 2015, there was $464 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 10. Employee Benefit Plan – Pension

 

The Company has 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. Components of net periodic pension benefit related to the Company’s pension plan were as follows for the periods indicated:

  

34
 

  

   Three Months Ended 
   March 31, 
(dollars in thousands)  2015   2014 
         
Components of net periodic pension (benefit)          
Interest cost  $101   $112 
Expected return on plan assets   (178)   (186)
Amortization of prior service cost   2    2 
Recognized net actuarial loss   27    - 
Net periodic pension (benefit)  $(48)  $(72)

 

The Company made no contributions to the pension plan during 2014. The Company has not determined at this time how much, if any, contributions to the plan will be made for the year ending December 31, 2015.

 

Note 11. 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, 2015.

 

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.

 

35
 

 

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, 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, 2015 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)   2015 
     
Assets                    
Securities available for sale                    
Obligations of U.S. Government agencies  $-   $14,874   $-   $14,874 
SBA Pool securities   -    71,747    -    71,747 
Agency mortgage-backed securities   -    33,728    -    33,728 
Agency CMO securities   -    46,485    -    46,485 
Non agency CMO securities   -    780    -    780 
State and political subdivisions   -    58,128    -    58,128 
FNMA and FHLMC preferred stock   -    55    -    55 
Total securities available for sale  $-   $225,797   $-   $225,797 

 

Assets Measured at Fair Value on a Recurring Basis at December 31, 2014 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)   2014 
     
Assets                    
Securities available for sale                    
Obligations of U.S. Government agencies  $-   $14,569   $-   $14,569 
SBA Pool securities   -    74,799    -    74,799 
Agency mortgage-backed securities   -    28,629    -    28,629 
Agency CMO securities   -    39,215    -    39,215 
Non agency CMO securities   -    828    -    828 
State and political subdivisions   -    55,926    -    55,926 
FNMA and FHLMC preferred stock   -    45    -    45 
Total securities available for sale  $-   $214,011   $-   $214,011 

 

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.

  

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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. 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 (Level 2). 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.

 

The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2015 and December 31, 2014, 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, 2015 Using
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   March 31, 
   (Level 1)   (Level 2)   (Level 3)   2015 
   (dollars in thousands) 
Assets                    
Impaired loans  $-   $-   $17,228   $17,228 
Other real estate owned  $-   $-   $1,755   $1,755 

  

Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2014 Using
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   December 31, 
   (Level 1)   (Level 2)   (Level 3)   2014 
   (dollars in thousands) 
Assets                    
Impaired loans  $-   $-   $17,852   $17,852 
Other real estate owned  $-   $-   $1,838   $1,838 

 

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The following table displays quantitative information about Level 3 Fair Value Measurements as of March 31, 2015 and December 31, 2014:

 

Quantitative information about Level 3 Fair Value Measurements at March 31, 2015
(dollars in thousands)  Fair Value   Valuation Technique(s)  Unobservable Input  Range (Weighted Average)
     
Assets              
               
Impaired loans  $17,228   Discounted appraised value  Selling cost   0% - 42% (13%)
           Discount for lack of marketability and age of appraisal   0% - 30% (8%)
               
Other real estate owned  $1,755   Discounted appraised value  Selling cost   10% (10%)
           Discount for lack of marketability and age of appraisal   0% -12% (2%)

 

Quantitative information about Level 3 Fair Value Measurements at December 31, 2014
(dollars in thousands)  Fair Value   Valuation Technique(s)  Unobservable Input  Range (Weighted Average)
     
Assets              
               
Impaired loans  $17,852   Discounted appraised value  Selling cost   0% - 30% (9%)
           Discount for lack of marketability and age of appraisal   0% - 35% (13%)
               
Other real estate owned  $1,838   Discounted appraised value  Selling cost   10% (10%)
           Discount for lack of marketability and age of appraisal   0% - 22% (2%)

 

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.

 

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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.

 

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, 2015 and December 31, 2014, 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.

 

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

 

       Fair Value Measurements at March 31, 2015 Using 
       Quoted Prices in   Significant Other   Significant     
       Active Markets for   Observable   Unobservable   Balance at 
       Identical Assets   Inputs   Inputs   March 31, 
(dollars in thousands)  Carrying Amount   (Level 1)   (Level 2)   (Level 3)   2015 
Assets:                         
Cash and short-term investments  $14,130   $14,130   $-   $-   $14,130 
Interest bearing deposits with banks   11,772    11,772    -    -    11,772 
Securities available for sale   225,797    -    225,797    -    225,797 
Securities held to maturity   31,495    -    32,998    -    32,998 
Restricted securities   7,415    -    7,415    -    7,415 
Loans, net   803,549    -    -    807,819    807,819 
Bank owned life insurance   24,618    -    24,618    -    24,618 
Accrued interest receivable   4,229    -    4,229    -    4,229 
Total  $1,123,005   $25,902   $295,057   $807,819   $1,128,778 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $169,976   $169,976   $-   $-   $169,976 
Interest-bearing deposits   788,181    -    738,330    -    738,330 
Short-term borrowings   76,090    76,090    -    -    76,090 
Trust preferred debt   10,310    -    10,310    -    10,310 
Accrued interest payable   293    -    293    -    293 
Total  $1,044,850   $246,066   $748,933   $-   $994,999 

 

       Fair Value Measurements at December 31, 2014 Using 
       Quoted Prices in   Significant Other   Significant     
       Active Markets for   Observable   Unobservable   Balance at 
       Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  Carrying Amount   (Level 1)   (Level 2)   (Level 3)   2014 
Assets:                         
Cash and short-term investments  $14,024   $14,024   $-   $-   $14,024 
Interest bearing deposits with banks   5,272    5,272    -    -    5,272 
Securities available for sale   214,011    -    214,011    -    214,011 
Securities held to maturity   32,163    -    33,367    -    33,367 
Restricted securities   7,533    -    7,533    -    7,533 
Loans, net   807,548    -    -    812,429    812,429 
Bank owned life insurance   24,463    -    24,463    -    24,463 
Accrued interest receivable   4,013    -    4,013    -    4,013 
Total  $1,109,027   $19,296   $283,387   $812,429   $1,115,112 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $162,328   $162,328   $-   $-   $162,328 
Interest-bearing deposits   776,926    -    721,240    -    721,240 
Short-term borrowings   76,818    76,818    -    -    76,818 
Trust preferred debt   10,310    -    10,310    -    10,310 
Accrued interest payable   316    -    316    -    316 
Total  $1,026,698   $239,146   $731,866   $-   $971,012 

 

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The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of the Company’s normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. The Company attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. The Company monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

Note 12. Preferred Stock and Warrant

 

On January 9, 2009, the Company signed a definitive agreement with the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008 to participate in the Treasury’s Capital Purchase Program. Pursuant to this agreement, the Company sold 24,000 shares of its Series A fixed rate cumulative perpetual preferred stock, liquidation value $1,000 per share (the “Series A Preferred Stock”), to the Treasury for an aggregate purchase price of $24 million. The Series A Preferred Stock paid a cumulative dividend at a rate of 5% for the first five years, and effective January 9, 2014, pays a rate of 9%. As part of its purchase of the Series A Preferred Stock, the Treasury was also issued a warrant (the “Warrant”) to purchase, on its initial terms, up to 373,832 shares of the Company’s common stock at an initial exercise price of $9.63 per share. If not exercised, the Warrant expires after ten years. On October 21, 2013, the Treasury sold all 24,000 shares of Series A Preferred Stock that were held by Treasury to private investors. Capital stock transactions by the Company subsequent to the Warrant’s issuance adjusted the Warrant’s exercise price per share to $9.374 and increased the number of shares that may be acquired upon exercise to 384,041.19 shares. For more information about the Warrant, including the Company’s repurchase of the Warrant subsequent to March 31, 2015, see Note 17 – Subsequent Events.

 

Accounting for the issuance of the Series A Preferred Stock included entries to the equity portion of the Company’s consolidated balance sheet to recognize the Series A Preferred Stock at the full amount of the issuance, the warrant and discount on the Series A Preferred Stock at values calculated by discounting the future cash flows by a prevailing interest rate that a similar security would receive in the current market environment. At the time of issuance, that discount rate was determined to be 12%. The fair value of the warrant of $950 thousand was calculated using the Black-Scholes model with inputs of 7 year volatility, average rate of quarterly dividends, 7 year Treasury strip rate and the exercise price of $9.63 per share exercisable for up to 10 years. The present value of the Series A Preferred Stock using a 12% discount rate was $14.4 million. The Series A Preferred Stock discount determined by the allocation of discount to the warrant was accreted quarterly over a 5 year period on a constant effective yield method at a rate of approximately 6.4%. Allocation of the Series A Preferred Stock discount and the warrant as of January 9, 2009 is provided in the tables below:

 

Warrant Value  2009 
Series A Preferred Stock  $   24,000,000 
Price  $9.63 
Warrant - shares   373,832 
Value per warrant  $2.54 
Fair value of warrant  $949,533 

 

NPV of Series A Preferred Stock            
@ 12% discount rate  (dollars in thousands) 
       Relative   Relative 
   Fair Value   Value %   Value 
$24 million 1/09/2009               
NPV of Series A Preferred Stock (12% discount rate)  $14,446    93.8%  $22,519 
Fair value of warrant   950    6.2%   1,481 
   $15,396    100.0%  $24,000 

 

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From February 2011 to May 2014, the Company deferred its regularly scheduled dividend payments on its Series A Preferred Stock. Deferral of dividends on the Series A Preferred Stock did not constitute an event of default.  Dividends on the Series A Preferred Stock are, however, cumulative, and the Company had accumulated the dividends in accordance with the terms of the Series A Preferred Stock and U.S. GAAP and reflected the accumulated dividends as a portion of the effective dividend on Series A Preferred Stock on the consolidated statements of income.  On August 15, 2014, the Company paid $5.5 million of current and all deferred but accumulated dividends on its Series A Preferred Stock.

 

In connection with its private placements, on June 12, 2013, the Company issued 5,240,192 shares of its Series B Preferred Stock for a gross purchase price of $23.8 million, or $4.55 per share. The Series B Preferred Stock has no maturity date. The holders of Series B Preferred Stock are entitled to receive dividends if, as and when declared by the Company’s Board of Directors, in an identical form of consideration and at the same time, as those dividends or distributions that would have been payable on the number of whole shares of the Company’s common stock that such shares of Series B Preferred Stock would be convertible into upon satisfaction of certain conditions. The Company will not pay any dividends with respect to its common stock unless an equivalent dividend also is paid to the holders of Series B Preferred Stock. The Series B Preferred Stock ranks junior with regard to dividends to any class or series of capital stock of the Company the terms of which expressly provide that such class or series will rank senior to the common stock or the Series B Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company, including the Series A Preferred Stock.

 

Note 13. Trust Preferred Debt

 

On September 17, 2003, $10 million of trust preferred securities were placed through EVB Statutory Trust I in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Junior Subordinated Debentures”) issued by the Parent. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.95%. As of March 31, 2015 and December 31, 2014, the interest rate was 3.22% and 3.21%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Parent has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Parent’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Parent.

 

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At March 31, 2015 and December 31, 2014, all of the trust preferred securities qualified as Tier 1 capital.

 

Subject to certain exceptions and limitations, the Company is permitted to elect from time to time to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities. If the Company defers interest payments on the Junior Subordinated Debentures for more than 20 consecutive quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements would be immediately due and payable.

 

From June 2011 to March 2014, the Company deferred its regularly scheduled interest payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities due to prohibitions on such payments under provisions of regulatory agreements with the Company’s and the Bank’s federal and state banking regulators. On June 17, 2014, the Company paid all current and deferred interest on these outstanding Junior Subordinated Debentures, and the Company has not deferred any subsequent interest payments through March 31, 2015.

 

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Note 14. Capital Requirements

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

 

In July 2013, the federal bank regulatory agencies adopted rules to implement the Basel III capital framework and a revised framework for calculating risk-weighted assets (the “Basel III Capital Rules”). The Basel III Capital Rules were effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain portions of the new rules). For a summary of these final rules, see Part I, Item 1 “Business” under the heading “Regulation and Supervision – Capital Requirements” included in the 2014 Form 10-K.

 

As of March 31, 2015, the most recent notification from the Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, common equity Tier 1 (“CET1”) risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The capital ratios of the Company and the Bank as of March 31, 2015 and December 31, 2014, presented with related minimum regulatory guidelines, is as follows:

 

           Minimum To Be 
As of March 31, 2015          Well-Capitalized 
       Minimum   Under Prompt 
       Capital   Corrective Action 
   Actual Capital   Requirements   Provisions 
CET1 to risk weighted assets:               
Company   9.69%   4.50%    N/A 
Bank   12.57%   4.50%   6.50%
                
Tier 1 capital to risk weighted assets:               
Company   13.79%   6.00%    N/A 
Bank   12.57%   6.00%   8.00%
                
Total capital to risk weighted assets:               
Company   15.05%   8.00%    N/A 
Bank   13.83%   8.00%   10.00%
                
Tier 1 capital to average assets:               
Company   10.19%   4.00%    N/A 
Bank   9.28%   4.00%   5.00%

 

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           Minimum to be 
As of December 31, 2014          Well-Capitalized 
       Minimum   Under Prompt 
       Capital   Corrective Action 
   Actual Capital   Requirements   Provisions 
Tier 1 capital to risk weighted assets:               
Company   14.06%   4.00%    N/A 
Bank   12.28%   4.00%   6.00%
                
Total capital to risk weighted assets:               
Company   15.31%   8.00%    N/A 
Bank   13.53%   8.00%   10.00%
                
Tier 1 capital to average assets:               
Company   10.76%   4.00%    N/A 
Bank   9.40%   4.00%   5.00%

 

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Note 15. Low Income Housing Tax Credits

 

The Company has invested in three separate housing equity funds at March 31, 2015. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were $2.1 million and $2.2 million at March 31, 2015 and December 31, 2014, respectively. These investments and related tax benefits have expected terms through 2017. Tax credits and other tax benefits recognized related to these investments during the quarters ended March 31, 2015 and 2014 were $116 thousand and $96 thousand, respectively. Total projected tax credits to be received for 2015 are $313 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $35 thousand at both March 31, 2015 and December 31, 2014, and are included in other liabilities on the consolidated balance sheets.

 

Note 16. Accumulated Other Comprehensive Loss

 

The changes in accumulated other comprehensive loss for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

(dollars in thousands)  Unrealized
Securities
Gains (Losses)
   Adjustments
Related to
Pension Plan
   Accumulated
Other
Comprehensive
Loss
 
Balance at December 31, 2014  $(1,954)  $(2,112)  $(4,066)
Other comprehensive income before reclassification   1,473    -    1,473 
Reclassification adjustment for gains included in net income   (16)   -    (16)
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity   26    -    26 
Net current period other comprehensive income   1,483    -    1,483 
Balance at March 31, 2015  $(471)  $(2,112)  $(2,583)
                
Balance at December 31, 2013  $(8,396)  $(472)  $(8,868)
Other comprehensive income before reclassification   2,632    -    2,632 
Reclassification adjustment for gains included in net income   (251)   -    (251)
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity   28    -    28 
Net current period other comprehensive   2,409    -    2,409 
Balance at March 31, 2014  $(5,987)  $(472)  $(6,459)

 

Reclassifications of gains on securities available for sale are reported in the consolidated statements of income as “Gain on sale of available for sale securities, net” with the corresponding income tax effect being reflected as a component of income tax expense (benefit). Amortization of unrealized losses on securities transferred from available for sale to held to maturity is included interest income on investments (taxable or non-taxable, as appropriate) in the Company’s consolidated statements of income.

  

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During the three months ended March 31, 2015 and 2014, the Company reported gains on the sale of available for sale securities and amortization of unrealized losses on securities transferred from available for sale to held to maturity as shown in the following table:

 

   Three Months Ended 
   March 31, 
(dollars in thousands)  2015   2014 
Gains on sale of available for sale securities  $25   $380 
Less: tax effect   (9)   (129)
Net gains on the sale of available for sale securities  $16   $251 
           
Amortization of unrealized losses on securities transferred from available for sale to held to maturity  $(40)  $(43)
Less: tax effect   14    15 
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity  $(26)  $(28)

 

Note 17. Subsequent Events

 

On April 22, 2015, the Company completed a private placement of $20.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes to certain institutional accredited investors. Unless earlier redeemed, the notes mature on May 1, 2025 and bear interest at a fixed rate of 6.50% per year, from and including April 22, 2015 to but excluding May 1, 2020. From and including May 1, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per year equal to the then current three month LIBOR rate plus 502 basis points. The subordinated notes have been structured to qualify as Tier 2 capital for regulatory purposes.

 

On May 13, 2015, the Company repurchased from Treasury the warrant to purchase 384,041.19 shares of the Company’s common stock at an exercise price of $9.374 per share, each as adjusted from the warrant’s terms at original issue due to certain capital stock transactions by the Company. The aggregate repurchase price of the warrant was $115 thousand, based on the fair value of the warrant as agreed upon by the Company and Treasury. Following the repurchase of the Warrant, the Treasury has no remaining equity investment in the Company.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

We present management’s discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about the major components of our results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes to the Interim Consolidated Financial Statements presented elsewhere in this report and the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in the 2014 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.

 

Internet Access to Corporate Documents

 

Information about the Company can be found on the Company’s investor relations website at http://www.evb.org. The Company posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those documents as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. All such filings are available at no charge. The information on the Company’s website is not, and shall not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated into any other filings the Company makes with the SEC.

 

Forward Looking Statements

 

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, income or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services, the performance or disposition of portions of the Company’s asset portfolio, future changes to the Bank’s branch network, the payment of dividends and the ability to realize deferred tax assets; (iii) statements of future financial performance and economic conditions; (iv) statements regarding the adequacy of the allowance for loan losses; (v) statements regarding the effect of future sales of investment securities or foreclosed properties; (vi) statements regarding the Company’s liquidity; (vii) statements of management’s expectations regarding future trends in interest rates, real estate values, and economic conditions generally and in the Company’s markets; (viii) statements regarding future asset quality, including expected levels of charge-offs; (ix) statements regarding potential changes to laws, regulations or administrative guidance; (x) statements regarding strategic initiatives of the Company or the Bank and the results of these initiatives, including the Company’s integration of VCB and transactions to redeem or refinance the Company’s Series A Preferred Stock; and (xi) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

¨factors that adversely affect our strategic and business initiatives, including the Company’s integration of VCB, and other factors that could impact the business of the combined organization, including, without limitation, changes in the economic or business conditions in the Company’s markets;
¨our ability and efforts to assess, manage and improve our asset quality;
¨the strength of the economy in our target market area, as well as general economic, market, political, or business factors;

 

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¨changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers or issuers, concentrations in segments of the loan portfolio or declines in real estate values in the Company’s markets;
¨the effects of our adjustments to the composition of our investment portfolio;
¨the strength of the Company’s counterparties;
¨an insufficient allowance for loan losses;
¨our ability to meet the capital requirements of our regulatory agencies;
¨changes in laws, regulations and the policies of federal or state regulators and agencies, the implementation of the Basel III capital framework and for calculating risk-weighted assets, and compliance with laws and regulations to which the Company is subject;
¨adverse reactions in financial markets related to the budget deficit of the United States government;
¨changes in the interest rates affecting our deposits and loans;
¨the loss of any of our key employees;
¨failure, interruption or breach of any of the Company’s communication or information systems, including those provided by external vendors;
¨changes in our competitive position, competitive actions by other financial institutions and the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets;
¨our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth;
¨changes in government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan products and financial services;
¨our ability to maintain internal control over financial reporting;
¨our ability to realize our deferred tax assets, including in the event we experience an ownership change as defined by Section 382 of the Code;
¨our ability to raise capital as needed by our business;
¨our reliance on secondary sources, such as FHLB advances, sales of securities and loans and federal funds lines of credit from correspondent banks, to meet our liquidity needs; and
¨other circumstances, many of which are beyond our control.

 

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions and projections within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, actions or achievements of the Company will not differ materially from any future results, performance, actions or achievements expressed or implied by such forward-looking statements. Readers should not place undue reliance on such statements, which speak only as of the date of this report. The Company does not undertake any steps to update any forward-looking statement that may be made from time to time by it or on its behalf. For additional information on risk factors that could affect the Company's forward-looking statements, see the Company's Annual Report on Form 10-K for the year ended December 31, 2014 and other reports filed with the SEC.

 

Critical Accounting Policies

 

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.

 

Allowance for Loan Losses

 

The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. For more information see the section titled “Asset Quality” within this Item 2.

 

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Impairment of Loans

 

The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The Company does not consider a loan impaired during a period of insignificant payment shortfalls if we expect the ultimate collection of all amounts due. Impairment is measured on a loan by loan basis for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans, representing consumer, one to four family residential first and seconds and home equity lines, are collectively evaluated for impairment. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are also considered impaired loans. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial condition, grants a concession (including, without limitation, rate reductions to below-market rates, payment deferrals, forbearance and, in some cases, forgiveness of principal or interest) to the borrower that it would not otherwise consider. For more information see the section titled “Asset Quality” within Item 2.

 

Loans Acquired in a Business Combination

 

The Company accounts for loans acquired in a business combination, such as the Company’s acquisition of VCB, in accordance with the FASB ASC Topic 805, “Business Combinations.” Accordingly, acquired loans are segregated between PCI loans and purchased performing loans and are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses.

 

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair market value, PCI loans were aggregated into pools of loans based on common characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing or PCI loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition.

 

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Impairment of Securities

 

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

 

Other Real Estate Owned

 

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at estimated fair market value of the property, less estimated disposal costs, if any. Any excess of cost over the estimated fair market value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically by management and any write-downs are charged against current earnings.

 

Goodwill

 

With the adoption of ASU 2011-08, “Intangible-Goodwill and Other-Testing Goodwill for Impairment,” the Company is no longer required to perform a test for impairment unless, based on an assessment of