Toggle SGML Header (+)


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

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 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 office)   (Zip Code)

 

(804) 443-8400

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 August 12, 2015 was 13,029,550.

 

 
 

 

EASTERN VIRGINIA BANKSHARES, INC.

 

INDEX

  

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014 2
     
  Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2015 and June 30, 2014 3
     
  Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the Three Months Ended June 30, 2015 and June 30, 2014 4
     
  Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2015 and June 30, 2014 5
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Six Months Ended June 30, 2015 and June 30, 2014 6
     
  Consolidated Statements of Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2015 and June 30, 2014 7
     
  Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and June 30, 2014 8
     
  Notes to the Interim Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 49
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 74
     
Item 4.   Controls and Procedures 74
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 75
     
Item 1A. Risk Factors 75
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 75
     
Item 3. Defaults Upon Senior Securities 75
     
Item 4. Mine Safety Disclosures 75
     
Item 5. Other Information 75
     
Item 6. Exhibits 76
     
  SIGNATURES 77

 

 1 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

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

 

   June 30,
2015
   December 31,
2014*
 
   (unaudited)     
Assets:          
Cash and due from banks  $14,416   $14,024 
Interest bearing deposits with banks   6,467    5,272 
Federal funds sold   -    334 
Securities available for sale, at fair value   227,932    214,011 
Securities held to maturity, at carrying value (fair value of $31,542 and $33,367, respectively)   30,671    32,163 
Restricted securities, at cost   8,118    7,533 
Loans, net of allowance for loan losses of $12,287 and $13,021, respectively   828,423    807,548 
Deferred income taxes, net   16,937    17,529 
Bank premises and equipment, net   28,628    27,433 
Accrued interest receivable   3,990    4,013 
Other real estate owned, net of valuation allowance of $3 and $76, respectively   1,344    1,838 
Goodwill   17,085    17,085 
Bank owned life insurance   24,786    24,463 
Other assets   10,394    8,726 
   Total assets  $1,219,191   $1,181,972 
           
Liabilities and Shareholders' Equity:          
Liabilities          
Noninterest-bearing demand accounts  $178,844   $162,328 
Interest-bearing deposits   778,378    776,926 
Total deposits   957,222    939,254 
Federal funds purchased and repurchase agreements   8,489    14,885 
Short-term borrowings   94,605    76,818 
Junior subordinated debt   10,310    10,310 
Senior subordinated debt   19,140    - 
Accrued interest payable   530    316 
Other liabilities   6,986    6,115 
   Total liabilities   1,097,282    1,047,698 
           
Shareholders' Equity          
Preferred stock, $2 par value per share, authorized 10,000,000 shares, issued:          
Series A; $1,000 stated value per share, 0 and 14,000 shares fixed rate cumulative perpetual preferred in 2015 and 2014, respectively   -    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 138,092 and 104,142 nonvested shares in 2015 and 2014, respectively   25,771    25,750 
Surplus   48,797    47,339 
Retained earnings   41,494    39,290 
Warrant   -    1,481 
Accumulated other comprehensive loss, net   (4,633)   (4,066)
   Total shareholders' equity   121,909    134,274 
           
   Total liabilities and shareholders' equity  $1,219,191   $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 
   June 30, 
   2015   2014 
Interest and Dividend Income          
Interest and fees on loans  $10,382   $8,562 
Interest on investments:          
Taxable interest income   1,185    1,338 
Tax exempt interest income   268    204 
Dividends   96    89 
Interest on deposits with banks   4    4 
Total interest and dividend income   11,935    10,197 
Interest Expense          
Deposits   934    978 
Federal funds purchased and repurchase agreements   13    5 
Short-term borrowings   37    36 
Junior subordinated debt   81    88 
Senior subordinated debt   264    - 
Total interest expense   1,329    1,107 
Net interest income   10,606    9,090 
Provision for Loan Losses   -    - 
Net interest income after provision for loan losses   10,606    9,090 
Noninterest Income          
Service charges and fees on deposit accounts   673    837 
Debit/credit card fees   442    378 
Gain on sale of available for sale securities, net   26    109 
(Loss) on sale of bank premises and equipment   (30)   - 
Other operating income   421    315 
Total noninterest income   1,532    1,639 
Noninterest Expenses          
Salaries and employee benefits   5,523    4,748 
Occupancy and equipment expenses   1,392    1,267 
Telephone   210    211 
FDIC expense   254    305 
Consultant fees   546    279 
Collection, repossession and other real estate owned   126    89 
Marketing and advertising   347    270 
(Gain) loss on sale of other real estate owned   (6)   28 
Impairment losses on other real estate owned   -    6 
Other operating expenses   1,807    1,316 
Total noninterest expenses   10,199    8,519 
Income before income taxes   1,939    2,210 
Income Tax Expense   432    555 
Net Income  $1,507   $1,655 
Effective dividend on Series A Preferred Stock   166    541 
           
Net income available to common shareholders  $1,341   $1,114 
           
Net income per common share: basic  $0.07   $0.06 
Net income per common share: diluted  $0.07   $0.06 

 

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

 

 3 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

(dollars in thousands)

 

   Three Months Ended 
   June 30, 
   2015   2014 
Net income  $1,507   $1,655 
Other comprehensive (loss) income, net of tax:          
Unrealized securities (losses) gains arising during period (net of tax, ($1,066) and $893, respectively)   (2,070)   1,732 
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $19 and $26, respectively)   38    52 
Less: reclassification adjustment for securities gains included in net income (net of tax, $8 and $37, respectively)   (18)   (72)
Other comprehensive (loss) income   (2,050)   1,712 
Comprehensive (loss) income  $(543)  $3,367 

 

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

 

 4 

 

  

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

 

   Six Months Ended 
   June 30, 
   2015   2014 
Interest and Dividend Income          
Interest and fees on loans  $20,573   $17,112 
Interest on investments:          
Taxable interest income   2,387    2,845 
Tax exempt interest income   528    417 
Dividends   204    191 
Interest on deposits with banks   8    8 
Total interest and dividend income   23,700    20,573 
Interest Expense          
Deposits   1,985    1,965 
Federal funds purchased and repurchase agreements   31    10 
Short-term borrowings   79    71 
Junior subordinated debt   161    176 
Senior subordinated debt   264    - 
Total interest expense   2,520    2,222 
Net interest income   21,180    18,351 
Provision for Loan Losses   -    250 
Net interest income after provision for loan losses   21,180    18,101 
Noninterest Income          
Service charges and fees on deposit accounts   1,336    1,659 
Debit/credit card fees   805    687 
Gain on sale of available for sale securities, net   51    489 
(Loss) gain on sale of bank premises and equipment   (27)   5 
Other operating income   886    691 
Total noninterest income   3,051    3,531 
Noninterest Expenses          
Salaries and employee benefits   11,113    9,334 
Occupancy and equipment expenses   2,913    2,586 
Telephone   407    422 
FDIC expense   426    637 
Consultant fees   951    622 
Collection, repossession and other real estate owned   215    156 
Marketing and advertising   668    437 
Loss on sale of other real estate owned   26    15 
Impairment losses on other real estate owned   5    11 
Other operating expenses   3,442    2,477 
Total noninterest expenses   20,166    16,697 
Income before income taxes   4,065    4,935 
Income Tax Expense   949    1,284 
Net Income  $3,116   $3,651 
Effective dividend on Series A Preferred Stock   386    1,059 
           
Net income available to common shareholders  $2,730   $2,592 
           
Net income per common share: basic  $0.15   $0.15 
Net income per common share: diluted  $0.15   $0.15 

 

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

 

 5 

 

  

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

   Six Months Ended 
   June 30, 
   2015   2014 
Net income  $3,116   $3,651 
Other comprehensive (loss) income, net of tax:          
Unrealized securities (losses) gains arising during period (net of tax, ($308) and $2,248, respectively)   (597)   4,364 
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $33 and $41, respectively)   64    80 
Less: reclassification adjustment for securities gains included in net income (net of tax, $17 and $166, respectively)   (34)   (323)
Other comprehensive (loss) income   (567)   4,121 
Comprehensive income  $2,549   $7,772 

 

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

 

 6 

 

  

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Six Months Ended June 30, 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                       3,651         3,651 
Other comprehensive income                            4,121    4,121 
Stock based compensation                  39              39 
Restricted common stock vested   30    -    -    (30)   -    -    - 
Balance, June 30, 2014  $23,608   $25,481   $10,480   $42,706   $43,232   $(4,747)  $140,760 
                                    
                                    
Balance, December 31, 2014  $25,750   $15,481   $10,480   $47,339   $39,290   $(4,066)  $134,274 
Net income                       3,116         3,116 
Other comprehensive (loss)                            (567)   (567)
Cash dividends - preferred, Series A                       (547)        (547)
Cash dividends - preferred, Series B                       (105)        (105)
Cash dividends - common ($0.02 per share)                       (260)        (260)
Repurchase of preferred stock        (14,000)                       (14,000)
Repurchase of common stock   (1)                            (1)
Repurchase of warrants        (1,481)        1,366              (115)
Stock based compensation                  114              114 
Restricted common stock vested   22    -    -    (22)   -    -    - 
Balance, June 30, 2015  $25,771   $-   $10,480   $48,797   $41,494   $(4,633)  $121,909 

 

(1) For the purposes of this table, Preferred Stock Series A includes the effect of the warrant (prior to its repurchase by the Company during the second quarter of 2015) 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.

 

 7 

 

  

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

 

   Six Months Ended 
   June 30, 
   2015   2014 
Operating Activities:          
Net income  $3,116   $3,651 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   -    250 
Depreciation and amortization   1,250    1,048 
Stock based compensation   114    39 
Amortization of debt issuance costs   15    - 
Net accretion of certain acquisition related fair value adjustments   (402)   - 
Net amortization of premiums and accretion of discounts on investment securities, net   1,506    1,626 
(Gain) on sale of securities available for sale transactions, net   (51)   (489)
Loss (gain) on sale of bank premises and equipment   27    (5)
Loss on sale of other real estate owned   26    15 
Impairment losses on other real estate owned   5    11 
Loss on LLC investments   145    23 
Earnings on life insurance policies   (323)   (274)
Net change in:          
Accrued interest receivable   23    131 
Other assets   (1,942)   (1,294)
Accrued interest payable   214    (983)
Other liabilities   1,756    1,108 
Net cash provided by operating activities   5,479    4,857 
Investing Activities:          
Purchase of securities available for sale   (48,580)   (17,000)
Purchase of securities held to maturity   (22)   - 
Purchase of restricted securities   (4,347)   (5,228)
Purchases of bank premises and equipment   (2,727)   (1,127)
Improvements to other real estate owned   (1)   - 
Net change in loans   (21,363)   (41,484)
Proceeds from:          
Maturities, calls, and paydowns of securities available for sale   12,537    9,053 
Maturities, calls, and paydowns of securities held to maturity   1,351    1,248 
Sale of securities available for sale   19,970    20,527 
Sale of restricted securities   3,762    3,547 
Sale of bank premises and equipment   255    5 
Sale of other real estate owned   1,548    462 
Net cash used in investing activities   (37,617)   (29,997)
Financing Activities:          
Net change in:          
Demand, interest-bearing demand and savings deposits   33,650    (13,723)
Time deposits   (15,747)   787 
Federal funds purchased and repurchase agreements   (6,396)   473 
Short-term borrowings   17,787    34,820 
Senior subordinated debt   20,000    - 
Debt issuance costs   (875)   - 
Repurchase of preferred stock   (14,000)   - 
Repurchase of common stock   (1)   - 
Repurchase of warrants   (115)   - 
Dividends paid - preferred, Series A   (547)   - 
Dividends paid - preferred, Series B   (105)   - 
Dividends paid - common   (260)   - 
Net cash provided by financing activities   33,391    22,357 
Net increase (decrease) in cash and cash equivalents   1,253    (2,783)
Cash and cash equivalents, December 31   19,630    19,346 
Cash and cash equivalents, June 30  $20,883   $16,563 
Supplemental disclosure:          
Interest paid  $2,306   $3,205 
Supplemental disclosure of noncash investing and financing activities:          
Unrealized (losses) gains on securities available for sale  $(956)  $6,123 
Loans transferred to other real estate owned  $(1,084)  $(289)

 

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

 

 8 

 

  

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 and six months ended June 30, 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 four 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 $3 thousand, which is adjustable on a quarterly basis.

 

 9 

 

 

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 common 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.

 

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.

 

 10 

 

 

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.

 

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.

 

 11 

 

  

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 U.S. 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.

 

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, and as such, the Company adopted ASU 2015-03 in the second quarter of 2015. The adoption of the new guidance did not have a material impact on the Company’s 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.

 

 12 

 

  

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on our consolidated financial statements.

 

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.

 

 13 

 

 

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.

  

           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 acquired  $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, 2014. 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, 2014. Acquisition related expenses of $168 thousand and $224 thousand were included in the Company's actual consolidated statements of income for the three and six months ended June 30, 2015, respectively, but were excluded from the unaudited pro forma information listed below. 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   Unaudited   Unaudited 
   Pro Forma   Pro Forma   Pro Forma   Pro Forma 
   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
(dollars in thousands)  2015   2014   2015   2014 
Net interest income  $10,606   $10,066   $21,180   $20,554 
Net income   1,675    1,232    3,340    2,804 

 

 14 

 

  

Note 3. Investment Securities

 

The amortized cost and estimated fair value, with gross unrealized gains and losses, of securities at June 30, 2015 and December 31, 2014 were as follows:

 

(dollars in thousands)  June 30, 2015 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
  Cost   Gains   Losses   Value 
Available for Sale:                
Obligations of U.S. Government agencies  $13,491   $-   $410   $13,081 
SBA Pool securities   71,966    114    1,073    71,007 
Agency residential mortgage-backed securities   19,731    53    384    19,400 
Agency commercial mortgage-backed securities   6,574    -    87    6,487 
Agency CMO securities   53,589    285    720    53,154 
Non agency CMO securities   670    34    -    704 
State and political subdivisions   65,102    301    1,313    64,090 
FNMA and FHLMC preferred stock   2    7    -    9 
Total  $231,125   $794   $3,987   $227,932 

 

(dollars in thousands)  December 31, 2014 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
  Cost   Gains   Losses   Value 
Available for Sale:                
Obligations of U.S. Government agencies  $14,991   $-   $422   $14,569 
SBA Pool securities   76,469    70    1,740    74,799 
Agency residential 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 

 

 15 

 

  

(dollars in thousands)  June 30, 2015 
       Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
  Cost   in AOCI*   Value   Gains   Losses   Value 
Held to Maturity:                        
Agency CMO securities  $11,814   $71   $11,743   $338   $-   $12,081 
State and political subdivisions   19,484    556    18,928    536    3    19,461 
Total  $31,298   $627   $30,671   $874   $3   $31,542 

 

*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 
  Cost   in AOCI*   Value   Gains   Losses   Value 
Held to Maturity:                        
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 June 30, 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 accreted over the remaining life of the securities as an adjustment to interest income. At June 30, 2015, the Company’s mortgage-backed securities consisted of commercial and residential 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.

 

 16 

 

 

The amortized cost, carrying value and estimated fair values of securities at June 30, 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)  June 30, 2015 
  Amortized
Cost
   Fair
Value
 
         
Available for Sale:        
Due in one year or less  $2,378   $2,327 
Due after one year through five years   82,927    82,425 
Due after five years through ten years   136,796    134,357 
Due after ten years   9,024    8,823 
Total  $231,125   $227,932 

 

(dollars in thousands)  June 30, 2015 
  Carrying
Value
   Fair
Value
 
         
Held to Maturity:        
Due in one year or less  $-   $- 
Due after one year through five years   21,379    22,005 
Due after five years through ten years   8,545    8,791 
Due after ten years   747    746 
Total  $30,671   $31,542 

 

Proceeds from the sales of securities available for sale for the six months ended June 30, 2015 and 2014 were $20.0 million and $20.5 million, respectively. Net realized gains on the sales of securities available for sale for the six months ended June 30, 2015 and 2014 were $51 thousand and $489 thousand, respectively. Proceeds from maturities, calls and paydowns of securities available for sale for the six months ended June 30, 2015 and 2014 were $12.5 million and $9.1 million, respectively. Proceeds from maturities, calls and paydowns of securities held to maturity for the six months ended June 30, 2015 and 2014 were $1.4 million and $1.2 million, 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 $50.6 million and an aggregate fair value of $51.3 million were pledged at June 30, 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 June 30, 2015, by duration of the period of the unrealized loss, are shown below:

 

   June 30, 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  $4,385   $110   $8,696   $300   $13,081   $410 
SBA Pool securities   9,137    48    50,950    1,025    60,087    1,073 
Agency residential mortgage-backed securities   7,619    111    9,967    273    17,586    384 
Agency commercial mortgage-backed securities   6,487    87    -    -    6,487    87 
Agency CMO securities   25,483    418    8,720    302    34,203    720 
State and political subdivisions   41,816    960    9,258    356    51,074    1,316 
Total  $94,927   $1,734   $87,591   $2,256   $182,518   $3,990 

 

 17 

 

 

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 June 30, 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 had fallen, specifically in the middle and long-end of the yield curve, which had caused bond prices to rise and thereby reduced the amount of unrealized losses. However, during the second quarter of 2015, interest rates generally increased which caused bond prices to decline, which in turn increased the amount of unrealized losses at the end of that quarter. At June 30, 2015, there were 154 debt securities with fair values totaling $182.5 million considered temporarily impaired. Of these debt securities, 90 with fair values totaling $94.9 million were in an unrealized loss position of less than 12 months and 64 with fair values totaling $87.6 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 June 30, 2015 and no impairment has been recognized. At June 30, 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 residential 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 $5.1 million and $4.5 million at June 30, 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 July 1, 2014, and ending June 30, 2015, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 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 Reserve Bank and Community Bankers Bank, which are carried at cost.

 

 18 

 

  

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:

 

   June 30, 2015   December 31, 2014 
(dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial, industrial and agricultural  $85,845    10.21%  $85,119    10.37%
Real estate - one to four family residential:                    
Closed end first and seconds   243,072    28.91%   236,761    28.86%
Home equity lines   111,007    13.20%   110,100    13.42%
Total real estate - one to four family residential   354,079    42.11%   346,861    42.28%
Real estate - multifamily residential   29,802    3.54%   25,157    3.07%
Real estate - construction:                    
One to four family residential   19,091    2.27%   19,698    2.40%
Other construction, land development and other land   36,620    4.36%   35,591    4.34%
Total real estate - construction   55,711    6.63%   55,289    6.74%
Real estate - farmland   10,553    1.26%   9,471    1.15%
Real estate - non-farm, non-residential:                    
Owner occupied   168,861    20.09%   157,745    19.22%
Non-owner occupied   99,287    11.81%   104,827    12.77%
Total real estate - non-farm, non-residential   268,148    31.90%   262,572    31.99%
Consumer   14,443    1.72%   15,919    1.94%
Other   22,129    2.63%   20,181    2.46%
Total loans   840,710    100.00%   820,569    100.00%
Less allowance for loan losses   (12,287)        (13,021)     
Loans, net  $828,423        $807,548      

 

Deferred costs, net are included in the table above and totaled $1.5 million and $1.4 million for June 30, 2015 and December 31, 2014, respectively.

 

 19 

 

  

The following table presents the aging of the recorded investment in past due loans as of June 30, 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  $206   $14   $383   $603   $85,242   $85,845 
Real estate - one to four family residential:                              
Closed end first and seconds   6,038    1,662    3,359    11,059    232,013    243,072 
Home equity lines   234    104    250    588    110,419    111,007 
Total real estate - one to four family residential   6,272    1,766    3,609    11,647    342,432    354,079 
Real estate - multifamily residential   -    -    -    -    29,802    29,802 
Real estate - construction:                              
One to four family residential   80    -    189    269    18,822    19,091 
Other construction, land development and other land   -    -    1    1    36,619    36,620 
Total real estate - construction   80    -    190    270    55,441    55,711 
Real estate - farmland   273    280    -    553    10,000    10,553 
Real estate - non-farm, non-residential:                              
Owner occupied   172    1,686    568    2,426    166,435    168,861 
Non-owner occupied   215    -    676    891    98,396    99,287 
Total real estate - non-farm, non-residential   387    1,686    1,244    3,317    264,831    268,148 
Consumer   8    26    4    38    14,405    14,443 
Other   -    -    -    -    22,129    22,129 
Total loans  $7,226   $3,772   $5,430   $16,428   $824,282   $840,710 

 

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

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 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.

 

 20 

 

  

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

 

   June 30,   December 31, 
(dollars in thousands)  2015   2014 
Nonaccrual loans  $7,263   $6,622 
Loans past due 90 days and accruing interest   240    53 
Troubled debt restructurings (accruing)   14,843    15,223 

 

At June 30, 2015 and December 31, 2014, there were approximately $2.3 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.

 

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

 

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

 

 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 June 30, 2015 and December 31, 2014 were as follows:

 

   June 30, 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  $577   $7,051   $7,628   $1,023   $15,673   $16,696 
Real estate - one to four family residential:                              
Closed end first and seconds   1,347    7,758    9,105    1,374    6,475    7,849 
Home equity lines   33    10,850    10,883    33    11,858    11,891 
Total real estate - one to four family residential   1,380    18,608    19,988    1,407    18,333    19,740 
Real estate - multifamily residential   -    3,790    3,790    -    3,539    3,539 
Real estate - construction:                              
One to four family residential   -    1,945    1,945    -    3,206    3,206 
Other construction, land development and other land   286    1,875    2,161    79    3,674    3,753 
Total real estate - construction   286    3,820    4,106    79    6,880    6,959 
Real estate - farmland   -    -    -    -    -    - 
Real estate - non-farm, non-residential:                              
Owner occupied   4,408    17,998    22,406    1,841    21,037    22,878 
Non-owner occupied   1,661    12,460    14,121    3,472    20,762    24,234 
Total real estate - non-farm, non-residential   6,069    30,458    36,527    5,313    41,799    47,112 
Consumer   -    435    435    -    1,462    1,462 
Other   -    845    845    -    -    - 
Total loans  $8,312   $65,007   $73,319   $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 June 30, 2015 and December 31, 2014:

 

           Over 90 Days Past 
   Nonaccrual   Due and Accruing 
   June 30,   December 31,   June 30,   December 31, 
(dollars in thousands)  2015   2014   2015   2014 
Commercial, industrial and agricultural  $383   $334   $-   $53 
Real estate - one to four family residential:                    
Closed end first and seconds   4,996    3,364    240    - 
Home equity lines   425    564    -    - 
Total real estate - one to four family residential   5,421    3,928    240    - 
Real estate - construction:                    
One to four family residential   189    221    -    - 
Other construction, land development and other land   1    -    -    - 
Total real estate - construction   190    221    -    - 
Real estate - farmland   -    590    -    - 
Real estate - non-farm, non-residential:                    
Owner occupied   568    1,521    -    - 
Non-owner occupied   677    -    -    - 
Total real estate - non-farm, non-residential   1,245    1,521    -    - 
Consumer   24    28    -    - 
Total loans  $7,263   $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 June 30, 2015:

 

(dollars in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Impaired   Acquired
Loans -
Purchased
Credit
Impaired
   Total 
Commercial, industrial and agricultural  $80,879   $3,269   $553   $230   $337   $577   $85,845 
Real estate - multifamily residential   29,802    -    -    -    -    -    29,802 
Real estate - construction:                                   
One to four family residential   18,623    87    121    -    260    -    19,091 
Other construction, land development and other land   27,504    1,786    1,410    -    5,634    286    36,620 
Total real estate - construction   46,127    1,873    1,531    -    5,894    286    55,711 
Real estate - farmland   9,496    875    182    -    -    -    10,553 
Real estate - non-farm, non-residential:                                   
Owner occupied   141,218    8,012    3,955    -    11,268    4,408    168,861 
Non-owner occupied   82,331    2,804    1,485    -    11,006    1,661    99,287 
Total real estate - non-farm, non-residential   223,549    10,816    5,440    -    22,274    6,069    268,148 
Total commercial loans  $389,853   $16,833   $7,706   $230   $28,505   $6,932   $450,059 

 

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 June 30, 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 June 30, 2015:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $232,426   $10,646   $243,072 
Home equity lines   110,132    875    111,007 
Total real estate - one to four family residential   342,558    11,521    354,079 
Consumer   14,091    352    14,443 
Other   22,125    4    22,129 
Total consumer loans  $378,774   $11,877   $390,651 

 

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 six months ended June 30, 2015:

 

   Beginning Balance               Ending Balance 
(dollars in thousands)  January 1, 2015   Charge-offs   Recoveries   Provision   June 30, 2015 
Commercial, industrial and agricultural  $1,168   $(80)  $21   $510   $1,619 
Real estate - one to four family residential:                         
Closed end first and seconds   1,884    (332)   13    134    1,699 
Home equity lines   1,678    (137)   5    467    2,013 
Total real estate - one to four family residential   3,562    (469)   18    601    3,712 
Real estate - multifamily residential   89    -    -    13    102 
Real estate - construction:                         
One to four family residential   235    (102)   1    123    257 
Other construction, land development and other land   2,670    -    -    (80)   2,590 
Total real estate - construction   2,905    (102)   1    43    2,847 
Real estate - farmland   144    -    -    (65)   79 
Real estate - non-farm, non-residential:                         
Owner occupied   2,416    (139)   1    (440)   1,838 
Non-owner occupied   1,908    -    -    (740)   1,168 
Total real estate - non-farm, non-residential   4,324    (139)   1    (1,180)   3,006 
Consumer   305    (7)   34    (75)   257 
Other   524    (24)   12    153    665 
Total  $13,021   $(821)  $87   $-   $12,287 

 

The following table presents a rollforward of the Company’s allowance for loan losses for the six months ended June 30, 2014:

 

   Beginning Balance               Ending Balance 
(dollars in thousands)  January 1, 2014   Charge-offs   Recoveries   Provision   June 30, 2014 
Commercial, industrial and agricultural  $1,787   $(290)  $30   $(331)  $1,196 
Real estate - one to four family residential:                         
Closed end first and seconds   2,859    (304)   211    (188)   2,578 
Home equity lines   1,642    (54)   13    244    1,845 
Total real estate - one to four family residential   4,501    (358)   224    56    4,423 
Real estate - multifamily residential   79    -    -    29    108 
Real estate - construction:                         
One to four family residential   364    -    6    (69)   301 
Other construction, land development and other land   1,989    -    2    501    2,492 
Total real estate - construction   2,353    -    8    432    2,793 
Real estate - farmland   116    -    -    11    127 
Real estate - non-farm, non-residential:                         
Owner occupied   3,236    -    27    (1,144)   2,119 
Non-owner occupied   1,770    -    3    855    2,628 
Total real estate - non-farm, non-residential   5,006    -    30    (289)   4,747 
Consumer   387    (86)   55    (1)   355 
Other   538    (26)   14    343    869 
Total  $14,767   $(760)  $361   $250   $14,618 

 

 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 June 30, 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  $309   $1,310   $-   $1,619   $337   $84,931   $577   $85,845 
Real estate - one to four family residential:                                        
Closed end first and seconds   592    1,107    -    1,699    8,192    233,533    1,347    243,072 
Home equity lines   265    1,748    -    2,013    625    110,349    33    111,007 
Total real estate - one to four family residential   857    2,855    -    3,712    8,817    343,882    1,380    354,079 
Real estate - multifamily residential   -    102    -    102    -    29,802    -    29,802 
Real estate - construction:                                        
One to four family residential   73    184    -    257    260    18,831    -    19,091 
Other construction, land development and other land   1,604    986    -    2,590    5,634    30,700    286    36,620 
Total real estate - construction   1,677    1,170    -    2,847    5,894    49,531    286    55,711 
Real estate - farmland   -    79    -    79    -    10,553    -    10,553 
Real estate - non-farm, non-residential:                                        
Owner occupied   911    927    -    1,838    11,268    153,185    4,408    168,861 
Non-owner occupied   718    450    -    1,168    11,006    86,620    1,661    99,287 
Total real estate - non-farm, non-residential   1,629    1,377    -    3,006    22,274    239,805    6,069    268,148 
Consumer   89    168    -    257    348    14,095    -    14,443 
Other   -    665    -    665    4    22,125    -    22,129 
Total  $4,561   $7,726   $-   $12,287   $37,674   $794,724   $8,312   $840,710 

 

 27 

 

 

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 

 

 28 

 

  

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 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  $337   $337   $-   $337   $309   $931   $11 
Real estate - one to four family residential:                                   
Closed end first and seconds   8,192    8,755    3,481    4,711    592    8,517    199 
Home equity lines   625    625    175    450    265    432    9 
Total real estate - one to four family residential   8,817    9,380    3,656    5,161    857    8,949    208 
Real estate - construction:                                   
One to four family residential   260    362    89    171    73    246    4 
Other construction, land development and other land   5,634    5,634    1    5,633    1,604    5,638    133 
Total real estate - construction   5,894    5,996    90    5,804    1,677    5,884    137 
Real estate - non-farm, non-residential:                                   
Owner occupied   11,268    11,620    8,367    2,901    911    10,399    290 
Non-owner occupied   11,006    11,006    6,642    4,364    718    10,918    262 
Total real estate - non-farm, non-residential   22,274    22,626    15,009    7,265    1,629    21,317    552 
Consumer   348    358    16    332    89    360    9 
Other   4    4    4    -    -    5    - 
Total loans*  $37,674   $38,701   $18,775   $18,899   $4,561   $37,446   $917 

 

* 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.

 

 29 

 

 

Determining the fair value of purchased credit-impaired (“PCI”) loans at November 14, 2014 required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference and is not recorded. In accordance with U.S. GAAP, the Company did not “carry over” any allowances for loan losses that were reserved for the VCB loan portfolio prior to the Company’s acquisition of VCB. PCI loans had unpaid principal balances of $9.3 million and $8.8 million and recorded carrying values of $8.3 million and $7.8 million at June 30, 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 periods indicated:

 

   Three months ended   Six months ended 
   June 30, 2015   June 30, 2015 
(dollars in thousands)  Accretable Yield   Accretable Yield 
Balance at beginning of period  $1,029   $1,131 
Accretion   (104)   (206)
Reclassification of nonaccretable difference due to improvement in expected cash flows   -    - 
Other changes, net   -    - 
Balance at end of period  $925   $925 

  

 30 

 

 

The following tables present, by loan class, information related to loans modified as TDRs during the three and six months ended June 30, 2015 and 2014:

 

   Three Months Ended June 30, 2015   Three Months Ended June 30, 2014 
(dollars in thousands)  Number
of Loans
   Pre-
Modification
Recorded
Balance
   Post-
Modification
Recorded
Balance*
   Number
of
Loans
   Pre-
Modification
Recorded
Balance
   Post-
Modification
Recorded
Balance*
 
Real estate - one to four family residential:                              
Closed end first and seconds   -   $-   $-    3   $512   $513 
Consumer   -    -    -    2    385    385 
Total   -   $-   $-    5   $897   $898 

 

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

 

   Six Months Ended June 30, 2015   Six Months Ended June 30, 2014 
(dollars in thousands)  Number
of Loans
   Pre-
Modification
Recorded
Balance
   Post-
Modification
Recorded
Balance*
   Number
of
Loans
   Pre-
Modification
Recorded
Balance
   Post-
Modification
Recorded
Balance*
 
Real estate - one to four family residential:                              
Closed end first and seconds   -   $-   $-    3   $512   $513 
Consumer   -    -    -    2    385    385 
Total   -   $-   $-    5   $897   $898 

 

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

 

The following tables present, by loan class, information related to the loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three and six months ended June 30, 2015 and 2014 and were modified as TDRs within the 12 months prior to default:

 

   Three Months Ended
June 30, 2015
   Three Months Ended
June 30, 2014
 
(dollars in thousands)  Number of
Loans
   Recorded
Balance
   Number of
Loans
   Recorded
Balance
 
Real estate - one to four family residential:                    
Closed end first and seconds   1   $68    -   $- 
Total   1   $68    -   $- 

 

   Six Months Ended
June 30, 2015
   Six Months Ended
June 30, 2014
 
(dollars in thousands)  Number
of Loans
   Recorded
Balance
   Number
of Loans
   Recorded
Balance
 
Real estate - one to four family residential:                    
Closed end first and seconds   1   $68    -   $- 
Total   1   $68    -   $- 

 

At June 30, 2015, there were no foreclosed residential real estate properties included in other real estate owned. However, at June 30, 2015, there were $514 thousand in residential real estate loans in the process of foreclosure.

 

 31 

 

  

Note 5. Deferred Income Taxes

 

As of June 30, 2015 and December 31, 2014, the Company had recorded net deferred income tax assets of approximately $16.9 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 June 30, 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.

 

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