Toggle SGML Header (+)


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

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 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 November 9, 2015 was 13,029,550.

 

 

 

 

EASTERN VIRGINIA BANKSHARES, INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014 2
     
  Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2015 and September 30, 2014 3
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended September 30, 2015 and September 30, 2014 4
     
  Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2015 and September 30, 2014 5
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Nine Months Ended September 30, 2015 and September 30, 2014 6
     
  Consolidated Statements of Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2015 and September 30, 2014 7
     
  Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2015 and September 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 50
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 73
     
Item 4.   Controls and Procedures 73
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 73
     
Item 1A. Risk Factors 74
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 74
     
Item 3. Defaults Upon Senior Securities 74
     
Item 4. Mine Safety Disclosures 74
     
Item 5. Other Information 74
     
Item 6. Exhibits 75
     
  SIGNATURES 76

 

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)

 

   September 30,
2015
   December 31,
2014*
 
Assets:          
Cash and due from banks  $12,598   $14,024 
Interest bearing deposits with banks   11,661    5,272 
Federal funds sold   244    334 
Securities available for sale, at fair value   229,608    214,011 
Securities held to maturity, at carrying value (fair value of $31,057 and $33,367, respectively)   29,964    32,163 
Restricted securities, at cost   8,261    7,533 
Loans, net of allowance for loan losses of $11,938 and $13,021, respectively   849,455    807,548 
Deferred income taxes, net   15,588    17,529 
Bank premises and equipment, net   28,416    27,433 
Accrued interest receivable   4,196    4,013 
Other real estate owned, net of valuation allowance of $2 and $76, respectively   233    1,838 
Goodwill   17,085    17,085 
Bank owned life insurance   24,942    24,463 
Other assets   10,136    8,726 
Total assets  $1,242,387   $1,181,972 
           
Liabilities and Shareholders' Equity:          
Liabilities          
Noninterest-bearing demand accounts  $185,633   $162,328 
Interest-bearing deposits   789,168    776,926 
Total deposits   974,801    939,254 
Federal funds purchased and repurchase agreements   7,911    14,885 
Short-term borrowings   97,975    76,818 
Junior subordinated debt   10,310    10,310 
Senior subordinated debt   19,029    - 
Accrued interest payable   860    316 
Other liabilities   6,558    6,115 
Total liabilities   1,117,444    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 13,029,550 and 12,978,934 including  138,092 and 104,142 nonvested shares in 2015 and 2014, respectively   25,783    25,750 
Surplus   48,884    47,339 
Retained earnings   43,138    39,290 
Warrant   -    1,481 
Accumulated other comprehensive loss, net   (3,342)   (4,066)
Total shareholders' equity   124,943    134,274 
Total liabilities and shareholders' equity  $1,242,387   $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 
   September 30, 
   2015   2014 
Interest and Dividend Income          
Interest and fees on loans  $10,443   $8,623 
Interest on investments:          
Taxable interest income   1,173    1,185 
Tax exempt interest income   250    180 
Dividends   114    91 
Interest on deposits with banks   4    5 
Total interest and dividend income   11,984    10,084 
           
Interest Expense          
Deposits   988    995 
Federal funds purchased and repurchase agreements   9    5 
Short-term borrowings   56    39 
Junior subordinated debt   83    82 
Senior subordinated debt   348    - 
Total interest expense   1,484    1,121 
Net interest income   10,500    8,963 
Provision for Loan Losses   -    - 
Net interest income after provision for loan losses   10,500    8,963 
Noninterest Income          
Service charges and fees on deposit accounts   745    825 
Debit/credit card fees   468    383 
Gain on sale of available for sale securities, net   71    7 
Gain on sale of held to maturity securities, net   10    - 
(Loss) on sale of bank premises and equipment   (11)   - 
Other operating income   441    390 
Total noninterest income   1,724    1,605 
Noninterest Expenses          
Salaries and employee benefits   5,394    4,652 
Occupancy and equipment expenses   1,396    1,286 
Telephone   285    207 
FDIC expense   196    121 
Consultant fees   92    250 
Collection, repossession and other real estate owned   209    49 
Marketing and advertising   355    181 
(Gain) loss on sale of other real estate owned   (8)   51 
Other operating expenses   1,598    1,831 
Total noninterest expenses   9,517    8,628 
Income before income taxes   2,707    1,940 
Income Tax Expense   697    658 
Net Income  $2,010   $1,282 
Effective dividend on Series A Preferred Stock   -    540 
Net income available to common shareholders  $2,010   $742 
           
Net income per common share: basic and diluted  $0.11   $0.04 

 

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

 

3 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

   Three Months Ended 
   September 30, 
   2015   2014 
Net income  $2,010   $1,282 
Other comprehensive income, net of tax:          
Unrealized securities gains arising during period (net of tax, $674 and $577, respectively)   1,304    1,120 
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $20 and $32, respectively)   40    63 
Less: reclassification adjustment for securities gains  included in net income (net of tax, $28 and $2, respectively)   (53)   (5)
Other comprehensive income   1,291    1,178 
Comprehensive income  $3,301   $2,460 

 

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)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Interest and Dividend Income          
Interest and fees on loans  $31,016   $25,735 
Interest on investments:          
Taxable interest income   3,560    4,030 
Tax exempt interest income   778    597 
Dividends   318    282 
Interest on deposits with banks   12    13 
Total interest and dividend income   35,684    30,657 
           
Interest Expense          
Deposits   2,973    2,960 
Federal funds purchased and repurchase agreements   40    15 
Short-term borrowings   135    110 
Junior subordinated debt   244    258 
Senior subordinated debt   612    - 
Total interest expense   4,004    3,343 
Net interest income   31,680    27,314 
Provision for Loan Losses   -    250 
Net interest income after provision for loan losses   31,680    27,064 
Noninterest Income          
Service charges and fees on deposit accounts   2,081    2,484 
Debit/credit card fees   1,273    1,070 
Gain on sale of available for sale securities, net   122    496 
Gain on sale of held to maturity securities, net   10    - 
(Loss) gain on sale of bank premises and equipment   (38)   5 
Other operating income   1,327    1,081 
Total noninterest income   4,775    5,136 
Noninterest Expenses          
Salaries and employee benefits   16,507    13,986 
Occupancy and equipment expenses   4,309    3,872 
Telephone   692    629 
FDIC expense   622    758 
Consultant fees   1,043    872 
Collection, repossession and other real estate owned   424    205 
Marketing and advertising   1,023    618 
Loss on sale of other real estate owned   18    66 
Impairment losses on other real estate owned   5    11 
Other operating expenses   5,040    4,308 
Total noninterest expenses   29,683    25,325 
Income before income taxes   6,772    6,875 
Income Tax Expense   1,646    1,942 
Net Income  $5,126   $4,933 
Effective dividend on Series A Preferred Stock   386    1,599 
Net income available to common shareholders  $4,740   $3,334 
           
Net income per common share: basic and diluted  $0.26   $0.19 

 

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)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Net income  $5,126   $4,933 
Other comprehensive income, net of tax:          
Unrealized securities gains arising during period (net of tax, $365 and $2,825, respectively)   707    5,484 
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $53 and $73, respectively)   104    143 
Less: reclassification adjustment for securities gains included in net income (net of tax, $45 and $168, respectively)   (87)   (328)
Other comprehensive income   724    5,299 
Comprehensive income  $5,850   $10,232 

 

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 Nine Months Ended September 30, 2015 and 2014

(dollars in thousands)

 

                       Accumulated     
       Preferred   Preferred           Other     
   Common   Stock   Stock       Retained   Comprehensive     
   Stock   Series A*   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                       4,933         4,933 
Other comprehensive income                            5,299    5,299 
Cash dividends - preferred, Series A                       (5,490)        (5,490)
Stock based compensation                  58              58 
Director stock grant   12              26              38 
Restricted common stock vested   30              (30)             - 
Balance, September 30, 2014  $23,620   $25,481   $10,480   $42,751   $39,024   $(3,569)  $137,787 
                                    
Balance, December 31, 2014  $25,750   $15,481   $10,480   $47,339   $39,290   $(4,066)  $134,274 
Net income                       5,126         5,126 
Other comprehensive income                            724    724 
Cash dividends - preferred, Series A                       (547)        (547)
Cash dividends - preferred, Series B                       (210)        (210)
Cash dividends - common ($0.04 per share)                       (521)        (521)
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                  175              175 
Director stock grant   12              26              38 
Restricted common stock vested   22              (22)             - 
Balance, September 30, 2015  $25,783   $-   $10,480   $48,884   $43,138   $(3,342)  $124,943 

 

*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)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Operating Activities:          
Net income  $5,126   $4,933 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   -    250 
Depreciation and amortization   1,884    1,581 
Stock based compensation   175    58 
Amortization of debt issuance costs   37    - 
Net accretion of certain acquisition related fair value adjustments   (423)   - 
Net amortization of premiums and accretion of discounts on investment securities, net   2,278    2,551 
(Gain) on sale of available for sale securities, net   (122)   (496)
(Gain) on sale of held to maturity securities, net   (10)   - 
Loss (gain) on sale of bank premises and equipment   38    (5)
Loss on sale of other real estate owned   18    66 
Impairment losses on other real estate owned   5    11 
Loss on LLC investments   275    70 
Earnings on life insurance policies   (479)   (415)
Net change in:          
Accrued interest receivable   (183)   36 
Other assets   (1,876)   (539)
Accrued interest payable   544    (1,026)
Other liabilities   2,012    1,677 
Net cash provided by operating activities   9,299    8,752 
Investing Activities:          
Purchase of securities available for sale   (98,453)   (17,837)
Purchase of securities held to maturity   (22)   - 
Purchase of restricted securities   (7,450)   (6,841)
Purchases of bank premises and equipment   (3,160)   (1,574)
Improvements to other real estate owned   (1)   - 
Net change in loans   (42,452)   (50,378)
Proceeds from:          
Maturities, calls, and paydowns of securities available for sale   18,449    14,899 
Maturities, calls, and paydowns of securities held to maturity   1,401    1,875 
Sale of securities available for sale   63,646    25,496 
Sale of securities held to maturity   531    - 
Sale of restricted securities   6,722    5,264 
Sale of bank premises and equipment   255    5 
Sale of other real estate owned   2,832    547 
Net cash used in investing activities   (57,702)   (28,544)
Financing Activities:          
Net change in:          
Demand, interest-bearing demand and savings deposits   37,693    (7,328)
Time deposits   (2,236)   (5,662)
Federal funds purchased and repurchase agreements   (6,974)   611 
Short-term borrowings   21,157    34,515 
Senior subordinated debt   20,000    - 
Debt issuance costs   (1,008)   - 
Director stock grant   38    38 
Repurchase of preferred stock   (14,000)   - 
Repurchase of common stock   (1)   - 
Repurchase of warrants   (115)   - 
Dividends paid - preferred, Series A   (547)   (5,490)
Dividends paid - preferred, Series B   (210)   - 
Dividends paid - common   (521)   - 
Net cash provided by financing activities   53,276    16,684 
Net increase (decrease) in cash and cash equivalents   4,873    (3,108)
Cash and cash equivalents, December 31   19,630    19,346 
Cash and cash equivalents, September 30  $24,503   $16,238 
Supplemental disclosure:          
Interest paid  $3,460   $4,369 
Income taxes paid  $78   $- 
Supplemental disclosure of noncash investing and financing activities:          
Unrealized gains on securities available for sale  $940   $7,813 
Loans transferred to other real estate owned  $(1,249)  $(309)

 

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”), which is unconsolidated, and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three and nine months ended September 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 three retail branches in the Company’s market area and access to office equipment at these locations during normal business hours. For its services, the Company receives fixed monthly compensation from Southern Trust Mortgage, LLC in the amount of $2 thousand, which is adjustable on a quarterly basis.

 

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.”

 

9 

 

 

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

 

In January 2015, the FASB issued ASU 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.

 

10 

 

 

In February 2015, the FASB issued ASU 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 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 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.

 

In May 2015, the FASB issued ASU 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.

 

In July 2015, the FASB issued ASU 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments within this ASU are in 3 parts. Among other things, Part I amendments designate contract value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans disclose: (a) individual investments that represent 5 percent or more of net assets available for benefits; and (b) the net appreciation or depreciation for investments by general type requirements for both participant-directed investments and nonparticipant-directed investments. Part III amendments provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts I and II of this ASU are effective on a retrospective basis and Part III is effective on a prospective basis, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact that ASU 2015-12 will have on its consolidated financial statements.

 

11 

 

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.” The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier to an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier to an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

 

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting).” On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the "S" section of the ASC. The Company does not expect the adoption of ASU 2015-15 to have a material impact on its consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its 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.

 

12 

 

 

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 

 

13 

 

 

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 $224 thousand and $550 thousand were included in the Company's actual consolidated statements of income for the nine months ended September 30, 2015 and 2014, respectively, but were excluded from the unaudited pro forma information listed below. No acquisition related expenses were included in the Company’s actual consolidated statements of income for the three months ended September 30, 2015. However, $550 thousand of acquisition related expenses were included in the Company’s actual consolidated statements of income for the three months ended September 30, 2014, 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   Nine Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
(dollars in thousands)  2015   2014   2015   2014 
Net interest income  $10,500   $10,190   $31,680   $30,744 
Net income   2,010    1,408    5,286    4,212 

 

Note 3. Investment Securities

 

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

 

(dollars in thousands)  September 30, 2015 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
Obligations of U.S. Government agencies  $9,404   $-   $99   $9,305 
SBA Pool securities   62,916    33    782    62,167 
Agency residential mortgage-backed securities   18,865    16    141    18,740 
Agency commercial mortgage-backed securities   14,372    -    43    14,329 
Agency CMO securities   52,555    366    452    52,469 
Non agency CMO securities   131    1    -    132 
State and political subdivisions   72,661    397    592    72,466 
Total  $230,904   $813   $2,109   $229,608 

 

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

 

14 

 

 

(dollars in thousands)  September 30, 2015 
       Net Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
   Cost   in AOCI*   Value   Gains   Losses   Value 
Held to Maturity:                              
Agency CMO securities  $11,662   $64   $11,598   $406   $-   $12,004 
State and political subdivisions   18,869    503    18,366    693    6    19,053 
Total  $30,531   $567   $29,964   $1,099   $6   $31,057 

 

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

 

(dollars in thousands)  December 31, 2014 
       Net 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 net unrealized holding 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 September 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. During the third quarter of 2015, the Company sold a state and political subdivisions security that was classified as “Held to Maturity” due to the significant deterioration in the issuer’s financial condition. The carrying value of this security was $522 thousand and a gain of $10 thousand was recognized as a result of the sale.

 

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

 

15 

 

 

The amortized cost, carrying value and estimated fair value of securities at September 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)  September 30, 2015 
Available for Sale:  Amortized Cost   Fair
Value
 
Due in one year or less  $2,282   $2,256 
Due after one year through five years   87,419    87,257 
Due after five years through ten years   130,273    129,263 
Due after ten years   10,930    10,832 
Total  $230,904   $229,608 

 

(dollars in thousands)  September 30, 2015 
Held to Maturity:  Carrying
Value
   Fair
Value
 
Due in one year or less  $-   $- 
Due after one year through five years   20,687    21,412 
Due after five years through ten years   8,530    8,888 
Due after ten years   747    757 
Total  $29,964   $31,057 

 

Proceeds from the sales of securities available for sale for the nine months ended September 30, 2015 and 2014 were $63.6 million and $25.5 million, respectively. Net realized gains on the sales of securities available for sale for the nine months ended September 30, 2015 and 2014 were $122 thousand and $496 thousand, respectively. Proceeds from the sales of securities held to maturity for the nine months ended September 30, 2015 were $531 thousand. Net realized gains on the sales of securities held to maturity for the nine months ended September 30, 2015 were $10 thousand. There were no sales of securities held to maturity during the nine months ended September 30, 2014. Proceeds from maturities, calls and paydowns of securities available for sale for the nine months ended September 30, 2015 and 2014 were $18.4 million and $14.9 million, respectively. Proceeds from maturities, calls and paydowns of securities held to maturity for the nine months ended September 30, 2015 and 2014 were $1.4 million and $1.9 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 $64.0 million and an aggregate fair value of $64.7 million were pledged at September 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 September 30, 2015, by duration of the period of the unrealized loss, are shown below:

 

   September 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  $4,875   $31   $4,429   $68   $9,304   $99 
SBA Pool securities   9,187    52    44,225    730    53,412    782 
Agency residential mortgage-backed securities   5,320    21    9,774    120    15,094    141 
Agency commercial mortgage-backed securities   12,304    43    -    -    12,304    43 
Agency CMO securities   21,877    279    6,645    173    28,522    452 
State and political subdivisions   36,982    433    5,727    165    42,709    598 
Total  $90,545   $859   $70,800   $1,256   $161,345   $2,115 

 

16 

 

 

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 September 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 in general throughout the first nine months of 2015, interest rates have fallen, specifically in the middle and long-end of the yield curve, which has caused bond prices to rise and thereby reduced the amount of unrealized losses at the end of the quarter. At September 30, 2015, there were 128 debt securities with fair values totaling $161.3 million considered temporarily impaired. Of these debt securities, 77 with fair values totaling $90.5 million were in an unrealized loss position of less than 12 months and 51 with fair values totaling $70.8 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 September 30, 2015 and no impairment has been recognized. At September 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 $5.2 million and $4.5 million at September 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 October 1, 2014, and ending September 30, 2015, the Company does not consider this investment to be other-than-temporarily impaired at September 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.

 

17 

 

 

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:

 

   September 30, 2015   December 31, 2014 
(dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial, industrial and agricultural  $84,941    9.86%  $85,119    10.37%
Real estate - one to four family residential:                    
Closed end first and seconds   237,318    27.55%   236,761    28.86%
Home equity lines   115,088    13.36%   110,100    13.42%
Total real estate - one to four family residential   352,406    40.91%   346,861    42.28%
Real estate - multifamily residential   28,110    3.26%   25,157    3.07%
Real estate - construction:                    
One to four family residential   19,936    2.31%   19,698    2.40%
Other construction, land development and other land   51,656    6.00%   35,591    4.34%
Total real estate - construction   71,592    8.31%   55,289    6.74%
Real estate - farmland   11,188    1.30%   9,471    1.15%
Real estate - non-farm, non-residential:                    
Owner occupied   177,215    20.58%   157,745    19.22%
Non-owner occupied   101,133    11.74%   104,827    12.77%
Total real estate - non-farm, non-residential   278,348    32.32%   262,572    31.99%
Consumer   20,075    2.33%   15,919    1.94%
Other   14,733    1.71%   20,181    2.46%
Total loans   861,393    100.00%   820,569    100.00%
Less allowance for loan losses   (11,938)        (13,021)     
Loans, net  $849,455        $807,548      

 

Deferred costs, net are included in the table above and totaled $1.6 million and $1.4 million for September 30, 2015 and December 31, 2014, respectively.

 

18 

 

 

The following table presents the aging of the recorded investment in past due loans as of September 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  $694   $106   $217   $1,017   $83,924   $84,941 
Real estate - one to four family residential:                              
Closed end first and seconds   5,591    1,974    4,240    11,805    225,513    237,318 
Home equity lines   392    147    318    857    114,231    115,088 
Total real estate - one to four family residential   5,983    2,121    4,558    12,662    339,744    352,406 
Real estate - multifamily residential   -    -    -    -    28,110    28,110 
Real estate - construction:                              
One to four family residential   194    10    68    272    19,664    19,936 
Other construction, land development and other land   -    -    -    -    51,656    51,656 
Total real estate - construction   194    10    68    272    71,320    71,592 
Real estate - farmland   -    107    -    107    11,081    11,188 
Real estate - non-farm, non-residential:                              
Owner occupied   86    -    568    654    176,561    177,215 
Non-owner occupied   131    -    676    807    100,326    101,133 
Total real estate - non-farm, non-residential   217    -    1,244    1,461    276,887    278,348 
Consumer   20    5    1    26    20,049    20,075 
Other   -    -    -    -    14,733    14,733 
Total loans  $7,108   $2,349   $6,088   $15,545   $845,848   $861,393 

 

*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.

 

19 

 

 

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

 

(dollars in thousands)  September 30, 2015   December 31, 2014 
Nonaccrual loans  $5,856   $6,622 
Loans past due 90 days and accruing interest   1,105    53 
Troubled debt restructurings (accruing)   15,426    15,223 

 

At September 30, 2015 and December 31, 2014, there were approximately $1.2 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.

 

20 

 

 

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

 

   September 30, 2015   December 31, 2014 
   Acquired           Acquired         
   Loans -   Acquired       Loans -   Acquired     
   Purchased   Loans -   Acquired   Purchased   Loans -   Acquired 
   Credit   Purchased   Loans -   Credit   Purchased   Loans - 
(dollars in thousands)  Impaired   Performing   Total   Impaired   Performing   Total 
Commercial, industrial and agricultural  $577   $5,514   $6,091   $1,023   $15,673   $16,696 
Real estate - one to four family residential:                              
Closed end first and seconds   1,105    7,468    8,573    1,374    6,475    7,849 
Home equity lines   32    9,898    9,930    33    11,858    11,891 
Total real estate - one to four family residential   1,137    17,366    18,503    1,407    18,333    19,740 
Real estate - multifamily residential   -    2,071    2,071    -    3,539    3,539 
Real estate - construction:                              
One to four family residential   -    679    679    -    3,206    3,206 
Other construction, land development and other land   280    1,660    1,940    79    3,674    3,753 
Total real estate - construction   280    2,339    2,619    79    6,880    6,959 
Real estate - farmland   -    -    -    -    -    - 
Real estate - non-farm, non-residential:                              
Owner occupied   4,313    17,413    21,726    1,841    21,037    22,878 
Non-owner occupied   1,622    11,003    12,625    3,472    20,762    24,234 
Total real estate - non-farm, non-residential   5,935    28,416    34,351    5,313    41,799    47,112 
Consumer   -    406    406    -    1,462    1,462 
Other   -    822    822    -    -    - 
Total loans  $7,929   $56,934   $64,863   $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 September 30, 2015 and December 31, 2014:

 

           Over 90 Days Past 
   Nonaccrual   Due and Accruing 
   September 30,   December 31,   September 30,   December 31, 
(dollars in thousands)  2015   2014   2015   2014 
Commercial, industrial and agricultural  $217   $334   $-   $53 
Real estate - one to four family residential:                    
Closed end first and seconds   3,814    3,364    1,105    - 
Home equity lines   493    564    -    - 
Total real estate - one to four family residential   4,307    3,928    1,105    - 
Real estate - construction:                    
One to four family residential   68    221    -    - 
Total real estate - construction   68    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   19    28    -    - 
Total loans  $5,856   $6,622   $1,105   $53 

 

21 

 

 

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.

 

22 

 

 

The following table presents commercial loans by credit quality indicator at September 30, 2015:

 

                       Acquired     
                       Loans -     
                       Purchased     
       Special               Credit     
(dollars in thousands)  Pass   Mention   Substandard   Doubtful   Impaired   Impaired   Total 
Commercial, industrial and agricultural  $81,611   $1,924   $496   $-   $333   $577   $84,941 
Real estate - multifamily residential   28,110    -    -    -    -    -    28,110 
Real estate - construction:                                   
One to four family residential   19,352    224    104    -    256    -    19,936 
Other construction, land development and other land   42,740    1,925    1,113    -    5,598    280    51,656 
Total real estate - construction   62,092    2,149    1,217    -    5,854    280    71,592 
Real estate - farmland   10,139    323    182    -    544    -    11,188 
Real estate - non-farm, non-residential:                                   
Owner occupied   151,805    12,465    2,221    -    6,411    4,313    177,215 
Non-owner occupied   86,102    616    1,053    -    11,740    1,622    101,133 
Total real estate - non-farm, non-residential   237,907    13,081    3,274    -    18,151    5,935    278,348 
Total commercial loans  $419,859   $17,477   $5,169   $-   $24,882   $6,792   $474,179 

 

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

 

                       Acquired     
                       Loans -     
                       Purchased     
       Special               Credit     
(dollars in thousands)  Pass   Mention   Substandard   Doubtful   Impaired   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 September 30, 2015 and December 31, 2014, the Company did not have any loans classified as Loss.

 

23 

 

 

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at September 30, 2015:

 

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $224,265   $13,053   $237,318 
Home equity lines   114,145    943    115,088 
Total real estate - one to four family residential   338,410    13,996    352,406 
Consumer   19,732    343    20,075 
Other   14,730    3    14,733 
Total consumer loans  $372,872   $14,342   $387,214 

 

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.

 

24 

 

 

The following table presents a rollforward of the Company’s allowance for loan losses for the nine months ended September 30, 2015:

 

   Beginning               Ending 
   Balance               Balance 
(dollars in thousands)  January 1, 2015   Charge-offs   Recoveries   Provision   September 30, 2015 
Commercial, industrial and agricultural  $1,168   $(181)  $39   $535   $1,561 
Real estate - one to four family residential:                         
Closed end first and seconds   1,884    (622)   87    469    1,818 
Home equity lines   1,678    (160)   7    (675)   850 
Total real estate - one to four family residential   3,562    (782)   94    (206)   2,668 
Real estate - multifamily residential   89    -    -    (6)   83 
Real estate - construction:                         
One to four family residential   235    (102)   3    210    346 
Other construction, land development and other land   2,670    -    1    45    2,716 
Total real estate - construction   2,905    (102)   4    255    3,062 
Real estate - farmland   144    -    -    141    285 
Real estate - non-farm, non-residential:                         
Owner occupied   2,416    (139)   1    (214)   2,064 
Non-owner occupied   1,908    -    -    (567)   1,341 
Total real estate - non-farm, non-residential   4,324    (139)   1    (781)   3,405 
Consumer   305    (34)   43    (12)   302 
Other   524    (52)   26    74    572 
Total  $13,021   $(1,290)  $207   $-   $11,938 

 

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

 

   Beginning               Ending 
   Balance               Balance 
(dollars in thousands)  January 1, 2014   Charge-offs   Recoveries   Provision   September 30, 2014 
Commercial, industrial and agricultural  $1,787   $(314)  $43   $(207)  $1,309 
Real estate - one to four family residential:                         
Closed end first and seconds   2,859    (414)   227    (427)   2,245 
Home equity lines   1,642    (129)   14    314    1,841 
Total real estate - one to four family residential   4,501    (543)   241    (113)   4,086 
Real estate - multifamily residential   79    -    -    21    100 
Real estate - construction:                         
One to four family residential   364    -    6    (15)   355 
Other construction, land development and other land   1,989    -    9    395    2,393 
Total real estate - construction   2,353    -    15    380    2,748 
Real estate - farmland   116    -    -    14    130 
Real estate - non-farm, non-residential:                         
Owner occupied   3,236    -    27    (939)   2,324 
Non-owner occupied   1,770    -    13    583    2,366 
Total real estate - non-farm, non-residential   5,006    -    40    (356)   4,690 
Consumer   387    (182)   80    21    306 
Other   538    (277)   21    490    772 
Total  $14,767   $(1,316)  $440   $250   $14,141 

 

25 

 

 

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 September 30, 2015:

 

   Allowance allocated to loans:   Total Loans: 
           Acquired               Acquired     
   Individually   Collectively   loans -       Individually   Collectively   loans -     
   evaluated   evaluated   purchased       evaluated   evaluated   purchased     
   for   for   credit       for   for   credit     
(dollars in thousands)  impairment   impairment   impaired   Total   impairment   impairment   impaired   Total 
Commercial, industrial and agricultural  $306   $1,255   $-   $1,561   $333   $84,031   $577   $84,941 
Real estate - one to four family residential:                                        
Closed end first and seconds   631    1,187    -    1,818    8,813    227,400    1,105    237,318 
Home equity lines   265    585    -    850    625    114,431    32    115,088 
Total real estate - one to four family residential   896    1,772    -    2,668    9,438    341,831    1,137    352,406 
Real estate - multifamily residential   -    83    -    83    -    28,110    -    28,110 
Real estate - construction:                                        
One to four family residential   116    230    -    346    256    19,680    -    19,936 
Other construction, land development and other land   1,299    1,417    -    2,716    5,598    45,778    280    51,656 
Total real estate - construction   1,415    1,647    -    3,062    5,854    65,458    280    71,592 
Real estate - farmland   215    70    -    285    544    10,644    -    11,188 
Real estate - non-farm, non-residential:                                        
Owner occupied   878    1,186    -    2,064    6,411    166,491    4,313    177,215 
Non-owner occupied   922    419    -    1,341    11,740    87,771    1,622    101,133 
Total real estate - non-farm, non-residential   1,800    1,605    -    3,405    18,151    254,262    5,935    278,348 
Consumer   84    218    -    302    342    19,733    -    20,075 
Other   -    572    -    572    3    14,730    -    14,733 
Total  $4,716   $7,222   $-   $11,938   $34,665   $818,799   $7,929   $861,393 

 

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 December 31, 2014:

 

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

 

27 

 

 

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2015:

 

           Recorded   Recorded             
       Unpaid   Investment   Investment       Average   Interest 
   Recorded   Principal   With No   With   Related   Recorded   Income 
(dollars in thousands)  Investment   Balance   Allowance   Allowance   Allowance   Investment   Recognized 
Commercial, industrial and agricultural  $333   $333   $-   $333   $306   $752   $17 
Real estate - one to four family residential:                                   
Closed end first and seconds   8,813    9,417    3,910    4,903    631    8,461    362 
Home equity lines   625    625    175    450    265    490    15 
Total real estate - one to four family residential   9,438    10,042    4,085    5,353    896    8,951    377 
Real estate - construction:                                   
One to four family residential   256    357    21    235    116    249    6 
Other construction, land development and other land   5,598    5,598    -    5,598    1,299    5,626    196 
Total real estate - construction   5,854    5,955    21    5,833    1,415    5,875    202 
Real estate - farmland   544    546    -    544    215    54    27 
Real estate - non-farm, non-residential:                                   
Owner occupied   6,411    6,764    3,531    2,880    878    9,812    221 
Non-owner occupied   11,740    11,740    6,573    5,167    922    11,200    410 
Total real estate - non-farm, non-residential   18,151    18,504    10,104    8,047    1,800    21,012    631 
Consumer   342    353    15    327    84    355    14 
Other   3    3    3    -    -    5    - 
Total loans*  $34,665   $35,736   $14,228   $20,437   $4,716   $37,004   $1,268 

 

*PCI loans are excluded from this table.

 

28 

 

 

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

 

           Recorded   Recorded             
       Unpaid   Investment   Investment       Average   Interest 
   Recorded   Principal   With No   With   Related   Recorded   Income 
(dollars in thousands)  Investment   Balance   Allowance   Allowance   Allowance   Investment   Recognized 
Commercial, industrial and agricultural  $1,451   $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 - farmland                  -    -    -    - 
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.

 

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 $8.9 million and $8.8 million and recorded carrying values of $7.9 million and $7.8 million at September 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 

 

29 

 

 

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   Nine months ended 
   September 30, 2015   September 30, 2015 
(dollars in thousands)  Accretable Yield   Accretable Yield 
Balance at beginning of period  $925   $1,131 
Accretion   (110)   (316)
Reclassification of nonaccretable difference due to improvement in expected cash flows   -    - 
Other changes, net   -    - 
Balance at end of period  $815   $815 

 

The following tables present, by loan class, information related to loans modified as TDRs during the nine months ended September 30, 2015 and 2014. No loans were modified as TDRs during the three months ended September 30, 2015 or 2014:

 

   Nine Months Ended September 30, 2015   Nine Months Ended September 30, 2014 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
(dollars in thousands)  Loans   Balance   Balance*   Loans   Balance   Balance* 
Real estate - one to four family residential:                              
Closed end first and seconds   -   $-   $-    2   $490   $489 
Consumer   -    -    -    2    385    377 
Total   -   $-   $-    4   $875   $866 

 

*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.

 

30 

 

 

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 nine months ended September 30, 2015 and 2014 and were modified as TDRs within the 12 months prior to default:

 

   Three Months Ended   Three Months Ended 
   September 30, 2015   September 30, 2014 
   Number of   Recorded   Number of   Recorded 
(dollars in thousands)  Loans   Balance   Loans   Balance 
Real estate - non-farm, non-residential:                    
Non-owner occupied   -   $-    1   $855 
Total   -   $-    1   $855 

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2015   September 30, 2014 
   Number of   Recorded   Number of   Recorded 
(dollars in thousands)  Loans   Balance   Loans   Balance 
Real estate - one to four family residential:                    
Closed end first and seconds   1   $68    -   $- 
Real estate - non-farm, non-residential:                    
Non-owner occupied   -    -    1    855 
Total   1   $68    1   $855 

 

At September 30, 2015, $166 thousand in foreclosed residential real estate properties were included in OREO, and $881 thousand in residential real estate loans were in the process of foreclosure.

 

31 

 

 

Note 5. Deferred Income Taxes

 

As of September 30, 2015 and December 31, 2014, the Company had recorded net deferred income tax assets of approximately $15.6 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 September 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

 

Bank premises and equipment are summarized as follows:

 

(dollars in thousands)  September 30, 2015   December 31, 2014 
Land and improvements  $6,824   $6,929 
Buildings and leasehold improvements   28,568    28,001 
Furniture, fixtures and equipment   20,613    21,719 
Construction in progress   1,162    553 
    57,167    57,202 
Less accumulated depreciation   (28,751)   (29,769)
Net balance  $28,416   $27,433 

 

Depreciation and amortization of bank premises and equipment for the nine months ended September 30, 2015 and 2014 amounted to $1.9 million and $1.6 million, respectively.

 

Note 7. Borrowings

 

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

 

32 

 

 

The tables below present selected information on federal funds purchased and repurchase agreements during the nine months ended September 30, 2015 and the year ended December 31, 2014:

 

Federal funds purchased        
(dollars in thousands)  September 30, 2015   December 31, 2014 
Balance outstanding at period end  $-   $- 
Maximum balance at any month end during the period  $2,440   $2,000 
Average balance for the period  $83   $174 
Weighted average rate for the period   0.72%   0.78%
Weighted average rate at period end   0.00%   0.00%

 

 

Repurchase agreements        
(dollars in thousands)  September 30, 2015   December 31, 2014 
Balance outstanding at period end  $7,911   $14,885 
Maximum balance at any month end during the period  $12,392   $14,885 
Average balance for the period  $9,028   $4,523 
Weighted average rate for the period   0.59%   0.59%
Weighted average rate at period end   0.48%   0.60%

 

Short-term borrowings. Short-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. Short-term advances from the FHLB at September 30, 2015 consisted of $98.0 million in fixed rate one month advances. Short-term advances from the FHLB at December 31, 2014 consisted of $16.4 million using a daily rate credit, which was due on demand, and $60.4 million in fixed rate one month advances.

 

The table below presents selected information on short-term borrowings during the nine months ended September 30, 2015 and the year ended December 31, 2014:

 

Short-term borrowings        
(dollars in thousands)  September 30, 2015   December 31, 2014 
Balance outstanding at period end  $97,975   $76,818 
Maximum balance at any month end during the period  $107,545   $82,930 
Average balance for the period  $86,389   $72,565 
Weighted average rate for the period   0.21%   0.21%
Weighted average rate at period end   0.23%   0.22%

 

Long-term borrowings. From time to time, the Company may obtain long-term borrowings from the FHLB, which consist of advances from the FHLB that are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. At September 30, 2015 and December 31, 2014, the Company had no long-term FHLB advances outstanding.

 

The Company’s line of credit with the FHLB can equal up to 30% of the Company’s gross assets or approximately $373.4 million at September 30, 2015. This line of credit totaled $226.3 million with approximately $115.5 million available at September 30, 2015. As of September 30, 2015 and December 31, 2014, loans with a carrying value of $309.9 million and $304.5 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value. Short-term borrowings outstanding under the FHLB line of credit were $98.0 million and $76.8 million as of September 30, 2015 and December 31, 2014, respectively.

 

33 

 

 

Note 8. Net Income Per Common Share

 

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

 

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

 

   Three Months Ended 
(dollars in thousands, except share and per share amounts)  September 30, 2015   September 30, 2014 
Basic Net Income Per Common Share          
Net income available to common shareholders  $2,010   $742 
Less: Net income allocated to participating securities, Series B Preferred Stock   577    227 
Net income allocated to common shareholders  $1,433   $515 
Weighted average common shares outstanding for basic net income per common share   13,029,550    11,868,301 
Basic net income per common share  $0.11   $0.04 
           
Diluted Net Income Per Common Share          
Net income available to common shareholders  $2,010   $742 
Weighted average common shares outstanding for basic net income per common share   13,029,550    11,868,301 
Effect of dilutive securities, stock options   -    - 
Effect of dilutive securities, Series B Preferred Stock   5,240,192    5,240,192 
Weighted average common shares outstanding for diluted net income per common share   18,269,742    17,108,493 
Diluted net income per common share  $0.11   $0.04 

 

   Nine Months Ended 
(dollars in thousands, except share and per share amounts)  September 30, 2015   September 30, 2014 
Basic Net Income Per Common Share          
Net income available to common shareholders  $4,740   $3,334 
Less: Net income allocated to participating securities, Series B Preferred Stock   1,361    1,021 
Net income allocated to common shareholders  $3,379   $2,313 
Weighted average common shares outstanding for basic net income per common share   13,013,005    11,864,366 
Basic net income per common share  $0.26   $0.19 
           
Diluted Net Income Per Common Share          
Net income available to common shareholders  $4,740   $3,334 
Weighted average common shares outstanding for basic net income per common share   13,013,005    11,864,366 
Effect of dilutive securities, stock options   -    - 
Effect of dilutive securities, Series B Preferred Stock   5,240,192    5,240,192 
Weighted average common shares outstanding for diluted net income per common share   18,253,197    17,104,558 
Diluted net income per common share  $0.26   $0.19 

 

34 

 

 

At September 30, 2015 and 2014, options to acquire 71,525 and 114,987 shares of common stock, respectively, were not included in computing diluted net income per common share because their effects were anti-dilutive.

 

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

 

Additionally, the impact of warrants to acquire shares of the Company’s common stock that were issued to the U.S. Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Capital Purchase Program is not included, as the warrants were anti-dilutive. As previously disclosed, these warrants were repurchased by the Company during May 2015. For additional information on preferred stock warrants, see Note 12 – Preferred Stock and Warrant.

 

The Company identified and corrected an immaterial error affecting the calculation of basic net income per common share for certain periods prior to the second quarter of 2015.  Previously, the Company did not consider the Series B Preferred Stock as a participating security when calculating basic net income per common share.  The Company will correct basic net income per common share for historical periods as such measures are disclosed in future public reports, filings and statements.  This immaterial error had no impact on previously reported diluted net income per common share for any historical periods.

 

Note 9. Stock Based Compensation Plans

 

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

 

On April 19, 2007, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative and to encourage such persons to have a greater financial interest in the Company. The 2007 Plan authorizes the Company to issue up to 400,000 additional shares of common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units. There were 225,642 shares still available to be granted as awards under the 2007 Plan as of September 30, 2015.

 

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

 

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

 

Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock option award. There were no stock options granted or exercised in the nine months ended September 30, 2015 and 2014. There was no remaining unrecognized compensation expense related to stock options.

 

35 

 

 

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

 

           Remaining   Aggregate 
   Options   Weighted Average   Contractual Life   Intrinsic Value 
   Outstanding   Exercise Price   (in years)   (in thousands) 
Stock options outstanding at December 31, 2014   110,487   $18.76           
Forfeited   (12,100)   18.91           
Expired   (26,862)   20.57           
Stock options outstanding at September 30, 2015   71,525   $18.06    1.87   $- 
                     
Stock options exercisable at September 30, 2015   71,525   $18.06    1.87   $- 

 

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

 

The table below summarizes information concerning stock options outstanding and exercisable at September 30, 2015:

 

Stock Options Outstanding and Exercisable
Exercise   Number   Weighted Average
Price   Outstanding   Remaining Term
$21.16    29,525   1.00 years
$19.25    21,500   2.00 years
$12.36    20,500   3.00 years
$18.06    71,525   1.87 years

 

On March 19, 2015, the Company granted 45,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2016.  The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2018 to the extent certain financial performance requirements for fiscal year 2017 are met. On October 15, 2014, the Company granted 42,500 shares of restricted stock under the 2007 Plan to its executive officers.  Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2015.  The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2017 to the extent certain financial performance requirements for fiscal year 2016 are met. On November 20, 2014, the Company granted 3,242 shares of restricted stock under the 2007 Plan to one of its executive officers.  All of these shares are subject to time vesting over a two year period, and generally vest fifty percent (50%) on the first and second anniversaries of the grant date. On November 18, 2013, the Company granted 38,000 shares of restricted stock under the 2007 Plan to its executive officers in the form of Troubled Asset Relief Program (“TARP”) compliant restricted stock awards. All of these shares are subject to time vesting over a five year period, and generally vest forty percent (40%) on the second anniversary of the grant date and twenty percent (20%) on each of the third, fourth and fifth anniversaries of the grant date. On June 29, 2012, the Company granted 34,000 shares of restricted stock under the 2007 Plan to its executive officers in the form of TARP compliant restricted stock awards. All of these shares are subject to time vesting over a five year period, and generally vest forty percent (40%) on the second anniversary of the grant date and twenty percent (20%) on each of the third, fourth and fifth anniversaries of the grant date.

 

For the three and nine months ended September 30, 2015, restricted stock compensation expense was $61 thousand and $175 thousand, respectively, compared to restricted stock compensation expense of $19 thousand and $58 thousand, respectively, for the same periods in 2014, and was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair market value of the Company’s common stock on the date the restricted shares were awarded, which was $6.28 per share for the March 19, 2015 awards, $6.10 per share for the October 15, 2014 awards, $6.17 per share for the November 20, 2014 award, $6.70 per share for the 2013 awards and $3.72 per share for the 2012 awards.

 

36 

 

 

A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of September 30, 2015, and changes during the nine months ended September 30, 2015, is presented below; the weighted average price is the weighted average fair value at the date of grant:

 

       Weighted-Average 
   Shares   Price 
Nonvested as of  December 31, 2014   104,142   $5.85 
Granted   45,000    6.28 
Vested   (11,050)   4.64 
Nonvested as of  September 30, 2015   138,092   $6.09 

 

At September 30, 2015, there was $554 thousand of total unrecognized compensation expense related to restricted stock awards. This unearned compensation is being amortized over the remaining vesting period for the time and performance based shares.

 

Note 10. Employee Benefit Plan – Pension

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(dollars in thousands)  2015   2014   2015   2014 
 Components of net periodic pension (benefit)                    
 Interest cost  $101   $112   $303   $335 
 Expected return on plan assets   (178)   (186)   (535)   (558)
 Amortization of prior service cost   2    2    7    6 
 Recognized net actuarial loss   26    -    80    - 
 Net settlement loss   29    20    82    20 
 Net periodic pension (benefit)  $(20)  $(52)  $(63)  $(197)

 

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

 

Note 11. Fair Value Measurements

 

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

 

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

 

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

 

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

 

37 

 

 

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any fair value option elections as of September 30, 2015.

 

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

 

Assets Measured at Fair Value on a Recurring Basis

 

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

 

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Assets Measured at Fair Value on a Recurring Basis at September 30, 2015 Using
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   September 30, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2015 
Assets                    
Securities available for sale                    
Obligations of U.S. Government agencies  $-   $9,305   $-   $9,305 
SBA Pool securities   -    62,167    -    62,167 
Agency residential mortgage-backed securities   -    18,740    -    18,740 
Agency commercial mortgage-backed securities   -    14,329    -    14,329 
Agency CMO securities   -    52,469    -    52,469 
Non agency CMO securities   -    132    -    132 
State and political subdivisions   -    72,466    -    72,466 
Total securities available for sale  $-   $229,608   $-   $229,608 

 

38 

 

 

Assets Measured at Fair Value on a Recurring Basis at December 31, 2014 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2014 
Assets                    
Securities available for sale                    
Obligations of U.S. Government agencies  $-   $14,569   $-   $14,569 
SBA Pool securities   -    74,799    -    74,799 
Agency residential mortgage-backed securities   -    28,629    -    28,629 
Agency CMO securities   -    39,215    -    39,215 
Non agency CMO securities   -    828    -    828 
State and political subdivisions   -    55,926    -    55,926 
FNMA and FHLMC preferred stock   -    45    -    45 
Total securities available for sale  $-   $214,011   $-   $214,011 

 

Assets Measured at Fair Value on a Non-Recurring Basis

 

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

 

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

 

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

 

Other Real Estate Owned. OREO is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a non-recurring basis. Any initial fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of income.

 

39 

 

 

The following table summarizes assets measured at fair value on a non-recurring basis as of September 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Assets Measured at Fair Value on a Non-Recurring Basis at September 30, 2015 Using 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   September 30, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2015 
Assets                    
Impaired loans  $-   $-   $15,721   $15,721 
Other real estate owned  $-   $-   $233   $233 

 

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

 

40 

 

 

The following table displays quantitative information about Level 3 Fair Value Measurements as of September 30, 2015 and December 31, 2014:

 

Quantitative information about Level 3 Fair Value Measurements at September 30, 2015
(dollars in thousands)  Fair Value   Valuation Technique(s)  Unobservable Input  Range
(Weighted
Average)
Assets              
Impaired loans  $15,721   Discounted appraised value  Selling cost  0% - 42% (13%)
           Discount for lack of marketability and age of appraisal  0% - 25% (7%)
               
Other real estate owned  $233   Discounted appraised value  Selling cost  10% (10%)
           Discount for lack of marketability and age of appraisal  0% - 12% (8%)

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

41 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of guarantees of credit card accounts previously sold is based on the estimated cost to settle the obligations with the counterparty at the reporting date. At September 30, 2015 and December 31, 2014, the fair value of loan commitments, standby letters of credit and credit card guarantees are not significant and are not included in the table below.

 

42 

 

 

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

 

       Fair Value Measurements at September 30, 2015 Using 
       Quoted Prices in
Active
   Significant Other   Significant     
       Markets for   Observable   Unobservable   Balance at 
   Carrying   Identical Assets   Inputs   Inputs   September 30, 
(dollars in thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   2015 
Assets:                         
Cash and short-term investments  $12,598   $12,598   $-   $-   $12,598 
Interest bearing deposits with banks   11,661    11,661    -    -    11,661 
Securities available for sale   229,608    -    229,608    -    229,608 
Securities held to maturity   29,964    -    31,057    -    31,057 
Restricted securities   8,261    -    8,261    -    8,261 
Loans, net   849,455    -    -    852,925    852,925 
Bank owned life insurance   24,942    -    24,942    -    24,942 
Accrued interest receivable   4,196    -    4,196    -    4,196 
Total  $1,170,685   $24,259   $298,064   $852,925   $1,175,248 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $185,633   $185,633   $-   $-   $185,633 
Interest-bearing deposits   789,168    -    744,908    -    744,908 
Short-term borrowings*   105,886    105,886    -    -    105,886 
Junior subordinated debt   10,310    -    9,644    -    9,644 
Senior subordinated debt**   19,029    -    19,872    -    19,872 
Accrued interest payable   860    -    860    -    860 
Total  $1,110,886   $291,519   $775,284   $-   $1,066,803 

 

*Includes federal funds purchased and repurchase agreements.

**Net of unamortized debt issuance costs of $971.

 

43 

 

 

       Fair Value Measurements at December 31, 2014 Using 
       Quoted Prices in
Active
   Significant Other   Significant     
       Markets for   Observable   Unobservable   Balance at 
   Carrying   Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   2014 
Assets:                         
Cash and short-term investments  $14,024   $14,024   $-   $-   $14,024 
Interest bearing deposits with banks   5,272    5,272    -    -    5,272 
Securities available for sale   214,011    -    214,011    -    214,011 
Securities held to maturity   32,163    -    33,367    -    33,367 
Restricted securities   7,533    -    7,533    -    7,533 
Loans, net   807,548    -    -    812,429    812,429 
Bank owned life insurance   24,463    -    24,463    -    24,463 
Accrued interest receivable   4,013    -    4,013    -    4,013 
Total  $1,109,027   $19,296   $283,387   $812,429   $1,115,112 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $162,328   $162,328   $-   $-   $162,328 
Interest-bearing deposits   776,926    -    721,240    -    721,240 
Short-term borrowings*   91,703    91,703    -    -    91,703 
Junior subordinated debt   10,310    -    9,100    -    9,100 
Accrued interest payable   316    -    316    -    316 
Total  $1,041,583   $254,031   $730,656   $-   $984,687 

 

*Includes federal funds purchased and repurchase agreements.

 

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

 

Note 12. Preferred Stock and Warrant

 

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

 

On May 13, 2015, the Company repurchased from the Treasury the Warrant for an aggregate repurchase price of $115 thousand, based on the fair value of the Warrant as agreed upon by the Company and the Treasury. Following the repurchase of the Warrant, the Treasury has no remaining equity investment in the Company. Additionally, on June 15, 2015, the Company redeemed the remaining $9.0 million of its Series A Preferred Stock.

 

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

 

44 

 

 

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

 

 

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

 

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

 

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

 

Note 13. Junior and Senior Subordinated Debt

 

On September 17, 2003, $10 million of trust preferred securities were placed through EVB Statutory Trust I in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”) issued by the Parent. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.95%. As of September 30, 2015 and December 31, 2014, the interest rate was 3.28% and 3.21%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Parent has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt and other related documents. The Parent’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Parent.

 

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At September 30, 2015 and December 31, 2014, all of the trust preferred securities qualified as Tier 1 capital.

 

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

 

45 

 

 

From June 2011 to March 2014, the Company deferred its regularly scheduled interest payments on its outstanding Junior Subordinated Debt relating to its trust preferred securities due to prohibitions on such payments under provisions of regulatory agreements with the Company’s and the Bank’s federal and state banking regulators. On June 17, 2014, the Company paid all current and deferred interest on these outstanding Junior Subordinated Debt, and the Company has not deferred any subsequent interest payments through September 30, 2015.

 

On April 22, 2015, the Company entered in a Senior Subordinated Note Purchase Agreement with certain institutional accredited investors pursuant to which the Company sold $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 ("Senior Subordinated Debt") to the investors at a price equal to 100% of the aggregate principal amount of the Senior Subordinated Debt. The Senior Subordinated Debt bears interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the Senior Subordinated Debt will bear interest at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus 502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2020. The Company may, at its option, redeem, in whole or in part, the Senior Subordinated Debt as early as May 1, 2020, and any partial redemption would be made pro rata among all of the holders. At September 30, 2015, all of the Senior Subordinated Debt qualified as Tier 2 capital. At September 30, 2015, the remaining unamortized debt issuance costs related to the Senior Subordinated Debt totaled $971 thousand.

 

Note 14. Capital Requirements

 

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

 

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

 

As of September 30, 2015, the most recent notification from the Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, common equity Tier 1 (“CET1”) risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The capital ratios of the Company and the Bank as of September 30, 2015 and December 31, 2014, presented with related minimum regulatory guidelines, is as follows:

 

46 

 

 

           Minimum To Be 
As of September 30, 2015          Well-Capitalized 
       Minimum   Under Prompt 
       Capital   Corrective Action 
   Actual Capital   Requirements   Provisions 
CET1 to risk weighted assets:               
Company   9.74%   4.50%   N/A 
Bank   12.87%   4.50%   6.50%
                
Tier 1 capital to risk weighted assets:               
Company   12.61%   6.00%   N/A 
Bank   12.87%   6.00%   8.00%
                
Total capital to risk weighted assets:               
Company   16.16%   8.00%   N/A 
Bank   14.13%   8.00%   10.00%
                
Tier 1 capital to average assets:               
Company   9.15%   4.00%   N/A 
Bank   9.34%   4.00%   5.00%

 

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

 

47 

 

 

Note 15. Low Income Housing Tax Credits

 

The Company has invested in four separate housing equity funds at September 30, 2015. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were $2.9 million and $2.2 million at September 30, 2015 and December 31, 2014, respectively. These investments and related tax benefits have expected terms through 2032, with the majority maturing by 2027. Tax credits and other tax benefits recognized related to these investments during the nine months ended September 30, 2015 and 2014 were $368 thousand and $285 thousand, respectively. Total projected tax credits to be received for 2015 are $335 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $1.0 million and $35 thousand at September 30, 2015 and December 31, 2014, respectively, and are included in other liabilities on the consolidated balance sheets.

 

Note 16. Accumulated Other Comprehensive Loss

 

The changes in accumulated other comprehensive loss for the nine months ended September 30, 2015 and 2014 are summarized as follows:

 

(dollars in thousands)  Unrealized
Securities Gains
(Losses)
   Adjustments
Related to
Pension
Plan
   Accumulated Other
Comprehensive
Loss
 
Balance at December 31, 2014  $(1,954)  $(2,112)  $(4,066)
Other comprehensive income before reclassification and amortization   707    -    707 
Reclassification adjustment for gains included in net income   (87)   -    (87)
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity   104    -    104 
Net current period other comprehensive income   724    -    724 
Balance at September 30, 2015  $(1,230)  $(2,112)  $(3,342)
                
Balance at December 31, 2013  $(8,396)  $(472)  $(8,868)
Other comprehensive income before reclassification and amortization   5,484    -    5,484 
Reclassification adjustment for gains included in net income   (328)   -    (328)
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity   143    -    143 
Net current period other comprehensive income   5,299    -    5,299 
Balance at September 30, 2014  $(3,097)  $(472)  $(3,569)

 

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

 

48 

 

 

During the three and nine months ended September 30, 2015 and 2014, the Company reported gains on the sale of available for sale securities and amortization of unrealized losses on securities transferred from available for sale to held to maturity as shown in the following table:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(dollars in thousands)  2015   2014   2015   2014 
Gains on sale of available for sale securities  $81   $7   $132   $496 
Less: tax effect   (28)   (2)   (45)   (168)
Net gains on the sale of available for sale securities  $53   $5   $87   $328 
                     
Amortization of unrealized losses on securities transferred from available for sale to held to maturity  $(60)  $(95)  $(157)  $(216)
Less: tax effect   20    32    53    73 
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity  $(40)  $(63)  $(104)  $(143)

 

49 

 

 

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

 

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

 

Internet Access to Corporate Documents

 

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

 

Forward Looking Statements

 

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

 

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

 

¨factors that adversely affect our strategic and business initiatives, including, without limitation, changes in the economic or business conditions in the Company’s markets;
¨our ability and efforts to assess, manage and improve our asset quality;
¨the strength of the economy in our target market area, as well as general economic, market, political, or business factors;
¨changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers or issuers;
¨concentrations in segments of the loan portfolio or declines in real estate values in the Company’s markets;
¨the effects of our adjustments to the composition of our investment portfolio;
¨the strength of the Company’s counterparties;
¨an insufficient allowance for loan losses;
¨our ability to meet the capital requirements of our regulatory agencies;
¨changes in laws, regulations and the policies of federal or state regulators and agencies, the implementation of the Basel III capital framework and for calculating risk-weighted assets;
¨changes in the interest rates affecting our deposits and loans;
¨the loss of any of our key employees;
¨failure, interruption or breach of any of the Company’s communication or information systems, including those provided by external vendors;
¨our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth;
¨future mergers or acquisitions, if any;

 

50 

 

 

¨changes in government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan products and financial services;
¨our ability to maintain internal control over financial reporting;
¨our ability to realize our deferred tax assets, including in the event we experience an ownership change as defined by Section 382 of the Code;
¨our ability to raise capital as needed by our business;
¨our reliance on secondary sources, such as FHLB advances, sales of securities and loans and federal funds lines of credit from correspondent banks to meet our liquidity needs; and
¨other circumstances, many of which are beyond our control.

 

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

 

Critical Accounting Policies

 

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

 

Allowance for Loan Losses

 

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

 

Impairment of Loans

 

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

 

Loans Acquired in a Business Combination

 

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

 

51 

 

 

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

 

Impairment of Securities

 

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

 

Other Real Estate Owned

 

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

 

Goodwill

 

With the adoption of ASU 2011-08, “Intangible-Goodwill and Other-Testing Goodwill for Impairment,” the Company is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill, it determines that it is more likely than not that the fair value of goodwill is less than its carrying amount. If the likelihood of impairment is more than 50 percent, the Company must perform a test for impairment and we may be required to record impairment charges. In assessing the recoverability of the Company’s goodwill, the Company must make assumptions in order to determine the fair value of the respective assets. Major assumptions used in the impairment analysis were discounted cash flows, merger and acquisition transaction values (including as compared to tangible book value), and stock market capitalization. The Company chose to bypass the preliminary assessment of qualitative impairment factors and completed its annual goodwill impairment test during the fourth quarter of 2014 through the use of an independent third party specialist and determined there was no impairment to be recognized in 2014. If the underlying estimates and related assumptions change in the future, the Company may be required to record impairment charges.

 

52 

 

 

Retirement Plan

 

The Company has historically maintained a defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended on February 28, 2011 to freeze the plan with no additional contributions for grandfathered participan