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

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of August 5, 2016 was 13,100,832.

 

   

 

EASTERN VIRGINIA BANKSHARES, INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 2
     
  Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2016 and June 30, 2015 3
     
  Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months Ended June 30, 2016 and June 30, 2015 4
     
  Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2016 and June 30, 2015 5
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Six Months Ended June 30, 2016 and June 30, 2015 6
     
  Consolidated Statements of Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2016 and June 30, 2015 7
     
  Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2016 and June 30, 2015 8
     
  Notes to the Interim Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 65
     
Item 4. Controls and Procedures 65
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 66
     
Item 1A. Risk Factors 66
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66
     
Item 3. Defaults Upon Senior Securities 66
     
Item 4. Mine Safety Disclosures 66
     
Item 5. Other Information 66
     
Item 6. Exhibits 67
     
SIGNATURES 68

 

 1 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

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

 

   June 30, 2016   December 31,
2015*
 
   (unaudited)     
Assets:          
Cash and due from banks  $13,706   $13,451 
Interest bearing deposits with banks   13,114    18,304 
Federal funds sold   52    200 
Securities available for sale, at fair value   231,497    230,943 
Securities held to maturity, at carrying value (fair value of $30,460 and $30,575, respectively)   29,155    29,698 
Restricted securities, at cost   9,412    8,959 
Loans, net of allowance for loan losses of $10,467 and $11,327, respectively   898,955    869,451 
Deferred income taxes, net   12,016    15,060 
Bank premises and equipment, net   27,948    27,836 
Accrued interest receivable   4,139    4,059 
Other real estate owned, net of valuation allowance of $2 and $2, respectively   2,280    520 
Goodwill   17,085    17,085 
Bank owned life insurance   25,416    25,099 
Other assets   10,182    9,719 
Total assets  $1,294,957   $1,270,384 
           
Liabilities and Shareholders' Equity:          
Liabilities          
Noninterest-bearing demand accounts  $191,945   $174,071 
Interest-bearing deposits   806,642    814,648 
Total deposits   998,587    988,719 
Federal funds purchased and repurchase agreements   6,701    5,015 
Short-term borrowings   120,905    114,413 
Junior subordinated debt   10,310    10,310 
Senior subordinated debt   19,072    19,022 
Accrued interest payable   680    590 
Other liabilities   6,010    6,040 
Total liabilities   1,162,265    1,144,109 
           
Shareholders' Equity          
Preferred stock, $2 par value per share, authorized 10,000,000 shares, issued and outstanding:          
Series B; 5,240,192 shares non-voting mandatorily convertible non-cumulative preferred   10,480    10,480 
Common stock, $2 par value per share, authorized 50,000,000 shares, issued and outstanding          
13,101,448 and 13,029,550 including 177,221 and 121,271 nonvested shares in 2016 and 2015, respectively   25,848    25,817 
Surplus   49,047    48,923 
Retained earnings   48,346    44,941 
Accumulated other comprehensive loss, net   (1,029)   (3,886)
Total shareholders' equity   132,692    126,275 
Total liabilities and shareholders' equity  $1,294,957   $1,270,384 

 

*Derived from audited consolidated financial statements.

 

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

 

 2 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

 

   Three Months Ended 
   June 30, 
   2016   2015 
Interest and Dividend Income          
Interest and fees on loans  $10,996   $10,382 
Interest on investments:          
Taxable interest income   1,463    1,185 
Tax exempt interest income   23    268 
Dividends   127    96 
Interest on deposits with banks   10    4 
Total interest and dividend income   12,619    11,935 
           
Interest Expense          
Deposits   1,086    934 
Federal funds purchased and repurchase agreements   7    13 
Short-term borrowings   118    37 
Junior subordinated debt   92    81 
Senior subordinated debt   351    264 
Total interest expense   1,654    1,329 
Net interest income   10,965    10,606 
Provision for Loan Losses   -    - 
Net interest income after provision for loan losses   10,965    10,606 
Noninterest Income          
Service charges and fees on deposit accounts   728    673 
Debit card/ATM fees   448    442 
Gain on sale of available for sale securities, net   172    26 
(Loss) on sale of bank premises and equipment   (5)   (30)
Earnings on bank owned life insurance policies   159    168 
Other operating income   170    253 
Total noninterest income   1,672    1,532 
Noninterest Expenses          
Salaries and employee benefits   5,486    5,523 
Occupancy and equipment expenses   1,340    1,392 
Telephone   209    210 
FDIC expense   204    254 
Consultant fees   232    546 
Collection, repossession and other real estate owned   167    126 
Marketing and advertising   477    346 
Loss (gain) on sale of other real estate owned   2    (6)
Merger and merger related expenses   -    3 
Other operating expenses   1,840    1,805 
Total noninterest expenses   9,957    10,199 
Income before income taxes   2,680    1,939 
Income Tax Expense   770    432 
Net Income  $1,910   $1,507 
Effective dividend on Series A Preferred Stock   -    166 
Net income available to common shareholders  $1,910   $1,341 
           
Net income per common share: basic and diluted  $0.11   $0.07 

 

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

 

 3 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(dollars in thousands)

 

   Three Months Ended 
   June 30, 
   2016   2015 
Net income  $1,910   $1,507 
Other comprehensive income (loss), net of tax:          
Unrealized securities gains (losses) arising during period (net of tax, $323 and ($1,066), respectively)   626    (2,070)
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $9 and $19, respectively)   20    38 
Less: reclassification adjustment for securities gains  included in net income (net of tax, $58 and $8, respectively)   (114)   (18)
Other comprehensive income (loss)   532    (2,050)
Comprehensive income (loss)  $2,442   $(543)

 

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

 

 4 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

 

   Six Months Ended 
   June 30, 
   2016   2015 
Interest and Dividend Income          
Interest and fees on loans  $21,949   $20,573 
Interest on investments:          
Taxable interest income   2,969    2,387 
Tax exempt interest income   93    528 
Dividends   242    204 
Interest on deposits with banks   20    8 
Total interest and dividend income   25,273    23,700 
           
Interest Expense          
Deposits   2,157    1,985 
Federal funds purchased and repurchase agreements   14    31 
Short-term borrowings   240    79 
Junior subordinated debt   180    161 
Senior subordinated debt   702    264 
Total interest expense   3,293    2,520 
Net interest income   21,980    21,180 
Provision for Loan Losses   17    - 
Net interest income after provision for loan losses   21,963    21,180 
Noninterest Income          
   Service charges and fees on deposit accounts   1,467    1,336 
   Debit card/ATM fees   845    805 
   Gain on sale of available for sale securities, net   237    51 
   (Loss) on sale of bank premises and equipment   (9)   (27)
Earnings on bank owned life insurance policies   318    323 
   Other operating income   365    563 
       Total noninterest income   3,223    3,051 
Noninterest Expenses          
Salaries and employee benefits   10,734    11,011 
Occupancy and equipment expenses   2,770    2,906 
Telephone   417    407 
FDIC expense   407    426 
Consultant fees   454    889 
Collection, repossession and other real estate owned   332    215 
Marketing and advertising   938    663 
Loss on sale of other real estate owned   3    26 
Impairment losses on other real estate owned   -    5 
Merger and merger related expenses   -    224 
Other operating expenses   3,321    3,394 
Total noninterest expenses   19,376    20,166 
Income before income taxes   5,810    4,065 
Income Tax Expense   1,673    949 
Net Income  $4,137   $3,116 
Effective dividend on Series A Preferred Stock   -    386 
Net income available to common shareholders  $4,137   $2,730 
           
Net income per common share: basic and diluted  $0.23   $0.15 

 

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

 

 5 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

   Six Months Ended 
   June 30, 
   2016   2015 
Net income  $4,137   $3,116 
Other comprehensive income (loss), net of tax:          
Unrealized securities gains (losses) arising during period (net of tax, $1,532 and ($308), respectively)   2,976    (597)
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $19 and $33, respectively)   38    64 
Less: reclassification adjustment for securities gains included in net income (net of tax, $80 and $17, respectively)   (157)   (34)
Other comprehensive income (loss)   2,857    (567)
Comprehensive income  $6,994   $2,549 

 

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

 

 6 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Six Months Ended June 30, 2016 and 2015

(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, 2014  $25,750   $15,481   $10,480   $47,339   $39,290   $(4,066)  $134,274 
Net income   -    -    -    -    3,116    -    3,116 
Other comprehensive (loss)   -    -    -    -    -    (567)   (567)
Cash dividends - preferred stock, Series A   -    -    -    -    (547)   -    (547)
Cash dividends - preferred stock, Series B   -    -    -    -    (105)   -    (105)
Cash dividends - common stock ($0.02 per share)   -    -    -    -    (260)   -    (260)
Repurchase of preferred stock, Series A   -    (14,000)   -    -    -    -    (14,000)
Repurchase of common stock   (1)   -    -    -    -    -    (1)
Repurchase of warrants   -    (1,481)   -    1,366    -    -    (115)
Stock based compensation   -    -    -    114    -    -    114 
Restricted common stock vested   22    -    -    (22)   -    -    - 
Balance, June 30, 2015  $25,771   $-   $10,480   $48,797   $41,494   $(4,633)  $121,909 
                                    
Balance, December 31, 2015  $25,817   $-   $10,480   $48,923   $44,941   $(3,886)  $126,275 
Net income   -    -    -    -    4,137    -    4,137 
Other comprehensive income   -    -    -    -    -    2,857    2,857 
Cash dividends - preferred stock, Series B   -    -    -    -    (210)   -    (210)
Cash dividends - common stock ($0.04 per share)   -    -    -    -    (522)   -    (522)
Repurchase of common stock   (3)   -    -    (6)   -    -    (9)
Stock based compensation   -    -    -    152    -    -    152 
Director stock grant   3    -    -    9    -    -    12 
Restricted common stock vested   31    -    -    (31)   -    -    - 
Balance, June 30, 2016  $25,848   $-   $10,480   $49,047   $48,346   $(1,029)  $132,692 

 

*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 Preferred Stock Series A and the discount on such preferred stock.

 

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

 

 7 

 

 

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

 

   Six Months Ended 
   June 30, 
   2016   2015 
Operating Activities:          
Net income  $4,137   $3,116 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   17    - 
Depreciation and amortization   1,257    1,250 
Stock based compensation   152    114 
Deferred taxes   1,573    885 
Amortization of debt issuance costs   52    15 
Net accretion of certain acquisition related fair value adjustments   (118)   (402)
Net amortization of premiums and accretion of discounts on investment securities, net   1,483    1,506 
(Gain) on sale of available for sale securities, net   (237)   (51)
Loss on sale of bank premises and equipment   9    27 
Loss on sale of other real estate owned   3    26 
Impairment losses on other real estate owned   -    5 
Loss on LLC investments   136    145 
Earnings on bank owned life insurance policies   (318)   (323)
Net change in:          
Accrued interest receivable   (80)   23 
Other assets   (709)   (1,942)
Accrued interest payable   90    214 
Other liabilities   (30)   871 
Net cash provided by operating activities   7,417    5,479 
Investing Activities:          
Purchase of securities available for sale   (48,790)   (48,580)
Purchase of securities held to maturity   -    (22)
Purchase of restricted securities   (5,636)   (4,347)
Purchases of bank premises and equipment   (1,378)   (2,727)
Purchases of loans   (5,825)   (11,651)
Improvements to other real estate owned   (12)   (1)
Net change in loans   (25,775)   (9,712)
Proceeds from:          
Maturities, calls, and paydowns of securities available for sale   14,602    12,537 
Maturities, calls, and paydowns of securities held to maturity   381    1,351 
Sale of securities available for sale   36,878    19,970 
Sale of restricted securities   5,183    3,762 
Sale of bank premises and equipment   -    255 
Sale of other real estate owned   573    1,548 
Net cash (used in) investing activities   (29,799)   (37,617)
Financing Activities:          
Net change in:          
Demand, interest-bearing demand and savings deposits   8,660    33,650 
Time deposits   1,192    (15,747)
Federal funds purchased and repurchase agreements   1,686    (6,396)
Short-term borrowings   6,492    17,787 
Senior subordinated debt   -    20,000 
Debt issuance costs   (2)   (875)
Director stock grant   12    - 
Repurchase of preferred stock, Series A   -    (14,000)
Repurchase of common stock   (9)   (1)
Repurchase of warrants   -    (115)
Dividends paid - preferred stock, Series A   -    (547)
Dividends paid - preferred stock, Series B   (210)   (105)
Dividends paid - common stock   (522)   (260)
Net cash provided by financing activities   17,299    33,391 
Net (decrease) increase in cash and cash equivalents   (5,083)   1,253 
Cash and cash equivalents, December 31   31,955    19,630 
Cash and cash equivalents, June 30  $26,872   $20,883 
Supplemental disclosure:          
Interest paid  $3,203   $2,306 
Income taxes paid  $100   $64 
Supplemental disclosure of noncash investing and financing activities:          
Unrealized gains (losses) on securities available for sale  $4,271   $(956)
Loans transferred to other real estate owned  $(2,324)  $(1,084)

 

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 “Company”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), which is unconsolidated, and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015 (the “2015 Form 10-K”).

 

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

 

Nature of Operations

 

Eastern Virginia Bankshares, Inc. is a bank holding company 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 Company 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 Board”).

 

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 2.87% ownership interest in Bankers Insurance, LLC, which primarily sells insurance products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has a 100% ownership interest in Dunston Hall LLC, 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 2016 presentation. These reclassifications have no effect on previously reported net income.

 

Recent Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

 

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

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income (loss) at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

 

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During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: a) income tax consequences; b) classification of awards as either equity or liabilities; and c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

 

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

 

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 Hampton, Newport News and Williamsburg, Virginia. Additional information regarding this acquisition is included in the Company’s 2015 Form 10-K.

 

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed from VCB had the following impact on the consolidated statements of income during the three and six months ended June 30, 2016 and 2015:

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
(dollars in thousands)  2016   2015   2016   2015 
Loans(1)  $122   $318   $245   $596 
Core deposit intangible(2)   (54)   (63)   (111)   (129)
Time deposits(3)   (6)   (31)   (16)   (65)
Net impact to income before income taxes  $62   $224   $118   $402 

 

(1)Loan discount accretion is included in the “Interest and fees on loans” section of “Interest and Dividend Income” in the consolidated statements of income.
(2)Core deposit intangible premium amortization is included in the “Other operating expenses” section of “Noninterest Expenses” in the consolidated statements of income.
(3)Time deposit premium amortization is included in the “Deposits” section of “Interest Expense” in the consolidated statements of income.

 

 11 

 

 

Note 3. Investment Securities

 

The amortized cost and estimated fair value, with gross unrealized gains and losses, of investment securities at June 30, 2016 and December 31, 2015 were as follows:

 

(dollars in thousands)  June 30, 2016 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
Obligations of U.S. Government agencies  $5,998   $35   $8   $6,025 
SBA Pool securities   61,168    248    302    61,114 
Agency residential mortgage-backed securities   29,765    45    130    29,680 
Agency commercial mortgage-backed securities   23,198    502    -    23,700 
Agency CMO securities   51,178    318    265    51,231 
Non agency CMO securities   51    1    -    52 
State and political subdivisions   56,483    1,268    56    57,695 
Corporate securities   2,000    -    -    2,000 
Total  $229,841   $2,417   $761   $231,497 

 

(dollars in thousands)  December 31, 2015 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
Obligations of U.S. Government agencies  $9,404   $-   $142   $9,262 
SBA Pool securities   64,866    25    1,065    63,826 
Agency residential mortgage-backed securities   24,250    7    354    23,903 
Agency commercial mortgage-backed securities   18,503    -    188    18,315 
Agency CMO securities   52,870    130    829    52,171 
Non agency CMO securities*   61    -    -    61 
State and political subdivisions   61,604    303    502    61,405 
Corporate securities   2,000    -    -    2,000 
Total  $233,558   $465   $3,080   $230,943 

 

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

 

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(dollars in thousands)  June 30, 2016 
       Net Unrealized                 
       Losses       Gross   Gross     
   Amortized   Recorded   Carrying   Unrealized   Unrealized   Fair 
   Cost   in AOCI*   Value   Gains   Losses   Value 
Held to Maturity:                              
Agency CMO securities  $10,957   $48   $10,909   $331   $    -   $11,240 
State and political subdivisions   18,680    434    18,246    974    -    19,220 
Total  $29,637   $482   $29,155   $1,305   $-   $30,460 

 

*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, 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  $11,430   $59   $11,371   $305   $    -   $11,676 
State and political subdivisions   18,807    480    18,327    572    -    18,899 
Total  $30,237   $539   $29,698   $877   $-   $30,575 

 

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

 

There were no investment securities classified as “Trading” at June 30, 2016 or December 31, 2015. During the fourth quarter of 2013, the Company transferred investment securities with an amortized cost of $35.5 million, previously designated as “Available for Sale”, to “Held to Maturity” classification. The fair value of those investment securities as of the date of the transfer was $34.5 million, reflecting a gross unrealized loss of $994 thousand. The gross unrealized loss, net of tax at the time of transfer remained in Accumulated Other Comprehensive Income (Loss) and is being accreted over the remaining life of the investment securities as an adjustment to interest income.

 

At June 30, 2016, the Company’s mortgage-backed investment securities consisted of commercial and residential mortgage-backed investment securities. The Company’s mortgage-backed investment securities are all backed by an Agency of the U.S. government and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.

 

 13 

 

 

The amortized cost, carrying value and fair value of investment securities at June 30, 2016, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

 

(dollars in thousands)  June 30, 2016 
Available for Sale:  Amortized Cost   Fair
Value
 
Due in one year or less  $1,843   $1,863 
Due after one year through five years   95,972    96,367 
Due after five years through ten years   118,311    119,664 
Due after ten years   13,715    13,603 
Total  $229,841   $231,497 

 

(dollars in thousands)  June 30, 2016 
Held to Maturity:  Carrying
Value
   Fair
Value
 
Due in one year or less  $1,015   $1,024 
Due after one year through five years   22,561    23,542 
Due after five years through ten years   4,832    5,121 
Due after ten years   747    773 
Total  $29,155   $30,460 

 

The following table presents the gross realized gains and losses on the sale of investment securities available for sale and proceeds from the sale of investment securities available for sale during the three and six months ended June 30, 2016 and 2015.

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
(dollars in thousands)  June 30, 2016   June 30, 2015   June 30, 2016   June 30, 2015 
Realized gains (losses):                    
Gross realized gains  $287   $249   $372   $294 
Gross realized (losses)   (115)   (223)   (135)   (243)
Net realized gains  $172   $26   $237   $51 
Proceeds from sales of investment securities  available for sale  $23,947   $15,580   $36,878   $19,970 

 

Proceeds from maturities, calls and paydowns of investment securities available for sale for the six months ended June 30, 2016 and 2015 were $14.6 million and $12.5 million, respectively. Proceeds from maturities, calls and paydowns of investment securities held to maturity for the six months ended June 30, 2016 and 2015 were $381 thousand and $1.4 million, respectively.

 

The Company pledges investment securities to secure public deposits, balances with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and repurchase agreements. Investment securities with an aggregate book value of $67.2 million and an aggregate fair value of $68.4 million were pledged at June 30, 2016. Investment securities with both aggregate book and fair values of $88.0 million were pledged at December 31, 2015.

 

Investment securities in an unrealized loss position at June 30, 2016, by duration of the period of the unrealized loss, are shown below:

 

   June 30, 2016 
(dollars in thousands)  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Investment Securities  Value   Loss   Value   Loss   Value   Loss 
Obligations of U.S. Government agencies  $-   $-   $4,490   $8   $4,490   $8 
SBA Pool securities   3,646    17    32,060    285    35,706    302 
Agency residential mortgage-backed securities   11,223    90    6,194    40    17,417    130 
Agency CMO securities   14,992    148    9,102    117    24,094    265 
State and political subdivisions   2,665    16    2,808    40    5,473    56 
Total  $32,526   $271   $54,654   $490   $87,180   $761 

 

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

 

Based on the Company’s evaluation, management does not believe any unrealized losses at June 30, 2016, 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, and are not attributable to credit deterioration. Interest rates have generally declined since December 31, 2015, which has caused the fair values of our investments to generally increase thereby reducing the amount of unrealized losses present at that time. At June 30, 2016, there were 70 debt investment securities with fair values totaling $87.2 million considered temporarily impaired. Of these debt investment securities, 26 with fair values totaling $32.5 million were in an unrealized loss position of less than 12 months and 44 with fair values totaling $54.7 million were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities until recovery of the amortized cost basis and it is more likely than not that the Company will not be required to sell these investment securities before a recovery of unrealized losses, the Company does not consider these investment securities to be other-than-temporarily impaired at June 30, 2016 and no impairment has been recognized. At June 30, 2016, there were no equity investment securities in an unrealized loss position.

 

Investment securities in an unrealized loss position at December 31, 2015, by duration of the period of the unrealized loss, are shown below:

 

   December 31, 2015 
(dollars in thousands)  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Investment Securities  Value   Loss   Value   Loss   Value   Loss 
Obligations of U.S. Government agencies  $4,848   $58   $4,414   $84   $9,262   $142 
SBA Pool securities   19,573    180    39,700    885    59,273    1,065 
Agency residential mortgage-backed securities   9,370    104    9,341    250    18,711    354 
Agency commercial mortgage-backed securities   18,315    188    -    -    18,315    188 
Agency CMO securities   34,075    596    6,340    233    40,415    829 
State and political subdivisions   31,415    408    3,840    94    35,255    502 
Total  $117,596   $1,534   $63,635   $1,546   $181,231   $3,080 

 

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $6.4 million and $5.9 million at June 30, 2016 and December 31, 2015, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Because the FHLB generated positive net income for each quarterly period beginning July 1, 2015, and ending June 30, 2016, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2016 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.

 

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Note 4. Loan Portfolio

 

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

 

   June 30, 2016   December 31, 2015 
(dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial, industrial and agricultural  $111,782    12.29%  $98,828    11.22%
Real estate - one to four family residential:                    
Closed end first and seconds   221,580    24.36%   232,826    26.43%
Home equity lines   117,238    12.89%   116,309    13.20%
Total real estate - one to four family residential   338,818    37.25%   349,135    39.63%
Real estate - multifamily residential   32,833    3.61%   29,672    3.37%
Real estate - construction:                    
One to four family residential   19,133    2.10%   19,495    2.21%
Other construction, land development and other land   64,477    7.09%   46,877    5.32%
Total real estate - construction   83,610    9.19%   66,372    7.53%
Real estate - farmland   11,313    1.24%   11,418    1.30%
Real estate - non-farm, non-residential:                    
Owner occupied   181,853    20.01%   187,224    21.27%
Non-owner occupied   112,081    12.32%   104,456    11.86%
Total real estate - non-farm, non-residential   293,934    32.33%   291,680    33.13%
Consumer   21,420    2.36%   19,993    2.27%
Other   15,712    1.73%   13,680    1.55%
Total loans   909,422    100.00%   880,778    100.00%
Less allowance for loan losses   (10,467)        (11,327)     
Loans, net  $898,955        $869,451      

 

Deferred costs and (fees), net are included in the table above and totaled $1.7 million and $1.6 million for June 30, 2016 and December 31, 2015, respectively.

 

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The following table presents the aging of the recorded investment in past due loans as of June 30, 2016 by class of loans:

 

(dollars in thousands)  30-59 Days
Past Due
   60-89 Days
Past Due
   Over 90 Days
Past Due
   Total Past
Due
   Total
Current*
   Total Loans 
Commercial, industrial and agricultural  $65   $-   $-   $65   $111,717   $111,782 
Real estate - one to four family residential:                              
Closed end first and seconds   2,180    366    3,849    6,395    215,185    221,580 
Home equity lines   -    66    428    494    116,744    117,238 
Total real estate - one to four family residential   2,180    432    4,277    6,889    331,929    338,818 
Real estate - multifamily residential   -    -    -    -    32,833    32,833 
Real estate - construction:                              
One to four family residential   5    -    -    5    19,128    19,133 
Other construction, land development and other land   -    -    -    -    64,477    64,477 
Total real estate - construction   5    -    -    5    83,605    83,610 
Real estate - farmland   -    -    -    -    11,313    11,313 
Real estate - non-farm, non-residential:                              
Owner occupied   -    -    1,633    1,633    180,220    181,853 
Non-owner occupied   263    -    676    939    111,142    112,081 
Total real estate - non-farm, non-residential   263    -    2,309    2,572    291,362    293,934 
Consumer   32    70    -    102    21,318    21,420 
Other   -    -    -    -    15,712    15,712 
Total loans  $2,545   $502   $6,586   $9,633   $899,789   $909,422 

 

*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, 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  $149   $-   $193   $342   $98,486   $98,828 
Real estate - one to four family residential:                              
Closed end first and seconds   2,748    1,322    4,647    8,717    224,109    232,826 
Home equity lines   1,166    -    250    1,416    114,893    116,309 
Total real estate - one to four family residential   3,914    1,322    4,897    10,133    339,002    349,135 
Real estate - multifamily residential   -    -    -    -    29,672    29,672 
Real estate - construction:                              
One to four family residential   11    -    89    100    19,395    19,495 
Other construction, land development and other land   -    -    -    -    46,877    46,877 
Total real estate - construction   11    -    89    100    66,272    66,372 
Real estate - farmland   -    -    -    -    11,418    11,418 
Real estate - non-farm, non-residential:                              
Owner occupied   1,637    -    624    2,261    184,963    187,224 
Non-owner occupied   -    -    676    676    103,780    104,456 
Total real estate - non-farm, non-residential   1,637    -    1,300    2,937    288,743    291,680 
Consumer   377    4    -    381    19,612    19,993 
Other   -    -    -    -    13,680    13,680 
Total loans  $6,088   $1,326   $6,479   $13,893   $866,885   $880,778 

 

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

 

 17 

 

 

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)  June 30, 2016   December 31, 2015 
Nonaccrual loans  $5,797   $6,175 
Loans past due 90 days and accruing interest   2,571    1,117 
Troubled debt restructurings (accruing)   14,224    15,535 

 

At June 30, 2016 and December 31, 2015, there were approximately $1.8 million and $1.3 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.

 

 18 

 

 

Outstanding principal balance and the carrying amount of loans acquired pursuant to the Company’s acquisition of VCB (or “Acquired Loans”) that were recorded at fair value at the acquisition date and are included in the consolidated balance sheet at June 30, 2016 and December 31, 2015 were as follows:

 

   June 30, 2016   December 31, 2015 
   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  $481   $2,760   $3,241   $549   $3,476   $4,025 
Real estate - one to four family residential:                              
Closed end first and seconds   1,132    6,086    7,218    1,116    6,290    7,406 
Home equity lines   32    8,961    8,993    32    9,955    9,987 
Total real estate - one to four family residential   1,164    15,047    16,211    1,148    16,245    17,393 
Real estate - multifamily residential   -    1,822    1,822    -    1,988    1,988 
Real estate - construction:                              
One to four family residential   -    442    442    -    515    515 
Other construction, land development and other land   264    2,013    2,277    275    1,910    2,185 
Total real estate - construction   264    2,455    2,719    275    2,425    2,700 
Real estate - non-farm, non-residential:                              
Owner occupied   4,237    15,042    19,279    4,296    16,528    20,824 
Non-owner occupied   1,512    9,436    10,948    1,600    10,847    12,447 
Total real estate - non-farm, non-residential   5,749    24,478    30,227    5,896    27,375    33,271 
Consumer   -    172    172    -    276    276 
Other   -    647    647    -    800    800 
Total loans  $7,658   $47,381   $55,039   $7,868   $52,585   $60,453 

 

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at June 30, 2016 and December 31, 2015:

 

           Over 90 Days Past 
   Nonaccrual   Due and Accruing 
   June 30,   December 31,   June 30,   December 31, 
(dollars in thousands)  2016   2015   2016   2015 
Commercial, industrial and agricultural  $131   $193   $-   $- 
Real estate - one to four family residential:                    
Closed end first and seconds   4,061    4,153    1,131    1,117 
Home equity lines   727    425    -    - 
Total real estate - one to four family residential   4,788    4,578    1,131    1,117 
Real estate - construction:                    
One to four family residential   -    89    -    - 
Total real estate - construction   -    89    -    - 
Real estate - non-farm, non-residential:                    
Owner occupied   194    624    1,440    - 
Non-owner occupied   677    676    -    - 
Total real estate - non-farm, non-residential   871    1,300    1,440    - 
Consumer   7    15    -    - 
Total loans  $5,797   $6,175   $2,571   $1,117 

 

 19 

 

 

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

 

Pass Grades

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

 

Special Mention

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

 

Classified Grades

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

 

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

 

The allocation methodology applied by the Company includes management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of migration analysis 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.

 

 20 

 

 

The following table presents commercial loans by credit quality indicator at June 30, 2016:

 

                   Acquired     
                   Loans -     
                   Purchased     
       Special           Credit     
(dollars in thousands)  Pass   Mention   Substandard   Impaired   Impaired   Total 
Commercial, industrial and agricultural  $107,943   $2,644   $57   $657   $481   $111,782 
Real estate - multifamily residential   32,833    -    -    -    -    32,833 
Real estate - construction:                              
One to four family residential   18,664    213    79    177    -    19,133 
Other construction, land development and other land   55,893    2,639    188    5,493    264    64,477 
Total real estate - construction   74,557    2,852    267    5,670    264    83,610 
Real estate - farmland   10,060    731    -    522    -    11,313 
Real estate - non-farm, non-residential:                              
Owner occupied   158,980    12,254    1,848    4,534    4,237    181,853 
Non-owner occupied   95,769    1,286    972    12,542    1,512    112,081 
Total real estate - non-farm, non-residential   254,749    13,540    2,820    17,076    5,749    293,934 
Total commercial loans  $480,142   $19,767   $3,144   $23,925   $6,494   $533,472 

 

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

 

                   Acquired     
                   Loans -     
                   Purchased     
       Special           Credit     
(dollars in thousands)  Pass   Mention   Substandard   Impaired   Impaired   Total 
Commercial, industrial and agricultural  $95,440   $1,709   $291   $839   $549   $98,828 
Real estate - multifamily residential   29,672    -    -    -    -    29,672 
Real estate - construction:                              
One to four family residential   19,000    220    89    186    -    19,495 
Other construction, land development and other land   38,013    1,785    1,242    5,562    275    46,877 
Total real estate - construction   57,013    2,005    1,331    5,748    275    66,372 
Real estate - farmland   10,396    318    165    539    -    11,418 
Real estate - non-farm, non-residential:                              
Owner occupied   162,103    12,206    2,283    6,336    4,296    187,224 
Non-owner occupied   86,894    2,130    1,040    12,792    1,600    104,456 
Total real estate - non-farm, non-residential   248,997    14,336    3,323    19,128    5,896    291,680 
Total commercial loans  $441,518   $18,368   $5,110   $26,254   $6,720   $497,970 

 

At June 30, 2016 and December 31, 2015, the Company did not have any loans classified as Doubtful or Loss.

 

 21 

 

 

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at June 30, 2016:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $211,643   $9,937   $221,580 
Home equity lines   116,635    603    117,238 
Total real estate - one to four family residential   328,278    10,540    338,818 
Consumer   21,099    321    21,420 
Other   15,712    -    15,712 
Total consumer loans  $365,089   $10,861   $375,950 

 

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, 2015:

 

(dollars in thousands)  Performing   Nonperforming   Total 
Real estate - one to four family residential:               
Closed end first and seconds  $220,016   $12,810   $232,826 
Home equity lines   115,434    875    116,309 
Total real estate - one to four family residential   335,450    13,685    349,135 
Consumer   19,655    338    19,993 
Other   13,678    2    13,680 
Total consumer loans  $368,783   $14,025   $382,808 

 

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.

 

 22 

 

 

The following table presents a rollforward of the Company’s allowance for loan losses for the six months ended June 30, 2016:

 

   Beginning               Ending 
   Balance               Balance 
(dollars in thousands)  January 1, 2016   Charge-offs   Recoveries   Provision   June 30, 2016 
Commercial, industrial and agricultural  $1,894   $(68)  $49   $61   $1,936 
Real estate - one to four family residential:                         
Closed end first and seconds   1,609    (578)   200    136    1,367 
Home equity lines   795    (401)   29    196    619 
Total real estate - one to four family residential   2,404    (979)   229    332    1,986 
Real estate - multifamily residential   78    -    -    7    85 
Real estate - construction:                         
One to four family residential   295    -    3    3    301 
Other construction, land development and other land   2,423    -    1    294    2,718 
Total real estate - construction   2,718    -    4    297    3,019 
Real estate - farmland   272    -    -    (20)   252 
Real estate - non-farm, non-residential:                         
Owner occupied   1,964    (208)   63    (566)   1,253 
Non-owner occupied   1,241    -    61    (232)   1,070 
Total real estate - non-farm, non-residential   3,205    (208)   124    (798)   2,323 
Consumer   287    (34)   24    61    338 
Other   469    (32)   14    77    528 
Total  $11,327   $(1,321)  $444   $17   $10,467 

 

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

 

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

 

 23 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of June 30, 2016:

 

   Allowance allocated to loans:   Total Loans: 
           Acquired               Acquired     
   Individually   Collectively   loans -       Individually   Collectively   loans -     
   evaluated   evaluated   purchased       evaluated   evaluated   purchased     
   for   for   credit       for   for   credit     
(dollars in thousands)  impairment   impairment   impaired   Total   impairment   impairment   impaired   Total 
Commercial, industrial and agricultural  $455   $1,481   $-   $1,936   $657   $110,644   $481   $111,782 
Real estate - one to four family residential:                                        
Closed end first and seconds   200    1,150    17    1,367    6,088    214,360    1,132    221,580 
Home equity lines   -    619    -    619    175    117,031    32    117,238 
Total real estate - one to four family residential   200    1,769    17    1,986    6,263    331,391    1,164    338,818 
Real estate - multifamily residential   -    85    -    85    -    32,833    -    32,833 
Real estate - construction:                                        
One to four family residential   61    240    -    301    177    18,956    -    19,133 
Other construction, land development and other land   1,436    1,282    -    2,718    5,493    58,720    264    64,477 
Total real estate - construction   1,497    1,522    -    3,019    5,670    77,676    264    83,610 
Real estate - farmland   203    49    -    252    522    10,791    -    11,313 
Real estate - non-farm, non-residential:                                        
Owner occupied   178    1,075    -    1,253    4,534    173,082    4,237    181,853 
Non-owner occupied   651    419    -    1,070    12,542    98,027    1,512    112,081 
Total real estate - non-farm, non-residential   829    1,494    -    2,323    17,076    271,109    5,749    293,934 
Consumer   76    262    -    338    321    21,099    -    21,420 
Other   -    528    -    528    -    15,712    -    15,712 
Total  $3,260   $7,190   $17   $10,467   $30,509   $871,255   $7,658   $909,422 

 

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, 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  $562   $1,332   $-   $1,894   $839   $97,440   $549   $98,828 
Real estate - one to four family residential:                                        
Closed end first and seconds   517    1,092    -    1,609    8,163    223,547    1,116    232,826 
Home equity lines   265    530    -    795    625    115,652    32    116,309 
Total real estate - one to four family residential   782    1,622    -    2,404    8,788    339,199    1,148    349,135 
Real estate - multifamily residential   -    78    -    78    -    29,672    -    29,672 
Real estate - construction:                                        
One to four family residential   67    228    -    295    186    19,309    -    19,495 
Other construction, land development and other land   1,263    1,160    -    2,423    5,562    41,040    275    46,877 
Total real estate - construction   1,330    1,388    -    2,718    5,748    60,349    275    66,372 
Real estate - farmland   210    62    -    272    539    10,879    -    11,418 
Real estate - non-farm, non-residential:                                        
Owner occupied   824    1,140    -    1,964    6,336    176,592    4,296    187,224 
Non-owner occupied   810    431    -    1,241    12,792    90,064    1,600    104,456 
Total real estate - non-farm, non-residential   1,634    1,571    -    3,205    19,128    266,656    5,896    291,680 
Consumer   88    199    -    287    338    19,655    -    19,993 
Other   -    469    -    469    2    13,678    -    13,680 
Total  $4,606   $6,721   $-   $11,327   $35,382   $837,528   $7,868   $880,778 

 

 24 

 

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2016:

 

           Recorded   Recorded             
       Unpaid   Investment   Investment       Average   Interest 
   Recorded   Principal   With No   With   Related   Recorded   Income 
(dollars in thousands)  Investment   Balance   Allowance   Allowance   Allowance   Investment   Recognized 
Commercial, industrial and agricultural  $657   $657   $68   $589   $455   $848   $9 
Real estate - one to four family residential:                                   
Closed end first and seconds   6,088    6,416    3,131    2,957    200    7,447    184 
Home equity lines   175    175    175    -    -    648    - 
Total real estate - one to four family residential   6,263    6,591    3,306    2,957    200    8,095    184 
Real estate - construction:                                   
One to four family residential   177    177    18    159    61    181    4 
Other construction, land development and other land   5,493    5,493    -    5,493    1,436    5,517    129 
Total real estate - construction   5,670    5,670    18    5,652    1,497    5,698    133 
Real estate - farmland   522    525    -    522    203    532    17 
Real estate - non-farm, non-residential:                                   
Owner occupied   4,534    4,534    3,448    1,086    178    5,015    118 
Non-owner occupied   12,542    12,542    8,901    3,641    651    12,742    288 
Total real estate - non-farm, non-residential   17,076    17,076    12,349    4,727    829    17,757    406 
Consumer   321    333    6    315    76    330    11 
Other   -    -    -    -    -    1    - 
Total loans*  $30,509   $30,852   $15,747   $14,762   $3,260   $33,261   $760 

 

*PCI loans are excluded from this table.

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 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  $839   $839   $-   $839   $562   $753   $49 
Real estate - one to four family residential:                                   
Closed end first and seconds   8,163    8,530    3,981    4,182    517    8,386    416 
Home equity lines   625    625    175    450    265    521    16 
Total real estate - one to four family residential   8,788    9,155    4,156    4,632    782    8,907    432 
Real estate - construction:                                   
One to four family residential   186    186    20    166    67    235    8 
Other construction, land development and other land   5,562    5,562    -    5,562    1,263    5,611    260 
Total real estate - construction   5,748    5,748    20    5,728    1,330    5,846    268 
Real estate - farmland   539    541    -    539    210    167    36 
Real estate - non-farm, non-residential:                                   
Owner occupied   6,336    6,336    3,506    2,830    824    8,995    292 
Non-owner occupied   12,792    12,792    7,686    5,106    810    11,312    595 
Total real estate - non-farm, non-residential   19,128    19,128    11,192    7,936    1,634    20,307    887 
Consumer   338    350    12    326    88    352    19 
Other   2    2    2    -    -    4    - 
Total loans*  $35,382   $35,763   $15,382   $20,000   $4,606   $36,336   $1,691 

 

*PCI loans are excluded from this table.

 

Determining the fair value of purchased credit-impaired (“PCI”) loans 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 $8.6 million and $8.8 million and recorded carrying values of $7.7 million and $7.9 million at June 30, 2016 and December 31, 2015, respectively.

 

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

 

   Three months ended   Six months ended 
   June 30, 2016   June 30, 2016 
(dollars in thousands)  Accretable Yield   Accretable Yield 
Balance at beginning of period  $1,221   $1,280 
Accretion   (125)   (254)
Reclassification of nonaccretable difference due to improvement in expected cash flows   8    32 
Other changes, net   10    56 
Balance at end of period  $1,114   $1,114 

 

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

 

The following table presents, by loan class, information related to loans modified as TDRs during the three months ended June 30, 2016 and 2015:

 

   Three Months Ended June 30, 2016   Three Months Ended June 30, 2015 
       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   4   $599   $599        -   $     -   $     - 
Total   4   $599   $599    -   $-   $- 

 

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

 

The following table presents, by loan class, information related to loans modified as TDRs during the six months ended June 30, 2016 and 2015:

 

   Six Months Ended June 30, 2016   Six Months Ended June 30, 2015 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
(dollars in thousands)  Loans   Balance   Balance*   Loans   Balance   Balance* 
Commercial, industrial and agricultural   1   $68   $68         -   $      -   $       - 
Real estate - one to four family residential:                              
Closed end first and seconds   5    640    640    -    -    - 
Total   6   $708   $708    -   $-   $- 

 

*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.

 

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The following tables present, by loan class, information related to the loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three and six months ended June 30, 2016 and 2015 and were modified as TDRs within the 12 months prior to default:

 

   Three Months Ended   Three Months Ended 
   June 30, 2016   June 30, 2015 
   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   $350    1   $68 
Total   1   $350    1   $68 

 

   Six Months Ended   Six Months Ended 
   June 30, 2016   June 30, 2015 
   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   $350    1   $68 
Total   1   $350    1   $68 

 

At June 30, 2016, $2.2 million in foreclosed residential real estate properties were included in OREO, and $569 thousand in residential real estate loans were in the process of foreclosure.

 

Note 5. Deferred Income Taxes

 

As of June 30, 2016 and December 31, 2015, the Company had recorded net deferred income tax assets of approximately $12.0 million and $15.1 million, respectively. The realization of deferred income tax assets is assessed quarterly and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.  Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future.  Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Further, management has considered future reversals of existing taxable temporary differences and limited, prudent and feasible tax-planning strategies, such as changes in investment security income (tax-exempt to taxable), additional sales of loans and sales of branches/buildings with an appreciated asset value over the tax basis. Based upon an analysis of available evidence, management has determined that it is “more likely than not” that the Company’s deferred income tax assets as of June 30, 2016 and December 31, 2015 will be fully realized and therefore no valuation allowance to the Company’s deferred income tax assets was recorded. However, the Company can give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions which are subject to uncertainty and based on estimates that may change due to changing economic conditions and other factors.  Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

 

The Company’s ability to realize its deferred income tax assets may be limited if the Company experiences an ownership change as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). For additional information see Part I, Item 1A. “Risk Factors” included in the Company’s 2015 Form 10-K.

 

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Note 6. Bank Premises and Equipment

 

Bank premises and equipment are summarized as follows:

 

(dollars in thousands)  June 30, 2016   December 31, 2015 
Land and improvements  $6,865   $6,837 
Buildings and leasehold improvements   28,696    28,487 
Furniture, fixtures and equipment   20,464    20,385 
Construction in progress   1,960    1,136 
    57,985    56,845 
Less accumulated depreciation   (30,037)   (29,009)
Net balance  $27,948   $27,836 

 

Depreciation and amortization of bank premises and equipment for both the six months ended June 30, 2016 and 2015 amounted to $1.3 million.

 

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.

 

The tables below present selected information on federal funds purchased and repurchase agreements during the six months ended June 30, 2016 and the year ended December 31, 2015:

 

Federal funds purchased        
(dollars in thousands)  June 30, 2016   December 31, 2015 
Balance outstanding at period end  $-   $- 
Maximum balance at any month end during the period  $-   $2,440 
Average balance for the period  $19   $63 
Weighted average rate for the period   1.14%   0.72%
Weighted average rate at period end   0.00%   0.00%

 

Repurchase agreements        
(dollars in thousands)  June 30, 2016   December 31, 2015 
Balance outstanding at period end  $6,701   $5,015 
Maximum balance at any month end during the period  $11,942   $12,392 
Average balance for the period  $5,929   $8,002 
Weighted average rate for the period   0.47%   0.57%
Weighted average rate at period end   0.46%   0.47%

 

Short-term borrowings. Short-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. Short-term advances from the FHLB at June 30, 2016 consisted of $120.9 million in fixed rate one month advances. Short-term advances from the FHLB at December 31, 2015 consisted of $114.4 million in fixed rate one month advances. Outstanding accrued interest at June 30, 2016 and December 31, 2015 totaled $39 thousand and $14 thousand, respectively.

 

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The table below presents selected information on short-term borrowings during the six months ended June 30, 2016 and the year ended December 31, 2015:

 

Short-term borrowings        
(dollars in thousands)  June 30, 2016   December 31, 2015 
Balance outstanding at period end  $120,905   $114,413 
Maximum balance at any month end during the period  $122,923   $114,413 
Average balance for the period  $115,086   $89,580 
Weighted average rate for the period   0.42%   0.22%
Weighted average rate at period end   0.44%   0.32%

 

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 June 30, 2016 and December 31, 2015, 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 $385.6 million at June 30, 2016. This line of credit totaled $225.1 million with approximately $104.2 million available at June 30, 2016. As of June 30, 2016 and December 31, 2015, loans with a carrying value of $304.5 million and $307.2 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

 

Note 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 voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders.  Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

 

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

 

   Three Months Ended 
(dollars in thousands, except share and per share amounts)  June 30, 2016   June 30, 2015 
Basic Net Income Per Common Share          
Net income available to common shareholders  $1,910   $1,341 
Less: Net income allocated to participating securities, Series B Preferred Stock   546    385 
Net income allocated to common shareholders  $1,364   $956 
Weighted average common shares outstanding for basic net income per common share   13,098,512    13,023,550 
Basic net income per common share  $0.11   $0.07 
           
Diluted Net Income Per Common Share          
Net income available to common shareholders  $1,910   $1,341 
Weighted average common shares outstanding for basic net income per common share   13,098,512    13,023,550 
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   18,338,704    18,263,742 
Diluted net income per common share  $0.11   $0.07 

 

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   Six Months Ended 
(dollars in thousands, except share and per share amounts)  June 30, 2016   June 30, 2015 
Basic Net Income Per Common Share          
Net income available to common shareholders  $4,137   $2,730 
Less: Net income allocated to participating securities, Series B Preferred Stock   1,184    784 
Net income allocated to common shareholders  $2,953   $1,946 
Weighted average common shares outstanding for basic net income per common share   13,066,880    13,004,595 
Basic net income per common share  $0.23   $0.15 
           
Diluted Net Income Per Common Share          
Net income available to common shareholders  $4,137   $2,730 
Weighted average common shares outstanding for basic net income per common share   13,066,880    13,004,595 
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   18,307,072    18,244,787 
Diluted net income per common share  $0.23   $0.15 

 

At June 30, 2016 and 2015, options to acquire 67,525 and 102,887 shares of common stock, respectively, were not included in computing diluted net income per common share for the three and six months ended June 30, 2016 and 2015 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 of 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.

 

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. No additional awards may be granted under the 2003 Plan. Any awards previously granted under the 2003 Plan that were outstanding as of April 17, 2013 remain outstanding and will vest in accordance with their regular terms.

 

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

 

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On May 19, 2016, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2016 Equity Compensation Plan (the “2016 Plan”) to promote the success of the Company by providing incentives to key employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company and with growth in shareholder value consistent with the Company’s risk management practices. The 2016 Plan authorizes the Company to issue up to 500,000 additional shares of common stock pursuant to stock options, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards. There were 500,000 shares still available to be granted as awards under the 2016 Plan as of June 30, 2016.

 

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 six months ended June 30, 2016 and 2015. There was no remaining unrecognized compensation expense related to stock options at June 30, 2016, and there was no stock option compensation expense for three and six months ended June 30, 2016 or 2015.

 

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, 2015   67,525   $18.12           
Stock options outstanding at June 30, 2016   67,525   $18.12    1.11   $       - 
                     
Stock options exercisable at June 30, 2016   67,525   $18.12    1.11   $- 

 

*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 June 30, 2016:

 

Stock Options Outstanding and Exercisable
Exercise   Number   Weighted Average
Price   Outstanding   Remaining Term
$21.16    28,525   0.25 years
$19.25    20,000   1.25 years
$12.36    19,000   2.25 years
$18.12    67,525   1.11 years

 

On April 29, 2016, the Company granted 6,500 shares of restricted stock under the 2007 Plan to various senior officers of the Bank. All of the shares are subject to time vesting over a one-year period and will vest on April 29, 2017. On March 24, 2016, the Company granted 65,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2017.  The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2019 to the extent certain financial performance requirements for fiscal year 2018 are met. On March 19, 2015, the Company granted 45,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2016.  The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2018 to the extent certain financial performance requirements for fiscal year 2017 are met. On October 15, 2014, the Company granted 42,500 shares of restricted stock under the 2007 Plan to its executive officers.  Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2015.  The remaining fifty percent (50%) of 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.

 

For the three and six months ended June 30, 2016, restricted stock compensation expense was $91 thousand and $152 thousand, respectively, compared to restricted stock compensation expense of $63 thousand and $114 thousand, respectively, for the same periods in 2015, and in each case was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $7.00 per share for the April 29, 2016 awards, $6.80 per share for the March 24, 2016 awards, $6.28 per share for the March 19, 2015 awards and $6.10 per share for the October 15, 2014 awards.

 

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A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of June 30, 2016, and changes during the six months ended June 30, 2016, 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, 2015   121,271   $6.01 
Granted   71,500    6.82 
Vested   (15,550)   5.11 
Nonvested as of  June 30, 2016   177,221   $6.42 

 

At June 30, 2016, there was $828 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 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   Six Months Ended 
   June 30,   June 30, 
(dollars in thousands)  2016   2015   2016   2015 
Components of net periodic pension (benefit)                    
Interest cost  $99   $101   $197   $202 
Expected return on plan assets   (159)   (179)   (317)   (357)
Amortization of prior service cost   2    3    4    5 
Recognized net actuarial loss   26    27    53    54 
Net settlement loss   -    53    -    53 
Net periodic pension (benefit)  $(32)  $5   $(63)  $(43)

 

The Company made no contributions to the pension plan during 2015. 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, 2016.

 

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.

 

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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 June 30, 2016.

 

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 June 30, 2016 and December 31, 2015, 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 June 30, 2016 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   June 30, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2016 
Assets                    
Securities available for sale                    
Obligations of U.S. Government agencies  $        -   $6,025   $        -   $6,025 
SBA Pool securities   -    61,114    -    61,114 
Agency residential mortgage-backed securities   -    29,680    -    29,680 
Agency commercial mortgage-backed securities   -    23,700    -    23,700 
Agency CMO securities   -    51,231    -    51,231 
Non agency CMO securities   -    52    -    52 
State and political subdivisions   -    57,695    -    57,695 
Corporate securities   -    2,000    -    2,000 
Total securities available for sale  $-   $231,497   $-   $231,497 

 

Assets Measured at Fair Value on a Recurring Basis at December 31, 2015 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)   2015 
Assets                    
Securities available for sale                    
Obligations of U.S. Government agencies  $         -   $9,262   $      -   $9,262 
SBA Pool securities   -    63,826    -    63,826 
Agency residential mortgage-backed securities   -    23,903    -    23,903 
Agency commercial mortgage-backed securities   -    18,315    -    18,315 
Agency CMO securities   -    52,171    -    52,171 
Non agency CMO securities   -    61    -    61 
State and political subdivisions   -    61,405    -    61,405 
Corporate securities   -    2,000    -    2,000 
Total securities available for sale  $-   $230,943   $-   $230,943 

 

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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.

 

The following table summarizes assets measured at fair value on a non-recurring basis as of June 30, 2016 and December 31, 2015, 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 June 30, 2016 Using
                 
   Quoted Prices in   Significant Other   Significant     
   Active Markets for   Observable   Unobservable   Balance at 
   Identical Assets   Inputs   Inputs   June 30, 
(dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   2016 
Assets                    
Impaired loans  $    -   $      -   $11,502   $11,502 
Other real estate owned  $-   $-   $2,280   $2,280 

 

Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2015 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)   2015 
Assets                    
Impaired loans  $     -   $      -   $15,394   $15,394 
Other real estate owned  $-   $-   $520   $520 

 

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The following table displays quantitative information about Level 3 Fair Value Measurements as of June 30, 2016 and December 31, 2015:

 

Quantitative information about Level 3 Fair Value Measurements at June 30, 2016
              
(dollars in thousands)  Fair Value   Valuation Technique(s)  Unobservable Input  Range (Weighted Average)
Assets              
Impaired loans  $11,502   Discounted appraised value  Selling cost  0% - 33% (12%)
           Discount for lack of marketability and age of appraisal  0% - 41% (8%)
               
Other real estate owned  $2,280   Discounted appraised value  Selling cost  10% (10%)
           Discount for lack of marketability and age of appraisal  0% - 60% (13%)

 

Quantitative information about Level 3 Fair Value Measurements at December 31, 2015
              
(dollars in thousands)  Fair Value   Valuation Technique(s)  Unobservable Input  Range (Weighted Average)
Assets              
Impaired loans  $15,394   Discounted appraised value  Selling cost  0% - 24% (13%)
           Discount for lack of marketability and age of appraisal  0% - 30% (4%)
               
Other real estate owned  $520   Discounted appraised value  Selling cost  10% (10%)
           Discount for lack of marketability and age of appraisal  0% - 36% (5%)

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

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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 June 30, 2016 and December 31, 2015, the fair value of loan commitments, standby letters of credit and credit card guarantees are not significant and are not included in the table below.

 

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

 

       Fair Value Measurements at June 30, 2016 Using 
       Quoted Prices in   Significant Other   Significant     
       Active Markets for   Observable   Unobservable   Balance at 
       Identical Assets   Inputs   Inputs   June 30, 
(dollars in thousands)  Carrying Amount   (Level 1)   (Level 2)   (Level 3)   2016 
Assets:                         
Cash and short-term investments*  $13,758   $13,758   $-   $-   $13,758 
Interest bearing deposits with banks   13,114    13,114    -    -    13,114 
Securities available for sale   231,497    -    231,497    -    231,497 
Securities held to maturity   29,155    -    30,460    -    30,460 
Restricted securities   9,412    -    9,412    -    9,412 
Loans, net   898,955    -    -    899,008    899,008 
Bank owned life insurance   25,416    -    25,416    -    25,416 
Accrued interest receivable   4,139    -    4,139    -    4,139 
Total  $1,225,446   $26,872   $300,924   $899,008   $1,226,804 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $191,945   $191,945   $-   $-   $191,945 
Interest-bearing deposits   806,642    -    766,891    -    766,891 
Short-term borrowings**   127,606    127,606    -    -    127,606 
Junior subordinated debt   10,310    -    11,402    -    11,402 
Senior subordinated debt***   19,072    -    21,181    -    21,181 
Accrued interest payable   680    -    680    -    680 
Total  $1,156,255   $319,551   $800,154   $-   $1,119,705 

 

*Includes federal funds sold.

**Includes federal funds purchased and repurchase agreements.

***Net of unamortized debt issuance costs of $928.

 

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       Fair Value Measurements at December 31, 2015 Using 
       Quoted Prices in   Significant Other   Significant     
       Active Markets for   Observable   Unobservable   Balance at 
       Identical Assets   Inputs   Inputs   December 31, 
(dollars in thousands)  Carrying Amount   (Level 1)   (Level 2)   (Level 3)   2015 
Assets:                         
Cash and short-term investments*  $13,651   $13,651   $-   $-   $13,651 
Interest bearing deposits with banks   18,304    18,304    -    -    18,304 
Securities available for sale   230,943    -    230,943    -    230,943 
Securities held to maturity   29,698    -    30,575    -    30,575 
Restricted securities   8,959    -    8,959    -    8,959 
Loans, net   869,451    -    -    871,989    871,989 
Bank owned life insurance   25,099    -    25,099    -    25,099 
Accrued interest receivable   4,059    -    4,059    -    4,059 
Total  $1,200,164   $31,955   $299,635   $871,989   $1,203,579 
                          
Liabilities:                         
Noninterest-bearing demand deposits  $174,071   $174,071   $-   $-   $174,071 
Interest-bearing deposits   814,648    -    763,315    -    763,315 
Short-term borrowings**   119,428    119,428    -    -    119,428 
Junior subordinated debt   10,310    -    9,933    -    9,933 
Senior subordinated debt***   19,022    -    19,669    -