Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
¨
No
x
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 Website, 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 such files).
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
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.
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 aggregate market value of common stock held by non-affiliates
of the registrant as of June 30, 2016 was $94.6 million.
There were 13,116,600 shares of common stock,
par value $2.00 per share, outstanding as of March 10, 2017.
Part I
Item 1.
Business
General
Eastern Virginia Bankshares, Inc. (the “Company”) is
a bank holding company that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and
commenced operations on December 29, 1997. The Company was headquartered in Tappahannock, Virginia until October 2016 at which
time it was relocated to Glen Allen, Virginia. Through our wholly-owned bank subsidiary, EVB (the “Bank”) which is
headquartered in Tappahannock, Virginia, we operate twenty-four full service branches and two drive-in facilities in eastern Virginia,
and one loan production office in Chesterfield County, Virginia. Two of EVB’s three predecessor banks, Bank of Northumberland,
Inc. and Southside Bank, were established in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In
April 2006, these three banks were merged and the surviving bank was re-branded as EVB. Additionally, the Company acquired Virginia
Company Bank (“VCB”) on November 14, 2014 and merged VCB with and into the Bank with the Bank surviving, thereby adding
to the Bank three additional branches located in Hampton, Newport News and Williamsburg. On December 13, 2016, the Company entered
into an Agreement and Plan of Merger to merge with and into Southern National Bancorp of Virginia, Inc. (“Southern National”),
with Southern National surviving (such transaction, the “Pending Merger”). The Pending Merger, which is expected to
be completed by the third quarter of 2017, is subject to regulatory approvals and the approval of the shareholders of both companies,
as well as customary closing conditions.
EVB is a community bank targeting small to medium-sized businesses
and consumers in our traditional coastal plain markets and the emerging suburbs outside of the Richmond, Tidewater, and southern
Virginia areas. Our mission is to enable our customers, teammates and shareholders to achieve their financial dreams and goals,
making our communities better places to live.
The accompanying consolidated financial statements include the accounts
of the Company, the Bank and its subsidiaries, at times collectively referred to as the “Company”, “we”,
“our”, or “us.”
We provide a broad range of personal and commercial banking services
including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial
deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower
to make decisions at the local level, so they can provide timely lending decisions and respond promptly to customer inquiries.
Having been in many of our markets for over 100 years, we have established relationships with and an understanding of our customers.
We believe that, by offering our customers personalized service and a breadth of products, we can compete effectively as we expand
within our existing markets and into new markets.
The Bank owns EVB Financial Services, Inc., which in turn has a
100% ownership interest in EVB Investments, Inc. EVB Investments, Inc. offers a comprehensive range of investment services through
Infinex Investments, Inc. On May 15, 2014, the Bank acquired a 4.9% ownership interest in Southern Trust Mortgage, LLC. Pursuant
to an independent contractor agreement with Southern Trust Mortgage, LLC, the Company advises and consults with Southern Trust
Mortgage, LLC and facilitates the marketing and brand recognition of their mortgage business. In addition, the Company provides
Southern Trust Mortgage, LLC with offices at two retail branches in the Company’s market area and access to office equipment
at these locations during normal business hours. For its services, the Company receives fixed monthly compensation from Southern
Trust Mortgage, LLC in the amount of $2 thousand, which is adjustable on a quarterly basis.
The Bank has a 6.0% ownership interest in Bankers Title, LLC. Bankers
Title, LLC is a multi-bank owned title agency providing a full range of title insurance settlement and related financial services.
The Bank has a 2.94% ownership 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 100% ownership interests in Dunston
Hall LLC and POS LLC, which were formed to hold the title to real estate acquired by the Bank upon foreclosure on property of real
estate secured loans. The financial position and operating results of all the subsidiaries of the Bank are not significant to the
Company as a whole and are not considered principal activities of the Company at this time.
The Company also owns one non-operating subsidiary, EVB Statutory
Trust I (the “Trust”), that was formed in September 2003. The Trust was formed for the purpose of issuing $10.0 million
of trust preferred capital securities. The Trust is an unconsolidated subsidiary of the Company and its principal asset is $10.3
million of the Company’s junior subordinated deferrable interest debentures (the “Junior Subordinated Debt”)
that is reported as a liability of the Company.
Market Areas
The Company currently conducts business through twenty-four full
service branches and two drive-in facilities, primarily in the eastern portion of the state. Our markets are located east of U.S.
Route 250 and extend from northeast of Richmond to the Chesapeake Bay and Hampton in central Virginia and across the James River
from Colonial Heights to southeastern Virginia. Geographically, we have five primary market areas: Northern Neck, Middle Peninsula,
Capital (suburbs of Richmond), Tidewater (Williamsburg, Newport News and Hampton), and Southern.
Our Northern Neck and Middle Peninsula regions are in the eastern
coastal plain of Virginia, often referred to as River Country. A number of the branches in this locale have been in business for
over one hundred years and have strong customer ties going back over multiple generations. According to the Virginia Economic Development
Partnership, the region’s industries have traditionally been associated with abundant natural resources that include five
rivers and the Chesapeake Bay. The diversified economy includes seafood harvesting, light manufacturing, agriculture, leisure,
marine services and service sectors dedicated to many upscale retirement communities.
Our Capital region is currently comprised of Chesterfield, Hanover,
Henrico and King William counties and Colonial Heights, which are largely emerging suburbs of Richmond. Hanover County is approximately
10 miles from downtown Richmond and eighty-six miles south of Washington, DC. Hanover County is the largest county by area in the
Richmond metropolitan area. The county provides residents and businesses the geographic advantages of a growing metropolitan area
coupled with substantial acreage for expansion in a suburban setting. With a branch and our corporate headquarters in the adjacent
county of Henrico, which is closer to Richmond, we have the advantage of an established economic setting with many small business
prospects. Our location in Colonial Heights puts us in the south Richmond suburbs and allows us to capitalize on economic activity
related to the U.S. Army facility at Fort Lee. The other county, King William, offers us growth opportunities as the Richmond suburbs
expand farther east of their current boundaries.
Our Tidewater region is currently comprised of Williamsburg, Newport
News and Hampton. This area, located approximately 60 miles east of Richmond along the U.S. Interstate 64 corridor, is part of
the Hampton Roads MSA and is a densely populated and well-established area. This major metropolitan area is the second largest
metropolitan area in Virginia behind the Northern Virginia area and is home to the third largest harbor in the U.S., which supports
extensive military and commercial shipping operations. In addition to being home to several Fortune 500 companies, the region has
a high value customer base, such as entrepreneurs, small businesses, and professionals, which often are not well served by our
larger competitors. The banking facilities in this region offer a wide range of banking products and services, including mortgage,
investment and insurance products.
Our Southern region is comprised of New Kent, Surry, Sussex, and
Southampton counties. New Kent has shown continued population growth over the past several years. Our Southern Region is located
southeast of Richmond and north of Williamsburg placing us in the growth zone of U.S. Interstate 64 that runs from Richmond to
the Virginia Beach area of the Virginia Tidewater region. The other three counties are approximately fifty miles southeast of Richmond
along or just off the state U.S. Route 460 corridor and are adjacent to the Greater Tidewater area. The ports of Hampton Roads
are approximately fifty miles to the east of our Southern region. The region’s close proximity to major military, naval and
research centers and transportation infrastructure make this an attractive location for contractors and service and manufacturing
companies.
Business Strategy
As a result of over 100 years of experience serving the Northern
Neck and Middle Peninsula regions, we have a stable, loyal customer base and a high deposit market share in these regions. Due
to the lower projected population growth of these markets, we expanded in Chesterfield, Hanover, Henrico, Gloucester, New Kent
and King William Counties and the city of Colonial Heights to target the higher potential growth in these existing and emerging
suburban markets. The deposit market share we have accumulated in our Northern Neck, Middle Peninsula and Southern regions has
helped fund our loan growth in the emerging suburban areas in the Capital region. Additionally, in 2014 we expanded into our Tidewater
region through the acquisition of VCB. This acquisition added three branches and expanded our footprint along the U.S. Interstate
64 corridor into the attractive and growing markets of the Virginia Peninsula.
We believe that economic growth and bank consolidation have created
a growing number of businesses and consumers in need of a broad range of products and services, as well as the high level of personal
service that we provide. We look at 2017 as a year to strengthen our existing markets. Our long-term business plan is to capitalize
on the growth opportunity in our markets by further developing our branch network and augmenting our market area, including through
the Pending Merger with Southern National.
Competition
The Bank encounters strong competition for its banking services
within its primary market areas. The sources of competition vary based on the particular market of operation, which can range from
a small rural town to part of a large urban market. The Bank competes with large national and regional financial institutions,
savings associations and other independent community banks, as well as credit unions, mutual funds and life insurance companies.
The banking business in the Bank’s primary market areas is highly competitive for both loans and deposits, and is dominated
by a relatively small number of large banks with many offices operating over a wide geographic area. Among the advantages such
large banks have over the Bank are their ability to offer banking products and services at large branch networks, to launch and
finance wide-ranging advertising campaigns and, by virtue of their greater total capitalization, to have substantially higher lending
limits than the Bank. In addition, large banks may more easily comply with certain regulations applicable to banking activities
and consumer financial products and services.
Factors such as interest rates offered, the number and location
of branches and the types of products offered, as well as the reputation of the institution, affect competition for deposits and
loans. The Bank competes by emphasizing customer service and technology, establishing long-term customer relationships, building
customer loyalty, and providing products and services to address the specific needs of its customers. The Bank targets individuals
and small to medium sized business customers. No material part of the Bank’s business is dependent upon a single or a few
customers, and the loss of any single customer would not have a material adverse effect upon the Bank’s business.
Because federal regulation of financial institutions changes regularly
and is the subject of constant legislative debate, we cannot foresee how federal regulation of financial institutions may change
in the future. However, it is possible that current and future governmental regulatory and economic initiatives could impact the
competitive landscape in the Bank’s markets.
Employees
As of December 31, 2016, the Company had 315 full-time equivalent
employees. Management of the Company considers its relations with employees to be excellent. No employees are represented by a
union or any similar group, and the Company has never experienced any strike or labor dispute.
Regulation and Supervision
General
Bank holding companies, banks and their affiliates are extensively
regulated under both federal and state law. The regulatory framework is intended primarily for the protection of depositors, federal
deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. The following
summary briefly describes significant provisions of currently applicable federal and state laws and certain regulations and the
potential impact of such provisions on the Company and the Bank. This summary is not complete, and we refer you to the particular
statutory or regulatory provisions or proposals for more information. Because regulation of financial institutions changes regularly
and is the subject of constant legislative and regulatory debate, we cannot forecast how federal and state regulation and supervision
of financial institutions may change in the future and affect the Company’s and the Bank’s operations.
Regulatory Reform
The financial crisis of 2008, including the downturn of global economic,
financial and money markets and the threat of collapse of numerous financial institutions, and other related events led to the
adoption of numerous laws and regulations that apply to financial institutions. The most significant of these laws is the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), adopted on July 21, 2010 to implement significant
structural reforms to the financial services industry. The Dodd-Frank Act is discussed in more detail below.
The Company continues to experience a period of rapidly changing
regulatory requirements and an environment of constant regulatory reform. These regulatory changes could have a significant effect
on how the Company conducts its business. The full extent of the Dodd-Frank Act and other potential regulatory reforms cannot yet
be fully predicted and will depend to a large extent on the specific regulations that are adopted.
Regulation of the Company
As a public company, the Company is subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Company must file annual,
quarterly, current and other reports with the Securities and Exchange Commission (the “SEC”), and also comply with
other laws and regulations of the SEC applicable to public companies.
As a bank holding company, the Company is also subject to the Bank
Holding Company Act of 1956 (the “BHCA”) and supervision and regulation by the Board of Governors of the Federal Reserve
System (the “Federal Reserve Board”). Generally, a bank holding company is required to obtain the approval of the Federal
Reserve Board before acquiring direct or indirect ownership or control of more than five percent of the voting shares of a bank
or bank holding company, including through a bank or bank holding company merger or acquisition, completing a non-bank acquisition,
or engaging in an activity considered to be a banking activity, either directly or through a subsidiary. Bank holding companies
and their subsidiaries are also subject to restrictions on transactions with insiders and affiliates.
Pursuant to the BHCA, the Federal Reserve Board has the power to
order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary
when the Federal Reserve Board has reasonable grounds to believe that continuation of such activity or ownership constitutes a
serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The BHCA generally limits the activities of a bank holding company
and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is closely related to banking
or to managing or controlling banks, and permits interstate banking acquisitions subject to certain conditions, including national
and state concentration limits. The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition,
merger or consolidation proposed by a bank holding company. A bank holding company must be well capitalized and well managed to
engage in an interstate acquisition or merger, and banks may branch across state lines provided that the law of the state in which
the branch is to be located would permit establishment of the branch if the bank were a state bank chartered by such state.
A bank holding company is prohibited from engaging in or acquiring,
either directly or indirectly through a subsidiary, ownership or control of more than five percent of the voting shares of any
company engaged in non-banking activities. A bank holding company may, however, engage in or acquire an interest in a company that
engages in activities that the Federal Reserve Board has determined by regulation or order are so closely related to banking as
to be a proper incident to banking. A bank holding company also may become eligible to engage in activities that are financial
in nature or complimentary to financial activities by qualifying as a financial holding company under the Gramm-Leach-Bliley Act
of 1999 (the “GLBA”). To qualify as a financial holding company, each insured depository institution controlled by
the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment
Act. To date, the Company has not qualified as a financial holding company, and the qualification as such by other bank holding
companies has not had a material impact on the business of the Company.
Each of the Bank’s depository accounts is insured by the Federal
Deposit Insurance Corporation (the “FDIC”) against loss to the depositor to the maximum extent permitted by applicable
law, and federal law and regulatory policy impose a number of obligations and restrictions on the Company and the Bank to reduce
potential loss exposure to the depositors and to the FDIC insurance funds. For example, pursuant to the Dodd-Frank Act and Federal
Reserve Board policy, a bank holding company must commit resources to support its subsidiary depository institutions, which is
referred to as serving as a “source of strength.” In addition, insured depository institutions under common control
must reimburse the FDIC for any loss suffered or reasonably anticipated by the Deposit Insurance Fund (the “DIF”) as
a result of the default of a commonly controlled insured depository institution. The FDIC may decline to enforce the provisions
if it determines that a waiver is in the best interest of the DIF. An FDIC claim for damage is superior to claims of stockholders
of an insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders
of subordinated debt, other than affiliates, of the commonly controlled insured depository institution.
The Federal Deposit Insurance Act (the “FDIA”) provides
that amounts received from the liquidation or other resolution of any insured depository institution must be distributed, after
payment of secured claims, to pay the deposit liabilities of the institution before payment of any other general creditor or stockholder
of that institution - including that institution’s parent holding company. This provision would give depositors a preference
over general and subordinated creditors and stockholders if a receiver is appointed to distribute the assets of the Bank.
The Company also is subject to regulation and supervision by the
Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”).
Capital Requirements
The Federal Reserve Board and the FDIC have adopted rules to implement
the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted
assets and risk-based capital measurements (collectively, the “Basel III Capital Rules”) that apply to banking organizations
they supervise. For the purposes of these capital rules, (i) common equity tier 1 capital (“CET1”) consists principally
of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative
preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities; and
(iii) Tier 2 capital consists principally of Tier 1 capital plus qualifying subordinated debt and preferred stock, and limited
amounts of the allowance for loan losses. Each regulatory capital classification is subject to certain adjustments and limitations,
as implemented by the Basel III Capital Rules. The Basel III Capital Rules also establish risk weightings that are applied to many
classes of assets held by community banks, importantly including applying higher risk weightings to certain commercial real estate
loans.
The Basel III Capital Rules were effective January 1, 2015, and
the Basel III Capital Rules capital conservation buffer will be phased in from 2016 to 2019.
When fully phased in, the Basel III Capital Rules require banks
to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”
(which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted
assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%,
plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively
resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1
plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0%
total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation)
and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance
sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
The Basel III Capital Rules provide deductions from and adjustments
to regulatory capital measures, primarily to CET1, including deductions and adjustments that were not applied to reduce CET1 under
historical regulatory capital rules. For example, mortgage servicing rights, deferred tax assets, dependent upon future taxable
income, and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one
such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. These deductions from and adjustments
to regulatory capital will generally be phased in beginning in 2015 through 2018.
The Basel III Capital Rules permanently includes in Tier 1 capital
trust preferred securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion in total assets, subject
to a limit of 25% of Tier 1 capital. The Company expects that its trust preferred securities will be included in the Company’s
Tier 1 capital until their maturity.
The Basel III Capital Rules also implement a “countercyclical
capital buffer,” generally designed to absorb losses during periods of economic stress and to be imposed when national regulators
determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. This buffer is a CET1 add-on
to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of
between 2.5% and 5%).
Under the Basel III Capital Rules, the minimum capital ratios as
of December 31, 2016 were as follows (including the impact of the capital conservation buffer):
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5.1250% CET1 to risk-weighted assets.
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6.6250% Tier 1 capital to risk-weighted assets.
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8.6250% Total capital to risk-weighted assets.
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The Basel III Capital Rules prescribe a standardized approach for
risk weightings that expand the risk-weighting categories to a much larger and more risk-sensitive number of categories than has
been historically applied, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities,
to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes
that impacted the Company’s determination of risk-weighted assets included, among other things:
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Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development
and construction loans.
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Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
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Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or
less that is not unconditionally cancellable (currently set at 0%).
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Management believes that, as of December 31, 2016, the Company would
have met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements
were then in effect.
Limits on Dividends
The Company is a legal entity that is separate and distinct from
the Bank, and the ability of the Company to pay dividends depends upon the amount of dividends declared by the Bank, if any. In
addition, the ability of the Company to pay dividends is subject to various laws and regulations, including limits on the sources
of dividends and requirements to maintain capital at or above regulatory minimums. Regulatory restrictions also exist with respect
to the Bank’s ability to pay dividends. Banking regulators have indicated that Virginia banking organizations should generally
pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes accrued
or due by the bank, and (2) if the prospective rate of earnings retention appears consistent with the organization’s capital
needs, asset quality and overall financial condition. In addition, Federal Reserve Board supervisory guidance indicates that the
Federal Reserve Board may have safety and soundness concerns if a bank holding company pays dividends that exceed earnings for
the period in which the dividend is being paid. Further, the FDIA prohibits insured depository institutions such as the Bank from
making capital distributions, including paying dividends, if after making such distribution the institution would become undercapitalized
as defined in the statute.
Reporting Obligations
As a bank holding company, the Company must file with the Federal
Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The
Bank must submit to federal and state regulators annual audit reports prepared by independent auditors. The Company’s annual
report, which includes the report of the Company’s independent auditors, can be used to satisfy this requirement. The Bank
must submit quarterly, to the FDIC, Reports of Condition and Income (referred to in the banking industry as a Call Report). The
Company must submit quarterly, to the Federal Reserve Board, Consolidated Financial Statements for Bank Holding Companies (FR Y-9C)
and Parent Company Only Financial Statements for Large Bank Holding Companies (FR Y-9LP).
The Dodd-Frank Act
The Dodd-Frank Act implements far-reaching changes across the financial
regulatory landscape, including changes that have affected all bank holding companies and banks, including the Company and the
Bank. Provisions that significantly affect the business of the Company and the Bank include the following:
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Insurance of Deposit Accounts.
The Dodd-Frank Act changed the assessment base for federal deposit insurance from the
amount of insured deposits to consolidated assets less tangible capital. The Dodd-Frank Act also made permanent the $250,000 limit
for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation protection from $100,000
to $250,000.
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Payment of Interest on Demand Deposits.
The Dodd-Frank Act repealed the federal prohibitions on the payment of interest
on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
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Creation of the Consumer Financial Protection Bureau (“CFPB”).
The Dodd-Frank Act centralized significant
aspects of consumer financial protection by creating a new agency, the CFPB, which is discussed in more detail below.
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Debit Card Interchange Fees.
The Dodd-Frank Act imposed limits for debit card interchange fees for issuers that have
over $10 billion in assets, which could affect the amount of interchange fees collected by financial institutions with less than
$10 billion in assets.
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In addition, the Dodd-Frank Act implements other changes to financial
regulations, including provisions that:
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Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from availing
themselves of such preemption.
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Impose comprehensive regulation of the over-the-counter derivatives market, subject to significant rulemaking processes, which
would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives
businesses in the institution itself.
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Require loan originators to retain 5 percent of any loan sold or securitized, unless it is a "qualified residential mortgage,"
subject to certain exceptions.
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Implement corporate governance revisions that apply to all public companies not just publicly-traded financial institutions.
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The Dodd-Frank Act contains many other provisions, and federal regulators
continue to draft implementing regulations which may affect the Company or the Bank. Accordingly, the topics discussed above are
only a representative sample of the types of new or increasing regulatory issues in the Dodd-Frank Act that may have an impact
on the Company and the Bank.
Source of Strength Doctrine
The Dodd-Frank Act codifies and expands the existing Federal Reserve
Board policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary
banks. Under the Dodd-Frank Act, the term “source of financial strength” is defined to mean the “ability of a
company that directly or indirectly controls an insured depository institution to provide financial assistance to such insured
depository institution in the event of the financial distress of the insured depository institution.” As of March 2017, implementing
regulations of the Dodd-Frank Act source of strength provisions, however, have not yet been promulgated. It is the Federal Reserve
Board’s existing policy that a bank holding company should stand ready to use available resources to provide adequate capital
to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks. Consistent with this, the Federal Reserve Board has
stated that, as a matter of prudent banking, a bank holding company should generally not maintain a given rate of cash dividends
unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate
of earnings retention appears to be consistent with the organization’s capital needs, asset quality, and overall financial
condition.
Incentive Compensation
The Federal Reserve Board, the Office of the Comptroller of the
Currency and the FDIC have issued regulatory guidance (the “Incentive Compensation Guidance”) intended to ensure that
the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by
encouraging excessive risk-taking. The Federal Reserve Board will review, as part of the regular, risk-focused examination process,
the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking
organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s
activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included
in reports of examination and incorporated into the organization’s supervisory ratings. Enforcement actions may be taken
against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes,
pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to
correct the deficiencies. The federal banking agencies emphasize that all banking organizations must carefully design and oversee
incentive compensation policies to ensure such policies do not undermine the safety and soundness of such organizations.
In 2016, the SEC and the federal banking agencies proposed rules
that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based
compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive
officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to
material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether
compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead
to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements
must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward. The proposed rules
also impose additional corporate governance requirements on the boards of directors of covered financial institutions and imposes
additional record-keeping requirements. The comment period for these proposed rules has closed and a final rule has not yet been
published.
Regulation of the Bank
The Bank, as a state-chartered member bank of the Federal Reserve
System, is subject to regulation and examination by the Bureau and the Federal Reserve Board. The various laws and regulations
issued and administered by the regulatory agencies (including the CFPB) affect corporate practices, such as the payment of dividends,
the incurrence of debt and the acquisition of financial institutions and other companies, and affect business practices and operations,
such as the payment of interest on deposits, the charging of interest on loans, and the types of business conduct, the products
and terms offered to customers. In addition, the Bank is subject to the rules and regulations of the FDIC, which currently insures
substantially all of the Bank’s deposits up to applicable limits of the DIF, and is subject to deposit insurance assessments
to maintain the DIF.
Prior approval of the applicable primary federal regulatory and
the Bureau is required for a Virginia chartered bank or a bank holding company to merge with another bank or bank holding company,
or purchase the assets or assume the deposits of another bank or bank holding company, or acquire control of another bank or bank
holding company. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities
will consider, among other things, the competitive effect and public benefits of the transactions, the financial condition and
capital position of, and any asset concentrations (including commercial real estate loan concentrations) of the combined organization,
the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community
Reinvestment Act and fair housing initiatives, the data security and cybersecurity infrastructure of the constituent organizations
and the combined organization, and the applicant’s compliance with and the effectiveness of the subject organizations in
combating money laundering activities and complying with Bank Secrecy Act requirements.
FDIC Insurance, Assessments and Regulation
The Bank’s deposits are insured by the DIF of the FDIC up
to the standard maximum insurance amount for each deposit ownership category. As of March 2017, the basic limit on FDIC deposit
insurance coverage was $250,000 per depositor. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the
institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial
hearing and review processes.
The DIF is funded by assessments on banks and other depository institutions
calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 capital). As required by
the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target “designated reserve ratio”
(described in more detail below) of 2% for the DIF and established a lower assessment rate schedule when the reserve ratio reaches
1.15% and, in lieu of dividends, provides for a lower assessment rate schedule, when the reserve ratio reaches 2% and 2.5%. An
institution's assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure
over a three year period, which considers the institution’s weighted average CAMELS component rating, and is subject to further
adjustments including related to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion
in assets). At December 31, 2016 total base assessment rates for institutions that have been insured for at least five years range
from 1.5 to 40 basis points, with rates of 1.5 to 30 basis points applying to banks with less than $10 billion in assets.
The Dodd-Frank Act transferred to the FDIC increased discretion
with regard to managing the required amount of reserves for the DIF, or the “designated reserve ratio.” Among other
changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to 1.35% and removed the upper limit on the designated
reserve ratio, (ii) requires that the designated reserve ratio reach 1.35% by September 2020, and (iii) requires the FDIC to offset
the effect on institutions with total consolidated assets of less than $10 billion of raising the designated reserve ratio from
1.15% to 1.35% – which requirement was met through rules adopted by the FDIC during 2016. The FDIA requires that the FDIC
consider the appropriate level for the designated reserve ratio on at least an annual basis. On October 2010, the FDIC adopted
a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank
Act. On June 30, 2016 the designated reserve ratio rose to 1.17 percent, which triggered three major changes to deposit insurance
assessments for the third quarter of 2016: (i) the range of initial assessment rates for all institutions declined from 5 to 35
basis points to 3 to 30 basis points (which are included in the total base assessment rates in the above paragraph); (ii) surcharges
equal to an annual rate of 4.5 basis points began for insured depository institutions with total consolidated assets of $10 billion
or more; and (iii) the revised assessment method described above was implemented.
FDIC insurance expense totaled $707 thousand, $821 thousand and
$921 thousand in 2016, 2015 and 2014, respectively. FDIC insurance expense includes deposit insurance assessments and Financing
Corporation (“FICO”) assessments related to outstanding FICO bonds. The FICO is a mixed-ownership government corporation
established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now
defunct Federal Savings & Loan Insurance Corporation. The FICO assessment rate for the DIF ranged between a high of 0.58 basis
points for 2016, with a low of 0.56 basis points for the second, third and fourth quarters of 2016. For the first quarter of 2017,
the FICO assessment rate for the DIF is 0.54 basis points resulting in a premium of $0.0054 per $100 of DIF-eligible deposits.
Prompt Corrective Action
The federal banking agencies have broad powers under current federal
law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends
upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” These terms are defined under uniform
regulations issued by each of the federal banking agencies regulating these institutions. An insured depository institution which
is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight
and is increasingly restricted in the scope of its permissible activities. The Company believes that, as of December 31, 2016,
its bank subsidiary, EVB, was “well capitalized” based on the applicable ratios.
Mortgage Banking Regulation
In connection with making mortgage loans, the Bank is subject to
rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, require certain
disclosures, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases,
restrict certain loan features and fix maximum interest rates and fees. In addition to other federal laws, mortgage origination
activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act (“TILA”), Home Mortgage Disclosure
Act, Real Estate Settlement Procedures Act (“RESPA”), and Home Ownership Equity Protection Act, and the regulations
promulgated under these acts. These laws prohibit discrimination, require the disclosure of certain information to mortgagors concerning
credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require
the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical
distribution and income level. The Dodd-Frank Act has transferred rulemaking authority under many of these laws to the CFPB.
Compliance with the requirements of TILA, RESPA, and other federal
and state laws and regulations (including regulations adopted by the CFPB) may require substantial investments in mortgage lending
systems and processes and implementation efforts to respond to regulatory developments, all of which may impose significant costs
on the Bank. For example, compliance with the CFPB’s Integrated Mortgage Disclosure Rules under TILA and RESPA (or
“TRID”), which became effective in October 2015, requires the Bank to implement at significant cost new systems and
processes that will apply to most closed-end mortgage loans originated by the Bank.
The Bank’s mortgage origination activities are also subject
to Regulation Z, which implements TILA. As amended and effective in January 2014, certain provisions of Regulation Z require mortgage
lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying
for a mortgage loan has a reasonable ability to repay the loan according to its terms. Alternatively, a mortgage lender can originate
“qualified mortgages”, which are generally defined as mortgage loans without negative amortization, interest-only payments,
balloon payments, terms exceeding 30 years, and points and fees paid by a consumer equal to or less than 3% of the total loan amount.
Higher-priced qualified mortgages (e.g., subprime loans) receive a rebuttable presumption of compliance with ability-to-repay rules,
and other qualified mortgages (e.g., prime loans) are deemed to comply with the ability-to-repay rules. The Bank predominately
originates mortgage loans that comply with Regulation Z’s “qualified mortgage” rules.
Consumer Protection
The Dodd-Frank Act created the CFPB, a federal regulatory agency
that is responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions
with more than $10 billion of assets and, to a lesser extent, smaller institutions. The Dodd-Frank Act gives the CFPB authority
to supervise and regulate providers of consumer financial products and services, establishes the CFPB’s power to act against
unfair, deceptive or abusive practices and gives the CFPB rulemaking authority in connection with numerous federal consumer financial
protection laws (for example, but not limited to, TILA and RESPA).
As a smaller institution (i.e., with assets of $10 billion or less),
most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company and the Bank by the Federal Reserve
Board. However, the CFPB may include its own examiners in regulatory examinations by a small institution’s prudential regulators
and may require smaller institutions to comply with certain CFPB reporting requirements. In addition, regulatory positions taken
by the CFPB and administrative and legal precedents established by CFPB enforcement activities, including in connection with supervision
of larger bank holding companies, could influence how the Federal Reserve Board applies consumer protection laws and regulations
to financial institutions that are not directly supervised by the CFPB. The precise impact of the CFPB’s consumer protection
activities on the Company and the Bank cannot be determined with certainty. In 2016, the CFPB proposed rules that provide an exception
to the requirement to deliver an annual privacy notice if a financial institution only provides nonpublic personal information
to unaffiliated third parties under limited exceptions under the Gramm-Leach-Bliley Act and related regulations, and has not changed
its policies and practices regarding disclosure of nonpublic personal financial information from those disclosed in the most recent
privacy notice provided to the customer.
Confidentiality and Required Disclosures of Customer Information
The Company and the Bank are subject to various laws and regulations
that address the privacy of nonpublic personal financial information of consumers. The GLBA and certain regulations issued thereunder
protect against the transfer and use by financial institutions of consumer nonpublic personal information. A financial institution
must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution's policies
and procedures regarding the handling of customers' nonpublic personal financial information. These privacy provisions generally
prohibit a financial institution from providing a customer's personal financial information to unaffiliated third parties unless
the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to
opt out of such disclosure.
The Company and the Bank are also subject to various laws and regulations
that attempt to combat money laundering and terrorist financing. The Bank Secrecy Act requires all financial institutions to, among
other things, create a system of controls designed to prevent money laundering and the financing of terrorism, and imposes recordkeeping
and reporting requirements. The USA Patriot Act facilitates information sharing among governmental entities and financial institutions
for the purpose of combating terrorism and money laundering, and requires financial institutions to establish anti-money laundering
programs. The Federal Bureau of Investigation (“FBI”) sends banking regulatory agencies lists of the names of persons
suspected of involvement in terrorist activities, and requests banks to search their records for any relationships or transactions
with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report with
the U.S. Department of the Treasury (the “Treasury”) and contact the FBI. The Office of Foreign Assets Control (“OFAC”),
which is a division of the Treasury, is responsible for helping to ensure that United States entities do not engage in transactions
with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. If the Bank finds
a name of an “enemy” of the United States on any transaction, account or wire transfer that is on an OFAC list, it
must freeze such account or place transferred funds into a blocked account, file a suspicious activity report with the Treasury
and notify the FBI.
Although these laws and programs impose compliance costs and create
privacy obligations and, in some cases, reporting obligations, and compliance with all of the laws, programs and privacy and reporting
obligations may require significant resources of the Company and the Bank, these laws and programs do not materially affect the
Bank’s products, services or other business activities.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”) imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income
neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting
community credit needs are assessed based on specified factors. These factors also are considered in evaluating mergers, acquisitions
and applications to open a branch or facility. Following the Bank’s most recent scheduled compliance examination in July
2016, it received a CRA performance evaluation of “satisfactory.”
Federal Home Loan Bank of Atlanta
The Bank is a member of the Federal Home Loan Bank (“FHLB”)
of Atlanta, which is one of 12 regional FHLBs that provide funding to their members for making housing loans as well as for affordable
housing and community development loans. Each FHLB serves as a reserve, or central bank, for the members within its assigned region.
Each is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. Each FHLB makes loans
to members in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank
must purchase and maintain stock in the FHLB of Atlanta. In 2004, the FHLB converted to its new capital structure, which established
the minimum capital stock requirement for member banks as an amount equal to the sum of a membership requirement and an activity-based
requirement. At December 31, 2016, the Bank held $8.5 million of FHLB of Atlanta stock.
Volcker Rule
The Dodd-Frank Act prohibits bank holding companies and their subsidiary
banks from engaging in proprietary trading except in limited circumstances, and places limits on ownership of equity investments
in private equity and hedge funds (the “Volcker Rule”). On December 10, 2013, the U.S. financial regulatory agencies
(including the Federal Reserve Board, the FDIC and the SEC) adopted final rules to implement the Volcker Rule. In relevant part,
these final rules would have prohibited banking entities from owning collateralized debt obligations (“CDOs”) backed
by trust preferred securities, effective July 21, 2015. However, subsequent to these final rules the U.S. financial regulatory
agencies issued an interim rule effective April 1, 2014 to exempt CDOs backed by trust preferred securities from the Volcker Rule
and the final rule, provided that (a) the CDO was established prior to May 19, 2010, (b) the banking entity reasonably believes
that the CDO’s offering proceeds were used to invest primarily in trust preferred securities issued by banks with less than
$15 billion in assets, and (iii) the banking entity acquired the CDO investment on or before December 10, 2013.
Smaller banks, with total consolidated assets of $10 billion or
less, engaged in modest proprietary trading activities for their own accounts are subject to a simplified compliance program under
the final rules. Several portions of the Volcker Rule remain subject to regulatory rulemaking and legislative activity, including
to further delay effectiveness of some provisions of the Volcker Rule. The Company believes that its financial condition will not
be significantly impacted by the Volcker Rule, and does not expect that any delays in the effectiveness of the Volcker Rule will
significantly impact its financial condition.
Future Regulation
Including and in addition to the specific proposals described above,
from time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as
by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository
institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking
statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could
increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation
will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or
results of operations of the Company. A change in statutes, regulations, regulatory policies or regulatory guidance or interpretative
positions applicable to the Company or any of its subsidiaries could have a material effect on the business of the Company.
Available Information
The Company’s SEC filings are filed electronically and are
available to the public over the Internet at the SEC’s web site at http://www.sec.gov. In addition, any document filed by
the Company with the SEC can be read and copied at the SEC’s public reference facilities at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of documents can be obtained at prescribed rates by writing to the Public Reference Section of the
SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings also are available through our web site at http://www.evb.org
under “SEC Filings” as soon as reasonably practicable after they are filed with the SEC. Copies of documents also can
be obtained free of charge by writing to the Company’s Corporate Secretary at 10900 Nuckols Road, Suite 325, Glen Allen,
VA 23060 or by calling 804-443-8400. The information on the Company’s website is not, and shall not be deemed to be, a part
of this Annual Report on Form 10-K or incorporated into any other filings the Company makes with the SEC.
Item 1A.
Risk Factors
An investment in our common stock involves significant risks inherent
to the Company’s business. Like other bank holding companies, we are subject to a number of risks, many of which are outside
of our control. If any of the events or circumstances described in the following risk factors actually occur, our business, financial
condition, results of operations and prospects could be harmed. These risks are not the only ones that we may face. Other risks
of which we are not aware, including those which relate to the banking and financial services industry in general and us in particular,
or those which we do not currently believe are material, may harm our future business, financial condition, results of operations
and prospects. Readers should consider carefully the following important risks, in conjunction with the other information in this
Annual Report on Form 10-K including our consolidated financial statements and related notes, in evaluating us, our business and
an investment in our securities.
Deterioration in economic conditions could adversely affect
us.
Deterioration in economic and market conditions, such as the economic
downturn and recession that resulted from the financial crisis of 2008, could hurt our business and our financial condition and
results of operations. Our business is directly affected by general economic and market conditions, broad trends in industry and
finance, and inflation, all of which are beyond our control. A deterioration in economic conditions, and in particular an economic
slowdown within our markets, could result in increases in loan delinquencies, problem assets and foreclosures, and could result
in decreases in demand for our products and services, and values of collateral supporting our loans. Declines in the housing market,
including as experienced through falling home prices and rising foreclosures, can negatively impact the credit performance of real
estate related loans. Declines in the employment markets, including as experienced through high unemployment and underemployment,
can negatively impact the credit performance of consumer loans. Any of the foregoing effects could negatively impact our business,
financial condition and results of operations.
We operate in a mixed market environment with influences from both
rural and urban areas, and we will be affected by economic conditions in our Northern Neck, Middle Peninsula, Capital, Tidewater
and Southern market areas. Changes in the local economy may influence the growth rate of our loans and deposits, the quality of
the loan portfolio, and loan and deposit pricing. Although we might not have significant credit exposure to all the businesses
in our market areas, a downturn in any business sector of a market area or a downturn with respect to any significant business
in a market area could have a negative impact on local economic conditions and real estate collateral values in that market area,
which could negatively affect our profitability.
Offerings of our securities and other potential capital strategies
or the conversion of shares of our non-voting mandatorily convertible non-cumulative preferred stock, Series B (the “Series
B Preferred Stock”) into common stock could dilute your investment or otherwise affect your rights as a shareholder.
In the future we may seek to raise additional capital through offerings
of our common stock, preferred stock, securities convertible into common stock, or rights to acquire such securities or our common
stock. Under our Articles of Incorporation, we have additional authorized shares of common stock that we can issue from time to
time at the discretion of our Board of Directors, without further action by shareholders, except where shareholder approval is
required by applicable law or listing requirements of the NASDAQ Stock Market. The issuance of any additional shares of common
stock or securities convertible into common stock in a subsequent offering could be substantially dilutive to holders of our common
stock. Holders of our common stock have no preemptive rights as a matter of law that entitle them to purchase their pro-rata share
of any offering or shares of any class or series. In addition, under our Articles of Incorporation, we can authorize and issue
additional shares of our preferred stock, in one or more series the terms of which would be determined by our Board of Directors
without shareholder approval, unless such approval is required by applicable law or listing requirements of the NASDAQ Stock Market.
The market price of our common stock could decline as a result of future sales of our securities or the perception that such sales
could occur.
New investors, particularly with respect to newly authorized series
of preferred stock, also may have rights, preferences, and privileges that are senior to, and that could adversely affect, our
then current shareholders, and particularly holders of our common stock. For example, a new series of preferred stock could rank
senior to shares of our common stock. As a result, we could be required to make any dividend payments on such preferred stock before
any dividends can be paid on our common stock, and in the event of our bankruptcy, dissolution, or liquidation, we may have to
pay the holders of this new series of preferred stock in full prior to any distributions being made to the holders of our common
stock.
In addition, the conversion of shares of our Series B Preferred
Stock into common stock would dilute the voting power of our then-outstanding shares of common stock.
We cannot predict or estimate the amount, timing, or nature of our
future securities offerings or other capital initiatives or whether, when or how many shares of our Series B Preferred Stock will
be converted into shares of common stock. Thus, our shareholders bear the risk of our future offerings or future conversions of
shares of our Series B Preferred Stock diluting their stock holdings, adversely affecting their rights as shareholders, and/or
reducing the market price of our common stock.
Affiliates of Castle Creek Capital Partners (“Castle
Creek”) and GCP Capital Partners (“GCP Capital”) are substantial holders of our common stock.
Castle Creek holds approximately 8.1% of our common stock and approximately
27.8% of our combined common stock and Series B Preferred Stock. GCP Capital holds approximately 8.6% of our common stock and approximately
12.6% of our combined common stock and Series B Preferred Stock. Pursuant to the terms of the securities purchase agreements entered
into with Castle Creek and GCP Capital, Castle Creek and GCP Capital each have a right to appoint a representative on our Board
of Directors and on the Bank’s board of directors. Boris M. Gutin serves on the Boards of Directors of the Company and the
Bank at the request of an affiliate of GCP Capital. Castle Creek and GCP Capital may have individual economic interests that are
different from the other’s interests and different from the interests of our other shareholders.
Compliance with laws, regulations and supervisory guidance,
both new and existing, may adversely impact our business, financial condition and results of operations.
We are subject to numerous laws, regulations and supervision from
both federal and state agencies. During the past few years, there has been an increase in legislation related to and regulation
of the financial services industry. We expect this increased level of oversight to continue. Failure to comply with these laws
and regulations could result in financial, structural and operational penalties, including receivership. In addition, establishing
systems and processes to achieve compliance with these laws and regulations may increase our costs and/or limit our ability to
pursue certain business opportunities.
Laws and regulations, and any interpretations and applications with
respect thereto, generally are intended to benefit consumers, borrowers and depositors, not shareholders. The legislative and regulatory
environment is beyond our control, may change rapidly and unpredictably and may negatively influence our revenue, costs, earnings,
and capital levels. Our success depends on our ability to maintain compliance with both existing and new laws and regulations.
Failure to comply with regulatory requirements could subject
us to regulatory action.
The Company and the Bank are supervised by the Federal Reserve Board
and the Bureau. As such, each is subject to extensive supervision and prudential regulation. Both the Company and the Bank must
maintain certain risk-based and leverage capital ratios and operate in a safe and sound manner as required by the Federal Reserve
Board and the Bureau. If the Company or the Bank fails to meet regulatory capital requirements or is deemed to be operating in
an unsafe and unsound manner or in violation of law, it may be subject to a variety of informal or formal regulatory actions. Informal
regulatory actions may include a memorandum of understanding which is initiated by the regulator and outlines an institution’s
agreement to take specified actions within specified time periods to correct violations of law or unsafe and unsound practices.
In addition, as part of the regular examination process, regulators may advise the Company or the Bank to operate under various
restrictions as a prudential matter. Any of these restrictions, in whatever manner imposed, could have a material adverse effect
on our business, financial condition and results of operations.
In addition to informal regulatory actions, we may also be subject
to formal regulatory actions. Failure to comply with an informal regulatory action could lead to formal regulatory actions. Formal
regulatory actions include written agreements, cease and desist orders, the imposition of substantial fines and other penalties.
Furthermore, if the Bank became severely undercapitalized, it could become subject to the prompt corrective action framework which
imposes progressively more restrictive constraints on operations, management and capital. A failure to meet regulatory capital
requirements could also subject the Company to capital raising requirements. Additional capital raisings would be dilutive to holders
of our common stock.
Any remedial measure or regulatory action, whether formal or informal,
could impose restrictions on our ability to operate our businesses and adversely affect our prospects, financial condition or results
of operations. In addition, any formal enforcement action could harm our reputation and our ability to retain and attract customers,
and impact the trading price of our common stock.
Our regulatory compliance burden and associated costs could
continue to increase, which could place restrictions on certain products and services, and limit our future capital strategies.
A wide range of regulatory initiatives directed at the financial
services industry have been proposed in recent years. One of those initiatives, the Dodd-Frank Act, represents a sweeping overhaul
of the financial services industry within the United States and mandates significant changes in the financial regulatory landscape
that has impacted and will continue to impact all financial institutions, including the Company and the Bank. The federal regulatory
agencies, and particularly bank regulatory agencies, are given significant discretion in drafting the Dodd-Frank Act’s implementing
rules and regulations, and certain of the implementing rules and regulations have not yet been proposed or approved; consequently
the full details and impact of the Dodd-Frank Act will depend on the final implementing rules and regulations. Accordingly, it
remains too early to fully assess the full impact of the Dodd-Frank Act and subsequent regulatory rulemaking processes on our business,
financial condition or results of operations.
The Dodd-Frank Act creates a new financial consumer protection agency,
the CFPB, that can impose new regulations on us and include its examiners in our routine regulatory examinations conducted by the
Federal Reserve Bank of Richmond (the “Reserve Bank”), which could increase our regulatory compliance burden and costs
and restrict the financial products and services we can offer to our customers. The CFPB, through the agency’s rulemaking
and enforcement authority with respect to the Dodd-Frank Act’s prohibitions against unfair, deceptive and abusive business
practices, may reshape the consumer financial protection laws and directly impact the business operations of financial institutions
offering consumer financial products or services, including the Company and the Bank. This agency’s broad rulemaking authority
includes identifying practices or acts that are unfair, deceptive or abusive in connection with any consumer financial transaction
or consumer financial product or service. The costs and limitations related to this additional regulatory agency and the limitations
and restrictions that will be placed upon the Company with respect to its consumer product and service offerings have yet to be
determined. However, these costs, limitations and restrictions may produce significant, material effects on our business, financial
condition and results of operations.
The Basel III Capital Rules require higher levels of capital
and liquid assets, which could adversely affect our net income and return on equity.
The Basel III Capital Rules, which began to apply to the Company
and the Bank on January 1, 2015, represent the most comprehensive overhaul of the U.S. banking capital framework in over two decades.
These rules require bank holding companies and their subsidiaries, such as the Company and the Bank, to dedicate more resources
to capital planning and regulatory compliance, and maintain substantially more capital as a result of higher required capital levels
and more demanding regulatory capital risk-weightings and calculations. The rules also require all banks to substantially change
the manner in which they collect and report information to calculate risk-weighted assets, and likely increase risk-weighted assets
at many banking organizations as a result of applying higher risk-weightings to certain types of loans and securities. As a result,
we may be forced to limit originations of certain types of commercial and mortgage loans, thereby reducing the amount of credit
available to borrowers and limiting opportunities to earn interest income from the loan portfolio, or change the way we manage
past-due exposures.
Due to the changes to bank capital levels and the calculation of
risk-weighted assets, many banks could be required to access the capital markets on short notice and in relatively weak economic
conditions, which could result in banks raising capital that significantly dilutes existing shareholders. Additionally, many community
banks could be forced to limit banking operations and activities, and growth of loan portfolios and interest income, in order to
focus on retention of earnings to improve capital levels. If the Basel III Capital Rules require the Company to access the capital
markets in this manner, or similarly limit the Bank’s operations and activities, the Basel III Capital Rules would have a
detrimental effect on our net income and return on equity and limit the products and services we provide to our customers.
We have a high concentration of loans secured by both residential
and commercial real estate and a further downturn in either or both real estate markets, for any reason, may increase our credit
losses, which would negatively affect our financial results.
We offer a variety of secured loans, including commercial lines
of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Most of our loans are secured
by real estate (both residential and commercial) in our market areas. At December 31, 2016, approximately 80.5% of our $1.0 billion
loan portfolio was secured by residential and commercial real estate. Changes in the real estate market, such as a deterioration
in market value of collateral, or a decline in local employment rates or economic conditions, could adversely affect our customers’
ability to pay these loans, which in turn could impact our profitability. Repayment of our commercial loans is often dependent
on the cash flow of the borrower, which may be unpredictable. If the value of real estate serving as collateral for the loan portfolio
materially declines, a significant portion of the loan portfolio could become under-collateralized. If the loans that are secured
by real estate become troubled when real estate market conditions are declining or have declined, in the event of foreclosure we
may not be able to realize the amount of collateral that was anticipated at the time of originating the loan. In that
event, we may have to increase the provision for loan losses, which could have a material adverse effect on our operating results
and financial condition.
Our small to medium-sized business target market may have
fewer financial resources to weather a downturn in the economy.
We target our commercial development and marketing strategy primarily
to serve the banking and financial services needs of small and medium-sized businesses. These businesses generally have fewer financial
resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact this
major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.
We have a concentration of credit exposure in acquisition
and development (or “ADC”) real estate loans.
At December 31, 2016, we had approximately $108.7 million in loans
for the acquisition and development of real estate and for construction of improvements to real estate, representing approximately
10.5% of our total loans outstanding as of that date. These loans are to developers, builders and individuals. Project types financed
include acquisition and development of residential subdivisions and commercial developments, builder lines for one to four family
home construction and loans to individuals for primary and secondary residence construction. These types of loans are generally
viewed as having more risk of default than residential real estate loans. Completion of development projects and sale of developed
properties may be affected significantly by general economic conditions, and further downturn in the local economy or in occupancy
rates in the local economy where the property is located could increase the likelihood of default. Because our loan portfolio contains
acquisition and development loans with relatively large balances, the deterioration of one or a few of these loans could cause
a significant increase in our percentage of non-performing loans. An increase in non-performing loans could result in a loss of
earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have
a material adverse effect on our financial condition and results of operations.
We may need to raise additional capital that may not be available
to us.
We may need to or may otherwise be required to raise additional
capital in the future, including if we incur losses or due to regulatory mandates. The ability to raise additional capital, if
needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial
performance. Accordingly, additional capital may not be raised, if and when needed, on terms acceptable to us, or at all. If we
cannot raise additional capital when needed, our ability to maintain our capital ratios could be materially impaired, and we could
face additional regulatory challenges.
If our allowance for loan losses becomes inadequate, our results
of operations may be adversely affected.
Making loans is an essential element of our business. The risk of
nonpayment is affected by a number of factors, including but not limited to: the duration of the credit; credit risks of a particular
customer; changes in economic and industry conditions; and, in the case of a collateralized loan, risks resulting from uncertainties
about the future value of the collateral. We cannot be sure that we will be able to identify deteriorating loans before they become
nonperforming assets, or that we will be able to limit losses on those loans that are identified. Our allowance for loan losses
is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, current economic conditions
that may affect a borrower’s ability to repay and the value of collateral, changes in the size and composition of the loan
portfolio and industry information. Also included in our estimates for loan losses are considerations with respect to the impact
of economic events, the outcome of which are uncertain. Because any estimate of loan losses is necessarily subjective and the accuracy
of any estimate depends on the outcome of future events, we face the risk that charge-offs in future periods will exceed our allowance
for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for
loan losses would result in a decrease of our net income. We cannot be certain that our allowance for loan losses is adequate to
absorb probable losses in our loan portfolio.
We may incur losses if we are unable to successfully manage
interest rate risk.
Our profitability depends in substantial part upon the spread between
the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities.
These rates are normally in line with general market rates and rise and fall based on the asset liability committee’s view
of our financing and liquidity needs. We may selectively pay above-market rates to attract deposits, as we have done in some of
our marketing promotions in the past. Changes in interest rates will affect our operating performance and financial condition in
diverse ways including the pricing of securities, loans and deposits, which, in turn, may affect the growth in loan and retail
deposit volume. Our net interest income will be adversely affected if market interest rates change so that the interest we pay
on deposits and borrowings increases faster than the interest we earn on loans and investments. Our net interest spread will
depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal
policies, and economic conditions generally. Fluctuations in market rates are neither predictable nor controllable and may have
a material and negative effect on our business, financial condition and results of operations.
Changes in interest rates also affect the value of our loans.
An increase in interest rates could adversely affect our borrowers’ ability to pay the principal or interest on existing
loans or reduce their desire to borrow more money. This may lead to an increase in nonperforming assets or a decrease
in loan originations, either of which could have a material and negative effect on our results of operations.
Our future success is dependent on our ability to compete
effectively in the highly competitive banking industry.
We face vigorous competition from other banks and other financial
institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and
other financial services in our market area. A number of these banks and other financial institutions are significantly larger
than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems,
and offer a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such
as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which
may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations
that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. We may face a competitive
disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our
marketing costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on
loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to
attract new or to retain existing clients may reduce or limit our margins and our market share and may adversely affect our results
of operations, financial condition and growth.
We face risks in connection with our strategic and other business
initiatives and we may not be able to fully execute on these initiatives, which could have a material adverse effect on our financial
condition or results of operations.
From time to time we may pursue, develop, and implement strategic
business initiatives. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able
to negotiate or finance such opportunities or that such opportunities, if pursued, will be successful.
We remain focused on building a robust banking franchise and continue
to evaluate and undertake various strategic activities and business initiatives. These initiatives may include products or services
that are new to us. There can be no assurance that we will successfully identify appropriate initiatives, that we will be able
to negotiate or finance such initiatives or that such initiatives, if undertaken, will be successful.
Our ability to execute strategic and other business initiatives
successfully will depend on a variety of factors. These factors likely will vary based on the nature of the initiative but may
include: overall market conditions, meeting applicable regulatory requirements and receiving approval of any regulatory applications
or filings, hiring or retaining key employees, achieving anticipated business results and our success in operating effectively
with any co-investor or partner with whom we elect to do business. Our ability to address these factors successfully cannot be
assured. In addition, our strategic efforts may divert resources or management's attention from ongoing business operations and
may subject us to additional regulatory scrutiny and potential liability. If we do not successfully execute a strategic initiative,
it could adversely affect our business, financial condition, results of operations or reputation. In connection with executing
any such initiative, we would expect to incur additional non-interest expense, and perhaps the initiative’s entire cost,
in advance of realizing improved financial condition and results of operations as a result of the initiative.
Deterioration in the soundness of our counterparties could
adversely affect us.
Our ability to engage in routine funding transactions could be adversely
affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated
as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties
in the financial industry, including brokers and dealers, commercial banks, and other institutional clients. As a result, defaults
by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally,
could create another market-wide liquidity crisis similar to that experienced in late 2008 and early 2009 and could lead to losses
or defaults by us or by other institutions. There is no assurance that the failure of our counterparties would not materially adversely
affect the Company’s results of operations.
Cyber-attacks or other security breaches could have a material
adverse effect on our business.
As a financial institution, our operations rely heavily on the secure
data processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure,
interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online
banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and
integrity of our systems and the technology we use could be threatened by a variety of interruptions or information security breaches,
including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets.
We may fail to promptly identify or adequately address any such failures, interruptions or security breaches if they do occur.
While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve.
We may be required to expend significant additional resources in the future to modify and enhance our protective measures.
The nature of our business may make it an attractive target and
potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. The technology-based
platform we use processes sensitive data from our borrowers and investors. While we have taken steps to protect confidential information
that we have access to, our security measures and the security measures employed by the owners of the technology in the platform
that we use could be breached. Any accidental or willful security breaches or other unauthorized access to our systems could cause
confidential customer, borrower and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized
access to confidential information could also expose us to liability related to the loss of the information, time-consuming and
expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance
or otherwise, or if design flaws in the technology-based platform that we use are exposed and exploited, our relationships with
borrowers and investors could be severely damaged, and we could incur significant liability.
Because techniques used to sabotage or obtain unauthorized access
to systems change frequently and generally are not recognized until they are launched against a target, we and our collaborators
may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, federal regulators and
many federal and state laws and regulations require companies to notify individuals of data security breaches involving their personal
data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity,
which may cause customers, borrowers and investors to lose confidence in the effectiveness of our data security measures. Any security
breach, whether actual or perceived, would harm our reputation and could cause us to lose customers, borrowers, investors and partners
and adversely affect our business and operations.
We rely heavily on our management team and the unexpected
loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.
We are a customer-focused and relationship-driven organization.
We expect our future success to be driven in a large part by the relationships maintained with our customers by our president and
chief executive officer and other senior officers. We have entered into employment agreements with certain of our executive officers,
including our chief executive officer. The existence of such agreements, however, does not necessarily assure that we will be able
to continue to retain their services. The unexpected loss of any of our key employees could have an adverse effect on our business
and possibly result in reduced revenues and earnings. The implementation of our business strategy will also require us to continue
to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products
and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit
their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals
more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting,
hiring, motivating or retaining them.
Our deposit insurance premiums could increase in the future,
which may adversely affect our future financial performance.
The FDIC insures deposits at FDIC insured financial institutions,
including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a certain level. The financial
crisis of 2008 and the resulting recession increased the rate of bank failures and expectations for further bank failures, requiring
the FDIC to make payments for insured deposits from the DIF – which depleted the DIF – and prepare for future payments
from the DIF.
On April 1, 2011, final rules to implement changes required
by the Dodd-Frank Act with respect to the FDIC assessment rules became effective. The rules provide that a depository institution’s
deposit insurance assessment will be calculated based on the institution’s total assets less tangible equity, rather than
the previous base of total deposits. These changes have not materially increased the Company’s FDIC insurance assessments
for comparable asset and deposit levels. However, if the Bank’s asset size increases or the FDIC takes other actions to replenish
the DIF, the Bank’s FDIC insurance premiums could increase.
Our disclosure controls and procedures and internal controls
may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably
assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated
to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or omission. Additionally, controls can be circumvented by individual acts, by collusion by two or more people and/or by
override of the established controls. Accordingly, because of the inherent limitations in our control systems and in human nature,
misstatements due to error or fraud may occur and not be detected.
Our operations rely on certain external vendors.
We are reliant upon certain external vendors to provide products
and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors
will not perform in accordance with the contracted arrangements under service level agreements. We maintain a system of comprehensive
policies and a control framework designed to monitor vendor risks including, among other things, (i) changes in the vendor’s
organizational structure, (ii) changes in the vendor’s financial condition, (iii) changes in the vendor’s
support for existing products and services and (iv) changes in the vendor’s strategic focus. While we believe these
policies and procedures help to mitigate risk, the failure of an external vendor to perform in accordance with the contracted arrangements
under service level agreements could be disruptive to our operations, which could have a material adverse impact on our business
and, in turn, our financial condition and results of operations.
Our communication and information systems may experience an
interruption in service.
We rely heavily on communications and information systems to conduct
our business. Any failure or interruption of these systems could result in failures or disruptions in our customer relationship
management, transaction processing systems and various accounting and data management systems. While we have policies and procedures
designed to prevent and/or limit the effect of any failure or interruption of our communication and information systems, there
can be no assurance that any such failures or interruptions will not occur, or, if they do occur, they will be adequately addressed
on a timely basis. The occurrence of failures or interruptions of our communication and information systems could damage our reputation,
result in a loss of customer business and subject us to additional regulatory scrutiny, which could have a material adverse effect
on our financial condition and results of operations.
We continually encounter technological change.
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends,
in part, upon our ability to address the needs of our customers by using technology to provide products and services that will
satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. Although recently we have significantly increased our focus on technological
innovation and have introduced new, more technologically-advanced products and services, we may not be able to effectively implement
new technology-driven products and services or be successful in marketing these products and services to our customers. Failure
to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact
on our business and, in turn, our financial condition and results of operations.
We are subject to environmental liability risk associated
with lending activities.
A significant portion of our loan portfolio is secured by real property.
During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there
is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we
may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur
substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected
property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may
increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before
initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse
effect on our financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism
and other external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism and
other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could
affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral
securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The
occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material
adverse effect on our financial condition and results of operations.
Changes in accounting standards and management’s selection
of accounting methods, including assumptions and estimates, could materially impact our financial statements.
From time to time the SEC and the Financial Accounting Standards
Board (“FASB”) change the financial accounting and reporting standards that govern the preparation of the Company’s
financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial
condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively,
resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. In addition, management
is required to use certain assumptions and estimates in preparing our financial statements, including determining the fair value
of certain assets and liabilities, among other items. If the assumptions or estimates are incorrect, the Company may experience
unexpected material consequences.
Liquidity needs could adversely affect our results of operations
and financial condition.
The Company relies on dividends from the Bank as its primary source
of additional liquidity, and the payment of dividends by the Bank to the Company is restricted by applicable state and federal
law. The primary sources of funds of the Bank are client deposits and loan repayments. While scheduled loan repayments are a relatively
stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans
can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting
business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural
disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid
by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments
and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to
meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, and federal
funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are
currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands.
We may be parties to certain legal proceedings that may impact
our earnings.
We face significant legal risks in our businesses, and the volume
of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain
high. Substantial legal liability or significant regulatory action against us could have material adverse financial impact or cause
significant reputational risk to us, which in turn could seriously harm our business prospects.
We have goodwill that may become impaired, and thus result
in a charge against earnings.
The Company
is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill,
it determines that it is more likely than not that the fair value of goodwill is less than its carrying amount. If the likelihood
of impairment is more than 50 percent, the Company must perform a test for impairment and we may be required to record impairment
charges.
In assessing the recoverability of the Company’s goodwill, the Company must make assumptions in order to
determine the fair value of the respective assets. Major assumptions used in the impairment analysis are discounted cash flows,
merger and acquisition transaction values (including as compared to tangible book value), and stock market capitalization. The
Company has elected to bypass the preliminary assessment and conduct a full goodwill impairment analysis on an annual basis through
the use of an independent third party specialist. As of December 31, 2016, we had $17.1 million of goodwill related to branch acquisitions
in 2003 and 2008 and the acquisition of VCB in 2014. To date, we have not recorded any impairment charges on our goodwill, however
there is no guarantee that we may not be forced to recognize impairment charges in the future as operating and economic conditions
change. Any material impairment charge would have a negative effect on the Company’s financial results and shareholders’
equity.
Other-than-temporary impairment could reduce our earnings.
We may be required to record other-than-temporary impairment (or
“OTTI”) charges on our investment securities if they suffer a decline in value that is considered other-than-temporary.
Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information
for certain investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes
in the competitive environment could have a negative effect on our investment securities portfolio in future periods. An OTTI charge
could have a material adverse effect on our results of operations and financial condition.
Our common stock trading volume may not provide adequate liquidity
for investors.
Although shares of the Company’s common stock are listed on
the NASDAQ Global Select Market, the average daily trading volume in the common stock is less than that of many other financial
services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of a sufficient number of willing buyers and sellers of the common stock at any given time. This presence
depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given
the daily average trading volume of the Company’s common stock, significant sales of the common stock in a brief period of
time, or the expectation of these sales, could cause a decline in the price of the Company’s common stock.
Our common stock and Series B Preferred Stock are not insured
deposits.
Our common stock and Series B Preferred Stock are not bank deposits
and, therefore, losses in their value are not insured by the FDIC, any other deposit insurance fund or by any other public or private
entity. Investment in the Company’s common stock or Series B Preferred Stock is inherently risky for the reasons described
in this “Risk Factors” section and elsewhere in this Form 10-K, and is subject to the same market forces and investment
risks that affect the price of capital stock in any other company, including the possible loss of some or all principal invested.
Certain losses or other tax assets could be limited if we
experience an ownership change, as defined in the Internal Revenue Code.
Our ability to use net operating loss carryforwards, built-in losses
and certain other tax assets may be limited in the event of an “ownership change” as defined by Section 382 of the
Internal Revenue Code of 1986, as amended (the “Code”). In general, an “ownership change” will occur if
there is a cumulative change in our ownership by “5% shareholders” (as defined in the Code) that exceeds 50 percentage
points over a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit
on the amount of losses or other tax assets we can use to reduce our taxable income equal to the product of the total value of
our outstanding equity immediately prior to the “ownership change” and the applicable federal long-term tax-exempt
interest rate. A number of special rules apply to calculating this limit. While stock issuances that we have completed since 2013
and other changes in ownership of certain of our shareholders may have increased the likelihood of an “ownership change,”
we currently believe that an “ownership change” has not occurred. If such an ownership change has occurred or occurs
in the future, we may not be able to use all of our net operating losses and other tax assets to offset taxable income, thus paying
higher income taxes which would negatively impact our financial condition and results of operations.
Risks Related to the Pending Merger with Southern National
Because of the fixed exchange ratio and the fluctuation of
the market price of Southern National common stock, the market value of the merger consideration to be paid by Southern National
to our shareholders will fluctuate.
On December 13, 2016, the Company entered into an Agreement and
Plan of Merger (the “Merger Agreement”) to merge with and into Southern National Bancorp of Virginia, Inc. ( or “Southern
National”), with Southern National surviving (such transaction, the “Pending Merger”). In the Pending Merger,
each share of our common stock and of our Series B Preferred Stock will be converted into the right to receive 0.6313 shares of
common stock of the combined company, the value of which will depend upon the price of Southern National common stock at the effective
date of the Pending Merger, and cash in lieu of any fractional shares. Upon the effective date of the Pending Merger, Southern
National common stock, including the shares issued to former holders of our common stock and our Series B Preferred Stock, will
be the common stock of the combined company. The price of Southern National common stock as of the effective date of the Pending
Merger may vary significantly from its price at the date the fixed exchange ratio was established. There will be no adjustment
to the merger consideration for changes in the market price of either shares of Southern National common stock or shares of our
common stock. There also is no maximum or minimum closing price of Southern National common stock at which we or Southern National
may unilaterally terminate the Merger Agreement. Variations in the price of Southern National common stock may result from changes
in the business, operations or prospects of Southern National, regulatory considerations, general market and economic conditions,
and other factors, many of which are outside of the control of Southern National.
Termination of the Merger Agreement could negatively impact
us.
If the Merger Agreement is terminated, our business may
have been adversely affected by the failure to pursue other beneficial opportunities due to the focus of management on the
Pending Merger, without realizing any of the anticipated benefits of completing the Pending Merger. Additionally, if the
Merger Agreement is terminated, the market price of our common stock could decline to the extent that the current market
price reflects a market assumption that the Pending Merger will be completed. Furthermore, costs relating to the Pending
Merger, such as legal, accounting and financial advisory fees, must be paid even if the Pending Merger is not completed.
Failure to complete the Pending Merger could also result in reputational harm to us. If the Merger Agreement is terminated
under certain circumstances, including circumstances involving a change in recommendation by our Board of Directors, the
Company may be required to pay to Southern National a termination fee of $7.5 million. If the Merger Agreement is terminated
and our Board of Directors seeks another merger or business combination, our shareholders cannot be certain that we will be
able to find a party willing to pay the equivalent or greater consideration than that which Southern National has agreed to
pay with respect to the Pending Merger.
We are subject to business uncertainties and contractual restrictions
related to the Pending Merger.
Uncertainty about the effect of the Pending Merger on employees
and customers may have an adverse effect on us and our business. These uncertainties may impair our ability to attract, retain
and motivate key personnel until the Pending Merger is completed, and could cause customers and others that deal with the Company
and the Bank to seek to change existing business relationships. Retention of certain employees by the Company and the Bank may
be challenging until the Pending Merger is completed, as certain employees may experience uncertainty about their future roles
with the Bank. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire
not to remain with our organization, our business before or following completion of the Pending Merger could be harmed. Southern
National may be subject to similar risks and uncertainties related to the Pending Merger, and the negative consequences of risk
and uncertainties encountered by the Company and Southern National may negatively affect the business, financial condition or results
of operations of the combined company. In addition, subject to certain exceptions, we have agreed to operate our business in the
ordinary course prior to closing and to refrain from taking certain specified actions until the Pending Merger occurs, which may
prevent us from pursuing attractive business opportunities that may arise prior to completion of the Pending Merger.
Combining Southern National and the Company may be more difficult,
costly or time-consuming than we expect.
Southern National and the Company have operated and, until the
completion of the Pending Merger, will continue to operate independently. The success of the Pending Merger will depend, in
part, on our ability to successfully combine the businesses of Southern National with ours. It is possible that the
integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to
maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the
Pending Merger. The loss of key employees could adversely affect the combined company’s ability to successfully conduct
its business in the markets in which we now operate, which could have an adverse effect on the combined company’s
financial results and the value of Southern National’s common stock after the Pending Merger is completed. If the
combined company experiences difficulties with the integration process, the anticipated benefits of the Pending Merger may
not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions,
there also may be business disruptions that cause the Bank to lose customers or cause customers to remove their accounts from
the Bank and move their business to competing financial institutions. Integration efforts between Southern National and the
Company will also divert management attention and resources. These integration matters could have an adverse effect on each
of the Company, the Bank, Southern National and Sonabank during this transition period and for an undetermined period
after consummation of the Pending Merger.
Our ability to complete the Pending Merger is subject to the
receipt of consents and approvals from regulatory agencies which may impose conditions that could adversely affect us or cause
the Merger to be abandoned.
Before the Pending Merger may be completed, we must obtain
various approvals or consents from the Federal Reserve Board and the Bureau. These regulators
may impose conditions on the completion of the Pending Merger. Although we do not currently expect that any significant
conditions would be imposed, there can be no assurance that they will not be, and such conditions could have the effect of
delaying completion of the Pending Merger or imposing additional costs on or limiting the revenues of the combined company
following completion of the Pending Merger. There can be no assurance as to whether the regulatory approvals will be
received, the timing of those approvals, or whether any conditions will be imposed.
The Merger Agreement limits our ability to pursue alternatives
to the Pending Merger and might discourage competing offers for a higher price or premium.
The Merger Agreement contains “no-shop” provisions that,
subject to limited exceptions, limit our ability to discuss, facilitate or commit to competing third-party proposals to acquire
all or a significant part of our Company. In addition, under certain circumstances, if the Merger Agreement is terminated and we,
subject to certain restrictions, consummate a similar transaction other than the Pending Merger, we must pay to Southern National
a termination fee of $7.5 million. These provisions might discourage a potential competing acquiror that might have an interest
in acquiring all or a significant percentage of ownership of us from considering or proposing the acquisition even if it were prepared
to pay consideration with a higher per share market price than that proposed in the Pending Merger.
The Pending Merger may distract our management from their
other responsibilities.
The Pending Merger could cause our management to focus their time
and energies on matters related to the transaction that otherwise would be directed to our business and operations. Any such distraction
on the part of our management could affect our ability to service existing business and develop new business and adversely affect
our business and earnings before the completion of the Pending Merger, or the business and earnings of the combined company after
completion of the Pending Merger.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our principal executive offices (and corporate headquarters) are
leased and located at 10900 Nuckols Road, Suite 325, Glen Allen, Virginia 23060 where we relocated to in October 2016. At the end
of 2016, the Company owned twenty-one full service branch buildings including the land on which eighteen of those buildings are
located and two remote drive-in facilities. The Company currently has long-term leases for six of its branches, one loan production
office and its corporate headquarters in Glen Allen, Virginia. Three of the leases are for branch buildings, three of the leases
are for the land on which Company owned branches are located, one lease is for a loan production office building in Chesterfield,
Virginia and one lease is for the corporate headquarters. All leases are under long-term non-cancelable operating lease agreements
with renewal options, at total annual rentals of approximately $788 thousand as of December 31, 2017. The counties of Northumberland
and Middlesex are each the home to three of our branches. The counties of Essex and Gloucester are each home to two branch offices.
In addition, Essex County houses an operations center that formerly served as our corporate headquarters. Henrico County houses
one branch office and the Company’s corporate headquarters. Hanover County houses three branch offices and the Bank’s
loan administration center, while King William County, Lancaster, New Kent, Southampton, Surry, Sussex Counties and the cities
of Colonial Heights, Hampton, Newport News and Williamsburg each have one full service branch office. In addition, the city of
Newport News houses a commercial/administrative center. Southampton County and Sussex County also each have a stand-alone drive-in/automated
teller machine location.
The Company believes its facilities are in good operating condition,
are suitable and adequate for its operational needs and are adequately insured.
See Item 13. “Certain Relationships and Related Transactions,
and Director Independence” and Item 8. “Financial Statements and Supplementary Data,” under the heading “Note
23. Former Related Party Lease” of this Form 10-K for more information on the Company’s former related party lease.
Item 3.
Legal Proceedings
The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings incidental to its businesses other than those arising in the ordinary course of business.
Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management,
any such liability from legal proceedings incidental to the Company’s business will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
Item 4.
Mine Safety Disclosures
None.
Executive Officers of the Registrant
Following are the persons who are currently executive officers of
the Company, their ages as of December 31, 2016, their current titles and positions held during the last five years:
Joe A. Shearin, 60, joined the
Company in 2001 as the President and Chief Executive Officer of Southside Bank. Mr. Shearin served in that capacity until 2006
when he became President and Chief Executive Officer of the Bank. Mr. Shearin became the President and Chief Executive Officer
of the Company in 2002.
J. Adam Sothen, 40, joined the Company in June 2010 as Vice President
and Corporate Controller of the Bank. In September 2011, Mr. Sothen was appointed as the Company’s Chief Financial Officer
and the Bank’s Executive Vice President and Chief Financial Officer. Mr. Sothen served as the Corporate Controller until
October 2012.
James S. Thomas, 62, joined the Company in 2003 as Senior Vice President
and Retail Banking Manager of Southside Bank. In 2005, he became Executive Vice President and Chief Operating Officer of Southside
Bank. In April 2006, Mr. Thomas became Executive Vice President of Retail Banking for the Bank. In June 2007, Mr. Thomas was promoted
to Executive Vice President and Chief Credit Officer of the Bank.
Douglas R. Taylor, 60, joined the Company in April 2010 as Executive
Vice President and Chief Risk Officer of the Bank.
Ann-Cabell Williams, 55, joined the Company in July 2011 as Executive
Vice President and Retail Executive of the Bank. From January 2007 until joining the Company, Ms. Williams served as Chief
Operation Officer and Retail Executive for Bank of Virginia. In April 2016, she became Executive Vice President and Chief
Channel Distribution Officer of the Bank.
Bruce T. Brockwell, 51, joined the Company in April 2011 as Senior
Vice President and Senior Commercial Lending Officer of the Bank. In May 2012, he became Senior Vice President and Director of
Commercial Banking of the Bank. In August 2013, Mr. Brockwell was promoted to Executive Vice President and Director of Commercial
Banking of the Bank. In April 2016, he became Executive Vice President and Chief Banking Officer of the Bank.
Mark C. Hanna, 48, joined the Company in November 2014 as Executive
Vice President and Regional Executive of the Bank. From November 2006 until joining the Company, Mr. Hanna served as President
and Chief Executive Officer for Virginia Company Bank. From September 2005 to November 2006, Mr. Hanna served as President of Virginia
Company Bank.
Dianna B. Emery, 58, joined the Company in December 2007 as Cash
Management Sales Officer of the Bank and later transitioned to Senior Business Analyst of the Bank. In March 2011, she became
Vice President and Operations Manager of the Bank. In July 2015, she became Senior Vice President and Chief Operations
Officer of the Bank. In November 2015, Ms. Emery was promoted to Executive Vice President and Chief Operations Officer of
the Bank.
Notes to Consolidated Financial Statements
December 31, 2016, 2015 and 2014
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Eastern Virginia Bankshares,
Inc. (the “Company”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), and EVB (the “Bank”)
and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and conform to accepted practices within the banking industry. A summary of significant accounting policies is briefly
described below.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
In addition, the Company owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to the Trust is reported
as a liability of the Company.
Nature of Operations
Eastern Virginia Bankshares, Inc. is a bank holding company that
was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December
29, 1997. The Company was headquartered in Tappahannock, Virginia until October 2016 at which time it was relocated to Glen Allen,
Virginia. The Company conducts its primary operations through its wholly-owned bank subsidiary, EVB, which is headquartered in
Tappahannock, Virginia. Two of EVB’s three predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established
in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In April 2006, these three banks were merged
and the surviving bank was re-branded as EVB. Additionally, the Company acquired Virginia Company Bank (“VCB”) (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”).
On December 13, 2016, the Company entered into an Agreement and
Plan of Merger to merge with and into Southern National Bancorp of Virginia, Inc. (“Southern National”), with Southern
National surviving (such transaction, the “Pending Merger”). The Pending Merger, which is expected to be completed
by the third quarter of 2017, is subject to regulatory approvals and the approval of the shareholders of both companies, as well
as customary closing conditions.
The Bank owns EVB Financial Services, Inc., which in turn has a
100% ownership interest in EVB Investments, Inc. EVB Investments, Inc. offers a comprehensive range of investment services through
Infinex Investments, Inc. On May 15, 2014, the Bank acquired a 4.9% ownership interest in Southern Trust Mortgage, LLC. Pursuant
to an independent contractor agreement with Southern Trust Mortgage, LLC, the Company advises and consults with Southern Trust
Mortgage, LLC and facilitates the marketing and brand recognition of their mortgage business. In addition, the Company provides
Southern Trust Mortgage, LLC with offices at two retail branches in the Company’s market area and access to office equipment
at these locations during normal business hours. For its services, the Company receives fixed monthly compensation from Southern
Trust Mortgage, LLC in the amount of $2 thousand, which is adjustable on a quarterly basis.
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 2.94% ownership interest in Bankers Insurance, LLC, which primarily sells insurance
products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has
a 100% ownership interest in Dunston Hall LLC and POS LLC, which were formed to hold the title to real estate acquired by the Bank
upon foreclosure on property of real estate secured loans. The Bank previously had a 100% ownership interest in Tartan Holdings
LLC and ECU-RE LLC which were used in a similar capacity as Dunston Hall LLC and POS LLC, but they are now inactive with the Virginia
State Corporation Commission and will no longer be used by the Bank. 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.”
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible
to significant change in the near term relate to the determination of the allowance for loan losses, loans acquired in a business
combination, impairment of loans, impairment of securities, the valuation of other real estate owned (or “OREO”), the
projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes and goodwill impairment. In
the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation
of the results of operations in these financial statements, have been made.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the 2016 presentation. These reclassifications had no effect on previously reported net income.
Significant Group Concentrations of Credit
Risk
Substantially all of the Company’s lending activities are
with customers located in Virginia. At December 31, 2016 and 2015, respectively, 32.7% and 39.6% of the Company’s loan portfolio
consisted of real estate loans secured by one to four family residential properties, which includes closed end first and second
mortgages as well as home equity lines. In addition, at December 31, 2016 and 2015, the Company had $14.4 million and $20.0 million
of loans to the hospitality industry (hotels, motels, inns, etc.). These amounts represent 3.1% and 5.4% of the Company’s
total commercial real estate loans and 10.2% and 15.7% of the Bank’s total risk-based capital at December 31, 2016 and 2015,
respectively. These concentrations of loans did not exceed established supervisory guidelines of 25% of the Bank’s total
risk-based capital. The Company does not have any significant loan concentrations to any one customer. Note 4 - Loan Portfolio
discusses the Company’s lending activities.
The Company invests in a variety of securities and does not have
any significant securities concentrations in any one industry or to any one issuer. Note 3 – Investment Securities discusses
the Company’s investment activities.
At December 31, 2016 and 2015, the Company’s cash and due
from banks included three commercial bank deposit accounts that were in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insured limit of $250,000 per institution by approximately $164 thousand and $6.9 million, respectively.
Business Combination
On November 14, 2014, the Company acquired VCB.
The acquisition was accounted for using the acquisition method of accounting. Under this method, assets and liabilities of VCB
were recorded at their respective fair values as of November 14, 2014. These fair values were preliminary and subject to refinement
for up to one year after the closing date of the acquisition (the “Measurement Period”), or until November 14, 2015,
as information relative to the closing date fair values became available. The Company’s financial position and results of
operations as of and for the years ended December 31, 2016 and 2015 include assets acquired and liabilities assumed from VCB that
remain on the Company’s balance sheet as of December 31, 2016 and 2015 and results of operations generated by these assets
and liabilities from November 14, 2014 forward. No adjustments were made to the preliminary fair values during the Measurement
Period. See Note 2—Business Combinations for additional information regarding the acquisition of VCB.
Cash and Cash Equivalents
For purposes of the consolidated statements of
cash flows, cash and cash equivalents includes cash and due from banks, interest bearing deposits with banks and federal funds
sold, which all mature within ninety days.
Restrictions on Cash and Due from Bank Accounts
The Company is required to maintain average reserve
balances in cash with the Federal Reserve Bank of Richmond (the “Reserve Bank”). The Company had reserve requirements
of $2.0 million and $1.4 million with the Reserve Bank for December 31, 2016 and 2015, respectively. These reserve requirements
were covered by internal holdings.
Investment Securities
The accounting and measurement framework for our investment securities
differs depending on the security classification. We classify investment securities as available for sale or held to maturity based
on our investment strategy and management’s assessment of our intent and ability to hold the investment securities until
maturity. Management determines the appropriate classification of investment securities at the time of purchase, subject to any
subsequent change in our intent and ability to hold the securities until maturity. If management has the intent and the Company
has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities
held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest
method. Investment securities which the Company may not hold to maturity are classified as investment securities available for
sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily
to maturity. Any decision to sell investment securities available for sale would be based on various factors, including, but not
limited to, asset/liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory
capital considerations. Investment securities available for sale are carried at fair value, with unrealized gains and losses, net
of related deferred income taxes, included in shareholders’ equity as a separate component of accumulated other comprehensive
income (loss). Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold.
Premiums and discounts are amortized or accreted into interest income using the interest method over the terms of the securities.
Impairment of securities occurs when the fair value of a security
is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety
in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company
will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to
sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the
Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis
of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss,
there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit
loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive (loss)
income.
For equity securities, impairment is considered to be other-than-temporary
based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment
of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment
security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the
duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate
of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to
holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
Restricted Securities
As a requirement for membership, the Company invests in the stock
of the Federal Home Loan Bank (“FHLB”) of Atlanta, Community Bankers Bank (“CBB”), and the Reserve Bank.
These investments are carried at cost.
Loans
The Company offers an array of lending and credit services to customers
including mortgage, commercial and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans
in the Company’s market area. The ability of the Company’s debtors to honor their contracts is dependent upon the real
estate and general economic conditions in the Company’s market area. Loans that management has both the intent and ability
to hold for the foreseeable future or until maturity or pay-off generally are stated at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses, and net of any deferred fees or costs on originated loans. Interest income
is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized
as an adjustment to the yield (interest income) of the related loans. The Company is amortizing these amounts over the contractual
life of the related loans. The Company occasionally purchases loans outside of a business combination. These loans are reviewed
with the same scrutiny as originated loans and any discounts or premiums are amortized as a yield adjustment over the remaining
life of the 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 the Company’s loan portfolio.
A loan (including a troubled debt restructuring or “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.
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. Impaired loans are stated at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses, and net of any deferred fees or costs on originated loans (recorded investment).
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment shortfalls generally are not classified
as impaired. The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan-by-loan basis for real estate (including multifamily residential, construction, farmland
and non-farm, non-residential) and commercial loans, by either the present value of expected cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value of collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans, representing consumer, one to four family residential first and seconds and
home equity lines, are collectively evaluated for impairment. Accordingly, the Company does not separately identify the individual
consumer and one to four family residential loans for impairment disclosures, except for TDRs as noted below. The Company maintains
a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment.
A loan is accounted for as a TDR if the Company, for economic or
legal reasons related to a deterioration in the borrower’s financial condition, grants a concession to the borrower that
it would not otherwise consider. TDRs are considered impaired loans. A TDR may involve the receipt of assets from the debtor in
partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest rate, the forbearance
of principal and interest payments for a specified period, the conversion from an amortizing loan to an interest-only loan for
a specified period, or some combination of these concessions. These concessions can be temporary and are done in an attempt to
avoid foreclosure and are made with the intent to restore the loan to a performing status once sufficient payment history can be
demonstrated. At the time of a TDR, the loan is placed on non-accrual status. A loan 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. As of December 31, 2016 and 2015,
the Company had $12.7 million and $16.8 million of loans classified as TDRs.
Loans Acquired in a Business Combination
The Company accounts for loans acquired in a business combination,
such as the Company’s acquisition of VCB, in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 805, “
Business Combinations
.” Accordingly, acquired
loans are segregated between purchased credit-impaired (“PCI”) loans and purchased performing loans and are recorded
at fair value on the date of acquisition without the carryover of the related allowance for loan losses.
PCI loans are those for which there is evidence of credit deterioration
since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required
principal and interest payments. When determining fair market value, PCI loans were aggregated into pools of loans based on common
characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration
such as internal risk grades and past due and nonaccrual status. The Company estimates the amount and timing of expected cash flows
for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life
of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over
expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue
to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision
for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future
interest income. Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. The Company
accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the
acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount.
The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for
loan losses established at the acquisition date for purchased performing or PCI loans. A provision for loan losses is recorded
for any deterioration in these loans subsequent to the acquisition.
Allowance for Loan Losses
The allowance for loan losses is a reserve for estimated credit
losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio,
and is based on periodic evaluations of the collectability and historical loss experience of loans. A provision for loan losses,
which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment,
is appropriate to absorb probable losses in the loan portfolio. Actual credit losses are deducted from the allowance for loan losses
for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral,
if collateral dependent. The following general charge-off guidelines apply:
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Management believes that the collectability of the principal is unlikely regardless of delinquency status.
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If unsecured, the loan will be charged-off in full no later than 120 days after its payment due date if a closed-end credit.
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If unsecured, the loan will be charged-off in full no later than 180 days after its payment due date if an open-ended credit.
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If secured, the outstanding principal balance of the loan will be charged-off generally after the collateral has been liquidated
and sale proceeds applied to the balance.
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Subsequent recoveries, if any, are credited to the allowance for
loan losses.
The Company's ALL Committee is responsible for
assessing the overall appropriateness of the allowance for loan losses and monitoring the Company's allowance for loan losses methodology,
particularly in the context of current economic conditions and a rapidly changing regulatory environment. The ALL Committee
at least annually reviews the Company's allowance for loan losses methodology.
The allocation methodology applied by the Company includes management’s
ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific
allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several
factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review
and grading of the loan portfolio, consideration of migration analysis and delinquency experience on each portfolio category, trends
in past due and nonaccrual loans, the level of classified loans, the risk characteristics of the various classifications of loans,
changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing
economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect
potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses
is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category.
The total allowance is available to absorb losses from any segment of the portfolio. In determining the allowance for loan losses,
the Company considers its portfolio segments and loan classes to be the same.
The allowance for loan losses is comprised of a specific allowance
for identified problem loans and a general allowance representing estimations performed pursuant to either FASB ASC Topic 450 “
Accounting
for Contingencies,”
or FASB ASC Topic 310
“Accounting by Creditors for Impairment of a Loan.”
The
specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent
loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party
appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties
or general market conditions when deemed appropriate. The general component covers non-classified or performing loans and those
loans classified as substandard, doubtful or loss that are not impaired. The general component is based on migration analysis adjusted
for qualitative factors, such as economic conditions, interest rates and unemployment rates. 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
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Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;
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Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;
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Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;
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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
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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.
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Special Mention
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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.
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Classified Grades
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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;
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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
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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.
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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.
Management believes that the level of the allowance for loan losses
is appropriate in light of the credit quality and anticipated risk of loss in the loan portfolio. While management uses available
information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review
the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for
loan losses through increased provisions for loan losses or may require that certain loan balances be charged-off or downgraded
into classified loan categories when their credit evaluations differ from those of management based on their judgments about information
available to them at the time of their examinations.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control
over the assets has been surrendered. Control over financial assets is deemed to be surrendered when: 1) the assets have been isolated
from the Company, so as to be presumptively beyond reach of the Company and its creditors, even in bankruptcy or other receivership;
2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets; and 3) the Company does not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters
of credit and guarantees of previously sold credit card accounts. Such financial instruments are recorded in the financial statements
when they become payable.
Other Real Estate Owned
Real estate acquired through, or in lieu of, foreclosure is held
for sale and is stated at the fair value of the property, less estimated disposal costs, if any. Cost includes loan principal and
accrued interest. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance
for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings.
Development and improvement costs relating to the property are capitalized. Net operating income or expenses of such properties
are included in collection, repossession and other real estate owned expenses.
Bank Premises and Equipment
Land is carried at cost with no depreciation. Premises and equipment
are stated at cost, less accumulated depreciation. Depreciation is computed generally by the straight-line method for financial
reporting purposes. Depreciation for tax purposes is computed based on accelerated methods. It is the Company’s policy for
maintenance and repairs to be charged to expense as incurred and to capitalize major additions and improvements and depreciate
the cost thereof over the estimated useful lives.
Upon sale or retirement of depreciable properties, the cost and
related accumulated depreciation are netted against proceeds and any resulting gain or loss is reflected in income.
Goodwill and Intangible Assets
The excess of the cost of an acquisition over the fair value of
the net assets acquired consists primarily of goodwill, core deposit intangibles, and other identifiable intangibles.
Acquired
intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred,
licensed, rented or exchanged, and are amortized over their useful life. Goodwill is not amortized but is subject to impairment
tests if, based on an assessment of qualitative factors related to goodwill, the Company determines that it is more likely than
not that the fair value of goodwill is less than its carrying amount. If the likelihood of impairment is more than 50 percent,
the Company must perform a test for impairment and may be required to record the impairment changes. In assessing the recoverability
of the Company’s goodwill, which was recognized in connection with the acquisition of branches in 2003 and 2008 and the acquisition
of VCB in 2014, the Company must make assumptions in order to determine the fair value of the respective assets. Any impairment
of goodwill will be recognized as an expense in the period of impairment and such impairment could be material. The Company has
elected to bypass the preliminary assessment and conduct a full goodwill impairment analysis on an annual basis through the use
of an independent third party specialist. The Company has completed the annual goodwill impairment test during the fourth quarter
of each year (as of September 30 of that year). Based on annual testing, there were no impairment charges in 2016, 2015 or 2014.
During the third quarter of 2010, the Company sold certain one to
four family residential mortgage loans and retained the right to service the loans sold. Upon sale, a mortgage servicing rights
asset was capitalized in the amount of $214 thousand, which represents the then current fair value of future net cash flows expected
to be realized for performing servicing activities. Mortgage servicing rights are amortized in proportion to and over the period
of estimated net servicing income, which is 4 years. As of December 31, 2014 the balance of mortgage servicing rights had been
fully amortized. The Company earns fees for servicing these residential mortgage loans. These fees are generally calculated on
the outstanding principal balance of the loans serviced and are recorded as income when earned. Total loan servicing income amounted
to $16 thousand, $19 thousand and $37 thousand for the years ended December 31, 2016, 2015 and 2014, respectively, and is included
in other operating income in the consolidated statements of income.
Income Taxes
The Company determines deferred income tax assets and liabilities
using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined annually
for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax assets will not be realized.
When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in the consolidated balance sheets along with any
associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated
with unrecognized tax benefits are classified as additional income taxes in the consolidated statements of income. The Company
did not have any uncertain tax positions for the periods ending December 31, 2016, 2015 or 2014.
Retirement Plan
The Company has historically maintained a defined benefit pension
plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of
participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants
have been added to the plan. The plan was again amended on February 28, 2011, to freeze the plan with no additional contributions
for grandfathered 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 participant’s 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. See Note 10 – Employee
Benefit Plans.
Stock Compensation Plans
At December 31, 2016, the Company had equity awards outstanding
under two stock based compensation plans. The Company accounts for these plans under the provisions of FASB ASC Topic 718 “
Compensation
– Stock Compensation
.” Compensation expense for grants of restricted shares is accounted for using the fair market
value of the Company’s common stock on the date the restricted shares are awarded. Compensation expense for grants of stock
options is accounted for at fair value as determined using the Black-Scholes option-pricing model. Compensation expense for restricted
shares and stock options is charged to income ratably over the vesting period. Compensation expense recognized is included in salaries
and employee benefits expense in the consolidated statements of income. See Note 14 – Stock Based Compensation Plans.
Fair Value Measurements
The Company follows the provisions of FASB ASC Topic 820 “
Fair
Value Measurements and Disclosures,”
for financial assets and financial liabilities. FASB ASC Topic 820 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. See Note 20 - Fair Value Measurements.
Segment Reporting
Public business enterprises are required to report information about
operating segments in annual financial statements and selected information about operating segments in financial reports issued
to shareholders. Operating segments are components of an enterprise about which separate financial information is available that
is evaluated regularly by management in deciding how to allocate resources and in assessing their performance. Generally, financial
information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how
to allocate resources to segments. The Company has determined that it has one significant operating segment, the providing of general
commercial financial services to customers located in the geographic areas of the Company’s retail branch network.
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 to be a participating security. FASB guidance
requires that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in
undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s
common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s
common stock outstanding. Potential common shares that may be issued by the Company relate to outstanding stock options and the
Company’s Series B Preferred Stock, and are determined using the treasury method. Net income per common share calculations
are presented in Note 12 – Net Income Per Common Share.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense totaled $1.1 million, $984 thousand and $748 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
Comprehensive Income
FASB ASC Topic 220 “
Comprehensive Income”
establishes
standards for the reporting and presentation of comprehensive income and its components (revenues, expenses, gains and losses)
within the Company’s consolidated financial statements. Although certain changes in assets and liabilities, such as unrealized
gains and losses on securities available for sale and pension liability adjustments, are reported as a separate component of the
equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.
Recent Significant Accounting Pronouncements:
Adoption of New Accounting Standards:
In June 2014, the
FASB issued Accounting Standards Update (“ASU”) 2014-12,
“Compensation
– Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period.”
The new guidance
applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target
to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting
and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in
“Compensation
– Stock Compensation (Topic 718)”
should be applied to account for these
types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning
after December 15, 2015. Early adoption is permitted, and reporting entities may choose to apply the amendments in the ASU either
on a prospective or retrospective basis. The adoption of the new guidance did not have a material impact on the Company’s
consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01,
“Income
Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the
Concept of Extraordinary Items.”
The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary
items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present,
and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual
activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction
meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results
of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations.
The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable
to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the
fiscal year of adoption. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial
statements.
In February 2015, the FASB issued ASU 2015-02,
“Consolidation
(Topic 810): Amendments to the Consolidation Analysis.”
The amendments in this ASU are intended to improve targeted
areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization
structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition
to reducing the number of consolidation models from four to two, the new standard simplifies the FASB ASC and improves current
U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of
the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”),
and changing consolidation conclusions for public and private companies in several industries that typically make use of limited
partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period.
ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect
adjustment to retained earnings as of the beginning of the first year restated. The adoption of the new guidance did not have a
material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05,
“Intangibles
- Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement.”
The amendments in this ASU provide guidance to customers regarding cloud computing arrangements that
include a software license. If a cloud computing arrangement includes a software license, then the customer should account for
the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing
arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments
do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software
licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments
in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods,
beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively
to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The adoption of the new
guidance did not have a material impact on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU 2015-12,
“Plan Accounting:
Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans
(Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical
Expedient.”
The amendments within this ASU are in 3 parts. Among other things, Part I amendments designate contract
value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement
that plans disclose: (a) individual investments that represent 5 percent or more of net assets available for benefits; and (b)
the net appreciation or depreciation for investments by general type requirements for both participant-directed investments and
nonparticipant-directed investments. Part III amendments provide a practical expedient to permit plans to measure investments and
investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the
plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts I and II of this
ASU are effective on a retrospective basis and Part III is effective on a prospective basis, for fiscal years beginning after December
15, 2015. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated
financial statements.
In August 2015, the FASB issued ASU 2015-15,
“Interest
– Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated
with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting).”
On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct
deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address
presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative
guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would
not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt
issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings
on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the "S" section of the ASC. The adoption of
the new guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Standards Not Yet Adopted:
In August 2014, the FASB issued ASU 2014-15,
“Presentation
of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern.”
This update is intended to provide guidance about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered
in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year
after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period.
If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the
timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are
effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption
is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.
In January 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 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 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.
During March 2016, the FASB issued ASU 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 does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements.
During June 2016, the FASB issued ASU 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.
During August 2016, the FASB issued ASU 2016-15,
“Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”
to address diversity in how
certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective
for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The amendments should be applied using a retrospective transition method to each period presented. If retrospective application
is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as
of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect
the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU 2017-01,
“Business
Combinations (Topic 805): Clarifying the Definition of a Business”
. The amendments in this ASU clarify the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three
elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred
to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the
inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue
to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not
met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive
process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market
participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input
and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15,
2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after
the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have
a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU 2017-04,
“Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
. The amendments in this ASU simplify
how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures
a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of
that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative
assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are
SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. Public business entities that are not SEC filers should adopt the amendments in this ASU for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04
to have a material impact on its consolidated financial statements.
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.
The Company accounted for the acquisition using the acquisition
method of accounting in accordance with FASB ASC 805,
“Business Combinations.”
Under the acquisition
method of accounting, the assets and liabilities of VCB were recorded at their respective acquisition date fair values. Determining
the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant
judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values were preliminary and subject
to refinement during the Measurement Period as additional information relative to the acquisition date fair values became available.
No adjustments were made to the preliminary fair values during the Measurement Period. The Company recognized goodwill of $1.1
million in connection with the acquisition, none of which is deductible for income tax purposes.
The following table details the total consideration paid by the
Company on November 14, 2014 in connection with the acquisition of VCB, the fair values of the assets acquired and liabilities
assumed, and the resulting goodwill.
|
|
|
|
|
|
|
|
|
As Recorded
|
|
|
|
|
As Recorded
|
|
|
Fair Value
|
|
|
by the
|
|
|
(dollars in thousands)
|
|
by VCB
|
|
|
Adjustments
|
|
|
Company
|
|
|
Consideration paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
$
|
6,688
|
|
|
EVBS common stock
|
|
|
|
|
|
|
|
|
|
|
6,676
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
|
|
$
|
13,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
1,377
|
|
|
$
|
-
|
|
|
$
|
1,377
|
|
|
Interest bearing deposits with banks
|
|
|
249
|
|
|
|
-
|
|
|
|
249
|
|
|
Securities available for sale, at fair value
|
|
|
11,277
|
|
|
|
-
|
|
|
|
11,277
|
|
|
Restricted securities, at cost
|
|
|
557
|
|
|
|
-
|
|
|
|
557
|
|
|
Loans
|
|
|
103,791
|
|
|
|
(2,322
|
)
|
|
|
101,469
|
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
3,513
|
|
|
|
3,513
|
|
|
Bank premises and equipment
|
|
|
7,020
|
|
|
|
(1,044
|
)
|
|
|
5,976
|
|
|
Accrued interest receivable
|
|
|
344
|
|
|
|
-
|
|
|
|
344
|
|
|
Other real estate owned
|
|
|
211
|
|
|
|
(108
|
)
|
|
|
103
|
|
|
Core deposit intangible
|
|
|
-
|
|
|
|
1,010
|
|
|
|
1,010
|
|
|
Bank owned life insurance
|
|
|
2,742
|
|
|
|
-
|
|
|
|
2,742
|
|
|
Other assets
|
|
|
243
|
|
|
|
-
|
|
|
|
243
|
|
|
Total identifiable assets acquired
|
|
|
127,811
|
|
|
|
1,049
|
|
|
|
128,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand accounts
|
|
|
18,797
|
|
|
|
-
|
|
|
|
18,797
|
|
|
Interest-bearing deposits
|
|
|
85,791
|
|
|
|
(149
|
)
|
|
|
85,642
|
|
|
Federal funds purchased and repurchase agreements
|
|
|
3,119
|
|
|
|
-
|
|
|
|
3,119
|
|
|
Federal Home Loan Bank advances
|
|
|
8,650
|
|
|
|
-
|
|
|
|
8,650
|
|
|
Accrued interest payable
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
Other liabilities
|
|
|
373
|
|
|
|
-
|
|
|
|
373
|
|
|
Total identifiable liabilities assumed
|
|
|
116,760
|
|
|
|
(149
|
)
|
|
|
116,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
$
|
11,051
|
|
|
$
|
1,198
|
|
|
$
|
12,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill resulting from acquisition
|
|
|
|
|
|
|
|
|
|
$
|
1,115
|
|
Fair values of the major categories of assets
acquired and liabilities assumed were determined as follows:
Loans:
The acquired loans were recorded at fair value
at the acquisition date of $101.5 million without carryover of VCB's allowance for loan losses of $1.1 million. Where loans
exhibited characteristics of performance, fair value was determined based on a discounted cash flow analysis which included default
estimates; loans without such characteristics, fair value was determined based on the estimated values of the underlying collateral.
While estimating the amount and timing of both principal and interest cash flows expected to be collected, a market-based discount
rate was applied. In this regard, the acquired loans were segregated into pools based on loan type and credit risk.
Loan type was determined based on collateral type and purpose, industry segment and loan structure. Credit risk characteristics
included risk rating groups pass
,
special mention, substandard, and doubtful and lien
position. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate,
adjustable-rate, balloon maturities).
At November 14, 2014, the gross contractual amounts receivable and
the fair value for the purchased performing loans were $116.6 million and $93.7 million respectively, while the estimated cash
flows not expected to be collected were approximately $2.0 million. Information about the PCI loan portfolio at November 14, 2014
is as follows:
|
|
|
November 14,
|
|
|
(dollars in thousands)
|
|
2014
|
|
|
Contractual principal and interest due
|
|
$
|
9,977
|
|
|
Nonaccretable difference
|
|
|
937
|
|
|
Expected cash flows
|
|
|
9,040
|
|
|
Accretable yield
|
|
|
1,185
|
|
|
Purchase credit impaired loans - estimated fair value
|
|
$
|
7,855
|
|
Premises and Equipment:
The fair value of VCB's premises,
including land, buildings and improvements, was determined based upon appraisal by licensed appraisers. These appraisals were based
upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison
and income capitalization approaches for each property appraised. The fair value of bank-owned real estate resulted in a discount
of $1.0 million. Land is not depreciated.
Core Deposit Intangible
: The fair value of the core deposit
intangible (“CDI”) was determined based on a combined discounted economic benefit and market approach. The economic
benefit was calculated as the cost savings between maintaining the core deposit base and using an alternate funding source, such
as FHLB advances. The life of the deposit base and projected deposit attrition rates was determined using VCB's historical
deposit data. The CDI was estimated at $1.0 million or 1.25% of deposits. The CDI is being amortized over a weighted
average life of 89 months using a sum-of-the-months method.
Time Deposits:
The fair value adjustment of time deposits
represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates
for similar term certificates of deposit. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity
from one month to five years is a $149 thousand premium and is being amortized into income on a level-yield basis over the weighted
average remaining life of approximately 61 months.
FHLB Advances:
The fair value of FHLB advances was considered
to be equivalent to VCB’s recorded book balance as the advances matured in 90 days or less.
Deferred Tax Assets and Liabilities:
Certain deferred
tax assets and liabilities were carried over to the Bank from VCB based on the Company’s ability to utilize them in the future.
Additionally, deferred tax assets and liabilities were established for acquisition accounting fair value adjustments as the future
amortization/accretion of these adjustments represent temporary differences between book income and taxable income.
The table below illustrates the unaudited pro
forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2013. The unaudited combined
pro forma revenue and net income combines the historical results of VCB with the Company's consolidated statements of income for
the periods listed below and, while certain adjustments were made for the estimated effect of certain fair value adjustments and
other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place
on January 1, 2013. Acquisition related expenses of $224 thousand and $1.8 million were included in the Company's actual consolidated
statements of income for the years ended December 31, 2015 and 2014, respectively, but were excluded from the unaudited pro forma
information listed below. Additionally, the Company expects to achieve further operational cost savings and other efficiencies
as a result of the acquisition which are not reflected in the unaudited pro forma amounts below:
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Net interest income
|
|
$
|
44,800
|
|
|
$
|
42,375
|
|
|
$
|
41,548
|
|
|
Net income
|
|
|
7,759
|
|
|
|
7,518
|
|
|
|
5,724
|
|
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 for the years ended December 31, 2016, 2015 and 2014:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Loans
(1)
|
|
$
|
529
|
|
|
$
|
838
|
|
|
$
|
226
|
|
|
Core deposit intangible
(2)
|
|
|
(213
|
)
|
|
|
(250
|
)
|
|
|
(22
|
)
|
|
Time deposits
(3)
|
|
|
(23
|
)
|
|
|
(109
|
)
|
|
|
(7
|
)
|
|
Net impact to income before income taxes
|
|
$
|
293
|
|
|
$
|
479
|
|
|
$
|
197
|
|
|
|
(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.
|
Note 3. Investment Securities
The amortized cost and estimated fair value, with
gross unrealized gains and losses, of investment securities at December 31, 2016 and 2015 were as follows:
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA Pool securities
|
|
$
|
58,787
|
|
|
$
|
13
|
|
|
$
|
1,081
|
|
|
$
|
57,719
|
|
|
Agency residential mortgage-backed securities
|
|
|
26,710
|
|
|
|
9
|
|
|
|
890
|
|
|
|
25,829
|
|
|
Agency commercial mortgage-backed securities
|
|
|
28,522
|
|
|
|
-
|
|
|
|
670
|
|
|
|
27,852
|
|
|
Agency CMO securities
|
|
|
52,991
|
|
|
|
42
|
|
|
|
1,350
|
|
|
|
51,683
|
|
|
Non agency CMO securities*
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43
|
|
|
State and political subdivisions
|
|
|
55,698
|
|
|
|
182
|
|
|
|
1,379
|
|
|
|
54,501
|
|
|
Corporate securities
|
|
|
2,000
|
|
|
|
5
|
|
|
|
-
|
|
|
|
2,005
|
|
|
Total
|
|
$
|
224,751
|
|
|
$
|
251
|
|
|
$
|
5,370
|
|
|
$
|
219,632
|
|
*The combined unrealized gains on these securities
was less than $1.
|
(dollars in thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 was less than
$1.
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Net Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Recorded
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
in AOCI*
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency CMO securities
|
|
$
|
9,830
|
|
|
$
|
37
|
|
|
$
|
9,793
|
|
|
$
|
153
|
|
|
$
|
8
|
|
|
$
|
9,938
|
|
|
State and political subdivisions
|
|
|
18,550
|
|
|
|
387
|
|
|
|
18,163
|
|
|
|
643
|
|
|
|
9
|
|
|
|
18,797
|
|
|
Total
|
|
$
|
28,380
|
|
|
$
|
424
|
|
|
$
|
27,956
|
|
|
$
|
796
|
|
|
$
|
17
|
|
|
$
|
28,735
|
|
*Represents the unamortized net unrealized holding
loss for securities transferred from available for sale to held to maturity, net of amortization or accretion.
|
(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 unamortized net unrealized holding
loss for securities transferred from available for sale to held to maturity, net of amortization or accretion.
There are no securities classified as “Trading”
at December 31, 2016 or 2015. During the fourth quarter of 2013, the Company transferred securities with an amortized cost of $35.5
million, previously designated as “Available for Sale,” to “Held to Maturity” classification. The fair
value of those securities as of the date of the transfer was $34.5 million, reflecting a gross unrealized loss of $994 thousand.
The gross unrealized loss net of tax at the time of transfer remained in Accumulated Other Comprehensive (Loss) and is being amortized
over the remaining life of the securities as an adjustment to interest income. During the third quarter of 2015, the Company sold
a State and political subdivisions security that was classified as “Held to Maturity” due to the significant deterioration
in the issuer’s financial condition. The carrying value of this security was $521 thousand and a gain of $10 thousand was
recognized as a result of the sale.
The Company’s mortgage-backed securities
consist of commercial and residential mortgage-backed securities. The Company’s mortgage-backed securities are all backed
by an agency of the U.S. government and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.
The Company’s pooled trust preferred securities
previously included one senior issue of Preferred Term Securities XXVII which remained current on all payments and on which the
Company took an impairment charge in the third quarter of 2009 to reduce the Company’s book value to the market value at
September 30, 2009. On December 9, 2014 the Company sold this security resulting in a gain on sale of $82 thousand and the Company
reversed the related impairment reserve. During the second quarter of 2010, the Company recognized an impairment charge in the
amount of $77 thousand on the Company’s investment in Preferred Term Securities XXIII mezzanine tranche, thus reducing the
book value of this investment to $0. On September 22, 2014 the Company sold this security resulting in a gain on sale of $2 thousand,
and the Company reversed the related impairment reserve. The decision to recognize the other-than-temporary impairment had been
based upon an analysis of the market value of the discounted cash flow for the security as provided by Moody’s at June 30,
2010, which indicated that the Company was unlikely to recover any of its remaining investment in these securities.
The amortized cost, carrying value and estimated
fair values of investment securities at December 31, 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)
|
|
December 31, 2016
|
|
|
|
|
Amortized Cost
|
|
|
Fair
Value
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
4,493
|
|
|
$
|
4,465
|
|
|
Due after one year through five years
|
|
|
88,860
|
|
|
|
87,382
|
|
|
Due after five years through ten years
|
|
|
109,153
|
|
|
|
105,872
|
|
|
Due after ten years
|
|
|
22,245
|
|
|
|
21,913
|
|
|
Total
|
|
$
|
224,751
|
|
|
$
|
219,632
|
|
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
1,004
|
|
|
$
|
1,005
|
|
|
Due after one year through five years
|
|
|
22,282
|
|
|
|
22,939
|
|
|
Due after five years through ten years
|
|
|
3,923
|
|
|
|
4,053
|
|
|
Due after ten years
|
|
|
747
|
|
|
|
738
|
|
|
Total
|
|
$
|
27,956
|
|
|
$
|
28,735
|
|
The following table presents the gross realized gains and losses
on the sale of investment securities available for sale and proceeds from the sales of investment securities available for sale
during the twelve months ended December 31, 2016, 2015 and 2014:
|
|
|
Twelve Months Ended December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
1,163
|
|
|
$
|
684
|
|
|
$
|
806
|
|
|
Gross realized (losses)
|
|
|
(462
|
)
|
|
|
(460
|
)
|
|
|
(268
|
)
|
|
Net realized gains
|
|
$
|
701
|
|
|
$
|
224
|
|
|
$
|
538
|
|
|
Proceeds from sales of investment securities available for sale
|
|
$
|
93,031
|
|
|
$
|
84,053
|
|
|
$
|
47,109
|
|
Proceeds from maturities, calls and paydowns of investment securities
available for sale for the years ended December 31, 2016, 2015 and 2014 were $30.4 million, $23.3 million and $36.0 million, respectively.
The following table presents the gross realized gains on the sale
of investment securities held to maturity and proceeds from the sales of investment securities held to maturity during the twelve
months ended December 31, 2016, 2015 and 2014:
|
|
|
Twelve Months Ended December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
Gross realized (losses)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net realized gains
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
Proceeds from sales of investment securities held to maturity
|
|
$
|
-
|
|
|
$
|
531
|
|
|
$
|
-
|
|
Proceeds from maturities, calls and paydowns of investment securities
held to maturity were $1.4 million, $1.6 million and $3.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company pledges investment securities to secure public deposits,
balances with the Reserve Bank and repurchase agreements. Investment securities with an aggregate book value of $57.9 million and
an aggregate fair value of $58.1 million were pledged at December 31, 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 December
31, 2016, by duration of the period of the unrealized loss, are shown below:
|
|
|
December 31, 2016
|
|
|
(dollars in thousands)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Description of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
SBA Pool securities
|
|
$
|
33,591
|
|
|
$
|
547
|
|
|
$
|
19,223
|
|
|
$
|
534
|
|
|
$
|
52,814
|
|
|
$
|
1,081
|
|
|
Agency residential mortgage-backed securities
|
|
|
18,617
|
|
|
|
802
|
|
|
|
4,063
|
|
|
|
88
|
|
|
|
22,680
|
|
|
|
890
|
|
|
Agency commercial mortgage-backed securities
|
|
|
27,853
|
|
|
|
670
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,853
|
|
|
|
670
|
|
|
Agency CMO securities
|
|
|
47,468
|
|
|
|
1,226
|
|
|
|
3,605
|
|
|
|
132
|
|
|
|
51,073
|
|
|
|
1,358
|
|
|
State and political subdivisions
|
|
|
39,000
|
|
|
|
1,309
|
|
|
|
2,165
|
|
|
|
79
|
|
|
|
41,165
|
|
|
|
1,388
|
|
|
Total
|
|
$
|
166,529
|
|
|
$
|
4,554
|
|
|
$
|
29,056
|
|
|
$
|
833
|
|
|
$
|
195,585
|
|
|
$
|
5,387
|
|
The Company reviews the investment securities portfolio on a quarterly
basis to monitor its exposure to other-than-temporary impairment that may result due to adverse economic conditions and associated
credit deterioration. A determination as to whether a security’s decline in market value is other-than-temporary takes into
consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company
may consider in the other-than-temporary impairment analysis include the length of time the security has been in an unrealized
loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic
conditions. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults,
prepayment speeds, and the value of any underlying collateral. For certain securities in unrealized loss positions, the Company
will enlist independent third-party firms to prepare cash flow analyses to compare the present value of cash flows expected to
be collected from the security with the amortized cost basis of the security.
Based on the Company’s evaluation, management does not believe
any unrealized loss at December 31, 2016 represents an other-than-temporary impairment as these unrealized losses are primarily
attributable to current financial market conditions for these types of investments, particularly related to changes in interest
rates, which rose during late 2016 causing bond prices to decline, and are not attributable to credit deterioration. At December
31, 2016, there were 155 debt securities with fair values totaling $195.6 million considered temporarily impaired. Of these debt
securities, 132 with fair values totaling $166.5 million were in an unrealized loss position of less than 12 months and 23 with
fair values totaling $29.1 million were in an unrealized loss position of 12 months or more. Because the Company intends to hold
these investments in debt securities until recovery of the amortized cost basis and it is more likely than not that the Company
will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments
to be other-than-temporarily impaired at December 31, 2016 and no impairment has been recognized. At December 31, 2016, there were
no equity 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 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 FHLB stock totaled
$8.5 million and $5.9 million at December 31, 2016 and 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 January 1, 2016, and ending December 31, 2016, the Company does not consider this investment to be other-than-temporarily
impaired at December 31, 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 CBB totaling $3.0 million at both December 31, 2016 and
2015, which are carried at cost.
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:
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Commercial, industrial and agricultural
|
|
$
|
148,963
|
|
|
|
14.42
|
%
|
|
$
|
98,828
|
|
|
|
11.22
|
%
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
215,462
|
|
|
|
20.85
|
%
|
|
|
232,826
|
|
|
|
26.43
|
%
|
|
Home equity lines
|
|
|
122,506
|
|
|
|
11.85
|
%
|
|
|
116,309
|
|
|
|
13.20
|
%
|
|
Total real estate - one to four family residential
|
|
|
337,968
|
|
|
|
32.70
|
%
|
|
|
349,135
|
|
|
|
39.63
|
%
|
|
Real estate - multifamily residential
|
|
|
32,400
|
|
|
|
3.14
|
%
|
|
|
29,672
|
|
|
|
3.37
|
%
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
16,204
|
|
|
|
1.57
|
%
|
|
|
19,495
|
|
|
|
2.21
|
%
|
|
Other construction, land development and other land
|
|
|
92,466
|
|
|
|
8.95
|
%
|
|
|
46,877
|
|
|
|
5.32
|
%
|
|
Total real estate - construction
|
|
|
108,670
|
|
|
|
10.52
|
%
|
|
|
66,372
|
|
|
|
7.53
|
%
|
|
Real estate - farmland
|
|
|
11,289
|
|
|
|
1.09
|
%
|
|
|
11,418
|
|
|
|
1.30
|
%
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
201,284
|
|
|
|
19.48
|
%
|
|
|
187,224
|
|
|
|
21.27
|
%
|
|
Non-owner occupied
|
|
|
139,649
|
|
|
|
13.52
|
%
|
|
|
104,456
|
|
|
|
11.86
|
%
|
|
Total real estate - non-farm, non-residential
|
|
|
340,933
|
|
|
|
33.00
|
%
|
|
|
291,680
|
|
|
|
33.13
|
%
|
|
Consumer
|
|
|
42,403
|
|
|
|
4.10
|
%
|
|
|
19,993
|
|
|
|
2.27
|
%
|
|
Other
|
|
|
10,605
|
|
|
|
1.03
|
%
|
|
|
13,680
|
|
|
|
1.55
|
%
|
|
Total loans
|
|
|
1,033,231
|
|
|
|
100.00
|
%
|
|
|
880,778
|
|
|
|
100.00
|
%
|
|
Less allowance for loan losses
|
|
|
(11,270
|
)
|
|
|
|
|
|
|
(11,327
|
)
|
|
|
|
|
|
Loans, net
|
|
$
|
1,021,961
|
|
|
|
|
|
|
$
|
869,451
|
|
|
|
|
|
Deferred fees and costs, net are included in the
table above and totaled $1.8 million and $1.6 million for December 31, 2016 and 2015, respectively.
The following table presents the aging of the
recorded investment in past due loans as of December 31, 2016 by class of loans:
|
(dollars in thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Over 90 Days
Past Due
|
|
|
Total Past
Due
|
|
|
Total
Current*
|
|
|
Total Loans
|
|
|
Commercial, industrial and agricultural
|
|
$
|
118
|
|
|
$
|
89
|
|
|
$
|
166
|
|
|
$
|
373
|
|
|
$
|
148,590
|
|
|
$
|
148,963
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
3,408
|
|
|
|
1,472
|
|
|
|
3,505
|
|
|
|
8,385
|
|
|
|
207,077
|
|
|
|
215,462
|
|
|
Home equity lines
|
|
|
92
|
|
|
|
219
|
|
|
|
369
|
|
|
|
680
|
|
|
|
121,826
|
|
|
|
122,506
|
|
|
Total real estate - one to four family residential
|
|
|
3,500
|
|
|
|
1,691
|
|
|
|
3,874
|
|
|
|
9,065
|
|
|
|
328,903
|
|
|
|
337,968
|
|
|
Real estate - multifamily residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,400
|
|
|
|
32,400
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
240
|
|
|
|
-
|
|
|
|
15
|
|
|
|
255
|
|
|
|
15,949
|
|
|
|
16,204
|
|
|
Other construction, land development and other land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,466
|
|
|
|
92,466
|
|
|
Total real estate - construction
|
|
|
240
|
|
|
|
-
|
|
|
|
15
|
|
|
|
255
|
|
|
|
108,415
|
|
|
|
108,670
|
|
|
Real estate - farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,289
|
|
|
|
11,289
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
61
|
|
|
|
-
|
|
|
|
225
|
|
|
|
286
|
|
|
|
200,998
|
|
|
|
201,284
|
|
|
Non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
139,649
|
|
|
|
139,649
|
|
|
Total real estate - non-farm, non-residential
|
|
|
61
|
|
|
|
-
|
|
|
|
225
|
|
|
|
286
|
|
|
|
340,647
|
|
|
|
340,933
|
|
|
Consumer
|
|
|
77
|
|
|
|
7
|
|
|
|
17
|
|
|
|
101
|
|
|
|
42,302
|
|
|
|
42,403
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,605
|
|
|
|
10,605
|
|
|
Total loans
|
|
$
|
3,996
|
|
|
$
|
1,787
|
|
|
$
|
4,297
|
|
|
$
|
10,080
|
|
|
$
|
1,023,151
|
|
|
$
|
1,033,231
|
|
*For purposes of this table only, the "Total
Current" column includes loans that are 1-29 days past due.
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.
The following table presents nonaccrual loans,
loans past due 90 days and accruing interest, and troubled debt restructurings (accruing) at December 31:
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Nonaccrual loans
|
|
$
|
5,181
|
|
|
$
|
6,175
|
|
|
Loans past due 90 days and accruing interest
|
|
|
1,341
|
|
|
|
1,117
|
|
|
Troubled debt restructurings (accruing)
|
|
|
10,441
|
|
|
|
15,535
|
|
At December 31, 2016 and 2015, there were approximately $2.2 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.
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 December 31, 2016 and 2015 were as
follows:
|
|
|
December 31, 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
|
|
$
|
420
|
|
|
$
|
2,452
|
|
|
$
|
2,872
|
|
|
$
|
549
|
|
|
$
|
3,476
|
|
|
$
|
4,025
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
1,135
|
|
|
|
4,914
|
|
|
|
6,049
|
|
|
|
1,116
|
|
|
|
6,290
|
|
|
|
7,406
|
|
|
Home equity lines
|
|
|
32
|
|
|
|
8,417
|
|
|
|
8,449
|
|
|
|
32
|
|
|
|
9,955
|
|
|
|
9,987
|
|
|
Total real estate - one to four family residential
|
|
|
1,167
|
|
|
|
13,331
|
|
|
|
14,498
|
|
|
|
1,148
|
|
|
|
16,245
|
|
|
|
17,393
|
|
|
Real estate - multifamily residential
|
|
|
-
|
|
|
|
1,652
|
|
|
|
1,652
|
|
|
|
-
|
|
|
|
1,988
|
|
|
|
1,988
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
-
|
|
|
|
360
|
|
|
|
360
|
|
|
|
-
|
|
|
|
515
|
|
|
|
515
|
|
|
Other construction, land development and other land
|
|
|
252
|
|
|
|
2,182
|
|
|
|
2,434
|
|
|
|
275
|
|
|
|
1,910
|
|
|
|
2,185
|
|
|
Total real estate - construction
|
|
|
252
|
|
|
|
2,542
|
|
|
|
2,794
|
|
|
|
275
|
|
|
|
2,425
|
|
|
|
2,700
|
|
|
Real estate - farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
2,988
|
|
|
|
12,298
|
|
|
|
15,286
|
|
|
|
4,296
|
|
|
|
16,528
|
|
|
|
20,824
|
|
|
Non-owner occupied
|
|
|
1,475
|
|
|
|
6,639
|
|
|
|
8,114
|
|
|
|
1,600
|
|
|
|
10,847
|
|
|
|
12,447
|
|
|
Total real estate - non-farm, non-residential
|
|
|
4,463
|
|
|
|
18,937
|
|
|
|
23,400
|
|
|
|
5,896
|
|
|
|
27,375
|
|
|
|
33,271
|
|
|
Consumer
|
|
|
-
|
|
|
|
148
|
|
|
|
148
|
|
|
|
-
|
|
|
|
276
|
|
|
|
276
|
|
|
Other
|
|
|
-
|
|
|
|
642
|
|
|
|
642
|
|
|
|
-
|
|
|
|
800
|
|
|
|
800
|
|
|
Total loans
|
|
$
|
6,302
|
|
|
$
|
39,704
|
|
|
$
|
46,006
|
|
|
$
|
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 December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Over 90 Days Past
|
|
|
|
|
Nonaccrual
|
|
|
Due and Accruing
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Commercial, industrial and agricultural
|
|
$
|
784
|
|
|
$
|
193
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
3,240
|
|
|
|
4,153
|
|
|
|
1,135
|
|
|
|
1,117
|
|
|
Home equity lines
|
|
|
543
|
|
|
|
425
|
|
|
|
-
|
|
|
|
-
|
|
|
Total real estate - one to four family residential
|
|
|
3,783
|
|
|
|
4,578
|
|
|
|
1,135
|
|
|
|
1,117
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
15
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
Total real estate - construction
|
|
|
15
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
578
|
|
|
|
624
|
|
|
|
206
|
|
|
|
-
|
|
|
Non-owner occupied
|
|
|
-
|
|
|
|
676
|
|
|
|
-
|
|
|
|
-
|
|
|
Total real estate - non-farm, non-residential
|
|
|
578
|
|
|
|
1,300
|
|
|
|
206
|
|
|
|
-
|
|
|
Consumer
|
|
|
21
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
Total loans
|
|
$
|
5,181
|
|
|
$
|
6,175
|
|
|
$
|
1,341
|
|
|
$
|
1,117
|
|
If interest income had been recognized on nonaccrual
loans at their stated rates during years 2016, 2015 and 2014, interest income would have increased by approximately $383 thousand,
$290 thousand and $124 thousand, respectively.
The following table presents commercial loans
by credit quality indicator at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Impaired
|
|
|
Impaired
|
|
|
Total
|
|
|
Commercial, industrial and agricultural
|
|
$
|
136,533
|
|
|
$
|
9,839
|
|
|
$
|
531
|
|
|
$
|
1,640
|
|
|
$
|
420
|
|
|
$
|
148,963
|
|
|
Real estate - multifamily residential
|
|
|
32,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,400
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
15,624
|
|
|
|
319
|
|
|
|
91
|
|
|
|
170
|
|
|
|
-
|
|
|
|
16,204
|
|
|
Other construction, land development and other land
|
|
|
84,832
|
|
|
|
-
|
|
|
|
212
|
|
|
|
7,170
|
|
|
|
252
|
|
|
|
92,466
|
|
|
Total real estate - construction
|
|
|
100,456
|
|
|
|
319
|
|
|
|
303
|
|
|
|
7,340
|
|
|
|
252
|
|
|
|
108,670
|
|
|
Real estate - farmland
|
|
|
7,270
|
|
|
|
3,504
|
|
|
|
-
|
|
|
|
515
|
|
|
|
-
|
|
|
|
11,289
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
179,400
|
|
|
|
9,359
|
|
|
|
1,892
|
|
|
|
7,645
|
|
|
|
2,988
|
|
|
|
201,284
|
|
|
Non-owner occupied
|
|
|
127,817
|
|
|
|
2,222
|
|
|
|
689
|
|
|
|
7,446
|
|
|
|
1,475
|
|
|
|
139,649
|
|
|
Total real estate - non-farm, non-residential
|
|
|
307,217
|
|
|
|
11,581
|
|
|
|
2,581
|
|
|
|
15,091
|
|
|
|
4,463
|
|
|
|
340,933
|
|
|
Total commercial loans
|
|
$
|
583,876
|
|
|
$
|
25,243
|
|
|
$
|
3,415
|
|
|
$
|
24,586
|
|
|
$
|
5,135
|
|
|
$
|
642,255
|
|
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 December 31, 2016 and 2015, the Company did
not have any loans classified as Doubtful or Loss.
The following table presents consumer loans, including
one to four family residential first and seconds and home equity lines, by payment activity at December 31, 2016:
|
(dollars in thousands)
|
|
Performing
|
|
|
Nonperforming
|
|
|
Total
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
$
|
204,847
|
|
|
$
|
10,615
|
|
|
$
|
215,462
|
|
|
Home equity lines
|
|
|
121,912
|
|
|
|
594
|
|
|
|
122,506
|
|
|
Total real estate - one to four family residential
|
|
|
326,759
|
|
|
|
11,209
|
|
|
|
337,968
|
|
|
Consumer
|
|
|
42,077
|
|
|
|
326
|
|
|
|
42,403
|
|
|
Other
|
|
|
10,605
|
|
|
|
-
|
|
|
|
10,605
|
|
|
Total consumer loans
|
|
$
|
379,441
|
|
|
$
|
11,535
|
|
|
$
|
390,976
|
|
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
|
|
The following table presents a rollforward of
the Company’s allowance for loan losses for the year ended December 31, 2016:
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
(dollars in thousands)
|
|
January 1, 2016
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
December 31, 2016
|
|
|
Commercial, industrial and agricultural
|
|
$
|
1,894
|
|
|
$
|
(96
|
)
|
|
$
|
98
|
|
|
$
|
1,139
|
|
|
$
|
3,035
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
1,609
|
|
|
|
(1,042
|
)
|
|
|
477
|
|
|
|
443
|
|
|
|
1,487
|
|
|
Home equity lines
|
|
|
795
|
|
|
|
(497
|
)
|
|
|
24
|
|
|
|
331
|
|
|
|
653
|
|
|
Total real estate - one to four family residential
|
|
|
2,404
|
|
|
|
(1,539
|
)
|
|
|
501
|
|
|
|
774
|
|
|
|
2,140
|
|
|
Real estate - multifamily residential
|
|
|
78
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
71
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
295
|
|
|
|
-
|
|
|
|
6
|
|
|
|
(104
|
)
|
|
|
197
|
|
|
Other construction, land development and other land
|
|
|
2,423
|
|
|
|
-
|
|
|
|
7
|
|
|
|
202
|
|
|
|
2,632
|
|
|
Total real estate - construction
|
|
|
2,718
|
|
|
|
-
|
|
|
|
13
|
|
|
|
98
|
|
|
|
2,829
|
|
|
Real estate - farmland
|
|
|
272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(115
|
)
|
|
|
157
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,964
|
|
|
|
(353
|
)
|
|
|
63
|
|
|
|
(407
|
)
|
|
|
1,267
|
|
|
Non-owner occupied
|
|
|
1,241
|
|
|
|
(90
|
)
|
|
|
1,432
|
|
|
|
(1,999
|
)
|
|
|
584
|
|
|
Total real estate - non-farm, non-residential
|
|
|
3,205
|
|
|
|
(443
|
)
|
|
|
1,495
|
|
|
|
(2,406
|
)
|
|
|
1,851
|
|
|
Consumer
|
|
|
287
|
|
|
|
(151
|
)
|
|
|
95
|
|
|
|
228
|
|
|
|
459
|
|
|
Other
|
|
|
469
|
|
|
|
(84
|
)
|
|
|
37
|
|
|
|
306
|
|
|
|
728
|
|
|
Total
|
|
$
|
11,327
|
|
|
$
|
(2,313
|
)
|
|
$
|
2,239
|
|
|
$
|
17
|
|
|
$
|
11,270
|
|
The following table presents a rollforward of
the Company’s allowance for loan losses for the year ended December 31, 2015:
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
(dollars in thousands)
|
|
January 1, 2015
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
December 31, 2015
|
|
|
Commercial, industrial and agricultural
|
|
$
|
1,168
|
|
|
$
|
(336
|
)
|
|
$
|
51
|
|
|
$
|
1,011
|
|
|
$
|
1,894
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
1,884
|
|
|
|
(1,113
|
)
|
|
|
116
|
|
|
|
722
|
|
|
|
1,609
|
|
|
Home equity lines
|
|
|
1,678
|
|
|
|
(160
|
)
|
|
|
31
|
|
|
|
(754
|
)
|
|
|
795
|
|
|
Total real estate - one to four family residential
|
|
|
3,562
|
|
|
|
(1,273
|
)
|
|
|
147
|
|
|
|
(32
|
)
|
|
|
2,404
|
|
|
Real estate - multifamily residential
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
78
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
235
|
|
|
|
(129
|
)
|
|
|
4
|
|
|
|
185
|
|
|
|
295
|
|
|
Other construction, land development and other land
|
|
|
2,670
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(248
|
)
|
|
|
2,423
|
|
|
Total real estate - construction
|
|
|
2,905
|
|
|
|
(129
|
)
|
|
|
5
|
|
|
|
(63
|
)
|
|
|
2,718
|
|
|
Real estate - farmland
|
|
|
144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
|
|
272
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
2,416
|
|
|
|
(139
|
)
|
|
|
1
|
|
|
|
(314
|
)
|
|
|
1,964
|
|
|
Non-owner occupied
|
|
|
1,908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(667
|
)
|
|
|
1,241
|
|
|
Total real estate - non-farm, non-residential
|
|
|
4,324
|
|
|
|
(139
|
)
|
|
|
1
|
|
|
|
(981
|
)
|
|
|
3,205
|
|
|
Consumer
|
|
|
305
|
|
|
|
(33
|
)
|
|
|
49
|
|
|
|
(34
|
)
|
|
|
287
|
|
|
Other
|
|
|
524
|
|
|
|
(68
|
)
|
|
|
31
|
|
|
|
(18
|
)
|
|
|
469
|
|
|
Total
|
|
$
|
13,021
|
|
|
$
|
(1,978
|
)
|
|
$
|
284
|
|
|
$
|
-
|
|
|
$
|
11,327
|
|
The following table presents the balance in the
allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of December 31,
2016:
|
|
|
Allowance allocated
to loans:
|
|
|
Total Loans:
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
Individually
|
|
|
Collectively
|
|
|
loans -
|
|
|
|
|
|
Individually
|
|
|
Collectively
|
|
|
loans -
|
|
|
|
|
|
|
|
evaluated
|
|
|
evaluated
|
|
|
purchased
|
|
|
|
|
|
evaluated
|
|
|
evaluated
|
|
|
purchased
|
|
|
|
|
|
|
|
for
|
|
|
for
|
|
|
credit
|
|
|
|
|
|
for
|
|
|
for
|
|
|
credit
|
|
|
|
|
|
(dollars in thousands)
|
|
impairment
|
|
|
impairment
|
|
|
impaired
|
|
|
Total
|
|
|
impairment
|
|
|
impairment
|
|
|
impaired
|
|
|
Total
|
|
|
Commercial,
industrial and agricultural
|
|
$
|
865
|
|
|
$
|
2,170
|
|
|
$
|
-
|
|
|
$
|
3,035
|
|
|
$
|
1,640
|
|
|
$
|
146,903
|
|
|
$
|
420
|
|
|
$
|
148,963
|
|
|
Real estate - one to four
family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and
seconds
|
|
|
416
|
|
|
|
1,054
|
|
|
|
17
|
|
|
|
1,487
|
|
|
|
7,110
|
|
|
|
207,217
|
|
|
|
1,135
|
|
|
|
215,462
|
|
|
Home
equity lines
|
|
|
50
|
|
|
|
603
|
|
|
|
-
|
|
|
|
653
|
|
|
|
225
|
|
|
|
122,249
|
|
|
|
32
|
|
|
|
122,506
|
|
|
Total real estate - one
to four family residential
|
|
|
466
|
|
|
|
1,657
|
|
|
|
17
|
|
|
|
2,140
|
|
|
|
7,335
|
|
|
|
329,466
|
|
|
|
1,167
|
|
|
|
337,968
|
|
|
Real estate - multifamily
residential
|
|
|
-
|
|
|
|
71
|
|
|
|
-
|
|
|
|
71
|
|
|
|
-
|
|
|
|
32,400
|
|
|
|
-
|
|
|
|
32,400
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
55
|
|
|
|
142
|
|
|
|
-
|
|
|
|
197
|
|
|
|
170
|
|
|
|
16,034
|
|
|
|
-
|
|
|
|
16,204
|
|
|
Other
construction, land development and other land
|
|
|
1,368
|
|
|
|
1,264
|
|
|
|
-
|
|
|
|
2,632
|
|
|
|
7,170
|
|
|
|
85,044
|
|
|
|
252
|
|
|
|
92,466
|
|
|
Total real estate - construction
|
|
|
1,423
|
|
|
|
1,406
|
|
|
|
-
|
|
|
|
2,829
|
|
|
|
7,340
|
|
|
|
101,078
|
|
|
|
252
|
|
|
|
108,670
|
|
|
Real estate - farmland
|
|
|
40
|
|
|
|
117
|
|
|
|
-
|
|
|
|
157
|
|
|
|
515
|
|
|
|
10,774
|
|
|
|
-
|
|
|
|
11,289
|
|
|
Real estate - non-farm,
non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
321
|
|
|
|
946
|
|
|
|
-
|
|
|
|
1,267
|
|
|
|
7,645
|
|
|
|
190,651
|
|
|
|
2,988
|
|
|
|
201,284
|
|
|
Non-owner
occupied
|
|
|
177
|
|
|
|
407
|
|
|
|
-
|
|
|
|
584
|
|
|
|
7,446
|
|
|
|
130,728
|
|
|
|
1,475
|
|
|
|
139,649
|
|
|
Total real estate - non-farm,
non-residential
|
|
|
498
|
|
|
|
1,353
|
|
|
|
-
|
|
|
|
1,851
|
|
|
|
15,091
|
|
|
|
321,379
|
|
|
|
4,463
|
|
|
|
340,933
|
|
|
Consumer
|
|
|
63
|
|
|
|
396
|
|
|
|
-
|
|
|
|
459
|
|
|
|
309
|
|
|
|
42,094
|
|
|
|
-
|
|
|
|
42,403
|
|
|
Other
|
|
|
-
|
|
|
|
728
|
|
|
|
-
|
|
|
|
728
|
|
|
|
-
|
|
|
|
10,605
|
|
|
|
-
|
|
|
|
10,605
|
|
|
Total
|
|
$
|
3,355
|
|
|
$
|
7,898
|
|
|
$
|
17
|
|
|
$
|
11,270
|
|
|
$
|
32,230
|
|
|
$
|
994,699
|
|
|
$
|
6,302
|
|
|
$
|
1,033,231
|
|
The following table presents 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
|
|
The following table presents loans individually
evaluated for impairment by class of loans as of December 31, 2016:
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
With No
|
|
|
With
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
(dollars in thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
Commercial, industrial and agricultural
|
|
$
|
1,640
|
|
|
$
|
1,640
|
|
|
$
|
668
|
|
|
$
|
972
|
|
|
$
|
865
|
|
|
$
|
1,094
|
|
|
$
|
70
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
7,110
|
|
|
|
7,712
|
|
|
|
3,760
|
|
|
|
3,350
|
|
|
|
416
|
|
|
|
6,893
|
|
|
|
393
|
|
|
Home equity lines
|
|
|
225
|
|
|
|
225
|
|
|
|
175
|
|
|
|
50
|
|
|
|
50
|
|
|
|
453
|
|
|
|
2
|
|
|
Total real estate - one to four family residential
|
|
|
7,335
|
|
|
|
7,937
|
|
|
|
3,935
|
|
|
|
3,400
|
|
|
|
466
|
|
|
|
7,346
|
|
|
|
395
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
|
170
|
|
|
|
170
|
|
|
|
17
|
|
|
|
153
|
|
|
|
55
|
|
|
|
178
|
|
|
|
8
|
|
|
Other construction, land development and other land
|
|
|
7,170
|
|
|
|
7,170
|
|
|
|
1,745
|
|
|
|
5,425
|
|
|
|
1,368
|
|
|
|
5,885
|
|
|
|
317
|
|
|
Total real estate - construction
|
|
|
7,340
|
|
|
|
7,340
|
|
|
|
1,762
|
|
|
|
5,578
|
|
|
|
1,423
|
|
|
|
6,063
|
|
|
|
325
|
|
|
Real estate - farmland
|
|
|
515
|
|
|
|
517
|
|
|
|
261
|
|
|
|
254
|
|
|
|
40
|
|
|
|
525
|
|
|
|
34
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
7,645
|
|
|
|
7,647
|
|
|
|
6,195
|
|
|
|
1,450
|
|
|
|
321
|
|
|
|
6,176
|
|
|
|
407
|
|
|
Non-owner occupied
|
|
|
7,446
|
|
|
|
7,446
|
|
|
|
6,166
|
|
|
|
1,280
|
|
|
|
177
|
|
|
|
11,509
|
|
|
|
380
|
|
|
Total real estate - non-farm, non-residential
|
|
|
15,091
|
|
|
|
15,093
|
|
|
|
12,361
|
|
|
|
2,730
|
|
|
|
498
|
|
|
|
17,685
|
|
|
|
787
|
|
|
Consumer
|
|
|
309
|
|
|
|
322
|
|
|
|
3
|
|
|
|
306
|
|
|
|
63
|
|
|
|
323
|
|
|
|
17
|
|
|
Total loans*
|
|
$
|
32,230
|
|
|
$
|
32,849
|
|
|
$
|
18,990
|
|
|
$
|
13,240
|
|
|
$
|
3,355
|
|
|
$
|
33,036
|
|
|
$
|
1,628
|
|
*PCI loans are excluded from this table.
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 PCI loans at November
14, 2014 required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate
rates of interest. For such loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized
as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually
required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference and
is not recorded. In accordance with U.S. GAAP, the Company did not “carry over” any allowances for loan losses that
were reserved for the VCB loan portfolio prior to the Company’s acquisition of VCB. PCI loans had unpaid principal balances
of $7.1 million and $8.8 million and recorded carrying values of $6.3 million and $7.9 million at December 31, 2016 and 2015, respectively.
Loans acquired from VCB that constituted PCI loans
were recorded by the Company at fair value on the date of acquisition as follows:
|
|
|
November 14,
|
|
|
(dollars in thousands)
|
|
2014
|
|
|
Contractual principal and interest at acquisition
|
|
$
|
9,977
|
|
|
Nonaccretable difference
|
|
|
937
|
|
|
Accretable yield
|
|
|
1,185
|
|
|
PCI loans at acquisition, at fair value
|
|
$
|
7,855
|
|
The following table presents a summary of the
changes in the accretable yield of the PCI loan portfolio, which was acquired at November 14, 2014, for the years ended December
31, 2016, 2015 and 2014:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
(dollars in thousands)
|
|
Accretable Yield
|
|
|
Accretable Yield
|
|
|
Accretable Yield
|
|
|
Balance at beginning of period
|
|
$
|
1,280
|
|
|
$
|
1,131
|
|
|
$
|
1,185
|
|
|
Accretion
|
|
|
(505
|
)
|
|
|
(445
|
)
|
|
|
(54
|
)
|
|
Reclassification of nonaccretable difference due to improvement in expected cash flows
|
|
|
65
|
|
|
|
294
|
|
|
|
-
|
|
|
Other changes, net
|
|
|
63
|
|
|
|
300
|
|
|
|
-
|
|
|
Balance at end of period
|
|
$
|
903
|
|
|
$
|
1,280
|
|
|
$
|
1,131
|
|
The following table presents, by class of loans,
information related to loans modified as TDRs during the years ended December 31, 2016 and 2015:
|
|
|
Year Ended December 31, 2016
|
|
|
Year Ended December 31, 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
|
|
|
2
|
|
|
$
|
145
|
|
|
$
|
145
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Real estate - one to four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
7
|
|
|
|
1,224
|
|
|
|
1,224
|
|
|
|
2
|
|
|
|
355
|
|
|
|
355
|
|
|
Real estate - non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
2
|
|
|
|
554
|
|
|
|
554
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
11
|
|
|
$
|
1,923
|
|
|
$
|
1,923
|
|
|
|
2
|
|
|
$
|
355
|
|
|
$
|
355
|
|
*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 Company has no obligation to fund additional advances on its
impaired loans.
The following table presents, by class of loans,
information related to loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification)
during the years ended December 31, 2016 and 2015 and were modified as TDRs within the 12 months prior to default:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 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
|
|
|
2
|
|
|
$
|
389
|
|
|
|
1
|
|
|
$
|
68
|
|
|
Total
|
|
|
2
|
|
|
$
|
389
|
|
|
|
1
|
|
|
$
|
68
|
|
At December 31, 2016, $869 thousand in foreclosed
residential real estate properties were included in OREO, and $229 thousand in residential real estate loans were in the process
of foreclosure.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as
follows:
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Land and improvements
|
|
$
|
7,788
|
|
|
$
|
6,837
|
|
|
Buildings and leasehold improvements
|
|
|
29,091
|
|
|
|
28,487
|
|
|
Furniture, fixtures and equipment
|
|
|
21,152
|
|
|
|
20,385
|
|
|
Construction in progress
|
|
|
798
|
|
|
|
1,136
|
|
|
|
|
|
58,829
|
|
|
|
56,845
|
|
|
Less accumulated depreciation
|
|
|
(31,135
|
)
|
|
|
(29,009
|
)
|
|
Net balance
|
|
$
|
27,694
|
|
|
$
|
27,836
|
|
Depreciation and amortization of bank premises and equipment for
the years ended December 31, 2016, 2015 and 2014 amounted to $2.5 million, $2.6 million and $2.2 million, respectively.
Note 6. Other Real Estate Owned (“OREO”)
At December 31, 2016 and 2015 OREO was $2.7 million and $520 thousand,
respectively. OREO is primarily comprised of residential properties, residential lots, raw land and non-residential properties
associated with commercial relationships, and is located primarily in the Commonwealth of Virginia.
Changes in the balance for OREO for the years ended December 31,
2016 and 2015 are as follows:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
Balance at the beginning of year, gross
|
|
$
|
522
|
|
|
$
|
1,914
|
|
|
Transfers from loans
|
|
|
3,969
|
|
|
|
1,966
|
|
|
Capitalized costs
|
|
|
26
|
|
|
|
1
|
|
|
Sales proceeds
|
|
|
(1,824
|
)
|
|
|
(3,255
|
)
|
|
Previously recognized impairment losses on disposition
|
|
|
-
|
|
|
|
(79
|
)
|
|
Loss on disposition
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
Balance at the end of year, gross
|
|
|
2,692
|
|
|
|
522
|
|
|
Less valuation allowance
|
|
|
(36
|
)
|
|
|
(2
|
)
|
|
Balance at the end of year, net
|
|
$
|
2,656
|
|
|
$
|
520
|
|
Changes in the valuation allowance for OREO for
the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Balance at the beginning of year
|
|
$
|
2
|
|
|
$
|
76
|
|
|
$
|
254
|
|
|
Valuation allowance
|
|
|
34
|
|
|
|
5
|
|
|
|
24
|
|
|
Charge-offs
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
(202
|
)
|
|
Balance at the end of year
|
|
$
|
36
|
|
|
$
|
2
|
|
|
$
|
76
|
|
Expenses applicable to OREO, other than the
valuation allowance, were $323 thousand, $222 thousand and $114 thousand for the years ended December 31, 2016, 2015 and 2014,
respectively.
Note 7. Deposits
Interest-bearing deposits consist of the following:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
Demand deposits
|
|
$
|
311,279
|
|
|
$
|
306,503
|
|
|
Money market savings deposits
|
|
|
193,707
|
|
|
|
172,530
|
|
|
Savings deposits
|
|
|
108,269
|
|
|
|
97,407
|
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
Time deposits $250 and over
|
|
|
37,887
|
|
|
|
37,797
|
|
|
Other time deposits
|
|
|
191,081
|
|
|
|
200,411
|
|
|
Total interest-bearing deposits
|
|
$
|
842,223
|
|
|
$
|
814,648
|
|
A summary of interest expense by deposit category for the years
ended December 31, 2016, 2015 and 2014 is as follows:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Demand deposits
|
|
$
|
1,170
|
|
|
$
|
1,067
|
|
|
$
|
949
|
|
|
Money market savings deposits
|
|
|
773
|
|
|
|
748
|
|
|
|
498
|
|
|
Savings deposits
|
|
|
192
|
|
|
|
131
|
|
|
|
120
|
|
|
Time deposits
|
|
|
2,211
|
|
|
|
2,111
|
|
|
|
2,343
|
|
|
Total
|
|
$
|
4,346
|
|
|
$
|
4,057
|
|
|
$
|
3,910
|
|
At December 31, 2016, the scheduled maturities
of time deposits are as follows:
|
(dollars in thousands)
|
|
|
|
|
2017
|
|
$
|
112,999
|
|
|
2018
|
|
|
47,784
|
|
|
2019
|
|
|
33,982
|
|
|
2020
|
|
|
17,923
|
|
|
2021
|
|
|
16,280
|
|
|
|
|
$
|
228,968
|
|
Overdrawn demand deposit accounts totaling $121 thousand at December
31, 2016 and $97 thousand at December 31, 2015 were reclassified from deposits to loans.
Note 8. 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 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:
|
Federal funds purchased
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Balance outstanding at year end
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Maximum balance at any month end during the year
|
|
$
|
2,000
|
|
|
$
|
2,440
|
|
|
Average balance for the year
|
|
$
|
42
|
|
|
$
|
63
|
|
|
Weighted average rate for the year
|
|
|
0.93
|
%
|
|
|
0.72
|
%
|
|
Weighted average rate at year end
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Balance outstanding at year end
|
|
$
|
5,140
|
|
|
$
|
5,015
|
|
|
Maximum balance at any month end during the year
|
|
$
|
11,942
|
|
|
$
|
12,392
|
|
|
Average balance for the year
|
|
$
|
5,777
|
|
|
$
|
8,002
|
|
|
Weighted average rate for the year
|
|
|
0.47
|
%
|
|
|
0.57
|
%
|
|
Weighted average rate at year end
|
|
|
0.47
|
%
|
|
|
0.47
|
%
|
Short-term borrowings.
Short-term borrowings
consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end
loans that are secured by one to four family residential properties. Short-term advances from the FHLB at December 31, 2016 consisted
of $6.8 million using a daily rate credit, which is due on demand, and $166.9 million in fixed rate one month advances. 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 December 31, 2016 and 2015 totaled $53 thousand and $28 thousand, respectively.
The table below presents selected information
on short-term borrowings:
|
Short-term borrowings
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Balance outstanding at year end
|
|
$
|
173,650
|
|
|
$
|
114,413
|
|
|
Maximum balance at any month end during the year
|
|
$
|
173,650
|
|
|
$
|
114,413
|
|
|
Average balance for the year
|
|
$
|
119,366
|
|
|
$
|
89,580
|
|
|
Weighted average rate for the year
|
|
|
0.43
|
%
|
|
|
0.22
|
%
|
|
Weighted average rate at year end
|
|
|
0.53
|
%
|
|
|
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 December 31, 2016 and 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 $394.6 million at December 31, 2016. This line of credit
totaled $225.4 million with approximately $51.8 million available at December 31, 2016. As of December 31, 2016 and 2015, loans
with a carrying value of $301.0 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 9. Junior and Senior Subordinated Debt
On September 17, 2003, $10 million of trust preferred securities
were placed through EVB Statutory Trust I in a pooled underwriting totaling approximately $650 million. The trust issuer has invested
the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures
(the “Junior Subordinated Debt”) issued by the Company. The trust preferred securities pay cumulative cash distributions
quarterly at a variable rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.95%. As of December 31, 2016 and 2015,
the interest rate was 3.94% and 3.48%, respectively. The dividends paid to holders of the trust preferred securities, which are
recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption
date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Company has
fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt
and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated
indebtedness of the Company.
The trust preferred securities may be included in Tier 1 capital
for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the securities
not considered as Tier 1 capital will be included in Tier 2 capital. At December 31, 2016 and 2015, all of the trust preferred
securities qualified as Tier 1 capital.
Subject to certain exceptions and limitations, the Company is permitted
to elect from time to time to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debt relating
to its trust preferred securities. If the Company defers interest payments on the Junior Subordinated Debt for more than 20 consecutive
quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements
would be immediately due and payable.
From June 2011 to March 2014, the Company deferred its regularly
scheduled interest payments on its outstanding Junior Subordinated Debt relating to its trust preferred securities due to prohibitions
on such payments under provisions of regulatory agreements, which have been subsequently terminated. The Company and the Bank were
previously under a written agreement with the Reserve Bank and the Bureau until July 30, 2013, and thereafter, a memorandum of
understanding with the Reserve Bank and the Bureau until March 13, 2014. On June 17, 2014, the Company paid all current and deferred
interest on the outstanding Junior Subordinated Debt, and the Company has not deferred any subsequent interest payments through
December 31, 2016.
On April 22, 2015, the Company entered in a Senior Subordinated
Note Purchase Agreement with certain institutional accredited investors pursuant to which the Company sold $20.0 million in aggregate
principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 (the "Senior Subordinated Debt") to
the investors at a price equal to 100% of the aggregate principal amount of the Senior Subordinated Debt. The Senior Subordinated
Debt bears interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on
May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the Senior Subordinated Debt will bear interest
at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus
502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August
1, 2020. The Company may, at its option, redeem, in whole or in part, the Senior Subordinated Debt as early as May 1, 2020, and
any partial redemption would be made pro rata among all of the holders. At December 31, 2016 and 2015, all of the Senior Subordinated
Debt qualified as Tier 2 capital. At December 31, 2016, the remaining unamortized debt issuance costs related to the Senior Subordinated
Debt totaled $875 thousand.
Note 10. Employee Benefit Plans
Pension Plan
The Company historically maintained a defined benefit pension plan
covering substantially all of the Company’s employees. Benefits are based on years of service and the employee’s compensation
during the last five years of employment. The Company’s funding policy has been to contribute annually the maximum amount
that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributable
to service to date but also for those expected to be earned in the future.
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 participant’s 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.
The Company intends to terminate the plan effective May 1, 2017
in connection with the Pending Merger.
Information pertaining to the activity in the plan, using a measurement
date of December 31, is as follows:
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
10,434
|
|
|
$
|
12,059
|
|
|
$
|
10,263
|
|
|
Interest cost
|
|
|
380
|
|
|
|
404
|
|
|
|
447
|
|
|
Actuarial loss (gain)
|
|
|
104
|
|
|
|
(901
|
)
|
|
|
2,282
|
|
|
Benefits paid
|
|
|
(852
|
)
|
|
|
(1,173
|
)
|
|
|
(916
|
)
|
|
Settlement (gain) loss
|
|
|
(21
|
)
|
|
|
45
|
|
|
|
(17
|
)
|
|
Benefit obligation at end of year
|
|
$
|
10,045
|
|
|
$
|
10,434
|
|
|
$
|
12,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
8,395
|
|
|
$
|
9,565
|
|
|
$
|
10,000
|
|
|
Actual return on plan assets
|
|
|
305
|
|
|
|
3
|
|
|
|
481
|
|
|
Benefits paid
|
|
|
(852
|
)
|
|
|
(1,173
|
)
|
|
|
(916
|
)
|
|
Fair value of plan assets at end of year
|
|
$
|
7,848
|
|
|
$
|
8,395
|
|
|
$
|
9,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at the end of year
|
|
$
|
(2,197
|
)
|
|
$
|
(2,039
|
)
|
|
$
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liability
|
|
$
|
(2,197
|
)
|
|
$
|
(2,039
|
)
|
|
$
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,758
|
|
|
$
|
2,618
|
|
|
$
|
3,076
|
|
|
Prior service cost
|
|
|
74
|
|
|
|
83
|
|
|
|
91
|
|
|
Deferred income tax benefit
|
|
|
(963
|
)
|
|
|
(919
|
)
|
|
|
(1,077
|
)
|
|
Amount recognized
|
|
$
|
1,869
|
|
|
$
|
1,782
|
|
|
$
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
380
|
|
|
$
|
404
|
|
|
$
|
447
|
|
|
Expected return on plan assets
|
|
|
(607
|
)
|
|
|
(713
|
)
|
|
|
(745
|
)
|
|
Amortization of prior service cost due to curtailment
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
Recognized net loss due to settlement
|
|
|
138
|
|
|
|
204
|
|
|
|
35
|
|
|
Recognized net actuarial loss
|
|
|
107
|
|
|
|
107
|
|
|
|
-
|
|
|
Net periodic benefit cost
|
|
$
|
27
|
|
|
$
|
11
|
|
|
$
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
|
$
|
139
|
|
|
$
|
(458
|
)
|
|
$
|
2,493
|
|
|
Amortization of prior service cost
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
Total recognized in other comprehensive (loss) income
|
|
$
|
131
|
|
|
$
|
(466
|
)
|
|
$
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive (loss) income
|
|
$
|
158
|
|
|
$
|
(455
|
)
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions for benefit obligation at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.70
|
%
|
|
|
3.85
|
%
|
|
|
3.55
|
%
|
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions for net periodic pension cost at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.85
|
%
|
|
|
3.55
|
%
|
|
|
4.35
|
%
|
|
Expected return on plan assets
|
|
|
7.75
|
%
|
|
|
7.75
|
%
|
|
|
7.75
|
%
|
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Expected future interest crediting rate
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation
|
|
$
|
10,045
|
|
|
$
|
10,434
|
|
|
$
|
12,059
|
|
Expected Long-Term Rate of Return on Assets
In consultation with its investment advisors and actuary, the
Company’s plan sponsor selects the expected long-term rate of return on assets assumption. This rate is intended to reflect
the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical
performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or
anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue
over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions. The
discount rate used to calculate funding requirements and benefit expense was 3.85%, 3.55% and 4.35% in 2016, 2015 and 2014, respectively.
Because assets are held in a qualified trust, anticipated returns
are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during
the period during which the assets are invested. However, consideration is given to the potential impact of current and future
investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan
assets (to the extent such expenses are not explicitly estimated with periodic cost). The Company made no contributions to the
pension plan during 2016, 2015 and 2014. In connection with the Pending Merger, the Company expects to fully fund the pension plan
and terminate it effective May 1, 2017.
Fair value is discussed in detail in Note 20 – Fair Value
Measurements. The fair value of the Company’s pension plan assets at December 31, 2016 and 2015, by asset category are as
follows:
|
Assets Measured at Fair Value at December 31, 2016 Using
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2016
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity mutual funds (1)
|
|
$
|
2,028
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,028
|
|
|
Fixed income mutual funds (2)
|
|
|
5,820
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,820
|
|
|
Total assets at fair value
|
|
$
|
7,848
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,848
|
|
|
Assets Measured at Fair Value 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from broker
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21
|
|
|
Equity mutual funds (1)
|
|
|
6,259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,259
|
|
|
Fixed income mutual funds (2)
|
|
|
2,115
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,115
|
|
|
Total assets at fair value
|
|
$
|
8,395
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,395
|
|
|
|
(1)
|
This category includes investments in mutual funds focused on equity securities with a diversified
portfolio and includes investments in large cap and small cap funds, growth funds, international focused funds and value funds.
The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is
used to value the funds.
|
|
|
(2)
|
This category includes investments in mutual funds focused on fixed income securities with both short-term
and long-term investments. The funds are valued using the net asset value method in which an average of the market prices for the
underlying investments is used to value the funds.
|
The pension plan’s weighted-average
asset allocations as of December 31, 2016 and 2015, by asset category are as follows:
|
|
|
Plan Assets as of December 31,
|
|
|
Asset Category
|
|
2016
|
|
|
2015
|
|
|
Mutual Funds - Fixed Income
|
|
|
74
|
%
|
|
|
25
|
%
|
|
Mutual Funds - Equity
|
|
|
26
|
%
|
|
|
75
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
The Company believes that the trust fund is sufficiently diversified
to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 74% fixed income
and 26% equities. The investment manager selects investment fund managers with demonstrated experience and expertise, and funds
with demonstrated historical performance, for the implementation of the plan’s investment strategy. The investment manager
will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop
an efficient investment structure.
It is the responsibility of the Company’s trustee to administer
the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are
not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to
the trust. There is no Company common stock included in the plan assets.
Estimated future benefit payments, assuming that the pension
plan is not terminated during 2017 in connection with the Pending Merger, which reflect expected future service, as appropriate,
are as follows:
|
(dollars in thousands)
|
|
|
|
|
2017
|
|
$
|
1,519
|
|
|
2018
|
|
|
790
|
|
|
2019
|
|
|
457
|
|
|
2020
|
|
|
591
|
|
|
2021
|
|
|
904
|
|
|
Years 2022 - 2026
|
|
|
2,640
|
|
|
Total
|
|
$
|
6,901
|
|
401(k) Plan
The Company maintains a defined contribution 401(k) profit sharing
plan (the “401(k) Plan”). The 401(k) Plan allows for a maximum voluntary salary deferral up to the statutory limitations.
All employees are eligible to participate on the first day of hire. The 401(k) Plan provides for a matching contribution, which
equals 100% of the first 3% of the employee’s contributions and 50% of the next 3% of the employee’s contributions.
At the option of the Compensation Committee, the Company may make an additional discretionary contribution after the end of each
year to employees not previously grandfathered in the Pension Plan in an amount equal to 3% of the employee’s compensation
(as described in plan documents). For matching and discretionary employer contributions, an employee is 100% vested after two years
of service. The amounts charged to expense under the 401(k) Plan were $633 thousand, $610 thousand and $503 thousand for the years
ended December 31, 2016, 2015 and 2014, respectively. The Company does not offer its stock as an investment option under the 401(k)
Plan.
Deferred Compensation Plan
The Company has a Supplemental Executive Retirement Plan which
is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly
compensated employees. As of December 31, 2016, the Company has entered into a deferred supplemental compensation agreement with
its Chief Executive Officer and one of its other executive officers. For the Chief Executive Officer, full vesting of benefits
under the supplemental agreement occurs only at age 67, with partial vesting of approximately 5% for each year of service after
age 52. Benefits are to be paid in equal monthly installments over a 15 year period. There is no pre-retirement benefit, but a
beneficiary can be named to receive the remaining payments for the 15 year period after benefits have commenced. For the other
executive officer, full vesting of benefits under the supplemental agreement occurs only at age 65, with partial vesting of approximately
5% for each year of service after age 46. Benefits are to be paid in equal monthly installments over a 200 month period. There
is no pre-retirement benefit, but a beneficiary can be named to receive the remaining payments for the 200 month period after benefits
have commenced. In connection with the Pending Merger, benefits for participants in the Supplemental Executive Retirement Plan
will fully vest on an accelerated basis upon completing the Pending Merger.
The deferred compensation expense for the Company’s deferred
supplemental compensation agreements for 2016, 2015 and 2014, based on the present value of the retirement benefits, was $142 thousand,
$173 thousand and $105 thousand, respectively.
Note 11. Income Taxes
The current and deferred components of income
tax expense are as follows:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Current
|
|
$
|
(87
|
)
|
|
$
|
(42
|
)
|
|
$
|
3,513
|
|
|
Deferred
|
|
|
3,497
|
|
|
|
2,536
|
|
|
|
(1,066
|
)
|
|
Provision for income taxes
|
|
$
|
3,410
|
|
|
$
|
2,494
|
|
|
$
|
2,447
|
|
A reconciliation between the provision for income taxes and
the amount computed by multiplying income by the current statutory federal income tax rate of approximately 34% for the years ended
December 31, 2016, 2015 and 2014, respectively, is as follows:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Income tax expense at statutory rates
|
|
$
|
3,808
|
|
|
$
|
3,328
|
|
|
$
|
2,758
|
|
|
Tax-exempt interest income on obligations of state and political subdivisions
|
|
|
(75
|
)
|
|
|
(333
|
)
|
|
|
(292
|
)
|
|
Tax-exempt earning on life insurance policies
|
|
|
(217
|
)
|
|
|
(216
|
)
|
|
|
(191
|
)
|
|
Tax credits
|
|
|
(318
|
)
|
|
|
(325
|
)
|
|
|
(314
|
)
|
|
Nondeductible merger and merger related expenses
|
|
|
210
|
|
|
|
13
|
|
|
|
460
|
|
|
Reduction of nontaxable interest expense incurred to carry tax-exempt assets
|
|
|
2
|
|
|
|
9
|
|
|
|
8
|
|
|
Other
|
|
|
-
|
|
|
|
18
|
|
|
|
18
|
|
|
Provision for income taxes
|
|
$
|
3,410
|
|
|
$
|
2,494
|
|
|
$
|
2,447
|
|
Deferred income taxes result from timing differences
between taxable income and the income for financial reporting purposes. The most significant timing difference relates to the allowance
for loan losses.
Cumulative net deferred tax assets consist
of the following components at December 31, 2016 and 2015:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
3,842
|
|
|
$
|
3,851
|
|
|
Net operating loss carryforward
|
|
|
3,211
|
|
|
|
7,125
|
|
|
Net unrealized loss on securities available for sale
|
|
|
1,741
|
|
|
|
889
|
|
|
Net unrealized loss on securities transferred from available for sale to held to maturity
|
|
|
144
|
|
|
|
183
|
|
|
Tax credit carryforward
|
|
|
3,356
|
|
|
|
3,143
|
|
|
Deferred loan costs
|
|
|
153
|
|
|
|
-
|
|
|
Interest on nonaccrual loans
|
|
|
129
|
|
|
|
99
|
|
|
Benefit plans
|
|
|
1,816
|
|
|
|
1,584
|
|
|
Depreciation and amortization
|
|
|
504
|
|
|
|
583
|
|
|
Unbilled rent payable
|
|
|
98
|
|
|
|
-
|
|
|
Home equity line closing cost
|
|
|
176
|
|
|
|
136
|
|
|
Other real estate owned
|
|
|
270
|
|
|
|
64
|
|
|
Other
|
|
|
206
|
|
|
|
80
|
|
|
Total deferred tax assets
|
|
|
15,646
|
|
|
|
17,737
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
FHLB dividend
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
Goodwill and other intangible assets
|
|
|
(3,218
|
)
|
|
|
(2,668
|
)
|
|
Other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Total deferred tax liabilities
|
|
|
(3,227
|
)
|
|
|
(2,677
|
)
|
|
Net deferred tax asset
|
|
$
|
12,419
|
|
|
$
|
15,060
|
|
The realization of deferred income tax assets is assessed 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 December 31, 2016 and 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” in this Annual
Report on Form 10-K.
The Company files income tax returns in the U.S. federal jurisdiction
and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for years prior to 2013.
Note 12. 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:
|
|
|
Years Ended
|
|
|
(dollars in thousands, except share and per share amounts)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
Basic Net Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
7,759
|
|
|
$
|
6,908
|
|
|
$
|
3,716
|
|
|
Less: Net income allocated to participating securities, Series B Preferred Stock
|
|
|
2,218
|
|
|
|
1,983
|
|
|
|
1,128
|
|
|
Net income allocated to common shareholders
|
|
$
|
5,541
|
|
|
$
|
4,925
|
|
|
$
|
2,588
|
|
|
Weighted average common shares outstanding for basic net income per common share
|
|
|
13,089,192
|
|
|
|
13,017,175
|
|
|
|
12,014,862
|
|
|
Basic net income per common share
|
|
$
|
0.42
|
|
|
$
|
0.38
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
7,759
|
|
|
$
|
6,908
|
|
|
$
|
3,716
|
|
|
Weighted average common shares outstanding for basic net income per common share
|
|
|
13,089,192
|
|
|
|
13,017,175
|
|
|
|
12,014,862
|
|
|
Effect of dilutive securities, stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Effect of dilutive securities, Series B Preferred Stock
|
|
|
5,240,192
|
|
|
|
5,240,192
|
|
|
|
5,240,192
|
|
|
Weighted average common shares outstanding for diluted net income per common share
|
|
|
18,329,384
|
|
|
|
18,257,367
|
|
|
|
17,255,054
|
|
|
Diluted net income per common share
|
|
$
|
0.42
|
|
|
$
|
0.38
|
|
|
$
|
0.22
|
|
Options to acquire 36,500, 67,525 and 110,487 shares of common
stock were not included in computing diluted net income per common share for the years ended December 31, 2016, 2015 and 2014,
respectively, 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 2016, 2015 and 2014. For more information related to the conversion rights of these
preferred shares, see Note 22 – 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 22 – Preferred Stock and Warrant.
Note 13. Related Party Transactions
During the year, officers, directors, principal shareholders,
and their affiliates (related parties) were customers of and had transactions with the Company in the ordinary course of business.
In management’s opinion, these transactions were made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable loans to non-related customers and did not involve more than the normal risk of
collectability or present other unfavorable features.
Loan activity to related parties is as follows:
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
Balance at beginning of year
|
|
$
|
10,658
|
|
|
$
|
10,559
|
|
|
Additional borrowings
|
|
|
3,204
|
|
|
|
7,051
|
|
|
Curtailments
|
|
|
(3,039
|
)
|
|
|
(4,501
|
)
|
|
Reclassification*
|
|
|
(361
|
)
|
|
|
(2,451
|
)
|
|
Balance at end of year
|
|
$
|
10,462
|
|
|
$
|
10,658
|
|
*Loans with a principal balance of $361 thousand and $2.5 million
from two former directors who are no longer on the Company’s board.
At December 31, 2016 and 2015, there was approximately $3.6
million and $1.9 million in available credit that the related parties could draw upon, respectively.
Deposits from related parties held by the Company at December
31, 2016 and 2015 amounted to $4.7 million and $10.7 million, respectively.
Note 14. Stock Based Compensation Plans
On September 21, 2000, the Company adopted the Eastern Virginia
Bankshares, Inc. 2000 Stock Option Plan (the “2000 Plan”) to provide a means for selected key employees and directors
to increase their personal financial interest in the Company, thereby stimulating their efforts and strengthening their desire
to remain with the Company. Under the 2000 Plan, up to 400,000 shares of Company common stock could be granted in the form of stock
options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending
and restating the 2000 Plan (the “2003 Plan”) and still authorizing the issuance of up to 400,000 shares of common
stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights,
common stock, restricted stock and phantom stock. No additional awards may be granted under the 2003 Plan. Any awards previously
granted under the 2003 Plan that were outstanding as of April 17, 2013 remain outstanding and will vest in accordance with their
regular terms.
On April 19, 2007, the Company’s shareholders approved
the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s
ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative and to encourage
such persons to have a greater financial interest in the Company. Under the 2007 Plan, the Company could issue up to 400,000 additional
shares of common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance
shares, incentive awards and stock units. No additional awards may be granted under the 2007 Plan. Any awards previously granted
under the 2007 Plan that were outstanding as of May 19, 2016 remain outstanding and will vest in accordance with their regular
terms.
On May 19, 2016, the Company’s shareholders approved the
Eastern Virginia Bankshares, Inc. 2016 Equity Compensation Plan (the “2016 Plan”) to promote the success of the Company
by providing incentives to key employees, non-employee directors, consultants and advisors to associate their personal interests
with the long-term financial success of the Company and with growth in shareholder value consistent with the Company’s risk
management practices. The 2016 Plan authorizes the Company to issue up to 500,000 additional shares of common stock pursuant to
stock options, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards.
There were 484,232 shares still available to be granted as awards under the 2016 Plan as of December 31, 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. The Company’s stock options granted to eligible participants were recognized, as required, as compensation
cost over the vesting period except in the instance where a participant reaches normal retirement age of 65 prior to the normal
vesting date. For the years ended December 31, 2016, 2015 and 2014 there was no stock option compensation expense.
There were no stock options granted or exercised in the years
ended December 31, 2016, 2015 and 2014. There was no remaining unrecognized compensation expense related to stock options.
A summary of the Company’s stock option activity and related
information is as follows:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Average
|
|
|
Life
|
|
|
Value
|
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Stock options outstanding at January 1, 2014
|
|
|
152,287
|
|
|
$
|
19.09
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(20,750
|
)
|
|
|
19.97
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(21,050
|
)
|
|
|
28.60
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2014
|
|
|
110,487
|
|
|
|
18.76
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16,100
|
)
|
|
|
18.47
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(26,862
|
)
|
|
|
20.57
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2015
|
|
|
67,525
|
|
|
|
18.12
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,250
|
)
|
|
|
18.10
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(27,775
|
)
|
|
|
21.16
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2016
|
|
|
36,500
|
|
|
$
|
15.81
|
|
|
|
1.25
|
|
|
$
|
-
|
|
|
Stock options exercisable at December 31, 2016
|
|
|
36,500
|
|
|
$
|
15.81
|
|
|
|
1.25
|
|
|
$
|
-
|
|
*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 December 31, 2016:
|
Stock Options Outstanding and Exercisable
|
|
Exercise
|
|
|
Number
|
|
|
Weighted Average
|
|
Price
|
|
|
Outstanding
|
|
|
Remaining Term
|
|
$
|
19.25
|
|
|
|
18,250
|
|
|
0.75 years
|
|
$
|
12.36
|
|
|
|
18,250
|
|
|
1.75 years
|
|
$
|
15.81
|
|
|
|
36,500
|
|
|
1.25 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. On November 20, 2014,
the Company granted 3,242 shares of restricted stock under the 2007 Plan to one of its executive officers. All of these shares
are subject to time vesting over a two year period, and generally vest fifty percent (50%) on the first and second anniversaries
of the grant date. In connection with the Pending Merger, all outstanding time and performance based shares of restricted stock
will vest on an accelerated basis upon completing the Pending Merger.
For the years ended December 31, 2016, 2015 and 2014, restricted
stock compensation expense was $358 thousand, $248 thousand and $100 thousand, respectively, and was included in salaries and employee
benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair
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, $6.10 per share
for the October 15, 2014 awards and $6.17 per share for the November 20, 2014 award.
A summary of the status of the Company’s nonvested shares
in relation to the Company’s restricted stock awards as of December 31, 2016, 2015 and 2014, and changes during the years
ended December 31, 2016, 2015 and 2014, is presented below; the weighted average price is the weighted average fair value at the
date of grant:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Nonvested as of January 1, 2014
|
|
|
73,500
|
|
|
$
|
5.30
|
|
|
Granted
|
|
|
45,742
|
|
|
|
6.10
|
|
|
Vested
|
|
|
(15,100
|
)
|
|
|
3.93
|
|
|
Nonvested as of December 31, 2014
|
|
|
104,142
|
|
|
|
5.85
|
|
|
Granted
|
|
|
45,000
|
|
|
|
6.28
|
|
|
Vested
|
|
|
(27,871
|
)
|
|
|
5.85
|
|
|
Nonvested as of December 31, 2015
|
|
|
121,271
|
|
|
|
6.01
|
|
|
Granted
|
|
|
71,500
|
|
|
|
6.82
|
|
|
Vested
|
|
|
(24,771
|
)
|
|
|
5.67
|
|
|
Nonvested as of December 31, 2016
|
|
|
168,000
|
|
|
$
|
6.41
|
|
At December 31, 2016, there was $639 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. The total fair value of restricted stock awards vested during 2016, 2015 and
2014 was $190 thousand, $181 thousand and $97 thousand, respectively.
Note 15. Accumulated Other Comprehensive (Loss)
The balances in accumulated other comprehensive (loss) are shown
in the following table:
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Unrealized
|
|
|
Adjustments
|
|
|
Other
|
|
|
|
|
Securities
|
|
|
Related to
|
|
|
Comprehensive
|
|
|
(dollars in thousands)
|
|
(Losses) Gains
|
|
|
Pension Plan
|
|
|
(Loss) Income
|
|
|
Balance at December 31, 2013
|
|
$
|
(8,396
|
)
|
|
$
|
(472
|
)
|
|
$
|
(8,868
|
)
|
|
Other comprehensive income before reclassification
|
|
|
6,635
|
|
|
|
-
|
|
|
|
6,635
|
|
|
Reclassification adjustment for gains included in net income
|
|
|
(355
|
)
|
|
|
-
|
|
|
|
(355
|
)
|
|
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity
|
|
|
162
|
|
|
|
-
|
|
|
|
162
|
|
|
Change in unfunded pension liability
|
|
|
-
|
|
|
|
(1,640
|
)
|
|
|
(1,640
|
)
|
|
Balance at December 31, 2014
|
|
|
(1,954
|
)
|
|
|
(2,112
|
)
|
|
|
(4,066
|
)
|
|
Other comprehensive (loss) before reclassification
|
|
|
(102
|
)
|
|
|
-
|
|
|
|
(102
|
)
|
|
Reclassification adjustment for gains included in net income
|
|
|
(148
|
)
|
|
|
-
|
|
|
|
(148
|
)
|
|
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity
|
|
|
122
|
|
|
|
-
|
|
|
|
122
|
|
|
Change in unfunded pension liability
|
|
|
-
|
|
|
|
308
|
|
|
|
308
|
|
|
Balance at December 31, 2015
|
|
|
(2,082
|
)
|
|
|
(1,804
|
)
|
|
|
(3,886
|
)
|
|
Other comprehensive (loss) before reclassification
|
|
|
(1,190
|
)
|
|
|
-
|
|
|
|
(1,190
|
)
|
|
Reclassification adjustment for gains included in net income
|
|
|
(463
|
)
|
|
|
-
|
|
|
|
(463
|
)
|
|
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity
|
|
|
76
|
|
|
|
-
|
|
|
|
76
|
|
|
Change in unfunded pension liability
|
|
|
-
|
|
|
|
(86
|
)
|
|
|
(86
|
)
|
|
Balance at December 31, 2016
|
|
$
|
(3,659
|
)
|
|
$
|
(1,890
|
)
|
|
$
|
(5,549
|
)
|
Reclassifications of gains on securities available for sale
are reported in the consolidated statements of income as “Gain on sale of available for sale securities, net” with
the corresponding income tax effect being reflected as a component of income tax expense. Amortization of unrealized losses on
securities transferred from available for sale to held to maturity is included in interest income on investments (taxable or non-taxable)
in the Company’s consolidated statements of income.
During the years ended December 31, 2016, 2015 and 2014, the
Company reported gains on the sale of available for sale and held to maturity securities and amortization of unrealized losses
on securities transferred from available for sale to held to maturity as shown in the following table:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Gains on sale of available for sale and held to maturity securities
|
|
$
|
701
|
|
|
$
|
224
|
|
|
$
|
538
|
|
|
Less: tax effect
|
|
|
(238
|
)
|
|
|
(76
|
)
|
|
|
(183
|
)
|
|
Net gains on the sale of available for sale and held to maturity securities
|
|
$
|
463
|
|
|
$
|
148
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrealized losses on securities transferred from available for sale to held to maturity
|
|
$
|
(115
|
)
|
|
$
|
(185
|
)
|
|
$
|
(246
|
)
|
|
Less: tax effect
|
|
|
39
|
|
|
|
63
|
|
|
|
84
|
|
|
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity
|
|
$
|
(76
|
)
|
|
$
|
(122
|
)
|
|
$
|
(162
|
)
|
Note 16. Commitments and Contingent Liabilities
In the normal course of business there are various outstanding
commitments and contingent liabilities, which are not reflected in the accompanying financial statements. The Company does not
anticipate any material losses as a result of these transactions. See Note 21 – Financial Instruments with Off-Balance Sheet
Risk.
Note 17. Dividend Limitations
Dividends may be paid to the Company by the Bank under formulas
established by the appropriate regulatory authorities. Generally, the amount of dividends the Bank may pay to the Company at any
time, without prior approval, is limited to current year to date earnings as of the dividend date plus earnings retained for the
two preceding years.
Note 18. Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s
and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weightings and
other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The Basel III Capital Rules, a new comprehensive capital framework
for U.S. banking organizations, became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period
for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require
the maintenance of minimum amounts and ratios as presented in the table below of common equity tier 1 capital (“CET1”),
Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital to adjusted quarterly average assets (as defined).
|
|
·
|
The Company and the Bank’s CET1 capital includes common stock and related surplus and retained earnings. In connection
with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include components of accumulated
other comprehensive income (loss) in CET1 capital. CET1 capital for both the Company and the Bank is reduced by, goodwill, deferred
tax assets, and other intangible assets, net of associated deferred tax liabilities, and subject to transition provisions.
|
|
|
·
|
Tier 1 capital includes CET1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital
at December 31, 2016 and 2015 includes $21.6 million of Series B Preferred Stock (including related surplus). At December 31,
2016 and 2015, $10.0 million of qualified trust preferred securities were included in the Company’s additional Tier 1
capital. The Bank did not have any additional Tier 1 capital beyond CET1 capital as of December 31, 2016 and 2015.
|
|
|
·
|
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes
an allowable portion of the allowance for loan losses. Tier 2 capital for the Company at December 31, 2016 and 2015 also includes
$20.0 million of qualified senior subordinated debt.
|
Risk-weighted assets for the Company and the Bank were both
$1.1 billion at December 31, 2016 and $888.5 million and $889.6 million, respectively at December 31, 2015, as determined under
then applicable regulations. Management believes, as of December 31, 2016 and 2015, that the Company and the Bank met all capital
adequacy requirements to which they are subject.
As of December 31, 2016, the most recent notification from the
Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized
as well capitalized at December 31, 2016, an institution must maintain minimum total risk-based, CET1 risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that
management believes have changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and
ratios, and minimum regulatory capital requirements, as of December 31, 2016 and 2015 are also presented in the table.
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Minimum To Be Well
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital
|
|
|
Capitalized Under Prompt
|
|
|
|
|
Actual
|
|
|
Requirement *
|
|
|
Corrective Action Provisions
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
93,853
|
|
|
|
8.8000
|
%
|
|
$
|
54,659
|
|
|
|
5.1250
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
130,894
|
|
|
|
12.2507
|
%
|
|
|
54,759
|
|
|
|
5.1250
|
%
|
|
$
|
69,450
|
|
|
|
6.5000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
122,786
|
|
|
|
11.5129
|
%
|
|
$
|
70,656
|
|
|
|
6.6250
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
130,894
|
|
|
|
12.2507
|
%
|
|
|
70,786
|
|
|
|
6.6250
|
%
|
|
$
|
85,477
|
|
|
|
8.0000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
154,056
|
|
|
|
14.4449
|
%
|
|
$
|
91,987
|
|
|
|
8.6250
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
142,164
|
|
|
|
13.3055
|
%
|
|
|
92,155
|
|
|
|
8.6250
|
%
|
|
$
|
106,846
|
|
|
|
10.0000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
122,786
|
|
|
|
9.2748
|
%
|
|
$
|
52,955
|
|
|
|
4.0000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
130,894
|
|
|
|
9.8711
|
%
|
|
|
53,041
|
|
|
|
4.0000
|
%
|
|
$
|
66,302
|
|
|
|
5.0000
|
%
|
|
|
*
|
Except with regard to the Company’s and the Bank’s
Tier 1 capital to average assets ratio, includes the current phased-in portion of the Basel III Capital Rules capital conservation
buffer (0.625%) which is added to the minimum capital requirements for capital adequacy purposes. The capital conservation buffer
is being phased in through four equal annual installments of 0.625% from 2016 to 2019, with full implementation in January 2019
(2.5%). The Company’s and the Bank’s capital conservation buffer must consist of additional CET1 above regulatory
minimum requirements. Failure to maintain the prescribed levels places limitations on capital distributions and discretionary
bonuses to executives. As of December 31, 2016, the capital conservation buffer of the Company and the Bank was 4.3000% and 5.3055%,
respectively.
|
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Minimum To Be Well
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital
|
|
|
Capitalized Under Prompt
|
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Corrective Action Provisions
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CET1 to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
87,114
|
|
|
|
9.8050
|
%
|
|
$
|
39,981
|
|
|
|
4.5000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
115,813
|
|
|
|
13.0200
|
%
|
|
|
40,034
|
|
|
|
4.5000
|
%
|
|
$
|
57,827
|
|
|
|
6.5000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
112,513
|
|
|
|
12.6637
|
%
|
|
$
|
53,308
|
|
|
|
6.0000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
115,813
|
|
|
|
13.0200
|
%
|
|
|
53,378
|
|
|
|
6.0000
|
%
|
|
$
|
71,171
|
|
|
|
8.0000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
143,698
|
|
|
|
16.1737
|
%
|
|
$
|
71,077
|
|
|
|
8.0000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
126,993
|
|
|
|
14.2700
|
%
|
|
|
71,171
|
|
|
|
8.0000
|
%
|
|
$
|
88,964
|
|
|
|
10.0000
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
112,513
|
|
|
|
9.2029
|
%
|
|
$
|
48,903
|
|
|
|
4.0000
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Bank
|
|
|
115,813
|
|
|
|
9.4600
|
%
|
|
|
48,946
|
|
|
|
4.0000
|
%
|
|
$
|
61,182
|
|
|
|
5.0000
|
%
|
Note 19. Dividend Reinvestment and Stock Purchase Plan
The Company has a Dividend Reinvestment and Stock Purchase Plan
(the “DRSPP”), which provides for the automatic conversion of dividends into common stock for enrolled shareholders.
The DRSPP also permits participants to make voluntary cash payments of up to $20 thousand per shareholder per calendar quarter
for the purchase of additional shares of the Company’s common stock. When the administrator of the DRSPP purchases shares
of common stock from the Company, the purchase price will generally be the market value of the common stock on the purchase date
as defined by the Nasdaq Stock Market. When the administrator purchases shares of common stock in the open market, the purchase
price will be the weighted average of the prices actually paid for the shares for the relevant purchase date, excluding all fees,
brokerage commissions, and expenses. When the administrator purchases shares of common stock in privately negotiated transactions,
the purchase price will be the weighted average of the prices actually paid for the shares for the relevant purchase date, excluding
all fees, brokerage commissions, and expenses. Effective March 1, 2012, the DRSPP was amended and restated to effect certain design
changes to the plan, but not to change the number of shares issuable thereunder. Beginning on August 15, 2012, the issuance of
common stock under the DRSPP was temporarily suspended. In July 2016 the Company reinitiated the Company’s DRSPP. Of the
353,473 shares reserved for issuance under the Company’s DRSPP, there were 128,670 shares available for issuance under the
plan as of December 31, 2016.
Note 20. Fair Value Measurements
Fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize
the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which
prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety
is reported in one of the three levels. These levels are:
|
|
*
|
Level 1 – Valuation is based upon quoted prices (unadjusted) for identical instruments traded in active markets.
|
|
|
*
|
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions
are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
|
|
|
*
|
Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market.
|
U.S. GAAP allows an entity the irrevocable option to elect fair
value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract
basis. The Company has not made any fair value option elections as of December 31, 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 December 31, 2016 and 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 December 31, 2016 Using
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2016
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA Pool securities
|
|
$
|
-
|
|
|
$
|
57,719
|
|
|
$
|
-
|
|
|
$
|
57,719
|
|
|
Agency residential mortgage-backed securities
|
|
|
-
|
|
|
|
25,829
|
|
|
|
-
|
|
|
|
25,829
|
|
|
Agency commercial mortgage-backed securities
|
|
|
-
|
|
|
|
27,852
|
|
|
|
-
|
|
|
|
27,852
|
|
|
Agency CMO securities
|
|
|
-
|
|
|
|
51,683
|
|
|
|
-
|
|
|
|
51,683
|
|
|
Non agency CMO securities
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
|
|
43
|
|
|
State and political subdivisions
|
|
|
-
|
|
|
|
54,501
|
|
|
|
-
|
|
|
|
54,501
|
|
|
Corporate securities
|
|
|
-
|
|
|
|
2,005
|
|
|
|
-
|
|
|
|
2,005
|
|
|
Total securities available for sale
|
|
$
|
-
|
|
|
$
|
219,632
|
|
|
$
|
-
|
|
|
$
|
219,632
|
|
|
Assets Measured at Fair Value on a Recurring Basis at December 31, 2015 Using
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
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
|
|
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 December 31, 2016 and 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 December 31, 2016 Using
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2016
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,885
|
|
|
$
|
9,885
|
|
|
Other real estate owned
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,656
|
|
|
$
|
2,656
|
|
|
Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2015 Using
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
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
|
|
The following table displays quantitative information about
Level 3 Fair Value Measurements as of December 31, 2016 and 2015:
|
Quantitative information about Level 3 Fair Value Measurements at December 31, 2016
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Value
|
|
|
Valuation Technique(s)
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
9,885
|
|
|
Discounted appraised value
|
|
Selling cost
|
|
0% - 93% (13%)
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability and age of appraisal
|
|
0% - 25% (7%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
2,656
|
|
|
Discounted appraised value
|
|
Selling cost
|
|
10% (10%)
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability and age of appraisal
|
|
0% - 40% (5%)
|
|
Quantitative information about Level 3 Fair Value Measurements at December 31, 2015
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
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.
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 December 31, 2016 and 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 estimated fair value and the carrying value of the Company’s
recorded financial instruments are as follows:
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 Using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2016
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments*
|
|
$
|
5,696
|
|
|
$
|
5,696
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,696
|
|
|
Interest bearing deposits with banks
|
|
|
11,919
|
|
|
|
11,919
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,919
|
|
|
Securities available for sale
|
|
|
219,632
|
|
|
|
-
|
|
|
|
219,632
|
|
|
|
-
|
|
|
|
219,632
|
|
|
Securities held to maturity
|
|
|
27,956
|
|
|
|
-
|
|
|
|
28,735
|
|
|
|
-
|
|
|
|
28,735
|
|
|
Restricted securities
|
|
|
11,557
|
|
|
|
-
|
|
|
|
11,557
|
|
|
|
-
|
|
|
|
11,557
|
|
|
Loans, net
|
|
|
1,021,961
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,012,425
|
|
|
|
1,012,425
|
|
|
Bank owned life insurance
|
|
|
25,734
|
|
|
|
-
|
|
|
|
25,734
|
|
|
|
-
|
|
|
|
25,734
|
|
|
Accrued interest receivable
|
|
|
4,705
|
|
|
|
-
|
|
|
|
4,705
|
|
|
|
-
|
|
|
|
4,705
|
|
|
Total
|
|
$
|
1,329,160
|
|
|
$
|
17,615
|
|
|
$
|
290,363
|
|
|
$
|
1,012,425
|
|
|
$
|
1,320,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
209,138
|
|
|
$
|
209,138
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
209,138
|
|
|
Interest-bearing deposits
|
|
|
842,223
|
|
|
|
-
|
|
|
|
764,406
|
|
|
|
-
|
|
|
|
764,406
|
|
|
Short-term borrowings**
|
|
|
178,790
|
|
|
|
178,790
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178,790
|
|
|
Junior subordinated debt
|
|
|
10,310
|
|
|
|
-
|
|
|
|
10,664
|
|
|
|
-
|
|
|
|
10,664
|
|
|
Senior subordinated debt***
|
|
|
19,125
|
|
|
|
-
|
|
|
|
19,216
|
|
|
|
-
|
|
|
|
19,216
|
|
|
Accrued interest payable
|
|
|
752
|
|
|
|
-
|
|
|
|
752
|
|
|
|
-
|
|
|
|
752
|
|
|
Total
|
|
$
|
1,260,338
|
|
|
$
|
387,928
|
|
|
$
|
795,038
|
|
|
$
|
-
|
|
|
$
|
1,182,966
|
|
*Includes federal funds sold.
**Includes federal funds purchased and repurchase agreements.
***Net of unamortized debt issuance costs of $875.
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015 Using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
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
|
|
|
|
-
|
|
|
|
19,669
|
|
|
Accrued interest payable
|
|
|
590
|
|
|
|
-
|
|
|
|
590
|
|
|
|
-
|
|
|
|
590
|
|
|
Total
|
|
$
|
1,138,069
|
|
|
$
|
293,499
|
|
|
$
|
793,507
|
|
|
$
|
-
|
|
|
$
|
1,087,006
|
|
*Includes federal funds sold.
**Includes federal funds purchased and repurchase agreements.
***Net of unamortized debt issuance costs of $978.
The Company assumes interest rate risk (the risk that general
interest rate levels will change) as a result of the Company’s normal operations. As a result, the fair values of the Company’s
financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the
Company. The Company attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest
rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors
who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to
do so in a falling rate environment. The Company monitors rates and maturities of assets and liabilities and attempts to minimize
interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s
overall interest rate risk.
Note 21.
Financial Instruments with Off-Balance Sheet
Risk
In the normal course of business, the Company is a party to
financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, standby letters
of credit, guarantees of credit card accounts previously sold and potential repurchase obligations related to previously sold loans,
and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular
classes of financial instruments.
The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and guarantees
of credit card accounts previously sold is represented by the contractual notional amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Unless otherwise noted, the Company does not require collateral
or other security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s
credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include property,
plant and equipment and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers.
These lines of credit are usually uncollateralized and do not always contain a specified maturity date and may not be drawn upon
to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to customers. The Company has not incurred any losses on
its commitments in either 2016 or 2015.
The amounts of loan commitments and standby letters of credit
are set forth in the following table as of December 31, 2016 and 2015:
|
|
|
December 31,
|
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
Loan commitments
|
|
$
|
223,059
|
|
|
$
|
173,973
|
|
|
Standby letters of credit
|
|
$
|
8,689
|
|
|
$
|
6,542
|
|
In connection with the sale of its credit card loan portfolio,
the Company has guaranteed credit card accounts of certain customers to the Bank that purchased the accounts. At December 31, 2016
and 2015, the guarantees totaled $756 thousand and $763 thousand, respectively, of which the outstanding balance of the guarantees
was $143 thousand and $212 thousand, respectively. As of December 31, 2016, the Company does not anticipate any significant or
material losses as a result of the guaranteed credit card accounts.
Note 22.
Preferred Stock and Warrant
On January 9, 2009, the Company signed a definitive
agreement with the Treasury under the Emergency Economic Stabilization Act of 2008 to participate in the Treasury’s Capital
Purchase Program. Pursuant to this agreement, the Company sold 24,000 shares of its Series A fixed rate cumulative perpetual preferred
stock, liquidation value $1,000 per share (the “Series A Preferred Stock”), to the Treasury for an aggregate purchase
price of $24 million. The Series A Preferred Stock paid a cumulative dividend at a rate of 5% for the first five years, and effective
January 9, 2014, paid a rate of 9%. As part of its purchase of the Series A Preferred Stock, the Treasury was also issued a warrant
(the “Warrant”) to purchase, on its initial terms, up to 373,832 shares of the Company’s common stock at an initial
exercise price of $9.63 per share. If not exercised, the Warrant would have expired after ten years. On October 21, 2013, the Treasury
sold all 24,000 shares of Series A Preferred Stock that were held by Treasury to private investors. Capital stock transactions
by the Company subsequent to the Warrant’s issuance adjusted the Warrant’s exercise price per share to $9.374 and increased
the number of shares that could have been acquired upon exercise to 384,041.19 shares.
On May 13, 2015, the Company repurchased from the Treasury the
Warrant for an aggregate repurchase price of $115 thousand, based on the fair value of the Warrant as agreed upon by the Company
and the Treasury. Following the repurchase of the Warrant, the Treasury has no remaining equity investment in the Company. Additionally,
on June 15, 2015, the Company redeemed the remaining $9.0 million of its Series A Preferred Stock.
In connection with its private placements, on June 12, 2013,
the Company issued 5,240,192 shares of its Series B Preferred Stock for a gross purchase price of $23.8 million, or $4.55 per share.
The Series B Preferred Stock has no maturity date. The holders of Series B Preferred Stock are entitled to receive dividends if,
as and when declared by the Company’s Board of Directors, in an identical form of consideration and at the same time, as
those dividends or distributions that would have been payable on the number of whole shares of the Company’s common stock
that such shares of Series B Preferred Stock would be convertible into upon satisfaction of certain conditions. The Company will
not pay any dividends with respect to its common stock unless an equivalent dividend also is paid to the holders of Series B Preferred
Stock. The Series B Preferred Stock ranks junior with regard to dividends to any class or series of capital stock of the Company
the terms of which expressly provide that such class or series will rank senior to the common stock or the Series B Preferred Stock
as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company.
Note 23. Former Related Party Lease
The Bank has entered into a long-term land lease with a former
related party to provide for space for one branch located in Hartfield, Virginia. This lease has been classified as an operating
lease for financial reporting purposes. The lease term expires on April 30, 2025 with annual lease payments of approximately $8
thousand. Future minimum lease payments required over the remaining term of this non-cancelable operating lease total $66 thousand.
Under the terms of the lease, the Bank has two options to extend the lease term beyond April 30, 2025. Total lease expense was
$8 thousand for each of the years 2016, 2015 and 2014, respectively.
Note 24. Lease Commitments
The Company currently has long-term
leases for six of its branches, one loan production office and its corporate headquarters. Three of the leases are for branch
buildings, three of the leases are for the land on which Company owned branches are located, one lease is for a loan production
office building in Chesterfield, Virginia and one lease is for
the corporate headquarters
in Glen Allen, Virginia. Pursuant to the terms of these leases, the following is a schedule, by year, of future minimum lease payments
required under the long-term non-cancelable lease agreements.
|
(dollars in thousands)
|
|
Lease Payments
|
|
|
2017
|
|
$
|
788
|
|
|
2018
|
|
|
843
|
|
|
2019
|
|
|
830
|
|
|
2020
|
|
|
848
|
|
|
2021
|
|
|
826
|
|
|
Thereafter
|
|
|
3,736
|
|
|
|
|
$
|
7,871
|
|
Rent expense for the years ended December 31, 2016, 2015 and
2014 was $752 thousand, $508 thousand and $315 thousand, respectively, and was included in occupancy and equipment expenses.
Note 25. Common Stock Repurchases
In January 2001, the Company announced a stock repurchase program
by which management was authorized to repurchase up to 300,000 shares of the Company’s common stock. This program was amended
in 2003 and the number of shares by which management is authorized to repurchase is up to 5% of the outstanding shares of the Company’s
common stock on January 1 of each year. There is no stated expiration date for the program. During 2016, 2015 and 2014, the Company
did not repurchase any of its common stock under the program.
Note 26. Condensed Parent Company Only Financial Information
The condensed financial position as of December 31, 2016 and
2015 and the condensed results of income and cash flows for each of the years in the three-year period ended December 31, 2016,
of Eastern Virginia Bankshares, Inc., parent company only, are presented below:
Condensed Balance Sheets
December 31, 2016 and 2015
(dollars in thousands)
|
|
|
2016
|
|
|
2015
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash on deposit with subsidiary
|
|
$
|
9,826
|
|
|
$
|
14,616
|
|
|
Investment in subsidiaries
|
|
|
147,954
|
|
|
|
139,166
|
|
|
Deferred income taxes, net
|
|
|
993
|
|
|
|
931
|
|
|
Other assets
|
|
|
3,852
|
|
|
|
2,630
|
|
|
Total assets
|
|
$
|
162,625
|
|
|
$
|
157,343
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
10,310
|
|
|
$
|
10,310
|
|
|
Senior subordinated debt
|
|
|
19,125
|
|
|
|
19,022
|
|
|
Accrued benefit cost
|
|
|
1,630
|
|
|
|
1,499
|
|
|
Other liabilities
|
|
|
360
|
|
|
|
237
|
|
|
Total shareholders’ equity
|
|
|
131,200
|
|
|
|
126,275
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
162,625
|
|
|
$
|
157,343
|
|
Condensed Statements of Income
Years Ended December 31, 2016,
2015 and 2014
(dollars in thousands)
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposit with subsidiary
|
|
$
|
63
|
|
|
$
|
76
|
|
|
$
|
132
|
|
|
Total income
|
|
|
63
|
|
|
|
76
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on junior subordinated debt
|
|
|
370
|
|
|
|
329
|
|
|
|
339
|
|
|
Interest on senior subordinated debt
|
|
|
1,405
|
|
|
|
963
|
|
|
|
-
|
|
|
Salaries and employee benefits
|
|
|
472
|
|
|
|
441
|
|
|
|
554
|
|
|
Professional fees
|
|
|
534
|
|
|
|
437
|
|
|
|
403
|
|
|
Merger and merger related expenses
|
|
|
617
|
|
|
|
38
|
|
|
|
1,325
|
|
|
Other
|
|
|
306
|
|
|
|
259
|
|
|
|
215
|
|
|
Total expenses
|
|
|
3,704
|
|
|
|
2,467
|
|
|
|
2,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit and equity in undistributed net income of subsidiary
|
|
|
(3,641
|
)
|
|
|
(2,391
|
)
|
|
|
(2,704
|
)
|
|
Income tax benefit
|
|
|
(1,031
|
)
|
|
|
(800
|
)
|
|
|
(516
|
)
|
|
Loss before equity in undistributed net income of subsidiary
|
|
|
(2,610
|
)
|
|
|
(1,591
|
)
|
|
|
(2,188
|
)
|
|
Equity in undistributed net income of subsidiary
|
|
|
10,369
|
|
|
|
8,885
|
|
|
|
7,852
|
|
|
Net income
|
|
$
|
7,759
|
|
|
$
|
7,294
|
|
|
$
|
5,664
|
|
Condensed Statements of Cash
Flows
Years Ended December 31, 2016,
2015 and 2014
(dollars in thousands)
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,759
|
|
|
$
|
7,294
|
|
|
$
|
5,664
|
|
|
Adjustments to reconcile net income to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (income) of subsidiary
|
|
|
(10,369
|
)
|
|
|
(8,885
|
)
|
|
|
(7,852
|
)
|
|
Stock based compensation
|
|
|
358
|
|
|
|
248
|
|
|
|
100
|
|
|
Amortization of debt issuance costs
|
|
|
105
|
|
|
|
64
|
|
|
|
-
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
Other assets
|
|
|
(1,222
|
)
|
|
|
(935
|
)
|
|
|
(302
|
)
|
|
Other liabilities
|
|
|
110
|
|
|
|
108
|
|
|
|
(977
|
)
|
|
Net cash (used in) operating activities
|
|
|
(3,259
|
)
|
|
|
(2,106
|
)
|
|
|
(3,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in investment in subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,400
|
)
|
|
Net cash (used in) investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior subordinated debt
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
Debt issuance costs
|
|
|
(2
|
)
|
|
|
(1,042
|
)
|
|
|
-
|
|
|
Director stock grant
|
|
|
133
|
|
|
|
38
|
|
|
|
38
|
|
|
Repurchase of preferred stock, Series A
|
|
|
-
|
|
|
|
(14,000
|
)
|
|
|
(10,000
|
)
|
|
Repurchase of common stock
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
Cancellation of common stock
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Repurchase of warrant
|
|
|
-
|
|
|
|
(115
|
)
|
|
|
-
|
|
|
Dividends paid - preferred stock, Series A
|
|
|
-
|
|
|
|
(547
|
)
|
|
|
(5,955
|
)
|
|
Dividends paid - preferred stock, Series B
|
|
|
(471
|
)
|
|
|
(315
|
)
|
|
|
-
|
|
|
Dividends paid - common stock
|
|
|
(1,178
|
)
|
|
|
(781
|
)
|
|
|
-
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,531
|
)
|
|
|
3,237
|
|
|
|
(15,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash on deposit with subsidiary
|
|
|
(4,790
|
)
|
|
|
1,131
|
|
|
|
(21,683
|
)
|
|
Cash on deposit with subsidiary, January 1
|
|
|
14,616
|
|
|
|
13,485
|
|
|
|
35,168
|
|
|
Cash on deposit with subsidiary, December 31
|
|
$
|
9,826
|
|
|
$
|
14,616
|
|
|
$
|
13,485
|
|
Note 27. Low Income Housing Tax Credits
The Company had investments in four separate housing equity
funds at December 31, 2016. The general purpose of these funds is to encourage and assist participants in investing in low-income
residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as
low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits
to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated
balance sheets and were $2.3 million and $2.8 million at December 31, 2016 and 2015, respectively. These investments and related
tax benefits have expected terms through 2032, with the majority maturing by 2027. Tax credits and other tax benefits recognized
related to these investments during the years ended December 31, 2016 and 2015 were $469 thousand and $478 thousand, respectively.
Total projected tax credits to be received for 2016 are $318 thousand, which is based on the most recent quarterly estimates received
from the funds. Additional capital calls expected for the funds totaled $984 thousand and $1.0 million at December 31, 2016 and
2015, respectively, and are included in other liabilities on the consolidated balance sheets.
