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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

 

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

COMMISSION FILE NUMBER: 0-22955

 

 

BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

VIRGINIA   54-1838100

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

 

(I.R.S. EMPLOYER

IDENTIFICATION NO.)

100 SOUTH MAIN STREET, KILMARNOCK, VA   22482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)   (ZIP CODE)

(804) 435-1171

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

 

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.    x  yes    ¨  no

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

4,817,856 shares of common stock on November 4, 2014

 

 

 


Table of Contents

FORM 10-Q

For the interim period ending September 30, 2014.

INDEX

 

PART I - FINANCIAL INFORMATION

  

ITEM 1. FINANCIAL STATEMENTS

  

CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013

     3   

CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (UNAUDITED)

     4   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (UNAUDITED)

     5   

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

     5   

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (UNAUDITED)

     6   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     7   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     25   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     31   

ITEM 4. CONTROLS AND PROCEDURES

     31   

PART II - OTHER INFORMATION

  

ITEM 1. LEGAL PROCEEDINGS

     31   

ITEM 1A. RISK FACTORS

     31   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     31   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     31   

ITEM 4. MINE SAFETY DISCLOSURES

     31   

ITEM 5. OTHER INFORMATION

     31   

ITEM 6. EXHIBITS

     32   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

    September 30, 2014     December 31, 2013 (1)  
(Dollars in thousands)   (unaudited)        

ASSETS

   

Cash and due from banks

  $ 4,341      $ 6,789   

Interest-bearing deposits

    6,952        8,900   

Federal funds sold

    137        120   

Securities available for sale, at fair value

    36,519        38,522   

Restricted securities

    1,980        1,638   

Loans receivable, net of allowance for loan losses of $3,151 and $2,925

    270,980        247,912   

Loans held for sale

    —          196   

Premises and equipment, net

    10,868        10,620   

Accrued interest receivable

    1,060        1,124   

Other real estate owned, net

    2,839        3,897   

Bank owned life insurance

    7,284        5,129   

Goodwill

    2,808        2,808   

Mortgage servicing rights

    620        579   

Other assets

    2,346        2,901   
 

 

 

   

 

 

 

Total assets

  $ 348,734      $ 331,135   
 

 

 

   

 

 

 

LIABILITIES

   

Noninterest-bearing deposits

  $ 60,334      $ 57,805   

Savings and interest-bearing demand deposits

    118,189        114,056   

Time deposits

    97,382        96,486   
 

 

 

   

 

 

 

Total deposits

    275,905        268,347   

Securities sold under repurchase agreements

    6,978        9,118   

Federal Home Loan Bank advances

    25,000        15,000   

Other liabilities

    1,785        1,534   
 

 

 

   

 

 

 

Total liabilities

    309,668        293,999   
 

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

   

Common stock ($5 par value; authorized - 10,000,000 shares; outstanding - 4,818,733 and 4,817,856 shares, respectively)

    24,094        24,089   

Additional paid-in capital

    2,772        2,757   

Retained earnings

    12,695        11,463   

Accumulated other comprehensive loss, net

    (495     (1,173
 

 

 

   

 

 

 

Total shareholders’ equity

    39,066        37,136   
 

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 348,734      $ 331,135   
 

 

 

   

 

 

 

 

(1) Derived from the audited consolidated financial statements.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

    For the three months ended     For the nine months ended  
(Dollars in thousands except per share amounts)   September 30, 2014     September 30, 2013     September 30, 2014     September 30, 2013  

INTEREST INCOME

       

Loans, including fees

  $ 3,323      $ 3,182      $ 9,763      $ 9,471   

Securities:

       

Taxable

    93        104        272        345   

Tax-exempt

    92        101        286        226   

Interest-bearing deposit accounts

    7        13        15        49   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    3,515        3,400        10,336        10,091   
 

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

       

Deposits

    456        582        1,363        1,814   

Federal funds purchased

    —          —          1        —     

Securities sold under repurchase agreements

    3        3        7        13   

FHLB advances

    76        103        261        348   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

    535        688        1,632        2,175   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    2,980        2,712        8,704        7,916   
 

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

    190        304        452        566   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    2,790        2,408        8,252        7,350   
 

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME

       

Income from fiduciary activities

    193        166        580        493   

Service charges and fees on deposit accounts

    249        270        736        811   

VISA-related fees

    60        252        210        658   

Other service charges and fees

    343        399        850        875   

Secondary market lending income

    213        665        392        966   

Increase in cash surrender value of life insurance

    64        47        155        82   

Net (losses) gains on sale of securities available for sale

    (8     13        (25     284   

Loss on securities with other-than-temporary impairment

    —          —          —          (168

Portion of loss recognized in other comprehensive income

    —          —          —          48   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment recognized in income

    —          —          —          (120

Other real estate losses

    (60     (240     (279     (494

Net (losses) gains on sale of fixed assets

    (2     165        136        165   

Other income

    18        8        52        34   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

    1,070        1,745        2,807        3,754   
 

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSES

       

Salaries and employee benefits

    1,653        1,604        4,837        4,941   

Occupancy expense

    356        324        1,068        984   

Software maintenance

    116        134        391        391   

Bank franchise tax

    47        44        141        132   

VISA expense

    26        213        134        558   

Telephone expense

    52        50        160        152   

FDIC assessments

    63        105        201        311   

Foreclosure property expense

    46        34        105        96   

Consulting expense

    75        98        244        143   

Other expense

    743        700        2,171        2,046   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

    3,177        3,306        9,452        9,754   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

    683        847        1,607        1,350   

Income tax expense

    171        227        375        358   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 512      $ 620      $ 1,232      $ 992   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

       

Average basic shares outstanding

    4,818,733        4,817,856        4,818,454        4,816,523   

Earnings per share, basic

  $ 0.11      $ 0.13      $ 0.26      $ 0.21   

Diluted Earnings Per Share

       

Average diluted shares outstanding

    4,828,285        4,820,172        4,831,055        4,818,903   

Earnings per share, diluted

  $ 0.11      $ 0.13      $ 0.26      $ 0.21   

See Notes to Consolidated Financial Statements.

 

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BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

    For the three months ended     For the nine months ended  
(Dollars in thousands)   September 30, 2014     September 30, 2013     September 30, 2014     September 30, 2013  

Net income

  $ 512      $ 620      $ 1,232      $ 992   

Other comprehensive income (loss):

       

Unrealized gains (losses) on securities:

       

Unrealized holding gains (losses) arising during the period

    177        (125     1,002        (1,442

Deferred tax (expense) benefit

    (60     43        (340     490   

Reclassification of net securities losses (gains) and impairments recognized in net income

    8        (13     25        (164

Deferred tax (benefit) expense

    (3     4        (9     56   
 

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) adjustment, net of tax

    122        (91     678        (1,060
 

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plan:

       

Net periodic pension (benefit) cost

    (6     22        (17     67   

Net pension gain (loss)

    6        (22     17        (67

Deferred tax benefit

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plan adjustment, net of tax

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Post retirement benefit plan:

       

Net periodic cost

    11        1        34        3   

Net loss

    (11     (1     (34     (3

Deferred tax benefit

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Post retirement benefit plan adjustment, net of tax

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

    122        (91     678        (1,060
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 634      $ 529      $ 1,910      $ (68
 

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

 

(Dollars in thousands, except

share data or amounts)

   Shares of
Common
Stock
     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Loss
    Total
Shareholders’
Equity
 

Nine Months ended September 30, 2014

                

Balance at beginning of period

     4,817,856       $ 24,089       $ 2,757       $ 11,463       $ (1,173   $ 37,136   

Net income

     —           —           —           1,232         —          1,232   

Other comprehensive income

     —           —           —           —           678        678   

Stock-based compensation expense

     877         5         15         —           —          20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at end of period

     4,818,733       $ 24,094       $ 2,772       $ 12,695       $ (495   $ 39,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended September 30,  
     2014     2013  

Cash Flows From Operating Activities

    

Net income

   $ 1,232      $ 992   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     573        567   

Net amortization and accretion of securities

     281        295   

Provision for loan losses

     452        566   

Stock compensation expense

     20        122   

Deferred income tax benefit

     —          (7

Loss (gain) on securities available-for-sale

     25        (284

Impairment loss on securities available-for-sale

     —          120   

Increase in OREO valuation allowance

     187        249   

Loss on sale of other real estate

     92        245   

Gain on disposal of fixed assets

     (136     (165

Mortgage servicing rights

     (41     (535

Loan originations for sale to FNMA

     (8,306     (19,118

Loan sales to FNMA

     8,706        19,691   

Gain on loans sold to FNMA

     (204     (335

Increase in cash surrender value of life insurance

     (155     (82

Decrease (increase) in accrued income and other assets

     404        (226

(Decrease) increase in other liabilities

     (99     881   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,031        2,976   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Proceeds from maturities and principal paydowns of available-for-sale securities

     3,888        2,774   

Proceeds from sales and calls of available-for-sale securities

     3,810        9,433   

Purchase of bank owned life insurance

     (2,000     (5,000

Purchases of available-for-sale securities

     (4,974     (17,199

Purchases of restricted securities

     (342     (38

Increase in federal funds sold

     (17     (449

Loan (originations) and principal collections, net

     (23,112     (13,018

Proceeds from sale of other real estate

     371        1,076   

Purchases of premises and equipment

     (780     (402

Proceeds from the sale of premises and equipment

     311        727   
  

 

 

   

 

 

 

Net cash used in investing activities

     (22,845     (22,096
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Increase in demand, savings, and other interest-bearing deposits

     6,662        4,006   

Net increase (decrease) in time deposits

     896        (7,217

Net (decrease) increase in securities sold under repurchase agreements

     (2,140     2,971   

Increase in Federal Home Loan Bank advances

     10,000        —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     15,418        (240
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (4,396     (19,360

Cash and due from banks at beginning of period

     15,689        39,924   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 11,293      $ 20,564   
  

 

 

   

 

 

 

Supplemental Schedule of Cash Flow Information

    

Cash paid for:

    

Interest

   $ 1,665      $ 2,159   
  

 

 

   

 

 

 

Income taxes

     341        212   
  

 

 

   

 

 

 

Non-cash investing and financing:

    

Unrealized gain (loss) on investment securities

     1,027        (1,606
  

 

 

   

 

 

 

Change in fair value of pension and post-retirement obligation

     —          —     
  

 

 

   

 

 

 

Loans transferred to other real estate owned

     197        2,313   
  

 

 

   

 

 

 

Loans originated to facilitate sale of OREO

     605        204   
  

 

 

   

 

 

 

Changes in deferred taxes resulting from OCI transactions

     349        546   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

Note 1: General

Bay Banks of Virginia, Inc. (the “Company”) owns 100% of the Bank of Lancaster (the “Bank”), 100% of Bay Trust Company, Inc. (the “Trust Company”) and 100% of Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements include the accounts of the Bank, the Trust Company, Steptoes Holdings and Bay Banks of Virginia, Inc.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. In management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share or shareholders’ equity as previously reported.

Note 2: Significant Accounting Policies

Loans

The Company grants mortgage loans on real estate; commercial and industrial loans; and consumer and other loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans on real estate. 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 areas.

Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income, such as deferred fees and costs, and charge-offs. Interest on loans is recognized over the term of the loan and is calculated using the interest method on principal amounts outstanding. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan, adjusted for early pay-offs, where applicable.

The accrual of interest is generally discontinued at the time a loan is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Payments received for loans no longer accruing interest are applied to the unpaid principal balance. Loans greater than 90 days past due may remain on accrual status if the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are charged off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual and past due policies are materially the same for all types of loans.

All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. Any interest received on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Generally, a loan is returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or it becomes well secured and in the process of collection.

Allowance for loan losses (“ALL”)

The ALL reflects management’s judgment of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter. To determine the total ALL, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and homogenous pools of loans analyzed on a segmented basis. Considerations include historical experience, the nature and volume of the loan portfolio, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing local and national economic conditions, and internal policies and procedures including credit risk management and underwriting. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as additional information becomes available.

The ALL calculation methodology’s historical loss factor period is considered the length of a business cycle. The business cycle, upon which the historical loss factor is based, was believed to have begun in the fourth quarter of 2008. During the third quarter of 2013, management determined that the business cycle had ended given noticeable national economic improvement and local real estate market stabilization. The historical loss factor is now based on that business cycle of 19 quarters, compared to the previous averaging period that had been growing each quarter based on the business cycle that began in 2008. The change in methodology during the third quarter of 2013 produced an immaterial change in the ALL calculation.

Management employs a risk rating system to evaluate and consistently categorize loan portfolio credit risk. Loans assigned risk rating grades include all commercial loans not secured by real estate, commercial mortgages, residential mortgages greater than $1 million, smaller residential mortgages which are impaired, loans to real estate developers and contractors, consumer loans greater than $250 thousand with chronic delinquency, and troubled debt restructures. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades are evaluated as new information becomes available for each borrowing relationship or at least quarterly. All other loans not specifically assigned a risk rating grade are monitored as a discrete pool of loans generally based on delinquency status. Risk rating categories are as follows:

 

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Pass – Borrower is strong or sound and collateral securing the loan, if any, is adequate.

Watch – Borrower exhibits some signs of financial stress but is generally believed to be a satisfactory customer and collateral, if any, may be in excess of 90% of the loan balance.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention and any collateral may not be fully adequate to secure loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the debt. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as a bankable asset is not warranted.

The ALL consists of specific, general, and unallocated components. The specific component is determined by identifying impaired loans (as described below) then evaluating each one to calculate the amount of impairment. Impaired loans measured for impairment generally include: (1) non-accruing Special mention, Substandard and Doubtful loans in excess of $250,000; (2) Substandard and Doubtful loans in excess of $500,000; (3) Special Mention loans in excess of $500,000 if any of the loans in the relationship are more than 30 days past due or if the borrower has filed for bankruptcy; and (4) all troubled debt restructurings (“TDRs”). A specific allowance arises 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. The general component collectively evaluates smaller commercial loans, residential mortgages and consumer loans, grouped into segments and classes. Historical loss experience is calculated and applied to each segment or class, then adjusted for qualitative factors. Qualitative factors include changes in the local and national economic outlook, including unemployment, interest rates, inflation rates and real estate trends; the level and trend of past due and nonaccrual loans; strength of policies and procedures; and oversight of credit risk and quality of underwriting. These qualitative adjustments reflect management’s judgment of risks inherent in the segments. An unallocated component is maintained if needed to cover uncertainties that could affect management’s estimate of probable losses. The unallocated 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 portfolio. Changes in the allowance for loan losses and the related provision expense can materially affect net income.

The specific component of the ALL calculation accounts for the loan loss reserve necessary on impaired loans. 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. 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 delays and payment shortfalls generally are not considered impaired. Management 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. Accrual of interest may or may not be discontinued for any given impaired loan. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Because large groups of smaller balance homogeneous loans are collectively evaluated for impairment, the Company does not generally separately identify smaller balance individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

The general component of the ALL calculation collectively evaluates groups of loans in segments or classes, as noted above. The segments are: (1) Mortgage loans on real estate; (2) Commercial and industrial loans; and (3) Consumer and other loans. The segment for Mortgage loans on real estate is disaggregated into the following classes: (1) Construction, land and land development; (2) Farmland; (3) Residential first mortgages; (4) Residential revolving and junior mortgages; (5) Commercial mortgages (non-owner-occupied); and (6) Commercial mortgages (owner-occupied). Every loan is assigned to a segment or a class. Loans in segment 1 are secured by real estate. Loans in segments 2 and 3 are secured by other types of collateral or are unsecured. A given segment or class may not reflect the purpose of a loan. For example, a business owner may provide his residence as collateral for a loan to his company, in which case the loan would be grouped in a residential mortgage class. Historical loss factors are calculated for the prior 19 quarters by segment and class, and then applied to the current balances in each segment and class. Finally, qualitative factors are applied to each segment and class.

Construction and development loans carry risks that the project will not be finished according to schedule or according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. These loans also bear the risk that the general contractor may face financial pressure unrelated to the project. Loans secured by land, farmland and residential mortgages carry the risk of continued credit-worthiness of the borrower and changes in value of the underlying real estate collateral. Commercial mortgages and commercial and industrial loans carry risks associated with the profitable operation of a business and its related cash flows. Additionally, commercial and industrial loans carry risks associated with the value of collateral other than real estate which may depreciate over time. Consumer loans carry risks associated with the continuing credit-worthiness of the borrower and are more likely than real estate loans to be adversely affected by divorce, unemployment, personal illness or bankruptcy of an individual. Consumer loans secured by automobiles carry risks associated with rapidly depreciating collateral. Consumer loans include credit cards.

The summation of the specific, general and unallocated components results in the total estimated ALL. Management may also include an unallocated component to cover uncertainties in the level of probable losses. This estimate is inherently subjective and actual losses could be greater or less than the estimates.

 

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Additions to the ALL are made by charges to earnings through the provision for loan losses. Charge-offs result from credit exposures deemed to be uncollectible and the ALL is reduced by these. Recoveries of previously charged off amounts are credited back to the ALL. Charge-off policies are materially the same for all types of loans.

Mortgage servicing rights (“MSRs”)

MSRs are included on the consolidated balance sheet and recorded at fair value on an ongoing basis. Changes in the fair value of the MSRs are recorded in the results of operations. A fair value analysis of MSRs is performed on a quarterly basis.

Note 3: Amendments to the Accounting Standards Codification

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-4): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendment clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, either upon (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendment also requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. Companies should apply this amendment for fiscal years and interim periods beginning after December 15, 2014. The Company adopted the new guidance during the first quarter of 2014. The adoption did not have a material impact on the Company’s consolidated financial statements. Disclosures are included in Note 6.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with early adoption prohibited. The Company is evaluating the impact that ASU 2014-09 will have on its consolidated financial statements.

Note 4: Securities

The aggregate amortized costs and fair values of the available-for-sale securities portfolio are as follows:

 

(Dollars in thousands)

Available-for-sale securities

September 30, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
    Fair
Value
 

U.S. Government agencies

   $ 11,452       $ 7       $ (59   $ 11,400   

State and municipal obligations

     23,255         189         (316     23,128   

Certificates of deposits

     1,984         9         (2     1,991   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 36,691       $ 205       $ (377   $ 36,519   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities

December 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
    Fair
Value
 

U.S. Government agencies

   $ 9,383       $ 11       $ (86   $ 9,308   

State and municipal obligations

     27,690         109         (1,242     26,557   

Certificates of deposits

     1,736         9         —          1,745   

Auction rate security

     912         —           —          912   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 39,721       $ 129       $ (1,328   $ 38,522   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Gross realized gains and gross realized losses on sales and calls of securities were as follows:

 

     For the three months ended
September 30,
     For the nine months ended
September 30,
 
(Dollars in thousands)    2014     2013      2014     2013  

Gross realized gains

   $ 3      $ 13       $ 8      $ 285   

Gross realized losses

     (11     —           (33     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Net realized (losses) gains

   $ (8   $ 13       $ (25   $ 284   
  

 

 

   

 

 

    

 

 

   

 

 

 

Aggregate proceeds

   $ 479      $ 1,173       $ 3,810      $ 9,433   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average yields (taxable equivalent) on securities were 2.43% and 2.40% for the three months ended September 30, 2014 and 2013, respectively, and 2.39% and 2.28% for the nine months ended September 30, 2014 and 2013, respectively.

Securities with a market value of $11.3 million and $12.9 million were pledged as collateral for repurchase agreements and for other purposes as required by law as of September 30, 2014 and December 31, 2013, respectively.

Securities in an unrealized loss position at September 30, 2014 and December 31, 2013, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All agency securities, states and municipal securities and certificates of deposit are investment grade or better and their losses are considered temporary. Management does not intend to sell the securities and does not expect to be required to sell the securities. Furthermore, all amortized cost bases are expected to be recovered. Bonds with unrealized loss positions at September 30, 2014 included 21 federal agencies and 36 municipals. Bonds with unrealized loss positions at December 31, 2013 included 15 federal agencies and 50 municipals. The tables are shown below.

 

     Less than 12 months      12 months or more      Total  

(Dollars in thousands)

September 30, 2014

   Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

U.S. Government agencies

   $ 4,247       $ 6       $ 4,640       $ 53       $ 8,887       $ 59   

States and municipal obligations

     153         1         10,979         315         11,132         316   

Certificates of deposits

     246         2         —           —           246         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 4,646       $ 9       $ 15,619       $ 368       $ 20,265       $ 377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 months or more      Total  

December 31, 2013

   Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

U.S. Government agencies

   $ 4,808       $ 66       $ 1,462       $ 20       $ 6,270       $ 86   

States and municipal obligations

     14,255         1,120         2,306         122         16,561         1,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 19,063       $ 1,186       $ 3,768       $ 142       $ 22,831       $ 1,328   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $1,421,400 and $1,079,800 at September 30, 2014 and December 31, 2013, respectively. The Company also had an investment in Federal Reserve Bank of Richmond (“FRB”) stock which totaled $382 thousand at both September 30, 2014 and December 31, 2013. The investments in both FHLB and FRB stock are required investments related to the Bank’s membership with the FHLB and FRB. These securities do not have a readily determinable fair value as their ownership is restricted, and they lack an active market for trading. Additionally, per charter relations to the FHLB and FRB stock, all repurchase transactions of such stock must occur at par. Accordingly, these securities are carried at cost, and are periodically evaluated for impairment. The Company’s determination as to whether its investment in FHLB and FRB stock is impaired is based on management’s assessment of the ultimate recoverability of its par value rather than recognizing temporary declines in its value. The determination of whether the decline affects the ultimate recoverability of the investments is influenced by available information regarding various factors. These factors include, among others, the significance of the decline in net assets of the issuing banks as compared to the capital stock amount reported by these banks, and the length of time a decline has persisted; commitments by such banks to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuing bank; and the overall liquidity position of the issuing bank. Based on its most recent analysis of publicly available information regarding the financial condition of the issuing banks, management concluded that no impairment existed in the carrying value of this stock.

 

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Note 5: Loans

The following is a summary of the balances of loans:

 

(Dollars in thousands)    September 30, 2014     December 31, 2013  

Mortgage loans on real estate:

    

Construction, Land and Land Development

   $ 35,553      $ 31,839   

Farmland

     1,151        1,262   

Commercial Mortgages (Non-Owner Occupied)

     17,568        14,626   

Commercial Mortgages (Owner Occupied)

     32,672        34,177   

Residential First Mortgages

     124,425        114,458   

Residential Revolving and Junior Mortgages

     25,396        24,045   

Commercial and Industrial loans

     31,628        23,938   

Consumer Loans

     5,302        5,986   
  

 

 

   

 

 

 

Total loans

   $ 273,695      $ 250,331   

Net unamortized deferred loans costs

     436        506   

Allowance for loan losses

     (3,151     (2,925
  

 

 

   

 

 

 

Loans, net

   $ 270,980      $ 247,912   
  

 

 

   

 

 

 

The recorded investment in past due and non-accruing loans is shown in the following table. A loan past due by more than 90 days is generally placed on nonaccrual unless it is both well secured and in the process of collection.

 

(Dollars in thousands)

Loans Past Due and Nonaccruals

September 30, 2014

   30-89
Days
Past Due
     90 Days or
More Past
Due and
Still Accruing
     Nonaccruals      Total Past
Due and
Nonaccruals
     Current      Total
Loans
 

Construction, Land and Land Development

   $ 294       $ —         $ 832       $ 1,126       $ 34,427       $ 35,553   

Farmland

     —           —           —           —           1,151         1,151   

Commercial Mortgages (Non-Owner Occupied)

     74         —           —           74         17,494         17,568   

Commercial Mortgages (Owner Occupied)

     —           —           571         571         32,101         32,672   

Residential First Mortgages

     1,886         —           402         2,288         122,137         124,425   

Residential Revolving and Junior Mortgages

     127         —           80         207         25,189         25,396   

Commercial and Industrial

     20         —           228         248         31,380         31,628   

Consumer Loans

     89         38         82         209         5,093         5,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,490       $ 38       $ 2,195       $ 4,723       $ 268,972       $ 273,695   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans Past Due and Nonaccruals

December 31, 2013

   30-89
Days
Past Due
     90 Days or
More Past
Due and Still
Accruing
     Nonaccruals      Total Past
Due and
Nonaccruals
     Current      Total
Loans
 

Construction, Land and Land Development

   $ 65       $ —         $ 854       $ 919       $ 30,920       $ 31,839   

Farmland

     —           —           —           —           1,262         1,262   

Commercial Mortgages (Non-Owner Occupied)

     —           —           —           —           14,626         14,626   

Commercial Mortgages (Owner Occupied)

     —           —           427         427         33,750         34,177   

Residential First Mortgages

     668         —           1,083         1,751         112,707         114,458   

Residential Revolving and Junior Mortgages

     108         —           76         184         23,861         24,045   

Commercial and Industrial

     16         —           311         327         23,611         23,938   

Consumer Loans

     60         19         3         82         5,904         5,986   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 917       $ 19       $ 2,754       $ 3,690       $ 246,641       $ 250,331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 6: Allowance for Loan Losses

Allowance for Loan Losses

A disaggregation of and an analysis of the change in the allowance for loan losses by segment is shown below.

 

(Dollars in thousands)    Mortgage
Loans on
Real Estate
    Commercial
and
Industrial
    Consumer
Loans
    Total  

For the Three Months Ended September 30, 2014

        

ALLOWANCE FOR LOAN LOSSES:

        

Beginning Balance

   $ 2,589      $ 211      $ 173      $ 2,973   

(Charge-offs)

     (10     —          (22     (32

Recoveries

     15        —          5        20   

Provision

     109        91        (10     190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,703      $ 302      $ 146      $ 3,151   
  

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ 723      $ —        $ 11      $ 734   

Collectively evaluated for impairment

     1,980        302        135        2,417   
     Mortgage
Loans on
Real Estate
    Commercial
and
Industrial
    Consumer
Loans
    Total  

For the Three Months Ended September 30, 2013

        

ALLOWANCE FOR LOAN LOSSES:

        

Beginning Balance

   $ 2,461      $ 250      $ 272      $ 2,983   

(Charge-offs)

     (264     —          (50     (314

Recoveries

     4        2        0        6   

Provision

     225        61        18        304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,426      $ 313      $ 240      $ 2,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ 574      $ —        $ 33      $ 607   

Collectively evaluated for impairment

     1,852        313        207        2,372   
(Dollars in thousands)    Mortgage
Loans on
Real Estate
    Commercial
and
Industrial
    Consumer
Loans
    Total  

For the Nine Months Ended September 30, 2014

        

ALLOWANCE FOR LOAN LOSSES:

        

Beginning Balance

   $ 2,465      $ 256      $ 204      $ 2,925   

(Charge-offs)

     (224     —          (43     (267

Recoveries

     29        —          12        41   

Provision

     433        46        (27     452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,703      $ 302      $ 146      $ 3,151   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Mortgage
Loans on
Real Estate
    Commercial
and
Industrial
    Consumer
Loans
    Total  

For the Nine Months Ended September 30, 2013

        

ALLOWANCE FOR LOAN LOSSES:

        

Beginning Balance

   $ 2,579      $ 262      $ 252      $ 3,093   

(Charge-offs)

     (629     (17     (105     (751

Recoveries

     64        2        5        71   

Provision

     412        66        88        566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 2,426      $ 313      $ 240      $ 2,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Loan receivables evaluated for impairment individually and collectively by segment as of September 30, 2014 and December 31, 2013 are as follows:

 

(Dollars in thousands)    Mortgage
Loans on
Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

As of September 30, 2014

           

Individually evaluated for impairment

   $ 6,425       $ —         $ 17       $ 6,442   

Collectively evaluated for impairment

     230,340         31,628         5,285         267,253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 236,765       $ 31,628       $ 5,302       $ 273,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

           

Individually evaluated for impairment

   $ 6,306       $ 311       $ 39       $ 6,656   

Collectively evaluated for impairment

     214,101         23,627         5,947         243,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 220,407       $ 23,938       $ 5,986       $ 250,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

Internal Risk Rating Grades

Internal risk rating grades are generally assigned to commercial loans not secured by real estate, commercial mortgages, residential mortgages greater than $1 million, smaller residential mortgages which are impaired, loans to real estate developers and contractors, consumer loans greater than $250,000 with chronic delinquency, and TDRs, as shown in the following table. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades (refer to Note 2) are evaluated as new information becomes available for each borrowing relationship or at least quarterly.

 

(Dollars in thousands)

As of September 30, 2014

INTERNAL RISK RATING GRADES

   Construction,
Land and
Land
Development
     Farmland      Commercial
Mortgages
(Non-Owner
Occupied)
     Commercial
Mortgages
(Owner
Occupied)
     Commercial
and
Industrial
     Total  

Grade:

                 

Pass

   $ 29,485       $ 1,151       $ 13,079       $ 23,176       $ 28,291       $ 95,182   

Watch

     3,371         —           4,151         4,424         2,383         14,329   

Special mention

     1,406         —           —           3,176         639         5,221   

Substandard

     1,291         —           338         1,896         315         3,840   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,553       $ 1,151       $ 17,568       $ 32,672       $ 31,628       $ 118,572   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

INTERNAL RISK RATING GRADES

   Construction,
Land and
Land
Development
     Farmland      Commercial
Mortgages
(Non-Owner
Occupied)
     Commercial
Mortgages
(Owner
Occupied)
     Commercial
and
Industrial
     Total  

Grade:

                 

Pass

   $ 25,616       $ 1,262       $ 9,083       $ 23,984       $ 20,309       $ 80,254   

Watch

     3,493         —           5,204         7,429         2,743         18,869   

Special mention

     1,416         —           —           1,001         487         2,904   

Substandard

     1,314         —           339         1,763         399         3,815   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,839       $ 1,262       $ 14,626       $ 34,177       $ 23,938       $ 105,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans not assigned internal risk rating grades are comprised of smaller residential mortgages and smaller consumer loans. Payment activity of these loans is reviewed monthly by management. However, some of these loans are graded when the borrower’s total exposure to the Bank exceeds the limits noted above. Loans are considered to be nonperforming when they are delinquent by 90 days or more or non-accruing and credit risk is primarily evaluated by delinquency status, as shown in the table below.

 

(Dollars in thousands)

As of September 30, 2014

PAYMENT ACTIVITY STATUS

   Residential
First
Mortgages (1)
     Residential
Revolving
and Junior
Mortgages (2)
     Consumer
Loans (3)
     Total  

Performing

   $ 124,023       $ 25,316       $ 5,182       $ 154,521   

Nonperforming

     402         80         120         602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 124,425       $ 25,396       $ 5,302       $ 155,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

PAYMENT ACTIVITY STATUS

   Residential
First
Mortgages (4)
     Residential
Revolving
and Junior
Mortgages (5)
     Consumer
Loans (6)
     Total  

Performing

   $ 113,375       $ 23,969       $ 5,964       $ 143,308   

Nonperforming

     1,083         76         22         1,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 114,458       $ 24,045       $ 5,986       $ 144,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(1) Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $2.5 million as of September 30, 2014.
(2) Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $219 thousand as of September 30, 2014.
(3) Consumer Loans which have been assigned a risk rating grade of Substandard totaled $6 thousand as of September 30, 2014.
(4) Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $2.6 million as of December 31, 2013.
(5) Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $216 thousand as of December 31, 2013.
(6) Consumer Loans which have been assigned a risk rating grade of Substandard totaled $9 thousand as of December 31, 2013.

Impaired Loans

The following tables show the Company’s recorded investment and the customers’ unpaid principal balances for impaired loans, with the associated allowance amount, if applicable, as of September 30, 2014 and December 31, 2013, along with the average recorded investment and interest income recognized for the three and nine months ended September 30, 2014 and 2013.

 

     As of September 30, 2014      As of December 31, 2013  

(Dollars in thousands)

IMPAIRED LOANS

   Recorded
Investment
     Customers’ Unpaid
Principal Balance
     Related
Allowance
     Recorded
Investment
     Customers’ Unpaid
Principal Balance
     Related
Allowance
 

With no related allowance:

                 

Construction, land & land development

   $ 451       $ 452       $ —         $ 453       $ 453       $ —     

Residential First Mortgages

     1,037         1,051         —           1,053         1,057         —     

Residential Revolving and Junior Mortgages (1)

     —           —           —           —           —           —     

Commercial Mortgages (Non-owner occupied)

     264         264         —           264         264         —     

Commercial Mortgages (Owner occupied)

     1,899         1,924         —           1,831         1,840         —     

Commercial & industrial

     —           —           —           311         311         —     

Consumer (2)

     6         6         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,657         3,697         —           3,912         3,925         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                 

Construction, land & land development

     423         447         205         151         156         51   

Residential First Mortgages

     2,178         2,178         435         2,198         2,198         409   

Residential Revolving and Junior Mortgages (1)

     173         173         83         251         879         173   

Commercial Mortgages (Non-owner occupied)

     —           —           —           —           —           —     

Commercial Mortgages (Owner occupied)

     —           —           —           105         105         1   

Commercial & industrial

     —           —           —           —           —           —     

Consumer (2)

     11         11         11         39         39         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,785         2,809         734         2,744         3,377         667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans:

                 

Construction, land & land development

     874         899         205         604         609         51   

Residential First Mortgages

     3,215         3,229         435         3,251         3,255         409   

Residential Revolving and Junior Mortgages (1)

     173         173         83         251         879         173   

Commercial Mortgages (Non-owner occupied)

     264         264         —           264         264         —     

Commercial Mortgages (Owner occupied)

     1,899         1,924         —           1,936         1,945         1   

Commercial & industrial

     —           —           —           311         311         —     

Consumer (2)

     17         17         11         39         39         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,442       $ 6,506       $ 734       $ 6,656       $ 7,302       $ 667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Junior mortgages include equity lines.
(2) Includes credit cards.

 

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Table of Contents
     For the Three Months Ended
September 30, 2014
     For the Three Months Ended
September 30, 2013
 
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

           

Construction, land & land development

   $ 451       $ 1       $ 233       $ 7   

Residential First Mortgages

     1,038         10         2,402         27   

Residential Revolving and Junior Mortgages (1)

     —           —           98         1   

Commercial Mortgages (Non-owner occupied)

     264         4         132         4   

Commercial Mortgages (Owner occupied)

     1,905         19         1,805         30   

Consumer (2)

     6         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,664         34         4,670         69   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Construction, land & land development

     426         1         —           —     

Residential First Mortgages

     2,181         26         2,051         34   

Residential Revolving and Junior Mortgages (1)

     173         2         267         2   

Commercial Mortgages (Non-owner occupied)

     —           —           —           —     

Commercial Mortgages (Owner occupied)

     —           —           —           —     

Consumer (2)

     21         1         56         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,801         30         2,374         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Construction, land & land development

     877         2         233         7   

Residential First Mortgages

     3,219         36         4,453         61   

Residential Revolving and Junior Mortgages (1)

     173         2         365         3   

Commercial Mortgages (Non-owner occupied)

     264         4         132         4   

Commercial Mortgages (Owner occupied)

     1,905         19         1,805         30   

Consumer (2)

     27         1         56         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,465       $ 64       $ 7,044       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Junior mortgages include equity lines.
(2) Includes credit cards.

 

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Table of Contents
     For the Nine Months Ended
September 30, 2014
     For the Nine Months Ended
September 30, 2013
 
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

           

Construction, land & land development

   $ 452       $ 2       $ 123       $ 7   

Residential First Mortgages

     1,043         31         1,930         69   

Residential Revolving and Junior Mortgages (1)

     —           —           98         1   

Commercial Mortgages (Non-owner occupied)

     264         12         66         4   

Commercial Mortgages (Owner occupied)

     1,917         61         1,547         47   

Consumer (2)

     7         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,683         106         3,764         128   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Construction, land & land development

     288         2         —           —     

Residential First Mortgages

     2,187         74         1,899         85   

Residential Revolving and Junior Mortgages (1)

     174         7         255         6   

Commercial Mortgages (Non-owner occupied)

     —           —           —           —     

Commercial Mortgages (Owner occupied)

     —           —           —           —     

Consumer (2)

     26         2         64         4   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,675         85         2,218         95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Construction, land & land development

     740         4         123         7   

Residential First Mortgages

     3,230         105         3,829         154   

Residential Revolving and Junior Mortgages (1)

     174         7         353         7   

Commercial Mortgages (Non-owner occupied)

     264         12         66         4   

Commercial Mortgages (Owner occupied)

     1,917         61         1,547         47   

Consumer (2)

     33         2         64         4   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,358       $ 191       $ 5,982       $ 223   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Junior mortgages include equity lines.
(2) Includes credit cards.

Smaller non-accruing loans and non-accruing loans that are not graded because they are included in homogenous pools generally do not meet the criteria for impairment testing, and are therefore excluded from impaired loan disclosures. At September 30, 2014 and December 31, 2013, non-accruing loans excluded from impaired loan disclosure totaled $793 thousand and $724 thousand, respectively. If interest on these non-accruing loans had been accrued, such income would have approximated $11 thousand and $12 thousand during the three months ended September 30, 2014 and 2013, respectively, and $23 thousand and $26 thousand during the nine months ended September 30, 2014 and 2013, respectively.

Loan Modifications

Loans modified as TDRs are considered impaired and are individually evaluated for the amount of impairment in the ALL. The following table presents, by segments of loans, information related to loans modified as TDRs during the three and nine months ended September 30, 2014 and 2013.

 

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Table of Contents
            For the three months ended             For the three months ended  
            September 30, 2014             September 30, 2013  
            Pre-Modification      Post-Modification             Pre-Modification      Post-Modification  
(Dollars in thousands)           Outstanding      Outstanding             Outstanding      Outstanding  
     Number of      Recorded      Recorded      Number of      Recorded      Recorded  

TROUBLED DEBT RESTRUCTURINGS

   Loans      Investment      Investment      Loans      Investment      Investment  

Construction, land & land development (1)

     —         $ —         $ —           2       $ 45       $ 45   

Consumer (2)

     —           —           —           1         8         8   

 

(1) Modifications were an extension of the loan terms.
(2) Modifications were capitalization of the interest.

 

            For the nine months ended             For the nine months ended  
            September 30, 2014             September 30, 2013  
            Pre-Modification      Post-Modification             Pre-Modification      Post-Modification  
            Outstanding      Outstanding             Outstanding      Outstanding  
     Number of      Recorded      Recorded      Number of      Recorded      Recorded  

TROUBLED DEBT RESTRUCTURINGS

   Loans      Investment      Investment      Loans      Investment      Investment  

Construction, land & land development (1)

     —         $ —         $ —           2       $ 45       $ 45   

Residenital first mortages (2)

     —           —           —           1         207         205   

Consumer (2)

     —           —           —           1         8         8   

 

(1) Modifications were an extension of the loan terms.
(2) Modifications were capitalization of the interest.

 

(Dollars in thousands)    For the nine months ended      For the nine months ended  
     September 30, 2014      September 30, 2013  
TROUBLED DEBT RESTRUCTURINGS    Number of      Recorded      Number of      Recorded  

THAT SUBSEQUENTLY DEFAULTED

   Loans      Investment      Loans      Investment  

Residential First Mortgages

     —         $ —           1       $ 106   

Residential revolving and junior mortgages

     1         75         —           —     

No troubled debt restructurings which occurred in the previous twelve months subsequently defaulted in either the third quarter of 2014 or 2013.

Foreclosures

The table below details the properties included in other real estate owned (“OREO”) as of September 30, 2014 and December 31, 2013. There were no collateralized consumer residential mortgage loans in the process of foreclosure as of September 30, 2014.

 

     As of September 30, 2014      As of December 31, 2013  
     No. of      Carrying      No. of      Carrying  
(Dollars in thousands)    Properties      Value      Properties      Value  

Residential

     10       $ 1,593         11       $ 2,442   

Land lots

     13         601         14         684   

Convenience store

     2         234         2         239   

Restaurant

     1         107         1         107   

Commerical properties

     1         304         2         425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     27       $ 2,839         30       $ 3,897   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7: Earnings per share

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

 

     For the Three Months Ended      For the Nine Months Ended  
     September 30, 2014      September 30, 2013      September 30, 2014      September 30, 2013  
     Average      Per share      Average      Per share      Average      Per share      Average      Per share  
     Shares      Amount      Shares      Amount      Shares      Amount      Shares      Amount  

Basic earnings per share

     4,818,733       $ 0.11         4,817,856       $ 0.13         4,818,454       $ 0.26         4,816,523       $ 0.21   

Effect of dilutive securities:

                       

Stock options

     9,552            2,316            12,601            2,380      
  

 

 

       

 

 

       

 

 

       

 

 

    

Diluted earnings per share

     4,828,285       $ 0.11         4,820,172       $ 0.13         4,831,055       $ 0.26         4,818,903       $ 0.21   
  

 

 

       

 

 

       

 

 

       

 

 

    

For the three months ended September 30, 2014 and 2013, options on 68,828 and 170,215 shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive. For the nine months ended September 30, 2014 and 2013, options on 68,828 and 170,215 shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive.

 

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Table of Contents

Note 8: Stock-Based Compensation

On June 28, 2013, the Company registered with the Securities and Exchange Commission a new stock-based compensation plan, which superseded all other plans. There are 377,123 shares available for grant under this plan at September 30, 2014.

Stock-based compensation expense related to stock awards during the three month periods ended September 30, 2014 and 2013 was zero and $(4) thousand, respectively, and during the nine month periods ended September 30, 2014 and 2013 was $20 thousand and $122 thousand, respectively. Compensation expense for stock options is the estimated fair value of options on the date granted using the Black-Scholes Model amortized on a straight-line basis over the vesting period of the award. There was no unrecognized compensation expense related to stock options as of September 30, 2014.

Options for a total of 7,000 shares were granted and vested during the nine months ended September 30, 2014. The fair value of options granted during the nine months ended September 30, 2014 was $2.75. Options for a total of 89,500 shares were granted and vested during the nine months ended September 30, 2013. The fair value of options granted during the nine months ended September 30, 2013 was $1.03 and $1.08.

The variables used in these calculations of the fair value of the options are as follows:

 

     For the nine months ended September 30,  
     2014     2013  

Risk free interest rate (5 year Treasury)

     1.74     0.86

Expected dividend yield

     0     3.6

Expected term (years)

     5        5   

Expected volatility

     51.4     33.8

Stock option activity for the nine months ended September 30, 2014 (unaudited) is summarized below:

 

    Shares     Weighted Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Life (in years)
    Aggregate
Intrinsic
Value (1)
 

Options outstanding, January 1, 2014

    191,002      $ 7.35        6.8     

Granted

    7,000        5.99       

Forfeited

    —          —         

Exercised

    —          —         

Expired

    (7,239     14.65       
 

 

 

       

Options outstanding and exercisable, September 30, 2014

    190,763      $ 7.02        6.4      $ 24,896   
 

 

 

   

 

 

     

 

 

 

 

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2014. This amount changes based on changes in the market value of the Company’s common stock.

In the first quarter of 2014, 877 shares of restricted stock were granted to an executive officer of the Bank. Early in October 2014, the executive officer left the Bank. The shares were forfeited and the compensation expense recognized to date was reversed in October 2014.

Note 9: Employee Benefit Plans

The Company has a non-contributory, defined benefit pension plan for full-time employees who were over 21 years of age and vested in the plan as of December 31, 2012, when the plan was frozen. Each participant’s account balance grows based on monthly interest credits. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company sponsors a postretirement benefit plan covering current and future retirees who acquire age 55 and 10 years of service or age 65 and 5 years of service. The post-retirement benefit plan provides coverage toward a retiree’s eligible medical and life insurance benefits expenses. The plan is unfunded and funded as benefits are due.

 

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Table of Contents

Components of Net Periodic (Benefit) Cost

 

(Dollars in thousands)    Pension Benefits     Post-Retirement Benefits  
Three months ended September 30,    2014     2013     2014      2013  

Service cost

   $ —        $ —        $ 4       $ 6   

Interest cost

     36        36        7         7   

Expected return on plan assets

     (51     (54     —           —     

Amortization of unrecognized net loss

     9        22        —           1   

Remaining amortization of unrecognized net loss due to settlements

     —          62        —           —     

Amortization of transition obligation

     —          —          —           1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic (benefit) cost

   $ (6   $ 66      $ 11       $ 15   
  

 

 

   

 

 

   

 

 

    

 

 

 
(Dollars in thousands)    Pension Benefits     Post-Retirement Benefits  
Nine months ended September 30,    2014     2013     2014      2013  

Service cost

   $ —        $ —        $ 12       $ 17   

Interest cost

     106        107        22         23   

Expected return on plan assets

     (151     (161     —           —     

Amortization of unrecognized net loss

     28        68        —           3   

Remaining amortization of unrecognized net loss due to settlements

     —          62        —           —     

Amortization of transition obligation

     —          —          —           2   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic (benefit) cost

   $ (17   $ 76      $ 34       $ 45   
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company expects to make no contribution to its pension plan and $3 thousand to its post-retirement benefit plan during the remainder of 2014. The Company has contributed $8 thousand toward the post-retirement plan during the first nine months of 2014.

Note 10: Long Term Debt

On September 30, 2014, the Bank had FHLB debt consisting of four advances (see table below). The $10 million advance was restructured during the second quarter of 2013 to extend the maturity and reduce the interest rate from 4.23% to a three month LIBOR-based floating rate advance. A $5 million advance with an interest rate of 2.69%, matured in May 2014 and was replaced with a new $5 million three month LIBOR-based floating rate advance. Two additional $5 million advances were drawn in June 2014. Both were fixed rate advances.

The four advances are shown in the following table.

 

                   Current     Maturity  

Description

   Balance      Originated      Interest Rate     Date  

Adjustable Rate Hybrid

   $ 10,000,000         4/12/2013         2.61360     4/13/2020   

Adjustable Rate Credit

     5,000,000         5/20/2014         0.23210     5/20/2015   

Fixed Rate Credit

     5,000,000         6/18/2014         0.26000     6/18/2015   

Fixed Rate Credit

     5,000,000         6/26/2014         0.26000     6/26/2015   
  

 

 

         
   $ 25,000,000           
  

 

 

         

Advances on the FHLB lines are secured by a blanket lien on qualified 1 to 4 family residential real estate loans. Immediate available credit, as of September 30, 2014, was $40.7 million against a total line of credit is $67.7 million.

Note 11: Fair Value Measurements

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Authoritative accounting guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

Level 1 –    Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –    Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –    Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

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Table of Contents

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

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.

Defined benefit plan assets: Defined benefit plan assets are recorded at fair value on an annual basis at year end.

Mortgage servicing rights: MSRs are recorded at fair value on a recurring basis, with changes in fair value recorded in the result of operations. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment assumptions currently quoted for comparable instruments and a discount rate, is used to determine fair value. MSRs are classified as Level 3.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

 

(Dollars in thousands)           Fair Value Measurements at September 30, 2014 Using  

Description

   Balance      Level 1      Level 2      Level 3  

Securities available-for-sale:

           

U. S. Government agencies

   $ 11,400       $ —         $ 11,400       $ —     

State and municipal obligations

     23,128         —           23,128         —     

Certificates of deposit

     1,991         —           1,991         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale:

   $ 36,519       $ —         $ 36,519       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ 620       $ —         $ —         $ 620   
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit plan assets:

           

Cash and cash equivalents

   $ 3       $ 3       $ —         $ —     

Mutual funds - fixed income

     1,129         1,129         —           —     

Mutual funds - equity

     1,712         1,712         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total defined benefit plan assets

   $ 2,844       $ 2,844       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Fair Value Measurements at December 31, 2013 Using  

Description

   Balance      Level 1      Level 2      Level 3  

Securities available-for-sale:

           

U. S. Government agencies

   $ 9,308       $ —         $ 9,308       $ —     

State and municipal obligations

     26,557         —           26,557         —     

Certificates of deposit

     1,745         —           1,745         —     

Auction rate securities

     912         —           —           912   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale:

   $ 38,522       $ —         $ 37,610       $ 912   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ 579       $ —         $ —         $ 579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit plan assets:

           

Cash and cash equivalents

   $ 3       $ 3       $ —         $ —     

Mutual funds - fixed income

     1,070         1,070         —           —     

Mutual funds - equity

     1,747         1,747         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total defined benefit plan assets

   $ 2,820       $ 2,820       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The reconciliation of items using Level 3 inputs is as follows:

 

(Dollars in thousands)    Auction
Rate
Security
    MSRs  

Balance, January 1, 2014

   $ 912      $ 579   

Impairments

     —          —     

Fair value adjustments

     —          41   

Sales

     (912     —     
  

 

 

   

 

 

 

Balance, September 30, 2014

   $ —        $ 620   
  

 

 

   

 

 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

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. 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. Any given loan may have multiple types of collateral. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a 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 ALL are measured at fair value on a nonrecurring 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 estimated costs to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. 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 nonrecurring basis. The initial fair value of OREO is based on an appraisal done at the time of foreclosure. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest income on the Consolidated Statements of Income.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at the end of the respective period.

 

          Fair Value Measurements at September 30, 2014 Using  
(Dollars in thousands)   Balance as of                    

Description

  September 30, 2014     Level 1     Level 2     Level 3  

Impaired Loans, net

  $ 2,051      $  —        $ —        $ 2,051   

Other real estate owned, net

    2,839        —          —          2,839   
          Fair Value Measurements at December 31, 2013 Using  
    Balance as of                    

Description

  December 31, 2013     Level 1     Level 2     Level 3  

Impaired Loans, net

  $ 2,077      $  —        $ —        $ 2,077   

Other real estate owned, net

    3,897        —          —          3,897   

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

 

    Balance as of     Valuation     Unobservable    

Range

(Weighted

 
(Dollars in thousands)   September 30, 2014     Technique     Input     Average)  

Impaired Loans, net

  $ 2,051        Discounted appraised value        Selling Cost        10% - 20% (10%)   
        Lack of Marketability        25% - 75% (56%)   

Other real estate owned, net

    2,839        Discounted appraised value        Selling Cost        3% - 13% (5%)   
        Lack of Marketability        7% - 20% (11%)   

The following table displays quantitative information about Level 3 Fair Value Measurements as of December 31, 2013:

 

    Balance as of     Valuation     Unobservable     Range (Weighted  
(Dollars in thousands)   December 31, 2013     Technique     Input     Average)  

Impaired Loans, net

  $ 2,077        Discounted appraised value        Selling Cost        10% - 20% (10%)  
        Lack of Marketability        25% - 100% (54%)   

Other real estate owned, net

    3,897        Discounted appraised value        Selling Cost        3% - 13% (6%)   
        Lack of Marketability        7% - 30% (15%)   

 

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The estimated fair values of financial instruments are shown in the following table. The carrying amounts in the table are included in the balance sheet under the applicable captions.

 

            Fair Value Measurements at September 30, 2014 Using  
(Dollars in thousands)    Balance as of                       

Description

   September 30, 2014      Level 1      Level 2      Level 3  

Financial Assets:

           

Cash and due from banks

   $ 4,341       $ 4,341       $ —         $ —     

Interest-bearing deposits

     6,952         6,952         —           —     

Federal funds sold

     137         137         —           —     

Securities available-for-sale

     36,519         —           36,519         —     

Restricted securities

     1,980         —           —           1,980   

Loans, net

     270,980         —           —           275,571   

Accrued interest receivable

     1,060         —           1,060         —     

Mortgage servicing rights

     620         —           —           620   

Financial Liabilities:

           

Non-interest-bearing liabilities

   $ 60,334       $ 60,334       $ —         $ —     

Savings and other interest-bearing deposits

     118,189         —           118,189         —     

Time deposits

     97,382         —           —           98,181   

Securities sold under repurchase agreements

     6,978         —           6,978         —     

FHLB advances

     25,000         —           25,939         —     

Accrued interest payable

     133         —           133         —     
            Fair Value Measurements at December 31, 2013 Using  

Description

   Balance as of
December 31,2013
     Level 1      Level 2      Level 3  

Financial Assets:

           

Cash and due from banks

   $ 6,789       $ 6,789       $ —         $ —     

Interest-bearing deposits

     8,900         8,900         —           —     

Federal funds sold

     120         120         —           —     

Securities available-for-sale

     38,522         —           37,610         912   

Restricted securities

     1,638         —           —           1,638   

Loans, net

     247,912         —           —           253,139   

Loans held for sale

     196         —           —           196   

Accrued interest receivable

     1,124         —           1,124         —     

Mortgage servicing rights

     579         —           —           579   

Financial Liabilities:

           

Non-interest-bearing liabilities

   $ 57,805       $ 57,805       $ —         $ —     

Savings and other interest-bearing deposits

     114,056         —           114,056         —     

Time deposits

     96,486         —           —           98,049   

Securities sold under repurchase agreements

     9,118         —           9,118         —     

FHLB advances

     15,000         —           15,923         —     

Accrued interest payable

     167         —           167         —     

The carrying amounts of cash and due from banks, interest-bearing deposits, federal funds sold or purchased, accrued interest, loans held for sale and non-interest-bearing deposits, are payable on demand, or are of such short duration that carrying value approximates market value.

Securities available-for-sale are carried at the fair values measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Therefore carrying value equals market value. The carrying value of restricted securities approximates fair value based on the redemption provisions of the issuer.

MSRs are carried at fair value. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment assumptions currently quoted for comparable instruments and a discount rate, is used to determine fair value.

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. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would affect the valuation.

 

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Time deposits are presented at estimated fair value by discounting the future cash flows using interest rates offered for deposits of similar remaining maturities.

The fair value of the FHLB advances is estimated by discounting the future cash flows using the current interest rates offered for similar advances.

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 counter parties. 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 counter parties at the reporting date. At September 30, 2014 and December 31, 2013, the fair value of loan commitments and standby letters of credit was immaterial and therefore, they are not included in the table above.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value 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. Management 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. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 12: Changes in Accumulated Other Comprehensive Income (Loss)

The balances in accumulated other comprehensive income (loss) are shown in the following tables:

 

(Dollars in thousands)   Net Unrealized
Gains (Losses)
on Securities
    Pension and
Post-retirement
Benefit Plans
    Accumulated Other
Comprehensive
Income (Loss)
 

Balance July 1, 2014

  $ (235   $ (382   $ (617

Change in net unrealized holding gains on securities, before reclassification, net of tax expense of $60

    117        —          117   

Reclassification for previously unrealized net losses recognized in income, net of tax benefit of $3

    5        —          5   
 

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

  $ (113   $ (382   $ (495
 

 

 

   

 

 

   

 

 

 
    Net Unrealized
Gains (Losses)
on Securities
    Pension and
Post-retirement
Benefit Plans
    Accumulated Other
Comprehensive
Income (Loss)
 

Balance July 1, 2013

  $ (689   $ (660   $ (1,349

Change in net unrealized holding losses on securities, before reclassification, net of tax benefit of $43

    (83     —          (83

Reclassification for previously unrealized net gains recognized in income, net of tax benefit of $4

    (9     —          (9
 

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

  $ (781   $ (660   $ (1,441
 

 

 

   

 

 

   

 

 

 
    Net Unrealized
Gains (Losses)
on Securities
    Pension and
Post-retirement
Benefit Plans
    Accumulated Other
Comprehensive
Income (Loss)
 

Balance January 1, 2014

  $ (791   $ (382   $ (1,173

Change in net unrealized holding losses on securities, before reclassification, net of tax expense of $340

    662        —          662   

Reclassification for previously unrealized net losses recognized in income, net of tax benefit of $9

    16        —          16   
 

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

  $ (113   $ (382   $ (495
 

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Net Unrealized
Gains (Losses)
on Securities
    Pension and
Post-retirement
Benefit Plans
    Accumulated Other
Comprehensive
Income (Loss)
 

Balance January 1, 2013

   $ 279      $ (660   $ (381

Change in net unrealized holding losses on securities, before reclassification, net of tax benefit of $490

     (952     —          (952

Reclassification for previously unrealized net gains and impairment losses recognized in income, net of tax of $56

     (108     —          (108
  

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

   $ (781   $ (660   $ (1,441
  

 

 

   

 

 

   

 

 

 

Reclassification for previously unrealized (losses) gains and impairments on securities are reported in the Consolidated Statements of Income as follows. No unrealized gains (losses) on pension and post-employment related costs were reclassified to the Consolidated Statements of Income in the three and nine months ended September 30, 2014 and 2013.

Accumulated Other Comprehensive Income (Loss)

Reclassification for the Three Months Ended

Holding (Losses) Gains on Securities

 

(In thousands)    September 30, 2014     September 30, 2013  

Net (losses) gains on sale of securities available-for-securities

   $ (8   $ 13   

Tax benefit (expense)

     3        (4
  

 

 

   

 

 

 

Impact on net income

   $ (5   $ 9   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

Reclassification for the Nine Months Ended

Holding Gains (Losses) on Securities

 

(In thousands)    September 30, 2014     September 30, 2013  

Net (losses) gains on sale of securities available-for-securities

   $ (25   $ 284   

Loss on securities with other-than-temporary impairment

     —          (120

Tax benefit (expense)

     9        (56
  

 

 

   

 

 

 

Impact on net income

   $ (16   $ 108   
  

 

 

   

 

 

 

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Inc. This discussion should be read in conjunction with the above consolidated financial statements and the notes thereto.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, expansion activities, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

EXECUTIVE SUMMARY

Results through September 30, 2014 are highlighted by growth in loans and continued improvements in earnings. The capital position remains solid. Core earnings and growth remain priorities. Return on average assets is up to 0.49% for the first nine months of 2014 compared to 0.40% for the same period in 2013. Return on average equity is up to 4.32% from 3.63% for the same time period comparison.

In September 2014, the Bank received approval from federal and state banking regulators to open a second branch office in Richmond, and opened the branch in November of 2014. A third Richmond location was purchased early in October 2014, and plans are to open it in mid-2015. This will give the Bank a total of three offices in the growing Richmond market. Total assets have grown by $17.6 million, or 5.3%, during the first nine months of 2014.

The in-house loan portfolio grew by $23.3 million, or 9.3%, in the first nine months of 2014. Loans originated and sold to Fannie Mae generated growth of $4.8 million in the portfolio of loans serviced for Fannie Mae since December 31, 2013. The servicing portfolio totals $63.8 million as of September 30, 2014 compared to $58.9 million as of December 31, 2013 and $57.9 million as of September 30, 2013.

The net interest margin increased to 3.82% for the third quarter of 2014 compared to 3.60% for the same period in 2013. As this low-rate climate continues, loan yields continue to decline, but increased loan balances have resulted in increased interest income. The refinance of our $10 million FHLB advance in April 2013, plus the maturity and replacement of a $5 million FHLB advance in May 2014, resulted in an average FHLB advance cost of 1.21% for the third quarter of 2014 compared to 2.70% for the third quarter of 2013. Two new $5 million advances acquired in June 2014, during this low-rate environment, will further reduce the average cost of FHLB advances and cost of funds going forward. Scheduled maturities of time deposits continue to reduce both costs of funds and interest expense. Maturities of time deposits are typically renewed at lower rates, leave the Bank or transfer into lower-cost checking or savings accounts.

Along with growth in the loan portfolio, these margin improvements were a major contributor to the 24.2% increase in earnings for the nine months ended September 30, 2014 compared to the same period in 2013. Net interest income improved by $268 thousand and $788 thousand for the year over year three-month and nine-month comparisons, respectively, ended September 30, 2014 compared to September 30, 2013.

Asset quality improved, with nonperforming assets down to 1.45% of total assets as of September 30, 2014 from 2.01% as of December 31, 2013. OREO balances are down to $2.8 million as of September 30, 2014 compared to $3.9 million as of December 31, 2013. Non-accruing loan balances are down to $2.2 million as of September 30, 2014 as compared to $2.8 million at December 31, 2013.

Annualized net loan charge-offs against the ALL are down to 0.12% of total loans during the first nine months of 2014 compared to 0.38% during the first nine months of 2013.

During the first quarter of 2014, the Company sold a troubled investment for which an impairment loss was recognized in 2013. In addition, during the first quarter of 2014, the Company sold its former Heathsville, Virginia, branch office recognizing a gain of approximately $138 thousand.

Finally, the Company’s core capital levels and regulatory ratios remain well above what is considered “well capitalized” by the Company’s regulators. The Company took no Troubled Asset Relief Program (“TARP”) or Small Business Lending Fund (“SBLF”) investments from the U.S. Treasury.

For more information, visit the Company’s website at www.baybanks.com. Information contained on the Company’s website is not a part of this report.

 

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Table of Contents

EARNINGS SUMMATION

For the three months ended September 30, 2014 and 2013, net income was $512 thousand and $620 thousand, respectively, a decrease of $108 thousand or 17.4% from 2013 to 2014. Diluted earnings per average share for the three months ended September 30, 2014 and 2013 were $0.11 and $0.13, respectively. Return on average assets was 0.59% for the three months ended September 30, 2014 compared to 0.74% for the three months ended September 30, 2013. The annualized return on average equity was 5.29% and 6.82% for the three months ended September 30, 2014 and 2013, respectively. During the third quarter of 2013, the Company recognized a mortgage servicing rights asset that directly increased pretax earnings by $535 thousand and a gain of $165 thousand on the sale of the Bay Trust office.

For the nine months ended September 30, 2014 and 2013, net income was $1.2 million and $992 thousand, respectively, an increase of $240 thousand or 24.2% from 2013 to 2014. Diluted earnings per average share for the nine months ended September 30, 2014 and 2013 were $0.26 and $0.21, respectively. Annualized return on average assets was 0.44% at September 30, 2014 compared to 0.40% at September 30, 2013. The annualized return on average equity was 3.83% and 3.60% at September 30, 2014 and 2013, respectively.

RESULTS OF OPERATIONS

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, and the volume of non-performing assets have an effect on net interest income, the net interest margin, and net income.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2013

NET INTEREST INCOME

 

Net Interest Income Analysis

(Fully taxable equivalent basis)

   Average Balances, Income and Expense, Yields and Rates  
(Dollars in Thousands)    Three months ended 9/30/2014     Three months ended 9/30/2013  
     Average      Income/            Average      Income/         
     Balance      Expense      Yield/Cost     Balance      Expense      Yield/Cost  

INTEREST EARNING ASSETS:

                

Taxable investments

   $ 20,684       $ 94         1.81   $ 23,144       $ 103         1.78

Tax-exempt investments (1)

     17,601         139         3.16     19,520         153         3.14
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     38,285         233         2.43     42,664         256         2.40

Gross loans (2)

     266,192         3,322         4.98     245,332         3,182         5.19

Interest-bearing deposits

     12,034         7         0.23     18,313         13         0.28

Federal funds sold

     287         —           0.05     451         —           0.17
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Earning Assets

   $ 316,798       $ 3,562         4.50   $ 306,760       $ 3,451         4.50
  

 

 

    

 

 

      

 

 

    

 

 

    

INTEREST -BEARING LIABILITIES:

                

Savings deposits

   $ 42,464       $ 16         0.15   $ 45,490       $ 18         0.16

NOW deposits

     42,590         16         0.15     41,378         16         0.15

Time deposits => $100,000

     45,463         194         1.69     45,194         254         2.23

Time deposits < $100,000

     50,750         197         1.54     55,439         264         1.89

Money market deposit accounts

     31,079         32         0.40     29,111         30         0.41
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Deposits

     212,346         455         0.85     216,612         582         1.07

Federal funds purchased

     —           —           —          5         —           0.60

Securities sold under repurchase agreements

     7,898         2         0.11     9,514         3         0.11

FHLB advances

     25,000         76         1.21     15,000         102         2.70
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-Bearing Liabilities

   $ 245,244       $ 533         0.86   $ 241,131       $ 687         1.13
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income and net interest margin

      $ 3,029         3.82      $ 2,764         3.60
     

 

 

         

 

 

    

Non-interest-bearing deposits

   $ 60,238         —           0.00   $ 56,080         —           0.00

Total Cost of funds

           0.70           0.92

Net interest rate spread

           3.80           3.58

Notes:

(1) Income and yield assumes a federal tax rate of 34%.
(2) Includes loan fees, VISA program and nonaccrual loans.

Interest income for the three months ended September 30, 2014, on a tax-equivalent basis, was $3.6 million, an increase of $112 thousand from the third quarter of 2013. Interest expense for the three months ended September 30, 2014, was $533 thousand, a decrease of $154 thousand from the third quarter of 2013, due mainly to reductions in both balances and costs of time deposits, but also from the reduced cost of the FHLB advances. Net interest income for the three months ended September 30, 2014, on a tax-equivalent basis, was $3.0 million, an increase of $265 thousand from the third quarter of 2013. The annualized net interest margin was 3.82% and 3.60% for the three months ended September 30, 2014 and 2013, respectively. Further reductions in the cost of funds are anticipated as time deposits mature and are replaced at lower rates. As long as market rates remain low, this positive trend is expected to continue.

 

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The net interest spread, which is the difference between the annualized yield on earning assets and the total cost of funds, increased to 3.80% for the three months ended September 30, 2014, compared to 3.58% for the three months ended September 30, 2013.

NON-INTEREST INCOME

Non-interest income for the three months ended September 30, 2014 decreased $675 thousand, or 38.7%, compared to the three months ended September 30, 2013. This decrease was primarily due to the recognition of mortgage servicing rights in 2013 of $535 thousand and a gain of $165 thousand on the sale of the Bay Trust building in 2013. Also, VISA-related fees declined by $192 thousand due to the assignment of merchant agreements to a third party, but mitigated by a similar reduction in VISA expense.

NON-INTEREST EXPENSE

For the three months ended September 30, 2014 and 2013, non-interest expenses totaled $3.2 million and $3.3 million, respectively. In the third quarter of 2014, VISA-related expense decreased $187 thousand due to the aforementioned assignment of merchant agreements to a third party. This decrease was partially offset by a $49 increase in salaries and benefits related to the ramp up of the Richmond offices.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013

NET INTEREST INCOME

 

Net Interest Income Analysis

(Fully taxable equivalent basis)

   Average Balances, Income and Expense, Yields and Rates  
(Dollars in Thousands)    Nine months ended 9/30/2014     Nine months ended 9/30/2013  
     Average      Income/            Average      Income/         
     Balance      Expense      Yield/Cost     Balance      Expense      Yield/ Cost  

INTEREST EARNING ASSETS:

                

Taxable investments

   $ 20,840       $ 272         1.74   $ 24,965       $ 345         1.84

Tax-exempt investments (1)

     18,545         433         3.11     15,166         342         3.01
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     39,385         705         2.39     40,131         687         2.28

Gross loans (2)

     258,481         9,763         5.04     237,856         9,471         5.31

Interest-bearing deposits

     8,213         16         0.25     26,759         49         0.24

Federal funds sold

     301         —           0.06     682         1         0.20
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Earning Assets

   $ 306,380       $ 10,484         4.56   $ 305,428       $ 10,208         4.46
  

 

 

    

 

 

      

 

 

    

 

 

    

INTEREST-BEARING LIABILITIES:

                

Savings deposits

   $ 43,454       $ 50         0.15   $ 46,095       $ 71         0.20

NOW deposits

     42,437         47         0.15     40,989         60         0.20

Time deposits => $100,000

     40,931         524         1.71     46,110         769         2.23

Time deposits < $100,000

     54,332         658         1.62     56,889         805         1.89

Money market deposit accounts

     28,396         85         0.40     28,186         110         0.52
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Deposits

     209,550         1,364         0.87     218,269         1,815         1.11

Federal funds purchased

     121         1         0.58     77         —           0.74

Securities sold under repurchase agreements

     7,836         7         0.11     8,280         13         0.21

FHLB advances

     18,667         261         1.87     15,000         347         3.09
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-Bearing Liabilities

   $ 236,174       $ 1,633         0.92   $ 241,626       $ 2,175         1.20
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income and net interest margin

      $ 8,851         3.85      $ 8,033         3.51
     

 

 

         

 

 

    

Non-interest-bearing deposits

   $ 58,568         —           0.00   $ 52,532         —           0.00

Total Cost of funds

           0.74           0.98

Net interest rate spread

           3.83           3.48

Notes:

(1) Income and yield assumes a federal tax rate of 34%.
(2) Includes loan fees, VISA program and nonaccrual loans.

Interest income for the nine months ended September 30, 2014, on a tax-equivalent basis, was $10.5 million, an increase of $276 thousand from the same period of 2013 due mainly to increased loan balances. Interest expense for the nine months ended September 30, 2014 was $1.6 million, a decrease of $542 thousand from the same period of 2013, due mainly to reductions in both balances and costs of time deposits, but also from the reduced cost of the FHLB advances. Net interest income for the nine months ended September 30, 2014, on a tax-equivalent basis, was $8.9 million, an increase of $818 thousand from the same period of 2013. The annualized net interest margin was 3.85% and 3.51% for the nine months ended September 30, 2014 and 2013, respectively. Further reductions in the cost of funds are anticipated as time deposits mature and are replaced at lower rates. As long as market rates remain low, this positive trend is expected to continue.

 

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The net interest spread, which is the difference between the annualized yield on earning assets and the total cost of funds, increased to 3.83% for the nine months ended September 30, 2014, compared to 3.48% for the nine months ended September 30, 2013.

NON-INTEREST INCOME

Non-interest income for the nine months ended September 30, 2014 decreased $947 thousand, or 25.2%, compared to the nine months ended September 30, 2013. This decrease was primarily due to the recognition of mortgage servicing rights in 2013 of $535 thousand and VISA-related fees declined by $448 thousand due to the assignment of merchant agreements to a third party, which was offset by a similar reduction in expense.

NON-INTEREST EXPENSE

For the nine months ended September 30, 2014, non-interest expenses totaled $9.5 million, a decrease of $302 thousand, or 3.1%, compared to the same period in 2013. This decrease is primarily due to a reduction in VISA-related expense of $424 thousand, resulting from the aforementioned assignment of merchant agreements to a third party and $110 thousand reduction in FDIC assessments. These decreases were partially offset by increases in consulting expense of $101 thousand primarily related to accounting services.

AVERAGE INTEREST-EARNINGS ASSETS AND AVERAGE INTEREST-BEARING LIABILITIES

Average interest-earning assets increased 0.31% to $306.4 million for the nine months ended September 30, 2014, as compared to $305.4 million for the nine months ended September 30, 2013, as interest-bearing deposits were redeployed into higher yielding loans and bank-owned life insurance. Average interest-earning assets as a percent of total average assets were 91.6% for the nine months ended September 30, 2014 as compared to 91.2% for the same period in 2013. The loan portfolio, with $258.5 million in average balances as of September 30, 2014, is the largest category of interest-earning assets.

Average interest-bearing liabilities decreased 2.3% to $236.2 million for the nine months ended September 30, 2014, as compared to $241.6 million for the nine months ended September 30, 2013. The largest category of interest-bearing liabilities is time deposits, with combined average balances of $95.3 million for the nine months ended September 30, 2014, down from $103.0 million for the similar period in 2013.

ASSET QUALITY

In the first nine months of 2014, asset quality improved. Non-performing assets, which include OREO and non-performing loans, declined by $1.6 million to $5.1 million, or 1.45% of assets. This level also represents 1.85% of loans plus OREO.

Non-Performing Assets

 

(Dollars in thousands)    September 30, 2014     December 31, 2013  

Loans past due 90 days or more and still accruing

   $ 38      $ 19   

Non-accruing loans

     2,195        2,754   
  

 

 

   

 

 

 

Total non-performing loans

     2,233        2,773   
  

 

 

   

 

 

 

Other real estate owned

     2,839        3,897   
  

 

 

   

 

 

 

Total non-performing assets

   $ 5,072      $ 6,670   
  

 

 

   

 

 

 

Allowance for loan losses

   $ 3,151      $ 2,925   
  

 

 

   

 

 

 

Allowance to non-performing loans

     141.1     105.5

Non-performing assets to total assets

     1.45     2.01

Non-performing loans, which include loans past due 90 days or more and still accruing, plus non-accruing loans, as a percentage of total loans, decreased to 0.82% as of September 30, 2014 compared to 1.1% as of December 31, 2013. Non-accruing loans totaled $2.2 million as of September 30, 2014, down from $2.8 million at year-end 2013.

Loans charged off during the first nine months of 2014, net of recoveries, totaled $227 thousand compared to $680 thousand for the first nine months of 2013. This represents a decline in the annualized net charge-off ratio to 0.12% for the first nine months of 2014 compared to 0.38% for the first nine months of 2013, reflecting an improvement in asset quality. The majority of the charge-offs were anticipated and specific reserves had been provided for them in the ALL. Management believes it is maintaining an adequate level of the ALL at 1.15% and 1.17% of total loans at September 30, 2014 and December 31, 2013, respectively.

Classified assets, which include loans with risk rating grades of substandard, doubtful and loss, plus OREO, decreased by $2.1 million during the first nine months of 2014 to $9.4 million, or 23.06% of Tier 1 capital plus the allowance for loan losses. Risk rating grades are assigned conservatively, causing some homogenous loans, such as residential mortgages, to fall into the pool of adversely risk rated loans and thereby evaluated for impairment, even though they may be performing as agreed and therefore not impaired.

As of September 30, 2014, loans valued at $6.4 million were considered impaired, whereas $6.7 million were considered impaired as of December 31, 2013. Between December 31, 2013 and September 30, 2014, two loans were identified as impaired, one was dispensed through foreclosure and charged-off, and one was moved into the pool of loans for collective evaluation of impairment due to a large paydown. Management has reviewed the impaired credits and the underlying collateral and expects no additional losses above those which are specifically reserved in ALL.

 

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FINANCIAL CONDITION

Total assets increased to $348.7 million as of September 30, 2014 compared to $331.1 million as of December 31, 2013. Cash and due from banks, which produces no income, was $4.3 million and $6.8 million on September 30, 2014 and December 31, 2013, respectively. Interest-bearing deposits at other banks, which is mainly the Bank’s cash on deposit at the Federal Reserve Bank of Richmond, has decreased by $1.9 million since year end 2013.

During the nine months ended September 30, 2014, gross loans increased by $23.4 million or 9.3%, to $273.7 million from $250.3 million at year-end 2013. The largest components of this increase were $10.0 million related to residential first mortgages, $7.7 million related to commercial and industrial loans and $3.7 million related to construction loans.

The Bank had $2.8 million of OREO at September 30, 2014 and $3.9 million at December 31, 2013. As of September 30, 2014, OREO consists of 10 residences, 13 lots, two former convenience stores, one former restaurant and one commercial business property. During the first nine months of 2014, three properties with a total book value of $197 thousand from two borrowers were added through foreclosures, and six properties with a total book value of $1.1 million were sold. There were $160 thousand of write-downs of OREO properties during the first nine months of 2014, compared to $249 thousand for the same period in 2013. All properties maintained as OREO are valued at the lesser of cost or fair value less estimated costs to sell and are actively marketed.

In March 2014, the Company sold a former branch in Heathsville, Virginia for $311 thousand and recognized a gain of $138 thousand on the sale. The branch was included in other assets as of December 31, 2013.

As of September 30, 2014, securities available-for-sale at fair value totaled $36.5 million as compared to $38.5 million on December 31, 2013. This represents a net decrease of $2.0 million or 5.2% for the nine months. The decrease in securities available-for-sale is primarily the result of the redeployment of cash from maturing securities into higher-yielding loans and in bank owned life insurance and the sale of a troubled asset with a fair value of $912 thousand. An impairment loss was recognized on this asset in 2013 and therefore, no gain or loss was recognized on the sale of the asset as its carrying value equaled its fair value at the time of sale. As of September 30, 2014, available-for-sale securities represented 10.5% of total assets and 11.9% of earning assets. All securities in the Company’s investment portfolio are classified as available-for-sale and marked to market on a monthly basis. These unrealized gains or losses, net of tax, are booked as an adjustment to shareholders’ equity, and are not realized as an adjustment to earnings until the securities are actually sold or an other than temporary impairment occurs.

In the second quarter of 2013, the Company purchased $5.0 million of bank owned life insurance in order to offset the cost of employee benefits. During the second quarter of 2014, the Company purchased an additional $2.0 million of such insurance. The bank owned life insurance’s carrying value as of September 30, 2014 was $7.3 million.

As of September 30, 2014, total deposits were $275.9 million compared to $268.3 million at year-end 2013. This represents an increase in balances of $7.6 million or 2.8% during the nine months. The increase consisted of $896 thousand increase in time deposit balances, $4.1 million in savings and interest-bearing demand deposits and $2.5 million in non-interest bearing deposits.

To support loan growth, $10.0 million of new FHLB advances were drawn during the second quarter of 2014 plus $3.0 million in a brokered money market accounting during the third quarter of 2014. The Bank has also accumulated $2.5 million of time deposits through an internet listing service during 2014.

As of September 30, 2014, securities sold under repurchase agreements decreased $2.1 thousand to $7.0 million from $9.1 million at December 31, 2013. This decrease was the result of normal seasonality for these customers.

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations (such as commitments to fund loans) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with other banks, federal funds sold and investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates are major factors for liquidity. Management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

At September 30, 2014, cash totaled $4.3 million, federal funds sold totaled $137 thousand, interest-bearing deposits totaled $7.0 million, and securities and loans maturing in one year or less totaled $26.7 million. This results in a liquidity ratio as of September 30, 2014 of 10.9% as compared to 12.9% as of December 31, 2013. The Company determines this ratio by dividing the sum of cash and cash equivalents, investment securities maturing in one year or less, loans maturing in one year or less and federal funds sold, by total assets. The Bank has a formal liquidity management policy and contingency plan, which includes periodic evaluation of cash flow projections.

In addition, the Company has a line of credit with the FHLB of $67.7 million, with $40.7 million available, plus federal funds lines of credit with correspondent banks totaling $20.3 million.

 

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CAPITAL RESOURCES

Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allows management to effectively leverage its capital to maximize return to shareholders. The Company’s capital, also known as shareholders’ equity, is comprised mainly of outstanding common stock and retained earnings. Capital can be increased with securities offerings or through earnings.

Several factors impact shareholders’ equity, including net income and regulatory capital requirements. The Company’s capital resources are also impacted by net unrealized gains or losses on securities. The available-for-sale securities portfolio is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive income (loss) on the balance sheets and statement of changes in shareholders’ equity. Another factor affecting accumulated other comprehensive income (loss) is changes in the market value of the Company’s pension and post-retirement benefit plans. The Company’s shareholders’ equity before accumulated other comprehensive loss was $39.6 million on September 30, 2014 compared to $38.3 million on December 31, 2013. Accumulated other comprehensive loss decreased $678 thousand between December 31, 2013 and September 30, 2014, primarily as a result of decreases in unrealized net losses in the investment portfolio.

Book value per share, before accumulated other comprehensive loss, on September 30, 2014, compared to December 31, 2013, increased to $8.21 from $7.96. Book value per share, including accumulated other comprehensive loss, increased to $8.11 on September 30, 2014 from $7.71 on December 31, 2013. No cash dividends were paid for the nine-month period ended September 30, 2014, nor for the comparable period ended September 30, 2013.

The Bank is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. These ratios continue to be well in excess of regulatory minimums. As of September 30, 2014, the Bank maintained Tier 1 capital of $31.6 million, net risk weighted assets of $254.5 million, and Tier 2 capital of $3.2 million. On September 30, 2014, the Tier 1 leverage ratio was 9.26%, the Tier 1 capital to risk weighted assets ratio was 12.42%, and the total capital ratio to risk weighted assets ratio was 13.66%. Management is evaluating Basel III capital rules which will begin a phase-in period on January 1, 2015, and expects no detrimental effects.

OFF BALANCE SHEET COMMITMENTS

In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments may involve elements of liquidity, credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby-letters of credit is represented by the contractual amount of these instruments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third-party. The credit risk of issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Off Balance Sheet Arrangements

 

(Dollars in thousands)    September 30, 2014      December 31, 2013  

Total Loan Commitments Outstanding

   $ 38,647       $ 37,279   

Standby-by Letters of Credit

     380         329   

The Company maintains liquidity and credit facilities with non-affiliated banks in excess of the total loan commitments and stand-by letters of credit. As these commitments are earning assets only upon takedown of the instrument by the customer, thereby increasing loan balances, management expects the revenue of the Company to be enhanced as these credit facilities are utilized.

There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

CONTRACTUAL OBLIGATIONS

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

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RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 3, Amendments to the Accounting Standards Codification, for information related to the adoption of new amendments to the Accounting Standards Codification.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings as of September 30, 2014.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change to the Company’s internal control over financial reporting during the nine months ended September 30, 2014 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

ITEM 1A. RISK FACTORS

Not required.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None to report.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None to report.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None to report.

 

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ITEM 6. EXHIBITS

 

31.1    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (vi) Notes to Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Bay Banks of Virginia, Inc.

 
(Registrant)  
November 13, 2014     By:  

/s/ Randal R. Greene

      Randal R. Greene
      President and Chief Executive Officer
      (Principal Executive Officer)
    By:  

/s/ Deborah M. Evans

      Deborah M. Evans
      Treasurer and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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