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EX-10.1 - EXECUTIVE SEVERANCE AGREEMENT BETWEEN AMERICAN NATIONAL BANKSHARES INC., AMERICAN NATIONAL BANK AND TRUST COMPANY, AND R. HELM DOBBINS DATED MARCH 2, 2015 - AMERICAN NATIONAL BANKSHARES INC.ex10_1.htm
XML - IDEA: XBRL DOCUMENT - AMERICAN NATIONAL BANKSHARES INC.R9999.htm
EX-10.2 - EXECUTIVE SEVERANCE AGREEMENT BETWEEN AMERICAN NATIONAL BANKSHARES INC., AMERICAN NATIONAL BANK AND TRUST COMPANY, AND DABNEY T.P. GILLIAM DATED MARCH 2, 2015 - AMERICAN NATIONAL BANKSHARES INC.ex10_2.htm
EX-10.3 - EXECUTIVE SEVERANCE AGREEMENT BETWEEN AMERICAN NATIONAL BANKSHARES INC., AMERICAN NATIONAL BANK AND TRUST COMPANY, AND H. GREG STRADER DATED MARCH 2, 2015 - AMERICAN NATIONAL BANKSHARES INC.ex10_3.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN NATIONAL BANKSHARES INC.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN NATIONAL BANKSHARES INC.ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN NATIONAL BANKSHARES INC.ex32_1.htm
EX-32.2 - EXHIBIT 32.2 - AMERICAN NATIONAL BANKSHARES INC.ex32_2.htm
10-Q - 10-Q 3-31-15 (PDF) - AMERICAN NATIONAL BANKSHARES INC.form10q03312015.pdf
EXCEL - IDEA: XBRL DOCUMENT - AMERICAN NATIONAL BANKSHARES INC.Financial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2015.

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO           .

Commission file number:  0-12820

AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)

VIRGINIA
 
54-1284688
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
628 Main Street
   
Danville, Virginia
 
24541
(Address of principal executive offices)
 
(Zip Code)

(434) 792-5111
(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.

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.

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 the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer 
Accelerated filer 
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes
No
 

At May 6, 2015, the Company had 8,727,696 shares of Common Stock outstanding, $1 par value.

AMERICAN NATIONAL BANKSHARES INC.

Index
   
Page
       
Part I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Financial Statements
 
       
   
       
   
       
   
       
   
       
   
       
   
       
 
Item 2.
       
 
Item 3.
       
 
Item 4.
       
Part II.
OTHER INFORMATION
 
       
 
Item 1.
       
 
Item 1A.
       
 
Item 2.
       
 
Item 3.
       
 
Item 4.
       
 
Item 5.
       
 
Item 6.
       
SIGNATURES
54

2


 
PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

American National Bankshares Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
(Dollars in thousands, except share data)
 
 
Assets
 
(Unaudited)
March 31, 2015
   
(*)
December 31, 2014
 
Cash and due from banks
 
$
23,995
   
$
29,272
 
Interest-bearing deposits in other banks
   
75,254
     
38,031
 
Federal funds sold
   
13,616
     
-
 
                 
Securities available for sale, at fair value
   
352,208
     
344,716
 
Restricted stock, at cost
   
5,231
     
4,468
 
Loans held for sale
   
1,936
     
616
 
                 
Loans, net of unearned income
   
965,902
     
840,925
 
Less allowance for loan losses
   
(12,844
)
   
(12,427
)
Net loans
   
953,058
     
828,498
 
                 
Premises and equipment, net
   
24,371
     
23,025
 
Other real estate owned, net of valuation allowance $2,947 in 2015 and $2,971 in 2014
   
2,653
     
2,119
 
Goodwill
   
44,210
     
39,043
 
Core deposit intangibles, net
   
3,583
     
2,045
 
Bank owned life insurance
   
17,261
     
15,193
 
Accrued interest receivable and other assets
   
22,722
     
19,466
 
Total assets
 
$
1,540,098
   
$
1,346,492
 
                 
Liabilities
               
Demand deposits -- noninterest bearing
 
$
289,818
   
$
254,458
 
Demand deposits -- interest bearing
   
229,721
     
193,432
 
Money market deposits
   
202,706
     
174,000
 
Savings deposits
   
110,104
     
90,130
 
Time deposits
   
410,326
     
363,817
 
Total deposits
   
1,242,675
     
1,075,837
 
                 
                 
Customer repurchase agreements
   
53,664
     
53,480
 
Long-term borrowings
   
9,941
     
9,935
 
Trust preferred capital notes
   
27,546
     
27,521
 
Accrued interest payable and other liabilities
   
9,583
     
5,939
 
Total liabilities
   
1,343,409
     
1,172,712
 
                 
Shareholders' equity
               
Preferred stock, $5 par, 2,000,000 shares authorized, none outstanding
   
-
     
-
 
Common stock, $1 par, 20,000,000 shares authorized, 8,727,696 shares outstanding at March 31, 2015 and 7,873,474 shares outstanding at December 31, 2014
   
8,710
     
7,872
 
Capital in excess of par value
   
77,612
     
57,650
 
Retained earnings
   
106,102
     
104,594
 
Accumulated other comprehensive income, net
   
4,265
     
3,664
 
Total shareholders' equity
   
196,689
     
173,780
 
Total liabilities and shareholders' equity
 
$
1,540,098
   
$
1,346,492
 

                                                  (*) -  Derived from audited financial statements.                                              
 
                                                  The accompanying notes are an integral part of the consolidated financial statements.

3

American National Bankshares Inc. and Subsidiaries
 
Consolidated Statements of Income
 
(Dollars in thousands, except share and per share data) (Unaudited)
 
 
   
Three Months Ended
March 31
 
   
2015
   
2014
 
Interest and Dividend Income:
       
Interest and fees on loans
 
$
11,770
   
$
9,847
 
Interest on federal funds sold
   
4
     
-
 
Interest and dividends on securities:
               
Taxable
   
975
     
964
 
Tax-exempt
   
960
     
1,035
 
Dividends
   
82
     
75
 
Other interest income
   
48
     
33
 
Total interest and dividend income
   
13,839
     
11,954
 
                 
Interest Expense:
               
Interest on deposits
   
1,194
     
1,229
 
Interest on short-term borrowings
   
3
     
2
 
Interest on long-term borrowings
   
80
     
80
 
Interest on trust preferred capital notes
   
184
     
184
 
Total interest expense
   
1,461
     
1,495
 
                 
Net Interest Income
   
12,378
     
10,459
 
Provision for Loan Losses
   
600
     
-
 
                 
Net Interest Income After Provision for Loan Losses
   
11,778
     
10,459
 
                 
Noninterest Income:
               
Trust fees
   
952
     
1,122
 
Service charges on deposit accounts
   
497
     
413
 
Other fees and commissions
   
588
     
444
 
Mortgage banking income
   
222
     
263
 
Gains on sales of securities
   
310
     
39
 
Other
   
587
     
422
 
Total noninterest income
   
3,156
     
2,703
 
                 
Noninterest Expense:
               
Salaries
   
4,147
     
3,538
 
Employee benefits
   
1,075
     
975
 
Occupancy and equipment
   
1,172
     
936
 
FDIC assessment
   
185
     
164
 
Bank franchise tax
   
235
     
222
 
Core deposit intangible amortization
   
301
     
331
 
Data processing
   
462
     
348
 
Software
   
283
     
262
 
Other real estate owned, net
   
53
     
16
 
Merger related expense
   
359
     
-
 
Other
   
1,775
     
1,631
 
Total noninterest expense
   
10,047
     
8,423
 
Income Before Income Taxes
   
4,887
     
4,739
 
Income Taxes
   
1,372
     
1,289
 
Net Income
 
$
3,515
   
$
3,450
 
                 
Net Income Per Common Share:
               
Basic
 
$
0.40
   
$
0.44
 
Diluted
 
$
0.40
   
$
0.44
 
Weighted Average Common Shares Outstanding:
               
Basic
   
8,723,633
     
7,904,759
 
Diluted
   
8,732,679
     
7,917,601
 

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

4

American National Bankshares Inc. and Subsidiaries
 
Consolidated Statements of Comprehensive Income
 
(Dollars in thousands) (Unaudited)
 
 
   
Three Months Ended
March 31
 
   
2015
   
2014
 
         
Net income
 
$
3,515
   
$
3,450
 
                 
Other comprehensive income:
               
                 
Unrealized gains on securities available for sale
   
1,234
     
1,809
 
Income tax expense
   
(432
)
   
(633
)
                 
Reclassification adjustment for gains on sales of securities
   
(310
)
   
(39
)
Income tax expense
   
109
     
14
 
                 
Other comprehensive income
   
601
     
1,151
 
                 
Comprehensive income
 
$
4,116
   
$
4,601
 

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

5

American National Bankshares Inc. and Subsidiaries
 
Consolidated Statements of Changes in Shareholders' Equity
 
Three Months Ended March 31, 2015 and 2014
 
(Dollars in thousands except per share data) (Unaudited)
 
 
   
Common
Stock
   
Capital in
Excess of
Par Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Total
Shareholders'
Equity
 
                     
                     
Balance, December 31, 2013
 
$
7,891
   
$
58,050
   
$
99,090
   
$
2,520
   
$
167,551
 
                                         
Net income
   
-
     
-
     
3,450
     
-
     
3,450
 
                                         
Other comprehensive income
   
-
     
-
     
-
     
1,151
     
1,151
 
                                         
Equity based compensation
   
14
     
152
     
-
     
-
     
166
 
                                         
Cash dividends declared, $0.23 per share
   
-
     
-
     
(1,819
)
   
-
     
(1,819
)
                                         
Balance, March 31, 2014
 
$
7,905
   
$
58,202
   
$
100,721
   
$
3,671
   
$
170,499
 
                                         
Balance, December 31, 2014
 
$
7,872
   
$
57,650
   
$
104,594
   
$
3,664
   
$
173,780
 
                                         
Net income
   
-
     
-
     
3,515
     
-
     
3,515
 
                                         
Other comprehensive income
   
-
     
-
     
-
     
601
     
601
 
                                         
Issuance of common stock
   
826
     
19,657
     
-
     
-
     
20,483
 
                                         
Stock options exercised
   
9
     
153
     
-
     
-
     
162
 
                                         
Equity based compensation
   
3
     
152
     
-
     
-
     
155
 
                                         
Cash dividends declared, $0.23 per share
   
-
     
-
     
(2,007
)
   
-
     
(2,007
)
                                         
Balance, March 31, 2015
 
$
8,710
   
$
77,612
   
$
106,102
   
$
4,265
   
$
196,689
 

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


6

American National Bankshares Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
Three Months Ended March 31, 2015 and 2014
 
(Dollars in thousands) (Unaudited)
 
 
   
2015
   
2014
 
Cash Flows from Operating Activities:
       
Net income
 
$
3,515
   
$
3,450
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
   
600
     
-
 
Depreciation
   
440
     
434
 
Net accretion of purchase accounting adjustments
   
(1,113
)
   
(896
)
Core deposit intangible amortization
   
301
     
331
 
Net amortization (accretion) of securities
   
680
     
668
 
Gains on sales of securities
   
(310
)
   
(39
)
Gain on sale of loans held for sale
   
(166
)
   
(215
)
Proceeds from sales of loans held for sale
   
9,329
     
13,745
 
Originations of loans held for sale
   
(10,483
)
   
(12,159
)
Net gain on other real estate owned
   
(27
)
   
(49
)
Valuation allowance on other real estate owned
   
22
     
24
 
Net gain on sale of premises and equipment
   
(5
)
   
-
 
Equity based compensation expense
   
155
     
166
 
Net change in bank owned life insurance
   
(113
)
   
-
 
Deferred income tax  expense (benefit)
   
(143
)
   
94
 
Net change in interest receivable
   
219
     
344
 
Net change in other assets
   
(56
)
   
(565
)
Net change in interest payable
   
(1
)
   
(43
)
Net change in other liabilities
   
569
     
1,143
 
Net cash provided by operating activities
   
3,413
     
6,433
 
                 
Cash Flows from Investing Activities:
               
Proceeds from sales of securities available for sale
   
3,820
     
2,061
 
Proceeds from maturities, calls and paydowns of securities available for sale
   
24,979
     
22,540
 
Purchases of securities available for sale
   
(16,936
)
   
(26,459
)
Net change in restricted stock
   
(25
)
   
360
 
Net (increase) decrease in loans
   
(9,865
)
   
12,225
 
Proceeds from sale of premises and equipment
   
42
     
-
 
Purchases of premises and equipment
   
(348
)
   
(119
)
Proceeds from sales of other real estate owned
   
316
     
232
 
Cash paid in bank acquisition
   
(5,935
)
   
-
 
Cash acquired in bank acquisition
   
18,173
     
-
 
Net cash provided by investing activities
   
14,221
     
10,840
 
                 
Cash Flows from Financing Activities:
               
Net change in demand, money market, and savings deposits
   
37,878
     
5,164
 
Net change in time deposits
   
(8,289
)
   
(11,590
)
Net change in customer repurchase agreements
   
184
     
(5,325
)
Net change in long-term borrowings
   
-
     
(38
)
Common stock dividends paid
   
(2,007
)
   
(1,819
)
       Proceeds from exercise of stock options
   
162
     
-
 
Net cash provided by (used in) financing activities
   
27,928
     
(13,608
)
                 
Net Increase in Cash and Cash Equivalents
   
45,562
     
3,665
 
                 
Cash and Cash Equivalents at Beginning of Period
   
67,303
     
67,681
 
                 
Cash and Cash Equivalents at End of Period
 
$
112,865
   
$
71,346
 

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


7

AMERICAN NATIONAL BANKSHARES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation
 
        The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank").  The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
 
        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, goodwill and intangible assets, the valuation of deferred tax assets, other-than-temporary impairments of securities, and acquired loans with specific credit-related deterioration.
 
        All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 9.
 
           In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for the year ending December 31, 2015.  Certain reclassifications have been made to prior period balances to conform to the current period presentation. These reclassifications did not have an impact on net income and were considered immaterial. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

Note 2 – Merger with MainStreet

         
On January 1, 2015, the Company completed its acquisition of MainStreet BankShares, Inc. ("MainStreet"). The merger of MainStreet with and into the Company was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of August 24, 2014, between the Company and MainStreet, and a related Plan of Merger. Immediately after the merger, Franklin Community Bank, N.A., MainStreet's wholly owned bank subsidiary, merged with and into the Bank.  Pursuant to the MainStreet merger agreement, holders of shares of MainStreet common stock received $3.46 in cash and 0.482 shares of the Company's common stock for each share of MainStreet common stock held immediately prior to the effective date of the merger, plus cash in lieu of fractional shares.  Each option to purchase shares of MainStreet common stock that was outstanding immediately prior to the effective date of the merger vested upon the merger and was converted into an option to purchase shares of the Company's common stock, adjusted based on a 0.643 exchange ratio. Each share of the Company's common stock outstanding immediately prior to the merger remained outstanding and was unaffected by the merger. The cash portion of the merger consideration was funded through a cash dividend of $6,000,000 from the Bank to the Company, and no borrowing was incurred by the Company or the Bank in connection with the merger. Replacement stock option awards representing 43,086 shares of the Company's common stock were granted in conjunction with the MainStreet acquisition.  The value of the consideration transferred with the replacement awards was not determined as of March 31, 2015; therefore, the amounts of the consideration transferred and goodwill recorded in connection with the merger will be adjusted for the value of the replacement awards in the second quarter of 2015.

    The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.
 
        In connection with the merger, the consideration paid, and the fair value of identifiable assets acquired and liabilities assumed as of the merger date are summarized in the following table (dollars in thousands).

8


     
Consideration Paid:
   
Common shares issued (825,586)
 
$
20,483
 
Cash paid to shareholders
   
5,935
 
Value of consideration
   
26,418
 
         
Assets acquired:
       
Cash and cash equivalents
   
18,173
 
Investment securities
   
18,800
 
Restricted stock
   
738
 
Loans
   
114,902
 
Premises and equipment
   
1,475
 
Deferred income taxes
   
2,683
 
Core deposit intangible
   
1,839
 
Other real estate owned
   
168
 
Banked owned life insurance
   
1,955
 
Other assets
   
917
 
Total assets
   
161,650
 
         
Liabilities assumed:
       
Deposits
   
137,323
 
Other liabilities
   
3,076
 
Total liabilities
   
140,399
 
Net assets acquired
   
21,251
 
Goodwill resulting from merger with MainStreet
 
$
5,167
 
 
        In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The Company acquired the $122,300,000 loan portfolio at a fair value discount of $7,400,000. The estimated fair value of the performing portion of the portfolio was $105,800,000. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 310-20.
 
       Certain loans, those for which specific credit-related deterioration since origination was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on reasonable expectations about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.
 
       The following table details the acquired loans that are accounted for in accordance with FASB ASC 310-30 as of January 1, 2015 (dollars in thousands).


Contractually required principal and interest at acquisition
 
$
13,504
 
Contractual cash flows not expected to be collected (nonaccretable difference)
   
3,298
 
Expected cash flows at acquisition
   
10,206
 
Interest component of expected cash flows (accretable yield)
   
1,208
 
Fair value of acquired loans accounted for under FASB ASC 310-30
 
$
8,998
 

 
In accordance with GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by MainStreet.

In connection with the merger with MainStreet, the Company acquired an investment portfolio with a fair value of $18,800,000. The fair value of the investment portfolio was determined by taking into account market prices obtained from independent valuation sources.

In connection with the merger with MainStreet, the Company recorded a deferred income tax asset of $2,700,0000 related to tax attributes of MainStreet, along with the effects of fair value adjustments resulting from applying the acquisition method of accounting.

In connection with the merger with MainStreet, the Company acquired other real estate owned with a fair value of $168,000. Other real estate owned was measured at fair value less estimated cost to sell.

9

In connection with the merger with MainStreet, the Company acquired premises and equipment with a fair value of $1,400,000.

The fair value of savings and transaction deposit accounts acquired from MainStreet was assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The portfolio was segregated into pools based on segments: retail, individual retirement accounts, and brokered. For each segment, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each segment is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment of $290,000 will be accreted to reduce interest expense over the average remaining maturities of the respective pools, which is estimated to be 12 months.

A core deposit intangible of $1,800,000 was recognized in connection with the merger with MainStreet. This intangible will be amortized over a 10 year period on an accelerated cost recovery basis.
 
Direct costs related to the acquisition were expensed as incurred. During the entire year of 2011, the Company incurred $359,000 in merger and acquisition expenses.
 
The following table presents unaudited pro forma information as if the merger with MainStreet had occurred on January 1, 2014. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit intangible and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger with MainStreet occurred in 2014.  In particular, expected operational cost savings are not reflected in the pro forma amounts (dollars in thousands):.

   
Pro forma
 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
 
 
2015
   
2014
 
Net interest income
 
$
11,980
   
$
12,420
 
Provision for loan loss
   
(600
)
   
-
 
Non-interest income
   
3,156
     
2,914
 
Non-interest expense and income taxes
   
(11,134
)
   
(11,439
)
Net income
 
$
3,402
   
$
3,895
 

Note 3 – Securities
 
        The amortized cost and fair value of investments in debt and equity securities at March 31, 2015 and December 31, 2014 were as follows (dollars in thousands):

   
March 31, 2015
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
 
Fair Value
 
Securities available for sale:
               
Federal agencies and GSEs
 
$
78,383
   
$
513
   
$
9
   
$
78,887
 
Mortgage-backed and CMOs
   
63,514
     
1,400
     
65
     
64,849
 
State and municipal
   
190,539
     
7,717
     
56
     
198,200
 
Corporate
   
8,854
     
66
     
13
     
8,907
 
Equity securities
   
1,000
     
365
     
-
     
1,365
 
Total securities available for sale
 
$
342,290
   
$
10,061
   
$
143
   
$
352,208
 

10

   
December 31, 2014
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
 
Fair Value
 
Securities available for sale:
               
Federal agencies and GSEs
 
$
81,958
   
$
252
   
$
104
   
$
82,106
 
Mortgage-backed and CMOs
   
56,289
     
1,248
     
112
     
57,425
 
State and municipal
   
188,060
     
7,523
     
90
     
195,493
 
Corporate
   
8,416
     
16
     
53
     
8,379
 
Equity securities
   
1,000
     
313
     
-
     
1,313
 
Total securities available for sale
 
$
335,723
   
$
9,352
   
$
359
   
$
344,716
 

Restricted Stock

Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost.  The restricted securities are not subject to the investment security classification and are included as a separate line item on the Company's balance sheet.  The FRB requires the Bank to maintain stock with a par value equal to 6.0% of its common stock and paid-in surplus.  One-half of this amount is paid to the FRB and the remaining half is subject to call when deemed necessary by the Board of Governors of the Federal Reserve System.  The FHLB requires the Bank to maintain stock in an amount equal to a specific percentage of the Bank's total assets and 4.5% of outstanding borrowings. The Bank also owns common stock in CBB Financial Corporation and Pacific Coast Bankers Bankshares, which both provide services to community banks. The cost of restricted stock at March 31, 2015 and December 31, 2014 were as follows (dollars in thousands):

   
March 31,
   
December 31,
 
 
 
2015
   
2014
 
FRB stock
 
$
3,177
   
$
2,742
 
FHLB stock
   
1,802
     
1,625
 
CBB Financial Corporation stock
   
150
     
101
 
 Pacific Coast Bankers Bankshares stock
   
102
     
-
 
   Total restricted stock
 
$
5,231
   
$
4,468
 
 
 
Temporarily Impaired Securities
 
      The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2015.  The reference point for determining when securities are in an unrealized loss position is month-end.  Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period (dollars in thousands).


   
Total
   
Less than 12 Months
   
12 Months or More
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Federal agencies and GSEs
 
$
7,589
   
$
9
   
$
5,492
   
$
6
   
$
2,097
   
$
3
 
Mortgage-backed and CMOs
   
7,335
     
65
     
5,095
     
39
     
2,240
     
26
 
State and municipal
   
13,213
     
56
     
13,213
     
56
     
-
     
-
 
Corporate
   
2,778
     
13
     
1,162
     
1
     
1,616
     
12
 
Total
 
$
30,915
   
$
143
   
$
24,962
   
$
102
   
$
5,953
   
$
41
 

Federal Agencies and GSE debt securities: The unrealized losses on the Company's investment in four government sponsored entities ("GSE") were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

Mortgage-backed securities and CMOs: The unrealized losses on the Company's investment in 13 GSE mortgage-backed securities and collateralized mortgage obligations ("CMOs") were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

11

State and municipal securities:  The unrealized losses on 14 state and municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

Corporate securities:  The unrealized losses on three investments in corporate securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverablity of the par value rather than by recognizing temporary declines in value. The company does not consider restricted stock to be other-than-temoraily impaired at March 31, 2015, and no impairment has been recognized.
 
        The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2014 (dollars in thousands):

   
Total
   
Less than 12 Months
   
12 Months or More
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Federal agencies and GSEs
 
$
28,979
   
$
104
   
$
21,449
   
$
35
   
$
7,530
   
$
69
 
Mortgage-backed and CMOs
   
7,182
     
112
     
1,171
     
13
     
6,011
     
99
 
State and municipal
   
20,542
     
90
     
15,836
     
60
     
4,706
     
30
 
Corporate
   
5,032
     
53
     
2,273
     
4
     
2,759
     
49
 
Total
 
$
61,735
   
$
359
   
$
40,729
   
$
112
   
$
21,006
   
$
247
 

Other-Than-Temporary-Impaired Securities
 
        As of March 31, 2015 and December 31, 2014, there were no securities classified as having other-than-temporary impairment.

Note 4 – Loans

Segments
 
        Loans, excluding loans held for sale, as of March 31, 2015 and December 31, 2014 were comprised of the following (dollars in thousands):

   
March 31, 2015
   
December 31, 2014
 
         
Commercial
 
$
146,280
   
$
126,981
 
Commercial real estate:
               
Construction and land development
   
68,069
     
50,863
 
Commercial real estate
   
436,562
     
391,472
 
Residential real estate:
               
Residential
   
211,261
     
175,293
 
Home equity
   
97,811
     
91,075
 
Consumer
   
5,919
     
5,241
 
Total loans
 
$
965,902
   
$
840,925
 

 

12

Acquired Loans
 
         Interest income, including accretion, on loans acquired from MidCarolina Financial Corporation ("MidCarolina") and MainStreet for the three months ended March 31, 2015 was approximately $4,675,000. This included $1,070,000 in accretion income. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):
 
   
March 31, 2015
   
December 31, 2014
 
Outstanding principal balance
 
$
189,911
   
$
84,892
 
Carrying amount
   
177,105
     
78,111
 
 
        The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies FASB ASC 310-30, to account for interest earned, at March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):

   
March 31, 2015
   
December 31, 2014
 
Outstanding principal balance
 
$
27,843
   
$
18,357
 
Carrying amount
   
21,758
     
14,933
 
 
      The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies FASB ASC 310-30, for the three months ended March 31, 2015 (dollars in thousands):

   
Accretable Yield
 
Balance at December 31, 2014
 
$
1,440
 
Additions from merger with MainStreet
   
1,208
 
Accretion
   
(268
)
Reclassification from nonaccretable difference
   
2,851
 
Balance at March 31, 2015
 
$
5,231
 

Past Due Loans
 
      The following table shows an analysis by portfolio segment of the Company's past due loans at March 31, 2015 (dollars in thousands):

                             
   
30- 59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days +
Past Due
and Still
Accruing
   
Non-
Accrual
Loans
   
Total
Past
Due
   
Current
   
Total
Loans
 
                             
Commercial
 
$
51
   
$
-
   
$
-
   
$
157
   
$
208
   
$
146,072
   
$
146,280
 
Commercial real estate:
                                                       
Construction and land development
   
108
     
-
     
-
     
572
     
680
     
67,389
     
68,069
 
Commercial real estate
   
341
     
-
     
-
     
3,242
     
3,583
     
432,979
     
436,562
 
Residential:
                                                       
Residential
   
776
     
177
     
-
     
678
     
1,631
     
209,630
     
211,261
 
Home equity
   
98
     
424
     
-
     
432
     
954
     
96,857
     
97,811
 
Consumer
   
2
     
1
     
-
     
42
     
45
     
5,874
     
5,919
 
Total
 
$
1,376
   
$
602
   
$
-
   
$
5,123
   
$
7,101
   
$
958,801
   
$
965,902
 

13

 
        The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2014 (dollars in thousands):

   
30- 59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days +
Past Due
and Still
Accruing
   
Non-
Accrual
Loans
   
Total
Past
Due
   
Current
   
Total
Loans
 
                             
Commercial
 
$
114
   
$
165
   
$
-
   
$
-
   
$
279
   
$
126,702
   
$
126,981
 
Commercial real estate:
                                                       
Construction and land development
   
44
     
269
     
-
     
279
     
592
     
50,271
     
50,863
 
Commercial real estate
   
257
     
-
     
-
     
3,010
     
3,267
     
388,205
     
391,472
 
Residential:
                                                       
Residential
   
390
     
325
     
-
     
560
     
1,275
     
174,018
     
175,293
 
Home equity
   
223
     
60
     
-
     
262
     
545
     
90,530
     
91,075
 
Consumer
   
1
     
42
     
-
     
1
     
44
     
5,197
     
5,241
 
Total
 
$
1,029
   
$
861
   
$
-
   
$
4,112
   
$
6,002
   
$
834,923
   
$
840,925
 


Impaired Loans
 
       The following table presents the Company's impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at March 31, 2015 (dollars in thousands):

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                   
Commercial
 
$
157
   
$
157
   
$
-
   
$
160
   
$
-
 
Commercial real estate:
                                       
Construction and land development
   
1,111
     
1,161
     
-
     
1,115
     
8
 
Commercial real estate
   
414
     
475
     
-
     
420
     
-
 
Residential:
                                       
Residential
   
658
     
658
     
-
     
642
     
4
 
Home equity
   
758
     
759
     
-
     
553
     
4
 
Consumer
   
43
     
42
     
-
     
43
     
-
 
   
$
3,141
   
$
3,252
   
$
-
   
$
2,933
   
$
16
 
With a related allowance recorded:
                                       
Commercial
   
6
     
6
     
-
     
6
     
-
 
Commercial real estate:
                                       
Construction and land development
   
-
     
-
     
-
     
-
     
-
 
Commercial real estate
   
1,941
     
2,011
     
104
     
1,946
     
3
 
Residential
                                       
Residential
   
183
     
183
     
12
     
183
     
2
 
Home equity
   
8
     
8
     
-
     
8
     
-
 
Consumer
   
14
     
14
     
-
     
15
     
-
 
   
$
2,152
   
$
2,222
   
$
116
   
$
2,158
   
$
5
 
Total:
                                       
Commercial
 
$
163
   
$
163
   
$
-
   
$
166
   
$
-
 
Commercial real estate:
                                       
Construction and land development
   
1,111
     
1,161
     
-
     
1,115
     
8
 
Commercial real estate
   
2,355
     
2,486
     
104
     
2,366
     
3
 
Residential:
                                       
Residential
   
841
     
841
     
12
     
825
     
6
 
Home equity
   
766
     
767
     
-
     
561
     
4
 
Consumer
   
57
     
56
     
-
     
58
     
-
 
   
$
5,293
   
$
5,474
   
$
116
   
$
5,091
   
$
21
 


14

 
        The following table presents the Company's impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at December 31, 2014 (dollars in thousands):

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                   
Commercial
 
$
7
   
$
7
   
$
-
   
$
12
   
$
1
 
Commercial real estate:
                                       
Construction and land development
   
280
     
325
     
-
     
448
     
-
 
Commercial real estate
   
1,520
     
1,797
     
-
     
1,844
     
-
 
Residential:
                                       
Residential
   
603
     
603
     
-
     
723
     
8
 
Home equity
   
256
     
256
     
-
     
316
     
-
 
   Consumer
   
1
     
1
     
-
     
2
     
-
 
   
$
2,667
   
$
2,989
   
$
-
   
$
3,345
   
$
9
 
With a related allowance recorded:
                                       
Commercial
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Commercial real estate:
                                       
Construction and land development
   
576
     
577
     
12
     
593
     
34
 
Commercial real estate
   
1,275
     
1,422
     
149
     
1,297
     
8
 
Residential:
                                       
Residential
   
4
     
4
     
1
     
4
     
-
 
Home equity
   
-
     
-
     
-
     
-
     
-
 
   Consumer
   
15
     
15
     
3
     
17
     
1
 
   
$
1,870
   
$
2,018
   
$
165
   
$
1,911
   
$
43
 
Total:
                                       
Commercial
 
$
7
   
$
7
   
$
-
   
$
12
   
$
1
 
Commercial real estate:
                                       
Construction and land development
   
856
     
902
     
12
     
1,041
     
34
 
Commercial real estate
   
2,795
     
3,219
     
149
     
3,141
     
8
 
Residential:
                                       
Residential
   
607
     
607
     
1
     
727
     
8
 
Home equity
   
256
     
256
     
-
     
316
     
-
 
   Consumer
   
16
     
16
     
3
     
19
     
1
 
   
$
4,537
   
$
5,007
   
$
165
   
$
5,256
   
$
52
 


The following table shows the detail of loans modified as troubled debt restructurings ("TDRs")  during the three months ended March 31, 2015  included in the impaired loan balances. There were no loans modified as TDRs during the three months ended March 31, 2014 (dollars in thousands):


   
Loans Modified as a TDR for the
Three Months Ended March 31, 2015
 
 Loan Type  
Number of
Contracts
   
Pre-Modification
Outstanding Recorded
Investment
   
Post-Modification
Outstanding Recorded
Investment
 
Commercial
   
-
   
$
-
   
$
-
 
Commercial real estate
   
1
     
8
     
8
 
   Construction and land development
   
-
     
-
     
-
 
   Home Equity
   
2
     
341
     
341
 
   Residential real estate
   
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
 
Total
   
3
   
$
349
   
$
349
 

       During the three months ended March 31, 2015 and 2014, the Company had no loans that subsequently defaulted within twelve months of modification as a TDR. The Company defines defaults as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure subsequent to modification.
 
15

Residential Real Estate in Process of Foreclosure

The company had $111,000 in residential real estate in the process of foreclosure.

Risk Grades
 
        The following table shows the Company's loan portfolio broken down by internal risk grading as of March 31, 2015 (dollars in thousands):

Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade

   
Commercial
   
Commercial
Real Estate
Construction
   
Commercial
Real Estate
Other
   
Residential
   
Home
Equity
 
                     
Pass
 
$
143,138
   
$
60,150
   
$
417,148
   
$
191,888
   
$
94,742
 
Special Mention
   
2,727
     
3,621
     
11,153
     
13,990
     
2,015
 
Substandard
   
415
     
4,298
     
8,261
     
5,383
     
1,054
 
Doubtful
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
146,280
   
$
68,069
   
$
436,562
   
$
211,261
   
$
97,811
 

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

 
Consumer
 
   
Performing
 
$
5,877
 
Nonperforming
   
42
 
Total
 
$
5,919
 
 
      The following table shows the Company's loan portfolio broken down by internal risk grading as of December 31, 2014 (dollars in thousands):


Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade

   
Commercial
   
Commercial
Real Estate
Construction
   
Commercial
Real Estate
Other
   
Residential
   
Home
Equity
 
                     
Pass
 
$
125,405
   
$
45,534
   
$
382,607
   
$
165,367
   
$
88,646
 
Special Mention
   
1,569
     
569
     
4,889
     
6,709
     
1,801
 
Substandard
   
7
     
4,760
     
3,976
     
3,217
     
628
 
Doubtful
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
126,981
   
$
50,863
   
$
391,472
   
$
175,293
   
$
91,075
 

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

   
Consumer
 
     
Performing
 
$
5,240
 
Nonperforming
   
1
 
Total
 
$
5,241
 
 
        Loans classified in the Pass category typically are fundamentally sound and risk factors are reasonable and acceptable.
 
        Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.
 
16

        Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.
        Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.
        Consumer loans are classified as performing or nonperforming.  A loan is nonperforming when payments of interest and principal are past due 90 days or more, or payments are less than 90 days past due, but there are other good reasons to doubt that payment will be made in full.

Note 5 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
 
        Changes in the allowance for loan losses and the reserve for unfunded lending commitments as of the indicated dates and periods are presented below (dollars in thousands):
 
        The reserve for unfunded loan commitments is included in other liabilities.

   
Three Months Ended
March 31, 2015
   
Year Ended
December 31, 2014
   
Three Months Ended
March 31, 2014
 
             
Allowance for Loan Losses
           
Balance, beginning of period
 
$
12,427
   
$
12,600
   
$
12,600
 
Provision for loan losses
   
600
     
400
     
-
 
Charge-offs
   
(309
)
   
(964
)
   
(73
)
Recoveries
   
126
     
391
     
87
 
Balance, end of period
 
$
12,844
   
$
12,427
   
$
12,614
 
                         
Reserve for Unfunded Lending Commitments
                       
Balance, beginning of period
 
$
163
   
$
210
   
$
210
 
Provision for (recovery of) loan losses
   
6
     
(47
)
   
7
 
Charge-offs
   
-
     
-
     
-
 
Balance, end of period
 
$
169
   
$
163
   
$
217
 

17

 
      The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at March 31, 2015 (dollars in thousands):

   
Commercial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Unallocated
   
Total
 
                         
                         
Allowance for Loan Losses
                       
Balance as of December 31, 2014
 
$
1,818
   
$
6,814
   
$
3,715
   
$
80
   
$
-
   
$
12,427
Charge-offs
   
-
     
(267
)
   
(7
 
)
   
(35
 
)
 
-
     
(309
 
)
Recoveries
   
9
     
57
     
27
     
33
     
-
     
126
 
Provision for loan losses
   
1
     
434
     
156
     
(2
 
)
   
11
     
600
 
Balance as of March 31, 2015
 
$
1,828
   
$
7,038
   
$
3,891
   
$
76
   
$
11
   
$
12,844
 
                                                 
Balance as of March 31, 2015: